Timothy L. Buzby - President and CEO Christy Prendergast - Deputy General Counsel R. Dale Lynch - SVP, CFO and Treasurer.

Chas Tyson - KBW.

Good morning and welcome to The Federal Agricultural Mortgage Corporation Second Quarter 2015 Investor Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions [Operator Instructions]. Please note today's event is being recorded.

I would now like to turn the conference over to Mr. Tim Buzby, President and CEO. Please go ahead, sir..

Good morning. I'm Tim Buzby, Farmer Mac's President and CEO. The Farmer Mac is pleased to welcome you to our Second Quarter 2015 Investor Conference Call.

Our General Counsel is out of the office today, so I will ask Christy Prendergast, Farmer Mac's Deputy General Counsel, to comment on forward-looking statements that management may make today, as well as Farmer Mac's use of non-GAAP financial measures..

Thanks, Tim. 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, as well as those described in our 2014 annual report on Form 10-K, our subsequent quarterly reports on Form 10-Q and our other filings with the SEC. Farmer Mac uses core earnings, a non-GAAP financial measure, to measure corporate performance and develop financial plans.

In management's view, core earnings is a useful alternative measure for understanding Farmer Mac's economic performance, transaction economics and business trends. This non-GAAP financial measure may not be comparable to similarly labelled non-GAAP financial measures disclosed by other companies.

Farmer Mac's disclosure of core earnings 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. A recording of this call will be available on our Web-site for two weeks starting later today..

Thank you, Christy. Second quarter 2015 was a good strong quarter for Farmer Mac. In fact it represents an important milestone for us that is worth emphasizing. For over a year and a half, we have been talking about three unique items, items not related to our program business that affected our financial results in various ways.

One was the loss of dividend income on the CoBank preferred stock previously held in our investment portfolio that was redeemed in fourth quarter 2014. The other two items were important initiatives that will benefit Farmer Mac over the long run but which complicated our financial results recently.

Both of these initiatives, the cash management and liquidity initiative and the capital restructuring initiative, were successfully completed in first quarter 2015. What these three items behind us, second quarter 2015 is the first quarter since the end of 2013 in which none of these items affected our current or expected results.

This allowed the underlying fundamentals of our business to become the clear and prominent drivers of our results, and the results were good. During the second quarter, gross and net business volume showed material growth, average spreads increased modestly and credit quality remained healthy.

Farmer Mac ended second quarter 2015 with outstanding business volume of $15.1 billion. We added $731 million of new business resulting in net growth after maturities and repayments of almost $470 million. This increase was due to broad-based growth across most of our lines of business and products.

Farmer Mac purchased $307 of AgVantage securities in the quarter, with healthy contributions from both our Rural Utilities and agricultural counterparties.

We provided $180 million of AgVantage financing to the National Rural Utilities Cooperative Finance Corporation as part of our Rural Utilities Service refinancing transaction completed by a large generation and transmission utility. As part of this transaction, Farmer Mac also purchased a $47 million portion of the loan originated by CFC.

However, this loan purchase did not close until the third quarter. This transaction is a great example of the RUS refinancing opportunities that we have discussed in recent quarters and which we believe continue to exist.

On the agricultural side of our AgVantage business, we provided $77 million of financing in four Farm Equity AgVantage transactions with two counterparties, and an additional $50 million financing for an agricultural lender.

As reported previously, Farm Equity AgVantage is a variation of our AgVantage wholesale financing product, so it is customized for investors in agricultural real estate and agribusinesses. Since we introduced this product a year ago, its total business volume has grown to $187 million as of June 30.

We believe this product has room for further growth given the increase in interest we've had from institutions and investors in the agricultural asset class.

Farm & Ranch loan purchases were also strong this quarter with nearly $197 million in purchases, which represents a meaningful increase compared to first quarter 2015 purchases which were $130 million.

Greater participation from our bank customers, modest expansion of our loan products and a general uptick in lending activity that we believe is related to the completion of the 2014 tax season, contributed to this increase. Prepayment rates remain subdued and therefore trends in net loan growth are favorable.

