Title: FINAL RULE--Disclosure to Shareholders Accounting and Reporting Requirements--12 CFR Parts 620 and 621
Issue Date: 06/12/1986
Agency: FCA
Federal Register Cite: 51 FR 21336
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 620 and 621

Disclosure to Shareholders Accounting and Reporting Requirements

AGENCY: Farm Credit Administration.

ACTION: Final rule.

SUMMARY: The Farm Credit Administration Board (Board) adopts amendments to regulations under Part 620 that (1) require disclosure by each Farm Credit System (System) bank and association in its annual report to shareholders of the aggregate amount of compensation paid during the last fiscal year to the institutions' senior officers as a group, without naming them; (2) require each production credit association (PCA) to send the financial statements of the Federal intermediate credit bank (FICB) in its district to PCA shareholders; and (3) require each System bank and PCA, beginning with the quarter ending June 30, 1986, to report quarterly to shareholders on the financial condition of the institution.

EFFECTIVE DATE: The regulations shall become effective upon the expiration of 30 days after this publication during which either or both Houses of Congress are in session. Notice of effective date will be published.

FOR FURTHER INFORMATION CONTACT:

Thomas J. Holland, Office of Examination and Supervision, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090, (703) 883-4452; or

Dorothy J. Acosta, Office of General Counsel, Farm Credit Administration, 1501 Farm Credit Drive, McLean, VA 22102-5090, (703) 883-4020.

TEXT:
SUPPLEMENTARY INFORMATION: On April 7, 1986, (51 FR 11745) the Farm Credit Administration (FCA), by its Acting Chairman, published for comment proposed amendments to recently adopted regulations that require System banks and associations to disseminate annual reports to shareholders at the end of each fiscal year and information statements to association shareholders prior to any shareholder meeting at which directors are elected (51 FR 8644, March 13, 1986). The proposed amendments would require (1) System banks and associations to disclose aggregate compensation of senior officers in the annual report to shareholders; (2) FICB financial statements to be distributed to PCA shareholders; and (3) System banks and PCAs to report quarterly to shareholders.

The Farm Credit Corporation of America (FCCA) commented on behalf of the 37 System banks. Comments were also received from a number of association officers and directors and the Tenth District FLBA shareholders Advisory Committee. All but two of the association officers and directors that commented are in the Baltimore District. Their comments related primarily to the disclosure of senior officer compensation and the cost of the disclosure. The Tenth District Shareholders Advisory Committee did not comment directly on the provisions of the regulation, but set forth its interpretation of the Farm Credit Amendments Act of 1985 (1985 Amendments), as it affects the FCA's authority to approve interest rates. The FCCA comments represented the coordinated comments of the 37 System banks on the three areas addressed by the proposed amendments. The comments and the Board's response are discussed below.

1. General

The FCCA indicated that System institutions recognize the need for full disclosure of material information and acknowledge the regulatory responsibility of FCA. However, they commented that consideration should be given to the unique nature of System institutions and the shareholders' investment in these institutions. The FCCA stated that because the stock of System institutions is not publicly traded and is not held for capital appreciation, investment in System institutions is generally motivated by the availability and the cost of credit rather than the usual investment considerations. Therefore, the FCA should carefully consider whether the disclosure requirements of the Securities and Exchange Commission (SEC) for publicly traded companies are appropriate for System institutions. However, the FCCA did not identify any particular disclosures that are inappropriate. Also, it asserted that the disclosure requirement must take into account a careful balancing of the benefits of additional disclosure against the associated costs, which must be ultimately borne by all of the System's borrower/shareholders.

The Board does not believe that the distinction between holding stock for investment purposes and holding stock as a requirement for doing business with an institution has any material bearing on the need of shareholders for information on which to make informed decisions. There are distinctions between the types of information material to the shareholders of SEC reporting issues and shareholders of System institutions, and every effort has been made to adjust the disclosure requirements of the regulation accordingly.

While the stock of System institutions is not publicly traded in a secondary market, that stock is held by over 900,000 individuals and business entities who have a common interest in financial and operating information concerning those institutions. Also, the size of many System institutions in terms of assets is comparable to, and sometimes greater than, financial institutions and other commercial entities whose equity and debt securities are widely held by the public. Regardless of their motivation for purchasing the stock, borrowers make a substantial financial investment in System institutions and obtain a right to participate in the affairs of those institutions. Shareholders can potentially benefit from their investment in System institutions in terms of retained earnings, dividends and patronage refunds. Thus, shareholders need sufficient information to make intelligent decisions about the management and operation of the institution relating to their investments and to hold directors and management accountable for their actions. Furthermore, full disclosure should lead in the long run to more efficient operations, as it should make directors and management more conscious of their responsibilities and more aware that they are accountable to shareholders for their actions.

