(a) The board of directors of each Farm Credit institution shall prescribe in its bylaws the classes of stock and participation certificates to be issued to and subscribed by borrowers and others and how they shall be transferred, converted or retired consistent with the law.

(b) The Governor shall prescribe the initial amount of authorized capital stock for a newly chartered production credit association.

§ 615.5260 Retirement of capital stock and allocated equities of banks for cooperatives.

(a) In case of liquidation or dissolution of a present or former borrower, the bank may, but shall not be required to, retire and cancel at book value, not exceeding part, all or a part of the capital stock or any allocated equity in the bank owned by or allocated to such borrower. Before any such retirement shall be made, the banks shall have reasonable assurance that the liquidation or dissolution is or soon will be completed and the business of the borrower is not being continued under circumstances in which it would be appropriate and feasible for any successor to acquire and hold the investment interests of the present or former borrowers in the bank. Retirements under this provision shall be authorized in accordance with bank board policy.

(b) Where the debt of a borrower to the bank is in default, such bank may, but shall not be required to, retire and cancel all or part of any stock or allocated equities of the bank on which the bank has a lien as collateral for the debt, at the book value thereof, not exceeding par value, in total or partial liquidation of the debt, under any of the following conditions.

(1) The borrower has been declared bankrupt.

(2) The borrower has had a substantial part of its property placed in the hands of a receiver.

(3) The borrower has ceased operations, regardless of whether its charter has been surrendered.

(4) In the judgment of the bank, the indebtedness of the borrower to the bank is uncollectable.

[37 FR 11434, June 7, 1972, as amended at 38 FR 27839, Oct. 9, 1973]

§ 615.5270

Purchase of class B stock of the Federal intermediate credit bank by production credit associations.

(a) When the earnings of the bank are inadequate to meet its capital needs, and when feasible to do so with due regard for the circumstances of the associations, the bank board may, by resolution, authorize the bank, with the prior approval of the Farm Credit Administration, to require production credit associations to subscribe for such additional capital as may be needed by the bank. The amount determined shall be allotted, to the nearest full share, among the associations so that the total of all stock owned, including the additional amount to be subscribed for, will be as nearly as practicable in the same proportion to the total amount of Class B stock already owned and to be subscribed for by all associations of the district as each association's average indebtedness to the bank during the immediately preceding 3 fiscal years is of the average indebtedness of all associations to the bank during such period. The "average indebtedness" may be computed on the basis of either average daily balance, or average of beginning and ending monthly balances of such indebtedness for the 3year period. Each association shall subscribe for stock in the bank so allotted to it. Such subscriptions shall be subject to call and payment therefor shall be made at such times and in such amounts, all as may be determined by the bank.

(b) When making such allotments the bank may transfer, retire or reissue outstanding class B stock among the associations as may be necessary to establish the proportion indicated in the preceding paragraph. Stock that is retired or transferred for this purpose shall first be the stock purchased by the association to the extent it is available unless otherwise approved by the Farm Credit Administration. The bank shall pay the association for all stock so retired or transferred and shall collect therefor from any association to which such stock is transferred or reissued, at the fair book value thereof not to exceed par.

(c) The rate of interest on such obligations shall not exceed the limitations set forth in § 614.4310 of this chapter when such notes are offered as collateral for a direct loan from the bank.

(d) The total amount which an association may invest in such obligations at any one time shall not exceed 15 percent of the balance of loans outstanding at the close of the association's preceding fiscal year.

(e) All notes in which an association invests shall be endorsed with full recourse against the cooperative or dealer. The association shall contact each notemaker who meets the association's credit standards to encourage him to become a borrower.

Subpart F-Minimum Investment Requirement

All institutions of the Farm Credit System may deposit securities and current funds with and receive interest from any member bank of the Federal Reserve System, or any savings institution insured by the Federal Savings and Loan Insurance Corporation. Associations may deposit funds with their supervising bank, any commercial bank insured by the Federal Deposit Insurance Corporation, or any savings institution insured by the Federal Savings and Loan Insurance Corporation.

