Good day, and welcome to the Federal Agricultural Mortgage Corporation Third Quarter 2014 Investor Conference Call and Webcast. All participants will be in listen-only mode. (Operator Instructions) I would now like to turn the conference call over to Mr. Timothy Buzby, President and CEO. Mr. Buzby, the floor is yours sir.

Thank you. Good morning. I am Tim Buzby, the President and CEO of Farmer Mac. The Farmer Mac management team and I are pleased to welcome you to our third quarter 2014 investor conference call. Before starting this morning, I will ask Steve Mullery, Farmer Mac’s 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. Steve?

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 2013 Annual Report on Form 10-K, our subsequent quarterly reports on Form 10-Q and our other filings with the Securities and Exchange Commission. Farmer Mac uses core earnings, a non-GAAP financial measure, to measure corporate performance and develop financial plans. In third quarter 2014, Farmer Mac also presented core earnings, excluding the effects of two short-term initiatives: first, a cash management and liquidity initiative implemented in second quarter of 2014 that has been described in more detail in our SEC filings; second, a capital structure initiative under which Farmer Mac reduced it’s risk by taking advantage of favorable market conditions to issue preferred stock in advance of the planned March 30, 2015 redemption of all the outstanding Farm Asset Linked Capital Securities, which are also known as FALConS. In management’s view, core earnings and core earnings excluding these initiatives are useful alternative measures for underlying Farmer Mac’s economic performance, transaction economics and business trends. These non-GAAP financial measures may not be comparable to similarly labeled non-GAAP financial measures disclosed by other companies. Farmer Mac’s disclosure of core earnings and core earnings excluding the indicated items are intended to be supplemental in nature. These measures are not meant to be considered in isolation from as a substitute for or as more important than related financial information prepared in accordance with GAAP. A recording of this call will be available on our website for two weeks starting later today.

Thank you, Steve. Farmer Mac had a good third quarter in a number of key fundamental areas, most notably net effective spread continued to increase to 89 basis points for the third quarter, up from 84 basis points in second quarter 2014 and added $0.6 million after-tax to core earnings compared to second quarter 2014. This increase was primarily due to net growth in higher spread Farm & Ranch loans and USDA securities as well as a modest increase in pricing for some of our Farm & Ranch loan products. Credit quality also remained at historically favorable levels with 90-day delinquencies near the lowest end of historic ranges and we had an additional $0.5 million after-tax release from the allowance for losses, primarily due to the pay down of $9.7 million of ethanol loans during the third quarter. This follows a $1.7 million after-tax release from the allowance for losses in second quarter 2014, which was also primarily due to the pay down of ethanol loans during that quarter. All of these factors made good contributions to core earnings in the third quarter. Last quarter, we announced a cash management liquidity initiative that is designed to help diversify Farmer Mac’s investment alternatives for short-term assets to include the ability to invest in significant size repo investments and potentially position Farmer Mac to apply to participate in the Federal Reserve Bank of New York’s RRP facility. As you recall we have recognized $11.6 million benefit to core earnings in second quarter related to that initiative. We also indicated that for the second half of 2014 Farmer Mac would incur an after-tax net financing cost estimated at $0.6 million to $1.2 million in each of the third and fourth quarters. In third quarter, the after-tax net financing cost was $1 million. In…

Great. Thank you, Tim and good morning. As Tim mentioned at the outset of the call, Farmer Mac had good results in the third quarter with widening net effective spread, ongoing favorable credit quality, and net growth in Farm & Ranch loans and USDA securities. These strong fundamentals added good contributions to core earnings for the quarter and we believe bode well for the future. Let me first provide an update on the cash management and liquidity initiative, which we implemented last quarter. As of September 30, 2014, this initiative resulted in $1.6 billion of term repo assets presented as securities purchased under agreements to resell and $1.7 billion of related liabilities presented as securities sold not yet purchased on Farmer Mac’s balance sheet. For third quarter of 2014, Farmer Mac incurred a total of $17.9 million in interest expense related to the financing costs of this strategy and unrealized gains of $16.4 million from the securities sold, not yet purchased for a pre-tax net financing cost of $1.5 million or $1.0 million after-tax, which is in line with the estimates we provided to the analysts last quarter. Farmer Mac estimates that the incremental net after-tax financing costs that will be incurred in fourth quarter 2014 related to the strategy will also be approximately $1 million and estimates that the full year net economic benefit of the cash management and liquidity initiative will be at least $8 million to $9 million in 2014, after netting the related incremental after-tax financing costs over the term of this transaction, with the tax benefit to core earnings, which you recognized in the second quarter of this year. As Tim mentioned this quarter, we further analyzed core earnings to isolate the effects of the short-term initiatives that will not affect core earnings materially beyond…

