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 June 30, 2013, Farmer Mac II LLC held assets with a fair value of $1.7 billion, had debt outstanding of $352.0 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 six months ended June 30, 2013 and 2012:

Table 9.1



Core Earnings by Business Segment
For the Three Months Ended June 30, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	29,365		$	13,157		$	14,991		$	5,471		$	(1,239	)		$	61,745
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(195		)	—			—			—			195				—
Interest expense (2)	(12,845		)	(10,419		)	(11,958		)	(1,504		)	3,142				(33,584		)
Net effective spread	16,325			2,738			3,033			3,967			2,098				28,161
Guarantee and commitment fees	5,860			42			1,052			—			(195		)		6,759
Other income (3)	1,299			317			—			2,782			15,326				19,724
Non-interest income	7,159			359			1,052			2,782			15,131				26,483

Release of loan losses	529			—			—			—			—				529

Release of losses	175			—			—			—			—				175
Other non-interest expense	(3,999		)	(758		)	(1,335		)	(2,047		)	—				(8,139		)
Non-interest expense (4)	(3,824		)	(758		)	(1,335		)	(2,047		)	—				(7,964		)
Core earnings before income taxes	20,189			2,339			2,750			4,702			17,229			(5)	47,209
Income tax (expense)/benefit	(7,067		)	(819		)	(963		)	1,842			(6,029		)		(13,036		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	13,122			1,520			1,787			6,544			11,200			(5)	34,173
Preferred stock dividends	—			—			—			(881		)	—				(881		)
Non-controlling interest - preferred stock dividends	—			—			—			(5,547		)	—				(5,547		)
Segment core earnings	$	13,122		$	1,520		$	1,787		$	116		$	11,200		(5)	$	27,745

Total assets at carrying value	$	5,468,909		$	1,659,134		$	2,631,931		$	3,175,977		$	—			$	12,935,951
Total on- and off-balance sheet program assets at principal balance	9,325,489			1,667,170			2,602,859			—			—				13,595,518


(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 June 30, 2012
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	36,897		$	14,197		$	16,124		$	6,024		$	(1,664	)		$	71,578
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(543		)	—			—			—			543				—
Interest expense (2)	(19,605		)	(11,407		)	(13,118		)	(1,361		)	8,530				(36,961		)
Net effective spread	16,749			2,790			3,006			4,663			7,409				34,617
Guarantee and commitment fees	5,466			41			1,100			—			(543		)		6,064
Other income/(expense) (3)	514			172			—			(717		)	(33,314		)		(33,345		)
Non-interest income/(loss)	5,980			213			1,100			(717		)	(33,857		)		(27,281		)

Release of loan losses	1,220			—			—			—			—				1,220

Provision for losses	(1,394		)	—			—			—			—				(1,394		)
Other non-interest expense	(3,576		)	(744		)	(1,385		)	(2,110		)	—				(7,815		)
Non-interest expense (4)	(4,970		)	(744		)	(1,385		)	(2,110		)	—				(9,209		)
Core earnings before income taxes	18,979			2,259			2,721			1,836			(26,448		)	(5)	(653		)
Income tax (expense)/benefit	(6,643		)	(791		)	(952		)	1,759			9,256				2,629
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	12,336			1,468			1,769			3,595			(17,192		)	(5)	1,976
Preferred stock dividends	—			—			—			(720		)	—				(720		)
Non-controlling interest - preferred stock dividends	—			—			—			(5,547		)	—				(5,547		)
Segment core earnings	$	12,336		$	1,468		$	1,769		$	(2,672	)	$	(17,192	)	(5)	$	(4,291	)

Total assets at carrying value	$	4,842,598		$	1,612,384		$	2,226,318		$	3,369,114		$	—			$	12,050,414
Total on- and off-balance sheet program assets at principal balance	8,513,212			1,579,187			2,158,021			—			—				12,250,420


