Title: PROPOSED RULE--Organization; Reorganization Authorities for System Institutions--12 CFR Part 611
Issue Date: 03/19/1993
Agency: FCA
Federal Register Cite: 58 FR 15099
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Part 611

RIN 3052-AB22

Organization; Reorganization Authorities for System Institutions


ACTION: Proposed rule.

[*15099]

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board (Board), proposes for public comment amendments to the regulations governing the procedure by which certain Farm Credit System (Farm Credit or System) institutions may terminate their Farm Credit status. The amendments would expand the application of the regulations to all System associations, add provisions that would apply to the termination of one or more associations whose assets and direct loan from the district bank constitute a significant proportion of the assets and direct loans in the district, and make technical and conforming revisions. The FCA also proposes for public comment regulations governing the procedure by which Farm Credit banks may terminate their Farm Credit status. The Agricultural Credit Act of 1987 (1987 Act), enacted on January 6, 1988, amended provisions of the Farm Credit Act of 1971 (1971 Act) by establishing a procedure under which a Farm Credit institution may terminate its Farm Credit status by becoming chartered as a financial institution under other Federal or State authority. The Food, Agriculture, Conservation and Trade Act Amendments of 1991 (1991 Act), enacted on December 13, 1991, amended the 1971 Act by extending the length of the FCA's review period for the approval of disclosure information relating to terminations and other corporate restructuring. The Farm Credit Banks and Associations Safety and Soundness Act of 1992 (1992 Act), enacted on October 28, 1992, further amended the 1971 Act by adding clarifying provisions for repayment of certain types of debt obligations. The 1971 Act, as amended, imposes certain requirements on an institution seeking to terminate its status as a Farm Credit institution; authorizes the FCA to impose by regulation such other conditions as the FCA considers appropriate; and requires the FCA to promulgate regulations providing for the repayment of certain System assistance.

DATES: Comments must be received by April 19, 1993.

ADDRESSES: Comments should be submitted in writing, in triplicate, to Patricia W. DiMuzio, Division Director, Regulation Development Division, Office of Examination, Farm Credit Administration, McLean, Virginia 22102-5090. Copies of all communications received will be available for examination by interested parties in the Regulation Development Division, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Robert S. Child, Policy Analyst, Office of Examination, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4498, TDD (703) 883-4444,

or

Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION:

I. Introduction

On December 18, 1989, the FCA published an Advance Notice of Proposed Rulemaking (ANPRM) (54 FR 51763) requesting comments on the manner and process for implementing the new termination procedures under the 1971 Act. Based on a consideration of comments received in response to the ANPRM and other relevant factors, the FCA decided to promulgate one set of regulations for associations whose investment in the bank and whose direct loan from the bank constitute 25 percent or less of the investment and direct loan (referred to herein as "Small Associations") and another set of regulations for banks and for other associations, or any combination of associations seeking to terminate together, whose aggregate investments and loans exceed the 25-percent level (which associations are referred to herein as "Large Associations"). On July 12, 1990, the FCA published for public comment (55 FR 28639) proposed amendments to 12 CFR part 611 relating to the termination of Farm Credit status of Small Associations. Final regulations were adopted by the Board on January 23, 1991, were published in the Federal Register on January 30, 1991 (56 FR 3397), and became effective on March 11, 1991. The Board now proposes amendments to those regulations that would extend their application to Large Associations, impose additional requirements on Large Association terminations, and make technical and conforming revisions. The Board also proposes new regulations applicable to the termination of Farm Credit Banks (FCBs) and banks for cooperatives (BCs).

The proposed regulations would implement sections 7.10, 7.11, 6.9(e)(3)(C)(ii), 6.26(d)(1)(C) (iv) and (v), and 6.26(c)(5) (E) and (F) of the 1971 Act. Section 7.10 provides that a Farm Credit institution may terminate its Farm Credit status if it satisfies the following requirements:

(1) A 90-day advance notice to the FCA;

(2) Approval by the FCA Board;

(3) Approval by a Federal or State authority of a charter for a commercial bank, savings and loan, or other financial institution;

(4) The payment by the institution of the amount by which total capital of the institution exceeds 6 percent of its assets, such payments to be made to the Farm Credit System Insurance Fund if termination occurs after 1991;

(5) The payment or adequate provision for the payment of all outstanding debt obligations of the institution;

(6) Approval of the termination by a majority of the stockholders of the institution voting, in person or by written proxy, at a duly authorized stockholders' meeting, held prior to giving notice to the FCA Board; and

(7) The fulfillment of such other conditions as the Board, by regulation, considers appropriate.

Section 7.11 requires that any plan of termination, together with all information that will be distributed to the stockholders, must be submitted to the FCA Board for approval prior to the stockholder vote. If the plan is disapproved by the Board, the letter of disapproval must specify the reasons for [*15100] such disapproval. The 1991 Act amended this section to increase the time period for the FCA's review of the plan from 30 days to 60 days.

In addition, the 1992 Act amended sections 6.9(e)(3)(C)(ii), 6.26(d)(1)(C)(iv) and 6.26(c)(5)(E) of the Act to require any terminating bank to pay to the Farm Credit System Financial Assistance Corporation (FAC) the estimated present value of the bank's proportionate share of the Systemwide repayment obligations for FAC payments of: (1) Certain Capital Preservation Agreements; (2) merger assistance, eligible borrower stock retirement, and expenses of the Farm Credit System Assistance Board and the FAC; and (3) reimbursements to the Department of the Treasury for interest payments made to the FAC. Furthermore, under amended sections 6.26(d)(1)(C)(v) and 6.26(c)(5)(F), terminating associations must pay to their affiliated FCB a proportionate share of the present value of all of the bank's estimated future FAC repayments, excluding the assistance associated with the Capital Preservation Agreements.

The proposed regulations would add new subparts Q and R to part 611. Subpart Q would contain the termination requirements for FCBs terminating alone and FCBs terminating together with one or more associations. The subpart would incorporate by reference many of the provisions of subpart P and would have additional provisions relating to the calculation of the exit fee; divestment of Systemwide obligations on which the terminating bank is the primary obligor; and provision for satisfaction of joint and several liability on consolidated and Systemwide obligations. New subpart R, containing provisions applicable to terminations of BCs, would incorporate by reference many of the provisions of subpart P, as well as provisions of subpart Q relating to Systemwide obligations and FAC repayments.

The existing regulations in subpart P would be revised to be applicable to all associations and to reflect the amendments to section 6.26 of the 1971 Act for FAC repayments by associations and the amendment to section 7.11 of the 1971 Act increasing the time period for the FCA's review of disclosure documents to 60 days. Provisions applicable when a Large Association proposes to terminate would be added. The term "terminating association" has been revised to read "terminating institution" throughout the subpart because many of the provisions in subpart P would be incorporated by reference in proposed subparts Q and R. Technical and clarifying revisions have also been made to the existing regulations.

In drafting these proposed regulations, the FCA has taken into consideration the comments received in response to the ANPRM that relate to the termination of banks and the effect of the termination of Large Associations on the districts in which they are located. Comments on these issues were received from the then existing Federal Farm Credit Corporation of America (FCCA) on behalf of its member System banks and the Farm Credit Banks Funding Corporation (Funding Corporation), two law firms on behalf of several System associations, one FCB, and one trade association representing community banks.

Below is a section-by-section explanation of the proposed regulations, together with a discussion of relevant comments received in response to the ANPRM.

II. Section-by-Section Analysis

A. Subpart P -- Termination of Farm Credit Status -- Associations

1. Section 611.1200 -- General -- Applicability

Paragraph (c) of this section and references thereto would be deleted, so that this subpart would be applicable to all Farm Credit associations.

2. Section 611.1205 -- Definitions

Section 611.1205 would be amended to add definitions for "Large Association" and "viability." A Large Association would be defined as an association whose investment in the FCB in its district is in excess of 25 percent of the bank's capital as computed according to generally accepted accounting principles (GAAP) or whose direct loan from the district FCB is in excess of 25 percent of the total loans of the bank. The definition would also include any two or more associations with the same affiliated FCB that seek to terminate together (or within 6 months of each other) and whose aggregate investments in the FCB or direct loan from the FCB exceeds the 25-percent level. "Viability" would be defined as the ability to sustain or commence profitable operations.

The proposed definition of GAAP is different from the definition in the current regulations in that the provision regarding the FCA's authority to interpret how GAAP should be applied has been deleted. In proposed 611.1240, language has been added providing that the FCA may prescribe an accounting principle that is no less stringent than GAAP if the application is consistent with the objective of ensuring that the exit fee be calculated on a fair and reasonable basis.

3. Section 611.1210 -- Advanced Notification

Proposed 611.1210(b)(1) would require the terminating institution to send a certified copy of the commencement resolution to both the FCA and the Farm Credit System Insurance Corporation (FCSIC). Section 611.1210(b)(2) has been revised to clarify that the brief announcement to all holders of equity must specify the effect of termination on the borrower's stock and on any borrower rights.

4. Section 611.1212 -- Filing Date of Termination Application

The Board proposes to revise 611.1212(c) to provide that the FCA shall disapprove a termination application if the filing date that would otherwise be assigned pursuant to 611.1212(a) would be less than 60 days after the FCA was notified by the terminating institution that it was contemplating the termination of its Farm Credit status. The current regulation provides for the filing date to be no earlier than 60 days after the FCA was notified, even if the filing date would otherwise be earlier. The change is proposed in order to eliminate any uncertainties about when the review period begins.

5. Section 611.1215 -- Farm Credit Administration Review and Approval and Section 611.1220 -- Voting Record Date and Stockholder Approval

Pursuant to the change in section 7.11(a)(2) of the 1971 Act made by the 1992 Act, the FCA review period for the termination application would be changed from 30 days to 60 days in paragraph (b) of 611.1215 and in paragraph (a) of 611.1220. In addition, paragraphs (e) and (f) of 611.1215 have been revised to remove redundancies and to clarify that if a reconsideration vote is held, termination may occur no earlier than 15 days after the vote.

6. Section 611.1240 -- Exit Fee

Paragraph (b) of this section would be revised to delete the reference to the Farm Credit Assistance Fund, since payment of the exit fee was to be made to the Assistance Fund only until 1992. In the future, exit fee payments will be made only to the Farm Credit System Insurance Fund.

Paragraph (e) includes the authority of FCA to prescribe an accounting principle as explained in number 2 above. Paragraph (e)(2), was amended by adding "or subtractions from liabilities" in order to clarify that the [*15101] FCA may review any type of transaction outside of the ordinary course of business that may affect the exit fee.

