john grady, tom tight

Presented by:

John F. Grady III, CTP,

Thomas N. Tight

May 22, 2010

The Florida Government Finance Officers Association Annual Conference 2010

Investment Strategies in the Current Market Environment

A look at Permitted Investments

3

Public Funds Investment Philosophy

Risk Management Strategies

Credit RiskInvest in high quality securities and has a staff of credit analysts unequaled in the industry

Market RiskUse active portfolio management to limit its clients exposure to market risk.

Reinvestment Risk

Sophisticated option adjusted return analysis for security evaluation to limit a portfolio’s exposure to risk.

◊ Safety of Principal: Preserving Principal by selecting investments in accordance with the investment policy

◊ Liquidity of Assets: Ensuring ability to provide sufficient available funding for liquidity needs

◊ Return on Assets: Optimize returns within the established investment parameters

Long Term Investment Strategy

High Quality Investments

Custom Portfolios with an average AAA rating based on state statutes, investment policy requirements, and market conditions

Adequate Liquidity

Maturity distribution based on the cash flow analysis to enhance the performance

Historical Performance

Proven portfolio management, strong credit research and a track record of performance with less risk than

Safety first philosophy with a diversified strategy to lower return volatility over a long horizon

4

Investment Objectives

Investment Objectives for Public Funds

◘ Safety

◘ Liquidity

◘ Yield (Return on Assets)

◘ Compliance with Laws and Investment Policy

◘ Dynamic

◘ Limited Portfolio and Security Volatility

◘ Ease of Implementation and Understanding

5

Maturity and Liquidity

Maturity Requirements should be based on

◘ Type of portfolio (Liquidity Assets versus Core Assets)

◘ Security Type (U.S. Treasury, Federal Agency)

◘ Risk Tolerance (Volatility)

Liquidity Requirements should:

◘ Provide liquidity to meet anticipated day to day operational needs for a specific period of time

◘ Deposited in AAAm MMF or AAA rated open market securities

◘ A specific maturity limitation on Liquidity Assets

6

Reporting by Portfolio

Liquidity Portfolios typically reported on Yield on Cost (Passive Strategy)

◘ Historically Liquidity Portfolios in Florida have been reported on yield on cost and compared to short term investments such as the Florida SBA or the S&P Money Market Index

◘ Many investment officers are utilizing money market fund indexes as a benchmark for Liquidity Portfolios

Core Asset Portfolios typically reported on Total Return (Active Strategy)

◘ The CFA Institute (formerly AIMR) has established total return as the standard for calculating return on actively managed investment portfolios

◘ This method takes into account all realized and unrealized gains and losses and a time weighting of cash flows

7

Interest Rate (Price Fluctuation Risk)

Bond Prices and Interest Rates are Inversely Related

◘ Interest Rate Risk refers to price fluctuations as a result of changes in interest rates

◘ Bond prices tend to rise in value as interest rates fall, and prices fall when interest rates rise

◘ As a general rule, the longer the maturity, the greater the degree of price volatility

Duration is a measure of correlation of Time to Maturity and Price Volatility

◘ Duration a more accurate measure for time to maturity by factoring in cash flows ◘ A Bond’s duration is dependent on timing of cash flows, call and put option provisions and

final maturity

Interest R

ates

Bo

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Pri

ces

Inte

rest

Rat

es

Bo

nd

Prices

Invers

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ela

tion

sh

ip

$

$ %

%

Vo

lati

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Time to Final Maturity (Duration)

8

Risks Defined

Several factors can impact the liquidity of an investment

◘ Ability to sell at a competitive price due to supply and demand constraints

◘ Volatility in the market and time to maturity

◘ Restrictions that result in redemption penalties

◘ Call and Put Options, Security Sector, Issuer

Credit Risk - default or decline in security value due to Issuer financial conditions

◘ Arguably the biggest issue in the current environment

◘ Measures the additional return required from an investor to lend money to the institution

◘ Increases or decreases with changes in ratings

◘ Regulatory actions can also impact the risk of an issuer

Risk Interest and/or Principal will be reinvested at a lower rate of return than the current interest rate

◘ Short term securities have high reinvestment risk (MMF, Discount Notes)

◘ Securities with higher coupons have higher reinvestment risk than lower coupons

◘ Mortgage Backed Securities have higher reinvestment risk

◘ Callable Securities have high reinvestment risk

9

Making Investment Decisions

Several Key Decisions are Involved when Implementing an Investment Strategy

◘ Maintain an Updated Investment Policy

◘ Consider the results of the Cash Flow Analysis

◘ Determine Risk Tolerance

◘ Determine Appropriate Target Duration

◘ Evaluate Market Conditions and Economic Data

◘ Consider Historical Perspective and the Current Environment

◘ Understand Benefits (Enhanced Earnings, Dynamic Management Approach) and Risks involved with various Investment Strategies (Liquidity, Reinvestment, Credit)

◘ Assess the relative value of each maturity and sector

◘ Implement an Active and/or Passive Strategy for Core and Liquidity Funds based on Investment Management Goals and Objectives

10

Treasury Inflation Protected Securities (TIPS)

◘ Direct obligations of the U.S. Government (full faith and credit)

◘ Principal is protected from inflation

◘ Principal adjustment tied to CPI-U index

◘ Treasury guarantees payment of par at maturity

TIPS – How they work

◘ Issued with a fixed coupon

◘ Semiannual coupon payments

◘ Principal adjusted according to an index based on the Consumer Price Index

◘ Semiannual payments are adjusted based on the fixed coupon and adjusted par

◘ Less volatility in certain interest rate environments as result of adjusting interest payment

◘ Can be purchased through Auction or on secondary market

11

Authorized Investments

Identify Cash Flow Components◘ The best strategy is a fund by fund review

Determine the Degree of Certainty and Predictability◘ Have past events skewed historical fund balances◘ Are there known future events that may impact fund balances

Construct A Cash Flow Forecast◘ Utilize historical information to develop a cash flow analysis based on timing of

revenues and expenditures◘ Only include those funds appropriate for consideration of longer term investment

strategies

Conduct Periodic Reviews and Updates◘ Cash flow analysis should be conducted at least annually and contain at least 2 years

of information◘ Compare prior projections with actual results for ongoing certainty and predictability◘ Identify trends and determine the expectation of continuation of trends based on

internal (fee increases) and external (interest on investments) factors

12


FEDERAL AGENCY SECURITIES (AGENCIES)Federal Agency Securities (Agencies) are issued by official government bodies and have the Full Faith and Credit of the U.S. Government.

