Title: FINAL RULE--Organization; Disclosure to Shareholders; Accounting and Reporting Requirements--12 CFR Parts 611, 620, and 621
Issue Date: 06/27/1991
Agency: FCA
Federal Register Cite: 56 FR 29412
___________________________________________________________________________
FARM CREDIT ADMINISTRATION

12 CFR Parts 611, 620, and 621

RIN 3052-AB20

Organization; Disclosure to Shareholders; Accounting and Reporting Requirements


ACTION: Final rule.

SUMMARY: The Farm Credit Administration (FCA), by the Farm Credit Administration Board, adopts final regulations that amend 12 CFR parts 611, 620, and 621, that were published as proposed regulations on January 24, 1991 (56 FR 2715). These final regulations 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 final regulations require disclosure of enforcement actions and additional disclosure related to capital, obligations of the Farm Credit System Financial Assistance Corporation, obligations insured by the Farm Credit System Insurance Corporation (FCSIC), and the establishment of the Federal Agricultural Mortgage Corporation (Farmer Mac); and new authorities to participate in Farmer Mac programs. Other amendments clarify the existing disclosure and accounting and reporting requirements; reflect changes to generally accepted accounting principles; and modify existing requirements for preparing, distributing, and filing reports. The final regulations also include technical amendments necessary to recognize the structural changes in Farm Credit System (System) institutions and changes in lending authority required or authorized by the 1987 Act.

EFFECTIVE DATE: These 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 the effective date will be published in the Federal Register.

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: On January 24, 1991, the Farm Credit Administration (FCA) published for public comment (56 FR 2715) proposed amendments to 12 CFR parts 611, 620, and 621 relating to Farm Credit System (System) institutions' disclosure to shareholders. The proposed amendments also reflected changes in the Farm Credit Act of 1971, as amended by the Agricultural Credit Act of 1987 (1987 Act) (Pub. L. 100-233). The proposed amendments were divided into three categories. In the first category were proposed technical amendments to the regulations addressing changes in the structure and lending authority of System institutions. The second category comprised proposed amendments requiring disclosure related to capital, 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. The third category comprised other proposed procedural, technical, and conforming changes. Clarifications to the existing regulations regarding disclosure and accounting and reporting requirements were also proposed. The comment period for these proposed amendments closed on February 25, 1991.

The FCA received two letters commenting on the proposed regulations. One letter was submitted by the Farm Credit Council (FCC) on behalf of its membership and the Farm Credit Banks Funding Corporation (Funding Corporation). The other letter was submitted by the Farm Credit Bank (FCB) of Springfield and the Springfield Bank for Cooperatives endorsing the comments contained in the FCC letter. The FCC letter represented a summary of the consolidated comments of its membership and the Funding Corporation.

The FCC comment letter incorporated by reference two attachments containing a list of issues regarding the disclosure regulations identified by the System Financial Reporting/Disclosure Workgroup on which the System workgroup sought interpretations and expressed concerns. The issues were submitted by the System workgroup in August 1990. Some of these issues are addressed by the final regulations and others were addressed in a February 1991 FCA staff response that clarified existing provisions. The FCC requested that the final regulations address those requested interpretations and concerns and that clarifications be included as supplemental information to the final rule.

The FCA believes the final rule clarifies those points that need to be clarified and does not believe that it is necessary or appropriate to include the full text of the February response as supplemental information to the final regulations. However, the final regulations make no change to 620.3(i)(2) of the existing regulations to increase the minimum reporting level of compensation to senior officers from $50,000 to $60,000 as requested. The issue of raising the compensation minimum reporting level for senior officers was included in the System workgroup's list of concerns. In adopting the proposed amendments to the existing regulations, the FCA considered the issue and believed that raising the minimum reporting level would not ensure Farm Credit institutions' full disclosure to shareholders. The FCA determined that an amendment in the proposed rule to raise the compensation minimum reporting level for senior officers was not appropriate and the final rule confirms the FCA's determination to make no changes to redesignated 620.5(i)(2). The basis for establishing the existing minimum reporting level can be found at 51 FR 21336, June 12, 1986.

In addition, the FCA has not adopted the suggestion that a number of significant items of 620.5 be relegated to a supplemental report that is available to shareholders only upon request. Because the annual and quarterly reports required by part 620 are used both as a prospectus and a shareholder report, the FCA believes it would not be appropriate to relegate essential disclosures to such supplemental reports. The FCA continues to believe that the nature of the information suggested to be included in a supplemental report is the information about an institution's operations that is needed by shareholders to make informed decisions and to hold management accountable for its actions. The FCA further believes that requiring shareholders to request essential disclosures constitutes an undue burden on shareholders and could preclude the receipt of data by shareholders on a timely basis.

The following discussion summarizes comments received and the FCA's response to the comments. The discussion is presented by section in the order the sections appear in the final regulations. It includes an explanation of the proposed amendments to the existing regulations, comments on the proposed amendments, the FCA response to the comments, significant supplementary information contained in the proposed rule necessary to clarify the final regulations, and an explanation of significant changes made to the proposed regulations in adopting the final regulations.

I. Part 611 -- Organization

Subparts L, M, and N of the existing regulations were proposed to be revised to reflect changes to the citations to part 620 that would be required by the proposed amendments. These are conforming changes only and are adopted with minor technical revisions.

II. Part 620 -- Disclosure to Shareholders

The FCC requested that the FCA clarify how the proposed regulations would apply to associations that have become long-term direct lenders but have not purchased the bank's existing loan portfolio. In response to this comment, the FCA notes that the term "direct lender", as defined in 619.9135, includes agricultural credit associations (ACAs) and Federal land credit associations (FLCAs) that are authorized to lend to eligible borrowers. Thus, any association having such authority is a direct lender association for the purposes of the disclosure regulations. Accordingly, each association having direct lending authority must comply with the disclosure requirements for direct lenders, whether or not the association has purchased the existing bank loan portfolio.