Paragraph (i) is proposed to be added to allow certain tax liabilities and payments to the FAC to be deducted from the exit fee. These liabilities would not be booked as of the computation date, but would become liabilities at the time of termination due to the decision to terminate. This change was made in part because of the 1992 Act amendments to the 1971 Act providing for the payment of certain FAC obligations prior to termination. In addition, effective for the fiscal year beginning after December 15, 1992, a new accounting treatment (Statement of Financial Accounting Standards No. 109) requires institutions to recognize a tax liability on any patronage distribution from an FCB to taxable associations regardless of whether it is received in cash. Prior accounting rules generally did not require the recognition of any tax liability until the patronage was received in cash by the taxable association. Accordingly, no tax liability has been provided for the cumulative amount of allocated equities received by a taxable institution that have not been "redeemed" by the institution, prior to the date of implementation of the new accounting rules. The Board concluded that the net value of such patronage should be the same, whenever received, and has therefore determined that it would be appropriate in these termination regulations to calculate capital based on the after-tax impact of all patronage distributions.

7. Section 611.1250 -- Repayment of Debts

New paragraph (e) would be added to 611.1250 to provide for the payment of a portion of the present value of the FCB's share of certain System FAC debt repayment obligations as of the quarter ended prior to the submission of the application. Pursuant to section 6.26 (c)(5)(F) and (d)(1)(C)(v) of the 1971 Act, as amended by the 1992 Act, the terminating association's share is based on the association's retail loan volume relative to the retail loan volume of the bank and its affiliated associations had the association remained in the System, and payment is made to the affiliated bank. The proposed regulation would also provide that the terminating association would pay a portion of the FCB's estimated future share of non-Treasury-paid interest. The present value calculations would be made by the FAC.

8. Section 611.1260 -- Dissenters' Rights

Paragraph (c) of existing 611.1260 requires a terminating institution to issue subordinated debt in the successor institution for the excess above par or stated value of a dissenting stockholder's stock or participation certificates. This paragraph is proposed to be amended to permit the successor institution to pay cash or a combination of cash and subordinated debt for the amount in excess of par or stated value. The terminating institution would continue to be required to pay cash in an amount up to the par or stated value. This change is intended to give the institution more flexibility in how it retires the interests of dissenting stockholders. In addition, the Board proposes to add new paragraph (g) to require that the interests of dissenting stockholders be retired on or before the termination date.

9. Section 611.1275 -- Termination of Large Associations

Proposed 611.1275 contains additional requirements that would apply when a Large Association, as defined, proposes to terminate. Commentors were divided about whether there should be special provisions when association terminations would have a major impact on the remaining district institutions. Two commentors representing associations stated that there should be no special provisions because the borrowers would have voted to terminate and because the free market and competition should enable institutions to thrive and prosper. An FCB commented that a bank termination need not be delayed pending replacement of the bank; rather, interim financing should be arranged until a permanent replacement bank is selected. The FCCA commented that it is clearly appropriate to consider the effect of a termination on the remaining institutions, and stated that interim arrangements should be made to ensure continuing service to the affected territory.

The FCA, in its role as safety and soundness regulator of the System, is concerned about the effect of the termination of a Large Association on the financial health of the FCB and non-terminating associations in the Large Association's district and believes that an analysis of the viability of such remaining institutions must be undertaken as soon as possible in the termination process. The FCA would, therefore, in consultation with the FCSIC, prepare an analysis of the effect of the Large Association's termination on the viability of the district. Such analysis would take into account various factors, including how the cost of funds would be affected if a new institution were chartered to take over the territory of the terminating association rather than expanding the territory of an existing association, and the potential for achieving a reasonable market share in the territory. The FCA may contact other institutions in the same district and request additional information to be used in the analysis. This information would be required to be submitted to the FCA within 10 business days of the FCA's request in order to be considered in the FCA analysis, unless a longer period is permitted by the FCA.

B. Subpart Q -- Termination of Farm Credit Status -- Farm Credit Banks

1. Section 611.1300 -- Applicability and Definitions

Proposed 611.1300 would provide that subpart Q is applicable to the termination of Farm Credit Banks. It would also incorporate by reference the definitions in proposed 611.1205 of subpart P except for the definition of "terminating institution."

2. Section 611.1310 -- Advance Notification

The advance notification procedures in proposed 611.1310 are similar to the procedures for associations in proposed 611.1210. An FCB seeking to terminate would be required to notify the FCA, the FCSIC, other System banks, the Funding Corporation, the FAC, and the bank's stockholders within 5 days of the adoption of a commencement resolution by the bank's board of directors. Affiliated associations are required to notify borrowers and prospective borrowers of the effect that the bank's termination may have on their loans, including whether the borrower would continue to have any of the borrower rights provided by the 1971 Act and FCA regulations. The FCB would be required to submit an estimate of its exit fee to the FCA within 15 days after submission of the commencement resolution, and would also be required to commence negotiations with other Farm Credit banks on the satisfaction of obligations on which the bank is jointly and severally liable under section 4.4 of the 1971 Act.

3. Section 611.1311 -- Filing of Termination Application

This section would incorporate by reference 611.1211 of subpart P of these proposed regulations. [*15102]

4. Section 611.1312 -- Filing Date of Termination Application

This section would incorporate by reference paragraphs (a) and (b) of 611.1212 of the proposed regulations. In addition, proposed paragraph (b) of this section would provide that, if the advance notification required in 611.1310 is less than 90 days prior to the filing date that would otherwise be assigned to the termination application, the FCA would disapprove the application. During the 90-day period, the FCA will make arrangements for another bank to provide interim or permanent service in the territory of the terminating bank. Should such arrangements be made in less than 90 days, the FCA would have the discretion to reduce the 90-day period.

The FCA Board is proposing this 90-day period because it believes a sufficient time period to find a replacement bank for the district of the terminating bank is necessary to be able to assure the adequate flow of agricultural credit to the district. The FCA does not believe that this 90-day requirement would materially delay the termination process, because a corporate restructuring such as the kind of restructuring that would be proposed by a terminating bank is ordinarily a lengthy process.

5. Section 611.1313 -- Selection of Farm Credit Bank to Serve Territory

This section sets forth factors for the FCA to consider in deciding which remaining FCB or FCBs should be reassigned the territory of the terminating bank. The factors would include but not be limited to prospective efficiencies; the preferences of the associations in the district that do not seek to terminate; bank management; willingness of the bank to purchase all the loans to the associations; compatibility of organization and operations; potential market diversification; and geographical proximity.

6. Section 611.1315 -- Farm Credit Administration Review and Approval

This section would incorporate by reference 611.1215 of the proposed regulations, which sets forth the time periods for FCA review and preliminary approval of the disclosure information in the termination application, as well as the conditions for final approval.

7. Section 611.1320 -- Voting Record Date and Stockholder Approval

This section would incorporate by reference the provisions of proposed 611.1220, except that paragraph (c)(3) and the provisions regarding dissenting stockholders in paragraph (e) would not be applicable in a vote for bank termination.

8. Section 611.1325 -- Requirements for Information Statement

This section would incorporate by reference the provisions of 611.1225 of the proposed regulations, except that paragraphs (h) and (s) would not be applicable. In addition, the section provides that other financing institutions (OFIs) have the right to have their FCB stock retired if they do not wish to become stockholders in the successor institution.

9. Section 611.1326 -- Prohibited Acts

This section would incorporate by reference 611.1226 of the proposed regulations, which prohibits a terminating institution or persons affiliated with it from making false statements about the proposed plan of termination.

10. Section 611.1330 -- Plan of Termination

Proposed 611.1330 would incorporate by reference the provisions of 611.1230 of the proposed regulations.

11. Section 611.1335 -- Stockholder Reconsideration

This section would incorporate by reference 611.1235 of the proposed regulations and would clarify that the reference to 15 percent of the eligible voting stockholders means, for a bank termination, associations holding 15 percent of the voting shares of the district.

12. Section 611.1340 -- Exit Fee

Paragraph (a) of this section would provide that, for an FCB terminating alone, the assets and capital that are expected to be paid out or distributed to the institutions remaining in the System would be deducted from the assets and capital of the bank before the exit fee is computed. If, in connection with the termination, loans or other assets with reserves are paid back to the terminating bank at above the net book value, the amount of the excess will be added to the surplus of the FCB. This would include direct loans to non-terminating associations that repay such loans on or prior to termination. Once such amounts are deducted, the computation set forth in proposed 611.1240 would be utilized.

Paragraph (b) of this section would provide that, when one or more associations in a district are terminating along with the FCB, the computation would be made as follows. First, the exit fee of each terminating association would be computed in accordance with proposed 611.1240. Then the balance sheet of the FCB, less the assets and capital of the non-terminating institutions, and the balance sheets of the terminating associations would be combined under GAAP, using cross-elimination methods, and the exit fee of the combined entity would be computed in accordance with proposed 611.1240. The exit fees of the terminating associations would be deducted from the exit fee of the combined entity, and the FCB would be responsible for paying the remainder.

Paragraph (c) would provide that an OFI would have the same right as an association to have its investment in the FCB retired before the bank terminates, and the investment of any OFIs choosing to have their stock retired would be deducted from the capital and assets of the bank before the exit fee is computed. If an OFI chooses instead to become a stockholder in the successor institution, the OFI's investment in the FCB would be considered part of the FCB's capital in computing the exit fee.

13. Section 611.1350 -- Repayment of Obligations

Proposed 611.1350 would contain provisions for treatment of obligations of the FCB. Paragraph (a) would provide that certain obligations must be repaid, or provisions for repayment must be made, prior to termination; other obligations would be assumed by the successor institution. Paragraph (b) would require the terminating bank to provide for satisfaction of the portion of issues of consolidated or Systemwide obligations on which it is primarily liable prior to termination. It is the Board's view that the 1971 Act does not authorize the successor institution to use Systemwide obligations as a source of funding. However, most of the outstanding Systemwide obligations are not callable. Therefore, the proposed regulation sets forth three methods by which a terminating bank may satisfy the obligations. First, the bank may enter into an agreement with one or more remaining System banks under which such banks would assume primary liability. Second, the terminating bank may purchase, in the open market, obligations in the amount of the portion of an issue for which the bank is primarily liable. Such obligations would be canceled by the Funding Corporation. Third, the terminating bank may deposit funds into a trust account that will be sufficient to pay the interest and principal on the obligations when payment is due. [*15103]

An issue that arises only in the context of a bank termination is how the terminating bank can provide for satisfaction of its off-balance-sheet joint and several liability to investors in Systemwide bonds and consolidated notes and bonds outstanding on the termination date, and its liability for interest payments on the individual obligations issued by banks operating under the same title of the 1971 Act and outstanding on the termination date. Comments on this issue were sought in the ANPRM, and the FCA received comments from four respondents, including the FCCA. Although one commentor stated that it was unclear what more could be required after a bank had paid the debt on which it was primarily liable, the other commentors offered a number of thoughtful suggestions regarding how to provide for continuing contingent obligations to bondholders in an orderly way. The suggestions included: (1) Requiring the terminating bank to enter into an indemnification contract with remaining banks that would be in effect until obligations outstanding at the termination date are retired, or the decrease in the System's spreading of risk has been regained, or such other time as the FCA may fix; (2) requiring no specific arrangement at the time of termination, but refunding any exit fee payment to the extent that contingent or unexpected liabilities occur or the successor is otherwise required to make unforeseen payments; and (3) leaving the matter to the banks to resolve, subject to FCA approval.

