Title: PROPOSED RULE--Organization; Disclosure to Shareholders; Accounting and Reporting Requirements--12 CFR Parts 611, 620, and 621
Issue Date: 01/24/1991
Agency: FCA
Federal Register Cite: 56 FR 2715
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 620, and 621

RIN 3052-AB20

Organization; Disclosure to Shareholders; Accounting and Reporting Requirements


ACTION: Proposed rule.

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board, publishes for comment proposed amendments to 12 CFR parts 611, 620, and 621 to implement changes made necessary as a result of the amendment of the Farm Credit Act of 1971 (1971 Act), as amended by the Agricultural Credit Act of 1987 (1987 Act) (Pub. L. 100-233). The proposed amendments include technical amendments necessary to recognize the structural changes in Farm Credit institutions and changes in lending authority required or authorized by the 1987 Act. The proposed amendments would also require additional disclosures due to the changes in the capital structure of Farm Credit institutions and the implementation of the FCA capital adequacy regulations, the establishment of the Farm Credit System Insurance Corporation, the establishment of the Federal Agricultural Mortgage Corporation, new authorities to participate in secondary market activities, and purchases and sales of loans. Other proposed amendments modify existing requirements for preparing, distributing, and filing reports, incorporate changes to and clarification of generally accepted accounting principles, and clarify the existing disclosure requirements.

DATES: Comments should be received on or before February 25, 1991.

ADDRESSES: Submit any comments in writing (in triplicate) to Anne E. Dewey, General Counsel, Farm Credit Administration, McLean, Virginia 22102-5090. Copies of all communications received will be available for examination by interested parties in the Office of General Counsel, Farm Credit Administration.

FOR FURTHER INFORMATION CONTACT:

Tong-Ching Chang, Staff Accountant, Policy and Risk Analysis Division, Office of Examination, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, (703) 883-4483, TDD (703) 883-4444;
or
Joy Strickland, Attorney, Office of General Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, Virginia 22102-5090, (703) 883-4020, TDD (703) 883-4444.

SUPPLEMENTARY INFORMATION: The proposed regulation amendments discussed below are of three types: (1) Technical amendments addressing changes in the structure and lending authority of Farm Credit institutions; (2) amendments requiring disclosures related to capital issues, obligations insured by the Farm Credit System Insurance Corporation (FCSIC), obligations issued by the Farm Credit System Financial Assistance Corporation, purchases and sales of loans, participation in secondary market activities, and enforcement actions; and (3) other procedural, technical, and conforming changes. The proposed amendments also clarify existing regulations where appropriate. In addition, the proposed amendments would revise and clarify the definition of "formally restructured loans" contained in part 621, subpart A.

I. Proposed Technical Amendments Addressing Changes in the Structure and Lending Authority of Farm Credit Institutions

The 1987 Act required the merger of Federal land banks (FLBs) and Federal intermediate credit banks (FICBs) in each Farm Credit district to form Farm Credit Banks (FCBs) and authorized the merger of Federal land bank associations (FLBAs) or Federal land credit associations (FLCAs) with production credit associations (PCAs) to form agricultural credit associations (ACAs) and the merger of FCBs with banks for cooperatives (BCs) to form agricultural credit banks (ACBs). In addition, the 1987 Act authorized the transfer of long-term real estate lending authority from an FCB to an FLBA when approved by the shareholders of both institutions, resulting in an FLCA. The 1987 Act requires such a transfer when an FLBA merges with a PCA to form an ACA. The FCA proposes technical amendments to update the language throughout part 620 to reflect the above provisions of the 1987 Act.

II. Proposed Amendments Requiring Disclosure Related to Capital Issues, Obligations Insured by the Farm Credit System Insurance Corporation, Obligations Issued by the Farm Credit System Financial Assistance Corporation, Purchases and Sales of Loans, Participation in Secondary Market Activities, and Enforcement Actions

A. Capital Issues

The 1987 Act made significant changes in the capital structure of Farm Credit institutions including the addition of a new requirement to retire "eligible borrower stock" at par value upon repayment of a loan, whether or not such stock is impaired (see section 4.9A of the 1971 Act). "Eligible borrower stock" is defined as stock, participation certificates, and allocated equities issued or allocated to persons other than Farm Credit System institutions, that were outstanding on the date of enactment of section 4.9A or issued after the date of enactment as a condition of obtaining a loan, but before the earlier of 9 months from enactment of section 4.9A or the date the institution adopts capitalization bylaws to reflect the 1987 Act, which amended the 1971 Act. In addition, the 1987 Act added section 4.3A to the 1971 Act, which provides that stock issued in accordance with the bylaws of the Farm Credit banks and associations, except eligible borrower stock, can only be retired at the discretion of each institution's board of directors. Section 4.3A also provides that the board of directors of an institution may not reduce the institution's permanent capital through the payment of patronage refunds or dividends or stock retirement if, after or due to such action, the institution would fail to meet its minimum capital adequacy standards. The section defines "permanent capital" to include current year retained earnings, allocated and unallocated earnings, all surplus (less allowance for losses), and stock issued by a System institution, except eligible borrower stock or stock that may be retired at the option of the holder. In order to implement section 4.3A of the 1971 Act, the FCA promulgated regulations in part 615, subpart H, requiring each Farm Credit institution to meet minimum capital standards and to determine the amount of capital needed to assure that the institution remains financially sound and continues to meet the needs of its borrowers. As a result of the above statutory and regulatory provisions, the FCA is proposing new disclosure requirements in part 620 to address changes in capital adequacy requirements as a result of the 1987 Act.

