BUSINESS SEGMENT REPORTING

Management has determined that Farmer Mac's operations consist of three reportable segments – Farm & Ranch, USDA Guarantees, and Rural Utilities. Farmer Mac uses these three segments to generate revenue and manage business risk, and each segment is based on distinct products and distinct business activities. In addition to these three operating segments, a corporate segment is presented. That segment represents activity in Farmer Mac's investment portfolio and other corporate activities. The segment financial results include directly attributable revenues and expenses. Corporate charges for administrative expenses that are not directly attributable to an operating segment are allocated based on headcount.

Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management's view, core earnings is a useful alternative measure in understanding Farmer Mac's economic performance, transaction economics, and business trends. Core earnings differs from GAAP net income by excluding the effects of fair value accounting guidance, which are not expected to have a cumulative net impact on GAAP earnings if the financial instruments are held to maturity, as is generally expected. Core earnings also differs from GAAP net income by excluding specified infrequent or unusual transactions that Farmer Mac believes are not indicative of future operating results and that may not reflect the trends and economic financial performance of Farmer Mac's core business. This non-GAAP financial measure may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac's disclosure of this non-GAAP measure is intended to supplement GAAP information and not to replace it.

The financial information presented below reflects the accounts of Farmer Mac and its subsidiaries on a consolidated basis. Accordingly, the core earnings for Farmer Mac's reportable operating segments will differ from the stand-alone financial statements of Farmer Mac's subsidiaries. These differences will be due to various factors, including the reversal of unrealized gains and losses related to fair value changes of trading assets and financial derivatives, as well as the allocation of certain expenses such as dividends and interest expense related to the issuance of capital and the incurrence of indebtedness managed at the corporate level. The allocation of general and administrative expenses that are not directly attributable to an operating segment may also result in differences. The assets of Farmer Mac's subsidiary Farmer Mac II LLC will only be available to creditors of Farmer Mac after all obligations owed to creditors of and equity holders in Farmer Mac II LLC have been satisfied. As of September 30, 2013, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding of $374.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million, and had $1.0 billion of common stock outstanding held by Farmer Mac.

The following tables present core earnings for Farmer Mac's reportable operating segments and a reconciliation to consolidated net income for the three and nine months ended September 30, 2013 and 2012:

Table 9.1



Core Earnings by Business Segment
For the Three Months Ended September 30, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	30,139		$	13,461		$	14,958		$	5,263		$	(846	)		$	62,975
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(227		)	—			—			—			227				—
Interest expense (2)	(13,738		)	(10,630		)	(11,973		)	(1,472		)	3,026				(34,787		)
Net effective spread	16,174			2,831			2,985			3,791			2,407				28,188
Guarantee and commitment fees	5,953			30			1,063			—			(227		)		6,819
Other income/(expense) (3)	157			241			—			(825		)	3,429				3,002
Non-interest income/(loss)	6,110			271			1,063			(825		)	3,202				9,821

Release of loan losses	499			—			—			—			—				499

Provision of losses	(463		)	—			—			—			—				(463		)
Other non-interest expense	(3,785		)	(769		)	(1,356		)	(2,068		)	—				(7,978		)
Non-interest expense (4)	(4,248		)	(769		)	(1,356		)	(2,068		)	—				(8,441		)
Core earnings before income taxes	18,535			2,333			2,692			898			5,609			(5)	30,067
Income tax (expense)/benefit	(6,487		)	(817		)	(942		)	1,983			(1,963		)		(8,226		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	12,048			1,516			1,750			2,881			3,646			(5)	21,841
Preferred stock dividends	—			—			—			(881		)	—				(881		)
Non-controlling interest - preferred stock dividends	—			—			—			(5,547		)	—				(5,547		)
Segment core earnings/(losses)	$	12,048		$	1,516		$	1,750		$	(3,547	)	$	3,646		(5)	$	15,413

Total assets at carrying value	$	5,630,252		$	1,674,309		$	2,567,828		$	3,212,618		$	—			$	13,085,007
Total on- and off-balance sheet program assets at principal balance	9,545,398			1,676,793			2,564,075			—			—				13,786,266


(1)	Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts.


(2)	Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which are included in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated financial statements.


(3)	Includes reconciling adjustments for the reclassification of expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Guaranteed Securities.


(4)	Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.


(5)	Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



Core Earnings by Business Segment
For the Three Months Ended September 30, 2012
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	28,887		$	14,299		$	15,401		$	6,437		$	(1,214	)		$	63,810
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(190		)	—			—			—			190				—
Interest expense (2)	(11,858		)	(11,469		)	(12,292		)	(1,959		)	4,130				(33,448		)
Net effective spread	16,839			2,830			3,109			4,478			3,106				30,362
Guarantee and commitment fees	5,551			38			1,002			—			(190		)		6,401
Other income/(expense) (3)	519			251			300			(699		)	1,692				2,063
Non-interest income/(loss)	6,070			289			1,302			(699		)	1,502				8,464

Provision for loan losses	(137		)	—			—			—			—				(137		)

Release of losses	43			—			—			—			—				43
Other non-interest expense	(3,582		)	(757		)	(1,368		)	(2,084		)	—				(7,791		)
Non-interest expense (4)	(3,539		)	(757		)	(1,368		)	(2,084		)	—				(7,748		)
Core earnings before income taxes	19,233			2,362			3,043			1,695			4,608			(5)	30,941
Income tax (expense)/benefit	(6,731		)	(827		)	(1,065		)	1,941			(1,612		)		(8,294		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	12,502			1,535			1,978			3,636			2,996			(5)	22,647
Preferred stock dividends	—			—			—			(719		)	—				(719		)
Non-controlling interest - preferred stock dividends	—			—			—			(5,547		)	—				(5,547		)
Segment core earnings/(losses)	$	12,502		$	1,535		$	1,978		$	(2,630	)	$	2,996		(5)	$	16,381

Total assets at carrying value	$	5,046,716		$	1,640,940		$	2,206,529		$	3,608,296		$	—			$	12,502,481
Total on- and off-balance sheet program assets at principal balance	8,712,157			1,599,226			2,156,676			—			—				12,468,059


(1)	Includes reconciling adjustments for yield maintenance income and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.