The Board believes that it is important to have an arrangement in place prior to the termination date specifying the procedure by which the joint and several liabilities of the terminating bank will be addressed by the successor institution. Although the existence of the Insurance Fund significantly decreases the likelihood that any bank would ever in the future be called upon to satisfy another bank's primary obligations, there continues to be a possibility that a call would be made. It is the Board's view that flexibility should be given to the banks to work out an acceptable procedure, provided that such flexibility does not result in the remaining banks' being able to impede the termination.

Therefore, paragraphs (c) and (d) of the proposed regulations would require that, immediately following the notification to the remaining banks of the terminating bank's intention to terminate, the banks must enter into negotiations over the satisfaction of the terminating bank's joint and several liability on the outstanding consolidated and Systemwide obligations. However, should the banks be unable to reach an agreement or the agreement is not acceptable to the FCA, the FCA would specify the terms of the agreement according to a formula set forth in the proposed regulations. The formula would provide for the release of the terminating institution from the joint and several liability over time as notes and bonds mature and are paid. The terminating institution would commit itself to payments if a default occurred and the Insurance Fund were exhausted. The FCA would review such an arrangement as part of the overall review and approval process.

The formula for determining future payments would be based on the following:

(1) Calculations would be made to determine the percentage of the total consolidated and Systemwide debt of the System banks held by the terminating bank. This percentage would be used to determine the liability of the successor institution on the termination date.

(2) The computation date for this formula would be chosen by the FCA, but would be on or before the computation date set forth in proposed 611.1240(c). The date would be chosen to reflect the typical debt relationship of the terminating bank to the System as a whole prior to the retirement of any bonds made in connection with or in anticipation of termination.

(3) This percentage would remain constant but would be applied only to debt outstanding on the termination date. Therefore, the total debt amount would decrease as issues mature and are paid off.

(4) On the termination date, the debt issued and outstanding for which the terminating bank is jointly and severally liable would be identified.

Paragraph (e) of the proposed regulations would clarify that, notwithstanding any agreement among the banks to establish how calls would be made by the FCA on defaulted obligations, the terminating bank would remain liable under section 4.4 of the 1971 Act for all of the issues outstanding on the termination date until such issues have been repaid.

As discussed above, the 1992 Act requires a terminating FCB to pay to the FAC the estimated present value of its share of certain future repayments to the FAC for obligations undertaken by the FAC in connection with the Capital Preservation Agreements, operating expenses of the FAC and the Assistance Board, and the Treasury-paid interest. These requirements are set forth in proposed paragraph (f). The Board also proposes that the terminating bank pay the estimated present value of its share of future payments of interest on the Capital Preservation Agreements and the interest on FAC debt not paid by the Treasury. The Board believes that such provisions are needed to meet the objectives of the 1992 Act to ensure that terminating institutions do not escape their liability for repayment of assistance to the System. The proposed regulation would provide that, as soon as the FAC is notified that an FCB is seeking to terminate pursuant to proposed 611.1310, it must prepare an estimate of the present value of the terminating bank's share of the FAC repayment.

14. Section 611.1355 -- Retirement of Equities

System institutions are not authorized under the 1971 Act to hold equity investments in entities that are not part of the System. Therefore, paragraph (a) of proposed 611.1355 would require an FCB to retire equities held by System institutions that do not seek to terminate along with the FCB.

The proposed regulation further provides that, if an FCB has an allowance for loan losses against a direct loan or loans serviced by an FLBA and such loans will be refinanced at above net book value by another Farm Credit institution, the amount of the allowance would be considered as part of the unallocated surplus of the FCB for purposes of computing the value of the FCB stock. The Board notes that it may be appropriate to include the amount of the allowance in the value of the stock because, if the direct loan or loans through the FLBA are refinanced, the allowance would be eliminated. The Board specifically seeks comment on this part of the computation.

Paragraph (b) would require the retirement of any preferred stock issued by the terminating bank. Paragraph (c) would provide an option to OFIs to have their stock retired if the OFIs choose not to be equity holders in the successor institution. The stock of the OFIs would be retired on the same basis as the stock held by Farm Credit associations.

15. Section 611.1366 -- Loan Refinancing by Borrowers

This section would be applicable to borrowers from the FCB other than System institutions and would incorporate by reference 611.1266 of the proposed regulations. Non-System institution borrowers would include OFIs and eligible borrowers whose loans were made through FLBAs acting as agents for the FCB. [*15104]

16. Section 611.1375 -- Farm Credit Administration Evaluation

This section would require the FCA to evaluate the effect of termination on the viability of the remaining institutions in the System whenever assets of the terminating applicant(s) exceed 10 percent of the assets of the Farm Credit System. Farm Credit banks and other institutions remaining in the System would be permitted, at their option, to submit their own evaluation of the effect of termination of another bank or banks.

C. Subpart R -- Termination of Farm Credit Status -- Banks for Cooperatives

1. Section 611.1400 -- Scope of Subpart

This section would provide that proposed subpart R applies to the termination of BCs.

2. Section 611.1405 -- Provisions Applicable to Terminating Banks for Cooperatives

Equity holders in a BC, in contrast to equity holders in an FCB, are primarily borrowers that are not other Farm Credit institutions. This means that the concerns that arise are similar or, in many cases, identical to those that arise when an association seeks to terminate. Consequently, most of the provisions of subpart P are applicable to the termination of a BC. Therefore, proposed 611.1400 would incorporate by reference the provisions in proposed subpart P with certain exceptions. Those exceptions would be provisions pertaining to the search for a replacement bank ( 611.1212(c)); the retirement of FCB stock ( 611.1255); borrower rights ( 611.1270); and viability issues in the context of a Large Association termination ( 611.1275). Borrower rights provisions in the 1971 Act and regulations do not apply to loans made by a BC because BCs do not fall within the definition of "qualified lender" in section 4.14A(a)(6) of the 1971 Act.

In addition, this section would incorporate by reference certain provisions from proposed subpart Q of part 611 pertaining to notification of the Funding Corporation and other banks of a BC's intention to terminate ( 611.1310); the requirement that the terminating bank agree with the other banks on a procedure for the successor institution to provide for satisfaction of joint and several liability ( 611.1350); provisions for Systemwide repayment of FAC assistance ( 611.1350); retirement of stock, if any, held by other Farm Credit institutions ( 611.1355); and evaluation of the effect of the termination of one or more institutions whose assets exceed 10 percent of the assets of the System ( 611.1375).

List of Subjects in 12 CFR Part 611

Agriculture, Banks, banking, Organization and functions (Government agencies), Rural areas.

For the reasons stated in the preamble, part 611 of chapter VI, title 12 of the Code of Federal Regulations is proposed to be amended to read as follows:

PART 611 -- ORGANIZATION

1. The authority citation for part 611 continues to read as follows:

Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 5.9, 5.10, 5.17, 7.0-7.13, 8.5(e)of the Farm Credit Act; 12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2243, 2244, 2252, 2279a-2279f-1, 2279aa-5(e); secs. 411 and 412 of Pub. L. 100-233; 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003 and 1004.

2. Part 611 is amended by revising subpart P to read as follows:

Subpart P -- Termination of Farm Credit Status -- Associations

Sec.

611.1200 General -- Applicability.

611.1205 Definitions.

611.1210 Advance notification.

611.1211 Filing of termination application.

611.1212 Filing date of termination application.

611.1215 Farm Credit Administration review and approval.

611.1220 Voting record date and stockholder approval.

611.1225 Requirements for information statement.

611.1226 Prohibited acts.

611.1230 Plan of termination.

611.1235 Stockholder reconsideration.

611.1240 Exit fee.

611.1250 Repayment of debts.

611.1255 Retirement of equities owned.

611.1260 Dissenters' rights.

611.1266 Loan refinancing by borrowers.

611.1270 Continuation of borrower rights.

611.1275 Termination of Large Associations.

Subpart P -- Termination of Farm Credit Status -- Associations

611.1200 General -- Applicability.

(a) Each institution is authorized, in accordance with sections 7.10 and 7.11 of the Act, to terminate its status as a Farm Credit institution. The regulations in this subpart set forth the procedural, disclosure, voting and approval requirements applicable to such termination. The Farm Credit Administration may in its sole discretion grant a waiver in writing from any requirement of this subpart for good cause shown.

(b) These regulations are applicable to an association that seeks to terminate its status as a Farm Credit institution and to become chartered as a bank, savings and loan association, or other type of financial institution under other Federal or State law. In the event that a receiver or conservator is appointed by the Farm Credit Administration in the case of a voluntary or involuntary liquidation of the institution the provisions of subpart L of this part apply, and the provisions of this subpart shall not apply.

611.1205 Definitions.

For the purposes of this subpart, the following definitions shall apply:

(a) Commencement resolution means the resolution adopted pursuant to 611.1210(a) to indicate the commencement of the termination process.

(b) GAAP means generally accepted accounting principles, which is that body of conventions, rules and procedures necessary to define accepted accounting practice at a particular time, as promulgated by the Financial Accounting Standards Board and other authoritative sources recognized as setting standards for the accounting profession in the United States. GAAP shall include not only broad guidelines of general application but also detailed practices and procedures that constitute standards against which financial presentations are evaluated.