1. Capital Adequacy Issues

The proposed regulation would amend existing 620.3 to require additional disclosure to reflect the above statutory and regulatory requirements regarding the capital adequacy of Farm Credit institutions and redesignate it as 620.5. Proposed paragraph (d)(1)(ix) of the redesignated 620.5 would require that institutions disclose the statutory and regulatory restriction on the distribution of earnings and retirement of stock when capital standards are not met ( 615.5215) and the regulatory requirement that banks for cooperatives add annual amounts to unallocated surplus until the unallocated surplus reaches half of the institutions' minimum permanent capital requirements ( 615.5330). Proposed 620.5(d)(3) would require the institution to state whether it is currently subject to any such restrictions or requirements or knows of any reason it will be subject to such a requirement during the fiscal year subsequent to the fiscal year just ended. Additionally, proposed 620.5(d)(2) would require an institution to describe the regulatory minimum permanent capital standards established in part 615, the institution's capital adequacy requirement, and the minimum stock purchase requirement in effect.

The proposed 620.5(g)(4) would also require additional disclosure in management's discussion and analysis. Each institution would be required to discuss the adequacy of its permanent capital position and any trends, commitments, contingencies, or events that are reasonably likely to have a materially adverse effect upon the institution's capital adequacy or its ability to meet minimum permanent capital standards. In addition, each institution would be required to disclose any foreseeable material change in its capital plan adopted pursuant to 615.5200 that may have an effect on the institution's minimum stock purchase requirements of its ability to retire stock and distribute earnings.

The FCA believes that these additional disclosures are necessary to provide the shareholders with meaningful information regarding the capital adequacy of the institution. Such information is believed to be material because the financial position of the institution and the ability of the institution to generate and distribute earnings are affected by the capital position of the institution.

2. Effect of Changes in Capital Structure of Key Financial Ratios and Financial Statements

Because section 4.9A of the 1971 Act requires institutions to retire "eligible borrower stock" at par value and section 4.3A provides that such protected borrower stock cannot be counted as permanent capital to satisfy regulatory capital requirements, such stock should be distinguished from stock that is considered permanent capital in the financial statements, financial summaries, and computations of certain capital ratios. Therefore, the FCA proposes to amend 620.5(f) to make the necessary changes. For the purpose of computing capital ratios, new definitions of "protected borrower stock" and "net worth" are proposed. The proposed definition of the term "net worth" would include both protected borrower stock and stock that qualifies as permanent capital. While in common usage the term "protected borrower stock" may be interchangeable with "eligible borrower stock," it is technically more descriptive of the characteristics of the stock than the statutory term.

The proposed amendments would require that protected borrower stock be reported separately from permanent capital under the caption "net worth." Proposed 620.5(f)(1)(i) would require that each institution's report include the following ratios: the return on average net worth, permanent capital ratio, and net worth to assets. A conforming change to 620.5(g)(2)(iii) is also proposed to require the reporting institution to include an explanation of its basis for computation of these ratios.

The proposed amendments would delete the definition of "risk funds" and the requirement to present a debt-to-capital ratio. In view of the focus in the capital regulations on capital adequacy and the minimum permanent capital standards, the concepts of risk funds and debt-to-capital are believed to be less meaningful to shareholders.

B. Insured Obligations, Obligations Issued by the Farm Credit System Financial Assistance Corporation, Purchases and Sales of Loans, and Participation in Secondary Market Activities

Sections 5.51 and 5.60 of the 1971 Act provide for the insurance of certain obligations of banks by the Farm Credit System Insurance Corporation. In response to these provisions, a new disclosure requirement is proposed in 620.5(e)(1) which would require banks to describe outstanding obligations as either insured or uninsured to reflect the nature of the obligation.

Proposed 620.5(e)(4) would impose a new disclosure requirement to reflect the statutory responsibility of System institutions for repayment of obligations issued by the Farm Credit System Financial Assistance Corporation in accordance with 6.26 of the 1971 Act. The FCA believes this disclosure is needed because repayment of principal or interest of an obligation issued by the Farm Credit System Financial Assistance Corporation may have a significant impact on the financial condition of a reporting institution and consequently may significantly affect a shareholder's investment in the institution.

The disclosure required in existing regulations would not reflect the institution's sales and purchases of loans or its participation in secondary market activities, which was authorized by the 1987 Act. Certain Farm Credit institutions have authority to sell interests in loans to other lending institutions that are not Farm Credit institutions, in addition to the recently granted authority to participate in secondary market activities through Federal Agricultural Mortgage Corporation (Farmer Mac) programs. Since the sale of loans is likely to increase as a result of the 1987 Act, the FCA proposes to revise the existing definition of "loans" to clarify that the definition includes purchased interests in loans, including subordinated participation interests in loans sold, and interests in pools of subordinated interests that are held in lieu of retaining a subordinated participation interest in loans sold. Proposed 620.5 (g)(1)(iv)(E) and (g)(3)(ii)(C) would require an institution to describe its participation in Farmer Mac secondary market activities and any activity in origination of loans for resale. Further, the institution would be required to disclose the amounts of purchased loans, loans sold with recourse, retained subordinated participation interests in any loans sold, and any interests in pools of subordinated participation interests or contributions to the reserve described in 8.7 of the 1971 Act that are held or made in lieu of retaining a subordinated participation interest in the loans sold. The institution would also be required to disclose the actual risk associated with the quality of these assets.

Proposed 260.5(a)(9) would substitute the term "related Farm Credit institution," as described in 619.9146 for "related Farm Credit organizations." The effect of the change would be to require the institution to describe the business of any service corporation in which it has an ownership interest, including any service corporation organized to participate in secondary market activities.

C. Disclosure of Enforcement Actions

Proposed 620.5(c)(2) would require each institution to describe the existence and nature of any enforcement actions, i.e., agreements, cease and desist orders, temporary cease and desist orders, suspensions or removals of officers or directors, or civil money penalties, imposed or assessed on the institution or its officers or directors. If civil money penalties have been assessed, the institution would also be required to disclose the amount of such penalties.