The Board agrees that the benefits to be derived from regulatory requirements should outweigh the cost of compliance. The Board recognizes that System institutions will incur costs in preparing and disseminating disclosure materials, but believes that the benefits that will accrue in the long run to shareholders in the more efficient operation of the institutions will outweigh the costs.

2. Quarterly Reporting to Shareholders

The FCCA commented that the cost of distribution of quarterly financial statements to borrow/shareholders is not justified by the incremental benefit to be derived from quarterly reporting over the annual report requirement. The FCCA conceded that disclosure of interim information may be appropriate in certain circumstances -- for example, where there has been a materially adverse change in the financial condition of an institution -- and agreed that quarterly reporting to the FCA should be required. However, the FCCA asserted that System institutions should not be required to distribute quarterly reports to shareholders but should be permitted to make the quarterly report filed with the FCA available upon request or voluntarily distribute a quarterly report in a format deemed appropriate by the institution. The FCCA noted that this suggestion would be consistent with SEC disclosure requirements. The FCCA further commented that the System and FCA should have an opportunity to evaluate the implementation of the new annual reporting disclosure requirement before deciding whether additional quarterly reporting requirements should be instituted.

The Board recognizes that the requirement to distribute quarterly reports to shareholders goes beyond SEC requirements. However, most publicly traded companies routinely distribute the quarterly reports filed with the SEC to their shareholders. Furthermore, their quarterly statements are extensively reported and analyzed in the national press.

The Farm Credit Act of 1971, as amended, (Act) places a regulatory obligation upon the FCA to encourage borrower/shareholder participation in System institutions. In the 1985 Amendments, Congress affirmed the FCA's regulatory obligations with respect to System financial reporting by expressly authorizing the FCA to regulate disclosure to shareholders. The Board believes that requiring quarterly reporting is an appropriate means to that end and has concluded that there is a strong need for quarterly reporting not only to FCA, but also to borrower/shareholders.

The Board believes the costs of printing and mailing, when separated from the cost of report preparation (which would be incurred in any event if the reports were merely filed with the FCA) are not excessive and are justified by the benefit that accrues to shareholders. Nonetheless, in order to assure that affirmative disclosure can be achieved at minimum cost, the final regulation allows an institution, as an alternative to mailing, to publish its quarterly report in newspapers and periodicals of wide enough circulation in its trade area to be reasonably assured that all of the institution's shareholders will be reached. Such publication must occur within 45 days of the end of the quarter.

The FCCA commented that System institutions are neither accustomed to nor equipped to assume the accounting and disclosure responsibilities of publicly traded corporations and need additional lead time to permit System institutions to gear up to comply with the new requirements. The FCCA asserts that if quarterly reports are required as of June 30, 1986, the diversion of time and resources to satisfy the quarterly requirements could mean that all shareholder reports produced during the next year will be of a lower quality than desired by the FCA and the System. The FCCA proposes that the quarterly reporting requirement not be effective until 1987.

It should be noted that the proposed amendments to require quarterly reporting and establishing the framework for it were published for public comment as early as April 7, 1986. Also, the System's Accounting Standards Committee had established a suggested framework for interim reporting which was distributed to System banks in March of 1986. The proposed amendments stated that, if the amendments were adopted, quarterly reports would be required for the quarter ending June 30, 1986. The regulation allows 45 days after the end of the quarter for the preparation and dissemination of the report, which would place the due date for second quarter 1986 reports at not later than August 14. Therefore, the Board believes that System institutions have had adequate notice of, and opportunity to anticipate, the requirements and expects all System banks and PCAs to comply fully with the reporting requirements beginning with the second quarter ending June 30, 1986. The Board does not agree that the preparation of quarterly reports should result in a lower quality annual report to shareholders. Rather, the Board believes that the preparation of quarterly reports in 1986 should enhance the quality and timeliness of information presented in the annual report to shareholders, which is required for the 1986 fiscal year-end.

The FCCA commented that insufficient time is provided after the close of the quarter for the preparation and distribution to shareholders and recommended that the period of time within which the report must be distributed to shareholders be lengthened from 45 to 60 days. The Board believes that 45 days is ample time to provide for the compilation and distribution of quarterly reports to shareholders. The extent of the information to be provided is generally related to material changes in the financial condition of the institution since the end of the fiscal year and an analysis of the results of operations for the quarter. An extension of the reporting period beyond that proposed would dilute the timeliness and hence the importance of the information to the shareholder. Therefore, the final regulation retains the 45-day requirement for distribution to shareholders.