(c) Large Association means:

(1) An association whose investment in its affiliated Farm Credit Bank is in excess of 25 percent of the Farm Credit Bank's capital as computed according to GAAP or whose direct loan from the Farm Credit Bank is in excess of 25 percent of the total amount of direct loans of the bank; or

(2) Two or more associations with the same affiliated Farm Credit Bank that seek to terminate within the same 6-month period and whose aggregate investments in the Farm Credit Bank or direct loans from the Farm Credit Bank are in excess of 25 percent of the total capital or direct loans of the Farm Credit Bank.

(d) Viability means the ability to sustain or commence profitable operations exclusive of nonrecurring items.

(e) OFI means other financing institution, as that term is defined in 614.4540(e) of this chapter.

(f) Reconsideration vote means the vote at which the voting stockholders reconsider whether to terminate the terminating institution's Farm Credit status.

(g) Successor institution means the institution to which the terminating institution will convert when its Farm Credit charter is revoked. [*15105]

(h) Terminating institution means an association seeking to terminate its status as a Farm Credit institution and to become chartered as a bank, savings and loan association, or other type of financial institution.

(i) Termination resolution means the resolution adopted pursuant to 611.1211(a) approving the applications for termination and a new charter and providing for submission of the termination proposal to a stockholder vote.

(j) Termination vote means the stockholder vote at which the termination proposal is first submitted to the voting stockholders for their approval or disapproval.

611.1210 Advance notification.

(a) An institution's board of directors shall commence the process of termination by adopting a commencement resolution indicating the institution's intention to terminate its Farm Credit status.

(b) Within 5 days of the adoption of the commencement resolution by the board of directors, the terminating institution shall:

(1) Submit a certified copy of the commencement resolution to the Farm Credit Administration and the Farm Credit System Insurance Corporation; and

(2) Mail a brief announcement to all holders of equity in the institution which states that the board is taking steps to terminate its Farm Credit status and which describes the process of termination, the anticipated effect of termination on current holders of equity, including the effect on specific borrower rights, and the type of institution the successor institution will be. If bylaws are adopted in accordance with paragraph (e) of this section, the announcement shall also state that, during the time period from the passage of the commencement resolution until the effective date of termination, new common stock and participation certificates either purchased from the association in connection with a loan or retired by the association prior to the termination will not entitle the holder to receive a share in the adjusted book value in excess of par of the institution.

(c)(1) Within 15 days after submission of the commencement resolution pursuant to paragraph (b)(1) of this section, the terminating institution shall submit to the Farm Credit Administration a statement of its estimate of the exit fee together with an explanation of the computation of the exit fee pursuant to the requirements of 611.1240. For purposes of this estimation of the exit fee, the computation date set forth in 611.1240(c) shall be the quarter end preceding the date of the commencement resolution.

(2) Within 45 days of its receipt of the terminating institution's estimated exit fee, the Farm Credit Administration shall either confirm the institution's estimate of the exit fee or notify the institution of any required revisions to the computation.

(3) In the event that the Farm Credit Administration requires adjustments to the estimated exit fee pursuant to paragraph (c)(2) of this section, the terminating institution may request reconsideration of any revisions. Such request shall be in writing and shall set forth specific reasons why the revisions should not be made. The Farm Credit Administration shall reconsider the revisions and shall inform the terminating institution of its determination within 15 days of the receipt of the reconsideration request.

(d) During the time period after the board of directors' adoption of the commencement resolution pursuant to paragraph (a) of this section and prior to the effective date of termination, the following conditions shall apply to the terminating institution's conduct of business:

(1) Each prospective new borrower shall be informed of the effect of the proposed termination upon the borrower's loan and stock and shall be specifically informed whether the borrower will continue to have any of the borrower rights provided under the Act and regulations promulgated thereunder;

(2) Any common stockholders or participation certificate holders who seek to have such equity interest retired before termination shall be informed that the retirement would extinguish the holder's right to an interest in the successor institution if the termination is completed or to dissent from the termination and receive an amount equal to the adjusted book value, as determined pursuant to 611.1260 of this subpart, of the holder's equity in the terminating institution.

(e) Notwithstanding any provisions of 615.5230(b) of this chapter to the contrary, an institution may adopt bylaws which provide for the issuance of a special class of common stock and participation certificates in connection with loans granted during the time period subsequent to the adoption of the commencement resolution and prior to the termination. Such common stock or participation certificates, which shall be issued in accordance with section 4.3A of the Act, shall have characteristics identical to shares of the existing classes of common stock or participation certificates issued as a condition of the extension of a loan, except for the following:

(1) In the event of termination, the holder shall be entitled to receive the following:

(i) If the holder is eligible to vote and does not vote against the termination, an interest in the successor institution in an amount equal to the adjusted book value, as determined pursuant to 611.1260 of this subpart, or the purchase price of the stock, whichever is less;

(ii) If the holder is not eligible to vote or is eligible to vote and votes against the termination, either an interest in the successor institution as set forth in paragraph (e)(1)(i) of this section, or, if such holder dissents pursuant to 611.1260, cash in the amount of the purchase price or the adjusted book value of the stock or participation certificate, whichever is less.

(2) In the event that the termination does not occur, the special classes of stock or participation certificates shall automatically convert into shares of the otherwise identical classes of stock or participation certificates issued prior to the adoption of the commencement resolution.

611.1211 Filing of termination application.

(a) The board of directors of an institution that seeks to terminate its Farm Credit status shall adopt an appropriate termination resolution approving an application for such termination, approving an application for a new charter for the successor institution, and providing for the submission of such termination proposal to its stockholders for a vote.

(b) An original and three copies of a termination application consisting of the following materials shall be submitted by the terminating institution to the Farm Credit Administration for review and preliminary approval:

(1) A certified copy of the termination resolution adopted pursuant to paragraph (a) of this section;

(2) A copy of the plan of termination as required under 611.1230;

(3) An information statement that complies with the requirements of 611.1225;

(4) All other information that is to be submitted to the stockholders and other equity holders in connection with the contemplated action; and

(5) Any additional information the board of directors wishes to submit to the Farm Credit Administration in support of the request or that the Farm Credit Administration requires. [*15106]

(c) The terminating institution shall provide the Farm Credit Administration with any material revisions to information in the plan of termination, including updated financial information, that becomes available during the pendency of the termination application and prior to termination.

611.1212 Filing date of termination application.

(a) Except as provided in paragraph (c) of this section, the termination application shall be given a filing date which shall be the date on which it is determined to be technically complete. Within 10 business days after the Farm Credit Administration receives the termination application, the Farm Credit Administration shall determine that the application is technically complete and give it a filing date, or return the application to the terminating institution if it is incomplete. If the Farm Credit Administration fails to make a determination or fails to return the application before the end of the 10-day review period, the application shall be deemed to be technically complete and shall receive a filing date which shall be the last day of the 10-day review period.

(b) A termination application is considered to be technically complete when it is determined upon preliminary review to contain responses to all items required to be submitted to the Farm Credit Administration under 611.1211.

(c) In the event that the filing date that would otherwise be assigned to the termination application in accordance with paragraph (a) of this section is less than 60 days following the date on which the Farm Credit Administration received the advance notification required in 611.1210, the application shall be disapproved by the Farm Credit Administration. However, the Farm Credit Administration may in its sole discretion reduce the required 60-day period in the event that a new Farm Credit service provider to serve the territory is determined. This paragraph shall not apply if the entire territory of the institution is already included in the charter of one or more associations that are chartered to offer credit services of the same type as the terminating institution.

(d) After the Farm Credit Administration has received the advance notification pursuant to 611.1210, it shall contact other Farm Credit institutions to determine their willingness to provide service to the territory of the terminating institution or to determine if there are persons who wish to charter a new institution to serve the territory. The inability of the Farm Credit Administration to arrange for a new service provider for the territory during the 60 days after receipt of the advance notification shall not be a ground for disapproving the termination application.

611.1215 Farm Credit Administration review and approval.

(a) When the termination application has received a filing date, the Farm Credit Administration shall review the application and either disapprove or give its preliminary approval pursuant to section 7.11(a)(2) of the Act.

(b) The Farm Credit Administration Board shall have 60 days from the filing date, as defined in 611.1212, to approve or disapprove the termination application. If the Farm Credit Administration Board does not act within such 60-day period, the plan of termination may be submitted to the stockholders pursuant to section 7.11(a)(2) of the Act.

(c) If the application is disapproved, written notice specifying the reasons for disapproval shall be transmitted to the chief executive officer of the institution, who shall promptly notify the institution's board of directors. If the application is disapproved, it shall not be submitted to the stockholders for a vote.

(d) Upon stockholder approval of the proposed termination as provided in 611.1220, the secretary of the terminating institution shall forward to the Farm Credit Administration a certified record of the results of the stockholder vote and shall notify its stockholders and other equity holders of the results of the vote as provided in 611.1220(e).

(e) Final approval by the Farm Credit Administration Board pursuant to section 7.10(a)(2) shall be conditioned upon the following:

(1) A termination vote in favor of termination and, if a reconsideration vote is held, a reconsideration vote in favor of termination;

(2) Receipt by the Farm Credit Administration of conformed executed copies of all contracts and agreements submitted pursuant to 611.1230;

(3) Satisfactory evidence of the terminating institution's adequate provision for payment of debts and retirement of equities;

(4) Evidence of the grant of a new charter for the successor institution by the appropriate Federal or State chartering authority;

(5) Receipt by the Farm Credit Insurance Fund of the exit fee; and

(6) The fulfillment of any other condition of termination imposed by the Farm Credit Administration Board that is necessary and appropriate to provide for the equitable treatment of the parties affected by the termination.

(f) If the Farm Credit Administration grants final approval, the terminating institution's charter shall be revoked, and the termination shall be effective on the last to occur of --

(1) Satisfaction of all conditions listed in paragraph (e) of this section;

(2) The proposed termination date of the terminating institution;

(3) Ninety (90) days after receipt by the Farm Credit Administration of the notice required to be submitted pursuant to paragraph (d) of this section; and

(4) Fifteen (15) days after a reconsideration vote, if such vote is held.

611.1220 Voting record date and stockholder approval.

(a) Upon receipt of preliminary approval of the termination application by the Farm Credit Administration Board, or if the Board takes no action prior to the end of the 60-day period set forth in 611.1215(b), the terminating institution shall call a meeting of its voting stockholders. The stockholder meeting shall be held within 60 days of receipt of the preliminary approval or, if the Board takes no action, within 60 days of the last day of the 60-day period. All holders of equity in the terminating institution shall be permitted to attend the meeting. The stockholders eligible to vote shall be the stockholders who are eligible to vote on the voting record date as determined by the institution's bylaws if such date is not more than 70 days prior to the stockholder vote, or on a date fixed by the board of directors which shall be not more than 70 days prior to the date of the stockholder vote.