III. Other Proposed Procedural, Technical, and Conforming Amendments

The proposed amendments include many procedural and technical changes to part 620. A new Subpart A -- General is proposed which would contain definitions and other general provisions that would be applicable to all disclosure statements required by part 620. Specific requirements pertaining to individual reports remain in the applicable subparts. As a result of the addition of subpart A and the redesignation of other sections, conforming amendments are proposed to part 611 where appropriate.

A. Definitions

The proposed amendments use the same definitions contained in existing regulations to the extent possible. However, to reflect the structural changes in Farm Credit institutions, new definitions for "association," "bank," and "direct lender association" would be added which refer to definitions of the terms in part 619. Also, definitions of the terms "related association" and "related bank" would be added which would replace the references to "district bank" and "associations in the district." The proposed amendment would also amend the existing definition of "normal risk of collectibility" to clarify that loans having a greater than normal risk of collectibility may also include loans other than nonperforming loans.

B. General Preparation and Filing Requirements

Proposed 620.2(a) would require that each institution file three copies of the reports or information statement required by this part with the FCA offices designated by the Chief Examiner, instead of filing all reports directly with the Chief Examiner. Under the proposed regulation, the reports filed must be received by the FCA within the period that the reports are required to be distributed to shareholders. Under the proposed paragraph, each association would also be required to make annual and quarterly reports of its related bank available for inspection by its shareholders.

C. Prohibition Against Incomplete, Inaccurate, or Misleading Disclosure

The FCA proposes a new 620.3 that would expand the prohibition in existing 620.22 and 620.32 against inaccurate or misleading disclosures in connection with an election to apply to any disclosures made by a Farm Credit institution or its officers, directors, or employees. Each institution, its employees, officers, directors, or nominees for directors of the institution would be prohibited from making incomplete and inaccurate or misleading disclosure to shareholders and the general public concerning any matters required to be disclosed by part 620.

D. Distribution of Bank Reports to Association Shareholders

When the current disclosure regulations were initially enacted, the FCA determined that due to the structure of the Farm Credit System (i.e., the FLBA/FLB relationship and the PCA/FICB relationship) and the impact the FLBs and FICBs had on the financial results of the FLBAs and PCAs, respectively, there was a need for shareholders of the associations to receive on a quarterly and annual basis the financial statements of the bank (which represent the combined statements of the bank and associations within the same Farm Credit district), in addition to the association reports. The current regulations do not specify that the entire bank report (which includes financial statements of the bank and combined financial statements of the bank and associations in the district as well as management discussion and analysis (MD&A)) is to be distributed to association shareholders. The proposed amendments would clarify that the entire bank report must be distributed to the association shareholders rather than the financial statements only, as stated by the existing regulation.

In view of the structural changes that have resulted from the implementation of the 1987 Act and the prospect of increased autonomy and financial independence of associations, the FCA reexamined the requirement for routine distribution of bank quarterly reports to association shareholders. These changes, along with the new capital requirements and other provisions of the 1971 Act, are likely to result in greater autonomy for Farm Credit institutions. Nevertheless, the FCB and its related associations continue to be interdependent, and the condition of the bank could have a significant impact on the shareholders' investment in the associations. Due to these changed circumstances and the concern of Farm Credit institutions that routinely providing association shareholders with bank quarterly reports may not result in the most meaningful disclosure, the FCA proposes to require that the association's report be a more complete report of its financial condition, including disclosure of the impact of the related bank's operation on the association.

Therefore, proposed 620.5(g)(2)(vi) would require each association to disclose its relationship with its related bank as well as any events, if known, affecting the bank that would also materially affect the association.

In addition to the proposed requirements for disclosure by an association of its relationship with the related bank, the proposed amendments would require the quarterly reports of the bank to be sent to association shareholders, except for quarters in which no significant events occur or no significant events continue to materially affect the bank and related associations. A definition of "significant event" would be added which would include any event that is likely to have a material impact on the reporting institution's financial condition, results of operations, cost of funds, and reliability of sources of funds. Significant events would include, but would not be limited to, actual or probable noncompliance with the regulatory minimum permanent capital standards or capital adequacy requirements, stock impairment, the imposition of or entering into enforcement actions, execution of financial assistance agreements with other institutions, collateral deficiencies that affect a bank's ability to obtain loan funds, or defaults of debt obligations. While this list is not all inclusive, the FCA believes that the listed items are significant and, therefore, a bank would be required to distribute a quarterly report to association shareholders for the quarters in which any of the events listed occur or continue to have a material impact on the bank and related associations. For periods in which bank quarterly reports are not required to be distributed to association shareholders, the bank would be required to certify to the FCA that no significant events have occurred during the current quarter and no such events that occurred during previous quarters continue to have a material impact on related associations. The certification would be signed by the persons who are required to sign the quarterly report filed with the FCA. The proposed amendments would continue to require that bank quarterly reports be routinely distributed to shareholders of FLBAs that are not direct lender associations. Otherwise, FLBA shareholders would receive no quarterly report at all.

For periods in which quarterly bank reports are not distributed to association shareholders, proposed 620.10(e) would require that the bank report be made available upon request. Proposed 620.2 would require that the annual and quarterly report of the each Farm Credit institution include an address and telephone number of the location where association shareholders may obtain copies of bank quarterly information. Copies would be required to be available free of charge to association shareholders from both the issuing bank and the association.

To ensure that association shareholders recognize the relevancy of the bank financial information to the operations of the association and to their investment in the association, proposed 620.2 would require that the annual report and quarterly reports of the association contain a statement that the shareholders' investment is materially affected by the financial condition of the related bank. In addition, should the proposed amendments be adopted, institutions would be required to disclose the regulatory changes in the method of distributing bank quarterly reports and new procedures under which the association shareholders would be able to obtain the bank quarterly reports in the first annual and first quarterly reports issued.

