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• S-50 Sec. 5136 R.S.-10 BOARD OF GOVERNORS 501 Or THE FEDERAL RESERVE SYSTEM WASHINGTON ADDRESS Df"f"ICIAL CDRRESPDNDENCE TD THE BDARD December 22, 1937. SUBJEC'r: Amortization of Premiums on Bonds with Call Prices under Comptroller's Regulations Regarding Investment Securities. Dear Sir: Inclosed for your information are excerpts from a letter dated December 15, 1937, from 1\'lr. Paulger, Chief of tho Board's Division of Examinations, to tho Vice President in charge of the Examination Department of one of tho Federal Reserve banks regarding the amortization of promituns on bonds with call prices under tho provisions of the regulatL1ns of the Comptroller of the Currency governing tho purchase of invostmont securities. Vory truly yours, -----L. P. Bethea, Ass:i.stnn t Secretary. Inclosure. TO PRJ;SIDENTS OF ALL FEDERAL RZSERVE BANKS. 502 S-55-a Sec. 5156 R.S.-10 December 15, 1957. Mr. , Vice President, Federal Reserve Bank of , _______, Dear Mr. Reference is made to the report of examination of--~--~-' , as of September 13, 1957, and your letter of December 2 with respect thereto. ---~---' * * :* * * .* * * * . * It is noted, also, that a further violation of section 5156 was reported qy reason of three issues carried qy the bank at amounts in excess of the call price of the bonds. Included in tho list, however, was one issue with respect to which the following comment was made: "Not callable until 1947. Being amortized to call price by first call date." It appears that the examiner may have been under some misapprehension with respect to the provisions of the regulations .of the Comptroller of the Currency regarding premium and call price. .It is understood that the requirement of the regulations that 11 the security (ir..cluding premium) shall at no intervening date be carried at an amount in excess of that at which the obligor may legally redeem such security" refers to the price at which the securit,y may then be redeemed und not to some future call price. Paragraph No. 5 in Bulletin No. 1, dated Jmto 9, 1956, of the Comptroller of the Currency, which reads as follows, boars specifically on this point. "Amortization of premiums on 'investment securities' pur-· chased by bank. -- Some banks have misunderstood the amortization requirements of the: regulations as respects secUrities purchased at a price exceeding par. It should be made clear that the premium need only be gradually amortized at regular intervals over the lifo of a security to the end that at its ma turi 17.r the security will not be carried at an amount in excess of par. If the security is callable at a given price above par, tho rate of amortization will have to be such as to have gradually extinguished the premium down to call price by the call date, regardless of whether the security is in fact called on that date. Thereafter, if not called, amortization shall continue from that point to maturi~ on the same basis as though the security had bc:en purchased on the call date at the· call price." 503 -2- S-55-a Soc. 5156 R.S.-10 It is suggested that this matter be called to the attention of the examiners as it has been noted that in some other reports of examination bonds carried in excess of the call price have been listed as violations, although the bonds were not callable lli~til some time in the future. You will appreciate, I am sure, that these comments with respect to premiums are not intended to suggest that in some cases the elimination of premiums, even if not required by law, may not be altogether desirable and in accordance with sound banking practice. These comments aro intended only to guard against the treating of matters as violations of the law and the Comptroller's regulations when in fact they are not violations. Very truly yours, (Signed) Leo H. Paulger Leo H. Paulger, Chief, Division of Examinations.
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