March 24, 2016 Government Investment Officers Association 12 th Annual Conference Las Vegas, NV FIXED INCOME RESEARCH Managing and Preparing for Rising Rates Intended for Institutional Clients Only See Page 41 for Important Disclaimers & Disclosures Ellis Phifer, CFA, CMT Managing Director (901)

2 MANAGING AND PREPARING FOR RISING RATES Agenda Interest Rates and the Fed: A Long Term Relationship Interest Rates Prior to a Fed Tightening Interest Rates After a Fed Tightening Begins Current Economic Conditions Interest Rate Expectations Positioning While Rates are Rising

3 Interest Rates and the Fed MANAGING AND PREPARING FOR RISING RATES

4 Agenda Interest Rates and the Fed: A Long Term Relationship Interest Rates Prior to a Fed Tightening Interest Rates After a Fed Tightening Begins Current Economic Conditions Interest Rate Expectations Positioning While Rates are Rising

Tightening Cycle Phase I – Pre-Tightening Yield Curve “Humps” MANAGING AND PREPARING FOR RISING RATES

Tightening Cycle Yield Curve “Humps” Phase I – Pre-Tightening MANAGING AND PREPARING FOR RISING RATES

7 Current Cycle Yield Curve “Humps” Phase I – Pre-Tightening MANAGING AND PREPARING FOR RISING RATES

8 Agenda Interest Rates and the Fed: A Long Term Relationship Interest Rates Prior to a Fed Tightening Interest Rates After a Fed Tightening Begins Current Economic Conditions Interest Rate Expectations Positioning While Rates are Rising MANAGING AND PREPARING FOR RISING RATES

Tightening Cycle Phase II – Post Tightening Yield Curve “Flattens” MANAGING AND PREPARING FOR RISING RATES

Tightening Cycle Phase II – Post Tightening MANAGING AND PREPARING FOR RISING RATES

11 10-Year Treasury During Tightening MANAGING AND PREPARING FOR RISING RATES

12 Stocks During Tightening MANAGING AND PREPARING FOR RISING RATES

13 Commodities During Tightening MANAGING AND PREPARING FOR RISING RATES

14 MANAGING AND PREPARING FOR RISING RATES Agenda Interest Rates and the Fed: A Long Term Relationship Interest Rates Prior to a Fed Tightening Interest Rates After a Fed Tightening Begins Current Economic Conditions Interest Rate Expectations Positioning While Rates are Rising

15 The Consumer Household Debt Service Household Net Worth MANAGING AND PREPARING FOR RISING RATES

16 Retail Sales – Falling Gas Prices MANAGING AND PREPARING FOR RISING RATES

17 New Home Sales MANAGING AND PREPARING FOR RISING RATES

18 Construction Spending MANAGING AND PREPARING FOR RISING RATES

19 Commercial Bank Credit MANAGING AND PREPARING FOR RISING RATES

20 Total Nonfarm Payrolls MANAGING AND PREPARING FOR RISING RATES

21 Job Openings, Hires, and Quits MANAGING AND PREPARING FOR RISING RATES

22 Wage Growth Coming? MANAGING AND PREPARING FOR RISING RATES

23 MANAGING AND PREPARING FOR RISING RATES Agenda Interest Rates and the Fed: A Long Term Relationship Interest Rates Prior to a Fed Tightening Interest Rates After a Fed Tightening Begins Current Economic Conditions Interest Rate Expectations Positioning While Rates are Rising

24 Can We Get Past the First Stage? Number of Fed Moves o Up to two more range moves – 25bps each o End of year range:  75bps – 100bps AT MOST Curve Adjustments – Flatter, but not Flat The Fed: After Liftoff MANAGING AND PREPARING FOR RISING RATES

25 The Fed: What are the Chances? MANAGING AND PREPARING FOR RISING RATES

26 Agenda Interest Rates and the Fed: A Long Term Relationship Interest Rates Prior to a Fed Tightening Interest Rates After a Fed Tightening Begins Current Economic Conditions Interest Rate Expectations Positioning While Rates are Rising MANAGING AND PREPARING FOR RISING RATES

27 Three Periods to Study MANAGING AND PREPARING FOR RISING RATES

Tightening Cycle MANAGING AND PREPARING FOR RISING RATES

Tightening Cycle MANAGING AND PREPARING FOR RISING RATES

30 Current Tightening Cycle MANAGING AND PREPARING FOR RISING RATES

31 MANAGING AND PREPARING FOR RISING RATES Characteristics Favored for Rising Rates Cash Flows Laddered Maturities Amortizing Products Calls Increasing Coupons Step Ups Floaters

32 MANAGING AND PREPARING FOR RISING RATES Baseline Portfolio

33 MANAGING AND PREPARING FOR RISING RATES Baseline Portfolio

34 MANAGING AND PREPARING FOR RISING RATES Laddered Portfolio

35 MANAGING AND PREPARING FOR RISING RATES Laddered Portfolio

36 MANAGING AND PREPARING FOR RISING RATES Mortgages

37 MANAGING AND PREPARING FOR RISING RATES Callable Portfolio

38 MANAGING AND PREPARING FOR RISING RATES Callable Portfolio

39 MANAGING AND PREPARING FOR RISING RATES Agency Step-Ups 5 Year Step Up 1.25%,1.50%, 2.00%, 4.00%, 6.00% Compare to 3-Year Callable 1.15% Step is projected to be called when coupon steps to 2.00%, even in a +300

40 MANAGING AND PREPARING FOR RISING RATES Floating SBA Low Premium SBA pool Quarterly Reset – No Cap

41 Disclaimers & Disclosures The information contained herein is based on sources considered to be reliable but is not represented to be complete and its accuracy is not guaranteed. The opinions expressed herein reflect the judgment of the author at this date and are subject to change without notice and are not a complete analysis of every material fact respecting any company, industry or security Raymond James & Associates, Inc. and affiliates and their officers, directors, shareholders and employees and members of their families may make investments in a company or securities mentioned herein before, after or concurrently with the publication of this report. Raymond James & Associates, Inc. may from time to time perform or seek to perform investment banking or other services for, or solicit investment banking or other services from any company, person or entities mentioned herein. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any security. Raymond James & Associates, Inc. makes no representation as to the legal, tax, credit, or accounting treatment of any transactions mentioned herein, or any other effects such transactions may have on you and your affiliates or any other parties to such transactions and their respective affiliates. You should consult with your own advisors as to such matters.