U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P

Managing Municipal Debt in Today’s MarketManaging Municipal Debt in Today’s Market

August 13-17, 2011

NASACT 2011 Conference

Alex WallaceManaging Director

U.S. Bancorp Municipal Securities Group

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 2

Municipal IssuanceMunicipal Issuance

Municipal Supply*

*2011 YTD 1/1 - 8/1

$142

$432$410

$390

$430$389

$408

0

100

200

300

400

500

600

2005 2006 2007 2008 2009 2010 2011

$Bill

ions

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

BAB

Non BAB

# Trans

Tax-Exempt Rates Below Historical Averages*

2.79%

3.60%

4.61%

0.90%

2.26%

3.88%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

5yr MMD

Perc

ent

agea

s

10yr Average

8/11/2011 MMD

*Comparison of 8/11/2011 AAA MMD v. 10-yr Historical MMD averages

10yr MMD5yr MMD 30yr MMD

Source: TM3Source: SDC

Municipal Issuance by Mode*

*2011 YTD 1/1 - 8/1

Municipal Issuance by Market Access*

*2011 YTD 1/1 - 8/1Source: SDCSource: SDC

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011

Perc

enta

gens

Private

Negotiated

Competitive

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2005 2006 2007 2008 2009 2010 2011

Perc

enta

gens

Variable Rate

Fixed Rate

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 3

Municipal Market Issues Coming into 2011Municipal Market Issues Coming into 2011

Legislative

Reinstatement of ARRA programs (temporarily or permanently) Elimination of tax-exemption Impacts of Dodd-Frank Wall Street Reform Act

Potential Supply / Demand Imbalance

Expectation for overall lower volume in 2011 Outflows from municipal bond funds Continuance of cross-over buyer support in the municipal market Underperformance of municipal bonds versus other asset classes

Interest Rate and Credit Spreads

Sustainability of low interest rate environment. Inflationary concerns looming Tax-exempt and taxable relationship (i.e., ratio) Credit spreads under pressure, especially for more storied credits

Credit Differentiation

Investors and rating agencies are more focused on credit drivers, liquidity, and transactional risks

Emergence of headline risk and perception of defaults in the municipal market Future of bond insurance Issuer disclosure requirements

Variable Rate Market

An estimated $112 billion in expiring Letters of Credit and Standby Bond Purchase Agreements in 2011

Outflows from tax-exempt money market funds Impact of Basel III on banks’ ability to provide liquidity at acceptable prices Floating rate alternatives (Direct Purchase, Floating Rate Notes, Put Bonds, etc) Swap Exposure – estimated mark-to-markets of approximately negative $300 Billion

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 4

Fixed87%

Indexed Note6%Variable

7%

Negotiated75%

Competitive22%

Private Placement

3%

2011 Municipal Issuance2011 Municipal Issuance

Source: Thompson Reuters

Annual Municipal Issuance Volume (Jan. – June) Issuance by Methods (Billions)

Market Commentary Issuance by Rate Mode (Billions)

Year-to-date municipal issuance volume at a 10 year low Municipal issuance is down 40% from 2010 levels Approximately $142 billion of new debt has come to

market this year in the public market 75% of all volume has been negotiated year-to-date 87% of year-to-date primary public market volume has

been in fixed rate mode v. 7% in variable rate mode Private market activity growing

- Direct Purchases- Renewals- Remarketing Takeovers- Swap Novations

$195

$239$215

$244

$207

$263 $268

$223$234

$142

$0

$50

$100

$150

$200

$250

$300

YTD2002

YTD2003

YTD2004

YTD2005

YTD2006

YTD2007

YTD2008

YTD2009

YTD2010

YTD2011

$Bill

ions

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 5

Municipal Defaults (7/2009 – 8/2011)Municipal Defaults (7/2009 – 8/2011)

Sector All Notices Defaults Reserve Fund Draws

Par ($MM) # Trans. Par ($MM) # Trans. Par ($MM) # Trans.

