2000 10 11 IABP.O. Box 1504
78-495 CALLS TAMPICO (760) 777-7000
LA QUINTA, CALIFORNIA 92253 FAX (760) 777-7101
AGENDA
INVESTMENT ADVISORY BOARD
Study Session Room
78-495 Calle Tampico- La Quinta, CA 92253
October 11, 2000 - 5:30 P.M.
I CALL TO ORDER
a. Pledge of Allegiance
b. Roll Call
II PUBLIC COMMENT- (This is the time set aside for public comment on any matter not scheduled on the agenda.)
III CONFIRMATION OF AGENDA
IV CONSENT CALENDAR
Approval of Minutes of Meeting on September 13, 2000 for the Investment
Advisory Board.
V BUSINESS SESSION
A. Transmittal of Treasury Report for August 2000
B. Continued discussion and review of Investment Policy Investments in
GSE's
VI CORRESPONDENCE AND WRITTEN MATERIAL
A. Month End Cash Report and other selected Financial Data -
September 2000
B. Pooled Money Investment Board Reports - July 2000
VII BOARD MEMBER ITEMS
Vill ADJOURNMENT
INVESTMENT ADVISORY BOARD Business Session: A
Meeting Date: October 11, 2000
ITEM TITLE:
Transmittal of Treasury Report
for August 31, 2000
BACKGROUND:
Attached please find the Treasury Report for August 31, 2000.
RECOMMENDATION:
Review, Receive and File the Treasury Report for August 31, 2000.
Jo n M. Falcon"er, Finance Director
Ta CV
jhf 4 Qu&tA
MEMORANDUM
TO: La Quinta City Council
FROM: John M. Falconer, Finance Director/Treasurer
SUBJECT: Treasurer's Report for August 31, 2000
DATE: September 25, 2000
Attached is the Treasurer's Report for the month ending August 31, 2000. The report is submitted to
the City Council each month after a reconciliation of accounts is accomplished by the Finance Dept.
The following table summarizes the changes in investment types for the month:
Investment
Beginning
Purchased
Sold/Matured
Other
Ending
Change
Cash (1)
$623,148
(347,263)
275,885
(347,263)
LAW
$7,045,921
800,000
(3,000,000)
0
4,845,921
(2,200,000)
US Treasuries (2)
$31,438,391
13,890
31,452,281
13,890
US Gov't Agencies (2)
$19,172,508
5,000,000
(5,000,000)
(142,145)
19,030,363
(142,145)
Commercial Paper (2)
$3,995,487
3,000,000
(4,000,000)
(21)
2,995,466
(1,000,021)
Mutual Funds
$4,025,473
2,987,721
777,304
21,276
6,214,614
2,189,141
Total
$66 300 928
1 11,787,721
12 777 304
(496,815)
64,814,530(1,486,398)
I certify that this report accurately reflects all pooled investments and is in compliance with the California
Government Code; and ins 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. the City of
La Quinta used the Bureau of the Public Debt, U.S. Bank Monthly Statement and the Bank of New York
Monthly Custodian Report to determine the fair market value of investments at month end.
)hn M. Falconer I
nance Director/Treasurer
jn Z td
ate
Footnote
(1) The amount reported in the other column represents the net increase (decrease) of deposits and
withdrawals from the previous month.
(2) The amount reported in the other column represents the amortization of premium/discount for the
month on US Treasury, Commercial Paper and Agency investments.
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CITY OF LA QUiNTA
BALANCE SHEET 08/31/00
CITY
ASSETS:
POOLED CASH
(8,041,267.01)
LQRP INVESTMENT IN POOLED CASH
INVESTMENT T-BILUNOTES & OTHER
44,980,000.00
AUTO MALL CASH
2O2,126.13
LQRP CASH
BOND REDEMPTION CASH
BOND RESERVE CASH
BOND PROJECT CASH
BOND ESCROW CASH
PETTY CASH
1,000.00
CASH & INVESTMENT TOTAL
37,141,859.12
INVESTMENT IN LAND HELD FOR RESALE
ACCOUNTS RECEIVABLE
35,280.09
PREMIUM/DISCOUNT ON INVESTMENT
(491,044.35)
LQRP-ACCOUNTS RECEIVABLE
INTEREST RECEIVABLE
205,763.62
LOAN/NOTES RECEIVABLE
13,930.25
DUE FROM OTHER AGENCIES
DUE FROM OTHER AGENCIES - CVAG
651,913.19
CVAG ALLOWANCE
(651,913.19)
DUE FROM OTHER GOVERNMENTS
DUE FROM OTHER FUNDS
897,793.48
DUE FROM RDA
8,497,550.20
INTEREST ADVANCE -DUE FROM RDA
2,023,594.18
ADVANCES TO OTHER FUNDS
NSF CHECKS RECEIVABLE
2,469.86
ACCRUED REVENUE
TRAVEL ADVANCES
4,879.00
EMPLOYEE ADVANCES
PREPAID EXPENSES
50,727.55
RECEIVABLE TOTAL
11,240,943.88
WORKER COMPENSATION DEPOSIT
37,637.00
RENT DEPOSITS
UTILITY DEPOSITS
75.00
MISC. DEPOSITS
2,100.00
CITY CITY RDA
RDA FA
FIXED LONG TERM FIXED
LONG TERM FINANCING LONG TERM
GRAND
ASSETS DEBT RDA ASSETS
DEBT AUTHORITY DEBT
TOTAL
11,542,319.85
(805.14)
3,500,247.70
805,000.00
805,000.00
44,980,000.00
202,126.13
52,967.94
52,967.94
3,788,465.20
28.73
3,788,493.93
11,405,990.31
595,594.57
12,001,584.88
1,000.00
27,594,743.30 594,818.16 b5, ss1 ,42u.otl
60,900.00
0,010,000.00 8,106,180.09
(24,077.87)
(1,768.07) (516,890.29)
63,642.88
63,642.88
205,763.62
2,678,631.60
2,692,561.85
651,913.19
(651,913.19)
551,629.04
1,449,422.52
8,497,550.20
2,023,594.18
2,469.86
833.40 833.40
4,879.00
50,727.55
3,331,559.05
8,008,231.93
22,bdU, is4.ab
37,637.00
75.00
2,100.00
DEPOSITS TOTAL
39,812.00
GENERAL FIXED ASSETS
1,386,331.67 15,590,699.00 9,988,279.05
26,965,309.72
ACCUMULATED DEPRECIATION
(812,743.27)
(812,743.27)
3,395,117.03
AMOUNT AVAILABLE TO RETIRE UT DEBT
3,395,117.03
AMOUNT TO BE PROVIDED FOR L/T DEBT
1,645,647.34
94,703,355.40
8,010,000.00 104,359,002.74
TOTAL OTHER ASSETS
573,588.40 15,590,699.00 1,645,647.34 9,988,279.05
98,098,472.43
8,010,000.00 133,906,686.22
TOTAL ASSETS
48 996 203.40 15 590 699.00 1,645,647.34 30 926 302.35 9,988,279.05
98 098 472.43 8,603,050.09
8,010,000.00 221 858 653.66
LIABILITY
ACCOUNTS PAYABLE
DUE TO OTHER AGENCIES
130,114.56
DUE TO OTHER FUNDS
112,867.29
INTEREST ADVANCE -DUE TO CITY
ACCRUED EXPENSES
PAYROLL LIABILITIES
STRONG MOTION INSTRUMENTS
4,085.00
FRINGE TOED LIZARD FEES
29,661.50
SUSPENSE
5,194.52
DUE TO THE CITY OF LA QUINTA
PAYABLES TOTAL
281,922.87
ENGINEERING TRUST DEPOSITS
SO. COAST AIR QUALITY DEPOSITS
ARTS IN PUBLIC PLACES DEPOSITS
436,404.79
LQRP DEPOSITS
DEVELOPER DEPOSITS
1,097,588.39
MISC. DEPOSITS
507,854.63
AGENCY FUND DEPOSITS
1,308,367.89
TOTAL DEPOSITS 3,350,215.70
1,327,250.23
1,327,250.23
15,156.00
15,156.00
130,114.56
9,305.00 1,449,422.52
4,085.00
29,661.50
5,194.52
9,305.00 l ,bl b,410. i u
436,404.79
15,156.00
1,097,588.39
507,854.63
1,308,367.89
3,365,371.70
DEFERRED REVENUE
8,270.67
8,010,000.00
8,018,270.67
OTHER LIABILITIES TOTAL
8,270.67
8,010,000.00
8,018,270.67
COMPENSATED ABSENCES PAYABLE
321,991.94
10,521,148.18
321,991.94
11,844,803.58
DUE TO THE CITY OF LA QUINTA
1,323,655.40
12,249,102.00
12,249,102.00
DUE TO COUNTY OF RIVERSIDE
9,418,222.25
9,418,222.25
DUE TO C.V. UNIFIED SCHOOL DIST.
DUE TO DESERT SANDS SCHOOL DIST.
65,910,000.00
8,010,000.00 73,920,000.00
BONDS PAYABLE
TOTAL LONG TERM DEBT
1,645,647.34
98,098,472.43
8,010,000.00 107,754,119.77
TOTAL LIABILITY
3,640,409.24
1,645,647.34 1,342,406.23
98,098,472.43
8,019,305.00
8,010,000.00 120,756,240.24
EQUITY -FUND BALANCE
45,355,794.16 15,590,699.00
29,583,896.12 9,988,279.05
583,745.09
101,102,413.42
TOTAL LIABILITY & EQUITY 48 996 203.40 15 590 699.00 1,645,647.34 30 926 302.35 9,988,279.05 98 098 472.43 8,603,050.09 8,010,000.00 221 858 653.66
INVESTMENT ADVISORY BOARD MEETING BUSINESS SESSION: B
Meeting Date: October 11, 2000
ITEM TITLE
Continued review of the Investments in GSE's
BACKGROUND:
Staff has attached the Freddie mac and Federal Farm Credit Annual Reports dated
December 31, 1999.
RECOMMENDATION:
Provide Staff with direction based upon review of documentation and Board
Member discussion
n W Falconer, Finance Director
Lel&W C. amxW, ChWrmikn wW CEO,, Fred*
�� f
TABLE OF CONTENTS
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Summary of Results
Year Ended December 31,
1 9 9 9
1 9 9 8
% Change
(in million, except per share amouna)
Net interest income on earning assets
$
2,540
$
1,927
32 %
Management and guarantee income
$
1,405
$
1,307
7 %
Other income, net
$
110
$
103
7 9%
Total revenues
$
4,055
$
3,337
22 %
Credit -related expenses
$
159
$
342
(54) %
Administrative expenses
$
655
$
578
13 %
Housing tax credit partnerships
$
80
$
61
31 %
Total non -interest expense
$
894
$
981
(9) %
Net income
$
2,223
$
1,700
31 %
Earnings per common share (3)
Basic
$
2.97
$
2.32
28 %
Diluted
$
2.96
$
2.31
28 %
Retained portfolio (in billions)
$
324
$
255
27 %
Total mortgage portfolio (in billions)(')
$
862
$
733
18 %
(1) Inchida mcgnized gains (losses) on hedging tnansaaion totaling $22 million and $(9) million for the yeah ended December 31, 1999 and 1998, mpeenvely
(2) Repnenu cosy associated with Freddie Mac's mmstment in boning tax arda partnerships. Tan credits gmeraud by th m invatments mince the corponown'f tax liability
(3) After payments of ptrfernrd stock dividends of $153 million and $121 mi&x for the years ended December 31, 1999 and 1998 mpertively
(4) Equal to the ntw d portfe/io pha Total PCs, net of Freddie Mac PCs held in the retained portfolio.
inancial
S862
$ 3 0o S2.46
Nimt
To Our Shareholders
In 1999 — our tenth year as a public company — Freddie Mac financed homes for more
than 2 million families. As we fulfilled our mission to make the American dream of decent,
accessible housing a reality, we achieved record earnings per share of $2.96, an increase of
28 percent over 1998. Our shareholders enjoyed a return on common equity above 20
percent for the 18th consecutive year. Notwithstanding these strong results, our stock per-
formance was very disappointing.
1999's record earnings were achieved while we reduced risk in our business to histor-
ically low levels. Our exposure to interest -rate risk fell to the lowest level since we began
reporting our portfolio market value sensitivity two years ago. Despite rising interest rates,
we were able to grow our retained portfolio by 27 percent to $324 billion at year-end. Credit
losses were less than 2 basis points of our total portfolio — one-half of 1998's levels and the
lowest in more than a decade — reflecting our outstanding risk management capabilities
and the benefits of a strong economy.
Freddie Mac's preparations for the year 2000 date change resulted in a seamless tran-
sition without a moment's disruption to our business or service to our customers. Beyond
meeting this challenge, our investment significantly enhanced our systems capabilities.
Our results for 1999 reflect Freddie Mac's steadfast commitment to serving the hous-
ing finance needs of Americas families. We do this by linking homeowners and renters
with the world's capital markets. Freddie Mac has long been the leader in bringing effi-
ciency and innovation to the mortgage market. In the midst of dramatic change in the
marketplace, Freddie Mac will remain the best way to finance housing in America.
Attracting Capital Worldwide to Finance America's Housing
Freddie Mac buys residential mortgages and funds them in the capital markets in one of
two ways — using mortgage -backed securities or a variety of debt instruments. By bring-
ing increased efficiency to the securities markets, we lower our funding costs and make
housing more affordable for the nation's families.
Freddie Mac pioneered the development of the markets for conventional mortgage -
backed securities and multiclass securities in the 1970s and 1980s. Now mortgage secu-
rities are among the most liquid and widely held investments in the world.
In the 1990s, we brought our innovation to bear in the debt market. We began issu-
ing callable debt in significant amounts in 1993, allowing us to grow our retained port-
folio dramatically. The Reference Notes" we introduced in 1998 are meeting the needs
of U.S. and international investors for high -quality liquid debt. In 1999, we launched
the first corporate debt financing calendar, providing investors with valuable informa-
tion for investment planning. In early 2000, we expanded our menu of debt offerings
with short-term Reference Billssm, sold to security dealers in internet-based auctions. These
efforts have brought tremendous growth to Freddie Mac and attracted global capital to
finance Americas housing.
4
Bringing Innovation to the Mortgage Market
Freddie Mac is leading the way in providing lenders the mortgage products consumers want,
while meeting rising expectations for convenience, speed and lower cost. A prime example of
our innovation is Loan Prospector', the automated underwriting service we introduced in 1995.
Loan Prospector enables much faster, more accurate and more objective underwriting
than previously possible. In 1999, Freddie Mac launched Loan Prospector on the Internet,
bringing these advantages closer to the earliest stages of the homebuying process. In the short
time since its introduction, Loan Prospector on the Internet has become a tool of choice for
200 wholesale lenders and 7,000 mortgage brokers and will soon be available to retail lenders.
With innovations like Loan Prospector, Freddie Mac will remain a premier source of funds
for single-family housing.
In addition, Freddie Mac has become a leader in the multifamily market. With a full
suite of products, including financing for senior and assisted -living housing and the purchase
of adjustable -rate loans, our multifamily business had a record year. The vast majority of our
multifamily purchases served families with low- and moderate -incomes, helping Freddie Mac
meet all of our affordable housing goals in 1999.
Building on Our Success
As technology brings change to the mortgage markets, Freddie Mac will build on our
leadership role. We intend to provide the best service to both traditional and emerging
industry segments. We will continue to streamline the mortgage process, allowing lenders
to reach an expanding base of borrowers. These improvements will drive costs lower and
boost homeownership.
Freddie Mac is well -positioned to take advantage of opportunities in the coming year
and beyond. Although mortgage origination volumes are expected to slow in 2000, we
remain committed to achieving mid -teens earnings growth. Our financial results will ben-
efit from our innovation and superior risk management, as well as a continuing strong
economic environment.
009
Our strategies will enable us to serve more families and are the best route to increasing
shareholder value. Our shareholders can count on Freddie Mac to:
• Work to maintain your confidence by managing the business in a consistent fashion
• Maintain world -class risk management — we will not sacrifice long-term value for
short-term gain
• Work relentlessly to find profitable opportunities to deploy your capital and, when we
cannot, return surplus capital to you
• Keep striving to improve Freddie Mac and the housing finance system and do an
outstanding job fulfilling our mission
Freddie Mac plays a fundamental role in a mortgage market that is $5 trillion and con-
stantly growing. We are harnessing technology to reduce costs and serve more borrowers. We
have unparalleled access to the world's capital markets. Our risk management is disciplined
and skilled. We have the people and the dedication to succeed. With these advantages, the
future is bright for Freddie Mac and the families we serve.
Sincerely,
Leland C. Brendsel
Chairman and
Chief Executive Officer
David W. Glenn
President and
Chief Operating 0fflcer
Our nation's demand for decent housing and affordable mortgage credit has led to the
most advanced home financing system in the world. Freddie Mac is at the heart of this
system, linking the world's capital markets to individual borrowers to provide the best
mortgage financing possible.
Freddie Mac has a noble mission: to improve the quality of life by making the
American dream of decent, accessible housing a reality.
To fulfill that mission, Freddie Mac brings innovation to the mortgage market that
reduces the cost of mortgage credit and helps put greater numbers of families in homes
of their own. Today's homebuyers have a wider choice of loan products at lower cost.
Getting a mortgage has never been easier, faster or fairer.
Serving
A new home can mean new schools, new
playgrounds... and new friends!
Homebuyers can rely on Freddie Mac for
a consistent supply of low-cost mortgage
finance^^
Americas i
Now Freddie Mac is making the world's best housing finance system even better. We
aim to dramatically improve the home financing experience for every possible homebuyer.
We will work with a broad range of mortgage lenders to harness new technologies that
streamline the mortgage process. We will expand access to low-cost financing to under -
served segments of the market. We will serve more borrowers, attract new investors and
improve the flow of mortgage capital. The result will be a faster, simpler process for obtain-
ing home loans at lower cost. By ensuring ready access to affordable financing, Freddie
Mac is helping create a brighter future for America's families. 10,
Freddie Mac is a reliable and trusted
partner to lenders in the primary market.
Together, we are working to dramatically
improve the mortgage financing system.
Loan Prospector on the Internet is low-
ering costs for originators while provid-
ing borrowers with virtually instant loan
approvals.
•
013
Freddie Mac buys mortgages from a nationwide network of thousands of mortgage lenders.
Our customers can rely on us to provide a steady supply of mortgage funds and the tools they
need to provide outstanding service to borrowers.
1999 is a perfect example. Lenders using Freddie Mac's Loan Prospector automated underwrit-
ing service were able to Process huge refinancing volumes without a hitch. We macle this powerful tool
even more accessible to mortgage originators with the introduction of Loan Prospector on the Internet,
lowering costs and enabling lenders to provide virtually instant loan approvals.
Today's families have greater access to low-cost mortgage financing than at any time in history.
This success is the direct result of our innovations that serve our customers: innovative mortgage prod-
ucts that help lenders reach more homebuyers; underwriting advances that help qualify more borrowers;
processing capability that handles unprecedented volumes; and servicing strategies that help lenders
retain customers.
Lenders
Homebuyers today expect more than ever from their lending institutions. They have come to rely
on fast and accurate decisions, excellent service and low cost. At Freddie Mac, we are committed to
helping lenders meet these demands and grow their business. Freddie Mac is investing in solutions
that will keep our customers on the forefront of a changing mortgage market. Working together, we
will make housing dreams come true for millions more of Americas families.
014
Freddie Mac links homebuyers and the capital markets, turning the mortgages con-
sumers need into the financial instruments investors want. By issuing top-quality mort-
gage and debt securities backed by the financial strength of the company, Freddie Mac
attracts capital worldwide to finance Americas housing.
Freddie Mac offers a variety of high -quality mortgage -backed securities for investors
in search of superior value. We pioneered the development of the markets for conven-
tional mortgage -backed securities and multiclass securities. Now mortgage securities are
among the most liquid and widely held investments in the world.
Freddie Mac is also leading the way with innovation in the global debt market. Our Reference
Bills, Notes and Bonds" provide investors with a high degree of liquidity and predictability.
Prov*d*ing Tiop
Investors in search of highly liquid
investments in the global securities mar -
.an count on the financial strength
eddie Mac.
015
Demonstrating their international appeal, Freddie Mac's debt securities are now owned
by most of the world's largest central banks. By attracting a broader investor base, Freddie
Mac is lowering our funding costs, which supports greater growth for the company and
lower mortgage rates.
As one of the largest security issuers, with rock -solid financial strength, Freddie Mac is a
name respected by investors worldwide. Freddie Mac's growing presence in the global capital
markets will ensure a steady supply of low-cost mortgage financing for Americas families.
016
It is the people of Freddie Mae who enable the company to accomplish our mission. Our
more than 3,500 employees are dedicated to improving the quality of life by making housing
dreams come true for Americas families.
Freddie Mac attracts the best expertise in the business. To build on our success, Freddie
Mac relies on a diversity of talent, with every employee able to contribute to their fullest poten-
tial. To that end, we offer a variety of career development opportunities, training programs
and educational assistance.
As a great company that values our employees, Freddie Mac is gaining recognition as an
employer of choice for the 21 st century.
• Fortune magazine placed Freddie Mac among the "Most Admired" companies in
America. The selection was based on our excellent record of hiring, diversity, company
growth, benefits, salary increases, training and promotions.
A grea-t
• Washingtonian magazine named Freddie Mac one of the best places to work in
the Washington, D.C., area. The magazine cited Freddie Mac's support of employee
volunteerism and community involvement.
• Money magazine ranked Freddie Mac's employee benefits 13th in a survey of the
nations largest companies. Specific mention was made of the company's 401(k)
"SteadySaver" retirement savings plan, which offers a range of investment options.
Dottie Shephard, a business analyst in
Freddie Mac's expanding markets area,
won an all expenses paid trip to Jamaica
as part of an employee referral contest.
First Prize in Freddie Mac's employee
referral contest was a brand new
Volkswagon Beetle. Employee referral
accounted for almost 30 percent of
Freddie Mac's external hiring in 1999.
•
a d T* r M
a gtrJ
Cnt� Discussion andAndysis ofFinancid Condition and,Resulaof Operations
36
19
Dek Finmeing
20
1 a �t+Iataagemcnt
20
Ov&I .
20
Mortgage Credit Risk
24
Institutional Credit Risk
26
IMAvm-Rase and Other Mar e* Risks
26
Interest -hate Risk
29
Other Market Risks
30 Derivative Financial Instruments
31 O)p banal and Odxr ArAwd Risks
31 Liquidity and Capital Mimagement
31 Liquidity
32 Capital Management
35� Volume Statistics
36 ' Average Balance Sheets and Rate/Volume Analysis
38 Consolidated Results of Operations
41 Regulatory Matters
42 Tax Matters
42 Effect of New Accounting Standard
42 Recent Events
Consolidated Financial Information
43 Five -Year Financial Highlights
44 Consolidated Financial Statements
48 Notes to Consolidated Financial Statements
80 Management's Report on Consolidated Financial
Statements and Internal Control Structure
81 Reports of Independent Public Accountants
82 Additional Financial Information
84 Eleven -Year Financial Highlights
FREDDIE MAC
Freddie Mac
Management's Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL HIGHLIGHTS
1999 Performance
In 1999, Freddie Mac achieved another year of record
revenues and earnings. "Total revenues" increased 22 percent,
to $4.055 billion in 1999 from $3.337 billion in 1998. "Net
income" increased 31 percent, to $2.223 billion in 1999 from
$1.700 billion in 1998. Diluted earnings per common share
grew 28 percent, to $2.96 per share in 1999 from $2.31 per
share in 1998. Freddie Mac's return on common equity was
26 percent in 1999, exceeding 20 percent for the eighteenth
consecutive year.
Exhibit 1— Earnings Per Common Share -Diluted"'
$3.00
$2.80
$2.60
$2.40
$2.20
$2.00
$130
$1:60
$1.40
$1.20
$1.00
$0.80
$0.60
$0.40
$0.20
$0.00
89 90 91 92 93 94 95 % 97 98 99
(1) `Earnings per common share -diluted "are computed based on the total of weighted
average common shares outstanding and the effect ofdilutive common equivalent
shares outstanding.
Freddie Mac's revenues in 1999 were driven by
mortgage portfolio growth. In a year of rising interest rates,
the corporation's total mortgage portfolio grew 18 percent,
while the retained portfolio grew 27 percent. Freddie Mac
achieved this growth while strengthening both its credit risk
and interest -rate risk profiles.
Freddie Mac's total mortgage portfolio growth rate of
18 percent exceeded the estimated 9 percent growth
in total outstanding U.S. residential mortgage debt. The
corporation's total mortgage portfolio growth reflects 1999
new business purchases totaling $273 billion, only slightly
below 1998's record purchase volume of $288 billion, accom-
panied by slowing total portfolio liquidations which fell to
20 percent in 1999 from 31 percent in 1998. Nearly two-
thirds of 1999's total mortgage portfolio growth occurred
during the first half of the year, reflecting mortgage refi-
nancing volumes. Refinancing activity slowed during the
latter half of the year as mortgage interest rates rose.
Retained portfolio growth continued to be a key
component of Freddie Mac's earnings growth in 1999. The
corporation grew the retained portfolio $69 billion, or 27
percent, during 1999, while significantly reducing its exposure
to interest -rate risk. A significant portion of retained
portfolio purchases during 1999 consisted of investments in
non -Freddie Mac guaranteed mortgage -related securities.
These investments consist of securities from agencies such as
the Government National Mortgage Association ("Ginnie
Mae") and securities collateralized by products such as home
equity loans.
Growth in "Net income" of 31 percent in 1999 exceeded
revenue growth of 22 percent due primarily to a decrease
in non -interest expense, which consists predominantly of
credit -related and administrative expenses. The decrease in
non -interest expense was driven by a decline of $183 million,
or 54 percent, in credit -related expenses, partially offset by a
$77 million, or 13 percent, increase in "Administrative
expenses." The decrease in credit -related expenses in 1999
reflects continued favorable economic conditions, particularly
house -price appreciation, and Freddie Mac's credit risk
management activities. The increase in "Administrative
expenses" compared to 1998 primarily reflects costs related
to the corporation's year 2000 readiness efforts, as well as
continued investment in business process improvements.
Disciplined deployment of shareholders' capital under-
lies all of Freddie Mac's activities. The corporation seeks to
invest capital only when it can achieve attractive long-term
returns and when related risks are acceptable. When profitable
investment opportunities are not available, Freddie Mac will
return capital to its shareholders through common stock
repurchases. Since November 1998, Freddie Mac raised $1.7 15
billion of additional capital through a $1.0 billion common
stock offering in November 1998 and three preferred stock
offerings totaling $688 million during 1999. This additional
capital supported portfolio growth and provided the corpo-
ration with added liquidity in the period leading up to the
century date change. As profitable investment opportunities
diminished during fourth quarter 1999, Freddie Mac
returned $92 million of capital to shareholders through
common stock repurchases.
Business Strategy and Outlook
Underlying Freddie Mac's financial performance and strength
is its fundamental role in Americas housing market of link-
ing the residential mortgage and capital markets. In this role,
Freddie Mac focuses on two key business strategies:
• Maintaining the lowest possible cost of financing for
its mortgage purchases and investments by creating
more liquid markets for its mortgage -backed
securities and debt and
• Bringing innovation and efficiency to the mortgage
market.
Freddie Mac participates as an investor in the secondary
mortgage market through purchases of residential mortgages
originated by mortgage lenders. The corporation finances
purchased mortgages by securitizing the mortgages and
Ow0
FREDDIE MAC
selling them in the form of mortgage -backed securities to
investors in the mortgage market, or by issuing other financing
instruments, principally debt, in the capital markets. Because
of its financial performance, its regular and significant
participation as an issuer in the capital markets, its
risk management capabilities and its public mission as a
government -sponsored enterprise ("GSE"), Freddie Mac is
positioned to create liquid markets for its mortgage -backed
securities and debt to lower its overall costs of financing
mortgage -related investments. The benefits of lower financing
costs are ultimately passed on to mortgage originators and
borrowers in the form of lower mortgage interest rates.
The strength of Freddie Mac's credit guarantee and
the large volume of its mortgage -backed securities support
the liquidity of these securities. By attracting investors to the
housing market, Freddie Mac provides mortgage lenders with
continuous access to lower -cost financing, which ultimately
increases borrowers' access to lower -cost mortgages. Freddie
Mac is also enhancing the liquidity of its securities by seeking
to increase demand for its debt securities in both the
domestic and international capital markets, most recently
through its introduction during 1998 and 1999 of several
new debt financing programs: Reference NotesSM and
Callable Reference NotesSM for long-term financing, and
Reference Bills1m for short-term financing. As worldwide
16 investor demand broadens for Freddie Mac's debt securities,
management believes these programs could produce a mean-
ingful reduction in the corporation's debt financing costs.
In addition to maintaining the lowest possible cost of
financing, Freddie Mac seeks to continually improve the
mortgage origination process by helping to streamline this
process for lenders and borrowers. Through Freddie Mac's
automated underwriting service, Loan Prospector®, mortgage
lenders and borrowers benefit from the increased speed,
reliability and ease of mortgage underwriting decisions. By
launching Loan Prospector on the Internet in mid-1999,
Freddie Mac is providing mortgage lenders with broader
access to this underwriting tool. Freddie Mac will
continually invest in innovative solutions that better assess
mortgage credit quality and improve the overall process of
underwriting residential mortgages.
Freddie Mac expects continued growth, reflecting the cor-
poration's ongoing commitment to its key business strategies.
Freddie Mac's goal is to continue growing its total mortgage
portfolio more rapidly than the rate of growth in total out-
standing U.S. residential mortgage debt. The corporation
believes there will be profitable investment opportunities
to grow the retained portfolio in 2000, while adhering to
its interest -rate risk management discipline. Furthermore,
through a combination of strong house -price appreciation and
Freddie Mac's credit risk management capabilities, the corpo-
ration expects continued improvement in credit perform-
ance, with lower credit losses anticipated in 2000 than
experienced in 1999.
Over the long term, Freddie Mac has consistently
produced earnings growth. During the 10-year period
ended December 31, 1999, the corporation's diluted earnings
per share grew at a compound annual rate of 17 percent.
Through risk management and capital deployment strategies,
management believes that Freddie Mac has built a foundation
for mid -teens earnings growth over the next few years. The
corporation's ability to continue producing earnings
growth is dependent upon factors such as total mortgage
portfolio growth, retained portfolio growth, credit per-
formance and other factors discussed in "FORWARD -
LOOKING STATEMENTS."
FORWARD -LOOKING STATEMENTS
Freddie Mac regularly communicates information concerning
its business activities to investors, securities analysts, the news
media and others as part of its normal operations. Some of
these communications include "forward -looking statements"
pertaining to management's current expectations as to
Freddie Mac's future business plans, results of operations
and/or financial condition. Forward -looking statements are
typically accompanied by, and identified with, such terms as
"anticipates," "believes," "expects," "intends" anticipates, expects, intends and similar
phrases. Management's expectations for the corporation's
future necessarily involve a number of assumptions and
estimates, and various factors could cause actual results to
differ materially from these expectations.
Management's discussion and analysis includes
forward -looking statements addressing the corporation's
prospects for earnings and mortgage portfolio growth, trends
in credit losses and net interest yield, changes in capital posi-
tion and other business and financial matters. Factors that
could cause actual results to differ from the expectations
expressed in these and other forward -looking statements by
management include: substantial changes in interest rates,
employment rates, house -price appreciation and the general
economy; changes in the corporation's strategies for and
results of credit loss mitigation, interest -rate and other mar-
ket risk management activities, and investment activities; the
availability of debt funding in sufficient quantity and at
attractive spreads to support continued growth in the retained
portfolio; the availability of call options in the derivatives
market comparable to those provided by callable debt; the
availability of equity funding in sufficient quantity to
support continued growth of the retained portfolio; the rate
of growth in total outstanding U.S. residential mortgage
debt; the size of the conforming residential mortgage
market; borrower preferences for fixed-rate mortgages or
FREDDIE MAC
adjustable -rate mortgages ("ARMs")/floating-rate mort-
gages; preferences of originators to sell mortgages into the
secondary market; changes in investor preferences for
mortgage -backed securities and debt versus other invest-
ments; competition in the purchase of mortgages and sale
of mortgage -backed and debt securities; the corporation's
ability to implement innovative solutions to business
processing systems issues; the occurrence of a major nat-
ural or other disaster in a geographic area in which the total
mortgage portfolio is heavily concentrated; the degree to
which the corporation's business and financial forecasting
methods accurately predict actual results; the impact of
new accounting standards, particularly Statement of
Financial Accounting Standards ("SFAS") No. 133 on the
accounting for derivative financial instruments, which
Freddie Mac will implement effective January 1, 2001; and
changes in the corporation's regulatory environment, reg-
ulatory capital requirements or Congressional charter.
MARKET OVERVIEW
Freddie Mac conducts business in two markets —the U.S.
residential mortgage market and the global securities market.
Freddie Mac's participation in these markets serves to link
America's homebuyers and renters with the world's capital
markets. Fulfilling this role requires Freddie Mac to meet
the challenge of improving access to low-cost mortgage
financing while successfully managing its business risks.
The U.S. residential mortgage market was more than
$5 trillion at the end of 1999. This market is larger than the
$3.5 trillion of U.S. Treasury securities and larger than the
$2.4 trillion of U.S. corporate debt securities outstanding at
the end of 1999. Freddie Mac forecasts that the residential
mortgage market will grow 6 percent to 8 percent annually
for the next several years, driven by strong demand for hous-
ing and house -price appreciation.
The residential mortgage market consists of a primary
mortgage market and a secondary mortgage market that link
homebuyers and investors. In the primary market, financial
institutions provide mortgage funds to borrowers for resi-
dential properties, and service mortgage loans. Residential
mortgage lenders and servicers are generally commercial banks
and their subsidiaries, mortgage companies, savings institu-
tions, credit unions and other institutions. Mortgage lenders
obtain mortgage funds in a variety of ways, often from
deposits or by selling mortgages into the secondary market.
The mortgage lending process begins with mortgage
brokers or mortgage lenders. Mortgage brokers advise
prospective homeowners about mortgage products and lend-
ing rates, and they connect borrowers with lenders. Mortgage
lenders underwrite and originate mortgages. Mortgage ser-
vicers administer mortgage loans, collecting payments of
principal and interest from borrowers. These payments are
ultimately passed through to secondary mortgage market
investors. In addition, private mortgage insurance companies
and other financial institutions sometimes provide third -
party insurance for mortgage loans. Third -party insurance or
other credit enhancements are required by law on certain
loans sold to Freddie Mac and Fannie Mae.
Freddie Mac operates within the secondary mortgage
market. The secondary market encompasses institutions
engaged in buying and selling mortgages and mortgage -
related investments. The magnitude of investment and
trading activity in this market supports a continuous flow of
funds to the primary market. Stable mortgage flows help
moderate cyclical swings in the housing market.
Secondary market participants include Freddie Mac
and Fannie Mae, investment banking firms and others who
trade and invest in mortgage securities. Freddie Mac and
Fannie Mae are the largest participants in the U.S. second-
ary market, with a combined total mortgage portfolio of over
$2 trillion (approximately 40 percent of all U.S. residential
mortgage debt outstanding). Both companies are stock-
holder -owned, Congressionally chartered corporations with
the public purpose of increasing the supply and availability
of home mortgage financing. Distinct from Freddie Mac
and Fannie Mae is Ginnie Mae, a wholly owned government 17
corporation within the U.S. Department of Housing and
Urban Development ("HUD"). Unlike Freddie Mac and
Fannie Mae, Ginnie Mae's guarantee is backed by the full
faith and credit of the U.S. government.
Freddie Mac competes primarily with Fannie Mae for
the purchase of conventional residential mortgages —home
loans that are not insured or guaranteed by agencies of the
U.S. government. The corporation's business is limited to the
conforming mortgage market. Conforming mortgages cannot
exceed prescribed dollar limits that are adjusted annually by
Freddie Mac and Fannie Mae to reflect changes in the average
purchase price of single-family conventionally financed
homes, as reported by the Federal Housing Finance Board
("FHFB"). Effective January 1, 2000, the one -unit, single-
family loan limit increased 5.3 percent to $252,700 from
$240,000 in 1999. Freddie Mac estimates that approximately
$1.09 trillion of conforming single-family mortgages were
originated in 1999. Of that amount, $523 billion, or 48 per-
cent, were sold to Freddie Mac and Fannie Mae compared
to 50 percent in 1998.
Freddie Mac also competes with other institutions that
retain or securitize mortgages such as depository institutions,
private -label issuers and Federal Home Loan Banks partici-
pating in FHFB-approved programs. Competition from
o22
FREDDIE MAC
18
these entities can vary with economic, financial market and
regulatory environments. Among other things, these factors
may affect the degree to which these institutions sell mort-
gages in the secondary market rather than retaining them in
their own portfolios.
Freddie Mac competes in the global securities markets
as an issuer of mortgage -backed securities ("Participation
Certificates" or "PCs") and debt. Under Freddie Mac's
Congressional charter and other federal laws and regulations,
Freddie Mac securities have a number of special attributes,
including:
• Exemption from U.S. Securities and Exchange
Commission registration requirements (although
Freddie Mac is fully subject to the antifraud provi-
sions of the securities laws);
• The ability of financial institutions to invest in
Freddie Mac mortgage -backed and debt securities
essentially without limit;
• Access to the Federal Reserve's book -entry system for
the issuance, transfer and payment of most mortgage -
backed and debt securities and
• The eligibility of Freddie Mac mortgage -backed and
debt securities as collateral for certain Federal Reserve
loans and accounts maintained under the Treasury
Tax and Loan program.
These attributes help Freddie Mac operate efficiently
and on a large scale in both its securitization and debt financ-
ing activities. Freddie Mac competes in the mortgage secu-
rities market based on the relative strength of its security
programs. Freddie Mac PCs are liquid securities that enable
the corporation to finance large mortgage purchases quickly
and opportunistically.
In the global debt market, Freddie Mac issues a vari-
ety of callable and non -callable debt securities to meet the
demand for investments and hedging vehicles that are large,
liquid and highly rated. Through its innovative debt securi-
ties programs, Freddie Mac is continuing its efforts to reduce
the costs of its debt financing.
BUSINESS REVIEW
Freddie Mac's principal business activity is the purchase and
financing of single-family and multifamily residential mort-
gages and mortgage -related securities. Freddie Mac uses two
principal methods to finance its mortgage -related invest-
ments:
• Securitization Financing. Under this method of
financing, purchased mortgages are securitized in the
form of guaranteed mortgage passthrough securities
(referred to as PCs) issued to investors by Freddie
Mac. Mortgage investments financed by the issuance
of PCs are an off balance sheet contingency (referred
to as "Total Mortgage Participation Certificates" or
"Total PCs").
• Debt Financing. Under this method of financing,
mortgages and mortgage -related securities held as
on -balance sheet portfolio investments are financed
principally with debt securities issued by Freddie
Mac and, to a lesser extent, with equity and other
liabilities. Mortgages and mortgage -related securities
held as portfolio investments by Freddie Mac are
referred to as the "retained portfolio."
Freddie Mac's public mission requires it to provide a
continuous supply of mortgage credit for U.S. homebuyers
in all economic environments. Freddie Mac flexibly employs
both of these financing methods on a daily basis to ensure that
it fulfills this mission. Each of these methods of financing
mortgage investments generates different sources and types
of revenue, exposes the corporation to different types and
degrees of risk and requires the commitment of different
levels of capital.
Freddie Mac's total mortgage portfolio consists of Total
PCs, net of PCs held in the retained portfolio, plus the retained
portfolio. During 1999, the total mortgage portfolio grew 18
percent, from $733 billion at the end of 1998 to $862 billion
at the end of 1999.
Securitization Financing
When Freddie Mac finances mortgage purchases through the
securitization process, it issues PCs in exchange for mortgages
or sells PCs to investors for cash. Each PC issued by Freddie
Mac represents an undivided interest in a pool of mortgages.
Principal and interest payments on the mortgages in the pool
underlying PCs are passed through to PC holders by Freddie
Mac on a monthly basis. Freddie Mac assumes the mortgage
credit risk on the underlying mortgages (the risk that mortgage
borrowers will default on their payment obligations) by
guaranteeing the payment of principal and interest to
holders of its PCs.
Payments on the mortgages underlying a PC pool are
remitted to Freddie Mac by mortgage servicers approved by
Freddie Mac. Generally, the rate of interest payable by servicers
to Freddie Mac on the mortgages in any PC pool will exceed
the coupon rate of the related PCs, with the difference retained
by Freddie Mac as a fee to compensate the corporation for
enhancing liquidity, assuming mortgage credit risk and
administering principal and interest payments on PCs. This
fee income, recorded as "Management and guarantee income"
over the lives of the mortgages underlying PCs, provides
Freddie Mac with a steady source of revenue. Any interest
payable by the borrowers on mortgages in a PC pool that
exceeds the mortgage servicer's required remittance to Freddie V j�
w 3
FREDDIE MAC
Mac is retained by the servicer as compensation for servicing
the mortgages. The balance of Total PCs grew $103 billion,
or 16 percent, from $646 billion at the end of 1998 to
$749 billion at the end of 1999.
The costs of securitization financing and Freddie Mac's
ability to compete for mortgage purchases may be affected by
the price difference, or "spread," between PCs and
competing securities. Freddie Mac's Gold PC® offers a faster
remittance of mortgage principal and interest payments to
investors than Fannie Mae securities. Management believes
that this faster remittance cycle should be reflected in the
market prices of Gold PCs, causing them to trade at higher
prices than Fannie Mae securities with similar coupons and
maturities. At times, however, factors such as differences in
liquidity and temporary imbalances in supply and demand
have caused the price premiums on Gold PCs to fall below
the level that Freddie Mac believes reflects the full value of the
Gold PC's faster remittance cycle. This increases the costs of
its securitization financing. In the current market environment,
Freddie Mac believes that the faster remittance cycle of the
Gold PC should cause both 30-year and 15-year Gold PCs to
trade at a price between 5.5 and 7.0 thirty-seconds (one thirty-
second is equal to 3.125 basis points in price) above similar
Fannie Mae securities. For 1999, 30-year Gold PCs and 15-year
Gold PCs traded at an average of 2.8 and 3.2 thirty-seconds,
respectively, above the price of similar Fannie Mae securities,
compared to 3.5 thirty-seconds and 2.7 thirty-seconds, respec-
tively for 1998. The price of Freddie Mac securities relative to
Fannie Mae securities may strengthen or weaken Freddie Mac's
competitive position.
Freddie Mac continues to support the market for its
PCs through various activities, including the securities trading
activities of its Securities Sales and Trading Group
("SS&TG"), participating with external money management
firms to buy and sell PCs, marketing to dealers and investors
the relative merits of trading and investing in PCs, partic-
ipating in the dollar roll market, introducing new mortgage -
related securities products and related initiatives. Freddie
Mac anticipates that it will continue its market support
activities for both 30-year and 15-year Gold PCs, and initiate
and expand new efforts in the future. Freddie Mac may
increase, reduce or discontinue these or other related activities
at any time.
Debt Financing
Freddie Mac principally issues debt securities to finance mort-
gage -related investments held in the retained portfolio. In
financing mortgage -related investments with debt, Freddie
Mac issues a mixture of short-term debt and long-term callable
and non -callable debt. This funding mix enables Freddie Mac
to manage its interest -rate risk effectively by giving it the flex-
ibility to closely match the cash outflows from debt financing
with the expected cash inflows from its mortgage -related
investments. Freddie Mac more closely matches the cash flows
associated with its debt financing by using derivative financial
instruments that effectively modify the interest rate, maturity
or callability of the corporation's contractual short-term and
long-term debt.
The corporation recognizes net interest income earned
on the retained portfolio, which is the interest income earned
on these investments less the interest expense on the interest -
bearing liabilities funding them. Mortgage -related investments
comprising the retained portfolio primarily include Freddie
Mac PCs, but also include unsecuritized mortgage loans and
non -Freddie Mac securities. During 1999, the retained
portfolio grew $69 billion, or 27 percent, from $255 billion
at the end of 1998 to $324 billion at the end of 1999. At
December 31, 1999, the retained portfolio consisted of $56
billion in "Mortgages" and $268 billion in "Guaranteed
mortgage securities" (including $211 billion of repurchased
Freddie Mac PCs).
