Federal Agricultural Mortgage Corporation

Thank you, and good morning, everybody. I am Mike Gerber, the President and CEO of Farmer Mac.

And the Farmer Mac management team and I are pleased to welcome you to our Second Quarter 2012 Investor Conference Call. Before we begin this morning, I will ask Steve Mullery, Farmer Mac's General Counsel, to comment on forward-looking statements that may be made today.

Steve?

Thanks, Mike. Some of the statements made on this conference call may constitute forward-looking statements under the securities laws.

We make these statements based on our current expectations and assumptions about future events and business performance. We do not undertake any obligation to update these statements after the date of this call.

We caution you that forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied by the forward-looking statements.

In evaluating Farmer Mac, you should consider these risks and uncertainties, including those described in our most recent Annual Report on Form 10-K, our subsequent quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission.

A recording of this call will be available on our website for 2 weeks starting later today.

Thank you, Steve. We are pleased to report another quarter of excellent results at Farmer Mac.

Second quarter 2012 numbers continue to be strong, with record levels of core earnings and total program volume. Credit quality of the portfolio again improved, reflecting the strength in the agricultural economy over the past few years.

With the current weather conditions and resulting volatility, the outlook for the ag economy has changed somewhat and we will share our current thoughts regarding the impacts of that ongoing event. Let's take a look at some of the highlights.

Second quarter 2012 core earnings reached a new high of $12.9 million, compared to $10 million in the second quarter of 2011, which was a 28% increase.

GAAP results for the second quarter were a loss of $4.3 million for the quarter, primarily due to the effects of the fair value changes on financial derivatives. This compares to $5.2 million of earnings in the second quarter of 2011.

During the second quarter of 2012, Farmer Mac added $639.8 million of new program volume. That brought Farmer Mac's outstanding program volume to $12.3 billion as of June 30, 2012.

The net increase of $337.1 million, when compared to December 31, 2011, represents a 5.7% annual growth rate. Equally important is the fact that we showed solid additions of volume in all of our product line.

Credit quality also remained strong. Farmer Mac's 90-day delinquencies were $47 million or 1.07% of our Farmer Mac I portfolio as of June 30, 2012, down from $54.6 million or 1.27% as of June 30, 2011.

As we analyze the overall credit quality of our program business, we also take into account more than just the Farmer Mac I agricultural loan delinquencies. The total program business includes AgVantage securities and rural utilities loans, neither of which have any delinquencies and our USDA Guaranteed Securities, or Farmer Mac II loans, that are backed by the full faith and credit of the United States.

When these are taken into consideration, the overall level of 90-day delinquent loans in all of our program assets was just 38 basis points as of June 30, 2012, and that compares to 44 basis points as of March 31, 2012 and 45 basis points as of June 30, 2011. Of course, the issue that's developed over the second quarter is the significant drought conditions that are gripping much of Midwest.

Based on what we know today, the size and the quality of the crop in much of their primary growing regions will be impacted. In some places, it will be significant, in others, the impact will not be as severe.

Today, Farmer Mac is monitoring developments related to the drought, as well as doing some additional stress testing on our portfolio to gauge the potential impacts.

With the growing season not yet finished and harvest not yet begun, it is too early to determine the near and the long-term effect of the drought on borrowers and ultimately on Farmer Mac's portfolio. Many factors, such as crop insurance, and most producers have coverage, higher prices for the commodities affected, for example, corn at $8 and soy beans today at $16, and the strong financial condition of producers, including lower debt and a low interest rate environment, all of those -- those factors, all of which impact those sectors are likely to offset some of the impacts of the drought.

Therefore, it will take some time to sort out the impact on the industry.

Our short-term concerns revolve around the protein, the dairy and the ethanol sectors, as these are most likely to be affected in the near term as a result of higher corn prices and other feed prices for the livestock. These rising prices will have an impact on the profitability of those ag producers.

As we have done in the framework of historical cycles and events within agriculture, we will continue to carefully assess the data and monitor the impacts as they unfold.

With that as a background, I'd like to turn to Tim Buzby, our CFO, to cover our financial results in greater detail. Tim?

Thanks, Mike. As mentioned, second quarter core earnings were $12.9 million or $1.17 per diluted share, up from $10 million or $0.94 per share a year earlier.

Farmer Mac uses core earnings, a non-GAAP financial measure, to measure corporate economic performance and develop financial plans, because in management's view, core earnings is a useful alternative measure for understanding Farmer Mac's economic performance, transaction economics and business trends.