Within the USDA Guarantees line of business, we purchased $124 million of new guaranteed securities, which continues the 2015 trend toward higher volumes compared to last year, as banks are increasingly willing to sell the lower-return guaranteed portions of loans to fund other new loan originations.

Farmer Mac's net effective spread for second quarter 2015 grew in both dollars and in percentage terms compared to first quarter 2015.

Overall, new business spreads have been stable since mid-2013, with slowing prepayment rates in the past two years and a continuing business mix shift to higher-margin products has combined to drive modestly higher average overall spreads in recent quarters. The credit quality of our portfolio remains healthy.

As of June 30, 2015, $31.9 million or 0.58% of our $5.5 billion Farm & Ranch portfolio was 90-days delinquent. That's down modestly from first quarter 2015 and remains very favorable compared to our long-term average.

As we have mentioned previously, we expect that over time Farmer Mac's 90-day delinquency rate will eventually revert to our historical average of approximately 1% due to macroeconomic or related factors. However, we have not seen an impact on our portfolio or a rise in delinquencies.

As we've discussed on previous calls, the Western part of the United States including California continues to experience drought conditions with the water level in many Californian reservoirs at historically low levels. The situation remains very similar to what we discussed during our first quarter call.

The persistence of extreme drought conditions in the Western states could have an adverse effect on Farmer Mac's delinquency rates or loss experienced in the future, but we have not yet seen any impact.

We continue to remain informed about the drought and its effects on the agricultural industries located in the Western states and on our Farm & Ranch portfolio through regular discussions with our loan servicers that service loans in the drought-stricken areas as well as customers and other lenders in the industry.

With that as background, I would like to turn to Dale Lynch, our Chief Financial Officer, to cover our financial results in more detail.

Dale?.

Thank you, Tim. As Tim mentioned, second quarter 2015 was a milestone for us in that it marks the first quarter after the successful completion of the special initiatives that Tim discussed, therefore the first quarter in a while in which our financial results are no longer impacted by these factors.

As I cover our results, I'll provide insight in the prior period comparisons when those prior periods did include these effects.

Turning to the financials, Farmer Mac's second quarter 2015 core earnings were $11.6 million or $1.02 per diluted share, compared to $9.1 million or $0.80 per diluted common share for first quarter 2015 and $23.2 million or $2.05 per diluted share in the year ago quarter.

The $2.5 million increase in core earnings compared to first quarter 2015 was primarily driven by the elimination of $3.5 million after-tax in dividend payments as a result of the completion of our capital restructuring initiatives and an increase in after-tax net effective spread of $0.3 million.

The sequential increase in core earnings is partially offset by a $1.3 million after-tax increase in credit expenses and a $0.4 million after-tax increase in operating expenses.

Increase in operating expenses was primarily a result of a $0.2 million after-tax increase in legal costs associated with the preparation of comment letters submitted in June of this year regarding the FCA's proposed rule on Farmer Mac's corporate governance.

These comment letters are part of the normal regulatory process of proposed new rule, but given the complexity and importance of the rule, our letters were necessarily detailed and required significant amount of legal work to complete it.

The comment period for the proposed rule is now closed and we do not expect ongoing expenses of this magnitude as part of the final rulemaking process.

The decrease of $11.6 million in core earnings from the year ago quarter was clearly driven by the impact of the unique factors that Tim –mentioned, primarily the $11.6 million tax benefit with the cash management initiative produced in the second quarter 2014 and which did not obviously reoccur this quarter.

Apart from the loss of this tax benefit, a number of factors combined to largely offset each other compared to the year ago quarter.

On the positive side, where $1.9 million after-tax increase in net effective spread resulting from a $1.1 billion increase in portfolio growth and a net savings of $2.8 million after-tax in preferred dividend payments resulting from a dividend save from redemption of the FALConS preferred stock, netted against and incremental dividends incurred as part of our capital restructuring initiative.

Offsetting these items were increased credit costs of $2.5 million after-tax and a $1.9 million after-tax in lost dividend income resulting from the fourth quarter 2014 redemption of the CoBank preferred stock.

Switching to GAAP net income, second quarter 2015 net income was $22.2 million or $1.94 per diluted share, compared to $20.2 million or $1.78 per diluted share for the year ago quarter.