(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 Six Months Ended June 30, 2013
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	58,179		$	26,498		$	29,880		$	11,205		$	(2,519	)		$	123,243
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(375		)	—			—			—			375				—
Interest expense (2)	(25,430		)	(20,827		)	(23,833		)	(2,971		)	6,349				(66,712		)
Net effective spread	32,374			5,671			6,047			8,234			4,205				56,531
Guarantee and commitment fees	11,660			75			2,011			—			(375		)		13,371
Other income (3)	1,894			517			—			2,220			20,926				25,557
Non-interest income	13,554			592			2,011			2,220			20,551				38,928

Release of loan losses	99			—			—			—			—				99

Provision for losses	(571		)	—			—			—			—				(571		)
Other non-interest expense	(7,971		)	(1,572		)	(2,748		)	(4,183		)	—				(16,474		)
Non-interest expense (4)	(8,542		)	(1,572		)	(2,748		)	(4,183		)	—				(17,045		)
Core earnings before income taxes	37,485			4,691			5,310			6,271			24,756			(5)	78,513
Income tax (expense)/benefit	(13,120		)	(1,642		)	(1,859		)	3,533			(8,664		)		(21,752		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	24,365			3,049			3,451			9,804			16,092			(5)	56,761
Preferred stock dividends	—			—			—			(1,732		)	—				(1,732		)
Non-controlling interest - preferred stock dividends	—			—			—			(11,094		)	—				(11,094		)
Segment core earnings	$	24,365		$	3,049		$	3,451		$	(3,022	)	$	16,092		(5)	$	43,935

Total assets at carrying value	$	5,468,909		$	1,659,134		$	2,631,931		$	3,175,977		$	—			$	12,935,951
Total on- and off-balance sheet program assets at principal balance	9,325,489			1,667,170			2,602,859			—			—				13,595,518


(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 Six Months Ended June 30, 2012
	Farm & Ranch			USDA Guarantees			Rural Utilities			Corporate			Reconciling Adjustments				Consolidated Net Income
	(in thousands)
Interest income (1)	$	74,441		$	28,512		$	32,822		$	12,256		$	(3,322	)		$	144,709
Interest income related to consolidated trusts owned by third parties reclassified to guarantee fee income	(1,273		)	—			—			—			1,273				—
Interest expense (2)	(41,545		)	(22,956		)	(26,639		)	(2,777		)	18,033				(75,884		)
Net effective spread	31,623			5,556			6,183			9,479			15,984				68,825
Guarantee and commitment fees	10,789			88			2,390			—			(1,273		)		11,994
Other income/(expense) (3)	951			274			1			(1,240		)	(25,083		)		(25,097		)
Non-interest income/(loss)	11,740			362			2,391			(1,240		)	(26,356		)		(13,103		)

Release of loan losses	800			—			—			—			—				800

Provision for losses	(1,424		)	—			—			—			—				(1,424		)
Other non-interest expense	(7,068		)	(1,508		)	(2,767		)	(4,284		)	—				(15,627		)
Non-interest expense (4)	(8,492		)	(1,508		)	(2,767		)	(4,284		)	—				(17,051		)
Core earnings before income taxes	35,671			4,410			5,807			3,955			(10,372		)	(5)	39,471
Income tax (expense)/benefit	(12,485		)	(1,544		)	(2,032		)	3,406			3,630				(9,025		)
Core earnings before preferred stock dividends and attribution of income to non-controlling interest - preferred stock dividends	23,186			2,866			3,775			7,361			(6,742		)	(5)	30,446
Preferred stock dividends	—			—			—			(1,440		)	—				(1,440		)
Non-controlling interest - preferred stock dividends	—			—			—			(11,094		)	—				(11,094		)
Segment core earnings	$	23,186		$	2,866		$	3,775		$	(5,173	)	$	(6,742	)	(5)	$	17,912

Total assets at carrying value	$	4,842,598		$	1,612,384		$	2,226,318		$	3,369,114		$	—			$	12,050,414
Total on- and off-balance sheet program assets at principal balance	8,513,212			1,579,187			2,158,021			—			—				12,250,420


(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.