(b) The notice of meeting to consider and act upon the board of directors' resolutions shall be accompanied by an information statement that complies with the requirements of 611.1225.

(c)(1) The terminating institution shall establish voting security procedures that comply with the procedures for the election of directors in 611.330, as applicable. Specifically, the terminating institution shall ensure that all information regarding how or whether individual stockholders have voted and all materials such as ballots, proxy ballots, election records, and other relevant documentation related to the votes of stockholders is held in strict confidence.

(2) The terminating institution may adopt procedures that require the stockholders to sign or otherwise verify their eligibility to vote on an envelope which contains a marked ballot in a [*15107] sealed envelope. The terminating institution may also use signed proxies or eligibility certificates that will accompany a ballot or instructions on how to vote the proxy in a separate sealed envelope.

(3) The terminating institution shall use a form of identity code on the ballot enabling it to determine which stockholders are eligible to exercise dissenters' rights and shall require that the votes be tabulated by an independent party who is not a stockholder, director, or officer of the terminating institution or the successor institution. When the terminating institution receives notification pursuant to 611.1260 that a stockholder intends to exercise dissenters' rights, the institution shall verify with the independent party that the stockholder voted against the termination. The terminating institution shall be informed of the vote of a stockholder only in the event that the stockholder exercises the right to retire stock in the institution in accordance with 611.1260.

(d) The proposal shall be approved by the stockholders if agreed to by a majority of the eligible voting stockholders of the institution voting in person or by proxy at the stockholders' meeting.

(e) Upon approval of a proposed termination by the stockholders of the terminating institution, a certified statement showing the results of the stockholder vote shall be forwarded to the Farm Credit Administration within 10 days following the stockholders' meeting. The terminating institution shall notify its stockholders and other holders of equity interests of the results of the vote not later than 30 days after the final vote. If the stockholder vote is in favor of termination, stockholders who voted against the termination and other equity holders shall be informed of their right to dissent as provided in 611.1260(f). In addition, the terminating institution shall further notify stockholders of their right to file a petition for reconsideration in accordance with 611.1235 and that any petition for reconsideration must be filed on or before a date certain, which shall be 35 days after the date the terminating institution mails notice to the stockholders of the results of the stockholder vote.

611.1225 Requirements for information statement.

Notice of the meeting to consider and act upon a proposed termination shall be sent to all stockholders and other holders of equity interests and shall be accompanied by an information statement that contains the information and materials set forth in this regulation as follows:

(a) A statement on either the first page of the material or the notice of the stockholders' meeting, in capital letters and boldface type that:

THE FARM CREDIT ADMINISTRATION HAS NEITHER APPROVED NOR PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION ACCOMPANYING THE NOTICE OF MEETING OR PRESENTED AT THE MEETING AND NO REPRESENTATION TO THE CONTRARY SHALL BE MADE OR RELIED UPON

(b) A paragraph on the first page of the material entitled "Executive Summary" and containing a concise description of the material changes in rights of the borrowers, stockholders, and holders of other equity interests to occur as a result of the termination, the effect of such changes, and the potential benefits and disadvantages to them of the termination.

(c) A description of the plan of termination as required in 611.1230.

(d) A discussion by the board of directors of the terminating institution of the potential benefits and disadvantages of the termination together with the basis for the board's recommendation for termination.

(e) A list of the initial board of directors and senior officers of the successor institution, together with a brief description of the business experience of each such person, including principal occupation and employment, during the past 5 years.

(f) A summary of the provisions of the organizational documents of the successor institution, including the articles of incorporation and bylaws, that differ materially from the charter and bylaws of the terminating institution. The summary shall indicate both whether the maintenance of a borrowing relationship with the successor institution will be required as a condition for maintaining a stockholder's interest, and whether the maintenance of a stockholder's interest will be required as a condition for maintaining a borrowing relationship.

(g) An explanation of any changes in the nature of the stockholders' and other equity holders' investment in the institution, including but not limited to any changes in dividends, patronage refunds, voting rights, preferences, retirement of equities, and priority upon liquidation. If any eligible borrower stock is outstanding, such explanation shall include a statement that the protection afforded to eligible borrower stock by section 4.9A of the Act shall be extinguished at termination and that any stock of the successor institution received in exchange for eligible borrower stock shall not be protected under section 4.9A of the Act.

(h) An explanation of the effect of termination on the rights that borrowers are granted under the Act; the expiration date of those rights, if applicable, under the provisions of the plan of termination; a statement that borrowers may seek to have their loans sold to or refinanced with another lending institution, including the Farm Credit institution(s) that will be chartered to serve the terminating institution's territory or any other institutions that already serve the territory, provided that any such Farm Credit institution is authorized to make such a loan in accordance with part 614 of this chapter; and an explanation of the procedure for a borrower to apply for the sale or refinancing of his loan to the institution(s) that will be chartered to serve the terminating institution's territory, if such designations have been made. The disclosure shall include the name, address and telephone number of such institution(s), together with a statement that any such institution is not obligated to accept any loans of the terminating institution.

(i) An explanation of the formula and process by which equity of the terminating institution will be exchanged for equity in the successor institution or other consideration.

(j) A description of any agreement or arrangement with any person, including any officers or directors of the terminating institution, relating to employment or termination of employment with the terminating institution or employment with the successor institution.

(k) An explanation of the computation of the exit fee and the estimated amount of the exit fee.

(l) A statement identifying the State or Federal authority that will charter the successor institution and detailing the nature and type of financial institution that the successor institution will become after termination, as well as the conditions of approval, if any, placed on the successor institution by such State or Federal authority.

(m) A summary of the differences, if any, between the terminating institution and the successor institution with respect to interest rates, interest rate policies, collection policies, services provided, service fees, and any other item of interest that would affect a borrower's lending relationship with the successor institution, including any restrictions on stockholders in their ability to borrow from the successor institution. [*15108]

(n) A discussion of the expected capital requirements of the successor institution, and the amount and method of capitalization for the successor institution.

(o) An explanation of the sources and manner of funding the operations of the successor institution.

(p) An explanation of the existence of any continuing contingent liability and the manner in which this liability will be addressed by the successor institution.

(q) A summary of the differences in tax status of the terminating institution and the successor institution, and an explanation of the effect of such changes on both the successor institution and the stockholders.

(r) A brief description of the regulatory environment for the successor institution and a summary of the differences from the current regulatory environment that affect the cost of doing business or the value of equity and that are not addressed elsewhere in the information statement.

(s) A statement describing those stockholders and other holders of equity that are entitled to dissenters' rights and an explanation of those rights as set forth in 611.1260, including the estimated value of the stock upon distribution, procedures for the exercise of dissenters' rights and the time period during which such rights may be exercised, and a statement that eligible voting stockholders who do not vote against the termination will not receive dissenters' rights.

(t)(1) A presentation of the following financial data:

(i) A balance sheet and income statement for the terminating institution for each of the 2 preceding fiscal years;

(ii) A balance sheet for the terminating institution as of a date within 90 days of the date the termination application is forwarded to the Farm Credit Administration, presented on a comparative basis with the corresponding period of the prior fiscal year;

(iii) An income statement for the interim period between the end of the last fiscal year and the date of the required balance sheet presented on a comparative basis with the corresponding period of the prior fiscal year;

(iv) A pro forma balance sheet of the successor institution presented as if termination had occurred as of the date of the most current balance sheet presented in the statement; and

(v) A pro forma summary of earnings for the successor institution presented as if the termination had been effective at the beginning of the interim period between the end of the last fiscal year and the date of the balance sheet presented pursuant to paragraph (t)(1)(iv) of this section.

(2) The format for the balance sheet and income statement shall be the same as is contained in the institution's annual report to stockholders and shall contain appropriate footnote disclosures, including data relating to nonperforming loans and related assets and allowance for losses.

(3) The financial statements shall include either of the following:

(i) A statement signed by the chief executive officer and each member of the board of directors of the terminating institution that the various financial statements are unaudited, but have been prepared in all material respects in accordance with GAAP (except as otherwise disclosed therein) and are, to the best of each signer's knowledge, a fair and accurate presentation of the financial condition of the institution; or

(ii) A signed opinion by an independent certified public accountant that the various financial statements have been examined in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and other such auditing procedures as were considered necessary in the circumstances, and, as of the date of the statements, present fairly the financial position of the terminating institution in accordance with GAAP applied on a consistent basis, except as otherwise disclosed therein.

(u) A description of any event subsequent to the date of the financial statements, but prior to the date upon which the termination application is submitted to the Farm Credit Administration, that would have a material impact on the financial condition of the terminating institution or the successor institution.

(v) A description of any event subsequent to the submission of the termination application to the Farm Credit Administration that would have a material impact on any information in the termination application.

(w) A statement of any other material fact or circumstance that a stockholder would need in order to make an informed decision on the proposed plan of termination, or that is necessary to make the required disclosures not misleading.

(x) A proxy, together with instructions on the purpose and authority for its use, and the proper method for signature by the stockholder.

(y) A certification signed by each member of the board of directors of the terminating institution stating that the director has reviewed the entire information statement and that, to the best of his or her knowledge, the information contained therein is truthful, accurate and complete. If any director refuses to sign the certification, the director shall inform the Farm Credit Administration of the reasons for such refusal.

611.1226 Prohibited acts.

(a) No terminating institution or director, officer, employee or agent thereof, shall make any untrue or misleading statement of a material fact, or fail to disclose any material fact concerning the proposed plan of termination to a stockholder of the institution.

(b) No director, officer, employee, or agent of a terminating institution shall make an oral or written representation to any person that a preliminary or final approval by the Farm Credit Administration of an institution's plan of termination constitutes, directly or indirectly, either a recommendation on the merits of the proposal or an assurance concerning the adequacy or accuracy of any information provided to the institution's stockholders and other equity holders in connection therewith.

611.1230 Plan of termination.

The plan of termination shall include the following information:

(a) Copies of all contracts, agreements and other documents pertaining to the proposed termination and organization of the successor institution.

(b) A statement of the means by which the assets of the terminating institution will be transferred to, and its liabilities assumed by, the successor institution.

(c) The terminating institution's plan to retire, and the successor institution's plan to issue, equities held by holders of stock, participation certificates, and allocated equities, if any.

(d) A copy of the charter application filed with the appropriate Federal or State chartering authority, together with any exhibits or other supporting information that is submitted to such authority.

