Credit Evaluation of Municipal Bonds in the Dodd-Frank Era

1. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era 21st Annual Investment Education Conference San Antonio, Texas March 26th, 2013 Prepared by: Mikell Tomlinson Senior Vice President

2. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Agenda • Provide an overview of the regulatory changes impacting municipal risk due diligence requirements. • Review OCC guidance to evaluation muni credit. • Recommended protocol for documenting pre-and post-purchase credit risk analysis on municipal bond investments. • Identify the key financial, economic, and demographic considerations. • Shay Tear Sheets • How to recognize red flags of credit deterioration. • Shay Muni-Monitor • EMMA • Ratings Template Source: Bloomberg

3. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Dodd- Frank and its Impact on Depository Investment Regulations Source: Bloomberg

4. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era OCC Rule Change and Guidance Source: Bloomberg

5. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era OCC Rule Change and Guidance Source: Bloomberg

6. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era OCC Rule Change and Guidance Source: The Office of the Comptroller of the Currency Source: Bloomberg

7. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era FDIC Rule Change and Guidance Source: Bloomberg

8. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA NCUA Rule Change NCUA Rule Change Source: Bloomberg

9. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Municipal Credit Monitoring and Analysis Program Robust Pre-Purchase Analysis Monthly or Quarterly Ratings Update Comprehensive Annual Financial Report If/when a bond experiences a negative ratings action, elevate analysis and monitoring. Source: Bloomberg

10. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

11. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

12. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

13. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era What are you Investing in? Source: Bloomberg

14. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era What are you Investing in? Source: Bloomberg

15. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era What are you Investing in? Source: Bloomberg

16. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

17. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Source: Bloomberg

18. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Source: Bloomberg

19. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Metrics for Credit Evaluation Source: Bloomberg

20. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Metrics for Credit Evaluation Source: Bloomberg

21. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Metrics for Credit Evaluation Source: Bloomberg

22. Source: Bloomberg

23. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Signs of Fiscal Distress • Qualified Audit Option • Cash Problems • Tax Collections 95% or lower • At or close to tax ceiling • Rising Mandated or Fixed Cost • Variability in Sales or Income Tax Receipts • Negative trends: Operating Losses, Reserve Draws • Pension Deferrals • For GO bonds, debt to assessed ration grater than 20% or debt to capita greater than $3,000 • Decreasing Capital Outlay • Significant Litigation or Settlement • Interest Earnings as Large % of cash on hand • Negative Demographic trends Source: Bloomberg

24. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

25. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

26. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

27. Credit Evaluation of Municipal Bonds in the Dodd-Frank ERA Source: Bloomberg

28. Credit Evaluation of Municipal Bonds in the Dodd-Frank Era Conclusion: • Examiners must see proof of an internal credit analysis process. • You can use third party research but it cannot be the only source at determination. • Determination must come to conclusion based on an internal process. Source: Bloomberg

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