Federal Agency Issuers Include:Government National Mortgage Association (GNMA), U.S. Department of Housing and Urban Development (HUD), Farmer Home Administration

Characteristics of Agencies:

Issued by the U.S. government to pay for government projects.

Issued through an auction process in the primary market at par (except discount notes)

Traded in the secondary market as marketable securities at discounts and premiums determined by interest rates

Interest Earned is exempt from state and local taxes (not exempt from Federal Taxes)

Investment Strategy Historical CurrentSector Allocation 50% - 60% 50% - 60%Issuer Allocation 10% - 20% 10% - 20%Rating AAA AAAMaturity 3 - 5 Years 3 - 5 Years

Investment Strategy

13


U.S. TREASURY SECURITIES (TREASURIES)Negotiable debt obligations issued with by the U.S. Government. Treasuries are backed by the Full Faith and Credit of the U.S. Government.

There are three types of securities issued by the U.S. Government:

Treasury Bills: Issued at a discount; mature in less than 1 year

Treasury Notes: Pay Interest Semi-annually; mature 1 year to 5 years

Treasury Bonds: Pay Interest Semi-annually; mature up to 30 years

Characteristics of Treasuries include:

Issued by the U.S. government to pay for government projects.

Issued through an auction process in the primary market at par (except discount notes)

Traded in the secondary market as marketable securities at discounts and premiums determined by interest rates.

Interest Earned is Exempt from state and local taxes but not from Federal Taxes

Investment Strategy Historical CurrentSector Allocation 100% 75% - 100%Issuer Allocation 100% 75% - 100%Rating UST USTMaturity 5 - 7 Years 5 - 7 Years

Investment Strategy

14


MONEY MARKET FUND (MMF)MMF typically invest in government securities, certificates of deposit, commercial paper of companies, or other highly liquid and low-risk securities. MMF are regulated under the Investment Company Act of 1940 and Rule 2a-7 under the Act.

Characteristics of a MMF Include:

Goal of maintaining a Net Asset Value (NAV) at a constant $1.00 per share.

Typically have relatively lower risks compared to other longer term mutual funds

Pay interest that generally reflects short-term interest rates

Investment Strategy Historical CurrentSector Allocation 100% 50% - 75%Issuer Allocation 100% 25% - 30%Rating AAm AAAmMaturity Overnight Overnight

Investment Strategy

15


GOVERNMENT SPONSORED ENTERPRISE (GSE)GSEs are independent organizations that are in part sponsored by the federal government. Historically, GSE securities did not have the Full Faith and Credit of the U.S. Treasury. Recent Legislation has provided the implicit Full Faith and Credit of the U.S. Government for GSE securities.

Federal Agency Issuers Include:

Federal National Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC), Federal Home Loan Bank (FHLB), Federal Farm Credit Bank (FFCB)

Characteristics of GSEs:

Issued to enhance the flow and lower the cost of credit for specific sectors of the economy including housing and farming

Issued through an auction process in the primary at par (except discount notes)


Interest Earned is exempt from state and local taxes for FFCB and FHLB (not exempt from Federal Taxes)

Interest earned on FHLMC and FNMA is fully taxable

Investment Strategy Historical CurrentSector Allocation 75% - 100% 50% - 80%Issuer Allocation 40% - 100% 25% - 35%Rating AAA AAAMaturity 5 - 7 Years 5 - 7 Years

Investment Strategy

16


CORPORATE NOTES/BONDS (CORPORATES)

Debt obligations, or IOUs, issued by private and public corporations. Funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding the business.

Characteristics of Corporates:

Typically issued in multiples of $1,000 and/or $5,000.

Purchaser lends money to the issuing corporation

Corporation promises pay principal, plus interest on a specified maturity date

Interest earnings from corporate bonds are taxable

Unlike stocks, corporate bonds do not give you an ownership interest in the issuing corporation

Investment Strategy Historical CurrentSector Allocation 0% - 50% 0% - 50%Subsector Allocation NA 5% - 10%Issuer Allocation 5% - 15% 2 %- 5%Rating A or Better A BetterMaturity 3 - 5 Years 3 - 5 Years

Investment Strategy

17


CORPORATE NOTES/BONDS (CORPORATES)

Debt obligations, or IOUs, issued by private and public corporations. Funds they raise from selling bonds for a variety of purposes, from building facilities to purchasing equipment to expanding the business.

Characteristics of Corporates:

Typically issued in multiples of $1,000 and/or $5,000.

Purchaser lends money to the issuing corporation

Corporation promises pay principal, plus interest on a specified maturity date

Interest earnings from corporate bonds are taxable

Unlike stocks, corporate bonds do not give you an ownership interest in the issuing corporation

Investment Strategy Historical CurrentSector Allocation 0% - 50% 0% - 50%Subsector Allocation NA 5% - 10%Issuer Allocation 5% - 15% 2 %- 5%Rating A or Better A BetterMaturity 3 - 5 Years 3 - 5 Years

Investment Strategy

18


COMMERCIAL PAPER

Unsecured, short-term debt instrument (promissory note) issued by a corporation, typically for the financing of accounts receivable, inventories and meeting short-term liabilities. Current Legislation provides U.S. Government Full Faith and Credit for certain CP issues

Characteristics of Commercial Paper:

Maturities from 1 day to 270 days (does not need to registered with the SEC)

Usually issued at a discount, reflecting prevailing market interest rates.