Maintaining access to low-cost debt financing will be
a key driver of future retained portfolio growth. Freddie Mac's
introduction of new debt financing programs is building
liquidity in the market for its debt in an effort to drive down
overall debt costs. In 1998, the corporation introduced its
Reference Notes financing program under which the
corporation regularly sells large issues of non -callable debt to 19
provide investors with high -quality, liquid debt securities. In
April 1999, Freddie Mac further enhanced its debt financ-
ing program by introducing Callable Reference Notes to
improve liquidity in the callable debt market. Most recently,
in November 1999, Freddie Mac introduced Reference Bills
which are large issues of short-term debt that are auctioned
on a regular schedule. Reference Bills with one-, two- and
three-month maturities are auctioned weekly. Reference Bills
with six- and twelve-month maturities are sold every four
weeks. Freddie Mac anticipates that this program, which
commenced in January 2000, will provide improved liquid-
ity for Freddie Mac short-term debt due to the cycle of reg-
ular, standardized issuances. The corporation also announced
a $65 billion Reference Notes financing calendar for 2000.
The financing calendar provides clarity and transparency
with regard to the timing of new debt issues and reopenings
of prior issues, the anticipated size of individual offerings and
exact settlement dates. As investor demand continues to grow,
management believes these programs could produce a reduc-
tion in the corporation's debt financing costs.
Freddie Mac invests its capital to purchase investments
only when the corporation can expect to achieve attractive
long-term returns, and when it believes the related risks are
acceptable. Freddie Mac has produced growth in net interest
income in a wide variety of interest -rate environments
1-1 024
FREDDIE MAC
through its ability to increase the size of its retained portfolio
and successfully manage interest -rate risk.
RISK MANAGEMENT
Freddie Mac is subject to two primary business risks: (i) credit
risk and (ii) interest -rate and other market risks. Freddie Mac
is also exposed to operational and other related risks.
Management of these risks affects both the level and stability
of the corporation's long-term value and short-term earnings.
Credit Risk
Freddie Mac's primary exposure to credit risk is associated
with the mortgages it purchases ("mortgage credit risk"). The
corporation is also subject to credit risk from the institutions
with which it conducts business ("institutional credit risk").
Mortgage Credit Risk
Mortgage credit risk is the risk that the corporation will not receive
amounts due from mortgage borrowers because of borrower
defaults, potentially resulting in a loss if Freddie Mac is unable
to collect amounts due through restructuring of the mortgage,
sale of the underlying property or other loss mitigation activities.
Credit Risk Management Oversight: Freddie Mac's
Board of Directors (the "Board") oversees the corporation's
credit risk management. Under the Board's oversight, Freddie
20 Mac's senior management is responsible for the day-to-day
management of the corporation's credit risk activities. Freddie
Mac maintains a credit risk oversight function that reports
directly to the Chief Operating Officer. Its purpose is to
independently monitor the corporation's credit risk exposure
and assess the effectiveness of the corporation's credit risk
management systems and processes.
Credit Risk Management Strategies: Freddie Mac's
management of mortgage credit risk comprises three broad areas:
• Establishing and enforcing sound underwriting stan-
dards, increasingly through the use of automated
underwriting;
• Obtaining credit enhancements on higher risk
mortgages and
• Executing loss mitigation activities to resolve
non -performing loans.
Underwriting Standards and Quality Control —
Freddie Mac seeks to ensure that the mortgages it purchases
are protected by the borrower's willingness and ability to
repay the mortgage obligation, and by adequate equity in the
underlying property. Increasingly, automated underwriting
tools such as Freddie Mac's Loan Prospector and other
quantitative credit risk management tools are used to evaluate
and monitor credit risk for single-family mortgages. During
1999, 50 percent of Freddie Mac's single-family purchase
volume was evaluated prior to purchase using Loan
Prospector, compared to 36 percent in 1998. Introduced in
1995, Loan Prospector combines loan -to -value ("LTV")
ratios and other loan and borrower characteristics to generate
credit risk classifications that enable Freddie Mac and lenders
to evaluate overall loan risk. The statistically based risk assess-
ments provided by Loan Prospector increase the ability of
Freddie Mac and mortgage lenders to distinguish between
single-family loans based on their likelihood of default.
The corporation also controls the quality of its single-
family mortgage purchases by purchasing mortgages from
seller/servicers that maintain approved underwriting
and servicing standards as required by Freddie Mac. The
corporation monitors seller/servicers' compliance with its
underwriting standards through quality control reviews and
on -site audits and actively investigates situations involving
possible fraud.
As part of its post -purchase quality control review
process, Freddie Mac uses Loan Prospector to evaluate the
credit quality of single-family mortgages that were not eval-
uated by Loan Prospector prior to purchase. Particular focus
is placed on reviewing purchases identified as high -risk
mortgages. For multifamily mortgages, Freddie Mac relies
primarily on a combination of intensive underwriting and
strict requirements on the mortgage lenders that are eligible
to participate in Freddie Mac's multifamily programs.
Credit Enhancements —Freddie Mac manages the
credit risk related to higher LTV mortgages by generally
requiring primary mortgage insurance for loans with original
LTV ratios exceeding 80 percent. Primary mortgage insur-
ance covers a portion of the loss experienced on those loans
that default. For certain loans, Freddie Mac also obtains credit
enhancements to supplement primary mortgage insurance
coverage. For these loans, the lender or a third party has
agreed to retain primary default risk by pledging collateral or
agreeing to accept losses on loans that default. Freddie Mac
benefits from credit enhancements to the extent that mort-
gages default at expected levels in a future period, typically
resulting in the corporation's receipt of collateral or cash
proceeds that offset credit losses. In exchange for this potential
future benefit, Freddie Mac receives a lower guarantee fee on
securitized mortgages that are credit enhanced. Table I
presents the composition of Freddie Mac's credit -enhanced
mortgage investments.
025
FREDDIE MAC
Table 1— Credit -Enhanced Mortgage Investments
December 31, 1999 1998
(dollars in millions)
Credit -enhanced mortgages(" $200,602 $170,390
Non -Freddie Mac securities 56,569 29,817
Total $257,171 $200,207
(1) Includes loans for which the lender or a third parry has retained primary default
risk by pledging collateral or agmeing to accept losses on loans that default. Freddie
Mac retains secondary default risk on credit -enhanced mortgages to the extent losses
exceed the level covered by the applicable credit enhancement.
As shown in Table 1, the corporations credit -enhanced
mortgage investments have two components: credit -enhanced
mortgages and non -Freddie Mac securities. Non -Freddie Mac
securities held in the retained portfolio are protected by the
credit guarantee of various agencies, bond insurance policies
or senior/subordinated structures (see "RISK MANAGE-
MENT—CreditRisk—Institutional Credit Risk" for further dis-
cussion of non -Freddie Mac securities).
Pool insurance is the most prevalent type of credit
enhancement protecting Freddie Mac's mortgage portfolio.
Pool insurance covers a large group of similar loans, in
contrast to primary mortgage insurance which is obtained for
individual loans. Pool insurance contracts expire after no fewer
than eight years, and typically cover losses ranging between
0.80 percent and 1.50 percent of the original unpaid principal
balance of the pooled loans at the time of purchase. For the
pool insurance contracts that expire before the completion of
the mortgage term, Freddie Mac ensures that the contracts
cover the period of time during which it is most likely that the
related mortgages may default. In addition to pool -insured
loans, Freddie Mac's credit -enhanced mortgages include loans
protected by reinsurance, collateral (including cash or mar-
ketable securities) pledged by a lender or recourse agreements
under which the lender repurchases loans that default.
Since 1995, Freddie Mac has increased the credit -
enhanced portion of its total mortgage portfolio. The portion
of the total mortgage portfolio not protected by credit
enhancements, the at -risk portfolio, represents those mortgages
for which the corporation has assumed primary default risk.
As shown in Exhibit 2, 30 percent of the corporations total
mortgage portfolio was credit -enhanced at December 31,
1999, compared to 27 percent and 16 percent at December
31, 1998 and 1997, respectively
Exhibit 2 — Total Mortgage Portfolio (At -Risk vs. Credit -Enhanced)
$900
$800
$700
ro
� $600
to " $500
o
a $400
Y C
0-
:2 $300
$200
$100
$0
95 % 97 98 99
■ At -Risk Portfolio Balance ■ Credit -Enhanced Portfolio Balance
While the use of credit enhancements reduces Freddie
Mac's exposure to mortgage credit risk, it increases the corpo-
ration's exposure to institutional credit risk (see "RISK MAN-
AGEMENT —Credit Risk —Institutional Credit Risk").
Loss Mitigation Activities Mortgages may become
non -performing despite the corporation's underwriting stan-
dards due to changes in general economic conditions, changes
in the financial status of individual borrowers or other factors.
Table 2 summarizes the corporation's non -performing loans
and restructured and seriously delinquent loans.
Table 2 — Non -Performing Loans, Troubled Debt Restructurings and 21
Serious Delinquencies
December 31, 1999 1998 1997
(dollars in millions)
Non -accrual loans("
$ 621
$1,068
$1,449
Real estate owned
438
574
722
Total non -performing assets
1,059
1,642
2,171
Troubled debt restructurings (2)
553
647
799
Serious delinquencies(3)
2,309
2,219
2,267
Total
$3,921
$4,508
$5,237
(1)Includes loans for which intemst income u recognized on a cash basis. For single-family
loans, this population is determined using statistically based models. For multifamily
loans, the population includes all loans 90 days or more delinquent.
(2)Includes perviously delinquent loans that have been modif ed and areperforming
in accordance with the modified terns.
(3)Inch da single-family loans 90 days or more delinquent; excluding all loans disclosed as
non -accrual For multifamily loans, the population includes ad loans 60 days or mom
delinquent but kss than 90 days delinquent.
Loss mitigation activities are a key component of Freddie
Mac's strategy for managing and resolving non -performing
assets and lowering credit losses. These activities influence the
amounts recovered by the corporation on delinquent mortgages
and real estate owned ("REO"). The corporation emphasizes
early intervention in delinquencies and alternatives to foreclosure.
Foreclosure alternatives are intended to reduce the number of
0 02 6
FREDDIE MAC
delinquent mortgages proceeding to foreclosure and, ultimately,
reduce Freddie Mac's total losses by eliminating a portion of the
costs related to foreclosed properties.
Loan modifications and pre -foreclosure sales are the two
foreclosure alternatives most often carried out by
servicers on behalf of Freddie Mac. A loan modification is an
agreement that changes one or more of the original terms of a
mortgage for qualifying borrowers, usually the loan's interest
rate or payment period. A pre -foreclosure sale is a transaction
in which Freddie Mac accepts less than a full payoff of the
amount owed on a defaulted mortgage in exchange for the sale
of a home prior to foreclosure. In 1999, Freddie Mac executed
foreclosure alternatives on a total of 5,517 loans, consisting of
3,830 loan modifications and 1,687 pre -foreclosure sales.
Over the years, Freddie Mac has developed innovations
that help servicers manage non -performing loans more
effectively. These innovations include Early IndicatorSM, a system
that determines the probability that delinquent loans will
continue through to foreclosure, and Servicer Performance
ProfilesSM, which are confidential reports in which Freddie Mac
evaluates the performance of its mortgage servicers based on
their management of performing and non -performing loans.
Credit Risk Profile: In addition to the corporation's
credit risk management practices, the credit risk profile of
22 Table 3 - Total Mortgage Portfolio
purchased mortgages also influences Freddie Mac's credit
results. As discussed below, Freddie Mac monitors certain
loan characteristics such as product mix, LTV ratio and
geographic concentration, which may affect the default
experience on the corporation's mortgage portfolio.
NroduetMrx Product mix affects the credit risk profile
of Freddie Mac's total mortgage portfolio. Table 3 presents the
distribution of Freddie Mac's total mortgage portfolio by mortgage
product type.
LTV Ratios The likelihood of mortgage default
depends not only on the initial credit quality of the loan, but
also on events occurring subsequent to origination.
Accordingly, Freddie Mac monitors the LTV ratio at the date
of mortgage origination, as well as the estimated current
LTV ratio, which reflects changes in economic conditions
(such as house -price appreciation) occurring after the date
of mortgage origination. The estimated current LTV ratio
compares the current unpaid principal balance of the mort-
gage to the estimated current market value of the property
collateralizing the mortgage. Historical experience has
shown that defaults are less likely to occur on mortgages with
low estimated current LTV ratios. The distribution of
Freddie Mac's single-family portfolio by original and esti-
mated current LTV range is presented in Tables 4 and S,
respectively.
December 31, 1999 1998
(dollars in millions)
Total mortgage portfolio balances:
Mortgages and Freddie Mac PCs
30-year single-family fixed-rate
$567,396
66%
$481,592
66%
15-year single-family fixed-rate
169,922
20
152,785
21
ARMS/floating-rate
36,114
4
38,708
5
Balloon/resets
15,508
1
19,486
2
Total single-family
788,940
91
692,571
94
Multifamily
16,817
2
10,972
2
Total mortgages and Freddie Mac PCs
805,757
93
703,543
96
Non -Freddie Mac securities(')
Fixed-rate
42,626
5
22,982
3
ARMS/floating-rate
13,943
2
6,835
1
Total non -Freddie Mac securities
56,569
7
29,817
4
Total mortaaee oortfolio
$862,326
100%
$733,360
100%
Credit risk distribution:
Freddie Mac at-risk(2) $605,155 70% $533,153 73%
Credit-enhanced(3) $257,171 30% $200,207 27%
(])Non -Freddie Mac securities held in the total mortgage portfolio are categorized based upon the product type of the mortgage collateral underlying the security
(2)Includes those loans for which Freddie Mac has assumed primary default risk.
(3)Includes loans for which the lender or a third party has retained primary default risk by pledging collateral or agreeing to accept losses on loans that default. Also includes non -
Freddie Mac securities such as securities guaranteed by Ginnie Mae and asset -backed securities and commercial mortgage -backed securities. In some cases, the lender's or third
parry's risk is limited to a specific level of losses at the time the credit enhancement becomes effective.
0 2)
FREDDIE MAC
Table 4 — Original LTV Ratio Range
December 31,
1999
1998
1997
0% to 70%
32%
33%
33%
Above 70% to 80%
42
42
41
Above 80% to 90%
15
15
16
Above 90% to 95%
10
10
10
Above 95%
1
—
—
Total
100%
100%
100%
Table 5 — Estimated Current LTV Ratio Range"'
December 31,
1999
1998
1997
0% to 70%
59%
52%
54%
Above 70% to 80%
19
21
19
Above 80% to 90%
16
18
16
Above 90% to 95%
2
3
4
Above 95%
4
6
7
Total
100%
100%
100%
(1) Current market values are estimated by adjusting the value of the property at origi-
nation based on changes in the market value of house prices since origination.
Geographic Concentration —Freddie Mac mitigates the
potential adverse effect of changing local and regional economic
conditions on its credit results by maintaining a geographically
diverse mortgage portfolio. The geographic distribution of
mortgages purchased by Freddie Mac generally reflects the dis-
tribution of outstanding residential mortgage debt in the United
States. Further information on geographic credit concentrations
is provided in Note 9 to the Consolidated Financial Statements.
Credit Performance: The effectiveness of Freddie Mac's
credit risk management is reflected primarily in the level of
defaulted mortgages and the level of credit losses relative to
the total mortgage portfolio. Effective risk management and
favorable economic conditions, particularly house -price
appreciation, were key drivers of these measures of credit
performance in 1999. Table 6 and the following discussion
address the credit performance of Freddie Mac's single-
family and multifamily mortgage portfolios.
Table 6 — Credit Performance
Year Ended December 31, 1999 1998 1997
(dollars in millions)
Delinquencies, end of period"'
Single-family:12'
At -risk portfolio13' 0.39%
0.50%
0.55%
Total portfolio 0.43%
0.49%
0.56%
Multifamily:")
Net carrying value $ 23
$ 40
$ 80
Percentage 0.14%
0.37%
0.96%
REO, end of period
Single-family $ 437
$ 569
$712
Multifamily 1
5
10
Total $ 438
$ 574
$722
REO activity
Properties in inventory -
beginning of period 6,781
8,402
9,057
Properties acquired 11,474
15,490
19,326
Properties disposed (12,636) (17,111)
(19,981)
Properties in inventory -
end of period 5,619
6,781
8,402
Net char gge-offs
Single-Eily:
Foreclosure alternatives (5) $ 14
$ 58
$ 62
REO acquisitions 45
61
222
Total single-family 59
119
284
Multifamily (3)
(3)
12
Total $ 56
$116
$296
Number of single-family
23
foreclosure alternatives
settled") 5,517
6,535
6,102
Credit -related expenses
Provision for mortgage losses $ 60
$190
$310
REO operations expense:
Single-family 99
151
213
Multifamily —
1
6
Total 99
152
219
Total credit -related
expenses $159
$ 342
$529
Credit losses16'
Single-family $158
$ 270
$497
Multifamily (3) .
(2)
18
Total $155
$ 268
$515
Total Credit Losses/Average
Total Mortgage Portfolio:
Including non -
Freddie Mac securities 1.9 by
4.0 by
8.3 by
Excluding non -
Freddie Mac securities 2.0 by
4.1 by
8.4 by
Reserve for mortgage losses,
end of period $ 772
$ 768
$694
(1) Includes mortgages purchased for Freddie Mac's total mortgage portfolio. Excludes
non -Freddie Mac securities held in the total mortgage pportfolio.
(2)Based on the number of mortgages 90 days or more delinquent.
(3)Inch des only those loans for which Freddie Mac has
assumed primary default risk.
Excludes loans for which the lender or a third party
has retained primary default
risk by pledging collateral or agreeing to accept losses
on loans that default.
(4)Based on net carrying value of mortgages 60 days or
more delinquent.
(S)Primarily consist ofpre foreclosure sales and loan modifications.
f l
(6)Equal to charge -offs plus REO operations expense.
:..
FREDDIE MAC
Single family —The single-family at -risk delinquency rate
declined 11 basis points from year-end 1998 to 0.39 percent at
December 31, 1999, improving in all regions of the country.
REO properties in inventory continued to decline in 1999,
both in terms of dollar amount and number of properties held,
with dispositions outpacing acquisitions. The single-family
REO balance was $437 million at December 31, 1999, down
from $569 million and $712 million at December 31, 1998
and 1997, respectively. Acquisitions of single-family REO
properties declined to their lowest level since 1992.
Single-family credit losses totaled $158 million in 1999,
a 41 percent and 68 percent decline from losses experienced
in 1998 and 1997, respectively. The decline in credit losses
was due primarily to lower loss severity rates on defaulted
mortgages and declining REO acquisitions. Lower loss severities
reflect continued strong home prices, as well as increased recov-
eries on credit enhancements.
Table 7 presents the distribution of the single-
family mortgage portfolio and at -risk delinquencies by year
of origination.
. Based on the effectiveness of the corporation's credit
risk management, Freddie Mac expects continued strong
credit performance. Freddie Mac has increasingly purchased
or required credit enhancements on its mortgage portfolio
since 1995. As shown in Table 7, mortgages originated in
24 1995 or later represented nearly three-quarters of the corpo-
ration's single-family portfolio at December 31, 1999. These
mortgages have significant credit enhancement protection,
and therefore are expected to reduce Freddie Mac's credit
losses even as they move through their peak default years
(generally, three to five years after origination) (see "FOR-
WARD -LOOKING STATEMENTS").
Multifamily —The multifamily delinquency rate was
0.14 percent at December 31, 1999, down from 0.37 percent
and 0.96 percent at December 31, 1998 and 1997, respectively.
The decline from both December 31, 1998 and 1997 reflects
decreases of $17 million and $57 million, respectively, in the
net carrying value of non -performing multifamily mortgages.
Multifamily net recoveries totaled $3 million in 1999, compared
to net recoveries of $3 million in 1998 and net charge -offs
of $12 million in 1997. Net recoveries in 1999 and 1998
resulted from the collection of certain amounts previously
deemed uncollectible.
Institutional Credit Risk
Freddie Mac is subject to credit risk from institutional counter -
parties to the extent they do not fulfill their obligations to Freddie
Mac under the terms of specific contracts or agreements.
Freddie Mac's primary institutional credit risk exposure arises
from agreements with the following counterparties:
• Mortgage servicers;
• Mortgage insurers;
• Guarantors of non -Freddie Mac securities held in the
retained portfolio;
Table 7 — Single -Family Mortgage Portfolio and At -Risk Delinquencies by Year of Origination"'
December 31,
1999
1998
At -Risk
At -Risk
Dollars in
Delinquency
Dollars in
Delinquency
Year of Origination
Millions"'
Rate"'
Millions`Z'
Rate"'
Pre-1992
$ 35,897
1.00%
$ 47,719
1.16%
1992
37,475
0.45%
50,834
0.49%
1993
96,961
0.29%
117,460
0.34%
1994
39,289
0.66%
49,311
0.70%
1995
35,660
0.87%
45,225
0.89%
1996
56,252
0.77%
71,750
0.76%
1997
71,715
0.29%
87,264
0.19%
1998
248,673
0.09%
223,008
0.02%
1999
167,018
0.04%
—
—
Total
$788,940
0.39%
$692,571
0.50%
(1)Excludes non -Freddie Mac securities held in the total mortgage portfolio.
(2)Balance of total single-family mortgage portfolio (at -risk and non -at -risk mortgages combined) for respective period presented by year of origination.
(3)At-risk delinquenry statistics are based on loans 90 days or more delinquent plus foreclosures in process and approved as a percentage of the total number of loans in the year of
origination. Includes only those loans far which Freddie Mac has assumed primary default risk. Excludes loans for which a Lander or a third party has retained primary default risk
by pledging collateral or agreeing to accept losses on loans that default. In some cases the lender's or third parry's risk is limited to a specific level of losses at the time the credit
enhancement becomes effective.
V i g
FREDDIE MAC
• Issuers and guarantors of investments held in the
liquidity and contingency portfolio and
• Counterparties to derivative financial instruments
entered into by the corporation.
Freddie Mac is exposed to institutional credit risk
arising from the insolvency of mortgage servicers that remit
monthly principal and interest payments on mortgages to
Freddie Mac. To protect itself against this risk, Freddie Mac
requires servicers to meet minimum net worth, insurance and
other eligibility requirements, and institutes remedial actions
against seller/servicers that fail to comply with these standards.
Freddie Mac also bears institutional credit risk relating to
the non-performance of mortgage insurers that insure purchased
mortgages. Freddie Mac manages this risk by regularly moni-
toring its exposure to individual mortgage insurers. Freddie
Mac also performs periodic on -site audits of mortgage insurers
to ensure compliance with its eligibility requirements and to
evaluate their management and control practices. Substantially
all mortgage insurers providing primary mortgage insurance
coverage on single-family mortgages purchased during 1999
were rated "AA" or better by major credit rating agencies,
with 70 percent rated "AA+" or better. In addition, mortgage
insurers are regulated by state insurance authorities.
Freddie Mac's retained portfolio is exposed to institu-
tional credit risk to the extent that guarantors of non -Freddie
Mac securities held in this portfolio become insolvent. Non -
Freddie Mac securities in the retained portfolio consist of agency
and non -agency mortgage -related securities. Agency mortgage -
related securities present minimal institutional credit risk expo-
sure to Freddie Mac due to the high credit quality of issuers
and guarantors such as Ginnie Mae. Ginnie Mae's guarantee is
backed by the full faith and credit of the U.S. government. Non -
agency mortgage -related securities are exposed to both mortgage
and institutional credit risk. The corporation mitigates the mort-
gage credit risk associated with these securities through the use
of senior/subordinated bond structures, bond insurance or a
combination of both. The institutional credit risk associated with
non -agency mortgage -related securities arises from the insol-
vency of bond insurers that guarantee these securities. Freddie
Mac manages this risk by only purchasing securities meeting the
corporation's investment guidelines, and by performing ongoing
analysis to ensure the creditworthiness of bond insurers. Table 8
presents the composition of non -Freddie Mac securities held in
Freddie Mac's retained portfolio at December 31, 1999 and 1998
and their credit rating by product type.
Table 8 — Non -Freddie Mac Securities
December 31, 1999
1998
Dollars in
% AAA
Dollars in % AAA
Millions
Rated'"
Millions Rated"'
Agency Securities $19,860
100%
$8,207 100%
Non -Agency Securities:
Home equity 13,808
96%
5,923 86%
Commercial mortgage -
backed securities12) 7,822
96%
6,592 95%
Mortgage revenue bonds 5,690
79%
4,640 78%
Manufactured housing 4,693
92%
1,711 73%
Other mortgage -
related securities 4,696
91 %
2,744 93%
Total $56,569
95%
$29,817 91%
(1)Credit rating is designated by at least two nationally recognized statistical rating
agencies.
OConsists ofsecurities backed by pools of loans that include significant amounts of
multifamily mortgages.
As illustrated in Table 8, 95 percent of non -Freddie Mac
securities held by the corporation were rated "AAA" by
independent credit rating agencies at December 31, 1999.
With the exception of mortgage revenue bonds, substantially
all of the remaining securities not rated "AAA" had an
independent credit rating of "AA" or better. Mortgage rev-
enue bonds, which are bonds issued by state and local
municipalities, were rated "A" or better at December 31, 25
1999. Freddie Mac often obtains secondary bond insurance
for securities that are not rated "AAA".
Institutional credit risk also arises from the insolvency
of issuers or guarantors of investments held in Freddie Mac's
liquidity and contingency investment portfolio, which is used
to meet both anticipated and unanticipated liquidity and
working capital requirements (see "LIQUIDITY AND
CAPITAL MANAGEMENT —Liquidity"). Instruments
within this portfolio are investment grade at the time of pur-
chase, primarily short-term in nature and diversified among
various issuers, thereby mitigating to a significant extent the
institutional credit risk inherent in this portfolio.
As discussed later, Freddie Mac uses derivative financial
instruments primarily in connection with its interest -rate risk
management activities (see "RISK MANAGEMENT —
Interest -Rate and Other Market Risks —Derivative Financial
Instruments"). The use of over-the-counter derivative financial
instruments exposes Freddie Mac to institutional credit risk
that arises from the possibility that a counterparty will be
unable to perform according to. the terms of the derivatives
contract. Exchange -traded derivative financial instruments,
such as futures contracts, do not increase the corporation's
exposure to institutional credit risk since changes in the value
of open exchange -traded contracts are settled daily. Freddie
Mac mitigates its exposure to institutional credit risk related
to over-the-counter derivative contracts by using master netting,
L)%00
FREDDIE MAC
agreements. These agreements provide for the netting of
amounts receivable and payable under all transactions
covered by the master netting agreement between Freddie
Mac and a single counterparty in the event that the master
agreement is terminated due to non-performance.
In addition to using master netting agreements,
Freddie Mac manages institutional credit risk associated with
derivative financial instruments by limiting its selection of
counterparties to only those institutions having credit ratings
among the highest available from major rating agencies. The
corporation also limits its exposure to any one counterparty,
regularly monitors financial positions and, in many cases,
requires collateral in order to manage institutional credit risk.
At December 31, 1999, the four largest counterparties (based
on notional or contractual amounts outstanding), each with
an independent credit rating of "A+" or better, accounted for
approximately 54 percent of the notional amount of the
corporation's outstanding over-the-counter derivative financial
instruments. Freddie Mac's management of credit risk related
to derivative financial instruments is discussed further in Note
9 to the Consolidated Financial Statements.
The corporation's aggregate exposure to institutional
credit risk for derivative financial instruments can be estimated
by calculating the "net replacement value" of, or cost to
replace, all outstanding non -exchange traded derivative finan-
26 cial instruments for each counterparty with which the cor-
poration was in a net gain or "positive fair value" position, after
taking into account the offsetting provided by master netting
agreements. The corporation's estimated exposure to credit
risk, based on net replacement values, was $4.7 billion at
December 31, 1999, compared to $1.1 billion at December
31, 1998. The increase in the corporation's credit risk expo-
sure reflects both the increased use of derivative financial
instruments, as well as changes in interest rates which
increased the net gain position on contracts with several of
Freddie Mac's largest counterparties. (see "RISK MAN-
AGEMENT —Interest -Rate and Other Market Risks —Derivative
Financial Instruments"). Freddie Mac's exposure to institu-
tional credit risk can fluctuate from period to period due to
changes in interest rates and/or foreign exchange rates.
Of the total estimated exposure to institutional credit
risk on derivative financial instruments in a net gain position,
$4.0 billion was fully collateralized at December 31, 1999.
Substantially all of the corporation's uncollateralized exposure
of $0.7 billion at December 31, 1999 resulted from derivatives
contracts with counterparties having an independent credit
rating of "AAA". Freddie Mac's policy for requiring collateral
from counterparties is based on independent credit ratings,
estimated credit risk exposure on net replacement values and
internal assessments of counterparty credit quality. In addition,
it is the corporation's policy to limit its uncollateralized risk -
adjusted credit risk exposure to any one counterparty from
all investment and derivative activities to less than 1 percent
of "Stockholders' equity." To date, Freddie Mac has not
incurred any credit losses on derivative financial instruments
or set aside specific reserves for institutional credit risk expo-
sure. Management does not believe such reserves are neces-
sary, given the corporation's collateral and counterparty policy
requirements.
Interest -Rate and Other Market Risks
Although Freddie Mac's mortgage -related investments
financed with debt offer the potential for achieving higher
returns than those likely to be achieved through mortgage
securitization, they also expose the corporation to a higher
degree of interest -rate and other market risks, and require the
commitment of higher levels of capital per dollar of mortgages
financed. Disciplined management of these risks is critical to
Freddie Mac's ability to manage its debt and securitization
financing activities.
Interest -Rate Risk
Interest -rate risk is the risk that changes in the level of inter-
est rates could affect adversely the market value or future
earnings of Freddie Mac. Managing interest -rate risk includes
consistently maintaining acceptable levels of interest -rate risk
exposure while ensuring that investments meet the corpora-
tion's thresholds for return on equity and achieving annual
net interest income targets set by management.
Sources of Interest -Rate Risk: Freddie Mac's interest -rate
risk exposure results largely from the uncertainty of when
mortgages will prepay. Mortgage borrowers may prepay their
mortgage loans, in most cases without penalty, before the
scheduled maturity date of the loan ("prepayment risk"). This
feature makes the timing and amount of mortgage prepayments
very sensitive to interest rates. A significant decline in interest
rates could lead to high prepayments which result in a shorter
expected life for the mortgage than originally projected.
Conversely, a significant increase in interest rates could lead
to lower than anticipated prepayments and a longer expected
life for the mortgage than originally projected.
As discussed earlier, debt financing is Freddie Mac's
principal source of financing mortgage -related investments
held in the retained portfolio. Investment, funding and
hedging decisions made for the retained portfolio are sensitive
to prepayment uncertainty. As a result, differences between
prepayment estimates and actual prepayments could lead to
mismatches in the expected cash flows between assets and
liabilities. This risk is partially mitigated by Freddie Mac's
strategy of using a mix of short-term debt, callable and non -
callable debt and derivative financial instruments to provide
flexibility for adjusting the duration of the portfolio when
these mismatches occur.
031
FREDDIE MAC
The effects of interest -rate risk on Freddie Mac's mortgage -
related investments and how well this risk is managed will be
realized over time through reported net interest income. The
potential variability of this income is driven by changes in interest
rates and the resulting changes in mortgage prepayment rates
which can create mismatches between the income on mortgage -
related investments in the retained portfolio and the expense on
liabilities funding these investments. In a low interest -rate envi-
ronment, higher mortgage prepayment levels reduce net interest
income to the extent that mortgage -related investments are repaid
and replaced with lower -yielding investments and the corporations
funding costs cannot be correspondingly reduced. In a high
interest -rate environment, lower prepayment levels can reduce net
interest income to the extent that mortgage -related investments are
repaid more slowly than expected, and the associated debt reprices
and can only be replaced by higher -cost debt.
To a lesser degree, securitization financing of mortgage
purchases also exposes Freddie Mac to interest -rate risk.
Changes in interest rates and resulting changes in the rate of
mortgage prepayments underlying PCs could decrease future
earnings if the associated management and guarantee income
is not replaced, or is replaced with new business that generates
lower income. Additionally, the timing differences between
when payments are received from borrowers and subsequently
remitted to PC investors (referred to as the PC remittance
cycle) can lead to significant interest expense, particularly in
a rapidly declining interest -rate environment. If the interest
rate paid to the PC investor is higher than the reinvestment
rate for the cash received, then Freddie Mac bears the cost
difference during the time from when the mortgage borrower
pays Freddie Mac and when the payment is made to the PC
investor. Overall, the level of exposure to interest -rate risk
associated with mortgage securitization financing is lower than
the level of risk associated with debt financing of mortgage -
related investments, because there is substantial matching
between the prepayment patterns of the underlying mortgages
and the PCs that finance the mortgages. Interest -rate risk
associated with mortgage securitization financing is managed
by the corporation in conjunction with its management of
related risks associated with debt financing.
Trading activities in support of the market for Freddie
Mac Gold PCs are managed by Freddie Mac's SS&TG unit
and various external money managers. The primary goal of
these activities is to improve the liquidity of Freddie Mac Gold
PCs and strengthen relationships with key mortgage security
investors. Gold PCs are traded actively, and daily changes in
market value are recognized through "Other income, net."
These trading portfolios are subject to Freddie Mac's risk
measurement and management standards which minimize
losses in periods of significant changes in interest rates.
When Freddie Mac purchases mortgage -related
investments through debt financing or mortgage securitiza-
tion, it is also exposed to prepayment uncertainty to the
extent it buys mortgages at a premium or discount. These
amounts (reported on Freddie Mac's Consolidated Balance
Sheets as "Purchase and sale premiums, discounts and
deferred fees") are deferred and amortized over the estimated
weighted average lives of the underlying mortgages using the
effective interest method. The rate of amortization of these
deferred items is sensitive to large changes in interest rates and
mortgage prepayments, and tends to be higher in periods
when prepayment estimates are increased or when actual pre-
payments exceed expectations. The interest -rate risk associated
with deferred items is mitigated, in part, by financial
instruments that respond in an opposite manner to changes
in mortgage prepayments (see Note 1 to the Consolidated
Financial Statements).
Interest -Rate Risk Management Oversight: Freddie
Mac's Board of Directors oversees the corporation's interest -rate
risk management process. Under the Board's oversight, Freddie
Mac's senior management is responsible for the management
of the corporation's interest -rate risk management activities.
Members of senior management serve on a Risk Management
Committee responsible for setting risk thresholds, expected
return on equity and net interest income targets and for
reviewing the quality of actual results. A separate group
within the portfolio management area is responsible for the 27
day-to-day interest -rate risk management strategies and rebal-
ancing activities. Freddie Mac also maintains a market risk
oversight function that reports directly to the Chief Financial
Officer. Its purpose is to identify all of the corporation's
interest -rate and other market risk exposures, and to provide
senior management with an independent evaluation of
whether these risks are effectively identified, measured, man-
aged and controlled.
Measurement of Interest -Rate Risk: As an investor in
mortgage -related securities, Freddie Mac's most significant
market risk exposure relates to changes in the level of interest
rates. To assess this risk, Freddie Mac measures, on a daily basis,
its risk exposure resulting from an immediate, adverse 50-basis-
point parallel shift in the current yield curve (the greatest loss
that would result from an upward or downward 50-basis-point
shift). Risk exposure is stated in terms of Portfolio Market
Value Sensitivity ("PMVS"), which is the estimated percentage
decline in the net market value of the corporation's interest -
earning assets and liabilities (referred to as "portfolio market
value"). This methodology includes the effects of derivative
financial instruments on Freddie Mac's assets and liabilities,
treats preferred stock as a debt equivalent and takes into
account the market value of projected future cash flows from
mortgage securitization financing. Through the PMVS
process, Freddie Mac is able to closely monitor and limit
030
FREDDIE MAC
potential mismatches between the terms of assets and liabilities
due to changes in interest rates.
Freddie Mac supplements PMVS measurements with
additional interest -rate modeling and tools such as stress tests
that measure the effect on the corporation of more severe
interest -rate and credit environments for purposes of
evaluating the adequacy of the corporation's capital (see
"LIQUIDITY AND CAPITAL MANAGEMENT —Capital
Management —Capital Adequacy").
Freddie Mac uses proprietary financial and risk models
to estimate interest -rate risk. These models use a range of
possible interest -rate scenarios to project estimated mortgage
prepayments. The use of financial models to measure interest -
rate risk exposes Freddie Mac to certain operational and other
related risks (see "RISK MANAGEMENT —Operational and
Other Related Risks —Business and Financial Model Risk").
Interest -Rate Risk Management Strategies and Results:
Freddie Mac issues debt and actively rebalances its funding mix
to protect the corporation's portfolio market value.
Funding Transactions For acquisitions of mortgage -
related investments, Freddie Mac obtains financing with a
mix of debt and derivative financial instruments that provide
the ability to closely match cash outflows from this financing
with the cash inflows from the corporation's investments.
28 Freddie Mac uses a mix of short-term debt, long-term callable
and non -callable debt and derivative financial instruments to
maximize its ability to reprice debt when mortgages prepay
faster than expected. Freddie Mac's ability to maintain this
flexibility depends on its ability to issue debt and enter into
derivative financial instruments on acceptable terms.
Rebalancing Transactions —Freddie Mac executes
interest -rate risk management (or "rebalancing") transactions
to provide short-term and long-term protection. To provide
short-term protection, Freddie Mac typically buys or sells
derivative financial instruments, such as U.S. Treasury futures
or interest -rate swaps, in order to closely match the expected
life of its assets and liabilities. In addition, Freddie Mac obtains
long-term protection from wider swings in interest rates by
purchasing call options to change the characteristics of the debt
used to finance the mortgages purchased. Through these
transactions, Freddie Mac's objective is to maximize the
amount of debt that it has the option to reprice when interest
rates are rapidly declining, and to minimize the amount of
debt that must be repriced when interest rates are rapidly
increasing.
Risk Management Results Exhibit 3 illustrates the
percentage of business days PMVS was within certain ranges
during 1999 as compared to 1998 and 1997.
Exhibit 3 — Portfolio Market Value Sensitivity Ranges
50%
45%
40%
c 35%
3 30%
0 25%
20%
CO 15%
�s
100/
5%
0%
<=1.00% 1.01% 2.01% 3.01% 4.01% >5.00%
to to to to
2.00% 3.00% 4.00% 5.00%
Portfolio Market Value Sensitivity (PMVS)
1999 ■ 1998 01997
As shown in Exhibit 3, PMVS was 3.00 percent or less
for approximately 88 percent of the business days in 1999,
compared to 4 percent and 51 percent of the business days in
1998 and 1997, respectively. Additionally, PMVS was 2.00
percent or less for 55 percent of the business days in 1999. At
December 31,1999,1998 and 1997, each 1 percent of PMVS
equated to a potential dollar value loss of approximately $128
million, $93 million and $82 million, respectively.
The corporation also measures and monitors interest -
rate risk assuming more severe changes in interest rates. To
quantify the potential effect of a more dramatic shift in interest
rates, estimates of PMVS at the end of December 31, 1999,
1998 and 1997, assuming a 100 basis -point rather than a 50
basis -point adverse parallel shift of the current yield curve are
presented in Table 9. Table 9 also provides the potential dol-
lar loss in portfolio market value as a percentage of interest -earn-
ing assets.
Table 9 - Portfolio Market Value Sensitivity (Assuming a 100 Basis -
Point Parallel Shift of the Yield Curve)
Potential Dollar Value
Loss as a Percent of
As of PMVS Interest -Earning Assets
December 31, 1999
2.9%
0.1 %
December 31, 1998
14.0%
0.4%
December 31, 1997
11.5%
0.5%
Freddie Mac's PMVS was generally lower throughout
1999 as compared to 1998. The decline in PMVS for 1999
reflects the corporation's actions to protect its portfolio market
value against rising interest rates. During 1998 and 1999,
Freddie Mac executed funding and rebalancing actions which
significantly reduced its interest -rate risk exposure for 1999.
When short-term debt and derivative financial instruments
were priced at attractive levels in 1998, Freddie Mac purchased
substantial amounts of protection against rising interest rates,
including purchases of derivative financial instruments to J J
FREDDIE MAC
reduce short-term funding exposure, and purchases of
option -based derivatives designed to adjust future funding
costs for purposes of offsetting mortgage lengthening. Freddie
Mac further reduced its interest -rate risk exposure in 1999
by executing rebalancing transactions (including issuances of
Reference Notes, sales of U.S. Treasury securities and the use
of interest -rate swaps) that lengthened the duration of its debt
portfolio to match the lengthened duration of its mortgage
portfolio. Freddie Mac's operating results for 1999 reflect the
effects of the 1998 protection and the additional protection
purchased in 1999 (see "CONSOLIDATED RESULTS OF
OPERATIONS -Net Interest Income on Earning Assets").
For many mortgage investors in 1999, the market value
of their portfolios decreased as a result of the increase in inter-
est rates and the resulting reduction in mortgage prepayments.
Because Freddie Mac maintained a low risk profile during
1999, and as a result of its risk management strategies, the port -
folio's overall value increased by $2.2 billion, from $10.3 bil-
lion in 1998 to $12.5 billion in 1999, on a pre-tax basis (see
Note 13 to the Consolidated Financial Statements).
The generally higher PMVS during 1998 as compared
to 1997 was due to the lower mortgage interest rates that
prevailed during 1998, as well as increased market volatility.
Because of lower interest -rate levels, a greater proportion of the
corporation's mortgage portfolio was subject to refinancing
during 1998. Despite the higher PMVS, the corporation's
interest -rate risk exposure in 1998 remained within acceptable
levels in accordance with operating risk thresholds established
by the corporation.
Exhibit 4 - Cumulative Repricing of Effective long Term Debt
100%
900�0
80%
~ 7010
60%
500�0
W 40°io
30%
20%
100/0
0%
00 01 02 03 04 05 06 07 08 09+
f Earliest Repricing -+ Latest Repricing
Exhibit 4 illustrates the cumulative percentage of
Freddie Mac's effective long-term debt outstanding at
December 31, 1999 that will reprice in future years assuming
that W all effective callable debt is repriced at the earliest
possible call date and (ii) no debt is repriced until its scheduled
maturity. The top line illustrates the cumulative amount of
the corporation's effective long-term debt that is available for
repricing either through maturity or exercise of the call option
in each year. These early repricing opportunities provide
substantial protection against prepayment risk. The bottom
line shows the cumulative final maturity of the corporation's
effective long-term debt, assuming that no debt is called, but
rather that each instrument remains outstanding until its final
maturity. These long final maturities provide protection if pre-
payments are slowed and the lives of the corporation's retained
mortgage investments are extended. In 2000, approximately
9 percent of the effective long-term debt outstanding as of
December 31, 1999 is scheduled to mature. However, an
additional 24 percent, for a total of 33 percent, of effective
long-term debt could be called by Freddie Mac should
prepayments of mortgage -related investments accelerate.
Other Market Risks
In addition to parallel shifts of the yield curve, Freddie Mac
also monitors and manages its exposure to other interest -rate
and market risks. The following discussion describes these risks.
Yield Curve Risk: To the extent that Freddie Mac
cannot exactly match the durations of its assets and liabilities,
the corporation's portfolio market value may be exposed to
non -parallel shifts in the yield curve, such as a flattening
or steepening. Freddie Mac measures yield curve risk by
monitoring the sensitivity of its portfolio market value to
changes in interest rates along all points of the yield curve.
Freddie Mac manages this risk by funding a significant portion 29
of its mortgage -related investments with a mixture of effective
short-term and long-term debt designed to match the
expected cash flow characteristics of its investments.
Mortgage -related investments funded in a steeper yield curve
environment generally have higher initial spreads that
decline over time as short-term debt matures. Mortgage -
related investments funded in a flatter yield curve environ-
ment generally have spreads that are initially lower (given
smaller differences between the cost of short-term and long-
term debt), but generate earnings in future periods that gen-
erally are more stable over the lives of the investments.
