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1996 06 12 IABpZ U � � y:',....n a.m. •'� Of TNt INVESTMENT ADVISORY BOARD AGENDA Study Session Room 78-495 Calle Tampico- La Quinta, CA 92253 June 12, 1996 - 5:30 P.M. I CALL TO ORDER a. Pledge of Allegiance b. Roll Call II CONFIRMATION OF AGENDA III PUBLIC COMMENT -(This is the time set aside for public comment on any matter not scheduled on the agenda.) IV CONSENT CALENDAR A. Approval of Minutes of Meeting on April 10, 1996 for the Investment Advisory Board. B. Approval of Minutes of Meeting on May 8, 1996 for the Investment Advisory Board V BUSINESS SESSION A. Transmittal of Treasury Report for April 30, 1996 B. Consideration of approval of Investment Policy for the City of La Quinta. VI BOARD MEMBER COMMENTS VII INFORMATIONAL ITEMS A. Information regarding Sweep Bank Account B. LAI F Pooled Money Investment Board Report - March 1996 C. Diversification of Portfolio VII ADJOURNMENT INVESTMENT ADVISORY BOARD MEETING: June 12, 1996 BUSINESS SESSION: A ITEM TITLE Transmittal of Treasury Report for April 30, 1996 ISSUE AND DISCUSSION: Attached please find the Treasury Report for April 30, 1996. RECOMMENDATION: Review, Receive and File the Treasury Report for April 30, 1996. Approved for submission to the Investment Advisory Board: T 0 4hf 4 QK&r4 MEMORANDUM TO: La Quinta City Council FROM: John Falconer, Finance Director/Treasurer SUBJECT: Treasurer's Report for April 30, 1996 DATE: May 30, 1996 Attached is the Treasurer's Report for the month ending April 30, 1996. This report is submitted to the City Council each month after a reconciliation of accounts is accomplished by the Finance Department. Cash and Investments: Decrease of $14,975. due to the net effect of expenditures in excess of revenues. State Pool: ICMA: Decrease of $4,742. due to the net effect of transfers to and from the cash and investment accounts. No change. Mutual Funds: Increase of $62,613. due to interest earned. Total increase in cash balances $42,896. I certify that this report accurately reflects all pooled investments and is in compliance with the California Government Code; and is in conformity with the City Investment policy. As Treasurer of the City of La Quinta, I hereby certify that sufficient investment liquidity and anticipated revenues are available to meet the pools expenditure requirements for the next six months. a.AA /t4 — 5--13C) lid, Jo4 M. Falconer � Finahce Director/Treasurer Date/ oCD c to p m>>o aCD CD C=r a 3 3 m CD CD 0) CO �Q 7 (n -� W a n w So 0) =3 N a W ON WX 63:11, :�4co 11,00:- O v v V O C n N O Ci -4 0 y-L -L -A"-L CO)— NDD CAM_0z!Mz0 O cD CD CD CD CO c n c c� CD � 0 c -19 O C S Z� 01 � -19��c)Z� O= S Cf � Y1 �Ncoi,`.°�� n ��, �3 D o �� m ��3 0 �c �� 3 0 ° cn=cncnc� ° o o n— I'm o CD m �n� d m m r' ° - -n� �(� 3r mono 3 7 =. C =. =.`� 0 _. 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In addition to sending the policies to the Board Members, copies were also sent to the City Manager and City Attorney. Please bring the bound draft copies of the Investment Policies to the meeting. RECOMMENDATION: Review the draft policies, provide final comments and submit the draft Investment Policies to the City Council for their consideration. prov d for sub is 'on to the Investment Advisory Board: Jo n M. Falcone F' ance Director City of La Quinta Investment Policy (Draft) CITY OF LA QUINTA Investment Policies Table of Contents Section Topic Paae Executive Summary 2 I General Purpose 4 II Investment Policy 4 III Scope 4 IV Objectives 5 ► Safety ► Liquidity ► Yield V Prudence 6 VI Delegation of Authority 6 Vil Conflict of Interest 7 Vill Authorized Financial Dealers and Institutions 7 ► Broker/Dealers ► Financial Institutions IX Authorized Investments and Diversification 9 X Investment Pools 9 XI Collateral ization 9 XII Safekeeping and Custody 10 XIII Interest Earning Distribution Policy 10 XIV Maximum Maturities 10 XV Internal Controls 10 XVI Benchmark 12 XVII Reporting Standards 12 XVIII Investment of Bond Proceeds 13 XIX Investment Advisory Board - City of La Quinta 13 XX Investment Policy Adoption 13 Appendices Authorized Investments and Diversification 15 Municipal Code Ordinance 2.70 - Investment Advisory Board 16 Municipal Code Ordinance 3.08 - Investment of Moneys and Funds 17 Listing of Approved Financial Institutions - 19 Broker/Dealer Questionnaire and Certification 20 Investment Pool Questionnaire 24 Segregation of Major Investment Responsibilities 28 Glossary 29 1 City of La Quinta Investment Policy Executive Summary The general purpose of this Investment Policy is to provide the rules and standards users must follow in investing funds of the City of La Quinta. It is the policy of the City of La Quinta to invest all public funds in a manner which will provide a diversified portfolio with maximum security while meeting daily cash flow demands and the highest investment return in conformity to all state and local statutes. This Policy applies to all cash and investments of the City of La Quinta, La Quinta Redevelopment Agency and the La Quinta Financing Authority, hereafter referred in this document as the "City". The primary objectives, in order of priority, of the City of La Quinta's investment activity shall be: Safety of principal is the foremost objective of the investment program. Investments of the City of La Quinta shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. The investment portfolio shall be designed with the objective of attaining a market rate of return or yield throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Investments shall be made with judgment and care - under circumstances then prevailing - which persons of prudence discretion, and intelligence exercise in the management of their own affairs., not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. Authority to manage the City of La Quinta's investment portfolio is derived from the City Ordinance. Management responsibility for the investment program is delegated to the City Treasurer, who shall establish and implement written procedures for the operation of the City's investment program consistent with the Investment Policy. The Treasurer shall establish and implement a system of internal controls to maintain the safety of the portfolio. In addition, the internal control system will also insure the timely preparation and accurate reporting of the portfolio financial information. The adequacy of these controls will be reviewed and reported on annually by an independent auditor. N Investment responsibilities carry added duties of insuring that investments are made without improper influence or the appearance to a reasonable person of questionable or improper influence. The City of La Quinta maintains a listing of financial institutions which are approved for investment purposes. All Broker/Dealers and financial institutions selected by the Treasurer to provide investment services will be approved by the City Manager subject to City Council approval. The Treasurer will be permitted to invest only in City approved investments up to the maximum allowable percentages and, where applicable, through the bid process requirements. Authorized investment vehicles and related maximum portfolio positions are listed in Appendix A. At least two bids will be required of investments in government securities. Coll ateralization will be required for Certificates of Deposit in excess of $100,000. Collateral will always be held by an independent third party with whom the City of La Quinta has a current custodial agreement. Evidence of ownership must be supplied to the City and retained by the City Treasurer. The City of La Quinta shall require that each individual investment have a maximum maturity of two years unless specific approval is authorized by the City Council. In addition, the City's investment in the State Local Area Investment Fund (LAIF) is allowable as long as the average maturity does not exceed two years, unless specific approval is authorized by the City Council. The City's investment in Money Market Mutual funds is allowable as long as the average maturity does not exceed 60 days. The City of La Quinta will use the six month U.S. Treasury Bill as a benchmark when measuring the performance of the investment portfolio. The Investment Policies shall be adopted by resolution of the La Quinta City Council on an annual basis, The Investment Policies will be adopted before the end of June of each year. This Executive Summary is an overall review of the City of La Quinta Investment Policies. Reading this summary does not constitute a complete review which can only be accomplished by reviewing all the pages. 3 T 0 0 4i,f 4 sep Q" 78495 CALLE TAMPICO - LA QUINTA, CALIFORNIA 92253 - (619) 777-7000 FAX (619) 777-7107 City of La Quinta Statement of Investment Policy July 1, 1996 through June 30, 1997 Adopted by the City Council on The general purpose of this document is to provide the rules and standards users must follow in administering the City of La Quinta cash investments. It is the policy of the City of La Quinta to invest public funds in a manner which will provide a diversified portfolio with safety of principal while meeting daily cash flow demands with the highest investment return . In addition, the Investment Policy will conform to all State and local statutes governing the investment of public funds. This Investment Policy applies to all cash and investments of the City of La Quinta, City of La Quinta Redevelopment Agency and the City of La Quinta Financing Authority, hereafter referred in this document as the "City' . These funds are reported in the City of La Quinta Comprehensive Annual financial Report (CAFR) and include: All funds within the following fund types: ► General ► Special Revenue ► Capital Project ► Debt Service ► Internal Service ► Trust and Agency ► Any new fund types and fund(s) that may be created. 4 -� MAILING ADDRESS - P.O. BOX 1504 - LA QUINTA, CALIFORNIA 92253 �G� IV OBJECTIVES The primary objective, in order of priority, of the City of La Quinta's investment activity shall be: 1. Safety Safety of principal is the foremost objective of the investment program. Investments of the City of La Quinta shall be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio in accordance with the permitted investments. The objective will be to mitigate credit risk and interest rate risk. Credit Risk - is the risk of loss due to the failure of the security issuer or backer. Credit risk may be mitigated by: ► Limiting investments to the safest types of securities; ► Pre -qualifying the financial institutions, and broker/dealers, which the City of La Quinta will do business; and ► Diversifying the investment portfolio so that potential losses on individual securities will be minimized. Interest Rate risk is the risk that the market value of securities in the portfolio will fall due to changes in general interest rates. Interest' rate risk may be mitigated by: ► Structuring the investment portfolio so that securities mature to meet cash requirements for ongoing operations, thereby avoiding the need to sell securities on the open market prior to maturity; and ► By investing operating funds primarily in shorter -term securities. 2. Liquidity The investment portfolio shall remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated. This is accomplished by structuring the portfolio so that securities mature concurrent with cash needs to meet anticipated demands. Furthermore since all possible cash demands cannot be anticipated the portfolio should consist of securities with active secondary or resale markets. 3. Yield The investment portfolio shall be designed with the objective of attaining a market rate of return throughout budgetary and economic cycles, taking into account the investment risk constraints and liquidity needs. Return on investment is of least importance compared to the safety and liquidity objectives described above. The core of investments are limited to relatively low risk securities in anticipation of earning a fair return relative to the risk being assumed. Securities shall not be sold prior to maturity with the following exceptions: ► A declining credit security could be sold early to minimize loss of principal; 10. Liquidity needs of the portfolio require that the security be sold. The City shall follow the Uniform Prudent Investor Act as adopted by the State of California in Probate Code Sections 16045 through 16054.. Section 16053 sets forth the terms of a prudent person which are as follows: Investments shall be made with judgment and care - under circumstances then prevailing - which persons of prudence, discretion, and intelligence excerise in the professional management of their own .affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income to be derived. Authority to manage the City of La Quinta's investment portfolio is derived from the City Ordinance. Management responsibility for the investment program is delegated to the City Treasurer, who shall establish written procedures for the operation of the investment program consistent with the Investment Policy. Procedures should include reference to safekeeping, wire transfer agreements, banking service contracts, and collateral/depository agreements. Such procedures shall include explicit delegation of authority to persons responsible for investment transactions. No person may engage in an investment transaction except as provided under the terms of this Investment Policy and the procedures established by the City Treasurer. The City Treasurer shall be responsible for all transactions undertaken and shall establish a system of controls to regulate the activities of subordinate officials. The City Manager or Assistant City Manager shall aRprove in writing all purchases and sales of investments prior to their execution by the City Treasurer. ► \ i Investment responsibilities carry added duties of insuring that investments are made without improper influence or the appearance of improper influence. Therefore, the City Manager, Assistant City Manager, and the City Treasurer shall adhere to the State of California Code of Economic Interest and to the following: ► The City Manager, Assistant City Manager, and the City Treasurer shall not personally or through a close relative maintain any accounts, interest, or private dealings with any firm with which the City places investments, with the exception of regular savings, checking and money market accounts, or other similar transactions that are offered on a non-negotiable basis to the general public. Such accounts shall be disclosed annually to the City Clerk in conjunction with annual disclosure statements of economic interest. ► All persons authorized to place or approve investments shall report to the City Clerk kinship relations with principal employees of firms with which the City places investments. The City of La Quinta maintains a listing of financial institutions which are approved for investment purposes. In addition a list will also be maintained of approved broker/dealers selected by credit worthiness, who maintain an office in the State of California. 1. Broker/Dealers who desire to become bidders for investment transactions must supply the City of La Quinta with the following: ► Current audited financial statements ► Proof of National Association of Security Dealers Certification ► Trading resolution ► Proof of California registration ► Resume of Financial broker ► Completion of the City of La Quinta Broker/Dealer questionnaire which contains a certification of having read the City of La Quinta Investment Policy The City Treasurer shall evaluate the documentation submitted by the broker/dealer and independently verify existing reports on file for any firm and individual conducting investment related business. 7 The City Treasurer will also contact the following agencies during the verification process: ► National Association of Security Dealer's Public Disclosure Report File - 1-800-289-9999 ► State of California Department of Corporations 1-916-445-3062 All Broker/Dealers selected by the City Treasurer to provide investment services will be approved by the City Manager subject to City Council approval. The City Attorney will perform a legal review of the trading resolution/investment contract submitted .by each Broker/Dealer. Each securities dealer shall provide monthly and quarterly reports filed pursuant to U.S. Treasury Department regulations. Each mutual fund shall provide a prospectus and statement of additional information. 2. Financial Institutions will be required to meet the following criteria in order to receive City funds for investment: A. Insurance - Public Funds shall be deposited only in financial institutions insured by the Federal Deposit Insurance Corporation B. Collateral - The amount of City of La Quinta deposits or investments not insured by agency of the federal government shall be 110% collateralized by securities' or 150% mortgages' market values of that amount of invested funds plus unpaid interest earnings. C. Size - The amount of City of La Quinta deposits or investments must be collateralized or insured by an agency of the federal government. D. Disclosure - Each financial institution maintaining invested funds in excess of $100,000 shall furnish corporate authorities a copy of all statements of resources and liabilities which it is required to furnish to the State banking or savings and loan commissioners as required by the California Financial Code. The City shall not invest in excess of $100,000 in banking institutions which do not disclose to the city a current listing of securities pledged for collateralization in public monies. 8 • : ► ►i 14 Llk&F_1►I01B7h14*iI9L•7-A C•7� The City Treasurer will be permitted to invest in the investments listed in the Appendix entitled - Authorized Investments and Diversification. There are three (3) types of investment pools: 1) state -run pools, 2) pools that are operated by a political subdivision where allowed by law and the political subdivision is the trustee i.e. County Pool; and 3) pools that are operated for profit by third parties. The City of La Quinta has an investment with the State of California's Treasurers Office Local Agency Investment Fund commonly referred to as LAIF. LAIF was organized in 1977 through State Legislation Section 16429.1, 2 and 3. Each LAIF account is restricted to a maximum investable limit of $20 million. In addition, LAIF will provide quarterly market value information to the City of La Quinta. On an annual basis the City Treasurer will submit the Investment Pool Questionnaire to LAIF. Also, prior to opening any new Investment Pool account, which would require City Council approval, the City Treasurer will require the completion of the Investment Pool Questionnaire. The City does not have an investment with any other Investment Pool - County Pools or Third Party Pools. Collateralization will be required for Certificates of Deposits. The type of collateral is limited to City authorized investments. 1. Certificates of Deposits under $100,000, The City Treasurer may waive collateralization of a deposit that is federally. insured. 2. Certificates of Deposit over $100.000, The amount not federally insured shall be 1 10% collateralized by securities or 150% mortgages market value of that amount of invested funds plus unpaid interest earnings. Collateral will always be held by an independent third party with whom the City of La Quinta has a current custodial agreement. Evidence of ownership must be supplied to the City of La Quinta and retained by the City Treasurer. 9 l Lei U. 10 1 N • All security transactions of the City of La Quinta shall be conducted on a delivery - versus - payment (DVP) basis. Securities will be held by a third party custodian designated by the City Treasurer and evidenced by safekeeping receipts. Deposits and withdrawls of money market mutual funds and LAIF shall be made directly to the to the entity and not to an investment advisor. Money market mutual funds and LAIF shall also operate on a DVP basis to be considered for investment. Interest earnings is generated from pooled investments and specific investments. 1. fooled Investments - It is the general policy of the City to pool all available operating cash of the City of La Quinta, La Quinta Redevelopment Agency and La Quinta Financing Authority and allocate interest earnings, in the following order, as follows: A. Payment to the General Fund of an amount equal to the total annual bank service charges as incurred by the general fund for all operating funds as included in the annual operating budget. B. Payment to the General Fund of a management fee equal to 5 % of the annual pooled cash fund investment earnings. C. Payment to each fund of an amount based on the average computerized daily cash balance included in the common portfolio for the earning period. 2. Specific Investments - Specific investments purchased by a fund shall incur all earnings and expenses to that particular fund. INVAEF, MA, it Ii ii_ I� The City of La Quinta shall require that each individual investment to have a maximum maturity 'of two years unless specific approval is authorized by the City Council. In addition, the City's investment in the State Local Area Investment Fund (LAIF) is allowable as long as the average maturity does not exceed two years, unless specific approval is authorized by the City Council. The City's investment in Money Market Mutual funds is allowable as long as the average maturity does not exceed 60 days. The City Treasurer shall establish a system of internal controls to accomplish the 10 following objectives: ► Safeguard assets; ► The orderly and efficient conduct of its business, including adherence to management policies; ► Prevention or detection of errors and fraud; ► The accuracy and completeness of accounting records; and, ► Timely preparation of reliable financial information. While no internal control system, however elaborate, can guarantee absolute assurance that the City's assets are safeguarded, .it is the intent of the City's internal control to provide a reasonable assurance that management of the investment function meets the City's objectives. The internal controls shall address the following: a. Control of collusion. Collusion is a situation where two or more employees are working in conjunction to defraud their employer. b. Separation of transaction authority from accounting and record keeping. By separating the person who authorizes or performs the transaction from the people who record or otherwise account for the transaction, a separation of duties is achieved. C. Custodial safekeeping. Securities purchased from any bank or dealer including appropriate collateral (as defined* by State Law) shall be placed with an independent third party for custodial safekeeping. d. Avoidance of physical delivery securities. Book entry securities are much easier to transfer and account for since actual delivery of a document never takes place. Delivered securities must be properly safeguarded against loss or destruction. The potential for fraud and loss increases with physically delivered securities. e. Clear delegation of authority to subordinate staff members. Subordinate staff members must have a clear understanding of their authority and responsibilities to avoid improper actions. Clear delegation of authority also preserves the internal control structure that is contingent on the various staff positions and their respective responsibilities as outlined in the Segregation of Major Investment Responsibilities appendices. f. Written confirmation or telephone transactions for investments and wire transfers. Due to the potential for error and improprieties arising from telephone transactions, all telephone transactions should be supported by written communications and approved by the appropriate person. Written communications may be via fax if on letterhead and the -safekeeping institution 11 has a list of authorized signatures. Fax correspondence must be supported by evidence of verbal or written follow-up. g. Development of a wire transfer agreement with the City's bank and third arty custodian. This agreement should outline the various controls, security provisions, and delineate responsibilities of each party making and receiving wire transfers. In addition to the System of Internal Controls developed by the City, the Internal Controls shall be reviewed annually by the independent auditor. The independent auditors management letter comments pertaining to cash and investments, if any, shall be directed to the City Manager who will direct the City Treasurer to provide a written response to the independent auditors letter. This response will also be directed to the City's Investment Advisory Board for their action. The investment portfolio shall be designed with the objective of obtaining a rate of return throughout budgetary and economic cycles commensurate with the investment risk constraints and the cash flow needs of the City. Return on investment is of least importance compared to safety and liquidity objectives. The City of La Quinta will use the six month U.S. Treasury Bill as a benchmark when measuring the performance of the investment portfolio. SB564 section 3 requires a quarterly report to the Legislative Body of Investment activities. The City of La Quinta has elected to report the investment activities to the City Council on a monthly basis through the Treasurers Report. The City Treasurer shall submit a monthly Treasurers Report to the City Council and the Investment Advisory Board that includes all investments under the authority of the Treasurer. The Treasurers Report shall consist of a narrative of significant changes in cash balances and the following: 11. Changes in investments from the previous month; ► A certification statement from the City Treasurer; ► Purchases and sales of investments; 12 ► Cost to market value comparisons of all investments by authorized investment category, except for LAW which will be provided quarterly; ► Comparison of actual holdings to Investment Policy maximums; ► Twenty four (24) months history of cash and investments for trend analysis; ► Balance Sheet. The City's investment policy shall govern bond proceeds and bond reserve fund investments. California Code Section 5922 (d) governs the investment of bond proceeds and reserve funds in accordance with bond indenture provisions which shall be structured in accordance with the City's investment policy. The US Tax Reform Act of 1986 requires the City to perform arbitrage calculations as required and return excess earnings to the US Treasury from investments of proceeds of bond issues sold after the effective date of this law. This arbitrage calculations may be contracted with an outside source to provide the necessary technical assistance to comply with this regulation. Investible funds subject to the 1986 Tax Reform Act will be kept segregated from other funds and records will be kept in a fashion to facilitate the calculations. The City's investment position relative to the new arbitrage restrictions is to continue pursuing the maximum yield on applicable investments while ensuring the safety of capital and liquidity. It is the City's position to continue maximization of yield and to rebate excess earnings, if necessary. It _� •i ZOT.,l ; 1 11 Rei I VAG]we I-11L11r_1 The Investment Advisory Board (IAB) consists of seven members of the community that have been appointed by and report to the City Council. The. IAB meets on a monthly basis to 1) review account statements and verifications to ensure accurate reporting as they relate to an investment activity, 2) monitor compliance with existing Investment Policy and Procedures and 3) review investment contracts and investment consultants. The appendices include City of La Quinta Ordinance 2.70 entitled Investment Advisory Board Provisions. On an annual basis, the Investment policies will be initially reviewed by the Investment Advisory Board and the City Treasurer. The Investment Advisory Board will forward 13 the Investment policies, with any revisions, to the City Manager and City Attorney for their review and. comment. A joint meeting will be held with the Investment Advisory Board, City Manager, City Attorney, and City Treasurer to review the Investment policies and comments, prior to submission to the City Council for their consideration. The Investment Policies shall be adopted by resolution of the City of La Quinta City Council on an annual basis. The Investment Policies will be adopted before the end of June of each year. 14 z 0 Q U rn w C G z a N H z w i F- w z a N IL O x Q I I `s � I 0 I A I oI I I I� 5 C I � In (T a �j LL ILL I m I I la o` I ly IT i my all� j _ m Im I is I V � V V V V � y N H V ID 41 m so S� �j I C � coo m O Oe IZ 0 c a C N I i It .aOl .2 �C a° 0 I� 'a° 2 5 �o la j� I i-- jL T �I o� I a ;I ,a 'zI 3 E 0 ia0 LL I� !I I i I I I I I I I I I ' m I I I i C 1 O _� IE I ao I 1 Ea �N u C I;, E Ivi c, I�) o jl c m I� 7 7 IE m Q� E :� = v LL jI N I.s�� 46 m C Z v O C c o I I I a1 I I£< I I INI I� A jm I d m o pc m _❑ m u� I� pppp,J,JJJ m �o Im LL 7< O N C tll C VV a aN mmLL� O O J v j'LL I i0)O ' ITI. ICI IZ ial C Ol C C C i�U COD Ia I �C '� I pl c o �iI i j ICI Iy I U �o c =«? c �a2B ��B ( is I iS ; i I o ; ;o I Im E E IcIm I to I ID �? d� E m c E a is o ,`a 9 °= o I ;y IE IcTi �E a. N IY o I� 11 la lIyE i� IE'La E CR s IU I> m' mmmmma,m o'Z2$'Z7Z$ > E o` b�� d e-' iNl li,I cn IC7 'C I N i Il0 II II I I' .2 g a c 0 o E c m� v a 'LA E c c c3 Y E o m E� m o a U z� ° d = c v E N os m g C Mc c A U o U m L^ �Nl c E uo v g E a .c c U g o C. :?m N A U Q p l7 m A N c T Ew A w ao s y N u m c 25 c N £ E 0 aNicq �a �C g E� m naafi m Y c d �� « L C y N 2 C C u c w c �e tC c o E$' b $0� - as 15 ma nan ,, a c Y E p m c oa 'E o m a o 2-g C A� g 02 m� U y N L N E C GO a J H < 0 m IL cn a u0 ro v m 15 Chapter 2.70 INVESTMENT ADVISORY BOARD PROVISIONS s: ).010 General Rules Regarding Appointment and Terms. ).020 Board meetings and compensation. ).030 Board functions. ).010 General rules regarding appointment and terms. ;pt as set out below, see Chapter 2.06 for General Provisions. Investment Advisory Board (the "board") is a standing board composed of seven (7) -s from the public that are appointed by city council. La Quinta residency is preferred, but quirement for board members. Recruitment for members may be advertised outside of the :ground in the investment field and/or related experience is preferred. Background tion will be required and potential candidates must agree to a background check and pion. in annual basis, in conjunction with the Political Reform Act disclosure statutes, or at any i change in circumstances warrants, each board member will provide the City Council with sure statement which identifies any matters on the board. Such matters may include, but limited to, changes in employment, changes in residence, or changes in clients. Board members will serve for two year staggered terms beginning on July 1 of every other )mmencing July 1, 1993. Initially, two members will be appointed for two year terms and iembers will be appointed for one year terms. These initial appointments will start their :alculations from July 1, 1993. ).020 Board meetings and compensation. -d members will be reimbursed for meeting and related expenses at an amount of fifty dollars er meeting. illy, the Board should meet once a month, but this schedule may be extended to quarterly Is upon the concurrence of the Board and the City Council. The specific meeting dates will rmined by the Board members and meetings may be called for on an as needed basis. ).030 Board functions. Board will annually elect a Chairperson and Vice -chairperson at the first meeting held after ine 30. following are functions of the Board that are to be addressed at each meeting: (1) review : statements and verifications to ensure accurate reporting as they relate to an investment (ii) monitor compliance with existing Investment policy and procedures; and (iii) review and ivestment contracts, and investment consultants. Board will report to City council after each meeting either in person or through ondence at a regular City Council meeting. 16 and 1, to ated rized are -feral ode, ►hich and f the been :) the the zither ided, . 2 § made 3.08.060 Deposits of securities. Pursuant to the delegation of authority in Section 3.08.010, the city treasurer is authorized to deposit for safekeeping, the securities in which city moneys have been invested pursuant to this chapter, in any institution or depository authorized by the terms of any state law, including but not limited to Section 53608 of the Government Code as it now reads or may hereafter be amended. In accordance with said section, the city treasurer shall take from the institution or depository a receipt for the securities so deposited and shall not be responsible for the securities delivered to and receipted for by the institution or depository until they are withdrawn therefrom by the city treasurer. (Ord. 2 § 1 (part), 1982 3.08.070 Trust fund administration. Any departmental trust fund established by the city council pursuant to Section 36523 of the Government Code shall be administered by the city treasurer in accordance with Section 36523 and 26524 of the Government code and any other applicable provisions of law. (Ord. 2 § 1 (part), 1982) 18 LISTING OF APPROVED FINANCIAL INSTITUTIONS 1. Banking Services - Wells Fargo Bank 2. Custodian Services - Wells Fargo Bank Institutional Trust 3. Deferred Compensation - International City/County Management Association Retirement Corporation 4. Broker/Dealer Services - 5. Government Pool - State of California Local Agency Investment Fund City of La Quinta Account La Quinta Redevelopment Agency 6. Bond Trustees - 1991 City Hall Revenue Bonds - First Trust 1991 RDA Project Area 1 - First Trust 1992 RDA Project Area 2 - First Interstate Bank 1994 RDA Project Area 1 - First Trust 1995 RDA Project Area 1 & 2 - First Interstate Bank No Changes to this listing may be made without City Council approval. K BROKER/DEALER QUESTIONNAIRE AND CERTIFICATION 1. Name of Firm: 2. Address: 3. am 5. Telephone: ( ) ( 1 Broker's Representative to the City (attach resume): Name: Title: Telephone: ( ) Manager/Partner-in-charge (attach resume): Name: Title: Telephone: 6. List all personnel who will be trading with or quoting securities to City employees (attach resume) Name: Title: 7. Telephone: ( ) ( ) Which of the above personnel have read the City's investment policy? 8. Which instruments are offered regularly by your local office? (Must equal 100%) % U.S. Treasuries BA's % Commercial Paper % CD's % Mutual Funds % Agencies (specify): 20 % Repos % Reverse Repos CMO's % Derivatives % Stocks/Equities % Other (specify): 9. References -- Please identify your most directly comparable public sector clients in our geographical area. Entity Entity Contact Contact Telephone ( ) Telephone ( ) Client Since Client Since 10. Have any of your clients ever sustained a loss on a securities transaction arising from a misunderstanding or misrepresentation of the risk characteristics of the instrument? If so, explain. 11. Has your firm or your local office ever been subject to a regulatory or state/ federal agency investigation for alleged improper, fraudulent, disreputable or unfair activities related to the sale of securities? Have any of your employees been so investigated? If so, explain. 12. Has a client ever claimed in writing that ys, were responsible for an investment loss? Yes No If yes, please provide action taken Has a client ever claimed in writing that your firm was responsible for an investment loss? Yes No If yes, please provide action taken Do yQu have any current, or pending complaints that are unreported to the NASD? Yes - No If yes, please provide -action taken 21 Does your firm have any current, or pending complaints that are unreported to the NASD? Yes No If yes, please provide action taken 13. Explain your clearing and safekeeping procedures, custody and delivery process. Who audits these fiduciary responsibilities? Latest Audit Report Date 14. How many and what percentage of your transactions failed. Last month? % $ Last year? % $ 15. Describe the method your firm would use to establish capital trading limits for the City of La Quinta. 16. Is your firm a member in the S.I.P.C. insurance program. Yes If yes, explain primary and excess coverage and carriers. No 17. What portfolio information, if any, do you require from your clients? 18. What reports and transaction confirmations or any other research publications will the City receive? 19. Does your firm offer investment training to your clients? Yes No 22 20. Does your firm have professional liability insurance. Yes No If yes, please provide the insurance carrier, limits and expiration date. 21. Please list your NASD Registration Number 22. Do you have any relatives who work at the City of La Quinta? Yes No If yes, Name and Department 23. Do you maintain an office in California. Yes No 24. Do you maintain an office in La Quinta or Riverside County? Yes No 25. Please enclose the following: • Latest audited financial statements. • Samples of reports, transaction confirmations and any other research/publications the City will receive. • Samples of research reports and/or publications that your firm regularly provides to clients. • Complete schedule of fees and charges for various transactions. 'CERTIFICATION' I hereby certify that I have personally read the Statement of Investment Policy of the City of La Quinta, and have implemented reasonable procedures and a system of controls designed to preclude imprudent investment activities arising out of transactions conducted between our firm and the City of La Quinta. All sales personnel will be routinely informed of the City's investment objectives, horizons, outlooks, strategies and risk constraints whenever we are so advised by the City. We pledge to exercise due diligence in informing the City of La Quinta of all foreseeable risks associated with financial transactions conducted with our firm. By signing this document the City of La Quinta is authorized to conduct any and all background checks. Under penalties of perjury, the responses to this questionnaire are true and accurate to the best of my knowledge. Broker Representative Date Title Sales Manager and/or Managing Partner* Date Title 23 INVESTMENT POOL QUESTIONNAIRE Note: This Investment Pool Questionnaire was developed by the Government Finance Officers Association (GFOA). Prior to entering a pool, the following questions and issues should be considered. SECURITIES Government pools may invest in a broader range of securities than your entity invests in. It is important that you are aware of, and are comfortable with, the securities the pool buys. 1. Does the pool provide a written statement of investment policy and objectives? 2. Does the statement contain: a. A description of eligible investment instruments? b. The credit standards for investments? c. The allowable maturity range of investments? d. The maximum allowable dollar weighted average portfolio maturity? e. The limits of portfolio concentration permitted for each type of security? f. The policy on reverse repurchase agreements, options, short sales and futures? 3. Are changes in the policies communicated to the pool participants? 4. Does the pool contain only the types of securities that are permitted by your investment policy? INTEREST Interest is not reported in a standard format, so it is important that you know how interest is quoted, calculated and distributed so that you can make comparisons with other investment alternatives. Interest Calculations 1. Does the pool disclose the following about yield calculations: a. The methodology used to calculate interest? (Simple maturity, yield to maturity, etc.) b. The frequency of interest payments? c. How interest is paid? (Credited to principal at the end of the month, each quarter; mailed?) d. How are gains/losses reported? Factored monthly or only when realized? 24 REPORTING 1. Is the yield reported to participants of the pool monthly? (If not, how often?) 2. Are expenses of the pool deducted before quoting the yield? 3. Is the yield generally in line with the market yields for securities in which you usually invest? 4. How often does the pool report, and does that report include the market value of securities? SECURITY The following questions are designed to help you safeguard your funds from loss of principal and loss of market value. 1. Does the pool disclose safekeeping practices? 2. Is the pool subject to audit by an independent auditor? 3. Is a copy of the audit report available to participants? 4. Who makes the portfolio decisions? 5. How does the manager monitor the credit risk of the securities in the pool? 6. Is the pool monitored by someone on the board of a separate neutral party external to the investment function to ensure compliance with written policies? 7. Does the pool have specific policies with regards to the various investment vehicles? a.. What are the different investment alternatives? b. What are the policies for each type of investment? 8. Does the pool mark the portfolio to its market value? 9. Does the pool disclose the following about how portfolio securities are valued: a. The frequency with which the portfolio securities are valued? b. The method used to value the portfolio (cost, current value, or some other method)? 25 OPERA TONS The answers to these questions will help you determine whether this pool meets your operational requirements: 1. Does the pool limit eligible participants? 2. What entities are permitted to invest in the pool? 3. Does the pool allow multiple accounts and sub -accounts? 4. Is there a minimum or maximum account size? 5. Does the pool limit the number of transactions each month? What is the number of transactions permitted each month? 6. Is there a limit on transaction amounts for withdrawals and deposits? a. What is the minimum and maximum withdrawal amount permitted? b. What is the minimum and maximum deposit amount permitted? 7. How much notice is required for withdrawals/deposits? 8. What is the cutoff time for deposits and withdrawals? 9. Can withdrawals be denied? 10. Are the funds 100% withdrawable at anytime? 1 1. What are the procedures for making deposits and withdrawals? a. What is the paperwork required, if any? b. What is the wiring process? 12. Can an account remain open with a zero balance? 13. Are confirmations sent following each transaction? STA TEMENTS It is important for you and the agency's trustee (when applicable), to receive statements monthly so the pool's records of your activity and holding are reconciled by you and your trustee. 26 1. Are statements for each account sent to participants? a. What are the fees? b. How often are they passed? c. How are they paid? d. Are there additional fees for wiring funds (what is the fee)? 2. Are expenses deducted before quoting the yield? QUESTIONS TO CONSIDER FOR BOND PROCEEDS It is important to know (1) whether the pool accepts bond proceeds and (2) whether the pool qualifies with the U.S. Department of the Treasury as an acceptable commingled fund for arbitrage purposes. 1. Does the pool accept bond proceeds subject to arbitrage rebate? 2. Does the pool provide accounting and investment records suitable for proceeds of bond issuance subject to arbitrage rebate? 3. Will the yield calculation reported by the pool be acceptable to the IRS or will it have to be recalculated? 4. Will the pool accept transaction instructions from a trustee? 5. Are you allowed to have separate accounts for each bond issue so that you do not commingle the interest earnings of funds subject to rebate with funds not subject to regulations? 27 SEGREGATION OF MAJOR INVESTMENT RESPONSIBILITIES Functoon Responsibilities Develop formal Investment Policy City Treasurer Recommend modifications to Investment Policy Investment Advisory Board Review formal Investment Policy and recommend City Manager and City Council action City Attorney Adopt formal Investment Policy City Council Review Financial Institutions & Select Investments City Treasurer Approve investments City Manager or Assistant City Manager Execute investment transactions City Treasurer Confirm wires, if applicable City Manager or Accounting Supervisor Record investment transactions in City's accounting records Accounting Supervisor Investment verification - match broker confirmation to City investment records Account Technician Reconcile investment records - to accounting records and bank statements - to Treasurers Report of investments Account Technician Security of investments at City Vault Security of investments Outside City Third Party Custodian Review internal control procedures External Auditor 28 GLOSSARY The purpose of this glossary is to provide the reader of the City of La Quinta investment policies with a better understanding of financial terms used in municipal investing. AGENCIES: Federal agency securities COLLATERAL: Securities, evidence of deposit or other property which a borrower ASKED: The price at which securities are pledges to secure repayment of a loan. Also offered. refers to securities pledged by a bank to secure deposits of public monies. BANKERS' ACCEPTANCE (BA): Short-term credit arrangements to enable businesses to obtain funds to finance commercial transactions. They are time drafts drawn on a bank by an exporter or importer to obtain funds to pay for specific merchandise. By its acceptance, the bank becomes primarily liable for the payment of the drafts at its maturity. An acceptance is a high-grade negotiable instrument. Acceptances are purchased in various denominations for 30, 60 or 90 days, but no longer than 270 days. The interest is calculated on a 360-day discount basis similar to treasury bills. Local agencies may not invest more than 40% of their surplus money in bankers acceptances. BID: The price offered by a buyer of securities. (When you are selling securities, you ask for a bid.) See Offer. BROKER: A broker brings buyers and sellers together for a commission. CERTIFICATE OF- DEPOSIT (CD): Time deposits of a bank or savings and loan. They are purchased in various denominations with maturities ranging from 30 to 360 days. The interest is calculated on a 360-day, actual - day month basis and is payable monthly. 29 COMMERCIAL PAPER: S h o r t- t e r m unsecured promissory notes issued by a corporation to raise working capital. These negotiable instruments are purchased at a discount to par value or at par value with interest bearing. Commercial paper is issued by corporations such as General Motors Acceptance Corporation,. IBM, Bank America, etc. COMPREHENSIVE ANNUAL FINANCIAL REPORT (CAFR): The official annual report for the City of La Quinta. It includes five combined statements for each individual fund and account group prepared in conformity with GAAP. It also includes supporting schedules necessary to demonstrate compliance with finance -related legal and contractual provisions, extensive introductory material, and a detailed Statistical Section. COUPON: (a) The annual rate of interest that a bond's issuer promises to pay the bondholder on the bond's face value. (b) A certificate attached to a bond evidencing interest due on a payment date. DEALER: A dealer, as opposed to a broker, acts as a principal in all transactions, buying and selling for his own account.. DEBENTURE: A bond secured only by the general credit of the issuer. DELIVERY VERSUS PAYMENT: There are two methods of delivery of securities: delivery versus payment and delivery versus receipt. Delivery versus payment is delivery of securities with an exchange of money for the securities. Delivery versus receipt is delivery of securities with an exchange of a signed receipt for the securities. DERIVATIVES: (1) Financial instruments whose return profile is linked to, or derived from, the movement of one or more underlying index or security, and may include a leveraging factor, or (2) financial contracts based upon notional amounts whose value is derived from an underlying index or security (interest rates, foreign exchange rates, equities or commodities). DISCOUNT: The difference between the cost price of a security and its maturity when quoted at lower than face value. A security selling below original offering price shortly after sale also is considered to be at a discount DIVERSIFICATION: Dividing investment funds among a variety of securities offering independent returns. FEDERAL CREDIT AGENCIES: Agencies of the Federal government set up to supply credit to various classes of institutions and individuals, e.g., S&L's, small business firms, students, farmers, farm cooperatives, and exporters. The following is a listing: 1. FNMAs (Federal National Mortgage Association) - Used to assist the home mortgage market by purchasing mortgages insured by the Federal Housing ga Administration and the Farmers Home Administration, as well as those guaranteed by the Veterans Administration. They are issued in various maturities and in minimum denominations of $10,000. Principal and Interest is paid monthly. 2. FHLBs (Federal Home Loan Bank Notes and Bonds) - Issued by the Federal Home Loan Bank System to help finance the housing industry. The notes and bonds provide liquidity and home mortgage credit to savings and loan associations, mutual savings banks, cooperative banks, insurance companies, and mortgage - lending institutions. They are issued irregularly for various maturities. The minimum denomination is $ 5,000. The notes are issued with maturities of less than one year and interest is paid at maturity. The bonds are issued with various maturities and carry semi-annual coupons. Interest is calculated on a 360- day, 30-day month basis. 3. FLBs (Federal Land Bank Bonds) - Long- term mortgage credit provided to farmers by Federal Land Banks. These bonds are issued at irregular times for various maturities ranging from a few months to ten years. The minimum denomination is $1,000. They carry semi-annual coupons. Interest is calculated on a 360- day, 30 day month basis. 4. FFCBs (Federal Farm Credit Bank) - Debt instruments used to finance the short and intermediate term needs of farmers and the national agricultural industry. They are issued monthly with three- and six- month maturities. The FFCB issues larger issues (one to ten year) on a periodic basis. These issues are highly liquid. 