BUSINESS SEGMENT REPORTING

After an evaluation of Farmer Mac's overall portfolio of product offerings and reportable segments in accordance with applicable accounting guidance, Farmer Mac's management has determined that Farmer Mac's operations consist of four reportable operating segments effective January 1, 2014 – Farm & Ranch, USDA Guarantees, Rural Utilities, and Institutional Credit. The Institutional Credit segment comprises Farmer Mac's guarantees of AgVantage securities related to general obligations of lenders that are secured by pools of eligible loans. Prior to January 1, 2014, AgVantage securities were included under either the Farm & Ranch or Rural Utilities line of business, as applicable, depending on the type of loans pledged to secure the AgVantage securities. Because the AgVantage product is priced differently and has different credit characteristics than the loans that Farmer Mac purchases, are pooled in LTSPCs, or underlie non-AgVantage Farmer Mac Guaranteed Securities, Farmer Mac's management determined AgVantage securities should be reported in a separate business segment. All prior period information has been recast to reflect the breakout of the Institutional Credit segment from both the Farm & Ranch and Rural Utilities segments.

Farmer Mac uses these four segments to manage business risk, and each segment is based on distinct products and distinct business activities. In addition to these four 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 March 31, 2014, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding of $383.0 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 March 31, 2014 and 2013:

Table 9.1



Core Earnings by Business Segment
For the Three Months Ended March 31, 2014
	Farm & Ranch			USDA Guarantees			Rural Utilities			Institutional Credit			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	18,339		$	12,959		$	7,744		$	17,646		$	5,235		$	(12,205	)		$	49,718
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(531		)	—			—			—			—			531				—
Interest expense (2)	(10,230		)	(9,603		)	(5,543		)	(11,315		)	(999		)	2,964				(34,726		)
Net effective spread	7,578			3,356			2,201			6,331			4,236			(8,710		)		14,992
Guarantee and commitment fees	3,909			26			877			2,237			—			(531		)		6,518
Other income/(expense) (3)	130			28			—			—			(571		)	(6,406		)		(6,819		)
Non-interest income/(loss)	4,039			54			877			2,237			(571		)	(6,937		)		(301		)

Provision for loan losses	(573		)	—			—			—			—			—				(573		)

Provision for losses	(101		)	—			—			—			—			—				(101		)
Other non-interest expense	(3,552		)	(731		)	(777		)	(445		)	(2,341		)	—				(7,846		)
Non-interest expense (4)	(3,653		)	(731		)	(777		)	(445		)	(2,341		)	—				(7,947		)
Core earnings before income taxes	7,391			2,679			2,301			8,123			1,324			(15,647		)	(5)	6,171
Income tax (expense)/benefit	(2,587		)	(938		)	(805		)	(2,843		)	2,839			5,475				1,141
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	4,804			1,741			1,496			5,280			4,163			(10,172		)	(5)	7,312
Preferred stock dividends	—			—			—			—			(952		)	—				(952		)
Non-controlling interest - preferred stock dividends	—			—			—			—			(5,547		)	—				(5,547		)
Segment core earnings/(losses)	$	4,804		$	1,741		$	1,496		$	5,280		$	(2,336	)	$	(10,172	)	(5)	$	813

Total assets at carrying value	$	2,272,643		$	1,691,056		$	1,030,422		$	5,157,887		$	3,402,345		$	—			$	13,554,353
Total on- and off-balance sheet program assets at principal balance	5,293,975			1,686,696			1,027,246			6,100,286						—				14,108,203


(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 "(Losses)/gains 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 Three Months Ended March 31, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Institutional Credit			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	15,416		$	13,341		$	8,989		$	19,298		$	5,734		$	(1,280	)		$	61,498
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(180		)	—			—			—			—			180				—
Interest expense (2)	(7,153		)	(8,647		)	(5,806		)	(13,435		)	(1,294		)	3,207				(33,128		)
Net effective spread	8,083			4,694			3,183			5,863			4,440			2,107				28,370
Guarantee and commitment fees	3,671			33			948			2,140			—			(180		)		6,612
Other income/(expense) (3)	595			200			—			—			(562		)	5,600				5,833
Non-interest income/(loss)	4,266			233			948			2,140			(562		)	5,420				12,445

Provision for loan losses	(430		)	—			—			—			—			—				(430		)

Release of losses	(746		)	—			—			—			—			—				(746		)
Other non-interest expense	(3,804		)	(749		)	(802		)	(459		)	(2,521		)	—				(8,335		)
Non-interest expense (4)	(4,550		)	(749		)	(802		)	(459		)	(2,521		)	—				(9,081		)
Core earnings before income taxes	7,369			4,178			3,329			7,544			1,357			7,527			(5)	31,304
Income tax (expense)/benefit	(2,579		)	(1,462		)	(1,165		)	(2,640		)	1,765			(2,635		)		(8,716		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	4,790			2,716			2,164			4,904			3,122			4,892			(5)	22,588
Preferred stock dividends	—			—			—			—			(851		)	—				(851		)
Non-controlling interest - preferred stock dividends	—			—			—			—			(5,547		)	—				(5,547		)
Segment core earnings	$	4,790		$	2,716		$	2,164		$	4,904		$	(3,276	)	$	4,892		(5)	$	16,190

Total assets at carrying value	$	1,762,977		$	1,701,413		$	1,072,494		$	5,093,825		$	3,261,963		$	—			$	12,892,672
Total on- and off-balance sheet program assets at principal balance	4,782,609			1,648,105			1,039,698			5,967,450						—				13,437,862


(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 "(Losses)/gains 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.