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CLAconnect.com/privateclient

Asset/Liability Management 2nd Annual Foundation Conference February 5, 2014

Tony Hallada, CEO Steven D. Jones, CFA®, CFP®, CAIA® Director, Institutional Investment Services

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Asset/Liability Management Agenda • Brief History • Benefits • “Liability Stream” • Option 1: Cash Reserve • Option 2: Cash Matching • Option 3: Duration Matching • Option 4: Monte Carlo Simulation • Option 5: Targeted Scenarios - Stress Testing • Portfolio Construction • Market Outlook 2014

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Asset/Liability Management Brief History

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• ALM was pioneered by banks and insurance companies.

In highly levered organizations, changes

in the balance sheet can overwhelm

operating results.

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Asset/Liability Management Brief History (cont.)

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• Ideally, assets are selected that move in tandem with liabilities.

Properly matching assets to liabilities can help stabilize residual equity.

• Later adopted by corporations to manage their DB pension plans.

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Asset/Liability Management Benefits • Supports strategic planning efforts • Allows operations to drive success by stabilizing

residual equity • Helps avoid “forced” selling of assets • Provides insight and guidance towards defining the

appropriate Time Horizon, Return Objective, and Risk Tolerance

• Supports compliance with UPMIFA

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Asset/Liability Management Supports Compliance with UPMIFA

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“In managing and investing an institutional fund, the following factors, if relevant, must be considered: (A) general economic conditions; (B) the possible effect of inflation or deflation; (C) the expected tax consequences, if any, of investment decisions or strategies; (D) the role that each investment or course of action plays within the overall

investment portfolio of the fund; (E) the expected total return from income and the appreciation of investments; (F) other resources of the institution; (G) the needs of the institution and the fund to make distributions and to

preserve capital; and (H) an asset’s special relationship or special value, if any, to the charitable

purposes of the institution.” * * SOURCE: UNIFORM PRUDENT MANAGEMENT OF INSTITUTIONAL FUNDS ACT (Model Act)

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Asset/Liability Management “Liability Steam”

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ALM requires construction of “liability stream” • Part art / part science • Definition – net cash flows associated with an investment

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Asset/Liability Management “Liability Steam” (cont.)

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Possible data sources for constructing your liability stream: - Business plan (revenue, expenses, capital budget) - Projections from Sources and Uses of Funds Statement - Pro Forma financial projections (EBIDA)

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Asset/Liability Management Option 1: Cash Reserve

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Set aside enough cash to cover 12-36 months of possible cash outflows.

Advantages - Simple - Low risk Disadvantages - Low return on cash investments

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Asset/Liability Management Option 2: Cash Matching

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Create a structured bond portfolio with principal and interest payments coming due as needed to cover all expected cash outflows.

Advantages - Simple - Low risk Disadvantages - Interest rates at historic lows - Future cash flow needs may change

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Asset/Liability Management Option 3: Duration Matching

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Used to manage interest rate risk (banks, insurance, DB plans)

• Duration is (roughly) the PV, time-weighted average maturity

• Residual equity is “immune” to changes in interest rates when Duration Assets

= Duration Liabilities

PV(Assets)

PV(Liabilities)

Funded Status

$0

$2

$4

$6

$8

$10

$12

3.50 3.75 4.00 4.25 4.50 4.75 5.00 5.25 5.50 5.75 6.00

PV Calculation

Interest Rates

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Asset/Liability Management Option 3: Duration Matching (cont.)

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Advantages - Flexible, allows “tailored” risk exposures Disadvantages - Complex, may require professional management - Requires periodic rebalancing

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Asset/Liability Management Option 4: Monte Carlo Simulation

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Computerized statistical modeling technique used to randomly generate of a large number of possible outcomes.

Advantages - May help identify unexpected extreme outcomes Disadvantages - Too many possible outcomes to draw meaningful insight - Dependant upon underlying probability distribution

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Asset/Liability Management Option 4: Monte Carlo Simulation (cont.)