Core earnings for the quarter benefited from higher net effective spread of $27.2 million, compared to $21 million in second quarter of 2011. The increase in net effective spread was primarily attributable to the cumulative purchases of AgVantage securities throughout 2011 and 2012 that Farmer Mac holds on balance sheet.

The overall net effective spread for second quarter 2012 was 99 basis points, compared to 96 basis points for the same quarter in 2011.

Also during second quarter, we recorded net provisions for losses of $200,000, compared to a net release from the allowance for losses of $800,000 in the same period in 2011. There were no charge-offs recorded against the allowance during the second quarter.

The GAAP net loss to common stockholders was $4.3 million, or $0.41 per diluted share, compared to net income of $5.2 million, or $0.48 per diluted share, for second quarter of 2011.

In addition to the items affecting core earnings, the remaining change in GAAP results was almost entirely attributable to the effects of fair value changes on financial derivatives. Due to the significant decrease in long-term interest rates during second quarter 2012, for example the 10-year treasury rate decreased by 57 basis points during the quarter, Farmer Mac recorded unrealized fair value losses of $21.6 million on its financial derivatives.

Farmer Mac uses financial derivatives, primarily interest rate swaps, to mitigate its exposure to interest rate risk and achieve an overall lower effective cost of borrowing. Because Farmer Mac's financial derivatives were not designated in hedge relationships for accounting purposes through second quarter 2012, changes in the fair values of these instruments were recorded in earnings, with no offsetting fair value adjustments on the corresponding hedge items.

Going forward, in order to dampen some of the volatility of our periodic GAAP earnings and the resulting effects on our capital surplus and book value, as of July 1, we designated certain of our financial derivatives in hedge relationships for accounting purposes. Those designations will now allow us to record offsetting fair value adjustments for the hedged assets in earnings.

GAAP earnings will still differ from core earnings, but not as much. For example, of the $21.6 million of unrealized fair value losses on financial derivatives we recorded in second quarter, $14.5 million of those losses were related to the derivatives that are now in hedge relationships.

So if hedge accounting had been in place during second quarter, we would have expected to record offsetting gains on hedge assets of $14.5 million into our GAAP earnings. As of quarter end, Farmer Mac's $492 million of regulatory core capital exceeded the statutory minimum capital requirement of $356 million by $136 million, an excess of 38%.

The capital surplus was up from a $126 million at year end 2011. More complete information on Farmer Mac's performance for the quarter is set forth in the 10-Q we filed yesterday with the SEC.

With that, I'll turn the discussion back to you, Mike.

Thanks, Tim. As you can see, Farmer Mac continues to achieve solid results.

Strong core earnings, the addition of new volume despite weaker demand at the retail level and continued high credit quality, all contributed to another strong quarter. These results will continue to build capital, which builds long-term strength and positions us for continued growth.

Strong product lines, growth in number of institutions that sell loans to us and a changing regulatory environment in the banking industry, all provide, we believe, significant opportunities to continue to build our portfolio and accomplish the mission for which we were created. While the current conditions will have impacts on agriculture as a whole, we remain confident that our financial strength and commitment to mission will allow us to continue to aggressively pursue opportunities to bring capital and liquidity to rural America, as well as provide value to you, our shareholders.

We look forward to sharing those results with you in the future. At this time, I'll turn it back over to Keith and we'll be glad to take any questions you might have.

Just a question, I realize at this point it's really hard to kind of assess -- it's hard to assess what's going to happen as far as the impacts of the drought and presumably we'll know in the next several months. Is there any way, looking out beyond this?

Am I stretching too much, could there be a silver lining for origination growth down the road, if presumably, losses are manageable, given your underwriting, if there are any, that this could cause farmers, to say, draw down on their working capital lines so they'd have less cash available at the end of the season, that it might induce them to draw on the value of their farms or take out bigger mortgages, particularly given that LTVs and the amount of debt out there is so low.

Yes, it -- I think it's as -- and you mentioned, and I think it's early in the game and very difficult to really assess what will happen. Generally in these kinds of cycles, as they use up their liquidity and then you go back to more normal borrowing cycles, which would likely include more long-term borrowing and more real estate secured borrowing, and less ability to pay for all of these assets out of cash.

So there will be some opportunities in that. The question of how much and, depends on, again, a lot of the factors that we talked about, that are a little hard to gauge at this point in time until we see how the crop plays out, crop insurance answers their questions and we see the impact on balance sheet for producers.

