Source: https://www.federalregister.gov/documents/2002/04/12/02-8711/organization-loan-policies-and-operations-termination-of-farm-credit-status
Timestamp: 2018-08-17 06:12:34
Document Index: 665041956

Matched Legal Cases: ['arts 611', '§\u2009611', '§\u2009615', '§\u2009611', '§\u2009621', '§\u2009621', '§\u2009611', '§\u2009611', '§\u2009611', 'art 614', '§\u2009614', '§\u2009611', '§\u2009611']

A Rule by the Farm Credit Administration on 04/12/2002
This regulation will become effective 30 days after publication in the Federal Register during which either or both houses of Congress are in session. We will publish a notice of the effective date in the Federal Register.
67 FR 17907
17907-17917 (11 pages)
02-8711
https://www.federalregister.gov/d/02-8711 https://www.federalregister.gov/d/02-8711
This final rule amends our regulations to allow a Farm Credit System (FCS, Farm Credit or System) bank or association to terminate its FCS charter and become a financial institution under another Federal or State chartering authority. Our purpose is to amend the existing regulations so they apply to all System banks and associations and to make other changes.
Alan Markowitz, Senior Policy Analyst, Office of Policy and Analysis, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4479, TTY (703) 883-4434;
Rebecca S. Orlich, Senior Attorney, Office of General Counsel, Farm Credit Administration, McLean, VA 22102-5090, (703) 883-4020, TTY (703) 883-2020.
The objectives of our rule are to:
Provide a termination procedure for Farm Credit associations and banks under section 7.10 of the Farm Credit Act of 1971, as amended (Act);
Ensure that nonterminating FCS institutions can continue fulfilling their congressional mandate of serving the credit needs of farmers, ranchers, and cooperatives;
Ensure that nonterminating FCS institutions are able to operate safely and soundly;
Ensure that stockholder disclosure materials are accurate, informative, and easy to understand.
We proposed amendments to our existing termination rule on November 5, 1999. (See 64 FR 60370 for a full discussion of the 1999 proposal.) We also published a sample exit fee calculation for a hypothetical FCS bank and association choosing to terminate their Farm Credit status under the 1999 proposal. See 65 FR 5286, Feb. 3, 2000.
After further deliberations and consultation with the Farm Credit System Insurance Corporation (FCSIC), we reproposed our termination rule primarily to change the method of calculating the equity of “dissenters.” “Dissenters,” for purposes of this preamble discussion, include (1) “dissenting stockholders,” who are defined in the regulation as equity holders other than System institutions that choose not to hold stock in the successor institution, and (2) System institutions who choose not to hold stock in the successor institution. See 66 FR 43536, Aug. 20, 2001. Start Printed Page 17908
Our 1999 proposal required a terminating institution to retire the equities of dissenters, in cash or in exchange for other debt or equity in the successor institution (if the dissenter agreed), before calculation of the exit fee. We noted in the preamble to the 1999 proposal that such a calculation would enable dissenters to receive approximately the same payment for their equities that they would receive if the institution were liquidated.
Our reproposal and this final rule require the calculation of dissenters' equity “after payment” of the exit fee. Congress required System institutions to make a payment to the Farm Credit Insurance Fund (Insurance Fund) as one of the prerequisites to the exercise of the authority to terminate status as a System institution. Section 7.10(a)(4) of the Act provides for the terminating institution to pay “the amount by which the total capital of the institution exceeds, 6 percent of the assets.” In addition, section 7.10(a)(7) of the Act provides that the terminating institution must meet “such other conditions as the Farm Credit Administration Board by regulation considers appropriate.”
Calculating and deducting the exit fee before other payments maximizes the payment to the Insurance Fund. It also means that stockholders of a terminating institution will receive approximately the same proportionate value for their equities, whether they dissent or choose to be stockholders of the successor institution. Dissenters will not receive a windfall at the expense of the continuing stockholders, and vice versa. We believe the consequence is that stockholders will base their decision to support or dissent from termination on other aspects of the proposal, such as whether giving up Farm Credit status will benefit borrowers.