The FCA continues to believe that annual distribution of bank financial information to association shareholders is necessary to provide the shareholders with meaningful information, and this requirement would be preserved. By providing association shareholders with bank annual reports and bank quarterly reports upon the occurrence of significant events, and by making bank quarterly reports readily available upon request when no such significant events occur, the FCA believes that association shareholders will receive necessary and meaningful bank financial information.

E. Financial Statements and the Statement of Cash Flows

The proposed regulations contain amendments to reflect changes to generally accepted accounting principles (GAAP). In 1987, the Financial Accounting Standards Board implemented Statement of Financial Accounting Standards No. 95, which substituted the statement of cash flows for the statement of changes in financial position. In order to implement this change, the FCA proposes to amend 620.5(m) by substituting the statement of cash flows for the statement of changes in financial position. Also, the FCA proposes to substitute the statement of changes in net worth for the statement of changes in capital to disclose changes in the amounts of protected borrower stock and permanent capital.

The statement of cash flows is, in part, intended to assess a reporting entity's ability to generate positive future net cash flows to meet its obligations and pay dividends and to assess its needs for external financing. Since associations obtain their funding from their related banks, and loan payments received are seasonal, the information provided in the statement of cash flows on a quarterly basis is less meaningful. Therefore, the FCA proposes to amend 620.11(d) to require that banks publish the statement of cash flows on a quarterly basis and to authorize associations to publish quarterly statements of cash flows at their option.

F. Clarifications of Existing Requirements

The FCA proposes certain amendments to clarify existing provisions of the disclosure regulations. Proposed 620.5(b) (currently 620.3(b)) would be amended to clarify the term "principal offices" by adding the explanatory words "headquarters, and major facilities where the institution makes and services its loans." Paragraph (g) of 620.5 would be amended to clarify that institutions are required to fully discuss "any material aspects of" the institution's financial condition and results of operations in its management's discussion and analysis for the annual report. The FCA also proposes to amend 620.11 to clarify that, subject to the provisions provided in paragraph (b) of that section, the major captions to be provided in the interim financial statements are the same as those required in the financial statements contained in the institution's annual report. For the interim MD&A, the captions are not required to be the same as those in the annual report, and only those captions containing information that materially changes the information in the annual report need to be included.

The quarterly report is intended to be a concise but meaningful discussion of any material changes that have occurred since the end of the last fiscal year. It need not be voluminous to comply with the disclosure regulations. As the FCA has noted in the past, institutions may include information not required by the regulation; however, the disclosure of a large volume of information without clarity and focus does not necessarily constitute meaningful disclosure.

G. Miscellaneous Procedural, Technical, and Conforming Amendments

Several procedural and technical amendments are proposed throughout part 620. A description of several of the proposed amendments to 620.5, which prescribes the content of the annual report to shareholders, follows. Section 620.5(a)(3) would be amended by requiring associations to disclose, or incorporate by reference to a bank's report if one is distributed, the lending and financial services offered by the related bank; paragraph (a)(4) is proposed to be amended by replacing the words "mergers or consolidations" with the words "changes in the reporting entity" to include reorganizations consummated pursuant to part 611, subpart O -- Special Reconsideration of Mergers, as well as mergers and consolidations; paragraph (e)(2) is proposed to be amended to expand the existing wording "any other financial assistance agreement" to "any other form of financial assistance"; and paragraph (f) would be amended by adding "extraordinary items" to the list.

Also, 620.5(f)(1)(i) is proposed to be amended by reversing the sequence of "obligations with maturities longer than 1 year" and "obligations with maturities less than 1 year"; paragraph (g)(1)(i) of 620.5 is proposed to clarify that only associations that make agricultural production loans must disclose such loans by subcategory; and paragraph (g)(2)(ii) of 620.5 is proposed to be amended by removing the reference to other Farm Credit institutions, which would allow for the disclosure of assistance from any sources, including the Farm Credit System Assistance Board and the FCSIC.

Moreover, the FCA proposes to modify the definition of "formally restructured loans" in part 621 to clarify that the disclosure of formally restructured loans should be made in accordance with GAAP. Existing 621.2(a)(8) refers to "formally restructured" as defined in Statement of Financial Accounting Standards (SFAS) No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructuring (SFAS No. 15), issued by the Financial Accounting Standards Board. The second sentence of 621.2(a)(8) further states that, "After a loan is classified as 'formally restructured,' it shall continue to be classified as formally restructured until it is fully paid off or otherwise discharged." However, paragraph 40(a) of SFAS No. 15, which describes disclosure requirements for troubled debt restructuring, provides that "* * * receivable whose terms have been modified need not be included in that disclosure if, subsequent to restructuring, its effective interest rate * * * has been equal to or greater than the rate that the creditor was willing to accept for a new receivable with comparable risk." As a result, some have questioned whether the regulation adequately reflects the possibility that under SFAS No. 15 a restructured loan would no longer be considered formally restructured if, as a result of fluctuations in the interest rates on new receivables, the effective interest rate on a restructured loan is considered a market rate. Accordingly, to prevent any further confusion the FCA Board proposes to amend 621.2(a)(8) by deleting the second sentence, which has been interpreted as requiring without exception that a loan continue to be classified and disclosed as "formally restructured" until it is fully paid off or otherwise discharged.

List of Subjects in 12 CFR Parts 611, 620, and 621

Accounting, Agriculture, Banks, Banking, Credit, Organization and functions (Government agencies), Reporting and recordkeeping requirements, Rural areas.

For the reasons stated in the preamble, parts 611, 620, and 621 of chapter VI, title 12 of the Code of Federal Regulations are proposed to be amended 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, 5.0, 5.9, 5.10, 5.17, 7.0-7.13; 12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2221, 2243, 2244, 2252, 2279a-2279f-1; secs. 411 and 412 of Pub. L. 100-233.