Thanks, Dale. Third quarter 2014 marked continued progress in key fundamental drivers of Farmer Mac’s business. Net effective spread has now increased for two consecutive quarters and our credit performance remained about as good as it can get. We continue to grow our most profitable product, Farm & Ranch loans, which is helping to drive the increasing spreads and we are encouraged by this continuing trend. In fulfilling our machine to serve rural America, we are constantly looking to innovate by deepening and broadening our customer base and working to develop new products that help provide greater liquidity and bring new capital to agricultural and rural markets. Farmer Mac is proud of its ability to help farmers and ranchers, while at the same time delivering good profits and strong credit quality for its investors. We are pleased with the results for the first nine months of 2014 and look forward to closing out the year with a good fourth quarter. At this time, we would be happy to answer questions you may have.

Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions) The first question we have comes from Bose George of KBW. Please go ahead.

Good morning, guys. This is actually Chas Tyson on for Bose. I just had a question about the credit costs from the allowance obviously delinquencies continue to be pretty low at 46 basis points in the Farm & Ranch portfolio. Just wondering where and when you think that could normalize to and how that will affect the allowance going forward?

Well, it’s hard to say. We have seen delinquencies coming down pretty much on a continuous trajectory for a number of years. With that, we have seen the allowance come down at the same time as the quality of the portfolio has increased. If there were a downturn in agriculture in general or specific effects from the impacts of the droughts in the west or something else that could come about and that caused delinquencies to go up, you would see our allowance go up. I think in general, the movements that we see in the allowance we had reductions in each of the last two quarters, couple of $100,000 this quarter and a little more than $1.5 million I think last quarter. You could see similar increases in the allowance. I wouldn’t focus on those as being typically significant. So, long as you are talking about $2 million or $1 million in a quarter, which could become $2 million to $3 million to $4 million in a year in either direction one way or the other, I think those are just – will just be normal fluctuations and could be driven by individual loans or like we said this quarter and last quarter with ethanol loans paying down, you see that improve. So, I think unless we were to see a significant change in delinquencies coupled with a significant change in the allowance and are indicating that in through disclosures that those items are significant or unexpected. I think generally you will just see a little bit of volatility up or down for the time being. And as we start to see a trend change, we will certainly disclose that much what it’s due to.

And Chas, just one additional point too on that, just in the last couple – to Tim’s point in the last couple of quarters, the primary driver in the reduction in the releases has been the ethanol pay downs. Our ethanol portfolio I believe is down to roughly $30 million of principal balance. So I guess I would just caution you these releases have been primarily related to that. As the credit environment remains status quo I would not continue to expect significant releases and we are getting down to a pretty small UPB of ethanol loans. So, we are getting down to what I would characterize as kind of a very low market level of allowances provided on our loans. But we have not seen anything that would change any of those metrics. They are out in California irrespective not seen anything that would change this. So I think we are sort of steady course, but just keep in mind that the releases have been primarily has been primarily ethanol pay down related.

Yes, that makes sense. I saw you guys in the Q you talked about the delinquencies related to that I think 41 loans sold, do you have kind of – just what the total number of Farm & Ranch loans is? And then on those 41 delinquencies any expectation for severities and how that compares to historical severity rates?

The number of loans off hand, I don’t know. Anybody else from the management team don’t have that number handy, please offer that up. I think from a severity standpoint individual loans can impact our charge-offs significantly, you could easily see $1 million or $2 million loss on a particular loan. We have seen that in that past on ethanol loans and other permanent planting loans. Where we have obviously specifically taken a look at a loan and set aside something specific for that loan those amounts are disclosed in total as a specific allowance and everything else is just a statistical general allowance. So as we continue to evaluate things we will certainly try to disclose and be clear if there are charge-offs and it is significantly related to one particular loan, we will indicate that. And I think as Dale was saying as well, we are down to a level of allowance that is pretty low compared to the more than $5 million worth of loans that we have. So we will evaluate that from a statistical standpoint as well and so even if our calculations continue to drop there may be a level at some point at which we just determine that we need to maintain a certain allowance that makes sense which maybe somewhere south of where we are today, but something that would still be reasonable in terms of looking at a portfolio understanding that we only get information from the portfolio when we see it and the rest of it is statistical and there maybe some unknowns in that.