This final rule would make the following additional changes to the existing rule:
The final rule applies to all FCS banks and associations. The existing rule applies to small associations only. In the existing rule, an association is defined as “small” when its investment in its affiliated FCS bank is 25 percent or less of the bank's capital, or when its loan from the bank totals 25 percent or less of the bank's total loans.
In the final rule, an institution's exit fee is calculated on the date of termination. In the existing rule, the date of the exit fee calculation is the quarter end before the termination application is filed.
In the final rule, terminating institutions must escrow 110 percent of both the estimated exit fee and cash stock retirements to dissenters pending a final audit. After the audit confirms the final exit fee, the escrow agent will disburse the funds. In the existing rule, there are no escrow requirements.
In the final rule, a terminating association may repay its direct loan on a schedule agreed to by its bank. In the existing rule, a terminating association must repay its direct loan in 3 years or less.
If a bank and a terminating association are unable to agree on when and how the bank will retire the association's investment in the bank, the final rule requires the bank to retire the investment on or before the date the association's direct loan is repaid. In the existing rule, the FCA specifies how the investment is retired if the bank and the association cannot agree.
In the final rule, System institutions have the option of exchanging their investments in a terminating institution for equity in the successor to the extent permitted by law. In the existing rule, System institutions do not have this option.
In the final rule, a terminating bank's payment to the Farm Credit System Financial Assistance Corporation (FAC) is based on its retail loan volume, the loan volume of associations terminating with the bank, and the loan volume of associations maintaining their direct loan with the bank after termination. Payments to FAC by a bank are not covered in the existing rule because the existing rule does not cover the termination of an FCS bank.
We received two comment letters on our reproposal—one from the Farm Credit Council (Council) on behalf of its member FCS banks and associations and one from the Independent Community Bankers of America (ICBA). The ICBA is a trade association that represents approximately 5,000 community banks across the country. After carefully considering these comments, we have decided to adopt the final rule with no changes from the reproposal.
The Council requested that we amend the summary of our preamble to clarify that only a System bank or association may apply to terminate under this rule. We have done so.
The ICBA asserted that we should not allow any Farm Credit bank to terminate System status and that only FCS associations be allowed to terminate. However, the termination provisions of the Act apply to banks as well as associations. Section 7.10(a) of the Act permits any System “institution” to terminate its System status if that institution meets the conditions of section 7.10(a)(1) through (7). Because the term “institution” is used throughout the Act to include banks as well as associations, section 7.10 of the Act clearly covers the termination of System banks. Therefore, the final rule continues to include banks and associations.
The ICBA further asserted this rule has the potential for creating an unlevel playing field, especially when the terminating bank's financial resources are the result of its government sponsorship as a System institution. However, section 7.10(a)(4) of the Act requires a terminating institution to pay an exit fee to the Insurance Fund in an amount by which the institution's total capital exceeds 6 percent of its assets. Therefore, the successor institution would keep only a limited amount of the financial resources that it accumulated as a System institution.
The ICBA recommended that we include termination procedures for other financing institutions (OFI) including how an OFI would obtain its capital should it decide to terminate its relationship with a Farm Credit bank. While OFIs have discount relationships with System banks pursuant to section 1.7(b)(1)(B) of the Act, they are not System institutions. Therefore, OFIs are not covered by section 7.10 of the Act.
Pursuant to section 605(b) of the Regulatory Flexibility Act (5 U.S.C. 601 et seq.), the FCA hereby certifies that the final rule will not have a significant economic impact on a substantial number of small entities. Each of the banks in the Farm Credit System, considered together with its affiliated associations, has assets and annual income in excess of the amounts that would qualify them as small entities. Therefore, Farm Credit System institutions are not “small entities” as defined in the Regulatory Flexibility Act.