A. Subpart A -- General

The amended disclosure regulations contain many procedural and technical changes to part 620. A new subpart A has been added, and the existing subparts of part 620 have been redesignated accordingly. New "Subpart A -- General" contains definitions and general provisions that are applicable to all disclosure statements required by all subparts of part 620. Specific requirements pertaining to individual reports remain in the applicable subparts.

1. Section 620.1 -- Definitions

To reflect the structural and capitalization changes in System institutions as a result of the 1987 Act, the final regulation incorporates new definitions as part 619 for "association," "bank," and "direct lender association" and new definitions in part 615 for "permanent capital" and "protected borrower capital." In addition, the final regulation adds a new definition of "significant event." The final regulation also adds new definitions, "related association" and "related bank," to replace the previous references to "district bank" and "association in the district"; updates the definition of "loan" to reflect the Federal Agricultural Mortgage Corporation (Farmer Mac) secondary market activities and purchases and sales of loans; and clarifies the definition of "normal risk of collectibility" in which loans having a greater than normal risk of collectibility may include loans other than nonperforming loans.

The FCC commented on several definitions contained in the proposed amendments. The first comment was on the proposed definition of "loan" in 620.1(g). The FCC stated that the definition as drafted could be construed to have a much broader meaning. They further stated that the statement "that is recorded as an asset" contained in the first sentence of the definition should be repeated in the second sentence to subject all items listed in the second sentence to the same condition. The FCA notes that the first sentence of the definition provides a general definition that requires an item to be recorded as an asset in order to be considered a loan. The second sentence clarifies the general definition with specific examples that normally fall within the meaning of the general definition. Therefore, the repetition of the condition in the second sentence would be unnecessary. However, to ensure clarity, the FCA believes that it is necessary to include "lease financings" in the second sentence to support the general definition "extension of * * * lease" stated in the first sentence. The FCC also suggested that the definition of "loan" in parts 620 and 621 should be consistent. When it reviews part 621, the FCA will consider this specific comment as well as other comments made by the FCC relating to part 621 in that review.

The FCC further commented that the term "net worth" is unnecessary and possibly confusing. They believe that the term "capital" continues to be a suitable descriptive term to include all equity accounts. The FCA has considered the FCC's comment and concluded that the terms"capital" and "net worth" are generally interchangeable in the industry. However, the FCA has revised the final regulation to include the term "capital" in place of the proposed term "net worth." The FCA believes that capital that is protected by the 1987 Act must be separated from capital that is at risk on the face of the financial statements. This distinction is critical to readers' understanding of the financial statements and necessary for full disclosure regarding an institution's capital structure. Accordingly, the final regulation specifies what elements of "capital" are to be used in the calculation of certain financial ratios and in matters relating to the disclosure of capital.

Regarding the definition of "normal risk of collectibility," the FCC stated that the proposed amendment would result in an open-ended set of criteria. They believe that the "other high risk" classification in 621.2(a)(18) would adequately cover any "miscellaneous" circumstances where a loan has more than the normal risk of collectibility and that the definition in part 620 is unnecessary and should be eliminated. The existing definition of "normal risk of collectibility" provides that "* * *. Any loans properly identifiable as 'nonperforming loans' * * * shall be deemed to have more than a normal risk of collectibility." This has been misinterpreted to mean that only nonperforming loans involve more than normal risk of collectibility. The FCA wishes to clarify that while all loans identified as nonperforming in accordance with 621.2(a)(17) are determined to have more than a normal risk of collectibility, other loans may also be considered to have more than a normal risk of collectibility even though they may not be classified as nonperforming loans. The amendment is intended to emphasize that management is required to exercise judgment to determine whether a loan involves more than a normal risk of collectibility and such determination should be made independent from the classification of the loan as nonperforming. When it reviews part 621, the FCA will consider the definition of "other high risk loans" in its review. The FCA adopts the clarification of "normal risk of collectibility" as proposed.

Moreover, the FCC commented that "permanent capital" is not a term used in general-purpose financial statements and that the use of a permanent capital concept should be limited to certain regulatory calculations. They further commented that the amount of permanent capital disclosed on the balance sheet may differ from the permanent capital used in the computation of the permanent capital ratio (PCR) due to double-counted capital eliminations and the use of average daily balances. The FCA believes that "permanent capital" is an important and relevant term to shareholders because the ability of the institution to distribute earnings depends upon the level of permanent capital. The regulation does not contemplate that the term "permanent capital" be used on the face of the financial statements. The proposed regulations required disclosure of the amount of permanent capital in the selected financial data section, not in the financial statements. In order to clarify what amount of permanent capital is required under the selected financial data section, the FCA has revised the proposed heading "Permanent capital" in 620.5(f) to "At-risk capital." The reporting institution should also disclose that, for the purpose of computing the PCR, adjustments in accordance with regulatory requirements are necessary.

Another comment stated that the proposed definition of "protected borrower stock" in 620.1(k) is not sufficiently comprehensive and suggested using the term "protected borrower capital" to include any protected allocated surplus to make it clear to readers that more than stock is included. The FCA believed that the term "protected borrower stock" included protected allocated surplus because it references 615.5260 and corresponds with the 1987 Act in which "borrower stock" includes stock, participation certificates, and allocated equities. However, in order to clarify this regulation, the FCA has no objection to using the suggested term "protected borrower capital" in place of "protected borrower stock," and has adopted the term in the final regulations.

Lastly, regarding the definition of "significant event" in 620.1(q), the FCC asserted that a bank's execution of a financial assistance agreement with a small association may not represent a material risk to the bank, and the probability of activation of such an agreement may not be likely. The FCC requested clarification as to whether the financial assistance agreement in such circumstance would constitute a significant event. In order to clarify the requirements, the FCA notes that items listed in the proposed definition, i.e., 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, and defaults of debt obligations, are deemed by the FCA to be significant events and are not subject to any evaluation or judgment as to their materiality or likelihood.