(2)	Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated financial statements.


(3)	Includes reconciling adjustments for the reclassification of yield maintenance income, expenses related to interest rate swaps and fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Guaranteed Securities.


(4)	Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.


(5)	Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



Core Earnings by Business Segment
For the Nine Months Ended September 30, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	88,318		$	39,959		$	44,838		$	16,468		$	(3,365	)		$	186,218
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(602		)	—			—			—			602				—
Interest expense (2)	(39,168		)	(31,457		)	(35,806		)	(4,443		)	9,375				(101,499		)
Net effective spread	48,548			8,502			9,032			12,025			6,612				84,719
Guarantee and commitment fees	17,613			105			3,074			—			(602		)		20,190
Other income (3)	2,051			758			—			1,395			24,355				28,559
Non-interest income	19,664			863			3,074			1,395			23,753				48,749

Release of loan losses	598			—			—			—			—				598

Provision for losses	(1,034		)	—			—			—			—				(1,034		)
Other non-interest expense	(11,756		)	(2,341		)	(4,104		)	(6,251		)	—				(24,452		)
Non-interest expense (4)	(12,790		)	(2,341		)	(4,104		)	(6,251		)	—				(25,486		)
Core earnings before income taxes	56,020			7,024			8,002			7,169			30,365			(5)	108,580
Income tax (expense)/benefit	(19,607		)	(2,459		)	(2,801		)	5,516			(10,627		)		(29,978		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	36,413			4,565			5,201			12,685			19,738			(5)	78,602
Preferred stock dividends	—			—			—			(2,613		)	—				(2,613		)
Non-controlling interest - preferred stock dividends	—			—			—			(16,641		)	—				(16,641		)
Segment core earnings/(losses)	$	36,413		$	4,565		$	5,201		$	(6,569	)	$	19,738		(5)	$	59,348

Total assets at carrying value	$	5,630,252		$	1,674,309		$	2,567,828		$	3,212,618		$	—			$	13,085,007
Total on- and off-balance sheet program assets at principal balance	9,545,398			1,676,793			2,564,075			—			—				13,786,266


(1)	Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts.


(2)	Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps not designated as hedges, which are included in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated financial statements.


(3)	Includes reconciling adjustments for the reclassification of expenses related to interest rate swaps not designated as hedges and fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Guaranteed Securities.


(4)	Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.


(5)	Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.



Core Earnings by Business Segment
For the Nine Months Ended September 30, 2012
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	103,328		$	42,811		$	48,223		$	18,693		$	(4,536	)		$	208,519
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(1,463		)	—			—			—			1,463				—
Interest expense (2)	(53,403		)	(34,425		)	(38,931		)	(4,736		)	22,163				(109,332		)
Net effective spread	48,462			8,386			9,292			13,957			19,090				99,187
Guarantee and commitment fees	16,340			126			3,392			—			(1,463		)		18,395
Other income/(expense) (3)	1,470			525			301			(1,939		)	(23,391		)		(23,034		)
Non-interest income/(loss)	17,810			651			3,693			(1,939		)	(24,854		)		(4,639		)

Release of loan losses	663			—			—			—			—				663

Provision for losses	(1,381		)	—			—			—			—				(1,381		)
Other non-interest expense	(10,650		)	(2,265		)	(4,135		)	(6,368		)	—				(23,418		)
Non-interest expense (4)	(12,031		)	(2,265		)	(4,135		)	(6,368		)	—				(24,799		)
Core earnings before income taxes	54,904			6,772			8,850			5,650			(5,764		)	(5)	70,412
Income tax (expense)/benefit	(19,216		)	(2,371		)	(3,097		)	5,347			2,018				(17,319		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	35,688			4,401			5,753			10,997			(3,746		)	(5)	53,093
Preferred stock dividends	—			—			—			(2,159		)	—				(2,159		)
Non-controlling interest - preferred stock dividends	—			—			—			(16,641		)	—				(16,641		)
Segment core earnings/(losses)	$	35,688		$	4,401		$	5,753		$	(7,803	)	$	(3,746	)	(5)	$	34,293

Total assets at carrying value	$	5,046,716		$	1,640,940		$	2,206,529		$	3,608,296		$	—			$	12,502,481
Total on- and off-balance sheet program assets at principal balance	8,712,157			1,599,226			2,156,676			—			—				12,468,059


(1)	Includes reconciling adjustments for yield maintenance income and amortization of premiums on assets consolidated at fair value to reflect core earnings amounts.


(2)	Based on effective funding cost determined for each operating segment, including expenses related to interest rate swaps, which are included in "Gains/(losses) on financial derivatives and hedging activities" on the consolidated financial statements.


(3)	Includes reconciling adjustments for the reclassification of yield maintenance income, expenses related to interest rate swaps and fair value adjustments on financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains over the estimated lives of certain Farmer Mac Guaranteed Securities and USDA Guaranteed Securities.


(4)	Includes directly attributable costs and an allocation of indirectly attributable costs based on headcount.


(5)	Net adjustments to reconcile core earnings before income taxes; core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends; and segment core earnings to corresponding income measures: income before income taxes, net income, and net income attributable to common stockholders, respectively.