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The January 2003-2004 One-Year Look-Back®

February 5, 2004
The Disciplined Investor®

The purpose of this teleconference is to validate our methodology by looking back at The Disciplined Investor® Volume 10, Number 4, “The January 2003 Level Playing Field®,” dated January 16, 2003. We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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A Call to Action:

December 4, 2003
Andy Hixson, Seung Lee

This is a revised version of today’s Call to Action. In our efforts to present “Call to Action” information in a timely manner, haste is required. When time permitted today, we discovered a couple of minor errors. In addition, while correcting these, we also took the opportunity to add a few clarifying textual revisions.

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Bumpin’ on Up

December 1, 2003
David V. Raphael

In this Disciplined Investor®, we will utilize Shape ManagementSM to evaluate a liability product that has been around for a few years, but is picking up steam in the marketplace – the bump-up CD. We’ll explain the structure, examine its intended purpose, and provide you with a framework to evaluate whether the bump-up CD has a role in your liability portfolio. What we will come to discover is that this product looks attractive on a total cost basis if we strongly believe that only a limited number of depositors will ever take advantage of the “bump-up” feature embedded in this CD.

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ARM Funds and Other Random Musings

November 20, 2003
Kurt A. Fritz

Every couple of months, someone will ask if they should park some money in one of several ARM funds. My gut instinct is that it is probably not a good investment. Nonetheless, since these ARM funds come up time and again, I decided to review the facts surrounding one such fund.

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Traditional & Options-Based Credit Analysis

October 28, 2003
Raj Nandkumar

This article compares traditional and options-based credit analysis, and explains why options-based models should be used in conjunction with traditional models to gain an understanding of the true credit risk of a corporate bond. The emphasis will be on understanding the differences at an intuitive and conceptual level rather than a mathematical one.

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The Perfect Storm

August 4, 2003
Michael L. Coogan

There is an old saying that warns, “Be careful what you wish for.” On June 25th, the Fed cut rates to 1%. The 10-year Treasury was trading around 3-¼%. Swap spreads were tight as a drum. Prime had just moved to 4%. Mortgage prepayments were projected to intensify further. As we all know, they did. Deflation, not inflation, was the current economic topic. Bank interest margins were compressing each month. As we looked at our asset/liability report, further interest rate decreases would crush the economic value of our institution. In short, most portfolio managers wished for higher rates. Be careful what you wish for.

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Revisiting a Floating Perpetual Trust Preferred Stock

July 31, 2003
Girish M. Patel

Three years ago, John Behof wrote an article (“FNMA 2-Year Floating Preferred Stock,” dated 8/3/00) warning us about a floating perpetual callable preferred stock issue. Here, we will look back at the risks John discussed and see what has transpired.

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The Ups and Downs of Shape Management℠: A Case Study

July 11, 2003
Eric C. Brown

We are in the midst of a bond market that can only be described as extreme in the experience of any currently active investor. Rates are at lows not seen in over forty years, mortgage refinancing volume is at all-time highs, and the word “deflation” is being bandied about as something other than a punch line. Investors in general, and depository institutions in particular, are experiencing an array of pains and challenges that accompany this unusual environment.

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Magician’s Secrets Revealed – Part I

June 20, 2003
Kurt A. Fritz

Editor’s note: Kurt’s article on step-up callable securities has a magical theme to it. Despite his overwhelming literary talent, we have our doubts regarding his capability to compete with the magic and wizardry of the new Harry Potter book being released tomorrow!

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The May 2000 - May 2003 Three-Year Look-Back®

May 29, 2003
Eric C. Brown

The purpose of this teleconference is to validate our methodology by looking back at The Disciplined Investor® Volume 7, Number 24, “The May 2000 Level Playing Field®.” We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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Liability Select / Part II

May 27, 2003
Brad Bonga, Craig Johnson, Larry Levin

Our goal is to reduce our cost of funds in the same way that the Agencies (Freddie Mac, Fannie Mae, etc.) have been doing for years. Currently, we can fund with floating rates and fixed rates but we are at the mercy of the marketplace. Funding with a customized callable liability that has been specifically crafted for your individual institution allows you to control your liability destiny.

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Trust Preferred Update IV...

May 21, 2003
Craig S. Johnson

We are announcing the issuance of another Trust Preferred Funding deal, the MM Community Funding X, with Citigroup (formerly Salomon Smith Barney). We are beginning to collect collateral for the current deal that is planned to close late July 2003.