The FCCA commented that the reporting of business combinations required by 620.11(b) (5) and (6), while consistent with SEC quarterly reporting requirements, is not necessarily appropriate for System institutions. The FCCA suggested that the FCA provide more specific guidance for transactions that have occurred and that can be expected to occur. The FCCA identified consolidations and mergers as two obvious such transactions that would be covered by this section.

The Board believes that it is not possible to address all transactions that have occurred or can be expected to occur that could be covered by this or any section of the regulations and declines to implement the suggestion.

A number of minor substantive and technical changes have been made in response to comments:

Section 620.11(a) contained an incorrect reference to 12 CFR 620.21. An appropriate change has been made to the final rule to clarify that the format is governed by paragraphs (b), (c), and (d) of 620.11.

The final regulation clarifies that the "major balance sheet captions" and "major income statement captions" to be provided are those captions appearing in the institution's annual report to shareholders.

The FCCA suggested that de minimus rules should be established for 620.11(b) (2) and (3) to prevent immaterial items from being required to be disclosed. While the Board believes that the rules of condensation have the same effect as de minimus rules, a de minimus provision has been added to the final rule as 620.11(f).

As proposed, 620.11(b)(4) would have required disclosure of material contingencies even if a significant change has not occurred since year-end. This requirement is consistent with the SEC requirements and is an exception to the assumption permitted for all other disclosures that the readers of interim statements have access to year-end financial statements. The FCCA questioned the need for such duplication of information and opined that it would place inappropriate emphasis on one aspect of the financial statement. The Board has concluded that the FCCA comment has merit, and has deleted the requirement in the final rule.

The FCCA commented that 620.11(c) appears to require Management's Discussion and Analysis of all items enumerated to be included in 630.3(g) be addressed in the quarterly report, as well as any material changes occurring during the interim period. The FCCA read the requirement to require a duplication of the discussion in the annual report, which it views as extremely burdensome. The FCCA suggested that the quarterly report focus on material developments occurring during the interim period.

The proposed regulation was not intended to require a complete reiteration of the information contained in the annual report. Rather, the intention was to require management to include a discussion and analysis of the financial condition and results of operations that have occurred during the year-to-date and quarterly periods presented in the financial statements so as to enable the reader to assess material changes that have occurred during the specified periods. The items enumerated in 620.3(g) were intended to be used as a guide to assist in the preparation of the interim discussions. This section has been modified in the final regulation to clarify this intention.

A new paragraph (d) has been added to 620.10 to clarify that quarterly reports, like other reports distributed to shareholders, should be prepared in accordance with Part 621.

An internal inconsistency in the regulation has been corrected by deleting a clause in the second sentence of 620.11(c)(2) in the proposed amendment that implied that the inclusion of an income statement for the most recent fiscal quarter is optional. The deleted clause read: "If the institution is required to, or has elected to provide an income statement for the most recent fiscal quarter, . . ."

This clause was inconsistent with 620.11(d)(2), which requires an income statement for the most recent fiscal quarter.

3. Requiring Distribution of FICB Financial Statements to PCA Shareholders

The recently adopted 620.2(b) requires that copies of the Federal land bank (FLB) financial statements be distributed to Federal land bank association (FLBA) shareholders in addition to the FLBA statements. The proposed amendment would have required that copies of the FICB financial statements, be distributed to PCA shareholders in addition to the PCA statements. The FCCA commented that such reports should be made available to association shareholders on request, but should not be required to accompany the PCA's annual report. The FCCA took issue with part of the FCA's stated rationale for the provision, noting that borrower interest rates are currently largely determined by the System's cost of funds and FCA's approval of interest rates. For this reason, the FCCA contended that there is little benefit to borrowers/shareholders receiving copies of the FICB financial statements insofar as interest rates are concerned. The FCCA conceded that FICB financial statements may assist PCA borrowers in evaluating the PCA's investment in the FICB, but asserted that the same could be said for providing financial statements of the other banks in the district as well as Systemwide financial statements. The FCCA further concluded that in the current environment intrabank and interdistrict actions may be more relevant to evaluating a PCA's investment, and that to furnish FICB financials without furnishing additional information could be misleading to shareholders. The FCCA recommended that the regulations require that financial statements of district banks as well as Systemwide financial statements be made available to all shareholders on request.