The $2 million increase compared to the previous year's quarter was primarily the result of the effects of unrealized fair value changes on derivatives and hedged assets which is a $10.4 million after-tax gain in the second quarter 2015 compared to a $3.1 million after-tax loss in the year ago quarter.

Turning to spreads, Farmer Mac's net effective spreads for the second quarter was $29.8 million or 88 basis points, compared to $29.3 million or 86 basis points in the first quarter this year and $29 million or 92 basis points in the year ago quarter.

The $0.5 million and 2 basis point increase in net effective spread compared to the first quarter of this year was primarily attributable to growth in our outstanding business volume and increase in net effective spread for USDA Guarantees and Institutional Credit lines of business and to a lower average balance of our lower-spread cash and investment securities held within our liquidity investment portfolio.

A $0.7 million increase compared to the year ago period was attributable to growth in our outstanding business volumes. The 4 basis point reduction in percentage terms compared to the year ago quarter was a result of the lost dividends on redemption of the CoBank preferred stock we have discussed previously. That was a negative 7 basis point impact.

Again, this negative 7 basis point impact was partially offset by increase in net effective spread across the rest of our program business.

Turning to the core lines of business, net effective spreads for second quarter of 2015 compared to first quarter of 2015 were as follows; $9.7 million or 182 basis points for Farm & Ranch compared to $10.1 million or 197 basis points in the first quarter; $4.5 million or 98 basis points for USDA Guarantees compared to $4.2 million or 95 basis points; $2.8 million or 118 basis points for Rural Utilities compared to $2.8 million or 115 basis points; and lastly, $10.9 million or 78 basis points for Institutional Credit compared to $10.4 million or 77 basis points in the first quarter.

From a credit perspective, portfolio quality was largely the same overall compared to first quarter 2015, as the substandard assets percentage was down slightly to 2.5%.

The total allowance for losses was $10.6 million or 0.19% of our $5.5 billion Farm & Ranch portfolio as of June 30, 2015, compared to $9.4 million or 0.18% of the Farm & Ranch portfolio at the end of the first quarter. So credit quality remained essentially unchanged and in a good position.

The $1.2 million increase in the total allowance for losses is driven primarily by the downgrade in the risk rating of a single loan to a canola processing plant. For this downgrade, this quarter we established a specific reserve for this loan and Farmer Mac believes it's adequately reserved for losses related to this loan.

Farmer Mac only has two canola loans in this portfolio totaling $20 million. We charged off $111,000 after-tax this quarter which in combination with the increased allowance on the canola loan resulted in total after-tax credit cost of $1.3 million this quarter.

As Tim mentioned, the Farm & Ranch portfolio 90-day delinquencies were $31.9 million or 0.58% on our Farm & Ranch portfolio as of June 30, compared to $32.1 million or 0.6% as of end of first quarter 2015 and $26 million or 0.49% in the year ago quarter.

So as reflected in our substandard assets, total allowance for losses and/or 90-day delinquencies, credit quality remains very stable and toward the favorable end of the range of our historical averages.

In addition, for Farmer Mac's other lines of business, there are currently no delinquent AgVantage securities or Rural Utilities loans, and the USDA Securities are backed by the full faith and credit of the United States.

As a result, across all of Farmer Mac's four lines of business, the overall level of 90-day delinquencies is comprised entirely of Farm & Ranch loans and which is just 0.21% of total volume as of second quarter this year compared to 0.22% total volume as of the first quarter of this year and 0.18% in the year ago quarter.

In terms of business volumes, we added more than $731 million in new business this quarter. Turning to the specifics, we added the following new business volumes; $307 million of AgVantage securities, $197 million of Farm & Ranch loan purchases, $124 million of USDA Securities and $103 million of Farm & Ranch standbys.

After repayments, our net outstanding business volume increased $470 million this quarter. Now turning to capital, Farmer Mac's $553 million of core capital as of June 30 exceeded the statutory minimum amount of $440 million by $109 million or about 25%.

This compares to core capital of $531 million or $97 million of capital above the statutory minimum as of the end of the first quarter this year, and the core capital of $766 million or $345 million of capital above the minimum as of the year-end 2014.