(e) A statement whether the successor institution will continue to have a credit relationship with a Farm Credit bank or other Farm Credit institution and the effect such status will have on the provision for payment of the terminating institution's debts. The plan of termination shall include evidence of the agreement and plan for satisfaction of outstanding debts, whether contained in a general financing agreement or otherwise.

(f) The proposed effective date of the termination. [*15109]

611.1235 Stockholder reconsideration.

(a) Eligible voting stockholders have the right to reconsider the approval of the termination provided that --

(1) A petition signed by at least 15 percent of the eligible voting stockholders of the institution is filed with the institution, and a copy of such petition is filed with the Farm Credit Administration, within 35 days after the date of mailing of the notification of the final results of the stockholder vote required under 611.1215; and

(2) Such petition is certified by the terminating institution as provided in paragraph (b) of this section.

(b) Each petition shall include the signature, printed name and full address of each voting stockholder signing the petition. Within 5 days of its receipt of a timely filed stockholder petition, the institution shall certify whether the signatures on the petition are the signatures of persons who were eligible voting stockholders of the terminating institution on the voting record date, and the institution shall notify the Farm Credit Administration of such certification.

(c) The petition shall include the name and address of a person who shall serve as petitioners' representative and who shall represent the interests of the petitioners in the reconsideration vote process.

(d) If the terminating institution certifies that at least 15 percent of eligible voting stockholders have signed the petition, a special stockholders' meeting shall be called by the institution to vote on the reconsideration. Such meeting shall be held within 60 days after the date on which the stockholders were notified of the final result of the termination vote. If a majority of stockholders of the institution voting in person or by written proxy vote against the termination, the termination is not approved. If a majority of stockholders of the institution voting in person or by written proxy vote in favor of the termination, the termination shall be effective pursuant to the provisions of 611.1215(f), but not earlier than 15 days after the reconsideration vote.

(e) The petitioners, through the petitioners' representative, and board of directors of the terminating institution shall each have the opportunity to present to the stockholders and other equity holders a written statement of their views regarding the reasons for calling a reconsideration vote. Such statements shall be reasonable in length and shall be mailed to stockholders and other equity holders along with the notice of stockholders' meeting for the reconsideration vote.

(f) The terminating institution shall, at its expense, immediately provide the stockholders initiating the petition with a list of the names and addresses of all of the eligible voting stockholders of the institution. All other expenses for the petition shall be borne by the petitioners. Reasonable expenses for the reconsideration vote shall be borne by the terminating institution.

611.1240 Exit fee.

(a) For the purposes of this section, the following definitions apply:

(1) Assets means all assets less appropriate valuation reserves as determined in accordance with GAAP except where otherwise noted in this section.

(2) Contingent liabilities means those liabilities that, in accordance with GAAP, will materialize if certain events occur.

(3) Total capital means all capital stock, surplus and undivided profits accounts as determined in accordance with GAAP, except where otherwise noted, and as adjusted pursuant to the requirements of this section.

(b) A terminating institution shall pay an exit fee equal to the amount by which the total capital of the institution exceeds 6 percent of its assets. The exit fee shall be paid to the Farm Credit Insurance Fund.

(c) The computation date for the exit fee shall be the quarter end preceding the filing date. A certified audit of the terminating institution shall be performed by a qualified public accountant, as defined in 621.2(a)(21) of this chapter, as of the computation date. The Farm Credit Administration may, in its discretion, waive this requirement if such an audit was performed as of a date within the 6 months preceding the computation date.

(d) The method of computation shall be as follows:

(1) The average daily balance of assets and total capital for the 12 months preceding the computation date will be computed as a basis for determining the exit fee; and

(2) Account balances shall be computed in accordance with GAAP and adjusted in accordance with paragraph (e) of this section.

(e) For purposes of determining the amount of the exit fee, the Farm Credit Administration shall review the terminating institution's transactions over a 3-year period prior to the date of the adoption of the termination resolution. If this review indicates that the terminating institution's account balances do not accurately reflect the terminating institution's value of its assets and liabilities, the Farm Credit Administration may prescribe an accounting principle that is no less stringent than GAAP if the application of GAAP results in financial statements that are not consistent with the Farm Credit Administration's objective of ensuring that the exit fee is calculated on a fair and reasonable basis. In addition, if the review indicates a difference in value from the stated values, or if the institution has retired capital outside the ordinary course of business, or that the institution has taken any other actions unrelated to its core business that have the effect of increasing or decreasing the amount of the exit fee, the Farm Credit Administration may make adjustments to the institution's assets, liabilities, or capital and recompute the exit fee based on these adjustments. The review by the Farm Credit Administration shall include, but not be limited to:

(1) Additions to or subtractions from the allowance for loan losses;

(2) Additions to assets or subtractions from liabilities from transactions that are outside the terminating institution's ordinary course of business;

(3) Dividends or patronage refunds exceeding the terminating institution's usual dividends or patronage refunds;

(4) Changes in the terminating institution's capitalization plan or implementation of that plan that increased or decreased the level of borrower investment;

(5) Contingent liabilities, such as loss-sharing obligations, that can be reasonably quantified; and

(6) Assets that may be overvalued, undervalued or not recorded on the books of the institution.

(f) Capital of the terminating institution owned by another Farm Credit institution or by the Financial Assistance Corporation shall not be included in capital for the purpose of determining the exit fee.
(g) In the event that GAAP requires that a liability be recorded on the balance sheet that will be offset by an unrecorded asset, the transaction recording the liability shall be reversed.

(h) In the event that the terminating institution has recorded expenses, other than tax expenses and expenses due to satisfaction of obligations issued by the Financial Assistance Corporation, that would not have been recorded but for the termination, such transactions shall be reversed.

(i) If, subsequent to the computation date and prior to the termination date, the terminating institution records income tax expenses due to the decision to terminate and expenses due to satisfaction of obligations issued by the Financial Assistance Corporation, the [*15110] amount of these expenses shall be deducted from the exit fee.

(j) The exit fee shall be paid by certified check or other means agreed upon by the Farm Credit Administration and the terminating institution.

611.1250 Repayment of debts.

(a) The terminating institution shall provide for the payment or assumption by the successor institution of all outstanding debt obligations.

(b) The terminating institution may establish and maintain an OFI relationship with the Farm Credit Bank, subject to all applicable requirements of part 614, subpart P, of this chapter. The general financing agreement establishing the OFI relationship shall provide for the assumption by the successor institution of any direct loan or other obligation that a production credit association is authorized to incur and that is not repaid at the time of termination. Any part of the direct loan or other obligation that is not linked to a loan covered by the general financing agreement shall be repaid as provided in paragraph (c) of this section.

(c) A terminating institution that will not become an OFI shall either repay its direct loan and any other obligations to the Farm Credit Bank upon termination or shall arrange with the Farm Credit Bank to repay the loan or obligation. The terminating institution may, with the concurrence of the Farm Credit Bank, repay the loan or obligation over a period not to exceed 3 years following termination.

(d) The terminating institution shall pay or make satisfactory provision for payment of obligations to any other Farm Credit institutions under any loss-sharing agreement or other agreement.

(e)(1) The terminating institution shall pay to its district Farm Credit Bank a share, based on the association's retail loan volume relative to the retail loan volume of the bank and its affiliated associations had the terminating institution remained in the System, of the estimated present value of:

(i) All future assessments against the bank as required by paragraphs (c)(2)(C), (c)(4), and (c)(5)(F) of section 6.24 of the Act; and

(ii) The future payment obligation of its district bank as required by section 6.26(d)(1)(C)(v) of the Act.

(2) Calculations required by paragraph (e)(1) of this section shall be made by the Financial Assistance Corporation and shall be based on the retail loan volume as of the quarter end preceding the submission of the termination application.

611.1255 Retirement of equities owned.

(a) The Farm Credit Bank may retire all equities of the Farm Credit Bank that are owned by the terminating institution on the termination date or may enter into an agreement with the terminating institution that would provide for a phased retirement of the equities. Any such plan for phased retirement shall provide for such retirement to be completed by the earlier to occur of the date which is 3 years from the termination date or the date on which the terminating institution repays all indebtedness to the bank, provided that no retirement shall occur during that period if any such retirement would result in the Farm Credit Bank's failure to meet minimum capital requirements.

(b) If the Farm Credit Bank and the terminating institution are unable to reach agreement regarding the retirement of Farm Credit Bank equities, either institution may send the most recent proposals to the Farm Credit Administration along with an explanation of the points of disagreement. The Farm Credit Administration may require the bank to retire terminating institution equities under such conditions as the Farm Credit Administration may require.

(c) No retirement shall occur if the Farm Credit Administration determines that the retirement of equities of the Farm Credit Bank would threaten the viability of the Farm Credit Bank.

(d) The amount to be paid to a terminating institution in the retirement of equities owned in the Farm Credit Bank shall be equal to the amount of the stock and allocated equities owned by the terminating institution in the Farm Credit Bank, less any impairment, at the date the request for retirement is made by the terminating institution. If the Financial Assistance Corporation owns any preferred stock in the Farm Credit Bank, any impairment of bank capital shall be applied first against the value of institution-owned equities for the purpose of determining the value of stock to be retired.

(e) If the terminating institution has outstanding stock issued to another Farm Credit institution, the institution shall retire all such equity investment prior to termination.

(f) A Farm Credit Bank's equities obligated to be retired under any agreement between the terminating institution and the Farm Credit Bank shall not be considered as part of the permanent capital of the Farm Credit Bank for purposes of 615.5240 of this chapter.

611.1260 Dissenters' rights.

(a) Dissenting stockholders, at their discretion, may, but are not required to, have their stock or participation certificates in the terminating institution retired as provided in paragraph (b) of this section. To be eligible to be a dissenting stockholder a person must be the owner, other than a Farm Credit institution, of voting or nonvoting stock or other equities of the terminating institution who was either --

(1) Not eligible to vote on the termination resolution; or

(2) Eligible to vote on the termination resolution and voted, in person or by proxy, against such resolution.

(b) The terminating institution shall pay dissenting stockholders in accordance with the priorities in liquidation set forth in the bylaws of the terminating institution. Notwithstanding any provision of paragraph (c) to the contrary, dissenting stockholders who hold eligible borrower stock shall receive not less than par value for their stock.

(c)(1) Except as provided in paragraph (d) of this section, the price paid to dissenting stockholders who own common stock or participation certificates shall be the adjusted book value, which is the book value on the computation date adjusted to reflect --

(i) Any increase or decrease in asset value resulting from the appraisals required in 611.1240; and

(ii) Deduction of the amount of the exit fee.

