RECOMMENDATION By motion, approve the City s Quarterly Investment Report for the period ending September 30, 2017

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1 REPORT To the Honorable Mayor and City Council From the City Manager December 18, 2017 SUBJECT Quarterly Investment Report for Period Ending September 30, 2017 RECOMMENDATION By motion, approve the City s Quarterly Investment Report for the period ending September 30, 2017 BACKGROUND The City has an investment portfolio that consists of reserves and fund balances held by the City for general operations, capital projects, utilities, and various other special purpose funds. In June 2016, the City Council adopted a new investment policy that requires staff to provide a quarterly Investment report to Council at a public meeting. Additionally, the City hired an investment manager, (PFM), to manage the City s funds pursuant to the newly adopted policy. The City s primary investment objectives continue to be safety, liquidity, and return on investment (yield), in that order. The attached report represents all areas in which City invests funds, excluding trust funds and bond proceeds held with a trustee. ANALYSIS The attached investment report indicates that as of September 30, 2017, funds (excluding cash with fiscal agents) from all sources were invested producing an earnings rate of 1.38%. The market value of the portfolio as of September 30 was $233,915,845. This includes the funds held in the San Mateo County Treasurer s investment pool and with the State Treasurer s investment pool. All of these investments comply with the City s investment policy as of September 30, The City has sufficient liquid resources available to meet expenditure requirements for the next six months. The portion of the City s portfolio that is managed by PFM has a market value of $140,614,919, with yield at market of 1.68%, and an average maturity of 2.72 years. The market benchmark selected, with consultation from the City Council Finance/Audit Subcommittee, is the Bank of America Merrill Lynch 1-5 year U.S. Treasury Index. Below is a table summarizing the City s portfolio performance compared to the benchmark, as of September 30, 2017.

2 Portfolio/Benchmark Total Return Effective Duration Yield at Market Average Maturity Redwood City 0.34% % 2.72 years B of A ML 1-5 year U.S. Treasury Index 0.29% % 2.79 years The prevailing economic theme includes moderate growth expectations in the U.S. and abroad, further improvements in the U.S. Labor market, healthy consumer demand, and a stable corporate backdrop. Looking ahead, another rate hike by the Federal Reserve is expected before the end of this year. The term for the Chair of the Federal Reserve, Janet Yellen, will expire early next year and there will be four openings on the board; PFM will assess the market implications of all new appointees to the Board. The impact from the hurricanes in the southern U.S. will likely manifest itself in weaker economic data for the fourth quarter; however, historically the effects of weather-related events are typically short-lived and are often smoothed over by subsequent recovery and rebuilding activity. On the policy front, the potential for tax reform and the debt ceiling debate will resurface before the end of the year. PFM will continue to favor Treasuries over Agencies except in government-only accounts where current holdings will be maintained. Negotiable certificates of deposit offer good value, especially in the 2-year and under maturity range, and asset backed securities offer opportunities for modest incremental yield. PFM will continue to monitor incoming economic data, federal policy, and sector relationships to identify market opportunities. PFM has provided an in-depth market summary and discussion on their investment strategy and outlook in the attached investment report. ALTERNATIVES The Council can ask staff to provide the investment report in a different format, or to include different information. Staff could return at a future Council meeting with an updated report. FISCAL IMPACT The City s portfolio received $670,713 in net interest earnings over the last quarter. All interest earnings are allocated monthly through a preset methodology that spreads earnings to the appropriate funds. Fees for PFM s services during this period were $23,820, and are deducted from the total interest earnings. ENVIRONMENTAL REVIEW This activity is not a project under CEQA as defined in CEQA Guidelines, section 15378, because it has no potential for resulting in either a direct or reasonably foreseeable indirect physical change in the environment.

3 SYLVIA BRAVO PETERS DEPUTYTREASURER KIMBRA MCCARTHY TREASURER / ASSISTANT CITY MANAGER ADMINISTRATIVE SERVICES MELISSA STEVENSON DIAZ CITY MANAGER ATTACHMENTS 1. PFM Asset Management Investment Performance Review

4 Investment Performance Review

5 Investment Performance Review

6 Portfolio Review Sector Allocation and Compliance The portfolio is in compliance with the City s Investment Policy and the California Government Code. Security Type Market Value as of September 30, 2017 % of Portfolio Permitted by Policy In Compliance U.S. Treasury $56,098,641 24% 100% Federal Agency/GSE $65,042,712 28% 100% Corporate Notes $14,004,145 6% 30% Commercial Paper $4,753,311 2% 25% Security Sub-Total $139,898,809 60% Accrued Interest $551,141 Securities Total $140,449,950 LAIF $52,608,104 23% $65 million San Mateo County Pool $40,692,821 17% $50 million Money Market Fund $164,969 <1% 20% Total Investments $233,915, % Portfolio Earnings Earnings Rate Earnings Individual Securities 1.53% $422,299 San Mateo County Pool 1.25% $138,270 State Treasurer's Investment Pool - LAIF 1.07% $133,965 Average/Total 1.38% $694,533 Note: Individual security values are market values excluding accrued interest. County Pool and LAIF values are at cost. Individual Securities' yield is yield at cost on 09/30/17, and earnings are accrual basis earnings for the quarter ended 09/30/17. San Mateo County Pool and LAIF yields and earnings provided by the City. 1