[38 FR 27838, Oct. 9, 1973]

Subpart H-Net Worth Objective § 615.5200 General.

Each bank and association board shall establish a net worth objective to serve as a guide for the accumulation and maintenance of a net worth position adequate to reasonably assure the continued financial solvency of each institution and

Each bank board shall approve for each bank an operating and financial budget for each fiscal year. Each budget shall contain sufficient background information to indicate the principal assumptions and considerations involved in its formulation, detailed pro forma balance sheets, income and expense statements, bank and association programs to achieve net worth objectives and explanation of significant changes from the previous years. Bank boards also shall approve for each bank long range financial and operating projectons. Approved budgets and longer range projections shall be submitted for review as required from time to time by the Farm Credit Administration.

Subpart -Debt to Capital Ratios § 615.5220 Ratio requirements.

No issue of long-term notes, bonds, debentures, or other similar obligations by a bank or banks, shall be approved if it, together with the amount of other bonds, debentures, long-term notes, or other similar obligations issued and outstanding, exceeds 20 times the capital and surplus of all the banks which will be primarily liable on the proposed issue unless a lesser ratio is fixed by the Farm Credit Administration. The term "capital, legal reserves and surplus" as used in this section includes capital stock, participation certificates, legal reserves, allocated reserves, surplus and unallocated contingency reserves.

§ 615.5230 Special exception.

A bank may, with approval of the Farm Credit Administration, exceed this ratio for temporary periods if the 20 to 1 ratio for all similar banks will not be exceeded. When such exceptions occur, other like banks of the System shall be advised regarding the basis on which approval was given. § 615.5240

tions.

Production credit associa

No loan shall be made to or any paper purchased from or discounted for any

if the

production credit association amount of such paper added to the aggregate liabilities of the association exceeds 10 times the paid-in and unimpaired capital and surplus of the association. Subpart J-Prescription, Subscription and Retirement of Stock

§ 615.5250 Responsibility.

(a) The board of directors of each Farm Credit institution shall prescribe in its bylaws the classes of stock and participation certificates to be issued to and subscribed by borrowers and others and how they shall be transferred, converted or retired consistent with the law.

(b) The Governor shall prescribe the Initial amount of authorized capital stock for a newly chartered production credit association.

§ 615.5260 Retirement of capital stock and allocated equities of banks for cooperatives.

(a) In case of liquidation or dissolution of a present or former borrower, the bank may, but shall not be required to, retire and cancel at book value, not exceeding part, all or a part of the capital stock or any allocated equity in the bank owned by or allocated to such borrower. Before any such retirement shall be made, the banks shall have reasonable assurance that the liquidation or dissolution is or soon will be completed and the business of the borrower is not being continued under circumstances in which it would be appropriate and feasible for any successor to acquire and hold the investment interests of the present or former borrowers in the bank. Retirements under this provision shall be authorized in accordance with bank board policy.

(b) Where the debt of a borrower to the bank is in default, such bank may, but shall not be required to, retire and cancel all or part of any stock or allocated equities of the bank on which the bank has a lien as collateral for the debt, at the book value thereof, not exceeding par value, in total or partial liquidation of the debt, under any of the following conditions.

(1) The borrower has been declared bankrupt.

(2) The borrower has had a substantial part of its property placed in the hands of a receiver.

(3) The borrower has ceased operations, regardless of whether its charter has been surrendered.

(4) In the judgment of the bank, the indebtedness of the borrower to the bank is uncollectable.

[37 FR 11434, June 7, 1972, as amended at 38 FR 27839, Oct. 9, 1973]

§ 615.5270

Purchase of class B stock of the Federal intermediate credit bank by production credit associations.