Subpart L -- Liquidation of Associations

611.1168 [Amended]

2. Section 611.1168 is amended by removing the references, "subpart A", " 620.3", " 620.2(e)", and " 620.2(f)" and adding in their places, the references, "Subpart B", " 620.5", " 620.2(b)", and " 620.2(c)" in the first, second, and third sentences of paragraph (d) introductory text, respectively; by removing the reference, " 620.3(c)" and adding in its place, the reference " 620.5(c)" in paragraph (d)(2); by removing the reference, " 620.3(l)" and adding in its place, the reference " 620.5(l)" in paragraph (d)(3); by removing the reference, "subpart B" and adding in its place, the reference " 620.2 and subpart C" in the first sentence of paragraph (e) introductory text; and by removing the reference, " 620.10(d)" and adding in its place, the reference " 620.2(b)" in the second sentence of paragraph (e) introductory text.

Subpart M -- Liquidation of Banks

611.1175 [Amended]

3. Section 611.1175 is amended by removing the references, "subpart A", " 620.3", " 620.2(e)", and " 620.2(f)" and adding in their places, the references, "subpart B", " 620.5", " 620.2(b)", and " 620.2(c)" in the first, second, and third sentences of paragraph (d) introductory text, respectively; by removing the reference, " 620.3(c)" and adding in its place, the reference " 620.5(c)" in paragraph (d)(2); by removing the reference, " 620.3(l)" and adding in its place, the reference " 620.5(l)" in paragraph (d)(3); by removing the reference, "subpart B" and adding in its place, the reference " 620.2 and subpart C" in the first sentence of paragraph (e) introductory text; and by removing the reference, " 620.10(d)" and adding in its place, the reference " 620.2(b)" in the second sentence of paragraph (e) introductory text.

Subpart N -- Conservators and Conservatorships of Banks and Associations

611.1182 [Amended]

4. Section 611.1182 is amended by removing the references, " 620.2(e), 620.3(m)(3), 620.10(d), and 620.20 (e) and (f)" and adding in their place, the references " 620.2(b), 620.2(c), and 620.5(m)(2)" in paragraph (d).

PART 620 -- DISCLOSURE TO SHAREHOLDERS

5. The authority citation for part 620 continues to read as follows:

Authority: Secs. 5.17, 5.19, 8.11; 12 U.S.C. 2252, 2254, 2279aa-11; sec. 424 of Pub. L. 100-233.

Subparts B, C, D, and E [Redesignated as C, D, E and F]

6. Subparts B, C, D, and E are redesignated as new subparts C, D, E, and F.

7. Section 620.3 is redesignated as new 620.5 in subpart B.

8-11. Subpart A is amended by revising the heading to read as follows:

Subpart A -- General

12. Section 620.1 is amended by adding introductory text, removing existing paragraph (i); redesignating paragraphs (b), (c), (d), (e), (f), (g), (h), and (j) as new paragraphs (p), (e), (f), (g), (h), (j), (o), and (q); adding new paragraphs (b), (c), (d), (i), (k), (l), (m), (n), and (r); and revising newly redesignated paragraphs (g) and (j) to read as follows:

620.1 Definitions.

For the purpose of this part, the following definitions shall apply:

* * * * *

(b) Association means any of the associations as described in 619.9050.

(c) Bank means any of the Farm Credit banks as described in 619.9140.

(d) Direct lender association means any association that is a direct lender as described in 619.9135 of this chapter.

* * * * *

(g) Loan means any extension of credit or lease that is recorded as an asset of a reporting institution, whether made directly or purchased from another lender. The term "loan" includes, but is not limited to, loans originated through direct negotiations between the reporting institution and a borrower; purchased loans or interests in loans, including participation interests, retained subordinated participation interests in loans sold, interests in pools of subordinated interested that are held in lieu of retaining subordinated participation interest in loans sold; contracts of sale; and notes receivable.

* * * * *

(i) Net worth means total assets minus total liabilities.

(j) Normal risk of collectibility means the ordinary risk inherent in the lending operation. Loans that are deemed to have more than a normal risk of collectibility include, but are not limited to, any loans properly identifiable as "nonperforming" as defined in 621.2(a)(17) of this chapter.

(k) Permanent capital shall have the same meaning as in 615.5201(h) of this chapter.

(l) Protected borrower stock means eligible borrower stock as defined in 615.5260(h) of this chapter.

(m) Related association means an association within the reporting bank's chartered territory that generates loans for the bank or whose operations the bank funds.

(n) Related bank means a reporting association's funding bank or the bank for which it generates loans.

* * * * *

(r) Significant event means any event that is likely to have a material impact on the reporting institution's financial condition, results of operations, cost of funds, or reliability of sources of funds. The term "significant event" includes, but is not limited to, actual or probable noncompliance with the regulatory minimum permanent capital standards or capital adequacy requirements, stock impairment, the imposition of or entering into enforcement actions, execution of financial assistance agreements with other institutions, collateral deficiencies that impact a bank's ability to obtain loan funds, or defaults on debt obligations.

13. Section 620.2 is amended by revising the heading; adding introductory text; redesignating paragraphs (a), (b), and (c) as new 620.4, paragraphs (a), (b), and (c) in subpart B; removing paragraph (j); redesignating paragraphs (d), (e), (f), (g), (h), (i), and (k) as new paragraphs (a), (b), (c), (d), (e), (f), and (g); adding new paragraphs (h) and (i); removing the reference "paragraph (e)" and adding in its place "paragraph (b)" in newly redesignated paragraph (c); removing the words "this subpart" and adding in their place "subparts B and D" in newly redesignated paragraph (f); and revising newly redesignated paragraphs (a), (b)(3) attestation text, and (g) to read as follows:

620.2 Preparing and filing the reports.

For the purposes of this part, the following shall apply:

(a) Three complete copies of each report or information statement required by this part (for the purpose of this section, referred to as "report" unless otherwise specified), including financial statements and related schedules, exhibits, and all other papers and documents that are part of the report shall be filed with the Chief Examiner, Farm Credit Administration, McLean, Virginia 22102-5090, or with such other Farm Credit Administration offices as the Chief Examiner designates. The report shall be received by the Farm Credit Administration within the period prescribed under applicable sections of individual subparts regarding preparation and distribution of the report. The annual and quarterly reports shall be available for public inspection at the issuing institution and the Farm Credit Administration office with which the reports are filed. Bank reports shall also be available for public inspection at each related association office.