7 Portfolio Review Portfolio Recap Policy challenges in the U.S., combined with escalating tensions on the geopolitical front, led to bouts of uncertainty which triggered periods of risk-off and risk-on during the third quarter. Nonetheless, volatility remained low and equities continued to book new record highs, reflective of investor complacency. After three rate hikes since December 2016, the Federal Reserve (Fed) shifted gears and announced the beginning of their program to reduce the central bank s enormous balance sheet. The plan is to gradually reduce the Fed's securities holdings by decreasing its reinvestment of the principal payments on its large holdings of Treasury and agency mortgage-backed securities. This had little impact on our strategy as the process was telegraphed well in advance and will be gradual and predictable. Strong investor appetite for high-quality bonds generally caused the yield spreads on investment-grade fixed income sectors (relative to U.S. Treasuries) to tighten over the quarter, resulting in strong relative performance for corporate securities. The yield spreads on federal agency securities vs. comparable-maturity Treasuries narrowed to historic lows, in some cases near zero, leading to diminished value of the agency sector. Corporate yield spreads also tightened to multi-year lows as investors reaching for yield piled into a limited market supply of investment-grade securities. Without a clear trend in the direction of interest rates, we maintained the portfolio duration in line with the benchmark to minimize return volatility. 2

8 Portfolio Snapshot Credit Quality (S&P Ratings) Sector Allocation Portfolio Statistics As of September 30, 2017 Par Value: $139,770,000 Total Market Value: $140,614,919 A 1.5% A- 2.8% A+ 1.7% A-1 3.4% AA- 2.2% U.S. Treasury 40.1% Commercial Paper 3.4% Corporate 10.0% Security Market Value: $139,898,809 Accrued Interest: Cash: Amortized Cost: Yield at Market: $551,141 $164,969 $140,335, % AA+ 88.4% Federal Agency/GSE 46.5% Yield at Cost: Effective Duration: Duration to Worst: Average Maturity: 1.53% 2.61 Years 2.62 Years 2.72 Years 32% 28% 26.0% Maturity Distribution 28.4% Average Credit: * AA 24% 21.9% 20% 16% 17.4% 12% 8% 4% 0% 6.2% 0-1 Year 1-2 Years 2-3 Years 3-4 Years 4-5 Years > 5 Years 0.0% * An average of each security s credit rating assigned a numeric value and adjusted for its relative weighting in the portfolio. 3

9 Portfolio Performance Portfolio Performance (Total Return) Quarter Ended Annualized Return Portfolio/Benchmark Effective Duration 09/30/17 06/30/17 03/31/17 12/31/16 1 Year 3 Year 5 Year % 0.43% 0.43% BofA ML 1-5 Year U.S. Treasury Index % 0.38% 0.37% Difference 0.05% 0.05% 0.06% % 0.43% 0.43% 0.40% 0.35% 0.34% 0.38% 0.37% Total Return 0.30% 0.25% 0.20% 0.15% 0.10% 0.29% 0.05% 0.00% 0.00% 0.00% 09/30/17 06/30/17 03/31/17 12/31/16 1 Year 3 Year 5 Year BofA ML 1-5 Year U.S. Treasury Index Portfolio performance is gross of fees unless otherwise indicated. 4

10 Portfolio Composition Sector Allocation September 30, 2017 June 30, 2017 March 31, 2017 December 31, 2016 Sector MV ($MM) % of Total MV ($MM) % of Total MV ($MM) % of Total MV ($MM) % of Total Federal Agency/GSE % % % % U.S. Treasury % % % % Corporate % % % % Commercial Paper % % % % Total $ % $ % $ % $ % 100% 90% 80% 70% Commercial Paper Corporate U.S. Treasury Federal Agency/GSE 60% 50% 40% 30% 20% 10% 0% September 2017 June 2017 March 2017 December 2016 Detail may not add to total due to rounding. 5

11 Portfolio Composition Maturity Distribution As of September 30, 2017 Portfolio/Benchmark Yield at Market Average Maturity 0-1 Years 1-2 Years 2-3 Years 3-4 Years 4-5 Years >5 Years 1.68% 2.72 yrs 6.2% 26.0% 28.4% 17.4% 21.9% 0.0% BofA ML 1-5 Year U.S. Treasury Index 1.61% 2.79 yrs 1.7% 31.4% 26.3% 20.9% 19.8% 0.0% 35% 31.4% 30% 25% 20% 26.0% 28.4% 26.3% 17.4% 20.9% 21.9% 19.8% 15% 10% 5% 0% 6.2% 1.7% 0.0% 0.0% 0-1 Years 1-2 Years 2-3 Years 3-4 Years 4-5 Years > 5 Years BofA ML 1-5 Year U.S. Treasury Index 6

12 Portfolio Composition Issuer Distribution As of September 30, 2017 Issuer Market Value ($) % of Portfolio UNITED STATES TREASURY 56,098, % FANNIE MAE 31,443, % FREDDIE MAC 22,643, % FEDERAL HOME LOAN BANKS 7,967, % FEDERAL FARM CREDIT BANKS 2,987, % GENERAL ELECTRIC CO 2,513, % APPLE INC 2,508, % Top 5 = 86.6% Top 10 = 95.2% JP MORGAN CHASE & CO 2,445, % INTERNATIONAL BUSINESS MACHINES 2,403, % STATE STREET CORPORATION 2,136, % CANADIAN IMPERIAL BANK OF COMMERCE 1,499, % RABOBANK NEDERLAND 1,498, % AMERICAN EXPRESS CO 1,407, % MITSUBISHI UFJ FINANCIAL GROUP INC 1,256, % CHEVRON CORPORATION 590, % BNP PARIBAS 498, % Grand Total: 139,898, % 7

