December 17, 1990
Superintendent of Banking Interpretive Bulletin #7
TO THE CHIEF EXECUTIVE OFFICER OF THE STATE CHARTERED BANK ADDRESSED:
Re: Municipal Securities Backed by Guaranteed Investment Contracts (GICs)
It has come to our attention that a few state chartered banks have invested in municipal securities which are backed by so-called guaranteed investment contracts (GICs) issued by a subsidiary of Los Angeles-based First Executive Corporation. We are told the bid price on some of these issues has ranged down below 25 cents on the dollar. Below is a current list of the known issuers:
Adams County, CO, Industrial Dev. Rev., Series 1986A
El Paso, TX, Housing Finance Corporation Multifamily Housing Revenue Bonds, Series 1986A
Louisiana State Agricultural Finance Authority, Securitized Taxable Notes, Series 1986A
Louisiana State Housing Finance Authority Securities Taxable Revenue Bonds, Series 1986A
Memphis, TN, Health & Education and Housing Facility Board Multifamily Housing Revenue Bonds, Series 1986A
Nebraska Investment Finance Authority Agricultural Revenue Bonds, Series 1986A and 1986B
Southeast Texas Housing Finance Corp, Securitized Multifamily Housing Revenue Bonds, Series 1986A
Simi Valley, CA, Single-family Mortgage Revenue Bonds, Series 1989A (float account and reserve funds invested in GICs)
St. Paul Housing and Redevelopment Authority, MN, FHA Insured Multifamily Housing Revenue Bonds, Series 1989A -- Highland Retirement Project and Series 1989B -- 900 Como Lake Project (float account and reserve funds invested in GICs)
Tucson Industrial Development Authority, AZ, FHA Insured Variable Rate Multifamily Housing Revenue Bonds, Irvington Apartments Project (float account and reserve funds invested in GICs)
During the course of recent examinations, this office has classified the current market value of the investment as substandard and the depreciation as doubtful. We then have requested the bank to establish a specific valuation allowance for at least 50 percent of the doubtful classification. The instructions for consolidated reports of condition and income define a valuation allowance as "an account established against a specific asset category or to recognize a specific liability, with the intent of absorbing some element of estimated loss. Such allowances are created by charges to expense in the report of income and are netted from the asset accounts to which they relate for presentation in the report of condition." Provisions to establish this specific valuation allowance should be reported as "Other Noninterest Expense" and the specific allowance is then deducted from the book value of the issue.
The purpose of this letter is to notify all state banks of this position and to request that any bank which has municipal securities backed by the First Executive Corporation subsidiary's GICs establish a valuation allowance prior to December 31, 1990. The end result of the accounting entries is a charge off of one-half of the depreciation in 1990. We will closely monitor the condition of the First Executive subsidiary in the upcoming year to determine if additional charge off is necessary.
We would also ask that each bank report to this office on each of the issues held, the original book value, the current market value, and the fact that the appropriate valuation allowance has been established.
Most sincerely,
Robert R. Rigler
Superintendent of Banking
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