Basis Risk: Basis risk is the risk that changes in the
interest -rate spread between different financial instruments
may cause changes in the corporation's portfolio market value
or net interest income. Freddie Mac is primarily exposed to
basis risk as a result of the spread between the London
Interbank Offered Rate ("LIBOR") and Freddie Mac's short-
term debt rate. Freddie Mac's funding strategy includes using
interest -rate contracts and other derivative financial instruments
indexed to LIBOR to effectively lengthen the duration of
short-term debt. Freddie Mac's cost of effective long-term
debt will decrease if spreads between LIBOR and short-term
debt widen, and will increase if spreads tighten. Freddie Mac
is also exposed to basis risk to the extent that U.S. Treasury -based
%A
FREDDIE MAC
instruments are used to rebalance Freddie Mac's portfolio.
Freddie Mac enters into financing arrangements involving
basis risk only when such arrangements are intended to
enhance net interest income through reduced funding costs.
Volatility Risk. Volitility risk is the risk that changes in
market expectations regarding the volatility of future interest
rates may cause changes in the corporation's portfolio market
value. This expectation, defined as implied volatility, is
embedded in option prices. When Freddie Mac purchases
mortgage -related investments, it implicitly sells a prepayment
option to the mortgage borrower. Similarly, when Freddie
Mac issues callable debt or uses certain derivative financial
instruments, it implicitly buys a call option to match the cash
flow characteristics of the prepayment option embedded in
the mortgages. To the extent that increases in the implied
volatility of interest rates have a greater effect on options
embedded in mortgage -related investments than on the
options embedded in callable debt or derivative financial
instruments, Freddie Mac is exposed to increases in the level
of volatility. The corporation's portfolio market value may be
reduced as a result of increased volatility or may grow due to
decreased volatility. Freddie Mac monitors volatility risk by
measuring exposure levels on a daily basis.
Derivative Financial Instruments
30 Freddie Mac enters into derivative financial transactions as an
end user and not for trading or speculative purposes. The cor-
poration uses derivative financial instruments in combination
with underlying liabilities or assets to synthetically create debt
instruments or interest -earning assets that achieve lower effec-
tive financing costs or higher effective asset yields than those
available on alternative instruments. Additionally, through the
use of derivative financial instruments, Freddie Mac is better
able to match the expected durations of its assets and liabili-
ties and reduce the corporation's exposure to interest -rate and/or
foreign currency risk than through the issuance of debt.
The use of derivative financial instruments has become
increasingly important in Freddie Mac's overall strategy of
managing interest -rate risk. Through derivative financial
instruments, Freddie Mac hedges anticipated debt issuance
transactions and changes the effective repricing date of
outstanding short-term and long-term debt in rebalancing its
mix of total outstanding debt. Of the total notional balance
of derivative financial instruments outstanding at December
31, 1999, $417 billion were executed in conjunction with
debt financing ("debt -linked"), and $7 billion were executed
in conjunction with the purchase of mortgage -related
investments ("asset -linked"). Freddie Mac typically uses
derivative financial instruments to effectively convert
short-term financing to long-term fixed-rate debt. Due to
rising interest rates during 1999, Freddie Mac changed its
mix of debt funding by shifting from short-term to effective
long-term debt funding to match the lengthened duration of
its mortgage -related investments. Through the use of deriv-
atives, Freddie Mac converted 79 percent of its contractual
short-term debt to effective long-term debt at December 31,
1999, as compared to 51 percent at December 31, 1998 (see
"RISK MANAGEMENT —Interest -Rate and Other Market
Risks —Interest -Rate Risk —Interest -Rate Risk Management
Strategies and Results").
SFAS No. 133, which Freddie Mac will implement on
January 1, 2001, will revise significantly the accounting treat-
ment of derivative financial instruments. Among other
things, the new standard requires derivative instruments to
be recorded and carried on the balance sheet at their current
fair value. The new accounting treatment may result in
increased volatility in the reported earnings of corporations
that use such instruments, including Freddie Mac (see
"EFFECT OF NEW ACCOUNTING STANDARD" and
Note 1 to the Consolidated Financial Statements).
Table 10 summarizes the notional or contractual
amounts of derivative financial instruments by type and their
related net fair value. Freddie Mac estimates the fair value of
derivative financial instruments using discounted cash flow
models based on current market interest rates and estimates
of interest -rate volatility.
Table 10 — Derivative Financial Instruments
December 31, 1999 1998
Notional or Net Notional or Net
Contractual Fair Contractual Fair
Amount Value Amount Value
(dollars in millions)
Interest -rate contracts:
Interest -rate swaps
Receive floating $101,243 $1,978 $ 41,464 $(1,212)
Receive fixed 22,375 (385) 11,762 195
Basis(" 2,962 (2) 4,329 (30)
Interest -rate caps 17,811 717 18,299 313
Interest -rate floors 403 3 1,603 9
Interest -rate corridors 1,722 25 1,943 5
Future and options('' .267,737 2,674 220,832 1,119
Treasury -based
contracts(3) 8,894 278 11,542 70
Foreign currency swaps 1,097 (82) 1,464 (42)
Total $424,244 $ 5,206 $ 313,238 $ 427
W Interest -rate swaps in which Freddie Mac pays and receives a floating rate, but
which are based on two different indexes.
(2)All options held by Freddie Mac were options to enter into interest -rate contracts
(or swaptions).
(3)Exc"s exchange -traded derivative financial instruments, such as Treasury -based
futures contracts.
FREDDIE MAC
At December 31, 1999, the notional balance of Freddie
Mac's derivative financial instruments totaled $424 billion,
compared to $313 billion at December 31, 1998. This
increase in notional and contractual amounts reflects the
increased use of interest -rate swaps, futures and options to
lengthen the duration of Freddie Mac's existing debt to match
the lengthened duration of its mortgage portfolio.
Additionally, at December 31, 1999 and 1998, the net fair
value of the corporation's derivative financial instruments was
$5.2 billion and $0.4 billion, respectively. The increase in the
net fair value of the corporation's derivative financial instruments
resulted from changes in interest rates, which increased the
net gain position on contracts with several of Freddie Mac's
largest counterparties, as well as increases in the notional or
outstanding contractual amounts of these financial instruments.
While derivative financial instruments reduce Freddie Mac's
overall exposure to interest -rate and foreign currency risk,
they increase the corporation's exposure to institutional credit
risk (see "RISK MANAGEMENT —Credit Risk —
Institutional Credit Risk"). In addition, derivative financial
instruments may also subject the corporation to operational
risk (see "RISK MANAGEMENT —Operational and Other
Related Risks —Hedging Risk"). Further information regarding
derivative financial instruments is presented in Notes 1, 7 and
9 to the Consolidated Financial Statements.
Operational and Other Related Risks
Operational risk is the risk of loss due to human error, system
failures, fraud, or circumvention or overriding of internal
controls. Freddie Mac mitigates operational risk by following
comprehensive financial and operating policies and procedures,
and by regularly evaluating the effectiveness of its internal
control structure. The corporation's policies and procedures
include controls to ensure that system -generated data are
reconciled to source documentation in a timely fashion.
Freddie Mac also performs reasonableness and validity tests to
ensure the accuracy of its financial information. The corporation's
Internal Audit Department regularly monitors Freddie Mac's
compliance with established policies and procedures, and
evaluates Freddie Mac's internal control structure. In addition,
Freddie Mac maintains a continuity plan for critical business
processes and systems in the event of disasters.
Hedging Risk: Hedging refers to the buying or selling
of financial instruments to protect the corporation's portfolio
market value or future earnings from adverse changes in the
level and shape of the yield curve, and the volatility of interest
rates. Hedging risk is the risk that hedging transactions do
not effectively meet their objectives. The effectiveness of the
hedging strategy depends on Freddie Mac's ability to execute
hedging transactions when they are needed, at a reasonable
price. To manage this aspect of hedging risk, Freddie Mac
monitors market liquidity on a daily basis, and uses a variety
of hedging instruments to reduce its dependence on the
liquidity of any individual hedge market. Freddie Mac is also
subject to the risk that hedging instruments do not provide
effective protection. Freddie Mac manages this risk by adjusting
its hedging strategies based on actual and expected market
relationships.
Business and Financial Model Risk: The business and
financial models used by Freddie Mac also expose the corpo-
ration to risk. Freddie Mac's proprietary mortgage prepayment
model, a valuation tool for projecting expected levels of mortgage
prepayments in differing economic environments, is a core
model used in conjunction with other valuation models for
measuring and managing the corporation's exposure to credit
and interest -rate risk. Operational failure related to the
corporation's mortgage prepayment model could adversely
affect the value, or future earnings, of the corporation. Freddie
Mac mitigates operational risk related to this and other valu-
ation models by benchmarking its model results to market
estimates of external parties. In the case of forecasting models,
Freddie Mac mitigates operational risk by performing periodic
comparisons of actual results to forecasted results and adjusting
forecast models and assumptions accordingly.
Year 2000 Risk: Freddie Mac's efforts to prepare its
business systems for the century date change have resulted 31
in uninterrupted business processes and service to customers.
Management is confident that Freddie Mac's systems will
continue to handle the year 2000 date change successfully
throughout the year (see "FORWARD -LOOKING
STATEMENTS").
Freddie Mac monitored the resources required and the
costs incurred in preparing its business systems and facilities for
the year 2000 date change since the inception of its readiness
program in 1997. Additionally, the timing of certain investments
to replace critical systems was accelerated due to year 2000
issues. These investments were likely to have been made
within three years, even in the absence of the year 2000 dead-
line. Through December 31, 1999, costs totaling approximately
$165 million were incurred with respect to the corporation's
year 2000 readiness program, which includes approximately
$123 million of general year 2000 readiness costs and $42
million of accelerated systems replacement costs.
LIQUIDITY AND CAPITAL
MANAGEMENT
Liquidity
Freddie Mac's business activities present liquidity demands
that are driven by maturities of debt, purchases of mortgages,
payments of principal and interest to mortgage security holders
or3s
FREDDIE MAC
and general operations. The corporation's sources of cash to
meet these needs include short-term and long-term borrowings,
mortgage prepayments and cash flows from operations.
Because of its financial performance and its regular and
significant participation as an issuer in the funding markets,
the corporation's sources of funding remain adequate to meet
its liquidity needs. During 1999, Freddie Mac issued a total
of $688 million in stock through three preferred stock offerings,
and issued $1.678 trillion and $114 billion in short-term and
long-term debt, respectively, to support its business activities
and to provide the corporation with added liquidity leading
up to the century date change.
The corporation's Reference Notes, Callable Reference
Notes and Reference Bills programs enable the corporation to
sell large issues of non -callable, callable and short-term debt
(see "BUSINESS REVIEW —Debt Financing"). During 1999
and 1998, Freddie Mac issued $50 billion and $20 billion of
debt, respectively, under its Reference Notes program, and
issued $6 billion of debt in 1999 under its Callable Reference
Notes program. Freddie Mac introduced its new Reference
Bills program in November 1999. Issuances under this
program commenced in January 2000.
In addition to stock and debt issuances, the corporation
maintains a liquidity and contingency investment portfolio used
to manage recurring cash flows and meet other cash manage-
32 ment needs, maintain capital reserves to meet mortgage fund-
ing needs, provide diverse sources of liquidity and help manage
the interest -rate risk inherent in mortgage -related investments.
The liquidity and contingency investment portfolio enables
Freddie Mac to deploy fully its available capital and fulfill its
purpose of providing a stable and reliable supply of mortgage
credit nationwide. This portfolio is important to Freddie Mac's
financial management and its ability to provide liquidity and sta-
bility to the mortgage market. At December 31, 1999 and
1998, the liquidity and contingency investment portfolio
totaled $42 billion and $49 billion, respectively, and principally
consisted of cash and cash equivalents, reverse repurchase agree-
ments and highly rated short-term and longer -term investments.
The corporation recognizes net interest income on the liquid-
ity and contingency investment portfolio. Further information
regarding the liquidity and contingency investment portfolio
is presented in Note 4 to the Consolidated Financial Statements.
Capital Management
Freddie Mac manages its capital resources to provide attractive
returns on common equity while maintaining sufficient
capital to satisfy internal capital adequacy standards and
regulatory capital requirements, and to absorb unforeseen
losses that might arise in fulfilling its mortgage guarantee
obligations and conducting its business programs.
Capital Transactions
Table 11 summarizes the components of Freddie Mac's capital
base.
Table 11— Capital Base
December 31, 1999 1998 1997
(dollars in millions)
Common stock -
Par value
$ 152
$ 152
$ 152
Additional paid -in capital
474
494
51
Preferred stock
(at redemption value):
6.72% preferred stock"
—
300
300
1996 variable -rate
preferred stock2'
250
250
250
6.125% preferred stockl3'
287
287
287
6.14% preferred stock'"'
600
600
600
5.81% preferred stocks'
150
150
150
5% preferred stock(6'
400
400
—
5.1 % preferred stock"
400
400
—
1998 variable -rate
preferred stock"'
220
220
—
5.3% preferred stock(9)
200
200
—
5.1% preferred stock "1
150
—
—
5.79% preferred stock"'
250
—
—
1999 variable -rate
preferred stock"2'
288
—
—
Retained earnings
9,736
8,083
6,830
Net unrealized (loss) On on
certain investments reported
at fair value, net of taxes
(1,166)
120
146
Treasury stock, at cost
(866)
(821)
(1,245)
Stockholders' equity
11,525
10,835
7,521
Reserve for mortgage losses
772
768
694
Primary capital base
12,297
11,603
8,215
Subordinated borrowings
130
162
521
Adjusted total capital base
$12,427
$11,765
$8,736
(1) Redeemed on February 12, 1999.
(2) Variable -rate is equal to the sum ofthe three-month LIBOR rate plus 1 percent
divided by 1.377 and is capped at 9.00 percent. Optional redemption on or after
June 30001.
(3) Optional redemption on or afar December 31, 2001.
(4) Optional redemption on or after June 30, 2002.
(5) Optional redemption on or after October 27, 1998.
(6) Optional redemption on or after March 31, 2003.
(7) Optional redemption on or after September 3a 2003.
(8) variable -rate is equal to the sum of the three-month LIBOR rate plus 1 perrent
divided by 1.377, and is capped at 7.50 percent. Optional redemption on or after
September 3a 2003.
(9) Optional redemption on or after October 30, 2000.
(10) Optional redemption on or after March 31, 2004.
(11) Optional redemption on or after June 30, 2009.
(12) Initial dividend rate is 5.97perrent per annum through December 31, 2004.
Dividend rate resets on January 1, 2005 and on January 1 everyy f ve years thereafter
bared on a five- ear constant maturity Treasury rate which is capped at 11. 00per-
cent. Optional redemption on December 31, 2004 and on December 31 everyfive
years thereafter:
FREDDIE MAC
0%,
During 1999, the corporation added $694 million to
its primary capital base, largely driven by earnings and three
preferred stock offerings. The increase in the capital base
through preferred stock issuances provided the corporation
with the flexibility to respond to growth opportunities dur-
ing 1999. In March 1999, Freddie Mac issued $150 million
(or 3.0 million shares) of 5.1 % non -cumulative preferred
stock and, in July 1999, the corporation issued $250 million
(or 5.0 million shares) of 5.79% non -cumulative preferred
stock. Additionally, in November 1999, Freddie Mac issued
$288 million (or 5.75 million shares) of variable -rate non-
cumulative preferred stock. During 1998, the corporation
added $3.388 billion to its primary capital base which, in
addition to earnings growth, reflects a common stock offer-
ing in November 1998 totaling $1.003 billion (or 17.1 mil-
lion shares) and four preferred stock offerings totaling $1.220
billion. These stock offerings enabled the corporation to
respond to growth opportunities during both 1998 and 1999.
On February 12, 1999, Freddie Mac redeemed its
6.72% preferred stock. The corporation's outstanding 5.81 %
preferred stock issue has been redeemable since October 27,
1998, and its 5.3% preferred stock issue will become
redeemable on October 30, 2000. Freddie Macs capital struc-
ture may be influenced by the redemption and replacement
of all or part of these preferred stock issues, which could result
in changes in the corporation's mix of common and preferred
equity funding. Redemption of preferred stock in future peri-
ods will depend primarily on interest -rate levels. No other
issue of Freddie Mac's preferred stock outstanding at
December 31, 1999 will become redeemable in 2000.
Net unrealized losses in 1999 of $1.286 billion on certain
available -for -sale securities partially offset increases in the
corporations primary capital base, resulting in a net increase of
$694 million in the primary capital base. Freddie Mac's available -
for -sale portfolio consists of liquidity investments and certain
structured mortgage securities, primarily non -Freddie Mac secu-
rities. Although the credit quality of these securities is high, their
classification as available -for -sale allows Freddie Mac to manage
the associated credit risk effectively by retaining the ability to sell
the securities as appropriate. In accordance with the corporation's
overall risk management framework, it is management's practice
to fund available -for -sale securities on a duration -matched basis.
Freddie Mac's available -for -sale assets totaled $62 billion at
December 31,1999, up from $38 billion at December 31,1998.
In accordance with SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," available -
for -sale securities are marked to fair market value, with unreal-
ized gains and losses reported through "Stockholders' equity."
Under SFAS No. 115, the market value adjustment on available -
for -sale securities is limited to the securities themselves and there-
fore does not include the offsetting market valuation on the debt
instruments funding these investments. Since available -for -sale
securities are funded on a duration -matched basis, the decrease
in the market valuation of these securities did not represent an
economic loss for Freddie Mac in 1999 because it was offset by
an increase in the market valuation of the related debt.
The magnitude of the change in the mark -to -market
valuation of the corporation's available -for -sale portfolio is
influenced primarily by the size of the portfolio, the general
level of interest rates and credit risk premiums. Substantial
increases in these factors could result in further market value
declines (see "FORWARD -LOOKING STATEMENTS").
Freddie Mac actively manages capital to provide attrac-
tive returns on common equity by establishing a return on
equity threshold for new investments and returning surplus
capital to shareholders in periods when more capital is
generated than can be deployed at acceptable returns. During
1999 and 1998, Freddie Mac returned capital to sharehold-
ers of $92 million and $85 million, respectively, through
common stock repurchases pursuant to the corporation's
stock repurchase program. Common stock repurchases
during these years were low relative to previous years, reflect-
ing the availability of profitable investment opportunities
during these periods.
In addition to its corporate stock repurchase program,
Freddie Mac repurchases common stock to satisfy obligations
under its stock -based compensation plans. See Note 8 to the
Consolidated Financial Statements for further information on
the corporation's stock -based compensation plans. 33
Freddie Mac believes that common stock repurchases
may be an important component of earnings per share growth
in future periods. However, the amount of capital actually
available to repurchase common stock will be affected
primarily by mortgage portfolio growth opportunities,
Freddie Mac's assessment of the adequacy or sufficiency of its
capital, as well as the implementation of regulatory risk -based
capital standards (see "REGULATORY MATTERS —
Capital Standards").
Capital Adequacy
Freddie Mac regularly assesses the adequacy of its capital.
Management believes that at any point in time, capital should
be sufficient to ensure that Freddie Mac can satisfy its financial
obligations in a timely manner with its own resources even if
economic circumstances deteriorate unexpectedly and severely.
Maintaining adequate levels of capital protects the value of
Freddie Mac as a going concern.
As discussed earlier, the major risks inherent in Freddie
Mac's securitization financing and debt financing of mort-
gage -related investments are (i) credit risk and (ii) interest -rate
risk. The greater the exposure Freddie Mac has to these risks,
the more capital it needs to withstand adverse credit or inter-
est -rate environments.
Freddie Mac assesses its capital adequacy using a stress test
methodology, a type of scenario analysis used by many firms
to evaluate their financial strength under advaso,
FREDDIE MAC
business conditions. The customized stress test methodology
employed by Freddie Mac is designed to estimate the amount
of capital the corporation would need to satisfy its obligations
over a 10-year period of extremely adverse economic condi-
tions. Freddie Mac identifies six severe economic scenarios.
Each 10-year stress scenario is defined by extreme changes in
housing prices and interest rates, the two economic variables
that give rise to Freddie Mac's credit risk and interest -rate risk.
Freddie Mac simulates the corporation's financial performance
under these stressful economic conditions using
proprietary models of mortgage default and prepayments to
predict cash flows on mortgage -related investments. An
accounting model is also used to translate those cash flows, as
well as simulated cash flows on liabilities and off balance sheet
obligations, into income statements and balance sheets during
each of the 10-year stress periods. Freddie Mac's
standard for capital adequacy is to maintain capital equal to at
least 130 percent of that necessary to satisfy all financial obli-
gations under each of the six stress tests. The 30 percent addi-
tional capital beyond what is needed to cover credit risk and
interest -rate risk captured by the stress tests is an
additional cushion for other risks, such as operational risk.
At December 31, 1999, Freddie Mac satisfied this internal cap-
ital adequacy standard, having capital of at least 130 percent
of that required under each of the six stress scenarios. The stress
34 tests that Freddie Mac uses to assess capital adequacy are illus-
trated in Exhibit S.
Exhibit 5 — Stress Test Ellipse
Yearly House -Price Appreciation
Refi Boom High Inflation
"I,
S% A
E Interest -
Rate
53% -51% -24% 75% 113% Change
1%
3% 19BOs-Style
Depression C Recession
Note. The ellipse encompasses 99 percent of future 10-year economic scenarios. The stress
tests represent extreme moves in interest rates and house prices.
The axes in Exhibit 5 illustrate the principal underlying
economic factors that affect the value of Freddie Mac's total
mortgage portfolio. As discussed earlier, house -price changes
are important determinants of mortgage defaults, while
interest -rate changes affect mortgage prepayment levels and
Freddie Mac's cost of funds. The ellipse represents the joint
probability distribution of interest -rate and house -price shocks
possible over 10 years, given the relationship between 10-year
house -price and interest -rate changes observed in the past. As
illustrated in Exhibit S, house -price and interest -rate move-
ments tend to be positively correlated over long periods of
time. For example, large increases in interest rates tend to be
associated with house -price appreciation at the national level.
The stress tests selected around the ellipse to assess Freddie
Mac's capital adequacy are, in management's judgment,
approximately equally remote and include the points on the
ellipse representing the greatest changes in interest rates
(points A and D) and house -price depreciation (point Q.
Table 12 illustrates the house -price and interest -rate shock for
each of the six stress test scenarios.
Table 12 — Stress Test Economic Shocks
(1) The change in interest rates is expressed as a percent of currant interest rates. The
interest -rate shock is assumed to occur in the first year of the 10 year simulation.
For example, in the Depression 1 scenario (scenario Q, the assumed 10-year U.S.
Treasury rate of inurest decreases by 24 percent during the first year of the stress
period and remains at that level far the remaining nine years.
(2) The figurer in the table represent the average yearly house price growth rate over
each of the 10 year stress periods. However, the simulation actually concentrates the
house price shock in the first five years. For example, in the Depression 1 scenario
(scenario Q house prices depreciate an average of 6perrent per year for the first
five years of the stress period and remain unchanged for the remaining five years. In
addition to an average house price appreciation, the simulation assumes a fund
amount of dispersion around the national average to rrprrsent rrgional differences.
Management believes the stress test methodology
allows Freddie Mac to capture the risks of the corporation's
total mortgage portfolio, as well as to determine an appropriate
amount of capital to hold against such risks. The focus of the
stress tests is on the risks embedded in the current book of
business and current capital levels supporting this book of
business; accordingly, these stress tests assume a "wind -down"
mode with no new business or capital. In reality, Freddie Mac,
as a going concern, has the ability to raise capital or reduce
its risk exposure as economic conditions change. However,
the stress test methodology is a conservative approach to
assessing capital adequacy that does not take into account any
dynamic responses to changing economic conditions.
Management believes stress tests to be more effective
than traditional capital -to -asset ratios in determining the
adequate amount of capital for several reasons. First, a stress
test is a portfolio approach to measuring risk and capital
adequacy, capturing credit and interest -rate risks, as well as the
interactions among those risks. Second, stress tests give credit
U 9
FREDDIE MAC
for risk -reducing strategies such as the use of callable debt,
credit enhancements and capital market instruments such as
swaps, options, swaptions, caps, floors and credit derivatives.
Furthermore, stress tests are forward -looking and dynamic,
capturing the effects of changes in economic conditions, as
well as changes in the portfolio or off -balance sheet exposures.
In addition to its internal assessment of capital
adequacy, Freddie Mac ensures that capital is sufficient to
comply with regulatory capital standards. The Office of
Federal Housing Enterprise Oversight ("OFHEO") has pro-
posed a risk -based capital standard for Freddie Mac and
Fannie Mae based on a stress test model (see "REGULA-
TORY MATTERS -Capital Standards").
VOLUME STATISTICS
Table 13 summarizes Freddie Mac's purchase, liquidation and securitization activity for the years ended December 31,1999,1998
and 1997.
Table 13 - Volume Statistics
Year Ended December 31, 1999 1998 1997
(dollar in millions)
New business purchases"'
Single-family:
30-year fixed-rate
$195,974
72%
$213,659
74%
$ 85,605
70%
15-year fixed-rate
48,320
18%
58,897
21 %
18,697
16%
ARMs/floating-rate
16,524
6%
9,338
3%
10,105
8%
Balloon/resets
4,473
1%
2,534
1%
4,842
4%
Total single-family
265,291
97%
284,428
99%
119,249
98%
Multifamily
7,181
3%
3,910
1%
2,241
2%
Total
$272,472
100%
$288,338
100%
$121,490
100%
Credit risk distribution of purchases
35
Freddie Mac at-risk12'
$175,842 65%
$172,386 60%
$ 72,795 60%
Credit-enhanced(3)
$ 96,630 35%
$115,952 40%
$ 48,695 40%
Purchase market share(''
43%
42%
42%
Percentage of refinance
mortgage purchases
50%
64%
41%
Average LTV of purchases
Refinance mortgages
70%
70%
70%
Purchase money mortgages
81 %
81 %
81 %
Total purchases
75%
74%
76%
Mortgage liquidations
$143,508
$195,383
$ 91,882
Mortgage liquidation rate
20%
31%
15%
Original -issue securities settlements
Single-family PCs
$230,986
$249,627
$113,758
Multifamily PCs
2,045
937
500
Total
$233,031
$250,564
$114,258
Structured securitizationsl5'
$119,565
$135,162
$ 84,366
(])Includes mortgages exchanged for Freddie Mac PCs and purchased for cash, and non -Freddie Mac guaranteed mortgage securities. Excludes repurchased Freddie Mac PCs since
repurchases do not affect the unpaid principal balance of the total mortgage portfolio.
OIneludes only those mortgages for which Freddie Mac has assumed primary default risk.
(3)Includes loans for which the lender or a third party has retained primary default risk by pledging collateral or agreeing to accept losses on loans that default. In some cares, the
lender's or third party' risk is limited to a specific level oflosses at the time the credit enhancement becomes effective. Also includes non-Frrddie Mac securities held in the total
mortgage portfolio.
(4) Based on mortgage purchase and PC issuance activity relative to Fannie Mae.
(Wndudes issuances of mortgage -related securities in which the cashflows are structured into various classes having a variety of features, the majority of which qualify for treatment
as Real Ertate Mortgage Investment Conduits (REMIG) under the Internal Revenue Code.
040
FREDDIE MAC
Although Freddie Mac's purchase volumes decreased
relative to 1998, total purchases during 1999 represented the
second largest level of purchases in Freddie Mac's history. The
overall decrease in purchase volumes in 1999 compared to
1998 resulted primarily from rising interest rates during 1999
and a corresponding decrease in mortgage refinance activity. In
1999, refinanced mortgages represented 50 percent of
Freddie Mac's total purchases, down from 64 percent in 1998
and up from 41 percent in 1997.
Though interest rates trended upward in 1999, interest
rates continued to be low compared to historical standards, and
thus the supply of fixed-rate mortgages sold into the secondary
mortgage market remained strong. Borrower preferences for
fixed-rate mortgages continued during 1999 as spreads between
fixed-rate mortgages and ARMs/floating-rate mortgages
remained relatively narrow. Fixed-rate mortgages represented 90
percent of Freddie Mac's purchases for 1999, down from 95 per-
cent in 1998 and up from 86 percent in 1997. The increased
proportion of ARMS/floating-rate purchases during 1999
reflects portfolio purchases of floating-rate, non -Freddie Mac
securities for the retained portfolio (see "BUSINESS
REVIEW —Debt Financing). Freddie Mac's credit -enhanced
purchases were slightly down from 1998. This decline is the
result of lower levels of pool insurance on purchases made dur-
ing 1999 (see "RISK MANAGEMENT —Credit Risk-
36 Mortgage Credit Risk —Credit Risk Management —Credit
Enhancemena"), partially offset by the increased purchase of non -
Freddie Mac securities for the retained portfolio. Total purchase
volumes more than doubled in 1998 relative to 1997, prima-
rily reflecting an increase in mortgage refinance activity in 1998.
The corporation's market share, as a percentage of the
combined Freddie Mac and Fannie Mae purchases of both new
originations and seasoned mortgages, increased to 43 percent
for 1999 compared to 42 percent for both 1998 and 1997. As
discussed below, this increase reflects the impact of increased
business delivered under special business arrangements with
certain large mortgage originators. Freddie Mac competes for
mortgages primarily on the basis of the relative strength of its
mortgage purchase programs, security products, customer
service, ease of mortgage purchase processing and price.
A significant portion of Freddie Mac's mortgage
purchase volume is generated from several key mortgage
lenders that have entered into special business arrangements
with Freddie Mac. These individually negotiated relationships
characteristically involve a commitment by the lender to sell
a high proportion of its conforming mortgage origination
volume to Freddie Mac. The four most significant of these
arrangements accounted for slightly over 35 percent of Freddie
Mac's volume; the largest of such agreements is with Norwest
Mortgage, Inc. Freddie Mac is exposed to the risk that it will
lose significant purchase volume that it may be unable to
replace if, when the agreements terminate, one or more of
these key lenders chooses to significantly reduce the volume
of mortgages it sells to Freddie Mac.
The liquidation rate on the total mortgage portfolio was
20 percent for 1999, compared to 31 percent and 15 percent
for 1998 and 1997, respectively. The lower liquidation rate in
1999 compared to 1998 reflects a slowing of borrower prepay-
ments due to rising interest rates. The rise in the liquidation rate
in 1998 compared to 1997 reflects an increase in borrower pre-
payments due to declining interest rates.
As part of its securitization financing activities, Freddie Mac
engages in structured securitizations in which it resecuritizes PCs
that qualify as real estate mortgage investment conduits
("REMICs") under Internal Revenue Service ("IRS") regulations.
Structured securitization volumes vary based on market condi-
tions which impact investor demand for REMIC securities.
Freddie Mac's structured securitization activity was $120 billion
in 1999, compared to $135 billion and $84 billion in 1998 and
1997, respectively.
AVERAGE BALANCE SHEETS AND
RATE/VOLUME ANALYSIS
Table 14 presents average balance sheets and information with
respect to yields earned on assets and rates paid on liabilities
for the years ended December 31, 1999, 1998 and 1997.
Daily weighted average balances are calculated for
interest -earning assets, interest -bearing liabilities and Total
PCs. When daily weighted average balance information is
not available, a simple month -to -month average balance is
calculated. Table IS contains a rate/volume analysis that details
the changes to "Total revenues" during 1999, 1998 and 1997
resulting from changes in average balances, asset yields and
funding costs.
FREDD►E MAC
Table 14 - Average Balances and Yields
Year Ended December 31, 1999 1998 1997
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
Balance Expense Rate Balance Expense Rate Balance Expense Rate
(dollars in millions)
Assets
Interest -earning assets
Mortgages
$ 54,577
$ 3,967
7.27%
$ 50,383
$ 3,736
7.41%
$ 45,626
$ 3,439
7.54%
Guaranteed mortgage
securities0)
239,285
15,747
6.58%
152,687
10,533
6.90%
105,096
7,591
7.22%
Total retained portfolio
293,862
19,714
6.71%
203,070
14,269
7.03%
150,722
11,030
7.32%
Cash and investments(2)
53,085
2,751
5.10%
36,666
2,049
5.53%
26,378
1,563
5.84%
Securities purchased under
agreement to resell
5,182
288
5.56%
5,736
320
5.50%
8,042
408
5.07%
Total interest -earning assets
352,129
$ 22,753
6.45%
245,472
$16,638
6.77%
185,142
$13,001
7.01%
All other assets
6,359
5,016
4,177
Total assets $358,488 $250,488 $189,319
Liabilities and Stockholders' Equity
Interest -bearing liabilities
Debt securities:
Effective short-term debt
$ 44,516
$ 2,199
4.87%
$ 74,032
$ 4,037
5.38%
$ 47,753
$ 2,609
5.40%
Effective long-term debt
283,900
17,337
6.08%
147,810
9,724
6.56%
121,946
8,243
6.76%
Subordinated borrowings
147
14
9.36%
322
30
9.32%
505
48
9.50% 37
Total debt securities
328,563
19,550
5.91%
222,164
13,791
6.17%
170,204
10,900
6.38%
PC variance:
Due to prepayments")
9,299
658
7.08%
12,647
913
7.23%
6,385
477
7.46%
Due to ARM/floating-rate
adjustments(')
—
5
-
—
7
—
—
(7)
—
Net cost of PC variance
9,299
663
7.13%
12,647
920
7.28%
6,385
470
7.37%
Total interest -bearing
liabilities
337,862 $ 20,213 5.95%
234,811 $14,711 6.23%
176,589 $11,370 6.42%
All other liabilities
9,501
6,909
5,659
Stockholders' equity
11,125
8,768
7,071
Total liabilities and
stockholders' equity
$358,488
$ 250,488
$ 189,319
Net interest income/yield
$ 2,540 0.75%
$ 1,927 0.81%
$ 1,631 0.89%
Net interest income/yield
(fully taxable equivalent basis)
$ 2,721 0.80%
$ 2,091 0.88%
$ 1,741 0.94%
Guarantees
Total PCs (in basis points) $710,009 $ 1,405 19.8 by $ 609,877 $ 1,307 21.4 by $ 565,685 $ 1,298 22.9 by
(])Rates calculated on a fully taxable equivalent basis were 6.64%, 6.97% and 7.29% for the years ended December 31, 1999, 1998 and 1997, respective!,; based on related
income of $15.892 billion, $10.645 billion and $7.660 billion, respectively
(2)Rates calculated on a fully taxable equivalent basis were 5.24%, 5.65% and 6.00% for the years ended December 31, 1999, 1998 tend 1997, respectivel)� based on related
income of $2.819 billion, $2.101 billion and $1.604 billion, respectively.
(3)Mortgage liquidations on which interest continues accruing to the security holder.
(4)Rate changes on ARMS eating -rate mortgages for which the related security rate changes one month later.
o4z
FREDDIE MAC
38
Table 15 — Rate/Volume Analysis
1999 vs. 1998
1998 vs. 1997
Increase or (Decrease)
Increase or (Decrease)
Due To
Due To
Rate
Volume
Total
Rate
Volume
Total
(dollars in millions)
Interest -earning assets
Mortgages
$ (80)
$ 311
$ 231
$ (62)
$ 359
$ 297
Guaranteed mortgage securities
(761)
5,975
5,214
(494)
3,436
2,942
Total retained portfolio
(841)
6,286
5,445
(556)
3,795
3,239
Investments
(195)
865
670
(60)
458
398
Total interest -earning assets
$(1,036)
$ 7,151
$ 6,115
$(616)
$4,253
$3,637
Interest -bearing liabilities
Effective short-term debt
$ (272)
$0,566)
$(1,838)
$ (11)
$1,439
$1,428
Effective long-term debt
(1,319)
8,916
7,597
(276)
1,739
1,463
Total debt securities
(1,591)
7,350
5,759
(287)
3,178
2,891
PC variance
(13)
(244)
(257)
(17)
467
450
Total interest -bearing liabilities
$ (1,604)
$ 7,106
$ 5, 502
$ (304)
$3,645
$3,341
Net interest income
$ 568
$ 45
$ 613
$(312)
$ 608
$ 296
Management and guarantee income
$ (116)
$ 214
$ 98
$ (92)
$ 101
$ 9
Other income, net
$ 7
$ 3
Total revenues
$ 718
$ 308
CONSOLIDATED RESULTS OF
OPERATIONS
"Net income" for 1999 was $2.223 billion, a 31 percent
increase over the $1.700 billion reported for 1998. Diluted
earnings per common share for 1999 was $2.96, up 28 per-
cent over the $2.31 diluted earnings per common share
reported for 1998. The increases in "Net income" and diluted
earnings per common share were primarily due to a $613 mil-
lion, or 32 percent, increase in "Net interest income on earn-
ing assets," coupled with a $183 million, or 54 percent,
decrease in credit -related expenses. The increase in net inter-
est income was due to growth of the retained portfolio, while
improved credit performance reflects favorable economic con-
ditions, particularly house -price appreciation, as well as the
increasing influence of higher credit quality mortgage origi-
nations (see "RISK MANAGEMENT —Credit Risk —
Mortgage Credit Risk —Credit Performance). Net income for
1999 includes a pre-tax extraordinary gain of $8 million on
the retirement of debt. The debt retirement resulted in an after-
tax extraordinary gain of $5 million, or $0.01 basic and diluted
earnings per common share.
Table 16summarizes Freddie Mac's results of operations
for 1999 as compared to 1998, and 1998 as compared
to 1997.
FREDoIE MAC
043
Table 16 — Summary of Results
1999 vs. 1998
1998 vs. 1997
Dollar
Percent
Dollar
Percent
Year Ended December 31,
1999
1998
Change
Change
1997
Change
Change
(dollars in millions, except per share amounts)
Net interest income on earning assets
$2,540
$1,927
$
613
32%
$1,631
$ 296
18%
Management and guarantee income
1,405
1,307
98
7%
1,298
9
1%
Other income, net")
110
103
7
7%
100
3
3%
Total revenues
$4,055
$3,337
$
718
22%
$3,029
$ 308
10%
Credit -related expenses
$ 159
$ 342
$
(183)
(54)%
$ 529
$ (187)
(35)%
Administrative expenses
655
578
77
13%
495
83
17%
Housing tax credit partnershipS12)
80
61
19
31 %
41
20
49%
Total non -interest expense
$ 894
$ 981
$
(87)
(9)%
$1,065
$ (84)
(8)%
Net income
$2,223
$1,700
$
523
31 %
$1,395
$ 305
22%
Earnings per common share")
Basic
$ 2.97
$ 2.32
$
0.65
28%
$ 1.90
$ 0.42
22%
Diluted
$ 2.96
$ 2.31
$
0.65
28%
$ 1.88
$ 0.43
23%
Retained portfolio (in billions)
$324.4
$255.0
$
69.4
27%
$164.4
$ 90.6
55%
Total mortgage portfolio (in billions)(4)
$862.3
$733.4
$128.9
18%
$640.4
$ 93.0
15%
(1) Includes recognized gains (losses) on hedging transactions totaling $22 million, $(9) million and $5 million for the years ended December 31, 1999, 1998, and 1997, respectively
(2) Represents costs associated with Freddie Mac's investment in housing tax credit partnerships. Tax credits generated by these investments reduce the corporation's tax liability.
(3) After payments of preferred stock dividends of $153 million, $121 million and $95 miUion for the years ended December 31, 1999, 1998 and 1997, respectively.
(4) Equal to the retained portfolio plus Total PCs, net of Freddie Mac PCs held in the retained portfolio.
Net Interest Income on Earning Assets
"Net interest income on earning assets" totaled $2.540 billion
in 1999 compared to $1.927 billion in 1998. On a fully tax-
able equivalent ("FTE") basis, net interest income totaled
$2.721 billion in 1999, a 30 percent increase over 1998 FTE
net interest income of $2.091 billion. FTE net interest yield
on earning assets was 0.80 percent for 1999 compared to 0.88
percent for 1998.
Growth in FTE net interest income reflects a $91 billion,
or 45 percent, increase in the average balance of the retained
portfolio. The 8 basis -point decline in FTE net interest yield
from 1998 primarily reflects the net effect of funding and rebal-
ancing actions taken by Freddie Mac to protect the corporations
portfolio market value. Over the course of 1999, Freddie Mac
increased its proportion of higher -cost, longer -term funding to
better match expected asset and liability durations in a rising
interest -rate environment. In addition Freddie Mac increased
its holdings of option -based derivatives, which provide protec-
tion against significant interest -rate movements. While these
actions compressed net interest yield in 1999, they substantially
reduced the corporation's future interest -rate risk exposure.
The cost of these actions was partially offset by benefits
related to certain derivative transactions entered into in late
1998 to hedge against the effect of rising interest rates on
Freddie Mac's funding costs. Throughout 1999, as some of
these derivative transactions matured or were terminated,
related gains were recognized in "Net interest income on earn-
ing assets." These benefits are not expected to recur in 2000 39
since these derivatives contracts either matured or were termi-
nated by the end of 1999.
FTE net interest income totaled $2.091 billion in 1998
compared to $1.741 billion in 1997, while FTE net interest
yield on earning assets was 0.88 percent and 0.94 percent for
these same years, respectively. The increase in FTE net inter-
est income from 1997 to 1998 was due primarily to a $52 bil-
lion, or 35 percent, increase in the average balance of the
retained portfolio compared to 1997. The 6 basis -point
decline in FTE net interest yield during 1998 was primarily
due to lower initial spreads on new mortgage -related invest-
ments purchased during 1998, as well as an increased level of
high -cost PC variance funding of interest -earning assets due
to high mortgage prepayment levels that occurred in 1998 as
a result of lowered interest rates.
Interest income on mortgages does not include interest
deemed uncollectible on non -performing mortgages. If non-
performing mortgages had been fully performing, they would
have contributed an additional $13 million, $65 million and
$111 million to net interest income in 1999, 1998 and
1997, respectively.
Management and Guarantee Income
"Management and guarantee income," the fee Freddie Mac
earns on Total PCs, increased to $1.405 billion in 1999, a $98
million, or 7 percent, increase from $1.307 billion in 1998.
044
FREDDIE MAC
This increase was due to a $100 billion, or 16 percent, increase
in the average balance of Total PCs, partially offset by a 1.6
basis point decrease in the average guarantee fee rate compared
to 1998.
The average guarantee fee rate for 1999 continued to be
affected by portfolio turnover, reflecting: U) fee rates on new
PC issuances typically below the average fee rate on the Total
PC portfolio and (h) liquidations of existing PC balances hav-
ing comparatively higher fee rates. Lower average guarantee fee
rates on new issuances primarily reflect increased competitive
pressures, the continued use of credit enhancements on mort-
gage investments and changes in the mix of mortgage prod-
ucts purchased by Freddie Mac. The impact of portfolio
turnover was diminished relative to 1998 due to slowing mort-
gage prepayments experienced in a rising mortgage interest -rate
environment during 1999. As liquidation rates continue to
slow, average guarantee fee rates will increasingly be influenced
by product mix, the use of credit enhancements and the com-
petitive environment (see "MARKET OVERVIEW" and
"RISK MANAGEMENT —Credit Risk —Mortgage Credit
Risk —Credit Risk Management —Credit Enhancements').
The $9 million, or 1 percent, increase in "Management
and guarantee income" from 1997 to 1998 was due to a
$44 billion, or 8 percent, increase in the average balance of
Total PCs, partially offset by a 1.5 basis point decrease in the
40 average guarantee fee rate.
"Management and guarantee income" does not include
interest deemed uncollectible on non -performing mortgages
underlying the Total PC portfolio. If non -performing mort-
gages had been fully performing, they would have contributed
an additional $4 million, $17 million and $30 million to
"Management and guarantee income" in 1999, 1998 and
1997, respectively.
Other Income, Net
As presented in Table 17, the primary components of "Other
income, net" include fees earned from resecuritization activ-
ity (fees paid by underwriters for Freddie Mac's issuance and
management of structured securitizations), gains and losses
associated with certain investment -related activities and gains
and losses from certain hedging transactions. Also included
are fees earned by Freddie Mac primarily for automated
underwriting (Loan Prospector) and electronic network
(GoldWorks®) services that provide seller/servicers with eas-
ier access to the secondary mortgage market.