13 Portfolio Review Outlook and Strategy Although current low inflation is a conundrum, recent signaling from Fed officials boosted expectations for another rate hike this year, raising the market-implied probability of a December hike from 30% mid-third quarter to over 70%. With 2-year Treasury yields at the highest level since 2008, we plan to maintain the portfolio duration generally in line with the benchmark. However, the significant flattening of the yield curve since the beginning of the year has reduced the benefit of some maturity extensions, so we will carefully assess value along the yield curve. As we near the end of Janet Yellen s term as Chair of the Federal Reserve, which will expire early next year, we will assess the market implications of all new appointees to the Fed (there will be a total of 4 openings on the Fed s 7-member Board of Governors). Our prevailing economic theme includes moderate growth expectations in the U.S. and abroad, further improvements in the tightening U.S. labor market, healthy consumer demand, and a stable corporate backdrop. The impact from the recent Gulf Coast hurricanes will likely manifest itself in weaker economic data for September and early fourth quarter. However, history shows that the effects of weather-related events are typically short lived and may be smoothed over by the subsequent recovery and rebuilding activity. On the policy front, the potential for tax reform is worth watching, as will be the debt ceiling debate, which will resurface in December. 8

14 Portfolio Review Outlook and Strategy Our outlook on each of the major investment-grade fixed income sectors is as follows: Limited supply and robust demand are likely to keep yield spreads on federal agencies tight. Generally, we favor U.S. Treasuries over agencies, except for new issues that offer a fair yield concession. Supranationals remain an attractive alternative. Corporate fundamentals remain stable, and we continue to view the sector positively. However, recent richness in the sector warrants being more selective with industries, issuers, and individual issues. In the credit space, we find that negotiable certificates of deposit (CDs) offer the best value, especially in the 2-year and under maturity range. Taxable municipal security yields spreads are low and offer limited value. New issue volume is also down relative to last year, constraining supply. ABS continue to offer opportunity for modest incremental yield. We continue to closely monitor developments in the underlying collateral. Our view is less optimistic on the MBS sector as the Fed s balance sheet reduction in this area should put upward pressure on yields. Shorter, more stable structures may offer opportunities, but supply is very limited. 9

15 Market Update

16 Market Update Interest Rate Update Two-year treasury yields moved modestly higher towards the end of the quarter, possibly due to heightened expectations of another rate hike and a tax overhaul that could increase government borrowing. 1.60% 2-Year Treasury Yields September 30, 2016 September 30, % 1.20% Presidential Election 1.00% 0.80% Fed Rate Hike Fed Rate Hike Fed Rate Hike 0.60% 0.40% 0.20% 0.00% Sep '16 Oct '16 Nov '16 Dec '16 Jan '17 Feb '17 Mar '17 Apr '17 May '17 Jun '17 Jul '17 Aug '17 Sep '17 Source: Bloomberg, as of 9/30/17. 10

17 Market Update Short-Term Yields Higher but Curve Flatter in Third Quarter Treasury yields are substantially higher compared to a year ago. Short-term yields continue to rise in response to the Fed raising rates in their efforts to normalize policy. Longer-term yields still remain relatively low in response to lower inflation and growth expectations. 2.5% 2.0% 1.5% 1.0% 0.5% U.S. Treasury Yield Curve September 30, 2017 June 30, 2017 September 30, 2016 Yield Curve History Maturity 6/30/17 9/30/17 Change 3-Mo Mo Yr Yr Yr Yr Yr Yr % 3 m 6 m 1 y 2 y 3 y 5 y 30-Yr Source: Bloomberg, as of 9/30/17. 11

18 Market Update Economic Growth Gross domestic product (GDP) increased at an annualized rate of 3.0% in the third quarter of Third quarter GDP remained strong, supported by an increase in consumer and business spending, despite the impact from hurricanes Harvey and Irma. 6% U.S. Real GDP QoQ, SAAR 5% 4% 3% 2.7% 2.7% 3.0% Bloomberg Survey of Economists 2% 2.0% 1.9% 1% 0% -1% -2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q Source: Bloomberg, as of 10/31/17. SAAR is seasonally adjusted annualized rate. Orange dashes denotes four-quarter averages. 12

19 Market Update Hurricane Disruption Hurricane Harvey is expected to be the second most destructive natural disaster over the last three decades. Destruction to property caused by Hurricane Harvey is estimated to range from $77 to $97 billion. The lost economic output is forecasted to be $9 $11 billion. Total Economic Loss Due to Disasters (Billions of Today's Dollars) $200 $150 Destruction $175 Lost Output $100 $50 $108 $16 $73 $13 $17 $110 $45 $19 $61 $20 $24 $0 Hurricane Harvey Hurricane Matthew Superstorm Sandy Hurricane Irene Hurricane Katrina Hurricane Ivan 9/11 Los Angeles Northridge Quake Midwest Floods Hurricane Andrew Loma Prieta Quake Hurricane Hugo Hurricane Harvey estimates are preliminary and shown in the chart at the high end of the estimated range. Source: The Economic Impact of Hurricane Harvey, Moody s Analytics, 9/5/17. 13