Land Secured 4,412 247 2,756 148 1,352 86

Toll Road/ Transit 4,666 7 889 4 1,419 1

Tribal 940 4 940 4 n/a n/a

IDB 1,193 31 889 15 300 15

Housing 831 64 671 48 115 10

Retirement 2,182 65 782 26 292 9

Hotel 696 12 404 7 194 4

Other “Risky” Sectors 13,423 136 1,381 53 10,319 49

Safe Sectors* 7,492 48 7 3 4,910 18

Total $35,836 614 $8,719 308 $18,902 192

Initially Non-Rated $10,293 433 $5,947 259 $2,573 118

Initially Insured/ LOC Bonds $14,595 86 $624 5 $9,271 48

Initially Rated/ Uninsured $10,115 51 $1,640 18 $6,844 20

*GO/ Wtr/Swr/ Sales TxSource: Municipal Market Advisors

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 6

Municipal Yield CurveMunicipal Yield Curve

Market Commentary

Tax-Exempt MMD Yield Curves

7/1/2010 – 8/1/2011

Yield curve is historically steep – 2-30 year curve is over 400 basis points

Steep yield curve will drive financing structures and decisions made by our clients

Investor Segments

- Short-term: • MMF’s• Corporations• Banks

- Intermediate:• Intermediate Bond Funds • Retail• SMA’s

- Long-term• Bond Funds• Insurance Companies• Bank Trusts• Hedge Funds (Arbs. / TOBs)

0.00

1.00

2.00

3.00

4.00

5.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29

Yiel

d

Max AAA GO MMD

Average AAA GO MMD

Current AAA GO MMD

Min AAA GO MMDAverage AAA GO

Current AAA

Max AAA GO

Min AAA GO

Source: TM3

Short Term

Long Term

MMD Date 1 yr 3yr 5yr 10yr 15yr 20yr 30yrCurrent AAA GO 8/1/2011 0.20 0.61 1.14 2.63 3.36 3.82 4.29Average AAA GO 7/1/2010-8/1/2011 0.30 0.80 1.43 2.78 3.49 3.94 4.32Max AAA GO 1/14/2011 0.37 1.11 1.88 3.46 4.32 4.89 5.08Min AAA GO 8/31/2010 0.25 0.48 1.06 2.18 2.76 3.28 3.67

Yield (basis points)

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 7

Historic Long-Term RatesHistoric Long-Term Rates

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

AAA GO 30-yrUST 30-yrMMD AvgUST Avg

LONG TERM

MARKET

LONG TERM

MARKET

High Grade Municipal Index 30-yr Spot (Jan 1990 – Present)

Sept., 15, 2008Lehman Brothers Bankruptcy filing

20 year MMD Average

MMD Historic Low

20 year UST Average

UST Historic Low

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 8

Long-term Ratios: MMD and US TreasuryLong-term Ratios: MMD and US Treasury

Ratios are an important factor in determining future tax-exempt rates and the sustainability of “cross-over buyers”

30yr MMD/UST Ratio

50%

75%

100%

125%

150%

175%

200%

225%

Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Liquidity Crisis

ARS fail Insurers lose

AAA Trading/

leveraged buyers exit market

ARRA

BABs, QSCBs, etc. AMT Holiday

85%

99%

143%

128%

April 15, 2009:1st BAB Deal

Jan. 1, 2011:ARRA Expires

107%

August 1, 2011:105%

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 9

0.0

50.0

100.0

150.0

200.0

250.0

300.0

Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11

Spre

ad (b

ps)

AA GO v. AAA GOA GO v. AAA GOBAA GO v. AAA GO

Credit SpreadsCredit Spreads

- Shorter duration

- Current coupons not attractive- Use of web-based portals such as

Buy___Bonds.com

- Use of Mini-Bonds

Credit spreads have tightened but remain at historically high levels.

