ing provision for reasonable valuation reserves and losses in excess of reserves), shall be applied as follows: (a) To restore the amount of impairment, if any, of capital stock and participation certificates, as determined by the board of directors; (b) To restore the amount of impairment, if any, of the surplus account, as determined by the board of directors; (c) After restoring impairments, if any, of capital stock, participation certificates, and surplus, as provided herein, 25 percent of the remaining net earnings shall be used to create and maintain a reserve account (designated "Legal Reserve" account). The amount added to such account shall be allocated to the users of the bank in accordance with § 640.153-2; (d) If class A stock has been outstanding during any part of the fiscal year, to pay to the United States a franchise tax equal to 25 percent of the remaining net earnings; provided, that the amount of such tax shall not exceed a rate of return on such Government capital calculated at a rate equal to the computed average annual rate of interest on all public issues of public debt obligations of the United States issued during the fiscal year of the U.S. Treasury ending next before such tax is due, as certified to the Farm Credit Administration by the Secretary of the Treasury; (e) When a bank has no class A stock outstanding, it may pay noncumulative dividends on Class B stock and participation certificates in an amount not to exceed 5 percent in any year, when authorized by its board of directors; (f) After the foregoing requirements have been met (including the payment of dividends when applicable) the net earnings remaining shall be distributed as patronage refunds to production credit associations and other financing institutions, as provided in § 640.154. § 640.152 Absorption of net losses. In the event a net loss is substained in any year, it shall be absorbed in the following manner, and in the order stated: (a) By charges to the reserve account; (b) By charges to the surplus account, other than that transferred from the production credit corporation; (c) By charges to the surplus transferred from the production credit corporation; (d) The impairment of class B stock and participation certificates; and (e) The impairment of class A stock. § 640.153-1 Surplus-reserved. The surplus established by the bank on January 1, 1957, as provided in section 103 of the Farm Credit Act of 1956, shall be maintained as a part of the permanent capital of the bank. Should the surplus become impaired through losses, it shall be restored out of future earnings as provided in § 640.151. § 640.153-2 Legal reserve account. The legal reserve account of the bank shall be allocated on a patronage basis to production credit associations and other financing institutions. Allocations on a patronage basis means that such allocations shall be recorded on the books of the bank for the credit of such users (or their successors in interest) in the proportion that the amount of interest earned by the bank on loans to and discounts for each user bears to the total interest on loans to and discounts for all such users outstanding during the fiscal year. The users shall be given appropriate notice of such allocations in a form approved by the Farm Credit Administration. Allocations may be transferred only on the books of the bank and with its approval. Allocations shall be subject to a first lien as additional collateral for any indebtedness of the holder thereof to the bank, and in any case where such indebtedness is in default may be applied thereon. § 640.153-21 Same; distribution. Whenever the amount in the legal reserve account exceeds 25 percent of the capital stock and participation certificates outstanding at the end of any fiscal year, such excess may be distributed, in full or in part, if the board of directors of the bank so determines, oldest allocations first, in class B stock and participation certificates issued as of the date of the allocations and, whenever the bank has no class A stock outstanding, also in money. allocations for each year shall be fully absorbed before any losses are charged against allocations for an earlier year. Charges that are less than the full amount of all allocations issued for a specified year shall be on a pro rata basis. § 640.153-23 Same; disposition in the event of merger or consolidation of a production credit association or other financing institution. In the event of merger or consolidation of two or more production credit associations, the reserve account allocations of the respective associations shall be disposed of in the manner provided in the agreement of merger or consolidation. In the event of a merger or consolidation of another financing institution, the reserve account allocations of such institution shall be transferred to its successors in interest. § 640.153-24 Same; disposition on liquidation of credit bank. In the event of a liquidation or dissolution of a credit bank, the remaining reserve account allocations shall be paid to the owners of record or their successors in interest. § 640.154 Patronage refunds; general. Patronage refunds may be paid to production credit associations and other financing institutions only. The amount payable to each such institution shall be in the proportion that the amount of interest earned by the bank on loans to and discounts for that institution bears to the total interest on loans to and discounts for all production credit associations and other financing institutions outstanding during the fiscal year, and shall be paid as provided in §§ 640.154-1 and 640.154-2. participation certificates to other financing institutions as provided in § 640.154– 1, as may be authorized by the board of directors. § 640.172 Charging of fees or commissions unauthorized. No Federal intermediate credit bank may charge or receive from any production credit association or other financing institution "any fee, commission, bonus, gift, or other consideration" not specifically authorized by law (12 U.S.C. 1129). Subpart B-Loans and Discounts § 640.201 Lending powers. In general, the lending powers of the Federal intermediate credit banks are set forth in section 202(a) of the Federal Farm Loan Act, as amended (12 U.S.C. 1031), as follows: The Federal intermediate credit