20 Market Update Labor Market Remains Strong Despite the Impact of Hurricanes The U.S. labor market lost 33,000 jobs in September. The first decline in U.S. nonfarm payrolls in seven years. Despite the impact of the hurricanes on the September job numbers, the headline unemployment rate ticked down to 4.2%, hitting the lowest level in more than 16 years. The U6 unemployment rate also decreased slightly from 8.6% in June to 8.3% in September, while the labor force participation rate ticked up from 62.8% in June to 63.1% in September. Average hourly earnings an important gauge of wage growth grew 2.9% over the past 12 months. Monthly Change in Nonfarm Payrolls Unemployment Rate 400k Nonfarm Payrolls 12-Month Moving Average 9% 300k 8% 7.8% 7.2% 200k 7% 100k 6% 5.9% 0k 5% 5.0% 4.9% 4.2% -100k Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 4% Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 Source: Bloomberg, as of 9/30/17. 14

21 Portfolio Review California and San Mateo County Employment The California unemployment rate was 4.7% in September, staying above the national average of 4.2%. The San Mateo County unemployment rate decreased to 2.7% in September, remaining well below the national average. 14% Unemployment Rates September 2007 September % 10% 8% 6% 4% 2% 0% Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15 May-15 Sep-15 Jan-16 May-16 Sep-16 Jan-17 May-17 Sep-17 San Mateo County California United States Source: Federal Reserve Economic Data (FRED). Unemployment rates shown are not seasonally adjusted. 15

22 Market Update Inflation Steadies but Outlook Remains Weak Inflation pressures have declined from levels at the beginning of the year. The core personal consumption expenditures (PCE) price index, the Fed s preferred measure of inflation, slipped to 1.3% year-over-year in August. While some Fed officials expect this weakness to be transitory, the prospect for another rate hike in 2017 may be diminished should this trend continue. Although inflation expectations jumped following the U.S. election, the outlook has since softened, reflecting doubts in the administration s ability to implement its agenda. 2.5% Inflation Measures (YoY) 2.5% Expectations for Average Inflation Rate Over Next 5 Years 2.0% 2.0% 1.5% 1.0% 0.5% Core CPI Core PCE Fed's Long Term Inflation Target 1.5% 1.0% 0.0% Aug '12 Aug '13 Aug '14 Aug '15 Aug '16 Aug '17 0.5% Sep '12 Sep '13 Sep '14 Sep '15 Sep '16 Sep '17 Source: Bloomberg, as of 9/30/17. Inflation expectations based on yield difference between 5-year Treasury note and 5-year Treasury Inflation Protected Securities (TIPS). 16

23 Market Update U.S. Recession Indicators: Low Risk in the Near-Term Year 3 Month Treasury Yield Spread (in bps) Yield Curve Inverts Recession 10% 0% -10% -20% Industrial Production (YoY) Recession 20% Conference Board Leading Indicators (SA, YoY) 800 Initial Jobless Claims (4-week average, in thousand) 10% 0% -10% % -30% Recession Recession Source: Bloomberg, as of 8/31/17. SA is seasonally adjusted. 17

24 Market Update Probability of Fed Rate Hike at the December Meeting The probability of a third rate hike in 2017 at the FOMC s December meeting increased following their September meeting. The FOMC will initiate the balance sheet normalization program described in the June 2017 Addendum to the Committee s Policy Normalization Principles and Plans in October. 75% 60% 45% 30% 15% 0% Historical Probability of December Rate Hike 22% 70% Probability of Fed Rate Hike Meeting Probability (25bps) 12/13/ % 1/31/ % 3/21/ % 5/2/ % 6/13/ % Source: Bloomberg, as of 9/30/

25 Account Transactions and Holdings

26 Portfolio Activity Quarterly Portfolio Transactions Trade Date Settle Date Par ($) CUSIP Security Description Coupon Maturity Date Transact Amt ($) Yield at Market Realized G/L (BV) BUY 7/6/17 7/11/17 2,625, V % 1/31/22 2,644, % 7/18/17 7/19/17 2,320, EAEH8 FREDDIE MAC NOTES 1.37% 8/15/19 2,316, % 7/28/17 8/1/17 2,735, G0T60 FNMA NOTES 1.50% 7/30/20 2,726, % 8/1/17 8/4/17 2,400, HLW8 JP MORGAN CHASE & CO CORP NT (CALLABLE) 2.75% 6/23/20 2,455, % 8/30/17 8/31/17 3,225, XQ8 2.00% 7/31/22 3,271, % 9/5/17 9/7/17 2,100, AS2 STATE STREET CORP NOTES 2.55% 8/18/20 2,149, % 9/5/17 9/7/17 1,400, M0EE5 AMERICAN EXPRESS CREDIT (CALLABLE) CORP 2.20% 3/3/20 1,413, % 9/13/17 9/13/17 500, CCD1 BANK OF TOKYO MITSUBISHI UFJ COMM PAPER 0.00% 3/13/18 496, % 9/20/17 9/21/17 765, CCK5 BANK OF TOKYO MITSUBISHI UFJ COMM PAPER 0.00% 3/19/18 759, % 9/25/17 9/27/17 2,300, G2T0 GENERAL ELECTRIC CO CORPORATE NOTE 5.55% 5/4/20 2,567, % Total BUY 20,370,000 20,800, INTEREST 7/3/17 7/3/17 0 MONEY0002 MONEY MARKET FUND /5/17 7/5/17 2,825, G0S38 FANNIE MAE AGENCY NOTES 2.00% 1/5/22 27, /5/17 7/5/17 3,000, G0S38 FANNIE MAE AGENCY NOTES 2.00% 1/5/22 29, /15/17 7/15/17 2,400, HGY0 JPMORGAN CHASE & CO NOTES 6.00% 1/15/18 72, /16/17 7/16/17 2,000, AAE46 FHLB NOTES 1.25% 1/16/19 12, /17/17 7/17/17 3,000, EAEE5 FREDDIE MAC AGENCY NOTE 1.50% 1/17/20 22, /27/17 7/27/17 2,400, JN2 IBM CORP NOTES 1.90% 1/27/20 22, /31/17 7/31/17 2,625, V % 1/31/22 24, /31/17 7/31/17 2,920, H % 1/31/20 18, /31/17 7/31/17 2,000, H % 1/31/22 15, /1/17 8/1/17 0 MONEY0002 MONEY MARKET FUND

