BUSINESS SEGMENT REPORTING

After an evaluation of Farmer Mac's overall portfolio of product offerings and reportable segments, 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 net income attributable to common stockholders by excluding the effects of fair value accounting guidance, which are not expected to have a cumulative net impact on financial condition or results of operations reported in accordance with GAAP if the related financial instruments are held to maturity, as is generally expected. Core earnings also differs from net income attributable to common stockholders 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 September 30, 2014, Farmer Mac II LLC held assets with a fair value of $1.8 billion, had debt outstanding of $429.0 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, 2014 and 2013:

Table 9.1



Core Earnings by Business Segment
For the Three Months Ended September 30, 2014
	Farm & Ranch			USDA Guarantees			Rural Utilities			Institutional Credit			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	20,052		$	14,183		$	6,703		$	16,223		$	4,683		$	(962	)		$	60,882
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(508		)	—			—			—			—			508				—
Interest expense (2)	(11,337		)	(9,110		)	(3,813		)	(8,928		)	(910		)	(14,788		)		(48,886		)
Net effective spread	8,207			5,073			2,890			7,295			3,773			(15,242		)		11,996
Guarantee and commitment fees	3,716			49			—			2,915			—			(508		)		6,172
Other income/(expense) (3)	369			13			9			—			(2,392		)	19,284				17,283
Non-interest income/(loss)	4,085			62			9			2,915			(2,392		)	18,776				23,455

Provision for loan losses	(511		)	—			—			—			—			—				(511		)

Release of reserve for losses	1,315			—			—			—			—			—				1,315
Other non-interest expense	(3,797		)	(747		)	(762		)	(478		)	(2,626		)	—				(8,410		)
Non-interest expense (4)	(2,482		)	(747		)	(762		)	(478		)	(2,626		)	—				(7,095		)
Core earnings before income taxes	9,299			4,388			2,137			9,732			(1,245		)	3,534			(5)	27,845
Income tax (expense)/benefit	(3,255		)	(1,535		)	(749		)	(3,407		)	2,619			(1,237		)		(7,564		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	6,044			2,853			1,388			6,325			1,374			2,297			(5)	20,281
Preferred stock dividends	—			—			—			—			(3,283		)	—				(3,283		)
Non-controlling interest - preferred stock dividends	—			—			—			—			(5,412		)	—				(5,412		)
Segment core earnings/(losses)	$	6,044		$	2,853		$	1,388		$	6,325		$	(7,321	)	$	2,297		(5)	$	11,586

Total assets at carrying value	$	2,428,603		$	1,772,333		$	981,300		$	5,016,670		$	4,326,791		$	—			$	14,525,697
Total on- and off-balance sheet program assets at principal balance	5,314,437			1,759,948			978,637			5,951,800						—				14,004,822


(1)	Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts and interest income related to securities purchased under agreements to resell.


(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. Includes reconciling adjustments for interest expense related to securities sold, not yet purchased.

(3)

Includes interest income and interest expense related to securities purchased under agreements to resell and securities sold, not yet purchased, respectively; 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; and 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 September 30, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Institutional Credit			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	16,398		$	13,461		$	8,933		$	19,766		$	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)	(8,191		)	(8,956		)	(5,959		)	(13,561		)	(1,146		)	3,026				(34,787		)
Net effective spread	7,980			4,505			2,974			6,205			4,117			2,407				28,188
Guarantee and commitment fees	3,725			30			—			3,291			—			(227		)		6,819
Other income/(expense) (3)	157			241			—			—			(825		)	3,429				3,002
Non-interest income/(loss)	3,882			271			—			3,291			(825		)	3,202				9,821

Release of allowance for loan losses	499			—			—			—			—			—				499

Provision of losses	(463		)													—				(463		)
Other non-interest expense	(3,600		)	(711		)	(777		)	(445		)	(2,445		)	—				(7,978		)
Non-interest expense (4)	(4,063		)	(711		)	(777		)	(445		)	(2,445		)	—				(8,441		)
Core earnings before income taxes	8,298			4,065			2,197			9,051			847			5,609			(5)	30,067
Income tax (expense)/benefit	(2,904		)	(1,423		)	(769		)	(3,168		)	2,001			(1,963		)		(8,226		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	5,394			2,642			1,428			5,883			2,848			3,646			(5)	21,841
Preferred stock dividends	—			—			—			—			(881		)	—				(881		)
Non-controlling interest - preferred stock dividends	—			—			—			—			(5,547		)	—				(5,547		)
Segment core earnings/(losses)	$	5,394		$	2,642		$	1,428		$	5,883		$	(3,580	)	$	3,646		(5)	$	15,413

