Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. FEDERAL AGRICULTURAL MORTGAGE CORP (845877) 10-K published on Feb 21, 2019 at 8:43 am
Reporting Period: Dec 30, 2018
In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR after 2021 and will support the LIBOR indexes through 2021 to allow for a transition to any alternative reference rates. This announcement indicates that the continuation of LIBOR in its current form will not be guaranteed after 2021, and it appears likely that LIBOR will be discontinued or modified by 2021. In response to this development, the Federal Reserve Board and the Federal Reserve Bank of New York convened the Alternative Reference Rates Committee ("ARRC") to identify a set of alternative reference interest rates for possible use as market benchmark interest rates. The ARRC has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to LIBOR, and the Federal Reserve Bank of New York began publishing SOFR rates beginning in second quarter 2018. SOFR is based on a broad segment of the overnight Treasury repurchase market and is intended to be a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities. The Federal Reserve Bank of New York notes on its publication page for SOFR that use of SOFR is subject to important limitations and disclaimers, including that it may alter the methods of calculation, publication schedule, rate revision practices, or availability of SOFR at any time without notice, or that it may withdraw, modify, or amend the published SOFR rate in its sole discretion and without notice.
benchmark interest rate that may be developed, is expected to be complicated and may require the development of term and credit adjustments to accommodate for differences between the benchmark interest rates. The introduction of an alternative reference rate may also introduce additional basis risk for Farmer Mac if an alternative benchmark interest rate index is being used along with LIBOR during a transition period. If LIBOR is discontinued and an alternative benchmark interest rate, including SOFR, does not become widely used or accepted in place of LIBOR, then there may be uncertainty or differences in the calculation of the applicable interest rate or payment amounts depending on the terms of the governing instruments for Farmer Mac's assets and liabilities. If an alternative benchmark interest rate, including SOFR, does become widely used or accepted in place of LIBOR, then significant work may be required to transition to using this alternative rate in Farmer Mac's products. Either of these scenarios could result in different financial performance for previously booked transactions, require different hedging strategies, or require renegotiation of previously booked transactions, and may impact Farmer Mac's existing transaction data, products, systems, operations and pricing processes, which could adversely affect Farmer Mac's business, operating results, or financial condition.
Our Farm & Ranch line of business experienced net growth of $366.4 million during 2018 attributable to $960.8 million of new loans purchased and $430.1 million of new LTSPCs, offset in part by loan repayments of $571.1 million and LTSPC repayments of $453.4 million. Net growth in loan purchases decreased by $294.7 million during 2018 compared to 2017. This decrease in growth was primarily due to fewer opportunities to purchase large loans in amounts greater than $15.0 million compared to 2017. We believe that this could be due to fewer eligible borrowers that are able to secure financing of that size, as well as potentially increased pricing competition for the highest credit quality borrowers of these larger loans. Also, increases in interest rates have reduced the demand for refinances in 2018 compared to 2017. Based on our analysis of bank and FCS call report data, there was a decline in the growth of the overall agricultural mortgage market in 2018. Nevertheless, we believe that our relative share of the overall agricultural mortgage market during 2018 remained consistent with prior years and that our net growth of 9.3% in Farm & Ranch loan purchases compared favorably to the 4.9% net growth of the overall agricultural mortgage loan market based on a review of bank and FCS call report data as of September 30, 2018. Net growth in LTSPCs decreased by $67.2 million during 2018 compared to 2017 primarily due to the absence in 2018 of some customers that added large pools of loans under LTSPCs to restructure their credit risk profile, which occurred in 2017.
The Farm Bill amended Farmer Mac's charter to increase the acreage limitation from 1,000 acres or more to 2,000 acres or more of agricultural real estate that must secure an eligible Farm & Ranch loan for which the Congressionally-authorized maximum loan size adjusted for inflation is applicable (currently $13.1 million). This amendment is subject to FCA's assessment about the feasibility of such a change.
FCA is required to submit a report on its assessment of this change to Congress by no later than June 18, 2019. If FCA's assessment indicates that it is feasible to increase the acreage limitation to 2,000 acres or more of agricultural real estate, the change to Farmer Mac's charter will become effective one year after the date that FCA submits its report to Congress. If FCA's assessment determines that it is not feasible to increase the acreage limitation, then the current limitation will remain in place. In addition to this feasibility assessment, Congress expressed interest in FCA's opinion on alternatives other than the increased acreage limitation in relation to a maximum loan size that would adequately address any safety and soundness issues. We will continue to evaluate the effect that the increase in acreage limitation or any other related proposal by FCA may have on our business in the future. FCA must also conduct a study that analyzes and compares the financial risks inherent in loans made, held, securitized, or purchased by FCS banks and associations and Farmer Mac, and how such risks are required to be capitalized under statutes and regulations currently in effect. The Farm Bill also amended Farmer Mac's charter to repeal obsolete provisions and to make technical corrections. The Farm Bill also added a new subsection to the Farm Credit Act of 1971 to clarify that no funds from the administrative accounts of the Farm Credit System Insurance Corporation or from the Farm Credit System Insurance Fund may be used to provide assistance to Farmer Mac or to support any activities related to Farmer Mac.
The Farm Bill requires the Government Accountability Office ("GAO") to conduct two studies related to FCS institutions, including Farmer Mac. Specifically, the GAO must conduct a study to determine whether FCS institutions have sufficient authority and resources to meet the agricultural credit needs of Native American tribes and their members. The GAO must submit a written report to Congress within 90 days of enactment of the law presenting the findings of this study. If the GAO finds that FCS institutions do not have the ability to meet these agricultural credit needs, it must propose legislative and other recommendations that it determines would result in a system under which these needs are met in an equitable and effective manner. The GAO must also conduct a study assessing the availability of credit and related services, as well as any barriers limiting their availability, provided by FCS institutions, commercial banks, and life insurance companies, to socially disadvantaged farmers and ranchers. The GAO must submit a written report to Congress within 120 days of enactment of the law presenting the findings of this study and providing recommendations on how FCS institutions and other agricultural credit providers can improve outreach to these farmers and ranchers regarding the availability of credit and related services. We will continue to monitor any developments that could affect Farmer Mac as a result of the preparation and completion of these GAO studies.