banks, when chartered and established, shall have power, subject solely to the restrictions, limitations, and conditions contained in this Act or as may be prescribed by the Farm Credit Administration not inconsistent with the provisions of this Act (1) to discount for, or purchase from, any production credit association organized under the Farm Credit Act of 1933, as amended, with its endorsement, any note, draft, or other such obligation presented by such association; and to make loans and advances to any such association secured by such collateral as may be approved by the Governor of the Farm Credit Administration or without collateral to the extent authorized under rules and regulations prescribed by the Farm Credit Administration; (2) to discount for, or purchase from, any national bank, State bank, trust company, agricultural credit corporation, incorporated livestock loan company, savings institution, credit union, and any association of agricultural producers engaged in the making of loans to farmers and ranchers, with its endorsement, any note, draft, or other such obligation the proceeds of which have been advanced or used in the first instance for any agricultural purpose, including the breeding, raising, fattening, or marketing of livestock; and to make loans and advances to any such financing institution sécured by such collateral as may be approved by the Governor of the Farm Credit Administration: Provided, That no such loan or advance shall be made upon the security of collateral other than notes or other such obligations of farmers and ranchers eligible for discount or purchase under the provisions of this section, unless such loan or advance is made to enable the financing institution to make or carry loans for any agricultural purpose; and 86-027 O-68-20 Sec. 7. A Federal credit union shall have succession in its corporate name during its existence and shall have power-* (9) to borrow, in accordance with such rules and regulations as may be prescribed by the Director, from any source, in an aggregate amount not exceeding 50 per centum of its paid-in and unimpaired capital and surplus: Provided, That any Federal credit union may discount with or sell to any Federal intermediate credit bank any eligible obligations up to the amount of its paid-in and unimpaired capital; § 640.202 General rediscount agree It must be engaged in the business of extending short- and intermediate-term credit to farmers and ranchers for agricultural purposes, including the breeding, raising, fattening or marketing of livestock. A concern engaged in the business of manufacturing, merchandising, real estate brokerage, real estate loans, etc., will not be classified as an institution eligible to obtain credit from a credit bank merely because it has the power to make loans to farmers and stockmen and to borrow money. On the other hand, the fact that a corporation has powers not related to agricultural credit, or receives income from other sources, will not of itself render it ineligible. Such institutions should be carefully investigated and each case decided on its merits. § 640.203-2 Same; incorporation and capital structure. It must be incorporated; have a capital structure commensurate with the volume of business it expects to handle; and have prospective income sufficient to cover operating costs and establish reserves for possible losses. It must comply with State laws applicable to it. Violations of State laws will be cause for revocation by the bank of the borrowing and rediscounting rights of any institution which does not promptly rectify such conditions upon notice from the bank. Special attention should be given to the institution's articles of incorporation and bylaws; capital stock and other securities transactions; and, in the case of foreign corporations, evidence will be required that it has complied with the laws of each State in which it operates. § 640.203-4 Same; affiliated with other concerns. (a) In the case of any financing institution which is affiliated with a bank, cooperative association, or other concern (through stock ownership, management, interlocking directorates, or otherwise) the bank will consider the possible ef fects of such relationship upon the operations and credit policies of the applicant institution. It is important that the bank keep informed concerning the management, financial condition, and operations of such affiliated concern, in order to assure itself that the practices and policies of the affiliate will not jeopardize the interests of the bank. (b) A financing institution which is a subsidiary of or affiliated with a farmers cooperative association, and is otherwise eligible to borrow from and to rediscount with a Federal intermediate credit bank, may qualify to rediscount, with its endorsement, or borrow on the security of notes of farmers and stockmen (as distinguished from notes of cooperative associations) evidencing loans to finance the cost of supplies, equipment or services obtained from such affiliated cooperative association, if the board of directors of the bank finds that (1) an additional source of credit is needed to facilitate financing of such transactions; and (2) the primary benefits of such credit will inure to the borrowing farmers and stockmen. § 640.203-5 Same; examinations, financial statements, reports, etc. As a condition precedent to making loans to or discounting paper for any financing institution the bank will require such institution to agree to furnish the bank, the Farm Credit Administration, or any Farm Credit examiner, at any time upon call, full and current information regarding its financial condition and operations, including a detailed financial statement in such form as may be prescribed by the bank or by the Farm Credit Administration; and its agreement to submit, at its own expense, to periodic examinations by examiners of the bank, by national bank examiners, or by Farm Credit examiners: Provided, however, That any bank, trust company, or savings institution operating under the supervision of State or national authorities, in lieu of such agreement may submit its authorization to such supervising authority, in writing, to furnish the bank or the Farm Credit Administration upon request, any report of condition, report of examination, or other confidential