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Introducing the Strategic Credit Union Portfolio

May 15, 2003
Andrew J. Hixson

Over the past few years, our strategic partnerships with credit unions have grown steadily and since a credit union investment portfolio is generally different from a bank portfolio, we introduced a Typical Credit Union Portfolio in the March 2003 Level Playing Field®. With this newly introduced typical portfolio, I took on the challenge of designing a Strategic Credit Union Portfolio that would outperform this “benchmark.”

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The 2003 Advanced Course℠: Driving Strategy into Dollars

May 8, 2003
Nicholas W. Betzold, Jr.

Volatility was the theme of last year’s Advanced CourseSM. And as we have seen since that program, the world continues to be a volatile place fraught with peril for those who are unprepared. As I’m sure you agree, last year’s theme was very timely! Those of you who attended last year acquired knowledge and skills that have, once again, paid off handsomely over the ensuing year.

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A Diamond, or a Lump of Coal?

April 30, 2003
Kurt A. Fritz

Earlier last week, I was faced with a day when there were very few good quality securities available on the street. I began to peruse some of the street’s inventories and came across a very interesting bond, but before I share this new discovery, let me first set the table for our discussion.

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Watch Out Below

April 1, 2003
Mark P. Bodett, Kurt A. Fritz

As you know, we talk to literally hundreds of bankers in any given week – customers, Bond Math UniversitySM attendees, and prospects. Inevitably we end up talking about interest rates and one thing has remained constant – a debate on where rates are going.

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Amortization and Your Income Statement Revisited

March 12, 2003
James V. Lorentsen

Please review Jim Lorentsen’s comments on accounting practices and the attached article from the past, which provides two mechanical explanations of terms like “retrospective method” and “experience method” prior to this week’s Level Playing Field®.

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“Wave it in?!”

February 4, 2003
Craig Johnson

As most of you know, we on the desk are shown hundreds of bonds everyday. Some are good risk/rewards (shapes), some are average risk/rewards (shapes) and some are down right lousy risk/rewards (shapes). Sometimes, just a quick glance is all a bond needs before dismissal and at other times, we explicitly calculate the shape to ascertain a bond’s true value.

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Trust Preferred Update III…

January 24, 2003
Craig Johnson

I am writing to announce the issuance of another Trust Preferred Funding deal, the MM Community Funding IX. We will participate with Salomon Smith Barney and are planning a mid-to-late March 2003 close for the current deal.

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The January 2002-2003 One-Year Look-Back®

January 23, 2003
Disciplined Investor®

The purpose of this teleconference is to validate our methodology by looking back at The Disciplined Investor® Volume 9, Number 3, “The January 2002 Level Playing Field®.” We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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CPB CHICANERY?

January 10, 2003
Kurt A. Fritz

In a previous Disciplined Investor, “We Can Never Take the Bond Math on Faith” (Volume 9, Number 15, dated April 3, 2002) many of you will remember Girish Patel’s account of inaccurate Bloomberg analytics. For those who may have missed it, the main theme of his article was to always “trust but verify” someone else’s bond math.

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Where Are Rates Headed This Year? (Same Song, Umpteenth Verse)

January 6, 2003
Eric C. Brown, Seung Y. Lee

Every year for the past several years (and now every six months), the Wall Street Journal publishes a survey of fifty-odd economists with their projections for future interest rates (as well as other economic indicators).

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Continual Look-Backs®: 2002

December 20, 2002
Eric C. Brown

Many of you may be aware that since May of this year, we have been conducting in-house “Mini Look-Backs®” on all Level Playing Fields® as they reach their one- and three-year anniversaries. We finally got it through our thick skulls that if this is important to do once a year, maybe it is important enough for every Level Playing Field.

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Collateral Matters

December 4, 2002
Mark P. Bodett

The prepayment report for October, which shows up on CMO deals as the November print, has been out for several weeks. In general, prepayments came in even quicker than the fast prepayments that were projected. We are at all time highs on speeds.

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Trust Preferred Update II …

November 6, 2002
Craig Johnson

I am very excited to announce the issuance of TPref Funding III. This will be the last opportunity this year to participate in this approach to raising capital. The deal is scheduled to close in December, and for those who participate in issuing, you will receive your funds before the end of the year.

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A Lesson about Keeping our Secrets

October 28, 2002
Eric C. Brown

I would like to share an exciting story about a recommendation Shape ManagementSM produced a year ago, and the value of our collective policy of non-disclosure and non-circumvention that it demonstrates. It is basically a story in three parts: the good news, the good memories, and the good lesson.

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One Move Ahead

October 23, 2002
Eric C. Brown

If you attended either the June or the September editions of the 2002 Advanced CourseSM, you will recall that we devoted two talks to the topic “Best Moves We’ve Seen You Make.”