The final regulation retains the requirement to send FICB financial statements to PCA borrowers because of the significant impact the FICB has on the operations of a PCA. The Board recognizes that the cost of funds is a significant factor in determining borrower interest rates. However, a number of other material factors reflected in the bank's financial statements also affect the rate a FICB charges PCAs. The FICB's operating expenses, the risk inherent in the FICB's loan portfolio, financial assistance to other PCAs, and financial assistance to other System institutions will also affect those rates. While the market sets the general funding rate, each bank's management of its debt portfolio through maturity and interest rate selection materially influence borrower interest rates. The fact that the FCA currently approves interest rates does not diminish the importance of the performance of management as reflected in financial information contained in FICB financial statements. Furthermore, the FCA is currently approving interest rates (as opposed to interest rate plans) because of the significant financial stress System institutions are experiencing and because of the need to preserve System resources. The duration of this temporary measure depends on a number of factors unrelated to the disclosure issue.

The Board does not agree that requiring Systemwide financial statements to be made available to shareholders upon request would "assure access to 'potentially material and relevant information' for interested shareholders but would avoid the significant cost of requiring disclosure of incomplete and potentially misleading information." Specifically, the Board disagrees with the implication that the requirements of the proposed rule would result in potentially misleading information being disclosed to borrowers. Any intra-district or intra-System transactions that have a material impact on the financial condition of the institution would be required, pursuant to 12 CFR 620.2(c), to be disclosed in the association's annual report. If association annual reports and bank financial statements are prepared in compliance with the regulations, shareholders should have access to sufficient information not only about the association and the bank, but material contingencies related to other System institutions. While the Board believes it is a good policy to make the Systemwide financial statements available to borrowers upon request, the final rule does not require it. The Board believes that the factors that have the most immediate impact on a PCA borrower's cost of funds are more directly determined by the operations of the PCA and the FICB. Moreover, the final regulation establishes a minimum standard for disclosure and the Board assumes that System management and directors will, consistent with their legal obligations, make such additional disclosure of information beyond that called for by the regulation as they believe to be necessary for full, accurate and fair disclosure to shareholders.

The FCCA commented that the FCA Supplementary Information Statement was inaccurate in that it implied that most districts have intra-district loss-sharing agreements between PCAs and FICBs. While most districts do not have formal intra-district loss-sharing agreements between the PCAs and FICB, many district FICBs and PCAs have entered into agreements whereby the FICB agrees to share in certain specified losses of a PCA under certain circumstances. Furthermore, the FICB Capital Preservation Agreement requires that an FICB and the district PCAs develop, implement, and maintain PCA loss-sharing agreements. Before an FICB is entitled to assistance under the FICB Capital Preservation Agreement for the purpose of absorbing PCA loan losses, the district PCA must have given assistance to the PCAs experiencing losses equal to the assistance which would have been available under the Model Loss Sharing Agreement for PCAs.

In a related matter, the System requested clarification from the FCA concerning whether the financial statements to be distributed by the FICBs should be combined with those of the district PCAs. Specifically, the FCCA requested that the regulation sanction the use of combined FICB/PCA financial statements as their primary statements, since most FICBs are using combined statements as their primary statements.

The Board fully supports the concept of combined FICB/PCA, FLB/FLBA financial statements as the primary statements to be prepared by a district FLB or FICB. The Board believes that excluding the associations from the bank statements results in the publication of financial statements that do not show the true financial condition of the district banks. Furthermore, System institutions are required by statute to comply with generally accepted accounting principles, and in these circumstances combined reporting is the preferred method of presentation under generally accepted accounting principles. However, the Board believes that separate presentation of bank financial statements in the body of the report is also needed to allow the association to evaluate the bank's financial condition and results of operations. In addition, the Board believes disclosure of any accounting policy or practice that differed from those used in the combined statements is needed in order for a reader to evaluate properly the bank's financial statements. The Board notes that the rationale for combined financials also supports the argument that association borrower/shareholders need the financial statements of both the bank and association in order to properly evaluate the operations and financial position of the association.

In order to clarify the issue with respect to FLB/FLBA and FICB/PCA combined financials, FCA has made appropriate changes to Part 620. A new paragraph (k) has been added to 12 CFR 620.3 that requires FLBs to present financial statements of the FLB and the district FLBAs on a combined basis and requires FICBs to present the financial statements of the FICBs and their district PCAs on a combined basis. A separate bank statement of condition and statement of income is also required.