27 Portfolio Activity Trade Date Settle Date Par ($) CUSIP Security Description Coupon Maturity Date Transact Amt ($) Yield at Market Realized G/L (BV) 8/7/17 8/7/17 2,500, CK4 APPLE INC BONDS 1.90% 2/7/20 23, /28/17 8/28/17 1,495, G0T29 FNMA NOTES 1.50% 2/28/20 11, /28/17 8/28/17 590, BS8 CHEVRON CORP NOTES 1.68% 2/28/19 4, /28/17 8/28/17 3,000, G0T29 FNMA NOTES 1.50% 2/28/20 22, /31/17 8/31/17 3,000, B % 2/28/21 30, /31/17 8/31/17 3,000, D % 8/31/21 30, /31/17 8/31/17 2,900, VV9 2.12% 8/31/20 30, /31/17 8/31/17 3,000, J % 2/28/22 26, /31/17 8/31/17 2,870, B % 2/28/21 28, /1/17 9/1/17 0 MONEY0002 MONEY MARKET FUND /18/17 9/18/17 3,000, AAXX1 FEDERAL HOME LOAN BANK AGENCY 1.37% 3/18/19 21, /18/17 9/18/17 1,000, G7TZ4 FHLMC NOTES (EX-CALLABLE) 1.30% 9/18/18 6, /20/17 9/20/17 3,000, EGFX8 FFCB NOTES (CALLABLE) 1.01% 9/20/18 15, /30/17 9/30/17 1,890, C % 3/31/21 21, /30/17 9/30/17 3,000, Q % 3/31/21 18, /30/17 9/30/17 2,950, F % 9/30/19 25, Total INTEREST 60,365, , MATURITY 9/13/17 9/13/17 500, BWD1 BANK OF TOKYO MITSUBISHI UFJ COMM PAPER 0.00% 9/13/17 500, /20/17 9/20/17 750, BWL3 BANK OF TOKYO MITSUBISHI UFJ COMM PAPER 0.00% 9/20/17 750, Total MATURITY 1,250,000 1,250, SELL 7/6/17 7/11/17 2,400, WBH8 WACHOVIA CORP NOTES 5.75% 2/1/18 2,516, % (4,448.76) 7/18/17 7/19/17 2,320, D % 4/30/19 2,339, % (15,822.82) 20

28 Portfolio Activity Trade Date Settle Date Par ($) CUSIP Security Description Coupon Maturity Date Transact Amt ($) Yield at Market Realized G/L (BV) 7/28/17 8/1/17 2,735, VF4 1.37% 5/31/20 2,733, % (31,714.09) 8/1/17 8/4/17 2,400, HGY0 JPMORGAN CHASE & CO NOTES 6.00% 1/15/18 2,454, % (1,973.16) 8/30/17 8/31/17 3,000, G9HC4 FHLMC NOTES (EX-CALLABLE) 1.00% 5/25/18 3,002, % (5,160.00) 9/5/17 9/7/17 2,000, G7TZ4 FHLMC NOTES (EX-CALLABLE) 1.30% 9/18/18 2,012, % /5/17 9/7/17 220, VF4 1.37% 5/31/20 220, % (1,889.72) 9/5/17 9/7/17 1,180, VF4 1.37% 5/31/20 1,184, % (12,012.98) 9/25/17 9/27/17 1,765, VF4 1.37% 5/31/20 1,766, % (23,752.60) 9/25/17 9/27/17 815, EAEF2 FHLMC AGENCY NOTES 1.37% 4/20/20 815, % (1,563.15) Total SELL 18,835,000 19,047, ,