The FCC also asserted that the definition of "significant event" should include a reasonable future time period within which such events must occur in order to be considered significant and suggested 12 months to be a reasonable period of time in which to forecast significant events. The FCA disagrees with the FCC and believes that any significant event that is likely to have a material impact on the reporting institution should be disclosed, if known, without regard to the expectation of when such event will occur. However, it is recognized that the extent of the disclosure may vary depending on the institution's knowledge of the significance of the event at the time of the reporting.

2. Section 620.2 -- Preparing and Filing the Reports

Section 620.2 of the final regulations clarifies that reports sent to the FCA may be filed with offices designated by the Chief Examiner and specifies that the reports must be filed on or before the date required by the regulation. The section also contains a new requirement that reports be available for public inspection at the issuing institution. In addition, the reports must include a statement that the shareholders' investment in an association is materially affected by the financial condition of the related bank. The reports must also include the address and telephone number where an association shareholder can obtain copies of bank quarterly reports for quarters in which the bank does not distribute such information. The regulation also requires that the bank reports be provided to the requesting shareholder free of charge.

The FCC provided several comments on this section. First, it was suggested that proposed 620.2(a) be clarified to state that each institution is required to file three copies of material actually provided to stockholders with the FCA. The FCA intends to prescribe the minimum requirements for filing of periodic reports with the FCA in 620.2(a). The FCA has determined that the regulation as written is clear but also agrees that an institution would satisfy this regulatory requirement if it files with the FCA copies of material actually provided to stockholders. Therefore, no change to the regulation is necessary.

Secondly, the FCC recognized that a bank and its related associations continue to be financially and operationally interdependent and that they should continue to report on a combined basis. However, the FCC suggested that because facts and circumstances may change, the regulation should provide for greater flexibility by requiring that the reporting entity comply with Generally Accepted Accounting Principles (GAAP) rather than requiring combined reporting.

The FCA recognizes that the need for reporting on a combined bank and association basis may at some point change due to structural changes in the System, new capital requirements, and the prospect of increased autonomy and financial independence of associations. However, until conditions in the System change, the FCA continues to believe that combined bank and association reports provide shareholders with needed information to assess the impact that the bank and its related associations have on the financial condition of a particular association and its ability to obtain loan funds. Further, the FCA is monitoring developments of the Financial Accounting Standards Board in the area of consolidated reporting for the purpose of evaluating whether adjustments to the regulations are needed. The disclosure regulations can be amended at a later date to conform to any changes that may occur. Thus, the FCA has determined that no changes to the proposed regulations are needed at this time.

In addition, the FCC requested the FCA to develop in the context of the accounting and reporting regulations, a meaningful and usable presentation of the allowance for loan losses and provision for loan losses for the users of financial statements of production credit associations (PCAs). The FCC further suggested that the regulation should provide for the balance sheet and the statement of income to be prepared in accordance with GAAP and allow the impact of the statutory requirements to be disclosed in notes to the financial statements. The FCC believes that this would result in the most meaningful presentation to shareholders and would eliminate the "unnecessary and complex Management Discussion and Analysis" which currently must explain and disclose statutory requirements that have no impact on the operations of the PCAs.

The FCA will consider these comments in its review of part 621 in the light of any legislative changes to section 2.3(b) of the 1971 Act that may have occurred at that time.

The FCC further suggested that the regulations use the term "district report" to reference the report prepared on a combined basis for a bank and its related associations and the term "bank only" to reference the report of a bank standing alone. Moreover, they requested that redesignated 620.2(g) be revised to clarify that bank-only financial statements may be in summary form and to include additional language concerning disclosure for a bank for cooperatives (BC).

In response to these comments, the FCA has revised the last sentence of 620.2(g) to clearly reflect that the bank-only statements that are included in the annual and quarterly bank reports may be provided in summary form. However, the combination requirement in paragraph (g) only applies when a bank has related associations. Since BCs do not have related associations, the requirement for combined financial statements does not apply.

Lastly, the FCC states that proposed 620.2(i) appeared to require that two reports be sent to requesting shareholders -- one from the association and one from its related bank -- and requested that the FCA clarify what is intended by the paragraph. To clarify the requirement of 620.2(i), the FCA has revised the final regulations to require the institution receiving the request to provide the requesting shareholder with a bank quarterly report.

3. Section 620.3 -- Prohibition Against Incomplete, Inaccurate, or Misleading Disclosure

The FCA proposed a new 620.3 that expands the prohibition against incomplete, inaccurate, or misleading disclosures in connection with an election to apply to any disclosure made by a Farm Credit institution or its officers, directors, or employees to the general public concerning any matter required by part 620. Section 620.3 also requires an institution or person to make additional or corrective disclosure when a disclosure is made that is, in the judgment of the FCA, incomplete, inaccurate, or misleading.

The FCC commented that the term "incomplete" is too vague to provide appropriate guidance as to when a disclosure is, in fact, "complete." The FCC suggested using language similar to that used by the Federal Deposit Insurance Corporation (FDIC) in regulations relating to shareholder meetings. The FDIC regulation at 12 CFR 335.206 includes the phrase "omits to state any material fact necessary in order to make the statement therein not false or misleading." The FCC believes this phrase to be a more precise standard and more capable of uniform application by System banks and associations. The FCC also commented that its review of comparable Federal banking regulations failed to disclose any similar requirement for corrective statements when judged necessary by the regulator.

In response to these comments, the FCA believes that shareholders of System institutions are entitled to full and fair disclosure relating to the financial condition and operations of such institutions. The regulations in part 620 are intended to provide the minimum information necessary to constitute full and fair disclosure. Therefore, if a portion of the required information were not disclosed in the annual and quarterly reports, such as a description of material pending legal proceedings, the reports would not present full disclosure to the shareholders. The application of the terms "incomplete," "inaccurate," and "misleading" would include situations in which a reporting institution omitted a material fact necessary in order to make the other statements made not false or misleading. However, the FCA also wishes to ensure that the prohibition covers situations in which required disclosure items are omitted that do not make other disclosures false or misleading but would result in a shareholder's receiving less than full disclosure of the financial condition and operations of the institution.