The decrease in core capital from year-end 2014 resulted from the redemption of $250 million of Company preferred stock on March 30, 2015. In terms of liquidity, Farmer Mac had 187 days of liquidity at the end of the quarter compared to the minimum regulatory requirement of 90 days.

More complete information about Farmer Mac's performance for the second quarter is set forth in the 10-Q we filed today with the SEC. With that, Tim, I'll turn it back to you..

Thanks Dale. We saw many positive trends across our businesses this quarter and it showed in our results. Business volumes were particularly strong, driven by our broad-based business development efforts and good customer demand. Looking forward, the second half of 2015 looks promising.

While the agricultural industry digests lower commodity prices and deals with the persistent West Coast drought, the overall business climate for Farmer Mac is positive. We believe that the relative demand for Farmer Mac's products can increase as credit becomes somewhat tighter and we believe this is beginning to occur.

In fact, we believe that a so-called normalization of the agricultural credit environment can play to Farmer Mac's strength.

In terms of delivering upon our mission, we continue to make a concerted effort to communicate the value of our solutions to expand our customer base, and we feel our success on this front is evidenced by the growth of our business. We continue to sign up new banks for our loan purchase and credit protection products.

We see strong interest for our Farm Equity AgVantage financing from existing and potential new counterparties. We are also working hard to expand the rest of our Institutional Credit line of business to new agricultural lenders.

In fulfilling our mission to serve rural America, we are constantly looking to expand our customer base and work to innovate and develop new products that help bring new capital to agricultural and rural communities. At this time, we're happy to answer any questions you may have..

[Operator Instructions] Our first question comes from Bose George of KBW. Please go ahead..

This is actually Chas Tyson on for Bose.

First question, just wanted to ask on expenses, on the G&A expenses, should we essentially assume that the expenses, the increase now attributable to comment letters is kind of ongoing and in the run rate from now on? And then also on the compensation expense, I believe last quarter that was up due to some incentive comp, and I was just wondering about why it didn't necessarily come down this quarter..

This is Dale. So the increase in G&A that resulted from the comment letter is what we indicated was, this is really kind of an upfront cost. The comment period is now closed, we've submitted our comment letter and we don't expect an increase in expenses nearly of that magnitude.

We may have a few incremental expenses related to the process but the big part of the process is really the upfront comment letter, so we don't expect that to reoccur.

As far as the compensation, yes, as we indicated, the increase in comp is partially due to the higher incentive estimates but it's also due to the consolidation of our new subsidiary that we – or our new company that we formed about a year ago, Contour, which is our appraisal company.

I believe we indicated somewhere in our Q that the impact of that, we consolidate about $0.25 million per quarter in compensation expenses now associated with that new subsidiary. So keep in mind that that $0.25 million step-up really is related to that.

The income from that subsidiary will flow through other income, and as that subsidiary continues to grow and scale its business, we'll probably provide some incremental insights as to the revenue and the cost performance of the company. But it's just about a year old now and starting to get to reasonable scale..

Okay.

That Contour, was that a de novo or was that already an existing business, or I mean what's the history behind that?.

It's a new appraisal company that we started with another business partner of ours. We started it from scratch essentially adding appraisers in various parts of the country. We expect that business to kind of start to thrive here now. It's about a year old.

So we'll start to probably breakout its financial results separately beginning sometime next year..

Okay, thanks.

And then on the Farm Equity product, you guys have obviously done a very good job of being involved with the two lenders that you're doing business with right now, but wondering we've seen a lot of more institutional money come into that market recently, and if we should expect to see more lenders come online with that product or we should continue to see you working with the same lenders that you've been looking with previously?.

You'll certainly see us continue to work with the lenders that we've been working with, but we expect that there will be more to come. We've had numerous conversations with a number of institutions and funds and expect that as more money enters that space that they look for financing these..

Go it. And then I guess kind of taking a step back, I'm sure you guys have noted the stock price recently, and that seems to not necessarily trade in line with the fundamentals of the business, especially as you've cleaned up the income statement with this quarter.

Just wondering how you guys are thinking about that, if there is a way that you think you can help provide support to the common shares that are out there and if you are considering any alternatives?.