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STEPS • Define simulation

o Number of Trials o Expected Return / Standard Deviation o Liability Stream or Payout Ratio o Measure(s) of Success

• Monte Carlo - Probability Distribution

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Asset/Liability Management Option 5: Targeted Scenarios - Stress Testing

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Scenario Analysis Business modeling technique used to monitor key organizational metrics.

Advantages - Generates “targeted” results, more easily understood Disadvantages - Garbage in / garbage out - Real world may vary substantially from expectations

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STEPS • Define liability stream

• Determine “least-risk” portfolio - Not necessarily 90-day T-bills - What asset best moves in tandem with liability stream? Examples:

DB pensions are interest rate sensitive Perpetuity investors are inflation sensitive

• Stress test - Incrementally increase expected risk/return - Examine potential impact on key business metrics

Asset/Liability Management Option 5: Targeted Scenarios - Stress Testing

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Asset/Liability Management Portfolio Construction

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Once the target risk/return has been identified, it’s time to construct a portfolio that can reasonably be expected to achieve the desired result in an efficient manner. Construct portfolio – asset allocation is primary driver Desired result – match expected risk/return target Efficient manner – Sharpe ratio

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THE OTHER SIDE OF THE CREDIT SUPER CYCLE – “The Debt Deleveraging Cycle”

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U.S. Banks Have Restored Their Balance Sheets and Are Now Back to Record Profitability.

Source: FDIC

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Corporations Have Delevered

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Corporations Have Delevered

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Consumers Are Delevering

DAVIS 145

Quarterly Data 3/31/1980 - 6/30/2013

High Debt Service

Low Debt Service

Source: Department of CommerceBureau of Labor StatisticsFederal Reserve Board

Household Debt Service Ratio (Minimum Debt Service Payment

on Mortgage Debt and Consumer Creditas a % of Disposable Personal Income)

( )

Nominal GDP Gain/Annum When:

Gain/ % Debt Service Ratio is: Annum of Time

Above 12.8% 2. 3 12. 0 Between 11% and 12.8% 5. 5 59. 4

* Below 11% 6. 9 28. 6

Real GDP Gain/Annum When:

Gain/ % Debt Service Ratio is: Annum of Time

Above 12.8% 0. 2 12. 0 Between 11% and 12.8% 2. 9 59. 4

* Below 11% 3. 2 28. 6

Nonfarm PayrollsGain/Annum When:

Gain/ % Debt Service Ratio is: Annum of Time

Above 12.8% -0. 8 12. 0 Between 11% and 12.8% 1. 3 59. 4

* Below 11% 1. 9 28. 6

9.9 10.010.110.210.310.410.510.610.710.810.911.011.111.211.311.411.511.611.711.811.912.012.112.212.312.412.512.612.712.812.913.013.113.213.313.4

9.9 10.010.110.210.310.410.510.610.710.810.911.011.111.211.311.411.511.611.711.811.912.012.112.212.312.412.512.612.712.812.913.013.113.213.313.4

1980 1985 1990 1995 2000 2005 2010

Household Debt Service Ratio's Potential Impact On Growth Chart has been reanalyzed due to data revisions.

Copyright 2013 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. . www.ndr.com/vendorinfo/ . For data vendor disclaimers refer to www.ndr.com/copyright.htmlSee NDR Disclaimer at

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Consumers Are Delevering

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The Last Stage of Delevering is the Federal Government

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The Last Stage of Delevering is the Federal Government

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• Buying assets from banks continues to be the number one investment opportunity.

• We believe we are in a long-term bull market for equities. Growth stocks continue to be the number one opportunity in the public market. The IBD 50 or simple ETF strategies most likely should perform best in this type of environment.

• Gold most likely continues its descent in its current bear market due to fiscal improvement at the sovereign government level.

• High quality bonds will be challenging over the next 12-24 months as the 10-year treasury moves toward our target of 3.50 percent by mid-2014 and 4.25 percent by mid-2015.

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Asset/Liability Management Outlook for 2014

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• High yield municipal bonds, distressed debt, and floating rate investments continue to be the best place to invest in the bond market.