For the reasons stated in the preamble, parts 611 and 614 of chapter VI, title 12 of the Code of Federal Regulations are amended to read as follows:
End Amendment Part Start Part Start Printed Page 17909
Authority: Secs. 1.3, 1.13, 2.0, 2.10, 3.0, 3.21, 4.12, 4.15, 4.20, 4.21, 5.9, 5.10, 5.17, 6.9, 6.26, 7.0-7.13, 8.5(e) of the Farm Credit Act (12 U.S.C. 2011, 2021, 2071, 2091, 2121, 2142, 2183, 2203, 2208, 2209, 2243, 2244, 2252, 2278a-9, 2278b-6, 2279a—2279f-1, 2279aa-5(e)); secs. 411 and 412 of Pub. L. 100-233, 101 Stat. 1568, 1638; secs. 409 and 414 of Pub. L. 100-399, 102 Stat. 989, 1003, and 1004.
611.1200
611.1205
611.1210
611.1215
611.1220
611.1221
611.1222
611.1223
611.1230
611.1240
611.1245
611.1250
611.1255
611.1260
611.1265
611.1270
611.1275
611.1280
611.1285
611.1290
The regulations in this subpart apply to each bank and association that desires to terminate its System institution status and become chartered as a bank, savings association, or other financial institution.
(1) Send a certified copy of the commencement resolution to us and the Farm Credit System Insurance Corporation (FCSIC). If your institution is an association, also send a copy to your affiliated bank. If your institution is a bank, also send a copy to your affiliated associations, the other Farm Credit banks, the Federal Farm Credit Banks Funding Corporation (Funding Corporation), and the Farm Credit System Financial Assistance Corporation (FAC);
(c) Bank negotiations on joint and several liability. If your institution is a terminating bank, within 10 days of adopting the commencement resolution, your bank and the other Farm Credit banks must begin negotiations to provide for your satisfaction of liabilities (other than your primary liability) under section 4.4 of the Act. The Funding Corporation may, at its option, be a party to the negotiations to the extent necessary to fulfill its duties with respect to financing and disclosure. The agreement must comply with the requirements in § 611.1270(c).
(f) Special class of stock. Notwithstanding any requirements to the contrary in § 615.5230(b) of this chapter, you may adopt bylaws providing for the issuance of a special class of stock and participation certificates between the date of adoption of a commencement resolution and the termination date. Your stockholders must approve the special class before you adopt the commencement resolution. The equities must comply with section 4.3A of the Act and be identical in all respects to existing classes of equities that are entitled to the residual assets of the institution in a liquidation, except for the value a holder will receive in a termination. In a termination, the holder of the special class of stock receives value equal to the lower of either par (or face) value, or the value calculated under § 611.1280(c) and (d). A holder must have the same right to vote (if the equity is held on the voting record date) and to dissent as holders of similar equities issued before the commencement resolution. If the termination does not occur, the special classes of stock and participation certificates must automatically convert into shares of the otherwise identical equities.
(a) Statements about termination. Neither the institution nor any director, officer, employee, or agent may make any untrue or misleading statement of a material fact, or fail to disclose any Start Printed Page 17910material fact, about the termination to a current or prospective equity holder.
(b) Representations regarding FCA approval. Neither the institution nor any director, officer, employee, or agent may make an oral or written representation to anyone that a preliminary or final approval of the termination by us is, directly or indirectly, either a recommendation on the merits of the proposal or an assurance that the information you give to your equity holders is adequate or accurate.
(e) A statement, if applicable, whether the successor institution will continue to borrow from a Farm Credit bank and how such a relationship will affect your provision for payment of debts. The plan of termination must include evidence of any agreement and plan for satisfaction of outstanding debts (including amounts you owe to the FAC because of the termination).
(a) Plain language requirements. (1) Present the contents of the information statement in a clear, concise, and understandable manner.