Regarding the requirement that an institution or person make additional or corrective disclosure, the FCA believes corrective disclosure is an appropriate remedy in instances where shareholders or the general public have been provided with information that does not represent full and fair disclosure. For these reasons, the FCA has determined not to make any of the suggested changes to 620.3.

B. Subpart B -- Annual Report to Shareholders

1. Section 620.4 -- Preparing and Distributing the Annual Report

Section 620.4 sets forth specific requirements for filing of the annual report. The section consists of the requirements contained in 620.2 (a), (b), and (c) of the existing regulations with necessary adjustments to reflect structural changes of Farm Credit institutions. The section requires that the entire bank report (which includes financial statements of the bank and combined financial statements of the bank and its related associations as well as management's discussion and analysis (MD&A)) be distributed to association shareholders. It also includes a new statement to clarify that a bank shall coordinate its distribution of an annual report with its related associations.

2. Section 620.5 -- Contents of the Annual Report to Shareholders

Section 620.3 of the existing regulations has been redesignated as 620.5. Redesignated 620.5 requires disclosure to reflect statutory and regulatory changes regarding capital adequacy, lending authority, insurance of certain Systemwide debt obligations, participation in the Farmer Mac secondary market program, and other activities authorized or mandated by the 1987 Act. The section also requires disclosure of enforcement actions, presentation of a statement of cash flows, and a statement of changes in protected borrower capital and at-risk capital.

The FCC's letter contained a number of specific comments on this section. The FCA's responses to these comments are discussed below by paragraph.

(a) Description of business. Redesignated 620.5(a)(3) sets forth the requirement for disclosure of the types of lending activities engaged in and financial services offered by the reporting institutions. Section 620.5(a)(3) also requires a bank to include disclosure for services offered by its related associations. Section 620.5(a)(3) of the proposed regulations referred to a bank's related associations as "associations that are its shareholders." The FCC questioned whether a bank's disclosure should include a description for an association that has terminated its System status but continues to be a shareholder of the bank. The FCA did not intend to require a bank to disclose business of a non-System institution. Although the association continues to be a shareholder of the bank, disclosure of an institution that has ceased its System status is not required. To clarify the intent of the regulation, the FCA has revised the above reference in paragraph (a)(3) by substituting the defined term "related associations" for "associations that are its shareholders." The FCC also expressed its concern on the provision requiring only banks to disclose services offered by a service organization. The FCC indicated that at some future time associations may also own service organizations to engage in Farmer Mac secondary market activities as proposed in 55 FR 9138, March 12, 1990. In response to this comment, the FCC has expanded the provision to apply to associations. Also, the requirement for a disclosure of the institution's participation in the Farmer Mac program and origination of loans for resale in 620.5(a)(3) has been relocated to 620.5(g)(1)(iii)(A).

Moreover, the FCC suggested that both 620.5 (a)(3) and (a)(9), concerning a description of the business of and relationship with its related System institutions, be revised to subject these requirements to a materiality judgment. The FCA notes that the disclosure required under paragraphs (a)(3) and (a)(9) is a general description of the activities and services offered by the reporting entity and its related organizations and a brief description of the reporting entity's relationship with its related organizations. The extent of the description of the required disclosure is subject to management's materiality judgment. However, the disclosure required by these paragraphs is not subject to a materiality judgment.

Though the FCA did not propose any change to the provision, the FCC suggested that paragraph (a)(4) be amended to reduce the period to be covered in the discussion of significant business developments from 5 years to 3 years. The FCA believes that a 5-year period is necessary to show the trend of business movements and makes no change in this provision.

(b) Description of property. Redesignated 620.5(b) includes a new statement to clarify the existing term "principal offices" as "major facilities where the institution makes and services its loans." The FCC suggested that the FCA revise the proposed clarification by using a minimum standard relating to the book value of the facility as compared to the institution's capital, or a standard relating to a minimum percentage of total loan volume to provide more precise guidance as to which facilities qualify as "principal offices." The FCA notes that disclosure in 620.5(b) is intended to identify major office locations where the reporting institution makes and services its loans. Therefore, any measurement relative to the value of the facilities is irrelevant to why an office location must be included. Each reporting institution must exercise judgment to determine whether an office constitutes a "major facility."

(c) Legal proceedings and enforcement actions. Redesignated 620.5(c)(2) was proposed to require disclosure of enforcement actions. The FCC suggested that the proposed requirement for disclosure of the "nature" of enforcement actions be revised to require disclosure of the "type" of enforcement actions. Paragraph (c)(2) was intended to require a reporting institution to provide a general description of the condition or circumstances giving rise to the enforcement action. The institution should always identify the type of enforcement action when disclosing the existence of such action. To clarify what is to be disclosed, the FCA has revised paragraph (c)(2) to require a disclosure of the "type of and reason for each enforcement action in effect." The language in the final regulation has also been clarified to include disclosure of prohibitions from further participation in the conduct of the affairs of the institutions as well as removals of officers and directors. In addition, in reviewing comments received on the proposed regulations, the FCA considered the requirement to disclose suspensions of officers and directors. Due to the effect the disclosure of a suspension could have on a director or officer personally, the FCA has deleted the mandatory requirement for disclosure of suspensions in the final rule. Consequently, the determination of whether or not suspensions are to be disclosed will be made by management on a case-by-case basis depending upon the materiality of the impact of a suspension on the reporting institution. Section 620.5(c)(2) as revised is similar to the requirements of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA).

(d) Description of capital structure. Redesignated 620.5(d) reflects statutory and regulatory requirements with respect to capitalization of Farm Credit institutions. Institutions are required to state the regulatory permanent capital standards; the institutions' capital adequacy requirements and minimum stock purchase requirements; statutory and regulatory restrictions on the distribution of earnings and retirement of stock when capital standards are not met; 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; and whether the reporting institutions are currently subject to any such restrictions or requirements or know of any reason they will be subject to such requirements during the fiscal year subsequent to the fiscal year just ended.