(b) * * *

(3) * * *

The undersigned certify that this report has been prepared in accordance with all applicable statutory and regulatory requirements and that the information contained herein is true, accurate, and complete to the best of his or her knowledge and belief.

* * * * *

(g) Each annual and quarterly report of a bank shall present the financial statements of the bank and its related associations on a combined basis. The report shall also include, at a minimum, the statement of condition and statement of income for the bank only. These statements may be in summary form and shall disclose the basis of presentation if different from the accounting policies of the combined bank and association statements.

(h) Each association shall include a statement in a prominent location within each annual and quarterly report that the shareholders' investment in the association is materially affected by the financial condition and results of operations of the related bank and that a copy of the bank quarterly report is available upon request free of charge.

(i) Each annual and quarterly report shall include addresses and telephone numbers where association shareholders may obtain copies of bank quarterly reports. Upon receiving such a request, each bank and each related association shall promptly mail or deliver to the requesting shareholder a copy of the requested report free of charge.

14. A new 620.3 is added to Subpart A to read as follows:

620.3 Prohibition against incomplete, inaccurate, or misleading disclosure.

No institution and no employees, officer, director, or nominee for director of the institution shall make any disclosure to shareholders or the general public concerning any matter required to be disclosed by this part that is incomplete, inaccurate, or misleading. When any such person makes disclosure that, in the judgement of the Farm Credit Administration, is incomplete, inaccurate, or misleading, whether or not such disclosure is made in disclosure statements required by this part, such institution or person shall make such additional or corrective disclosure as is necessary to provide shareholders and the general public with a full and fair disclosure.

15. New subpart B, consisting of newly redesignated 620.4 and 620.5, is amended by revising the heading to read as follows:

Subpart B -- Annual Report to Shareholders

16. Newly redesignated 620.4 is amended by adding a new section heading; revising paragraph (b); and removing the reference to " 620.3" and adding in its place " 620.5" in paragraph (c) to read as follows:

620.4 Preparing and distributing the annual report.

* * * * *

(b) Each bank shall distribute its annual report to the shareholders of related associations within the period required by paragraph (a) of this section. Each bank shall coordinate such distribution with its related associations.

* * * * *

17. Newly redesignated 620.5 is amended by removing the words "mergers or consolidations" and adding in their place "changes in the reporting entity" in paragraph (a)(4); adding the words ", i.e., headquarters, and major facilities where the institution makes and services its loans," after the words "principal offices" in paragraph (b); revising paragraph (c) heading; redesignating existing paragraph (c) text as new paragraph (c)(1); adding new paragraph (c)(2); removing the words "in the institution's judgment" from paragraph (g)(2)(v); revising paragraphs (a)(3), (a)(9), (d), (e)(1), (e)(2), (f), (g) introductory text, (g)(1)(i), (g)(2)(ii), (g)(2)(iii), (g)(4)(ii), (j)(3)(i) and (m)(1); remaining paragraph (m)(2); redesignating existing paragraphs (g)(1)(iii), (g)(2)(vi), (g)(4)(v), and (m)(3) as new paragraphs (g)(1)(iv), (g)(2)(vii), (g)(4)(vi), and (m)(2); adding paragraphs (e)(4), (g)(1)(iii), (g)(1)(iv)(E), (g)(2)(vi), (g)(3)(ii)(C), and (g)(4)(v); and revising redesignated paragraph (g)(1)(iv) heading, paragraph (g)(1)(iv)(D), and paragraph (g)(4)(vi) to read as follows:

620.5 Contents of the annual report to shareholders.

* * * * *

(a) Description of business. * * *

(3) The types of lending activities engaged in, including any participation in the Federal Agricultural Mortgage Corporation programs or origination of loans for resale, and financial services offered. Each bank shall also briefly describe the lending and financial services offered by the associations that are its shareholders, as well as financial services offered to the borrowers in the bank's chartered territory by any service organization in which it has an ownership interest. Associations shall briefly describe the lending and financial services offered by the related bank or incorporate by reference relevant portions of the bank's report, if such report is distributed to association shareholders;

* * * * *

(9) A brief description of the business of any related Farm Credit institution, as described in 619.9146 of this chapter, and the nature of the institution's relationship with such organization.

* * * * *

(c) Legal proceedings and enforcement actions. * * *

(2) Describe the existence and nature of enforcement actions, i.e., agreements, cease and desist orders, temporary cease and desist orders, suspensions or removals of officers or directors, or civil money penalties, if any, imposed or assessed on the institution or its officers or directors and the amount of any civil money penalties assessed.

(d) Description of capital structure. (1) Describe each class of stock and participation certificates the institution is authorized to issue and the rights, duties, and liabilities of each class. The description shall include:

(i) The number of shares of each class outstanding;

(ii) The par or face value;

(iii) The voting and dividend rights;

(iv) The order of priority upon impairment or liquidation;

(v) The institution's retirement policies and restrictions on transfer;

(vi) The statutory requirement that a borrower purchase stock as a condition to obtaining a loan;

(vii) The manner in which the stock is purchased (i.e., promissory note to the issuer, or cash not advanced by issuing institution);

(viii) The statutory authority of the institution to require additional capital contributions, if any; and

(ix) The statutory and regulatory restrictions regarding retirement of stock and distribution of earnings, and for banks for cooperatives, the amount required to be added to the unallocated surplus, pursuant to 615.5215 and 615.5330 of this chapter.