Table 17 — Other Income, Net
Year Ended December 31,
1999
1998
1997
(dollars in millions)
Resecuritization fees
$ 64
$ 68
$ 56
Miscellaneous
income, net")
46
35
44
Total
$110
$103
$100
(1) Includes recognized gains (losses) on hedging transactions totaling $22 million, $(9)
million, and $S million for 1999, 1998, and 1997, respectively
"Other income, net" for 1999 increased $7 million
compared to 1998 primarily as a result of gains from certain
hedging transactions that must be reported in "Other
income, net" rather than in "Net interest income on earning
assets." These gains were partially offset by losses on certain
investment -related activities and, to a lesser extent, lower fees
earned from resecuritization activity.
"Other income, net" for 1998 increased $3 million
compared to 1997. This increase was primarily attributable to a
$12 million increase in resecuritization fees due to higher volumes
of structured securitizations during 1998, partially offset by lower
miscellaneous income, net, due to losses in 1998 associated with
certain investment and hedging transactions.
Credit -Related Expenses
Credit -related expenses (which consist of the "Provision for
mortgage losses" and "REO operations expense" ) decreased
$183 million, or 54 percent, from $342 million in 1998 to
$159 million in 1999, and decreased $187 million, or 35 per-
cent, from 1997 to 1998. These decreases were due to both
reductions in the "Provision for mortgage losses" and declines
in "REO operations expense," which were driven primarily by
strengthening house prices (see "RISK MANAGEMENT —
Credit Risk —Mortgage Credit Risk —Credit Performance").
The "Provision for mortgage losses" is charged against income
in an amount considered appropriate to maintain the corpo-
ration's reserve for mortgage losses at a level management
deems adequate to absorb estimated losses incurred on the total
mortgage portfolio.
Administrative Expenses
"Administrative expenses" increased $77 million, or 13 percent,
from $578 million in 1998 to $655 million in 1999, and
increased $83 million, or 17 percent, from 1997 to 1998. These
increases were due primarily to continued investment in busi-
ness process improvements, as well as costs related to the cor-
poration's year 2000 readiness efforts (see "OPERATIONAL
AND OTHER RELATED RISKS—YearXOORisk"). The ratio
of administrative expenses to revenues on a fully taxable equiv-
alent basis declined to 15 percent in 1999 from 17 percent in
1998. Administrative expenses as a percentage of the average
FREDDIE MAC
�4j
total mortgage portfolio also declined to 8.1 basis points in 1999
from 8.5 basis points in 1998.
Housing Tax Credit Partnerships
The costs associated with Freddie Mac's investment in housing
tax credit partnerships totaled $80 million in 1999, a $19 mil-
lion and $39 million increase from 1998 and 1997, respectively.
Housing tax credit partnerships develop multifamily low-income
rental properties. While these investments create operating losses,
they also generate tax credits that reduce the corporation's federal
income tax liability.
REGULATORY MATTERS
Capital Standards
Under the Federal Housing Enterprises Financial Safety and
Soundness Act of 1992 (the "GSE Act"), Freddie Mac and
Fannie Mae are subject to certain minimum and risk -based
capital standards issued by OFHEO. Until a final risk -based
capital regulation has been issued and in effect for one year,
the capital levels of Freddie Mac and Fannie Mae are to be clas-
sified only against the minimum capital standard. At
December 31, 1999, Freddie Mac's estimated minimum cap-
ital requirement, as reported to OFHEO, was $12.3 billion,
up from $10.3 billion at December 31, 1998. At December
31, 1999, Freddie Mac's core capital, which consists of the par
value of outstanding common stock (common stock issued less
common stock held in treasury), the redemption value of out-
standing perpetual preferred stock, additional paid -in capital
and retained earnings, as measured under generally accepted
accounting principles, was $12.7 billion, up from $10.7 bil-
lion at December 31, 1998. Capital surplus, the excess of
Freddie Mac's regulatory core capital over the minimum cap-
ital requirement, was estimated at $405 million at December
31, 1999, up from $383 million at December 31, 1998. In its
most recent classification, the Director of OFHEO classified
Freddie Mac as "adequately capitalized," OFHEO's highest clas-
sification. See Note 8 to the Consolidated Financial Statements
for further information regarding regulatory capital standards.
The Director of OFHEO has issued a proposed regula-
tion to implement the risk -based capital standard, which would
set forth capital requirements using a stress test model. In early
March 2000, Freddie Mac submitted to OFHEO detailed,
written comments on the proposal. Freddie Mac commented
that it believes the basic framework proposed by OFHEO is
sound, but a number of changes in the components of the stress
test are necessary in order to align capital to risk as envisioned
in the GSE Act. The corporation's comments in this regard
included recommendations regarding the measurement of the
benchmark for regional credit loss experience for single-fam-
ily mortgages, single-family and multifamily credit risk and
prepayment models, treatment of non -borrower credit risk,
projection of the Treasury yield curve and non -Treasury inter-
est rates, and assumptions as to refunding and operation
expenses. The comments emphasized the importance of imple-
menting the infrastructure systems and procedures, including
treatment of new activities, that are needed to make the stress
test operational and the proposal workable. Freddie Mac's com-
ments also identified options to make the implementation of
the proposed regulation accurate, predictable and timely.
Copies of those comments are available upon request.
OFHEO has stated that, after it considers all of the comments
submitted, it will determine whether to re -propose or to issue
a final regulation. Freddie Mac believes that a reasonable imple-
mentation of the risk -based capital standard, when finalized,
would be consistent with the corporation's internal assessment
of capital adequacy.
Housing Goals
The GSE Act requires the Secretary of HUD to establish three
mortgage purchase goals for Freddie Mac and Fannie Mae: a
goal for the purchase of mortgages on housing for low- and
moderate -income borrowers (the "Low- and Moderate -Income
Goal"); a goal for the purchase of mortgages on housing located
in central cities, rural areas and other underserved areas (the
"Underserved Areas Goal"); and a special affordable housing
goal for the purchase of mortgages on housing for low-income
borrowers in low-income areas and for very low-income bor-
rowers, including purchases of multifamily mortgages (the
"Special Affordable Goal"). 41
In December 1995, the Secretary issued regulations estab-
lishing affordable housing goals for the years 1996 through 1999.
The goals provide that 40 percent of the total number of
dwelling units financed by the corporations mortgage purchases
meet the Low- and Moderate -Income Goal in 1996 and 42 per-
cent in each of 1997, 1998 and 1999; 21 percent of the total
number of dwelling units financed by the corporations mort-
gage purchases meet the Underserved Areas Goal in 1996 and
24 percent in each of 1997, 1998 and 1999; and 12 percent of
the total number of dwelling units financed by the corporation's
mortgage purchases meet the Special Affordable Goal in 1996
and 14 percent in each of 1997, 1998 and 1999, including a
target of at least $988 million in qualifying multifamily mort-
gage purchases in each year from 1996 through 1999.
Freddie Mac met the Low- and Moderate -Income Goal of
42 percent in 1999, with low- and moderate -income purchases
of 46 percent. Freddie Mac also met the Underserved Areas Goal
of 24 percent in 1999, with underserved areas purchases of 28
percent. Finally, Freddie Mac met the Special Affordable Goal of
14 percent in 1999, with special affordable purchases of 17 per-
cent, and met the $988 million multifamily portion of this goal
with $2.3 billion of qualifying multifamily mortgage purchases.
On March 9, 2000, HUD published a proposed rule that
would establish new housing goals for Freddie Mac and Fannie
Mae for calendar years 2000 through 2003. Public comments
regarding the rule must be submitted to HUD on or begr¢i8Y
FREDDIE MAC
42
days after the March publication date. Freddie Mac is mamin-
ing the proposed rule and will provide HUD with detailed com-
ments during the public comment period. The proposed rule
would increase the Low- and Moderate -Income Goal from the
current 42 percent to 48 percent in the year 2000, and to 50
percent in years 2001 through 2003; it would increase the
Underserved Areas Goal from the current 24 percent to 29 per-
cent in the year 2000, and to 31 percent in years 2001 through
2003; and it would increase the Special Affordable Goal from
the current 14 percent to 18 percent in the year 2000, and to
20 percent in years 2001 through 2003. The proposed rule also
would clarify HUD's guidelines for counting different types of
mortgage purchases toward the housing goals. The proposed rule
may not be adopted as currently written. Management believes
that if the proposed rule were adopted as currently written, it
would not have a material adverse effect on Freddie Mac's results
of operations or financial condition.
Management views the purchases of mortgages bene-
fiting low- and moderate -income families and neighborhoods
as an integral part of Freddie Mac's mission and business, and
remains committed to fulfilling the needs of underserved bor-
rowers and markets. Accordingly, Freddie Mac expects that it
will continue to purchase the majority of the single-family and
multifamily mortgages counted toward its performance under
the housing goals through its standard purchase programs.
TAX MATTERS
In February 1997, Freddie Mac formed two real estate
investment trust ("REIT") subsidiaries that issued a total of
$4 billion in step-down preferred stock to investors. Under
IRS regulations in effect when the REITs were formed,
dividend payments to holders of the REITs' step-down
preferred stock are tax deductible. In 1997, subsequent to
the formation of Freddie Mac's REIT subsidiaries, the U.S.
Department of the Treasury (the "Treasury") announced its
intention to propose regulations that would effectively
eliminate the tax advantages of REITs that issue step-down
preferred stock. On January 5, 1999, the Treasury issued
proposed regulations and, on January 7, 2000, issued final
regulations generally consistent with those it had proposed.
These regulations deny certain of the tax benefits attribut-
able to Freddie Mac's REIT preferred stock for tax years
ending on or after February 27, 1997. Notwithstanding the
issuance of the final regulations, the tax treatment of
preferred stock dividends paid to investors in the REITs
remains uncertain. Accordingly, Freddie Mac has elected
not to treat such dividends as fully tax deductible in its
Consolidated Financial Statements. This treatment is sub-
ject to change once uncertainties related to the tax treatment
of such dividends are adequately clarified. The preferred
stock is redeemable by the REITs under certain circum-
stances where changes in applicable tax law could adversely
affect the tax treatment of the REITs or preferred stock.
EFFECT OF NEW ACCOUNTING
STANDARD
In June 1998, the Financial Accounting Standards Board
("FASB") issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which Freddie Mac will
implement on January 1, 2001. Management anticipates that
the adoption of SFAS No. 133 may increase
earnings volatility for the corporation. As a result, imple-
mentation strategies are currently being evaluated in order to
develop effective solutions that are consistent with business
fundamentals, mitigate earnings volatility and accommodate
growth and change in risk management strategies. Further
information regarding this new accounting standard is
presented in Note 1 to the Consolidated Financial Statements.
RECENT EVENTS
Executive Vice President and Chief Financial Officer John P.
Gibbons resigned from Freddie Mac, effective March 31,
2000. Vaughn A. Clarke, Senior Vice President of Finance,
is serving as Chief Financial Officer while Freddie Mac con-
ducts a search for a successor.
04
FREDDIE MAC
Freddie Mac
Five -Year Financial Highlights
December 31, 1999 1998 1997 1996 1995
(dollars in millions, except per share amounts)
Balance Sheet
Retained portfolio
$
324,443
$ 255,009
$ 164,421
$ 137,755
$ 107,424
Total assets
$
386,684
$ 321,421
$ 194,597
$ 173,866
$ 137,181
Debt securities, net
$
360,581
$ 287,234
$ 172,321
$ 156,491
$ 119,328
Total liabilities
$
374,602
$ 309,978
$ 186,154
$ 166,271
$ 130,297
Capital base:
Stockholders' equity
$
11,525
$ 10,835
$ 7,521
$ 6,731
$ 5,863
Reserve for mortgage losses"
772
768
694
680
683
Primary capital base
12,297
11,603
8,215
7,411
6,546
Subordinated borrowings
130
162
521
490
633
Adjusted total capital base
$
12,427
$ 11,765
$ 8,736
$ 7,901
$ 7,179
Total PCs
$
749,081
$ 646,459
$ 579,385
$ 554,260
$ 515,051
Freddie Mac PCs held in the retained portfolio
$
211,198
$ 168,108
$ 103,400
$ 81,195
$ 56,006
Primary capital ratio"'
1.33%
1.45%
1.23%
1.15%
1.10%
Adjusted total capital ratiol3'
1.34%
1.47%
1.30%
1.22%
1.20%
Total mortgage portfolio
$
862,326
$ 733,360
$ 640,406
$ 610,820
$ 566,469
New Business Purchase and Financing Activities
New business purchases
New business purchases (# of loans)
PC issuances
Structured securitizations(4'
Long-term debt:
Issued
Retired
$ 272,472
2,058,330
$ 233,031
$ 119,565
$ 113,600
(23,568)
$ 288,338
2,396,651
$ 250,564
$ 135,162
$ 63,789
(54,708)
$ 121,490
1,085,046
$ 114,258
$ 84,366
$ 35,091
(22,091)
$ 128,565
1,232,540
$ 119,702
$ 34,145
$ 33,852
(20,819)
$ 98,386
934,890
$ 85,877
$ 15,372
$ 29,643
(11,082)
Net
$ 90,032
$ 9,081
$ 13,000
$ 13,033
$ 18,561
Income Statement and Performance Ratios
Net interest income on earning assets
$ 2,540
$ 1,927
$ 1,631
$ 1,542
$ 1,298
Management and guarantee income
$ 1,405
$ 1,307
$ 1,298
$ 1,249
$ 1,185
Total revenues
$ 4,055
$ 3,337
$ 3,029
$ 2,875
$ 2,541
Income before income taxes and extraordinary item
$ 3,161
$ 2,356
$ 1,964
$ 1,797
$ 1,586
Net income
$ 2,223
$ 1,700
$ 1,395
$ 1,243
$ 1,091
Earnings per common sharers'
Basic
$ 2.97
$ 2.32
$ 1.90
$ 1.65
$ 1.42
Diluted
$ 2.96
$ 2.31
$ 1.88
$ 1.63
$ 1.41
Weighted average common shares outstanding (in thousands):(')
Basic
696,042
679,790
684,937
709,453
721,288
Diluted
700,211
684,658
691,701
714,878
725,114
Dividends per common share
$ 0.60
$ 0.48
$ 0.40
$ 0.35
$ 0.30
Dividend payout ratio on common stock
20.14%
20.65%
21.08%
21.26%
21.09%
Return on common equity�6'(9'
25.5%
24.1%
23.3%
22.2%
21.9%
Return on total equity1" (9)
20.3%
19.4%
19.5%
19.7%
19.7%
Return on average assets and contingencies(a'19'
0.26%
0.24%
0.21 %
0.20%
0.20%
Ratio of earnings to fixed charges"')
1.16:1
1.16:1
1.17:1
1.19:1
1.23:1
Ratio of earnings to combined fixed charges and
preferred stock dividends('°'
1.14:1
1.15:1
1.16:1
1.18:1
1.22:1
43
(1) Reserve for losses on retained mortgages"plus the Reservelor losses on Mortgage Participation Certificates.
(2) "Primary capital base" divided b the sum of "Total assess and "Total PCs" less "Freddie Mac PCs held in retained portfolio."
(3) Ad1'usttd total capital base"divided by the sum of "Total assets"and "Total PCs" less Freddie Mac PCs held in retained portfolio."
(4) Includes issuances of mortgage -related securities in which the cash flows are structured into various classes having a variety of features, the majority of which qualify for treat-
ment as Real Estate Mortgage Investment Conduits ( EMICs) under the Internal Revenue Cock.
(S) Earnings per common share -basic" are computed based on weighted average common shares outstanding. `Earnings per common share-diluted"are computed based on the total
Of weighted average common shares outstanding and the effect of dilutive common equivalent shares outstanding.
(6) Annual computation reflects the simple avenge of quarterly returns. Quarterly returns are computed as annualized "Net income" less preferred stock dividends divided by the
simple. average of the beginning and ending balances of Stockholders' equit's' net ofpreferred stock (at redemption value).
(7) Annual computation reflects the simple average of quarterly returns. Quarterly returns are computed as annualized `Net income" divided by the simple average of the beginning
and ending alancrs of Stockholders'equit�e
(8) Annual computation reflects the sim�le average of quarterly returns. Quarterly returns are computed as annualized `Net income" divided by the simple average of the beginning
and ending balances of Total assets ' and "Total! PCs"less "Freddie Mac PCs held in the retained portfolio."
(9) In 1999, annual return computations were changed to reflect the simple average of quarterly returns All prior years presented have been restated to reflect this change. (�
(10) Earnings represent consolidated pre-tax income plus consolidated fixed charges, less interest capitalized. Fixed charges include interest (including amounts capitalized) and thD Q
portion of net rental expense deemed representative of interest.
FREDDIE MAC
Freddie Mac
Consolidated Statements of Income
Year Ended December 31,
1999
1998
1997
(dollars in millions, except per share amounts)
Interest income
Mortgages
$ 3,967
$ 3,736
$ 3,439
Guaranteed mortgage securities
15,747
10,533
7,591
Investments and securities purchased under agreements to resell
3,039
2,369
1,971
22,753
16,638
13,001
Interest expense on debt securities
Short-term debt
(2,199)
(4,037)
(2,609)
Long-term debt
(17,351)
(9,754)
(8,291)
(19,550)
(13,791)
(10,900)
Interest expense due to security program cycles
(663)
(920)
(470)
(20,213)
(14,711)
(11,370)
Net interest income on earning assets
2,540
1,927
1,631
Management and guarantee income
1,405
1,307
1,298
Other income, net
110
103
100
Total revenues
4,055
3,337
3,029
Provision for mortgage losses
(60)
(190)
(310)
REO operations expense
(99)
(152)
(219)
Administrative expenses
(655)
(578)
(495)
Housing tax credit partnerships
(80)
(61)
(41)
Total non -interest expense
(894)
(981)
(1,065)
44 Income before income taxes and extraordinary item
3,161
2,356
1,964
Provision for income taxes
(943)
(656)
(569)
Income before extraordinary item, net of taxes
2,218
1,700
1,395
Extraordinary gain on retirement of debt, net of taxes
5
-
-
Net income
$ 2,223
$ 1,700
$ 1,395
Preferred stock dividends
(153)
(121)
(95)
Net income available to common stockholders
$ 2,070
$ 1,579
$ 1,300
Earnings per common share before extraordinary item
Basic
$2.97
$2.32
$1.90
Diluted
$2.95
$2.31
$1.88
Earnings per common share
Basic
$2.97
$2.32
$1.90
Diluted
$2.96
$2.31
$1.88
Weighted average common shares outstanding (thousands)
Basic
696,042
679,790
684,937
Diluted
700,211
684,658
691,701
See accompanying Notes to Consolidated Financial Statements.
049
FREDDIE MAC
Freddie Mac
Consolidated Balance Sheets
December 31,
1999
1998
(dollars in millions)
Assets
Retained portfolio
Mortgages
$ 56,676
$ 57,084
Reserve for losses on retained mortgages
(345)
(322)
56,331
56,762
Guaranteed mortgage securities (GMS)
267,767
197,925
Purchase and sale premiums, discounts and deferred fees
51
525
Net unrealized (loss) gain on available -for -sale securities
(1,580)
136
Retained portfolio, net
322,569
255,348
Cash and cash equivalents
5,144
2,565
Investments
31,747
44,753
Securities purchased under agreements to resell
4,961
1,756
Accounts and trading receivables
18,635
14,580
Real estate owned (REO), net
438
574
Other assets
3,190
1,845
Total assets
$ 386,684
$ 321,421
Liabilities and Stockholders' Equity
Debt securities, net
Due within one year
$175,525
$ 193,871
Due after one year
185,056
93,363
Total debt securities, net
360,581
287,234 45
Principal and interest due to Mortgage Participation
Certificate (PC) investors
7,334
19,441
Other liabilities
6,687
3,303
374,602
309,978
Reserve for losses on Mortgage Participation Certificates
427
446
Guarantees
Total Mortgage Participation Certificates (Total PCs)
749,081
646,459
Less Underlying mortgages
(749,081)
(646,459)
Subordinated borrowings
130
162
Stockholders' equity
Preferred stock, at redemption value
3,195
2,807
Common stock, $0.21 par value, 726,000,000 shares authorized, 725,882,280 shares issued
152
152
Additional paid -in capital
474
494
Retained earnings
9,736
8,083
Net unrealized (loss) gain on certain investments reported at fair value, net
of tax (benefit) expense of $(628) million and $64 million, respectively
(1,166)
120
Treasury stock, at cost, 30,791,274 and 30,703,151 shares, respectively
(866)
(821)
Total stockholders' equity
11,525
10,835
Total liabilities and stockholders' equity
$ 386,684
$ 321,421
See accompanying Notes to Consolidated Financial Statements.
050
FREDDIE MAC
Freddie Mac
Consolidated Statements of Stockholders' Equity
Year Ended December 31, 1999, 1998 and 1997
Net Unrealized (Loss)
Additional
Gain on Certain
Treasury
Total
Preferred
Common Paid -In
Retained
Investments Reported at
Stock
Stockholders'
Stock
Stock Capital
Earnings
Fair Value, Net of Taxes
at Cost
Equity
(dollars in millions)
Balance, December 31, 1996
$ 1,400
$152 $ 75
$ 5,804
$ (12)
$ (688)
$ 6,731
Net income
1,395
1,395
Change in net unrealized (loss) gain
on certain investments reported at
fair value, net of taxes
158
158
Comprehensive income
1,553
Cash dividends declared:
Preferred stock
(95)
(95)
Common stock
(274)
(274)
Common stock issuance
(24)
47
23
Common stock repurchase
(604)
(604)
Preferred stock issuance
750
750
Preferred stock redemption
(563)
(563)
Balance, December 31, 1997
$ 1,587
$ 152 $ 51
$ 6,830
$ 146
$ (1,245)
$ 7,521
Net income
1,700
1,700
Change in net unrealized (loss) gain
on certain investments reported at
46 fair value, net of taxes
(26)
(26)
Comprehensive income
1,674
Cash dividends declared:
Preferred stock
(121)
(121)
Common stock
(326)
(326)
Common stock issuance
443
581
1,024
Common stock repurchase
(157)
(157)
Preferred stock issuance
1,220
1,220
Balance, December 31, 1998
$ 2,807
$ 152 $ 494
$ 8,083
$ 120
$ (821)
$ 10,835
Net income
2,223
2,223
Change in net unrealized (loss) gain
on certain investments reported at
fair value, net of taxes
(1,286)
(1,286)
Comprehensive income
937
Cash dividends declared:
Preferred stock
(153)
(153)
Common stock
(417)
(417)
Common stock issuance
(20)
47
27
Common stock repurchase
(92)
(92)
Preferred stock issuance
688
688
Preferred stock redemption
(300)
(300)
Balance, December 31, 1999
$ 3,195
$152 $ 474
$ 9,736
$ (1)166)
$ (866)
$11,525
See accompanying Notts to Consolidated Financial Statements.
FREDDIE MAC
Freddie Mac
Consolidated Statements of Cash Flows
Year Ended December 31,
1999
1998
1997
(dollars in millions)
Cash Flows From Operating Activities
Net income
$ 2,223
$ 1,700
$ 1,395
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of mortgage purchase and sale premiums, discounts and deferred fees
106
109
59
Amortization of discounts on short-term debt
8,847
6,710
3,951
Amortization of discounts on long-term debt
354
283
142
Extraordinary gain on debt retirement (pre-tax)
(8)
-
-
Provision for mortgage losses
60
190
310
Provision for REO disposition losses
66
90
108
Net change in payables and receivables
(13,155)
269
5,071
(3,730)
7,651
9,641
Purchases of mortgages
(78,908)
(100,287)
(42,906)
PC issuances under Cash Program
68,012
83,452
37,313
Net cash (used in) provided by operating activities
(12,403)
(7,484)
5,443
Cash Flows From Investing Activities
Purchases of mortgage investments
(103,982)
(132,206)
(43,693)
Repayments of mortgage investments
44,403
56,970
20,936
Proceeds from sales of REO
1,111
1,541
1,662
Net decrease (increase) in investments
12,770
(31,329)
5,352
Net (increase) decrease in securities purchased under agreements to resell
(3,205)
5,226
(542)
Net cash used in investing activities
(48,903)
(99,798)
(16,285) 47
Cash Flows From Financing Activities
Proceeds from issuance of short-term debt
1,677,833
2,104,501
1,777,300
Repayments of short-term debt
(1,703,733)
(2,005,813)
(1,778,533)
Proceeds from issuance of long-term debt
113,600
63,789
35,091
Repayments of long-term debt
(23,568)
(54,708)
(22,091)
Proceeds from issuance of preferred stock
688
1,220
750
Redemption of preferred stock
(300)
-
(563)
Proceeds from issuance of common stock
27
1,024
23
Repurchases of common stock
(92)
(157)
(604)
Payment of cash dividends on preferred and common stock
(570)
(447)
(369)
Net cash provided by financing activities
63,885
109,409
11,004
Net increase in cash and cash equivalents
2,579
2,127
162
Cash and cash equivalents at beginning of period
2,565
438
276
Cash and cash equivalents at end of period
$ 5,144
$ 2,565
$ 438
Supplemental Cash Flow Information
Cash paid for:
Interest
Income taxes
Non -cash financing activities:
PCs issued under Guarantor program
Structured Securitizations
Giant PCs issued
Transfers to REO
$ 19,193 $ 14,757 $ 10,824
1,249 299 487
165,019
167,112
76,945
119,565
135,162
84,366
14,341
46,708
61,845
1,041
1,483
1,684
See accompanying Notes to Consolidated Financial Statements.
FREDDIE MAC
Freddie Mac
Notes to Consolidated Financial Statements
Note 1 Freddie Mac (or the "corporation") is a stockholder -owned government -sponsored enterprise ("GSE")
SUMMARY OF established by Congress in 1970 to provide a continuous flow of funds for residential mortgages. Freddie
SIGNIFICANT Mac performs this function by purchasing single-family and multifamily residential mortgages and mortgage -
AC C O U N T I N G related securities in the secondary mortgage market. Freddie Mac uses two principal methods to finance its
POLICIES mortgage -related investments: mortgage securitization financing and debt financing. Each of these two
methods of financing provides different sources and types of revenue for Freddie Mac and also exposes the
corporation to different types and degrees of risk. The obligations of Freddie Mac are not insured or
guaranteed by the United States or any agency or instrumentality of the United States.
Under securitization financing, Freddie Mac securitizes purchased mortgages in the form of guaranteed
mortgage passthrough securities (referred to as "Mortgage Participation Certificates" or "PCs"), which are
issued in exchange for mortgages or sold to investors for cash. The portfolio of mortgages underlying PCs is
an off -balance sheet contingency (referred to as "Total Mortgage Participation Certificates" or "Total PCs").
Through securitization, Freddie Mac increases the liquidity of, and assumes mortgage credit risk on, the
mortgages underlying the PCs. As compensation for enhancing liquidity, assuming credit risk and
administering principal and interest payments, Freddie Mac receives fee income that is recorded as
"Management and guarantee income." Guarantee fees are earned over the lives of the mortgages underlying
PCs, providing Freddie Mac with a steady source of revenue.
Freddie Mac generates fee -for -service revenue through other activities related to securitization financing.
This includes fees earned from the resecuritization of PCs and other mortgage securities primarily into
multiclass PCs that qualify as real estate mortgage investment conduits ("REMICs") under Internal Revenue
Service ("IRS") regulations, or into single -class Giant PCs. Also included are fees earned from seller/servicers
primarily for automated underwriting (Loan Prospector") and electronic network (GoldWorks®) services that
provide seller/servicers with easier access to the secondary mortgage market. Income generated from fee -for -
service activities is recorded as part of "Other income, net." In addition, income is earned through trading
activities conducted by Freddie Mac's Securities Sales and Trading Group and various external money managers
48 in support of the market for Freddie Mac PCs. Income generated from trading activities is recorded as part
of "Net interest income on earning assets" and "Other income, net."
In financing mortgage -related investments with debt, Freddie Mac issues a mixture of short-term debt, and
long-term callable and non -callable debt. Freddie Mac principally issues debt securities to finance mortgage -related
investments held in the retained portfolio. The corporation recognizes net interest income earned on the retained
portfolio, which is the interest income earned on these investments less the interest expense on the interest -bearing
liabilities funding them. The retained portfolio is comprised of unsecuritized "Mortgages" and "Guaranteed
mortgage securities." Guaranteed mortgage securities primarily consist of Freddie Mac PCs, and non -Freddie Mac
mortgage -related securities that include securities from agencies such as the Government National Mortgage
Association ("Ginnie Mae"), and securities collateralized by products such as home equity loans.
Freddie Mac maintains a liquidity and contingency investment portfolio that is also financed principally
by debt. This portfolio is used to manage recurring cash flows and meet other cash management needs, maintain
capital reserves to meet mortgage funding needs, provide diverse sources of liquidity and help manage the
interest -rate risk inherent in mortgage -related investments. The liquidity and contingency investment portfolio
enables Freddie Mac to deploy fully its available capital and helps the corporation fulfill its purpose of providing
a stable and reliable supply of mortgage credit nationwide. As with the retained portfolio, the corporation
recognizes net interest income on the liquidity and contingency investment portfolio.
Further information regarding Freddie Mac's operating results, as segmented on the basis of the two
methods by which it finances mortgage -related investments, is presented in Note 12.
Freddie Mac's financial reporting and accounting policies conform to generally accepted accounting
principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from those estimates. Certain prior year
amounts have been reclassified to conform to the current year presentation. The following is a summary of
the corporation's significant accounting policies.
0 3
FREDDIE MAC
Consolidation
The Consolidated Financial Statements include the accounts of the corporation and its majority -owned
subsidiaries, Home Ownership Funding Corporation, Home Ownership Funding Corporation II and
West*Mac Associates Limited Partnership ("West*Mac"). All material intercompany transactions have been
eliminated in consolidation. Freddie Mac is the majority owner of two real estate investment trust ("REIT")
subsidiaries, Home Ownership Funding Corporation and Home Ownership Funding Corporation II which,
in 1997, issued a total of $4 billion in step-down preferred stock to investors to finance the purchase of
mortgage -related investments. The preferred stock ownership interest in the REIT subsidiaries is reported in
"Debt securities, net," and the related dividends paid by the REIT subsidiaries are reported in interest expense
on long-term debt.
West*Mac is the owner and developer of Freddie Mac's corporate headquarters buildings. The interests
of the minority partners in West*Mac are immaterial in relation to the Consolidated Financial Statements and
are reported in "Other liabilities."
Mortgages and Guaranteed Mortgage Securities
Freddie Mac classifies mortgages as held -for -investment and mortgage -related securities as held -to -maturity,
and reports them at amortized cost when the corporation has the intent and ability to hold them to maturity.
Mortgages that Freddie Mac does not intend to hold for investment are classified as held -for -sale and are reported
at the lower of cost or market value as determined based on outstanding forward sale commitments or current
market prices. Substantially all of the mortgages held -for -sale at December 31, 1999 and 1998 were subject
to forward sale commitments. The lower of cost or market value is calculated based on the aggregate of all
mortgages held -for -sale. Mortgage -related securities that Freddie Mac does not intend to hold to maturity are
classified as available -for -sale and are reported at fair value, with unrealized gains and losses reported in
"Stockholders' equity' on a net -of -tax basis.
Interest income on "Mortgages" and "Guaranteed mortgage securities" is recognized on an accrual basis
unless the collection of interest income is considered doubtful. For single-family mortgages, estimates of
49
uncollectible interest are based on statistical models. For multifamily mortgages, interest income is recognized
on a cash basis when the mortgage is 90 days or more delinquent.
PCs repurchased by Freddie Mac are included in the retained portfolio as "Guaranteed mortgage
securities" and are also included in "Total PCs." Guarantee fee income on these PCs is recorded as part of
"Management and guarantee income." The total mortgage portfolio consists of Total PCs, net of PCs held in
the retained portfolio plus the retained portfolio.
Securitization and Resecuritization Activity
Freddie Mac sells or issues single -class PCs representing undivided interests in conforming single-family and
multifamily mortgages through the securitization process. From securitization, Freddie Mac recognizes fee income
over the lives of the underlying mortgages as "Management and guarantee income." Freddie Mac also resecuritizes
PCs and other mortgage securities primarily into REMICs or Giant PCs. A majority of the fees received from issuing
REMICs and Giant PCs is recognized as "Other income, net" in the period the fees are received. The remaining
portion, which is equal to the estimated future costs of managing the REMICs or Giant PCs, is deferred and
amortized over the weighted average lives of the securities to "Other income, net."
Purchase and Sale Premiums, Discounts and Deferred Fees
Purchase and sale premiums and discounts arise when Freddie Mac purchases mortgage -related investments
and issues PCs at a price above or below the par amount. Generally included are purchase and sale premiums
and discounts related to the purchase and securitization of mortgages, and which primarily represent interest -
only ("IO")-like assets. Also included are purchase discounts and premiums on principal -only ("PO") stripped
securities and other mortgage -related investments. Deferred fees result primarily from various credit
enhancements associated with PC issuances. "Purchase and sale premiums, discounts and deferred fees" are
amortized principally to interest income on the retained portfolio over the estimated weighted average lives of
the underlying mortgages using the effective interest method. The corporation uses actual prepayment
experience and estimates of future prepayments to determine the constant yield needed to apply the effective
; CO A
FREDDIE MAC
interest method. Weighted average life estimates and the rate of amortization are periodically reviewed and
revised, as necessary, to reflect changes in expected prepayment rates.
IO-like assets are subject to significant prepayment risk, which is largely mitigated by PO stripped securities
held in the retained portfolio. These PO and IO-like assets are reported at estimated fair value, with unrealized
gains and losses reported in "Stockholders' equity" on a net -of -tax basis.
Reserve for Mortgage Losses
Management maintains the corporation's "Reserve for losses on retained mortgages" and "Reserve for losses
on Mortgage Participation Certificates" (collectively, "Reserve for mortgage losses") at levels it deems adequate
to absorb estimated losses incurred on the total mortgage portfolio. Reserves are increased through periodic
provisions charged to expense and decreased by charge -offs, net of recoveries. Charge -offs are recognized when
a mortgage is modified in a troubled debt restructuring or foreclosed, and are equal to the cost basis of the
mortgage less the fair value of the mortgage or property acquired.
In estimating losses incurred on the single-family mortgage portfolio, management utilizes a statistically
based model that evaluates numerous factors including, but not limited to, general and regional economic
conditions, expected future default experience and mortgage collateral values. Multifamily mortgages are
individually evaluated for losses, with reserves established to cover collateral deficiencies based on the current fair
value of the underlying properties, less estimated costs to sell and repair the properties and/or remove hazardous
conditions. Management also considers uncertainties related to estimations in the reserve setting process.
Cash and Cash Equivalents
Freddie Mac considers highly liquid investment securities, generally with original maturities of three months
or less and used for cash management purposes, to be cash equivalents. Cash equivalents are reported at cost,
which approximates their fair value.
Investments
50 All investment securities were classified as either available -for -sale or trading at December 31, 1999 and 1998.
Available -for -sale securities are reported at fair value, with unrealized gains and losses reported in "Stockholders'
equity' on a net -of -tax basis. Securities held for trading purposes are reported at fair value, with unrealized
gains and losses reported in current period income. Interest income on investments is recognized on an accrual
basis unless the collection of interest income is considered doubtful, in which case interest income is recognized
on a cash basis.
Real Estate Owned
Real estate owned ("REO") is carried at the lower of cost or fair value less estimated selling costs. Accordingly,
provisions for estimated REO selling costs and for losses occurring subsequent to foreclosure due to changes
in the fair value of the property are recognized through the REO valuation allowance, with a corresponding
charge to "REO operations expense." REO-related expenses incurred and income earned during the holding
period are also included as part of "REO operations expense."
Debt Securities
Debt securities are classified on the Consolidated Balance Sheets as either "Due within one year" or "Due after
one year" based on their contractual maturity. Interest expense on debt securities is classified on the Consolidated
Statements of Income as either short-term or long-term, based on the effective repricing dates when the debt
securities are issued, giving effect to derivative financial instruments linked to contractual debt.
Debt securities denominated in a foreign currency are translated into U.S. dollars using foreign exchange
spot rates as of the date of the balance sheet. Interest expense amounts are translated into U.S. dollars using
the average foreign exchange spot rate during the year. Gains and losses resulting from the translation of assets
and liabilities are recorded in "Other income, net." The corporation uses foreign currency swaps to hedge against
the risk of changes in foreign currency exchange rates.
FREDDIE MAC
Debt issuance costs are deferred and amortized using the effective interest method over the period during
which the related indebtedness is outstanding or, for callable debt, the period during which the related
indebtedness is expected to be outstanding.
Security Program Variances
Timing differences between Freddie Mac's receipt of principal and interest payments from seller/servicers
and subsequent passthrough to PC investors results in the liability "Principal and interest due to Mortgage
Participation Certificate (PC) investors" ("P&I due"). P&I due balances arising from the passthrough of
prepaid mortgages are interest -bearing at the PC coupon rate from the date of prepayment until the date
the PC security balance is reduced, and non -interest bearing from the date the PC security balance is
reduced to the date of payment to the PC investor. Interest expense resulting from P&I due balances is
reported as "Interest expense due to security program cycles," and is recognized over the period between
the date of prepayment and the date of payment to the PC investor, consistent with the corresponding
period during which investment income is earned on the prepayment proceeds.
Income Taxes
Freddie Mac uses the asset and liability method of accounting for income taxes. Under the asset and liability
method, deferred tax assets and liabilities are recognized based upon the expected future tax consequences of
existing temporary differences between the financial reporting and the tax reporting basis of assets and liabilities
using enacted statutory tax rates. To the extent tax rates change, deferred tax assets and liabilities are adjusted
in the period the tax change is enacted. Deferred tax expense represents the net change in the deferred tax asset
or liability balance during the year. This amount, together with income taxes payable for the current year,
represents the total "Provision for income taxes" for the year.
Derivative Financial Instruments
Freddie Mac enters into derivative financial instruments as an end user and not for trading or speculative
purposes. These instruments are combined with underlying liabilities or assets to synthetically create debt 51
instruments or interest -earning assets that achieve lower effective financing costs or higher effective asset yields
than those available on alternative instruments. Derivative financial instruments also are used to reduce the
corporation's exposure to interest -rate and/or foreign currency risk. When derivative financial instruments meet
specific criteria, they are accounted for either as synthetic instruments or as hedges. When these financial
instruments fail to meet such criteria, they are reported at fair value, with related gains or losses reported in "Other
income, net.
Interest -Rate Contracts: Synthetic instrument accounting is applied to interest -rate contracts (which
include interest -rate swaps, caps, floors and corridors) when the contract has been entered into, purchased or
sold with the express intent of synthetically altering the characteristics of an underlying financial instrument.
Interest -rate contracts may alter the interest rate, call feature or maturity date of the related asset or liability.
When used for this purpose, the net differential received or paid under interest -rate contracts is recognized on
an accrual basis as an adjustment to interest income or expense on the associated assets or liabilities. Net
premiums paid for interest -rate contracts are deferred and amortized to interest income or expense over the
terms of the contracts. Gains and losses on terminated interest -rate contracts are deferred and amortized over
the remaining effective lives of the related underlying assets or liabilities.
Freddie Mac also enters into interest -rate contracts to hedge against the adverse effects of movements in
interest rates on existing debt or on anticipated issuances of debt. Gains and losses from these derivative
transactions that are designated as hedges are deferred and, upon termination of these transactions, are amortized
as adjustments to interest expense over the life of the underlying debt.
0 v
FREDDIE MAC
Futures: Freddie Mac enters into futures contracts to hedge against the adverse effects of movements in
interest rates on existing debt or on anticipated issuances of debt. Futures contracts are exchange -traded
agreements. All changes in the value of open futures contracts are settled in cash on a daily basis. Gains and
losses from these derivative transactions that are designated as hedges are deferred and, upon termination of
these transactions, are amortized as adjustments to interest expense over the life of the underlying debt.
Options: Freddie Mac enters into options to hedge against the adverse effects of movements in interest
rates on existing debt or on anticipated issuances of debt. The net option premium paid is deferred and
amortized to interest expense over the life of the option. Intrinsic value gains or losses (representing the amount
in excess of the strike price of the related option) from these derivative transactions that are designated as hedges
are deferred and, upon termination of these transactions, are amortized as adjustments to interest expense over
the life of the underlying debt. All other gains or losses associated with the terminated derivative transactions
are recorded in "Other income, net."
Treasury -Based Contracts: Freddie Mac enters into non -exchange traded contracts using U.S. Treasury
securities to hedge against the adverse effects of movements in interest rates on existing debt or on anticipated
issuances of debt. Gains and losses from these derivative transactions that are designated as hedges are deferred
and, upon termination of these transactions, are amortized as adjustments to interest expense over the life of
the underlying debt.
Foreign Currency Swaps: Synthetic instrument accounting is applied to foreign currency swaps that are
entered into in conjunction with the purchase of assets or issuance of debt denominated in a foreign currency
and that offset the foreign currency risk associated with such assets or debt. The net differential received or paid
under foreign currency swaps is recognized on an accrual basis as an adjustment to interest income or expense
on the related assets or debt. The net receivable or payable balances for each currency swap are presented in
either "Other assets" or "Other liabilities." All assets and liabilities denominated in a foreign currency are translated
52 into U.S. dollars using foreign exchange spot rates as of the date of the balance sheet. Interest income and expense
amounts are translated into U.S. dollars using the average foreign exchange spot rate during the year. Gains and
losses resulting from the translation of assets and liabilities are recorded in "Other income, net."
Earnings Per Common Share
"Earnings per common share -basic" are computed as net income available to common stockholders divided
by the weighted average common shares outstanding ("Weighted average common shares outstanding -basic")
for the period. "Earnings per common share -diluted" are computed as net income available to common
stockholders divided by the total of weighted average common shares outstanding and the effect of dilutive
common equivalent shares outstanding ("Weighted average common shares outstanding -diluted") for the
period. Dilutive common equivalent shares reflect the assumed issuance of additional common shares pursuant
to certain of the corporation's stock -based compensation plans (see Note 8) that could potentially reduce or
"dilute" earnings per share, based on the treasury stock method.
Table 1.1 provides a reconciliation of "Weighted average common shares outstanding -basic" to "Weighted
average common shares outstanding -diluted."
Table 1.1
Year Ended December 31, 1999 1998 1997
(shares in thousands)
Weighted average common shares outstanding -basic
696,042
679,790
684,937
Effect of dilutive common equivalent shares outstanding
4,169
4,868
6,764
Weighted average common shares outstanding -diluted
700,211
684,658
691,701
057
FREDDIE MAC
Comprehensive Income
Comprehensive income represents net income plus other components of comprehensive income which, for
Freddie Mac, include those changes in the fair value of certain investments that are currently reported as "Net
unrealized (loss) gain on certain investments reported at fair value" in "Stockholders' equity." Table 1.2 presents
the components of the change in the fair value of these investments.
