September 2017 Jon Augustine, Chief Investment Officer · 5.8% National home price change YOY% as...

Economic and Market Overview

September 2017

Jon Augustine, CFA

Chief Investment Officer

2

Economic Overview

B T C C A P I T A L M A N A G E M E N T

Source: Bloomberg

2014 Optimism

2014 Reality

2015 Optimism

2015 Reality

2016 Optimism

2016 Reality

Inflection Point or Disappoint for U.S. Growth

U.S. Real GDP Economic Forecast Overtime

2017 Optimism

2017 Reality

3


Economic Forecast

Source: Bloomberg Economist Consensus Survey

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Re

al G

DP

, C

PI,

10

-Yr

(%)

Real GDP (YOY %) CPI (YOY %) Core PCE (YOY %) 10-Year Note (%)

Source: Bloomberg L.P.

2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E

Real GDP (YOY %) 2.5 1.6 2.2 1.7 2.6 2.9 1.5 2.2 2.3 2.1

CPI (YOY %) 1.6 3.2 2.1 1.5 1.6 0.1 1.3 2.0 2.0 2.1

Core PCE (YOY %) 1.3 1.5 1.9 1.5 1.5 1.3 1.8 1.6 1.8 1.9

10-Year Note (%) 3.3 1.9 1.8 3.0 2.2 2.3 2.5 2.5 3.0 3.3

4

B T C C A P I T A L M A N A G E M E N T 5

By mid-year 2017 the

U.S. had already been

impacted by $130 billion

of climate impact.

Recent hurricanes will

likely make 2017 one of

the most costly natural

disaster years on

record.

