October 04, 2012Daily Rates & Viewpoints From the Officers & Staff of TIB.

Rating Credit Risk

Regulators rate credit risk and expect banks to rate credit risk based on the borrower’s expected performance, i.e. the likelihood the borrower will be able to service its obligations in accordance with the terms. Payment performance is a future event; therefore, the credit analyses should focus primarily on the borrower’s ability to meet its future debt service obligations. Generally, a borrower’s expected performance is based on the borrower’s financial strength as reflected by its historical and projected balance sheet and income statement proportions, its performance, and its future prospects in light of conditions that may occur during the term of the loan. Expected performance should be evaluated over the foreseeable future – not less than one year. While the borrower’s history of meeting debt service requirements must always be incorporated into any credit analysis, risk ratings will be less useful if overly focused on past performance. Credit risk ratings are meant to measure risk rather than record history. An example follows:

A business borrower is in the third year of a seven-year amortizing term loan. The borrower has enjoyed good business conditions and financial health since the inception of the loan, has made payments as scheduled, and is current. However, the borrower’s business prospects and financial capacity are weakening and are expected to continue to weaken in the upcoming year. As a result, the borrower’s projected cash flow will be insufficient to cover the required debt service. In this simple example, the risk rating should be changed now when the borrower’s risk of default increase, rather than later, when cash flow coverage becomes negative or when default occurs.
The primary consideration in credit risk assessment is the strength of the primary repayment source. The regulators define primary repayment source as a sustainable source of cash. In assigning a rating, examiners assess the strength of the borrower’s repayment capacity, in other words, the probability of default, where default is the failure to make a required payment in full and on time. 

Tom Atkinson Tom Atkinson
Executive Vice President

Market Levels @ 8:29 AM CDT

TIB Fed Funds & MMDA Rates - Previous Day
Agent 0.20% Prin 0.05% MMDA 0.30%
STAR Prin 0.10% STAR MMDA 0.35%
Key Indices/Commodities
1 - Month LIBOR 0.21% Dow Jones 13494.61
3 - Month LIBOR 0.35% NASDAQ 100 3135.22
1-Yr LIBOR 0.95% S&P 500 1452.00
1-Yr CMT 0.16% Spot Gold 1789.00
Prime 3.25% Spot Silver 34.79
3-yr LIBOR Swap/Offer 0.44% Spot Crude Oil 88.93
5-yr LIBOR Swap/Offer 0.76% CRB Index 306.58
3 Mo - Fed Fund Futures 0.125% 6 Mo - Fed Fund Futures 0.12%
US Treasury Yields US Non-Callable Agency Yields
Yield Maturity Yield Spread
0.04% 90 - Days    
0.08% 180 - Days    
0.19% 2 - Year 0.24% 5bp
0.27% 3 - Year 0.36% 9bp
0.59% 5 - Year 0.75% 16bp
1.61% 10 - Year 1.89% 28bp
2.82% 30 - Year    
142 BPs Yield Curve(2's-10's)
Sample 1x Callable Agency Issues
Description Call Date YTC YTM
FNMA1.50 10/22/20 10/13 1.50% 1.50%
Select MBS Levels
Description Coupon Yield Spread/Duration*
15-year FNMA 3.00% 1.35% 86 / 4.13
30-year GNMA 3.50% 2.27% 71 / 7.86
*Duration @ 12 month Historical CPR
Morning Commentary: Reed Bateman

Treasuries are slightly lower after several European bond auctions went fairly well overnight. Spain auctioned off 2, 3, and 5-year debt and the results were a little weak, but that was to be expected. France auctioned 8B in Euros overnight as well, and much more successfully than the Spanish version. Initial jobless claims increased slightly for the week ending September 29 th, up 367K, but were expected to come in a little higher. Continuing claims stayed put at 3.28M. This afternoon, we’ll have the release of the most recent FOMC meeting minutes, which should give us a little more insight to the thought process behind QE3. Equity markets have opened higher across the board, and commodities are higher, as well. Tomorrow, we’ll have payroll and unemployment figures, which should provide some market movement. Forecasts are for payrolls to increase by 115K and for the unemployment rate to increase from 8.1% to 8.2%.

Information contained herein is based on sources we believe to be reliable but its accuracy is not guaranteed. Customers should rely on their own outside counsel or accounting firm for specific circumstances. The securities, yields or levels discussed herein are for illustration purposes and are not guaranteed, not obligations of any bank, thrift or other entity and are not insured by the FDIC.

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