We have about roughly 10,000 loans in our portfolio, so I mean it’s we can kind of do the math there. I would say to you just as a note, just because the loan is delinquent doesn’t necessarily mean it’s going to have a spec reserve against it as well. It’s all going to come down to with the leverage on that loan as those the particular collateral net loans. So, I wouldn’t necessarily assume that there is going to be a formulaic spec reserve on a delinquency.

Sure, that makes sense. And then last one just curious on kind of the spread outlook for Farm & Ranch and for institutional credit, I know you guys talked about taking up those spreads in Farm & Ranch and just wondering if that you should have any effect on volume and I saw that the MetLife refinance probably coming in better than where some people thought Institutional Credits spreads would come in, so just curious on what you guys are pegging there in terms of spreads going forward?

Well, spread is one of the primary drivers of our results so that’s part of the nexus for us looking to increase those spreads and make sure that on a go forward basis we are not heading in the wrong direction. We want those spreads to remain healthy and continue to have the business be profitable at the margins. We also talked a little bit about in the corporate portfolio the repayments of the CoBank preferred stock which is going to bring down overall spreads. So I would just encourage you as you look at spreads going forward, look at the individual lines of business, look at those trends and again if there are any specific large transactions or pay-offs out into the future related to an AgVantage security or something we will try and note if there is a 5 basis point move in anyone of those individual lines of business, we will certainly try and disclose the reasons for that and what it’s coming from. But I think in general we would expect to see modest increases over time as we continue to add loans at higher spreads than where we are today. Dale, do you want to add anything to that?

Yes. I would just say that we have that’s the first time we have raised spread in years, not exactly sure but it’s more than three years perhaps as many as five years. So it’s a notable event. I mean the things to keep in mind on the Farm & Ranch side for spreads are the absolute level of rates to the extent that you do see the 10 year treasury in particular begin to move north again in terms of yield that will be helpful in rates. I think the expectation for a decline in farmer income while everyone focuses on the negative side of that, income is coming down. I think what that will do is hopefully provide and if it comes down in a measured format, along with the forecast by USDA that will tend to lead to a marginally greater demand for credit. Credit in ag has only been growing approximately 3% a year, whereas we have been doing our origination by growing 40% or 50% a year. So, clearly, we are gaining market share, but I think if the overall macro environment were to have less income in it, farmers would have that much more need for credit, which what I think could be healthy. And then the last thing in terms – and that would create demand, which would then tend to swing the balance and favor back to the bankers and less on the borrowers. And then the last thing I would mention would just be credit and the credit environment. Keep in mind that Tim said the credit statistics are about as good as they get and we try to caution people about that. If you do see an uptick in delinquencies in 2015 or 2016, which could well happen related to California or Arizona, the drought areas, I think that would also tend to swing the balance of power back to bankers again, which would swing spread would tend to lead to wider spreads. So, I would think of those three levers when you are thinking about directions of spreads, but it certainly feels like we have hit bottom about a year ago. We bounced around the bottom for about 6 to 9 months and it feels like in the last 3 to 6 months, we have seen some daylight. We are successful in refinancing most of our AgVantage bonds and the spread compression that we had talked about with you actually did not materialize. We are able to refinance most of those at existing or actually wider spreads than they were originally. So, I think it’s hard to say that we are going to continue to see a trend line, but it certainly feels promising where we sit right now.

Okay, that’s helpful. Thanks guys.

Next, we have John Dunn with Sidoti.

Good morning, guys.

Good morning, John.

You had talked – I think you had said in the past that likely the demand for Farm & Ranch from refinance is likely to hit a pause now and you talked about farmer income coming down, but could you talk about some of the other drivers that might drive farmers’ demand for credit?