Not usually backed by any form of collateral (unlike Asset Backed Commercial Paper)

Proceeds can only be used on current assets (inventories) - not allowed for fixed assets without SEC Involvement.

Investment Strategy Historical CurrentSector Allocation 0% - 50% 0% - 50%Subsector Allocation NA 5% - 10%Issuer Allocation 5% - 15% 2 %- 5%Rating A1/ P1 A1/ P1Maturity Up to 270 Days Up to 270 Days

Investment Strategy

19


CERTIFICATES OF DEPOSIT (CDs)

CDs are time deposits on deposit with the bank for a stated period of time. CDs typically earn a stated interest rate. Florida Statute 218.415(16)(c) requires banks to be Qualified Public Depositories to qualify to provide CDs to local governments.

Characteristics of CDs:

May offer higher rate of interest than other types of deposit accounts due to restricted access

Typically the longer the maturity date, the higher the stated interest rate.

May require forfeiture of all or a portion of interest earnings and/or principal for early withdrawal

Deposits held at FDIC, a government agency that insures bank deposits. Individual Accounts are now eligible for $250,000 of deposit insurance for all the deposits at each bank in each recognized

ownership capacity (CDs, checking accounts, etc.)

Investment Strategy Historical CurrentSector Allocation 10% - 20% 10% - 20%Issuer Allocation 10% 10%Qualified Public Depository FS Chapter 280 FS Chapter 280Maturity 1 Year 1 Year

Investment Strategy

20

FDIC Backed Notes

◘ Issued through the Treasury Liquidity Guarantee Program

◘ Full faith and credit of the Government (FDIC Insured)

◘ Issued by various financial companies to encourage lending

◘ Fixed and floating rate coupons

◘ Maximum 3 year maturity

◘ Considered the equivalent of agency bonds for investment policy considerations

◘ Yield advantage to Treasury and Agency bonds

21

Callable Securities

◘ Issuer has the option to redeem early

◘ Various Structures

◘ 3yr/Non Call 1

◘ Continuous, discrete, one time

◘ Trade at a spread over treasury securities

◘ Issued by Agencies, Corporations and Public Entities

◘ Attractive in a rising rate environment

22

Callable Securities

Source: Bloomberg

Two Year U.S. Treasury - 5 Year HistorySeptember 2004 - September 2009

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

Sep 04 Mar 05 Sep 05 Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09

Some market conditions favor callable securities and other conditions favor non-callable securities. Use historical analysis to take advantage of current trends.

2-Year Treasury Yield

Non-Callable

Callable

5 Year Average - 3.92%

23

Treasury Inflation Protected Securities (TIPS)

TIPS Advantages

◘ Provides a hedge against inflation

◘ Full Faith and credit of the U.S. Government

◘ Downside principal limit is par value

◘ Less volatility in certain interest rate environments as result of adjusting interest payment

TIPS Disadvantages

◘ Typically structured with lower coupons than fixed income securities at time of issue

◘ Not designed for portfolios structured with specific income requirements

24

TIPS Index Screen

Source: Bloomberg

25

TIPS – 1997 Issue

Source: Bloomberg

Coupon Cashflow Comparison - 5 Year Maturity - 1997 IssueU.S. Treasury TIPS vs Conventional Bonds

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

Jan 98 Jul 98 Jan 99 Jul 99 Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02

Cashflow Analysis TIPS - 5 Year Maturity - 1997 Issue Cashflow Analysis Conventional - 5 Year Maturity - 1997 Issue

26

TIPS 1997 Issue

Source: Bloomberg

1997 Issue CUSIP Issue Date Maturity Date Coupon Yield to Maturity PriceTreasury Inflation Protected Security 9128273A8 7/15/1997 7/15/2002 3.625% 3.744% 99.462$ Fixed Coupon U.S. Treasury 9128273C4 7/31/1997 7/31/2002 6.000% 6.024% 99.898$

Purchase Amount TIPS 1,005,409.10 Purchase Amount Conventional 1,001,021.04

Cashflow Analysis TIPS - 5 Year Maturity - 1997 Issue

DatePurchase/ Maturity Index

Adjusted Principal Coupon

Semi-Annual Interest Payment Total Cashflow

Cumulative Cashflow

Jul 97 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Jan 98 1.008740 1,014,196.24$ 3.625% $18,382.31 $18,382.31 ($981,617.69)Jul 98 1.026510 1,032,062.50$ 3.625% $18,706.13 $18,706.13 ($962,911.56)

Jan 99 1.024010 1,029,548.97$ 3.625% $18,660.58 $18,660.58 ($944,250.99)Jul 99 1.037750 1,043,363.29$ 3.625% $18,910.96 $18,910.96 ($925,340.03)

Jan 00 1.050520 1,056,202.37$ 3.625% $19,143.67 $19,143.67 ($906,196.36)Jul 00 1.069250 1,075,033.68$ 3.625% $19,484.99 $19,484.99 ($886,711.37)

Jan 01 1.086730 1,092,608.23$ 3.625% $19,803.52 $19,803.52 ($866,907.85)Jul 01 1.106810 1,112,796.85$ 3.625% $20,169.44 $20,169.44 ($846,738.41)

Jan 02 1.108710 1,114,707.12$ 3.625% $20,204.07 $20,204.07 ($826,534.34)Jul 02 $1,128,732.58 1.122660 1,128,732.58$ 3.625% $20,458.28 $1,149,190.86 $322,656.52

$193,923.94 $322,656.52

Cashflow Analysis Conventional - 5 Year Maturity - 1997 Issue



Semi-Annual Interest Payment

Cumulative Cashflow

Jul 97 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Jan 98 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($969,969.37)Jul 98 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($939,938.74)

Jan 99 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($909,908.11)Jul 99 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($879,877.48)

Jan 00 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($849,846.84)Jul 00 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($819,816.21)

Jan 01 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($789,785.58)Jul 01 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($759,754.95)

