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Member NYSE|FINRA|SIPC Creating a Foundation for Investing North Carolina Local Government Investment Association 2016 Winter Conference February 8, 2016 Discussion Summary Setting Goals and Objectives Identify funds to manage Timing of cash needs Determine investment approach Investment Policy Considerations Authorized Investments Asset Allocation Duration Purchasing Investments Broker-Dealers Setting up a Process Evaluation of Offers

2 Setting Goals and Objectives Key Questions What cash are you currently managing? What is the timing of using those funds? Funds typically fall into different categories Day to day operating funds (General/Utility) Capital Funds/Bond Proceeds Other reserves This categorization will help determine timing of cash flow needs Types of Cash Deposits Purpose Operati ng Funds Payroll Debt Service Other Operating Expenditur es Capital Projects No Specific Expense Capital/ Bond Proceeds Reserv es

3 Key Investment Concept Yield Curve Normal Yield Curve A curve on a graph in which the yield of fixed-interest securities is plotted against the length of time they have to run to maturity Yield Yield Curve Basic types of yield curves: Maturity Inverted Yield Curve A yield curve in which short-term debt instruments have a lower yield than longterm debt instruments of the same credit quality Yield Normal Inverted A yield curve in which long-term debt instruments have a lower yield than shortterm debt instruments of the same credit quality A yield curve in which there is little difference between short-term and longterm rates for bonds of the same credit quality FlatYield Curve Yield Flat Maturity Maturity 4 Investment Objectives Safety Avoiding the loss of your principal investment

Impact of Rising Interest Rates on Market Value Market Value of Investment Credit Quality Avoiding unexpected sale of investments Liquidity Timely access to your funds Short-term deposits Matching assets and liabilities Secondary market for investments ability to sell securities if needed Yield Credit Quality Diversification of Investments Positive slope to yield curve Taxable vs. Tax-Exempt Matur ity Current Market +0.50% +1.00% 1-Year $1,000,00 0 $995,03 6 $990,10 9 3Years $1,000,00 0 $985,37 8 $971,00 8 5Years

$1,000,00 0 $976,21 3 $953,06 0 Change in Market Value Matur ity Current Market +0.50% +1.00% 1-Year $0 ($4,964) ($9,891) 3Years $0 ($14,622 ) ($28,992 ) 5Years $0 ($23,787 ) ($46,940 ) Cost considerations 5 Determine an Investment Approach

Four main investment approaches: 1. Maintain a Short-term portfolio Keep all available cash in readily accessible short-term investments (i.e. NCCMT, Bank Deposits) 2. Build a Simple Investment Ladder 3. Build a Targeted Investment Ladder Utilize a cash flow forecast to match investment purchases against future unfunded expenses 4. Hire an Outside Manager Hire a third party manager with full Investment purchases are made in equal discretion to manage your investment amounts spread evenly across a time portfolio horizon Maintaining a short-term liquidity balance is key under any of these approaches 6 Investment Approach Short-Term Basic Approach: Keep all cash in short-term investments such as bank deposits or the NCCMT EffectiveFederal Funds Ratesince 2000 8.0% 7.0% 6.0% 5.0% 4.0% Liquidity 3.0% Limited time commitment 2.0% 1.0% 2016 2015 2014 2013

2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 0.0% 2000 Low cost 2001 Pros: Cons: Invested on short-end of the yield curve Budgetary uncertainty of investment income 7 Investment Approach Simple Investment Ladder Simple Investment Ladder Thousands Basic Approach: A strategy where investment maturities are spread out in equal amounts over equal increments of time. New investments are made as funds become available or as existing investments mature $200 $180 $160 $140 $120

$100 Pros: Additional yield under normal yield curve Predictable investment income $80 $60 $40 $20 $0 0 Months 3 Months 6 Months 9 Months Cons: 12 15 18 Months Months Months Yield Curve Agency Yields Liquidity 0.70% Costs 0.60% Limited additional time commitment 0.50% 0.40% 0.30% 0.20% 0.10% 0.00% 0 Months 3 Months 6 Months 9 Months 12 Months 15 Months 18 Months 8 Investment Approach Targeted Investment Ladder Cash Flow Forecast

Thousands Basic Approach: By using a cash flow forecast, investment purchases are made to match future unfunded expenses $400.0 Revenues $350.0 Expenses $300.0 $250.0 $150.0 $100.0 $50.0 Change in timing of projects Liquidity by matching assets and liabilities Thousands Predictable investment income Week 26 Week 24 Week 22 Week 20 Week 18 Week 16 Week 14 Week 12 Week 10 Optimized Cash Flow Pros: Additional yield under a normal yield curve Week 8