5. FICBs (Federal Intermediate Credit bank Debentures) - Loans to lending institutions used to finance the short-term and intermediate needs of farmers, such as seasonal production. They are usually issued monthly in minimum denominations of $3,000 with a nine - month maturity. Interest is payable at maturity and is calculated on a 360-day, 30-day month basis. 6. FHLMCs (Federal Home Loan Mortgage Corporation) - a government sponsored entity established in 1970 to provide a secondary market for conventional home mortgages. Mortgages are purchased solely from the Federal Home Loan Bank System member lending institutions whose deposits are insured by agencies of the United States Government. They are issued for various maturities and in minimum denominations of $10,000. Principal and Interest is paid monthly. Other federal agency issues are Small Business Administration notes (SBAs)., Government National Mortgage Association notes (GNMAs), Tennessee Valley Authority notes (TVAs), and Student Loan Association notes (SALLIE- MAEs). FEDERAL DEPOSIT INSURANCE CORPORATION (FDIC): A federal agency that insures bank deposits, currently up to $100,000 per deposit. FEDERAL FUNDS RATE: The rate of interest at which Fed funds are traded. This rate is currently pegged by the Federal Reserve through open -market operations. 31 FEDERAL HOME LOAN BANKS (FHLB): Government sponsored wholesale banks (currently 12 regional banks) which lend funds and provide correspondent banking services to member commercial banks, thrift institutions, credit unions and insurance companies. The mission of the FHLBs is to liquefy the housing related assets of its members who must purchase stock in their district Bank. FEDERAL OPEN MARKET- COMMITTEE (FOMC): Consists of seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank Presidents. The President of the New York Federal Reserve Bank is a permanent member, while the other Presidents serve on a rotating basis. The Committee periodically meets to set Federal Reserve guidelines regarding purchases and sales of Government Securities in the open market as a means of influencing the volume of bank credit and money. FEDERAL RESERVE SYSTEM: the central bank of the United States created by Congress and consisting of a seven member Board of Governors in Washington, D.C., 12 regional banks and about 5,700 commercial banks that are members of the system. GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA or Ginnie Mae): Securities influencing the volume of bank credit guaranteed by GNMA and issued by mortgage bankers, commercial banks, savings and loan associations, and other institutions. Security holder is protected by full faith and credit of the U.-S. Government. Ginnie Mae securities are backed by the FHA, VA or FMHM mortgages. The term "passthroughs" is often used to describe Ginnie Maes. LAIF (Local Agency Investment Fund) - A special fund in the State Treasury which local agencies may use to deposit funds for investment. There is no minimum investment period and the minimum transaction is $ 5,000, in multiples of $1,000 above that, with a maximum balance of $20,000,000 for any agency. The City is restricted to a maximum of ten transactions per month. It offers high liquidity because deposits can be converted to cash in 24 hours and no interest is lost. All interest is distributed to those agencies participating on a proportionate share basis determined by the amounts deposited and the length of time they are deposited. Interest is paid quarterly. The State retains an amount for reasonable costs of making the investments, not to exceed one -quarter of one percent of the earnings. LIQUIDITY: A liquid asset is one that can be converted easily and rapidly into cash without a substantial loss of value. In the money market, a security is said to be liquid if the spread between bid and asked prices is narrow and reasonable size can be done at those quotes. LOCAL GOVERNMENT INVESTMENT POOL (LGIP): The aggregate of all funds from political subdivisions that are placed in the custody of the State Treasurer for investment and reinvestment. MARKET VALUE: The price at which a security is trading and could presumably be purchased or sold. MASTER REPURCHASE AGREEMENT: A written contract covering all future transactions between the parties to repurchase --reverse repurchase agreements that establishes each party's rights in the 32 transactions. A master agreement will often specify, among other things, the right of the buyer -lender to liquidate the underlying securities in the vent of default by the seller - borrower. MATURITY: The date upon which the principal or stated value of an investment becomes due and payable MONEY MARKET: The market in which short-term debt instruments (bills, commercial paper, banders' acceptances, etc.) are issued and traded. OFFER: The price asked by a seller of securities. (When you are buying securities, you ask for an offer.) See Asked and Bid. OPEN MARKET OPERATIONS: Purchases and sales of government and certain other securities in the open market by the New York Federal Reserve Bank as directed by the FOMC in order to influence the volume of money and credit in the economy. Purchases inject reserves into the bank system and stimulate growth of money and credit; sales have the opposite effect. Open market operations are the Federal Reserve's most important and most flexible monetary policy tool. PORTFOLIO: Collection of all. cash and securities under the direction of the City Treasurer, including Bond Proceeds. PRIMARY DEALER: A group of government securities dealers who submit daily reports of market activity an depositions and monthly financial statements to the Federal Reserve Bank of New York and are subject to its informal oversight. Primary dealers include Securities and Exchange Commission (SEC) - registered securities broker -dealers, banks and a few unregulated firms. RATE OF RETURN: The yield obtainable on a security based on its purchase price or its current market price. This may be the amortized yield to maturity on a bond the current income return. REPURCHASE AGREEMENT (RP OR REPO): A repurchase agreement is a short-term investment transaction. Banks buy temporarily idle funds from a customer by selling U.S. Government or other securities with a contractual agreement to repurchase the same securities on a future date. Repurchase agreements are typically for one to ten days in maturity. The customer receives interest from the bank. The interest rate reflects both the prevailing demand for Federal funds and the maturity of the repo. Some banks will execute repurchase agreements for a minimum of $100,000 to $500,000, but most banks have a minimum of $1,000,000. REVERSE REPURCHASE AGREEMENTS - A reverse repurchase agreement is the opposite of a repurchase agreement. The City loans a security to a bank in exchange for cash. The City agrees to pay off the loan with interest on a future date. SAFEKEEPING: A service to customers rendered by banks for a fee whereby securities and valuables of all types and descriptions are held in the bank's vaults for protection. SECONDARY MARKET: A market made for the purchase and sale of outstanding issues 33 following the initial distribution. SECURITIES & EXCHANGE COMMISSION: Agency created by Congress to protect investors in securities transactions by administering securities legislation. SEC RULE 15C3-1: See Uniform Net Capital Rule. STRUCTURED NOTES: Notes issued by Government Sponsored Enterprises (FHLB, FNMAS, SLMA, etc.) And Corporations which have imbedded options (e.g., call features, step-up coupons, floating rate coupons, derivative -based returns) into their debt structure, Their market performance is impacted by the fluctuation of interest rates, the volatility of the imbedded options and shifts in the Shape of the yield curve. SURPLUS FUNDS: Section 53601 of the California Government Code defines surplus funds as any money not required for immediate necessities of the local agency. The City has defined immediate neccesities to be payment due within one week. TREASURY BILLS: Issued weekly with maturity dates up to. one year. They are issued and traded on a discount basis with interest figured on a 360-day basis, actual number of days. They are issued in amounts of $10,000 and up, in multiples of $ 5,000. They are a highly liquid security. TREASURY BONDS: Long-term coupon - bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities of more than 10 years. TREASURY NOTES: Medium -term coupon - bearing U.S. Treasury securities issued as direct obligations of the U.S. Government and having initial maturities from two to 10 years. UNIFORM NET CAPITAL RULE: Securities and Exchange Commission requirement that member firms as well as nonmember broker - dealers in securities maintain a maximum ratio of indebtedness to liquid capital of 15 to 1; also called net capital rule and net - capital ratio. Indebtedness covers all money owed to a firm, including margin loans and commitments to purchase securities, one reason new public issues are spread among members of underwriting syndicates. Liquid capital includes cash and assets easily converted into cash. UNIFORM PRUDENT INVESTOR ACT: The State of California has adopted this Act. The Act contains the following sections: duty of care, diversification, review of assets, costs, compliance determinations, delegation of investments, terms of prudent investor rule, and application. YIELD: The rate of annual income return on an investment, expressed as a percentage. (a) INCOME YIELD is obtained by dividing the current dollar income by the current market price for the security. (b) NET YIELD or YIELD TO MATURITY is the current income yield minus any premium above par of plus any discount from par in purchase price, with the adjustment spread over the period from the date of purchase to the date of maturity of the bond. 34 OZ v � Qum& OF TNT INVESTMENT ADVISORY BOARD MEETING: June 12, 1996 INFORMATIONAL ITEMS: A ITEM TITLE Information Regarding Sweep Bank Account ISSUE AND DISCUSSION: At the last meeting staff submitted information regarding a sweep bank account. Staff was asked to perform a survey of other Cities in the Coachella Valley which is attached that utilize Sweep Accounts. In addition, staff has contacted the Government Services Group at Wells Fargo to obtain current prospectus of sweep account options which is attached for discussion. Approved for submission to the Investment Advisory Board: hn M. Falcone lance Director City of La Quinta Survey of Coachella Valley Cities Sweep Accounts 5/9/96 City Yes No If no, Vehicle Used If yes, Swept Into Palm Springs X LAIF N/A Palm Desert X LAIF N/A Indio X LAIF N/A Desert Hot Springs (1) X N/A Savings Account 3% Rancho Mirage X LAIF N/A Indian Wells X N/A Money Market Mutual Funds Coachella Did Not Respo d Cathedral City X NIA Money Market Mutual Funds City of La Quinta X LAIF N/A (1) - Will be discontinued by Bank - will utilize LAIF How to Complete the CCMA Agreement Please print the following information so it can be read. Page 5 • Top of the page enter the date of the agreement. • Account Bank - enter the affiliate name, address, signature and title of bank officer • Customer - Name, address, taxpayer ID, signature and title of company officer. • Investment Bank - Will be signed by Investment Office when the agreement is sent to CCMA Implementation. • Certification - Signature and date of the Secretary or Assistant Secretary of the company. Page 6 & 7 - Designated Investments Form (previously Schedule B) Please read the instruction box on page 6 for additional instructions. • Selection of the Investment Options - Custor-A`e must indicate the Investment choices by NUMBERING THEIR CHOICES. - x's are not acceptable on this page - selections must be prioritized by numbers - 1 = 1 st Choice, 2 = 2nd Choice. • #4 Statement of Accredited Investor - if the customer selects Commercial Paper as their investment option have them initial the paragraph that is appropriate to their situation within #4. • Customer Name - Company name, signature, title, and date. Page 9 - Schedule A Designated Accounts • Concentration Account - name, account number, and a peg balance, if requested. • Interest Account - name and number (usually the same as the concentration account) • Customer Name - Company name, signature, title, and date. Page 19 - Master Repurchase Agreement - Schedule B • First Interstate Bank of Arizona - Leave blank. Must be signed by Investment Division officer after it is received by CCMA Operations. • Customer - Company name, signature, title, and date. Page 21- Schedule D Additional Signatories - to be used if Company requires more than one signature to authorize an agreement. • Customer Name - Company name and date. • Customer Name - Company name, signature, title, and date. • Certification - Signature and date of the Secretary or Assistant Secretary of the company. 1 / 19/96 Corporate Management Account Agreement Islerimt �erstate Bank r..Io First terstate Bank CORPORATE CASH MANAGEMENT ACCOUNT AGREEMENT The First Interstate Bank that the undersigned (the "Customer" severally and collectively if more than one) maintains its/their account(s) with hereunder (the "Account Bank") and First Interstate Bank of Arizona, N.A. or its designate (the "Investment Bank") (severally and collectively, the "Banks") shall furnish to the Customer the Corporate Cash Management Account service described below (the "Service"), subject to the following terms and conditions and First Interstate Bank's Cash Management Services Terms and Conditions (the "CMS Terms and Conditions"). Customer acknowledges receipt of and its agreement to the CMS Terms and Conditions. In the case of inconsistency between the CMS Terms and Conditions and this Agreement, this Agreement shall prevail. The Customer and Banks agree as follows: 1. Accounts. The Customer shall designate an account (the "Concentration Account") and may designate an account for the receipt of investment earnings (the "Interest Account"). The Customer and Account Bank shall jointly designate in Schedule A the desired target balance (the "Specified Balance") for the Concentration Account. 2. Investment Sweep Option. On each Business Day, the Account Bank will compute the excess funds position (the "Investment Sweep Amount") of the Concentration Account, based upon the Specified Balance. Only collected balances above the Specified Balance will be swept. If the Investment Sweep Amount is greater than zero, the Account Bank will debit the Account and sweep such amount to the Investment Bank. The Investment Bank shall invest the resulting Investment Sweep Amount until the following Business Day in accordance with the investment sweep options designated by the Customer (the "Designated Investment(s)"), subject to the Designated Investment(s) being made available by the Investment Bank or its agents. The Banks reserve the right to discontinue the availability of a particular investment option at any time without notice to Customer. Customer shall complete a CCMA Designated Investments form identifying those investments desired by Customer. The Investment Sweep Amount will not be swept until the Investment Bank has received a properly executed CCMA Designated Investments form; upon the Account Bank's receipt of such form, the Account Bank will begin sweeping the Investment Sweep Amount within ten (10) Business Days of receipt of such form. If the Designated Investment(s) are not available on any given Business Day, Customer instructs the Investment Bank to invest the Investment Sweep Amount in a "Repurchase Transaction" as defined in the Master Repurchase Agreement attached as Schedule B and incorporated herein by reference (the "Master Repurchase Agreement"). The Investment Sweep Amount will be allocated by the Investment Bank each Business Day among the Designated Investment(s) and any Repurchase Transactions by a proprietary computer program based on preset criteria for the availability of investments. On the following Business Day, whatever the specific allocation of Designated Investment(s), the Investment Bank will sweep the Investment Sweep Amount to the Account Bank and the Account Bank will credit such amount to the Concentration Account for the Customer's immediate use or reinvestment. However, the Investment Sweep Amount will not be credited to the Concentration Account until after the close of business on the following Business Day. 3. Designated Investment((). In providing this service to Customer, the Investment Bank makes available to Customer certain investment options. Customer directs Investment Bank to sweep funds into the investments designated by Customer. With respect to the investment options made available under this Agreement, Investment Bank has various alternatives for where from and how the investments are obtained. The Investment Bank may act as principal, as agent for the issuer or as agent for Customer in doing so. When acting as agent for the issuer, the Investment Bank receives compensation from the issuer, which may increase based on volume. Customer authorizes Investment Bank to act in any of the above capacities as desired by Investment Bank. When the Investment Bank acts as agent for Customer for mutual fund transactions, the Investment Bank represents numerous Customers as agent and such funds are held in the Investment Bank's name for the benefit of Customers. The Investment Bank provides all subsidiary accounting services on behalf of Customers for these purposes and is the only party authorized to effect transactions in the fund accounts. Customer authorizes Investment Bank or its designee to transmit purchase and redemption orders to the mutual funds, and otherwise interact with the mutual funds, consistent with the terms of this Agreement. If the Designated Investments of the Customer's choice are not available on a given day, the Investment Sweep Amount will be invested in whole or in part in a Repurchase Transaction. The Master Repurchase Agreement and this Agreement will apply to all such investments. If the Investment Sweep Amount is invested in whole or in part in a Repurchase Transaction, the repurchase counterparty (the Investment Bank or an Affiliate) will deliver to Harris Bancorp, or any affiliate or subsidiary thereof, ("Harris")) (or a similar party as determined by the Investment Bank), serving as a third party custodian for the benefit of the Customer and the repurchase counterparty, the securities serving as collateral pursuant to the Master Repurchase Agreement and identified in the Customer's daily confirmation of investment transaction(s). In the event of default by or insolvency of either the Investment Bank, the Account Bank or the repurchase counterparty, Harris will contact the Customer for instructions as to disposition of such collateral securities and distribution of any sale proceeds thereof. Customer expressly consents to Harris (or a similar party as determined by the Investment Bank) serving as third party custodian. 4. Interest Earning, and Expenses. The Designated Investment(s) and any Repurchase Transactions will be structured to earn interest on a daily basis. On transactions where the Investment Bank is acting as a principal and for Commercial Paper investments where the Investment Bank is acting as principal or as agent for the issuer, the interest rate is established by the Investment Bank and may be changed daily without prior notice to the Customer. The Customer may obtain information on the current interest rate(s) by contacting the Investment Bank. As full or partial compensation for performing the Service and in connection with those Designated Investment(s) where the Investment Bank is acting as principal, the Investment Bank reserves the right to take a markup on the sale of the Designated Investment(s) to the Customer. The amount of interest earned by the Customer, net of any markups, will be identified in periodic statements to the customer. The Account Bank will credit earnings to the Interest Account on each Business Day. 5. Periodic Statements. The Investment Bank will provide periodic statements to the Customer of investment transactions detailing daily transactions, accrued investment earnings, and a summary of earnings credited. The Customer must review the statements and notify the Account Bank of any errors, overcharges, improper investments or other problems with the Service (collectively, "Error(s)") within ten (10) Business Days of the Investment Bank's mailing of the first notice on which any such Error(s) appears. If the Customer fails to notify the Account Bank of such Error(s) within the time period set forth above, the confirmations and statements will be deemed to be correct and conclusive as to Customer. The Account Bank will accrue interest expense incurred under the Loan Sweep Option daily and will debit the Interest Account at the month end or, if earlier, the termination date. In the event that the Customer has exhausted its borrowing ability under the Loan Agreement, Customer agrees to immediately remit any deficiencies in accrued interest due. 6. Fees. Customer shall pay the Account Bank those fees set forth on Schedule C attached hereto and incorporated herein by reference (the "Fees"). At its discretion, the Account Bank is authorized to debit the Concentration Account for payment of the fees or, if the Customer is a Cash Management Customer, Account Bank may charge Fees to the Customer's account analysis. 7. Disclaimer. In addition to the Disclaimer of Information and Warranties in the CMS Terms and Conditions, the Banks are not providing any investment advice hereunder and make no representation or warranty as to the suitability or safety of any of the investments made pursuant to this Agreement 2 or the Customer's choice of Designated Investment(s). As long as the Banks or their Affiliates invest funds of the Customer in Designated Investment(s) or in a Repurchase Transaction as provided herein, neither the Banks nor First Interstate Bancorp and Affiliates, or their employees, officers or directors shall be liable to the Customer for any reason whatsoever related to the purchase of any Designated Investment(s) or a Repurchase Transaction for the Customer's account. CMS Terms and Conditions Survival of Certain Provisions and Defined Terms. As previously noted, except as otherwise inconsistent with the express terms of this Agreement, the CMS Terms and Conditions shall apply, including but not limited to those provisions applicable to Limitation of Liability, Indemnification, Disclaimer, Termination, Binding Arbitration Program and Assignment. The Limitation of Liability, Disclaimer and Indemnification provisions shall survive the termination of this Agreement. In addition, unless otherwise defined in this Agreement, capitalized terms used in this Agreement shall have the meaning set forth in the CMS Terms and Conditions. More specifically, the defined terms herein, "Banks," "Service" and "Customer" are included within the definitions of such terms (or their equivalent) in the CMS Terms and Conditions. 9. Authority of the Banks to Appoint Age�sl. The Banks are authorized to appoint agents, including Affiliates or subsidiaries, to assist the Banks or Harris in the performance of their obligations under this Agreement. 10. Amendments and Changes. Except as otherwise provided, the Account Bank or the Investment Bank may amend the terms of this Agreement (or of the attached Schedules) and the fees charged hereunder from time to time by giving written notice to the Customer or by mailing a copy of the amended Agreement or Schedule to the Customer. Changes to fees charged by the mutual funds are governed by their prospectuses, and federal and state securities laws and regulations. The Customer shall make any changes to its Designated Investment(s), or Specified Balances or accounts, through the execution of a new Designated Investment(s) form or Schedule A, respectively, by any person authorized by the Customer to execute this Agreement and the delivery of such form or schedule to the Account Bank on any Business Day. Any such changes shall become effective no later than five (5) Business Days following receipt by the Account Bank. 11. Schedules. All Schedules referenced in this Agreement are hereby incorporated by reference. In case of any inconsistency between the Schedules and this Agreement, the Schedules will prevail. Capitalized terms used in the Schedules shall have the meaning set forth in this Agreement, unless such terms are defined in the Schedules. 12. Counterparts. This Agreement may be executed in as many counterparts as may be deemed necessary or convenient, each of which, when so executed, shall be deemed an original, but all such counterparts shall constitute but one and the same agreement. 13. Notification. All written notices required by this Agreement shall be delivered or mailed to the other parties at the addresses set forth below or to such other address as a party may specify in writing. Notices sent hereunder shall be effective upon receipt, or if personally delivered, telexed or mailed as herein described, on the earlier to occur of delivery or five (5) Business Days after the postmarked date (if mailed). 14. Multiple Signers. If this Agreement covers more than one legal entity, each such entity shall be included in the term "Customer" and each such entity shall execute Schedule D pursuant to which they will agree to be bound by the terms and conditions of this Agreement. Account Bank and Investment Bank may take instructions and direction from any party signing this Agreement on behalf of all signers. All signers authorize Account Bank and Investment Bank to act on such instructions and direction. Such authorization shall include but not be limited to any changes or amendments to this Agreement or changes to Designated Investments or any schedule. Whether or not indicated on such instructions or direction, such actions shall be deemed to have been taken on behalf of all legal entities included in the term "Customer" hereunder. Notice sent to a signer of this Agreement shall be deemed notice to all signers of Schedule D. 15. Governing Law: This Agreement shall be governed by and construed under the laws of the State of Arizona, without giving effect to the conflict of laws principles of such state. 16. Disclosure of Customer Information: Customer consents to the disclosure of Customer information to First Interstate Bancorp or any Affiliate or subsidiary. 17. DISCLOSURE STATEMENT: IMPORTANT INFORMATION GENERAL * Funds deposited into the Concentration Account or the Interest Account are insured by the Federal Deposit Insurance Corporation (FDIC), subject to the FDIC's terms for such insurance but only until they are swept into investment instruments. * Investment instruments offered, sold, or placed by the Banks are not deposits in or obligations of, and are not guaranteed by, the Banks or any Affiliate (except for Repurchase Agreements, see below); and are not insured by the FDIC, the Securities Investors Protection Corporation, the United States of America or any agency or instrumentality thereof. * Investment instruments offered, sold, or placed by the Banks are subject to investment risk including possible loss of principal invested or the nonpayment of interest. * Yields vary with market conditions. Past performance is no guarantee of future results. FIRST INTERSTATE: The Banks, Affiliates or their subsidiaries may act as an investment advisor, custodian, transfer agent or provide other services, for or on behalf of certain mutual funds and receive fees for such services. Such relationships and the fees for such services are disclosed in the prospectuses for those funds. REPURCHASE AGREEMENTS: Repurchase Agreement transactions are obligations of, but not deposits with, the repurchase counterparty (the Investment Bank or Affiliates). COMMERCIAL PAPER AND MUTUAL FUNDS: The Investment Bank may act as agent for the issuer or as agent for Customer for commercial paper transactions and act as agent for Customer for mutual fund transactions. The Investment Bank may also act as principal for certain mutual fund transactions as well. Commercial paper and mutual funds are unsecured obligations of the respective issuers. Money Market Mutual Funds seek to maintain a stable net asset value of $1.00/share; however, there is no assurance that this objective will be met. GOVERNMENT SPONSORED ENTERPRISES ("GSE"): The Investment Bank will act as principal for all GSE transactions. Discount notes and other short term obligations issued by GSE's are obligations of their respective issuers. The obligations of such issuers are not obligations of, nor are they guaranteed by, the United States of America or any agency or instrumentality thereof. PROSPECTUSES AND OTHER INVESTMENT INFORMATION: Prior to Customer's choice of Designated Investment(s), Customer acknowledges having received and read current prospectuses or other information regarding the Designated Investments, including but not limited to Offering Statements and Information Statements, as applicable, describing the investments being offered. 4 This Agreement is entered into on this day of ,19 The Customer acknowledges Customer has read and understands this Agreement, including the Disclosure Statement, the Designated Investments Form and all Schedules. ACCOUNT BANK First Interstate Bank of , N.A. Attn: Cash Management P.O. Box By: Bank Officer Title: INVESTMENT BANK First Interstate Bank of Arizona N.A. 100 W. Washington P.O. Box 29751 Phoenix, AZ 85038-9751 By: Title: CUSTOMER [Customer name and address] Taxpayer ID No.: By: Company Officer Title: CERTIFICATION I certify that I am the Secretary or Assistant Secretary of the Customer, that the signature of the person(s) signing above is the genuine and authorized signature of that person and that he/she/they is authorized to sign in the capacity indicated. Signature of Secretary or Assistant Secretary Date 61 Designated Investments Form First Interstate Corporate Cash Management Account Agreement IMPORTANT INSTRUCTIONS: PLEASE READ BEFORE COMPLETING 1. You may select multiple investment options. If you do, please rank them in the order that you wish to invest your funds; for example, 1 for first, 2 for second, etc. Rank your Commercial Paper (CP) or Mutual Fund (MF) choices higher than your Government Sponsored Enterprise (GSE) choices. If you do not wish to invest your funds with a particular issuer, please leave that issuer line blank. 2. You may select the CP option or the MF option, or neither of those options. 3. You may not select both CP and MF options. 4. If you select CP or MF, then you must also select a GSE. 5. You must select at least one issuer under each of the investment options you have designated. l . Commercial Paper Investment Option (Please complete statement of Accredited Investor below) PacifiCorp Weyerhaeuser Real Estate (not available in Idaho and Montana) or Weyerhaeuser Company, whichever is available 2. Mutual Fund Investment Option Pacifica Prime Money Market Fund Pacifica Treasury Money Market Fund Dreyfus Treasury Prime Cash Management 3. Government Sponsored Enterprise Investment Option (Must select at least one GSE) Private Export Funding Corp. ("PEFCO") Federal National Mortgage Association ("Fannie Mae") Student Loan Marketing Association ("Sallie Mae") 4. STATEMENT OF ACCREDITED COMMERCIAL PAPER INVESTOR. (Complete this section only if Commercial Paper is selected as an investment option). Customer, as a prospective purchaser of commercial paper, hereby represents that the Customer is an "accredited investor" as defined in Rule 501 under the Securities Act of 1933, as amended. Customer has indicated below the category or categories under which Customer qualifies as an accredited investor. A natural person with an individual net worth, or joint net worth with spouse, in excess of $1,000,000, or with an individual income (excluding income of his or her spouse) in excess of $200,000 in each of the preceding two years and who reasonably expects an individual income in excess of $200,000 in the current year, or with a joint income in combination with spouse, in excess of $300,000 in each of the preceding two years and who reasonably expects a joint income in excess of $300,000 in the current year. A corporation, non-profit corporation, partnership, or municipal corporation, not formed for the specific purpose of acquiring the commercial paper offered, having total assets in excess of $5,000,000. 6 A bank (as defined in Section 3 (a)(2) of the Securities Act of 1933); or a savings and loan association (as defined in Section 3 (a)(5) of the Securities Act of 1933); or an institution (as defined in Section 3 (a)(5)(A) of Securities Act of 1933); or an insurance company (as defined in Section 2 (13) of the Securities Act of 1933). A broker -dealer registered pursuant to Section 15 of the Securities Act of 1934; or an investment company registered under the Investment Company Act of 1940; a business development company (as defined in Section 2 (a)(48) of the Investment Company Act of 1940); or a small business investment company licensed by the U.S. Small Business Administration under Section 301(c) or (d) of the Small Business Investment Act of 1958. An employee benefit plan within the meaning of Title I of the Employment Retirement Security Act of 1974 ("ERISA") (1) whose investment decision is made by a plan fiduciary, as defined in Section 3 (21) of ERISA, which is either a bank, savings and loan association, insurance company or registered investment adviser, or (2) having total assets in excess of $5,000,000 or (3) whose plan is self -directed, with investment decisions made solely by persons that are accredited investors. A director, executive officer, or general partner of any issuer of commercial paper available under the Corporate Cash Management Account. A private business development company as defined in Section 202(a)(22) of the Investment Advisor Act of 1940. A trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the commercial paper offered, and whose investment is directed by a sophisticated person as described in 17 CFR § 230.506(b)(2)(ii) (Li;,, an individual possessing such knowledge and experience in financial and business matters so as to capably evaluate the merits and risks of the prospective investment). A corporation, partnership or any other entity of which each of its equity owners satisfy one or more of the proceeding. Other: 5. SOPHISTICATED INVESTOR. Check this box only if Commercial Paper is selected as an investment option, you do not qualify as an Accredited Investor and you, or your representative or agent, have the ability to evaluate the merits and risks of such an investment based upon knowledge and experience in financial and business matters or other financial criteria. Your investment sales representative will ask you to answer certain questions to determine whether you qualify. This form lists Customer's choice of investments for the Corporate Cash Management Account Agreement (the "Agreement") between Customer and the Bank (as defined therein) and is subject to the terms of the Agreement. Customer acknowledges having read and understood the Disclosure Statement in the Agreement. Customer Name By: Title: Date: 7 Schedule A First Interstate Corporate Cash Management Account Agreement Designated Accounts and Specified Balances The Concentration Account, Interest Account and Specified Balance listed below are subject to the Corporate Cash Management Account Agreement. Concentration Account Name Account Number Specified Balance (if desired) Interest Account Name Account Number (May be the Concentration Account) If this Schedule A is executed to replace an existing Schedule A to the Corporate Cash Management Account Agreement, then the section below must be completed: This new Schedule A replaces any existing Schedule A to the Corporate Cash Management Account Agreement. Except for this change, the terms and conditions of the Corporate Cash Management Account Agreement (including the Disclosure Statement, Designated Investment form and all Schedules) apply and are reaffirmed. Customer Name By: Title: Date: Schedule B Corporate Cash Management Account PSA First Interstate Bank of Arizona, N.A. Master Repurchase Agreement Between: First Interstate Bank of Arizona, N.A. and Customer, as designated in that Corporate Cash Management Account Agreement ("CCMA Agreement") to which this Agreement is attached and incoporated into by reference. 1) Applicability From time to time the parties hereto may enter into transactions in which one party ("Seller") agrees to transfer to the other ("Buyer") securities or financial instruments ("Securities") against the transfer of funds by Buyer, with a simultaneous agreement by Buyer to transfer to Seller such Securities at a date certain or on demand, against the transfer of funds by Seller. Each such transaction shall be referred to herein as a "Transaction" and shall be governed by this Agreement, including any supplemental terms or conditions contained in Annex 1 hereto, unless otherwise agreed in writing. 2) Definitions a) "Act of Insolvency", with respect to any party, (i) the commencement by such party as debtor of any case or proceeding under any bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law, or such party seeking the appointment of a receiver, trustee, custodian or similar official for such party or any substantial part of its property, or (ii) the commencement of any such case or proceeding against such party, or another seeking such an appointment, or the filing against a party of an application for a protective decree under the provisions of the Securities Investor Protection Act of 1970, which (A) is consented to or not timely contested by such party, (B) results in the entry of an order for relief. Such an appointment, the issuance of such a protective decree or the entry of an order having a similar effect, or (C) is not dismissed within 15 days, (iii) the making by a party of a general assignment for the benefit of creditors, or (iv) the admission in writing by a party of such parry's inability to pay such parry's debts as they become due. b) "Additional Purchased Securities", Securities provided by Seller to Buyer pursuant to Paragraph 4(a) hereof. c) "Buyer's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage (which may be equal to the percentage that is agreed to as the Seller's Margin Amount under subparagraph (q) of this Paragraph), agreed to by Buyer and Seller prior to entering into the Transaction, to the Repurchase Price for such Transaction as of such date. d) "Confirmation", the meaning specified in Paragraph 3(b) hereof. e) "Income", with respect to any Security at any time, any principal thereof then payable and all interest, dividends or other distributions thereon. 11 f) "Margin Deficit", the meaning specified in Paragraph 4(a) hereof. g) "Margin Excess", the meaning specified in Paragraph 4(b) hereof. h) "Market Value", with respect to any Securities as of any date, the price for such Securities on such date obtained from a generally recognized source agreed to by the parties or the most recent closing bid quotation from such a source, plus accrued income to the extent not included therein (other than any income credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) as of such date (unless contrary to market practice for such Securities). i) "Price Differential", with respect to any Transaction hereunder as of any date, the aggregate amount obtained by daily application of the Pricing Rate for such Transaction to the Purchase Price for such Transaction on a 360 day per year basis for the actual number of days during the period commencing on (and including) the Purchase Date for such Transaction and ending on (but excluding) the date of determination (reduced by any amount of such Price Differential previously paid by Seller to Buyer with respect to such Transaction). j) "Pricing Rate", the per annum percentage rate for determination of the Price Differential. k) "Prime Rate", the prime rate of U.S. money center commercial banks as published in The Wall Street Journal. 1) "Purchase Date", the date on which Purchased Securities are transferred by Seller to Buyer. m) "Purchase Price", (i) on the Purchase Date, the price at which Purchased Securities are transferred by Seller to Buyer, and (ii) thereafter, such price increased by the amount of any cash transferred by Buyer to Seller pursuant to Paragraph 4(b) hereof and decreased by the amount of any cash transferred by Seller to Buyer pursuant to Paragraph 4(a) hereof or applied to reduce Seller's obligations under clause (iii) of Paragraph 5 hereof. n) "Purchased Securities", the Securities transferred by Seller to Buyer in a Transaction hereunder, and any Securities substituted therefor in accordance with Paragraph 9 hereof. The term "Purchased Securities" with respect to any Transaction at any time also shall include Additional Purchased Securities delivered pursuant to Paragraph 4(a) and shall exclude Securities returned pursuant to Paragraph 4(b). o) "Repurchase Date", the date on which Seller is to repurchase the Purchased Securities from Buyer, including any date determined by application of the provisions of Paragraphs 3(c) or 11 hereof. p) "Repurchase Price", the price at which Purchased Securities are to be transferred from Buyer to Seller upon termination of a Transaction, which will be determined in each case (including Transactions terminable upon demand) as the sum of the Purchase Price and the Price Differential as of the date of such determination, increased by any amount determined by the application of the provisions of Paragraph 11 hereof. q) "Seller's Margin Amount", with respect to any Transaction as of any date, the amount obtained by application of a percentage (which may be equal to the percentage that is agreed to as the Buyer's Margin Amount under subparagraph (c) of this Paragraph), agreed to by Buyer and Seller prior to entering into the Transaction, to the Repurchase Price for such Transaction as of such date. 12 3) Initiation; Confirmation; Termination a) An agreement to enter into a Transaction may be made orally or in writing at the initiation of either Buyer or Seller. On the Purchase Date for the Transaction, the Purchased Securities shall be transferred to Buyer or its agent against the transfer of the Purchase Price to an account of Seller. b) Upon agreeing to enter into a Transaction hereunder, Buyer or Seller (or both), as shall be agreed, shall promptly deliver to the other party a written confirmation of each Transaction (a "Confirmation"). The Confirmation shall describe the Purchased Securities (including CUSIP number, if any), identify Buyer and Seller and set forth (i) the Purchase Date, (ii) the Purchase Price, (iii) the Repurchase Date, unless the Transaction is to be terminable on demand, (iv) the Pricing Rate or Repurchase Price applicable to the Transaction, and (v) any additional terms or conditions of the Transaction not inconsistent with this Agreement. The Confirmation, together with this Agreement, shall constitute conclusive evidence of the terms agreed between Buyer and Seller with respect to the Transaction to which the Confirmation relates, unless with respect to the Confirmation specific objection is made promptly after receipt thereof. In the event of any conflict between the terms of such Confirmation and this Agreement, this Agreement shall prevail. c) In the case of Transactions terminable upon demand, such demand shall be made by Buyer or Seller, no later than such time as is customary in accordance with market practice, by telephone or otherwise on or prior to the business day on which such termination will be effective. On the date specified in such demand, or on the date fixed for termination in the case of Transactions having a fixed term, termination of the Transaction will be effected by transfer to Seller or its agent of the Purchased Securities and any Income in respect thereof received by Buyer (and not previously credited or transferred to, or applied to the obligations of, Seller pursuant to Paragraph 5 hereof) against the transfer of the Repurchase Price to an account of Buyer. 4) Margin Maintenance a) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Buyer is less than the aggregate Buyer's Margin Amount for all such Transactions (a "Margin Deficit"), then Buyer may by notice to Seller require Seller in such Transactions, at Seller's option, to transfer to Buyer cash or additional Securities reasonably acceptable to Buyer ("Additional Purchased Securities") so that the cash and aggregate Market Value of the Purchased Securities, including any such Additional Purchased Securities, will thereupon equal or exceed such aggregate Buyer's Margin Amount (decreased by the amount of any Margin Deficit as of such date arising from any Transactions in which such Buyer is acting as Seller). b) If at any time the aggregate Market Value of all Purchased Securities subject to all Transactions in which a particular party hereto is acting as Seller exceeds the aggregate Seller's Margin Amount for all such Transactions at such a time (a "Margin Excess"), then Seller may by notice to Buyer require Buyer in such Transactions, at Buyer's option, to transfer cash or Purchased Securities to Seller, so that the aggregate Market Value of the Purchased Securities, after deduction of any such cash or any Purchased Securities so transferred, will thereupon not exceed such aggregate Seller's Margin Amount (increased by the amount of any Margin Excess as of such date arising from any Transactions in which such Seller is acting as Buyer). c) Any cash transferred pursuant to this Paragraph shall be attributed to such Transactions as shall be agreed upon by Buyer and Seller. d) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer or Seller (or both) under subparagraphs (a) and (b) of this Paragraph may be exercised only where a Margin Deficit or Margin Excess exceeds a specified dollar amount or a specified 13 percentage of the Repurchase Prices for such Transactions (which amount or percentage shall be agreed to by Buyer and Seller prior to entering into any such Transactions). e) Seller and Buyer may agree, with respect to any or all Transactions hereunder, that the respective rights of Buyer and Seller under subparagraphs (a) and (b) of this Paragraph to require the elimination of a Margin Deficit or a Margin Excess, as the case may be, may be exercised whenever such a Margin Deficit or Margin Excess exists with respect to any single Transaction hereunder (calculated without regard to any other Transaction outstanding under this Agreement). 5) Income Payments Where a particular Transaction's term extends over an income payment date on the Securities subject to that Transaction, Buyer shall, as the parties may agree with respect to such Transaction (or, in the absence of any agreement, as Buyer shall reasonably determine in its discretion), on the date such income is payable either (i) transfer to or credit to the account of Seller an amount equal to such income payment or payments with respect to any Purchased Securities subject to such Transaction or (ii) apply the Income payment or payments to reduce the amount to be transferred to Buyer by Seller upon termination of the Transaction. Buyer shall not be obligated to take any action pursuant to the preceding sentence to the extent that such action would result in the creation of a Margin Deficit, unless prior thereto or simultaneously therewith Seller transfers to Buyer cash or Additional Purchased Securities sufficient to eliminate such Margin Deficit. 6) Security Interest Although the parties intend that all Transactions hereunder by sales and purchases and not loans, in the event any such Transactions are deemed to be loans, Seller shall be deemed to have pledged to Buyer as security for the performance by Seller of its obligations under each such Transaction, and shall be deemed to have granted to Buyer a security interest in, all of the Purchased Securities with respect to all Transactions hereunder and all proceeds thereof. 'n Payment and Transfer Unless otherwise mutually agreed, all transfers of funds hereunder shall be in immediately available funds. All Securities transferred by one party hereto to the other party (i) shall be in suitable form for transfer or shall be accompanied by duly executed instruments of transfer or assignment in blank and such other documentation as the party receiving possession may reasonably request, (ii) shall be transferred on the book -entry system of a Federal Reserve Bank, or (iii) shall be transferred by any other method mutually acceptable to Seller and Buyer. As used herein with respect to Securities, "transfer" is intended to have the same meaning as when used in Section 8-313 of the New York Uniform Commercial Code or, where applicable, in any federal regulation governing transfers of the Securities. 8) Segregation of Purchased Securities To the extent required by applicable law, all Purchased Securities in the possession of Seller shall be segregated from other securities in its possession and shall be identified as subject to this Agreement. Segregation may be accomplished by appropriate identification on the books and records of the holder, including a financial intermediary or a clearing corporation. Title to all Purchased Securities shall pass to Buyer and, unless otherwise agreed by Buyer and Seller, nothing in this Agreement shall preclude Buyer from engaging in repurchase transactions with the Purchased Securities or otherwise pledging or hypothecating the Purchased Securities, but no such transaction shall relieve buyer of its obligations to transfer Purchased Securities to Seller pursuant to Paragraphs 3, 4 or 11 hereof, or of Buyer's obligation to credit or pay Income to, or apply Income to the obligations of, Seller pursuant to Paragraph 5 hereof. 