Table 1.2
Year Ended December 31, 1999 1998 1997
(dollars in millions)
Net unrealized (losses) gains arising during the period,
net of tax (benefit) expense of $(702) million, $(11) million
and $82 million, respectively $ 0,303) $ (20) $153
Reclassification of net realized losses (gains) to income,
net of tax (expense) benefit of $9 million, $(3) million,
and $3 million, respectively 17 (6) 5
Change in net unrealized (loss) gain on certain investments
reported at fair value, net of tax (benefit) expense $ (1,286) $ (26) $158
Consolidated Statements of Cash Flows
The Consolidated Statements of Cash Flows include supplemental cash flow information related to Freddie
Mac's non -cash financing transactions involving the securitization of mortgages, resecuritization of existing
PCs and foreclosure on defaulted mortgages. Non -cash financing transactions related to mortgage securitization
and PC resecuritization include: (i) the exchange of mortgages with a seller for a like amount of PCs ("Guarantor
Program'); (ia) the exchange of existing single -class PCs with a seller for a like amount of multiclass PCs, backed
by the identical single -class PCs ("REMIC Program") and (iii) the exchange of existing Freddie Mac PCs with
a seller for an interest in a Freddie Mac PC backed by a group of PCs ("Giant PC Program"). 53
Newly Issued Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
supersedes all previous accounting and reporting standards for derivative financial instruments and hedging
activities. The new standard requires all derivative financial instruments (including certain derivatives embedded
in other financial instruments) to be recorded on the balance sheet as either assets or liabilities measured at
their fair value. Specifically, for a derivative financial instrument qualifying as a hedge of the fair value of a
fixed-rate instrument, fair value gains or losses on the derivative are to be reported in income, along with
offsetting fair value losses or gains on the hedged instrument attributable to the risk being hedged. For a
derivative financial instrument qualifying as a hedge of the cash flows associated with a variable -rate instrument
or an anticipated transaction, fair value gains or losses on the derivative are to be reported as an adjustment to
"Stockholders' equity" as a component of other comprehensive income, and recognized in income over the
period or periods during which the hedged instrument or anticipated transaction affects income. For a derivative
financial instrument not qualifying as a hedge, fair value gains and losses on the derivative are to be reported
in income. In May 1999, the FASB voted to delay the implementation date of this accounting standard for
one year, changing Freddie Mac's SFAS No. 133 implementation date to January 1, 2001. The cumulative
effects of this implementation will be reported as a change in accounting principle. Management is continuing
to assess the potential impact of this accounting standard on the corporation's reported results of operations
and financial position.
FREDDIE MAC
54
Note 2
The retained portfolio includes "Mortgages" and "Guaranteed mortgage securities,"
which are comprised of Freddie
MORTGAGES
Mac PCs and non -Freddie Mac mortgage -related securities. Table 2.1 summarizes the mortgages and mortgage -
related securities in the retained portfolio by mortgage product We.
A N D
GUARANTEED
MORTGAGE
Table 2.1
SECURITIES
December31,
1999
1998
(dollars in millions)
Mortgages and Freddie Mac PCs
Single-family:
30-year fixed-rate")
$ 200,137
$ 168,788
15-year fixed-rate
50,989
43,276
ABMs/floating-rate
3,162
2,999
Balloon/resets
1,231
2,151
Multifamily
12,355
7,978
Total mortgages and Freddie Mac PCs
267,874
225,192
Non -Freddie Mac Securities (2)
Fixed-rate
42,626
22,982
ARMs/floating-rate
13,943
6,835
Total non -Freddie Mac securities
56,569
29,817
Total retained portfolio(''
$ 324,443
$ 255,009
(1) Includes 20-year fried -rate mortgages, second mortgages and mobile home loans.
(2) Non -Freddie Mac securities held in the retained portfolio are categorized based upon the product type of the mortgage collateral underlying the securio
(3) Excludes related unamortized purchase and sak premiums, discounts and deferred fees, reserve for losses on retained mortgages, and net unrealized (loss)
gain on availablefor-sak guaranteed mortgage securities.
Table 2.2 summarizes the mortgage -related securities included in "Guaranteed mortgage securities" by
security product type.
Table 2.2
December 31,
1999
1998
(dollars in millions)
Freddie Mac PCs
$ 211,198
$ 168,108
Non -Freddie Mac securities:
Agency securities
19,860
8,207
Non -agency securities:
Home equity
13,808
5,923
Commercial mortgage -backed securities
7,822
6,592
Mortgage revenue bonds
5,690
4,640
Manufactured housing
4,693
1,711
Other mortgage -related securities
4,696
2,744
Total non -Freddie Mac securities
56,569
. 29,817
Total guaranteed mortgage securities"'
$ 267,767
$197,925
(1) Excludes related unamortiztd purchase and salepremiums, discounts and deferred fits and net unrealized (loss) gain on available for-sak guaranteed
mortgage securities.
FREDDIE MAC
O D
At December 31, 1999 and 1998, the retained portfolio included $0.6 billion and $3.3 billion,
respectively, of mortgages held -for -sale. The fair value of mortgages held -for -sale at December 31, 1999 and
1998 approximated their carrying value.
Table 2.3 summarizes the estimated fair value and corresponding gross unrealized gains and losses for
mortgage -related securities held in the retained portfolio.
Table 2.3
December 31,
1999
1998
Gross
Gross
Gross
Gross
Amortized Unrealized Unrealized
Estimated
Amortized
Unrealized
Unrealized Estimated
Cost
Gains
Losses
Fair Value"'
Cost
Gains
Losses Fair Value"'
(dollars in millions)
Held -to -maturity
$218,977
$ 258
$ (9,341)
$ 209,894
$171,830
$ 2,177
$ 0,052) $172,955
Available-for-sale(2)
49,008
195
(1,797)
47,406
26,756
503
(361) 26,898
Total
$267,985
$ 453
$01,138)
$ 257,300
$198,586
$ 2,680
$ 0,413) $199,853
(1) Estimated fair value includes the fair value of asset -linked drrivativt financial instruments which totaled $(3) million and $045) million at December 31,
1999 and 1998, respectively (see Notes 9 and 13).
(2) Includes I04ke assets and certain related amounts reported in `Purchase and Sale Premiums, Discounts and Deferred Fees. "
At December 31, 1999 and 1998, "Stockholders' equity" included net unrealized (losses) gains on
available -for -sale mortgage -related securities, net of tax, totaling $(1.040) billion and $93 million, respectively.
In 1999, 1998 and 1997, Freddie Mac sold $1.214 billion, $227 million and $202 million, respectively, of
mortgage -related securities from its available -for -sale portfolio, resulting in net realized gains (losses) included
in income of $0.5 million ($0.3 million, net of tax), $5.4 million ($3.5 million, net of tax) and $(0.8) million
[$(0.5) million, net of tax], respectively. The cost basis of the available -for -sale securities sold was determined
using the specific identification method.
55
Note 3 Freddie Mac maintains a "Reserve for losses on retained mortgages" and a "Reserve for losses on Mortgage
Participation Certificates" (collectively,
"Reserve for mortgage losses") to provide for estimated losses incurred
RESERVE FOR
on the total mortgage portfolio. Table 3.1 summarizes the activity in the "Reserve for mortgage losses."
MORTGAGE
LOSSES Table 3.1
Year Ended December 31,
1999 1998 1997
(dollars in millions)
Beginning balance
$ 768 $ 694 $ 680
Provision
60 190 310
Charge -offs, net of recoveries
(56) (116) (296)
Ending balance
$ 772 $ 768 $ 694
() 6 0
FREDDIE MAC
Note 4
INVESTMENTS
56
The "Reserve for mortgage losses" consists of a general reserve and a specific valuation allowance related to
impaired loans. The population of impaired loans includes multifamily loans for which it is probable that the
corporation will not receive all amounts contractually due, as well as all troubled debt restructurings (both single-
family and multifamily). The corporation's recorded investment in impaired loans and the related valuation allowance
are summarized in Table 3.2.
Table 3.2
December 31, 1999 1998
Recorded Valuation Net Recorded Valuation Net
Investment Allowance Investment Investment Allowance Investment
(dollars in millions)
Impaired loans with:
Related valuation allowance $ 62 $ (11) $ 51 $ 90 $ 0 7) $ 73
No related valuation allowance 545 — 545 611 — 611
Total $ 607 $ (11) $ 596 $ 701 $ 0 7) $ 684
For the years ended December 31, 1999, 1998 and 1997, the average recorded investment in impaired
loans was $655 million, $806 million and $952 million, respectively. Interest income recognized on impaired
loans was approximately $48 million, $53 million and $66 million for the years ended December 31, 1999, 1998
and 1997, respectively. Interest income on troubled debt restructurings is recognized on an accrual basis. Interest
income on other impaired loans is recognized on a cash basis.
Table 4.1 summarizes the amortized cost and carrying value of the liquidity and contingency investment
portfolio. The remaining contractual maturities of available -for -sale investments are summarized in Table 4.2.
Table 4.1
December 31, 1999 1998
Gross Gross Gross Gross
Amortized Unrealized Unrealized Carrying Amortized Unrealized Unrealized Carrying
Cost Gains Losses Valued' Cost Gains Losses Value"'
(dollars in millions)
Obligations of states and
municipalities
$ 3,530
$ 1
$ (18)
$ 3,513
$ 2,834
$ 9
$ (1)
$ 2,842
Asset -backed securities
10,387
2
(84)
10,305
7,144
13
(33)
7,124
Corporate debt securities
3,344
1
(95)
3,250
3,493
53
(9)
3,537
Treasury securities
—
—
—
—
355
2
—
357
Auction -rate preferred stock
629
1
(2)
628
1,471
8
—
1,479
Other available -for -sale
securities
127
—
—
127
121
—
—
121
Total available -for -sale
investments
$18,017
$ 5
$ (199)
17,823
$15,418
$ 85
$ (43)
15,460
Mortgage -related securities
held for trading purposes 121
2,556
42349
Federal funds sold
7,125
6,571
Eurodollar time deposits
3,420
13,953
Commercial paper
666
4,258
Accrued interest receivable
157
162
Total investments
$ 31,747
$ 44,753
(])The carrying value for availablefor-sak investments and mortgage -related securities held for trading purposes represents their estimated fair value Estimated
fair value includes the fair value ofasset-linked derivative financial instruments which totaled $5 million and $(3) million at December 31, 1999 and 1998
(see Notes 9 and 13). The carrying value for Federal funds sold, Eurodollar time deposits, commercial paper and accrued interest receivable is amortized cost. _
(2) Net tmdinggains totaled $21 million and $23 million for the years ended December 31, 1999 and 1998, respectively. 061
FREDDIE MAC
Note 5
SECURITIES
PURCHASED
UNDER
AGREEMENTS
TO RESELL
Table 4.2
December 31,
1999
1998
Amortized
Estimated
Amortized
Estimated
Cost
Fair Value
Cost
Fair Value
(dollars in millions)
Due within one year
$ 528
$ 527
$ 1,910
$ 1,917
Due after one year through five years
3,673
3,636
2,649
2,665
Due after five years through 10 years
1,464
1,406
2,090
2,124
Due after 10 years
1,965
1,949
1,625
1,630
7,630
7,518
8,274
8,336
Asset -backed securities"'
10,387
10,305
7,144
7,124
Total
$18,017
$17,823
$ 15,418
$ 15,460
(1) The contractual maturities ofasset-backed securities may not represent their expected lives as obligations underlying these securities may be prepaid at any
time without pena4
At December 31, 1999 and 1998, "Stockholders' equity" included net unrealized (losses) gains on
available -for -sale investments, net of tax, totaling $026) million and $27 million, respectively. In 1999, 1998
and 1997, Freddie Mac sold approximately $58 billion, $12 billion and $1 billion respectively, of available -
for -sale investments, resulting in net realized (losses) gains included in income of $(27) million [$(17) million,
net of tax] $3 million [($2 million, net of tax)], and $(6) million, [$(4) million, net of tax], respectively.
Securities purchased under agreements to resell (reverse repurchase agreements) are effectively collateralized
lending transactions in that Freddie Mac purchases a security with an agreement to sell back exactly the same
security. Table 5.1 summarizes information regarding the balances and maturities of reverse repurchase agreements.
Table 5.1
1999 1998
(dollars in millions)
Average outstanding balance during the year $ 5,182 $ 5,736
Maximum month -end outstanding balance $ 4,961 $ 4,997
Due within one year $ 4,951 $ 1,693
Due after one year through five years 10 63
Balance, December 31 $ 4,961 $ 1,756
The amount that a Freddie Mac customer can borrow under a reverse repurchase agreement is generally
limited , to a maximum of 97 percent of the initial fair value of the securities collateralizing the agreement,
depending on the type of collateral and/or the credit quality of the customer. The master agreements governing
reverse repurchase agreement transactions provide for the delivery of securities collateralizing the agreements
to Freddie Mac (or its custodian bank) and provide that Freddie Mac has the right to sell the collateral in the
event of borrower default. All reverse repurchase agreements permit Freddie Mac to obtain additional collateral
as margin if the fair value of the securities subject to the reverse repurchase agreement declines. As Freddie Mac
does not maintain control over securities received as collateral, these securities are not recorded as assets on the
Consolidated Balance Sheets.
57
06"
FREDDIE MAC
58
Note 6
Table 6.1 provides a summary of Freddie Mac's REO activity.
REAL ESTATE
OWNED
Table 6.1
R E0,
Valuation
R E0,
Gross
Allowance
Net
(dollars in millions)
Balance, December 31, 1996
$ 892
$ (84)
$ 808
Additions
1,684
(108)
1,576
Dispositions and write -downs
(1,786)
124
(1,662)
Balance, December 31, 1997
790
(68)
722
Additions
1,483
(90)
1,393
Dispositions and write -downs
(1,641)
100
(1,541)
Balance, December 31, 1998
632
(58)
574
Additions
1,041
(66)
975
Dispositions and write -downs
(1,185)
74
(11111)
Balance, December 31, 1999
$ 488
$ (50)
$ 438
Note 7
Contractual Debt
Table 7.1 provides information relating to debt securities and subordinated borrowings. Table 7.2 provides
DEBT
additional information related to amounts with original maturities of one year or
less.
SECURITIES AND
SUBORDINATED
Table 7.1
BORROWINGS
December 31, 1999
1998
Balance,
Effective
Balance,
Effective
Net"'
Rate"'
Net`11
Rate`2'
(dollars in millions)
Due within one year:
Discount notes, medium -term notes and
securities sold under agreements to repurchase $ 166,203
5.42%
$ 183,256
5.11 %
Current portion of long-term debt 9,322
6.28%
10,615
6.38%
Total due within one year 175,525
5.47%
193,871
5.18%
Due after one year") 185,186
6.24%
93,525
6.58%
Total $ 360,711
$ 287,396
(])Net of unamortized discounts and hedginggains totaling $21.2 billion and $16.4 billion at December 31, 1999 and 1998, respectively
(2)Represents the weighted average effective rate at the end of the period, and includes the amortization of discounts or premiums, hedging gains or losses and
debt issuance costs.
(3)Includes subordinated borrowings of $130 million (8.93 percent effective rate) and $162 million (8.98 percent effective rate) at December 31, 1999 and
1998, respectively net of unamortized discounts and fees totaling $0.4 billion at December 31, 1999 and 1998.
FREDDIE MAC
063
Table 7.2
1999
Average Balance
Maximum Balance
Outstanding
Effective
Outstanding at
Balance, Net
During the Year
Rate
Any Month End
(dollars in millions)
Discount notes
$157,439
$ 167,595
5.41%
$176,118
Medium -term notes
8,764
7,524
5.73%
10,002
Securities sold under agreements to repurchase
—
401
—
1,283
Total
$166,203
$ 175,520
5.42%
1998
Average Balance
Maximum Balance
Outstanding
Effective
Outstanding at
Balance, Net
During the Year
Rate
Any Month End
(dollars in millions)
Discount notes
$ 172,979
$ 119,113
5.09%
$ 174,192
Medium -term notes
9,572
7,819
5.38%
9,571
Securities sold under agreements to repurchase
705
568
5.64%
2,213
Total
$ 183,256
$ 127,500
5.11 %
Discount notes and medium -term notes are unsecured general obligations of Freddie Mac. Securities sold
under agreements to repurchase are effectively collateralized borrowing transactions in that Freddie Mac sells PCs
with an agreement to repurchase PCs that are substantially the same. These agreements require the underlying
PCs to be delivered to the dealers who arranged the transactions. 59
Subordinated borrowings, which are reported net of their unamortized discount, consist of capital
debentures and zero -coupon capital debentures that are subordinate to all obligations of Freddie Mac, including
obligations of others that have been guaranteed by Freddie Mac, whether existing at the date of issuance or
thereafter.
A significant portion of Freddie Mac's long-term debt is callable. Callable debt gives Freddie Mac the
option to redeem the debt security in whole or in part at either a specified call date or at any time on or after
a specified call date. Table 7.3 summarizes the maturities, balances and effective interest rates at December 31,
1999 for callable debt by call period.
Table 7.3
Call Period Balance, Net Effective
Inception Date Maturity of Discount Rate
(dollars in millions)
2000
2000-2028
$ 80,779
6.31 %
2001
2001-2029
14,404
6.78%
2002
2002-2029
6,497
6.84%
2003
2003-2019
2,367
6.61 %
2004
2004-2022
411
7.20%
Thereafter
2005-2029
2,411
7.24%
Total
$ 106,869
6.44%
064
FREDDIE MAC
60
Table 7.4 summarizes the contractual maturities of short- and long-term debt securities and subordinated
borrowings outstanding at December 31, 1999, assuming callable debt is W paid at scheduled maturity and
00 redeemed at the initial call date.
Table 7.4
Scheduled
Maturity
Assuming Callable
Debt is Redeemed at
Initial Call Date
(dollars in millions)
2000
$ 172,250
$ 251,199
2001
27,431
29,365
2002
19,108
17,874
2003
16,774
8,086
2004
30,145
13,608
2005
5,800
769
2006
10,524
2,339
2007
4,039
2,418
2008
22,821
12,928
2009
29,858
15,755
Thereafter
21,961
6,370
Total
$ 360,711
$ 360,711
In 1999, the corporation extinguished $821 million of debt prior to its scheduled maturity. As a result,
Freddie Mac recognized extraordinary net gains totaling $8 million ($5 million, net of tax), or $0.01 basic
and diluted earnings per common share in 1999.
Synthetic Debt
A significant portion of Freddie Mac's debt financing is executed in conjunction with debt -linked derivative
financial instruments (see Note 9). Debt -linked derivative financial instruments, when combined with the
underlying debt instruments, synthetically create debt instruments that achieve lower effective financing costs
than those available on alternative instruments, and/or reduce the corporation's exposure to interest -rate risk.
Debt -linked derivative financial instruments effectively convert short-term debt to long-term fixed-rate debt,
or convert long-term fixed-rate debt to short-term debt, as illustrated in Table 7.5.
Table 7.5
December 31,
1999
1998
(dollars in millions)
Debt securities due within one year
$ 175,525
$ 193,871
Fixed-rate debt due within one year
(9,322)
(10,615)
Floating-rate long-term debt
-
640
Derivative financial instruments converting short-term to long-term, net
(139,332)
(99,243)
Effective short-term debt
$ 26,871
$ 84,653
Effective rate
5.64%
5.25%
Debt securities due after one year"'
$ 185,186
$ 93,525
Fixed-rate debt due within one year
9,322
10,615
Floating-rate long-term debt
-
(640)
Derivative financial instruments converting short-term to long-term, net
139,332
99,243
Effective long-term debt
$ 333,840
$ 202,743
Effective rate
6.11 %
6.22%
FREDDIE MAC
(1) Indluda subordinated borrowings.
r
Table 7.6 summarizes the effective maturity and the earliest effective repricing date of synthetic short- and long-
term debt securities and subordinated borrowings outstanding at December 31, 1999.
Table 7.6
Effective Earliest Effective
Maturity Repricing Date
(dollars in millions)
2000
$ 57,660
$ 136,791
2001
41,950
45,937
2002
34,134
35,550
2003
36,227
27,977
2004
50,987
35,859
2005
9,864
1,993
2006
12,021
3,934
2007
3,259
8,827
2008
31,622
18,414
2009
57,940
37,837
Thereafter
25,047
7,592
Total
$ 360,711
$ 360,711
Note 8 Common Stock
STOCKHOLDERS' In November 1998, Freddie Mac sold 17.1 million shares of common stock from its treasury. The stock was
EQUITY sold at a price of $58.625 per share, resulting in net proceeds to Freddie Mac of $975 million. These shares
were sold in an underwritten public offering. Costs incurred in connection with the issuance of common stock
are charged to "Additional paid -in capital." 61
Preferred Stock
Freddie Mac issued 3.0 million shares of 5.1 % preferred stock on March 19,1999, 5.0 million shares of 5.79%
preferred stock on July 21, 1999 and 5.75 million shares of variable -rate preferred stock on November 5, 1999.
All 11 classes of preferred stock outstanding at December 31, 1999 have a par value of $1 per share, and are
redeemable (on specified dates) at the corporation's option at their redemption price (or redemption value)
plus dividends accrued through the redemption date. In addition, all 11 classes of preferred stock are perpetual
and non -cumulative, and carry no significant voting rights or rights to purchase additional Freddie Mac stock
or securities. Costs, incurred in connection with the issuance of preferred stock are charged to "Additional paid -
in capital." On February 12, 1999, Freddie Mac redeemed all outstanding shares of the 6.72% preferred stock
at its $25 per share redemption price, plus accrued dividends. Table 8.1 provides a summary of Freddie Mac's
preferred stock outstanding at December 31, 1999.
066
FREDDIE MAC
Table 8.1
Redemption Total
Issue Shares Shares Total Price Outstanding Redeemable
Date Authorized Outstanding Par Value per Share Balance") On or After
(shares and dollars in millions, except redemption price per share)
1996 Variable -rate(''
April 26, 1996
5.00
5.00
$ 5.00
$ 50.00 $
250
June 30, 2001
6.125%
November 1, 1996
5.75
5.75
5.75
50.00
287
December 31, 2001
6.14%
June 3, 1997
12.00
12.00
12.00
50.00
600
June 30, 2002
5.81 %
October 27, 1997
3.00
3.00
3.00
50.00
150
October 27, 1998
5%
March 23, 1998
8.00
8.00
8.00
50.00
400
March 31, 2003
5.1 %
September 23, 1998
8.00
8.00
8.00
50.00
400
September 30, 2003
1998 Variable-rate(3)
September 23, 1998
4.40
4.40
4.40
50.00
220
September 30, 2003
5.3%
October 28, 1998
4.00
4.00
4.00
50.00
200
October 30, 2000
5.1%
March 19, 1999
3.00
3.00
3.00
50.00
150
March 31, 2004
5.79%
July 21, 1999
5.00
5.00
5.00
50.00
250
June 30, 2009
1999 Variable-rate(4)
November 5, 1999
5.75
5.75
5.75
50.00
288
December 31, 2004
Total
63.90
63.90
$ 63.90
$ 3,195
(1) Amounts stand at redemption value.
(2) The dividend rate resets quarterly and is equal to the sum of the three-month London Interbank Offered Rau ("LIBOR) plus one percent divided by
1.377, and is capped at 9.00 percent.
(3) Includes 1.4 million shares subsequently issued on September 29, 1998. The dividend rate resets quarterly and is equal to the sum of the three-month
LIBOR rate plus one percent divided by 1.377, and is capped at 7.50 percent.
(4) Initial dividend rate is 5.97percent per annum through December 31, 2004. Dividend rate resets on January 1, 2005 and on January 1 everyfive years
thereafter based on a five year constant maturity Treasury rate, which is capped at 11. 00percent. Optional redemption on December 31, 2004 and on
December 31 everyfive years thereafter.
The dividend rate on the 5.1 % (1998 issue), 1998 variable -rate, 5.3%, 5.1 % (1999 issue), 5.79% and
1999 variable -rate preferred stock will increase if, prior to September 23, 2000, September 23, 2000, April
62 28, 2000, September 19, 2000, January 21, 2001 and May 5, 2001, respectively, the Internal Revenue Code
of 1986 is amended to reduce the dividends -received deduction from the current 70 percent rate. The increase
to the dividend rates will be equal to the amount necessary to offset the effect of the reduction in the dividends -
received deduction. However, no additional adjustment will be made to the extent the dividends -received
deduction is reduced below 50 percent. In the case of the 1998 and 1999 variable -rate preferred stock, such
adjustment may result in a dividend rate in excess of 7.50 percent and 11.00 percent, respectively.
067
FREDDIE MAC
Dividends Declared
Table 8.2 summarizes the cash dividends declared per share on Freddie Mac's common and preferred stock.
Table 8.2
Year Ended December 31,
1999
1998
1997
Common
$ 0.60
$ 0.48
$ 0.40
Preferred:
7.90%''
-
-
0.99
6.72%121
-
1.68
1.68
1996 variable -rate
2.35
2.46
2.48
6.125%
3.06
3.06
3.06
6.14%
3.07
3.07
1.77
5.81%
2.91
2.91
0.51
5%
2.50
1.92
-
5.1% (1998 issue)
2.55
0.69
-
1998 variable -rate
2.35
0.65
-
5.3%
2.65
0.46
-
5.1 % (1999 issue)
1.99
-
-
5.79%
1.28
-
-
1999 variable -rate
0.46
-
-
(1) The 7.90% preferred stock was redeemed on July 1, 1997.
(2) The 6.72% promd stock was redeemed on February 12, 1999.
Common Stock Repurchase Program
In September 1997, Freddie Mac's Board of Directors (the "Board") authorized the corporation to repurchase
up to five percent, or approximately 34 million shares, of its common stock outstanding as of September 5, 63
1997. Under this authorization, Freddie Mac repurchased approximately 1.9 million outstanding common
shares in each of 1999 and 1998.
Stock -Based Compensation
Freddie Mac has three stock -based compensation plans: the Employee Stock Purchase Plan (the "ESPP"), the
1995 Stock Compensation Plan (the "Employee Plan") and the 1995 Directors' Stock Compensation Plan
(the "Directors' Plan"). Freddie Mac applies Accounting Principles Board Opinion 25 and related interpretations
in accounting for the ESPP and the Employee Plan. SFAS No. 123, "Accounting for Stock -Based
Compensation," is used to account for stock compensation granted under the Directors' Plan.
Employee Stock Purchase Plan: Freddie Mac has established an ESPP under which shares of common
stock may be purchased by full-time and part-time employees continuously working 20 or more hours per
week or on certain types of approved paid or unpaid leave. The maximum market value of stock available for
annual purchase was $10,000 per employee in 1999. The purchase price under the ESPP in 2000 will be equal
to 85 percent of the fair value of the stock on the subscription (grant) date, August 2, 1999, or the exercise
date, July 31, 2000, whichever is lower. The ESPP is a non -compensatory plan and, as a result, no compensation
expense is recognized for stock purchase options granted under the ESPP.
On August 2, 1999, employees pledged to purchase 437,317 shares on July 31, 2000. Employees purchased
40.0,132 and 529,354 shares for the years ended December 31, 1999 and 1998, respectively.
The per share weighted average fair value of stock purchase options granted under the ESPP in 1999
and 1998 as of the grant date was $15.00 and $11.64, respectively.
k_ 068
FREDDIE MAC
1995 Stock Compensation Plan: Under the Employee Plan, Freddie Mac is permitted to grant to employees
stock -based awards, including stock options, dividend rights, restricted stock and stock appreciation rights
("SARs"). All such awards are forfeitable for at least one year after the date of grant, and Freddie Mac has the
right to impose performance conditions with respect to any awards under the Employee Plan. To date, no SARs
have been granted under the Employee Plan.
Stock options granted under the Employee Plan generally allow for the purchase of Freddie Mac's common
stock at a price equal to the fair value of the common stock on the grant date. Options generally may be exercised
for a period of 10 years from the grant date, subject to a vesting schedule commencing on the grant date. The
grant or exercise of such options does not result in compensation expense since the exercise price is equal to
the fair value of the stock on the grant date.
Dividend rights provide participants with the right to receive, at the time stock options are exercised or
upon expiration, an amount equal to the dividends paid on the stock from the date the options were granted.
Compensation expense associated with dividend rights is recognized when dividends are declared, based on
the amount of dividends declared.
Restricted stock entitles participants to all the rights of a stockholder, except that the shares awarded are
subject to a risk of forfeiture and may not be disposed of by the participant until the end of the restricted period
established by the corporation. The value of restricted shares awarded is amortized to compensation expense
over the restricted or vesting period. During 1999, 259,980 shares of restricted stock were granted under the
Employee Plan. At December 31, 1999, 789,299 shares of restricted stock granted under the Employee Plan
remained outstanding.
1995 Directors' Stock Compensation Plan: Under the Directors' Plan, Freddie Mac is permitted to grant
stock options with dividend rights, restricted stock and restricted stock units to non -employee members of the
Board. The accounting for dividend rights and restricted stock granted under the Directors' Plan is identical
to that described above for the Employee Plan. Restricted stock units represent a contractual right to receive
64 one share of common stock at a specified future date for each restricted stock unit. The accounting for restricted
stock units is identical to that of restricted stock. During 1999, 14,196 restricted stock units were granted under
the Directors' Plan. At December 31, 1999, 35,578 shares of restricted stock and restricted stock units granted
under the Directors' Plan remained outstanding.
Non -employee Directors are granted the option to purchase Freddie Mac common stock valued at
$125,000 ($250,000 in the case of a newly elected or appointed Director). These options have an exercise price
equal to the fair value of the common stock at the date of grant, and may be exercised for a period of 10 years
from the grant date, subject to a five-year vesting period. The fair value of the options granted is deferred and
amortized against income over the vesting period. The Directors' Plan also provides for annual awards to each
non -employee Director of restricted stock units valued at $65,000 ($130,000 in the case of a newly elected or
appointed Director) on the date of grant. Awards of both stock options and restricted stock units become
exercisable at the rate of 20 percent for each of five years following the grant date. Newly elected or appointed
Directors who were granted the larger amount of stock options and stock units in their first year of service do
not receive grants of stock options or stock units during their second year of service.
Compensation Expense: Actual compensation expense related to stock -based compensation plans charged
to income was $14.7 million, $10.4 million and $8.0 million for the years ended December 31, 1999, 1998
and 1997, respectively. Compensation expense is recognized for dividend rights and restricted stock for all plans
and all stock option awards made under the Directors' Plan.
Tabk 8.3 summarizes the pro forma net income and related basic and diluted earnings per common share,
had compensation expense for stock options granted under the ESPP and Employee Plan been determined
based on their fair value at the grant dates (the fair value method as described in SFAS No. 123).
069
FREDDIE MAC
Table 8.3
Year Ended December 31,
1999 1998 1997
(dollars in millions except per share amounts)
Net Income
As reported
$ 2,223 $ 1,700 $ 1,395
Pro forma
$ 2,211 $ 1,690 $ 1,385
Earnings per common share —basic
As reported
$ 2.97 $ 2.32 $ 1.90
Pro forma
$ 2.96 $ 2.31 $ 1.88
Earnings per common share —diluted
As reported
$ 2.96 $ 2.31 $ 1.88
Pro forma
$ 2.94 $ 2.29 $ 1.86
For pro forma disclosure purposes, compensation expense was calculated as the fair value of the stock
option awards issued as of the grant date, which
was estimated using the Black-Scholes model. Table 8.4
summarizes the assumptions used in determining
the fair value of options granted under Freddie Mac's three
stock -based compensation plans.
Table 8.4
Employee and Directors' Stock
ESPP Compensation Plans
1999
1998 1997 1999 1998 1997
Dividend yield"' 1.23%
1.18% 1.13% — — —
Expected life 1 year
1 year 1 year 10 years 10 years 10 years
Expected volatility 37.56%
31.71 % 29.63% 37.56% 31.71 % 29.63%
Risk -free interest rate 5.20%
65
5.21% 6.22% 5.34% 5.64% 6.89%
(1) Dividend yield assumptions are not used for the Employee and Directors' Stock Compensation Plans since the options under these plans provide for the
accrual of dividend equivalents which is included in rrported net income.
Other Stock -Based Compensation Information: The maximum number of shares of common stock that
may be granted to employees under the Employee Plan is 33.6 million shares. The maximum number of shares
of common stock that may be granted under the Directors' Plan is 2.4 million shares. At December 31, 1999,
a total of 14.3 million shares remained available for grant under both the Employee Plan and the Directors'
Plan. The maximum number of shares of common stock that may be granted to employees under the ESPP is
12.0 million shares. At December 31, 1999, 5.3 million shares remained available for grant under the ESPP.
The common stock delivered under these plans may be shares held in Freddie Mac's treasury, authorized
but previously unissued shares or shares purchased by Freddie Mac in the open market. No awards may be
made under the ESPP or Employees' Plan after December 31, 2004. No awards may be made under the
Directors' Plan after May 2008.
070
FREDDIE MAC
Table 8.5 provides a summary of activity related to stock options under the Employee Plan and the
Directors' Plan.
Table 8.5
Year ended December 31, 1999
1998 1997
Weighted
Weighted
Weighted
Stock Average
Stock
Average Stock
Average
Options Exercise Price
Options
Exercise Price Options Exercise Price
Outstanding, beginning of year 10,181,384 $ 18.75
11,059,715
$ 15.56 11,729,804
$ 13.38
Granted 1,075,290 58.64
892,867
46.69 1,002,110
34.52
Exercised (1,180,572) 12.27
(1,610,574)
11.30 (1,460,691)
10.12
Canceled (234,976) 51.53
(160,624)
20.56 (211,508)
21.11
Outstanding, end of year 9,841,126 $ 23.11
10,181,384
$ 18.75 11,059,715
$ 15.56
Options exercisable at year-end 7,069,515 $ 14.89
7,206,581
$ 13.07 7,449,492
$ 11.68
Weighed average fair value of
options granted during year $ 26.18
$ 20.48
$ 15.52
Table 8.6 provides additional information for stock options outstanding under the Employee Plan and
the Directors' Plan at December 31, 1999 by range of exercise prices.
Table 8.6
Options Outstanding
Options Exercisable
Weighted
Weighted
Weighted
Range of Average
Average
Average
Exercise Outstanding at Remaining
Exercise
Exercisable at
Exercise
Prices December 31, 1999 Contract Life
Price
December 31, 1999
Price
66
$ 6.25 to 14.99 3,359,825 2.56
$ 9.89
3,359,825
$ 9.89
15.00 to 24.99 3,735,757 5.68
18.26
3,399,277
17.99
25.00 to 34.99 990,101 7.41
33.17
275,329
33.50
35.00 to 44.99 94,600 8.49
43.19
19,359
43.22
45.00 to 54.99 878,607 8.74
47.35
11,019
46.83
55.00 to 64.10 782,236 9.27
60.63
4,706
60.50
9,841,126 5.38
$ 23.11
7,069,515
$ 14.89
Regulatory Capital
The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 (the "GSE Act") established risk -
based and minimum capital standards for Freddie Mac and Fannie Mae. The Director of the Office of Federal
Housing Enterprise Oversight ("OFHEO") has issued a proposed regulation to implement the risk -based capital
standard which would set forth capital requirements using a stress test model. The risk -based capital standard,
when finalized, will require Freddie Mac and Fannie Mae to maintain an amount of "total capital" sufficient for
the corporation to maintain positive total capital for a 10-year period under highly stressful economic scenarios.
Total capital includes "core capital" and general reserves for mortgage and foreclosure losses and certain other
amounts available to absorb losses. Core capital consists of the par value of outstanding common stock (common
stock issued less common stock held in treasury), the redemption value of outstanding perpetual preferred stock,
additional paid -in capital and retained earnings, as measured under GAAP.
The minimum capital standard is an amount of core capital equal to the sum of 2.50 percent of aggregate
on -balance sheet assets, as measured under GAAP, 0.225 percent of average mortgage purchase commitments
and, generally, 0.45 percent of other aggregate off balance sheet obligations, including Total PCs, net of PCs
held by Freddie Mac in its retained and trading portfolios.
At December 31, 1999, Freddie Mac's core capital totaled approximately $12.7 billion, which exceeded
the minimum capital requirement under the GSE Act.
FREDDIE MAC
Note 9 Financial Instruments With Off -Balance Sheet Risk
OFF -BALANCE In the normal course of business, the corporation is party to transactions involving financial instruments with
ff-balance sheet risk. These financial instruments include Total PCs, net, commitments to purchase mortgages,
SHEET o
ents to sell PCs and derivative financial instruments. These instruments subject the corporation to
FINANCIAL commitm
INSTRUMENTS, credit risk and/or interest -rate risk in excess of the amounts reported on the Consolidated Balance Sheets. Table
CONCENTRATIONS 9.1 summarizes financial instruments with off -balance sheet risk.
OF CREDIT
Table 9.1
RISK AND
CONTINGENCIES December 31,
1999
1998
(dollars in millions)
Financial instruments whose notional amounts represent credit risk:
Total PCs, net"'
$ 537,883
$ 478,351
Commitments to purchase mortgages
99,727
79,911
Financial instruments whose notional amounts exceed the amount of credit risk:
Commitments to sell PCs
822
5,067
Derivative financial instruments
424,244
313,238
(1) Excludes $211 billion and $168 billion at December 31, 1999 and 1998, respectively, of PCs held by Freddie Mac in the retained portfolio.
Mortgage Participation Certificates
Freddie Mac guarantees PC holders the timely payment of interest at the PC coupon rate, and the timely
payment of principal on mortgages underlying Gold PCs or the ultimate payment of principal on mortgages
underlying 75-day PCs. Several types of credit risk are associated with Total PCs, net. These include the risk
of loss from: (t) borrower default on the mortgage; (ice) the failure of institutions holding monthly remittances
payable to Freddie Mac and (iii) mortgage fraud. These credit risks are mitigated through Freddie Mac's uniform
underwriting and servicing criteria and, in certain instances, warranties obtained from sellers. Freddie Mac 67
also requires collateral in the form of security interests in the underlying real estate supporting the mortgages
backing the PCs, as well as mortgage insurance for mortgages exceeding certain loan -to -value ("LTV") ratios.
Certain transactions may also include other forms of credit enhancements provided by the seller. Management
monitors the corporation's credit exposure and provides for probable losses incurred through the "Reserve for
losses on Mortgage Participation Certificates." At December 31, 1999 and 1998, this reserve was $427 million
and $446 million, respectively (see Note 3).
As part of administering its PC programs, Freddie Mac is required to repurchase the mortgages backing
PCs when certain events occur. Specifically, Freddie Mac may be required under certain conditions to repurchase
balloon/reset mortgages, convertible adjustable -rate mortgages ("CARMs") and mortgages in default. Under
the balloon/reset and the CARM programs, the mortgagor has the option, if certain conditions are met, to
reset or convert the mortgage to a market -based fixed-rate mortgage. If the mortgagor elects to reset or convert
the mortgage rate, Freddie Mac is obligated to repurchase the mortgage from the security pool and may either
place the mortgage in its retained portfolio or securitize and sell the mortgage as part of a pool underlying a
new PC. Freddie Mac is also required to repurchase mortgages backing the PCs when the mortgages are deemed
to be in default, as defined in the security offering documents.
Commitments
Under the Cash Program, Freddie Mac purchases mortgages for cash and subsequently sells PCs backed by
those mortgages to third -party investors. The Cash Program subjects the corporation to interest -rate risk (the
risk of adverse changes in fair value due to movements in interest rates) between the time it commits to purchase
mortgages and the time it issues the related PCs. Freddie Mac manages this risk under the Cash Program by
committing to issue PCs at approximately the same time it commits to purchase mortgages. Issuing PCs under
the Guarantor Program does not expose the corporation to interest -rate risk because the purchase of mortgages
and issuance of PCs occur simultaneously.
FREDDIE MAC
68
At the time a commitment to purchase is entered into, Freddie Mac is subject to credit risk similar to that
described previously in "Mortgage Participation Certificates." In addition, Freddie Mac is subject to loss if a
party to a mandatory purchase commitment fails to deliver mortgages that Freddie Mac has committed to sell
as PCs under a mandatory sale agreement. The loss in such an event is equal to the change in the market value
of the mortgages to be delivered to Freddie Mac, and is offset by a pair -off fee payable to Freddie Mac by the
mortgage seller. The maximum delivery period for mandatory purchase commitments is 90 days for fixed-rate
mortgages and 105 days for adjustable -rate mortgages ("ARMs"). If a party fails to deliver mortgages under a
mandatory purchase commitment, the corporation primarily fulfills its mandatory sale commitments with held -
for -sale mortgages in the retained portfolio.
Table 9.2 summarizes Freddie Mac's outstanding commitments to purchase mortgages.
Table 9.2
December 31, 1999 1998
(dollars in millions)
Cash Program
Mandatory
Optional
Guarantor Program
$ 758 $ 2,534
6 6
Mandatory
53
149
Optional
238
280
Master Commitments
Mandatory
63,006
39,238
Optional
35,666
37,704
Total
$ 99,727
$ 79,911
Under the optional commitment programs, lenders may or may not exercise their commitment option.
Under the mandatory programs, the lender may buy back the commitment at any time by paying a pair -off
fee. A master commitment is a contract between Freddie Mac and a mortgage lender that sets forth the terms
and conditions under which Freddie Mac will purchase mortgages from approved seller/servicers. A master
commitment may provide for the purchase of mortgages under one or more purchase programs with various
product attributes, such as conventional fixed-rate or conventional ARMS.
Derivative Financial Instruments
Freddie Mac enters into derivative financial instruments as an end user and not for trading or speculative
purposes. These instruments are combined with underlying liabilities or assets to synthetically create debt
instruments or interest -earning assets, as well as to reduce the corporation's exposure to interest -rate and/or
foreign currency risk. Of the total notional balance of derivative financial instruments outstanding at December
31, 1999, $417 billion was executed in conjunction with debt financing ("debt -linked") and $7 billion was
executed in conjunction with the purchase of investments ("asset -linked"). Table 9.3 summarizes the notional
or contractual amounts of derivative financial instruments and their related gross fair value. Freddie Mac
estimates the fair value of derivative financial instruments using discounted cash flow models based on current
market interest rates and estimates of interest -rate volatility.
073
FREDDIE MAC
Table 9.3
December 31, 1999 1998
Notional or Gross Gross Notional or Gross Gross
Contractual Positive Negative Contractual Positive Negative
Amount Fair Value Fair Value Amount Fair Value Fair Value
(dollars in millions)
Interest -rate contracts:
Interest -rate swaps
Receive floating)
$101,243
$ 2,292 $
(314)
$ 41,464
$ 39
$ (1,251)
Receive fixed(2)
22,375
67
(452)
11,762
219
(24)
Basis("
2,962
5
(7)
4,329
1
(31)
Interest -rate caps(4)
17,811
726
(9)
18,299
315
(2)
Interest -rate floors (5)
403
3
—
1,603
16
(7)
Interest -rate corridors'"'
1,722
25
—
1,943
9
(4)
Futures and options
267,737
2,692
(18)
220,832
1,227
(108)
Treasury -based contracts(')
8,894
291
(13)
11,542
95
(25)
Foreign currency swaps
1,097
23
(105)
1,464
31
(73)
Total
$424,244
$ 6,124 $
(918)
$ 313,238
$1,952
$ 0,525)
(1) The weighted average pay and receive rates were 631 % and 6.20%, and 6.90% and 5.36% at December 31, 1999 and 1998, respectively
(2) The weighted average pay and receive rates were 5.99% and 6.44%, and 5.10% and 5.87% at December 31, 1999 and 1998, respectively
(3) Interest -rate swaps in which Freddie Mac pays and receives a floating rate, but which are based on two different indmces.
(4) The weighted average strike rate (the rate above which the cap is in -the -money) was 6.94% and 6.84% at December 31, 1999 and 1998, respectively
(5) The weighted average strike rate (the rate below which the floor is in -the -money) was 6.39% and 5.32% at December 31, 1999 and 1998, respectively
(6) The weighted average floor and cap rates were 8.96% and 11.97% at December 31, 1999, and 7.39% and 11.63% at December 31, 1998.
(7) Excludes exchange -traded derivative financial instruments, such as U.S. Treasury -based futures contracts.
Interest -Rate Swaps: Interest -rate swaps are contractual agreements between two parties for the exchange
of periodic payments based on a notional principal amount and agreed -upon fixed and floating interest rates. 69
Freddie Mac enters into interest -rate swap agreements in conjunction with debt issuances or asset purchases. These
swaps, when combined with the underlying liability or asset, synthetically create debt and asset yields that produce
lower effective debt costs or higher effective asset yields than those available on direct debt issuances or asset
purchases. The corporation is also a party to interest -rate swaps that adjust the effective costs or yields on short-
term debt and investment transactions related to the monthly mortgage and security payment remittance cycle.
Freddie Mac also enters into interest -rate swaps to hedge against the adverse effects of movements in interest rates
on existing debt or anticipated issuances of debt.