New/revised debt service payments Week 6 Week 0 $0.0 Week 4 New/revised operating budgets $200.0 Week 2 It is important to regularly update your forecast $400.0 Investment Cash Flow Revenues Liquidity Position Expenses $350.0 $300.0 $250.0 $200.0 $150.0 Week 26 Week 24 Week 22 Week 20 Week 18 Week 16 Week 14 Week 12 Week 10 Week 8 Week 6

$0.0 Week 4 Costs $50.0 Week 2 Additional time commitment $100.0 Week 0 Cons: 9 Importance of Maintaining a Short-Term Liquidity Position Cash flow forecast accuracy Uncertain timing of some expenditures (e.g. capital projects) Unexpected/unbudgeted expenses Actual Revenues vs. Forecast Thousands Even under a targeted ladder approach, maintaining a short-term position necessary 250.0 Actual 200.0 Forecast 150.0 100.0 50.0 It is important to set an internal liquidity target that everyone is comfortable with 9/ 25/ 15 9/ 11/ 15 8/ 28/ 15 8/ 14/ 15

7/ 31/ 15 7/ 17/ 15 7/ 3/ 15 6/ 19/ 15 6/ 5/ 15 5/ 22/ 15 5/ 8/ 15 4/ 24/ 15 4/ 10/ 15 3/ 27/ 15 Actual Expenses vs. Forecast 250.0 Actual 200.0 Forecast 150.0 100.0 50.0 9/ 25/ 15 9/ 11/ 15 8/ 28/ 15 8/ 14/ 15 7/ 31/ 15 7/ 17/ 15 7/ 3/ 15 6/ 19/ 15 6/ 5/ 15 5/ 22/ 15 5/ 8/ 15

4/ 24/ 15 4/ 10/ 15 0.0 3/ 27/ 15 Thousands The liquidity target can be refined over time based on cash flow analysis (i.e. forecast vs. actual performance) 0.0 10 Developing an Investment Policy Start with a framework LGC sample policy GFOA sample policy LGC Sample Policy GFOA Sample Policy Similar North Carolina peers Policy Contents Goals and Objectives Authorized Investments Asset Allocation Duration Delegation of Responsibility Investment Procedures Safe Keeping and Custody Reporting 11 Basic Types of Investments Types of Investments Collateralized Bank Deposits and CDs NCCMT (Cash and Term Portfolios) Treasuries Bills (discount security with up to 1 year maturity) Notes (up to 10 year maturity) Bonds (up to 30 year maturity)

STRIPS (discount security) Types of Investments Agencies Federal National Mortgage Association (Fannie Mae/FNMA) Federal Home Loan Mortgage Corporation (Freddie Mac/FHLMC) Federal Home Loan Bank (FHLB) Federal Farm Credit Bank (FFCB) North Carolina Municipal Bonds/Notes State of North Carolina Local government or public authority bond 'Prime Quality' Commercial Paper Foreign vs. Domestic Non-financial vs. Financial Asset Backed 12 Select Investment Risks Company Risk Sovereign Risk Industry Risk Market Risk 13 Investment Policy Considerations Consider Types of Permitted Investments Permitted Investments NC Investment of Public Funds (159-30) Additional Considerations Asset Allocation and Maturity Limitations Potential Asset Allocation Considerations Maximum allowable investment by investment type Minimum credit ratings Maximum limit by issuer

Industry Risk Maximum limit by credit rating Sovereign Risk Callable securities Asset Backed Investments Investment Maturity Considerations Maximum maturity Targeted percentage ranges by maturity 14 Purchasing Investments Identify funds that are available to invest Sample Request for Offers Approve a group of Broker-Dealers Investment Bid Request February 07, 2016 Request 1 of 2 Request Details Provide Broker-Dealers with Investment Policy and NC G.S. 159-30 Additional Specifications Agencies: FFCB, FHLB, FNMA, FHLMC Security Type Requested Non-callable Agencies Requested Bids Due By 2/ 8/ 2016 @ 11:00 AM Par Amount Requested $1,000,000 Request for offers Wire/ delivery instructions will be provided to the successful offeror.