29 Managed Account Detail of Securities Held For the Month Ending September 30, 2017 Security Type/Description S&P Moody's Trade Settle Original YTM Accrued Amortized Market Dated Date/Coupon/Maturity CUSIP Par Rating Rating Date Date Cost at Cost Interest Cost Value U.S. Treasury Bond / Note DTD 04/30/ % 04/30/ D23 630, AA+ Aaa 10/28/16 10/31/16 640, , , , DTD 09/30/ % 09/30/ F39 2,950, AA+ Aaa 10/28/16 10/31/16 3,013, ,993, ,964, DTD 10/31/ % 10/31/ F62 1,475, AA+ Aaa 11/07/16 11/08/16 1,497, , ,490, ,475, DTD 10/31/ % 10/31/ F62 2,000, AA+ Aaa 03/01/17 03/02/17 2,000, , ,000, ,000, DTD 02/02/ % 01/31/ H52 2,920, AA+ Aaa 09/08/16 09/09/16 2,947, , ,939, ,900, DTD 09/03/ % 08/31/ VV9 2,900, AA+ Aaa 09/12/16 09/13/16 3,010, , ,981, ,941, DTD 12/02/ % 11/30/ A42 1,440, AA+ Aaa 11/07/16 11/08/16 1,485, , ,475, ,454, DTD 12/02/ % 11/30/ A42 2,890, AA+ Aaa 08/24/16 08/25/16 2,998, , ,970, ,919, US TREASURY N/B DTD 12/31/ % 12/31/ N48 3,200, AA+ Aaa 06/27/17 06/29/17 3,213, , ,212, ,206, DTD 02/28/ % 02/28/ B90 2,870, AA+ Aaa 09/28/16 09/29/16 2,980, , ,956, ,897, DTD 02/28/ % 02/28/ B90 3,000, AA+ Aaa 10/03/16 10/05/16 3,109, , ,085, ,028, DTD 03/31/ % 03/31/ C57 1,890, AA+ Aaa 09/02/16 09/06/16 1,979, ,958, ,923, DTD 03/31/ % 03/31/ Q37 3,000, AA+ Aaa 03/15/17 03/17/17 2,914, ,925, ,951, DTD 05/02/ % 04/30/ Q78 3,000, AA+ Aaa 04/10/17 04/11/17 2,953, , ,959, ,962,

30 Managed Account Detail of Securities Held For the Month Ending September 30, 2017 Security Type/Description S&P Moody's Trade Settle Original YTM Accrued Amortized Market Dated Date/Coupon/Maturity CUSIP Par Rating Rating Date Date Cost at Cost Interest Cost Value U.S. Treasury Bond / Note DTD 09/02/ % 08/31/ D72 3,000, AA+ Aaa 12/01/16 12/05/16 3,008, , ,006, ,023, DTD 10/31/ % 10/31/ T67 2,000, AA+ Aaa 03/01/17 03/02/17 1,936, , ,943, ,955, DTD 10/31/ % 10/31/ F96 3,000, AA+ Aaa 01/03/17 01/05/17 3,006, , ,005, ,021, DTD 10/31/ % 10/31/ F96 3,000, AA+ Aaa 04/03/17 04/05/17 3,018, , ,016, ,021, DTD 02/02/ % 01/31/ H86 2,000, AA+ Aaa 03/01/17 03/02/17 1,953, , ,958, ,970, DTD 01/31/ % 01/31/ V72 2,625, AA+ Aaa 07/06/17 07/11/17 2,622, , ,622, ,626, DTD 03/02/ % 02/28/ J43 3,000, AA+ Aaa 03/15/17 03/17/17 2,944, , ,950, ,985, DTD 07/31/ % 07/31/ XQ8 3,225, AA+ Aaa 08/30/17 08/31/17 3,265, , ,265, ,237, Security Type Sub-Total 56,015, ,500, , ,355, ,098, Federal Agency Bond / Note FHLMC NOTES (EX-CALLABLE) DTD 09/18/ % 09/18/ G7TZ4 1,000, AA+ Aaa 09/18/15 09/18/15 1,000, ,000, , FFCB NOTES (CALLABLE) DTD 06/20/ % 09/20/ EGFX8 3,000, AA+ Aaa 06/20/16 06/20/16 3,000, ,000, ,987, FHLMC NOTES (EX-CALLABLE) DTD 06/28/ % 12/28/ G9ZR1 3,000, AA+ Aaa 06/28/16 06/28/16 3,000, , ,000, ,981, FHLB NOTES DTD 12/08/ % 01/16/ AAE46 2,000, AA+ Aaa 12/07/16 12/08/16 1,999, , ,999, ,995, FEDERAL HOME LOAN BANK AGENCY DTD 03/10/ % 03/18/ AAXX1 3,000, AA+ Aaa 03/09/17 03/10/17 2,993, , ,994, ,996,