14 Required Disclosure for Transactions in which the Seller Retains Custody of the Purchased Securities Seller is not permitted to substitute other securities for those subject to this Agreement and therefore must keep Buyer's securities segregated at all times, unless in this Agreement Buyer grants Seller the right to substitute other securities. If Buyer grants the right to substitute, this means that Buyer's securities will likely be commingled with Seller's own securities during the trading day. Buyer is advised that , during any trading day that Buyer's securities are commingled with Seller's securities, they [will] * [may] ** be subject to liens granted by Seller to [its clearing bank] * [third parties] ** and may be used by Seller for deliveries on other securities transactions. Whenever the securities are commingled, Seller's ability to resegregate substitute securities for Buyer will be subject to Seller's ability to satisfy [the clearing] * [any] ** lien or to obtain substitute securities. * Language to be used under 17 C.F.R. §403.4(e) if Seller is a government securities broker or dealer other than a financial institution. ** Language to be used under 17 C.F.R. §403.5(d) if Seller is a financial institution. 9) Substitution a) Seller may, subject to agreement with and acceptance by Buyer, substitute other Securities for any Purchased Securities. Such substitution shall be made by transfer to Buyer of such other Securities and transfer to Seller of such Purchased Securities. After substitution, the substituted Securities shall be deemed to be Purchased Securities. b) In Transactions in which the Seller retains custody of Purchased Securities, the parties expressly agree that Buyer shall be deemed, for purposes of subparagraph (a) of this Paragraph, to have agreed to and accepted in this Agreement substitution by Seller of other Securities for Purchased Securities provided however, that such other Securities shall have a Market Value at least equal to Market Value of the Purchased Securities for which they are substituted. 10) Representations Each of Buyer and Seller represents and warrants to the other that (i) it is duly authorized to execute and deliver this Agreement, to enter into the Transactions contemplated hereunder and to perform its obligations hereunder and has taken all necessary action to authorize such execution, delivery and performance, (ii) it will engage in such Transactions as principal (or, if agreed in writing in advance of any Transaction by the other party hereto, as agent for a disclosed principal), (iii) the person signing this Agreement on its behalf is duly authorized to do so on its behalf (or on behalf of any such disclosed principal), (iv) it has obtained all authorizations of any governmental body required in connection with this Agreement and the Transactions hereunder and such authorizations are in full force and effect and (v) the execution, delivery and performance of this Agreement and the Transactions hereunder will not violate any law, ordinance, charter, by-law or rule applicable to it or any agreement by which it is bound or by which any of its assets are affected. On the Purchase Date for any Transaction Buyer and Seller shall each be deemed to repeat all the foregoing representations made by it. 11) Events of Default In the event that (i) Seller fails to repurchase or buyer fails to transfer Purchased Securities upon the applicable Repurchase Date, (ii) Seller or Buyer fails, after one business day's notice, to comply with Paragraph 4 hereof, (iii) Buyer fails to comply with Paragraph 5 hereof, (iv) an Act of Insolvency occurs with respect to Seller or Buyer, (v) any representation made by Seller or Buyer shall have been incorrect or untrue in any material respect when made or repeated or deemed to have been made or repeated, or (vi) 15 Seller or Buyer shall admit to other its inability to, or its intention not to, perform any of its obligations hereunder (each an "Event of Default"). a) At the option of the nondefaulting party, exercised by written notice to the defaulting party (which option shall be deemed to have been exercised, even if no notice is given, immediately upon the occurrence of an Act of Insolvency), the Repurchase Date for each Transaction hereunder shall be deemed immediately to occur. b) In all Transactions in which the defaulting party is acting as Seller, if the nondefaulting party exercises or is deemed to have exercised the option referred to in subparagraph (a) of this Paragraph, (i) the defaulting parry's obligations hereunder to repurchase all Purchased Securities in such Transactions shall thereupon become immediately due and payable, (ii) to the extent permitted by applicable law, the Repurchase Price with respect to each such Transaction shall be increased by the aggregate amount obtained by daily application of (x) the greater of the Pricing Rate for such Transaction or the Prime Rate to (y) the Repurchase Price for such Transaction as of the Repurchase Date as determined` pursuant to subparagraph (a) of this Paragraph (decreased as of any day by (A) any amounts retained by the nondefaulting party with respect to such Repurchase Price pursuant to clause (iii) of this subparagraph, (B) any proceeds from the sale of Purchased Securities pursuant to subparagraph (d)(i) of this Paragraph, and (C) any amounts credited to the account of the defaulting party pursuant to subparagraph (e) of this Paragraph) on a 360 day per year basis for the actual number of days during the period from and including the date of the Event of Default giving rise to such option to but excluding the date of payment of the Repurchase Price as so increased, (iii) all Income paid after such exercise or deemed exercise shall be retained by the nondefaulting party and applied to the aggregate unpaid Repurchase Prices owed by the defaulting party, and (iv) the defaulting party shall immediately deliver to the nondefaulting party any Purchased Securities subject to such Transactions then in the defaulting parry's possession. c) In all Transactions in which the defaulting party is acting as Buyer, upon tender by the nondefaulting party of payment of the aggregate Repurchase Prices for all such transactions, the defaulting parry's right, title and interest in all Purchased Securities subject to such Transactions shall be deemed transferred to the nondefaulting party, and the defaulting party shall deliver all such Purchased Securities to the nondefaulting party. d) After one business day's notice to the defaulting party (which notice need not be given if an Act of Insolvency shall have occurred, and which may be the notice given under subparagraph (a) of this Paragraph or the notice referred to in clause (ii) of the first sentence of this Paragraph), the nondefaulting party may: (i) as to Transactions in which the defaulting party is acting as Seller, (A) immediately sell, in a recognized market at such price or prices as the nondefaulting party may reasonably deem satisfactory, any or all Purchased Securities subject to such Transactions and apply the proceeds thereof to the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder or (B) in its sole discretion elect, in lieu of selling all or a portion of such Purchased Securities, to give the defaulting party credit for such Purchased Securities in an amount equal to the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source, against the aggregate unpaid Repurchase Prices and any other amounts owing by the defaulting party hereunder; and (ii) as to Transactions in which the defaulting party is acting as Buyer, (A) purchase securities ("Replacement Securities") of the same class and amount as any Purchased Securities that are not delivered by the defaulting party to the nondefaulting party as required hereunder or (B) in its sole discretion elect, in lieu of purchasing Replacement Securities, to be deemed to have purchased Replacement Securities at the price therefor on such date, obtained from a generally recognized source or the most recent closing bid quotation from such a source. e) As to Transactions in which the defaulting party is acting as Buyer, the defaulting party shall be liable to the nondefaulting party (i) with respect to Purchased Securities (other than Additional Purchased 16 Securities), for any excess of the price paid (or deemed paid) by the nondefaulting party for Replace- ment Securities therefor over the Repurchase Price for such Purchased Securities and (ii) with respect to Additional Purchased Securities, for the price paid (or deemed paid) by the nondefaulting party for the Replacement Securities therefor. In addition, the defaulting party shall be liable to the nondefaulting party for interest on such remaining liability with respect to each such purchase (or deemed purchase) of Replacement Securities from the date of such purchase (or deemed purchase) until paid in full by Buyer. Such interest shall be at a rate equal to the greater of the Pricing Rate for such Transaction or the Prime Rate. f) For purposes of this Paragraph 11, the Repurchase Price for each Transaction hereunder in respect of which the defaulting party is acting as Buyer shall not increase above the amount of such Repurchase Price for such Transaction determined as of the date of the exercise or deemed exercise by the nondefaulting party of its option under subparagraph (a) of the Paragraph. g) The defaulting party shall be liable to the nondefaulting party for the amount of all reasonable legal or other expenses incurred by the nondefaulting party in connection with or as a consequence of an Event of Default, together with interest thereon at a rate equal to the greater of the Pricing Rate for the relevant Transaction or the Prime Rate. h) The nondefaulting party shall have, in addition to its rights hereunder, any rights otherwise available to it under any other agreement or applicable law. 12) Single Agreement Buyer and Seller acknowledge that, and have entered hereinto and will enter into each Transaction hereunder in consideration of and in reliance upon the fact that, all Transactions hereunder constitute a single business and contractual relationship and have been made in consideration of each other. Accordingly, each of Buyer and Seller agrees (i) to perform all of its obligations in respect of each Transaction hereunder, and that a default in the performance of any such obligations shall constitute a default by it in respect of all Transactions hereunder, (ii) that each of them shall be entitled to set off claims and apply property held by them in respect of any Transaction against obligations owing to them in respect of any other Transactions hereunder and (iii) that payments, deliveries and other transfers made by either of them in respect of any Transaction shall be deemed to have been made in consideration of payments, deliveries and other transfers in respect of any other Transactions hereunder, and the obligations to make any such payments, deliveries and other transfers may be applied against each other and netted. 13) Notices and Other Communications Unless another address is specified in writing by the respective party to whom any notice or other communication is to be given hereunder, all such notices or communications shall be in writing or confirmed in writing and delivered at the respective addresses set forth in Annex 11 attached hereto. 14) Entire Agreement; Severability This Agreement shall supersede any existing agreements between the parties containing general terms and conditions for repurchase transactions. Each provision and agreement herein shall be treated as separate and independent from any other provision or agreement herein and shall be enforceable notwithstanding the unenforceability of any such other provision or agreement. 15) Non -assignability; Termination The rights and obligations of the parties under this Agreement and under any Transaction shall not be assigned by either party without the prior written consent of the other party. Subject to the foregoing, this Agreement and any Transactions shall be binding upon and shall inure to the benefit of the parties and their 17 respective successors and assigns. This Agreement may be cancelled by either party upon giving written notice to the other, except that this Agreement shall, notwithstanding such notice, remain applicable to any Transactions then outstanding. 16) Governing Law This Agreement shall be governed by the laws of the State of New York without giving effect to the conflict of law principles thereof. 17) No Waivers, Etc. No express or implied waiver of any Event of Default by either party shall constitute a waiver of any other Event of Default and no exercise of any remedy hereunder by any party shall constitute a waiver of its right to exercise any other remedy hereunder. No modification or waiver of any provision of this Agreement and no consent by any party to a departure herefrom shall be effective unless and until such shall be in writing and duly executed by both of the parties hereto. Without limitation on any of the foregoing, the failure to give a notice pursuant to subparagraphs 4(a) or 4(b) hereof will not constitute a waiver of any right to do so at a later date. 18) Use of Employee Plan Assets a) If assets of an employee benefit plan subject to any provision of the Employee Retirement Income Security Act of 1974 ("ERISA") are intended to be used by either party hereto (the "Plan Party") in a Transaction, the Plan Party shall so notify the other party prior to the Transaction. The Plan Party shall represent in writing to the other party that the Transaction does not constitute a prohibited transaction under ERISA or is otherwise exempt therefrom, and the other party may proceed in reliance thereon but shall not be required so to proceed. b) Subject to the last sentence of subparagraph (a) of this Paragraph, any such Transaction shall proceed only if Seller furnishes or has furnished to Buyer its most recent available audited statement of its financial condition and its most recent subsequent unaudited statement of its financial condition. c) By entering into a Transaction pursuant to this Paragraph, Seller shall be deemed (i) to represent to Buyer that since the date of Seller's latest such financial statements, there has been no material adverse change in Seller's financial condition which Seller has not disclosed to Buyer, and (ii) agree to provide Buyer with future audited and unaudited statements of its financial condition as they are issued, so long as it is a Seller in any outstanding Transaction involving a Plan Party. 19) Intent a) The parties recognize that each Transaction is a "repurchase agreement" as that term is defined in Section 101 of Title 11 of the United States Code, as amended (except insofar as the type of Securities subject to such Transaction or the term of such Transaction would render such definition inappli- cable), and a "securities contract" as that term is defined in Section 741 of Title 11 of the United States Code, as amended. b) It is understood that either parry's right to liquidate Securities delivered to it in connection with Transactions hereunder or to exercise any other remedies pursuant to Paragraph 11 hereof, is a contractual right to liquidate such Transaction as described in Sections 555 and 559 of Title 11 of the United States Code, as amended. 18 20) Disclosure Relating to Certain Federal Protections The parties acknowledge that they have been advised that: a) in the case of Transactions in which one of the parties is a broker or dealer registered with the Securities and Exchange Commission ("SEC") under Section 15 of the Securities Exchange Act of 1934 (" 1934 Act"), the Securities Investor Protection Corporation has taken the position that the provisions of the Securities Investor Protection Act of 1970 ("SIPA") do not protect the other party with respect to any Transaction hereunder; b) in the case of Transactions in which one of the parties is a government securities broker or a government securities dealer registered with the SEC under Section 15C of the 1934 Act, SIPA will not provide protection to the other party with respect to any Transaction hereunder; and c) in the case of Transactions in which one of the parties is a financial institution, funds held by the financial institution, pursuant to a Transaction hereunder are not a deposit and therefore are not insured by the Federal Deposit Insurance Corporation, the Federal Savings and Loan Insurance Corporation or the National Credit Union Share Insurance Fund, as applicable. First Interstate Bank of Arizona, N.A. Customer: By: Title: Date: By: Title: Date: 19 Schedule D First Interstate Corporate Cash Management Account Agreement Additional Signatories The undersigned legal entities are included in the term "Customer" under and are signatories to that Corporate Cash Management Account Agreement (the "Agreement") between Account Bank, Investment Bank and , dated Customer Name The undersigned acknowledges it/they has read and understands the Agreement, including the Disclosure Statement contained therein, the Designated Investments form and all Schedules. Customer Name By: Title: Date: CERTIFICATION I certify that I am the Secretary or Assistant Secretary of the Customer, that the signature of the person(s) signing above is genuine and authorized signature of that person and that he/she/they is authorized to sign in the capacity indicated. Signature of Secretary or Assistant Secretary Date 21 Annex I First Interstate Corporate Cash Management Account Agreement Supplemental Terms and Conditions Buyer and Seller expressly agree that all transactions entered into pursuant to this Agreement will be deemed to be performed in Arizona and laws of the state of Arizona will govern this Agreement and all such transactions, regardless of the provisions of paragraph 16 herein. In transactions in which First Interstate Bank of Arizona, N.A., is the Seller, the bank hereby waives any right of substitution granted by paragraph 9 of this agreement. 23 I Commercial Paper First Issuer Update ®interstate Securities Sales & Trading Bank June 15, 1995 CREDIT RATINGS Commercial Papgr Long-term Debt (Parent only) Standard & Poors Corporation A-1 A Moody's Investors Service, Inc. P-1 A2 BUSINESS - Weyerhaeuser Company Weyerhaeuser Company was incorporated in Washington state in January 1900. Its principal businesses are the growing and harvesting of timber; the manufacture, distribution and sale of forest products including logs, wood chips, building products, pulp, paper and packaging products; real estate construction and development; and financial services. Weyerhaeuser is the world's largest private owner of merchantable softwood timber and producer of softwood lumber and market pulp. It is also one of North America's largest producers of forest products and recyclers of office wastepaper, newspaper and corrugated boxes. BUSINESS - Weyerhaeuser Real Estate Company Weyerhaeuser Real Estate Company (WRECO) was established in 1970 as a wholly -owned subsidiary of Weyerhaeuser Company and is principally engaged in the construction and sale of residential housing units in certain geographic areas in the United States. To a limited extent, WRECO is also engaged in the development, construction and sale of commercial buildings, residential and commercial lot sales, property management and other real estate related activities, either directly or through joint ventures as a general or limited partner. WRECO is managed from Federal Way, Washington and is organized into seven operating groups serving Washington, California , Florida, Nevada, Texas, New Jersey, Maryland, and Virginia. CONSOLIDATED BALANCE SHEET IDollar amounts in millions) Assets Weyerhaeuser Current Assets: Cash & short-term investments, including restricted deposits Receivables, less allowances Inventories Prepaid expenses Total Current Assets Property and equipment Construction in progress Timber & timberlands at cost, less fee stumpage charged to disposals Other assets and deferred charges Total Assets Real estate and financial services Cash and short-term investments, including restricted deposits Receivables, less discounts, & allowances Mortgage and construction notes and mortgages loans receivable Investments Mortgage -backed certificates and other pledged financial instruments Real estate in process of development, less reserves Land being processed for development, less reserves Deferred acquisition costs Investments in and advances to joint ventures and limited partnerships, less reserves Other Assets Total Assets 12/25/94 1 / Liabilities and shareholders' interest 1 / 1 6/93 Weyerhaeuser Current Liabilities: Notes payable $ 6 $ 5 $ 39. $ 73 Current maturities of long-term debt 321 14 909 783 Accounts payable 645 492 746 762 Accrued liabilities 695 565 284 281 Total Current Liabilities 1,667 1,076 1,978 1,899 Long-term debt 2,713 2,998 6,196 5,606 Deferred income taxes 986 905 603 666 Deferred pension & other liabilities 525 535 Minority interest in subsidiaries 103 109 610 605 Total Liabilities 5.994 5.623 212 192 9,599 8,968 Real estate and financial services Notes and commercial paper 416 289 Collateralized mortgage obligation bonds 183 307 Long-term debt 1,770 1,997 73 87 Other liabilities _ 3 456 116 135 Total Liabilities 2,723 3,049 472 847 Shareholders' interest 247 60 Common shares: authorized 400,000,000 shares, issued 206,072,890 shares, $1.25 par value 258 258 211 350 Other capital 416 411 Cumulative translation adjustment (107) (73) 668 738 Retained earnings 3,733 3,391 Treasury common shares, at cost: 738 700 455,387 and 983,952 (10) (21) 92 40 Total shareholders' interest 4.290 3.966 430 _361 S3. 327 386 13 670 Total liabilities and shareholders' interest S13.00 $.12-63$ This material is based upon information filed with regulatory agencies, published by sources available to the general public or otherwise furnished by the issuer. It is provided to you for information only and is not intended to solicit specific investment activity by you. First Interstate Bank of Oregon acts as agent for issuers of commercial paper in the placement of their commercial paper with qualified investors. BOND-50 2-950 WEYERHAEUSER COMPANY AND SUBSIDIARIES CONSOLIDATED EARNINGS For the three-year period ended December 26, 1994 (Dollar amounts in millions except per share figures) 1994 1993 199 Net sales and revenues Weyerhaeuser $9,281 $8,315 $7,744 Real Estate and financial services 1,117 1.230 1.522 10,398 9,545 9,266 Costs and expenses: Weyerhaeuser: Costs of products sold 6,819 6,252 5,919 Depreciation, amortization, fee stumpage 504 444 447 Selling, general and administrative expenses 615 592 592 Research and development expenses 47 44 43 Taxes other than payroll and income taxes 151 137 122 8,136 7,469 7,123 Real estate and financial services: 851 836 979 Costs and operating expenses 30 43 56 Depreciation and amortization 152 206 252 Selling, general and administrative expenses 9 _9 12 Taxes other than payroll and income taxes 1.042 1.094 1.299 9.178 8.5 , 8.422 Operating Income 1,220 982 844 Weyerhaeuser: Interest expense incurred 237 215 190 Less interest capitalized 36 23 13 Other income (expense), net (42) 60 35 Real Estate and Financial Services: Interest expense incurred 154 173 220 Less interest capitalized 78 77 72 Other income (expense), net 19 __54 _ 9 Earnings before income taxes and extraordinary item 920 808 563 Income taxes 331 281 191 Earnings before extraordinary item 589 527 372 Extraordinary item, net of applicable taxes of $34 52 Net earnings 579 372 Per common share: Earnings before extraordinary item 2.86 2.58 1.83 Extraordinary item --- .25 ---- Net earnings 2.86 2.83 1 83 Dividends paid 1.2� 1.20 1.20 COMMENTS FROM WEYERHAEUSER COMPANY'S 1994 ANNUAL REPORT TO SHAREHOLDERS Results from operations 1994 compared with 1993 The company's 1994 consolidated sales and revenues were $10.4 billion, a 9 percent increase over the $9.5 billion reported last year. Net earnings were $589 million, or $2.86 per common share, compared with 1993 net earnings of $579 million, or $2.83 per common share. 1994 earnings include the return of countervailing duty by the U.S. government against Canadian lumber imports and the expected cost of postretirement benefits for Canadian employees. The net effect of these two items contributed $.03 per common share. 1993 earnings included gains of $132 million, or $.65 per common share, from the sale of assets and extinguishment of debt, and a $15 million, or $.08 per common share, charge to earnings to reflect the revised 1993 federal corporate tax rate in the company's deferred tax accounts. The continuation in 1994 of the company's major modernization projects, started in 1993, accounted for the significant increase in capitalized interest from year to year. The significant changes from the prior year in other income for the company and real estate and financial services are attributable to the $70 million pretax gain on the disposal of the company's investment in the infant diaper business and the real estate and financial services pretax gain of $42 million on the sale of GNA Corporation, both in 1993. The timberlands and wood products segment posted operating earnings of $1 billion in 1994, which is a 16 percent increase over the $891 million reported in 1993. Sales for this segment were $5 billion, up 12 percent over the $4.5 billion reported last year. This segment posted record performances during the year as the businesses continued to accomplish their business improvement plans, timber supplies remained tight and markets remained strong throughout the year. The pulp, paper and packaging segment's 1994 operating earnings were $211 million, up substantially from last year's $61 million. This segment reported sales of $4.1 billion for the year, an increase of 14 percent over the $3.6 billion in 1993. Strong demand coupled with continued price improvement over the prior year in both the domestic and export pulp, paper and packaging markets are the key factors in this recovery. The combined real estate and financial services segments earned $18 million in 1994 compared with last year's earnings of $94 million, which included a pretax gain of $42 million on the sale of GNA corporation as well as one quarter of GNA operating results. Commercial Paper Fi�sta�e Securities Sales &Trading issuer update Bank June 15, 1995 CREDIT RATINGS Short-term Long-term Standard & Poors Corporation A-1 A Moody's Investors Service, Inc. P-1 A2 Duff & Phelps Credit Rating Co. Duff-1 "A BUSINESS PacifiCorp is an electric utility headquartered in Portland, Oregon, providing services through its generation, wholesale transaction and transmission, and retail distribution businesses. Retail electric utility businesses are operated under Pacific Power & Light Company and Utah Power & Light Company, serving 1.3 million retail customers in service territories aggregating about 153,000 square miles in portions of seven Western states: Utah, Oregon, Wyoming, Washington, Idaho, California and Montana. The service area contains diversified industrial and agricultural economies. Through PacifiCorp Holdings, Inc., a subsidiary formed in 1984 to hold and facilitate the conduct of businesses not regulated as electric utilities, PacifiCorp indirectly owns 87% of Pacific Telecom, Inc. (telecommunications company), 100% of PacifiCorp Financial Services (financial services company), and 100% of Pacific Generation Company (independent power production and cogeneration company). SELECTED CONSOLIDATED FINANCIAL INFORMATION CONSOLIDATED STATEMENT OF INCOME REVENUES EXPENSES Operations Maintenance Administrative & General Depreciation & Amortization Taxes, Other Than Income Finance interest expense TOTAL: INCOME FROM OPERATIONS INTEREST EXPENSE & OTHER Interest Expense Interest Capitalized Minority Interest & Other TOTAL: Income from continuing operations before income taxes Income Taxes INCOME FROM CONTINUING OPERATIONS BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Discontinued operations less applicable income tax expense: 19931$26.0 Cumulative effect on prior years of change in accounting for income taxes NET INCOME (amounts in millions of dollars) 12/31 12131/93 BALANCE SHEET 1 1 12131/93 3_,506.5 3,405.4 ASSETS PROPERTY, PLANT & EQUIPMENT 1,400.3 1,369.9 Electric 10,577.2 10,000.6 292.3 294.2 Telecommunication 1,572.7 1,579.8 244.6 247.4 Other & Construction in Progress 433.2 422.6 424.3 404.8 Accumulated Depreciation & Amortization (4,136.9) (3,863.5) 122.7 119.9 TOTAL PROPERTY, PLANT & EQUIPMENT 8,446.2 8,139.5 35.7 53.7 2,519.9 2,489.9 CURRENT ASSETS 986.6 915.5 Cash & Equivalents 23.3 31.2 Accounts Receivable - Net 442.7 451.0 Materials, Supplies, Fuel, Inventory 259.5 273.3 298.8 323.2 Other 89.9 194.8 (14.5) (13.9) TOTAL CURRENT ASSETS 815.4 9W.6 (15.5) j3_9� Regulatory Assets - Net 1,081.2 1,072.1 268.8 305.4 Other Assets 1,502.8 1,794.1 TOTAL ASSETS 11.845.6 11.956.7 717.8 610.1 249.8 187.4 CAPITALIZATION & LIABILITIES Common Equity: Common Stock (Net ESOP Guarantees) 2,985.5 2,911.3 Retained Earnings 474.3 351.3 468.0 422.7 Total Common Equity 3,459.8 3,262.6 Preferred Stock 586.4 586.4 ----- 52.4 Long-term Debt & Capital Leases 3,768.2 3,923.6 4.0 CURRENT LIABILITIES: Maturing Long-term Debt & Leases 95.8 155.6 468.0 479.1 Notes Payable & Commercial Paper 454.7 553.5 Accts. Payable, Taxes, Interest, Dividends, Customer Deposits and other 718.5 731.8 TOTAL CURRENT LIABILITIES 1,269.0 1,440.9 Deferred Credits & Minority Interest 2,762.2 2,743.2 TOTAL CAPITALIZATION & LIABILITIES 11 845-6 11-956-7 This material is based upon information filed with regulatory agencies, published by sources available to the general public or otherwise furnished by the issuer. It is provided to you for information only and is not intended to solicit specific investment activity by you. First Interstate Bank of Oregon acts as agent for issuers of commercial paper in the placement of their commercial paper with qualified investors. BOND-50 2-950 COMMENTS FROM PACIFICORP'S FORM 10-K In 1994, PacifiCorp (the "Company") made substantial progress toward strengthening the scope and competitive position of its electric utility and telecommunications operations, and continued the reduction in the size and scope of its financial services activities. 1994 compared to 1993 • Electric Operations' earnings contribution increased $18 million or 5% primarily due to increased energy sales in all customer categories and after-tax gains of $6 million relating to the sale of a portion of its emission allowances and $4 million relating to the sale of distribution facilities in Sandpoint, Idaho. • Telecommunications' earnings contribution from continuing operations increased $20 million or 39% primarily due to long lines settlement revenue, decreased interest expense, increased local telephone exchange access lines and continued growth in cellular operations. • The earnings contribution of other businesses increased $8 million primarily due to a $12 million increase in interest revenues from a note received in connection with the June 1993 sale of NERCO, Inc. ("NERCO"), the Company's former mining and resource development subsidiary. • Discontinued operations contribution decreased $52 million due to the effect of a gain in 1993 relating to the sale of an international communications subsidiary. • The average number of common shares outstanding rose 3% due to the issuance of 6 million shares in a September 1993 public offering and issuances under dividend reinvestment and employee stock ownership plans. In November 1994, the Company ceased issuing new shares to meet the requirements under the plans. The Company periodically evaluates the advantages of common share issuances in the context of its current capital structure, financing needs and market price and may consider future issuances. OTHER During 1994, PacifiCorp Financial Services, Inc. ("PFS") reduced its assets by $400 million. Proceeds from sales of its assets were used to reduce debt. PacifiCorp Holdings, Inc. ("Holdings") has entered into an agreement and plan of merger with Pacific Telecom under which holdings would acquire the 13% publicly held minority interest in Pacific Telecom for $30 per share. The merger requires approval by the holders of a majority of the outstanding shares of Pacific Telecom not owned by Holdings (5.3 million shares), and is subject to regulatory approvals and other conditions customary to such transactions. During 1994 the Company's wholly owned independent power production subsidiary, Pacific Generation Company ("PGC"), through its subsidiaries, began construction of a 240 megawatt cogeneration facility in California. When completed, the facility will be operated by PGC, and PGC will effectively own approximately 46% of the completed project. PGC plans to continue to pursue opportunities in the U.S. market and has begun a preliminary investigation of opportunities in the international markets. PFS and Holdings expect to fund scheduled debt maturities and financing commitments through cash flows from operations, further asset sales and through issuances of additional debt. FINANCING ACTIVITIES Short-term and Long-term Debt, including Current Maturities Consolidated debt decreased $314 million in 1994, Holdings and PFS retired $347 million of debt with the proceeds from sales of finance assets. Pacific Telecom's debt decreased $54 million primarily due to the application of net proceeds from the down payment for the sale of Alascom and the transition payment received from AT&T. The Company's debt increased $103 million due to a $169 million increase in short-term debt, partially offset by a $66 million decrease in long-term debt. During 1994, the Company refinanced long-term debt with fixed interest rates ranging from 6% to 10.7% with variable rate debt with year-end interest rates ranging from 5.2% to 6.2%. At December 31, 1994, the Company's variable rate debt totaled $1.3 billion. As of December 31, 1994, the Company had $830 million of mortgage bonds and common stock registered for sale with the Securities and Exchange Commission, including the Company's $500 million Series G Medium -Term Note program. Holdings has executed various agreements that support certain obligations of PFS, under which Holdings has agreed to maintain ownership of not less than 80% of the voting shares of PFS; provide equity contributions to PFS to maintain its tangible net worth at not less than $10 million; and provide liquidity support. Capitalization Millions of Dollars / December 31 1994 1993 Common equity $3,460 $3,263 Preferred stock 367 367 Preferred stock subject to mandatory redemption 219 219 Long-term borrowings 3,768 3,924 Long-term borrowings currently maturing 96 155 Short-term debt 465 554 Policy To insure access to capital markets and to produce a competitive cost of capital, the Company attempts to maintain an appropriate mix of debt and equity in its consolidated capital structure. In order to maintain its target debt rating of "A", the Company has a target debt to capitalization range of 48% to 54%. At December 31, 1994, the Company's total debt was 52% of total capitalization. Within its debt structure, the Company has historically attempted to match the life of its borrowed liabilities with its assets and to actively manage its exposure to fluctuating interest rates. 1993 Compared with 1992 Sales and revenues in 1993 were $9.5 billion, an increase of 3 percent over 1992. Net earnings were $579 million, or $2.83 per common share, up from 1992 net earnings of $372 million, or $1.83 per common share. Included in 1993 net earnings were after-tax gains of: • $52 million, or $.25 per common share, from the extinguishiment of debt, which was reported as an extraordinary item. • $44 million, or $.22 per common share, from the sale of the infant diaper business. • $36 million, or $.18 per common share, from the sale of GNA Corporation, a wholly owned subsidiary. And a charge of $20 million, or $A 0 per common share, which reflected the revised 1993 federal corporate tax rate in the company's deferred and current tax accounts. This charge consisted of $.08 per common share due to the effect of the higher rate on the accumulated temporary differences at December 27, 1992, and $.02 per common share related to 1993. The net sales and revenues and related costs and expenses of real estate and financial services were substantially less in 1993 when compared with 1992 as a result of the sale of GNA Corporation. During 1993 the company refinanced a significant amount of debt, which resulted in a short-term increase in interest expense. The increase in capitalized interest over the prior year coincided with expanded activity in the company's major capital projects. As a part of the GNA Corporation sales transaction, the company assumed $225 million of GNA debt. 1992 Compared With 1991 Sales and revenues in 1992 were $9.3 billion, up 6 percent from 1991. Net earnings were $372 million, or $1.83 per common share, compared with a 1991 loss of $162 million, or $.80 per common share. 1991 results reflected an after-tax special -items charge to earnings of $344 million. 1992 research and development expenses decreased 24 percent from 1991 as a result of the implementation of certain of the company's restructuring and business improvement plans. Interest expense incurred for 1992 was down by $68 million, or 14 percent, primarily due to the dissolution of the company's savings and loan operations in Southern California during the year. Significant changes in other income in 1992, compared with 1991, included a $25 million partial settlement accrued in 1992 with respect to a lawsuit for the refund of federal income taxes, and earnings of $2 million in the company's real estate joint -venture and limited -partnership activities in 1992, after losses of $17 million in 1991, attributable to the restructuring or sale of a number of these investments. In 1992 the company purchased two pulp mills, three sawmills, timberlands in Georgia, and a forest management license in Alberta, Canada, from Procter & Gamble. The 1992 timberlands and wood products operating earnings were $515 million, compared with $155 million in 1991, which included a restructuring charge of $152 million. This segment's improved earnings were driven, in part, by strong raw material and converted wood products prices. The curtailment of wood supply from public lands in the western United States, along with increased demand generated by the slowly improving U.S. economy, exerted upward pressure on the value of wood products in both the domestic and export markets. Pulp, paper and packaging operating earnings were $251 million for 1992, compared with $108 million in the previous year, which included a restructuring charge of $129 million. While pulp pricing showed some temporary strength due to the mid -year strike in the company's Canadian pulp mills, the overall trend from a year ago was down. Newsprint and paper suffered continued weak prices throughout 1992. Real estate posted operating earnings of $13 million in 1992 after recording a loss of $175 million in 1992, which included a $155 million restructuring charge. Financial services operating earnings were $68 million in 1992, up 13 percent from the 1991 results of $60 million. While this segment benefited from lower interest rates for most of the year, earnings were affected as a result of reduced investment returns. The dissolution of the company's wholly owned subsidiary Republic Federal Savings & Loan The significant decrease in financial services interest expense was due to the liquidation of Republic Federal Savings & Loan Association during 1992 and the sale of GNA Corporation in early 1993. In addition, accelerated prepayments caused by mortgage refinancings significantly reduced collateralized mortgage obligation bonds. Significant items in relation to net earnings included in other income for 1993 were a $70 million pretax gain on the disposal of the company's investment in the infant diaper business through a public offering in a new company, Paragon Trade Brands, Inc., and the real estate and financial services pretax gain of $42 million on the sale of GNA Corporation. The timberlands and wood products operating earnings for 1993 were $891 million, an increase of 73 percent over the $515 million recorded in 1992. Prices for logs and lumber exceeded 1992 levels due to increasing demand for housing construction materials and raw material supply shortages resulting from reduced harvests in the Western public forests. The pulp, paper and packaging segment had a $61 million operating profit in 1993, significantly below the $251 million posted in 1992. Prices for most of the products in this segment were at levels well below the previous year. The personal care products business included in this segment was divested in the first quarter of 1993. The real estate and financial services segments had operating earnings of $94 million in 1993 compared with $81 million in 1992. Association, which operated primarily in Southern California, was completed during 1992. Liquidity and Capital Resources General The company is committed to the maintenance of a sound, conservative capital structure. This commitment is based upon two considerations: the Obligation to protect the underlying interests of its shareholders and lenders, and the desire to have access, at all times, to major financial markets. The important elements of the policy governing the company's capital structure are as follows: • To view separately the capital structures of Weyerhaeuser Company, Weyerhaeuser Real Estate Company and Weyerhaeuser Financial Services, Inc., given the very different nature of their assets and business activities. The amount of debt and equity associated with the capital structure of each will reflect the basic earnings capacity, real value and unique liquidity characteristics of the assets dedicated to that business. • The combination of maturing short-term debt and the structure of long-term debt will be managed judiciously to minimize liquidity risk. Long-term debt maturities are shown in Note 16 of Notes to Financial Statements. Operations The company's financial position in 1994 remained strong as lt generated $1.3 billion of cash flow from operations before changes in working capital, compared with $982 million in 1993. Cash flow from operations before changes in working capital by business segment was as follows: Dollar Amounts In Millions 1994 1993 1992 Timberlands and wood products $1,226 $1,052 $668 Pulp, paper and packaging 530 326 513 Real estate 16 29 42 Financial services 33 12 80 Corporate and other 545 43 264 $1 260 1 $982 $1,039 Weyerhaeuser Company's working capital decreased $512 million from the prior year-end. Major factors affecting the decline were an increase in the current portion of long-term debt as the 9 1 /4 percent and 9.36 percent notes totaling $300 million became due in 1995, increases in accounts payable and accrued liabilities amounting to $283 million, and an increase in accounts receivable of $126 million. In the real estate and financial services segments, the mortgage operations built an inventory of mortgage loans receivable in 1993, which was reversed in 1994 as loan sales exceeded originations. Significant non -recurring items that impacted the cash flow from operations in 1993 were the $52 million gain on extinguishment of debt, net of income tax, which was recorded as an extraordinary item; the pretax gain of $70 million from the sale of the company's infant diaper business; and the pre-tax gain of $42 million from the sale of GNA Corporation. Investing Capital expenditures amounted to $1.1 billion in 1994 and $967 million in 1993. They are currently expected to approximate $1.2 billion in 1995; however, the expenditures could be increased or decreased as a consequence of future economic conditions. The company had approximately $306 million in capital expenditures committed on major projects at year-end 1994 representing construction activities at its Longview, Wash., and Plymouth, N.C., pulp and paper facilities and a new oriented strand board mill in West Virginia. Recent capital spending, including acquisitions, has been in the following areas: Dollar amounts in millions 1994 1993 1992 Timberlands and wood products $257 $241 $246 Pulp, paper and packaging 794 652 932 Corporate and other 51 74 28 $1,102 $967 $1,206 Financial services had a decrease from 1993 to 1994 in mortgage and investment securities acquired and related proceeds from the sale of mortgage and investment securities principally as a result of the sale of GNA Corporation. The company had proceeds of $616 million from the sale of its infant diaper business and the sale of GNA Corporation in 1993. Financing The reductions in both the sales of debentures and the related payments on debentures, commercial paper and other debt by Weyerhaeuser in 1994 as compared with the prior year are a result of the debt restructuring activity in 1993. Cash dividends paid on common shares amounted to $247 million in 1994 and $246 million in 1993. Although common share dividends have exceeded our target payout ratio in recent years, lt is the company's intent, over time, to pay dividends to its common shareholders in a range of 35 to 45 percent of common share earnings. To ensure its ability to meet future commitments, Weyerhaeuser Company, Weyerhaeuser Real Estate Company and Weyerhaeuser Mortgage Company, a subsidiary of Weyerhaeuser Financial Services, Inc., have established at year-end 1994 unused bank lines of credit in the maximum aggregate sum of approximately $2.5 billion. None of the entities is a guarantor of the borrowings of the others under any of these credit facilities. INFORMATION STATEMENT Student Loan Marketing Association Sallie ae February 14, 1995 THE DELIVERY OF THIS INFORMATION STATEMENT AT ANY TIME DOES NOT IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. THIS INFORMATION STATEMENT DOES NOT CONTAIN DESCRIPTIONS OF SPECIFIC SALLIE MAE SECURITIES AND DOES NOT OF ITSELF CONSTITUTE AN OFFER TO PURCHASE SUCH SECURITIES. IN CONJUNCTION WITH ITS SECURITIES OFFERINGS, SALLIE MAE MAY USE THIS INFORMATION STATEMENT ACCOMPANIED BY AN INFORMATION STATEMENT SUP- PLEMENT DESCRIBING THE SPECIFIC TERMS OF THE SECURITIES OFFERED THEREBY. TABLE OF CONTENTS Page Summary............................................................. 3 Capitalization.......................................................... 4 Consolidated Statements of Income .......................................... 5 Management's Discussion and Analysis of Operating Results and Financial Condition ..... 6 Business and Operations .................................................. 16 Products and Services .................................................. 16 Competition.......................................................... 19 Financing........................................................... Regulation and Reporting Requirements ..................................... 20 20 Management........................................................... 22 Directors............................................................ 22 Officers and Employees ................................................. 24 Consolidated Financial Statements ........................................... F 1 The Federal Family Education Loan Program ............................ Appendix A This Information Statement contains audited financial statements with respect to Sallie Mae for the year ended December 31, 1994. Sallie Mae updates its Information Statement quarterly. Copies of Sallie Mae's current Information Statement can be obtained, when available, by writing or telephoning the Corporate and Investor. Relations Department of Sallie Mae at 1050 Thomas Jefferson Street, N.W., Washington, D.C. 20007, telephone: (202) 298-3010. 2 SUMMARY The information below is qualified in its entirety by the detailed information a eargn in this information statement and any supplements thereto. PP g elsewhere Student Loan Marketing Association The Student Loan Marketing Association ("Sallie Mae") is a stockholder -owned co established by an Act of Congress in 1972. Sallie Mae's charter is subject to legislative change time to time. Sallie Mae is the largest source of financing and servicing for education ange from United States. Sallie Mae's products and services include student loan purchases commitmentsloans in the purchase student loans and secured advances to originators of student loans. Sallie e alsoo to operational support to originators 'of student loans and to post secondalso offers addition, Sallie Mae provides other education -related financial services such las tfinancing institutions. g In educational related facilities. See "Business and Operations." financing of Sallie Mae is the major intermediary to the nation's education credit market providing primarily through secondary market purchases and warehousing advances, for originators liquidity' loans made under federally sponsored atof student P student loan programs. These programs include the Federal Family Education Loan Program ("FFELP" which encompasses Subsidized and Unsubsidized Stafford loans, hethe n PLUteed S'" loan Loan Program), Supplemen- tal Loans for Students ("SLS") program, as well as the Health Education Assistance and Program ("HEAL"). The FFELP administered by the Department of Education, provides federal incentivesProgram encourage private sector funding of student loans. The primary federal incentive is reinsurance of state and other guarantors that insure lenders against credit risk on the loans. See Appendix HEAL program is similar to the FFELP but is administered by the Department of Health A. The Services. ealth and Human The Omnibus Budget Reconciliation Act of 1993 includes significant chan es in the stud delivery system, including the creation of a student loan ro g student loan government, diminished yields to participants in the FFELP d a funded directly by the federal loans acquired and held by Sallie Mae after August 10,1993. These changes al hav30%ing fee n all FFELP material adverse effect on Sallie Mae's long-term earningsprospects. See changes are having and will have a and Analysis of Operating Results and Financial Conditin — Direct Loan Progaagenment s Discussion Changes." Program and 1993 FFELP The principal office of Sallie Mae is at 1050 Thomas Jefferson Street D.C. 20007, and its telephone number is (202) 333-8000. N•w, Washington, Selected Financial Data Years ended December 31, 1994 1993 (Dollars in millions, except per share amounts) 1992 1991 1990 Net interest income Net income . . . ' ' ' ' ' ' ' ' ' ' • • • • • • • • • • • $ 695* $ 725* $ 662* $ 559 $ 479 Earnings per common share 403 430 394 345 301 Dividends per common share . . . . ' . . . ' ' ' . ' ' ' 4 91 4.83 4.21 3.55 2.96 Core earnings** ' . ' ............... 