The FCC commented that a simple statement regarding each item would be adequate and that guidance as to the nature and extent of the expected disclosure for capital-related matters is necessary. The FCA concurs with the FCC's view that a simple statement that effectively describes each of the subject matters is adequate. The FCA recognizes that the regulatory permanent capital standard is only a minimum standard, and an institution may nevertheless need more permanent capital to provide for the growth necessary to meet the needs of its borrowers and offset the risks inherent in that institution. As a result, the FCA believes that it is necessary to distinguish the regulatory minimum permanent capital standards from an institution's capital adequacy needs. Accordingly, a new 620.5(d)(4) has been added to require a separate disclosure of the institution's capital adequacy requirements, and proposed 620.5(d)(2) has been revised to require a description of regulatory minimum permanent capital standards and the disclosure of the institution's compliance with such standards. The final regulations also require banks to disclose the compliance of their related associations with the standards.

(e) Description of liabilities. Redesignated 620.5(e) contains amendments to reflect the establishment of the FCSIC and the Farm Credit System Financial Assistance Corporation. The FCC contended that the requirement in 620.5(e)(1) for a separate disclosure of insured versus uninsured debt is unnecessary and that disclosure of insured and uninsured debt would be made in accordance with GAAP if material. The FCA believes that shareholders are entitled to accurate information about the different nature and magnitude of insured and uninsured debt obligations issued by the reporting institution. Therefore, the FCA has concluded that the amounts of outstanding insured and uninsured debt are relevant and material to readers of financial statements, regardless of the quantitative materiality of the individual items.

The FCC also commented that any disclosure relative to other System institutions' responsibilities to repay obligations issued by the Farm Credit System Financial Assistance Corporation under paragraph (e)(4) would be unnecessarily complex and of no practical value to shareholders. The FCC further stated that disclosure in accordance with GAAP would meet the objective for meaningful disclosure to shareholders. The intent of 620.5(e)(4) is to require a reporting institution to describe in general the System institutions' responsibility, as a whole, for repayment of such debt obligations. Section 620.5(e)(4) does not require a reporting institution to disclose specific repayment obligations of other System institutions. When the repayment obligation of the reporting institution is estimable, disclosure in accordance with GAAP would be required. Thus, no changes to paragraph (e)(4) are needed.

(f) Selected financial data. Redesignated 620.5(f) is amended to conform to statutory and regulatory changes in the structure and capitalization of Farm Credit institutions. It also contains other technical changes, including the disclosure of extraordinary items and the deletion of the requirement to disclose the debt-to-capital ratio. In the final regulations, each selected item has been designated with a paragraph number for reference.

The FCC suggested that the FCA clarify whether the order and captions of the items in paragraph (f) may be altered or expanded by management to ensure the most appropriate and meaningful disclosure consistent with the other financial statements and schedules included in the annual report. The introductory paragraph of redesignated 620.5 states that "The report shall contain the following items in substantially the same order * * *." This provision requires that discussions relating to the major caption of each paragraph that appeared in lower-case alphabetical order under 620.5 be presented in the annual report in substantially the same order as prescribed in the regulations. However, this requirement does not apply to subissues prescribed within each of those paragraphs of 620.5 that appeared in numerical order, Roman numeral sequence, or any other sequence. Accordingly, except for the major captions, management may expand the list under "Selected Financial Data" of 620.5(f) and present the items prescribed thereunder in any logical order that would enhance readers' understanding of the report. In addition, the FCA does not object to System institutions' presentation of financial highlights in the form of condensed financial statements: Provided, That all items required are presented, and the presentation does not divert readers' attention away from significant financial indicators.

The FCC submitted two comments regarding disclosure of the permanent capital ratio (PCR). The FCC stated that the PCR of a combined entity is less meaningful than the bank-only PCR and requested the FCA to clarify that the 5-year disclosure requirement does not apply to the PCR for the years prior to the enactment of the 1987 Act. The FCA concurs with the first comment that the PCR of a combined entity is less meaningful and has modified proposed 620.5(f) to specify that banks present the bank-only PCR. However, the FCA believes that a specific provision in the regulation to clarify that the 5-year PCR disclosure requirement does not apply to the years prior to the enactment of the 1987 Act is not necessary. It is presumed that each reporting institution is required to comply with the regulations for the years that are applicable to such institution. Therefore, disclosure of the PCR for the years prior to 1988 is not required.

The FCC further suggested that the term "allocated equities" be replaced by the term "allocated surplus." Because the suggested term "allocated surplus" is also an appropriate term for presentation of equity accounts in the financial statements, the FCA has adopted the suggested term in the final rule.

Lastly, the FCC suggested that the FCA insert in 620.5(f) a provision permitting the combination of insignificant items and require only material items to be disclosed similar to provisions governing quarterly reports. In response to this comment, the FCA notes that the selected financial data should be distinguished from the condensed financial statements, where the combination of insignificant items is necessary in order to make a condensed balance sheet or income statement balance. The 5-year selected financial data required is data that is relevant in the analysis of the System institutions. Such disclosure is intended to allow readers of the financial statements to analyze the institution's performance based on trends over a period of years in the items presented. In presenting the required selected data, materiality is not relevant. Because the data selected are single elements within the major financial statement captions, the totaling of individual selected items is not required. Therefore, it is unnecessary to include a provision in paragraph (f) to allow the combination of insignificant data. However, a reporting institution may omit a selected item that is not applicable to the institution.

With respect to condensed financial statements, the rules for condensation for quarterly reports are intended to allow an institution to prepare a less detailed financial report than the annual report while ensuring that any major increases or decreases since the end of the preceding fiscal year are disclosed. This takes into consideration materiality and also presumes that the users of the interim financial information have read or have access to the audited financial statements for the preceding fiscal year. Because of the difference in purpose of the quarterly reports and the 5-year selected data, the criteria for presentation of the data and the application of materiality are also different.