Another comment by the FCCA concerned the distribution of FICB financial statements to PCA shareholders whose PCA owns a majority interest in the district FICB. In those cases, FICB data is generally consolidated in the PCA's own financial statements and the FCCA concluded that the requirement to send FICB statements with PCA annual reports would add nothing to shareholder disclosure in such circumstances.

The Board agrees that where a single PCA owns the district bank and issues consolidated statements, an additional requirement to provide the district bank financial statements is duplicative. However, where more than one PCA owns the bank, a consolidated PCA/FICB statement prepared by a PCA that owns a majority interest in the bank would not fully disclose the financial impact of the bank's operations because of the eliminations made for the minority interest. Furthermore, in districts where there are a few owners of the bank, the associations that did not elect to become part of the districtwide association are generally financially strong, and to not provide shareholders with information with respect to these associations could be a material oversight. For this reason, where the district bank is owned by more than one association, disclosure of bank-prepared combined financials shall also be distributed to association shareholders.

4. Disclosure of Senior Officer Compensation

The proposed amendment would have required that the aggregate compensation of senior officers (and at a minimum the top five most highly paid officers, whether or not designated as senior officers) be disclosed without naming the individuals included. It would also have required the inclusion of a statement that disclosure of the salaries of individual senior officers or any officer included in the aggregate would be available to shareholders upon request.

The FCCA indicated that the System strongly opposes this disclosure requirement. The FCCA commented that disclosure of aggregate compensation of senior officers is sufficient to enable shareholders to evaluate the stewardship of directors and objected to the required statement that disclosure of the compensation of individual officers is available upon request. The FCCA also asserted that the requirement to disclose the compensation of the five most highly paid officers, whether or not designated as senior officers would reach low level officers whose compensation is not meaningful to an evaluation of director stewardship. The FCCA suggested that the regulations only apply to officers receiving more than $50,000 in annual compensation. It commented that this would be comparable to SEC rules, which exclude all persons whose compensation is less than $60,000. It also noted that the relevance of the information to the shareholders evaluation of the stewardship of directors is diluted by the extensive role of the FCA in determining the compensation of bank officers and the role of the banks in determining association compensation. However, the FCCA asserted that such disclosure would be appropriate when FCA gets out of the business of setting bank CEO salaries and approving salary scales for other bank employees.

Most of the comments from association officers and directors opposed this disclosure requirement. Some believed that no disclosure should be made, even in the aggregate. Almost all believed that individual officers' salaries should not be disclosed. The rationales for the comments varied. Some apparently believed that shareholders have no right to any information about management compensation, viewing the requirement as an unwarranted invasion of an officer's privacy. One commentator asserted that farmers would compare the officer's income to their own, which is not comparable because of different tax treatment, and would wrongly conclude that officers are too highly paid. Others believed the information would not be used for the purpose for which it was intended, but would be the subject of idle curiosity. One association officer supported the disclosure of officers' compensation, believing it would operate as an incentive to increase officers' salaries to avoid embarrassment on part of the institution.

The Board continues to believe the information concerning that compensation of senior officers is material and should be disclosed and made available to borrower/shareholders. Shareholders are entitled to information concerning the amount of compensation being paid to officers and directors, and such standard disclosure has long been the practice for entities with significant public ownership. The FCA does not determine the compensation paid to bank CEOs, nor does it determine salary scales of other bank employees. The FCA does, in accordance with section 5.17(a)(15) of the Act, approve, except for associations, the salary scale for employees of the institutions of the System, and approve the compensation of the chief executive officer.

The SEC requires disclosure of the aggregate total compensation of all executive officers as a group and of the names and compensation of each of the five most highly paid executive officers whose compensation exceeds $60,000. The proposed amendment would have required only the aggregate figure to be disclosed along with a statement that disclosure of individual senior officers is available upon request, without regard to any dollar threshold. Also, to prevent circumvention of the disclosure requirement by failure of the board to designate an officer as a senior officer, the proposed amendment would have required that the aggregate disclosure include at a minimum the top five most highly paid officers whether or not designated by the board as senior officers. Disclosure of the name and total compensation of these individuals would also be available upon request without regard to any dollar threshold.

The final rule retains the requirement to disclose the aggregate compensation of senior officers and at a minimum the aggregate compensation of the five most highly paid officers (whether or not designated as senior officers) without regard to any dollar threshold. The suggested $50,000 threshold is not employed for individual senior officer disclosure that is available upon request because the Board believes that shareholders of smaller institutions are entitled to know the total compensation of senior officers even if individual compensation does not exceed $50,000. However, recognizing that in smaller organizations the disclosure of compensation of persons not designated as senior officers could reach beneath senior management levels, in the final rule the availability upon request of disclosure of compensation of persons not designated as senior officers whose compensation is included in the aggregate is limited to those whose total compensation exceeds $50,000.