Interest -Rate Caps, Floors and Corridors: Interest -rate caps and floors are agreements in which one party makes
a one-time up -front premium payment to another parry in exchange for the right to receive interest payments based
on a particular notional amount and the amount, if any, by which the agreed -upon index rate exceeds a specified
maximum ("cap") or is below a specified minimum ("floor") rate. Interest -rate caps and floors can be structured as
corridors. A corridor combines a purchased and sold interest -rate cap or floor to effectively reduce the cost of the
interest -rate cap or floor protection. Currently, all of the interest -rate corridors entered into by Freddie Mac involve
interest -rate caps. Similar to debt- and asset -linked swaps, interest -rate caps and floors produce lower effective debt
costs or higher effective asset yields when combined with short-term debt issuances and investments.
Futures and Options: Futures contracts are exchange -traded agreements that obligate one party to sell and
another party to purchase a specified amount of a designated financial instrument at a specified price and date.
Options give the holder the right, but not the obligation, to buy or sell a specified asset or enter into a contract
at a specified price during a specified period of time. Freddie Mac enters into futures and options to hedge against
the adverse effects of movements in interest rates on existing debt or on anticipated issuances of debt.
Treasury -Based Contracts: Freddie Mac enters into non -exchange traded contracts using U.S. Treasury securities
primarily to hedge against the adverse effects of movements in interest rates on existing debt or anticipated issuances
of debt. These transactions, under which securities are effectively sold or purchased for settlement at a future date,
hedge debt issuance transactions by creating positions that offset changes in the future cash flows of the relat11
FREDDIE MAC
Foreign Currency Swaps: Currency swaps are agreements that involve the receipt of a specified amount
of a designated foreign currency and payment of a specified amount of U.S. dollars at various future dates.
The currency swaps entered into by Freddie Mac are structured to hedge against the risk of changes in foreign
currency exchange rates associated with the purchase of assets and issuance of debt denominated in a foreign
currency. The amounts received under the terms of the currency swaps are equal to the interest and principal
payments on the related foreign currency -denominated assets and debt.
Table 9.4 summarizes changes in the notional amounts of derivative financial instruments and their remaining
contractual maturities.
Table 9.4
Notional or Contractual Amount 1999 1998
(dollars in millions)
Change in notional balance
Beginning balance $ 313,238 $ 95,547
New contracts 515,335 508,212
Calls"' (4,938) (3,821)
Maturities and terminations (399,391) (286,700)
Ending balance $ 424,244 $ 313,238
Contractual maturity(2)
Under one year $ 160,761 $ 206,646
From one to five years 160,751 56,192
From five to 10 years 93,983 46,507
Over 10 years 8,749 3,893
Total $ 424,244 $ 313,238
70 (1) Ad derivative financial instruments called during 1999 and 1998 were called at their par value, and no gains or losses were deferred or recorded to income.
(2) Certain ofthe corporation's derivative financial instruments contain provisions permitting termination prior to contractual maturity. In addition,
derivative financial instruments generady may be terminated by mutual consent of theparties, or effectively canceled by entering into an offsetting
transaction.
Notional amounts generally serve only as a factor in determining periodic amounts to be received and
paid and do not themselves represent actual amounts to be exchanged or directly reflect the corporation's exposure
to institutional credit risk. As such, notional amounts are not recorded as assets and liabilities in the Consolidated
Balance Sheets. Instead, amounts receivable and payable related to derivative financial instruments (netted by
counterparty) and the net unamortized balance of premiums paid (net of premiums received) are recorded as
assets and liabilities. At December 31, 1999, the net receivable amounts resulting from derivative financial
instruments totaled $126 million, and the net unamortized balance of premiums paid totaled $1.7 billion. Also
recorded on the Consolidated Balance Sheets are unrealized fair value gains or losses on derivative financial
instruments that are designated as hedges of debt instruments. At December 31, 1999, the net unrealized gain
on these derivatives totaled $3.6 billion. See Note 1 for a more detailed discussion of Freddie Mac's accounting
policies related to derivative financial instruments.
While derivative financial instruments reduce the corporation's exposure to interest -rate and/or foreign
currency risk, they increase the corporation's exposure to institutional credit risk. Institutional credit risk arises
from the possibility that a counterparty will be unable to perform according to the terms of the derivatives
contract. Exchange -traded contracts, such as futures contracts, do not increase the corporation's exposure to
institutional credit risk since changes in the value of open exchange -traded contracts are settled daily. To limit
its exposure to institutional credit risk on over-the-counter derivatives contracts, Freddie Mac uses master netting
agreements. These agreements provide for the netting of all amounts receivable and payable under all
transactions covered by the master agreement between Freddie Mac and a single counterparty in the event that
the master agreement is terminated due to non-performance.
In addition to using master netting agreements, Freddie Mac manages institutional credit risk associated
with derivative financial instruments by limiting its selection of counterparties to only those institutions
having credit ratings among the highest available from major rating agencies. The corporation also limits
its exposure to any one counterparty, regularly monitors financial positions and, in many cases, requires
FREDDIE MAC
collateral in order to manage institutional credit risk. At December 31, 1999, the four largest counterparties
(based on notional or contractual amounts), each with an independent credit rating of "A+" or better,
accounted for approximately 54 percent of the notional amount of the corporation's outstanding over-the-
counter derivative financial instruments.
The corporation's aggregate exposure to institutional credit risk for derivative financial instruments
can be estimated by calculating the "net replacement value " of, or cost to replace, all outstanding non -
exchange traded derivative financial instruments for each counterparty with which the corporation was in
a net gain or "positive fair value" position, considering the offsetting provided for through master netting
agreements. The corporation's estimated exposure to credit risk based on net replacement values was $4.7
billion and $1.1 billion at December 31, 1999 and 1998, respectively. Freddie Mac's exposure to institutional
credit risk can fluctuate from period to period due to changes in interest rates and/or foreign exchange
rates. Freddie Mac's credit risk exposure based on net replacement values at each quarter -end during 1999
varied from $1.7 billion to $4.7 billion.
Of the total estimated exposure to institutional credit risk on derivative financial instruments in a net gain
position, $4.0 billion was fully collateralized at December 31, 1999. Substantially all of the corporation's
uncollateralized exposure of $0.7 billion at December 31, 1999 resulted from derivatives contracts with
counterparties having a credit rating of "AAA". The corporation's policy for requiring collateral from counterparties
is based on independent credit ratings, estimated credit risk exposure on net replacement values and internal
assessments of counterparty credit quality. In addition, it is the corporations policy to limit its uncollateralized
risk -adjusted credit exposure to any one counterparty from all investment and derivative activities to less than 1
percent of "Stockholders' equity." To date, Freddie Mac has not incurred any credit losses on derivative financial
instruments or set aside specific reserves for institutional credit risk exposure. Management does not believe such
reserves are necessary, given the corporation's collateral and counterparty policy requirements.
Concentrations of Credit Risk
Table 9.5 summarizes the total mortgage portfolio by geographical concentration. Excluded from the total mortgage 71
portfolio at December 31, 1999 and 1998 are $56.6 billion and $29.8 billion, respectively, of non -Freddie Mac
mortgage -related securities held in the retained portfolio (see Note 2).
Table 9.5
December 31,
1999
1998
Amount
Percentage
Amount
Percentage
(dollars in millions)
By Region"'
West
$ 226,521
28.11%
$ 199,038
28.29%
Northeast
192,070
23.84
172,145
24.47
North Central
156,197
19.39
137,722
19.58
Southeast
138,355
17.17
114,219
16.23
Southwest
92,614
11.49
80,419
11.43
$ 805,757
100.00%
$ 703,543
100.00%
By State
California
$ 137,933
17.12%
$ 126,623
18.00%
New York
39,473
4'90
35,204
5.00
Illinois
38,720
4.81
34,949
4.97
Florida
43,862
5.44
36,725
5.22
All others
545,769
67.73
470,042
66.81
$ 805,757
100.00%
$ 703,543
100.00%
(1) Region Designation: West (AK, AZ, CA, GU, HI, ID, MT, NV, OR, UT, WA), Northeast (CT, DE, DC, MA, ME, MD, NH, NJ, NY, PA, RI, VT, VA,
WV); North Central (IL, IN, L4, MI, MN, ND, OH, SD, WI); Southeast (AL, FL, GA, KY, MS, NC, PR, SC, TN, VI); Southwest W. CO, AS, LA,
MO, NE, NM, OK, TX, W)9. !'�
`. O
FREDD►E MAC
Contingencies
From time to time, Freddie Mac may be involved as a party to certain legal proceedings arising in the normal
course of its business. While litigation and claims resolution are subject to many uncertainties and cannot be
predicted with assurance, it is management's opinion that losses, if any, will not have a material effect on Freddie
Mac's Consolidated Financial Statements.
A significant portion of Freddie Mac's mortgage purchase volume is generated from several key mortgage
lenders that have entered into special business arrangements with Freddie Mac. These individually negotiated
relationships characteristically involve a commitment by the lender to sell a high proportion of its conforming
mortgage origination volume to Freddie Mac. The four most significant of these arrangements accounted for
slightly over 35 percent of Freddie Mac's volume; the largest of such agreements is with Norwest Mortgage, Inc.
Freddie Mac is exposed to the risk that it will lose significant purchase volume that it may be unable to replace
if, when the agreements terminate, one or more of these key lenders chooses to significantly reduce the volume
of mortgages it sells to Freddie Mac.
Note 10 Table 10.1 presents the components of the corporation's "Provision for income taxes."
INCOME
TAXES
Table 10.1
Year Ended December 31, 1999 1998 1997
(dollars in millions)
Current tax provision
$ 1,287
$ 480
$ 512
Deferred tax provision:
Amortization of debt discounts and issuance costs
3
206
24
Amortization of mortgage purchase and sale premiums,
discounts and deferred fees
(201)
10
(10)
72 Provision for mortgage and REO losses (less than) in excess
of deductions
53
(27)
(24)
Deferred hedging gains
(124)
16
3
Capitalization of development costs
(8)
(7)
(6)
Other items, net
(67)
(22)
70
Total deferred tax provision
(344)
176
57
Total provision for income taxes
$ 943
$ 656
$ 569
Deferred tax assets and liabilities reflect the tax effect of temporary differences between the amounts of
assets and liabilities for financial reporting purposes and the tax basis of those assets and liabilities. The net deferred
tax asset is included in "Other assets." Included in the net deferred tax asset is a tax (benefit) expense on the net
unrealized (loss) gain on certain investments that are reported in "Stockholders' equity' (see Note 1). Management
believes that it is more likely than not that the total deferred tax asset will be realized in future periods. Table
10.2 summarizes the deferred tax asset and liability.
FREDDIE MAC
Table 10.2
December 31,
1999
1998
(dollars in millions)
Deferred tax assets:
Purchase and sale premiums, discounts and deferred fees
$ 633
$ 457
Reserve for mortgage losses
145
177
Other liabilities
287
164
Net unrealized loss (gain) on certain investments reported at fair value
628
(64)
Other
107
58
Total deferred tax asset
1,800
792
Deferred tax liabilities:
Other assets
147
147
Multiclass debt securities
97
101
Other
259
274
Total deferred tax liability
503
522
Net deferred tax asset
$ 1,297
$ 270
Table 10.3 reconciles the expected federal statutory tax provision to the effective provision for income taxes.
Table 10.3
Year Ended December 31, 1999
1998
1997
(dollars in millions)
Provision for income taxes at the statutory rate $ 1,106
$ 825
$ 687
Tax-exempt interest and dividends -received deductions (79)
(106)
(72)
Tax credits (84)
(63)
(46) 73
Total provision for income taxes $ 943
$ 656
$ 569
Statutory tax rate 35.0%
35.0%
35.0%
Effective tax rate 29.8%
27.8%
29.0%
In 1998, the IRS issued a Statutory Notice to Freddie Mac asserting income tax deficiencies for the
corporation's first two tax years, 1985 and 1986. In first quarter 1999, Freddie Mac filed a petition in the U.S. Tax
Court (the "Court") to contest the deficiencies. In third quarter 1999, the IRS issued a Statutory Notice for Freddie
Mac's tax years 1987 to 1990, and Freddie Mac filed a petition in the Court on September 29,1999. Subsequently,
the Court combined the 1985 to 1990 tax years into one case. The IRS is currently examining Freddie Mac's federal
income tax returns for the years 1991 through 1997. In management's opinion, adequate provision has been made
for all income taxes and related interest. Management believes that additional tax liability, if any, that may arise for
prior periods as a result of IRS adjustments will not have a material adverse impact on Freddie Mac's Consolidated
Financial Statements. Freddie Mac is exempt from state and local taxes, with the exception of real estate taxes.
In February 1997, Freddie Mac formed two REIT subsidiaries that issued a total of $4 billion in step-down
preferred stock to investors. Under IRS regulations in effect when the REITs were formed, dividend payments to
holders of the REITs' step-down preferred stock are tax deductible. In 1997, subsequent to the formation of Freddie
Mac's REIT subsidiaries, the U.S. Department of the Treasury (the "Treasury") announced its intention to propose
regulations that would effectively eliminate the tax advantages of REITs that issue step-down preferred stock. On
January 5, 1999, the Treasury issued such proposed regulations and, on January 7, 2000, issued final regulations
generally consistent with those it had proposed. These regulations deny certain of the tax benefits attributable to
Freddie Mac's REIT preferred stock for tax years ending on or after February 27,1997. Notwithstanding the issuance
of the final regulations, the tax treatment of preferred stock dividends paid to investors in the REITs remains
uncertain. Accordingly, Freddie Mac has elected not to treat such dividends as fully tax deductible in its Consolidated
Financial Statements. This treatment is subject to change once uncertainties related to the tax treatment of such
dividends are adequately clarified. The preferred stock is redeemable by the REITs under certain circumstances where
changes in applicable tax law could adversely affect the tax treatment of the REITs or preferred stock. ;
FREDDIE MAC
Note 11 Freddie Mac maintains a defined benefit pension plan covering substantially all of its employees. Benefits are based
EMPLOYEE on years of service and the employee's highest compensation over any three consecutive years of employment. It
BENEFITS . Freddie Mac's policy to contribute the maximum amount deductible for federal income tax purposes each year.
Plan assets consist primarily of corporate bonds and listed stocks. In addition to the defined benefit pension plan,
Freddie Mac maintains non -qualified, unfunded defined benefit pension plans for officers of the corporation.
The related retirement benefits for the non -qualified plans are paid from Freddie Mac's general assets.
The corporation is required to accrue the estimated cost of retiree benefits, other than pensions, as employees
render the services necessary to earn their post -retirement benefits. Freddie Mac maintains a defined benefit post -
retirement health care plan that provides post -retirement health care benefits on a contributory basis to retired
employees age 55 or older who rendered at least five years of service after age 35 and who, upon separation or
termination, immediately elected to commence benefits under the pension plan in the form of an annuity. The
corporation's post -retirement health care plan currently is not funded and therefore has no plan assets.
Table 11.1 summarizes the components of consolidated net periodic benefit costs related to Freddie Mac's
defined benefit pension plans and post -retirement health care plan.
Table 11.1
Pension Benefits
Post -Retirement Benefits
Year Ended December 31, 1999
1998
1997
1999 1998
1997
(dollars in thousands)
Service cost of current period $ 10,747
$ 7,994
$ 7,801
$ 2,444 $ 2,176
$ 1,676
Interest cost on benefit obligation 9,721
7,809
7,211
1,315 1,010
852
Expected return on plan assets (10,685)
(9,843)
(7,794)
- -
-
Recognized net actuarial (gain) loss 292
(552)
41
- (178)
(134)
Recognized prior service cost 14
14
14
- -
-
Recognized initial net asset being
74 amortized over 17 years 43
43
43
- -
-
Net periodic benefit costs $ 10,132
$ 5,465
$ 7,316
$ 3,759 $ 3,008
$ 2,394
Table 11.2 summarizes the changes in the projected benefit obligation and plan assets for the defined benefit
pension plans, and the change in the accumulated benefit obligation for the post -retirement health care plan.
Table 11.2
Pension Benefits
Post -Retirement Benefits
December 31,
1999
1998
1999
1998
(dollars in thousands)
Change in benefit obligation:
Benefit obligation -beginning balance
$ 145,122
$ 105,183
$ 19,551
$ 13,520
Service cost of current period
10,747
7,994
2,444
2,176
Interest cost on benefit obligation
9,721
7,809
1,315
1,010
Net actuarial (gain) loss
(21,983)
26,272
(3,270)
2,936
Benefits paid
(2,082)
(2,136)
(124)
(91)
Benefit obligation -ending balance
$ 141,525
$ 145,122
$19,916
$ 19,551
Change in plan assets:
Plan assets at fair value -beginning balance
$ 119,806
$110,397
Actual return on plan assets
19,868
11,457
Employer contributions
88
88
Benefits paid
(2,082)
(2,136)
Plan assets at fair value -ending balance
$ 137,680
$119,806
079
FREDDIE MAC
Freddie Mac's pension and post -retirement health care costs and the funded status of these plans for 1999,
1998 and 1997 were calculated using assumptions as of September 30, 1999, 1998 and 1997, respectively. Table
11.3 sets forth the funded status of the defined benefit pension plans and post -retirement health care plan, the
assumptions used to calculate the funded status and amounts recognized in the Consolidated Balance Sheets.
Table 11.3
Pension Benefits Post -Retirement Benefits
December31, 1999 1998 1999 1998
(dollars in thousands)
Benefit obligation in excess of plan assets $ 3,845 $ 25,316 $19,916 $ 19,551
Unrecognized net actuarial gain (loss) 25,161 (6,295) 3,603 333
Unrecognized prior service cost (472) (486) — —
Initial unrecognized net asset being
recognized over 17 years (1,177) (1,220) — —
Contributions made subsequent to measurement date — — (36) (31)
Net liability included in Other liabilities $ 27,357 $ 17,315 $ 23,483 $ 19,853
Major assumptions:
Assumed discount rate 7.50% 6.75% 7.50% 6.75%
Rate of increase in compensation levels 4.50% 4.50% — —
Consumer price index 3.50% 3.00% — —
Expected long-term rate of return on plan assets 9.00% 9.00% — —
The assumed health care cost trend rate used in measuring the accumulated post -retirement benefit
obligation was 7.0 percent in 1999, gradually declining to 5.0 percent in the year 2003 and remaining at that 75
level thereafter. Table 11.4 sets forth the effect on the accumulated post -retirement benefit obligation and the
sum of the service cost and interest cost components of the net periodic post -retirement benefit costs that would
result from a 1 percent increase or decrease in the assumed health care cost trend rate.
Table 11.4
1 Percent 1 Percent
Increase Decrease
Effect on the accumulated post -retirement benefit obligation 25% (19)%
Effect on net periodic post -retirement benefit cost components 28% (21)%
Freddie Mac also offers a tax -qualified defined contribution pension plan (the "Savings Plan") to all
eligible employees. Employees were permitted to contribute from 1 percent to 15 percent of their annual
salaries to the Savings Plan, up to $12,500 ($10,000 pre-tax and $2,500 after tax) in 1999 and 1998. Freddie
Mac matches employees' contributions up to 6 percent of their annual salaries; the proportion of the match
depends upon the length of service. In addition, Freddie Mac is authorized to make discretionary contributions
to a profit sharing account in the Savings Plan on behalf of each eligible employee, based on salary level. Freddie
Mac made contributions to the Savings Plan totaling $15.3 million, $13.7 million and $12.4 million in 1999,
1998 and 1997, respectively.
080
FREDDIE MAC
Note 12 Management assesses corporate performance and allocates capital principally on the basis of the two methods
BUSINESS in which it finances mortgages and mortgage -related investments: securitization financing and debt financing.
SEGMENT Freddie Mac separately manages the business activities associated with these two methods of financing, as each
REPORTING financing method generates different sources and types of revenue for Freddie Mac, exposes the corporation
to different types and degrees of risk and requires Freddie Mac's commitment of different levels of capital.
Securitization financing of mortgage investments (the "Securitization Financing Segment") involves
securitizing mortgages the corporation has purchased, and selling them to investors in the form of PCs. Freddie
Mac generates "Management and guarantee income," representing the fee income it receives as compensation
for, among other things, assuming the credit risk on Freddie Mac's total mortgage portfolio. The Securitization
Financing Segment therefore incurs all credit -related expenses as a consequence of assuming this credit risk.
Since credit risk is also the primary risk exposure of multifamily mortgage -related investments, the revenues
and expenses generated from these investments are included in the Securitization Financing Segment where
this risk is managed. Through other activities related to securitization financing, Freddie Mac earns fees from
the resecuritization of PCs and other mortgage securities (primarily into REMICs), as well as seller/servicer-
related fees. In addition, income is earned from trading activities conducted in support of the market for Freddie
Mac PCs. Income generated from fee -for -service and trading activities is recorded as part of "Other income,
net" or "Net interest income." "Net interest income" for the Securitization Financing Segment also reflects
interest earned on investments of capital allocated to this business segment. Also included is interest expense
on PC variance balances (representing cash flows generated by timing differences between Freddie Mac's receipt
of payments on mortgages underlying PCs, and the subsequent passthrough of such amounts to PC investors),
net of interest income from the temporary reinvestment of these balances.
Debt financing of mortgage -related investments (the "Debt Financing Segment") involves issuing debt
securities (and, to a lesser extent, equity and other liabilities) to finance the purchase of unsecuritized mortgages
and guaranteed mortgage securities, including Freddie Mac PCs and non -Freddie Mac mortgage securities,
that are held by Freddie Mac as investments for the retained portfolio. Freddie Mac also maintains a liquidity
76 and contingency portfolio that is financed principally by debt. The corporation recognizes "Net interest income"
on both the retained and the liquidity and contingency investment portfolios, which is the interest income
earned on these investments less the interest expense from the interest -bearing liabilities funding them. Most
of the corporation's consolidated total assets are financed with debt and other liabilities. Similar to Freddie
Mac PCs held in the retained portfolio, purchases of unsecuritized mortgages reflect management's decision
to assume the credit risk on these mortgages through the Securitization Financing Segment, and to retain such
mortgages as portfolio investments. Accordingly, income earned on unsecuritized mortgages is allocated between
the corporation's two financing segments, with the Securitization Financing Segment allocated a portion of
this income as compensation for assuming the credit risk on these mortgages. "Management and guarantee
income" for the Securitization Financing Segment includes a fee earned for the credit guarantee it provides on
unsecuritized mortgages, and "Net interest income" of the Debt Financing Segment is correspondingly reduced
by the cost of this credit guarantee.
Revenues and direct expenses are allocated among the corportion's two financing segments in
accordance with the accounting policies set forth in Note 1, "Summary of Significant Accounting Policies."
Overhead expenses, such as administrative expenses, are allocated either directly to each segment or through
estimates, based on factors such as revenues or portfolio volume, as applicable. There were no transactions
with any single customer that accounted for 10 percent or more of consolidated total revenues.
Table 12.1 details the corporation's financial performance by financing segment for the years ended
December 31, 1999, 1998 and 1997, respectively.
FREDDIE MAC
Table 12.1
Year Ended December 31,
1999
Securitization
Debt
Financing
Financing Elimination"'
Consolidated
(dollars in millions)
Net interest income (2)
$ 214
$ 2,173 $ 153
$2,540
Management and guarantee income
1,558
- (153)
1,405
Other income, net
135
(25) -
110
Total revenues
1,907
2,148 -
4,055
Credit -related expenses
(159)
- -
(159)
Administrative expenses
(547)
(108) -
(655)
Housing tax credit partnerships
(80)
- -
(80)
Income before income taxes
1,121
2,040 -
3,161
Provision for income taxes
(313)
(630) -
(943)
Income before extraordinary item, net of taxes
808
1,410 -
2,218
Extraordinary gain on retirement of debt, net of taxes -
5 -
5
Net income
$ 808
$ 1,415 $ -
$2,223
Year Ended December 31,
1998
Securitization
Debt
Financing
Financing Elimination"'
Consolidated
(dollars in millions)
Net interest income (2)
$ 297
$ 1,491 $ 139
$1,927
Management and guarantee income
1,446
- (139)
1,307
Other income, net
101
2 -
103
Total revenues
1,844
1,493 -
3,337
Credit -related expenses
(342)
- -
(342)
Administrative expenses
(495)
(83) -
(578)
Housing tax credit partnerships
(61)
- -
(61)
Income before income taxes
946
1,410 -
356
2�656)
Provision for income taxes
(267)
(389) -
Net income
$ 679
$ 1,021 $ -
$1,700
Year Ended December 31,
1997
Securitization
Debt
Financing
Financing Elimination"'
Consolidated
(dollars in millions)
Net interest income (2)
$ 193
$ 1,315 $ 123
$1,631
Management and guarantee income
1,421
- (123)
1,298
Other income, net
90
10 -
100
Total revenues
1,704
1,325 -
3,029
Credit -related expenses
(529)
- -
(529)
Administrative expenses
(431)
(64) -
(495)
Housing tax credit partnerships
(41)
- -
(41)
Income before income taxes
703
1,261 -
1,964
Provision for income taxes
(200)
(369) -
(569)
Net income
$ 503
$ 892 $ -
$1,395
(1) Reflects the elimination offees earned by the Securitization Financing Segment for the credit guarantee it provides on unsecuritized mortgages retained by
Debt Financing Segment
the Debt Financing Segment, and a corresponding elimination of the
cost of this credit guarantee
charged to the
for purposes of
deriving consolidated amounts.
(2) Net interest income for the Debt Financing Segment includes interest
expense on debt securities
and other liabilities that finance mortgage -related
investments. Included in interest expense on debt securities is non -cash amortization of debt discounts totaling $9.2 billion, $7.0 billion and $4.1 billion
for the years ended December 31, 1999, 1998 and 1997, respectivel)s which principally represents the contractual cost of funds associated with Wu rt 8 9
short-term debt at a discount. This cost of funds is paid when the debt matures.
� - VJ
FREDDIE MAC
78
Note 13 The Consolidated Fair Value Balance Sheets in Table 13.1 present Freddie Mac's estimates of the fair value of
FAIR VALUE the corporation's assets and liabilities at December 31, 1999 and 1998. These balance sheets were prepared on
DISCLOSURES the fair value basis of accounting, which is a basis of accounting other than GAAP, to provide relevant financial
information that is not provided by the historical cost financial statements. These disclosures satisfy the
guidelines of SFAS No. 107, "Disclosures About Fair Value of Financial Instruments," which generally require
disclosure of the fair value of financial instruments.
Table 13.1
December 31, 1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
(dollars in mil[ionsPl
Assets
Mortgages, net
$ 56,400
$ 55,000
$ 56,800
$ 58,200
Guaranteed mortgage securities, net
266,200
257,400
198,500
200,000
Retained portfolio, net
322,600
312,400
255,300
258,200
Cash and cash equivalents
5,200
5,200
2,600
2,600
Investments and securities purchased under
agreements to resell
36,700
36,700
46,500
46,500
Real estate owned (REO), net
400
400
600
600
Other assets
21,800
21,800
16,400
16,400
Off balance sheet items:
Guarantee fees on Total PCs
(400)
2,400
(400)
200
Outstanding commitments to purchase
and sell mortgages
-
100
-
100
$ 386,300
$ 379,000
$ 321,000
$ 324,600
Liabilities and Net Fair Value
Total debt securities, net
$ 362,400
$ 354,700
$ 288,900
$ 289,000
Principal and interest due to PC investors
7,300
7,300
19,400
19,400
Other liabilities
6,800
6,800
3,400
3,400
Derivative financial instruments
(1,700)
(5,200)
(1,500)
(400)
374,800
363,600
310,200
311,400
Estimated income taxes on differences between
fair values and GAAP values - 1,400 - 800
Preferred stock 3,200 2,900 2,800 2,900
Common stockholders' net fair value after tax 8,300 11,100 8,000 9,500
$ 386,300 $ 379,000 $ 321,000 $ 324,600
(1)Amounts have been rounded to the nearest $100 million.
Limitations
"Net fair value after tax" represents the difference between the estimated fair value of assets and liabilities reduced
by the tax effect of the difference between the fair value and GAAP value of equity. This estimate does not
attempt to present Freddie Mac's value as a going concern or the value of anticipated future business. Therefore,
net fair value does not represent an estimate of the aggregate fair value of Freddie Mac's common stock or Freddie
Mac as a whole.
Valuation Methods and Assumptions
The following methods and assumptions were used to estimate the fair value of Freddie Mac's assets and liabilities
at December 31, 1999 and 1998.
FREDDIE MAC
Mortgages, Net
The fair value of unsecuritized mortgages is estimated using an option -adjusted spread ("OAS") model. This
estimation process involves calculating an OAS, a constant spread that, when added to each period's U.S.
Treasury rate used for discounting, equates the present value of the expected future cash flows to the market
price of a benchmark Freddie Mac PC. The benchmark OAS is applied to the specific loans, calibrated to the
market price of a benchmark security, to determine the estimated fair value.
Guaranteed Mortgage Securities, Net
The fair value of guaranteed mortgage securities is based on quoted market prices. Included are available -for -
sale mortgage -related securities that are reported on the historical balance sheet at their estimated fair value
and, accordingly, their carrying amount is fair value. .
Cash and Cash Equivalents; Investments and Securities Purchased Under Agreements to Resell; Real Estate
Owned (REO), Net; Other Assets; Principal and Interest Due to PC Investors and Other Liabilities
These assets and liabilities are generally either short-term (in which case the carrying amount is a reasonable
estimate of fair value), or are reported on the historical balance sheet at their estimated fair value and,
accordingly, their carrying amount is fair value.
Guarantee Fees on Total PCs
The fair value of guarantee fees on Total PCs includes the expected guarantee fee income on Total PCs, net of
the expected default costs on the underlying mortgages, float costs from remittance cycle cash flows and
servicing -related administrative costs. The guarantee fee cash flows are estimated using benchmark interest -
only stripped securities ("IOs"), calculated as a fixed percentage of the outstanding mortgage balance, as the
cash flow pattern of IOs resembles that of guarantee fees. The value of these IOs is approximated using the
OAS approach described above in "Mortgages, Net." The present value of expected future default costs on the
underlying mortgages is estimated using proprietary models. The fair value of the costs from remittance cycle
cash flows is based on the estimated reinvestment income earned during the period between the remittance of 79
mortgage principal and interest to Freddie Mac, and the disbursement of these funds to PC investors. The
carrying amount of $(400) million at December 31, 1999 and 1998 represents the "Reserve for Losses on
Mortgage Participation Certificates" which is reported as part of total assets for purposes of this presentation.
Outstanding Commitments to Purchase and Sell Mortgages
Outstanding commitments include commitments to buy and sell mortgages and mortgage -related investments.
The fair value of mandatory commitments is estimated based on the pair -off fees the seller must pay if the
mortgages are not delivered. Optional purchase commitments are assumed to have a fair value of zero.
Total Debt Securities, Net and Preferred Stock
The fair value of debt securities (including subordinated borrowings) and preferred stock is based on quoted
market prices.
Derivative Financial Instruments
Freddie Mac estimates the fair value of derivative financial instruments based on discounted cash flows using
market estimates of interest rates and volatility. For purposes of this presentation, the carrying amount and
estimated fair value of asset -linked and debt -linked derivative financial instruments are presented separately from
the carrying amount and estimated fair value of the associated assets and debt.
Estimated Income Taxes on Differences Between Fair Values and GAAP Values
The fair value balance sheet includes an estimate of federal income taxes by applying the statutory federal tax rate
of 35 percent to the excess of net fair value over "Stockholders' equity' measured under GAAP. This adjustment
is made to the fair value of equity based on the assumption that income taxes will be paid on future earnings.
FREDDIE MAC
so
Managements Report on Consolidated Financial Statements and Internal Control Structure
The management of Freddie Mac (or the "corporation") is
responsible for the preparation, integrity and fair presentation
of the corporation's annual Consolidated Financial
Statements. The annual Consolidated Financial Statements
presented have been prepared in accordance with generally
accepted accounting principles and, as such, include amounts
based on judgments and estimates made by management.
Management also has prepared the other information
included in this annual report, and is responsible for its
accuracy and consistency with the Consolidated Financial
Statements.
The annual Consolidated Financial Statements referred
to above have been audited by Arthur Andersen LLP,
independent public accountants, who have been given
unrestricted access to all financial records and related data,
including minutes of all meetings of stockholders, the Board
of Directors (the "Board") and committees of the Board.
Management believes that all representations made to Arthur
Andersen LLP during the audit were valid and appropriate.
In addition, management is responsible for
establishing and maintaining an internal control structure
over financial reporting, including controls over the
safeguarding of assets. The objective of the internal control
structure is to provide reasonable assurance to management
and the Board as to the preparation of the financial
statements in accordance with generally accepted
accounting principles.
Management has made its own assessment of the
effectiveness of the corporation's internal control structure
over financial reporting, including controls over the
safeguarding of assets, as of December 31, 1999, in relation
to the criteria described in "Internal Control —Integrated
Framework" issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this
assessment, management believes that, as of December 31,
1999, the corporation's internal control structure was
effective in achieving the objective stated above.
However, there are inherent limitations in the
effectiveness of any internal control structure, including the
possibility of human error and the circumvention or
overriding of controls. Accordingly, even an effective internal
control structure can provide only reasonable assurance with
respect to the reliability of the financial statements.
Furthermore, the effectiveness of any internal control
structure can change with changes in circumstances.
Management also recognizes its responsibility for
fostering a strong ethical climate so that Freddie Mac's affairs
are conducted according to the highest standards of personal
and corporate conduct. This responsibility is characterized and
reflected in Freddie Mac's Code of Conduct, which is
publicized throughout the corporation. The Code of Conduct
addresses, among other things, potential conflicts of interest,
acceptable employee activities conducted outside of Freddie
Mac, acceptable financial activities, confidentiality of
proprietary information, ethical business conduct and
compliance with the Code of Conduct. Freddie Mac
maintains a systematic program to assess compliance with the
Code of Conduct.
The corporation has an Internal Audit Department
whose responsibilities include monitoring compliance with
established policies and procedures and evaluating Freddie
Mac's internal control structure. The Internal Audit
Department is independent of the activities it reviews.
Operational and special audits are conducted, and internal
audit reports are submitted to appropriate management and
the Audit Committee of Freddie Mac's Board.
The Audit Committee of the Board meets periodically
with management, internal auditors and Freddie Mac's
independent public accountants to review matters relating
to financial accounting and reporting policies and control
procedures. Both Arthur Andersen LLP and the Internal
Audit Department have full and free access, with and
without management present, to the Audit Committee.
Iterand U. Brendle
Chairman er Chief Executive Officer
JuAe
Senior Vice President, Finance 6 Chief Financial Officer
FREDDIE MAC
QSJ
Rort of Independent Public Accountants on Managements Assertion About the
Eyectiveness of the Internal Control Structure Over Financial Reporting
To the Board of Directors and Stockholders of Freddie Mac:
We have examined management's assertion that Freddie Mac
maintained an effective internal control structure over
financial reporting, including controls over the safeguarding
of assets, as of December. 31, 1999, included in the
accompanying Management's Report on Consolidated
Financial Statements and Internal Control Structure.
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 system of internal controls over
financial reporting, testing, and evaluating the design and
operating effectiveness of the system, 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 system of internal
controls, errors or irregularities may occur and not be detected.
Also, projections of any evaluation of the system to future
periods are subject to the risk that the system of internal
controls 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 Freddie
Mac maintained an effective system of internal controls over
financial reporting, including controls over the safeguarding
of assets, as of December 31, 1999, is fairly stated, in all
material respects, based upon criteria established in "Internal
Control —Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission.
e kai is
January 13, 2000
Report of Independent Public Accountants on Consolidated Financial Statements
To the Board of Directors and Stockholders of Freddie Mac:
We have audited the accompanying Consolidated Balance
Sheets of Freddie Mac, a federally chartered corporation (the
"corporation"), as of December 31, 1999 and 1998, and the
related Consolidated Statements of Income, Stockholders'
Equity and Cash Flows for each of the three years in the period
ended December 31, 1999. These financial statements are the
responsibility of the corporation'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 standards require that we
plan and perform an 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. 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
reasonable basis for our opinion.
In our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of Freddie Mac as of December 31, 1999 and 1998,
and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 1999, in
conformity with generally accepted accounting principles.
We have also audited, in accordance with generally
accepted auditing standards, the supplemental Consolidated
Fair Value Balance Sheets of Freddie Mac as of December 31,
1999 and 1998. As described in Note 13, the supplemental
Consolidated Fair Value Balance Sheets have been prepared
by management to present relevant financial information that
is not provided by the Consolidated Balance Sheets referred
to above and are not intended to be a presentation in
conformity with generally accepted accounting principles. In
addition, the supplemental Consolidated Fair Value Balance
Sheets do not purport to present the net realizable, liquidation
or market value of the corporation as a whole. Furthermore,
amounts ultimately realized by the corporation from the
disposal of assets and settlement of liabilities may vary
significantly from the fair values presented. In our opinion,
the supplemental Consolidated Fair Value Balance Sheets
referred to above present fairly, in all material respects, the
information set forth therein as described in Note 13.
a, it
January 13, 2000
086
81
FREDDIE MAC
Additional Financial Information (unaudited)
QUARTERLY RESULTS OF OPERATIONS
1999 1998
4th 3rd 2nd 1st 4th 3rd 2nd 1st
(dollars in millions)
Interest income on mortgages
$1,015
$ 995
$ 972
$ 985
$ 964 $
934 $
927 $
911
Interest income on guaranteed mortgage securities
4,354
4,120
3,819
3,454
3,144
2,685 2,482 2,222
Interest income on investments and securities
purchased under agreements to resell
800
764
658
817
770
542
563
494
Interest expense on debt securities:
Short-term debt
(464)
(338)
(473)
(924)
(1,223)
(952)
(989)
(873)
Long-term debt
(4,949)
(4,793)
(4,146)
(3,463)
(2,851)
(2,516)(2,271) (2,116)
Interest expense due to security program cycles
(92)
(138)
(190)
(243)
(267)
(213)
(246)
(194)
Net interest income on earning assets
664
610
640
626
537
480
466
444
Management and guarantee income
362
356
349
338
329
328
324
326
Other income, net
23
34
20
33
36
13
22
32
Total revenues
1,049
1,000
1,009
997
902
821
812
802
Provision for mortgage losses
(15)
(15)
(15)
(15)
(40)
(40)
(50)
(60)
REO operations expense
(25)
(21)
(18)
(35)
(29)
(39)
(40)
(44)
Administrative expenses
(167)
(164)
(161)
(163)
(169)
(142)
(135)
(132)
Housing tax credit partnerships
(18)
(22)
(20)
(20)
(15)
(16)
(15)
(15)
Income before income taxes and extraordinary item
824
778
795
764
649
584
572
551
Provision for income taxes
(238)
(223)
(238)
(244)
(181)
(159)
(158)
(158)
Income before extraordinary item, net of taxes
586
555
557
520
468
425
414
393
Extraordinary gain (loss) on retirement of debt,
net of taxes
8
9
(5)
(7)
-
-
-
-
82 Net income
$ 594
$ 564
$ 552
$ 513
$ 468 $
425 $
414 $
393
Net income available to common stockholders
$ 552
$ 525
$ 516
$ 477
$ 430 $
396 $
385 $
368
Earnings per common share before extraordinary items"
Basic $ 0.78 $ 0.74 $ 0.75 $ 0.70 $ 0.63 $ 0.58 $ 0.57 $ 0.54
Diluted $ 0.78 $ 0.74 $ 0.74 $ 0.69 $ 0.62 $ 0.58 $ 0.56 $ 0.54
Earnings per common share("
Basic $ 0.79 $ 0.75 $ 0.74 $ 0.69 $ 0.63 $ 0.58 $ 0.57 $ 0.54
Diluted $ 0.79 $ 0.75 $ 0.74 $ 0.68 $ 0.62 $ 0.58 $ 0.56 $ 0.54
0) Earnings per common shah-basic"are computed based on weighted average common shares outstanding. Earnings per common share-diluted"are computed based on the total
of weighted average common shares outstanding and the effect of dilutive common equivalent shares outstanding.
FREDDIE MAC
Additional Financial Information (unaudited)
TOTAL MORTGAGE PORTFOLIO LIQUIDATION ACTIVITY (annualized)
Quarter Ended
Year
March 31
June 30
September 30
December 31
Annual
1999
25.8%
20.8%
15.3%
11.6%
19.6%
1998
26.7%
27.8%
26.1 %
35.8%
30.5%
1997
11.7%
13.4%
16.0%
18.0%
14.7%
1996
17.2%
15.8%
12.7%
12.4%
14.7%
1995
8.1%
10.7%
15.0%
14.3%
12.2%
MORTGAGE DELINQUENCY STATISTICS
Single -Family Mortgages (based on number of mortgages)
Total Number
Delinquent Three
Foreclosures Approved
At -Risk
Total
Date
of Mortgages("
or More Payments`
and In Process"'
Portfolio"'
Portfolio
12/99
6,879,620
0.16%
0.23%
0.39%
0.43%
12/98
6,420,915
0.23%
0.27%
0.50%
0.49%
12/97
6,668,745
0.22%
0.33%
0.55%
0.56%
12/96
6,755,817
0.22%
0.36%
0.58%
0.60%
12/95
6,437,804
0.26%
0.34%
0.60%
0.61 %
(1) Includes only loans for which Freddie Mac has assumed primary default risk. Excludes loans for which the lender or a third party has retained primary default risk by pledging
collateral or agreeing to accept losses on loans that default. In some
cases, the lender' or third party'
risk is limited to a specific Level of losses at the time the credit enhancement -
becomes effective.
Multifamily Mortgages (based on net carrying value of mortgages)
(dollars in millions)
Net Carrying Value
Total Dollars
Delinquent Two
Foreclosures Approved
of Non -Performing
Date
of Mortgages
or More Payments
and In Process
Total
Mortgages 83
12/99
$ 16,817
0.12%
0.02%
0.14%
$ 23
12/98
$ 10,972
0.18%
0.19%
0.37%
$ 40
12/97
$ 8,364
0.52%
0.44%
0.96%
$ 80
12/96
$ 7,493
1.21 %
0.75%
1.96%
$147
12/95
$ 6,665
1.12%
1.76%
2.88%
$192
FREDDIE MAC
Eleven -Year Financial Highlights
December 31, 1999 1998
1997
(dollars in millions, except per share amounts)
Total mortgage portfolio(') $ 862,326 $ 733,360
$ 640,406
Retained portfolio') $ 324,443 $ 255,009
$ 164,421
Total PCs(2) $ 749,081 $ 646,459
$ 579,385
Total assets $ 386,684 $ 321,421
$ 194,597
Primary capital base('' $ 12,297 $ 11,603
$ 8,215
Adjusted total capital base $ 12,427 $ 11,765
$ 8,736
New business purchases $ 272,472 $ 288,338
$ 121,490
New business purchases (# of loans) 2,058,330 2,396,651
1,085,046
PC issuances $ 233,031 $ 250,564
$ 114,258
Net interest income on earning assets(2)(4) $ 2,540 $ 1,927
$ 1,631
Management and guarantee income(2)(4) $ 1,405 $ 1,307
$ 1,298
Total revenues(41 $ 4,055 $ 3,337
$ 3,029
Net income $ 2,223 $ 1,700
$ 1,395
Earnings per common share(5)(6)(»
Basic $ 2.97 $ 2.32
$ 1.90
Diluted $ 2.96 $ 2.31
84
$ 1.88
Dividends per common share(6'(" $ 0.60 $ 0.48
$ 0.40
Return on common equity Q(8) 25.5% 24.1 %
23.3%
(1) 1991-1994 data have been restated to reflect the transfer of multifamily in -substance foreclosures from REO to the retained portfolio pursuant to the adoption of Statement of
Financial Accounting Standards (SFAS) No. 114 in 1995.
(2) 1993-1995 data have been restated to reflect the adoption in 1996ofa change in the reporting of balances and associated income for Freddie Mac PCs held in the retained
portfolio.
(3) Stockholders' equity"plus the sum of Reserve for losses on retained mortgages"and `Reserve for losses on Mortgage Participation Certificates. "
(4) 1989-1993 amounts do not include pro forma adjustments to reflect the adoption in 1994 of a change in the reporting of uncoUectibk interest on single-family mortgages.