31 Managed Account Detail of Securities Held For the Month Ending September 30, 2017 Security Type/Description S&P Moody's Trade Settle Original YTM Accrued Amortized Market Dated Date/Coupon/Maturity CUSIP Par Rating Rating Date Date Cost at Cost Interest Cost Value Federal Agency Bond / Note FHLMC NOTES (EX-CALLABLE) DTD 04/26/ % 04/26/ G9AW7 3,000, AA+ Aaa 04/26/16 04/26/16 3,000, , ,000, ,981, FNMA NOTES (EX-CALLABLE) DTD 05/24/ % 05/24/ G3MC6 3,000, AA+ Aaa 05/24/16 05/24/16 3,000, , ,000, ,983, FHLMC NOTES (EX-CALLABLE) DTD 05/27/ % 05/24/ G9MA2 3,000, AA+ Aaa 05/27/16 05/27/16 3,000, , ,000, ,976, FREDDIE MAC NOTES DTD 04/16/ % 05/30/ EADG1 2,000, AA+ Aaa 03/01/17 03/02/17 2,014, , ,011, ,008, FHLB NOTES (CALLABLE) DTD 06/13/ % 06/13/ A8EK5 3,000, AA+ Aaa 06/14/16 06/14/16 3,000, , ,000, ,976, FNMA NOTES (CALLABLE) DTD 06/28/ % 06/28/ G3TD7 3,000, AA+ Aaa 06/28/16 06/28/16 3,000, , ,000, ,978, FNMA NOTES (CALLABLE) DTD 06/28/ % 06/28/ G0K93 5,000, AA+ Aaa 06/28/16 06/28/16 5,000, , ,000, ,968, FREDDIE MAC NOTES DTD 07/19/ % 08/15/ EAEH8 2,320, AA+ Aaa 07/18/17 07/19/17 2,316, , ,316, ,313, FANNIE MAE GLOBAL NOTES DTD 10/25/ % 10/24/ G0R39 1,500, AA+ Aaa 12/14/16 12/15/16 1,479, , ,485, ,482, FREDDIE MAC AGENCY NOTE DTD 01/17/ % 01/17/ EAEE5 3,000, AA+ Aaa 04/03/17 04/05/17 2,999, , ,999, ,992, FNMA NOTES DTD 02/28/ % 02/28/ G0T29 1,495, AA+ Aaa 02/24/17 02/28/17 1,494, , ,494, ,491, FNMA NOTES DTD 02/28/ % 02/28/ G0T29 3,000, AA+ Aaa 03/01/17 03/02/17 2,985, , ,988, ,992, FHLMC AGENCY NOTES DTD 04/20/ % 04/20/ EAEF2 2,185, AA+ Aaa 04/19/17 04/20/17 2,177, , ,178, ,171, FHLMC AGENCY NOTES DTD 04/20/ % 04/20/ EAEF2 3,240, AA+ Aaa 06/27/17 06/29/17 3,221, , ,223, ,219,

32 Managed Account Detail of Securities Held For the Month Ending September 30, 2017 Security Type/Description S&P Moody's Trade Settle Original YTM Accrued Amortized Market Dated Date/Coupon/Maturity CUSIP Par Rating Rating Date Date Cost at Cost Interest Cost Value Federal Agency Bond / Note FNMA NOTES DTD 08/01/ % 07/30/ G0T60 2,735, AA+ Aaa 07/28/17 08/01/17 2,726, , ,727, ,720, FANNIE MAE AGENCY NOTES DTD 01/09/ % 01/05/ G0S38 2,825, AA+ Aaa 02/10/17 02/13/17 2,827, , ,827, ,832, FANNIE MAE AGENCY NOTES DTD 01/09/ % 01/05/ G0S38 3,000, AA+ Aaa 05/08/17 05/09/17 3,003, , ,003, ,007, FANNIE MAE NOTES DTD 04/10/ % 04/05/ G0T45 3,000, AA+ Aaa 04/10/17 04/11/17 2,982, , ,983, ,993, FANNIE MAE NOTES DTD 04/10/ % 04/05/ G0T45 3,000, AA+ Aaa 05/08/17 05/09/17 2,982, , ,983, ,993, Security Type Sub-Total 65,300, ,205, , ,217, ,042, Corporate Note CHEVRON CORP NOTES DTD 03/03/ % 02/28/ BS8 590, AA- Aa2 02/28/17 03/03/17 590, , , IBM CORP NOTES DTD 01/27/ % 01/27/ JN2 2,400, A+ A1 02/01/17 02/03/17 2,399, , ,399, ,403, APPLE INC BONDS DTD 02/09/ % 02/07/ CK4 2,500, AA+ Aa1 02/09/17 02/14/17 2,500, , ,500, ,508, AMERICAN EXPRESS CREDIT CORP NOTES DTD 03/03/ % 03/03/ M0EE5 1,400, A- A2 09/05/17 09/07/17 1,412, , ,412, ,407, GENERAL ELECTRIC CO CORPORATE NOTE DTD 04/27/ % 05/04/ G2T0 2,300, AA- A1 09/25/17 09/27/17 2,516, , ,515, ,513, JP MORGAN CHASE & CO CORP NT (CALLABLE) DTD 06/23/ % 06/23/ HLW8 2,400, A- A3 08/01/17 08/04/17 2,448, , ,445, ,445, STATE STREET CORP NOTES DTD 08/18/ % 08/18/ AS2 2,100, A A1 09/05/17 09/07/17 2,146, , ,145, ,136,

33 Managed Account Detail of Securities Held For the Month Ending September 30, 2017 Security Type/Description S&P Moody's Trade Settle Original YTM Accrued Amortized Market Dated Date/Coupon/Maturity CUSIP Par Rating Rating Date Date Cost at Cost Interest Cost Value Security Type Sub-Total Commercial Paper 13,690, ,014, , ,009, ,004, CANADIAN IMPERIAL HLDING COMM PAPER DTD 01/18/ % 10/13/ EXD6 1,500, A-1 P-1 01/18/17 01/19/17 1,484, ,499, ,499, COOPERATIEVE RABOBANK U.A. COMM PAPER DTD 02/16/ % 10/23/ AXP3 1,500, A-1 P-1 02/16/17 02/17/17 1,486, ,498, ,498, BNP PARIBAS NY BRANCH COMM PAPER DTD 04/07/ % 12/05/ BZ52 500, A-1 P-1 06/06/17 06/06/17 496, , , BANK OF TOKYO MITSUBISHI UFJ COMM PAPER DTD 06/16/ % 03/13/ CCD1 500, A-1 P-1 09/13/17 09/13/17 496, , , BANK OF TOKYO MITSUBISHI UFJ COMM PAPER DTD 06/22/ % 03/19/ CCK5 765, A-1 P-1 09/20/17 09/21/17 759, , , Security Type Sub-Total 4,765, ,723, ,753, ,753, Managed Account Sub-Total 139,770, ,443, , ,335, ,898, Securities Sub-Total Accrued Interest Total Investments $139,770, $140,443, % $551, $140,335, $139,898, $551, $140,449,