Record Weather Impact


U.S. Conference Board Leading Economic Indicator

Source: Conference Board

6


Forecast Leading Economic Indicator By State

7


State-of-the-State

Source: Iowa Revenue Services


Iowa Sales Tax Collections Slow

• Iowa sales tax receipts continued to climb in 2016 at 2.36%

• Average five years growth rate has been 3.33%

Source: Iowa Revenue Services


ISM Manufacturing and Services PMI

10


Source: BLS, Conference Board,

University of Michigan, Bloomberg

Consumer

confidence

continues to

improve as

earnings stabilized

on slower

employment gains

University of

Michigan

Consumer

Sentiment Still

Strong

11


Economic Growth Gaps


National Unemployment

August 2017 4.4%

Source: Bureau of Labor Statistics

Aug

20172016 2015 2014 2013 2012 2011 2010 2009

United States 4.4 4.7 5.0 5.6 6.7 7.9 8.5 9.3 9.9

Iowa 3.3 3.5 3.8 4.0 4.4 4.9 5.3 5.7 6.4

Minnesota 3.8 4.0 3.9 3.8 4.6 5.3 5.8 7.0 7.8

Illinois 5.0 5.7 6.1 6.1 8.4 9.1 9.3 9.5 11.2

Missouri 4.0 4.4 4.6 5.6 6.5 6.8 7.5 9.2 9.8

Wisconsin 3.4 4.1 4.3 4.8 6.1 6.9 7.2 8.1 9.2

California 5.1 5.2 5.7 6.9 8.2 9.6 11.0 12.1 12.1

Nevada 4.9 5.1 6.3 7.3 8.7 10.4 12.3 13.6 12.8

Florida 4.0 4.9 5.1 5.8 6.6 7.8 9.0 10.7 11.2

Arizona 5.0 5.0 5.6 6.4 7.2 7.8 8.8 9.9 11.2

Alaska 7.2 6.6 6.5 6.5 6.9 6.9 7.4 7.8 8.0

13


Iowa Unemployment

August 2017 3.3%

Source: Bureau of Labor Statistics

CountyJul

20172016 2015 2014 2013 2012 2011 2010 2009

State of Iowa 3.3 3.7 3.8 4.3 4.7 5.0 5.5 6.0 6.4

Blackhawk 3.8 4.5 4.7 5.0 4.8 5.5 5.7 6.1 6.2

Cerro Gordo 3.2 3.5 3.8 4.5 5.0 5.5 6.2 6.5 7.5

Dubuque 3.0 3.5 3.9 4.0 4.3 4.5 4.8 5.8 6.4

Johnson 2.7 2.4 2.7 2.8 3.1 3.4 3.9 4.0 4.4

Linn 3.4 3.6 3.7 4.1 4.7 5.1 5.6 5.8 6.1

Polk 3.1 3.3 3.6 4.0 4.5 5.1 5.5 5.9 6.4

Pottawatamie 2.8 3.2 3.6 4.1 4.3 4.9 5.5 5.8 5.2

Story 2.4 2.1 2.4 2.5 2.9 3.3 3.7 4.0 4.7

Woodbury 3.2 4.0 3.9 4.4 4.6 5.2 5.7 7.2 6.0

14


Hurricane Impact on Jobless Claims


Individual Investors Wealth Continues to Grow

Individual investors should be confident in the markets as household and

nonprofit organization financial assets continue to grow.

Source: Federal Reserve

16


Home Value Growth – Source of Wealth Growth

• Large component of wealth is household equity. Home loans-to-value

have returned to 2007 levels.

• Rising home values have reduced the percent of borrowers where the

mortgage is higher than the property value.


5.8% National home

price change YOY% as

of 2Q 2017 . This

compares to 6.3%

average for the last 5

years. National Avg.

home price is $192,600

Iowa median home

price of changes has

averaged 6.5%

increase over the last 5

years

Iowa Median Home Price $163,000

Source: Corelogic, Bloomberg

National Home Prices YOY% Change

Home Prices

18


New Home Sales Still Well Below 2007 Levels

Source: Zillow Research, National

Association of Realtors, US

Census Bureau (December 2016)

Average Age of Homes Sold “This old House”

Average age of

homes continues

to get older. As

new home

building not

meeting demand

New Home Sales

still below 2007

levels

Recent Annualized New Home Sales Rate 571,000

Recent annualized existing home sales rate

5.44 million

19


Iowa Farmland Prices

20


Productivity Productivity Drives Wealth Development and Higher Standards of Living

21


Source: Bloomberg, Federal Reserve

Fiscal Policy Headwind

% US Debt / GDP

22


Fiscal Policy Headwinds

U.S. Federal Budget - Inflexible

Source: The Heritage Foundation

23

24

Fixed Income


Federal Reserve - Mission Complete?

Inflation of 2%

Unemployment 4.5-5.0%

Source: Bureau of Economic Analysis, Bureau of Labor Statistics

25


Source: Bloomberg & PIMCO As of August 2017

• Federal Reserve has a willingness to complete one more increase in 2017 of the Fed

Funds rate to 1.50%. Economists project two rate increases lifting the Fed Funds

rate to 2.00% by the end of 2018.

Federal Reserve Just Getting Started


Bonds: Principal Preservation

Source: Morningstar Direct 12/31/2016

27


Bond Returns Driven by Coupon Clipping

• 90 % of return over

the last 30 years is

from Income Return

• In only three years did

the bond market

generate a negative

return

• The average book

yield on bond or yield

to worst can provide a

good indication of

future returns from

bonds.

Source: Bloomberg, BofAML, BTC Capital Mgmt.

Index YTD Rtn

Yld to

Worst Mod Dur OAD

Projected

Memb

US Aggregate 3.29% 2.50 6.18 5.97 9,480

US Treasury 2.65% 1.87 6.24 6.27 257

US Government-Related 4.09% 2.42 5.51 5.48 970

US Corporate 5.04% 3.14 7.52 7.55 5,484

US MBS 2.39% 2.77 5.17 4.38 317

US Government/Credit 3.68% 2.39 6.63 6.66 6,711

US High Yield 6.57% 5.49 3.83 3.79 2,030

28


As of June 2017.

Source: Morningstar

Active - U.S. Intermediate-Term Bond Category for fixed income managers.