information in the possession of such supervising au thority. In connection with the initial application for credit submitted by an agricultural credit corporation, livestock loan company, or similar institution, the bank should make a careful and thorough examination: Provided, however, That in the case of a newly organized institution having only liquid assets (such as cash and bonds) and no liabilities of consequence, the bank may waive such initial examination. § 640.211 Limitations upon amount of credit; ratio of total liabilities to unimpaired capital and surplus. Within the limitations of the Act, it is the responsibility of the bank to determine the amount of credit that may be granted safely to any institution. Sound credit policy requires that careful consideration be given to the character and ability of the management of each institution; to its actual unimpaired capital and surplus; to the manner in which such capital is invested; to the nature and extent of its other liabilities; as well as to the quality of the paper offered and to the amount of general collateral pledged with the bank. Since these factors are subject to change from time to time, it is important that they be reviewed by the bank at frequent intervals. § 640.212 Maximum ratios permitted. The limitations set out in §§ 640.212– 1-640.212-4 are maximum ratios and may not be exceeded in any event. § 640.212-1 Same; production credit associations. No credit may be granted to any production credit association if the amount involved, added to its other liabilities, will exceed 10 times its paid-in and unimpaired capital and surplus. § 640.212-2 Same; other financing institutions. No credit may be granted to any other financing institution of the classes listed in paragraph 2 of section 202(a) of the Act, quoted in § 640.201 (other than banks and credit unions) if the amount involved, added to its other liabilities, exceeds the liabilities which the institution may incur under the laws governing its operations or, in any event, exceeds 10 times its paid-in and unimpaired capital and surplus. (a) No credit may be granted to any banking institution if the amount involved, added to its other liabilities (other than bona fide deposit liabilities), exceeds the amount of such liability permitted under the laws of the jurisdiction creating such bank, or exceeds twice its paid-in and unimpaired capital and surplus. (b) A corporation engaged in a banking business and operating under the banking laws of a State, but having the powers of an agricultural credit corporation, livestock loan company, or similar financing institution, must be limited to the amount of credit which may be granted to a banking institution as provided in this section. § 640.212-4 Same; credit unions. No credit may be granted to a credit union if the amount thereof, added to its other liabilities, exceeds the amount of such liability permitted under the laws of the jurisdiction creating such credit union, or exceeds the amount of its paid-in and unimpaired capital. § 640.213 Computation of debt-to-capital ratios. In computing the debt-to-capital ratio of an institution, the bank will include all liabilities (other than bona fide deposit liabilities in the case of banks) whether owing to the credit bank or to others. The unimpaired capital and surplus will include the following: (a) That portion of the institution's authorized and subscribed capital which has actually been paid in and (except in the case of production credit associations) for which stock certificates are outstanding in the names of bona fide stockholders; and (b) Its paid-in surplus (if any) and surplus created out of net earnings or savings specifically set aside to augment its effective capital; less (c) Any losses (whether fully realized or determined to be in prospect) which are not provided for or offset by reserves and undivided profits or otherwise. § 640.221 Credit standards. Paper offered to a credit bank by a financing institution, for discount or as collateral security for a loan, should be of such character as to assure liquidation of the obligation within a reasonable time, consistent with sound lending and agricultural practices. The integrity and financial condition of the notemaker, the collateral security offered, the productive capacity of the notemaker's farming and livestock operation, the adequacy and practicability of the plan of repayment, and other credit factors, when considered together, should afford reasonable assurance that under ordinary circumstances the income of the notemaker will be sufficient to repay the loan and discharge his other obligations. § 640.222 Loan purposes. (a) Loans discounted for or purchased from a production credit association shall have been made to qualified farmers or ranchers for general agricultural purposes, and other requirements of the borrowers including the needs of their families. (See § 650.101 of this chapter.) (b) The proceeds of loans discounted for or purchased from other financing institutions shall have been advanced to farmers or ranchers and have been used in the first instance for an agricultural purpose, including the breeding, raising, fattening, or marketing of livestock (12 U.S.C. 1031(2)). (c) In determining whether the purpose of a loan offered for discount is "agricultural" the bank will apply the term on a practical and constructive basis rather than in a purely technical sense. Eligibility should be judged in line with the usually accepted requirements of farm and ranch operations, including the support and maintenance of the farm or ranch family. (a) Notes evidencing direct loans to financing institutions, and notes or other obligations discounted or accepted as collateral for loans by an intermediate credit bank usually will be drawn with maturities coinciding with the normal marketing seasons for the crops or livestock from which liquidation is expected, ordinarily not more than 12 months. Intermediate-term loans for capital purposes, made in accordance with policies and procedures prescribed by the bank with maturities not to exceed 7 years, may be discounted or accepted as collateral for loans. (b) Investment securities and other obligations of the classes described in §§ 640.231 and 640.232, even though having more than 7 years to run to maturity, |