(g) Management's discussion and analysis of financial condition and results of operations. The amendments to redesignated 620.5(g) reflect changes resulting from the 1987 Act and require additional disclosure in the MD&A for capital, sales and purchases of loans, and secondary market activities of the reporting institution. In view of the focus on the statutory and regulatory requirements of permanent capital and capital adequacy, the amended regulations delete the concept of "risk funds." The provision requiring banks to disclose agricultural production loans by major subcategory is also deleted. Each institution is 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 on the institution's capital adequacy or its ability to meet minimum permanent capital standards. It also requires disclosure of 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 requirement or its ability to retire stock and distribute earnings. In addition, in order to make the association's report more complete, each association is required to disclose its relationship with its related bank, as well as any events affecting the bank, if known, that would also materially affect the association.

Some institutions have misinterpreted the existing regulations to require that the quarterly report contain a management's discussion and analysis (MD&A) repeating much of the same information included in its annual report. The regulation only requires discussion of any material changes that have occurred since the end of the last fiscal year to be presented in an easily understandable format. For presentation of financial statements, 620.11(b)(4) of the existing regulations states that "* * * 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 that have not changed significantly in amount or composition since the end of the most recent completed fiscal year may be omitted." With respect to the MD&A, 620.3(c) of the existing regulations states that "Discuss material changes, if any, to the information provided to shareholders pursuant to 620.3(g) that have occurred during the periods specified * * * ."

Management of each institution is responsible for ensuring that quarterly reports include an appropriate discussion regarding an institution's financial health. It need not be voluminous to comply with the disclosure regulations. As the FCA has noted in the past, institutions that include information not required by the regulations may not necessarily be making the most meaningful disclosure to shareholders. Disclosure of a large volume of information without clarity and focus does not constitute meaningful disclosure. The quarterly report should contain a concise but meaningful discussion of material changes presented in an easily understandable format. Disclosure by an institution to its shareholders of information that is not organized in an easily understandable format or is presented in a manner that is misleading would constitute a reporting deficiency pursuant to redesignated 620.11(a).

The FCC submitted three comments on 620.5(g). The first comment was on proposed 620.5(g)(1)(iii), which requires disclosure of the amount of purchased loans, loans sold with recourse, retained subordinated interests in loans sold, and interest in pools of subordinated interests that are held in lieu of retaining a subordinated participation interest in the loans sold. The FCC believed that paragraph (g)(1)(iii) as proposed would potentially require extensive disclosure and suggested that the provision be amended to require only disclosure of arrangements that are significant to the institution's operation. The FCC further suggested that the FCA clarify whether this requirement is intended to apply to all participations.

The FCA does not intend redesignated 620.5(g)(1)(iii) to apply to loans sold with no recourse. However, disclosure relating to loans sold into the Farmer Mac program without recourse is required in paragraph (g)(1)(iv)(E) of the same section. The FCA believes that the disclosure required by the proposed regulation is meaningful in that activities relating to the Farmer Mac secondary market and purchases and sales of loans involves different risk exposure than holding loans in an institution's portfolio. Disclosure required by paragraph (g)(1)(iii) is merely the "amount" of the arrangements by type; a detailed discussion of the institution's involvement is not required. However, when such arrangements are material to the institution's operations, additional disclosure of the institution's involvement and risk exposure in the arrangements is required under the provisions of 620.5(g)(1)(iv)(B) and (E). Section 620.5(g)(1)(iii) of the proposed regulations has been redesignated as 620.5(g)(1)(iii)(B) of the final rule.

The FCC also commented that any explanation of the basis of the calculation of ratios relating to permanent capital and at-risk capital would be too technical for a meaningful disclosure to shareholders. The FCA believes a general discussion of how the ratios are computed and the adequacy of capital is important to a shareholder's understanding of the restrictions on the distribution of earnings. The FCA intends that the explanation be a general explanation on how the ratios are computed rather than a technical description of the computations.

The FCC also questioned whether the purpose of the proposed amendment of 620.5(g)(4)(ii) is to require a greater quantification of data or a discussion of trends. The FCA proposed to amend paragraph (g)(4)(ii) to ensure that each institution's disclosure would cover all aspects of capital resources, i.e., protected borrower capital, permanent capital, debt obligations, and any off-balance-sheet financing, and changes thereto. The amended 620.5(g)(4)(ii) should not be construed as seeking a greater quantification of data.

(j) Transactions with senior officers and directors. This paragraph was proposed to be amended to eliminate the reference to district Federal land banks, which no longer exist as a result of the 1987 Act. The FCC requested that the FCA clarify whether the phrase "the last full fiscal year-to-date" in the paragraph means "the last fiscal year" in the context of the annual report. The FCA clarifies the phrase in the final regulations by removing the hyphens and affirms the FCC's interpretation of the phrase in the context of the annual report.

C. Subpart C -- Quarterly Report to Shareholders

1. Section 620.10 -- Preparing and Distributing the Quarterly Report

The final rule makes substantive changes in the distribution of bank quarterly reports to the shareholders of its related associations. The final regulations require the quarterly reports of the bank to be sent to association shareholders, except for quarters in which no significant events have occurred and no previously disclosed significant events continue to materially affect the bank and the related associations. For periods in which no significant events occur and no previously disclosed significant events continue to materially affect the related associations, bank quarterly reports are required to be made available upon request to association shareholders. Further, the final regulations require the bank 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 is required to be signed by the persons who are required to sign the quarterly report filed with the FCA. The regulation further require that bank quarterly reports be routinely distributed to shareholders of Federal land bank associations, which are not direct lender associations.

The FCC made several comments and suggestions regarding amended 620.10, but was supportive of the changes in the proposed regulations modifying the requirement for routine distribution of bank quarterly reports to shareholders of direct lender associations. Regarding 620.10(a), the FCC stated that paragraph (a) could be interpreted to exempt a bank from quarterly reporting requirements when all of the related associations in its district have direct lending authority. The FCC seeks clarification as to whether the FCA intends this result. In response to this comment, the FCA notes that the term "direct lender" should be distinguished from the term "retail lender." Farm Credit Banks are direct lenders by virtue of their authority to lend to associations, even if all retail authority has been transferred to the associations. As such, banks are required to prepare and distribute quarterly reports regardless of whether or not they exercise their direct lending authority.

