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 principally 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 related 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 be supplemental in nature and is not meant to be considered in isolation from, as a substitute for, or as more important than, the related financial information prepared in accordance with GAAP.

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 December 31, 2013, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding of $375.0 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 years ended December 31, 2013, 2012, and 2011:

Table 14.1



Core Earnings by Business Segment
For the Year Ended December 31, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	121,570		$	53,384		$	58,921		$	21,940		$	(20,417	)		$	235,398
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(964		)	—			—			—			964				—
Interest expense (2)	(53,978		)	(42,174		)	(47,842		)	(5,606		)	12,324				(137,276		)
Net effective spread	66,628			11,210			11,079			16,334			(7,129		)		98,122
Guarantee and commitment fees	23,690			132			4,100			—			(964		)		26,958
Other income (3)	2,244			791			—			1,622			34,156				38,813
Non-interest income	25,934			923			4,100			1,622			33,192				65,771

Release of loan losses	481			—			—			—			—				481

Provision for losses	(929		)	—			—			—			—				(929		)
Other non-interest expense	(15,292		)	(3,161		)	(5,465		)	(8,260		)	—				(32,178		)
Non-interest expense (4)	(16,221		)	(3,161		)	(5,465		)	(8,260		)	—				(33,107		)
Core earnings before income taxes	76,822			8,972			9,714			9,696			26,063			(5)	131,267
Income tax (expense)/benefit	(26,888		)	(3,140		)	(3,400		)	8,798			(9,122		)		(33,752		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	49,934			5,832			6,314			18,494			16,941			(5)	97,515
Preferred stock dividends	—			—			—			(3,495		)	—				(3,495		)
Non-controlling interest - preferred stock dividends	—			—			—			(22,187		)	—				(22,187		)
Segment core earnings/(losses)	$	49,934		$	5,832		$	6,314		$	(7,188	)	$	16,941		(5)	$	71,833

Total assets at carrying value	$	5,821,292		$	1,656,688		$	2,566,896		$	3,316,904		$	—			$	13,361,780
Total on- and off-balance sheet program assets at principal balance	9,672,730			1,687,117			2,590,465			—			—				13,950,312


(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 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 Year Ended December 31, 2012
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	131,714		$	56,815		$	63,243		$	24,729		$	(11,831	)		$	264,670
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(1,659		)	—			—			—			1,659				—
Interest expense (2)	(65,460		)	(45,560		)	(50,796		)	(6,469		)	25,595				(142,690		)
Net effective spread	64,595			11,255			12,447			18,260			15,423				121,980
Guarantee and commitment fees	22,095			163			4,364			—			(1,659		)		24,963
Other income/(expense) (3)	2,427			599			466			(2,113		)	(22,607		)		(21,228		)
Non-interest income/(loss)	24,522			762			4,830			(2,113		)	(24,266		)		3,735

Provision for loan losses	(3,691		)	—			—			—			—				(3,691		)

Release of losses	1,816			—			—			—			—				1,816
Other non-interest expense	(15,066		)	(3,065		)	(5,809		)	(8,784		)	—				(32,724		)
Non-interest expense (4)	(13,250		)	(3,065		)	(5,809		)	(8,784		)	—				(30,908		)
Core earnings before income taxes	72,176			8,952			11,468			7,363			(8,843		)	(5)	91,116
Income tax (expense)/benefit	(25,261		)	(3,134		)	(4,013		)	7,157			3,095				(22,156		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	46,915			5,818			7,455			14,520			(5,748		)	(5)	68,960
Preferred stock dividends	—			—			—			(2,879		)	—				(2,879		)
Non-controlling interest - preferred stock dividends	—			—			—			(22,187		)	—				(22,187		)
Segment core earnings	$	46,915		$	5,818		$	7,455		$	(10,546	)	$	(5,748	)	(5)	$	43,894

Total assets at carrying value	$	5,190,136		$	1,641,030		$	2,398,809		$	3,392,226		$	—			$	12,622,201
Total on- and off-balance sheet program assets at principal balance	9,056,489			1,615,579			2,343,120			—			—				13,015,188


(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 yield maintenance income and 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 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 Year Ended December 31, 2011
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	146,653		$	56,726		$	53,237		$	28,117		$	(10,046	)		$	274,687
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(3,269		)	—			—			—			3,269				—
Interest expense (2)	(92,155		)	(45,937		)	(40,950		)	(13,003		)	38,663				(153,382		)
Net effective spread	51,229			10,789			12,287			15,114			31,886				121,305
Guarantee and commitment fees	22,525			204			5,361			—			(3,269		)		24,821
Other income/(expense) (3)	3,201			283			—			(2,272		)	(73,422		)		(72,210		)
Non-interest income/(loss)	25,726			487			5,361			(2,272		)	(76,691		)		(47,389		)

Provision for loan losses	(610		)	—			—			—			—				(610		)

Release of losses	2,957			—			—			—			—				2,957
Other non-interest expense	(15,768		)	(2,752		)	(4,923		)	(8,173		)	—				(31,616		)
Non-interest expense (4)	(12,811		)	(2,752		)	(4,923		)	(8,173		)	—				(28,659		)
Core earnings before income taxes	63,534			8,524			12,725			4,669			(44,805		)	(5)	44,647
Income tax (expense)/benefit	(22,237		)	(2,983		)	(4,454		)	8,195			15,682				(5,797		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	41,297			5,541			8,271			12,864			(29,123		)	(5)	38,850
Preferred stock dividends	—			—			—			(2,879		)	—				(2,879		)
Non-controlling interest - preferred stock dividends	—			—			—			(22,187		)	—				(22,187		)
Segment core earnings	$	41,297		$	5,541		$	8,271		$	(12,202	)	$	(29,123	)	(5)	$	13,784

Total assets at carrying value	$	4,840,519		$	1,552,105		$	2,421,904		$	3,068,980		$	—			$	11,883,508
Total on- and off-balance sheet program assets at principal balance	8,057,027			1,513,177			2,343,098			—			—				11,913,302


(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 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.