(5) Earnings per common share-basic"are computed based on weighted average common shares outstanding. "Earnings per common share-diluted"are computed based on the
total of weighted average common shares outstanding and the effect of dilutive common equivalent shares outstanding.
(6) Earnings per common share, " Dividends per common share"and "Return on common equity"are shown as if common stock had been outstanding since January 1, 1989.
(7) `Earnings per common share"and "Dividends per common share" reflect a three for -one stock split effective April 1992 and a four for -one stock split effective December 1996.
(8) In 1999, annual return computations were changed to reflect the simple average of quarterly returns. 1994-1998 have been restated to reflect this change.
Quarterly returns
are computed as annualized "Net income" less preferred stock dividends divided by the simple average of the beginning and ending balances of "Stockholders' equit)� " net of
preferred stock (at redemption value).
See also Five -Year Financial Highlights."
089
FREDDIE MAC
1996
1995
1994
1993
1992
1991
1990
1989
$ 610,820
$ 566,469
$
533,484
$
494,727
$
441,410
$
386,209
$ 338,217
$ 294,722
$ 137,755
$107,424
$
72,828
$
55,698
$
33,896
$
27,046
$
21,858
$
21,852
$ 554,260
$ 515,051
$
491,325
$
454,906
$
407,514
$
359,163
$ 316,359
$ 272,870
$ 173,866
$137,181
$
106,199
$
83,880
$
59,502
$
46,860
$
40,579
$
35,462
$ 7,411
$ 6,546
$
5,895
$
5,197
$
4,355
$
3,303
$
2,756
$
2,382
$ 7,901
$ 7,179
$
7,121
$
6,680
$
5,813
$
5,265
$
5,322
$
4,427
$ 128,565
$ 98,386
$
124,246
$
229,706
$
191,126
$
99,965
$
75,518
$
78,589
1,232,540
934,890
1,256,566
2,315,162
1,969,851
1,061,942
841,086
992,542
$ 119,702
$ 85,877
$
117,110
$
208,724
$
179,207
$
92,479
$
73,815
$
73,518
$ 1,542
$ 1,298
$
1,047
$
808
$
695
$
683
$
619
$
517
$ 1,249
$ 1,185
$
1,173
$
1,077
$
936
$
792
$
654
$
572
$ 2,875
$ 2,541
$
2,300
$
2,023
$
1,695
$
1,511
$
1,304
$
1,123
$ 1,243
$ 1,091
$
983
$
786
$
622
$
555
$
414
$
437
$ 1.65
$ 1.63
$ 1.42
$ 1.41
$
$
1.27
1.26
$
$
1.02
1.01
$
$
0.82
0.82
$
$
0.77
0.77
$
$
0.58
0.58
$
$
0.61
0.61
85
$ 0.35
$ 0.30
$
0.26
$
0.22
$
0.19
$
0.17
$
0.13
$
0.13
22.2%
21.9%
23.2%
22.3%
21.2%
23.6% ,
20.4%
25.0%
090
FREDDIE MAC
86
Shareholder Information
QUARTERLY COMMON STOCK INFORMATION
1999 1998 1997
4th 3rd 2nd 1st 4th 3rd 2nd 1st 4th 3rd 2nd 1st
Closing Trading Prices
High $ 55.75 $ 61.06 $ 64.63 $ 61.19 $ 65.13
Low 45.75 49.75 53.56 55.00 45.31
Dividends Declared 0.15 0.15 0.15 0.15 0.12
ABOUT FREDDIE MAC'S EQUITY CAPITAL
As of December 31, 1999, Freddie Mac had two types of
stock outstanding: common stock, having a par value of
$0.21 per share, and 11 classes of non -cumulative perferred
stock, having a par value of $1.00 per share.
Freddie Mac's common stock is listed on the New York
and Pacific Stock Exchanges. Options on Freddie Mac's
common stock are traded on the U.S. option exchanges. The
1996 variable -rate, 6.125%, 6.14%, 5%, 1998 variable -rate,
5.1% (1998 issue), 5.79% and 1999 variable -rate non-
cumulative preferred stock are listed on the New York Stock
Exchange as "FREprB," "FREprC," "FREprD," "FREprF,"
"FREprG," "FREprH," "FREprK" and "FREprL,"
respectively. The 5.81 % and the 5.3% and 5.1 % (1999 issue)
classes of non -cumulative preferred stock are not listed on any
stock exchange.
As of December 31, 1999, there were 695,091,006
shares outstanding of common stock, 5,000,000 shares
outstanding of 1996 variable -rate non -cumulative preferred
stock, 5,750,000 shares outstanding of 6.125% non -cumulative
preferred stock, 12,000,000 shares outstanding of 6.14%
non -cumulative preferred stock, 3,000,000 shares
ourstanding of 5.81% non -cumulative preferred stock,
8,000,000 shares outstanding of 5% non -cumulative preferred
$ 51.38 $ 48.94 $ 49.94 $ 43.38 $ 37.44 $ 37.19 $ 33.63
39.50 42.38 42.50 35.13 31.63 27.13 27.03
0.12 0.12 0.12 0.10 0.10 0.10 0.10
stock, 4,395,000 shares outstanding of 1998 variable -rate
non -cumulative preferred stock, 8,000,000 shares
outstanding of 5.1 % non -cumulative preferred stock,
4,000,000 shares outstanding of 5.3% non -cumulative
preferred stock, 3,000,000 shares outstanding of 5.1 %
non -cumulative preferred stock, 5,000,000 shares
outstanding of 5.79% non -cumulative preferred stock,
and 5,750,000 shares outstanding of 1999 variable -rate
non -cumulative preferred stock.
As of February 29, 2000, Freddie Mac had
approximately 2,403 common stockholders of record.
Freddie Mac estimates that approximately 180,000
additional common stockholders hold shares through
banks, brokers and nominees.
STOCK TRANSFER AGENT
Inquiries concerning lost stock certificates, dividend
payments, change of address and account status should be
directed to Freddie Mac 's stock transfer agent:
First Chicago Trust, a division of EquiServe
P.O. Box 2506
Jersey City, New Jersey 07303-2506
Toll Free: (800) 519-3111
091
FREDDIE MAC
Board of Directors
(As of March 15, 2000)
Leland C. Brendsel
Thomas W. Jones
Chairman c' Chief Executive Officer
Chairman & Chief Executive Officer
Freddie Mac
Global Investment Management and
Private Banking Group
David W. Glenn
A division of Citigroup, Inc.
President & Chief Operating Officer
New York, New York
Freddie Mac
Henry Kaufman
Dennis DeConcini*
President
Former U.S. Senator from Arizona
Henry Kaufman & Company, Inc.
An economic and financial consulting and
Rahm Emanuel*
investment management firm
Managing Director
New York, New York
Wasserstein Perella & Co.
An investment banking firm
John B. McCoy
Chicago, Illinois
Retired Chairman & Chief Executive Officer
BANK ONE CORPORATION
Joel I. Ferguson*
A financial institution
Chairman
Columbus, Ohio
Ferguson Development Company
A real estate development company
James F. Montgomery
Lansing, Michigan
Chairman & Chief Executive Officer
Frontier Bank
George D. Gould
A savings and loan company
Vice Chairman
Park City, Utah
Klingenstein, Fields & Company, L.P.
An investment management firm
Russell E. Palmer
New York, New York
Chairman & Chief Executive Officer
The Palmer Group
Neil F. Hartigan*
A private investment firm
Partner
Philadelphia, Pennsylvania
McDermott, Will & Emery
A law firm
Ronald F. Poe
Chicago, Illinois
President
Ronald E Poe & Associates
A mortgage banking company
White Plains, New York
Stephen A. Ross
Professor
Massachusetts Institute of Technology
Cambridge, Massachusetts
Donald J. Schuenke
Retired Chairman
Northwestern Mutual Life Insurance
A life insurance company
Milwaukee, Wisconsin
Christina Seix
Chairman, Chief Executive Officer
& Chief Investment Officer
Seix Investment Advisors, Inc.
An investment management firm
Woodcliff Lake, New Jersey
William J. Turner
Co -Manager
Signature Capital, Inc.
A venture capital investment firm
New York, New York
*Appointed by the President of the United States
Freddie Mac lost a valued friend and advisor in 1999, with the passing ofJoe Serna, Jr. Mayor Serna served on Freddie Mac's Board of Directors since
1997. His warmth and commitment to the people of Sacramento were an inspiration to us all.
87
FREDDIE MAC
88
Senior Management
(As of March 15, 2000)
Leland C. Brendsel
Chairman er Chief Executive Offlcer
David W. Glenn
President & Chief Operating Offlcer
Maud Mater
Executive Vice President,
General Counsel & Secretary
Paul T. Peterson
Executive Vice President
Single Family Securitization Group
David A. Andrukonis
Senior Vice President & Chief Credit Officer
Donald J. Bisenius
Senior Vice President
Risk Assessment & Model Development
Henry J. Cassidy
Senior Vice President
Portfolio Management
Vaughn A. Clarke
Senior Vice President
Finance & Chief Financial Offlcer
Margaret Colon
Senior Vice President
Servicer Division
Adrian B. Corbiere
Senior Vice President
Multifamily Housing
R. Mitchell Delk
Senior Vice President
Government Relations
Patricia M. Dodson
Senior Vice President
Investor and Dealer Services
Nazir G. Dossani
Senior Vice President
Asset/Liability Management & Research
Melvin M. Kann
Senior Vice President 6- General Auditor
William I. Ledman
Senior Vice President
Information Systems & Services
Jerome T. Lienhard .
Senior Vice President
Investment Funding
Peter F. Maselli
Senior Vice President
Business Development
Michael C. May
Senior Vice President
Customer Services & Control
Candice D. Mendenhall
Senior Vice President
Human Resources
Gregory J. Parseghian
Senior Vice President
Corporate Finance & Chief Investment Officer
Gregory E. Reynolds
Senior Vice President & Corporate Controller
Dwight P. Robinson
Senior Vice President
Corporate Relations
Patrick Sheehy
Senior Vice President
Marketing, Sales & Production
David Stevens
Senior Vice President
Sales
Joel Van Ryckeghen
Senior Vice President
Customer Capabilities
C93
FREDDIE MAC
Subject to approval by Freddie Macs Board of Directors,
dividends on the corporation's common stock and non-
cumulative preferre d stock in 2000 are expected to be paid
on or about:
March 31, 2000
June 30, 20
September 30, 20►00
December 31, 2000
Corporate Headquarters
8200 Jones Branch Drive
McLean, VA 22102-3110
703/903-2000
800/424-5401
www.freddicmac.com
Freddie
Mac
We Open Doors
New York City Office
575 Lexington Avenue
Suite 1800
New York, NY 10022-6102
212/418-8900
HomeSteps Asset Services
8081 Royal Ridge Parkway
Suite 300
Irving, TX 75063
972/726-3600
Real Estate Services
12222 Merit Drive
Suite 700
Dallas, TX 75251-2277
972/702-2000
North Central Region
333 West Wacker Drive
Suite 2500
Chicago, IL 60606-1287
312/405-7400
Northeast Region
1410 Spring Hill Road
Suite 600
PO Box 50122
McLean, VA 22102-8922
703/902-7700
Southeast/Southwest Region
2300 Windy Ridge Parkway
North Tower, Suite 200
Atlanta, GA 30339-5671
770/857-8800
Western Region
21700 Oxnard Street
Suite 1900
Woodland Hills, CA 91367-3621
818/710-3000
ASS
ANNUAL INFORMATION STATEMENT — 1999
Farm Credit System *t*
we
Federal Farm Credit Banks
Funding Corporation
10 Exchange Place, Suite 1401
Jersey City, New Jersey 07302
(201) 200-8000
February 24, 2000
This page left blank intentionally.
097
This Annual Information Statement should be read in conjunction with the most recent Farm Credit
System Quarterly Information Statement issued in 2000 and certain press releases issued from time to time by
the Federal Farm Credit Banks Funding Corporation, all of which are incorporated by reference into this
Annual Information Statement.
Systemwide Debt Securities (as defined herein) are the joint and several obligations of the Banks (as
defined herein) and are not obligations of and are not guaranteed by the United States or any agency or
instrumentality thereof, other than the Banks. See "Description of Debt Securities."
Systemwide Debt Securities are not required to be registered under the Securities Act of 1933.
Accordingly, no registration statement has been filed with the Securities and Exchange Commission. The
Banks are not subject to the periodic reporting requirements of the Securities Exchange Act of 1934.
This Annual Information Statement does not constitute an offer to sell or a solicitation of any offer to buy
any Systemwide Debt Securities. Systemwide Debt Securities are offered by the Federal Farm Credit Banks
Funding Corporation on behalf of the Banks pursuant to offering circulars pertaining to particular types of debt
offerings. See "Description of Debt Securities." The relevant offering circulars as of this date are the Federal
Farm Credit Banks Consolidated Systemwide Bonds and Discount Notes Offering Circular dated June 18,
1999, which has not been amended by any supplements (Bond and Discount Note Offering Circular); the
Federal Farm Credit Banks Consolidated Systemwide Master Notes Offering Circular dated December 21,
1999, which has not been amended by any supplements (Master Notes Offering Circular); the Federal Farm
Credit Banks Global Debt Program Offering Circular dated October 10, 1996, which has not been amended
by any supplements (Global Debt Offering Circular); and the Federal Farm Credit Banks Consolidated
Systemwide Medium -Term Notes Offering Circular dated July 19, 1993, as most recently amended by the
supplement dated June 11, 1999 (Medium -Term Notes Offering Circular). Each of these offering circulars
may be amended or supplemented from time to time and new offering circulars may be issued. Before
purchasing Systemwide Debt Securities, investors should carefully examine the relevant offering circular, the
information incorporated therein, and any other offering documents pertaining to the particular issue of
Systemwide Debt Securities being offered.
Certification
The undersigned certify that the Federal Farm Credit Banks Funding Corporation has policies and
procedures in place to ensure, to the best of the knowledge and belief of management and the Board
of Directors of the Federal Farm Credit Banks Funding Corporation, that the information
contained in this Annual Information Statement is true, accurate, and complete.
Jerold L. Harris, James A. Brickley,
Chairman of the Board President and CEO
C9
8
TABLE OF CONTENTS
Five -Year Summary of Selected Combined Financial Data .......................
Description of Business .....................................................
Entities to Provide Assistance to Farm Credit System Institutions .................
Federal Supervision of the Farm Credit System ................................
Description of Debt Securities ...............................................
Directors and Management .................................................
Discussion and Analysis of Financial Condition and Results of Operations ..........
Index to Combined Financial Statements and Supplemental Combining Information
Index to Annual Information Statement .......................................
Certain Farm Credit System Entities .........................................
GLOSSARY
Page
4
10
15
16
19
26
F-1
I-1
Inside Back Cover
As used herein, the following terms have the following meanings:
Associations — FLBAs, FLCAs, PCAs and ACAS
ACA — Agricultural Credit Association, the successor Association resulting from the merger of an FLBA
or FLCA with a PCA
ACB — Agricultural Credit Bank, the successor Bank resulting from a BC/FCB merger
Banks — the FCBs and the ACB
BC — Bank for Cooperatives, including the ACB with respect to its cooperative lending activities
Consolidated Bank Debt Securities — debt securities issued by a combined Bank group pursuant to
Section 4.2 (c) of the Farm Credit Act
FCA — Farm Credit Administration
FCA Board — Board of FCA appointed by the President of the United States with the advice and consent
of the Senate
FCB — Farm Credit Bank, including the ACB with respect to its FCB lending activities
FLBA — Federal Land Bank Association
FLCA — Federal Land Credit Association, an FLBA that has been granted direct -lending authority
Farm Credit Act — Farm Credit Act of 1971, as amended
Financial Assistance Corporation — Farm Credit System Financial Assistance Corporation
Funding Corporation — Federal Farm Credit Banks Funding Corporation
Insurance Corporation — Farm Credit System Insurance Corporation
Insurance Fund — Farm Credit Insurance Fund maintained by the Insurance Corporation pursuant to the
Farm Credit Act
PCA — Production Credit Association
System — Farm Credit System
Systemwide Debt Securities — Federal Farm Credit Banks Consolidated Systemwide Bonds, Federal Farm
Credit Banks Consolidated Systemwide Discount Notes, Federal Farm Credit Banks Consolidated
Systemwide Master Notes, Federal Farm Credit Banks Global Debt Securities, Federal Farm Credit
Banks Consolidated Systemwide Medium -Term Notes, and any other debt securities that may be issued
by the Banks pursuant to Section 4.2 (d) of the Farm Credit Act
Trust Fund — Financial Assistance Corporation Trust Fund maintained by the Financial Assistance
Corporation pursuant to the Farm Credit Act
Farm Credit System Annual Reports to Investors, Annual and Quarterly Information Statements, and press
releases for the current fiscal year and the two preceding fiscal years, as well as offering circulars related to
Systemwide Debt Securities, are available for inspection at, or will be furnished without charge upon request
to, the Federal Farm Credit Banks Funding Corporation, 10 Exchange Place, Suite 1401, Jersey City, New
Jersey 07302; telephone (201) 200-8000. These documents, except for Annual Reports to Investors, are also
available on the Funding Corporation's Web site located at www.farmcredit-ffcb.com. Copies of each Bank's
recent periodic reports to shareholders may be obtained from the individual Bank. Bank addresses and phone
numbers where copies of the periodic reports of each Bank may be'obtained are listed on the inside back cover
of this Information Statement.
0 9 9
FIVE-YEAR SUMMARY OF
SELECTED COMBINED FINANCIAL DATA
The following selected combined financial data for each of the five years in the period ended
December 31, 1999 has been derived from the combined financial statements of the System that were audited
by PricewaterhouseCoopers LLP, independent accountants. The combined statement of condition at Decem-
ber 31, 1999 and 1998 and the related combined statements of income, of changes in capital, and of cash flows
for each of the three years in the period ended December 31, 1999 and notes thereto appear elsewhere in this
Annual Information Statement.
Combined Statement of Condition Data
Loans..........................................
Allowance for loan losses ..........................
Net loans ................................ '.......
Cash, Federal funds sold and investments ............
Accrued interest receivable on loans .................
Other property owned .............................
Total assets .....................................
Systemwide bonds, medium -term notes and
master notes ...................................
Systemwide discount notes ........................
Systemwide global debt securities ...................
Consolidated bank debt securities ...................
Farm Credit investment bonds .....................
Financial Assistance Corporation bonds ..............
Total liabilities ...................................
Protected borrower capital .........................
Capital.........................................
Combined Statement of Income Data
Net interest income ..............................
Provision for loan losses ...........................
Net noninterest expense ...........................
Merger -implementation and restructuring costs .......
Income before income taxes and extraordinary item ...
Provision for income taxes ....................... . . .
Income before extraordinary item ...................
Extraordinary item - loss on extinguishment of debt . .
1999 1998 1997 19% 1995
(in millions)
$70,002 $67,904 $63,439 $61,178 $58,589
1,938) 1,917) (1,835) 1,770) 1,677)
68,064 65,987 61,604 59,408 56,912
16,814 14,413 12,987 12,142 11,291
1,173 1,230 1,208 1,166 1,229
25 32 31 55 63
88,692 84,139 78,144 74,917 71,438
54,739 49,778 47,435
16,715 17,922 14,039
725
941 944 1,021
863 1,020 1,259
75,373 71,617 66,450
64 76 109
13,255 12,446 11,585
$ 2,272 $ 2,243 $ 2,190
(177) (150) (92)
(690) (662) (645)
1,405
(172)
1,233
Net income ..................................... $ 1,233
45,571 41,985
13,648 15,194
500
427 751
938 588
1,259 1,259
64,188 61,575
131 161
10,598 9,703
$ 2,161
(141)
(645)
1,431
1,453
1,375
(180)
(186)
174)
1,251
1,267
1,201
$ 1,251
$ 1,267
$ 1,201
$ 2,022
(36)
(659)
-(11)
1,316
137)
1,179
14)
$ 1,165
DESCRIPTION OF BUSINESS
The System is a nationwide network of lending institutions and affiliated service and other entities.
Through its Banks and Associations, the System provides credit and related services to farmers, ranchers,
producers and harvesters of aquatic products, rural homeowners, certain farm -related businesses, agricultural
and aquatic cooperatives (or to other entities for the benefit of such cooperatives), rural utilities, and to certain
foreign or domestic entities in connection with international agricultural credit transactions. The Banks and
Associations are not commonly owned or controlled. They are cooperatively owned, directly or indirectly, by
their borrowers. System institutions are federally chartered under the Farm Credit Act and are subject to
supervision, examination and regulation by the FCA. The following summaries of certain provisions of the
Farm Credit Act and the FCA regulations do not purport to be complete and are qualified in their entirety by
reference to the provisions of the Farm Credit Act and the FCA regulations.
Lending Operations
System Lending Institutions
Unlike commercial banks and other financial institutions that lend both to the agricultural sector and to
other sectors of the economy, under the Farm Credit Act, System institutions are restricted solely to making
loans and providing financially related services to qualified borrowers in the agricultural sector and to certain
related entities. Moreover, the System is required to make credit available in all areas of the nation. In order to
fulfill its broad statutory mandate, the System maintains lending units in all 50 states and the Commonwealth
of Puerto Rico.
In making credit available to all areas of the nation, the credit risk of the System's loan portfolio is spread
across the various sectors of the U.S. agricultural economy. While higher percentage concentrations of credit
sector risk existed in certain individual System institutions at December 31, 1999, at the System level only
loans to borrowers producing cash grains (e.g., wheat, corn and soybeans) or raising livestock (excluding
poultry and dairy) exceeded 10% of the System's total assets. At December 31, 1999, loans to borrowers
producing cash grains represented 12% of total System assets and loans to borrowers raising livestock
represented 10% of total System assets.
As of December 31, 1999, the nation was served by seven Banks — six FCBs and one ACB. Two FCBs
are jointly managed, but continue to be governed by separate boards of directors. During 1999, the St. Paul
BC merged with CoBank, ACB. The Banks obtain funds for their lending operations primarily from the sale of
Systemwide Debt Securities.
The FCBs have specified lending authorities within their chartered territories, which are sometimes
referred to as "Districts." The FCBs generally serve agricultural borrowers in their chartered territories by
making loans to or through their related Associations, which consist of FLBAs, FLCAs, PCAs and ACAs.
The FCBs and their affiliated Associations may also participate in loans to cooperatives with CoBank, ACB.
The FCBs are generally the sole source of borrowed funds for their related Associations. The Associations may
not borrow from commercial banks or other financial institutions without the approval of their related FCB
and neither the Banks nor the Associations are statutorily authorized to accept deposits. Certain Associations
are jointly managed. There is substantial variation among the Districts with respect to the size, number and
mix of Associations.
The ACB has the lending authorities of an FCB within its chartered territory and BC lending authorities
nationwide. BC lending authorities provide for loans to or for the benefit of agricultural and aquatic
cooperatives and rural utilities and include financing specified international agricultural credit transactions.
As used herein, references to a BC include the ACB with respect to its BC lending activities and
references to the FCBs include the ACB with respect to its FCB lending activities.
The Banks and Associations maintain service entities to provide a variety of services to System
institutions and their borrowers. Financially related services provided by some System institutions include,
among others, credit and mortgage life or disability insurance, various types of crop insurance, estate planning,
4
10.1
record keeping services, tax planning and preparation, and consulting (farm business and cooperative
business) .
The Farm Credit Act specifies the lending and related authorities of System institutions as described in
this Annual Information Statement. These authorities are also subject to extensive regulation by the FCA. In
addition, FCA enforcement actions may significantly affect the lending operations of the subject institutions.
See "Discussion and Analysis of Financial Condition and Results of Operations — Regulatory Matters." The
Farm Credit Act contains various provisions, in addition to those discussed herein, that are directly applicable
to System institutions' lending activities, e.g., provisions specifying the procedures applicable to restructuring
troubled loan assets.
Long -Term Real Estate Loans (Excluding Loans to Cooperatives)
The FCBs, the ACAs, and the FLCAs make long-term real estate loans that are secured by first
mortgages on farm and rural real estate. Certain FCBs make long-term real estate loans directly through
FLBAs, which originate and service these loans. In other cases, the FLCAs and the ACAs make the loans
directly. Although FLCAs and ACAs obtain some of the funds for their lending operations from the issuance
of equities and from internally generated earnings, a substantial majority of their funding is obtained through
borrowings from their related FCB.
Long-term real estate loans are made for a variety of purposes, including: purchasing land, buildings,
machinery, equipment and livestock; refinancing existing mortgages and paying other debts; constructing or
repairing buildings; improving land; and financing other agricultural needs. Loans are also made for the
purchase or construction of rural homes, for real estate needed for aquatic operations, for processing and
marketing facilities, and to certain farm -related businesses. Also, FCBs and their direct -lender Associations
have authority to participate in loans made by commercial lenders to certain entities whose operations are
functionally similar to those of an eligible borrower. This authority is subject to various approval requirements
and quantitative restrictions as to the volume of these loan participations. System institutions may not hold
50% or more of the principal amount of these loans and cumulative participations with non -System lenders
may not exceed 15% of an institution's assets.
Long-term real estate loans have maturities ranging from five to 40 years and must be secured by first
liens on interests in real estate. Loans can be made in amounts up to 85% of the appraised value of the
property taken as security (or a greater percentage to the extent the loan amount in excess of 85% is covered
by private mortgage insurance) or up to 97% of appraised value if guaranteed by a state, Federal, or other
governmental agency. As provided in the Farm Credit Act, the FCA may require that for a particular
institution long-term real estate loans be limited to 75% of the appraised value of the security.
Short- and Intermediate -Term Loans to Agricultural Producers
The FCBs provide funds for short- and intermediate -term lending to PCAs, ACAs and certain other
financing institutions, all of which lend directly to agricultural producers. As is the case with the FLCAs and
ACAs, while PCAs obtain some of the funds for their lending operations from the issuance of equities and
from internally generated earnings, a substantial majority of their funding is obtained through borrowings from
their related FCB.
PCAs and ACAs make loans to farmers, ranchers, rural homeowners, producers and harvesters of aquatic
products, and certain farm -related businesses. Loans may be made on a secured or unsecured basis. Loans are
also made to finance processing and marketing activities of farmers, ranchers, and commercial fishermen.
Most loans are made for production -input or operating purposes, and these loans generally mature within one
year. However, intermediate -term farm and rural home loans may have maturities of up to ten years, and loans
to producers or harvesters of aquatic products may have maturities of up to 15 years.
5 - 10=
Loans to or for the Benefit of Cooperatives
Under BC lending authorities, the ACB can make loans to agricultural cooperatives, aquatic coopera-
tives, rural utilities (including electrical distribution, generation and transmission, telecommunications, and
water and waste disposal systems) and other eligible borrowers on a nationwide basis. Under the BC lending
authorities, the ACB can also provide credit and related services to domestic or foreign borrowers in
connection with international export and import agricultural credit transactions. Under the BC lending
authorities, the ACB may participate with other System institutions in loans that the originating System
institution is authorized to make and with non -System institutions in authorized loans. Under the BC lending
authorities, the ACB may also participate with non -System institutions in loans to entities that are functionally
similar to eligible borrowers, subject to various approval requirements and quantitative restrictions as to the
volume of these loan participations.
In addition, under the BC lending authorities, the ACB is authorized to make and purchase interests in
loans and commitments to foreign or domestic entities for the purpose of financing the export of agricultural
commodities or products, farm supplies, or aquatic products, whether sourced from eligible cooperatives or
other entities, subject to certain limitations if these loans are not originally sourced from eligible cooperatives
and if at least 95% of these loans is not guaranteed or insured by an agency or wholly -owned corporation of the
United States.
Under the BC lending authorities, a cooperative is generally eligible to borrow from the ACB only if at
least 80% of the cooperative's voting control is held by agricultural or aquatic producers. Federations of
cooperatives, in which the control is so held, are also eligible to borrow from the ACB. For certain rural
utilities and farm supply cooperatives, the required control percentage is at least 60%. Additionally, to be
eligible, a cooperative must generally do at least 50% of its business with its members. However, business
transactions with the Federal government or services or supplies furnished by the cooperative as a public utility
are excluded in determining compliance with this requirement. Without regard to the foregoing requirements,
a cooperative that has received a loan from the ACB continues to be eligible to borrow from the ACB so long
as more than 50% (or such higher percentage as is established by the ACB) of the voting control of the
cooperative is held by farmers, producers or harvesters of aquatic products, or other eligible cooperatives. Also,
under some circumstances, certain subsidiaries or parents of cooperatives or groups of cooperatives and certain
nonprofit organizations organized to benefit agriculture, and subsidiaries of these organizations, are eligible to
borrow from the ACB.
In addition, cooperatives and other entities that have received a loan, loan commitment or loan guarantee
(and subsidiaries and joint ventures of these cooperatives or other entities) from the Rural Utilities Service or
the Rural Telephone Bank or that are eligible under the Rural Electrification Act of 1936, as amended, and
rural water and waste disposal system borrowers are eligible to borrow from the ACB.
In addition, any legal entity that holds more than 50% of the voting control of an eligible entity and
borrows for the purpose of making funds available to that eligible entity is also eligible to borrow from the
ACB. Furthermore, any domestic or foreign party in which an eligible entity has an ownership interest is also
eligible to borrow from the ACB, subject to certain limitations.
Organizational Restructuring Provisions of the Farm Credit Act
Statutorily authorized organizational and structural changes that may be effected in accordance with
provisions of the Farm Credit Act include: the merger of Banks within a District; the merger of two or more
Associations within a District; and the merger of like Banks. For this purpose an ACB is treated as a like Bank
of both an FCB and BC. In addition, an FCB may transfer to an FLBA, and is required to transfer to an ACA,
the FCB's authorities to make and participate in long-term real estate loans in the Association's service
territory. These organizational and structural changes may be subject to certain board of director, shareholder,
FCA Board and other approvals. Under the Farm Credit Act, shareholder approval may be revoked during a
specified period after the approval has been granted.
6 �V�
The Farm Credit Act permits a Bank or Association to withdraw from the System if:
• it provides written notice to the FCA Board at least 90 days prior to the proposed termination date,
• the termination is approved by the FCA Board,
• a Federal or state authority grants approval for the institution to be chartered as a financial institution,
• the institution pays to the Insurance Fund the amount by which its total capital exceeds 6% of its
assets,
• the institution pays or makes adequate provision for payment of all of its debt obligations,
• the termination is approved by a majority vote of the stockholders prior to giving notice to the FCA
Board, and
• all other conditions established by the FCA Board through regulations are met.
The FCA has issued regulations intended to implement this provision with respect to Associations whose
equity investment in and loans from the related FCB are proportionately small in relation to the FCB's total
capital and total loan assets. The FCA in 1993 published and received comments on proposed regulations
intended to implement the withdrawal provision with respect to Banks and certain large Associations. In
November 1999, the FCA re -published a proposal to amend the FCA regulations to allow a System institution
to terminate its charter and become a financial institution under another Federal or state chartering authority.
The proposed regulations would amend the existing termination regulations so that they apply to all Banks and
Associations and make certain other changes to the existing regulations. The proposed rule would establish
criteria and conditions that a terminating institution would have to meet in order to terminate its charter and
become another type of financial institution.
In accordance with the Farm Credit Act, a withdrawing Bank is obligated to pay to the Financial
Assistance Corporation, and a withdrawing Association is obligated to pay to its related Bank, a portion of the
present value of certain estimated payment obligations to the Financial Assistance Corporation as more fully
described under "Entities to Provide Assistance to Farm Credit System Institutions — Farm Credit System
Financial Assistance Corporation."
Disclosure Entity Responsibilities
Disclosure Entities — The FCA has promulgated regulations intended to ensure appropriate disclosure of
financial and other information concerning the System to investors in Systemwide Debt Securities and other
interested parties. These disclosures are the responsibility of System Disclosure Entities, which, as specified by
the FCA regulations, means the Banks, the Financial Assistance Corporation, and the Funding Corporation.
These regulations require that each Bank:
• provide to the Funding Corporation annual, quarterly, and interim financial and other information in
accordance with instructions from the Funding Corporation for preparation of the information
statements,
• respond to the Funding Corporation's inquiries and provide any follow up information requested by the
Funding Corporation,
• notify the Funding Corporation promptly of any events occurring subsequent to publication of the
information statements that may be material either to the financial condition and results of operations
of the Bank or to the financial condition and results of operations of the Bank and its related
Associations,
• provide in the engagement letter with its external auditor that the external auditor must, after notifying
the Bank, respond to inquiries from the Funding Corporation relating to preparation of the information
statements, and
• certify specified items to the Funding Corporation.
ti
104
The Financial Assistance Corporation is required to provide to the Funding Corporation such information
as may be required by the Funding Corporation to prepare the information statements.
The Funding Corporation is required to:
• prepare the information statements,
• establish a system of internal controls sufficient to reasonably ensure that any information it releases to
investors and the general public concerning any matter required to be disclosed by the FCA regulations
is true and that there are no omissions of material information,
• collect from each Disclosure Entity financial data and related analyses and other information needed
for preparation of the information statements,
• file the information statements with the FCA,
• ensure prompt delivery of sufficient copies of each information statement to selling group dealers for
distribution to investors and potential investors in Systemwide Debt Securities,
• make the report available to the general public upon request,
• notify the FCA if it is unable to prepare and publish an information statement in compliance with the
FCA regulations because one or more Banks have failed to comply with the requirements of the FCA
regulations, and
• request that the FCA provide information regarding the content of the latest Reports of Examination of
any Banks and related Associations, if such information is necessary for the preparation of an
information statement.
Other Operations
Funding Corporation — The Banks utilize a fiscal agent, the Funding Corporation, to issue, market, and
handle Systemwide Debt Securities. The Funding Corporation, established by the Farm Credit Act, is owned
by the Banks. The board of directors of the Funding Corporation is comprised of nine voting members: four
current or former Bank directors and three Bank chief executive officers or presidents, elected by the
stockholder Banks, and two additional voting members appointed by the other members of the board of
directors after receiving recommendations from and consulting with the Secretary of the Treasury and the
Chairman of the Board of Governors of the Federal Reserve System. The additional members cannot be
affiliated with the System or the FCA and cannot be actively engaged with a member of the selling groups
utilized by the Funding Corporation in the distribution of Systemwide Debt Securities. The president of the
Funding Corporation also serves as a non -voting member of the Funding Corporation board.
Located in the metropolitan New York City area, the Funding Corporation utilizes a selling group of
approximately 60 investment dealers and dealer banks that offer Federal Farm Credit Banks Consolidated
Systemwide Bonds, as well as smaller selling groups that offer other types of Systemwide Debt Securities. The
Funding Corporation selling groups distribute Systemwide Debt Securities on a worldwide basis to commer-
cial banks, states and municipalities, pension and money-market funds, insurance companies, investment
advisors, corporations, foreign banks and governments, and other investors. In addition, the Funding
Corporation assists the Banks with respect to a variety of asset/liability management and specialized funding
activities, including interest -rate swaps.
Under the Farm Credit Act, the Funding Corporation, acting for the Banks, has the responsibility for
determining, subject to FCA approval, the amounts, maturities, rates of interest, and terms of each issue of
Systemwide Debt Securities and for establishing conditions of participation in issuances of Systemwide Debt
Securities. To address this statutory responsibility to establish conditions of participation, following publication
in the Federal Register and FCA approval, the Funding Corporation and all the Banks entered into a Market
Access Agreement (MAA), effective November 23, 1994. The MAA establishes criteria and procedures for
the Banks to provide certain information and, under specified circumstances, for restricting or prohibiting an
individual Bank's participation in issuances of Systemwide Debt Securities. The MAA is intended to promote
1 �3
the identification and resolution of individual Bank financial problems in a timely manner and to effectively
discharge the Funding Corporation's statutory responsibility for determining conditions of participation with
respect to each Bank's participation in each issuance of Systemwide Debt Securities. Under the MAA, if
certain financial criteria are not met, a Bank may be placed in one of three categories, each of which imposes
certain requirements and/or restrictions on the affected Bank. The categories are progressively more
restrictive: a "Category I" Bank is subject to additional monitoring and reporting requirements; a "Cate-
gory II" Bank's ability to participate in issuances of Systemwide Debt Securities may be curtailed; and a
"Category III" Bank may not be permitted to participate in issuances of Systemwide Debt Securities.
All the Banks, the Funding Corporation and the Financial Assistance Corporation have also entered into
the Amended and Restated Contractual Interbank Performance Agreement (CIPA). The CIPA establishes
an agreed -upon standard of financial condition and performance for all Banks to achieve and/or maintain. In
the event Banks do not achieve and/or maintain the agreed -upon standard, the CIPA provides for certain
intra-System economic incentives to be applied to such Banks.
In addition, the Funding Corporation provides the Banks with certain consulting, accounting, and
financial reporting services, including the preparation of the System's Annual and Quarterly Information
Statements and the System's combined financial statements contained in the Information Statements. As the
System's financial spokesperson, the Funding Corporation is responsible for financial disclosure and the
release of public information concerning the financial condition and performance of the System as a whole.
Farm Credit Leasing Services Corporation (FCL) — On July 1, 1999, CoBank, ACB acquired a majority
interest in FCL, which was previously owned jointly by all Banks.
FCL leases or arranges leases for a variety of equipment and facilities for eligible System borrowers,
including agricultural producers, cooperatives and rural utilities. FCL offers leases on transportation, material
handling, high technology, processing, and other equipment. These leasing programs may be complemented
by services such as specification and engineering assistance, pool purchasing, warranty assistance, license and
title services, national account service programs, and equipment disposal. In addition, FCL arranges financing
for projects such as plants, equipment, buildings, railroad cars, and storage facilities.
Federal Agricultural Mortgage Corporation (Farmer Mac) — Farmer Mac, which is statutorily defined
as an institution of the System and is examined and regulated by the FCA, provides secondary marketing
arrangements, certifies marketing facilities in order to promote a secondary market for agricultural and rural
home mortgage loans that meet certain underwriting standards, and is authorized to become a direct pooler of
farm mortgage loans. The Farmer Mac board of directors has both System and non -System representation.
Farmer Mac is not liable for any debt or obligation of any other System institution, and no System institution
other than Farmer Mac is liable for any debt or obligation of Farmer Mac. Accordingly, the accounts of
Farmer Mac are not included in the combined financial statements of the System.
Standing Committees — System standing committees, whose powers have been delegated by the Banks,
include the Presidents' Planning Committee, which is comprised of all Bank and service entity chief executive
officers or presidents and one Association president from the territory served by each FCB, and the Presidents'
Planning Committee Executive Committee, a subcommittee of the Presidents' Planning Committee, both of
which develop Systemwide objectives, address Systemwide issues, and coordinate other System activities.
Other subcommittees of the Presidents' Planning Committee include: the Presidents' Risk Management
Committee, which addresses issues related to the lending and related operations of System lending
institutions; the Presidents' Finance Committee, which addresses issues related to finance and financial
management; and the Presidents' Regulatory, Legislative and Public Relations Committee, which addresses
issues involving communications, public relations, human resources, product development and training.
System Audit Committee — The FCA regulations with respect to disclosure to investors in Systemwide
Debt Securities require the board of directors of the Funding Corporation to establish and maintain a System
Audit Committee. These regulations specify that the System Audit Committee is to consist of no fewer than
three members; members must be independent of management of any Disclosure Entity or Association and
free from any relationship that, in the opinion of the board of directors of the Funding Corporation, would
9 106
interfere with the exercise of independent judgment as a System Audit Committee member. The System
Audit Committee reports to the board of directors of the Funding Corporation. The responsibilities of the
System Audit Committee include:
• making recommendations to the board of directors of the Funding Corporation regarding the selection
of an independent auditor of the Systemwide combined financial statements,
• overseeing the Funding Corporation management's preparation of information statements,
• reviewing the impact of any significant accounting and auditing developments, and reviewing account-
ing policy changes relating to the preparation of the Systemwide combined financial statements,
• reviewing the System's Annual and Quarterly Information Statements prior to their release, and
• overseeing the Funding Corporation's system of internal controls relating to the preparation of
information statements, including controls relating to the System's compliance with applicable laws
and regulations.
The System Audit Committee is composed of four members — one of the Funding Corporation's outside
directors; one FCB director; one ACB/BC director, and one person not otherwise affiliated with the System
(Outside Member) . All members except the Outside Member are selected by the Funding Corporation
Board. The Outside Member is selected by the other System Audit Committee members, subject to
ratification by the Funding Corporation Board.
ENTITIES TO PROVIDE ASSISTANCE TO FARM CREDIT SYSTEM INSTITUTIONS
The Farm Credit Act, through amendments enacted in 1988, provided for the creation of the Farm Credit
System Assistance Board (Assistance Board) and the Financial Assistance Corporation to carry out a
temporary program to provide financial assistance to, and to protect certain equities of borrowers of, System
institutions that were then experiencing financial difficulty. The Assistance Board's existence terminated on
December 31, 1992. In addition, the amendments to the Farm Credit Act enacted in 1988 provided for the
creation of the Insurance Corporation for the purpose of insuring the timely payment of principal of and
interest on Systemwide Debt Securities and for other specified purposes.
Farm Credit System Financial Assistance Corporation
The Financial Assistance Corporation is an institution of the System and a federally chartered
instrumentality of the United States. The board of directors of the Funding Corporation also serves as the
board of directors of the Financial Assistance Corporation.
The Financial Assistance Corporation was required to provide financial assistance, as authorized by the
Assistance Board, through the purchase of preferred stock issued by System institutions, in each case only to
the extent that such purchase was approved by the Assistance Board. In addition, in accordance with the Farm
Credit Act, the Financial Assistance Corporation funded the retirement of protected borrower equities by
System institutions in liquidation, funded the expenses of the Assistance Board, and paid all remaining
liabilities accrued under the System's Capital Preservation Agreements, which were intra-System assistance
agreements that were terminated by the Banks in 1988.
As authorized by the Farm Credit Act, the Financial Assistance Corporation, with the approval of the
Assistance Board, funded its activities through the issuance of $1.261 billion in principal amount of Financial
Assistance Corporation bonds, guaranteed as to the payment of principal and interest by the Secretary of the
Treasury as provided in the Farm Credit Act and backed by the full faith and credit of the United States. The
Financial Assistance Corporation bonds have maturities of 15 years from the date of issuance, although three
of the five issues of these bonds are callable at par. With respect to these callable bonds, in November 1998,
the $240 million of 9.45%, November 2003 bonds were called and redeemed; in April 1999, the $157 million
of 9.50%, April 2004 bonds were called and redeemed; and, subject to certain conditions, provision has been
made to call in September 2000 the $89 million of 9.20%, September 2005 bonds. The authority of the
10
Financial Assistance Corporation to issue bonds terminated on September 30, 1992. The Financial Assistance
Corporation will continue in existence no longer than two years following the maturity and full payment of its
outstanding bonds.
As discussed below, the responsibility for ensuring that the Financial Assistance Corporation has
sufficient funds for the payment of interest on its bonds and to repay the principal of these bonds is allocated
among System institutions, the Insurance Corporation, and the Secretary of the Treasury, in accordance with
the Farm Credit Act.
