Note 8.

Business Segment Reporting

Farmer Mac accomplishes its congressional mission of providing liquidity and lending capacity to rural lenders through three programs – Farmer Mac I, Farmer Mac II and Rural Utilities. Prior to first quarter 2010, Farmer Mac reported its financial results as a single segment using GAAP-basis income. Beginning in first quarter 2010, Farmer Mac revised its segment financial reporting, by using core earnings, a non-GAAP financial measure, to reflect the manner in which management has begun assessing the Corporation’s performance since the contribution of substantially all of the Farmer Mac II program business to a subsidiary, Farmer Mac II LLC. Farmer Mac uses core earnings to measure corporate economic performance and develop financial plans because, in management’s view, core earnings more accurately reflects 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 permanent effect on capital. 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 the Corporation’s core business. This non-GAAP financial measure may not be similar to non-GAAP financial measures disclosed by other companies.

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 June 30, 2011, Farmer Mac II LLC held assets with a fair value of $1.4 billion, had debt outstanding of $141.0 million, had preferred stock outstanding with a liquidation preference of $250.0 million and had $1.0 billion of common stock outstanding, all of which is held by Farmer Mac.

Management has determined that the Corporation’s operations consist of three reportable segments – Farmer Mac I, Farmer Mac II 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 program operating segments, a corporate segment is presented. That segment represents activity in Farmer Mac’s liquidity 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.

Each of the program operating segments generates revenue through purchasing loans or securities, committing to purchase loans or guaranteeing securities backed by eligible loans. Purchases of both program assets and assets held in Farmer Mac’s liquidity investment portfolio are funded through debt issuance of various maturities. Management makes decisions about pricing, funding and guarantee and commitment fee levels based on inherent credit risks, resource allocation and target returns on equity separately for each segment.

Under the Farmer Mac I program, Farmer Mac purchases or commits to purchase eligible mortgage loans secured by first liens on agricultural real estate, including through the issuance of LTSPCs. Farmer Mac also guarantees securities representing interests in, or obligations secured by, pools of eligible agricultural real estate mortgage loans, and may purchase those securities.

Under the Farmer Mac II program, Farmer Mac II LLC purchases USDA-guaranteed portions of loans, which are presented as “USDA Guaranteed Securities” on the condensed consolidated balance sheets. Farmer Mac currently operates only that part of the Farmer Mac II program that involves the guarantee of Farmer Mac II Guaranteed Securities to investors other than Farmer Mac or Farmer Mac II LLC.

Under the Rural Utilities program, Farmer Mac’s business activities include loan purchases, guarantees and purchases of securities with respect to eligible rural utilities loans. To date, all of the business under the Rural Utilities program has been with one lender, CFC, a related party.

The following tables present core earnings for Farmer Mac’s reportable operating segments and a reconciliation to GAAP net income for the three and six months ended June 30, 2011 and 2010.

Core Earnings by Business Segment
For the Three Months Ended June 30, 2011

													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	34,555		$	14,045		$	13,131		$	7,033		$	(1,912	)			$	66,852
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(839	)		-			-			-			839					-
Interest expense (2)		(22,398	)		(11,321	)		(10,044	)		(3,174	)		9,297					(37,640	)
Net effective spread		11,318			2,724			3,087			3,859			8,224					29,212

Guarantee and commitment fees		5,824			50			1,285			-			(839	)				6,320
Other income/(expense) (3)		1,261			59			-			(646	)		(14,879	)				(14,205	)
Non-interest income/(loss)		7,085			109			1,285			(646	)		(15,718	)				(7,885	)

Provision for loan losses		(160	)		-			-			-			-					(160	)

Reserve for losses		935			-			-			-			-					935
Other non-interest expense		(3,992	)		(712	)		(1,247	)		(2,175	)		-					(8,126	)
Non-interest expense (4)		(3,057	)		(712	)		(1,247	)		(2,175	)		-					(7,191	)