“Flight to quality” dynamics still exist

Limited exposure to A and BBB rated credits by investors

Retail participation remains a high priority for most issuers

Municipal Credit Spreads Since January 2006

Source: TM3

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 10

(5,000)

(4,000)

(3,000)

(2,000)

(1,000)

0

1,000

2,000

3,000

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Nov

-10

Jan-

11

Mar

-11

May

-11

Jul-1

1

$Th

ou

san

ds

Municipal Bond Fund FlowsMunicipal Bond Fund Flows

Recent negative headlines in the municipal market led to substantial mutual fund cash outflows and increased secondary selling pressure.

Tax-Exempt Bond Flows (Funds that Report Weekly)

YTD 2011 $22bn Outflows

YTD 2011 $22bn Outflows

Jan. 1, 2011Jan. 1, 2011

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 11

Historic Short-Term RatesHistoric Short-Term Rates

LONG TERM

MARKET

LONG TERM

MARKET

Short Term Indices: SIFMA & LIBOR (Jan 1990 – Present)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

SIFMA

1mo LIBOR

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 12

Short-term Ratios: SIFMA and LIBORShort-term Ratios: SIFMA and LIBOR

0.00

0.10

0.20

0.30

0.40

0.50

0.60

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul -11 Aug-11

Perc

enta

ge

(percentage) — SIFMA — 1mo LIBOR — 3mo LIBOR8/2/2010 0.28 0.30 0.448/3/2011 0.08 0.21 0.27Change (0.20) (0.09) (0.17)12m Average 0.24 0.24 0.2912m Ratio of SIFMA to LIBOR 98% 81%

Ratios are an important factor in determining future tax-exempt rates and the sustainability of “cross-over buyers”

Influx of new cash from taxable money market funds – currently represent a significant increase in the number of assets available to purchase tax-exempt instruments

Daily resets are trading 10 basis points through SIFMA

SIFMA v. LIBOR (Aug. 2010 – July 2011)

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 13 13

Variable Rate IssuanceVariable Rate Issuance

ObservationsMoney Market Fund Assets

and Outstanding VRDNs

Variable rate funding continues to provide compelling cost advantages compared to fixed rate debt

Availability of credit enhancement continues to be an issue

Increasing distinction (i.e., trading spread) between lower and higher quality credit providers

- Higher quality banks trading as much as 5bps through SIFMA

- Lower quality banks trading as high as 20bps over SIFMA Cross-over Buyers Include:

Corporations Taxable Funds Foreign Banks Hedge Funds Insurance Companies

Cross-over Buyers Include: Corporations Taxable Funds Foreign Banks Hedge Funds Insurance Companies

(As of July 31, 2011)

$301.2 bn

$356.0 bn

$0

$100

$200

$300

$400

$500

Outstanding VRDNs Tax Free MM Fund Assets

Billi

ons

Crossover Buyers

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 14

Money Market Fund FlowsMoney Market Fund Flows

Money Market Fund Response to Fall 2008 Market Turmoil

$0

$100

$200

$300

$400

$500

$600

Dec-06

Jun-07

Dec-07

Jun-08

Dec-08

Jun-09

Dec-09

Jun-10

Dec-10

Jun-11

Mon

ey M

arke

t Fu

nd A

sset

s (B

illio

ns)

0

1

2

3

4

5

6

7

8

9

SIFM

A (%

)

Max MMF Assets: $528bn (8/19/08)

MMF Assets Today:$301bn (7/26/11)

Money Market Fund Assets and

SIFMA

Money Market Fund Assets and

SIFMA

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 15

Municipal Market Credit ExpirationsMunicipal Market Credit Expirations

Market CommentaryTotal Muni Credit Expirations

2011 and Beyond

Record volume of expiring bank credit facilities have not taxed the market as expected

Issuers have been successful in extending expiring credit facilities or restructuring outstanding VRDNs

$75

$47$34

$22

$37

$18

$15

$20

$0.0

$20.0

$40.0

$60.0

$80.0

$100.0

$120.0

2011 2012 2013 2014+

Billi

ons

Year

SBPA Expirations

LOC Expirations

- Fixed Rate Bonds

- Direct Placements

- Floating Rate Notes

Source: Bond Buyer

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 16

Alternative StructuresAlternative Structures

Floating Rate Notes (FRN)