(A) The name, address, and telephone number of the institution; and Start Printed Page 17911
(iii) If we have not assigned the territory before you mail the information statement, give the name, address, and telephone number of the System institution specified by us and state that borrowers may contact the institution for information about loan refinancing.
(14) Sources of funding. Explain the sources and manner of funding for the successor institution's operations.
(4) A Federal or State chartering authority has granted a new charter to the successor institution; Start Printed Page 17912
(d) Effective date of termination. If we grant final approval, we will revoke your charter, and the termination will be effective on the last to occur of:
(a) Preliminary exit fee estimate—terminating association. You must provide a preliminary exit fee estimate to us when you submit the termination application. Calculate the preliminary exit fee estimate in the following order:
(1) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period as of the quarter end immediately before the date you send us your termination application.
(3) Compute the average daily balances based on financial statements that comply with GAAP. The financial statements, as of the quarter end immediately before the date you send us your termination application, must be independently audited by a qualified public accountant, as defined in § 621.2(i) of this chapter. We may, in our discretion, waive the audit requirement if an independent audit was performed as of a date less than 6 months before you submit the termination application.
(iii) Adjust for the dollar amount of significant transactions you reasonably expect to occur between the quarter end before you file your termination application and termination. Examples of these transactions include, but are not limited to, gains or losses on the sale of assets, retirements of equity, loan repayments, and patronage distributions. Do not make adjustments for future expenses related to termination, such as severance or special retirement payments, or stock retirements to dissenting stockholders and Farm Credit institutions.
(2) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period as of the quarter end immediately before the date you send us your termination application.
(3) Any amounts we refer to in this section are average daily balances unless we specify that they are not. Amounts that are not average daily balances will be referred to as “dollar amount.” Start Printed Page 17913
(4) Compute the average daily balances based on bank-only financial statements that comply with GAAP. The financial statements, as of the quarter end immediately before the date you send us your termination application, must be independently audited by a qualified public accountant, as defined in § 621.2(i) of this chapter. We may, in our discretion, waive this requirement if an independent audit was performed as of a date less than 6 months before you submit the termination application.
(A) Equity investments in your institution that are held by nonterminating associations and that you expect to transfer to another System bank before or at termination. A nonterminating association's investment consists of purchased equities, allocated equities, and a share of the bank's unallocated surplus calculated in accordance with the bank's bylaw provisions on liquidation. We may require a different calculation method for the unallocated surplus if we determine that using the liquidation provision would be inequitable to stockholders;
(v) Adjust for the dollar amount of significant transactions you reasonably expect to occur between the quarter end before you file your termination application and termination. Examples of these transactions include, but are not limited to, retirements of equity, loan repayments, and patronage distributions. Do not make adjustments for future expenses related to termination, such as severance or special retirement payments, or stock retirements to dissenting stockholders and Farm Credit institutions.
(vi) Assets that may be overvalued, undervalued, or not recorded on your books.
(3) We may require you to reverse the effect of a transaction if we determine that:
(i) You have retired capital outside the ordinary course of business;
(ii) You have taken any other actions unrelated to your core business that have the effect of changing the exit fee; or
(iv) Make the adjustments that we require under § 611.1250(c). For the Start Printed Page 17914final exit fee, we will review and may require additional adjustments for transactions between the date you adopted the termination resolution and the termination date.
(2) Base your exit fee calculation on the average daily balances of assets and liabilities for the 12-month period preceding the termination date. Assume for this calculation that you have not paid or accrued the items described in paragraph (b)(5)(iii)(B) and (C) of this section.
(A) Equity investments held in your institution by affiliated associations that you transferred at termination or during the 12 months before termination;
(8) Multiply the assets of the combined balance sheet after the above adjustments by 6 percent. Subtract this amount from the total capital of the combined balance sheet. This amount is the combined final exit fee for your institution and the terminating affiliated associations.