1.42 1.25 1.05 .85 Core earnings per common share 338 385 394 .59 ** 345 301 Net interest margin , ' ' ' ' ' ' ' ' • • • • • • 4.11 4.31 4.21 3.55 Return on common stockholders' equity .... ' ' ' ' • • 1.55%* 1.75%* 1.60%* 1.55 2.96 At end of period: q y' 29.06*** 1.44% 40.26 40.22 Student loans, net . 36.50 32.85 Warehousing advances .. $30,370 $26,804 $24,173 $22,067 $19 242 Academic facilities financings . . . . . . . . . ' ' ' ' ' ' • • • ?,032 7,034 8,085 91395 ' Total borrowings .. ' ' ' ' ' ' ' ' ' ' • • • • • • • 1,548 1,359 1,189 9,273 Stockholders' equity ....... _ ' ' ' ' ' ' ' ' ' • • • • • • 50,335 44,544 44,440 139 044 w "'•• 1,471*** 43,139 39,044 93 *During the years ended December 31, 1994, 1993 and 1992, premiums on debt extinguished 1,220 1,150 11 m lion and $141 million, respectively. Such amounts are disclosed separately, net of tax, in the consolidated statements gut hed totalled $14 million, $211 mil - income. Net interest income is adjusted to include premiums on debt extinguished. Net interest margin is determined of upon taxable equivalent net interest income adjusted to include premiums on debt extinguished.ed based **Core earnings are earnings before the impact of net floor revenue. ***Stockholders' equity reflects the addition to stockholders' equityof approximately gams on certain investments recognized pursuant to the adotioof ANo. 115AccoOunting fonet of r Certain Investments ized Debt and Equity Securities.,, in State and Local Taxes The Higher Education Act of 1965, as amended, and related federal statutes rovid on the debt obligations of Sallie Mae is exempt from taxation by state, municipal or to a that interest subject to certain limitations.cal authorities, 3 CAPITALIZATION The following table sets forth the capitalization of Sallie Mae at December 31, 1994. Note refer- ences are to the notes to the consolidated financial statements. (Dollars in millions, except per share amounts) Borrowed funds: Short-term borrowings (notes 6 and 7) ...................... $16,016 Long-term notes (notes 6 and 7) ........................... 34,319 Total borrowed funds ................................. 50,335 Stockholders' equity: Preferred stock, par value $50.00 per share, 5,000,000 shares authorized and issued, 4,277,650 shares outstanding (note 10) .... 214 Common stock, par value $.20 per share, 250,000,000 shares authorized, 123,844,046 shares issued (notes 11 and 12) ......... 25 Additional paid -in capital ................................ 524 Unrealized gains on investments, net of tax .................. 300 Retained earnings ..................................... 2,343 Stockholders' equity before treasury stock .................... 3,406 Common stock held in treasury at cost, 50,320,823 shares (note 11) . 12935 Total stockholders' equity .............................. 1,471 Total capitalization ...................................... $5106 4 Earnings per common share (note 11) STUDENT LOAN MARKETING ASSOCIATION CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts) The following consolidated statements of income of Sallie Mae for each of the three years in the period ended December 31, 1994 have been audited by Ernst & Young LLP independent a whose report with respect thereto appears under "Consolidated Financial Statements." uditors The , dated statements of income should be read in conjunction with the consolidated financialomen and related notes appearing elsewhere under "Consolidated Financial Statements." statements Years ended December 31, Interest income on loans: 1994 1993 1992 Insured student loans purchased (note 2) Servicing costs .............................. . Insured student loans purchased, net ............. Warehousing advances .. ' Academic facilities financings .................... . Total interest income on loans, net .......... . Income from investments, principally interest ......... . Total interest income, net ............ Interest expense (notes 6 and 7) Net �Ihterest income ..... • . Ope "sting expenses: ...... ' ... ' ' ' ' Salaries and employee benefits Other...................................... Total operating expenses ....................... . Income before federal income taxes and premiums on debt extinguished ................................ . Federal income taxes (note 13): Current ...... . Deferred................................... Total federal income taxes ....................... . Income before premiums on debt extinguished ...... . Premiums on debt extinguished, net of tax (note 6) ..... Net income .................................... Earnings per common share before premiums on debt extinguished (note 11) , , , , , $ 5.03 $ 4.91 $2,108,595 $1,843,458 $1, 731,497 (205,561) (199,595) (171,755) 1,903,034 1,643,863 1,559,742 345,820 314,877 456,540 102,399 71,858 55,435 21351,253 2,030,598 2,0711717 500,301 386,853 543,140 21851,554 2,417,451 2,614,857 21142,495 1,480,689 1,812,159 709,059 936,762 802,698 67,950 62,300 54,807 62,484 47,060 46,496 130,434 109,360 101,303 578,625 827,402 701,395 178,812 251,342 181,993 (12,284) 8,621 32,341 1661528 259,963 214,334 412,097 567,439 487,061 (9,329) (137,389) (93,134) $ 402,768 $ 430,050 $ 393,927 $ 6.41 $ 5.24 $ 4.83 $ 4.21 See accompanying notes to consolidated financial statements. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS AND FINANCIAL CONDITION Years ended December 31, 1992-1994 (Dollars in millions, except per share amounts) Overview Sallie Mae's net income of $403 million in 1994 decreased $27 million (6%) from 1993, while earnings per common share grew to $4.91, an increase of $.08 (2%) over 1993. Continued repurchases of common stock resulted in the growth in earnings per common share while net income decreased. Sallie Mae's core earnings (i.e., before the impact of net floor revenue) were $338 million in 1994, down 12% from $385 million in 1993, while core earnings per common share were $4.11 in 1994, a 5% decline from $4.31 in 1993. Net floor revenues improved 1994 earnings per common share by $.80 compared to $.52 in 1993. The spreads earned on Sallie Mae's student loan business continued to decline in 1994 as a result of legislative changes to the student loan program as well as increased competition in the student loan marketplace. The Omnibus Budget Reconciliation Act of 1993 (OBRA) changed the Federal Family Education Loan Program (FFELP) in a number of ways that lower the profitability of FFELP loans for all participants. It imposed a .30% "offset fee" unique to Sallie Mae, as well as yield reductions and risk -sharing for all holders. (See "Direct Loan Program and 1993 FFELP Changes" for further discussion). In addition, loan acquisition costs, which include amortization of loan purchase premi- ums, costs related to Sallie Mae's ExportSS loan origination and administration service, and foregone interest related to borrower incentives, decreased spreads on student loans by a greater amount in 1994 than in 1993. ExportSS costs increased in 1994 reflecting the increase in the number of lenders 'Using Sallie Mae's ExportSS loan origination and administration service and the continued growth in both national student loan origination volume and ExportSS' share of that volume. Loans originated And serviced for ExportSS lenders represent committed loan purchase volume that will become Sallie Mae assets at some point in the future and totalled $4.0 billion at December 31, 1994, as compared to $2.5 billion at December 31, 1993. Strong growth in total student loan originations as a consequence of legislated expansion of student eligibility as well as increases in student and parent loan limits have contributed to additional loan purchase and commitment volumes for Sallie Mae. In 1994, loan purchases totalled $8.0 billion, up 19 percent from 1993. The increase in purchase volume has allowed Sallie Mae to maintain its 34% market share of outstanding student loans in 1994. Approximately two-thirds of purchase volume was derived from Sallie Mae's base of commitment clients, particularly those who used the ExportSS loan origination service. ExportSS commitments outstanding increased from $7 billion at December 31, 1993 to $13 billion at December 31, 1994 largely reflecting the extension of Sallie Mae's relationship with Chase Manhattan Bank. In 1994, Sallie Mae entered into an eight -year agreement with Chase under which Sallie Mae will continue to provide its ExportSS-type loan origination and servicing support it has delivered to the bank since 1991 as well as marketing and financing for its student loan activities. The quality of ,Sallie Mae's service to student loan borrowers, lenders, and educational institu- tions is a key factor in its ability both to attract and hold market share for student loans and to minimize claims costs on defaulted loans. During 1994, Sallie Mae continued to enhance the quality of these services while realizing additional servicing expense efficiencies as servicing costs decreased to .72 percent of average student loans compared with .79 percent in 1993 and .75 percent in 1992. Sallie Mae's operating expenses increased from $109 million in 1993 to $130 million in 1994, principally reflecting both growth and increased competition in the student loan business. Operating expenses were also up due to new business development. Investments grew $2.4 billion during 1994 in part due to the adoption of FAS 115 which increased by $461 million the carrying value of certain investments, which are now carried at market value. The L $300 million after-tax impact of the increase was recorded as a separate component of stockholders' equity, giving the corporation more flexibility to manage its equity capital, includingthe repurchase o common stock, which totaled 10.5 million shares ;ix 19$4, P hase of During 1994, Sallie Mae issued $16.3 billion of long-term notes to refund maturing well as all $4.8 billion of its remaining obligations to the Federal Financing Bank, which were prep as and replaced with longer term obligations to take bill paid e advantage of low funding spreads to Treasury rates. Selected Financial Data Condensed Statements of Income Increase (decrease) Years ended December 31, 1994 vs. 1993 1993 vs. 1992 Net interest income 1994 1993 1992 $ % $ % 709 Operating expenses ... , $130 $ 936 $ 8001 $(227) (24)% $ 31 3 17% , Federal income taxes ' • ' ' ' ' ' ' ' ' ' ' 109 21 19 8 8 • • • • • • • • • . Income before premiums on debt 167 260 215 (93) (36) 45 21 extinguished . Premiums on debt extinguished, net of tax .. 412 (9) 567 (137) 493 (155) (93 1? Net income (93) 128 93 4 (44) 48 ............ Preferred stock dividend 403 430 31 (27) (6) 36 9 . ............... Net income attributable to 11 11 11 1 common stock ... Earnings per common share $ 392 $ 419 $ 383 $ (27) (6)% $ 36 9 % .............. Dividends per common share $ 4.91 $4.83 $4.21 $ .08 2 % $ .62 15 % ............ $1.42 $1.25 $1.05 $ .17 14% $.20 19% Cpre earnings ............ ............ $ 338 $ 385 $ 394 $ (47) (12)% $ (9) (2)% Core earnings per common share .......... 4 $.11 $4.31 $4.21 $ (.20) (5)% $ .10 2 % Condensed Balance Sheets Increase (decrease) December 31, 1994 vs. 1993 1993 vs. 1992 Assets 1994 1993 $ % $ % Student loans, net Warehousing advances $30,371 26 $ '804 $3,567 13% $ 2,631 11% . . ' ' Academic facilities financings ' ' ' . 7,032 7,034 (2) - (1,051) (13) . . Cash and investments ........ ' ' ' ' ' ' • • • 1,548 1,359 189 14 170 14 Other assets ........................ ' ' • • • • • • • ............... Total assets 12,697 1,313 10,270 2,427 24 (1,797) 1,042 271 26 (15) (65) .......................... Liabilities and Stockholders' Equity $52,961 4 _ $ 6,509 $6,452 14% $ (6) (112) (1)% Short-term borrowings = . Long-term notes .... .. ' ' ' ' ' ' ' ' ' ' . $16,016 13 $ ,619 2,397 $ $3,394 (97) (1)% . Other liabilities ......... ' ' ' • • • • 34,319 30,925 111 201 1 ...... Total liabilities' ' • • • • • ...................... 1,155 685 470 69 (276) (29) Stockholders' equity before treasurystock 51,490 45 22 9 _ 6,261 14 (172) (1) Common stock held in treasury at cost :: 3,406 2,826 580 20 317 13 .... Total stockholders' equity 1,935 1,546 389 25 _ 257 20 ......... Total liabilities and stockholders' 11471 1,280 191 15 60 5 a uit q Y • • • .. $52,961 $46,509 $6,452 14% $ (112) (1)% 7 Results of Operations In 1994, Sallie Mae's net income was $403 million (including $65 million in net floor revenues), a decrease of $27 million (6%) from the $430 million (including $45 million in net floor revenues) earned in 1993. Earnings per common share in 1994 totalled $4.91 (including $.80 from net floor revenues), an increase of $.08 (2%) over the $4.83 (including $.52 from net floor revenues) earned in 1993. Sallie Mae's core earnings were $338 million ($4.11 per common share) in 1994, down 12 percent from $385 million ($4.31 per common share) in 1993. The decline in core earnings was due principally to decreased spreads on student loans and investments, and increased operating expenses, somewhat offset by a higher percentage of student loans relative to average earning assets, servicing cost efficiencies, and the increase in average earning assets. OBRA imposed legislative fees on Sallie Mae and other participants in the Federal Family Educa- tion Loan Program. The direct impact of these fees, which included an offset fee applicableonly to Sallie Mae, as well as consolidation loan rebate and origination fees, reduced net income by $17 million in 1994 ($.21 per common share). Sallie Mae management estimates that over time the effect of OBRA will reduce the spreads earned on Sallie Mae's portfolio of student loans by about one-third and will occur fairly evenly over a five year period which began in late 1993. Another cost which resulted in decreased spreads on student loans included loan acquisition costs which include amortization of premiums, costs related to the corporation's ExportSS loan origination and administration service, and foregone interest related to borrower incentives. The following table analyzes the earnings spreads on student loans for the years ended Decem- ber 31, 19947 1993, and 1992. Adjusted student loan yields reflect contractual yields adjusted for acquisition costs (premiums paid to purchase loan portfolios, costs associated with Sallie Mae's .ExportSS service, and the estimated costs of borrower benefits) and deferred income. Student Loan Spread Analysis Years ended December 31, 1994 1993 1992 Adjusted student loan yields ................................. 7.06% 6.06% 6.57% Floor income ............................................ .44 1.26 .98 Direct OBRA fees ........................................ (.09) (.01) — Servicing costs .......................................... (.72) (.79) (.75) Student loan income, net ................................... 6.69 6.52 6.80 Cost of funds ........................................... (4.69) (3.47) (4.01) Student loan spread ...................................... 2.00% 3.05% 2.79% Core student loan spread ................................... 1.56% 1.79% 1.81% FFELP loans held by Sallie Mae qualify for the federal government's special allowance payment ("SAP"). The SAP increases the yield on loans to a variable 91-day Treasury bill based rate plus 3.10%, 3.25% or 3.50%, depending on when the loan was originated, if that yield is greater than the borrower's fixed interest rate. In low interest rate environments this situation results in wider spreads, since on about two-thirds of the older loans Sallie Mae owns, the borrower's fixed interest rate becomes, in effect, a floor rate, while Sallie Mae's cost of funds, which the corporation has matched to the Treasury bill rate, reflects the lower market rates. For most affected loans, the floor becomes a factor when the T-bill is less than 4.75%. As of December 31, 1994, the most recent auction of the bond -equivalent 91-day T-bill was 5.72%. (The average bond equivalent 91-day T-bill rate was 4.38% in 1994 versus 3.08% in 1993 and 3.54% in 1992.) Loans disbursed after October 1992 have variable borrower interest rates and thus do not have floor rates. During 1994 and 1993, Sallie Mae recognized $99 million and $69 million, pre-tax, respectively, of net student loan floor revenues, with the remaining $27 million and $251 million, respectively, used to support long-term performance goals, including the refinancing of certain long-term liabilities at prevailing lower interest rates and adding to reserves. There were no floor revenues recognized in 1992. The pre-tax cost associated with refinancing and defeasing liabilities totalled $14 million in 1994 as compared to $211 million in 1993 and $141 million in 1992 (such amounts are disclosed separately, net of tax, in the consolidated statements of income). In the following tables, taxable equivalent net interest income and net interest margins are adjusted to include premiums on debt extinguished. The taxable equivalent adjustment reflects the impact of certain tax-exempt and tax -advantaged investments. Net Interest Income Interest income Student loans, net Warehousing advances . . . . . . Academic facilities financings . . Investments ' ' ' Taxable equivalent adjustment' ..... Total taxable equivalent interest income ... . Interest expense . . . Premiums on debt extinguished ...... Taxable equivalent net interest income. Increase (decrease) Years ended December 31, 1994 vs. 1993 1993 vs. 1992 1994 1993 1992 _ $ _ % $ 90 $1,903 346 $1,644 $1,560 $ 259 16% $ 84 5% 102 315 72 457 55 31 30 10 43 (142) (31) 500 55 387 53 543 113 29 17 (156) 30 (29) 56 2 2 (3) . (5) 2,906 2,143 2,471 1,481 21671 1,812 435 662 18 45 (200) (7) 14 211 141 (197) (93) (331) 70 (18) 50 $ 749 $ 779 $ 718 $ (30) W% $ 61 8% The decrease in taxable equivalent net interest income was due to declining core spreads on student loans, principally additional fees paid directly by Sallie Mae relating to OBRA and increased loan acquisition costs, and decreased investment portfolio spreads, offset by increased net student loan floor revenue, a higher percentage of student loans relative to average earning a sn of g srvicing cost efficiencies and the increase in average earning assets. The impactof the fets, dectly by Sallie Mae relating to OBRA reduced net interest income and net inte ees paid $26 million and .04%, respectively, in 1994. rest margin by The following table reflects the rates earned on earning assets and paid on liabilities for the ears ended December 31, 1994, 1993, and 1992. y Average Balance Sheets Average Assets Student loans, net Warehousing advances . . . . . . . Academic facilities financings . Investments ' Total interest earning assets .......... Non -interest earning assets ........... Total assets ..................... . Average Liabilities and Stockholders' Equity Six month floating rate notes ....... . Other short-term borrowings ....... . Long-term notes ................ . Total interest bearing liabilities ........ Non -interest bearing liabilities Stockholders' equity ........... . Total liabilities and stockholders' equity . Net interest margin ................ Years ended December 31 1994 1993 1992 Balance Rate Balance -_.- Rate Balance Rate $28,456 6,981 6.69% 4.99 $25,222 6.52% $22,941 6.80% 1,488 8.67 7,669 1,258 4.16 7.43 9,266 1,057 4.98 6.98 11,283 4.65 10,359 4.00 11,586 4.97 48,208 6.03010 44,508 5.55% 44,850 5.95% 11240 1,183 1,224 $49,448 $45,691 $46,074 $ 3,410 132166 4.52% 4.43 $ 3,098 10,174 3.25% 3.42 $ 3,343 3.78% 30,397 4.67 30,374 4.09 8,708 31,953 4.36 4.53 46,973 4.% 59 43,646 3.88% 44,004 4.44% 912 1,563 790 1,255 903 1,167 $492448 $45,691 $46,074 1.55% 1.75% 1.60% 0 The following table summarizes debt by index (including the effects of interest rate exchange agreements) for the years ended December 31, 1994, 1993, and 1992 (dollars in millions). Years ended December 31, 1994 1993 1992 Average Average Average Ir..dex Balance Rate Balance Average Average Average Rate Balance Rate T bill, principally 91-day ............. $29,821 4.68% $271054 11,888 4.03 14,211 3.49% $25,147 3.99% 2.89 14,963 3.53 LIBO.......................... Fixed 2,174 5.65 1,542 6.72 11911 7.93 ........................... Other ........................... 3,090 4.85 839 4.85 1,983 5.72 Total ........................... $46,973 4.59% $43,646 3.88% $44,004 4.44% In the above table, for the years ended December 31, 1994, 1993, and 1992, T bill spreads over the weighted average T bill rates were .29%, .41%, and .46%, respectively and LIBOR spreads under the weighted average LIBOR rates were .30%, .46%, and .45%, respectively. The rate/volume analysis below shows the relative contribution of changes in interest rates and asset volumes. Rate/Volume Analysis Increase Taxable (decrease) equivalent attributable to change in increase (decrease) Rate Volume 1994 vs. 1993 Taxable equivalent interest income ........................... $ 435 $ 239 $ 196 Interest expense and premiums on debt extinguished .............. 465 312 153 Taxable equivalent net interest income ........................ $ (30) $ (73) $ 43 ' 4993 vs. 1992 .. Taxable equivalent interest income ... ...... ............. $(200) $(180) $ (20) >;Xnterest expense and premiums on debt extinguished .............. (261) (245) 16 Taxable equivalent net interest income ........................ $ 61 $ 65 $ (4) The $73 million decrease attributable to change in rates in 1994 was due to declining core spreads on student loans, principally additional fees paid directly to Sallie Mae relating to OBRA and in- creased loan acquisition costs, and decreased investment portfolio spreads offset by increased recogni- tion of student loan floor revenue, servicing cost efficiencies and a higher percentage of student loans relative to average earning assets. Interest Rate Risk Management Sallie Mae's principal objective in financing its loan assets is to minimize its sensitivity to changing interest rates by matching the interest rate characteristics of borrowings to specific assets in order to lock in spreads. Sallie Mae funds its variable rate loan assets with variable rate debt and fixed rate debt converted to variable rates with interest rate exchange agreements. To achieve a more precise match of interest rate characteristics between loan assets and their related liabilities, Sallie Mae has effectively converted some of its variable rate debt to a different variable rate index with interest rate exchange agreements. At December 31, 1994, $11.0 billion of fixed rate debt and $12.1 billion of variable rate debt were matched with interest rate exchange agreements. Fixed rate debt at December 31, 1994 also funded fixed rate warehousing advances and academic facilities financings. Investments were funded on a "pooled" approach, i.e., the pool of liabilities that funds the investment portfolio has an average rate and maturity that corresponds to the average rate and maturity of the investments which they fund. In both its match funding activities for its loan assets and its pool funding activities for its investments, Sallie Mae enters into various financial instrument contracts in the normal course of business to reduce interest rate risk and foreign currency exposure on certain of its borrowings. These financial instrument contracts include interest rate exchange agreements, interest rate cap and collar agreements, foreign currency swaps, forward currency exchange agreements, options on currency exchange agreements, options on securities, and financial futures contracts. 10 An interest -rate gap is the difference between volumes of assets and volumes of liabilities matur- ing or repricing during specific future time intervals. The following gap analysis reflects rate -sensitive positions at December 31, 1994 and is not necessarily reflective of positions that existed throughout the year. Assets Student loans, net Warehousing advances ........... . Academic facilities financings ......... Cash and investments .............. Other assets ..................... . Total...................... Liabilities and Stockholders' Equity Short-term borrowings .............. Long-term notes ....... . Interest rate exchange agreements ..... Other liabilities ......... Stockholders' equity ................ Total ........................ Period gap ....... . ............... . Cumulative gap ................... Interest Rate Sensitivity Period 3 months or less 3 months to 6 months 6 months to 1 year 1 to 2 2 to 5 Over 5 years years years $26,518 $3,853 $ $ $ _ $ 6,895 220 4 44 29 18 84 147 9 152 11 967 10,678 5 48 25 173 1,768 — — 1,313 44,311 3,906 95 256 334 4,059 12,811 2,066 1,139 — — 23,451 1,390 — 908 6,310 2,260 8,002 759 (1,029) (861) (6,079) (792) — — — — 1,155 _ — — — — 1,471 44,264 4,215 110 47 231 4,094 $ 47 $ (309) $ a5) $ 209 $ 103 $ (35) $ 47 $ (262) $ (277) $ (68) $ 35 $ — -In low interest rate environments, floors on student loans originated prior to mid 1992 cause the m0gins on these loans to widen beyond the locked -in spreads (see student loan floor discussio "Results of Operations"). At the interest rates prevailing at December 31, 1994 . no a r n under ble floor revenue would be generated by the Sallie Mae student loan portfolio. Such loans continue to be classified in the three months or less category in the table above, reflecting the fact that as interest rates rise these assets will resume their weekly rate reset. The weighted average remaining terms to maturity of Sallie Mae's earning assets and borrowings at December 31, 1994 were 5.0 years and 2.5 years, respectively. The following table reflects the average terms to maturity for Sallie Mae's earning assets and liabilities at December 31 1994: Earning assets Student loans, net . Warehousing advances ....... . Academic facilities financings. . Cash and investments ....... Total earning assets ........ Average Terms to Maturity (in years) 6.0 Borrowings 1.5 Short-term borrowings ...... 0.5 8.5 Long-term borrowings ....... 3.5 4.0 Total borrowings 5.0 2_5 Servicing Costs Sallie Mae loan servicing centers (LSCs) serviced 75% of the student loan portfolio at Decem- ber 31, 1994 versus 71% and 68% at December 31, 1993 and 1992, respectively, while third party Y 11 servicers under contract to Sallie Mae serviced the remainder. At December 31, 1994, 1993, and 1992, the LSCs employed 3,828; 3,401; and 3,324 persons, respectively. The following table breaks down servicing costs between LSC operating expenses and third party servicing fees: Years ended December 31, 1994 1993 1992 Loan servicing center costs ................... $155 $148 $119 Third party servicer costs .................... 51 52 53 Total servicing costs ........................ $206 $200 $172 Increase (decrease) 1994 vs. 1993 1993 vs. 1992 $ 7 5% $29 25% (1) (2) (1) (3) $ 6 3% $28 16% The quality of Sallie Mae's service to student borrowers, lenders, and educational institutions is a key factor in its ability both to attract and hold market share for student loans and to minimize claims costs on defaulted student loans. During 1994, Sallie Mae continued to enhance the quality of these services while realizing additional servicing expense efficiencies (servicing costs decreased to .72 percent of average student loans compared with .79 percent in 1993 and .75 percent in 1992). Most importantly in this regard, Sallie Mae is currently developing an imaging workflow system at its LSC's which is expected to further enhance productivity and service quality. Installation began in late 1994 and is expected to be completed in phases through 1996. Sallie Mae, through its ExportSS loan origination and administration service, provides back - office support to clients related to loan origination and servicing prior to loan purchase. The costs associated.with this service decreased interest income on insured student loans on the consolidated statements of income by $54 million (19 basis points) in 1994, $36 million (14 basis points) in 1993, and $28 million (12 basis points) in 1992. Operating Expenses Operating expenses for the year ended December 31, 1994 increased $21 million (19%) over 1993. Approximately two-thirds of the increase was related to the student loan business, including the costs associated with the enhancement of loan origination systems and costs, principally salaries and employee benefits, of a recently acquired subsidiary which markets Chase Manhattan Bank's student loans. The remainder was related to new business development, including the costs related to develop- ment work of CyberMark, a subsidiary established in late 1993 to offer technological services to higher education institutions. At December 31, 1994) 1993, and 1992, Sallie Mae employed headquarters and support personnel totaling 1,169; 1,109; and 1,017 persons, respectively. In 1994 and 1993, certain employees and their expenses were reclassified from operating expenses to servicing costs. Salaries, employee benefits and other costs are reflected in the following table: Increase (decrease) Years ended December 31, 1994 vs. 1993 1993 vs. 1992 1994 1993 1992 $ % $ Salaries and employee benefits .............. $ 68 $ 62 $ 55 $ 6 9% $ 7 14% Occupancy and equipment ................. 21 19 17 2 14 2 10 Professional fees ......................... 18 10 10 8 84 — — Advertising and printing ................... 11 7 7 4 44 — — Other ................................. 12 11 12 1 12 (1) (8) Total operating expenses ................... $130 $109 $101 $21 19% $ 8 8% Operating expenses as a percentage of average earning assets have increased from .25 percent in 1993 to .27 percent in 1994. 12 Federal Income Taxes Sallie Mae maintains a portfolio of tax -advantaged assets principally to support education -related financing activities. That portfolio was primarily responsible for the decrease in the effective tax rate from the statutory rate of 35 percent to 29 percent and 30 percent in 1994 and 1993, respectively, and from 34 percent to 30 percent in 1992. Sallie Mae is exempt from all state, local, and District of Columbia taxes except for real property taxes. Preferred Stock Preferred stock dividends are cumulative and payable quarterly at 4.50 percentage points below the highest yield of certain long-term and short-term United States Treasury obligations. The divi- dend rate for any dividend period will not be less than 5 percent per annum nor greater than 14 percent per annum. For years ended December 31, 1994, 1993, and 1992, the preferred stock dividend rate was 5.00 percent and reduced net income attributable to common stock by $10.7 million. Statutory Capital Adequacy Ratio The Higher Education Amendments of 1992 effectively requires that Sallie Mae maintain a statutory capital adequacy ratio (the ratio of stockholders' equity to total assets plus 50% of certain off -balance sheet items) of at least 2% or be subject to certain "safety and soundness" regulations in the form of increased financial monitoring by the Secretary of the Treasury. At December 31, 1994) Sallie Mae's statutory capital adequacy ratio was 2.70%. Recently Issued Accounting Pronouncement The Financial Accounting Standards Board issued Statement No. 118 (FAS 118), which amended Statement No. 114 (FAS 114), Accounting by Creditors for Impairment of a Loan — Income Recogni- tion and Disclosure, during 1994 which applies to Sallie Mae. FAS 118 deals with the disclosure, measurement and recognition of allowances for credit losses on loans. The statement requires that the impairment of a loan be measured based on the present value of future cash flows. Implementation of FAS 114 and FAS 118, which is required in 1995, is not expected to have a material impact on Sallie Mae's financial statements. Direct Loan Program and 1993 FFELP Changes OBRA contains provisions which create a direct student loan program and makes changes in the current Federal Family Education Loan Program (FFELP). As of the date of this Information State- ment, legislation has been introduced in Congress to limit the size of the direct student loan program. The Clinton Administration's Budget for Fiscal Year 1996 proposes increasing the scope of the direct student loan program to 100% of all student loans in the 1997-1998 academic year. Sallie Mae cannot predict whether or not these proposals or other changes will be made to the direct student loan program. The direct student loan program is funded directly by the federal government and administered by the Department of Education. OBRA establishes goals for the phase -in of direct lending expressed as a percentage of the combined dollar amount of loans originated under the direct loan program and the FFELP with the following targets: Academic years Direct loans as a % of total 1994-1995 .................... 5% 1995-1996.................................... 40 1996-1998 ....... ............................ 0 .... 5 1998-1999 .............. .............0 Historically, Sallie Mae has purchased most- loans just prior to their conversion to repayment phase after borrowers graduate or otherwise leave school. Management cannot predict at this time if these historical trends will continue. 13 OBRA also contains changes to the FFELP which have affected or will affect Sallie Mae, including the following provisions: Effective date Description August 10, 1993 Annual fee of .30 percent of the outstanding principal amount of FFELP loans (except for consolidated loans and loans originated by Sallie Mae as a lender of last resort) purchased and held by Sallie Mae after the effective date. This fee is paid by Sallie Mae to the Department of Education. October 1, 1993 Annual fee of 1.05 percent of outstanding balance of consolidated loans originated after this date payable by holders of these loans to the Department of Education. Origination fee of .50 percent paid by lenders to the Department of Education for loans originated. Reduction to 98% of the maximum government guarantee on all loans originated after the effective date. July 1, 1994 Insurance premium which guarantors can charge reduced from 3 percent to 1 percent for loans made after the effective date. July 1, 1995 Decrease on new loans in interest rate paid to holders of Stafford loans from 3.10 percent to 2.50 percent above the 91-day Treasury bill rate during in - school, grace, and deferment periods. OBRA could also require Sallie Mae to act as a lender of last resort to make FFELP loans when other private lenders are not available. Such loans would receive a 100 percent guarantee and would not be subject to the .30 percent fee on loans held by Sallie Mae. If the Secretary of Education determines that Sallie Mae is not adequately implementing this provision, the annual fee paid by Sallie Mae could be increased from .30 percent to 1.00 percent. As discussed in "Overview," provisions of OBRA began to materially impact Sallie Mae's net interest income in the 1994 first quarter, as a result of fees imposed on FFELP participants. Further- more, the Federal Direct Student Loan Program (FDSLP) will adversely impact the size of Sallie Mae's market. As of December 31, 1994, 103 colleges and universities are participating in the FDSLP for the 1994-95 academic year, representing about 5 percent of projected loan volume for the year. Approximately 1,500 schools, representing about 40 percent of projected national volume, have been accepted for participation in the 1995-96 academic year. OBRA contemplates increasing direct lending to 60 percent (or more if additional schools request participation) of projected loan volume in the 1998-1999 academic year. The Department of Education has stated that in early 1995 it intends to offer existing FFELP borrowers the opportunity to refinance FFELP loans into FDSLP loans. The Department has not finalized the scope and terms of this program and therefore, it is not possible to predict what portion of Sallie Mae's current FFELP portfolio may be affected by the program. Legislated expansion of student eligibility as well as increases in student and parent loan limits have increased the volume of national loan originations. National student loan originations of $18 bil- lion in the 1993 federal fiscal year represented a 20 percent increase in lending activity over the prior year. FFELP originations rose nearly 30 percent to about $23 billion for the 1994 federal fiscal year. In the meantime, however, the competition for FFELP loans has intensified at both the retail and secondary market levels. Securitization of student loans, which has developed into a significant funding alternative for FFELP lenders, has had the effect of increasing secondary market competition for FFELP loans. Furthermore, OBRA's imposition of fees on participants in the FFELP could induce some participants to leave the program while further increasing market share competition. 14 Charter Restructuring Sallie Mae is pursuing a charter restructuring under which it would give up its status as a government -sponsored enterprise and become a state -chartered corporation, subject to shareholder approval. The Clinton Administration has voiced support for the rechartering of Sallie Mae and has stated its intention to introduce legislation in 1995 concerning the future of Sallie Mae. The Clinton Administration's Budget for Fiscal Year 1996'states that any such restructuring would preserve the GSE status of Sallie Mae's existing debt. At this time it is difficult to project if and when such a plan would be approved by Congress. In addition, Sallie Mae is pursuing the possibility of entering additional lines of business related to the higher education market. Subsequent Event In late December, the corporation signed an agreement, which is now final, to acquire HICA Holding, Inc. for an undisclosed, not material amount. HICA Holding insures privately -sponsored postsecondary education loans, operating out of offices in South Dakota and Minnesota with 23 em- ployees. Sallie Mae currently owns about 75 percent of the approximately $800 million loans HICA insures today, most of which have been made to student attending graduate and professional institu- tions. Most of these students also borrowed under the FFELP and Sallie Mae owns those loans as well. This acquisition will enhance Sallie Mae's ability to support privately -funded postsecondary educa- tion loan programs. 15 BUSINESS AND OPERATIONS Sallie Mae was chartered by an Act of Congress in 1972 as a for -profit, stockholder -owned corporation to provide a national secondary market for federally sponsored student loans and as a source of credit to participants in the post -secondary education lending sector. Sallie Mae also engages in other credit, service and investment operations related to postsecondary education finance, as more fully described below. The corporation's structure and the scope of its business activities are set forth in Section 439, Part B, Title IV of the Higher Education Act of 1965, as amended (the "Act"), which is codified at 20 U.S.C. 1087-2. The Act also created the current federal student loan program, the Federal Family Education Loan Program ("FFELP"). See Appendix A for a description of FFELP. These provisions of the Act, including Sallie Mae's charter, are subject to legislative change from time to time. The Omnibus Budget Reconciliation Act of 1993 ("OBRA"), enacted on August 10, 1993, made significant changes to the FFELP and created a program of direct lending by the federal government to students. The direct lending program will replace 5% of the FFELP in the 1994-1995 academic year, increasing to 60% in the 1998-1999 academic year. The effect of the changes to the FFELP and the implementation of the direct loan program will have a material adverse effect on Sallie Mae's long- term earning prospects. (See "Management's Discussion and Analysis of Operating Results and Financial Condition — Direct Loan Program" and "Competition" in this section.) Products and Services As described below, Sallie Mae is principally engaged in the purchase of student loans insured under federally sponsored programs ("insured loans") and the making of secured loans ("warehous- ing advances") to providers of education credit. Loan Purchases. Sallie Mae's purchases of student loans primarily involve two federally spon- sored programs. Sallie Mae purchases Stafford loans, SLS loans and PLUS loans originated under the FFELP, all of which are insured by state -related or non-profit guarantee agencies ("guarantors") and reinsured by the United States Department of Education. The FFELP is more fully described under "The Federal Family Education Loan Program." It also purchases loans originated under the Health Education Assistance Loan Program ("HEAL"), which are insured directly by the United States Department of Health and Human Services. HEAL loans are made to health professions graduate students under the Public Health Services Act. Sallie Mae purchases insured student loans from commercial banks, savings and loan associa- tions, mutual savings banks, credit unions, certain pension funds and insurance companies, educa- tional institutions, and state and private nonprofit lending and secondary market agencies. Sallie Mae offers borrowers of loans which it owns, a variety of repayment options, including graduated repayment, income -sensitive repayment, and interest rate reductions for those borrowers who make timely repayments for a specified period of time or who make payment through direct debit. In addition, Sallie Mae offers electronic funds transfer of loan proceeds and electronic loan applica- tions to schools. Traditionally, Sallie Mae has purchased most loans just prior to their conversion to. repayment phase after borrowers graduate or otherwise leave school. However, the corporation also buys "in - school" loans and those in repayment. Sallie Mae or one of its servicing agents generally assumes responsibility for the servicing of loans after purchase. In addition to buying loans on an immediate basis, Sallie Mae enters into commitment contracts to purchase loans over a specified period of time. Most lenders using the secondary market hold loans while borrowers are in school and sell loans shortly before their conversion to repayment status, when servicing costs increase significantly. Sallie Mae offers these lenders commitment contracts, under 16 which lenders have the right or, in some cases, the obligation to sell to Sallie Mae a specified principal amount of loans, at a price based on certain loan characteristics, over a specified term, usually two to three years. These commitment contracts generally entail no fee to the lender. In conjunction with commitment contracts, Sallie Mae frequently provides the selling institution with operational support in the form of an automated loan administration system (PortSS) for the lender to use prior to loan sale or in the form of loan. origination and interim servicing provided through one of Sallie Mae's loan servicing centers (ExportSS). Both PortSS and ExportSS provide Sallie Mae and the lender with the assurance that the loans will be efficiently administered by Sallie Mae and that their borrowers will have access to Sallie Mae's repayment options and benefits. During 1993, most of Sallie Mae's new loan purchases were effected pursuant to purchase commitments, and more than half of that volume came from users of PortSS and ExportSS. Sallie Mae has also recently begun to provide loan processing services to postsecondary ary education institutions, which often play an active role in directing their borrowing students to specific lenders based on the service they provide. In 1994, the corporation introduced an electronic application processing system, LineSS, which automates schools' completion of the eligibility portion of the application and directing the application to the schools' chosen lender via the national information highway. Sallie Mae believes the structure of the FFELP and HEAL programs, as well as Sallie Mae's purchase criteria and servicing procedures, minimize the risk of loss on its insured student loan assets. There are several direct sources of payment for a loan: (i) the borrower and, in some cases, the co-signer; (ii) the state or non-profit guarantor which has insured or guaranteed the loan in the case of FFELP loans and the federal government in the case of HEAL loans; and (iii) the selling institution, and, in the event Sallie Mae contracts with a third -party servicer, the servicing agent, to both of which Sallie Mae has recourse under contractual arrangements in the event that, due to the fault of the seller or servicer, all or any part of the insurance or guarantee proves to be invalid. An additional indirect source of payment for a FFELP loan is the federal government, under reinsurance agree- ments with the guarantor, which provide for 80 to 100 percent coverage depending on the claims experience of the guarantor. The Budget Act reduced those percentages to 78% and 98% for loans originated on or after October 1, 1993. In addition, the Higher Education Amendments of 1992 provide that claims which a guarantor is financially unable to pay will be paid by the U.S. Secretary of Education or transferred to a financially sound guarantor. Sallie Mae also offers eligible borrowers a program for the consolidation of eligible insured loans into a single new insured loan with terms of 10 to 30 years. The Act provides that loan consolidation may be offered to borrowers who have at least one loan already owned by a holder or to borrowers whose holders do not offer the service. Sallie Mae purchases loans from various privately insured education loan programs. As of Decem- ber 31, 1994, Sallie Mae owned $769.8 million of such loans. Servicing. Prior to the purchase of loans from a lender, Sallie Mae, through its own Loan Servicing Centers ("LSCs") or its servicing agents, examines loan documents for compliance with federal and state guarantor requirements. Once acquired, loans are serviced through Sallie Mae's LSCs or through third -party servicers under contractual agreements with Sallie Mae. At Decem- ber 31, 1994, Sallie Mae's LSCs serviced approximately 75 percent of student loans owned. Sallie Mae also employed third -party servicers to service approximately 23 percent of its student loans. The remaining 2 percent were serviced by 7 lenders who, for a fee, retained the servicing of loans sold to Sallie Mae. The United States Department of Education and the various guarantee agencies prescribe rules and regulations which govern the servicing of federally insured student loans. These rules and regulations include specific procedures for contacting delinquent borrowers, locating borrowers who can no longer be contacted at their documented address or telephone number, and filing claims for reimbursement on loans in default. Payments under the loan's guarantee require strict adherence to these stated due diligence and collection procedures. 17 Regulations require that collection efforts commence within ten days of any delinquency and continue for the period of delinquency until the loan is deemed to be in default status. During the delinquency period, the holder of the loan must diligently attempt to contact the borrower, in writing and by telephone, at specified intervals. A loan under the FFELP generally is not considered to be in default until it is 180 days delinquent. A guarantee agency may reject any claim for payment under a loan guarantee if the specified due diligence and collection procedures have not been strictly followed and documented or if the claim is not timely filed. Minor errors in due diligence may result in the imposition of interest penalties, rather than a complete loss of the guarantee. In instances in which a guarantee is denied due to servicing or claim -filing errors, the guarantee may be reinstated by following specified procedures ("curing the defect"). Interest penalties are commonly incurred on loans that are cured. Sallie Mae generally is successful in curing more than 90 percent of all rejected claims within two years, either internally or by hiring collection agencies. Sallie Mae's internal procedures support compliance with Department of Education and guaran- tee agency regulations and reporting requirements and provide high quality service to borrowers. Sallie Mae has developed a computerized loan servicing system, CLASS, which monitors all student loans serviced by Sallie Mae's LSCs. The CLASS system identifies loans which require due diligence or other servicing procedures and disseminates the necessary loan information to initiate the servicing or collection process. The CLASS system enables Sallie Mae to service a high volume of loans efficiently and in a manner consistent with complex industry requirements. In addition, Sallie Mae is applying imaging technology at its servicing centers in order to increase servicing productivity and capacity. Sallie Mae also requires its third -party servicers to maintain operating procedures which comply with applicable state and federal regulations and reporting requirements and periodically reviews certain operations for such compliance. Warehousing Advances. Warehousing advances are secured loans made by Sallie Mae to finan- cial and educational institutions to fund FFELP and HEAL loans and other forms of education -related credit. These loans are at least 100 percent collateralized by existing insured student loan portfolios or certain types of marketable obligations issued or guaranteed by the United States or an instrumental- ity thereof or by other acceptable collateral such as residential first mortgages and mortgage -backed securities. Sallie Mae also makes secured loans to public sector and certain non-profit organizations at negotiated collateralization levels. Prior to making an advance, Sallie Mae performs a credit analysis of the borrowing institution to determine the amount and maximum term of the loan and the type and amount of collateral. The interest rate on the advance is a function of both credit and term. Generally, advances are made at floating interest rates with specified spreads to short-term interest rate indices. Fixed rate loans are also available. Terms of up to 15 years are offered. Borrowing institutions which use insured loans as collateral for FFELP-based warehousing advances must either invest the advance proceeds in additional education loans or maintain the size of their education loan portfolios throughout the term of the advance, while borrowers using govern- ment or agency securities as collateral for such advances generally must invest proceeds in additional education -related loans. Similar education funding requirements generally apply to borrowers receiv- ing warehousing advances to fund other forms of education -related credit. Public sector and certain nonprofit direct lenders and secondary market agencies may obtain loans to finance their student loan operations. In addition, some universities have obtained loans to fund their own institutional loan plans for students and parents. An advance may take the form of a line of credit, in which case the borrowing institution may draw down and repay the advance, without limitation; as long as the total amount borrowed at any one time does not exceed the amount of the credit line. Sallie Mae assesses a quarterly fee on the unused amount of the line of credit. 