(2) Payments made to dissenting stockholders who own common stock or participation certificates referred to in paragraph (c)(1) of this section shall be made on the following basis:

(i) If the adjusted book value of the common stock is less than or equal to the par or stated value of such stock, the full amount of the payment shall be in cash.

(ii) If the adjusted book value of the common stock or participation certificate is greater than its par or stated value, the institution shall pay in cash an amount equal to the par or stated value of the stock or participation certificate. For the amount in excess of par or stated value, the institution may:

(A) Pay cash;

(B) Cause or otherwise provide for the successor institution to issue on the date of termination subordinated debt to the stockholder in an amount equal to the amount by which the adjusted book value exceeds the par or stated value of the stock or participation certificate. Such subordinated notes shall have a maturity date not in excess of 7 years after the date of issuance, shall have a priority on liquidation ahead of all [*15111] equity shares but shall be subordinated to the claims of all other creditors, and shall carry a rate of interest that shall be not less than the rate for debt of comparable maturity issued by the Treasury of the United States plus 1 percent; or

(C) Provide for any combination of paragraph (c)(2)(ii)(A) and (c)(2)(ii)(B) of this section.

(d) If the institution has adopted bylaws in accordance with 611.1210(e), dissenting stockholders who own common stock or participation certificates issued in accordance with such bylaws shall be paid in cash an amount equal to the lesser of the par or adjusted book value of such stock or certificates.

(e) For the purposes of this section, common stock consists of voting stock, nonvoting stock that was formerly voting stock, and stock that has no priority of payment over any other class upon liquidation.

(f) The notice to stockholders and other holders of equity interests required in 611.1220(e) shall include the following information:

(1) A statement of the rights of dissenting stockholders as specified in paragraph (a) of this section;

(2) The current book and par value per share, and the expected book and market value of the stockholder's pro rata interest in the successor institution;

(3) An explanation of the procedure by which stockholders may exercise dissenters' rights and the form they shall return to the terminating institution informing it of their intent to exercise such rights. The notification form by which stockholders may exercise dissenters' rights shall include the date by which the form must be returned to the terminating institution, as specified in paragraph (b) of this section, and a place for stockholders to mark or indicate that they intend to exercise dissenters' rights. The notification form shall be a convenient method for the stockholders to notify the institution and may consist of, but is not limited to, a postcard or preprinted return envelope;

(4) An explanation that dissenting stockholders shall have until 30 days following notification of their dissenters' rights to request retirement of their stock or participation certificates. The stockholders' election to retire stock shall be rescinded if a petition for reconsideration is successful; and

(5) An explanation that maintenance of a borrowing relationship with the successor institution shall not be required as a condition for owning stock in the successor institution, unless otherwise directed by the bylaws of the successor institution.

(g) The terminating institution shall retire the shares of the dissenting stockholders on or before the termination date.

611.1266 Loan refinancing by borrowers.

(a) All loans and loan assets of the terminating institution shall become assets of the successor institution unless they have been sold by the terminating institution or refinanced by the borrower.

(b) If an institution has been designated to serve the territory of the terminating institution prior to the mailing of the information statement, or if an institution that offers credit services of the same type as the terminating institution is already chartered to serve the territory, such institution shall be identified in the information statement. In addition, such institution shall provide the terminating institution with the following information:

(1) The name and address of the institution office that the borrower may contact;

(2) An explanation of the procedures to apply for financing with the institution and the procedures by which the loan may be transferred to the institution;

(3) An explanation of the stock purchase requirements of the new institution; and

(4) Any other information the institution wishes to include or routinely provides to new borrowers.

(c) If the terminating institution receives the information required in paragraph (b) of this section prior to the mailing of the information statement to borrowers, the terminating institution shall include such information in the information statement. If an institution has not been designated to serve the territory or if the terminating institution does not receive the information required in paragraph (b) of this section prior to the mailing of the information statement, the terminating institution shall furnish each borrower with the address and telephone number of the district Farm Credit Bank or other appropriate Farm Credit institution with an explanation that such institution may be contacted for information about the Farm Credit institution(s) that will serve the territory in the future.

(d) The terminating institution shall provide credit and loan information to the institution designated to serve the territory upon the borrower's request, in accordance with 618.8300 through 618.8325 of this chapter, and take such other steps as are necessary to facilitate the transfer of the loan to the institution.

611.1270 Continuation of borrower rights.

A terminating institution may not require a waiver of applicable borrower rights provisions as a condition of ownership interest in and continued financing by the successor institution. Terminating institutions which maintain an OFI relationship with the Farm Credit Bank shall comply with borrower rights provisions contained in subparts K, L, M and N of part 614 of these regulations.

611.1275 Termination of Large Associations.

(a) When a Large Association proposes to terminate, the Farm Credit Administration shall evaluate in consultation with the Farm Credit System Insurance Corporation, the effect of the proposed termination of the Large Association on the viability of remaining System institutions in its district. The evaluation shall include a 2-year projection of earnings of those institutions.

(b) The Farm Credit Administration may request information from any non-terminating institutions in the Large Association's district in order to complete its evaluation of viability. Such institutions shall reply to any Farm Credit Administration request within 10 business days in order to have their information included in the evaluation unless a longer period is specified by the Farm Credit Administration.

(c) The criteria on which the Farm Credit Administration Board shall base its decision to approve or disapprove the termination shall include the effect of such termination on the viability of institutions that remain in the Farm Credit System.

3. New subparts Q and R are added to read as follows:

Subpart Q -- Termination of Farm Credit Status -- Farm Credit Banks

Sec.

611.1300 Applicability and definitions.

611.1310 Advance notification.

611.1311 Filing of termination application.

611.1312 Filing date of termination application.

611.1313 Selection of Farm Credit Bank to serve territory.

611.1315 Farm Credit Administration review and approval.

611.1320 Voting record date and stockholder approval.

611.1325 Requirements for information statement.

611.1326 Prohibited acts.

611.1330 Plan of termination.

611.1335 Stockholder reconsideration. [*15112]

611.1340 Exit fee.

611.1350 Repayment of obligations.

611.1355 Retirement of equities.

611.1366 Loan refinancing by borrowers.

611.1375 Farm Credit Administration evaluation.

Subpart R -- Termination of Farm Credit Status -- Banks for Cooperatives

611.1400 Scope of subpart.

611.1405 Provisions applicable to terminating banks for cooperatives.

Subpart Q -- Termination of Farm Credit Status -- Farm Credit Banks

611.1300 Applicability and definitions.

(a) Each Farm Credit Bank is authorized, in accordance with sections 7.10 and 7.11 of the Act, to terminate the status of the bank as a Farm Credit institution. The regulations in this subpart, including such regulations as are incorporated by reference, set forth the procedural, disclosure, voting and approval requirements applicable to such termination. The Farm Credit Administration may in its sole discretion grant a waiver in writing from any requirement of this subpart for good cause shown.

(b) The definitions set forth in 611.1205 of subpart P of this part shall apply to this subpart Q, except that paragraph (h) shall not apply.

611.1310 Advance notification.

(a) A terminating bank's board of directors shall commence the process of termination by adopting a commencement resolution indicating the bank's intention to terminate its Farm Credit status.

(b) Within 5 days of the adoption of the commencement resolution by the board of directors, the terminating bank shall:

(1) Submit a certified copy of the commencement resolution to the Farm Credit Administration and the Farm Credit System Insurance Corporation; and

(2) Mail a brief announcement to all holders of equity in the bank, the Federal Farm Credit Banks Funding Corporation, and the Farm Credit System Financial Assistance Corporation, stating that the board is taking steps to terminate the bank's Farm Credit status and describing the process of termination, the anticipated effect of termination on current holders of equity and on borrowers from the bank or from the associations that are stockholders in the bank, and the type of institution the successor institution will be.

(c) Within 5 days of its receipt of the announcement described in paragraph (b) of this section, each association in the district of the terminating bank shall mail a copy of the announcement to all holders of equity in the association along with an explanation of the effect that the bank's termination may have on their loans, including whether the borrower would continue to have any of the borrower rights provided by the Act and regulations.

(d) Within 10 days of the adoption of the commencement resolution, the terminating bank and the remaining Farm Credit Banks and banks for cooperatives shall enter into negotiations to provide for the terminating bank's satisfaction of joint and several liability on consolidated and Systemwide obligations as set forth in section 4.4 of the Act. Such agreement shall comply with the requirements set forth in 611.1350(c) of this subpart.

(e)(1) Within 15 days after submission of the commencement resolution pursuant to paragraph (b)(1) of this section, the terminating bank shall submit to the Farm Credit Administration a statement of its estimation of the exit fee together with an explanation of the computation of the exit fee pursuant to the requirements of 611.1340. For purposes of this estimation of the exit fee, the computation date set forth in 611.1240(c) shall be the quarter end preceding the date of the commencement resolution.

(2) Within 45 days of its receipt of the terminating bank's estimated exit fee, the Farm Credit Administration shall either confirm the bank's estimate of the exit fee or notify the bank of any required revisions to the computation.

(3) In the event that the Farm Credit Administration requires adjustments to the estimated exit fee pursuant to paragraph (e)(2) of this section, the terminating bank may request reconsideration of any such adjustments. Such request shall be in writing and shall set forth specific reasons why the adjustments should not be made. The Farm Credit Administration shall reconsider the adjustments and shall inform the terminating bank of its determination within 15 days of the receipt of the reconsideration request.

(f) During the time period after the board of directors' adoption of the commencement resolution pursuant to paragraph (a) of this section and prior to the effective date of termination, the following conditions shall apply to the conduct of business of the terminating bank and its affiliated associations:

(1) Each prospective new borrower, other than a Farm Credit institution, shall be informed of the effect of the proposed termination upon the borrower's loan and shall be specifically informed whether the borrower will continue to have any of the borrower rights provided under the Act and regulations promulgated thereunder;

(2) Any existing common stockholders, other than Farm Credit institutions, who seek to have their equity interests retired before termination shall be informed that the retirement would extinguish the holder's right to an interest in the successor institution or to receive an amount equal to the adjusted book value of the holder's equity in the bank if the termination is completed.

611.1311 Filing of termination application.

A terminating bank shall comply with the provisions in 611.1211 of this part.

611.1312 Filing date of termination application.

(a) A terminating bank shall comply with the provisions in paragraphs (a) and (b) of 611.1212, except that the reference on paragraph (a) to 611.1212(c) shall be construed to be a reference to paragraph (b) of this section.

