Hello and welcome to the Federal Agricultural Mortgage Corporation Investor Conference Call. [Operator Instructions] Please note that this event is being recorded. And now, I'd like to turn the conference over to Michael Gerber.

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,…

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…

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.

[Operator Instructions] And the first question comes from Mike Turner with Compass Point.

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.

The next question comes from George Thoreson with Wells Fargo.

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.

[Operator Instructions] Okay, as there are no more questions at the present time, I'd like to turn the call back over to management for any closing remarks.

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.

Thanks for participating. This concludes today's teleconference. You may now disconnect your phone lines. Have a nice day.