Minor technical and clarifying amendments are made to other sections of Part 620. Specifically:

Section 620.3(f)(1)(i) is amended by adding the words, "less allocated equities" after the word "Surplus" under the caption "Total capital."

Section 620.3(f)(1)(iii) is amended by deleting the word "average" in the phrase "Allowance for loan losses-to-average loans" under the caption "Key financial ratios."

Section 620.3(g)(1)(iii)(B) is amended by deleting the word "average" between the words "to" and "loans."

Section 620.3(g)(2)(i) is amended by adding the word "interest" between the words "net" and "income."

Section 620.20(c) is amended to reference Subpart B.

Section 621.2(a)(15)(iii) is amended by adding the word "not" after the word "secured" in the phrase "secured, in process" and after the word "and" in the phrase "collection, and fully collectible."

List of Subjects in 12 CFR Part 620

Banks, banking, Disclosure to shareholders, Annual reports.

For the reasons set forth in the preamble, Chapter VI, Title 12, of the Code of Federal Regulations is amended as follows:

1. The authority citations for Parts 620 and 621 are revised to read as follows:

Authority: Sec. 5.17 (9) and (10), Pub. L. 92-181, as amended by Pub. L. 99-205, 12 U.S.C. 2252(a) (9), (10).

PART 620 -- DISCLOSURE TO SHAREHOLDERS

2. Section 620.2 is amended by revising paragraph (b) and adding a new paragraph (k) to read as follows:

Subpart A -- Annual Reports to Shareholders

620.2 Preparing, distributing, and filing the report.

* * * * *

(b) For the purposes of 620.3(m), a Federal land bank association shall include the financial statements of the Federal land bank in the district in addition to its own and a production credit association shall include the financial statements of the Federal intermediate credit bank in the district in addition to its own. Production credit associations and Federal land bank associations shall comply with all other sections of this part except as expressly stated otherwise herein. This requirement shall not apply where the FICB is owned by a single PCA.

* * * * *

(k) For purposes of this part, each annual and quarterly reports of a Federal land bank shall present the financial statements of the Federal land bank and its district Federal land bank associations on a combined basis. The annual and quarterly reports of a Federal intermediate credit bank shall present the financial statements of the Federal intermediate credit bank and its district production credit associations on a combined basis. The respective reports shall 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 than the accounting policies of the combined bank and associations statements.

3. Section 620.3 is amended by revising paragraphs (f)(1) (i) and (iii), (g)(1)(iii)(B), (g)(2)(i), and (i) to read as follows:

620.3 Contents of the annual report to shareholders.

* * * * *

(f) * * *

(1) * * *

(i) Balance sheet

Total assets

Investments

Loans

Allowance for losses

Net loans

Acquired property

Total liabilities

Obligations with maturities longer than 1 year

Obligations with maturities less than 1 year

Total capital

Stock and participation certificates

Surplus, less allocated equities

Allocated equities

* * * * *

(iii) Key financial ratios

Return on average assets

Return on average capital

Net interest margin as a percentage of average earning assets

Capital-to-asset

Debt-to-capital

Net chargeoffs-to-average loans

Allowance for loan losses-to-loans

* * * * *

(g) * * *

(1) * * *

(iii) * * *

(B) An analysis of the allowance for loan losses that includes the ratios of the allowance to loans and net chargeoffs to average loans, and a discussion of the adequacy of the allowance for losses to absorb the risk inherent in the institution's loan portfolio;

* * * * *

(2) * * *

(i) Describe, on a comparative basis, changes in the major components of net interest income during the last 2 fiscal years, describing significant factors that contributed to the changes and quantifying the amount of change(s) due to an increase in volume or the introduction of new services and the amount due to changes in interest rates earned and paid, based on averages for each period.

* * * * *

(i) Compensation of directors and senior officers.

(1) Director compensation. Describe the arrangements under which directors of the institution are compensated for all services as a director (including total cash compensation and any noncash compensation that exceeds 10 percent of total compensation or $25,000, whichever is less) and state the total cash compensation paid to directors as a group during the last fiscal year. For each director, state:

(i) The number of days served at board meetings;

(ii) The total number of days served in other official activities; and

(iii) The total compensation paid to each director during the last fiscal year.