Regarding 620.10(e) and the definition of "significant event" in 620.1(q) of the final regulations, the FCC interpreted the language of the proposed regulations as follows: During the quarter in which a bank receives or enters into an enforcement action or executes a financial assistance agreement, the bank's quarterly report would be distributed to association shareholders. In the quarters subsequent to the quarter in which the enforcement action or financial assistance agreement was put in place, the bank would not be required to distribute its quarterly report to association shareholders if no significant events which occurred during preceding quarters continue to materially affect the related associations. Therefore, the bank would be required to conduct an analysis to determine whether the occurrence of the event continued to materially affect the related associations, and, if it did not, the bank would then make the certification to the FCA that no significant events continue to affect related associations.

The FCA confirms that the FCC's interpretation is correct. The regulation is intended to require that, when a significant event described in 620.10 occurs, the bank must distribute its quarterly report to association shareholders. For the quarters following the initial occurrence of the event, whether or not distribution is required will depend upon the materiality of the subsequent development of the event on its related associations.

The FCC further contended that the requirement of 620.10(e) of the proposed regulations for each board member to sign the certification that no significant event has occurred is excessive and suggested that it would be sufficient to require the signature of the chairman of the board, the chief executive officer, and the disclosure officer. Due to the financial interdependence of banks and associations and the impact the significant events could have on the associations, the FCA believes that the determination of whether significant events have occurred should be made by the full board. The board must make a reasonable attempt to obtain signatures of all board members. However, the FCA is aware that, at times, an individual required to sign the certification may not sign, but the FCA does not believe that this fact alone should require distribution of bank quarterly reports when they would not otherwise be required to be distributed. Therefore, in the final regulations, the FCA has revised paragraph (e) to require the certification to be signed by the same persons who are required to certify for the filing of the report with the FCA pursuant to redesignated 620.2(b)(3). If a majority of the board of directors decides that no significant events have occurred or continue to have a material impact on related associations and signs the certification, the report need not be distributed. In such instances, the certification would be sent to the FCA with the names of the individuals who did not sign and a statement as to why they did not sign. However, if a majority of the board of directors is unable or refuses to sign the certification, the bank must distribute its quarterly report to association shareholders.

The FCC also suggested that the certification reference the definition of "significant event" in 620.1(q). The FCA has revised the certification as suggested and also inserted the qualifier, "that are direct lenders," after "related associations" because a bank is only required to certify for its related direct lender associations.

Lastly, the FCC suggested that it is appropriate for associations to insert a disclosure of the procedures regarding distribution of bank reports only if the associations and bank elect to change their procedures in accordance with the proposed regulations. The FCC also suggested that 620.10(g) of the proposed regulations state that the disclosure is required to be made after the effective date of the "subsection," rather that the effective date of the "amendment." Because the revised procedures for distribution of bank quarterly reports to association shareholders apply to all banks and associations and the revision constitutes a regulatory change, the FCA believes shareholders should be informed of the change even if the banks and associations do not intend to change the routine distribution of bank quarterly reports immediately. Section 620.10(g) has been revised to substitute the "paragraph" for the word "amendment."

2. Section 620.11 -- Content of Quarterly Report to Shareholders

Amendments were proposed to 620.11 of the existing regulations to clarify current FCA requirements and to require a statement of cash flows in the disclosure regulations. Amended 620.11 requires banks to publish the statement of cash flows on a quarterly basis and associations to publish the quarterly statement of cash flows at their option. The FCA believes that the quarterly statement of cash flows is less meaningful for an association than for a bank, since associations obtain funding from their related banks and loan payments received are seasonal.

The FCC requested that proposed 620.11(d) be further amended to allow banks to prepare the quarterly statement of cash flows at their option. The FCA believes that banks should be required to publish the combined statement of cash flows on a quarterly basis, as the statement provides meaningful information to shareholders and holders of bank obligations. 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 Farm Credit banks issue debt obligations to the general public to obtain funding from external sources, this necessitates that banks publish the statement of cash flows on a quarterly basis. The FCC also suggested that the word "required" be changed to "provided" in proposed 620.11(b). The FCA has made this change in the final regulations.

D. Subpart D -- Association Annual Meeting Information Statement and Subpart E -- Bank Director Disclosure Requirements

Subparts D and E of part 620 of the existing regulations were proposed to be revised to correctly reference the redesignated sections of part 620. These are conforming changes only and have been adopted as proposed.

III. Part 621 -- Accounting and Reporting Requirements

A. Subpart A -- Accounting Requirements

1. Section 621.2 -- Definitions

The FCA proposed a technical amendment to the definition of "formally restructured loans" to clarify that the disclosure of formally restructured loans should be made in accordance with GAAP. The FCC made no comment on the proposed amendment but suggested that the supplementary information regarding this change contained in the proposed regulations be included in the final regulations. As stated in the supplementary information of the proposed regulations, 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. In the second sentence of 621.2(a)(8), it 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 a "* * * 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, i.e., the rate that the creditor was willing to accept for a new receivable with comparable risk. To prevent any further confusion, the FCA has amended 621.2(a)(8) by deleting the second sentence, which has been interpreted as requiring, without exception, that a loan continue to be disclosed as "formally restructured" until it is fully paid off or otherwise discharged.

It should be noted that this change only addresses the issue of whether or not a loan shall be reported as a restructured loan in an institution's financial statements in accordance with the requirements of SFAS No. 15. For purposes other than reporting the loan in the financial statements in accordance with SFAS No. 15, the loan may still be considered a restructured loan.