Benchmark (1) – Bloomberg Barclays U.S. Aggregate Index

Why Active Management Matters for Fixed Income

10-Year Returns of U.S. Median Active and Passive Managers

Source: PIMCO, Morningstar

During the last 5-year period 84%, 81% and 60% of

active funds or ETF’s outperformed their median

passive peer for the intermediate-term, high yield and

short-term categories, respectively

30

Stocks











Data as of 09/15/2017 Market Cap QTD YTD 1-Year 3-Years 5-Years

Benchmark Indexes:

Bloomberg Iowa Index 63,023,039,914$ +6.3% +12.4% +29.7% +11.6% +18.1%

S&P 500 INDEX 22,248,488,000,000$ +3.6% +13.3% +19.3% +10.0% +13.7%

MSCI EAFE 18,450,998,000,000$ +4.8% +19.7% +21.9% +4.6% +8.1%

Top 10 Constituents (by market cap):

ROCKWELL COLLINS INC 21,240,469,962$ +25.1% +42.7% +63.9% +21.0% +21.7%

PRINCIPAL FINANCIAL GROUP 18,143,840,720$ (1.7%) +10.4% +33.1% +8.5% +19.9%

CASEY'S GENERAL STORES INC 4,093,642,366$ (0.1%) (9.6%) (9.5%) +16.9% +13.7%

AMERICAN EQUITY INVT LIFE HL 2,498,579,024$ +4.9% +22.3% +59.0% +6.3% +18.5%

MEREDITH CORP 2,385,835,282$ (8.7%) (6.6%) +9.0% +9.3% +11.8%

HEARTLAND EXPRESS INC 1,893,467,916$ +8.3% +11.0% +17.2% (2.0%) +13.1%

FIDELITY & GUARANTY LIFE 1,837,638,772$ +0.7% +32.5% +32.8% +14.2% +13.1%

FBL FINANCIAL GROUP INC-CL A 1,741,325,435$ +14.3% (6.8%) +15.1% +22.4% +21.0%

HNI CORP 1,667,509,494$ (4.1%) (30.7%) (26.5%) +1.9% N/A

HEARTLAND FINANCIAL USA INC 1,344,786,591$ (6.4%) (7.7%) +24.2% +23.3% +11.4%

Bottom 10 Constituents (by market cap):

FLEXSTEEL INDS 364,244,514$ (12.9%) (22.9%) (4.8%) +11.3% +22.1%

NEWLINK GENETICS CORP 346,432,758$ +72.4% +23.2% +17.6% (21.8%) (5.0%)

AMES NATIONAL CORP 265,361,021$ (6.0%) (11.7%) +8.9% +11.2% +9.3%

AERPIO PHARMACEUTICALS INC 169,187,738$ +4.9% +22.3% +24.0% +6.3% (2.0%)

LEE ENTERPRISES 116,270,643$ +10.5% (27.6%) (33.5%) (17.3%) +7.0%

KEMPHARM INC 52,766,748$ (11.3%) +20.3% (19.5%) +21.0% +16.2%

WCF BANCORP INC 24,846,957$ +1.9% +5.6% +30.3% +8.6% +11.1%

ART'S-WAY MANUFACTURING CO 9,803,281$ (16.9%) (27.9%) (18.6%) (21.1%) (16.6%)

SPOTLIGHT INNOVATION INC 3,293,534$ (60.0%) (83.3%) (83.3%) (62.2%) (53.3%)

AMERICAN POWER GROUP CORP 543,255$ (86.6%) (92.1%) (95.5%) (75.3%) (56.4%)

Source: BTC Capital Management, Bloomberg LP.

40

Fiduciary Investing September 2017

David Chapman, CFA

Managing Director Institutional Relationship Manager



• Know the history of the account!

• Know the client’s goals for the fund

• Income for living

• Growth for retirement

• Growth for future generations

• Know the client’s risk and return objectives

• Should be consistent with client’s goals for the fund

• Should be consistent with client’s risk tolerance!

• Emotional tolerance

• Lifestyle tolerance

KEYS TO FIDUCIARY INVESTING


• Know any restrictions that must be considered

• Time frame

• Legal constraints

• Tax considerations

• Liquidity

• Restricted assets

• Document everything – Have client sign!