Yes, it’s a very good question, John. We have actually seen the refinances slowdown a bit compared to prior years and that makes sense with low rates having been so low for so long. Those farmers and ranchers that were interested in refinancing have probably pulled the trigger on that. I think the timing of your question is good. I was almost going to jump in at the end of Dale’s comments there and say that as we think about things that could happen both in the interest rate environment and in the credit environment, if there were a little bit of stress in ag, while that might cause a little bit of uptick in delinquencies in our portfolio, it also could do the same thing for bankers and other lenders around the country that look at their portfolio and how they manage the risk and credit risk in their portfolio. And if there was some stress, that might cause them to manage their risk a little differently, perhaps use Farmer Mac a little bit more, look to get our credit guarantee or perhaps sell us loans. Similarly, with the interest rate environment, if we actually do see rates start to go up, bankers will look at their asset liability management differently and may certainly look to do something with loans that they have on their books in order to reduce their ALM risk and perhaps sell those to Farmer Mac. So, I think with the possibility of our rising interest rates and the possibility of some stress in agriculture, while those things on the short-term may also cause us pause looking at our portfolio may actually lead to an increase in business down the road.

Got it. And then could you just maybe talk a little bit about the outlook for some of the newer customer types the Farmland Partners and just institutional credit in general and how that might develop over the next couple of years?

Sure. We have done a transaction with Farmland Partners that we did disclose. They are a publicly traded REIT. There is a lot of interest in the private equity space and in the engine space of looking at ag land as an investment. And I think that’s a combination of people looking for ways to earn yield over time. And if you look at historically and you combine the operating profits from Farmland over time plus the increases in land values. Over a lot of periods against most asset classes, Farmland is a very attractive investment. So, there is a lot of activity and interest in momentum in that space. We have talked to others in addition to Farmland Partners about what they are trying to do with their funds and that is a possibility that, that space could expand for us remains to be seen, but we are certainly interested in it. We believe that supplying the capital through those funds to rural America for the purchase of Farmland and other investment in rural America is a positive overall. Also, if you – the interest from additional investors like that when there is the possibility of a moderation in land values, it adds buyers to the pool. So, from that perspective, I think it adds a little bit of support to Farmland and the overall values over the long-term. And I also think what’s important is that the investors that we are seeing looking at the space and interested in the space are not investors looking to get in the space and get out in three years at a profit. They are looking for long-term investments. They are looking to operate the land or lease the land and do it for a long period of time in a safe way. They are not flashing the pan investors who are looking to get in and flip a farm and make money. They are looking for a long-term investments and stable values over time.

Got it. And then last one just you guys did a good job of holding line on expenses, anything business development, anything coming down the pipe that would alter that?

I don’t think so, we have added staff over the years as our business is growing and as we have needed to. A lot of the business transactions that we do that produce significant volume increases don’t require additional staff. For instance AgVantage bonds that we do can add $50 million, $100 million, $250 million of business volume at a time. With the existing staff they are working on same types of deals that might be smaller. But probably the most expensive business to originate is the ongoing purchase of Farm & Ranch in USDA loans. Farm & Ranch being a little bit more because of the underwriting requirements. We have spent a lot of time working on the efficiency and utilizing technology to make that as efficient as we can. Customer service is also somewhat expensive as we continue to add new customers and new banks and new institutions, we sell those loans over time. There will be some incremental increases, but I don’t think you will see any step up in expenses at any point in time in the near future related to the new business. If you did, it would be because of significant new business where we felt we needed to add support for that. At this time our projections are that we are going to grow similarly what you have seen in the past over the last couple of years and our cost structure should remain the same.

Got it. Thank you very much.

Sure. Thanks John.

(Operator Instructions) Next we have Kevin Barker of Compass Point.

Good morning. In regards to the stress that you are seeing in California and some other states in regards to the drought, what are some of the ranges of delinquency estimates that you could see in severely stress scenario if the drought continues, do you have specific ranges that you are testing or somewhere that you are projecting going forward?