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Can’t Scratch the Itch

October 18, 2002
Kurt A. Fritz

Have you ever had a song get stuck in your head? For many months, I have been quietly humming Rocky Top to myself (wife, kids, co-workers, etc). I can’t shake it. “Good ‘ole Rocky Top, Rocky Top Tennessee…” The other thing I can’t shake is a nagging concern I have about this market. Many of you have heard Craig Johnson touch on this theme at the Advanced CourseSM – it is the dilemma regarding all these options we are all “short” a.k.a. prepayment risk. Craig’s talk focused on several aspects of the market, which on the surface differed from his intuition including the surprisingly good performance of current coupon sequentials. As Craig and I discussed his talk, several offshoots of his theme popped into the forefront of my brain. I Kurt A. Fritz couldn’t shake ‘em. Let me explain.

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A Different Twist on Deposit Growth and Funding

October 16, 2002
Girish M. Patel

Several days ago, a community banker asked us to look at a new product that is designed to attract deposits and / or provide funding. New products always pique our curiosity and we were excited to examine this one.

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Trust Preferred Update

October 9, 2002
Craig Johnson

As our second trust preferred (TPref Funding II) transaction of 2002 comes to a close, I would like to update you regarding our involvement in the issuance of trust preferred securities.

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Updating the Typical Bank Portfolio

August 19, 2002
Celia T. Wong

Six months have passed since we last reviewed and updated the Typical Bank Portfolio to represent the “average” bank’s portfolio holdings. It is time once again to go through the process and see what the typical bank now holds. We will use this for all Level Playing Fields® from now until we update it once more.

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Investor Alert! We are Again in Interesting Times

August 5, 2002
Michael Coogan

Since it is the beginning of August, an ominous process is already in the works. Mutual fund statements are getting ready to invade the homes of millions of investors. I have developed a new theory on market value. Market value only matters in stocks when you open the envelope. I, for one, plan to deposit the envelope unopened in a file with other unopened statements. I will open those envelopes either when the stock market recovers or I retire, whichever is sooner. We can take bets on which will occur first.

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World Class Earnings: Victory Through Volatility!

July 2, 2002
Disciplined Investor®

Please join us September 18-20, 2002 in New York City, for our annual Advanced CourseSM program.

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Here We Go Again?

July 1, 2002
Mark P. Bodett

Since the May 2002 Level Playing Field, treasury rates have fallen 40 bp on the 2- and 5-Year, and 30 bp on the 10-Year. More importantly, mortgage rates as measured by the Fannie commitment rate have fallen 26 bp. While treasury rates are still some 60 bp above the lows of last fall, mortgage rates are only about 25 bp above their lows of the same period.

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A Call to Action: Breaking News about Prepay Pools

June 25, 2002
Brad Bonga

This is a call to action to bring to your attention two interesting opportunities that may facilitate your investment in Prepayment Penalty Pools (PPP) or which may allow you to make some of your existing investments more convenient.

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The May 1999-May 2002 Three-Year Look-Back® (Supplemental Document)

May 14, 2002
Disciplined Investor®

The following table is an accompaniment to Section V. Down to the Atomic Level.

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The May 1999 - May 2002 Three-Year Look-Back®

May 13, 2002
Disciplined Investor®

The purpose of this teleconference is to validate our methodology by looking back at The Beyond “Average Life” Letter (predecessor to The Disciplined Investor®) Volume 6, Number 21, “The May 1999 Level Playing Field®.” We encourage you to review that document in preparation for the teleconference. If you no longer have it or have joined us since its publication, please call your advisor to have it sent to you.

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World Class Earnings: Victory Through Volatility!

May 3, 2002
Disciplined Investor®

Please join us June 12-14, 2002 at the University of Chicago Graduate School of Business, Gleacher Center, for our annual Advanced CourseSM program.

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“Oh, never mind!”

April 15, 2002
Mark P. Bodett

Last Friday, April 12th, Fannie Mae took a page from Rosanne Rosanna Danna of Saturday Night Live fame. After hearing from the investment community, and maybe others, such as lawmakers, Fannie said “never mind” to their call of premium pools. This includes the pools that were called the previous Friday. Further, Fannie Mae pledged not to call their mortgage pools in the future. New factors for pools and CMOs will be available on April 17th.

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Fannie Mae Seasoned Pool Prepay Event

April 9, 2002
Mark P. Bodett

Last Friday there was a surprise in the April prepayment speeds for certain segments of Fannie Mae collateral. Prepayments for seasoned 8.5% collateral and above were much higher than expected, in some cases shockingly higher. On the following page is the Fannie prepayment breakdown for April and March.