(a) When the earnings of the bank are inadequate to meet its capital needs, and when feasible to do so with due regard for the circumstances of the associations, the bank board may, by resolution, authorize the bank, with the prior approval of the Farm Credit Administration, to require production credit associations to subscribe for such additional capital as may be needed by the bank. The amount determined shall be allotted, to the nearest full share, among the associations so that the total of all stock owned, including the additional amount to be subscribed for, will be as nearly as practicable in the same proportion to the total amount of Class B stock already owned and to be subscribed for by all associations of the district as each association's average indebtedness to the bank during the immediately preceding 3 fiscal years is of the average indebtedness of all associations to the bank during such period. The "average indebtedness" may be computed on the basis of either average daily balance, or average of beginning and ending monthly balances of such indebtedness for the 3year period. Each association shall subscribe for stock in the bank so allotted to it. Such subscriptions shall be subject to call and payment therefor shall be made at such times and in such amounts, all as may be determined by the bank.

(b) When making such allotments the bank may transfer, retire or reissue outstanding class B stock among the associations as may be necessary to establish the proportion indicated in the preceding paragraph. Stock that is retired or transferred for this purpose shall first be the stock purchased by the association to the extent it is available unless otherwise approved by the Farm Credit Administration. The bank shall pay the association for all stock so retired or transferred and shall collect therefor from any association to which such stock is transferred or reissued, at the fair book value thereof not to exceed par.

§ 615.5280 Equalization of Federal intermediate credit bank class B stock and allocated reserve owned by production credit associations.

Whenever at the end of any fiscal year of the bank, the relative amounts of class B stock of a bank owned by the production credit associations differ substantially from the proportion provided for in the preceding paragraph and additional subscriptions of class B stock through which such proportion could be reestablished are not contemplated, the bank board may direct that such proportion be reestablished with the prior approval of the Farm Credit Administration. In carrying out its purpose the bank may direct, either separately or in combination, such transfers, retirements, and reissuance of outstanding class B stock among the associations as will reestablish the aforesaid proportion as nearly as may be practicable. Stock that is retired or transferred for this purpose shall first be the stock purchased by the association to the extent it is available unless otherwise approved by the Farm Credit Administration. Stock may be transferred from one association to another and retain its same issue date or series designation. Allocated reserve owned by production credit associations may be equalized in a like manner.

§ 615.5290 Purchase of Federal intermediate credit bank participation certificates by other financing institutions.

Other financing institutions which are entitled to receive participation certificates from the bank as patronage refunds may also purchase further amounts of such participation certificates with the same rights, privileges, and conditions as those issued as patronage refunds. Upon determination of the bank board, with approval of the Farm Credit Administration, the bank may require other financing institutions to purchase additional capital in the bank to assist the bank in meeting its capital needs. Such required purchases shall be on an equitable basis as determined by the bank board.

§ 615.5300 Surrender of Federal intermediate credit bank stock certificates and issuance of new certificates. Upon retirement of any class B stock or participating interest evidenced by an outstanding certificate, the certificate in

volved shall be surrendered to the bank for cancellation. In case of partial retirement a new certificate shall be issued for the balance not retired, which shall bear the same issue date and series designation, if any, as the canceled certificate. In the event of a transfer of class B stock resulting from mergers or consolidations, or transfer of participation certificates from one holder to another, any new class B stock or participation certificates issued shall bear the same issue dates and series designations, if any, as the original certificates for which new certificates are substituted.

§ 615.5310 Lost, destroyed, or stolen Federal intermediate credit bank stock or participation certificates. Whenever a class B stock certificate or participation certificate which has been issued by the bank is lost, stolen, destroyed, or so mutilated as to impair its value, the bank may issue in lieu thereof a new certificate which shall bear the same issue date and series designation, if any, upon compliance with the following requirements.

(a) The owner shall furnish an affidavit of loss, acceptable to the bank setting forth the issue date or series, number of shares, and any other information required to establish its identity; a detailed statement of the circumstances surrounding the loss, theft, destruction, mutilation, or defacement of the certificate; and a statement that the affidavit was made for the purpose of obtaining a new certificate. Since class B stock and participation certificates may not be transferred except with the approval of the bank, a bond of indemnity ordinarily will not be required.