6/ 1/ 2017 Latest Maturity If regularly purchasing securities, create a manageable investment process: All offers must conform with N.C. General Statute 159-30 Callable No Please fill out Bid Information below and return in Excel format: Bidder Name Example Bidder Par Amount $ 1,000,000 Security Type FFCB Discount Note Maturity Date 6/ 1/ 2017 Price (%) 99.500% YTM % / Call Date Yield to Call Coupon Bond Equiv. (if % (if (%) Yield applicable) applicable) 0.000% 0.500% N/ A N/ A Identify amount, maturity and asset class Receive bid(s) at certain date/time Create template for evaluating bids Document winning bidder and reason

Other Bid Information Clearly communicate with Broker-Dealers about other harder to find asset classes that meet your needs (e.g. municipal bonds, CP) 15 Investment Purchasing Process Roles of Various Parties 1. Requests investment Municipality 2. Finds requested security 3. Provides trade confirmation 4. Provides confirmation and makes money available for purchase Third-Party Custodian Broker-Dealers se rit u c s er ity v r i l u e D ec s . 5

r fo s a y er y P 6. eliv d y r te f a 16 Summary Identify the various cash balances to invest and match those funds against anticipated cash flow expenses Set your Investment Objectives and determine an Investment Approach Create/Modify your Investment Policy based on your objectives/approach and consider additional restrictions beyond state statute Set up a manageable process for purchasing investments 17 Richmond Office One James Center 901 East Cary Street 11th Floor Richmond, VA 23219 Charlotte Office Ty Wellford First Vice President (804) 697-2915 [email protected] Independence Center 101 N. Tryon Street Suite 1220 Charlotte, NC 28246 Raleigh Office Glenwood Plaza 3605 Glenwood Ave. Suite 390

Raleigh, NC 27612 18 Disclaimer The U.S. Securities and Exchange Commission (the SEC) has clarified that a broker, dealer or municipal securities dealer engaging in municipal advisory activities outside the scope of underwriting a particular issuance of municipal securities should be subject to municipal advisor registration. Davenport & Company LLC (Davenport) has registered as a municipal advisor with the SEC. As a registered municipal advisor Davenport may provide advice to a municipal entity or obligated person. An obligated person is an entity other than a municipal entity, such as a not for profit corporation, that has commenced an application or negotiation with an entity to issue municipal securities on its behalf and for which it will provide support. If and when an issuer engages Davenport to provide financial advisory or consultant services with respect to the issuance of municipal securities, Davenport is obligated to evidence such a financial advisory relationship with a written agreement. When acting as a registered municipal advisor Davenport is a fiduciary required by federal law to act in the best interest of a municipal entity without regard to its own financial or other interests. Davenport is not a fiduciary when it acts as a registered investment advisor, when advising an obligated person, or when acting as an underwriter, though it is required to deal fairly with such persons, This material was prepared by public finance, or other non-research personnel of Davenport. This material was not produced by a research analyst, although it may refer to a Davenport research analyst or research report. Unless otherwise indicated, these views (if any) are the authors and may differ from those of the Davenport fixed income or research department or others in the firm. Davenport may perform or seek to perform financial advisory services for the issuers of the securities and instruments mentioned herein. This material has been prepared for information purposes only and is not a solicitation of any offer to buy or sell any security/instrument or to participate in any trading strategy. Any such offer would be made only after a prospective participant had completed its own independent investigation of the securities, instruments or transactions and received all information it required to make its own investment decision, including, where applicable, a review of any offering circular or memorandum describing such security or instrument. That information would contain material information not contained herein and to which prospective participants are referred. This material is based on public information as of the specified date, and may be stale thereafter. We have no obligation to tell you when information herein may change. We make no representation or warranty with respect to the completeness of this material. Davenport has no obligation to continue to publish information on the securities/instruments mentioned herein. Recipients are required to comply with any legal or contractual restrictions on their purchase, holding, sale, exercise of rights or performance of obligations under any securities/instruments transaction. The securities/instruments discussed in this material may not be suitable for all investors or issuers. Recipients should seek independent financial advice prior to making any investment decision based on this material. This material does not provide individually tailored investment advice or offer tax, regulatory, accounting or legal advice. Prior to entering into any proposed transaction, recipients should determine, in consultation with their own investment, legal, tax, regulatory and accounting advisors, the economic risks and merits, as well as the legal, tax, regulatory and accounting characteristics and consequences, of the transaction. You should consider this material as only a single factor in making an investment decision. The value of and income from investments and the cost of borrowing may vary because of changes in interest rates, foreign exchange rates, default rates, prepayment rates, securities/instruments prices, market indexes, operational or financial conditions or companies or other factors. There may be time limitations on the exercise of options or other rights in securities/instruments transactions. Past performance is not necessarily a guide to future performance and estimates of future performance are based on assumptions that may not be realized. Actual events may differ from those assumed and changes to any assumptions may have a material impact on any projections or estimates. Other events not taken into account may occur and may significantly affect the projections or estimates. Certain assumptions may have been made for modeling purposes or to simplify the presentation and/or calculation of any projections or estimates, and Davenport does not represent that any such assumptions will reflect actual future events. Accordingly, there can be no assurance that estimated returns or projections will be realized or that actual returns or performance results will not materially differ from those estimated herein. This material may not be sold or redistributed without the prior written consent of Davenport. Version 01/13/2014 LS|TW 19

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