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 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, "part 620, subpart A", " 620.3", " 620.2(e)", and " 620.2(f)" and adding in their places, the references, " 620.2 and subpart B of part 620", " 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(1)" and adding in its place, the reference " 620.5(1)" in paragraph (d)(3); by removing the reference, "subpart B" and adding in its place, the references " 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, "part 620, subpart A", " 620.3", " 620.2(e)", and " 620.2(f)" and adding in their places, the references " 620.2 and subpart B of part 620", " 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(1)" and adding in its place, the reference " 620.5(1)" in paragraph (d)(3); by removing the reference, "subpart B", and adding in its place, the references, " 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.

6A. A new Subpart B -- Annual Report to Shareholders is added.

620.3 [Redesignated as 620.5]

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

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

Subpart A -- General

9. 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 (o), (e), (f), (g), (h), (i), (n), and (p); adding new paragraphs (b), (c), (d), (j), (k), (l), (m), and (g); and revising newly redesignated paragraphs (g) and (i) 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 of this chapter.

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

(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 participation interests that are held in lieu of retaining a subordinated participation interest in loans sold; contracts of sale; notes receivable; and other similar obligations and lease financings.

* * * * *

(i) 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.

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

(k) Protected borrower capital means eligible borrower stock as defined in 615.5260 of this chapter.

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

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

* * * * *

(q) 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.

10. 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. The bank-only 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 request, the institution receiving the request shall promptly mail or deliver a bank quarterly report to the requesting shareholder free of charge.

11. 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 employee, 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 judgment 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.

12.-13. 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.

* * * * *

14. Newly designated 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 word "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); removing 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 and financial services offered. Each bank shall also briefly describe the lending and financial services offered by its related associations, 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. Each association shall briefly describe the lending and financial services offered by its related organizations or incorporate by reference relevant portions of the related 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 type of and reason for each enforcement action in effect, i.e., agreements, cease and desist orders, temporary cease and desist orders, prohibitions and 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, and the institution's compliance with such standards. For banks, also discuss any related associations that are not currently in compliance with the standards.

(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.

(4) Describe the institution's capital adequacy requirements and the minimum stock purchase requirement in effect.

(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.

(A) Total assets.

(B) Investments.

(C) Loans.

(D) Allowance for losses.

(E) Net loans.

(F) Acquired property.

(G) Total liabilities.

(H) Obligations with maturities less than 1 year.

(I) Obligations with maturities longer than 1 year.

(J) Protected borrower capital.

(K) At-risk capital.

(1) Stock and participation certificates.

(2) Allocated surplus.

(3) Unallocated surplus.

(ii) Statement of income.

(A) Net interest income.

(B) Provision for loan losses.

(C) Extraordinary items.

(D) Net income.

(iii) Key financial ratios.

(A) Return on average assets.

(B) Return on average protected borrower capital and at-risk capital.

(C) Net interest margin as a percentage of average earning assets.

(D) Protected and at-risk capital-to-total assets.

(E) Net chargeoffs-to-average loans.

(F) Allowance for loan losses-to-loans.

(iv) Net income distributed.

(A) Dividends.

(B) Patronage refunds.

(1) Cash.

(2) Stock.

(3) Allocated surplus.

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

(i) Balance sheet.

(A) Total assets.

(B) Accrued obligation under loss-sharing agreement, if any.

(C) Protected borrower capital.

(D) At-risk capital.

(ii) Statement of income.

(A) Compensation from related bank.

(B) Total operating expense.

(C) Extraordinary items.

(D) Provision for obligation under capital preservation or loss-sharing agreement, if any.
(E) Net income.

(iii) Other.

(A) Loans serviced for related bank.

(B) Dividends paid.

(C) Patronage refunds paid.

(1) Cash.

(2) Stock.

(3) Allocated surplus.

(D) Payments under loss-sharing agreement.

(3) For all institutions.

(i) Permanent capital ratio (for associations); or

(ii) Bank-only permanent capital ratio (for banks).

(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) Purchases and sales of loans. (A) Describe any participation in the Federal Agricultural Mortgage Corporation program or origination of loans for resale.

(B) Disclose the amount of purchased loans, loans sold with recourse, retained subordinated participation interests in loans sold, and interests in pools of subordinated participation 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 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 protected borrower capital and at-risk capital, 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 at-risk capital 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 capital, permanent capital, debt, and any off-balance-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 with:

* * * * *

(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 protected borrower capital and at-risk capital, and statement of cash flows.

* * * * *

Subpart C -- Quarterly Report to Shareholders

15. 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 (as defined in 620.1(q)) have occurred which are likely to have a material impact on related associations that are direct lenders or no significant events which occurred during the preceding quarters continue to materially affect such related associations.

The certification shall accompany the quarterly report filed with the FCA and shall be dated and signed by:

(1) The person designated by the board of directors to certify the reports of condition and performance in accordance with 621.12 of this chapter,

(2) The chief executive officer, and

(3) Each member of the board.

The name and position title of each person signing the certification shall be typed or printed beneath his or her signature. If any officer or any member of the board is unable to or refuses to sign the certification, the bank shall disclose the individual's name and position title and the reasons such individual is unable or refuses to sign the report. If a majority of the board of directors is unable to or refuses to sign the certification, the bank must distribute its quarterly report to shareholders of related direct lender associations.

(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 paragraph 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.

16. 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 paragraph (c) introductory text; 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 provided 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 protected borrower capital and at-risk 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.

(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

17. 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 section heading to read as follows:

620.20 Preparing and distributing the information statement.

620.21 [Amended]

18. 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]

19. Section 620.22 is removed.

Subpart E -- Bank Director Disclosure Requirements

620.32 [Removed]

20. Section 620.32 is removed.

PART 621 -- ACCOUNTING AND REPORTING REQUIREMENTS

21. 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

621.2 [Amended]

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

Dated: June 18, 1991.

Curtis M. Anderson,

Secretary, Farm Credit Administration Board.

[FR Doc. 91-15023 Filed 6-26-91; 8:45 am]
BILLING CODE 6705-01-M