(b) If a class B stock certificate or participation certificate which was reported lost, stolen, or destroyed is recovered by the owner, he should notify the bank immediately and if a new certificate was issued, the owner shall promptly return the old certificate to the bank.

§ 615.5320 Retirement of Federal intermediate credit bank class B stock, participation certificates, and allocated legal reserve.

After all stock held by the Governor has been retired, the bank may retire class B stock at par, participation certificates at face amount and allocated legal reserve without preferences to all holders thereof, and in such manner that the oldest outstanding stock, participa

tion certificates or allocated legal reserve will be retired first, provided that after such retirements the net worth structure of the bank meets the minimum requirements approved by the Farm Credit Administration. Notwithstanding the foregoing provision, in the event of an equalization of the ownership by production credit associations of capital stock, participation certificates, and allocated legal reserve of the bank, whether in connection with an assessment for capital stock or otherwise, when an association surrenders stock, participation certificates, or allocated legal reserve, it shall first surrender that which was acquired by purchase, to the extent available, and thereafter surrender that acquired through patronage distributions from the bank. If authorized by the bank board, participation certificates and allocated legal reserve owned by an other financing institution may be retired upon termination of the financing agreement, and participation certificates purchased by an other financing institution may be retired in an amount which has been determined to be excess capital to support the maximum amount of credit authorized to be outstanding. [39 FR 29586, Aug. 16, 1974]

Subpart K-Surplus and Reserves § 615.5330

Banks for cooperatives.

(a) Surplus. "Surplus" is defined as the net accumulation of net savings which has not been appropriated by the board of directors for a specific purpose. Amounts therein may be allocated to patrons or unallocated. Amounts not allocated shall not be distributed as patronage refunds. Each bank shall maintain in surplus an amount not less than 25 percent of all capital stock outstanding.

(b) Reserve for contingencies. When authorized by the bank board, an allocated or unallocated reserve for contingencies may be established and maintained when justified for circumstances which may lead to an unbudgeted expense or a loss.

(c) Reserve for losses on loans. Each bank shall maintain a general valuation reserve of at least 12 percent of net loans outstanding at the end of the fiscal year. In recognition of the risk inherent in the specialized agricultural enterprises being financed, a reserve in greater amount than the minimum is desirable. When the reserve is less than

the minimum amount, the bank board shall take appropriate action to increase the reserve so that the minimum requirement is attained within a reasonable period.

§ 615.5335 Federal intermediate credit bank system provision for losses on loans.

(a) Each bank shall evaluate its loans and discounts, accrued interest on loans and other loan assets at the close of each fiscal year and establish and maintain a provision for losses thereon which will reflect the fair book value of such assets.

(b) Each production credit association shall establish and maintain a provision for losses on loans and other loan assets. At the end of each fiscal year an amount equal to 1⁄2 percent of loans outstanding at the end of each fiscal year or such lesser amount that utilizes all earnings, shall be added to the provision until it equals 32 percent of the loans outstanding at the end of the fiscal year. The provision may be increased beyond the 32 percent level with the approval of the supervising bank.

(a) Each bank shall establish and maintain a provision for losses account on loans, participations purchased, real estate sales contracts, advances, accrued interest on loans, acquired property, and loans in the process of liquidation or foreclosure, and judgments.

(b) Each association shall establish and maintain a provision for losses to the extent that it shows assets of the above type on its books of account or has a contingent liability to restore losses on such assets by reason of its endorsement, loss sharing agreement(s), or pledge. The amount of the association's indemnity account credits may be used to meet an equal amount of its provisions for losses requirements.

(c) The provision for losses provided in paragraphs (a) and (b) of this section shall be in such reasonable amounts as, in the judgment of the bank and association, are considered adequate to meet such losses, subject to the following minimum fiscal year end requirements:

(1) The total of each association's provision for losses and indemnity account shall equal at least one percent of the amount of its contingent liability on the unmatured balance of loans outstanding.