34 Appendix IMPORTANT DISCLOSURES This material is based on information obtained from sources generally believed to be reliable and available to the public; however, cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation. All statements as to what will or may happen under certain circumstances are based on assumptions, some, but not all of which, are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results.the information contained in this presentation is not an offer to purchase or sell any securities. Dime à Market values that include accrued interest are derived from closing bid prices as of the last business day of the month as supplied by Interactive Data, Bloomberg, or Telerate. Where prices are not available from generally recognized sources, the securities are priced using a yield based matrix system to arrive at an estimated market value. à In accordance with generally accepted accounting principles, information is presented on a trade date basis; forward settling purchases are included in the monthly balances, and forward settling sales are excluded. à Performance is presented in accordance with the CFA Institute s Global Investment Performance Standards (GIPS). Unless otherwise noted, performance is shown gross of fees. Quarterly returns are presented on an unannualized basis. Returns for periods greater than one year are presented on an annualized basis. Past performance is not indicative of future returns. à Bank of America/Merrill Lynch Indices provided by Bloomberg Financial Markets. à Money market fund/cash balances are included in performance and duration computations. à Standard & Poorʼs is the source of the credit ratings. Distribution of credit rating is exclusive of money market fund/lgip holdings. à Callable securities in the portfolio are included in the maturity distribution analysis to their stated maturity date, although, they may be called prior to maturity. à MBS maturities are represented by expected average life. 27

35 Appendix GLOSSARY Ã ACCRUED INTEREST: Interest that is due on a bond or other fixed income security since the last interest payment was made. Ã AGENCIES: Federal agency securities and/or Government-sponsored enterprises. Ã AMORTIZED COST: The original cost of the principal of the security is adjusted for the amount of the periodic reduction of any discount or premium from the purchase date until the date of the report. Discount or premium with respect to short-term securities (those with less than one year to maturity at time of issuance) is amortized on a straight line basis. Such discount or premium with respect to longer-term securities is amortized using the constant yield basis. Ã BANKERS ACCEPTANCE: A draft or bill or exchange accepted by a bank or trust company. The accepting institution guarantees payment of the bill as well as the insurer. Ã COMMERCIAL PAPER: An unsecured obligation issued by a corporation or bank to finance its short-term credit needs, such as accounts receivable and inventory. Ã CONTRIBUTION TO DURATION: Represents each sector or maturity range s relative contribution to the overall duration of the portfolio measured as a percentage weighting. Since duration is a key measure of interest rate sensitivity, the contribution to duration measures the relative amount or contribution of that sector or maturity range to the total rate sensitivity of the portfolio. Ã DURATION TO WORST: A measure of the sensitivity of a security s price to a change in interest rates, stated in years, computed from cash flows to the maturity date or to the put date, whichever results in the highest yield to the investor. Ã EFFECTIVE DURATION: A measure of the sensitivity of a security s price to a change in interest rates, stated in years. Ã EFFECTIVE YIELD: The total yield an investor receives in relation to the nominal yield or coupon of a bond. Effective yield takes into account the power of compounding on investment returns, while ominal yield does not. Ã FDIC: Federal Deposit Insurance Corporation. A federal agency that insures bank deposits to a specified amount. Ã INTEREST RATE: Interest per year divided by principal amount and expressed as a percentage. Ã MARKET VALUE: The value that would be received or paid for an investment in an orderly transaction between market participants at the measurement date. Ã MATURITY: The date upon which the principal or stated value of an investment becomes due and payable. Ã NEGOTIABLE CERTIFICATES OF DEPOSIT: A CD with a very large denomination, usually $1 million or more, that can be traded in secondary markets. Ã PAR VALUE: The nominal dollar face amount of a security. 28

36 Appendix GLOSSARY Ã PASS THROUGH SECURITY: A security representing pooled debt obligations that passes income from debtors to its shareholders. The most common type is the mortgage-backed security. Ã REPURCHASE AGREEMENTS: A holder of securities sells these securities to an investor with an agreement to repurchase them at a fixed price on a fixed date. Ã SETTLE DATE: The date on which the transaction is settled and monies/securities are exchanged. If the settle date of the transaction (i.e., coupon payments and maturity proceeds) occurs on a non-business day, the funds are exchanged on the next business day. Ã TRADE DATE: The date on which the transaction occurred; however, the final consummation of the security transaction and payment has not yet taken place. Ã UNSETTLED TRADE: A trade which has been executed; however, the final consummation of the security transaction and payment has not yet taken place. Ã U.S. TREASURY: The department of the U.S. government that issues Treasury securities. Ã YIELD: The rate of return based on the current market value, the annual interest receipts, maturity value, and the time period remaining until maturity, stated as a percentage on an annualized basis. Ã YTM AT COST: The yield to maturity at cost is the expected rate of return based on the original cost, the annual interest receipts, maturity value, and the time period from purchase date to maturity, stated as a percentage on an annualized basis. Ã YTM AT MARKET: The yield to maturity at market is the rate of return based on the current market value, the annual interest receipts, maturity value, and the time period remaining until maturity, stated as a percentage on an annualized basis. 29