(2) Describe regulatory minimum permanent capital standards, the institution's capital adequacy requirements, and the minimum stock purchase requirements in effect.

(3) State whether the institution is currently prohibited from retiring stock or distributing earnings by the statutory and regulatory restrictions described in paragraph (d)(1)(ix) of this section, or knows of any reason such prohibitions may apply during the fiscal year subsequent to the fiscal year just ended.

(e) Description of liabilities. (1) Describe separately the institution's insured and uninsured debt, indicating the type, amount, maturity, and interest rates of each category of obligations outstanding at the end of the fiscal year just ended. Describe the nature of the insurance provided under part E of title V of the Act. Describe any applicable statutory and regulatory restrictions on the institution's ability to incur debt.

(2) Describe fully the institution's rights and obligations under any agreement, formal or informal, between the institution and any other person or entity having to do with capital preservation, loss sharing, or any other form of financial assistance.

* * * * *

(4) Describe the statutory responsibility of Farm Credit System institutions for repayment of obligations issued by the Farm Credit System Financial Assistance Corporation.

(f) Selected financial data. Furnish in comparative columnar form for each of the last 5 fiscal years the following financial data:

(1) For banks and direct lender associations:

(i) Balance sheet

Total assets

Investments

Loans

Allowance for losses

Net loans

Acquired property

Total liabilities

Obligations with maturities less than 1 year

Obligations with maturities longer than 1 year

Net worth

Protected borrower stock

Permanent capital

Stock and participation

certificates

Surplus, less allocated equities

Allocated equities

(ii) Statement of income

Net interest income

Provision for loan losses

Extraordinary items

Net income

(iii) Key financial ratios

Return on average assets

Return on average net worth

Net interest margin as a percentage of average earning assets

Permanent capital ratio

Net worth-to-asset

Net chargeoffs-to-average loans

Allowances for loan losses-to-loans

(iv) Net income distributed

Dividends

Patronage refunds

Cash

Stock

Allocated equities

(2) For associations that are not direct lender associations:

(i) Balance sheet

Total assets

Accrued obligation under loss-sharing agreement, if any

Net worth

Protected borrower stock

Permanent capital

(ii) Statement of income

Compensation from related bank

Total operating expense

Extraordinary items

Provision for obligation under capital preservation or loss-sharing agreement, if any

Net income

(iii) Other

Loans serviced for related bank

Dividends paid

Patronage refunds paid

Cash

Stock

Allocated equities

Permanent capital ratio

Payments under loss-sharing agreement

(g) Management's discussion and analysis of financial condition and results of operations. Fully discuss any material aspects of the institution's financial condition, changes in financial condition, and results of operations during the last 2 fiscal years, identifying favorable and unfavorable trends, and significant events or uncertainties. In addition to the items enumerated below, the discussion shall provide such other information as is necessary to an understanding of the institution's financial condition, changes in financial condition, and results of operations.

(1) Loan portfolio. (i) Describe the types of loans in the portfolio by major category (e.g., agricultural real estate mortgage loans, rural home loans, agricultural production loans, processing and marketing loans, farm business loans, and international loans), indicating the approximate percentage of the total dollar portfolio represented by each major category. Associations that make agricultural production loans shall provide the information required for such loans by major subcategory (e.g., cash grains, field crops, livestock, dairy, poultry, and timber). For each category and subcategory, discuss any special features of the loans that may be material to the evaluation of risk and any economic or business conditions that have had or are likely to have a material impact on their collectibility. For banks, also disclose separately the aggregate amount of loans outstanding to related associations and other financial institutions.

* * * * *

(iii) Disclose the amount of purchased loans, loans sold with recourse, retained subordinated interests in loans sold, and interests in pools of subordinated interests that are held in lieu of retaining a subordinated participation interest in the loans sold.

(iv) Risk exposure. * * *

(D) For banks, a description in the aggregate of the recent loss experience of related associations that are its shareholders, including the items enumerated in paragraphs (g)(1)(iv) (A), (B), and (C) of this section.

(E) Describe any obligations with respect to loans sold and the amount of any contributions made in connection with loans sold into the secondary market pursuant to section 8.7 of the Act. Further disclose the amount of risk of loss associated with such obligations and the amount included in the allowance for losses to provide for such risk.
(2) Results of operations. * * *

(ii) Describe any unusual or infrequent events or transactions or any significant economic changes, including, but not limited to, financial assistance received or paid that materially affected reported income. In each case, indicate the extent to which income was so affected.

(iii) Discuss the factors underlying the material changes, if any, in the return on average assets, the return on average net worth, and the permanent capital ratio as determined in accordance with part 615, subpart H of this chapter. An explanation of the basis of the calculation of ratios relating to permanent capital and net worth shall be included.

* * * * *

(vi) For associations, discuss any events affecting a related organization that are likely to have a material impact on the associations' financial condition, results of operations, cost of funds, or reliability of sources of funds.

* * * * *

(3) Liquidity and funding sources. * * *

(ii) Liquidity. * * *

(C) Discuss the institution's participation in the Federal Agricultural Mortgage Corporation secondary market programs authorized by title VIII of the Act and the origination of loans for resale under other authorities, if any.

* * * * *

(4) Capital resources. * * *

(ii) Describe any material trends or changes in the mix and cost of debt and capital resources. The discussion shall consider changes in protected borrower stock, permanent capital, debt, and any off-balanced-sheet financing arrangements.

* * * * *

(v) Discuss the adequacy of the current permanent capital position and any material changes in the capital plan adopted pursuant to 615.5200 of this chapter, to the extent that such changes may have an effect on the institution's minimum stock purchase requirements and its ability to retire stock and distribute earnings.

(vi) Discuss any trends, commitments, contingencies, or events that are reasonably likely to have a materially adverse effect upon the institution's ability to meet the regulatory minimum permanent capital standards and capital adequacy requirements.