18 In addition to providing advances on an iznzaedi4to basis, Sallie Mae enters into commitment contracts to provide advances over a specified period of time in the future. Under these commitment contracts, qualified borrowers have the option to borrow from Sallie Mae over a specified term, usually three to five years. Collateral is not required from the borrower until funds are actually advanced under the commitment contract. Academic Facilities Financings. Sallie Mae also offers financing to educational institutions for their physical plant and equipment. Certain of these financing are secured either by a mortgage on the underlying facility or by other collateral. Since 1987, Sallie Mae has provided facilities financing and commitments for future facilities financing to approximately 226 institutions totalling approximately $2.8 billion. Additional Products And Services. In addition to the products and services described above, Sallie Mae offers letters of credit to guarantee issues of certain state and nonprofit agency student loan revenue bonds. Currently outstanding letters of credit have original terms of up to 17 years. Sallie Mae also invests in student loan revenue and academic facilities obligations. Sallie Mae is also authorized under its charter to offer participations or pooled interests in loans, to assist in financing insured student loans where there is a shortage of capital, either as a direct lender, if required by the Secretary of Education, or as a source of funds to eligible state antee agencies or direct lenders; to underwrite student loan revenue obligations and academic fa it ies obligations; and to serve as a guarantee agency under the FFELP if requested by the Secretary of Education. Finally, Sallie Mae has authority to engage in certain other activities as its Board of Directors determines to be in furtherance of student loan programs insured under the Act or other- wise in support of the credit needs of students. At the end of 1993, Sallie Mae established a wholly -owned subsidiary, CyberMark, Inc. to develop, in partnership with others, new delivery systems for financial, telecommunications and media ser- vices to schools and students. Competition Sallie Mae is the major financial intermediary for education credit, but it is subject to competition in varying degrees from several large commercial banks as well as some local banks in certain markets and agencies or designated nonprofit institutions established in many states to provide secondary markets for student loans, many of which provide products and services similar to those offered by Sallie Mae. In addition, the securitization of student loan assets presents additional competition for student loan purchases. Based on the most recent information from the U.S. Department of Educa- tion, Sallie Mae's share (in dollars) of outstanding FFELP loans in 1993 was 34%; banks held 47% of the outstanding loans and state secondary market participants held 19% in 1992. The Omnibus Budget Reconciliation Act of 1993 creates a direct student loan program beginning in the 1994-95 academic year, funded directly by the U.S. Treasury and administered by the Depart- ment of Education. The Federal Direct Student Loan Program (FDSLP) will replace 5 percent of the FFELP lending in the 1994-1995 academic year, increasing to 60% (or more, if additional schools request participation) in the 1998-1999 academic year. See, "Management's Discussion and Analysis of Operating Results and Financial Condition — Direct Loan Program and 1993 FFELP Changes." Loans made under the direct loan program will not be available for purchase by Sallie Mae. In addition, students participating in the direct loan program will be able to consolidate their FFELP loans into a single direct loan. Sallie Mae may face competition for its existing FFELP portfolio in 1995 from the FDSLP. The Department of Education plans to offer FFELP borrowers the opportunity to refinance FFELP loans into FDSLP loans. The plan is to be finalized by early 1995. Existing law requires borrowers con- verting from the FFELP into a FDSLP consolidation loan to certify that the holder of their FFELP loans does not offer a satisfactory income -sensitive payment plan. It is impossible to predict what portion of Sallie Mae's current portfolio of student loans owned might be vulnerable to refinancing 19 into FDSLP consolidation loans until this program is fully developed and the scope of its offering is known. Sallie Mae offers its borrowers a broad array of repayment options, including graduated repayment, loan consolidation and interest rate rebates for timely payment, and began in early 1995 to offer an income -sensitive plan as an additional option. Depending on the effect of these and other changes to the FFELP made by the OBRA on lender and school behavior, there could be a material adverse effect on Sallie Mae's student loan business. In addition, OBRA requires Sallie Mae, but not other holders of FFELP loans, including secondary market participants with whom Sallie Mae competes, to pay a .30% fee on the outstanding principal amount of FFELP loans purchased and held by Sallie Mae after August 10, 1993. Financing Sallie Mae obtains funds for its operations primarily from the sale of its debt securities in the domestic and overseas capital markets, through public offerings and private placements of U.S. dollar and foreign currency denominated debt of varying maturities and interest rate characteristics. Sallie Mae debt securities are rated Aaa by Moody's Investor Services. Sallie Mae has also issued adjustable rate cumulative preferred stock, common stock, subordinated debentures convertible to common stock, and common stock warrants and puts to diversify its funding sources. Sallie Mae uses interest rate and currency exchange agreements (collateralized where appropriate), purchases of U.S. Trea- sury securities and other fixed-rate assets, and other hedging techniques to reduce the exposure to interest rate and currency fluctuations arising out of its financing activities. Prior to 1982, Sallie Mae borrowed a total of $5 billion from the Federal Financing Bank ("FFB"). During the first quarter of 1994, Sallie Mae prepaid all of the outstanding FFB debt. The Secretary of the Treasury is authorized at his discretion to purchase up to $1 billion in Sallie Mae obligations. To date, no borrowings have been made under this arrangement. Sallie Mae also has authority, which it has never used, to sell obligations to the FFB on the security of federally insured student loans. For further information about Sallie Mae's financing activities, see "Management's Discussion and Analysis of Operating Results and Financial Condition." Regulation and Reporting Requirements The federal government has oversight responsibilities with respect to certain aspects of Sallie Mae's activities. Sallie Mae's charter is subject to review and change by Congress. In addition, Sallie. Mae enjoys certain exemptions from federal and state laws, which are subject to change by Congress. With respect to such oversight and exemptions, the Act provides, among other things, for the following: 1. One-third of Sallie Mae's 21-member Board of Directors is appointed by the President of the United States. The other 14 members are elected by the holders of Sallie Mae's common stock. The Chairman of the Board is designated by the President of the United States from among the 21 members. 2. Debt obligations issued by Sallie Mae are exempt from state taxation to the same extent as United States government obligations. Sallie Mae is exempt from all taxation by any state or by any county, municipality, or local taxing authority except with respect to real property taxes. Sallie Mae is not exempt from the payment of federal corporate income taxes. 3. All stock and other securities of Sallie Mae are deemed to be exempt securities under the laws administered by the Securities and Exchange Commission to the same extent as obligations of the United States. 4. Sallie Mae may conduct its business without regard to any qualification or similar statute in any state of the United States, including the District of Columbia, the Commonwealth of Puerto Rico, and the territories and possessions of the United States. 20 5. The issuance of Sallie Mae's debt obligations must be approved by the Secretary of the Treasury. 6. Sallie Mae is required to have its financial statements examined annually by indepen- dent certified public accountants and to submit Fa-,xpport of the audit to the Secretary of the Treasury. The Treasury Department is also authorized to conduct audits of Sallie Mae and to otherwise monitor Sallie Mae's financial condition. Sallie Mae is also required to submit annual reports of its operations and activities to the President of the United States and the Congress. 7. Sallie Mae is subject to certain "safety and soundness" regulations including the re- quirement that Sallie Mae maintain a 2% capital adequacy ratio. For a discussion of the ratio see "Management's Discussion and Analysis of Operating Results and Financial Condition." Like other participants in the insured student loan programs, Sallie Mae is subject, from time to time, to review of its student lending operations by the General Accounting Office and the Depart- ment of Education and certain guarantee agencies. 21 MANAGEMENT Directors The Act provides that the Board of Directors of Sallie Mae shall consist of twenty-one persons and that the Board shall determine the general policies governing the operations of Sallie Mae. Under the Act, the holders of common stock elect fourteen of the Directors of which seven are affiliated with financial institutions and seven are affiliated with educational institutions and the remaining seven Directors are appointed by the President of the United States. The President of the United States designates the Chairman of the Board. Holders of Common Stock have one vote per share and are permitted to cumulate votes for the election of Directors. The names and ages of the present Directors and their principal occupations are as follows: Name Age Principal Occupation Representing the General Public Mitchell W. Berger, Esq .......... 38 Kris E. Durmer, Esq ............ 45 Diane S. Gilleland .............. 48 Regina T. Montoya, Esq .......... 41 James E. Moore ................ 48 Irene Natividad ................ 46 Ronald J. Thayer ............... 55 Directors Affiliated with Financial Institutions David A. Daberko .............. 49 David B. Harper ............... 61 Thomas H. Jacobsen ....... _ .... 55 President and founder of Berger & Davis, P.A., a law firm located in Fort Lauderdale, Florida Attorney, Kris E. Durmer Law Office, Nashua, New Hampshire Director, Arkansas Department of Higher Education. Vice President for Special Projects and Special Advisor to the Chairman of the Board of Westcott Communications, Inc., located in Dallas, Texas. In addition, Ms. Montoya is President of Jayhawk Corporation, also located in Dallas. She is also currently a contributing editor to "Prime Time Texas," a weekly television news magazine. President and CEO, ContiFinancial Services Corporation; and Chairman and CEO, ContiMortgage Corporation. Mr. Moore also serves as Senior Vice President, Financial Services Division, Continental Grain Company. Principal, Natividad & Associates, a public affairs firm located in Washington, D.C., and Executive Director of the Philippine American Foundation Department Executive, Wayne County Office of Jobs and Economic Development, Detroit, Michigan President, Chief Operating Officer, and a director of National City Corporation, and Chairman, National City Bank, both located in Cleveland, Ohio President, David B. Harper Management, Inc., and President and Chief Executive Officer, New Age Bancorporation, Inc., St. Louis, Missouri Chairman, President and Chief Executive Officer, Mercantile Bancorporation, Inc., and Mercantile Bank of St. Louis, N.A., St. Louis, Missouri Name Age James E. Rohr ................. 46 John F. Ruffle ................. 57 John W. Spiegel ................ 53 David J. Vitale ................. 48 Principal Occupation President and a director of PNC Bank Corp., and President and Chief Executive Officer, PNC Bank, N.A., both located in Pittsburgh, Pennsylvania Consultant, J. P. Morgan & Co., Inc., New York, New York Executive Vice President and Chief Financial Officer, SunTrust Banks, Inc., and Treasurer, Trust Company of Georgia, both located in Atlanta, Georgia Vice Chairman and Senior Risk Management Officer, The First National Bank of Chicago, and First Chicago Corporation, Chicago, Illinois Directors Affiliated with Educational Institutions William Arceneaux (Chairman of the Board) ......... 53 President Louisiana As ' t' f Raymond F Bacchetti ........... 60 Frederick M. Bohen ............. 57 Dolores E. Cross ............... 57 William I. Ihlanfeldt ............. 58 Thomas O'Brien ............... 55 Kenneth A. Shaw ............... 55 soda ion o Independent Colleges and Universities, Baton Rouge, Louisiana Education Program Officer, William & Flora Hewlett Foundation, Menlo Park, California Executive Vice President and Chief Operating Officer, The Rockefeller University, New York, New York President, Chicago State University, Chicago, Illinois Vice President for Institutional Relations, Northwestern University, Evanston, Illinois and Chairman, Northwestern University, Evanston Research Park Dean, School of Management, University of Massachusetts, Amherst, Massachusetts Chancellor and President of Syracuse University, Syracuse, New York 23 Officers and Employees At December 31, 1994, Sallie Mae had 4,997 employees, including 3,828 employees at Sallie Mae's Loan Servicing Centers. The executive officers of Sallie Mae, their ages, their years of employment with Sallie Mae and principal occupations for the past five years are as follows: Year Commenced Name & Title Age Employment Lawrence A. Hough President and Chief Executive Officer ......................... 50 1973 Robert D. Friedhoff Executive Vice President, Servicing ........................... 40 1979 Timothy G. Greene Executive Vice President and General Counsel .................. 55 1990 Dennis A. Kernahan Executive Vice President, Sallie Mae Chairman and Chief Executive Officer, CyberMark, Inc ............ 47 1973 Lydia M. Marshall Executive Vice President, Marketing .......................... 45 1985 Edith W. Martin Executive Vice President, Systems and Chief Technology Officer ..... 49 1994 Denise B. McGlone Executive Vice President and Chief Financial Officer .............. 42 1994 Gerald Cohen Senior Vice President, Personnel and Administration .............. 59 1982 William L. Wingate, Jr. Senior Vice President, Credit ............................... 57 1989 Mr. Hough was employed by Sallie Mae in October 1973. Prior to his current appointment in July 1990, he served as Executive Vice President, Marketing, Servicing and Systems (1984-1990). Mr. Friedhoff was employed by Sallie Mae in February 1979. Prior to his current appointment in November 1993, he served as Senior Vice President, Servicing (1991-1993) and Senior Vice President and Controller (1987-1991). Mr. Greene was employed by Sallie Mae in July 1990. Prior to his employment with Sallie Mae, Mr. Greene was a partner in the law firm of Eggers and Greene (1979-1990). Mr. Kernahan was employed by Sallie Mae in May 1973. Prior to his current appointment in January 1994, he served as Senior Vice President, Marketing and Institutional Finance (1991-1993) and as Senior Vice President, Marketing (1984-1991). Ms. Marshall was employed by Sallie Mae in July 1985. Prior to her current appointment in November 1993, she served as Senior Vice President, Marketing (1991-1993) and Senior Vice Presi- dent, Institutional and Public Finance (1988-1991) and Senior Vice President, Strategic Planning and Development (1985-1988). Dr. Martin was employed by Sallie Mae in September 1994. Prior to her current appointment, Dr. Martin held the position of Vice President and Chief Information Officer at .INTELSAT in Washington, D.C. (1992-1994). From 1984 to 1992, Dr. Martin held the positions of Vice President, High Technology Center (1985-1992) and Vice President, Technology Assessment (1984-1985) at The Boeing Aerospace Company. 24 Ms. McGlone was employed by Sallie Mae in January 1994. Prior to her current appointment, Ms. McGlone was Executive Vice President and Global Head of Derivatives of DKB Financial Prod- ucts, Inc. in New York (1991-1993) and Co -Head of Global Swaps for Security Pacific National Bank (1985-1991). Mr. Cohen was employed by Sallie Mae in March 1982. He was appointed to his current position in September 1984. Mr. Wingate was employed by Sallie Mae in December 1989. Prior to his employment with Sallie Mae, he served as Chairman, Credit Policy, and Manager, Banking Support Division, for both the BancOklahoma Corporation and Bank of Oklahoma, N.A. (1983-1989). 25 CONSOLIDATED FINANCIAL STATEMENTS INDEX Report of Independent Auditors ....... Page Consolidated Statements of Income Consolidated Balance Sheets Consolidated Statements of Cash Flows ....................................... F4 Consolidated Statements of Changes in Stockholders' Equity ....................... .... F5 Notes to Consolidated Financial Statements . F-1 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders Student Loan Marketing Association We have audited the accompanying consolidated balance sheets of the Student Loan Marketing Association at December 31, 1994 and 1993, and the related consolidated statements of income (page 5), changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1994. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those stan- dards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reason- able basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Student Loan Marketing Association at December 31, 1994 and 1993, and the consolidated results of operations and cash flows for each of the three years in the period ended December 31, 1994, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, in 1994 the Student Loan Marketing Associa- tion changed its method of accounting for certain investments in debt and equity securities. F• Washington, D.C. January 12, 1995 F-2 Ernst & Young LLP STUDENT LOAN MARKETING ASSOCIATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share amounts) Assets Loans: Insured student loans purchased (note 2) ..... . Deferred income ..................................... . Insured student loans purchased, net ...... . Warehousing advances (note 3) ........ Academic facilities financings (note 4) ..................... . Totalloans ........... Cash and investments (note 5) ............................ . Other assets, principally accrued interest receivable ....... . Total assets .......................................... . Liabilities Short-term borrowings (notes 6 and 7) ..... . Long-term notes (notes. 6 and 7) ............ . Other liabilities, principally accrued interest payable ..... . otalliabilities........................................ Commitments (note 9) Stockholders' equity Preferred stock, par value $50.00 per share, 5,000,000 shares authorized and issued, 4,277,650 outstanding (note 10) .......... Common stock, par value $.20 per share, 250,000,000 shares authorized: 123,844,046 and 123,828,851 shares, respectively, issued (notes 11 and 12) ................. . Additional paid -in capital ............. ' .. .... . Unrealized gains on investments, net of tax (notes 5 and 13) Retained earnings ..................................... . Stockholders' equity before treasury stock Common stock held in treasury at cost: 50,320,823 and 39,778,032 shares, respectively (note 11) .................... . Total stockholders' equity ................................ Total liabilities and stockholders' equity ...................... December 31, 1994 1993 $30,570,696 (200,227) 30,370,469 71031,906 1,548,393 38, 950, 768 12,697,112 1,312,917 $52,960,797 $26,977,624 (173,405) 26,804,219 7,033,896 11358,741 351196,856 10,269,881 11041,936 $46,508,673 $16,015,594 $13,618,580 34,319,445 30,925,350 1,154,514 684,659 51,489,553 45,228,589 213,883 213,883 24,769 247766 524,511 523,935 299,558 — 2,342,900 2,063,772 3,405,621 2,826,356 1,934,377 1,546,272 1,471,244 11280,084 $52,960,797 $4615082673 See accompanying notes to consolidated financial statements. F-3 STUDENT LOAN MARKETING ASSOCIATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Cash inflows (outflows) from operating activities: Net income ............................ Non -cash items included in income: Decrease (increase) in accrued interest receivable ........................... Increase (decrease) in accrued interest payable Other, net ............................ Total non -cash items included in income ....... Net cash inflows from operating activities ....... Cash inflows (outflows) from investing activities: Insured student loans purchased ............ Reduction of insured student loans purchased: Installment payments ................... Claims and resales ..................... Warehousing advances made ................ Warehousing advance repayments ............ Academic facilities financings made .......... Academic facilities financing repayments ....... Investments purchased .................... 'Proceeds from sale or maturity of investments . . Net cash (outflows) from investing activities ..... Cash inflows (outflows) from financing activities: Short-term borrowings issued ............... Short-term borrowings repaid ............... Long-term notes issued ................... Long-term notes repaid ................... Common stock issued ..................... Stock repurchased ....................... Dividends paid .......................... Net cash inflows (outflows) from financing activities ............................... Net increase (decrease) in cash and cash equivalents ............................. Cash and cash equivalents at beginning of year ... Cash and cash equivalents at end of year (note 5) ... Years ended December 31, 1994 1993 1992 $ 402,768 $ 430,050 $ 393,927 (184,021) 92,838 35,212 114,310 (135,605) (17;836) 134,106 (147,956) (40)539) 641395 (190,723) (23,163) 467,163 239,327 370,764 (7,955,655) (6)674,976) (5,772,035) 3,220,233 2,847,440 2,604,372 1,142, 350 1,176,186 1,049,974 (3,377,494) (12812,508) (118061407) 3,379,484 2,863,071 3,116,976 (292)966) (340,437) (364)968) 103,314 170,909 139,353 (87,312,581) (91,129,828) (96,666,127) 86,495,100 92,066,249 921284,551 (4,598,215) (833,894) (5,414,311) 118, 724,135 (113,946,559) 16,317,375 (15,303,842) 579 (388,105) (123.640) . _ 279.943 54,773,988 (55,446,793) 12,037,592 (11,261,302) 5,595 (256,797) (118,866) (266.583) 58,401,135 (61,138,942) 11,258,962 (72219)774) 19,143 (236,879) (1051851) 977.794 11148,891 (8611150) (4)065,753) 1.112.621 1.973. 781 6.039.534 $ 2,261,522 $ 1,112,631 $ 1,973,781 See accompanying notes to consolidated financial statements. F-4 STUDENT LOAN MARKETING ASSOCIATION CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Dollars in thousands, except per share amounts) Preferred stock (note 10): Balance, beginning and end of year ................ Common stock (notes 11 and 12): Balance, beginning of year ...................... Issuance of common shares ...................... Balance, end of year ........................... Additional paid -in capital: Balance, beginning of year ...................... Proceeds in excess of par value from issuance of common stock .............................. . Balance, end of year ................ ...... . Unrealized gains on investments, net of tax (notes 5 and 13): Balance, beginning of year ................ . Unrealized gains as of January 1 ................ Change in unrealized gains .................... Balance, end of year .......................... . Rotained earnings: Balance, beginning of year ..................... . Net income ................................ Cash dividends: Common stock ($1.42, $1.25 and $1.05 per share, respectively) ............................. Preferred stock .......................... . Balance, end of year ........................... Treasury stock, at cost (note 11): Balance, beginning of year ..........:.... Repurchase of 10,542,791; 5,470,290 and 3,684,614 common shares, respectively ........... Balance, end of year ............................ Total stockholders' equity .......................... Years ended December 31, 1994 1993 1992 $ 213,883 $ 213,883 $ 213,883 24, 766 24,742 3 24 241769 24,766 523,935 518,364 576 5,571 5242511 523,935 24,673 69 24,742 499,290 19,074 518,964 304,851 (5,293) 299,558 2,063,772 1)752,588 1,464,512 402,768 430,050 393,927 (112,946) (108,172) (95,157) (10,694) (10,694) (10,694) 2,342,900 2,063,772 11752,588 1,546,272 1,289,475 1,052,596 388,105 256,797 236,879 11934,377 1,546,272 1,289,475 $1,471,244 $1,280,084 $1,220,102 See accompanying notes to consolidated financial statements F-5 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts) 1. Significant Accounting Policies The Student Loan Marketing Association (Sallie Mae) is a stockholder -owned corporation chartered by Congress to provide liquidity for originators of student loans made under federally sponsored student loan programs and otherwise to support the credit needs of students and educa- tional institutions. Loans Loans, consisting of insured student loans purchased (student loans),warehousing advances, and academic facilities financings are carried at their unpaid principal balances which, for student loans, are adjusted for unamortized premiums and unearned purchase discounts. Investments Investments are held to provide liquidity, to hedge certain financing activities and to serve as a source of short-term income. Prior to 1994, all investments are stated at cost adjusted for amortiza- tion of premiums and accretion of discounts. Gains and losses realized on securities held to hedge specific debt issuances or asset purchases are deferred and amortized over the term of the related debt or asset. Other realized gains and losses on securities transactions and unrealized gains and losses on off -balance sheet derivative financial instruments entered into for trading purposes are included in income from investments in the accompanying statements of income. 1. Effective January 1, 1994, Sallie Mae adopted FAS 115 which requires investments to be segre- gated into three categories, each with a different accounting treatment. Securities that are actively traded are accounted for at fair market value. Securities that are intended to be held to maturity are accounted for at amortized cost. Securities that fall outside of the two previous categories are consid- ered as available -for -sale. Such securities are carried at market value, with the after-tax unrealized gain or loss, along with after-tax gain or loss on instruments which hedge such securities, carried as a separate component of equity. The amortized cost of debt securities in this category is adjusted for amortization of premiums and accretion of discounts. Sallie Mae's investments are generally short term in nature with the majority held to maturity. Investments in certain treasury securities are classified in the available -for -sale category. Student loan income Income on student loans is recognized using a method which approximates a level yield to maturity. Generally, servicing costs are incurred in a fixed amount per borrower and thus increase in proportion to principal balances outstanding as loans are repaid. To achieve a level yield, interest income is deferred during the early years of the loans, then recognized during the later years to offset the aforementioned proportional servicing cost increases. Changes in the estimates of future loan servicing costs are reflected in student loan income over the estimated remaining terms of the loans. Interest expense Interest expense is based upon contractual interest rates adjusted for net payments under derivative financial instruments with off -balance sheet risks, which include interest rate and foreign currency exchange agreements and the amortization of debt issuance costs -and deferred gains and losses on hedge transactions which include financial futures contracts held to reduce interest rate risk. Federal income taxes Certain items of income and expense are recognized in different periods for financial reporting and income tax purposes. Deferred income taxes are provided in recognition of these temporary differences. F-6 STUDENT LOAN MARXETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) I. Significant Accounting Policies (Continued) Earnings per common share Earnings per common share are computed using the weighted average of common and common equivalent shares outstanding for the period. Common equivalent shares include shares issuable upon exercise of incentive stock options. Consolidation The consolidated financial statements include the accounts of Sallie Mae and its subsidiaries, after eliminating significant intercompany accounts and transactions. 2. Student Loans Sallie Mae purchases student loans from originating lenders, typically just before the student leaves school and is required to begin repayment of the loan. Sallie Mae's portfolio consists principally of loans originated under two federally sponsored programs — the Federal Family Education Loan Program (FFELP) and the Health Education Assistance Loan Program (HEAL). Sallie Mae also purchases privately insured loans from time to time. There are four principal categories of FFELP loans: Stafford loans, PLUS loans, SLS loans and consolidation loans. Generally, these loans have repayment periods of between five and ten years and obligate the borrower to pay interest at a stated fixed rate or on loans originated after July 23, 1992, a variable rate that has a cap. However, the yield to holders is subsidized on the borrowers' behalf by the federal government to provide a market rate of return. The formula through which the subsidy is determined is referred to as the special allowance formula. Special allowance is paid whenever the average of all of the 91-day Treasury bill auctions in a calendar quarter, plus a spread of between 3.10 and 3.50 percentage points (dependent upon when the loan was originated), exceeds the rate of interest which the borrower is obligated to pay. In low interest rate environments the rate which'the borrower is obligated to pay may exceed the rate determined by the special allowance formula. In those instances the fixed rate paid by the borrower (on pre -July 23, 1992 loans) becomes a floor on an otherwise variable rate asset. The estimated average remaining term of student loans in Sallie Mae's portfolio was approxi- mately 6 years at December 31, 1994. The following table reflects the distribution of Sallie Mae's loan portfolio by type of program. FFELP — Stafford $18,098,613 FFELP — PLUS/SLS .. 4,438,697 FFELP — Consolidation loans ........................... 4,698,391 HEAL.........................2,565,220 Privately insured ..................................... 769,775 $30,570,696 As of December 31,1994, substantially all of Sallie Mae's student loan portfolio was in repayment. Holders of FFELP loans are insured against the borrower's default, death, disability, or bank- ruptcy. Insurance on FFELP loans is provided by certain state or non-profit guarantee agencies, which are reinsured by the federal government. HEAL loans are directly insured by the federal_government. Both FFELP and HEAL loans are subject to regulatory requirements relating to servicing. In the event of default on a student loan or the borrower's death, disability, or bankruptcy, Sallie Mae files a F-7 - STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 2. Student Loans (Continued) claim with the insurer or guarantor of the loan, who, provided the loan has been properly originated and serviced, pays Sallie Mae the unpaid principal balance on the loan as well as unpaid accrued interest. Claims not immediately honored by the guarantor because of servicing or origination defects are returned for remedial servicing, during which period income is not recognized. On certain paid claims, guarantors assess a penalty for minor servicing defects. Total costs associated with claims on de- faulted student loans including such penalties, unrecognized income and provisions for losses on uncurable default claims reduced interest income on student loans by $17.0 million, $16.5 million, and $36.2 million for the years ended December 31, 1994, 1993, and 1992, respectively. 3. Warehousing Advances Warehousing advances are secured loans made, generally, to finance student loans and other education -related loans at certain financial and educational institutions and public sector agencies. Such advances are collateralized by student loans, obligations of the United States government or instrumentalities thereof, or by other collateral, such as residential first mortgages and mortgage - backed securities. As of December 31, 1994, approximately 79 percent were collateralized by student loans, 9 percent by U.S. government securities, 6 percent by residential first mortgages and 6 percent by other collateral. A summary of warehousing advances by industry concentration follows: Commercial banks Public sector agencies ............................... Thrift institutions ................................. Educational institutions ............................. December 31, 1994 1993 $42986,168 $5,118,616 11206,928 1,135,902 675,000 662,025 163,810 117,353 $72031,906 $7,033,896 - Warehousing advances have specific maturities and generally bear rates of interest which vary with the 91-day Treasury bill rate, or the London Interbank Offered Rate (LIBOR), or which are fixed for the term of the advance. A summary of warehousing advance interest rate characteristics follows: December 31, 1994 1993 Variable rate: LIBOR ........................................ $4,540,695 $4,257,782 Treasury bill .................................... 2,302,415 22019,767 Fixed rate ................ 188,796 756,347 $7,031,906 $7,033,896 The average remaining terms to maturity of warehousing advances was 1 year as of December 31, 1994, with maturities as follows: 1995 — $4,228,471; 1996 — $1,978,031; 1997 — $436,175; 1998 — $56,557; 1999 — $41,675; after 1999 — $290,997. F-8 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 4. Academic Facilities Financings Academic facilities financings are comprised of loans to and bonds issued by educational institu- tions to finance their physical plant and equipment. A summary of academic facilities financings follows: December 31, 1994 1993 Fixed rate ............................ $1,334,525 $12139,245 Variable rate ....... 2132868 219,496 $1,548,393 $1,358,741 The average remaining term to maturity of academic facilities financings was 8 years as of December 31, 1994, with stated maturities and maturities if accelerated to the put or call date, shown in the following table: Year of Maturity Stated Maturity to Put or -""- 1995 Maturi h' Call Date .......................... 1996 ............ $ 128,697 $ 176,290 ............................... 1997 155,378 173,882 ........................................... 1998 64,449 56,210 .... ....................................... 1999 69,314 119,990 ... after 1999 110,238 118,631 .......................... . . .. , 1,020,317 903,390 $11548,393 $1,548,393 5. Cash and Investments A summary of cash and investments at carrying value and market value, where different, follows: December 31, 1994 1993 Carrying Market Value Value Carrying Value Market Value Cash ............. Federal funds and bank deposits ........ $ 56,022 2,205,500 $ 26,131 Total cash and cash equivalents ........ 21261,522 1,086,500 Asset backed securities ............... U.S. Treasury securities 3,965,910 $3,960,883 1,112,631 141,417 $ 141,859 .............. Student loan revenue bonds 11701,841 1,700,048 570,747 1,039,748 ........... Variable corporate bonds 1,058,743 1,064,043 531,887 554,287 .............. Third party repurchase agreements 684,507 679,834 49,743 33,270 ...... Commercial paper 620,000 1,267,000 ............... Federal funds and bank deposits 596,672 724,351 ........ Money market preferred stock ......... 463,000 367,700 70,000 Certificates of deposit ................ 150,000 280,400 Other 4, 795,106 ............................ 827,217 822;388 726,599 7311087 $12,697,112 $10,269,891 F-9 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 5. Cash and Investments (Continued) At December 31, 1994, certain US. Treasury Securities are classified as available -for -sale securi- ties under FAS 115 and carried at fair market value of approximately $1.1 billion with an amortized cost of approximately $612 million. The fair market value is adjusted for unrealized gains and losses on interest rate exchange agreements, which are held to reduce interest rate risk related to these securities. Sallie Mae neither acquired nor sold securities available -for -sale in 1994. Cash and cash equivalents excludes term federal funds and bank deposits with terms to maturity exceeding three months. As of December 31, 1994, stated maturities of cash and investments and maturities if accelerated to the put or call date, are shown in the following table. All investments classified as available -for -sale have original terms to maturity after 1999 as of December 31, 1994. Maturity to Year of Maturity Stated Maturity Put or Call Date 1995.......................................... $ 5,456,687 $ 5,977,785 1996.......................................... 353,153 366,581 1997 .......................................... 1,198, 712 1, 200, 530 1998.......................................... 673,144 675,131 1999.......................................... 1,319,548 1,368,126 after 1999...................................... 3,695,868 3,108,959 $12,697,112 $12,697,112 6. Borrowings The table on the following page summarizes outstanding notes, and their related average bal- ances and interest rates, which include the effects of related off -balance sheet financial instruments (see Note 7). Short-term borrowings have an original or remaining term to maturity of one year or less. The average rates of total long-term floating rate notes, total long-term fixed-rate notes, total long-term notes, and total notes were adjusted to include premiums on debt extinguished. F-10 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 6. Borrowings (Continued) Years ended December 31, 1994 1993 Ending Average Average Ending Average Average Balance Balance Rate Balan Short-term notes '-""-' ce Balance _ Rate Six month floating rate notes .. Other floating rate notes $ 3,849,125 $ 3,410,090 4.52% $ 3,299,179 $ 3,098,122 3.25% ..... Discount notes ..: ........ Fixed rate notes 811,550 2,6962122 596,894 3,244,158 4.43 4.45 369,469 622,230 266,563 3.09 430,129 3.14 ......... Securities sold -not yet 1,397,717 836,816 4.95 78,099 54,065 2.82 purchased and repurchase agreements ..... Short-term portion of long- 402,015 245,169 5.36 9,977 171,770 3.52 to 4- J. LLJL no es ............... 6,859,065 8,243,360 4.35 91239,626 9,250,910 3.45 Total short-term notes ....... 16,015,594 16,576,487 4.45 13,618,580 13,271,559 3.38 Long-term notes Floating rate notes: u S. dollar denominated: Interest bearing, due -' 1995-2002 ............ $24,841,651 $24,096,536 4.58 Foreign currency: $25,994 888 $ 23,160,666 3.29 Interest bearing, due 1995. Total floating rate notes. Fixed rate notes: U.S. dollar denominated: Interest bearing, due 1995-2018............ Zero coupon, due 1995-2022 . Dual currency, due 1995-1998 .............. Foreign currency: Interest bearing, due 1995 1 - 132471 3.56 37,250 3,164 3.38 24,841,651 24,110,007 4.55 26,032,138 232163,830 3.33 8,575,267 116,771 51498,293 4.69 111,152 4,265,260 6,234,114 3.51 11.06 118,284 393,012 6.72 237,656 449,648 5.63 471,568 467,636 4.48 - 999 ............ 548,100 228,127 5.11 38,100 115,389 3.63 Total fixed rate notes ... %477,794 6,287,220 5.11 4,893,212 7,210,151 6.54 Total long-term notes ....... 34,319,445 30,397,227 4.67 30,925,350 30,373,981 4.09 Total notes ...... .... $50,335,039 $46,973,714 4.59% $44,543,930 $43,645,540 3.88% At December 31, 1993, long-term floating rate notes included $4.8 billion, payable to the Federal Financing Bank (FFB) and guaranteed by the Secretary of Education, which bore interest at .125per- centage points above the average rate of the weekly 91-day Treasury bill auctions. The FFB borrow- ings were repaid in full during the first quarter of 1994. To match the interest rate characteristics on its fixed rate and floating rate borrowings with t he rate characteristics of its assets, Sallie Mae enters into interest rate exchange agreements with F-11 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 6. Borrowings (Continued) independent parties. Under these agreements, Sallie Mae makes periodic payments, indexed to the related asset rates, in exchange for periodic payments which generally match Sallie Mae's interest obligations on fixed or variable rate borrowings. The following table summarizes the ending balances of the borrowings that have been matched with interest rate exchange agreements at December 31, 1994 and 1993 (dollars in billions). December 31, 1994 1993 Short Long Short Long Term Term Total Term Term Total Fixed rate debt ............................ $2.4 $ 8.6 $11.0 $3.8 $ 4.1 $ 7.9 Floating rate debt .......................... 2.4 9.7 12.1 2.3 7.5 9.8 Total .................................... $4.8 $18.3 $23.1 $6.1 $11.6 $17.7 At December 31, 1994, Sallie Mae had outstanding long-term debt issues with put or call features totaling $16.3 billion. Stated maturities of long-term notes and maturities if accelerated to the put or call date, are shown in the following table: Maturity to Year of Stated Put or Maturity Maturity Call Date `- $ $13,943,277 1996................................................ 10, 086, 910 10, 824, 636 1997................................................ 10,740,110 6,889,175 1998................................................ 3,638,584 1, 511, 726 1999................................................ 7,083,750 582,955 2000-2022............................................ 2,770,091 5671676 $34,319,445 $34,319,445 For the years ended December 31, 1994, 1993, and 1992, Sallie Mae extinguished certain long- term notes prior to their scheduled maturity, both by repurchasing the notes and through in -sub- stance defeasance transactions, to lower future years' interest expense. The following table summa- rizes these transactions (dollars in millions): Years ended December 31, 1994 1993 1992 Maturity Carrying Maturity Carrying Maturity Carrying Value Value Premium Value Value Premium Value Value Premium Debt repurchases ..... $138 $21 $14 $1,730 $507 $113 $4,077 $507 $141 In -substance defeasance .. - - - 1,022 295 98 - - - Total debt extinguished $138 $21 $14 $2,752 $802 $211 $4,077 $507 $141 In the table above, the $98 million in -substance defeasance premium represents the cost to Sallie Mae of purchasing securities placed in irrevocable trusts for the purpose of extinguishing certain fixed rate notes and zero coupon bonds during the year ended December 31, 1993. The premiums on debt extinguished are disclosed separately, net of tax, in the consolidated statements of income. Sallie Mae issues debt with interest and/or principal payment characteristics tied to foreign currency indices to attempt to minimize its cost of funds. At December 31, 1994 and 1993, Sallie Mae F-12 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 6. Borrowings (Continued) had outstanding fixed rate notes repayable in US. dollars, with principal repayment obligations tied to foreign currency exchange rates, foreign currency notes which require the payment of principal and interest in foreign currencies, and dual currency notes which require the payment of interest in foreign currencies. To eliminate the corporation's exposure to the effect of currency fluctuations on these contractual obligations, Sallie Mae has entered into various foreign currency agreements with independent parties (see Note 7). Short-term notes having these characteristics are included in the short-term portion of long-term notes. 7. Derivative Financial Instruments Derivative Financial Instruments Held or Issued for Purposes Other than Trading Sallie Mae enters into various financial instruments with off -balance sheet risk in the normal course of business primarily to reduce interest rate risk and foreign currency exposure on certain borrowings. These financial instruments include interest rate exchange agreements, interest rate cap and collar agreements, foreign currency swaps, forward currency exchange agreements, options on currency exchange agreements, options on securities, and financial futures contracts. Sallie Mae manages the credit risk associated with these instruments by performing credit reviews of counterparties and monitoring market conditions to establish counterparty, sovereign and instru- ment -type credit limits and, when appropriate, requiring collateral. The following table summarizes the activity for Sallie Mae's interest rate exchange agreements, foreign currency agreements, and futures contracts held or issued for purposes other than trading for the years ended December 31, 1992, 1993, and 1994 (dollars in millions). Notional Principal Interest Rate Exchange Foreign Currency Futures Contract Balance, December 31, 1991 Agreements Agreements Amounts ,,,,,,,,,,,,,,,,,,, Issuances/Opens $27,317 $ 3,573 $ 6,055 ..................... Maturities/Expirations 8,000 80 26,613 ....................... Terminations/Closes (8,772) (530) (4,368) ......................... (1,327) — (26,825) Balance, December 31, 1992 ................ Issuances/Opens 25,218 3,123 1,475 ..................... Maturities/Expirations 6,236 37 12,672 ....................... Terminations/Closes (7,898) (1 660) ' (5,312) ........ . Balance, December 31, 1993 .................. Issuances/Opens 23,253 1,500 1,805 ........................... Maturities/Expirations 15,402 510 4,437 ..................... Terminations/Closes (9,518) (575) (3,088) ......................... (99) (37) (2,598) Balance, December 31, 1994 .................... $29,038 $ 1,398 $ 556 Interest Rate Exchange Agreements Sallie Mae enters into three types of interest rate exchange agreements under which it pays the following: 1) a floating rate in exchange for a fixed rate (standard swaps); 2) a fixed rate in exchange for a floating rate (reverse swaps); and 3) a floating rate in exchange for another floating rate, based upon different market indices (basis/reverse basis swaps). At December 31, 1994, Sallie Mae had outstanding $12.5 billion, $2.5 billion, and $14.0 billion of notional principal in standard swaps, reverse swaps, and basis/reverse basis swaps, respectively. Net payments are recorded in interest F-13 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 7. Derivative Financial Instruments (Continued) expense. The related net receivable or payable from counterparties is included in other assets or other liabilities. For the years ended December 31, 1994, 1993, and 1992, Sallie Mae received net payments on all interest rate exchange agreements reducing interest expense by $262 million, $639 million, and $850 million, respectively. As of December 31, 1994, stated maturities of interest rate exchange agreements and maturities if accelerated to the put or call date, are shown in the following table (dollars in millions). The maturities of interest rate exchange agreements generally coincide with the maturities of the associated assets or borrowings. Maturity to Year of Maturity Stated Maturity Put or Call Date 1995.............................................. $ 6,966 $14,073 1996.............................................. 52349 5,789 1997.............................................. 4,611 2,663 1998.............................................. 1,817 1,443 1999 ........................ ..................... 6,239 2,639 2000-2008.......................................... 4,056 2,431 $29,038 $29,038 Foreign Currency Agreements At December 31, 1994 and 1993, Sallie Mae had- borrowings repayable in U.S. dollars, with principal repayment obligations tied to foreign currency exchange rates of $425 million and $650 mil- lion respectively, and borrowings with principal repayable in foreign currencies of $548 million and $200 million, respectively. Such debt issuances were hedged by forward currency exchange agree- ments, foreign currency swaps, and options on currency exchange agreements. Such agreements typically mature concurrently with the maturities of the debt. At December 31, 1994, Sallie Mae also had outstanding $425 million, $548 million, and $425 million of notional principal in foreign currency exchange agreements, foreign currency swaps, and foreign currency options, respectively. The follow- ing table summarizes the outstanding amount of these borrowings and their currency translation values at December 31, 1994 and 1993, using spot rates at the respective dates (dollars in millions). December 31, 1994 1993 Carrying value of outstanding foreign currency debt ................ $973 $850 Currency translation value of outstanding foreign currency debt ....... 899 793 Financial Futures Contracts Sallie Mae enters into financial future contracts to hedge the risk of future rate changes. Interest - rate forward and futures contracts are commitments to either purchase or sell a financial instrument at a specific future date for a specified price and may be settled in cash or through the delivery of financial instruments. (Sallie Mae's futures contracts typically mature in one year or less.) Sallie Mae maintains certain cash margins to meet the dealers' criteria for financial futures. F-14 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 7. Derivative Financial Instruments (Continued) The deferred gains or losses related to financial futures contracts are included in other assets. Amortization of such gains or losses over the life of the futures contract is included in either invest- ment income or debt expense depending on whether the risk that the derivative is hedging relates to investments or debt. Derivative Financial Instruments Held or Issued for Trading Purposes From time to time Sallie Mae maintains a small number of active trading positions in derivative financial instruments which are used to attempt to generate additional income based on market conditions. These trading results are immaterial to Sallie Mae's financial statements for the years ended December 31, 1994, 1993, and 1992. 8. Fair Values of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Finan- cial Instruments," requires estimation of the fair values of financial instruments. The following is a summary of the assumptions and methods used to estimate those values. Student Loans Fair value was determined by analyzing amounts which Sallie Mae has paid recently to acquire similar loans in the secondary market. Warehousing Advances and Academic Facilities Financings The fair values of both warehousing advances and academic facilities financings were determined through standard bond pricing formulas using current interest rates and credit spreads. Cash and Investments For investments with remaining maturities of three months or less carrying value approximated fair value. Investments in U.S. Treasury securities were valued at market quotations. All other investments were valued through standard bond pricing formulas using current interest rates and credit spreads. Short-term Borrowings and Long-term Notes For borrowings with remaining maturities of three months or less carrying value approximated fair value. Where available the fair value of financial liabilities was determined from market quota- tions. If market quotations were unavailable standard bond pricing formulas were ,applied using current interest rates and credit spreads. Off -balance Sheet Financial Instruments The fair values of off -balance sheet financial instruments, including interest rate exchange agreements, interest rate cap -and collar agreements, foreign currency swaps, forward exchange agreements and financial futures contracts, were estimated at the amount that would be required to terminate such agreements, taking into account current interest rates and credit spreads. F-15 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 8. Fair Values of Financial Instruments (Continued) The following table summarizes the fair values of Sallie Mae's financial assets and liabilities, including off -balance sheet financial instruments (dollars in millions): December 31, Earning assets Student loans, net ............... Warehousing advances ............ Academic facilities financings ....... Cash and investments ............ Total earning assets .............. Interest bearing liabilities Short-term borrowings ............ Long-term notes ................ Total interest bearing liabilities ..... Off -balance sheet financial instruments "'Interest rate exchange agreements ... Forward exchange agreements and foreign currency swaps ........... Warehousing advance commitments . . Academic facilities financing 1994 1993 Fair Carrying Fair Carrying Value Value Difference Value Value Difference $30,774 $30,371 $ 403 $27,162 $26,804 $ 358 7,056 7,032 24 7,064 7,034 30 12497 1,548 (51) 1,459 1,359 100 12,686 12,697 (11) 10,750 10,270 480 52,013 519648 365 46,435 45,467 968 15,991 16,016 25 13,716 13,619 (97) 33,919 34,319 400 31,208 30,925 (283) 49,910. 50,335 425 44,924 44,544 (380) (137) - (137) 379 - 379 (203) - (203) (141) - (141) commitments .................. - - - - - Letters of credit ................ - - - - - - Excess of fair value over carrying value . $ 450 $ 826 The carrying value of cash and investments at December 31, 1994 included a mark -to -market adjustment related to the implementation of FASB 115 of $461 million for unrealized gains on certain long-term investments which is the principal reason for the decline in the excess of fair value over carrying value from 1993 to 1994. At December 31, 1994 and 1993 substantially all interest rate exchange agreements, and foreign exchange agreements and foreign currency swaps were hedging liabilities. 9. Commitments Sallie Mae has committed to purchase student loans during specified periods and to lend funds under the warehousing advance commitment, academic facilities financing commitment, and letters of credit programs. Letters of credit support the issuance of state student loan revenue bonds. They represent unconditional guarantees of Sallie Mae to repay holders of the bonds in the event of a default. In the event that letters of credit are drawn upon, such loans are collateralized by the student loans underlying the bonds. F-16 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 9. Commitments (Continued) Commitments outstanding are summarized below: Student loan purchase commitments .................. Warehousing advance commitments ................... Academic facilities financing commitments . Letters of credit ................................ . December 31, 1994 $17,089,597 493,112 95,710 2,376,685 $20,055,104 1993 $13,105,567 11228,907 119,990 1,878,717 $16,333,181 The following schedule summarizes expirations of commitments outstanding at December 31, 1994: Student Loan Purchases Warehousing Advances Academic Facilities Financings Letters of Credit 1995 ..... •••••••••••••••..... 1996 $ 4,363,135 $370,108 -- $14,895 $ 180,844 .. ...................... 1997 5,108,380 70,466 2,500 265,164 ......................... 1998 2,554,348 20,050 2,000 418,828 ......................... 1999 89,997 5,000 — 547,751 ...................... 2000-2017 174, 736 - 633,382 ........ • • • • • • • ...... 4,799,001 27,488 76,315 330,716 Total.... ••••••••••••••....... $17,089,597 $493,112 $95,710 $2,376,685 10. Preferred Stock Sallie Mae's 4.3 million outstanding shares of adjustable rate cumulative preferred stock, par value $50.00 per share, pay cumulative quarterly dividends at a per annum rate of 4.5 percentage points below the highest yield of certain United States Treasury obligations. However, the dividend rate for any dividend period will not be less than 5 percent per annum nor greater than 14 percent per annum. The dividend rate was 5 percent for the years ended December 31, 1994, 1993, and 1992. The stock is redeemable, at the option of Sallie Mae, in whole or in part, at $50.00 per share plus accrued dividends. In May 1986, the Board of Directors authorized management, under certain circumstances, to repurchase up to $50 million of Sallie Mae's adjustable rate cumulative preferred stock at market prices. As of December 31, 1994, Sallie Mae had repurchased 722,350 shares at an average price of $45.23 per share, totalling $32.7 million. 11. Common Stock On July 23, 1992 all of the outstanding voting and nonvoting common shares converted to a single new class of unrestricted voting common shares. All common shares and related dollar amounts have been restated to reflect this conversion. In July 1988, Sallie Mae offered to exchange for unrestricted common stock 2,149,960 restricted book value shares outstanding and shares issuable upon exercise of stock options held by current and former management under the stock option and incentive performance plans. The exchange was offered in four annual installments. The fourth and final exchange of 227,040 restricted book value shares occurred in January 1992. As of December 31, 1992, all of the restricted book value shares had been exchanged for 1,135,210 shares of unrestricted common stock. F-17 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 11. Common Stock (Continued) The Board of Directors has reserved 10 million common shares for issuance under various compensation and benefit plans. Sallie Mae has engaged in repurchases of its common stock since 1986. As of December 31, 1994, Sallie Mae held as treasury stock 50.3 million common shares purchased at an average price of $38.44. Earnings per common share are computed based on net income less dividends on preferred stock divided by the weighted average common and common equivalent shares outstanding for the period. Average common and common equivalent shares outstanding for the years ended December 31, 1994, 1993, and 1992 totalled 79,776,993; 86,829,757; and 90,937,613, respectively. 12. Stock Option Plan Sallie Mae maintains a stock option plan for key employees which permits grants of stock options for the purchase of common stock with exercise prices equal to the market value on the date of the grant. Stock options are exercisable one year after date of grant. The following table summarizes plan activity for stock options for the years ended December 31, 1994, 1993, and 1992. Outstanding at beginning of year .... Granted ....................... Exercised ...................... Cancelled ...................... Outstanding at end of year ......... Exercisable at end of year ......... 1994 Years ended December 31, 1993 Options Average Price Options Average Price Options 698,550 $58.80 533,925 $50.38 488,575 367,150 48.03 242,350 71.81 193,750 (13,445) 31.56 (57,575) 34.11 (143,800) (121,000) 62.33 (20,150) 62.79 (4,600) 931,255 $54.49 698,550 $58.80 5332925 587,855 $58.34 459,200 $52.03 342,175 1992 Average Price $38.18 70.87 36.27 56.87 $50.38 $38.90 13. Federal Income Taxes In 1992, Sallie Mae changed its method of accounting for income taxes from the deferred method to the liability method required by FAS 109, "Accounting for Income Taxes." Prior years' financial statements have not been restated. The cumulative effect of adopting FAS 109 in 1992 did not have a material effect on Sallie Mae's financial statements. F-18 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 13. Federal Income Taxes (Continued) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the company's deferred tax liabilities and assets as of Decem- ber 31, 1994 and 1993 under the liability method are as follows: December 31, Deferred tax liabilities: 1994 1993"4 --- Leases .... ........................ Unrealized investment gains ........................... $323,473 $309,533 Other ............................................ 1619300 14,167 10,556 498,940 320,089 Deferred tax assets: Deferred income .................................... Asset valuation 70,080 60 692 ' allowances In -substance defeasance transactions ' ' ' ' ' ' ' ' • • 49,584 45,784 . ••••••• Other..... ..... ....... 33,932 35,413 46,565 216,281 188,454 Net deferred tax liabilities .............................. $282,659 $131635 Unrealized investment gains are related to the implementation of FAS 115. (See Note 5.) Reconciliations of the statutory United States federal income tax rates to Sallie Mae's effective tax rate follow: Years ended December 31, Statutory rate 1994 1993 1992 --- . ..... • , Tax exempt interest and dividends received ' ' 35.0% 35.0% 34.0% deduction .......................... Other, net ............................... (5.9) (5.1) (5.6) (.5) .3 1.3 Effective tax rate ......................... 28.6% 30.2% 29.7% Federal income taxes paid for the year ended December 31, 1994, 1993 and 1992 were $188 mil- lion, $217 million and $113 million, respectively. F-19 STUDENT LOAN MARKETING ASSOCIATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Dollars in thousands, except per share amounts) 14. Quarterly Financial Information (unaudited) 1994 First Second Third Fourth Quarter Quarter Quarter Quarter Net interest income .................. $201,746 $184,771 $168,525 $154,017 Operating expenses .................. 262219 30,160 34,252 39,803 Federal income taxes ................. 532720 45,863 37,989 28,956 Income before premiums on debt extinguished ...................... 121,807 108,748 96,284 85,258 Premiums on debt extinguished, net of tax. (9,329) - - - Net income ........................ $112,478 $108,748 $ 96,284 $ 85,258 Earnings per common share before premiums on debt extinguished ........ $ 1.42 $ 1.30 $ 1.19 $ 1.10 Earnings per common share ............ $ 1.31 $ 1.30 $ 1.19 $ 1.10 1993 First Second Third Fourth Quarter Quarter Quarter Quarter Net interest income .................. $238,491 $225,410 $226,513 $246,348 Operating expenses .................. 25,768 27,609 262029 29,954 Federal income taxes ................. 65,819 58,992 65,853 69,299 Income before premiums on debt extinguished ...................... 146,904 138,809 134,631 1471095 Premiums on debt extinguished, net of tax. (42,202) (32,125) (25,536) (37,526) Net income ........................ $104,702 $106,684 $109,095 $109,569 Earnings per common share before premiums on debt extinguished ........ $ 1.62 $ 1.56 $ 1.53 $ 1.70 Earnings per common share ............ $ 1.15 $ 1.19 $ 1.24 $ 1.26 15. College Construction Loan Insurance Association In 1987, Sallie Mae assisted in creating the College Construction Loan Insurance Association ("Connie Lee"), a private, for -profit, stockholder -owned corporation, authorized by Congress to in- sure and reinsure educational facilities obligations. Sallie Mae's current investment in Connie Lee is approximately $44 million, and as of December 31, 1994, through its ownership of preferred and common stock and through agreements with other shareholders, Sallie Mae effectively controlled 36 percent of Connie Lee's outstanding voting stock. F-20 APPENDIX A THE FEDERAL FAMILY EDUCATION LOAN PROGRAM General The Federal Family Education Loan Program (formerly the Guaranteed Student Loan Program (the "Guaranteed Student Loan Program") under Title IV of the Higher Education Act provides for loans to be made to students .or parents of dependent students enrolled in eligible institutions to finance a portion of the costs of attending school. In the event of a default on a student loan or the borrower's death, disability, or bankruptcy, the holder of the loan (which must be an eligible lender) files a claim with the guarantor of the loan, which, provided the loan has been properly originated and serviced, pays the holder all or a portion of the unpaid principal balance on the loan as well as unpaid accrued interest. Origination and servicing requirements, as well as procedures to cure deficiencies, are established by the US. Department of Education (the "Department") and the various guarantee agencies. Under the FFELP payment of principal and interest with respect to the student loans isguaran- teed against default, death, bankruptcy or disability of the applicable borrower by the applicable guarantee agency. As described herein, the guarantee agencies are entitled, subject to certain condi- tions, to be reimbursed for all or a portion of guarantee payments they make by the Department pursuant to a program of federal reinsurance under the Act. In addition, holders of student loans are entitled to receive from the Department certain interest subsidy payments and special allowance payments with respect to certain loans as described herein. The FFELP is subject to statutory and regulatory revision from time to time. The most recent significant revisions are contained in the Higher Education Amendments of 1992 (the "1992 Amend- ments"), the Omnibus Budget Reconciliation Act of 1993 ("OBRA") and the "Higher Education Technical Amendments of 1993" (the "Technical Amendments"). As part of the 1992 Amendments the name of the Guaranteed Student Loan Program was changed to the FFELP. OBRA contains significant changes to the FFELP and creates a new direct loan program funded by the U.S. Depart- ment of Treasury and administered by the Department. The Technical Amendments clarify original Congressional intent and make grammatical corrections to the 1992 Amendments. Guarantee agencies enter into reinsurance agreements with the Secretary of Education (the "Secretary") pursuant to which the Secretary agrees to reimburse the guarantor for all or a portion of the amount expended by the guarantee agency in discharge of its guarantee obligation with respect to default claims provided the loans have been properly originated and serviced. Except for claims resulting from death, disability, or bankruptcy of a borrower, in which case the Secretary pays the full amount of the claim, the amount of reinsurance depends on the default experience of the guarantee agency. In the event of a shortfall between the amounts of claims paid to holders of defaulted loans and reinsurance payments from the federal government, guarantee agencies pay the claims from their reserves. These reserves come from four principal sources: fees they charge the students (currently ranging up -to 1% of the principal amount guaranteed), administrative cost allowances from the Department (payment of which is currently discretionary on the part of the Department), debt collection activities (generally, the guarantor may retain 27% of its collections on defaulted student loans), and investment income from reserve funds. The 1992 Amendments provide that claims which a guarantor is financially unable to pay will be paid by the Secretary or transferred to a financially sound guarantor, if the Secretary makes the necessary determination that the guarantor is financially unable to pay. Several types of guaranteed student loans are currently authorized under the Act: W loans to students who pass certain financial need tests ("Stafford Loans"); (ii) loans to students who do not A-1 pass the Stafford need tests or who need additional loans to supplement their Stafford Loans ("Un- subsidized Stafford Loans"); (iii) loans to parents of students ("PLUS Loans") who are dependents and whose need exceeds the available Unsubsidized Stafford Loans and/or Stafford Loans; and (iv) loans to consolidate the borrower's obligations under various federally authorized student loan programs into a single loan ("Consolidation Loans"). Following enactment of the 1992 Amendments, Stafford Loans, PLUS Loans and Consolidation Loans are officially referred to as "Federal Stafford Loans," "Federal PLUS Loans" and "Federal Consolidation Loans," respectively. The description and summaries of the Act, the Federal Family Education Loan Program, the guarantee agreements and the other statutes, regulations and documents referred to herein do not purport to be comprehensive, and are qualified in their entirety by reference to each such statute, regulation or document. There can be no assurance that future amendments or modifications will not materially change any of the terms or provisions of the programs described herein or of the statutes and regulations implementing these programs. Legislative and Administrative Matters The Act was amended by enactment of the 1992 Amendments, the general provisions of which became effective on July 23, 1992 and which extend the principal provisions of the FFELP to Septem- ber 30, 1998 (or in the case of borrowers who have received loans prior to that date, September 30, 2002, except that authority to make Consolidation Loans expires on September 30, 1998). The Technical Amendments became effective on December 20, 1993. OBR.A, effective August 10, 1993, implements a number of changes to the federal guaranteed student loan programs, including imposing on lenders or holders of guaranteed student loans certain fees, reducing special allowance payments for certain loans, reducing the interest payable to holders of consolidated loans and affecting the Department's financial assistance to guarantee agencies, includ- ing by reducing the percentage of claims the Department will reimburse guarantee agencies and reducing more substantially the premiums and default collections that guarantee agencies are enti- tled to receive and/or retain. In addition, such legislation also contemplates replacement of up to 60% of the federal guaranteed student loan programs with direct lending by the Department by the 1998 academic year. Eligible Lenders, Students and Institutions Lenders eligible to make loans under the FFELP generally include banks, savings and loan associations, credit unions, pension funds, insurance companies, and under certain conditions, schools and guarantee agencies. Sallie Mae is an eligible lender for consolidated loans and as a lender of last resort. Student loans may be made only to a "qualified student," generally defined as a United States citizen'or national or otherwise eligible individual under federal regulations who (a) has been accepted for enrollment or is enrolled and is maintaining satisfactory progress at an eligible institution, (b) is carrying at least one-half of the normal full-time academic workload for the course of study the student is pursuing, as determined by such institution, (c) has agreed to notify promptly the holder of the loan of any address change and (d) meets the application "need" requirements for the particular loan program. Each loan is to be evidenced by an unsecured promissory note. Eligible schools ("eligible institutions") include institutions of higher education and proprietary institutions of higher education. Eligible institutions of higher education must meet certain stan- dards, which generally provide that the institution (i) only admits persons that have a high school diploma or its equivalent; (ii) is legally authorized to operate within the state; (iii) provides not less than a two-year program with credit acceptable toward a bachelor's degree; (iv) is a public or non- profit institution; and (v) is accredited by a nationally recognized accrediting agency or is determined by the Department to meet the standards of an accredited institution. Eligible proprietary institutions of higher education include business, trade and post -secondary vocational schools meeting standards A-2 which provide that the institution (i) only admits persons that have a high school diploma or its equivalent, or persons that are beyond the age of compulsory school attendance and have the ability to benefit from the training offered (as defined in the Act); (ii) is authorized by the state to provide a program of post -secondary vocational education designed to fit individuals for useful employment in recognized occupations; (iii) has been in existence for at least two years; and (iv) is accredited by a national recognized accrediting agency or is specially accredited by the Department. With specified exceptions, institutions are excluded from consideration as eligible institutions if the institution (i) offers more than 50 percent of its courses by correspondence; (ii) enrolls 50 percent or more of its students in correspondence courses; (iii) has a student enrollment in which more than 25 percent of the students are incarcerated; or (iv) has a student enrollment in which more than 50 percent of the students are admitted without a high school diploma or its equivalent on the basis of their ability to benefit from the education provided (as defined by statute and regulation). Further, schools are specifically excluded from participation if (i) the institution has filed for bankruptcy or (ii) the institution, the owner, or its chief executive officer, has been convicted or pleaded nolo contendere or guilty to a crime involving the acquisition, use or expenditure of federal student aid funds, or has been judicially determined to have committed fraud involving funds under the student aid program. In order to participate in the program, the eligibility of a school must be approved by the Department under standards established by regulation. Financial Need Analysis Student loans may generally be made in amounts, subject to certain limits and conditions, to cover the student's estimated costs of attendance, including tuition and fees, books, supplies, room and board, transportation and miscellaneous personal expenses (as determined by the institution). Eex,h borrower must undergo a need analysis, which requires the borrower to submit a need analysis form to a multiple data entry processor which forwards the information to the federal centralproces- sor. The central processor evaluates the parents' and student's financial condition under federal guidelines and calculates the amount that the student and/or the family must contribute towards the student's cost of education (the "family contribution"). After receiving information on the family contribution, the institution then subtracts the family contribution from its cost of attendance to determine the student's eligibility for grants, Stafford Loans and work assistance. The difference between the amount of grants, work assistance and Stafford Loans for which the borrower is eligible and the student's estimated cost of attendance, the unmet need, may be borrowed through Unsub- sidized Stafford Loans and, after exhausting Unsubsidized Stafford Loan limits, SLS Loans. Parents may finance the family contribution amount through their own resources or through PLUS Loans. Special Allowance Payments The Act provides for quarterly special allowance payments to be made by the Department to holders of student loans to the extent necessary to ensure that such holder receives at least a specified market interest rate of return on such loans. The rates for special allowance payments are based on formulas that differ according to the type of loan, the repayment status of the loan, the date the loan A-3 was originally made or insured and the type of funds used to finance such loan (tax-exempt or taxable). The formulas currently used to calculate special allowance payment rates per annum for Stafford Loans and Consolidation Loans financed with taxable funds are set forth in the following table: Date of Disbursement Prior to November 16, 1986 . . November 16, 1986 to September 30, 1992 ....... October 1, 1992 to June 30, 1995 ................... Special Allowance Payments Formula Weekly average of 91-Day T Bill Rate plus 3.50% minus stated rate on loan Weekly average of 91-Day T Bill Rate plus 3.25% minus stated rate on loan Weekly average of 91-Day T Bill Rate plus 3.10% minus stated rate on loan After July 1, 1995 .......... Weekly average of 91-Day T Bill Rate plus 2.50% minus stated rate on loans that qualify as in school, grace or deferment and 3.10% for loans in repayment Special Allowance Payments are available on variable rate PLUS Loans and SLS Loans as described below under "PLUS and SLS Loan Programs" only to cover any amount by which the variable rate, which is reset annually based on the 52-week Treasury Bill, would exceed the applicable maximum rate. Such maximum is generally between 9% and 12%. Stafford Loans The Act provides for (i) federal insurance or reinsurance of Stafford Loans made by eligible lenders to qualified students, (ii) federal interest subsidy payments on certain eligible Stafford Loans to be paid by the Department to holders of the loans in lieu of the borrower making interest payments ("Interest Subsidy Payments"), and (iii) Special Allowance Payments representing an additional subsidy paid by the Department to the holders of eligible Stafford Loans (collectively referred to herein as "Federal Assistance"). Stafford Loans are loans under the FFELP that may be made, based on need, only to post- secondary students accepted or enrolled in good standing at an eligible institution who are carrying at least one-half the normal full-time course load at. that institution. The Act limits the amount a student can borrow in any academic year and the amount he or she can have outstanding in the aggregate. The following chart sets forth the historic loan limits. BORROWER LOAN LIMITS Loan Type Stafford (subsidized and unsubsidized) Undergraduate (per year) 1st year .................... 2nd year ................... 3rd year & above ............. Graduate (per year) ........... Aggregate Borrower limits Undergraduate ................ Graduate (including undergraduate) On or After On or After On or After Pre -January 1, 1987 January 1, 1987 July 1, 1993 July 1, 1994(2) $ 22500 $ 2,625 $ 2,625 $ 6,625 $ 2,500 $ 2,625 $ 3,500 $ 7,500 $ '2,500 $ 4,000 $ 5,500 $ 10,500 $ 52000 $ 7,500 $ 8,500(1) $ 182500 $12,500 $17,250 $23,000 $ 46,000 $25,000 $54,750 $65,500 $138,500 (1) Graduate Stafford and Unsubsidized Stafford Loan amounts were effective 10/1/93 (2) Applies to independent, undergraduate and graduate students borrowing under the unsubsidized Stafford program. A-4 The interest rate paid by borrowers on Stafford Loans has generally been 7 percent, 8 percent, or 9 percent, depending on the date of the loan and the interest rate on any outstanding borrowings of that borrower as of such date. The interest rate on loans made to new borrowers between July 1, 1988 and October 1, 1992 is 8, percent, but increases to 10 percent after the fourth year of repayment. In addition, holders of Stafford Loans receive a special allowance payment from the Secretary as dis- cussed above. y The Technical Amendments provide that, for fixed rate loans made on or after July 23, 1992 and for certain loans made to new borrowers on or after July 1, 1988, when the interest rate paid b borrowers exceeds the applicable 91-day Treasury bill rate plus 3.1 percentage points, the lender must convert the interest rate to a variable rate by January 1, 1995. The applicable interest rate shall be set annually at 3.1 (for loans made on or after July 23, 1992) or 3.25 (for loans made before July 23, 1992) -day U S. Treasury bill auction percentage points above the average bond equivalent yield of all 91 rates during the previous quarter. For new borrowers on or after October 1, 1992, the interest rate on Stafford Loans will be reset annually at 3.1 percentage of all 91-day US. Treasury bill auction rates during the previous will quarter and ve the average bond equivalent yield interest cap will decrease to 8.25% after July 1, 1994 for all borrowers, will be capped at 9°Io. The The Department is responsible for paying interest on subsidized Stafford Loans while the bor- rower is a qualified student, during a grace period or during certain deferral periods. The Department makes quarterly interest subsidy payments to the owner of Stafford Loans in the amount of interest accruing on the unpaid balance thereof prior to the commencement of repayment deferral periods, except that for loans made on or after July 1, 1995, the rate paid by the government may not exceed 91-day T Bill + 2.5%. The Act provides that the owner of an eligible Stafford Loan shall be deemed to have a contractual right against the United States to receive interest subsidy payments (and special allowance payments) in accordance with its provisions. Receipt of interest subsidy payments and special allowance payment is conditioned on compliance with the requirements of` he Act and continued eligibility of such loan for federal reinsurance. Such eligibility may however, if the loans are not held by an eligible lender, in accordance with the re reme y be lost, and the applicable guarantee agreements. q nts of the Act Repayment of principal on a Stafford Loan does not commence while a student remains a qualified student, but generally begins upon expiration of the applicable grace period, as described below .Any borrower may voluntarily prepay without premium or penalty any loan and in connection therewith may waive any grace period or deferral period. In general, each loan must be scheduled for repayment over a period of not more than ten years after the commencement of repayment. The Act currently requires minimum annual payments of $600 including principal and interest, unless the borrower and the lender agree payments. The 1992 Amendments authorized the Department to promulgate regulations, effective July 1, 1993, that require lenders to offer graduated or income - sensitive repayment schedules to borrowers. The effective date of the offering of income sensitive options was delayed by the Secretary of Education until July 1, 1995. Repayment of principal on a Stafford Loan must generally commence following a period of (a) not less than 9 months or more than 12 months (with respect to loans for which the applicable interest rate is 7% per annum) and (b) not more than 6 months (with respect to loans for which the applicable interest rate is 9% per annum or 8% per annum and for loans to first time borrowers on or after July 1 1988) after the borrower ceases to pursue at least a half-time course of study, a grace period. However, during certain other periods, each a deferral period and subject to certain conditions, no principal repayments need be made, including periods when the student has returned to an eligible. educational institution on a full-time basis or is pursuing studies pursuant to an approved graduate fellowship program, or when the student is a member of the Armed Forces or a volunteer under the Peace Corps Act or the Domestic Volunteer Service Act of 1973, or when the borrower is temporarilyor total disabled, or periods during which the borrower may defer principal a totally financial hardship. For new borrowers to whom loans are first disbursed eon or after Jule temporary payment of principal may be deferred only while the Borrower is at least a half-time student or is in n' A-5 approved graduate fellowship program or is enrolled in a rehabilitation program, or when the bor- rower is seeking but unable to find full-time employment, or when for any reason the lender deter- mines (in accordance with Department of Education regulations) that payment of principal will cause the borrower economic hardship, in each case subject to a maximum deferment of three years. The 1992 Amendments also require forbearance of loans in certain circumstances and permit forbearance of loans in certain other circumstances. The Unsubsidized Stafford Loan program created under the 1992 Amendments is designed for students who do not qualify for Stafford Loans due to parental and/or student income and assets in excess of permitted amounts. Otherwise, the basic requirements for Unsubsidized Stafford Loans are essentially the same as those for the Stafford Loans, including with respect to provisions governing the interest rate, the annual loan limits and the special allowance payments. The terms of the Unsubsidized Stafford Loans, however, differ in some respects. The federal government does not make Interest Subsidy Payments on Unsubsidized Stafford Loans. The borrower must either pay interest 60 days after the time the loan is disbursed or capitalize the interest until repayment begins. Unsub- sidized Stafford Loan borrowers are required to pay a 6.5% insurance fee payable upon disbursement to the Department, though no guarantee may be charged by the applicable guarantee agency. As of July 1,1994, the maximum insurance premium was reduced to 1% and the origination fee will be 3%. Subject to the same loan limits established for Stafford Loans, the student may borrow up to the amount of such student's unmet need. PLUS Programs The PLUS program permits parents of dependent students to borrow up to $4,000 per year, up to a maximum aggregate of $20,000, on behalf of each eligible student. Under the SLS program, graduate or professional school students and independent (and certain dependent) undergraduate students may borrow subject to the same loan limitations. Prior to October 17, 1986, the limits were $3,000 per year (up to $15,000) for loans to parents and graduate students and $2,500 per year (up to $12,500) for loans to independent undergraduate students. Most PLUS and SLS loans disbursed prior to July 1, 1987, carry an interest rate of 12 percent per annum. Beginning with loans disbursed on or after July 1, 1987, the rate on PLUS and SLS loans is variable, reset annually, based on the bond -equivalent yield of the one year U.S. Treasury bill rate established at the last auction held before the preceding June 1, plus 3.25 percent; the maximum rate charged to borrowers is 12 percent. The first payment of principal and interest is due within 60 days of full disbursement of the loan except for borrowers eligible for a deferment (e.g., full-time students or parents borrowing on their behalf) who may defer principal and interest payments while eligible for the deferment; deferred interest is then capitalized periodically or at the end of the deferment period under specific arrangements with the borrower. The maximum repayment term is 10 years. While PLUS and SLS loans carry no in -school interest subsidy, such loans made before July 1, 1987 are eligible for the same special allowance payments as are made on Stafford Loans. PLUS and SLS loans disbursed on or after July 1, 1987 are eligible to have special allowance payments made during any year (July 1 to June 30) when the variable rate, as calculated above, would have exceeded 12 percent but for the maximum rate. The Consolidation Program The Act authorizes a program under which certain borrowers may consolidate their various Student Loans into a Consolidation Loan insured and reinsured on a basis similar to Stafford Loans. Consolidation Loans may be made in an amount sufficient to pay outstanding principal, unpaid interest and late charges on all federally insured or reinsured student loans incurred under the FFELP selected by the borrower, as well as loans made pursuant to various other federal student loan programs and which may have been made by different lenders. Under this program, a lender may make a Consolidation Loan to an eligible borrower at the request of the borrower if the lender holds an outstanding loan of the borrower or the borrower certifies that he has been unable to obtain a Consolidation Loan from the_ holders of the outstanding loans made to the borrower. The Act prescribes the terms applicable to Consolidation Loans. A-6 Guarantee Agencies The Act authorizes guarantee agencies to support education financing and credit needs of stu- dents at post -secondary schools. The Act requires every state either to establish its own agency or to contract with another guarantee agency. Under various programs throughout the United States, guarantee agencies insure and sometimes service and hold guaranteed student loans. The guarantee agencies are reinsured by the federal government for 80% to 100% of claims paid, depending on their claims experience for loans disbursed prior to October 1, 1993 and for 78% to 98% of claims paid for loans disbursed after October 1, 1993. See "Federal Insurance and Reinsurance of Guarantee Agencies." Guarantee agencies collect a one-time insurance fee of up to 1% of the principal amount of each guarantee loan, depending on the guarantee agency. The guarantee agencies generally guarantee loans for students attending institutions in their particular state or region or for their residents attending schools in another state. States that do not have their own guarantee agency contract with a multi -state guarantee agency, or another state agency. Federal Insurance and Reinsurance of Guarantee Agencies A student loan is considered to be in default for purposes of the Act when the borrower fails to make an installment payment when due, or to comply with other terms of the loan, and if the failure persists for 180 days in the case of a loan repayable in monthly installments or for 240 days in the case of a loan repayable in less frequent installments. Under certain circumstances a loan deemed ineligi- ble for reimbursement may be restored to eligibility. If the loan in default is guaranteed in accordance with the provisions of the Act, the Department is rewired to pay the applicable guarantee agency the amount of the loss sustained thereby, upon notice and determination of such amount, within 90 days of such notification, subject to reduction as described below. If the loan is guaranteed by a guarantee agency, the eligible lender is reimbursed by the guarantee agency for 100% (98% for loans disbursed on or after October 1, 1993) of the unpaid principal balance of the loan plus accrued interest on any loan defaulted so long as the eligible lender has properly originated and serviced such loan. Under the Act, the Department enters into a guarantee agreement with each guarantee agency, which provides for federal reinsurance for amounts paid to eligible lenders by the guarantee agency with respect to defaulted loans. Pursuant to such agreements, the Department agrees to reimburse a guarantee agency for 100% of the amounts expended in connection with a claim resulting from the death, bankruptcy, total and permanent disability of a borrower, the death of a student whose parent is the borrower of a PLUS Loan or claims by borrowers who received loans on or after January 1, 1986 and who are unable to complete the programs in which they are enrolled due to school closure or borrowers whose borrowing eligibility was falsely certified by the eligible institution; such claims are not included in calculating a guarantor agency's claims rate experience for federal reinsurance purposes. The Department is also required to repay the unpaid balance of any loan if collection is stayed under the Bankruptcy Code and is authorized to acquire the loans of borrowers who are at high risk of default and who request an alternative repayment option from the Department. Further, the Department reimburses a guarantee agency for any amounts paid to satisfy claims not resulting from death, bankruptcy or disability subject to reduction as described below. A-7 The amount of such reinsurance payment to the guarantee agency is subject to reduction based upon the annual claims rate of the guarantee agency, calculated to equal the amount of federal reinsurance as a percentage of the original principal amount of guaranteed loans in repayment on the last day of the prior federal fiscal year. The formula is summarized as follows: Claims Paid Rate Federal Payment(1) 0% up to 5% ............ 100% of claim amounts 5% up to 9% ............ 100% of claims up to 5%, 90% of claims of 5% and over 9% and over ............ 100% of claims up to 5%, 90% of claims of 5% to 9%, and 80% of claims of 9% and over (1) The federal reimbursement is reduced to 98%, 88% and 78% for loans disbursed on or after October 1, 1993. The claims experience is not accumulated from year to year, but is determined solely on the basis of claims in any one federal fiscal year compared with the original principal amount of loans in repayment at the beginning of that year. The 1992 Amendments addressed industry concerns regarding the Department's commitment to providing support in the event of guarantee agency failures. Pursuant to the 1992 Amendments, guarantee agencies are required to maintain specified reserve fund levels. Such levels are defined as 0.5 percent of the total attributable amount of all outstanding loans guaranteed by the agency for the fiscal year of the agency that begins in 1993, 0.7 percent for the agency's fiscal year beginning in 1994, 0.9 .percent for the agency's fiscal year beginning in 1995, and 1.1 percent for the agency's fiscal year beginning on or after January 1, 1996. If the guarantee agency fails to achieve the minimum reserve level in any two consecutive years, if the guarantee agency's federal reimbursements are reduced to 80 percent (or 78 percent after October 1, 1993) or if the Department determines the guarantee agency's administrative or financial condition jeopardizes its continued ability to perform its responsi- bilities, the Department shall require the guarantee agency to submit and implement a management plan to address the deficiencies. The Department may terminate the guarantee agency's agreements with the Department if the guarantee agency fails to submit the required plan, or fails to improve its administrative or financial condition substantially, or if the Department determines the guarantee agency is in danger of financial collapse. In such event, the Department is authorized to undertake specified actions to assure the continued payment of claims, including maturity advances to guarantee agencies to cover immediate cash needs, transferring of guarantees to another guarantee agency, or transfer of guarantees to the Department itself. The Act provides that, subject to compliance with the Act, the full faith and credit of the United States is pledged to the payment of federal reinsurance claims. It further provides that guarantee agencies shall be deemed to have a contractual right against the United States to receive reinsurance in accordance with its provisions. In addition, the 1992 Amendments provide that if the Department determines that a guarantee agency is unable to meet its insurance obligations, holders of loans may submit insurance claims directly to the Department until such time as the obligations are transferred to a new guarantee agency capable of meeting such obligations or until a successor guarantee agency assumes such obligations. There can be no assurance that the Department would under any given circumstances assume such obligation to assure satisfaction of a guarantee obligation by exercising its right to terminate a reimbursement agreement with a guarantee agency or by making a determina- tion that such guarantee agency is unable to meet its guarantee obligations. Lastly, the 1993 OBRA provided the Secretary of Education with broad authority to manage the finances and affairs of guaranty agencies. In general, the Act clarified that agency reserve funds are federal property and may be taken by the Secretary if he views such action as in the best interests of the loan program. Also, the Secretary has broad authority to terminate an agency's agreement to guaranty loans. A-8 Sallie ae PRIVATE EXPORT FUNDING CORPORATION Private Export Funding Corporation ("PEFCO") is a privately owned corporation organized in 1970 with the support of the U.S. Department of the Treasury and the Export -Import Bank for the purpose of assisting the financing of exports of U.S.-origin goods and services. Its shareowners consist of 37 commercial banks, including most of the major United States commercial banks involved in export financing, six industrial companies involved in exporting U.S. products and services, and three financial services companies. PEFCO's principal business is to make U.S. dollar loans to foreign importers to finance the purchase of goods and services of United States manufacture or origin. Under various agreements between PEFCO and the Export -Import Bank, PEFCO's loans are made with the approval of Export - Import Bank, and the bank in turn guarantees such loans. The U.S. Attorney General has rendered a legal opinion to the effect that the contractual liabilities of the Export -Import Bank constitute general obligations of the United States backed by the full faith and credit thereof. PEFCO's fiscal year runs from October 1 to the succeeding September 30. Attached are the audited financial statements for fiscal 1993. Interest income from PEFCO's obligations is subject both to federal and to state income tax. For additional information about PEFCO, please contact your First Interstate Bank Sales representative. PRIVATE EXPORT FUNDING CORPORATION STATEMENT OF FINANCIAL CONDITION ASSETS Cash..................................................... Investment securities U.S. Treasury securities purchased under agreements to resell................................................. Auction -rate preferred stock .............................. U.S. Treasury securities .................... ........... . U.S. guaranteed securities ................................ Commercial paper ....................................... Interest and fees receivable ................................ Export loans guaranteed by Eximbank ....................... Other assets and deferred charges (including $9,917,000 of unamortized debt issue costs; $9,511,000 in 1992) .......... Total Assets ...................................... LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Short-term notes ........................................ Interest payable ........................................ . Accrued expenses and deferred income .................... Dividend payable ........................................ Income taxes payable .................................... Long-term secured notes (principal amount less unamortized discount of $1,373,000; $1,313,000 in 1992) .............. Total Liabilities .................................... Undisbursed export loan commitments ($664,370,000; $946,591,000 in 1992) Shareowners' equity Common stock —no par value; authorized 40,000 shares; issued and outstanding 14,221 shares .................. . Retained earnings .............................. ....... . Total Shareowners' Equity .......................... Total Liabilities and Shareowners' Equity ............. See Notes to Financial Statements A-1 September 30, 1993 8,000,000 60,000,000 150,248,000 38,304,000 51,099,000 2,637,144,000 Vq 713.000 $ 549,478,000 42,416,000 4,384,000 1,067,000 232,000 2 nm 262.000 `A'IITMOM8I1UI1l 14,189,000 42.898.000 �_VLIRIW@1III1 September 30, 1999 $ 7,502,000 60,000,000 286,310,000 25,635,000 5,000,000 44,685,000 2,128,317,000 13.426.000 $2,570,875,000 $ 385,058,000 40,995,000 6,620,000 1,067,000 150,000 2 076.329_000 RJUSHIPAPl1I/I/1 14,189,000 46.474.000 �:TIi:I:"�C�IIIII] $2,570,875,000 PRIVATE EXPORT FUNDING CORPORATION STATEMENT OF INCOME AND RETAINED EARNINGS Financing revenue Interest................................................. Commitment and other fees ............................... Financing expense Interest................................................. Commitment and other fees ............................... Net financing income ....................................... Net investment securities gains ............................... General and administrative expenses ......................... Income before income taxes and extraordinary item ............ Provision for income taxes ................................... Income before extraordinary item ............................ Extraordinary gain (loss) net of income tax effect of $299,000; $185,000in 1992......................................... Net Income ............................................... Dividends declared on common stock ($450 per share; $300in 1992)............................................ Retained earnings beginning of year .......................... Retained earnings end of year ............................... Earnings per share Income before extraordinary item ......................... Extraordinary item ....................................... Net income .............................................. See Notes to Financial Statements A-2 Year ended September 30, $223,713,000 2,564,000 222,622,000 I 3,655,000 3,209,000 4,107,000 2,757,000 (6,400,000) $157.80 Year ended September 30, 1992 $208,768,000 2,946,000 211,714,000 208,882,000 2,465,000 10,657,000 4,001,000 9,121,000 2,538,000 6,583,000 (4,266,000) 44,518,000 $ 46,474,000 $462.91 (25.39) $437.52 PRIVATE EXPORT FUNDING CORPORATION STATEMENT OF CASH FLOWS Operating Activities Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ....................... . . Net (gains) on investment securities ...................... Net (gain) loss due to extraordinary items ................. (Increase) in interest and fees receivable ................. Increase in interest payable and discount ................. Increase (decrease) in income taxes payable ............. Decrease in receivable from sale of securities ............. Other, net ............................................. Net cash (used) provided by operating activities ............. Investing Activities Proceeds from sales and maturities of investment securities. Purchases of investment securities ....................... Principal collected on export loans ............... ..... . Export loan disbursements .............................. Net cash (used) by. investing activities ...................... Financing Activities Proceeds from issuance of short-term notes ............... Repayments of short-term notes ......................... Proceeds from issuance of long-term secured notes less issuance costs ....................................... Principal repayments and repurchases of long-term secured notes............................................... Dividends paid ......................................... Net cash provided by financing activities .................... Increase in cash and cash equivalents .......... .......... . Cash and cash equivalents beginning of year ................ Cash and cash equivalents end of year ..................... Supplemental disclosures of cash flow Information: 1993 1992 Interest paid Income taxes paid $216,583,000 $201,306,000 $944,000 $2,733,000 See Notes to Financial Statements A-3 Year ended September 30, 1993 3,385,000 (3,209,000) (879,000) (7,435,000) 1,412,000 82,000 (1,646,000) (5,466,000) 1,033,519,000 (901,080,000) 242,772,000 (751.599.000) (376,388,000) 347,264,000 (119,990,000) (6.400.000) 384,770,000 2,916,000 7.502.000 Year ended September 30, 1992 $ 6,222,000 3,111,000 (10,657,000) 546,000 (2,262,000) 4,140,000 (72,000) 18,332,000 4,112,000 23,472,000 1,945,461,000 (1,821,784,000) 209,939,000 (416,449,000) ( 82,833,000) 2,030,420,000 (2,045,275,000) 196,929,000 (98,666,000) (19,269,000) 64,139,000 4,778,000 2.724.000 $ 7,502,000 PRIVATE EXPORT FUNDING CORPORATION NOTES TO FINANCIAL STATEMENTS Note 1—Agreements with Export -Import Bank PEFCO has agreements with the Export -Import Bank of the United States (Eximbank) which, for specified fees, provide that Eximbank will: 1. Guarantee the due and punctual payment of principal and interest on all export loans made by PEFCO; 2. Guarantee the due and punctual payment of interest on PEFCO's long-term debt obligations when requested by PEFCO; and 3. Guarantee certain fees paid by borrowers on behalf of PEFCO. Under its agreements with PEFCO, Eximbank retains a broad measure of supervision over PEFCO's major financial management decisions. In addition to approving the terms of individual loan commitments, Eximbank approval of the terms of PEFCO's long-term debt issues is required. Surplus funds may be invested only in approved types of assets. Eximbank is entitled to representation at all meetings of PEFCO's Board of Directors, Advisory Board and Exporters' Council. PEFCO furnishes Eximbank with full information as to budgets, financial condition and operating results. Note 2---Investment Securities Surplus funds are invested primarily in investment securities. Such investments are stated at cost adjusted for amortization of premium and discount. These investments averaged approximately $321 million in 1993 ($416 million in 1992) and their average yield for the year ended September 30, 1993, was 3.95% p.a. (5.07% p.a. in 1992). At year-end the yield on these investments was 3.70% p.a. (3.99% p.a. in 1992). At September 30, 1993, the average maturity was 402 days (541 days at September 30, 1992). The yields on auction -rate preferred stock have been adjusted to a taxable - equivalent basis. From time to time, PEFCO purchases U.S. Treasury securities under agreements to resell. Such investments averaged approximately $13 million in 1993 ($6 million in 1992). The average yield on repurchase agreements for the year ended September 30, 1993, was 2.97% p.a. (4.46% p.a. in 1992). In 1993, maturities ranged from one to seven days. For purposes of the Statement of Cash Flows, PEFCO considers U.S. Treasury securities purchased under agreements to resell as cash equivalents. Gains and losses on disposition of investment securities are computed by the specific identification method. A-4 Note 3—Lending Export loans outstanding at September 30, 1993, and related undisbursed commitments are classified as follows: Export Loans and Commitments Outstanding loans Undisbursed commitments Type of loan Amount Average rate Amount Average rate Fixed rate export loans Rate determined $2,268,743,000 8.78% p.a. $183,257,000 8.35% p.a. Rate to be determined — 481,113,000(a) Floating rate export loans 225,215,000(b) — Securitization participations 143,186,000(c) — $2,637,144,000(d) $664,370,000 (a) The fixed rate will be established by PEFCO at future times determined by the borrowers, but not later than May 1996. (b) The average interest rate on $78,438,000 of outstanding floating rate loans is .01 % p.a. above the London Interbank Offered Rate. With respect to this amount, the effective interest rate for the year ended September 30, 1993, as a result of interest rate swap transactions entered into by PEFCO, is 8.13% p.a. The average rate on $146,165,000 is .45% p.a. above the 30-day Federal Reserve composite commercial paper rate- (c) The rate on securitization participations is .1875% p.a. above the London Interbank Offered Rate. (d) Outstanding loans are scheduled for repayment during the following fiscal years: 1994................................ $ 401,718,000 1995................................ 272,659,000 1996................................ 266,331,000 1997................................ 270,477,000 1998................................ 273,976,000 1999 and thereafter .................. 1,151,983,000 $2,637,144,000 Export loans are fully and unconditionally guaranteed by Eximbank as to timely payment of principal and interest with the exception of interest on $79,050,000 of outstanding floating rate loans. The interest on $78,438,000 of these loans is guaranteed by Eximbank at the lesser of the London Interbank Offered Rate plus .01 % p.a. or 1.00% p.a. above the U.S. Treasury rate of the same maturity at the time of default. PEFCO receives a commitment fee on the undisbursed balance of loan commitments. It is PEFCO's policy to record loan commitments at the time of the borrower's acceptance of the PEFCO offer and to commence accrual of commitment fee revenue no later than 60 days subsequent to such acceptance. The fair value of commitment fee revenue on undisbursed commitments as of September 30, 1993, is $1,200,000 and is measured by the present value of estimated future commitment fee cash flows, based on the terms and estimated disbursement patterns of the agreements. Under the securitization support program, PEFCO provides liquidity support for both medium- and long-term Eximbank-guaranteed financing facilities in the following ways: (1) by funding interim notes until securitization of the Eximbank-guaranteed debt is effected, (as indicated in (c) above), (2) by providing liquidity support during the waiting period prior to payment by Eximbank under its guarantee and (3) by providing "market disruption insurance." PEFCO's liquidity support advance, if any, will be A-5 repaid and is secured by the Eximbank guarantee and, in certain instances, by deposits held by a trustee. PEFCO earns fees and interest under this program. As of September 30, 1993, PEFCO's maximum exposure to advance funds for securitization liquidity support on any given day was $142,000,000. No advances had been made under these arrangements as of September 30, 1993. Note 4-Short-term Notes Short-term notes averaged approximately $510 million in 1993 ($390 million in 1992) with an average interest rate of 3.97% p.a. in 1993 (4.88% p.a. in 1992). At September 30, 1993, the cost of these funds was 3.84% p.a. (4.20% p.a. at September 30, 1992). PEFCO maintains credit lines aggregating $255 million with 19 shareowner banks, for which it pays commitment fees of 1/8 of 1 % p.a. Note 5-Long-term Secured Notes Long-term secured notes have final maturities of five years or longer and are sold through underwriters. Long-term Secured Notes Original Principal Principal amount principal amount Coupon Effective due within Issue amount 9/30/93 interest interest Anticipated one year designation (millions) (millions) rate (p.a.) rate (p.a.) repayment schedule (millions) Series T $ 150 $ 1 11.25% 11.34% October 1993 $ 1 Series X 200 88 7.70% 7.70% January 1997 - Series Y 150 144 8.60% 8.80% June 1994 144 Series AA 100 100 9.30% 9.30% June 1995 - Series BB 100 100 9.10% 9.10% October 1998 - Series CC 100 100 9.50% 9.52% March 1999 - Series DD 100 100 9.45% 9.45% December 1999 - Series EE 200 200 8.90% 8.83% March 1995 - Series FF 200 180 9.00% 9.05% January 1996 - Series GG 100 100 8.95% 8.89% October 1997 - Series HH 100 100 8.35% 8.41 % January 2001 - Series II 200 200 8.40% 8.46% July 2001 - Series JJ 100 100 8.15% 8.07% April 1997 - Series KK 100 100 8.75% 8.74% June 2003 - Series LL 150 150 7.90% 8.02% March 2000 - Series MM 100 100 7.125% 7.115% October 1996 - Series NN 100 100 7.30% 7.46% January 2002 - Series 00 150 150 5.75% 5.77% April 1998 - Series PP 100 100 6.90% 6.91 % January 2003 - Series QQ 100 95 5.65% 5.64% March 1994-March 2003 10 $2,600 $2,308 $155 In 1993, PEFCO issued $150 million of Series 00 Notes, $100 million each of Series PP Notes and QQ Notes. The principal of all long-term secured notes is fully secured by U.S. Treasury securities or other obligations unconditionally guaranteed or fully insured by the United States, and foreign importer notes related to export loans guaranteed by Eximbank, to which securities and notes are assigned and held by a bank trustee. The collateral includes scheduled maturities sufficient to ensure that before the date on which payment of principal of each secured note is due, the trustee will have cash from maturing A-6 collateral sufficient to pay the principal of the secured note. Payment of interest on secured notes is guaranteed by Eximbank. Debt issue costs and deferred charges relating to forward transactions incurred in connection with the issuance of long-term secured notes are amortized proportionately over the life of each issue. Forward gains and losses and original issue discounts are reflected in the effective interest rates in the table above. The average balance of long-term secured notes was approximately $2,272 million in 1993 ($2,073 million in 1992) and the average interest cost for the year ended September 30, 1993, was 8.30% p.a. (8.59% p.a. in 1992). Maturities of long-term secured notes are as follows: 1994..................................... $ 154,527,000 1995..................................... 310,000,000 1996..................................... 190,000,000 1997..................................... 298,108,000 1998..................................... 260,000,000 1999 and thereafter ........................ 1,095,000,000 In connection with its management of interest rate exposure, PEFCO enters into interest rate swap and forward transactions. At September 30, 1993, the notional principal amount of interest rate swap transactions with commercial banks, was $385,000,000. Maturities range from December 1994 to May 2000. The amount at risk with respect to these contracts is the present value of replacing the swap transactions at current interest rates. The aggregate amount at risk approximated $9,300,000 at September 30, 1993. PEFCO controls the credit risk of its interest rate swap agreements by adhering to credit limits. PEFCO has issued two warrants entitling the holder(s) thereof to purchase $100,000,000 aggregate principal amount of PEFCO's debt securities, $50,000,000 for each warrant. The warrants may be exercised on any April 1 or October 1 during a ten year period beginning October 1, 1994. The debt securities will have a purchase price of 100% of the principal amount thereof, will bear interest at a rate of 6.75% p.a. and will be secured as to both principal and interest by obligations backed by the full faith and credit of the United States. Note 6—Shareowners' Equity Common stock —each share outstanding is subject to an additional assessment of $1,000 upon call by the Board of Directors. Net income per share has been calculated based on 14,221 shares outstanding during 1993 and 1992. Retained earnings —under an agreement with Eximbank, PEFCO has approval to declare or pay dividends of up to 85% of cumulative net income, subject to the following: (i) the shareowners' equity of PEFCO, after giving effect to such dividend, is maintained at a minimum of $55 million, (ii) PEFCO maintains, after giving effect to such dividend, a ratio of guaranteed assets to shareowners' equity not in excess of 75 to 1 and (iii) PEFCO maintains a maximum loan offer guideline of not less than $500 million. A-7 Note 7—Income Taxes The provision for income taxes is as follows: Federal —current ................................. Federal —deferred ................................ State and local ................................... Income taxes payable are as follows: Federal —current ................................ Federal —deferred ............................... State and local .................................. Year ended September 30, 1993 1992 $1,067,000 $2,783,000 (255,000) (455,000) — 25,000 $ 812,000 $2,353,000 September 30, 1993 $ 180,000 52.000 $ 232,000 September 30, 1992 $ 46,000 61,000 43,000 $150,000 A reconciliation from the U.S. Federal statutory tax rate to the effective income tax rate is as follows: 1993 1992 Tax at statutory rate ........................................ 34% 34% Decrease in taxes: Tax-exempt investment income .......................... (12) (7) Effective income tax rate .................................... 22% 27% In 1992, PEFCO adopted Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. Included in other assets and deferred charges at September 30, 1993 is a deferred tax asset of $194,000. This deferred tax receivable is due principally to the difference in the timing of recognition of certain employee benefits and securitization fees offset in part by net losses on hedging transactions. Note 8—Employee Benefit Plans PEFCO has a fully funded, non-contributory defined benefit pension plan covering all full-time employees. Pension benefits are based primarily upon participants' compensation and years of credited service. PEFCO's policy is to fund the maximum amount that can be deducted for Federal income tax purposes. At September 30, 1993, the plan had assets at fair value of $691,000 and a projected benefit obligation of $1,566,000 based on a discount rate of 6%. Pension expense was $150,000 in 1993 and $180,000 in 1992. PEFCO has a defined contribution profit sharing plan. Contributions to the plan are made by PEFCO and are based upon PEFCO's return on average equity, excluding, at the discretion of the Board of Directors, large non -recurring items. All employees are eligible. Contributions are vested immediately. PEFCO's contributions are limited as provided by Federal income tax regulations. Profit sharing expense was $35,000 in 1993 and $69,000 in 1992. Note 9—Extraordinary Items In 1993, PEFCO's office at 280 Park Avenue was severely damaged during a fire in the building. After a settlement with the insurer, PEFCO recognized an extraordinary gain of $580,000 net of income taxes during the year. In 1992, PEFCO repurchased $6 million principal amount of its outstanding long-term secured notes at a premium. This repurchase resulted in an extraordinary loss of $361,000, net of income tax benefits. . A-8 Note 10—Estimated Fair Value of Financial Instruments In 1993, PEFCO adopted Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments (SFAS No. 107). The pronouncement requires disclosure of fair value information about financial instruments for which it is practicable to estimate, whether or not recognized on the balance sheet. Market price quotations are not available for a significant portion of PEFCO's financial instruments. Therefore, the fair values presented are estimates using present value or other valuation techniques and may not be the net realizable value. Additionally, the calculation of estimated fair values is based on market conditions at a point in time and may not reflect current or future fair values. Certain financial instruments and all nonfinancial instruments are excluded from the scope of SFAS No. 107. As a result, the fair value disclosures provide only a partial estimate of the fair value of PEFCO. Adoption of SFAS No. 107 had no effect on PEFCO's net income or financial condition. The following presents the methodologies and assumptions used to estimate the fair value of financial instruments. Fair Value Approximates Book Value: The fair values of cash, securities purchased under agreements to resell, auction -rate preferred stock, commercial paper, securitization participations, floating rate export loans, interest and fees receivable, short-term notes and interest payable are considered to approximate book value due to their pricing characteristics or short-term nature. U.S. Treasury and U.S. Guaranteed Securities: These investments are stated at cost adjusted for amortization of premium and discount as stated in Note 2. Fair values are based on quoted market prices or dealer quotes. The carrying value and the fair value of U.S. Treasury and U.S. guaranteed securities at September 30, 1993, were $188.6 million and $188.5 million, respectively. Export Loans with Fixed Rates Determined: The fair value of export loans with fixed rates determined is estimated by discounting estimated future cash flows using discount rates appropriate for each maturity. The carrying value and the fair value of export loans with fixed rates determined at September 30, 1993, were $2.3 billion and $2.6 billion, respectively. Long -Term Secured Notes: The fair value accounts for market interest rates and PEFCO's credit rating. Fair values are based on quoted market prices or dealer quotes. The carrying value and the fair value of long-term secured notes at September 30, 1993, were $2.3 billion and $2.6 billion, respectively. Note 11—Accounting Developments In December 1990, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, which PEFCO will adopt during fiscal 1994. Under SFAS No. 106, employers must recognize the cost of certain postretirement benefits during the periods employees render service, with A-9 such costs being recognized by the full eligibility date. PEFCO currently recognizes these health care and life insurance costs as paid. Adoption of SFAS No. 106 will have no effect on PEFCO's cash outlays for these benefits. PEFCO estimates that the transition obligation upon adoption of SFAS No. 106 for its employees on October 1, 1993, is approximately $700,000. SFAS No. 106 permits the option of either immediately recognizing the transition obligation upon adoption or amortizing the transition obligation over future periods. PEFCO currently expects that it will amortize the transition obligation over 20 years, and the incremental pre-tax expense will be approximately $140,000 in 1994, including amortization of the transition obligation of approximately $35,000. In May 1993, FASB issued SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, which PEFCO will adopt during fiscal 1994. SFAS No. 115 expands the use of fair value accounting for certain investments in debt and equity securities, but retains the use of the amortized cost method for investments in debt securities that PEFCO has the positive intent and ability to hold to maturity. Due to the nature of PEFCO's business and its past history regarding its investment securities, it is expected that the majority of the investment portfolio will be classified as securities available -for - sale. As a result, the securities will be reported at fair value in the statement of financial condition with unrealized gains and losses reported in a separate component of shareowners' equity. The new standard may affect reported assets and shareowners' equity, but will have no impact on earnings or liabilities. A-10 MANAGEMENT'S REPORT ON RESPONSIBILITY FOR FINANCIAL REPORTING To the Board of Directors and Shareowners of Private Export Funding Corporation Private Export Funding Corporation ("PEFCO") maintains a system of internal control over financial reporting which is designed to provide reasonable assurance regarding the preparation of reliable published financial statements. The system contains self -monitoring mechanisms and actions are taken to correct deficiencies as they are identified. Even an effective internal control system, no matter how well designed, has inherent limitations —including the possibility of the circumvention or overriding of controls —and therefore can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal control system effectiveness may vary over time. PEFCO's management assessed its internal control over financial reporting as of September 30, 1993, in relation to criteria for effective internal control described in "Internal Control — Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, PEFCO believes that, as of September 30, 1993, its system of internal control over financial reporting met those criteria. 06qg� W0-1/PrZEZ--- Delcour S. Potter President and Chief Executive Officer November 10, 1993 A-11 Leo P. Masterson Vice President —Treasurer and Controller REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENTS To the Board of Directors and Shareowners of Private Export Funding Corporation In our opinion, the accompanying statements of financial condition and the related statements of income and retained earnings and of cash flows present fairly, in all material respects, the financial position of Private Export Funding Corporation at September 30, 1993 and 1992, and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. These financial statements are.the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial .statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. _i1 A C.C.- aO=[A�� New York, New York November 10, 1993 REPORT OF INDEPENDENT ACCOUNTANTS ON INTERNAL CONTROLS To the Board of Directors and Shareowners of Private Export Funding Corporation We have examined management's assertion that, as of September 30, 1993, Private Export Funding Corporation's ("PEFCO") internal control over financial reporting met the criteria for effective internal control described in "Internal Control —Integrated Framework." Management's assertion is included in the accompanying Management's Report on Responsibility For Financial Reporting. Our examination was made in accordance with standards established by the American Institute of Certified Public Accountants and, accordingly, included obtaining an understanding of the internal control structure over financial reporting, testing and evaluating the design and operating effectiveness of the internal control structure, and such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion. Because of inherent limitations in any internal control structure, errors or irregularities may occur and not be detected. Also, projections of any evaluation of the internal control structure over financial reporting to future periods are subject to the risk that the internal control structure may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assertion that, as of September 30, 1993, PEFCO's system of internal control over financial reporting met the criteria for effective internal control established by the Committee of Sponsoring Organizations of the Treadway Commission is. fairly stated, in all material respects, based upon criteria established in "Internal Control —Integrated Framework." New York, New York November 10, 1993 A-12 FIVE-YEAR HISTORICAL FINANCIAL DATA (thousands, except per share amounts) Year ended September 30, Export Loan Commitments: Commitments -cumulative Commitments Cancellations and adjustments of commitments . Net commitments Undisbursed commitments* Disbursements Repayments Selected Assets: Export loans* Cash and investment securities* Selected Liabilities: Short-term notes* Long-term secured notes* Net Income Net Income Per Share Average Shareowners' Equity Return on Average Share - owners' Equity Dividends * Year-end balances 1993 1992 1991 1990 1989 $8,027,280 $7,680,596 $7,000,386 $6,330,116 $5,754,093 $346,684 $680,210 $670,270 $576,023 $344,351 - 208 (42,473) (83,463) (1,301) $346,684 $680,418 $627,797 $492,560 $343,050 $664,370 $946,591 $784,000 $868,274 $743,457 751,599 416,449 747,432 444,900 277,354 242,772 209,939 191,876 164,136 232,454 $2,637,144 $2,128,317 $1,921,807 $1,366,251 $1,085,487 258,970 384,447 491,261 410,483 218,260 $ 549,478 $ 385,058 $ 399,387 $ 347,250 $ 135,538 2,306,262 2,076,322 1,974,543 1,372,960 -I ,102.985 $29824 $69222 $6,619 $8,199 $1 t1,262 $198.58 $437.52 $465.44 $576.54 $721..61 $58,374 $609152 $71,471 $80,214 $78,041 4.8% 10.3% 9.3% 10.2% 13.1 % $6,400 $4,266 $18,202 $15,999 $5,333 A-13 UNAUDITED SUMMARY INTERIM FINANCIAL STATEMENTS The following are PEFCO's unaudited Summary Statement of Financial Condition at December 31, 1993 and December 31, 1992 and unaudited Summary Statement of Income and Retained Earnings for the three months ended December 31, 1993 and December 31, 1992. Interim results are not necessarily indicative of the results to be expected for the fiscal year ended September 30, 1994. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the summary financial statements for such periods have been included. PRIVATE EXPORT FUNDING CORPORATION SUMMARY STATEMENT OF FINANCIAL CONDITION (in Thousands) (Unaudited) December 31, December 31, 1993 1992 ASSETS Cash and investment securities .................................. $ 338,053 $ 350,781 Export loans guaranteed by Eximbank ........................... 2,868,032 2,590,830 Interest receivable and other assets ............................. 73,357 68,409 Total assets .............................................. $3,279,442 $3,010,020 LIABILITIES AND SHAREOWNERS' EQUITY Short-term notes ............................................... $ 709,329 $ 677,165 Interest and other payables.................................... 57,409 56,035 Long-term secured notes (principal amount less unamortized discount of $1,327; $1,415 in 1992)................................... 2,455,781 2,218,720 Total liabilities ............................................ 3,222,519 2,951,920 Undisbursed export loan commitments ($431,003; $673,008 in 1992) Common stock ................................................. 14,189 14,189 Retained earnings ............................................. 42,734 43,911 Total shareowners' equity .................................. 56,923 58,100 Total liabilities and shareowners' equity ...................... $ 3,279,442 $ 3,010,020 A-14 SUMMARY STATEMENT OF INCOME AND RETAINED EARNINGS (In Thousands) (Unaudited) Financing revenue Interest........................................................ Commitment and other fees ...................................... Financing expense Interest........................................................ Commitment and other fees ...................................... Net financing income ........ Net investment securities gains General and administrative expenses ................................ Income before income taxes ........................................ Provision for income taxes ......................................... Netincome ....................................................... Retained earnings, beginning of period .............................. Dividend declared on common stock ................................ Retained earnings, end of period ..................................... A-15 Three Months Ended December 31, December 31, 1993 1992 $58,178 $54,909 525 700 58,703 55,609 55,787 54,162 895 881 56,682 55,043 2,021 566 9 1,111 837 903 1,193 774 290 137 903 637 42,898 46,474 (1,067) (3,200) $42,734 $43,911 Supplement dated May 12, 1995 to Information Statement dated March 31, 1995 Federal National Mortgage Association FannieMae This Supplement describes the financial condition of the Federal National Mortgage Associa- tion ( "Fannie Mae" or the "Corporation") as of March 31, 1995 and contains unaudited financial statements with respect to the Corporation for the quarter ended March 31, 1995. This Supplement should be read in conjunction with the Corporation's Information Statement dated March 31, 1995 ( the "Information Statement") , which is hereby incorporated by reference. The Information Statement describes the business and operations of the Corporation and contains financial data as of December 31, 1994. Fannie Mae also periodically makes available statistical information on its mortgage purchase and mortgage -backed securities volumes as well as other relevant information about Fannie Mae. Copies of the Corporation's current Information Statement, any supplements thereto and other available information, including the Corporation's Proxy Statement dated March 27, 1995, can be obtained without charge from the Office of Investor Relations, Fannie Mae, 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (telephone: 202 /752-7115) . In conjunction with its securities offerings, the Corporation may incorporate this Supple- ment by reference in one or more other documents describing the securities offered thereby, the selling arrangements therefor, and other relevant information. Such other documents may be called an Offering Circular, Prospectus, Guide to Debt Securities or otherwise. This Supplement does not itself constitute an offer to sell or a solicitation of an offer to purchase such securities. Fannie Mae is a federally chartered corporation. Its principal office is located at 3900 Wisconsin Avenue, N.W., Washington, D.C. 20016 (202/752-7000). Its Internal Revenue Service employer identification number is 52-0883107. The Corporation's securities are not required to be registered under the Securities Act of 1933. At the close of business on April 28, 1995, approximately 272,687,000 shares of the Corporation's common stock (without par value) were outstanding. The delivery of this Supplement at any time shall not under any circumstances create an implication that there has been no change in the affairs of the Corporation since the date hereof or that the information contained herein is correct as of any time subsequent to its date. TABLE OF CONTENTS Caption Page Selected Financial Data.............................................................. 3 Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three Months Ended March 31, 1995........................................ 4 Index to Interim Financial Statements ................................................. 10 Management........................................................................ 15 SELECTED FINANCIAL DATA The following selected financial data for the three months ended March 31, 1995 and 1994 are unaudited and include, in the opinion of management, all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. Operating results for the three months ended March 31, 1995 are not necessarily indicative of the results expected for the entire year. ( Dollars in millions, except per share amounts) Three Months Ended Income Statement Data: March 31, Interest income. 1995 1994 Interest expense........................................................... ............... $ 4,986 $ 3,973 ........................... Net interest income. 4,278 3,309 Guaranty fees ....................................................... 708 664 Gain on sales of mortgages, net ....................... .. ........... ..... 267 270 Miscellaneous income, net ' • " " " " " " " " " " " " • • • • • • • • • • • 2 2 Provision for losses �•�'��•�•""""""""""•• •••• 35 59 Foreclosed property expenses ................................................ (35) (40) Administrative expenses. .............................. .... ... .. (51) (60) Income before federal income taxes and e extraordinary item (129) (124 ) Provision for federal income taxes . :: ; :::. , , , . , , , , . , ?97 771 . , , . Income before extraordinary item (245) (253) Extraordinary gain (loss), net of tax effect ' ' • • • ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' ' • • 552 518 . Net income .................................. 3 (8) Per share: .................................................... $ 555 $ 510 Earnings before extraordinary item . Net earnings .............................................. $ 2.02 $ 1.89 Cash dividends........................................................ 2.03 1.86 ........................................... 0.68 0.60 Balance Sheet Data: March 31, Mortgage portfolio, net . 1895 1884 Total assets............................................................... ............................. $222,480 $196,823 Borrowings: ... ... 274,717 231,908 Due one none Due after yearar.................................................... 111,178 83,835 Total liabilities .. • • • • • • • • • • • • • • • 147,475 132,595 Stockholders' equity ...................................... " " ' • ' • " ' • • • • . 264,810 223,431 .................................. 9,907 8,477 Three Months Ended Other Data: March 31, Net interest margin . 1995 1994 Return on average equity ................................................... ............................................. 1.15% 1.26% Return on average assets 22.9 24.8 Ratio of earnings to fixed charges (1 j" .. ' ... " .. ' • " . ' • ' " " " " * * ' • ....... •8 .9 Dividend payout ratio. '��'•"""""""""'••• •••••••• 1.19:1 1.23:1 Equity to assets ratio ...................................................... 33.4% 32.1 % Mortgage purchases........................................................ 3.6 3.7 MBS issued .......................... $ 6,346 $ 19,166 MBS outstanding at March 31 ' • • • • " " r ' • " " " " " " " " " " • • • 13,070 52,805 . Capital at March 31(2)..................................... ... .. 533,262 507,376 ........................................ 10,729 9,305 (1) For the purpose of calculating the ratio of earnings to fixed charges, "earnings" consists income before federal taxes and fixed charges. "Fixed charges" represents of (2) Stockholders' equity plus allowance for losses. interest expense. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1995 Results of Operations In the first quarter of 1995, Fannie Mae again reported record earnings. Net income grew $45 million or 9 percent from the $510 million earned in the first quarter of 1994, primarily due to increases in net interest income, lower foreclosed property expenses, and a gain on the early retirement of debt versus a loss in the first quarter of 1994. Net interest income in the first three months of 1995 increased 7 percent compared with the first three months of 1994, primarily as a result of 20 percent growth in the average investment portfolio, which was offset, in part, by a decline in net interest margin. The following table presents an analysis of net interest income for the three months ended March 31, 1995 and 1994. Net Interest Income and Average Balances ( Dollars in millions) Three Months Ended March 31, 1995 1994 Interest income: $ 4,328 $ 3,731 Mortgage portfolio. ........................................................... 658 242 Investments and cash equivalents ................................................. 4,986 3,973 Total interest income ........................................................... Interest expense(1):............................................................... 948 398 Short-term debt................................................................. 3,330 2,911 Long-term debt.................................................................. 4,708 309 3,664 Total interest expense........... ...................... ....................... 62 Net interest income.... ............................................. 50 29 Tax equivalent adjustment(2)...................................................... $ ?58 $ 693 Net interest income tax equivalent basis ............................................. Average balances: Interest -earning assets(3): $221,411 $193,775 Mortgage portfolio, net ..................................................... • • • • 43,193 26,329 Investments and cash equivalents ................................................. $264,604 $220,104 Total interest -earning assets ...................................................... Interest -bearing liabilities(1):...................................................••• $ 65,302 $ 44,479 Short-term debt................................................................. 186797 160,516 Long-term debt ........................................ ......................... , 252,099 204,995 Total interest -bearing liabilities................................................... 12,505 15,109 Interest -free funds................................................................. Total interest -bearing liabilities and interest -free funds .............................. $264,604 $220,104 Average interest rates (2) : Interest -earning assets: 7.85% 7.72% Mortgage portfolio, net.......................................................... 6.19 3.74 Investments and cash equivalents ................................................. 7.58 7.25 Totalinterest- earning assets ...................................................... Interest -bearing liabilities(1):....................................................... 5.93 3.48 Short-term debt................................................................. 7.13 7.25 Long-term debt.................................................................. 6. 6. Total interest -bearing liabilities................................................... 76 .81 Investment spread............................................................. .39 .5 .45 Interest -free return(4)............................................................. 1.15°% 1.26% Net interest margin................................................................ (1) Classification of interest expense and interest -bearing liabilities as short-term or long-term is based on effective maturity or repricing date, taking into consideration the effect of interest rate swaps. (2) Reflects pro forma adjustments to permit comparison of yields on tax -advantaged and taxable assets. (3) Includes average balance of nonperforming loans of $2.0 billion and $1.4 billion for the three months ended March 31, 1995 and 1994, respectively. (4) Consists primarily of the return on that portion of the investment portfolio funded by equity and non -interest - bearing liabilities. 4 The following rate /volume analysis shows the relative contribution of asset and debt growth and interest rate changes to changes in net interest income for the three months ended March 31, 1995 and 1994. Rate / Volume Analysis (Dollars in millions) Attributable to Increase Changes in (1) First Quarter 1995 vs. First Quarter 1994 ( Decrease) Volume Rate Interest income: Mortgage portfolio ............................... Investments and cash equivalents $ 597 $539 $ 58 ............................ ,Total interest income 416 205 211 ....................................... 1,013 744 269 Interest expense: _ Short-term debt .................................... Long-term debt............ 550 236 314 ... .......................... 419 469 (50) Total interest expense ....................................... Net interest income 969 705 264 ......................................... $ 44 $ 39 $ 5 (1) Combined rate /volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative size. Guaranty fee income decreased by $3 million, or 1 percent, to $267 million, compared with first quarter 1994. This change resulted from a reduction in the average guaranty fee rate from 22.6 basis points in the first quarter of 1994 to 22.0 basis points in the first quarter of 1995, the effect of which was offset, in part, by a 2 percent increase in average net Mortgage -Backed Securities ( "MBS") outstanding when compared with the first quarter of 1994. In the first three months of 1995, miscellaneous income decreased 41 percent to $35 million versus $59 million in the first three months of 1994, as a result of lower REMIC fees. Net REMIC fees decreased by $17 million to $19 million in the first quarter of 1995. The Corporation defers and recognizes as income over the life of the REMIC a portion of REMIC fees to match expected future administrative costs. In the first quarter of 1995 the Corporation recognized additional deferred fees due to lower expected REMIC processing costs as a result of technology improvements and the associated transfer of administrative processes from external to internal sources. The Corporation expects that miscellaneous income in 1995 will be slightly lower than the $145 million earned in 1994. Administrative expenses for the quarter ended March 31, 1995 increased to $129 million compared with $124 mullion during the same period in 1994 , primarily due to increased staffing, technology -related expenses and affordable housing initiatives. Compensation expense was $77 mil- lion in the first quarter of 1995, compared with $71 million in the first quarter of 1994. The ratio of administrative expenses to the average mortgage portfolio plus average MBS outstanding was .073 percent in the first quarter of 1995 and .074 percent in the first quarter of 1994. The ratio of administrative expenses to revenues ('net interest income was 12.8 percent for the first quarter of 1995, compared witguaranty2.percent for the first quarter of 199eous income) q 1994. The effective federal income tax rates for the first three months of 1995 and 1994 were 31 percent and 33 percent, respectively. The decrease primarily reflected an increase in tax -advantaged investments. The Corporation had extraordinary gains of $4 million ($3 million after tax ) in the first quarter of 1995 compared with losses of $12 million ($8 million after tax) in the first quarter of 1994 from the 5 repurchase or call of debt. For the remainder of 1995, the Corporation believes that repurchases of debt will not have a significant impact on earnings, although such transactions may be completed from time to time. Credit Data The following table shows the Corporation's serious delinquencies for conventional loans in portfolio and underlying MBS at March 31, 1995 and 1994, and conventional properties acquired and total net charge -offs for the quarters ended March 31, 1995 and 1994. Single-family ... Multifamily .... Total .......... Delinquency Rate(l) March 31, March 31, 1995 1994 .57% .56% 1.20 2.57 Number of Properties Acquired March 31, March 31, 1995 1994 3,350 3,122 42 11 Net Charge -offs ( Dollars in millions) March 31, March 31, 1995 1994 $37 $39 2 14 $39 $53 (1) Single-family serious delinquencies consist of those loans in the portfolio or underlying MBS for which the Corporation has the primary risk of loss that are 90 or more days delinquent, in relief, or foreclosure. Multifamily serious delinquencies are those loans in the portfolio or underlying MBS that are 60 days or more delinquent for which the Corporation has primary risk of loss. The single-family and multifamily percentages are based on the number of such single-family loans and dollar amount of such multifamily loans, respectively, in the portfolio and underlying MBS. Charge -offs in the first quarter of 1994 included $25 million related to the January 17, 1994 Northridge, California earthquake, of which $15 million related to single-family loans and $10 million related to multifamily loans. The increases in single-family properties acquired and single-family charge -offs, excluding earthquake -related charge -offs, primarily reflected the continued weak economic conditions in. California. First quarter 1995 multifamily REO acquisitions included 39 properties from a portfolio that transferred from lender risk to Fannie Mae risk. Sufficient collateral was received on this transaction to cover anticipated losses and therefore no charge -offs were recorded for these multifamily REO acquisitions. The inventory of single-family properties was 6,568 as of March 31, 1995, compared with 5,522 as of March 31, 1994. The inventory of multifamily properties was 60 as of March 31, 1995, compared with 53 as of March. 31, 1994. . Total credit -related expenses, which include foreclosed property expenses and the provision for losses, were $86 million in the first quarter of 1995, compared with $100 million'in the first quarter of 1994. The decrease was primarily due to higher gains on property sales in the first quarter of 1995, which offset foreclosed property expenses, compared with the same period in 1094. The sum of net charge -offs and foreclosed property expenses in the three months ended March 31, 1995 was $90 million, compared with $113 million in the same period in 1994. The allowance for losses decreased to $823 million at March 31, 1995 from $828 million at December 31, 1994. The Corporation's. loss coverage ratio was 5.3 times the previous twelve months' charge -offs at March 31, 1995. Management expects this coverage to decline somewhat over the next few years as the large volume of loans from the early 1990s reach their peak credit loss years and as the Corporation continues to execute more preforeclosure sales, which accelerates loss recognition but generally reduces the overall loss significantly. 0 Balance Sheet Analysis Mortgage Portfolio The Corporation purchased $6.3 billion of mortgages at an average yield of 8.84 percent in the first three months of 1995, compared with $19.2 billion of mortgages at an average yield of 6.81 percent in the first three months of 1994. The decrease in mortgage purchases in 1995 was primarily due to the higher'level of interest rates and the reduction in the number of mortgages offered for sale in the secondary market. Mortgage loan repayments during the first quarter of 1995 totaled $3.8 billion, compared with $10.8 billion in the first quarter of 1994. The decrease in loan repayments was primarily due to the lower level of refinancing activity. Sales from portfolio totaled $0.2 billion for the first three months of 1995, compared with $1.2 billion for the first three months of 1994. As of March 31, 1995, the net mortgage portfolio totaled $222.5 billion with a yield (before deducting the allowance for losses) of 7.86 percent, compared with $220.5 billion at 7.80 percent as of December 31, 1994. The increase in yield was primarily due to lower prepayments of higher coupon mortgages and an increase in conventional mortgage purchase yields as interest rates increased. The portfolio growth during the first quarter of 1995 was generated by the purchase of a combination of whole loans, MBS, and REMIC tranches. By selectively accessing these markets, the Corporation expects to achieve continued portfolio growth. At March 31, 1995, the Corporation had mandatory delivery commitments and lender option commitments outstanding to purchase $2.2 billion and $1.5 billion of mortgage loans, respectively, compared with $1.4 billion and $1.6 billion, respectively, of such commitments outstanding at December 31, 1994. Financing and Other Activities During the first three months of 1995, the Corporation issued $203.7 billion of debt at an average cost of 6.07 percent and redeemed $201.4 billion at an average cost of 5.91 percent. Debt issued in the first three months of 1994 totaled $119.5 billion at an average cost of 3.52 percent, and debt redeemed was $104.3 billion at an average cost of 3.52 percent. The average cost of debt outstanding at March 31, 1995 and December 31, 1994 was 6.87 percent and 6.78 percent, respectively. The following table presents the amount of callable debt and the notional amount of callable swaps issued and outstanding at March 31, 1995, December 31, 1994 and March 31, 1994. Year ended (Dollars in billions) Three months ended December 31, Three months ended March 31, 1995 1994 March 31, 1994 Issued during the period .................. $ 2.5 $ 22.2 $ 6.8 Percentage of total long-term debt issued (1) .............................. 