Okay, and Tim, maybe on the hedging change, I mean, it makes sense to me, I am just trying to figure out maybe the potential impact, I guess, underlying that, one, would there be any change to sort of the thought that your net effective spread generally historically stays in the 90 to 100 basis point range. I presume there may not be any impact on that, but I don't know and then also, how do I think about the fact that, I guess it's about $950 million you're designating and you have, I think, about $6 billion in notional outstanding, yet the mark in the second quarter, was $14 million of the $21 million.

It just seems like the notional value is small relative to the total notional, yet the impact it would have had was material. I don't know if maybe you could expand on that, would be helpful.

Yes, to your first point, Mike, with respect to the net effective spread. The change to hedge accounting in the third quarter will have no impact on that going forward.

We've sort of led investors to the idea of low to mid 90s is what we expect for net effective spread and that continues to be our projection as we look forward. So a change in hedge accounting has no impact there.

The $950 million of notional value of swaps that we put in hedge relationships is simply we chose some of the largest swaps which have some of the longer durations. So they do, and as you see in the numbers we discussed and included in our filing, have an impact of about 2/3 of the total book in terms of change in fair value.

So yes, while it only is about 15% or so of the notional amount, the effect on the total change in value as interest rates move will be significant. Again, the context we tried to provide for second quarter was about $14 million out of the $21 million.

Question on the losses on the derivatives. The way the -- the 30-year was around 3.2% [ph] or so at the beginning of the quarter, ended the quarter considerably under that, to say the least.

I was a little surprised to see that the swaps, these interest rate swaps, should have shown some sort of a gain, but did you take a different position or something and flip flop those swaps to go the other way or -- I didn't think you could do that? And secondarily, as I understand the crop insurance, most of the portfolio is through your various Farmer Mac programs, it doesn't really have a whole lot to do with the average farmer sometimes.

What, maybe 20%, 25% of the loans are tied to the farmer and are those people all required to have crop insurance? Could you comment on that?

I'll let Tim answer the question, the first question on the derivatives, and then I'll take the crop insurance. So go ahead, Tim.

Yes, with respect to derivatives, George, no, there was no change in our position. The swap book doesn't change.

And as we enter into those swaps, generally, we keep them to maturity and don't make any changes. The drop in interest rates during the quarter, many of our pay fixed swaps, which is what we did put into the hedge relationships, that $950 million for example, have a -- the pay leg on those is a liability at a fixed interest rate, so that as interest rates fell during the quarter, the fair value of those swaps goes down because our obligation is at the higher level of interest rates, compared to the beginning of the quarter.

So no change there. As you see interest rates drop, you would expect to see the value of our portfolio go down, portfolio of the derivatives.

And as interest rates go up, you would tend to see the value of those derivatives increase. So I think that addresses the issue on the swaps and moving in rates.

Mike, I don't know if you want to try and address the crop insurance question?

Sure. Well, as you mentioned, and it is worth noting, although the drought is having a fairly broad impact across the country, many of our crops are not tied directly to that situation.

In other words, they're in other parts of the country, they're crops that are irrigated. So it only does impact a portion of our portfolio.

As it relates directly to crop insurance, there is not a specific requirement that everybody have crop insurance, but that said, the way the program's built, many of the programs were -- in fact, almost all the USDA programs would require producers to have crop insurance. So the result is that nearly everyone who is growing crops eligible for crop insurance have crop insurance.

That said, there is a wide variety of products that you can purchase in the crop insurance that give you varying amounts of coverage. And so, not only do you have the issue of the impact that the weather's having on the crop, but you have this moving part of, 2 producers, side by side, could have paid 4 different coverages of crop insurance and therefore, have different payments coming back when it all gets said and done.

So crop insurance will have an impact, will help significantly in terms of producers who have smaller yields, but at the end of the day, that's still -- there is a lot of variability there. The last thing I will mention is that as I said, not all the crops really are tied directly to the weather conditions and will be impacted directly by the weather conditions in our ag portfolio, in our Farmer Mac I business, but in addition, Farmer Mac I is only a portion of our portfolio.

Farmer Mac II, the rural utilities loans, all have different factors to deal with, and so, they will not be impacted, obviously, the same. And with the significant AgVantage loans that we have, they have a different risk profiles just because of the way they are structured.

So, lots of open questions at this point.

Thank you, Keith. And thank you everybody for being on the call.

We appreciate your attendance. We appreciate your comments and questions and we look forward to sharing next quarter's results.

Thanks again and everybody have a great weekend.