No we haven’t – as we have stated earlier we haven’t actually seen stress in the portfolio. What we see and what we hear is that things are bad and could get worse if the drought continues. We do conduct stress testing but again that includes a lot of estimates. We stress different areas, different crops and look at those results. We don’t disclose the specifics of those results, but what we have seen so far is nothing that causes us great concern. Again if there were to be losses while that might be something in the order of magnitude larger than what I mentioned earlier about there will be small volatile fluctuations. We could see increases and those were things that at that time we would then begin to disclose what we think the results would be. Obviously, the allowance and its construct is such that we disclose the amount of losses that we think are in the portfolio as of a point in time. We haven’t seen any evidence that we have losses in the portfolio now a year from now if that situation is different you will see an increase in the allowance. And then openly that could lead to charge-offs. The allowance is an estimate and isn’t losses coming – having come to fruition and have been identified it’s an estimate based on statistical analysis and the stress test that we would do. So at this point I wouldn’t be comfortable giving you a range because the combination of time and the multiple moving parts so I think would be – it would be just more of a guess at this point in time. We will continue to monitor it, continue to keep you abreast of it. And I am sure the press and the media as well will be talking about the drought over the course of the next year or so as rain either comes or doesn’t come. So, I don’t know, that doesn’t specifically give you an answer, but I can tell you that we do look at it closely. We do a lot of stress testing. We are comfortable with the level of the allowance where it is. We are comfortable with the portfolio overall. Our average LTV is we are relatively comfortable with that and being a real estate lender again only having exposure on real estate, not operating lines of credit or anything like that. We are in a pretty safe position from that perspective due to the collateral.

Okay. And I just highlight one last, if you read our disclosure closely you will see some paragraphs in the outlook section talking about we – about the drought and there is a passage in there talking we don’t see any current delinquencies related to this. And we also believe that we are well collateralized, I mean taking from that tone in context with the fact that we do the stress test on a pretty rigorous basis twice a year, which is obviously reviewed by our regulator. I think that’s a telling statistic – telling commentary in and of itself. We had many concerns about the materiality of that. You would not see us using language like we have used in our disclosure. For us to say that we are not going to lose a dollar in California or Arizona sure could happen, but based on the stress testing that we have done which is pretty rigorous, we have ended up with the disclosure language you see. So, I think those two tell you a lot.

Okay. And then you are mentioning earlier that you may actually see originations go higher given the current environment, do you expect it to be the case in the near term or is that something that’s a longer term phenomenon given what is going on with farm prices?

I think it’s more of a long-term outlook of what could occur trying to give a sense of the balance between what a downturn in ag could mean to our portfolio, but what it could mean to future business. So, I don’t think that’s something you are going to see next quarter in a future quarter, but I think as economics around agriculture revolve over the next year or two, I think that is a source of potential increases in business as there are other sources of increases in business, which are our marketing efforts adding new sellers getting current lenders that sell us loans to sell us more loans as well as our ongoing marketing to new types of producers of ag loans like that we did recently. As well, we are looking to expand in the institutional credit area constantly marketing and talking to others. We have often talked as well about the liquidity of banks today. There are a lot of banks that don’t want to sell loans, simply because they have a lot of cash and they are not interested in selling loans and reducing their income earning assets. As liquidity gets rung out of the banking system over time, again over the long-term we expect that there will be banks that currently don’t sell us loans we will be interested in doing so in order to raise cash and turnaround and lend it again, which really isn’t what’s happening today. So, again, I think there are number of places where the increase in business volume could come from and that was just one move we are trying to talk in terms of balancing the credit and tax going forward, but again, over the long-term not over the next quarter or the beginning of next year type of thing.

So despite the increase in spreads in the most recent quarter, you would say that the competitive environment for ag loans continues to be as strong as it has been in most recent quarters?

Absolutely, particularly for the best borrowers, I mean, there are lot of people competing different institutions to originate loans. Some of those do business with us and some don’t. At the end of the day, when we think that competition is great and for those lenders that use us, that’s terrific. Ultimately, we are hoping for the farmers and ranchers to get the best deal they can. Hopefully, that’s through Farmer Mac, but sometimes, it obviously won’t be, but that’s not necessarily bad either, if we are helping create a competitive environment that farmers and ranchers do better even if their business is away from us, that’s not necessarily a bad thing either.

Okay, thank you for taking my questions.

Sure.

At this time, we have no further questions. We will go ahead and conclude our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks. Gentlemen?

Nothing else, thank you. So, with no further questions, thanks for listening and participating this morning, we look forward to our next call to report our 2014 year end results in March. Thank you very much.

And we thank you sir to the rest of the management team for your time today. The conference call is now concluded. At this time, you may disconnect your lines. Thank you and have a great day everyone.