29% 45% 7 1 % Outstanding at end of period ...... $103.0 $101.9 $95.8 Percentage of total long-term debt outstanding(1) ........................ 54% 55% 58% (1) Includes the notional amount of callable swaps, and excludes long-term debt with a repricing frequency of one year or less. The shift during recent quarters from callable to noncallable debt reflected both market condi- tions and routine mortgage portfolio restructuring. The increase in interest rates during 1994 caused the duration of the mortgage portfolios assets to extend relative to that of its liabilities, and the issuance of noncallable long-term debt helps to lengthen the duration of the liabilities funding the mortgage portfolio. For the remainder of 1995, the Corporation expects the proportion of debt issued that is callable will increase compared with the first quarter of 1995. This expectation is based on 7 projected market conditions ( which can change quickly and considerably) , as well as expected mortgage portfolio restructuring activity. The Corporation uses interest rate swaps and other off -balance -sheet financial instruments in its financing activities to manage interest rate risk and to reduce the cost of debt issuance. The Corporation does not engage in trading or other speculative use of such off -balance -sheet financial instruments. Counterparty risk is the primary risk associated with these instruments. The Corporation reduces that risk by dealing only with institutions that meet certain credit guidelines, and by requiring collateral in certain circumstances. The Corporation uses interest rate swaps primarily to extend or adjust the effective maturity of certain debt obligations. Under these swaps, the Corporation generally pays a fixed rate and receives a. floating rate based on a notional principal amount. Asset swaps are used to achieve a specific investment objective at a desired yield. The notional amount of interest rate swap agreements outstanding, the weighted -average interest rates receivable and payable under the agreements, and the weighted -average remaining life of the swaps at March 31, 1995 and December 31, 1994 are presented in the following table. Weighted -Average Weighted -Average Notional Interest Rate Interest Rate Weighted -Average ( Dollars in millions) Amount (1) Receivable (2) Payable (2) Remaining Life March 31, 1995 Interest rate swaps: Debt ..................... $96,552 6.26% 6.61% 57 mos Asset ..................... 1,742 6.56 5.68 23 $98,294 December 31, 1994 Interest rate swaps: Debt ..................... $86,358 5.81% 6.50% 50 mos Asset ..................... 1,517 6.37 5.96 25 $87,875 (1) The notional amount only indicates the amount on which swap payments are being calculated and does not represent the amount at risk of loss. (2) The weighted -average interest rate receivable and payable is as of the date indicated. Some of the swaps are floating rate, so these rates may change as prevailing interest rates change. The contract amounts of other off -balance -sheet financial instruments, which include short sales of Treasury securities and credit enhancements, were $2.8 billion at March 31, 1995, compared with $3.8 billion at December 31, 1994. The exposure to credit loss for interest rate swaps and other off -balance -sheet financial instru- ments can be estimated by calculating the cost, on a present value basis, to replace at current market rates all those off -balance -sheet financial instruments outstanding for which the Corporation was in a gain position. The Corporation's net exposure at March 31, 1995 was $1.2 billion, compared with $3.0 billion at December 31, 1994. At March 31, 1995 and December 31, 1994, the Corporation had collateral with a market value of $0.4 billion and $1.2 billion, respectively, pledged from counterparties to offset credit risk. The exposure to credit loss can be expected to fluctuate significantly due to changes in interest rates. The Corporation's shareholders' equity at March 31, 1995 was $9.9 billion, compared with $9.5 billion at December 31, 1994, and $8.5 billion at March 31, 1994. During the first quarter of 1995, the Corporation repurchased 0.4 million shares at a cost of $30 million. On April 18, 1995, the Board of Directors approved a dividend on the Corporation's common stock of 68 cents per share for the quarter ended March 31, 1995. As of March 31, 1995, there were 273 million shares of common stock outstanding. As discussed in the Information Statement under "Management's Discussion and Analysis of Financial Condition and Results of Operations —Balance Sheet Analysis —Regulatory Capital Re- quirements," the Corporation is subject to capital standards. The Corporation met the applicable capital standards as of March 31, 1995. Management expects that continued growth in retained earnings will ensure continued compliance with the applicable standards. Mortgage -Backed Securities The Corporation issued $13.1 billion of MBS during the first three months of 1995, compared with $52.8 billion in the first three months of 1994. The decrease in MBS issued during the first quarter of 1995 compared with the first quarter of 1994 was primarily due to a reduction in the refinance activity in a higher rate environment and, in part, a greater percentage of adjustable -rate mortgages being originated, which many lenders desire to hold in their portfolio. REMIC issuances decreased to $1.0 billion in the first quarter of 1995 from $32.7 billion in the first quarter of 1994. This decline reflected the lower volume of fixed-rate MBS in a higher interest rate environment. In addition, higher interest rates caused a substantial amount of outstanding REMICs to become available for sale and reduced opportunities for dealers to create profitable new REMIC structures. The following table summarizes MBS activity for the three months ended March 31, 1995 and 1994. Summary of MBS Activity ( Dollars in millions) Issued Three Months Lender Originated ( 1 ) Ended Lender Fannie Mae March 31, Risk Risk Outstanding(l) Fannie Mae Lender Fannie Mae Originated Total Risk (2) Risk (3) Total (4 ) 1995 .............. $2,365 $10,456 $ 249 $13,070 $58,129 $475,133 $533,262 1994............. 1,454 49,033 2,318 52,805 57,073 450,303 507,376 (1) This table classifies lender originated MBS issued and MBS outstanding based on primary default risk category; however, Fannie Mae bears the ultimate risk of default on all MBS. MBS outstanding includes MBS that have been pooled to back Megas, SMBS, or REMICs. (2) Included in lender risk are $29.0 billion and $32.1 billion at March 31, 1995 and 1994' respectively, on which the lender or a third party agreed to bear default risk limited to a certain portion or percentage of the loans delivered and, in some cases, the lender has pledged collateral to secure that obligation. (3) Included are $5.0 billion at March 31, 1995 and $6.0 billion at March 31, 1994, which are backed by government insured or guaranteed mortgages. (4) Included are $46.3 billion and $25.4 billion at March 31, 1995 and 1994, respectively, of Fannie Mae MBS in portfolio. New Accounting Standards In the first quarter of 1995, the Corporation adopted Financial Accounting Standard No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"), as amended by Financial Accounting Standard No. 118 "Accounting by Creditors for Impairment of a Loan Income Recogni- tion and Disclosures." FAS 114 requires loans that will not be repaid in accordance with their contractual terms to be measured using a discounted cash flow methodology or the fair value of the collateral. 0 FAS 114 did not have a material impact on the Corporation. During 1995, the Financial Accounting Standards Board issued Financial Accounting Standard No. 121, "Accounting for the Impairment of Long -Lived Assets and for Long -Lived Assets to Be Disposed Of' ("FAS 121") . This standard requires that an impairment loss be recognized if the fair value of the asset is less than the carrying amount. Management does not expect this standard to have a material impact on the Corporation. INDEX TO INTERIM FINANCIAL STATEMENTS Caption Page Independent Accountants' Review Report ................................................ 11 Condensed Statements of Income ....................................................... 12 Condensed Balance Sheets.............................................................. 12 Condensed Statements of Cash Flows .................................................... 13 Notes to Interim Financial Statements ................................................... 13 Computation of Earnings Per Share ..................................................... 15 10 INDEPENDENT ACCOUNTANTS' REVIEW REPORT The Board of Directors Fannie Mae: We have reviewed the accompanying condensed balance sheet of Fannie Mae (Federal National Mortgage Association) as of March 31, 1995 and the related condensed statements of income and cash flows for the three-month periods ended March 31, 1995 and 1994. These condensed financial statements are the responsibility of Fannie Mae's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the condensed financial statements referred to above for them to be in conformity with generally. accepted accounting principles. We have previously audited, in accordance with . generally accepted auditing standards, the balance sheet. of Fannie Mae as of December 31, 1994 (presented herein in condensed form) and the related statements of income and cash flows for the year then ended (not presented herein); and in our report dated January 11, 1995, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed balance sheet as of December 31, 1994, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived. Washington, D.C. KPMG PEAT MARWICK LLP April 11, 1995 11 FANNIE MAE INTERIM FINANCIAL STATEMENTS CONDENSED STATEMENTS OF INCOME (Unaudited) Interest income ................................................... Interest expense .................................................. Net interest income ............................................... Guarantyfees ..................................................... Gain on sales of mortgages, net ..................................... Miscellaneous income, net ......................................... Provision for losses ............................................... Foreclosed property expenses ....................................... Administrative expenses ..... .................................... . Income before federal income taxes and extraordinary item ........... Provision for federal income taxes .................................. Income before extraordinary item ................................... Extraordinary gain (loss) —early extinguishment of debt (net of tax effect) ............................................... Netincome............ ......................................... Per share: Earnings before extraordinary item ............................... Netearnings ..................................................... Cash dividends ................................................. CONDENSED BALANCE SHEETS (Unaudited) Assets Mortgage portfolio, net .......................................... Investments.................................................... Otherassets .................................................... Total assets ............................................... Liabilities Debentures, notes, and bonds, net Due within one year ........................................... Due after one year ..................................... ... Other liabilities ................................................. Total liabilities ........................................... Stockholders' equity ............................................... Total liabilities and stockholders' equity ...................... See Notes to Interim Financial Statements 12 Three Months Ended March 31, 1995 1994 ( Dollars in millions, except per share amounts) $ 4,986 $ 3,973 4,278 3,309 708 664 267 270 2 2 35 59 (35) (40) (51) (60) 129) 124) 797 771 245) 253) 552 518 3 (8) $ 555 $ 510 $ 2.02 $ 1.89 2.03 1.86 0.68 0.60 March 31, December 31, 1995 1994 ( Dollars in millions) $222,480 $220,525 46,107 46,335 6,130 5,648 $274,717 $272,508 $111,178 $112,602 147,475 144,628 6,157 5,737 264,810 262,967 9,907 9,541 $274,717 $272,508 FANNIE MAE CONDENSED STATEMENTS OF CASH FLOWS (Unaudited) Three Months Ended March 31, 1995 1994 Net. cash provided (used) by operating activities .................... (Dollars in millions) $ $ (22) Cash flows from investing activities: Purchases of mortgages ......................................... Proceeds from sales of mortgages (6,274) (19,122) ........................... Mortgage principal repayments 241 1,213 .................................. Net decrease ( increase) in investments 4,221 11,228 ........................... Net cash used by investing activities 228 (7,224) ............................. (1,584) (13,905) Cash flows from financing activities: Cash proceeds from issuance of debt ............................. Cash payments to retire debt 202,208 125,150 ...................... Other......................................................... (202,142) (110,411) (209) (99) Net cash (used) provided by financing activities .................. (143) 14,640 Net increase in cash and cash equivalents ........... Cash and cash equivalents 205 713 at beginning of period .................... Cash and cash equivalents at end of period 231 977 ......................... $ 436 $ 1,690 NOTES TO INTERIM FINANCIAL STATEMENTS (Unaudited) Basis of Presentation The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 1995 are not necessarily indicative of the results that may be expected for the year ending December 31, 1995. The unaudited interim financial statements should be read in conjunction with the audited financial statements and notes to financial statements that are presented in the Information Statement dated March 31, 1995. 13 NOTES TO INTERIM FINANCIAL STATEMENTS (Continued) Commitments and Contingencies The Corporation had outstanding commitments to purchase mortgages and to issue MBS as shown below: March 31, 1995 (Dollars in billions) Commitments to purchase mortgages: Mandatory delivery .................................................. $ 2.2 Lender option (1) ...................................................... 0.7 Average net yield on mandatory delivery ............................... 8.39% Commitments to issue MBS: Mandatory delivery(1)............................................... $ 0.1 Lender option (1) .................................................... 2.5 Master commitments: Mandatory delivery(2)............................................... 82.3 Lenderoption ....................................................... 34.4 (1) Excludes commitments attached to master commitments, which are included in the total for master commitments. (2) Under a mandatory master commitment, a lender must either deliver under an MBS contract at a specified guaranty fee or enter into a mandatory portfolio commitment with the yield established upon executing the portfolio commitment. The Corporation also guarantees timely payment of principal and interest on outstanding MBS as summarized below: March 31, 1995 (Dollars in billions) MBS outstanding, net of $46.3 billion of MBS held in portfolio .............. $486.9 Amount for which the Corporation has primary foreclosure loss risk (1) : Conventional.......................................................... 470.1 Government insured or guaranteed ...................................... 5.0 (1) The Corporation, however, assumes the ultimate risk of loss on all MBS. 14 COMPUTATION OF EARNINGS PER SHARE (Unaudited) Three Months Ended March 31, 1995 1994 (In millions, except per share data) Earnings Per Share: Average common shares outstanding ........................................ 272.7 273.3 Effect of common stock equivalents ........................................ 1.0 1.2 Average fully diluted shares outstanding .................................... 273.7 274.5 Income before extraordinary item .......................................... $ 552 $ 518 Netincome.............................................................. 555 510 Earnings per share before extraordinary item ................................ $ 2.02 $ 1.89 Net earnings per share .................................................... 2.03 1.86 MANAGEMENT On April 13, 1995, the Corporation announced that Stephen B. Ashley has been nominated for election to its Board of Directors. He has been nominated to fill the seat that will be vacated by Eli Broad when Mr. Broad's term expires at the Corporation's annual meeting of stockholders on May 18, 1995. Mr. Ashley, age 55, has been Chairman and Chief Executive Officer since January 1991 and was President and Chief Executive Officer from January 1975 to December 1990 of Sibley Mortgage Corporation, a mortgage banking company. Mr. Ashley also is a past President of the Mortgage Bankers Association. He serves as a director of The Genesee Corporation and of Hahn Automotive Warehouse, Inc. His principal residence is in Livonia, New York. On April 28, 1995, the President of the United States announced his intention to reappoint William M. Daley, Thomas A. Leonard, John R. Sasso and Josh H. Villarreal to the Board of Directors after their present terms expire on May 18, 1995, the date of the Corporation's annual meeting of stockholders. 15 2 FannieMae INVESTMENT ADVISORY BOARD MEETING: May 8, 1996 Information Item B ITEM TITLE LAIF Pooled Money Investment Board Report - March 1996 ISSUE AND DISCUSSION: Attached please the March 1996 LAW Investment Report. Approved for submission to the Investment Advisory Board: STATE OF CALIFORNIA STATE TREASURER'S OFFICE POOLED MONEY ]INVESTMENT BOARD REPORT MARCH 1996 Table of Contents SUMMARY........................................................................................................1 SELECTED INVESTMENT DATA.................................................................2 INVESTMENT TRANSACTIONS...................................................................3 TIMEDEPOSITS............................................................................................17 DEMAND BANK DEPOSITS.........................................................................19 POOLED MONEY INVESTMENT BOARD DESIGNATION .....................20 SUMMARY OF INVESTMENT DATA FOR THE POOLED MONEY INVESTMENT ACCOUNT A COMPARISON OF MARCH 1996 WITH MARCH 1995 (Dollars in Thousands) MARCH 1996 AVERAGE DAILY PORTFOLIO TOTAL $28,787,047 TOTAL EARNINGS ON ACCRUAL BASIS $ 135,497 EFFECTIVE YIELD 5.557 AVERAGE LIFE OF PORTFOLIO ON THE LAST DAY OF THE MONTH (IN DAYS) 239 DOLLAR VALUE OF SECURITY TRANSACTIONS $19,326,617 DOLLAR VALUE OF TIME DEPOSITS $ 81,600 AVERAGE WORKDAY INVESTMENT ACTIVITY $ 924,201 NUMBER OF SECURITY TRANSACTIONS 452 NUMBER OF TIME DEPOSITS 15 AVERAGE PRESCRIBED DEMAND COMPENSATING BANK BALANCES FOR SERVICES $ 109,878 AVERAGE PRESCRIBED DEMAND BANK BALANCES FOR UNCOLLECTED FUNDS $ 135,878 MARCH 1995 $26,252,294 $ 132,311 5.934 361 $31,9471812 $ 22,300 $ 1,390,005 750 9 $ 150, 771 $ 140-,158 CHANGE + $ 2,534,753 + $ 3,186 .377 122 $ 12, 621,195 + $ 59,300 $ 465,804 298 + 6 $ 40,893 $ 4,280 -1- MATT FONG STATE TREASURER STATE OF CALIFORNIA INVESTMENT DIVISION SELECTED INVESTMENT DATA ANALYSIS OF THE POOLED MONEY INVESTMENT ACCOUNT PORTFOLIO (000 OMITTED) Change in March 31, 1996 Percent From Type of Security Amount Percent Previous Month Governments Bills 2,459,817 8.30 - .45 Bonds 0 0 0 Notes 51891,908 19.87 - .65 Strips 846,551 2.85 - .22 Total Governments 91198,276 31.02 - 1.32 Federal Agency Coupons 965,130 3.26 - .22 Certificates of Deposit 41130,828 13.93 - 2.51 Bankers Acceptances 256,867 .87 - .14 Repurchases 198,100 .67 - 2.40 Federal Agency Discount Notes 11350,853 4.56 - 1.76 Time Deposits 365,995 1.23 - .13 GNMA's 4,824 .02 0 Commercial Paper 71789,833 26.27 - .79 FHLMC 37,373 .13 - .01 Other 0 0 0 Corporate Bonds 11902,278 6.42 - .79 Pooled Loans 843,409 2.84 + .06 Reverse Repurchases -725,852 -2.45 + .26 GF Loans 31331,000 11.23 + 9.75 Total, All Types 29,648,914 100 INVESTMENT ACTIVITY Pooled Money Other Time Deposits TOTALS PMIA Monthly Average Effective Yield Year to Date Yield for Last Day of Month March 1996 Number . Amount 452 $ 19,326,617 20 $ 168,682 15 $ 81,600 487 $ 19,576,899 5.557 5.768 February 1996 Number Amount 468 $ 19,469,454 13 $ 55,278 23 $ 242,400 504 $ 19,767,132 5.643 _2_ 5.798 03/01/96 RRS Treas Notes Treas Notes REDEMPTION 5.250% 01/31/01 3.875 $ 25,000 5.250% 01 /31 /01 3.875 50,000 BA Union 03/01/96 5.560 12,500 88 $169,888.89 5.714 BA Montreal 03/01/96 5.520 10,000 93 142,600.00 5.677 BA Chase 03/01/96 5.550 5,000 116 89,416.67 5.729 CD Montreal 5.250% 03/01/96 5.250 50,000 15 109,375.00 5.322 CD Montreal 5.250% 03/01/96 5.250 50,000 15 109,375.00 5.322 CD Sanwa 5.260% 03/01/96 5.250 50,000 15 109,375.45 5.322 CD Sanwa 5.260% 03/01/96 5.250 50,000 15 109,375.45 5.322 CD Sanwa 5.510% 03/01/96 5.500 50,000 36 275,002.73 5.576 CD Nova Scotia 5.730% 03/01/96 5.670 5,000 73 57,657.24 5.765 CD Nova Scotia 5.730% 03/01/96 5.650 15,000 85 200,330.05 5.733 CP Am Exp 03/01/96 5.150 50,000 16 114,444.44 5.233 CP Am Exp 03/01/96 5.150 50,000 16 114,444.44 5.233 CP GMAC 03/01/96 5.730 50,000 73 580,958.33 5.877 CP GMAC 03/01/96 5.730 50,000 73 580,958.33 5.877 CP GMAC 03/01/96 5.660 15,000 74 174,516.66 5.806 CP ConAgra 03/01/96 5.750 10,000 85 135,763.89 5.910 CP GECC 03/01/96 5.570 40,000 85 526,055.56 5.722 CP GMAC 03/01/96 5.600 50,000 85 661,111.11 5.753 CP GMAC 03/01/96 5.600 50,000 85 661,111.11 5.753 CP ConAgra 03/01/96 5.770 50,000 87 697,208.33 5.932 CP Chemical 03/01/96 5.600 20,000 88 273,777.78 5.756 CP SRAC 03/01/96 5.620 40,000 108 674,400.00 5.795 CP Merrill 03/01/96 5.600 50,000 115 894,444.45 5.781 CP Merrill 03/01/96 5.600 50,000 115 894,444.45 5.781 CP GMAC 03/01/96 5.670 25,000 123 484,312.50 5.862 CP GMAC 03/01/96 5.670 50,000 123 968,625.00 5.862 CP Merrill 03/01/96 5.670 50,000 151 1,189,125.00 5.888 CP Merrill 03/01/96 5.670 50,000 151 1,189,125.00 5.888 Disc Notes FNMA 03/01/96 5.500 30,000 93 426,250.00 5.656 MTN P G & E 5.090% 03/01/96 5.090 25,000 1,075 3,743,270.83 5.090 SALE c/ Treas Bills 10/17/96 5.500 3,728 1 541.14 5.576 Treas Bills 10/18/96 5.500 50,000 1 7,256.94 5.576 Treas Notes 5.125% 12/31/98 5.500 50,000 1 7,470.69 5.576 Treas Notes 6.125% 09/30/00 5.500 11,110 1 1,728.68 5.576 Treas Notes 6.125% 09/30/00 5.500 50,000 1 7,780.21 5.576 Treas Notes 6.125% 09/30/00 5.500 50,000 1 7,780.21 5.576 Treas Notes 6.125% 09/30/00 5.500 50,000 1 7,780.21 5.576 Treas Notes 5.750% 10/31/00 5.500 36,000 1 5,486.25 5.576 PURCHASE CP Assoc 03/04/96 5.450 200,000 —3— 03/01/96 PURCHASE CP ConAgra 04/26/96 5.250 $ 27,000 PURCHASE V Treas Notes 4.375% 08/15/96 5.150 Treas Notes 5.500% 11 /15/98 5.150 03/04/96 SALE Treas Notes 5.625% 02/28/01 REDEMPTION BA Rabo Bank 03/04/96 BA Union 03/04/96 CD Soc Gen 5.680%. 03/04/96 CD Soc Gen 5.680% 03/04/96 CD Commerzbk 5.690% 03/04/96 CD Soc Gen 5.680% 03/04/96 CD Soc Gen 5.710% 03/04/96 CP Assoc 03/04/96 CP Merrill 03/04/96 CP Am Exp 03/04/96 CP Bear 03/04/96 CP Household 03/04/96 CP Household 03/04/96 CP Lehman 03/04/96 CP GMAC 03/04/96 CP Gr Western 03/04/96 PURCHASE CP Assoc 03/05/96 PURCHASE c/ Treas Notes 7.250% 11 /15/96 Treas Notes 7.250% 11 /15/96 Treas Notes 7.500% 12/31/96 03/05/96 REDEMPTION CD Commerzbk 5.680% 03/05/96 CD Nt West Bk 5.700% 03/05/96 CD Commerzbk 5.690% 03/05/96 CP Assoc 03/05/96 CP BanCal 03/05/96 CP Lehman 03/05/96 Disc Notes FNMA 03/05/96 24,765 50,000 5.613 50,000 4 $ 172,508.15 31.557 5.170 15,000 12 25,849.99 5.250 5.420 5,000 54 40,650.00 5.540 5.660 50,000 88 691,918.79 5.739 5.650 20,000 90 282,564.80 5.729 5.650 10,000 91 142,833.66 5.728 5.660 30,000 91 429,238.13 5.738 5.680 20,000 94 296,691.49 5.759 5.450 200,000 3 90,833.33 5.528 5.240 15,000 6 13,100.00 5.317 5.180 25,000 6 21,583.33 5.256 5.220 50,000 6 43,500.00 5.297 5.220 50,000 6 43,500.00 5.297 5.220 50,000 6 43, 500.00 5.297 5.660 25,000 90 353,750.00 5.820 5.620 40,000 90 562,000.00 5.779 5.610 10,000 91 141,808.33 5.769 5.420 170,000 5.375 50,000 5.375 50,000 5.375 47,820 5.560 10,000 76 117,681.71 5.650 5.670 5,000 77 60,812.09 5.765 5.650 20,000 89 279,475.45 5.730 5.420 170,000 1 25,594.44 5.496 5.500 50,000 60 458,333.35 5.627 5.650 50,000 77 604,236.11 5.798 5.480 20,000 92 280,088.89 5.635 —4— 03/05/96 SALE C/ Treas Notes Treas Notes Treas Notes PURCHASE BA B/A BA Union BA B/A BA B/A CD Soc Gen CD Soc Gen CP GMAC CP GMAC CP Am Exp CP Am Exp CP Am Exp CP Lehman CP Lehman CP Bear CP Merrill CP. Merrill MTN B/A 03/06/96 REDEMPTION CP GMAC CP GMAC CP FMCC Disc Notes FNMA Disc Notes FNMA PURCHASE 7.250% 11 /15/96 5.375 $ 50, 000 1 $ 7, 584.27 5.449 7.250% 11/15/96 5.375 50,000 1 7,584.27 5.449 7.500% 12/31/96 5.375 47,820 1 7,227.28 5.449 05/17/96 5.080 16,500 05/28/96 5.060 10,000 05/31/96 5.060 13,000 06/28/96 5.000 13,500 5.220% 05/10/96 5.210 50,000 5.220% 05/10/96 5.210 50,000 03/06/96 5.290 50,000 03/06/96 5.290 50,000 03/11/96 5.220 25,000 03/11 /96 5.220 50,000 03/11 /96 5.220 50,000 04/26/96 5.280 50,000 04/26/96 5.280 50,000 05/17/96 5.160 30,000 06/28/96 5.050 15,000 06/28/96 5.050 50,000 5.970% 03/01/01 6.130 15,000 03/06/96 5.290 50,000 1 7,347.22 5.364 03/06/96 5.290 50,000 1 7,347.22 5.364 03/06/96 5.440 50,000 62 468,444.44 5.567 03/06/96 5.490 25,000 121 461,312.50 5.670 03/06/96 5.490 50,000 121 922,625.00 5.670 CD B N Paris 5.180% 06/03/96 5.180 CD Commerzbk 5.150% 06/07/96 5.130 CP GECC 04/09/96 5.200 CP GECC 04/09/96 5.200 CP GECC 04/09/96 5.200 CP Bkrs Trst 06/06/96 5.120 CP Bkrs Trst 06/06/96 5.120 CP BanCal 07/29/96 5.100 FNMA 5.360% 02/16/01 5.771 03/07/96 SALE Treas Bills 03/06/97 4.870 25,000 25,000 50,000 50,000 50,000 25,000 50,000 50,000 15,000 50,000 e/ 50,555.55 e/ —5- 03/07/96 REDEMPTION BA B/A CP FMCC PURCHASE CD ABN Amro CP Am Exp CP ConAgra Disc Notes FHLMC Disc Notes FHLMC FR SBA Treas Bills Treas Bills Treas Bills Treas Bills 03/08/96 REDEMPTION BA Union CD B N Paris CP GECC CP GECC CP FMCC CP GMAC CP GMAC CP ConAgra CP ConAgra CP ConAgra CP Assoc CP Am Exp CP Am Exp CP FMCC Disc Notes FNMA SALE c/ Treas Bills Treas Bills Treas Bills PURCHASE CP Assoc CP ConAgra CP Lehman Treas Bills 03/07/96 5.400 $ 5,000 58 03/07/96 .5.440 50,000 63 5.160% 06/07/96 5.150 50,000 04/01 /96 5.200 50,000 05/02/96 5.310 15,000 06/06/96 5.050 50,000 06/06/96 5.050 50,000 6.125% 02/25/21 6.125 15,692 03/06/97 4.970 50,000 06/06/96 5.125 29,500 12/12/96 5.125 47,000 12/12/96 5.125 50,000 $ 43,500.00 5.523 476,000.00 5.568 03/08/96 5.420 5,100 58 44, 534.33 5.543 5.660% 03/08/96 5.650 50,000 123 965,240.69 5.728 03/08/96 5.180 50,000 16 115,111.11 5.264 03/08/96 5.180 50,000 16 115,111.11 5.264 03/08/96 5.440 50,000 64 483,555.56 5.569 03/08/96 5.660 50,000 80 628,888.89 5.811 03/08/96 5.660 50,000 80 628,888.89 5.811 03/08/96 5.750 30,000 85 407,291.67 5.910 03/08/96 5.750 50,000 85 668,194.44 5.910 03/08/96 5.750 50,000 85 668,194.44 5.910 03/08/96 5.660 53,000 85 708,286.11 5.816 03/08/96 5.550 10,000 86 132,583.33 5.702 03/08/96 5.550 50,000 86 662,916.67 5.702 03/08/96 5.530 50,000 123 944,708.33 5.714 03/08/96 5.300 25,000 50 184,027.78 5.413 06/06/96 5.125 29,500 1 4,061.42 5.196 12/12/96 5.125 47,000 1 6,309.59 5.196 12/12/96 5.125 50,000 1 6,712.33 5.196 03/11/96 5.200 135,000 04/25/96 5.350 50,000 04/26/96 5.380 50,000 03/06/97 5.120 40,000 03/11/96 SALE Treas Bills 04/04/96 4.945 $ 50,000 241 $ 1,791,381.97 4.715 Treas Bills 04/04/96 4.945 10,000 242 354,211.11 4.988 Treas Bills 04/04/96 4.945 50,000 256 1,935,166.67 4.715 Treas Bills 04/04/96 4.945 50,000 256 1,935,166.67 4.715 REDEMPTION BA Montreal 03/11/96 5.520 13,000 103 205,313.33 5.686 CD Montreal 5.500% 03/11/96 5.480 9,000 61 83,585.46 5.556 CD Montreal 5.500% 03/11/96 5.480 50,000 61 464,363.64 5.556 CP Assoc 03/11/96 5.200 135,000 3 58,500.00 5.274 CP Am Exp 03/11/96 5.220 25,000 6 21,750.00 5.297 CP Am Exp 03/11/96 5.220 50,000 6 43,500.00 5.297 CP Am Exp 03/11/96 5.220 50,000 6 43,500.00 5.297 CP Am. Exp 03/11/96 5.550 25,000 126 485,625.00 5.738 CP GMAC 03/11/96 5.660 50,000 160 1,257,777:78 5.886 Disc Notes FHLB 03/11/96 5.435 14,590 112 246,700.69 5.605 PURCHASE CP GECC 06/28/96 5.200 5,000 CP GECC 06/28/96 5.200 50,000 CP GECC 06/28/96 5.200 50,000 CP GECC 06/28/96 5.200 50,000 CP GECC 06/28/96 5.200 50,000 CP GECC 06/28/96 5.200 50,000 Treas Notes 5.125% 02/28/98 5.718 50,000 Treas Notes 5.125% 02/28/98 5.718 50,000 03/12/96 REDEMPTION BA B/A 03/12/96 5.390 5,000 63 47,162.50 5.516 CP GECC 03/12/96 5.450 50,000 83 628,263.89 5.596 CP GECC 03/12/96 5.450 50,000 83 628,263.89 5.596 CP Am Home 03/12/96 5.670 12,000 88 166,320.00 5.829 CP Am Home 03/12/96 5.670 50,000 88 693,000.00 5.829 Disc Notes FNMA 03/12/96 5.320 25,000 62 229,055.56 5.443 Disc Notes FNMA 03/12/96 5.320 30,000 62 274,866.66 5.443 Disc Notes FNMA 03/12/96 5.500 50,000 151 1,153,472.20 5.708 PURCHASE CP Am Exp 03/27/96 5.230 40,000 CP Merrill 06/28/96 5.250 50,000 03/13/96 REDEMPTION CP Assoc 03/13/96 5.420 50,000 61 459,194.44 5.546 CP AT&T 03/13/96 5.560 50,000 127 980,722.22 5.750 CP AT&T 03/13/96 5.560 50,000 127 980,722.22 5.750 —7— 03/13/96 PURCHASE CID GMAC CID GMAC 03/14/96 REDEMPTION CID GMAC CID GMAC CID Bkrs Trst CID GMAC CID FMCC Treas Bills Treas Bills Treas Bills RRP Treas Bills Treas Bills Treas Bills PURCHASE BA Union BA Chase BA Union CD Bk Calif CD Bk Calif CID FMCC CID FMCC CID GMAC CID GMAC CID GMAC CID Lehman CID Lehman 03/15/96 REDEMPTION MTN FMCC MTN FMCC PURCHASE CID Assoc CID Assoc CID Assoc CID Assoc CID Assoc 03/14/96 5.550 $ 25,000 03/14/96 5.550 50,000 03/14/96 5.550 25,000 1 $ 3,854.17 5.627 03/14/96 5.550 50,000 1 7,708.33 5.627 03/14/96 5.630 50,000 147 1,149,458.33 5.842 03/14/96 5.620 45,000 150 1,053,750.00 5.834 03/14/96 5.620 45,000 150 1,053,750.00 5.834 03/14/96 5.275 45,000 181 1,193,468.75 5.493 03/14/96 5.275 45,000 181 1,193,468.75 5.493 03/14/96 5.275 50,000 181 1,326,076.39 5.493 03/14/96 5.440 50,000 147 (1,086,654.05) -5.486 03/14/96 5.455 45,000 150 (1,000,182.77) -5.505 03/14/96 5.455 45,000 150 (1,000,182.77) -5.505 05/09/96 5.240 5,000 05/30/96 5.220 5,100 06/03/96 5.210 5,500 5.350% 07/01/96 5.350 50,000 5.350% 08/28/96 5.350 50,000 05/10/96 5.250 5,000 05/10/96 5.250 50,000 06/28/96 5.330 50,000 06/28/96 5.330 50,000 06/28/96 5.330 50,000 06/28/96 5.350 50,000 06/28/96 5.350 50,000 5.150% 03/15/96 6.350 50,000 595 5.150% 03/15/96 5.000 44,600 1,060 03/18/96 5.600 20,000 03/18/96 5.600 50,000 03/18/96 5.600 50,000 03/18/96 5.600 50,000 03/18/96 5.600 50,000 5,109,527.78 6.386 6,491,220.28 5.000 —8- 03/18/96 REDEMPTION CD B N Paris 5.670% 03/18/96 5.660 $ 50,000 132 $ 1,037,704.00 5:738 CP Assoc 03/18/96 5.600 20,000 3 9,333.33 5.680 CP Assoc 03/18/96 5.600 50,000 3 23,333.33 5.680 CP Assoc 03/18/96 5.600 50,000 3 23,333.33 5.680 CP Assoc 03/18/96 5.600 50,000 3 23,333.33 5.680 CP Assoc 03/18/96 5.600 50,000 3 23,333.33. 5.680 CP GMAC 03/18/96 5.550 50,000 133 1,025,208.33 5.744 PURCHASE CD B N Paris 5.330% 05/31/96 5.320 50,000 CD B N Paris 5.330% 05/31/96 5.320 50,000 CD Bk Calif 5.350% 08/30/96 5.350 50,000 CP GMAC 03/19/96 5.350 50,000 CP GMAC 03/19/96 5.350 50,000 CP GMAC 03/19/96 5.350 50,000 CP GMAC 03/19/96 5.350 50,000 CP Transam 04/25/96 5.320 42,000 CP B/A 04/25/96 5.300 50,000 CP Transam 06/28/96 5.270 24,632 MTN B/A 6.380% 03/15/01 6.380 25,000 Treas Notes 5.125% 02/28/98 5.833 50,000 Treas Notes 5.125% 02/28/98 5.833 50,000 03/19/96 REDEMPTION BA B/A 03/19/96 5.400 15,000 89 200,250.00 5.549 CP GMAC 03/19/96 5.350 50,000 1 7,430.56 5.425 CP GMAC 03/19/96 5.350 50,000 1 7,430.56 5.425 CP GMAC 03/19/96 5.350 50,000 1 7,430.56 5.425 CP GMAC 03/19/96 5.350 50,000 1 7,430.56 5.425 PURCHASE CD Union 5.370% 06/28/96 5.370 45,000 CP Am Exp 03/29/96 5.250 50,000 CP SRAC 07/01/96 5.270 50,000 CP GMAC 07/03/96 5.340 50,000 CP GMAC 07/03/96 5.340 50,000 03/20/96 REDEMPTION Disc Notes FHLB 03/20/96 5.410 50,000 121 909,180.56 5.586 Disc Notes FNMA 03/20/96 5.410 30,000 121 545,508.33 5.586 Disc Notes FNMA 03/20/96 5.410 50,000 121 909,180.56 5.586 Disc Notes FNMA 03/20/96 5.490 30,000 155 - 709,125.00 5.701 03/20/96 PURCHASE CD Bk Calif 5.420% 06/28/96 5.420 $ 50,000 CID FMCC 04/05/96 5.380 20,000 CID Bear 04/05/96 5.350 50,000 CID Comnwealth 04/24/96 5.530 20,000 CID GMAC 05/02/96 5.400 50,000 CID Unocal 05/03/96 5.530 10,000 CID Country 05/08/96 5.390 12,650 CID Unocal 05/09/96 5.450 20,000 CID Lehman 05/29/96 5.400 50,000 Treas Bills 03/06/97 5.125 30,000 Treas Bills 03/06/97 5.125 50,000 03/21/96 PURCHASE CID Bear 03/27/96 5.230 50,000 CID Chemical 04/01/96 5.350 30,000 CID Chemical 04/01/96 5.350 50,000 CID FMCC 04/01/96 5.360 50,000 CID FMCC 04/01/96 5.360 50,000 CID FMCC 04/01/96 5.360 50,000 03/22/96 REDEMPTION CD CIBC 5.600% 03/22/96 5.600 100,000 102 $1,586,666.67 5.677 CID GMAC 03/22/96 5.410 50,000 74 556,027.78 5.546 CID GMAC 03/22/96 5.410 50,000 74 556,027.78 5.546 CID GMAC 03/22/96 5.410 50,000 74 556,027.78 5.546 CID GMAC 03/22/96 5.410 50,000 74 556,027.78 5.546 CID FMCC 03/22/96 5.470 50,000 93 706,541.67 5.625 CID FMCC 03/22/96 5.470 50,000 93 706,541.67 5.625 CP Bear 03/22/96 5.600 50,000 95 738,888.90 5.762 CID Bear 03/22/96 5.600 50,000 95 738,888.90 5.762 Disc Notes FHLB 03/22/96 5.400 50,000 183 1,372,500.00 5.629 PURCHASE CID Merrill 04/01/96 5.400 25,000 CID Textron 04/26/96 5.510 25,000 CID Unocal 04/30/96 5.570 10,000 CID GMAC 05/08/96 5.350 50,000 CID GMAC 05/08/96 5.350 50,000 CID Am Home 05/17/96 5.350 13,000 CID GMAC 06/03/96 5.340 10,000 CID GMAC 06/03/96 5.340 50,000 CID GMAC 06/03/96 5.340 50,000 Treas Bills 03/06/97 5.115 40,000 Treas Bills 03/06/97 5.115 50,000 Treas Bills 03/06/97 5.115 50,000 —10— 03/25/96 PURCHASE CID GMAC 03/26/96 5.310 CID GMAC 03/26/96 5.310 CID GMAC 03/26/96 5.310 CID GMAC 03/26/96 5.310 CID Am Exp 03/29/96 5.250 CID Am Exp 03/29/96 5.250 CID Am Exp 03/29/96 5.250 CID Am Exp 03/29/96 5.250 CID GECC 04/11/96 5.330 CID GECC 04/11/96 5.330 03/26/96 REDEMPTION $ 50,000 50,000 50,000 50,000 30,000 50,000 50,000 50,000 10,000 50,000 CID GMAC 03/26/96 5.310 50,000 1 $ 7,375.00 5.384 CID GMAC 03/26/96 5.310 50,000 1 7,375.00 5.384 CID GMAC 03/26/96 5.310 50,000 1 7,375.00 5.384 CID GMAC 03/26/96 5.310 50,000 1 7,375.00 5.384 PURCHASE CID GECC 03/27/96 5.280 50,000 CID GECC 03/27/96 5.280 50,000 CID GECC 03/27/96 5.280 50,000 CID GECC 03/27/96 5.280 50,000 CID Am Exp 04/01/96 5.370 30,000 CID Am Exp 04/01/96 5.370 50,000 CID Am Exp 04/01/96 5.370 50,000 CID Am Exp 04/01/96 5.370 50,000 CID GMAC 04/11/96 5.450 50,000 CID GMAC 04/11/96 5.450 50,000 PURCHASE c/ Treas Notes 5.750% 09/30/97 5.300 47,000 Treas Notes 5.750% 09/30/97 5.300 50,000 Treas Notes 5.375% 11/30/97 5.300 37,485 03/27/96 REDEMPTION CD CIBC 5.220% 03/27/96 5.220 100,000 48 696,000.00 5.292 CD Bk Calif 5.250% 03/27/96 5.250 115,000 48 805,000.00 5.322 CD Duetsche 5.410% 03/27/96 5.390 11,000 63 103,776.54 5.465 CD Duetsche 5.410% 03/27/96 5.390 25,000 63 2359890.89 5.466 CD Sanwa 5.500% 03/27/96 5.500 15,000 68 155,833.33 5.576 CD Duetsche 5.755% 03/27/96 5.750 100,000 174 2,779,232.33 5.829 CD Rabobank 5.780% 03/27/96 5.760 50,000 176 1,408,133.89 5.839 CD Nova Scotia 5.780% 03/27/96 5.780 100,000 177 2,841,833.33 5.860 CID GECC 03/27/96 5.280 50,000 1 7,333.33 5.354 CID GECC 03/27/96 5.280 50,000 1 7,333.33 5.354 CID GECC 03/27/96 5.280 50,000 1 7,333.33 5.354 —11— 03/27/96 REDEMPTION CID GECC 03/27/96 5.280 $ 50,000 1 $ 7,333.33 5.354 CID Bear 03/27/96 5.230 50,000 6 43,583.35 5.307 CID Am Exp 03/27/96 5.230 40,000 15 87,166.67 5.314 CID Gr Western 03/27/96 5.220 25,000 42 152,250.00 5.324 CID Salomon 03/27/96 5.440 50,000 42 317,333.33 5.550 CID Salomon 03/27/96 5.440 50,000 42 317,333.33 5.550 CID GECC 03/27/96 5.150 25,000 49 175,243.06 5.258 CID GECC 03/27/96 5.150 50,000 49 350,486.11 5.258 CID SRAC 03/27/96 5.350 50,000 58 430,972.22 5.471 CID Assoc 03/27/96 5.350 100,000 69 1,025,416.67 5.480 CID GMAC 03/27/96 5.370 20,000 75 223,750.00 5.506 CID GMAC 03/27/96 5.370 50,000 75 559,375.00 5.506 CID Unocal 03/27/96 5.580 10,285 83 132,316.53 5.731 CID Morg Stan 03/27/96 5.500 35,000 96 513,333.34 5.659 CID Morg Stan 03/27/96 5.450 50,000 98 741,805.55 5.608 CID Morg Stan 03/27/96 5.450 50,000 98 741,805.55 5.608 CID FMCC 03/27/96 5.470 50,000 98 744,527.78 5.629 CP FMCC 03/27/96 5.470 50,000 98 744,527.78 5.629 CID Am Exp 03/27/96 5.550 50,000 142 1,094,583.33 5.753 FNMA 6.460% 03/27/96 6.400 25,000 329 1,444,000.00 6.504 PURCHASE CD Mitsubishi 5.500% 04/25/96 5.500 65,000 CID Assoc 03/28/96 5.550 50,000 CID Assoc 03/28/96 5.550 50,000 CID Assoc 03/28/96 5.550 50,000 CID Assoc 03/28/96 5.550 50,000 CID FMCC 04/02/96 5.500 50,000 CID FMCC 04/02/96 5.500 50,000 CID FMCC 04/02/96 5.500 50,000 CID FMCC 04/02/96 5.500 50,000 03/28/96 REDEMPTION CID Assoc 03/28/96 5.550 50,000 1 7,708.33 5.627 CID Assoc 03/28/96 5.550 50,000 1 7,708.33 5.627 CID Assoc 03/28/96 5.550 50,000 1 7,708.33 5.627 CID Assoc 03/28/96 5.550 50,000 1 7,708.33 5.627 CID GMAC 03/28/96 5.440 50,000 77 581,777.78 5.580 CID GMAC 03/28/96 5.440 50,000 77 581,777.78 5.580 PURCHASE CID FMCC 04/25/96 5.350 50,000 CID FMCC 04/25/96 5.350 50,000 CID FMCC 04/25/96 5.350 50,000 CID GECC 05/08/96 5.330 10,000 CID GECC 05/08/96 5.330 50,000 CID GECC 05/08/96 5.330 50,000 —12- 10 03/28/96 PURCHASE CID GMAC 05/10/96 5.420 $ 45,000 CID Morg Stan 05/29/96 5.330 6,850 CID Morg Stan 05/29/96 5.330 50,000 CID Morg Stan 08/28/96 5.260 44,500 CID Morg Stan 08/28/96 5.260 50,000 FR SBA 6.125% 03/25/21 6.125 3,980 Treas Notes 5.125% 02/28/98 5.853 50,000 Treas Notes 5.125% 02/28/98 5.853 50,000 PURCHASE c/ Treas Bills 04/04/96 5.450 50,000 Treas Bills 05/30/96 5.460 50,000 Treas Bills 06/13/96 5.450 50,000 Treas Bills 06/27/96 5.450 3,360 Treas Bills 06/27/96 5.450 50,000 Treas Bills 06/27/96 5.450 50,000 Treas Bills 01/09/97 5.460 48,000 Treas Notes 6.875% 02/28/97 5.460 6,299 Treas Notes 7.750% 01 /31 /00 5.450 2,415 03/29/96 RRS Treas Notes 5.125% 02/28/98 5.000 50,000 Treas Notes 5.250% 01/31/01 3.510 50,000 Treas Notes 5.250% 01/31/01 3.510 50,000 Treas Notes 5.250% 01/31/01 3.510 50,000 Treas Notes 5.250% 01/31/01 3.510 50,000 Treas Notes 5.250% 01/31/01 3.510 50,000 Treas Notes 5.250% 01/31/01 3.480 25,000 Treas Notes 5.250% 01/31/01 3.480 50,000 Treas Notes 5.250% 01/31/01 3.480 50,000 Treas Notes 5.250% 01/31/01 3.480 50,000 REDEMPTION CD Commerzbk 5.210% 03/29/96 5.190 25,000 42 $151,378.51 5.262 CD Commerzbk 5.210% 03/29/96 5.190 50,000 42 302,757.02 5.262 CID Am Exp 03/29/96 5.250 30,000 4 17,500.00 5.326 CID Am Exp 03/29/96 5.250 50,000 4 29,166.67 5.326 CID Am Exp 03/29/96 5.250 50,000 4 29,166.67 5.326 CID Am Exp 03/29/96 5.250 50,000• 4 29,166.67 5.326 CP Am Exp 03/29/96 5.250 50,000 10 72,916.67 5.330 Disc Notes FNMA 03/29/96 5.460 16,685 143 361,869.84 5.658 SALE V Treas Notes 4.375% 08/15/96 5.150 24,765 28 97,120.70 5.221 Treas Notes 5.500% 11/15/98 5.150 50,000 28 199,540.76 5.221 Treas Bills 09/19/96 5.150 30,000 29 118,650.28 5.221 —13— 03/29/96 SALE f/ Treas Notes 6.875% 10/31/96 5.150 $ 50,000 29 $ 210,230.87 5.221 Treas Notes 6.500% 08/15/97 5.150 19,475 29 .80,794.20 5.221 FHLMC 4.525% 01/27/07 5.200 1,340 29 5,466.61 5.272 FNMA 5.300% 03/11/98 5.200 50,000 29 203,831.33 5.272 FNMA 5.300% 03/11/98 5.200 50,000 29 203,831.33 5.272 FHLB 5.240% 07/20/98 5.200 50,000 31 219,411.11 5.272 FHLB 5.240% 07/20/98 5.200 50,000 31 219,411.11 5.272 FHLMC 6.290% 10/13/00 5.200 20,500 31 93,125.46 5.272 FNMA 5.250% 05/13/98 5.200 30,000 31 132,990.00 5.272 SALE c/ Treas Bills 04/04/96 5.450 50,000 1 7,414.57 5.525 Treas Bills 05/30/96 5.460 50,000 1 7,367.97 5.535 Treas Bills 06/13/96 5.450 50,000 1 7,341.76 5.525 Treas Bills 06/27/96 5.450 3,360 1 492.32 5.525 Treas Bills 06/27/96 5.450 50,000 1 7,328.13 5.525 Treas Bills 06/27/96 5.450 .50,000 1 7,328.13 5.525 Treas Bills 01/09/97 5.460 48,000 1 6,845.78 5.535 Treas Notes 6.875% 02/28/97 5.460 6,299 1 952.92 5.535 Treas Notes 7.750% 01 /31 /00 5.450 2,415 1 372.87 5.525 Treas Notes 5.750% 09/30/97 5.300 47,000 3 20,939.42 5.373 Treas Notes 5.750% 09/30/97 5.300 50,000 3 22,275.46 5.373 Treas Notes 5.375% 11 /30/97 5.300 37,485 3 16,410.12 5.373 RRP Treas Notes 5.250% 01/31/01 3.875 25,000 28 (74,405.38) -3.928 Treas Notes 5.250% 01/31/01 3.875 50,000 28 (148,810.76) -3.928 Treas Notes 5.250% 01/31/01 3.875 50,000 29 (154,125.43) -3.928 Treas Notes 5.250% 01/31/01 3.875 50,000 29 (154,125.43) -3.928 Treas Notes 5.250% 01/31/01 3.925 50,000 29 (155,916.54) -3.979 Treas Notes 5.250% 01/31/01 3.925 50,000 29 (155,916.54) -3.979 Treas Notes 5.250% 01/31/01 3.700 50,000 31 (157,712.50) -3.751 Treas Notes 5.250% 01/31/01 3.700 50,000 31 (157,712.50) -3.751 Treas Notes 5.250% 01/31/01 3.700 50,000 31 (157,712.50) -3.751 PURCHASE g/ CD Commerzbk 5.340% 04/30/96 5.330 50,000 CD Commerzbk 5.340% 04/30/96 5.330 50,000 CD Montreal 5.310% 04/30/96 5.310 25,000 CD Montreal 5.310% 04/30/96 5.310 50,000 CID Morg Stan 04/30/96 5.330 45,000 CID Morg Stan 04/30/96 5.330 50,000 CID Morg Stan 04/30/96 5.330 50,000 CID Morg Stan 04/30/96 5.330 50,000 CID Morg Stan 04/30/96 5.330 50,000 CID Lehman W30/96 5.530 50,000 —14— 03/29/96 PURCHASE CD Swiss 5.320% 07/02/96 5.310 $10,000 CD Swiss 5.320% 07/02/96 5.310 50,000 CD Swiss 5.320% 07/02/96 5.310 50,000 CP FMCC 04/01/96 5.500 50,000 CP FMCC 04/01/96 5.500 50,000 CP FMCC 04/01/96 5.500 50,000 CP FMCC 04/01/96 5.500 50,000 CP Unocal 05/10/96 5.550 5,000 CP GMAC 05/31/96 5.350 50,000 CP GMAC 05/31/96 5.350 50,000 Treas Bills -03/06/97 5.182 50,000 Treas Bills 03/06/97 5.182 50,000 03/31/96 REDEMPTION Treas Notes 5.125% 03/31 /96 5.108 Treas Notes 5.125% 03/31 /96 5.113 50,000 731 $ 5,109, 375.00 5.108 50,000 731 5,113,281.25 5.113 —15— a/ The abbreviations indicate the type of security purchased or sold; i.e., (U.S) Bills, Bonds, Notes, Debentures, Discount Notes, and Participation Certificates: Federal National Mortgage Association (FNMA), Farmers Home Administration Notes (FHA), Student Loan Marketing Association (SLMA), Small Business Association (SBA), Negotiable Certificates of Deposit (CD), Negotiable Certificates of Deposit Floating Rate (CD FR), Export Import Notes (EXIM), Bankers Acceptances (BA), Commercial Paper (CP), Government National Mortgage Association (GNMA), Federal Home Loan Bank Notes (FHLB), Federal Land Bank Bonds (FLB), Federal Home Loan Mortgage Corporation Obligation (FHLMC PC) & (FHLMC GMC), Federal Farm Credit Bank Bonds (FFCB), Federal Farm Credit Discount Notes (FFC), Corporate Securities (CB), U.S. Ship Financing Bonds (TITLE XI'S), International Bank of Redevelopment (IBRD), Tennessee Valley Authority (TVA) Medium Term Notes (MTN). b/ Purchase or sale yield based on 360 day calculation for discount obligations and Repurchase Agreements. c/ Repurchase Agreement. d/ Par amount of securities purchased, sold, or redeemed. e/ Securities were purchased and sold as of the same date. f/ Repurchase Agreement against Reverse Repurchase Agreement. g/ Outright purchase against Reverse Repurchase Agreement. h/ Security "SWAP" transactions. i/ Buy back agreement. RRS Reverse Repurchase Agreement. RRP Termination of Reverse Repurchase Agreement. -16- TIME DEPOSIT NAME DEPOSIT YIELD PAR AMOUNT MATURITY BEVERLY HILLS City National Bank 01-23-96 5.150 10,000,000 04-25-96 City National Bank 02-07-96 5.050 10,000,000 05-08-96 City National Bank 02-20-96 4.940 10,000,000 05-20-96 Great Western Bank 01-23-96 5.150 50,000,000 04-19-96 Great Western Bank 01-26-96 5.150 75,000,000 04-24-96 CHICO North St National Bank 02-15-96 4.940 500,000 05-17-96 INGLEWOOD Imperial Bank 01-03-96 5.170 10,000,000 04-02-96 Imperial Bank 01-10-96 5.230 20,000,000 04-09-96 Imperial Bank 02-07-96 5.060 51000,000 05-08-96 Imperial Bank 02-08-96 5.020 10,000,000 05-08-96 Imperial Bank 02-14-96 .4.970 15,000,000 06-13-96 Imperial Bank 02-20-96 4.970 11,000,000 06-21-96 Imperial Bank 03-04-96 5.040 11,000,000 07-02-96 Imperial Bank 03-12-96 5.160 15,000,000 07-18-96 LOS ANGELES Preferred Bank 01-16-96 5.210 11000,000 04-15-96 East West Federal Bank 01-17-96 5.230 21000,000 04-16-96 Preferred Bank 01-18-96 5.210 21000,000 04-17-96 Preferred Bank 02-26-96 4.990 21000,000 05-29-96 Preferred Bank 03-22-96 5.130 51000,000 06-21-96 ram- "I `A4 Oak Valley Comm. Bank 03-29-96 5.230 500,000 09-25-96 PETALUMA Bank of Petaluma 11-15-95 5.540 11000,000 05-13-96 -17- TIME DEPOSIT NAME DEPOSIT YIELD PAR AMOUNT MATURITY REDDING North Valley Bank 03-25-96 SACRAMENTO Sanwa Bank of Calif 01-26-96 Sanwa Bank of Calif 02-22-96 Sanwa Bank of Calif 02-27-96 SAN FRANCISCO Trans Pacific NB 03-22-96 SAN LUIS OBISPO 1st Bk San Luis Obispo 02-07-96 1st Bk San Luis Obispo 02-15-96 1st Bk San Luis Obispo 02-28-96 SAN RAFAEL West America Bank 01-23-96 SANTA ANA Grand National Bank 01-04-96 VACAVILLE Continental Pacific Bk 03-07-96 TOTAL TIME DEPOSITS AS OF MARCH 29, 1996 5.220 3,000,000 09-23-96 5.150 51000,000 07-31-96 5.100 50,000,000 08-20-96 5.100 10,000,000 08-26-96 5.350 800,000 09-18-96 5.050 2,60010-00 05-08-96 4.950 11000,000 05-15-96 5.030 11500,000 05-29-96 5.150 25,000,000 04-24-96 5.320 95,000 07-02-96 5.050 11000,000 06-05-96 $365,995,000 -18- DEMAND BANK DEPOSITS (000 omitted) DAILY BALANCES WARRANTS MARCH PER BANKS OUTSTANDINGS 1. $137,455 1,565,795 2. 137,455 1,565,795 3. 137,455 1,5651795 4.. 312,032 1,201,494 S. 222,809 1,114,395 6. 161,691 1,154,583 7. 1091S79 11429,928 8. 113,345 1,461,241 9. 113,345 1,461,241 10. 113,345 1,461,241 11. 171,438 1,263,445 12. 97,522 212,429 13. 223,328 194,853 14. 98,893 1,275,220 15. 233,862 11230,130 16. 233,862 1,237,908 17. 233,862 11237,908 18. 201,963 11040,569 19. 282,126 933,915 20. 315,898 932,502 21. 188,943 1,070,336 22. 188,321 1,222,069 23. 188,321 1,222.069 24. 188,321 1,222,069 25. 360,172 11150,170 26. 2890831 11076,511 27. 316,371 1,004,601 28. 183,422 971,769 29. 243,764 1,330,264 30. 243,764 11330,264 31. 243,764 11334,727 a/ AVERAGE DOLLAR DAYS $ 202,783 a/ The prescribed bank balance for March was $243,673,000.00. This consisted of $109,878,000.00 in compensating balances for services, $135,878,000.00 uncollected funds and a deduction of $2,083,000.00 for December delayed deposit credit. -19- DESIGNATION BY POOLED MONEY INVESTMENT BOARD OF TREASURY POOLED MONEY INVESTMENTS AND DEPOSITS No. 1561 In accordance with Sections 16480 through 16480.8 of the Government Code, the Pooled Money Investment Board, at its meeting on March 20, 1996, has determined and designated the amount of money available for deposit and investment under said sections. In accordance with Sections 16480.1 and 16480.2 of the Government Code, it is the intent that the money available for deposit or investment be deposited in bank accounts and savings and loan associations or invested in securities in such a manner so as to realize the maximum return consistent with safe and prudent treasury management, and the Board does hereby designate the amount of money available for deposit in bank accounts, savings and loan associ- ations, and for investment in securities and the type of such deposits and investments as follows: 1. In accordance with law, for deposit in demand bank accounts as Compensating Balance for Services $129,388,000 The active noninterest-bearing bank accounts designation constitutes a calendar -month average balance. For purposes of computing the compensating balances, the Treasurer shall exclude from the daily balances any amounts contained therein as a result of nondelivery of securities purchased for "cash" for the Pooled Money Investment Account and shall adjust for any deposits not credited by the bank as of the date of deposit. The balances in such accounts may fall below the above amount provided that the balances computed by dividing the sum of daily balances of that calendar month by the number of days in the calendar month reasonably approximates that amount. The balances may exceed this amount during h collection periods or in anticipation of large impending warrant presentations to the Treasury, but the balances are to be maintained in such a manner as to realize the maximum return consistent with safe and prudent treasury management. 2. In accordance with law, for investment in securities authorized by Section 16430, Government Code, or in term interest - bearing deposits in banks and savings and loan associations as follows: From To ( 1) 03/18/96 03/22/96 Transactions $ 676,600,000 Time Deposits in various Financial Institutions In Securities (Sections 16503a (Section 16430)* and 16602)* $ 27,280,605,000 $ 365,995,000 Estimated Total $ 27,646,600,000 (2) 03/25/96 03/29/96 $ (2,461,100,000) $ 24,819,505,000 $ 365,995,000 $ 25,185,500,000 (3) 04/01/96 04/05/96 $ 416,600,000 $ 25,236,105,000 $ 365,995,000 $ 25,602,100,000 (4) 04/08/96 04/12/96 $ 835,400,000 $ 26,071,505,000 $ 365,995,000 $ 26,437,500,000 (5) 04/15/96 04/19/96 $ 3,032,600,000 $ 29,104,105,000 $ 365,995,000 $ 29,470,100,000 From any of the amounts specifically designated above, not more than 30 percent in the aggregate may be invested in prime commercial paper under Section 16430(e), Government Code. Additional amounts available in treasury trust account and in the Treasury from time to time, in excess of the amounts and for the same types of investments as specifically designated above. Provided, that the availability of the amounts shown under paragraph 2 is subject to reduction in the amount by which the bank accounts under paragraph 1 would otherwise be reduced below the calendar month average balance of $129,388,000. POOLED MONEY INVESTMENT BOARD: Chairperson _%L I A I Mift-&_r Dated: March 20, 1996 *Government Code Member —20- 14 California State Treasurer's Office 915 Capitol Mall, Room 106 Sacramento, CA 95814 (916) 653-3147 i � � Oz • U Qum& GF O OF THti INVESTMENT ADVISORY BOARD MEETING: June 12, 1996 INFORMATIONAL ITEMS: C ITEM TITLE Diversification of Portfolio ISSUE AND DISCUSSION: During the month of May, the City purchased $10,000,000 in Treasury Bills with maturities of (3) three (3) to six (6) months in an effort to diversify the portfolio. $5,000,000 was transferred from the State of California Local Area Investment Fund (LAIF) as a result of the Investment Advisory Board recommendation and $5,000,000 came from money market mutual fund bond proceeds. Approved for submission to the Investment Advisory Board: ohn M. Falconer 'inance Director