We certainly, as you've noted, have seen the stock price dip down here a little bit the last couple of months and certainly aren't pleased with that.

Our kind of view of the stock price for the past year or so has been to wait until the end of 2015 to see how once some of these unique items get put behind us and we can now hopefully start to see our results be driven by business volumes, spreads and control of expenses, and hopefully our financial results will be consistent with those items as well, with credit also being a factor.

So I think as the results become easier for investors to digest and it becomes much more easy to analyze the results of the Company, hopefully that will bode well for the share price.

We are looking at various ways and having discussions, again now that those things are behind us, about ways that we can take a look at the stock, and hopefully it will begin to trade based on our fundamentals..

Got it.

Are there any alternatives that you can kind of give color on or is it more beginning stages that you're looking at it right now?.

I would say nothing specific that I'd point to at this stage..

Okay, thank you..

Our next question comes from [indiscernible] of Compass Point. Please go ahead..

This is [indiscernible]. I'm filling in actually for Kevin Barker. My first question is regarding the maturities and paydowns during the quarter. They were down significantly from the first quarter and also on a year-over-year basis.

So I was hoping if you could give us some color on that? And also as we think to the second half of 2015, would you expect kind of the first quarter run rate or would it be closer to 2Q?.

With respect to paydowns, agricultural loans generally have different payment characteristics. Some loans pay every month, some loans pay once a quarter, some loans pay twice a year and some loans pay once a year.

The reality is that because of that cyclicality, what you end up with in first quarter is, virtually all loans have a payment due on January 1. So if you take an annual pay loan for instance, it's going to have a pay-down in the first quarter but it's not going to have a pay-down in the second quarter, the third quarter or the fourth quarter.

So when you compound those factors that with all loans having payments due in the first quarter, you end up with more paydowns in the first quarter than you end up with the second quarter. By the same token, your paydowns in third quarter are generally less than first quarter but more than second quarter.

That is what's mostly attributable to the slowdown in payments or in amortization in the second quarter. So if you look historically at our portfolio over the years, generally that's what you see, the most significant paydowns in first quarter then the third quarter and then second and fourth quarters..

That's helpful. Thank you.

And also a question on the provision, was the entire $1.1 million related to the canola processing plant?.

Not the entire amount but the majority of it, yes..

[In itself] [ph] it was about $1 million as a standalone item..

And of course this is the first quarter in a while that we haven't seen reserve releases.

Do you anticipate as we progress through the year building releases further or do you think there's an opportunity for further reserve releases?.

I think it's really facts and circumstances based. We had an addition to the allowance because of that one loan this quarter. Next quarter we could have a release from the allowance due to one loan or we could have additions because of one or a handful of loans. I think with respect to the credit performance, it's been very positive over the years.

At the end of the day, as an institution that lends money, you do expect to have some credit losses. It's been favorable recently but I would say any modest amount, say $1 million or even a little bit more positive or negative any quarter, is to be expected and as we've seen this quarter it can flip and it certainly could flip back..

I'll just extend on Tim's point to say as well, the 19 basis points that our total allowance represents on our risk portfolio is a pretty darn low number, and that definitely is in line with where our 90-day delinquencies are in terms of favorability.

And if we are growing like we are currently growing, I would expect as an analyst that each quarter all else being equal you might see an increase dollar-wise of provision. That's sort of normal course. I mean our Company, our size, normal course is probably $3 million to $5 million of net provisions a year just based on growth, et cetera.

The releases we've had in the last 24 months are primarily the result of the pay-down of our F&R portfolio, and as those are paid off in full, we got a lot of our money back. So we recouped those losses. That portfolio is down to a de minimis amount. It's 20 or so million dollars or less.

So I just as an analyst probably wouldn't continue to expect those kinds of numbers. That's just not normal course for a credit company..

That's great. Thank you..

This concludes the question-and-answer session. I'd like to turn the conference back over to Tim Buzby for any closing remarks..

Being no further questions, I would like to thank you for listening and participating this morning. I look forward to our next call where we report our third quarter 2015 results in November. Thank you..

Thank you, sir. Today's conference has now concluded and we thank you for attending today's presentation. You may disconnect your lines and have a great day..