by the full faith and credit of the obligor. It includes an obligation payable from a special fund when the full faith and credit of a State or any political subdivision thereof is obligated for payments into the fund of amounts which will be sufficient to provide for all required payments in connection with the obligation. It implies an obligor possessing resources sufficient to justify faith and credit.

[28 F.R. 9916, Sept. 12, 1963]

on

§ 1.4 Limitations and restrictions purchase and sale of a public security.

A bank may deal in, underwrite, purchase and sell for its own account a public security subject only to the exercise of prudent banking judgment. Prudence will require such determinations as are appropriate for the type of transaction involved. For the purpose of underwriting or investment, prudence will also require a consideration of the resources and obligations of the obligor and a determination that the obligor possesses resources sufficient to provide for all required payments in connection with the obligation.

[28 F.R. 9916, Sept. 12, 1963]

§ 1.5 Limitations and restrictions

on

purchase of an investment security. (a) Evidence of obligor's ability to perform. A bank may purchase an investment security for its own account when in its prudent banking judgment (which may be based in part upon estimates which it believes to be reliable), it determines that there is adequate evidence that the obligor will be able to perform all that it undertakes to perform in connection with the security, including all debt service requirements, and that the security may be sold with reasonable promptness at a price which corresponds reasonably to its fair value.

(b) Judgment based predominantly upon reliable estimates. A bank may, subject to limitations set forth in § 1.6 (b), purchase an investment security for its own account although its judgment with respect to the obligor's ability to perform is based predominantly upon estimates which it believes to be reliable. Although the appraisal of the prospects of any obligor will usually be based in part upon estimates, it is the purpose of

this paragraph to permit a bank to exercise a somewhat broader range of judgment with respect to a more restricted portion of its investment portfolio. It is expected that this authority may be exercised not only in the absence of a record of performance but also when there are prospects for improved performance. It is also expected that an investment security purchased pursuant to this paragraph may by the establishment of a satisfactory financial record become eligible for purchase under paragraph (a) of this section.

(c) Securities ruled eligible by the Comptroller of the Currency. A bank may consider as a factor in reaching its prudent banking judgment with respect to an investment security a ruling published by the Comptroller of the Currency on the eligibility of such security for purchase. Consideration must also be given, however, to the possibility that circumstances on which the ruling was based may have changed since the time of the ruling.

[28 F.R. 9916, Sept. 12, 1963]

§ 1.6 Limitations and restrictions on holding investment securities.

(a) Obligations of any one obligor. A bank may not hold at any time investment securities of any one obligor in a total amount in excess of 10 percent of the bank's capital and surplus. For this purpose the amount of an investment security is to be determined on the basis of the par or face value of the security.

(b) Obligations purchased predominantly on the basis of reliable estimates. A bank may not hold at any time investment securities which would not be eligible for purchase pursuant to paragraph (a) of § 1.5 in a total amount in excess of 5 percent of the bank's capital and surplus.

(c) Limitations prescribed in eligibility rulings. When a ruling published by the Comptroller of the Currency provides that an investment security is eligible for purchase subject to a specified limitation, a bank may not at any time thereafter purchase such security, if, after such purchase, the bank's holdings of such security would be in excess of the specified limitation.

(d) Public securities. Public securities are not subject to the limitations contained in this section.

[28 F.R. 9917, Sept. 12, 1963]

purchase, sale and holding of specified obligations.

A bank may deal in and underwrite the obligations of the International Bank for Reconstruction and Development and the Inter-American Development Bank and all bonds, notes and other obligations of the Tennessee Valley Authority, but it may not hold at any one time the obligations of any one of such obligors in a total amount in excess of 10 percent of the bank's capital and surplus.

[28 F.R. 9917, Sept. 12, 1963]

§ 1.8 Prudent banking judgment; credit information required.

Every bank shall maintain in its files credit information adequate to demonstrate that it has exercised prudence in making the determinations and carrying out the transactions described in §§ 1.4 and 1.5.

[28 F.R. 9917, Sept. 12, 1963]

§ 1.9 Requests for rulings.

Any bank may request the Comptroller of the Currency to rule on the application of this part, or paragraph Seventh of 12 U.S.C. 24, to any security which it holds, or desires to purchase for its own account as an investment security; or which it holds, or desires to deal in, underwrite, purchase, hold or sell as a public security. Such a request for a ruling should be supported by (a) information sufficient to enable the Comptroller to make the necessary determination and (b) the bank's appraisal of the information furnished.