(2) Senior officer compensation. Disclose the aggregate amount of compensation paid during the last fiscal year to all senior officers as a group, stating the number of persons in the group without naming them. At a minimum, disclose the aggregate amount of compensation paid to the five most highly paid officers whether or not designated as a senior officer by the board. For the purposes of this paragraph, compensation shall include annual salary, cash bonuses, deferred compensation, vested pension benefits (unless the plan is made available to all employees on the same basis), and any other noncash compensation that exceeds 10 percent of the total cash compensation or $25,000, whichever is less. The report shall include a statement that disclosure of the total compensation paid during the last fiscal year to any senior officer, or to any other individual included in the aggregate whose compensation exceeds $50,000, is available to shareholders upon request.

* * * * *

4. Subpart B, Quarterly Reports to Shareholders, is added with the table of contents, to read as follows:

Subpart B -- Quarterly Reports to Shareholders

Sec.

620.10 Preparing, distributing, and filing the report.

620.11 Content of quarterly report to shareholders.

Subpart B -- Quarterly Report to Shareholders

620.10 Preparing, distributing, and filing the report.

(a) Each institution of the Farm Credit System except Federal land bank associations shall prepare a quarterly report for each fiscal quarter beginning with the quarter ending June 30, 1986, except that no report need be prepared for the fiscal quarter that coincides with the end of the fiscal year of the institution. The reporting requirements shall conform to the requirements set forth in 620.11.

(b) The quarterly report shall be filed with the Farm Credit Administration and distributed to shareholders no later than 45 days after the end of the quarterly period to which it relates. Distribution may be by mail or by publication in newspaper 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.

(c) Copies of the Federal land bank quarterly reports shall be distributed to the shareholders of the Federal land bank associations in the district, and copies of the Federal intermediate credit bank quarterly reports shall be distributed to the shareholders of the production credit associations in the district.

(d) The quarterly financial statements shall be prepared in accordance with the rules set forth in Part 621.

620.11 Content of quarterly report to shareholders.

(a) The information required to be included in the quarterly report may be presented in any format deemed suitable by the institution, except as provided in paragraphs (b), (c) and (d) of this section. The report must be easily readable and not presented in a manner that is misleading but may be condensed into major captions in accordance with the rules prescribed in paragraph (b) of this section. For purposes of this section, major captions to be provided are the same as those required to be provided in the financial statements contained in the institution's annual report to shareholders.

(b) Rules for condensation. -- (1) Interim balance sheets. When any major balance sheet caption is less than 10 percent of total assets and the amount in the caption has not increased or decreased by more than 25 percent since the end of the preceding fiscal year, the caption may be combined with others.

(2) Interim statements of income. When any major income statement caption is less than 15 percent of average net income for the 3 most recent fiscal years and the amount in the caption has not increased or decreased by more that 20 percent since the corresponding interim period of the preceding fiscal year, the caption may be combined with others. In calculating average net income, loss years should be excluded. If losses were incurred in each of the 3 most recent fiscal years, the average loss shall be used for purposes of this test.

(3) The interim statement of changes in financial position may be abbreviated, starting with a single figure for funds provided by operations and showing other changes individually only when they exceed 10 percent of the average of funds provided by operations for the 3 most recent fiscal years.

(4) The interim financial information shall include disclosure either on the face of the financial statements or in accompanying footnotes sufficient to make the interim information presented not misleading. Institutions may presume that users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure that would substantially duplicate the disclosure contained in the most recent audited financial statements (such as a statement of significant accounting policies and practices), and details of accounts have not changed significantly in amount or composition since the end of the most recent completed fiscal year may be omitted. However, disclosure shall be provided of events occurring subsequent to the end of the most recent fiscal year that have a material impact on the institution. Disclosures should encompass, for example, significant changes since the end of the most recently completed fiscal year in such items as accounting principles and practices; estimates inherent in the preparation of financial statements; status of long-term contracts; capitalization, including significant new indebtedness or modification of existing financing agreements; and the reporting entity resulting from business combinations or dispositions.

(5) If, during the most recent interim period presented, the institution entered into a business combination treated for accounting purposes as a pooling of interests, the interim financial statements for both the current year and the preceding year shall reflect the combined results of the pooled businesses. Supplemental disclosure of the separate results of the combined entities for periods prior to the combination shall be given, with appropriate comments or comparisons between the separate and consolidated results

(6) If a material business combination accounted for as a purchase has occurred during the current fiscal year, pro forma disclosure shall be made of the results of operations for the current year up to the date of the most recent interim balance sheet provided (and for the corresponding period in the preceding year) as though the companies had combined at the beginning of that period. This pro forma information shall, at a minimum, show:

(i) Total operating income.