Jan 02 1.000000 1,001,021.04$ 6.000% $30,030.63 $30,030.63 ($729,724.32)Jul 02 $1,001,021.04 1.000000 1,001,021.04$ 6.000% $30,030.63 $1,031,051.67 $301,327.35

$300,306.31 $301,327.35

$322,656

$301,327

27

TIPS 2005 Issue

Source: Bloomberg

Coupon Cashflow Comparison - 5 Year Maturity - 2005 IssueU.S. Treasury TIPS vs Conventional Bonds

$0

$5,000

$10,000

$15,000

$20,000

$25,000

Apr 06 Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09 Apr 10 Oct 10

Cashflow Analysis TIPS - 5 Year Maturity - 2005 Issue Cashflow Analysis Conventional - 5 Year Maturity - 2005 Issue

28

TIPS 2005 Issue

$182,439*

$182,439

*Projected

2005 Issue CUSIP Issue Date Maturity Date Coupon Yield to Maturity PriceTIPS 912828CZ1 4/26/2005 4/15/2010 0.875% 1.200% 99.624$ Fixed Coupon U.S. Treasury 912828DR8 4/13/2005 4/15/2010 4.000% 4.046% 99.794$

Purchase Amount TIPS 1,003,773.93 Purchase Amount Conventional 1,002,067.78

Cashflow Analysis TIPS - 5 Year Maturity - 2005 Issue




Cumulative Cashflow

Oct 05 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Apr 06 1.033820 1,037,721.56$ 0.875% $4,540.03 4,540.03 ($995,459.97)Oct 06 1.047730 1,051,684.06$ 0.875% 4,601.12 4,601.12 ($990,858.85)Apr 07 1.075140 1,079,197.50$ 0.875% 4,721.49 4,721.49 ($986,137.36)Oct 07 1.071140 1,075,182.41$ 0.875% 4,703.92 4,703.92 ($981,433.44)Apr 08 1.098610 1,102,756.08$ 0.875% 4,824.56 4,824.56 ($976,608.88)Oct 08 1.115710 1,119,920.61$ 0.875% 4,899.65 4,899.65 ($971,709.23)Apr 09 1.159000 1,163,373.98$ 0.875% 5,089.76 5,089.76 ($966,619.47)Oct 09 1.134810 1,139,092.39$ 0.875% 4,983.53 4,983.53 ($961,635.94)Apr 10 $1,139,092.39 1.134810 1,139,092.39$ 0.875% 4,983.53 1,144,075.92 $182,439.98

$43,347.59 $182,439.98

Cashflow Analysis Conventional - 5 Year Maturity - 2005 Issue




Cumulative Cashflow

Oct 05 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Apr 06 1.000000 1,002,067.78$ 4.000% $20,041.36 20,041.36 ($979,958.64)Oct 06 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($959,917.29)Apr 07 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($939,875.93)Oct 07 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($919,834.58)Apr 08 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($899,793.22)Oct 08 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($879,751.87)Apr 09 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($859,710.51)Oct 09 1.000000 1,002,067.78$ 4.000% 20,041.36 20,041.36 ($839,669.16)Apr 10 $1,002,067.78 1.000000 1,002,067.78$ 4.000% 20,041.36 1,022,109.13 $182,439.98

$180,372.20 $182,439.98

29

TIPS 2005 Issue – Inflation Assumption

Source: Bloomberg

30

TIPS 2005 Issue – Inflation Actual Results

Source: Bloomberg

31

Step Up Bond with Call Feature

Source: Bloomberg

Step Up Coupon (with Call Feature) Advantages

◘ Provides a hedge against inflation

◘ Call Feature provides additional premium for call risk

◘ Structured to Provide a higher return vs. fixed structure in the event of a call

◘ Less volatility in certain interest rate environments

◘ Provide additional duration and asset class diversification

Step Up Coupon (with Call Feature) Disadvantages

◘ Call feature subject to reinvestment rate risk

◘ Call feature results in uncertain actual maturity (call)

◘ Not designed for time specific expenditures (debt service payments)

32

Step Up Bond – Cash Flow to Maturity

Source: Bloomberg

Step Up Coupon (with Call Feature) vs. Fixed Coupon Cash Flow to Maturity

◘ Coupon payments increase at each interval with Step up

Coupon Cashflow ComparisonStep Up Coupon Callable vs Conventional Bonds

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

$45,000

$50,000

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

Jul11

Jan12

Jul12

Jan13

Jul13

Jan14

33

Step Up Bond – Cash Flow to Maturity

Source: Bloomberg

2004 Issue CUSIP Issue Date Maturity Date Coupon Yield to Maturity PriceLa Salle Bank Step Callable ED270720 1/9/2004 1/9/2014 See Below 4.000% 100.000$ Fixed Coupon U.S. Treasury 912828CA6 2/15/2004 2/15/2014 4.000% 3.754% 102.034$

Purchase Amount TIPS 1,000,000.00$ Purchase Amount Conventional 980,065.47$

Cashflow Analysis Step Up Coupon Bond - 10 Year Maturity

Date Purchase/ Maturity Index Adjusted Principal CouponSemi-Annual

Interest Payment Total CashflowCumulative Cashflow

Jan 04 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Jul 04 1.000000 1,000,000.00$ 4.000% $20,000.00 $20,000.00 ($980,000.00)

Jan 05 1.000000 1,000,000.00$ 4.000% $20,000.00 $20,000.00 ($960,000.00)Jul 05 1.000000 1,000,000.00$ 4.125% $20,625.00 $20,625.00 ($939,375.00)

Jan 06 1.000000 1,000,000.00$ 4.125% $20,625.00 $20,625.00 ($918,750.00)Jul 06 1.000000 1,000,000.00$ 4.250% $21,250.00 $21,250.00 ($897,500.00)

Jan 07 1.000000 1,000,000.00$ 4.250% $21,250.00 $21,250.00 ($876,250.00)Jul 07 1.000000 1,000,000.00$ 4.500% $22,500.00 $22,500.00 ($853,750.00)