[28 F.R. 9917, Sept. 12, 1963]

§ 1.10 Convertible securities.

When a bank purchases an investment security convertible into stock or with stock purchase warrants attached, entries must be made by the bank at the time of purchase to write down the cost of such security to an amount which represents the investment value of the security considered independently of the conversion feature or attached stock purchase warrants. Purchase of securities convertible into stock at the option of the issuer is prohibited.

[28 F.R. 9917, Sept. 12, 1963]

§ 1.11 Amortization of premiums.

(b) The $28,000,000 State Highway Department of the State of Delaware, 4%% Delaware Turnpike Revenue Bonds, dated January 1, 1962, are ineligible for purchase by national banks.

(c) The $74,000,000 State Roads Commission of the State of Maryland 4%% Northeastern Expressway Revenue Bonds, dated January 1, 1962, are ineligible for purchase by national banks.

(d) The $25,000,000 Town of Cherokee, Alabama, 44% Industrial Development Revenue Bonds, dated March 1, 1961, are eligible for purchase by national banks, within the limitations of Paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24).

[27 F.R. 2506, Mar. 16, 1962, as amended at 27 F.R. 6539, July 11, 1962; 27 F.R. 12811, Dec. 28, 1962. Redesignated 28 F.R. 8280, Aug. 13, 1962]

§ 1.106 Texas Turnpike Authority.

(a) Request. The Comptroller of the Currency has been requested to reconsider the rulings of June 8, 1955 and March 12, 1962 that the $58,500,000

(7) The bonds are additionally secured by the obligation of the Commission and the Department to levy an entrance fee subject to certain conditions.

(8) The anticipated revenues and State appropriations appear to be sufficient to provide adequate debt service. The outstanding feature underlying this issue is the ability of the Department to charge an entrance fee if certain conditions occur. Inasmuch as the Department does not presently charge an entrance fee and the present gross revenues of the Department amply cover estimated Debt Service, the covenant to charge such entrance fee adds additional and supplementary security to the bonds.

(b) Ruling. We conclude that the subject bonds are eligible for investment by national banks, within the limitations of Paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24). [27 F.R. 6539, July 11, 1962. Redesignated 28 F.R. 8280, Aug. 13, 1963]

§ 1.110

City of Kansas City, Missouri.

(a) Opinion. (1) Request has been made of the Comptroller of the Currency for a ruling whether the $18,700,000 City of Kansas City, Missouri, 44 percent Airport Revenue Bonds, dated July 1, 1954, are eligible for investment by national banks.

(2) On February 21, 1955, this Office ruled that subject bonds would not be eligible for investment by national banks. Since that date, we have reaffirmed our position several times, the most recent being in December 1959. We have been requested again to re-examine our position relative to these bonds.

(3) The bonds are not general obligations of the city, but are special revenue obligations payable from revenues derived by the city from certain rentals to be paid by Trans World Airlines, Inc. to the city under the provisions of a lease and agreement between the city and the company.

(4) The bonds were issued on July 1, 1954, with interest capitalized until June 30, 1957. The facilities for TWA were completed by January 1, 1957, and the company has been paying the required rental since that date. Payments into the sinking fund from rentals received will be used for the payment of serial bonds and the ultimate retirement of the term bonds.

(5) Rentals received from TWA from January 1, 1957, to April 30, 1961, the

50-026-71—2

date of the latest fiscal report of Kansas City, total $5,557,000, which when added to total occupancy permit fees received from TWA from July 1, 1954, to December 31, 1956, of $370,000, aggregate $5,927,000. Interest and fiscal fees on (revenue bonds from July 1, 1954, to April 30, 1961, amounted to $5,173,000. The rentals paid for this period were sufficient to provide for the required debt service.

(6) A review of the earnings for the year ending April 30, 1961, reveals that net operating income was 2.19 times the debt service required for the same period. The debt service amounted to $794,750 for this period and the same amount will be required for the period ending in 1962. The first of the serial maturities takes place on July 1, 1962, in the amount of $400,000. Using the earnings figures for the year ending April 30, 1961, this total debt service for 1962 of $1,187,000 is covered 1.47 times.