(ii) Income before securities gains (losses), extraordinary items, and the cumulative effect of accounting changes.

(iii) Net income.

(7) In addition to meeting the reporting requirements specified by existing accounting pronouncements for accounting changes, the institution shall state the date of any material accounting change and the reasons for making it. In addition, a letter from the persons who verify the institution's financial statements shall be filed as an exhibit, indicating whether or not the change is to an alternative principle which in their judgment is preferable under the circumstances, except that no such letter need be filed when the change is made in response to a standard adopted by the Financial Accounting Standards Board which requires such change.

(8) Any material retroactive prior period adjustment made during any period covered by the interim financial statements shall be disclosed, together with its effect upon net income and upon the balance of undivided profits for any prior period included. If results of operations for any period presented have been adjusted retroactively by such an item subsequent to the initial reporting of such period, similar disclosure of the effect of the change shall be made.

(9) The interim financial statements furnished shall reflect all adjustments that are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. A statement to that effect shall be included. Furnish any material information necessary to make the information called for not misleading, such as a statement that the results for interim periods are not necessarily indicative of results to be expected for the year.

(c) Management's discussion and analysis of financial condition and results of operations. Discuss material changes, if any, to the information provided to shareholders pursuant to 620.3(g) that have occurred during the periods specified in paragraphs (d)(1) and (2) of this section. Such additional information as is needed to enable the reader to assess material changes in financial condition and results of operations between the periods specified in paragraphs (d)(1) and (2) of this section shall be provided.

(1) Material changes in financial condition. Discuss any material changes in financial condition from the end of the preceding fiscal year to the date of the most recent interim balance sheet provided. If the interim financial statements include an interim balance sheet as of the corresponding interim date of the preceding fiscal year, any material changes in financial conditions from that date to the date of the most recent interim balance sheet provided also shall be discussed. If discussions of changes from both the end and the corresponding interim date of the preceding fiscal year are required, the discussions may be combined at the discretion of the institution.

(2) Material changes in results of operations. Discuss any material changes in the institution's results of operations with respect to the most recent fiscal year-to-date period for which an income statement is provided and the corresponding year-to-date period of the preceding fiscal year. Such discussion also shall cover material changes with respect to that fiscal quarter and the corresponding fiscal quarter in the preceding fiscal year. In addition, if the institution has elected to provide an income statement for the 12-month period ended as of the date of the most recent interim balance sheet provided, the discussion also shall cover material changes with respect to that 12-month period and the 12-month period ended as of the corresponding interim balance sheet date of the preceding fiscal year.

(d) Financial statements. The following financial statements shall be provided:

(1) An interim balance sheet as of the end of the most recent fiscal quarter and as of the end of the preceding fiscal year. A balance sheet for the comparable quarter of the preceding fiscal year is optional.

(2) Interim statements of income for the most recent fiscal quarter, for the period between the end of the preceding fiscal year and the end of the most recent fiscal quarter, and for the comparable periods for the previous fiscal year.

(3) Interim statements of changes in financial condition and statements of changes in capital 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.

(e) Review by independent public accountant. The interim financial information need not be audited or reviewed by an independent public accountant prior to filing. If, however, a review of the data is made in accordance with the established professional standards and procedures for such a review, the institution may state that the independent accountant has performed such a review. If such a statement is made, the report of the independent accountant on such review shall accompany the interim financial information.

(f) If any amount that would otherwise be required to be shown by this subpart with respect to any item is not material, it need not be separately shown. The combination of insignificant items is permitted.

5. Section 620.20 is amended by revising paragraph (c) to read as follows:

Subpart C -- Association Annual Meeting Information Statement

620.20 Preparing, distributing, and filing the information statement.

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(c) The statement shall incorporate by reference the annual report to shareholders required by Subpart A of this part. In addition, if any institution holds its annual meeting of shareholders more than 134 days after the end of its fiscal year, the statement shall be accompanied by the most recent quarterly statements required by Subpart B of this part.

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PART 621 -- ACCOUNTING AND REPORTING REQUIREMENTS

Subpart A -- Accounting Requirements

6. Section 621.2 is amended by revising paragraph (a)(15)(iii) to read as follows:

621.2 Definitions.

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(a) * * *

(15) * * *

(iii) It is severely past due and not adequately secured, not in process of collection, and not fully collectible with respect to all principal and interest; or

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Frank W. Naylor, Jr.,

Chairman, Farm Credit Administration Board.

[FR Doc. 86-13120 Filed 6-11-86; 8:45 am]

BILLING CODE 6705-01-M