Core earnings before income taxes		15,186			2,121			3,125			1,038			(7,494	)	(5	)		13,976
Income tax (expense)/benefit		(5,315	)		(742	)		(1,094	)		1,989			2,623					(2,539	)
Core earnings before preferred stock
dividends and attribution of income to
non-controlling interest		9,871			1,379			2,031			3,027			(4,871	)	(5	)		11,437
Preferred stock dividends		-			-			-			(720	)		-					(720	)
Non-controlling interest		-			-			-			(5,547	)		-					(5,547	)
Segment core earnings	$	9,871		$	1,379		$	2,031		$	(3,240	)	$	(4,871	)	(5	)	$	5,170

Total assets at carrying value	$	3,743,934		$	1,422,554		$	2,353,748		$	2,924,592		$	-				$	10,444,828
Total principal balance of on- and
off-balance sheet program assets		8,498,421			1,425,883			2,274,193			-			-					12,198,497

(1)	Includes reconciling adjustments for yield maintenance income and discount amortization on certain prepaid loans, 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3)

Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and financial derivatives and trading assets. Also includes a reconciling adjustment related to the recognition of deferred gains upon prepayment of certain Farmer Mac II 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; and segment core earnings to corresponding GAAP measures: income before income taxes, net income and net income available to common stockholders, respectively.

Core Earnings by Business Segment
For the Three Months Ended June 30, 2010

													Reconciling					GAAP
	Farmer Mac I			Farmer Mac II			Rural Utilities			Corporate			Adjustments					Amounts
	(in thousands)
Interest income (1)	$	27,081		$	13,825		$	13,987		$	6,390		$	(3,956	)			$	57,327
Interest income related to consolidated
trusts owned by third parties reclassified
to guarantee fee income		(1,282	)		-			-			-			1,282					-
Interest expense (2)		(18,210	)		(11,262	)		(11,342	)		(3,638	)		8,733					(35,719	)
Net effective spread		7,589			2,563			2,645			2,752			6,059					21,608

Guarantee and commitment fees		5,450			50			1,492			-			(1,282	)				5,710
Other income/(expense) (3)		411			-			-			(784	)		(10,108	)				(10,481	)
Non-interest income/(loss)		5,861			50			1,492			(784	)		(11,390	)				(4,771	)

Recoveries of loan losses		1,870			-			-			-			-					1,870

Reserve for losses		(3,043	)		-			-			-			-					(3,043	)
Other non-interest expense		(3,350	)		(721	)		(1,038	)		(1,709	)		-					(6,818	)
Non-interest expense (4)		(6,393	)		(721	)		(1,038	)		(1,709	)		-					(9,861	)

Core earnings before income taxes		8,927			1,892			3,099			259			(5,331	)	(5	)		8,846
Income tax (expense)/benefit		(3,124	)		(662	)		(1,085	)		2,249			1,866					(756	)
Core earnings before preferred stock
dividends, attribution of income to
non-controlling interest, and loss on
retirement of preferred stock		5,803			1,230			2,014			2,508			(3,465	)	(5	)		8,090
Preferred stock dividends		-			-			-			(720	)		-					(720	)
Non-controlling interest		-			-			-			(5,546	)		-					(5,546	)
Segment core earnings	$	5,803		$	1,230		$	2,014		$	(3,758	)	$	(3,465	)	(5	)	$	1,824

Total assets at carrying value	$	1,836,374		$	1,324,674		$	2,262,314		$	1,676,128		$	-				$	7,099,490
Total principal balance of on- and
off-balance sheet program assets		7,288,389			1,300,944			2,173,660			-			-					10,762,993

(1)	Includes reconciling adjustments for yield maintenance income and discount amortization on certain prepaid loans, 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 the expense related to interest rate swaps, which is included in losses on financial derivatives on the GAAP financial statements.

(3)	Includes reconciling adjustments for the reclassification of yield maintenance, discount amortization on certain prepaid loans and the expense related to interest rate swaps and fair value adjustments on loans held for sale and financial derivatives and trading assets.

(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, attribution of income to non-controlling interest, and loss on retirement of preferred stock; and segment core earnings to corresponding GAAP measures: income before income taxes, net income, and net income available to common stockholders, respectively.