(7) It should be noted that city ordinance authorizing the bonds required that at July 1, 1962, the Reserve Account have a minimum balance of $2,250,000. The balance at April 30, 1961, was $2,600,000, which is the maximum reserve amount required by the ordinance. This reserve account was built up by rentals collected in excess of debt service charges. Hereafter, all rentals over and above debt service charges will be paid to a sinking fund and applied to purchase or redemption of bonds. It was originally estimated that by the end of the fiscal period in 1962 there would be $180,000 in the sinking fund. However, the figures for the fiscal year ending 1961 showed a balance in the sinking fund of $166,000.

(8) The ordinance also required the establishment of a guarantee fund of $500,000, which has been attained. Another reserve called the operating fund has been established, as required by the ordinance. This fund is to be held for estimated operating expenses of the city's airports for a period of six months in advance. This fund now totals $351,000, while the total operating expenses for the year ending April 30, 1961, amounted to $576,000. In addition there is also a construction fund for extending, constructing, or making general improvements to the airport, which amounts to $939,000.

(9) These various funds have been built by the excess amounts of rental payments not required for debt services. This fact indicates that the revenue bonds are supported by properly managed operations and finances which are now in a position to cover debt services adequately. However, the strength of the issue lies in the ability of TWA to provide adequate rentals which will ultimately liquidate the issue.

(10) TWA is a subsidiary of Hughes Tool Company, Houston, Texas, which is engaged as a manufacturer of oil-well tools; the production and distribution of motion pictures; and in the manufacture of certain aircraft fuselage parts. As of December 31, 1960, it showed a net worth of $253,800,000, with an important part of the net worth being made up by its investment in TWA.

(11) TWA is a leading airline and is the only United States air carrier authorized to provide service on a scheduled basis on both a transcontinental and transatlantic route system. Principal operations base is located on leased property at Kansas City Municipal Airport, Kansas City, Missouri, and its principal overhaul base is located on leased property at the Mid-Continental International Airport, Kansas City, Missouri. The aggregate annual rental under such leases in effect at March 1, 1961, was approximately $6,250,000. TWA had lease agreements with three other airports besides Kansas City.

(12) TWA showed good earnings in 1959 and 1960; however, substantial losses have been reported for 1961. The company has incurred a heavy debt in its program of fleet modernization. We have no year-end figures at the present time; however, for nine months ending September 30, 1961, TWA reported total operating revenues were $290,000,000 and a net loss of $12,700,000 as compared to the same period in 1960, when total operating revenues were $290,000,000 and net earnings were $6,100,000. As of September 30, 1961, TWA has cash of $17,600,000 and U.S. securities of $15,900,000, current liabilities of $98,800000 and a long-term debt of $286,500,000. The later figure is up from $84,900,000 of a year ago, reflecting additional longterm borrowings in connection with fleet modernization. In this connection, TWA's net investment in property and equipment of September 30, 1961, was

$315,600,000 as compared to $204,900,000 the previous year. Tangible net worth of TWA at December 31, 1960, was $124,700,000.

(13) The financial structure in back of the subject bonds has improved to a degree that indicates that the rental payments from now on should be sufficient to cover debt service and provide a margin of safety as well. The financial stability of TWA is believed to be sufficient to provide the necessary rental payments to service the bonds.

(b) Ruling. We conclude that the subject bonds are eligible for investment by national banks, within the limitations of Paragraph Seventh of section 5136 of the Revised Statutes (12 U.S.C. 24). [27 F.R. 6539, July 11, 1962. Redesignated 28 F.R. 8280, Aug. 13, 1963]

§ 1.111 Georgia State Authorities.

(a) Request. The Comptroller of the Currency has been requested to reconsider the ruling of July 12, 1962, that the bonds of various public authorities created by the State of Georgia are not general obligations of the State within the meaning of Paragraph Seventh of 12 U.S.C. 24.

(b) Opinion. The State of Georgia has created, by special acts of its General Assembly, nine public authorities for the purpose of constructing and financing public buildings, bridges, highways, and other public improvements. An Authority has the power to hold property in its own name, to construct projects on land owned by the state, to borrow money for any of its corporate purposes, and to issue its negotiable revenue bonds payable solely from earnings. It does not have the power to levy taxes nor to pledge property other than its earnings. The State Constitution authorizes the State, its institutions and political subdivisions to contract for the long-term use of the facilities of an Authority and requires that appropriations be made sufficient to satisfy the payments required by such lease rental contracts (Art. VII, Sec. VI, Par. I(a)). The General Assembly, in section 46 of the General Appropriations Act of 1961, has made the required appropriation for the current and future years and has provided that payments on lease rental contracts, shall constitute a first charge on all such appropriations. The Su