Total assets at carrying value	$	2,003,547		$	1,674,309		$	1,049,840		$	5,144,693		$	3,212,618		$	—			$	13,085,007
Total on- and off-balance sheet program assets at principal balance	5,035,748			1,676,793			1,017,774			6,055,951						—				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 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, 2014
	Farm & Ranch			USDA Guarantees			Rural Utilities			Institutional Credit			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	57,988		$	40,449		$	21,228		$	51,244		$	15,103		$	(13,637	)		$	172,375
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(1,552		)	—			—			—			—			1,552				—
Interest expense (2)	(33,295		)	(27,433		)	(13,395		)	(30,020		)	(3,028		)	(18,943		)		(126,114		)
Net effective spread	23,141			13,016			7,833			21,224			12,075			(31,028		)		46,261
Guarantee and commitment fees	11,432			98			—			9,115			—			(1,552		)		19,093
Other income/(expense) (3)	742			49			9			—			(3,566		)	15,791				13,025
Non-interest income/(loss)	12,174			147			9			9,115			(3,566		)	14,239				32,118

Release of allowance for loan losses	499			—			—			—			—			—				499

Release of reserve for losses	2,188			—			—			—			—			—				2,188
Other non-interest expense	(11,263		)	(2,242		)	(2,369		)	(1,415		)	(7,797		)	—				(25,086		)
Non-interest expense (4)	(9,075		)	(2,242		)	(2,369		)	(1,415		)	(7,797		)	—				(22,898		)
Core earnings before income taxes	26,739			10,921			5,473			28,924			712			(16,789		)	(5)	55,980
Income tax (expense)/benefit	(9,358		)	(3,823		)	(1,917		)	(10,124		)	19,295			5,872				(55		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	17,381			7,098			3,556			18,800			20,007			(10,917		)	(5)	55,925
Preferred stock dividends	—			—			—			—			(6,543		)	—				(6,543		)
Non-controlling interest - preferred stock dividends	—			—			—			—			(16,778		)	—				(16,778		)
Segment core earnings/(losses)	$	17,381		$	7,098		$	3,556		$	18,800		$	(3,314	)	$	(10,917	)	(5)	$	32,604

Total assets at carrying value	$	2,428,603		$	1,772,333		$	981,300		$	5,016,670		$	4,326,791		$	—			$	14,525,697
Total on- and off-balance sheet program assets at principal balance	5,314,437			1,759,948			978,637			5,951,800						—				14,004,822


(1)	Includes reconciling adjustments for the amortization of premiums and discounts on assets consolidated at fair value to reflect core earnings amounts and interest income related to securities purchased under agreements to resell.


(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. Includes reconciling adjustments for interest expense related to securities sold, not yet purchased.

(3)


(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			Institutional Credit			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	47,860		$	39,959		$	26,903		$	58,393		$	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)	(22,967		)	(26,252		)	(17,690		)	(40,348		)	(3,617		)	9,375				(101,499		)
Net effective spread	24,291			13,707			9,213			18,045			12,851			6,612				84,719
Guarantee and commitment fees	11,099			105			948			8,640			—			(602		)		20,190
Other income/(expense) (3)	2,051			758			—			—			1,395			24,355				28,559
Non-interest income/(loss)	13,150			863			948			8,640			1,395			23,753				48,749

Release of allowance for loan losses	598			—			—			—			—			—				598

Provision for losses	(1,034		)	—			—			—			—			—				(1,034		)
Other non-interest expense	(11,199		)	(2,168		)	(2,350		)	(1,345		)	(7,390		)	—				(24,452		)
Non-interest expense (4)	(12,233		)	(2,168		)	(2,350		)	(1,345		)	(7,390		)	—				(25,486		)
Core earnings before income taxes	25,806			12,402			7,811			25,340			6,856			30,365			(5)	108,580
Income tax (expense)/benefit	(9,032		)	(4,341		)	(2,734		)	(8,869		)	5,625			(10,627		)		(29,978		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	16,774			8,061			5,077			16,471			12,481			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)	$	16,774		$	8,061		$	5,077		$	16,471		$	(6,773	)	$	19,738		(5)	$	59,348

Total assets at carrying value	$	2,003,547		$	1,674,309		$	1,049,840		$	5,144,693		$	3,212,618		$	—			$	13,085,007
Total on- and off-balance sheet program assets at principal balance	5,035,748			1,676,793			1,017,774			6,055,951						—				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 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.