Jan 08 1.000000 1,000,000.00$ 4.500% $22,500.00 $22,500.00 ($831,250.00)Jul 08 1.000000 1,000,000.00$ 4.750% $23,750.00 $23,750.00 ($807,500.00)

Jan 09 1.000000 1,000,000.00$ 4.750% $23,750.00 $23,750.00 ($783,750.00)Jul 09 1.000000 1,000,000.00$ 5.000% $25,000.00 $25,000.00 ($758,750.00)

Jan 10 1.000000 1,000,000.00$ 5.000% $25,000.00 $25,000.00 ($733,750.00)Jul 10 1.000000 1,000,000.00$ 6.000% $30,000.00 $30,000.00 ($703,750.00)

Jan 11 1.000000 1,000,000.00$ 6.000% $30,000.00 $30,000.00 ($673,750.00)Jul 11 1.000000 1,000,000.00$ 7.000% $35,000.00 $35,000.00 ($638,750.00)

Jan 12 1.000000 1,000,000.00$ 7.000% $35,000.00 $35,000.00 ($603,750.00)Jul 12 1.000000 1,000,000.00$ 8.000% $40,000.00 $40,000.00 ($563,750.00)

Jan 13 1.000000 1,000,000.00$ 8.000% $40,000.00 $40,000.00 ($523,750.00)Jul 13 1.000000 1,000,000.00$ 9.000% $45,000.00 $45,000.00 ($478,750.00)

Jan 14 $1,000,000.00 1.000000 1,000,000.00$ 9.000% $45,000.00 $1,045,000.00 $566,250.00

$566,250.00 $566,250.00

Cashflow Analysis Conventional Bond 10 Year Maturity



Feb 04 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Aug 04 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($980,398.69)Feb 05 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($960,797.38)Aug 05 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($941,196.07)Feb 06 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($921,594.76)Aug 06 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($901,993.45)Feb 07 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($882,392.14)Aug 07 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($862,790.83)Feb 08 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($843,189.53)Aug 08 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($823,588.22)Feb 09 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($803,986.91)Aug 09 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($784,385.60)Feb 10 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($764,784.29)Aug 10 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($745,182.98)Feb 11 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($725,581.67)Aug 11 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($705,980.36)Feb 12 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($686,379.05)Aug 12 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($666,777.74)Feb 13 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($647,176.43)Aug 13 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($627,575.12)Feb 14 $1,000,000.00 1.000000 980,065.47$ 4.000% $19,601.31 $1,019,601.31 $392,026.19

$392,026.19 $392,026.19

$566,250

$392,026

34

Step Up Bond Cash Flow with Call Scenario

Source: Bloomberg

Step Up Coupon (with Call Feature) vs. Fixed Coupon Cash Flow to Maturity

◘ Coupon payments increase at each interval with Step up

Coupon Cashflow ComparisonStep Up Coupon Callable vs Conventional Bonds

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

Jul04

Jan05

Jul05

Jan06

Jul06

Jan07

Jul07

Jan08

Jul08

Jan09

Jul09

Jan10

Jul10

Jan11

Jul11

Jan12

Jul12

Jan13

Jul13

Jan14

35

Step Up Bond – Cash Flow to Call

Source: Bloomberg

2004 Issue CUSIP Issue Date Maturity Date Coupon Yield to Maturity PriceLa Salle Bank Step Callable ED270720 1/9/2004 1/9/2014 See Below 4.000% 100.000$ Fixed Coupon U.S. Treasury 912828CA6 2/15/2004 2/15/2014 4.000% 3.754% 102.034$

Purchase Amount TIPS 1,000,000.00 Purchase Amount Conventional 980,065.47

Cashflow Analysis Step Up Coupon Bond



Jan 04 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Jul 04 1.000000 1,000,000.00$ 4.000% $20,000.00 $20,000.00 ($980,000.00)

Jan 05 1.000000 1,000,000.00$ 4.000% $20,000.00 $20,000.00 ($960,000.00)Jul 05 1.000000 1,000,000.00$ 4.125% $20,625.00 $20,625.00 ($939,375.00)

Jan 06 1.000000 1,000,000.00$ 4.125% $20,625.00 $20,625.00 ($918,750.00)Jul 06 1.000000 1,000,000.00$ 4.250% $21,250.00 $21,250.00 ($897,500.00)

Jan 07 1.000000 1,000,000.00$ 4.250% $21,250.00 $21,250.00 ($876,250.00)Jul 07 1.000000 1,000,000.00$ 4.500% $22,500.00 $22,500.00 ($853,750.00)

Jan 08 1.000000 1,000,000.00$ 4.500% $22,500.00 $22,500.00 ($831,250.00)Jul 08 1.000000 1,000,000.00$ 4.750% $23,750.00 $23,750.00 ($807,500.00)

Jan 09 1.000000 1,000,000.00$ 4.750% $23,750.00 $23,750.00 ($783,750.00)Jul 09 1.000000 1,000,000.00$ 5.000% $25,000.00 $25,000.00 ($758,750.00)

Jan 10 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($756,250.00)Jul 10 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($753,750.00)

Jan 11 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($751,250.00)Jul 11 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($748,750.00)

Jan 12 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($746,250.00)Jul 12 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($743,750.00)

Jan 13 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($741,250.00)Jul 13 1.000000 1,000,000.00$ 0.500% $2,500.00 $2,500.00 ($738,750.00)

Jan 14 $1,000,000.00 1.000000 1,000,000.00$ 0.500% $2,500.00 $1,002,500.00 $263,750.00

$263,750.00 $263,750.00

Cashflow Analysis Conventional Bond 10 Year Maturity



Feb 04 ($1,000,000.00) ($1,000,000.00) ($1,000,000.00)Aug 04 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($980,398.69)Feb 05 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($960,797.38)Aug 05 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($941,196.07)Feb 06 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($921,594.76)Aug 06 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($901,993.45)Feb 07 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($882,392.14)Aug 07 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($862,790.83)Feb 08 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($843,189.53)Aug 08 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($823,588.22)Feb 09 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($803,986.91)Aug 09 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($784,385.60)Feb 10 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($764,784.29)Aug 10 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($745,182.98)Feb 11 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($725,581.67)Aug 11 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($705,980.36)Feb 12 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($686,379.05)Aug 12 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($666,777.74)Feb 13 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($647,176.43)Aug 13 1.000000 980,065.47$ 4.000% $19,601.31 $19,601.31 ($627,575.12)Feb 14 $1,000,000.00 1.000000 980,065.47$ 4.000% $19,601.31 $1,019,601.31 $392,026.19

$392,026.19 $392,026.19

$263,750*

$392,026

*Assumes reinvestment at 50bps

Interest Rates: We know where we’ve been….but where are we going?