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We Can Never Take the Bond Math on Faith

April 3, 2002
Girish M. Patel

What I am about to tell you is a success story. For the last year and a half, we have been creating internal analytical models to duplicate third party sources so that we can automate the bond math process. We no longer will have to go through the tedious and repetitive steps in Bloomberg to arrive at total return numbers. The automation of this process will allow us to have more time, among other things, to keep a lookout for better risk/reward opportunities.

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A Slippery Slope

March 15, 2002
Eric C. Brown, Celia T. Wong

The recent “February 2001 One-Year Look-Back®,” (Disciplined Investor Volume 9, Number 07, February 11, 2002) reminded us of the sensitivity of the Level Playing Field® methodology to assumptions in the slope of the ending yield curves we model in our scenarios.

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Volatility and Total Return

March 5, 2002
Mark P. Bodett, Bruce A. Bonga

A major factor in the success or failure of an investment approach is how it either does or does not account for the performance effects of interest rate volatility, especially with regard to mortgage-related securities. As you know, we prefer to account for volatility effects through a disciplined, scenario-based Total Return approach. Others might advise using something like OAS (option adjusted spread) to evaluate this factor.

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Cohort Rate Shocks - Looking Forward

February 27, 2002
Eric C. Brown

One of the most valuable aspects of our One-Year Look-Back® process is that in trying to understand the past, we often discover new ways of looking at the future. Two years ago, an effort to redesign the format of the Look-Back led to significant (and useful) changes in the format of the Level Playing Field® itself. Today, an analysis conducted for the February 2001 One-Year Look- Back may provide some useful insights when we look forward.

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Budgeting for Losses

January 18, 2002
Christopher J. Carney, Jason A. Elder

For those of us who spend most of our time in the investment trenches, decisions and decision-making outcomes often seem obvious. Assuming that other portfolio managers share our “front-line” perspective can be dangerous to our bottom line, our shareholders, and our career. Given enough time, energy and effort, a front-line soldier can usually make his point with even an armchair general. However, on a constantly shifting investment battlefield, we may not have the time. For instance, taking losses on investments “in the heat of the battle” is typically very unpopular. Earnings pressure and accounting considerations cause management to regard such actions skeptically, even when taking losses increases shareholder wealth. If we wait for actual losses to appear, the fight to persuade management to realize them may take a long time. If and when we succeed, it may be too late!

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You lost…Congratulations!

January 11, 2002
Kurt A. Fritz

Some of you will recall my article from October of 2001 entitled “Finally catching some ZZZs (DI Volume 8, Number 56 ).” Many of you will not. In the article I discussed my initial inability to understand the large volume of super high quality VADMs being produced, until I realized that they were being created due to large demand for Z tranches. This demand was being driven by a desperate need to “extend” many investment portfolios’ durations.

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The 2001 Christmas Letter

December 21, 2001
Nick Betzold

At this time, every year, I have enjoyed a tradition originally started by a great man and leader in our industry, Clayton Brown. As Clayton used to do, either I or one of the other founders of this firm have always written a personal letter—not on behalf of the firm—but from our own hearts on the topic of Christmas.

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Pssst…Did You Hear Where Rates Are Going?

December 21, 2001
Alex Balc III, Eric C. Brown, Paul V. Houriet

Many fixed-income portfolio managers devote a great deal of energy toward interest rate forecasting. In fact, this is often the primary determinant of portfolio positioning – if the forecast is for higher rates, the portfolio will be weighted toward shorter or adjustable rate securities, and if the forecast is for lower rates, the portfolio will instead be weighted toward longer maturities or durations.

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Mitigating the Accounting Loss in Rates Up: The Advance Transfer Strategy

December 20, 2001
Brad Bonga, Girish Patel, Celia Wong

Part I (“Preparing for and Executing a Rates Up Strategy: Taking Losses”) of this two-part Disciplined Investor® presented a case in which the winner takes an accounting loss in rates up. We exhorted you to plan and prepare now, and then take the loss if and when the situation arises.

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Preparing for and Executing a Rates Up Strategy: Taking Losses

December 10, 2001
Brad Bonga, Girish Patel, Celia Wong

Let’s talk about a topic that we do not like to discuss and that at first appears painful to implement. Taking losses. That is right, we all abhor taking losses in our culture because we are ingrained to want to win. We are led to believe that taking a loss means we did not win. But is that actually true? We all know the saying, “Nobody remembers who lost the , but we remember the winner.” That may be true in sports, but in the arena of investing, losses are inevitable. The ability to take small losses (before they really get out of hand) and to shift to better risk/rewards is what differentiates a winner from a loser.

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