(a) General rule. If your institution is a terminating association, you must pay or make adequate provision for the payment of all outstanding debt obligations and assessments.
(d) FAC payments. Before termination, you must pay the estimated present value of future assessments and payment obligations to your affiliated Farm Credit bank to the extent required by subparagraphs (c)(5)(F) and (d)(1)(C)(v) of section 6.26 of the Act. The FAC must make the present value estimations, subject to our approval, based on an appropriate discount rate. The appropriate discount rate is the non-interest-bearing U.S. Treasury security rate for securities with a maturity as near as possible to the period remaining until the terminating association's obligations under this paragraph would be due (but before the due date).
(a) Safety and soundness restrictions. Notwithstanding anything in this subpart to the contrary, we may prohibit a bank from retiring the equities you hold in the bank if the retirement would cause the bank to fall below its Start Printed Page 17915regulatory capital requirements after retirement, or if we determine that the bank would be in an unsafe or unsound condition after retirement.
(b) Retirement agreement. Your affiliated bank may retire the purchased and allocated equities held by your institution in the bank according to the terms of the bank's capital revolvement plan or an agreement between you and the bank.
(a) General rule. If your institution is a terminating bank, you must pay or make adequate provision for the payment of all outstanding debt obligations, and provide for your responsibility for any probable contingent liabilities identified.
(2) The FAC must make the present value estimations, subject to our approval, based on an appropriate discount rate. The appropriate discount rate is the non-interest-bearing U.S. Treasury security rate for securities with a maturity as near as possible to the period remaining until your obligations under this paragraph would be due (but before the due date).
(3) If your bank or your predecessor bank has redeemed early any preferred stock issued to the FAC, we may require you to confirm in writing that your successor institution will assume responsibility for any and all of your contingent liabilities under any FAC-preferred stock redemption agreement and indemnification agreement.
(a) Retirement at option of equity holder. If your institution is a terminating institution, System institutions that own your equities have the right to require you to retire the equities on the termination date.
(c) Transfer of affiliated association's investment. As an alternative to equity retirement, an affiliated association that reaffiliates with another Farm Credit bank instead of terminating with its bank has the right to require the terminating bank to transfer its investment to its new affiliated bank when it reaffiliates. If your institution is a terminating bank, at the time of reaffiliation you must transfer the purchased and allocated equities held by the association, as well as its share of unallocated surplus, to the new affiliated bank. Calculate the association's share before deduction of the exit fee as of the month end preceding the reaffiliation date (or the Start Printed Page 17916termination date if it is the same as the reaffiliation date) in accordance with the liquidation provisions of your bylaws, unless we determine that the liquidation provisions would result in an inequitable distribution. If we make such a determination, we will require you to distribute the association's share of your unallocated surplus in accordance with another method that we deem equitable to stockholders. Before you distribute any unallocated surplus, you must make the following adjustments to stockholder equity as stated in the financial statements as of the month end preceding the reaffiliation date (or the termination date if it is the same as the reaffiliation date):
(b) Retirement at option of a dissenting stockholder. A dissenting stockholder may require a terminating institution to retire the stockholder's equity interest in the terminating institution.
(f) Payment to holders of special class of stock. If you have adopted bylaws under § 611.1210(f), you must pay a dissenting stockholder who owns shares of the special class of stock an amount equal to the lower of the par (or face) value or the value of such stock as determined under § 611.1280(c) and (d).
(1) A description of the rights of dissenting stockholders set forth in this section and the approximate value per share that a dissenting stockholder can expect to receive. State whether the successor institution will require borrowers to be stockholders or whether it will require stockholders to be borrowers.
3. The authority citation for part 614 continues to read as follows:
End Authority Start Printed Page 17917
4. Amend § 614.4130 by removing the reference “§ 611.1205(c)” and adding in its place the reference “§ 611.1205” in paragraph (a).
[FR Doc. 02-8711 Filed 4-11-02; 8:45 am]