37

Fed Funds Futures Contracts

Source: Bloomberg

Federal Funds Rate - Future ContractsAugust 2009 - March 2010

1.07%

0.23%

0.43%

0.64%

2.81%

0.87%

0.00%

0.25%

0.50%

0.75%

1.00%

1.25%

1.50%

1.75%

2.00%

2.25%

2.50%

2.75%

3.00%

Aug 09 Sep 09 Nov 09 Dec 09 Jan 10 Mar 10 Apr 10

June 2010 Contract

December 2010 Contract

March 2011 Contract

June 2011 Contract

38

Fed Funds Survey Forecast

Source: Bloomberg

Federal Funds Rate Expectations for 2010Bloomberg Survey March 2010

0.75%

1.25%

1.75%

2.50%

0.25% 0.25%

0.75%

1.00%

0.25% 0.25% 0.25% 0.25%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

2Q10 3Q10 4Q10 1Q11

High Forecast

Median Forecast

Low Forecast

39

Fed Funds Implied Probability

Source: Bloomberg

40

Fed Federal Funds Rate vs. 3 Month LIBOR

Source: Bloomberg

Federal Funds versus 3 Month LIBORJuly 2007 - May 2010

2.00%

5.25%

4.05%

5.36%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Jul 07 Oct 07 Dec 07Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Jan 09 Mar 09May 09 Jul 09 Sep 09Nov 09 Jan 10 Apr 10

Yiel

d

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Spre

ad to

Fed

eral

Fun

ds R

ate

41

Yield Curve Shape Shift Since Credit Crisis

Source: Bloomberg

Yield Curve ComparisonPre Credit Crisis vs. Current

August 2007 - April 2010

Change in RatesPre-Credit Crisis vs. Current

Yield Curve August 2007

30 Year5.51%6 Month

5.21%5.08%

Yield Curve April 2010

0.18%

Yield Curve December 2008

4.19%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

3 Month 6 Month 1 Year 2 Year 3 Year 4 Year 5 Year 7 Year 8 Year 9 Year 10 Year 15 Year 20 Year 25 Year 30 Year

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

42

Short Term Rates by Sector

Source: Bloomberg

Short Term Yield CurvesMay 2010 - February 2011

0.36%

0.48%

0.59%

0.72%0.66%

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

0.70%

0.80%

0.90%

1.00%

May 10 Jul 10 Sep 10 Nov 10 Jan 11 Mar 11 May 11

US T-Bills US Disc Notes Direct Issue CP A1+/P1+ Direct Issue CP A1/P1 CP A1+/P1+ CP A1/P1

43

Short Term Spreads Remain Stable

Source: Bloomberg

One Month vs Two Year U.S. Treasury - 3 Year HistoryApril 2007 - April 2010

8/3/074.916%

8/3/074.421%

(1.00%)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

May 07 Aug 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10

(1.00%)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Spread

1 Month U.S. Tresaury Note

2 Year U.S. Tresaury Note

44

Maturity Spreads Widen in Longer Term Notes

Source: Bloomberg

Two Year vs Ten Year U.S. Treasury - 3 Year HistoryApril 2007 - April 2010

1.070%

3.653%

5.130%

(1.00%)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

May 07 Aug 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10

(1.00%)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

2 Year Spread to 10 Year



45

Yield Curve vs. Sector Spreads – July 2007

Source: Bloomberg

Yield Curve Comparison - July 20073 Month - 5 Month Maturity

5.06%5.01%

5.82%5.57%

0.00%

1.00%2.00%

3.00%4.00%

5.00%6.00%

7.00%

Aug2010

Nov2010

Mar2011

Jul2011

Nov2011

Mar2012

Jun2012

Oct2012

Feb2013

Jun2013

Sep2013

Jan2014

May2014

Sep2014

Jan2015

Apr2015

United States Treasury Federal Agency AA Composite A Composite

46

Yield Curve vs. Sector Spreads – December 2008

Source: Bloomberg

Yield Curve Sector Comparison - December 20083 Month - 5 Year Maturity

0.17% 1.49%

4.43%

5.80%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Aug2010

Nov2010

Mar2011

Jul2011

Nov2011

Mar2012

Jun2012

Oct2012

Feb2013

Jun2013

Sep2013

Jan2014

May2014

Sep2014

Jan2015

Apr2015


47

Yield Curve vs. Sector Spreads – March 2010

Source: Bloomberg

Yield Curve Sector Comparison - May 20103 Month - 5 Year Maturity

2.44%

0.22%

3.70%

0.83%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Aug10

Nov10

Mar11

Jul11

Nov11

Mar12

Jun12

Oct12

Feb13

Jun13

Sep13

Jan14

May14

Sep14

Jan15

Apr15


48

Yield Curve vs. Sector Spreads – 2007 vs. 2010

Source: Bloomberg

Yield Curve Comparison - July 20073 Month - 5 Month Maturity

5.06%5.01%

5.82%5.57%

0.00%

1.00%2.00%

3.00%4.00%

5.00%6.00%

7.00%

Aug2010

Nov2010

Mar2011

Jul2011

Nov2011

Mar2012

Jun2012

Oct2012

Feb2013

Jun2013

Sep2013

Jan2014

May2014

Sep2014

Jan2015

Apr2015


Yield Curve Sector Comparison - May 20103 Month - 5 Year Maturity

2.44%

0.22%

3.70%

0.83%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

Aug10

Nov10

Mar11

Jul11

Nov11

Mar12

Jun12

Oct12

Feb13

Jun13

Sep13

Jan14

May14

Sep14

Jan15

Apr15


49

FNMA/FHLMC vs. U.S. Treasury Notes – 2 Year Maturity

Source: Bloomberg

FNMA/FHLMC Yield Spread to US Treasury - 2 Year MaturitySeptember 2008 - May 2010