• Have a sound, documented investment process

• Process proven to meet long term risk and return objectives

• Process always considers investments in context of overall portfolio

• Have regular investment reviews

• Formal reviews at least quarterly

• Following investment process

• Portfolio consistent with investor’s objective & risk/return goals

• Meet with clients at least annually to review any changes in objectives or circumstances

KEYS TO FIDUCIARY INVESTING


• Asset Allocation

• Avoid desire to make large changes unless change in client’s objective/circumstances

• Move tactically, but stay disciplined to investment process

• Have allowable ranges for each asset class for investor’s objective

• Tactical limits can move within to implement viewpoints

• Don’t go outside limits to still ensure achieve long term goals

• Market Timing / Client Requests

• Requests to liquidate and get out of markets

• Requests to buy certain portions of markets/alternative investments

• Requests to buy individual securities/stocks

• Listen to clients, but REMIND THEM TO STAY LONG-TERM COURSE

• Stay true to disciplined processes to get desired results

• If cannot talk client out of, get signed documentation to protect yourself

ASSET ALLOCATION CONSIDERATIONS


• Real Estate, Hedge Funds, Private Equity, Commodities, Managed Futures

• Potential Benefits:

• Diversification/low correlation

• Inflation hedge

• Higher return potential

• Potential Detriments:

• Higher risk

• High expenses

• Low liquidity

• Rely heavily on manager skill

• Make sure fit into overall portfolio consistent with investment objective

• Limit total exposure

ALTERNATIVE INVESTMENTS


• Passive recently successful due to low volatility, steady rising market

• 100% upside participation

• Active often better in more volatile, moderate to negative return environment

• Can have <100% downside participation – avoid overvalued securities

• Favor passive:

• More efficient asset classes • Large Cap Equities, Investment Grade Bonds

• Shorter investor time horizon

• Favor Active:

• Less efficient asset classes • Small Cap Equities, International Equities, Below Investment Grade Bonds

• Longer investor time horizon – let processes work

• Be conscious of expenses

• NOTHING WRONG WITH USING BOTH!!

ACTIVE VS PASSIVE MANAGEMENT


Biographies

Jon Augustine, CFA | Chief Investment Officer

Jon is Chief Investment Officer for BTC Capital Management. Jon is responsible for firm-wide risk management and oversight of all

investment processes and strategies. Prior to joining BTC Capital Management, Jon was CIO & Director for WB Capital Management

Inc. Jon earned his Chartered Financial Analyst (CFA) designation in 1985 and has more than 30 years of investment management

experience. He is a member of the CFA Institute and the CFA Society of Iowa. Jon earned his BBA in Finance and a Masters of

Business Administration degree from the University of Iowa.

Brian Rolland, CPA, CMA, CTP | Senior Managing Director

Brian is a Senior Managing Director for BTC Capital Management. Brian has 20 years of experience serving the investment needs of

institutional and private clients. In addition, he also has served clients with a Big 5 public accounting firm specializing in insurance

industry attestation. Prior to joining BTC Capital Management, Brian was an Institutional Consultant for WB Capital Management

and prior to that position, Brian was the Treasurer and Cash Operations Manager for the investment division of AEGON. Brian has

earned a Bachelor’s degree from the University of Northern Iowa and a Masters of Accounting degree from the University of Iowa.

David Chapman, CFA | Managing Director, Institutional Relationship Manager

David is a Managing Director and Institutional Relationship Manager for BTC Capital Management. David has over eight years of

investment experience including fixed income portfolio management, equity portfolio management, external fund selection and

client relationship management. David has a Bachelor of Science degree from Iowa State University with a major in finance and a

minor in marketing. He also earned a Master of Business Administration degree with a specialization in finance from Iowa State

University. David also holds a Doctor of Jurisprudence degree from Drake University.

This material is provided for informational purposes only. It contains no investment advice and

should not be construed as a recommendation to buy or sell any specific securities. Past

performance is no guarantee of future results. Performance data provided represents past

performance. Performance results shown are total returns, net of dividend withholding taxes;

assume reinvestment of dividends and capital gains as well as no reductions for taxes.

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