Public market issuance

Sold primarily to money market funds, short bond funds and

insurance companies

Index: SIFMA or % LIBOR based

Up to 7 year term

Hard maturity preferred

No remarketing fees

Does not require bank enhancement

Eliminates trading risk volatility

Structure lends to Interest rate risk hedging options

YTD issuance approximately $5B

Direct Purchase

Private market issuance

Principally purchased by commercial banks

Index: % LIBOR based

1-7 year initial mode

Soft Maturity negotiable

No remarketing fees

Eliminates trading risk volatility

Often customized to match existing swap rate structure to eliminate basis risk

YTD issuance estimated at $10B

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 17

Alternative Structures (cont’d)Alternative Structures (cont’d)

Synthetic Structures

Current rate environment attractive for hedging future issuances

- Taxable rates have rallied tremendously relative to tax-exempt rates

- Absolute tax-exempt levels remain historically low – Current MMD* approximately 116 basis points below twenty year average and almost 100 basis points below 6-months ago

MMD “cheap” relative to LIBOR

- Approximately 3 standard deviations to the 6-month average

As of 8/4/2011 Source: TM3

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 18

Impact of US Treasury DowngradeImpact of US Treasury Downgrade

Increased fears downgrade may force already fragile recovery into “double dip”

Initial market reaction counter-intuitive

“Flight-to-quality” to Treasuries (Despite downgrade, still seen as “safe”)

10yr Treasuries dropped to its lowest level since Jan. 2009

Long-term impact on municipal market unknown

Possibility credit spreads may widen

Certain sectors have already been affected and will remain under pressure

GARVEES

Housing Securities

Hospitals

Build America Bonds may be exposed to potential timing and subsidy-reduction risks

Increased uncertainty has dampened primary issuance to approximately $2.8B for the week, the slowest August week since 2003

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 19

Emerging TrendsEmerging Trends

Issuer confidence

Absolute rate levels

Ratios

Counterparty risks (credit enhancement, swaps, and remarketing)

Investor base dynamics (cross-buyers, money and bond fund flows)

Synchronizing disclosure in the public and private markets (especially on parity debt)

New product development

Basel III implementation

Issuers’ debt mix and methods of sale

Continued availability of alternative debt instruments

Floating Rate Notes

Direct Purchases

Put Bonds

Potential return of BABs?

Increases in municipal downgrades / defaults

U. S. B A N C O R P M U N I C I P A L S E C U R I T I E S G R O U P 20

Confidentiality and DisclaimerConfidentiality and Disclaimer

The material contained herein is confidential and may not be shared with parties without the express and prior written consent of U.S. Bancorp.

It has been prepared for informational purposes only. It is not a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy. This is not a research report. This material summarizes publicly available material. This material was not intended or written to be used, and it cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Each taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Past performance is not necessarily a guide to future performance. This material is distributed to and intended for U.S. persons only. Please see additional important information and qualifications throughout this material, including information regarding the risks of derivatives such as decline in value, settlement risk or liquidity risk. All pricing is on an indication basis only and should not be construed as the terms of the contract as they are neither binding nor guaranteed. Pricing may change due to market forces of supply and demand.

“US Bancorp” is the marketing name used by U.S. Bancorp and its subsidiaries including, U.S. Bank Municipal Securities Group and U.S. Bancorp Investments, Inc. Municipal products and services are available through U.S. Bank Municipal Securities Group and U.S. Bancorp Investments, Inc. U.S. Bank Municipal Securities Group is a separately identifiable division of U.S. Bank National Association and an affiliate of U.S. Bancorp Investments, Inc., member FINRA and SIPC. Investment products and services offered by U.S. Bank Municipal Securities Group and by US. Bancorp Investments, Inc are: Not a Deposit | Not FDIC Insured | Not Guaranteed by the Bank | May Lose Value | Not Insured by Any Federal Government Agency.