(20.00)

20.00

60.00

100.00

140.00

180.00

Sep 08 Nov 08 Feb 09 May 09 Jul 09 Oct 09 Dec 09 Mar 10

FNMA to Govt 2yr FHLMC to Govt 2yr


Source: Bloomberg

51

U.S. Treasury Notes - 2010

One Month vs Two Year U.S. TreasuryJanuary 2010 - May 2010

4/2/100.142%

5/7/100.071%

5/7/100.812%

4/2/101.108%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

Jan10

Jan10

Jan10

Jan10

Jan10

Feb10

Feb10

Feb10

Feb10

Mar10

Mar10

Mar10

Mar10

Apr10

Apr10

Apr10

Apr10

Apr10

May10

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

Spread

1 Month U.S. Tresaury Note


52

U.S. Treasury Notes – 5 Year History

Two Year U.S. Treasury - 5 Year HistoryNovember 2005 - May 2010

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

5.00%

5.50%

6.00%

Nov05

Feb06

May06

Aug06

Nov06

Feb07

May07

Aug07

Nov07

Feb08

May08

Aug08

Nov08

Feb09

May09

Aug09

Nov09

Feb10

May10

53


Annual Return Index Comparison One Year Period Ended December 31, 2009

0.21%0.58% 0.80% 0.78%

1.23%

3.84%

(0.67%)

(2.90%)0 0

1 1

00

3 3

-4.00%

-3.00%

-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

3-monthTreasury Bill



1-3 YearTreasury

1-3Treas/Agn

1-3 YearCorp/Gov

3-5 YearTreasury

5-7 YearTreasury

Ann

ual R

etur

n

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

Neg

ativ

e Q

uart

ers

Annual Return Index Comparison Ten Year Period Ended December 31, 2009

2.98%3.39%

3.80%

4.48% 4.60% 4.79%

6.00%6.54%

1414

3 34

3

000.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%




1-3 YearTreasury

1-3Treas/Agn

1-3 YearCorp/Gov

3-5 YearTreasury

5-7 YearTreasury

Ann

ual R

etur

n

-

2.00

4.00

6.00

8.00

10.00

12.00

14.00

16.00

18.00

20.00

Neg

ativ

e Q

uart

ers

Source: Bloomberg

54

Rolling Returns by Duration Strategy

Source: Bloomberg

1-3 Year Corp/Gov Index4.24%

1-3 Year UST/AGY Index4.52%

1-3 Year UST Index4.55%

3.80% 4.00% 4.20% 4.40% 4.60% 4.80%

Standard Deviation (Volatility Risk)

Change in Yield Sector ComparisonDecember 2008 - March 2010

0.94%

0.09%

-2.10%

-3.57%(4.00%)

(3.00%)

(2.00%)

(1.00%)

0.00%

1.00%

2.00%

3 Month 6 Month 1 Year 2 Year 3 Year 4 Year 5 Year


55

Annual Performance – 1-3 Year Duration

Source: Bloomberg

Annual Returns 1-3 Year Duration Strategy5 Year History Sector Comparison

1.67%

3.96%

7.32%6.59%

0.78%1.70%

4.14%

7.14%6.73%

1.23%1.75%

4.25%

6.87%

4.68%3.84%

2.01%

4.71%5.66%

(2.58%)

15.16%

1.86%

4.57%

6.19%

1.72%

8.01%

(4.0%)

(2.0%)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

2005 2006 2007 2008 2009

1-3YR UST

1-3YR UST/AGY

1-3YR CRP/GV

1-3YR CRP CONST

1-3YR CRP AA

56

Annual Performance – Short Term vs. 1-3 Duration

Source: Bloomberg

Annual Returns Short Term vs. 1-3 Year Duration Strategy5 Year History Sector Comparison

3.07%

4.85%5.00%

2.05%

0.21%

3.10%

4.81%

5.61%

3.57%

0.58%

2.35%

4.32%

5.95%

4.73%

0.80%

1.67%

3.96%

7.32%

6.59%

0.78%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

2005 2006 2007 2008 2009

3M Tbill

6M Tbill

12MTbill

1-3YR UST

57

Annualized Performance – 10 Year and Credit Crisis

Source: Bloomberg

1-3 Year Duration Strategy10 Year and Credit Crisis Hitorical Sector Comparison

4.42% 4.48%4.53%4.90%4.76%

5.13%5.49%

6.20%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

10.0%

367 732

1-3YR UST 1-3YR UST/AGY 1-3YR CRP/GV 1-3YR CRP CONST

58

Growth in Assets – 1-3 Year Duration Strategy

Source: Bloomberg

1-3 Year Duration Strategy - Growth in Assets10 Year and Credit Crisis Hitorical Sector Comparison

$38,540,863.03

$28,205,574.26

$38,945,290.04

$28,519,621.02

$39,811,227.32

$28,688,369.68

$42,679,695.15

$29,503,388.44

$25,000,000.00

$30,000,000.00

$35,000,000.00

$40,000,000.00

$45,000,000.00

$50,000,000.00

367 732

1-3YR UST

1-3YR UST/AGY

1-3YR CRP/GV

1-3YR CRP CONST

59

Rolling Returns and Volatility by Sector

Source: Bloomberg

Rolling Annual Returns1-3 Year Index Comparison

Ten Years Ended December 31, 2009

0.78%

1.23%

6.73%

3.84%4.68%

(1.00%)

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

12.00%

Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009

1-3 Year Treasury

1-3 Treas/Agn

1-3 Year Corp/Gov

60

Rolling Returns by Duration Strategy

Source: Bloomberg

Rolling Annual Returns10 Years Ended December 31, 2009

(2.00%)

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

Dec 1999 Dec 2000 Dec 2001 Dec 2002 Dec 2003 Dec 2004 Dec 2005 Dec 2006 Dec 2007 Dec 2008 Dec 2009

3-month Treasury Bill

12-month Treasury Bill

1-3 Year Treasury

1-3 Treas/Agn

1-3 Year Corp/Gov

Cash Flows and Portfolio Strategies

62

Developing a Cash Flow Analysis

Cash flows are typically cyclical, and also have a seasonality affect. One time events such as bond proceeds and grants should be excluded.