(b) In the event that the advance notification required in 611.1310 is not received by the Farm Credit Administration at least 90 days prior to the filing date that would otherwise be assigned to the termination application in accordance with paragraph (a) of this section, the application will be disapproved. During this 90-day period, the Farm Credit Administration shall contact other Farm Credit Banks to ascertain their willingness to provide service to the territory of the terminating bank. An inability of the Farm Credit Administration to arrange for a new bank for the territory shall not be grounds for an extension of the 90-day period. However, the Farm Credit Administration may in its sole discretion reduce the required 90-day period in the event that a new bank to serve the territory is selected prior to the expiration of the 90-day period.

611.1313 Selection of Farm Credit Bank to serve territory.

(a) In selecting a Farm Credit Bank for the district of the terminating bank, the Farm Credit Administration shall consider, among other things, the following:

(1) The prospective efficiencies and economies;

(2) The stated preferences of the associations in the district that are not terminating their Farm Credit status;

(3) Compatibility of organization and operations of the district of the [*15113] terminating bank and the district of the proposed replacement bank;

(4) Management of the bank;

(5) Capacity of the bank to service the additional territory;

(6) Willingness of the bank to purchase all the loans to the associations in the district;

(7) Market diversities between the bank's district and the district of the terminating bank; and

(8) Geographical proximity.

(b) The Farm Credit Administration may, in its discretion, apportion the district of the terminating bank among two or more Farm Credit Banks.

611.1315 Farm Credit Administration review and approval.

A terminating bank shall comply with the provisions in 611.1215 of this part, except that the reference in 611.1215(e) to 611.1220(e) shall be construed to be a reference to 611.1320.

611.1320 Voting record date and stockholder approval.

A terminating bank shall comply with the provisions in 611.1220 of this part, except that paragraph (c)(3) and (d) and the provisions in paragraph (e) pertaining to dissenting stockholders shall not apply. The reference in 611.1220(b) to 611.1225 shall be construed to be a reference to 611.1325.

611.1325 Requirements for information statement.

(a) A terminating bank shall comply with all the provisions in 611.1225 of this part except paragraphs (h) and (s).

(b) If an OFI owns any shares of the terminating bank, the information statement shall also include a statement that OFIs shall have the right to have their stock retired together with an explanation of the procedures for doing so.

611.1326 Prohibited acts.

A terminating bank and affiliated persons shall comply with the provisions in 611.1226 of this part.

611.1330 Plan of termination.

A terminating bank shall comply with the provisions in 611.1230 of this part.

611.1335 Stockholder reconsideration.

A terminating bank shall comply with the provisions in 611.1235 of this part. For purposes of this section, the references to "15 percent of the eligible voting stockholders" in paragraphs (a) and (d) of 611.1235 shall mean stockholder associations representing 15 percent of the eligible voting shares in the district.

611.1340 Exit fee.

(a) If a Farm Credit Bank terminates alone, the exit fee shall be computed as follows:

(1) The assets and capital of the associations affiliated with the terminating bank, including unallocated surplus and earnings computed pursuant to 611.1355(a), shall be deducted from the assets and capital of the terminating bank.

(2) After deduction of the assets and capital of the associations, any allowance for losses on assets that will be repaid at a value above net book value as a result of the termination shall be added to the assets and unallocated surplus of the bank, and the terminating bank shall comply with the provisions in 611.1240 of this part.

(b) If a Farm Credit Bank terminates its Farm Credit status in conjunction with one or more affiliated associations, the exit fee shall be computed as follows:

(1) The exit fee for each terminating association shall be computed in accordance with 611.1240.

(2) The balance sheets of the Farm Credit Bank as computed under paragraph (a) of this section, and of the terminating association(s) shall be combined, and the exit fee of the combined entity shall be computed in accordance with 611.1240.

(3) The exit fee for the terminating bank shall be the amount by which the exit fee for the combined entity exceeds the total of the exit fees of the individual terminating associations.

(c) The equity of any OFI that chooses to receive cash from the transaction pursuant to 611.1355(c) shall be deducted from the assets and capital of the terminating Farm Credit Bank in the computation of the exit fee.

611.1350 Repayment of obligations.

(a) The terminating bank shall provide for the payment or assumption by the successor institution of all outstanding System debt obligations.

(b) Satisfaction of consolidated or Systemwide obligations on which a terminating bank is primarily liable shall be provided for in one or more of the following ways:

(1) Assumption of primary liability by one or more remaining System banks;

(2) Open market purchase and cancellation of obligations representing issues on which the terminating bank is a primary obligor; or

(3) Deposit of funds into a trust account in an amount sufficient to retire principal and interest on the Systemwide obligations on which the terminating bank is primarily liable.

(c) The terminating bank shall enter into an agreement with the remaining System banks, subject to the approval of the Farm Credit Administration, which agreement shall specify how the successor institution shall satisfy its joint and several liability under section 4.4 of the Act, to holders of obligations issued pursuant to section 4.2 of the Act and outstanding on the termination date. Any payments that may be made pursuant to such agreement, whether prior to or subsequent to termination, shall not exceed the amount that would have been payable by the terminating bank if a call by the Farm Credit Administration pursuant to section 4.4(a)(2)(B) of the Act had been made on the day prior to the termination date for the entire amount of Systemwide debt outstanding.

(d) In the event that the terminating bank and the remaining banks are unable to reach agreement within 90 days prior to the proposed termination date, the Farm Credit Administration shall require the banks to enter into an agreement that shall establish the terminating bank's proportionate share of any subsequent calls to be made as follows:

(1) The Farm Credit Administration shall determine a date to compute the percent of the total of the liability for which the terminating bank is responsible. Such liability computation date shall be on or before the computation date.

(2) The total amount of bonds on which the terminating bank is primarily liable as a percentage of total bonds issued and outstanding on the liability computation date shall be determined.

(3) This percentage shall be applied to only those obligations issued and outstanding on the bank's termination date.

(e) The terminating bank shall remain jointly and severally liable for all consolidated and Systemwide debt outstanding on the terminating date. The terminating bank shall sign a statement acknowledging the joint and several liability and liability for interest on obligations issued by other banks operating under the same title of the Act as part of the termination application.

(f)(1) The terminating bank shall pay to the Financial Assistance Corporation a share of the estimated present value of:

(i) All future assessments against the bank as required under section 6.9(e)(B) and paragraphs (c)(2)(C), (c)(4), and (c)(5)(A) and (B) of section 6.26 of the Act based on the average accruing retail loan volume of the bank and its affiliated associations for the preceding [*15114] year, had the bank remained in the System;

(ii) The payment required under section 6.26(d)(1)(C) of the Act based on the average accruing retail loan volume of the bank and its affiliated associations during the time period from the year that the obligations were issued to the year prior to the computation date, had the bank remained in the System; and

(iii) The payment required under section 6.9(e)(2)(C) of the Act based on the average accruing loan volume of the bank during the time period from the year that the obligations were issued to the year prior to the computation date, had the bank remained in the System.

(2) The present value estimate shall be made by the Financial Assistance Corporation.

611.1355 Retirement of equities.

(a) The terminating bank must retire all equities owned by another Farm Credit institution prior to termination, unless such institution is an association that is terminating its Farm Credit status in conjunction with the bank's termination. The value of the equities shall include both allocated and unallocated equities and shall be calculated in accordance with 611.1340, except that the amount of the exit fee shall not be deducted from the assets of the bank for purposes of the calculation. In addition, the amount of the unallocated surplus shall be distributed based on the average direct loan for the 36 months preceding the computation date.

(b) The terminating bank must retire all preferred stock owned by the Financial Assistance Corporation by a method acceptable to the Financial Assistance Corporation and the Farm Credit Administration.

(c) A holder of equities in the terminating bank, other than the Financial Assistance Corporation or another Farm Credit institution, may, but is not required to, have its equities retired on the same basis as provided in paragraph (a) of this section. Such holder shall inform the terminating bank of its preference within 90 days of the terminating bank's distribution of an information statement unless the bank permits an extension of time.

611.1366 Loan refinancing by borrowers.

A terminating bank shall comply with the provisions in 611.1266 of this part.

611.1375 Farm Credit Administration evaluation.

(a) Within 30 days of the adoption of a commencement resolution by an institution, or group of institutions, whose assets on a combined basis constitute 10 percent or more of the assets of the Farm Credit System, the remaining Farm Credit Banks, banks for cooperatives and other System institutions may submit an analysis of projected financial condition and earnings for a 2-year period following the proposed termination date to the Farm Credit Administration. Any such analysis shall include a discussion of:

(1) The effect of the termination(s) on the viability of the remaining System institution(s) and/or any affiliated institutions;

(2) Any projected change in the cost of funds to the institutions remaining in the System due to increased expenses or higher interest rates, including the assumptions on which the projection is based; and

(3) Other relevant information.

(b) The Farm Credit Administration shall make a separate analysis and shall review any analysis provided by non-terminating System institutions and make a final determination as to the probable effect of such termination on the viability of institutions remaining in the Farm Credit System.

(c) Banks that do not terminate shall provide necessary information to the Farm Credit Administration as may be requested by the agency to enable the Farm Credit Administration to make accurate financial projections.

(d) The criteria on which the Farm Credit Administration Board shall base its decision whether to approve or disapprove a proposed termination shall include the effect of such termination on the viability of institutions that remain in the Farm Credit System.

Subpart R -- Termination of Farm Credit Status -- Banks for Cooperatives

611.1400 Scope of subpart.

Each bank for cooperatives is authorized, in accordance with sections 7.10 and 7.11 of the Act, to terminate its status as a Farm Credit institution. The regulations in this subpart, including such regulations as are incorporated by reference, set forth the procedural, disclosure, voting and approval requirements applicable to such termination. The Farm Credit Administration may, in its sole discretion, grant a waiver in writing from any requirement of this subpart for good cause shown.

611.1405 Provisions applicable to terminating banks for cooperatives.

(a) A terminating bank for cooperatives shall comply with all the provisions applicable to terminating associations in subpart P of this part, except that the following provisions shall not apply: 611.1205(h), 611.1212(c), 611.1255, 611.1270, and 611.1275.

(b) A terminating bank for cooperatives shall comply with the following provisions in subpart Q of this part: 611.1310, 611.1350, 611.1355, and 611.1375.

Dated: March 15, 1993.

Nan P. Mitchem,

Acting Secretary, Farm Credit Administration Board.
[FR Doc. 93-6351 Filed 3-18-93; 8:45 am]

BILLING CODE 6705-01-P