1. The Same... only Different Investment Types under PFIA Van C. CarterApril 22, 2015 Senior Vice President Public Finance Sales Manager Frost Bank

2. Full Disclosure I am a registered representative of Frost Brokerage Services, Inc. However, I am not speaking on behalf of Frost Brokerage or their products or services in this presentation. I do not perform securities transactions I am not representing, endorsing or selling any instruments referenced in this discussion I am not an attorney; I am not giving legal advice

3. Discussion Topics “Act” I: PFIA at 30,000’ Relationship of Deposits, FDIC and Collateral Rates vs Risk Approved Investments (definitions) Questions / Comments

4. “Act” I: PFIA (at 30,000’) Public Funds Investment Act (Ch. 2256) Establish Guidelines Give Direction Present Options Prompt Involvement Increase Awareness Assign Accountability Inspire Pro-activity

5. Relationship of Deposits, FDIC and Collateral FDIC – Limits and Allowances for government entities https://www.fdic.gov/deposit/deposits/factsheet.html Separate Coverage for Political Sub-Divisions* Authorized by State Law Functions delegated by State Law Exclusive Control of Funds for Exclusive Use * Does not include subordinated or non-autonomous divisions, agencies, or boards within subdivisions Excess Public Unit deposits MUST BE collateralized Type of DepositsFDIC Coverage Time & Savings Deposits$250,000 Demand Deposits$250,000

6. Rates vs Risk

7. Investments 2256.009Obligations of, or guaranteed by, Governmental Entities 2256.010Certificates of Deposit and Share Certificates 2256.011Repurchase Agreements 2256.0115Securities Lending Program 2256.012Bankers Acceptances 2256.013Commercial Paper 2256.014Mutual Funds 2256.015Guaranteed Investment Contracts 2256.016Investment Pools Other investment options are permitted in the PFIA, but apply to specific types of Public Entities Rule of Thumb: If you don’t understand it, DON’T do it NOTE: Conditions apply to ALL of these

8. 2256.009 Obligations of, or Guaranteed by, Government Entities “Obligation” – A debt (local or national) backed by the credit and taxing power of the debtor. “Government Entities” -an agency, instrumentality, or other entity of Federal, State, or local government (15 U.S. Code § 6602) Allowed issuers or guarantors of Obligations: –United States, its Agencies and Instrumentalities (http://www.usa.gov/directory/federal/index.shtml) –Texas, its Agencies and Instrumentalities (https://www.tsl.texas.gov/apps/lrs/agencies/index.html) –FDIC (guarantor or insurer) –Other States, their agencies, Counties, Cities and other Political Subdivisions (rated “A” or higher) –State of Israel “Agency” - a business or organization established to provide a particular service, typically one that involves organizing transactions between two other parties “Instrumentality” - the fact or function of serving some purpose Investments

9. 2256.009 Obligations of, or Guaranteed by, Government Entities (continued) Examples of Permitted Instruments Treasury Bills (4, 13, 26 and 52 weeks); $10,000 minimum, then multiples of $5,000 Treasury Notes (1 to 10 years); min: $1,000; Max $1 million (competitive) or $5 million GNMA (Mortgage Backed Securities, MBS) State, County, City issued bonds Investments

10. CMO’s http://www.freddiemac.com/mbs/docs/investors_guide_CMOs.pdf

11. 2256.010 CERTIFICATES OF DEPOSIT AND SHARE CERTIFICATES Funds to be deposited for a specific period of time in exchange for a guaranteed rate of interest to be paid Examples of Permitted Instruments Bank CD’s (main office or branch in Texas) CDARS ® Brokered CD’s (Broker or the depository arranges for placement in federally insured depository institutions) Investments

12. 2256.011 REPURCHASE AGREEMENTS A securities transaction in which the Seller agrees at the time of purchase to buy back (i.e. repurchase) the securities at a later date Examples of Permitted Instruments Overnight Repo’s NOTE: Underlying securities must conform to 2256.009 Investments

13. 2256.0115 SECURITIES LENDING PROGRAM Lending of securities from one party to another Securities lending is an important means of eliminating "failed" transactions as well as enabling hedge funds and other investment vehicles to sell shares short (sell high; buy low) Borrowers are generally hedge funds and proprietary trading desks of investment banks Investments

14. 2256.012 BANKER'S ACCEPTANCES A promised future payment (time draft) which is accepted and guaranteed by a bank, and drawn on a deposit at that bank. Works much like a post-dated check An unconditional liability of that bank A holder can sell or exchange the draft rather than waiting for stated payment date Key factors: –Maturity <270 days –Liquidated in full at maturity –Eligible for collateral (FRB) –Accepted by a bank existing in the United States rated A-1 or P-1 or higher Investments

15. 2256.013 COMMERCIAL PAPER Unsecured promissory note with a fixed maturity of no more than 270 days Backed is issuing bank’s or company’s promise to pay (no collateral) Key factors: –Maturity <270 days –Rated A-1 or P-1 or higher –Secured by an irrevocable letter of credit issued by a bank existing within the United States Investments

16. 2256.014 MUTUAL FUNDS A professionally managed investment program pooling money from many investors for trading in diversified holdings aka “investment companies” or “registered investment companies” Key factors: –Registered with SEC –Dollar weighed average stated maturity (WAM) of 90 days or less (money market mutual fund) –Dollar weighted average stated maturity (WAM) of <2 years (mutual fund) –Stable Net Asset Value (NAV) of $1 per share (stated in investment objectives) Investments

17. 2256.015 GUARANTEED INVESTMENT CONTRACTS Insurance contracts that guarantee the owner principal payment and a fixed or floating interest rate for a predetermined period of time Typically issued by insurance companies Marketed to institutions offering favorable tax status under federal laws Useful during bond issuing (taking time to drawn down bond proceeds) Key factors: –<5 years from issuance of bonds –Governing body must specifically authorize GIC’s in the bond issuing order, ordinance or resolution –Must receive at least 3 bids – Must purchase highest yielding GIC bid received Investments

18. 2256.016 INVESTMENT POOLS A professionally managed investment program consisting of approved securities Investors are of the same type (government entities) with larger, institutional, amount of investment Examples of Permitted Instruments TexPool Investments

19. Summary “Act” I: PFIA (at 30,000’) Relationship of Deposits, FDIC and Collateral Rates vs Risk Approved Investments

20. Questions