Historical and projected analysis establish trends and assist with the estimation of future cash flows based on internal and external events and impact on short term and core assets

◊ A cash flow analysis establishes the foundation for a successful, effective investment program

◊ One time events such as grants and bond proceeds should be excluded from the general analysis

◊ The analysis can be conducted on a fund-by-fund and/or pooled approach

◊ Historical balances can provide an indication of future trends

◊ Internal and external factors should be considered for projecting future asset balances

◊ The analysis should be updated annually to compare projected vs. actual results

◊ An appropriate approach is to analyze multiple scenarios to determine short term and core assets

63

Enhanced Cash Strategy

Enhanced Cash StrategyAsset Allocation

U.S. Treasury Notes, 29.52%

Federal Agency, 51.49%

FDIC Insured, 18.24%

U.S. Federal Credit Union,

0.75%

Enhanced Cash StrategyMaturity Distribution Total Portfolio

15.57%

35.75%

11.31% 13.59%

21.91%

1.86% 0.00% 0.00% 0.00% 0.00%0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

0 - 3Months

3 - 6Months

6 - 9Months

9 -12Months

1 - 1.5Years

1.5 - 2Years

2 - 3Years

3 - 4Years

4 - 5Years

5 Years+

Sample Portfolio Characteristics

◊ AAA Portfolio Structure

◊ Sectors include U.S. Treasury Notes, Federal Agency Notes, U.S. Federal Credit Union, FDIC Insured Notes, Commercial Paper

◊ Maturity distribution structure for weighted average maturity of approximately six months

64

Core Strategy

Sample Portfolio Characteristics

◊ AAA Portfolio Structure

◊ Sectors include U.S. Treasury Notes, Federal Agency Notes, U.S. Federal Credit Union, FDIC Insured Notes, Corporate Notes

◊ Maturity distribution structure for weighted average maturity of approximately 1.5 – 1.8 Years

Core Portfolio StrategyAsset Allocation

Federal Agency, 67.25%

FDIC Insured, 12.01%

U.S. Federal Credit Union,

1.54%

U.S. Treasury Notes, 19.20%

Core Portfolio StrategyMaturity Distribution Total Portfolio

0.00%5.35%

0.00%6.69%

41.42%

6.60%

25.88%

10.75%

3.30%0.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

0 - 3Months

3 - 6Months

6 - 9Months

9 -12Months

1 - 1.5Years

1.5 - 2Years

2 - 3Years

3 - 4Years

4 - 5Years

5 Years+

`

65

Selecting Benchmarks

Source: Bloomberg

Selecting the right Benchmark based on Goals and Objectives

◘ The Asset Allocation of the Benchmark should be similar to that of the Investment Portfolio

◘ The Duration of the Benchmark should be similar to the Investment Portfolio

◘ The Credit Quality of the Benchmark be similar to the Investment Portfolio

◘ The selected Benchmark provides a measure of portfolio performance given certain parameters established by State Statute and by the Investment Policy

◘ Important to calculate the return of an index and the investment portfolio with the total return method to present the return on assets considering all realized and unrealized gains and losses

Sample Portfolio

U.S. Treasury Bills5%

U.S. Treasury Notes

33% Georgia Fund5%

Federal Agency

Bills12%

Federal Agency Notes45%

Money

ML 1-3 Year U.S. Treasury IndexAsset Allocation

U.S. Treasur

y100%

66

Performance Case Study – Asset Allocation

Source: Bloomberg

Asset AllocationSample Portfolio vs. 1-3 UST/AGY Index

35.00%

72.00%

49.00%

28.00%

16.00%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

UST

AGY

CORP

67

Performance Case Study – Ratings Distribution

Source: Bloomberg

Ratings DistributionSample Portfolio vs. 1-3 UST/AGY Index

92.00%

100.00%

7.00%

0.00%0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

AAA

AA

68

Performance Case Study – Performance

Source: Bloomberg

Performance Comparison Case StudyDecember 31, 2008 - March 31, 2010

2.25%

1.55%

0.40%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

Sample Portfolio 1-3YR UST/AGY NOW Account

Sample Portfolio

1-3YR UST/AGY

NOW Account

69

Performance Case Study – Growth in Assets

Source: Bloomberg

Growth in Assets Comparison Case StudyDecember 31, 2008 - March 31, 2010

$25,703,132.85

$25,483,967.46

$25,124,718.95

$25,000,000.00

$25,250,000.00

$25,500,000.00

$25,750,000.00

$26,000,000.00

Sample Portfolio 1-3YR UST/AGY NOW Account

Sample Portfolio

1-3YR UST/AGY

NOW Account

70

Summary

◘ Protracted environment of challenged employment and growth

◘ Use this time to clean up your investment policy

◘ Continue to monitor and update cash flow projections

◘ Determine short and “core” portfolios

◘ Rates will be rising in the future?

◘ Keep an eye on inflation

◘ Take advantage of current government offerings

◘ Pay attention to what the yield curve is telling you

john grady, tom tight

Economy & Finance

rate risk

issuer risk

industry market risk

investment officers

investment ability

investment decisions

portfolio liquidity

managed investment portfolios