* * * * *

(j) Transactions with senior officers and directors. * * *

(3) Loans to senior officers and directors. (i) To the extent applicable, state that the institution (or in the case of an association that does not carry loans to its senior officers and directors on its books, its related bank) has had loans outstanding during the last full fiscal year-to-date to its senior officers and directors, their immediate family members, and any organizations with which such senior officers or directors are affiliated that:

* * * * *

(m) Financial statements.

(1) Furnish financial statements and related footnotes that have been prepared in accordance with generally accepted accounting principles and instructions and other requirements of the Farm Credit Administration and that have been audited in accordance with generally accepted auditing standards by a qualified public accountant, as defined in 621.2(a)(21) of this chapter, and an opinion expressed thereon. The statements shall include the following statements and related footnotes for the last 3 fiscal years: balance sheet, statement of income, statement of changes in net worth, and statement of cash flows.

* * * * *

Subpart C -- Quarterly Report to Shareholders

18. Section 620.10 is revised to read as follows:

620.10 Preparing and distributing the quarterly report.

(a) Each institution that is a direct lender shall prepare and distribute to its shareholders a quarterly report within 45 days after the end of each fiscal quarter, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution.

(b) Except as provided in paragraphs (e) and (f) of this section, each bank shall distribute its quarterly reports to shareholders of related associations within the period required by paragraph (a) of this section. Each bank shall coordinate such distribution with its related associations.

(c) The report shall contain, at a minimum, the information specified in 620.11 and, in addition, such other material information as is necessary to make the required disclosures, in light of the circumstances under which they are made, not misleading.

(d) Distribution to shareholders may be by mail or by publication in newspapers or periodicals in the trade area of wide enough circulation to be reasonably assured that all of the institution's shareholders are reached on a timely basis.

(e) A bank is not required to distribute its quarterly reports to shareholders of related associations that are direct lender associations for those quarters in which no significant events have occurred or no significant events which occurred during the preceding quarters continue to materially affect the related associations. For each quarter in which no distribution is made, the bank shall certify to the Farm Credit Administration as follows:

The undersigned certify that for the period between the end of the preceding fiscal quarter and the end of the most recent fiscal quarter, no significant events have occurred which are likely to have a material impact on related associations or no significant events which occurred during the preceding quarters continue to materially affect related associations.

The certification shall be signed by the persons required to sign the report filed pursuant to 620.2(b).

(f) For each quarter in which distribution of bank quarterly reports to association shareholders is not made pursuant to paragraph (e) of this section, copies of bank quarterly reports shall be made available free of charge to shareholders of related associations promptly upon request by the shareholder to the issuing bank or to the association of which the requestor is a shareholder.

(g) Each direct lender association shall include a statement in the first annual and first quarterly reports issued after the effective date of this amendment explaining the regulatory changes in the distribution of bank quarterly reports and the new procedures under which association shareholders can obtain the bank quarterly reports.

19. Section 620.11 is amended by revising paragraph (a); adding (b) introductory text; removing paragraph (b)(3); redesignating existing paragraphs (b)(4), (b)(5), (b)(6), (b)(7), (b)(8), and (b)(9) as new paragraphs (b)(3), (b)(4), (b)(5), (b)(6), (b)(7), and (b)(8); removing the words ", in the opinion of management," from redesignated paragraph (b)(8); removing the reference " 620.3(g)" and adding in its place " 620.5(g)" in the introductory text of paragraph (c); revising paragraph (d)(3); and adding new paragraph (d)(4) to read as follows:

620.11 Content of quarterly report to shareholders.

(a) General. The information required to be included in the quarterly report may be presented in any format deemed suitable by the institution, except as otherwise required by this section. The report must be organized in an easily understandable format and not presented in a manner that is misleading.

(b) Rules for condensation. For purposes of this section, major captions to be provided in the financial statements are the same as those required in the financial statements contained in the institution's annual report to shareholders, except that the financial statements included in the quarterly report may be condensed into major captions in accordance with the rules prescribed under this paragraph and paragraph (f) of this section.

* * * * *

(d) Financial statements. * * *

(3) Interim statements of changes in net worth for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year.

(4) For banks, interim statements of cash flows for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable period for the preceding fiscal year. For associations, interim statements of cash flows are optional.

* * * * *

Subpart D -- Association Annual Meeting Information Statement

20. Section 620.20 is amended by removing the references "subpart A" and "subpart B" and adding in their place "subpart B" and "subpart C," respectively, in paragraph (c); removing paragraphs (d), (e), (f), (g), and (h); and revising the heading to read as follows:

620.20 Preparing and distributing the information statement.

620.21 [Amended]

21. Section 620.21 is amended by removing the references " 620.3(j)", " 620.3(k)", " 620.3 (j) and (k)", " 620.3 (j) and (k)" and adding in their place, the references " 620.5(j)", " 620.5(k)", " 620.5 (j) and (k)", and " 620.5 (j) and (k)" in paragraph (c)(4), respectively; and by removing the reference " 620.3 (j) and (k)" and adding in its place, the reference " 620.5 (j) and (k)" in the first and second sentences of paragraph (d)(5).
620.22 [Removed]

22. Section 620.22 is removed.

Subpart E -- Bank Director Disclosure Requirements

620.32 [Removed]

23. Section 620.32 is removed.

PART 621 -- ACCOUNTING AND REPORTING REQUIREMENTS

24. The authority citation for part 621 continues to read as follows:

Authority: Secs. 5.17, 8.11; 12 U.S.C. 2252, 2279aa-11.

Subpart A -- Accounting Requirements

25. Section 621.2 is amended by removing the second sentence from the introductory text of paragraph (a)(8).

Dated: January 16, 1991.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 91-1422 Filed 1-23-91; 8:45 am]
BILLING CODE 6705-01-M