• Re-flationary fixed income should add value to a fixed income allocation again in 2014 (REITs, MLPs, Royalty Trusts).

• Stocks will most likely have a large correction some time near the end of Q1 2014 and that will be the next buying opportunity.

• Private real estate and private credit are much more attractively valued than the public markets. • Buy real estate from banks and servicers. • Buy debt from banks and servicers.

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Asset/Liability Management Outlook for 2014 (continued)

Tony R. Hallada CEO | CliftonLarsonAllen Wealth Advisors, LLC

PROFILE Tony is the CEO, managing principal, and an investment committee member of CliftonLarsonAllen Wealth Advisors, LLC. Based on Tony’s belief in “life planning,” he challenges conformity and motivates people to discover the abundant possibilities life holds.

EXPERIENCE IN SERVING CLIENTS Tony’s clients benefit from a close, personal relationship with him and objective advice aimed at getting them where they want to go in life. He has a broad range of experience in the capital markets and financial services industry, and is passionate about offering boutique investment strategies. During his more than 20-year tenure, he has also served as the vice president of Nuveen Investments and John G. Kinnard & Company. In addition, his clients appreciate the work experiences he gained at his family’s closely held Ford and International Harvester dealership. Between the ages of 12 and 21, he worked in all facets of the family business. By the time he graduated from college, he was a shareholder and was managing the front end of the dealership.

EDUCATION/PROFESSIONAL INVOLVEMENT Tony earned a BA from the University of Wisconsin-Madison and is a graduate of the University of Minnesota Carlson School of Business Executive Management Program. Tony is a member of the Financial Planning Association. He holds FINRA Series 7, 63, 65, and 24 licenses, and Minnesota Life and Health Insurance licenses. In 2012 and 2013, he was named a Five Star Wealth Manager by Twin Cities Business.

SPECIAL INTERESTS Tony resides in Medina, Minnesota with his wife Teresa, son Mason, and daughter Hannah. His hobbies include golf, basketball, biking, skiing, and reading. Tony is an active church member, coaches his son’s baseball team, and finds personal fulfillment in mentoring kids, especially those who have been adopted.

CONTACT INFORMATION 612-376-4529

tony.hallada@CLAconnect.com

CLAconnect.com/privateclient

Steven D. Jones, CFA®, CFP®, CAIA® Director, Institutional Investment Services | CliftonLarsonAllen Wealth Advisors, LLC

PROFILE Steven is the Director of the Institutional Investment Services at CliftonLarsonAllen Wealth Advisors, LLC. He has over thirty years of investment management experience with expertise in all major asset classes, and specializes in asset/liability management, macroeconomic analysis and asset allocation strategies.

EXPERIENCE IN SERVING CLIENTS Steven began serving institutional clients in 1990, as a portfolio manager for a major trust company in St. Louis. In 2006, he joined LarsonAllen Financial and expanded his client facing skills to include high net worth individuals. In 2009, Steven joined Hammond Associates as a Senior Investment Consultant where he served foundations, endowments, healthcare and high net worth clients.

EDUCATION/PROFESSIONAL INVOLVEMENT Steven is a CFA charterholder and serves as the Immediate Past President of the CFA Society of St. Louis. He also holds the following designations: Chartered Alternative Investment Analyst (CAIA) and the Certified Financial Planner (CFP). Steven received his MBA from Washington University in St. Louis and his BSBA from the University of Missouri-Columbia, where his major was Finance & Banking.

SPECIAL INTERESTS Steven currently resides in St Louis with his wife and youngest daughter. His eldest daughter is attending the University of Missouri-Columbia. Steven is an active member of the St. Gerard parish. He likes to ride bikes with his wife on the many trails in-and-around St. Louis. Steven’s hobbies include guitar, singing, exercising, movies and watching the Rams and Cardinals.

CONTACT INFORMATION Mobile 314-795-1095

steven.jones@CLAconnect.com

CLAconnect.com/privateclient