Interest on the 15-year bonds issued by the Financial Assistance Corporation described above (other than
bonds issued for purposes of paying Capital Preservation Agreement accruals) was funded by the Secretary of
the Treasury during the first five years, is allocated between the Secretary of the Treasury and the Banks
during the second five years, and will be paid entirely by the Banks during the final five years of each bond's
term. As the result of the growth of the System's surplus, the allocation provisions of the Farm Credit Act
require that the Banks pay 100% of the interest payments in 2000. Interest payable by the Banks is allocated to
the Banks on the basis of the average accruing retail loan volume of each Bank and its affiliated Associations
relative to that of all Banks and Associations for the preceding year. The Financial Assistance Corporation is
responsible for the repayment to the Secretary of the Treasury of interest initially funded by the Secretary of
the Treasury on the maturity date of the last -maturing Financial Assistance Corporation bonds in 2005. The
Banks are primarily responsible for funding this repayment by the Financial Assistance Corporation. Each
Bank's ultimate obligation for funding repayment of interest paid by the Secretary of the Treasury will be
calculated based on: (i) month -end average accruing retail loan volume for the System and each Bank from
the month end prior to each applicable bond issuance through mid-2005 and (ii) the interest funded by the
Secretary of the Treasury related to each applicable bond issuance. In order to provide for the orderly funding
of this repayment obligation by the Banks, the Financial Assistance Corporation is required to assess each
Bank, on an annual basis, an amount designed to accumulate, along with earnings realized on the investment
of these funds, the amount of the Banks' ultimate obligation (as determined by the Financial Assistance
Corporation on a fair and equitable basis) . This annual amount is to be no greater than .0006 nor less than
.0004 times each Bank's and its affiliated Associations' average accruing retail loan volume for the preceding
year, subject to adjustments by the Financial Assistance Corporation in order to ensure that the Financial
Assistance Corporation will have sufficient funds to repay the Secretary of the Treasury -advanced interest in
2005. Each Bank may (and, to the extent necessary to satisfy its obligations is, required to) pass on (either
directly, or indirectly through loan pricing or otherwise) all or part of the assessment to its affiliated direct -
lender Associations based on their proportionate average accruing retail loan volume for the preceding year,
but each Bank remains primarily liable for the amounts due.
The principal balance of the Financial Assistance Corporation bonds issued to provide financial assistance
to certified institutions may be repaid through the redemption of the related preferred stock issued by these
institutions. If the principal is not repaid in this manner, it is to be repaid with funds provided by the Financial
Assistance Corporation, the Insurance Corporation, or the Secretary of the Treasury, in accordance with
criteria set forth in the Farm Credit Act. Amounts funded by the Secretary of the Treasury are to be
subsequently repaid to the Secretary of the Treasury by the Insurance Corporation. During the 1992-1994
period, four of the five Banks that had received financial assistance effected the early redemption of the
preferred stock they had issued to the Financial Assistance Corporation. As a result, their assistance
agreements with the Assistance Board and the Insurance Corporation, as successor to the Assistance Board
under the agreements, were terminated. The remaining assisted Bank was the Federal Land Bank (FLB) of
Jackson in receivership, which receivership was terminated on January 30, 1995. See Note 9 to the
accompanying combined financial statements.
The principal balance of the Financial Assistance Corporation bonds issued to fund payments: (i) to a
receiver for the retirement of protected borrower equities that the receiver was not otherwise able to retire
(from the proceeds of financial assistance described above or from other funds available to the receiver),
(ii) for Assistance Board expenses, and (iii) for other authorized expenses is repayable by all Banks based on
the average accruing retail loan volume of each Bank and its affiliated Associations relative to that of all Banks
and Associations for the 15 years preceding the maturity of the bonds. Each Bank may (and, to the extent
necessary to satisfy its obligations, is required to) pass on (either directly, or indirectly through loan pricing or
otherwise) all or part of the amount necessary to satisfy the payment requirement to its affiliated direct -lender
Associations based on their proportionate average accruing retail loan volume for the preceding 15 years, but
each Bank remains primarily liable for the amounts due.
The payment of all the interest on bonds issued by the Financial Assistance Corporation to fund payment
of the Capital Preservation Agreement accruals assumed by it is the responsibility of the Banks. This payment
is to be allocated among and paid by the Banks, at such times as the Financial Assistance Corporation
determines, on the basis of their relative average accruing loan volumes for the preceding year. At maturity,
each Bank is to repay on demand to the Financial Assistance Corporation a pro rata share of the outstanding
principal based on its share of the Banks' average accruing loan volume for the 15 years preceding the maturity
of the related bonds. In order to provide for the orderly funding of the repayment obligation by the Banks, each
Bank and the Financial Assistance Corporation have entered into an agreement that requires each Bank to
make an annual annuity -type payment in an amount designed to accumulate, along with earnings realized on
such funds, approximately 909o' of the amount of the Bank's ultimate obligation and to make a final payment,
if necessary, prior to the maturity of the respective Financial Assistance Corporation bonds in order to satisfy
the Bank's ultimate obligation.
Under the Farm Credit Act, certain financially stronger System institutions were required to make a one-
time stock purchase in the Financial Assistance Corporation. In accordance with the Farm Credit Act, the
proceeds of the one-time stock purchase, which totaled $56 million, and investment earnings thereon
constitute the Trust Fund. The Trust Fund may be drawn on, under certain circumstances, to fund the
payment of the principal of or interest on Financial Assistance Corporation bonds. The Farm Credit Act
contains provisions that may result in the payment by the Insurance Corporation to the Financial Assistance
Corporation stockholders of an amount at least equal to their one-time stock purchase. These provisions are
more fully discussed in the following section.
Farm Credit System Insurance Corporation
Under the Farm Credit Act, the Insurance Corporation insures the timely payment of principal of and
interest on Systemwide Debt Securities and carries out various other responsibilities. Each Bank became
insured effective in January 1989. The Insurance Corporation is directed by a board of directors consisting of
the FCA Board.
Funding for the Insurance Fund —The Insurance Corporation's primary asset is the Insurance Fund.
Initial funding for the Insurance Fund was provided in January 1989 through the transfer of $260 million from
a revolving fund previously administered by the FCA. The primary sources of funds for the Insurance Fund
are:
• the annual premiums paid by the Banks, which commenced in 1991, and
• earnings on assets in the Insurance Fund.
Subject to a provision of the Farm Credit Act that authorizes the Insurance Corporation, in its sole
discretion, to reduce the annual premiums due from each Bank, the annual premiums due from each Bank for
each calendar year are equal to the sum of:
• the annual average principal outstanding for the year of loans made by the Bank that are in accrual
status, other than the government -guaranteed portion of these loans, multiplied by 0.15%,
• the annual average principal outstanding for the year of loans made by the Bank that are in nonaccrual
status multiplied by 0.25%, and
• the annual average principal outstanding for the year of the guaranteed portion of principal of Federal
and state government -guaranteed loans made by the Bank that are in accrual status multiplied by
0.015% and 0.03%, respectively.
For purposes of calculating insurance premiums, loans made by the Bank are the direct loans made to
borrowers by the Bank or by its related direct -lender Associations. Premiums will be due until the assets in the
Insurance Fund for which no specific use has been identified or designated reach the "secure base amount,"
which is defined in the Farm Credit Act as 2% of the aggregate outstanding insured obligations (adjusted to
reflect the System's reduced risk on loans guaranteed by Federal or state governments) or such other
percentage of the aggregate obligations as the Insurance Corporation in its sole discretion determines to be
actuarially sound. Each Bank is authorized to assess its related direct -lender Associations and the other
financing institutions to which it provides funding in order to cover the cost of a specified part of the Bank's
premium payments.
Consistent with provisions of the Farm Credit Act, in July 1996 the Insurance Corporation adopted a
policy statement establishing a semiannual review process for adjustments to the insurance premiums charged
to the Banks. The policy lists factors that will provide a basis for the discretionary adjustment of the
premiums, including the level and possible uses of the Insurance Fund, the overall condition of the System,
and the health of the agricultural economy. The policy provides that no premium reduction will be made for
nonaccrual loans until the Insurance Fund reaches the secure base amount. In September 1999, the Insurance
Corporation completed a semi-annual review of insurance premium rates for the year beginning January 1,
2000, and reduced the rate for accrual loans to zero percent effective January 1, 2000 (the statutory rate is
0.15%), while keeping the premiums for nonaccrual loans at the statutory rate of 0.25% and for the Federal or
state government -guaranteed loans at the reduced rate of zero percent.
In addition, the Farm Credit Act requires the Insurance Corporation to establish reserve accounts for
each Bank and a reserve account for Financial Assistance Corporation stockholders. If, at the end of any
calendar year, the Insurance Fund is at the secure base amount, the Insurance Corporation is required to
allocate to these reserve accounts the amount in excess of the amount required to maintain the Insurance
Fund at the secure base amount and to pay the estimated operating expenses and insurance obligations of the
Insurance Corporation for the immediately succeeding calendar year (90% to the Banks and 10% to Financial
Assistance Corporation stockholders). These reserve accounts remain part of the Insurance Fund and,
therefore, may be used for statutorily authorized Insurance Corporation purposes. Beginning no earlier than
eight years after the date on which the secure base amount is achieved, the Insurance Corporation may begin
to pay to each Bank and the Financial Assistance Corporation stockholders amounts allocated to these reserve
accounts, as specified by provisions of the Farm Credit Act and subject to certain conditions and limitations.
These provisions of the Farm Credit Act have no significant impact on the System's combined financial
statements.
In December 1999, the Insurance Corporation issued a final policy statement on the secure base amount
and the allocated insurance reserve accounts discussed in the prior paragraphs. The policy statement
establishes a framework for the periodic determination of the Insurance Fund's secure base amount. It also
implements the Insurance Corporation's authority to allocate excess Insurance Fund balances (determined as
described in the policy statement) above the secure base amount into accounts for each Bank and a reserve
account for Financial Assistance Corporation stockholders.
Uses of the Insurance Fund — The Insurance Corporation is required to expend funds in the Insurance
Fund:
• to insure the timely payment of principal of and interest on Systemwide Debt Securities and
Consolidated Bank Debt Securities,
• to satisfy any defaults caused by a System institution's failure to redeem its preferred stock issued to
the Financial Assistance Corporation, to meet its principal and interest payment obligations with
respect to Financial Assistance Corporation bonds, or to pay the Financial Assistance Corporation's
assessment related to the prefunding of the U.S. Treasury -advanced interest obligation, and
• to ensure the retirement of protected borrower stock at par value.
The Insurance Corporation also uses funds in the Insurance Fund to pay the operating expenses of the
Insurance Corporation. 13 110
Subject to the "least -cost determination" described below, the Insurance Corporation is also authorized,
in its sole discretion and on' such terms and conditions as its board of directors may prescribe, to expend funds
in the Insurance Fund to make loans to, purchase the assets or securities of, assume the liabilities of, or make
contributions to any Bank or direct -lender Association, i.e., a PCA, ACA or FLCA, (such a Bank or
Association being referred to as an "eligible institution") in order to:
• prevent the placing of the eligible institution in receivership,
• restore the eligible institution to normal operation, or
• reduce the risk to the Insurance Corporation posed by the eligible institution when severe financial
conditions threaten the stability of a significant number of eligible institutions or eligible institutions
possessing significant financial resources.
In addition, also subject to the "least -cost determination" described below, the Insurance Corporation, in
its sole discretion and on such terms and conditions as its board of directors may prescribe, may expend
amounts in the Insurance Fund to provide assistance in connection with the merger of a "qualifying" eligible
institution with another eligible institution, the sale of stock or assets of a "qualifying eligible institution to
another eligible institution, or the assumption of a "qualifying" eligible institution's liabilities by another
eligible institution. This assistance may include one or more of the following actions on the part of the
Insurance Corporation: the purchase of assets of, or the assumption of liabilities of, the "qualifying" eligible
institution; the making of loans or contributions to the acquiring eligible institution; and guaranteeing the
acquiring eligible institution against loss due to its transaction with the "qualifying" eligible institution. For the
foregoing purposes, a "qualifying" eligible institution is any eligible institution that:
• is in receivership,
• is, in the judgment of the Insurance Corporation's board of directors, in danger of being placed in
receivership, or
• requires assistance, in the sole discretion of the ' Insurance Corporation, to lessen the risk to the
Insurance Corporation posed by such eligible institution when severe financial conditions exist that
threaten the stability of a significant number of eligible institutions or eligible institutions possessing
significant financial resources.
The Insurance Corporation cannot provide discretionary assistance to an eligible institution as described
in the two immediately preceding paragraphs unless the means of providing this assistance is the least costly
means of all possible alternatives available to the Insurance Corporation, including liquidation of the eligible
institution (taking into account, among other factors, payment of the insured obligations issued on behalf of
the institution) .
The Insurance Corporation may also, in its discretion, make loans on the security of, or may purchase,
and liquidate or sell, any part of the assets of, any eligible institution that is placed in receivership because of
the inability of the eligible institution to pay the principal of or interest on any of its notes, bonds, debentures,
or other obligations in a timely manner.
The Insurance Corporation has published a statement of policy on financial assistance to eligible
institutions. Subject to statutory requirements, the policy sets forth a number of criteria the Insurance
Corporation will consider in reviewing proposals for assistance to operating eligible institutions, including, but
not limited to, the following:
• the cost to the Insurance Corporation of the assistance must be clearly less than other available
alternatives,
• all alternative sources of assistance must be explored in good faith prior to the Insurance Corporation
granting assistance,
• the proposed assistance must reasonably anticipate the viability of the recipient, including provisions
for the attainment of an adequate level of capitalization within a reasonable period of time,
• the proposed eventual repayment of the assistance,
• in general, proposals should not anticipate the acquisition and servicing of assets of the assisted eligible
institution by the Insurance Corporation,
• the proposal must contain quantifiable limits on all financial items in the request, and
• the potential financial effect of the proposal on shareholders, uninsured creditors and the financial
markets.
The Farm Credit Act provides that the Insurance Corporation will serve as receiver or conservator of any
System institution placed in receivership or conservatorship by the FCA and authorizes the Insurance
Corporation to issue certain rules and regulations relating to its statutory authorities.
For additional information with respect to the Insurance Fund, see "Description of Debt Securities —
Systemwide Debt Securities — General — Insurance Fund" and Note 7 to the accompanying combined
financial statements.
FEDERAL SUPERVISION OF THE FARM CREDIT SYSTEM
Farm Credit Administration
The FCA is an independent Federal regulatory agency having jurisdiction over System institutions. The
Farm Credit Act provides that the FCA is to be managed by a three -member full-time board appointed by the
President of the United States with the advice and consent of the Senate. Not more than two members of the
FCA Board may be members of the same political party. One FCA Board member is designated by the
President to serve as chairman of the board for the duration of the member's term. FCA Board members serve
staggered six -year terms and are not eligible for reappointment, except that a member appointed to fill an
unexpired term of three years or less can be reappointed to a full six -year term.
The Farm Credit Act authorizes, and in some instances requires, the FCA to issue regulations governing
various operations of System institutions. Additionally, the Farm Credit Act requires that the FCA examine
each System institution not less than once during each 18-month period, except in the case of FLBAs, which
are required to be examined at least once every three years. The Farm Credit Act provides that such
examinations may include, if appropriate, but are not limited to, analyses of credit and collateral quality,
capitalization, the effectiveness of management, and the application of policies in carrying out the Farm Credit
Act, in adhering to the FCA regulations, and in serving eligible borrowers.
Under the Farm Credit Act, determinations by the Funding Corporation as to the amounts, maturities,
rates of interest, terms, and conditions of participation by the Banks in each issuance of Systemwide Debt
Securities are subject to FCA approval. See "Description of Business — Other Operations — Funding
Corporation."
Further, the Farm Credit Act authorizes the FCA to take specified enforcement actions to ensure the safe
and sound operations of System institutions and their compliance with the Farm Credit Act and FCA
regulations. These enforcement powers include the power to. issue cease and desist orders, to suspend or
remove a director or officer of a System institution, and to impose specified civil money penalties for certain
violations of the Farm Credit Act, FCA regulations or certain orders of the FCA. The FCA also has the
exclusive authority to appoint a conservator or receiver for any System institution under circumstances
specified in the Farm Credit Act. See "Discussion and Analysis of Financial Condition and Results of
Operations — Regulatory Matters" for a discussion of recent regulatory developments and the status of
enforcement actions taken by the FCA.
15 114
Farm Credit System Insurance Corporation
See "Entities to Provide Assistance to Farm Credit System Institutions — Farm Credit System
Insurance Corporation." Also see "Description of Debt Securities — Systemwide Debt Securities — Gen-
eral — Insurance Fund" and Note 7 to the accompanying combined financial statements.
Federal Legislation
System institutions, which are created and extensively governed by Federal statute, are instrumentalities
of the Federal government intended to further governmental policy concerning the extension of credit to or for
the benefit of agricultural producers in the United States. The Farm Credit Act by its terms provides that the
right to alter, amend or repeal all or any provision of this Act is expressly reserved.
System institutions and their borrowers may also be significantly affected by other Federal legislation,
such as agricultural appropriations bills, not uniquely applicable to the System. Also, in general, to the extent
the Farm Credit Act does not specifically address matters relating to the governance and business activities of
System institutions, these matters may be governed by applicable state law.
DESCRIPTION OF DEBT SECURITIES
The following summaries of certain provisions of the Farm Credit Act, the FCA regulations and the
Systemwide Debt Securities do not purport to be complete and are qualified in their entirety by reference to
the provisions of the Farm Credit Act and the FCA regulations.
Systemwide Debt Securities
General. The System, unlike commercial banks and other depository institutions, obtains funds for its
lending operations primarily from the sale of Systemwide Debt Securities issued by the Banks through the
Funding Corporation. Each issuance of Systemwide Debt Securities must be approved by the FCA and each
Bank's participation is subject to the availability of specified eligible assets (referred to in the Farm Credit Act
as "collateral" and described below), to compliance with the conditions of participation as prescribed in the
Market Access Agreement, and to determinations by the Funding Corporation of the amounts, maturities,
rates of interest, and terms of each issuance. Systemwide Debt Securities are issued pursuant to authorizing
resolutions adopted by the boards of directors of each Bank and under the authority of the Farm Credit Act
and the FCA regulations. Systemwide Debt Securities are the general unsecured joint and several obligations
of the Banks. Systemwide Debt Securities are not obligations of and are not guaranteed by the United States
or any agency or instrumentality thereof, other than the Banks.
Each issuance of Systemwide Debt Securities ranks equally, in accordance with the FCA regulations,
with other unsecured Systemwide Debt Securities. Systemwide Debt Securities are not issued under an
indenture and no trustee is provided with respect to these securities. Systemwide Debt Securities are not
subject to acceleration prior to maturity upon the occurrence of any default or similar event.
The System may issue the following types of Systemwide Debt Securities:
• Federal Farm Credit Banks Consolidated Systemwide Bonds,
• Federal Farm Credit Banks Consolidated Systemwide Discount Notes,
• Federal Farm Credit Banks Consolidated Systemwide Master Notes,
• Federal Farm Credit Banks Global Debt Securities, and
•. Federal Farm Credit Banks Consolidated Systemwide Medium -Term Notes.
16 : 113
For a discussion of the various risks, tax and other considerations, and terms and conditions related to
each of these types of securities, see the discussions in the following offering circulars, as applicable:
• The Federal Farm Credit Banks Consolidated Systemwide Bonds and Discount Notes Offering
Circular dated June 18, 1999, which has not been amended by any supplements,
• The Federal Farm Credit Banks Consolidated Systemwide Master Notes Offering Circular dated
December 21, 1999, which has not been amended by any supplements,
• The Federal Farm Credit Banks Global Debt Program Offering Circular dated October 10, 1996,
which has not been amended by any supplements, and
• The Federal Farm Credit Banks Consolidated Systemwide Medium -Term Notes Offering Circular
dated July 19, 1993, as most recently amended by the supplement dated June 11, 1999.
Each of these offering circulars may be further amended or supplemented from time to time. In addition,
the Banks may in the future offer new types of Systemwide Debt Securities; the offering of any such securities
will be pursuant to additional offering circulars.
Collateral. The Farm Credit Act and FCA regulations require, as a condition of a Bank's participation
in the issuance of Systemwide Debt Securities, that the Bank maintain, free of any lien or other pledge,
specified eligible assets (referred to in the Farm Credit Act as "collateral") at least equal in value to the total
amount of outstanding debt securities of the Bank that are subject to the collateral requirement. These
securities include Systemwide Debt Securities for which the Bank is primarily liable and investment bonds or
other debt securities that the Bank has issued individually. The collateral is required to consist of notes and
other obligations representing loans or real or personal property acquired in connection with loans made under
the authority of the Farm Credit Act (valued in accordance with FCA regulations and directives), obligations
of the United States or any agency thereof direct or fully guaranteed, other FCA-approved Bank assets,
including marketable securities, or cash. The collateral requirement does not provide holders of Systemwide
Debt Securities with a security interest in any assets of the Banks. The Banks may in the future issue
Systemwide Debt Securities that are secured by specific assets.
While the collateral requirement limits the circumstances under which Systemwide Debt Securities may
be issued by the Banks, as described above, unless specifically provided under the terms of a particular issue,
Systemwide Debt Securities will not impose any additional limit on other indebtedness or securities that may
be incurred or issued by the Banks and will contain no financial or similar restrictions on the Banks.
Insurance Fund. As more fully described in Note 7 to the accompanying combined financial statements,
payment of principal of and interest on Systemwide Debt Securities is insured by the Insurance Corporation to
the extent provided in the Farm Credit Act. The Insurance Corporation maintains the Insurance Fund for this
purpose and for other purposes specified in the Farm Credit Act. In the event of a default by a Bank on an
insured debt obligation (as defined in the Farm Credit Act) for which that Bank is primarily liable, the
Insurance Corporation must expend amounts in the Insurance Fund to the extent necessary to insure the
timely payment of principal of and interest on such debt obligation, and the provisions of the Farm Credit Act
providing for joint and several liability of the Banks on such obligation cannot be invoked until all amounts in
the Insurance Fund have been exhausted. However, because of other mandatory and permissive uses of the
Insurance Fund specified in the Farm Credit Act, there is no assurance that any available amount in the
Insurance Fund will be sufficient to fund the timely payment of principal of or interest on insured debt
obligations in the event of a default by a Bank having the primary liability thereon. The insurance provided
through use of the Insurance Fund is not an obligation of and is not a guarantee by the United States or any
agency or instrumentality thereof, other than the Insurance Corporation.
Joint and Several Liability. Subject to the insurance provisions discussed above, in the event a Bank
having primary liability for a Systemwide Debt Security is unable to meet this liability, the FCA is required
under the Farm Credit Act to make calls to satisfy the liability first on all non -defaulting Banks in the
proportion that each such Bank's "available collateral" ("available collateral" is collateral in excess of the
aggregate of the Bank's collateralized obligations) bears to the aggregate available collateral of all such Banks.
17 1 .14
If these calls do not satisfy the liability, then a further call would be made in proportion to each such Bank's
remaining assets. On making a call on non -defaulting Banks with respect to a Systemwide Debt Security
issued on behalf of a defaulting Bank, the FCA is required to appoint the Insurance Corporation as the
receiver for such Bank, which receiver is to expeditiously liquidate the Bank.
Status in Liquidation. FCA regulations provide that in the event a Bank is placed in liquidation, holders
of Systemwide Debt Securities have claims against the Bank's assets, whether or not the holders file individual
claims. Under these regulations, the claims of these holders are junior to claims related to costs incurred by
the receiver in connection with the administration of the receivership, claims for taxes, claims of secured
creditors, and claims of holders of bonds, including investment bonds, issued by the Bank individually, to the
extent such bonds are collateralized in accordance with the requirements of the Farm Credit Act. These
regulations further provide that claims of holders of Systemwide Debt Securities are senior to all claims of
general creditors. If particular Systemwide Debt Securities were offered on a secured basis, the holders of such
obligations would, under the FCA regulations, have the priority accorded secured creditors of the liquidating
Bank. To date, the Banks have not issued secured Systemwide Debt Securities.
Use of Proceeds. Net proceeds from sales of Systemwide Debt Securities will be used by the Banks to
fund their loan portfolios, to meet maturing debt obligations, and for other corporate purposes. The Banks
anticipate that additional financing, including financing through various types of debt securities, will be
required from time to time. The amount and nature of such financings are dependent on a number of factors,
including the volume of the Banks' maturing debt obligations, the volume of loans made by and repaid to
System institutions, and general market conditions.
Consolidated Bank Debt Securities
The discussions above only address statutes, regulations and other matters applicable to Systemwide Debt
Securities; the discussions do not address Consolidated Bank Debt Securities. The Banks have not issued
Consolidated Bank Debt Securities since 1979. The last outstanding Consolidated Bank Debt Securities
matured in January 1997.
Financial Assistance Corporation Bonds
As of December 31, 1999, the Financial Assistance Corporation had outstanding $864 million in face
amount of U.S. Treasury -guaranteed bonds issued with an original maturity of 15 years and the approval of
the Assistance Board to fund assistance to eligible System institutions and for other purposes specified in the
Farm Credit Act. Under the Farm Credit Act, all such bonds provide for semiannual coupon interest
payments. The obligations of System institutions to fund the repayment of these bonds vary according to the
purposes for which the bonds were issued. See "Entities to Provide Assistance to Farm Credit System
Institutions — Farm Credit System Financial Assistance Corporation." The authority of the Financial
Assistance Corporation to issue bonds expired on September 30, 1992.
18 11
DIRECTORS AND MANAGEMENT
Boards of Directors
Each Bank is governed by a board of directors that is responsible for establishing policies and procedures
for the operation of the Bank. Each Bank's bylaws provide for the number, term, manner of election and
qualifications of the members of such board. The Farm Credit Act provides that at least one member of each
Bank's Board is to be elected by the other directors, which member can not be a director, officer, employee or
stockholder of a System institution.
The board members of each Bank are as follows:
Director
Name Ag
AgAmerica, FCB
Tucker Hart Adams ................ 62
Alan Dillman ...................... 53
Myron L. Edleman ................. 56
Robert E. Epler .................... 72
Samuel L. Foggie, Sr . .............. 72
e Since PrincipalOccupation
Jay W. Graf .......................
58
Robert Krug ......................
67
John G. Nelson III .................
49
Roy Tiarks ........................
49
Clarence Van Dyke ................
69
AgFirst Farm Credit Bank
E. McDonald Berryman .............
53
William C. Bess, Jr . ...............
56
Chester D. Black ..................
70
Robert A. Carson .................. 72
R. Tommy Clay, Sr . ............... 73
Douglas L. Flory ................... 60
Don W. Freeman .................. 59
Robert L. Holden, Sr . .............. 53
1994 President of The Adams Group, Inc.
Denver, CO
1993 Farmer and cattle feeder; owner —
Dillman Marketing and Research
Morrill, NE
1987 Grain and livestock farmer -rancher
Watertown, SD
1998 Nursery (trees, cut flowers)
Forest Grove, OR
1994 Retired President of the National Bankers
Association
Washington, D.C.
1995 Grain and livestock farmer
Republican City, NE
1999 Farmer
Othello, WA
1994 Farmer and rancher
Reardan, WA
1996 Farmer and rancher
Council Bluffs, IA
1999 Farmer and rancher
Manhattan, MT
1986 Grain, hog and timber farmer
Elberon, VA
1990 Co-owner of Farmers and Builders Supply Co.
Lincolnton, NC
1990 Retired Director of Agriculture Extension
Service
Raleigh, NC
1993 Row crop farmer
Lambert, MS
1990 Rancher
Putnam Co., FL
1994 Commercial beef, ewe and tom turkey farmer
Grottoes, VA
1993 Cattle rancher
Lowndesboro, AL
1990 Co-owner/operator of dairy/row crop/broiler
operation
Whigham, GA
19
Director
Name
Age
Since
Principal Occupation
William S. Jackson .................
75
1970
Dairy and row crop farmer
New Salem, PA
James A. Kinsey ...................
50
1990
Livestock farmer
Flemington, WV
Richard Kriebel ....................
56
1990
Crop farmer
Benton, PA
Paul Lemoine .....................
54
1993
Row crop and livestock farmer
Plaucheville, LA
T. Edward Lippy ...................
70
1988
Cash grain and vegetable farmer
Hampstead, MD
F. Merrel Lust ....................
64
1994
Corn, soybean and wheat farmer
Marion, OH
Eugene W. Merritt, Jr . .............
55
1990
Co-owner of grass farm and ornamental tree
farm
Easley, SC
Dale W. Player ....................
63
1990
Co-owner of row crop operation
Bishopville, SC
J. Dan Raines, Jr . .................
55
1990
Farmer and rancher
Ashburn, GA
Robert G. Sexton ..................
40
2000
Citrus grower and processor
Vero Beach, FL
Robert E. Strayhom ................
68
1990
Farmer
Chapel Hill, NC
AgriBank, FCB
Fred Adams .......................
56
1998
Grain and livestock farmer
Readyville, TN
Jack A. Anderson ..................
55
1990
Dairy farmer
St. Johns, MI
Doug Felton .......................
53
1996
Grain farmer
Cannon Falls, MN
William Flynn .....................
61
1998
Grain and livestock farmer
Davis, IL
Arlen Gilbertson ...................
49
1998
Grain and livestock farmer
Parshall, ND
Max R. Hattery ...................
60
1997
Grain and livestock farmer
Macy, IN
Carl D. Higbea ....................
65
1994
Grain and livestock farmer
Defiance, OH
Bill Mainer .......................
63
1988
Dairy and poultry farmer
Branch, AR
Harold Newman ...................
66
1990
CEO, Newman Signs
Jamestown, ND
Charles Oatts .....................
59
1994
Grain and livestock farmer
Hopkinsville, KY
Melvin Ott ........................
63
1990
Dairy farmer
Marshfield, WI
S. H. Phillips ......................
73
1990
International agricultural consultant
Lexington, KY
Dennis R. Robertson ...............
52
1989
Executive Vice President of the Arkansas Farm
Bureau Federation
Little Rock, AR
20 1 1 r
Director
Name Age Since
Leland Strom ...................... 43 1996
Meredith G. Yarick ................ 53 1995
CoBank, ACB
Donald E. Benschneider ............. 60
D. Sheldon Brown ................. 53
Stephen M. Caruso ................. 52
John S. Dean, Sr . ................. 60
Everett Dobrinski .................. 53
Randal J. Ethridge ................. 48
Philip J. Hein ..................... 72
Clifton Hudgins .................... 53
W. Howard Isom .................. 67
Dennis 0. Jones ................... 55
Gordon L. Lamb ................... 57
Otis H. Molz...................... 68
J. Roy Orton ...................... 61
Jack Parks ........................ 67
H. Christopher Peterson ............. 47
Richard F. Price ................... 69
Harold D. Printz ................... 53
Ronald A. Schuler ................. 62
Wayne Seaman.... ................ 61
Richard W. Sitman ................ 46
R. Nelson Stader .................. 66
Robert E. Terkhorn ................ 63
Principal Occupation
Grain farmer and real estate broker
Elgin, IL
Grain and livestock farmer; independent
insurance agent
Hume, MO
1997 Grain farmer
Payne, OH
1998 Assistant Manager, H. F. Brown, Inc.
Windsor, CT
1997 CEO, Citrus World, Inc.
Lake Wales, FL
1991 Retired CEO, Amicalola Electric
Membership Corp. Jasper, GA
1999 Grain and oilseed farmer
Makoti, ND
1997 Cow/calf farmer; Manager, People's Electric
Cooperative
Ada, OK
1999 Dairy farmer
Stratford, WI
1999 Vice President & CFO, Basin Electric Power
Cooperative
Bismarck, ND
1999 Chairman, Matson & Isom Accountancy
Corporation
Chico, CA
1999 Owner, Jones Farms
Bath, SD
1995 President, Lamb Farms, Inc.
Oakfield, NY
1989 Farmer and rancher
Deerfield, KS
1995 President, Orton Farms, Inc.
Ripley, NY
1989 Dairy farmer
Stephenville, TX
1999 Professor, Michigan State University
East Lansing, MI
1992 Grain and livestock farmer
Phoenix, MD
1989 General Manager, Producer's Supply Coop, Inc.
Nampa, ID
2000 President & CEO, California Canning Peach
Association
Gold River, CA
2000 President, Seaman Enterprises
Carroll, IA
1999 President, Jos. A Sitman, Inc.
Greensburg, LA
1989 Grain and cattle farmer
Mooresville, IN
1998 Retired Managing Director, CitiBank
Castle Rock, CO
21
Director
Name Age Since
Robert M. Tetrault ................ 48 1999
Douglas Triplett ................... 63 1999
O. Glenn Webb ................... 63 1989
Farm Credit Bank of Texas
Kenneth Andrews ................. 66
.R.W. "Buddy" Cortese ............. 53
Joe R. Crawford .................. 62
Jon "Mike" Garnett ................ 55
James A. McCarthy ............... 70
William F. Staats ................. 62
Farm Credit Bank of Wichita
Quentin Biesemeier ................ 69
Kenneth J. Flagler ................. 64
Lyle H. Gray 65
George Jenik ..................... 65
B.J. Porter ....................... 70
Edward L. Schenk ................. 61
Kenneth Shaw .................... 49
James E. Williams ................ 65
Western Farm Credit Bank
Richard M. Brooks ................ 71
Carl A. Cavaiani .................. 55
Earl J. Dolcini .. 70
Donnell Spencer .................. 65
J. Less Guthrie ................... 52
1994
1995
1998
1999
1988
1997
1990
1994
1990
1997
1997
1995
1999
1994
Principal Occupation
President, T/R Fish, Inc.
Portland, ME
Grain farmer
Annandale, MN
Livestock producer and fruit farming operations,
Tunnell Hill, IL; Chairman of the Board and
President, Growmark, Inc.
Bloomington, IL
Rancher
Madisonville, TX
Farmer and rancher
Fort Sumner, NM
Cattle producer
Baileyton, AL
Cattle, wheat, alfalfa and forage crops producer
Spearman, TX
Cotton, grain, sugar cane and cattle producer
Rio Hondo, TX
Professor of Finance — Louisiana State
University
Baton Rouge, LA
Farmer and rancher
Haxtun, CO
Farmer and rancher
Maple Hill, KS
Rancher and stockman
Leon, KS
Farmer
Sedgwick, CO
Retired
Las Cruces, NM
Farmer and rancher
Chickasha, OK
Rancher
Mountainair, NM
Farmer and rancher
Morrison, OK
1990 Financial consultant
San Francisco, CA and Ketchum, ID
1993 Farmer
Ballico, CA
1989 Rancher and dairyman
Petaluma, CA
2000 Farmer and rancher
Richfield, UT
1997 Farmer and rancher
Porterville, CA
22
lid
Director
Name Age Since Principal Occupation
Norman L. Knox .................. 66 1997 Farmer
Chandler, AZ
Harold J. Myers .................. 74 1989 Farmer
Arbuckle, CA
The boards of directors of the principal service organizations in the System are primarily comprised of
board members and/or officers of the Banks. The board members of each such service organization are as
follows:
Federal Farm Credit Banks Funding Corporation
Director
Name Age Since
Jack A. Anderson ................. 55 1996
Al Bellotto ...................... 74 1994
(term expired March 20, 2000)
James A. Brickley (non -voting) ..... 61 1990
Jay W. Graf ...................... 58 1996
J. Less Guthrie .................... 52 2000
(term commenced March 20, 2000)
Jerold L. Harris ................... 58 1992
Arnold R. Henson ................. 52 1996
James D. Kirk .................... 56 1999
Thomas C. Melzer ................ 55 1999
Thomas N. Slonaker ............... 65 1998
O. Glenn Webb ................... 63 1993
Principal Occupation
Dairy farmer
St. Johns, MI
Cattle rancher and citrus producer
Lakeland, FL
President and CEO, Federal Farm Credit Banks
Funding Corporation
Jersey City, NJ
Grain and livestock farmer
Republican City, NE
Farmer and rancher
Porterville, CA
President and CEO, Farm Credit Bank of
Wichita
Wichita, KS
CEO, Farm Credit Bank of Texas
Austin, TX
President and CEO, AgAmerica, FCB and
Western Farm Credit Bank
Sacramento, CA
Former President and CEO of the Federal
Reserve Bank of St. Louis; previously Managing
Director of Morgan Stanley & Co. and head of
Government Securities Department
St. Louis, MO
Former Executive Vice President and Chief
Investment Officer, First Interstate
Bancorporation; previously Senior Vice President
and Manager of U.S. Government Securities
Group at Federated Investors
Paradise Valley, AZ
Livestock producer and fruit farming operations
Tunnel Hill, IL; Chairman of the Board and
President, Growmark, Inc.
Bloomington, IL
Farm Credit System Financial Assistance Corporation
By law, the board of directors of the Financial Assistance Corporation consists of the board of directors of
the Funding Corporation (see above).
23
1�
Farm Credit Leasing Services Corporation
Director
Name Age Since
John Bekkers ..................... 54 1996
Terry M. Campbell ................ 49 1999
David L. Gill ..................... 49 1996
F. A. (Andy) Lowrey .............. 47 1998
William J. Lipinski ................ 42 1997
Steven J. Montgomery ............. 54 1985
Douglas D. Sims .................. 53 1999
Principal Occupation
President and COO, Gold Kist, Inc.
Atlanta, GA
Executive Vice President & CFO, Farmland
Industries, Inc.
Kansas City, MO
General Partner, Rio Farms
King City, CA
President & CEO, AgFirst Farm Credit Bank
Columbia, SC
President and CEO, First Pioneer Farm Credit,
ACA
Enfield, CT
Executive Vice President, CoBank, ACB
Denver, CO
CEO, CoBank, ACB
Denver, CO
Membership, Farm Credit System Audit Committee
The membership of the Farm Credit System Audit Committee is as follows:
Member
Name and Committee Position Age Since Principal Occupation
Richard M. Brooks ................. 71 1993 Financial consultant
FCB Director Member
Thomas N. Slonaker ............. 65 1998
Funding Corporation Outside
Director Member
O. Glenn Webb .................... 63 1994
ACB/BC Director Member
Arthur R. Wyatt ................... 72 1995
Outside Member
24
San Francisco, CA and Ketchum, ID
Former Executive Vice President and Chief
Investment Officer, First Interstate
Bancorporation; previously Senior Vice President
and Manager of U.S. Government Securities
Group at Federated Investors
Paradise Valley, AZ
Livestock producer and fruit farming operations,
Tunnel Hill, IL; Chairman of the Board and
President, Growmark, Inc.
Bloomington, IL
Retired Partner, Arthur Andersen LLP
Delray, FL and Champaign, IL
191
Chief Executive Officers and Presidents
Each Bank is managed by a chief executive officer and/or president who is responsible to the board of
directors of that Bank. The chief executive officer and/or president of each Bank, and of the System's
principal service organizations, together with their age, length of service at their present positions, as well as
positions held during the last five years, are as follows (current positions within each institution are italicized):
Position
Held
Name Age Since Principal Occupation
AgAmerica, FCB
James D. Kirk .................... 56 1994 President and CEO; President and CEO,
AgAmerica, FCB
AgFirst Farm Credit Bank
F. A. (Andy) Lowrey .............. 47 1998 President and CEO; President and CEO,
Palmetto Farm Credit, ACA
AgriBank, FCB
William J. Collins ................. 48 1999 CEO; Vice President, Secretary and General
Counsel, AgriBank, FCB
CoBank, ACB
Douglas D. Sims ..................
James A. Pierson ..................
Farm Credit Bank of Texas
Arnold R. Henson .................
Farm Credit Bank of Wichita
Jerold L. Harris ...................
Western Farm Credit Bank
James D. Kirk ....................
Federal Farm Credit Banks Funding
Corporation
James A. Brickley .................
Farm Credit System Financial
Assistance Corporation
James A. Brickley .................
Farm Credit Leasing Services
Corporation
53 1995 CEO; CEO, CoBank
62 1995 President and COO; President and CEO, Farm
Credit Bank of Springfield and Springfield Bank
for Cooperatives
52 1992 CEO
58 1991 President and CEO
56 1997 President and CEO; President and CEO,
AgAmerica, FCB
61 1990 President and CEO
61 1990 President and CEO
Philip J. Martini .................. 46 1999 President and CEO; President, Firstar Equipment
Finance Corp.; Senior Vice President, Cargill
Financial Services Corp.; President, Cargill
Agricultural Credit Corp.
Compensation of Bank directors and senior officers is contained in each Bank's annual report to
shareholders. The annual report of each Bank may be obtained from the individual Bank.
25
w�
DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following commentary explains principal aspects of the combined financial position and results of
operations of the entities of the System and should be read in conjunction with the combined financial
statements of the System commencing on page F-1 of this Annual Information Statement.
The combined financial statements and related financial information found in this Annual Information
Statement include the accounts of the Banks and related Associations, the Financial Assistance Corporation
and the Insurance Fund and reflect the investments in and allocated earnings of the service organizations
owned jointly by the Banks. Combined financial statements are presented because of the financial and
operational interdependence of these entities and for the purpose of responding to the joint and several liability
of the Banks for Systemwide Debt Securities. All significant intra-System transactions and balances are
eliminated in combination. (See Note 1 to the accompanying combined financial statements for additional
information on organization, operations and principles of combination.)
Although this Annual Information Statement reports on the combined financial position and results of
operations of the System entities described above, only the Banks are jointly and severally liable on
Systemwide Debt Securities. (See Note 10 to the accompanying combined financial statements for
information about the capital of the Banks and the Supplemental Combining Information on pages F-34 and
F-35 for information on the financial condition of the Banks at December 31, 1999.) Under the Farm Credit
Act, the timely payment of the principal of and interest on Systemwide Debt Securities is insured by the
Insurance Corporation to the extent funds are available in the Insurance Fund. (See Note 7 to the
accompanying combined financial statements.)
Overview
The System's combined net income was $1.233 billion, $1.251 billion and $1.267 billion for the years
ended December 31, 1999, 1998 and 1997, respectively. Net interest income was $2.272 billion, $2.243 billion
and $2.190 billion for the years ended December 31, 1999, 1998 and 1997, respectively. The level of net
interest income in each of 1999, 1998 and 1997 increased modestly from the respective prior year's level due
primarily to income earned on a higher level of average earning assets, which were funded, in part, by
increases in System capital. Provisions for loan losses were $177 million, $150 million and $92 million for the
years ended December 31, 1999, 1998 and 1997, respectively.
After generally rising in the 1990s, the aggregate level of national farm debt (which is defined as long-
term real estate loans and short- and intermediate -term loans, but does not include domestic loans to
cooperatives and loans made in connection with international transactions) is expected to stabilize for 2000
according to the United States Department of Agriculture (USDA). The System's long-term real estate loan
volume increased 3.9% in 1999, while the System's short- and intermediate -term loan volume remained
relatively stable. The increase in the System's loan volume reflects System institutions' efforts to maintain and
increase their market share of farm debt, while maintaining prudent underwriting standards, through various
marketing, business development and operating strategies.
Farmers' net cash income, as most recently estimated by the USDA (December 1999), is expected to be
at a near record level of $59.1 billion for 1999. The level of income attained in 1999 resulted from the increase
in the amount of direct Federal government payments to $22.7 billion, up $10.5 billion from 1998 and $15.2
billion from 1997. This record level of assistance has played a major role in stabilizing farm income and
tempering financial hardship for many System borrowers. However, farmers' net cash income is estimated to
decline in 2000 to $49.7 billion, the lowest level since 1986, although only slightly less than the levels
registered in 1991 and 1994. The estimate for 2000 assumes direct Federal government payments of
$17.2 billion, a decline of $5.5 billion from the 1999 level. The USDA estimates take into account the
cumulative effect of the last four years of bumper crops in most commodities that have contributed to
relatively low commodity prices. Due to large supplies of certain commodities and the prospects for little or no
increase in demand in the near term, commodity prices are not likely to improve. These conditions could place
financial stress on System borrowers in 2000 and beyond, particularly those borrowers in certain agricultural
26
�Y
sub -sectors that are currently experiencing some stress. Nevertheless, in line with the healthy level of farmers'
net cash income achieved during the 1990s, the repayment capacity of borrowers generally remains sound.
Additionally, throughout the late 1980s and early 1990s, the value of farm assets has risen more than farm
debt levels. As a result, the debt -to -asset ratio (a measure of solvency) improved steadily during this time
period, after peaking in 1985, and remained relatively stable in the late 1990s.
The total amount of nonperforming loans decreased $290 million from year-end 1998 to $1.106 billion.
The decrease resulted primarily from payments received and, to a lesser extent, charge -offs on certain large
nonaccrual loans to a few processing and marketing cooperatives. The generally favorable level of credit
quality in 1999 allowed most System institutions to maintain satisfactory earnings levels and to continue to
build and strengthen their capital bases. Overall, credit quality indicators for 1999 remained at generally
favorable levels; however, various external factors affecting agriculture (such as the level of direct Federal
government assistance, export demand, weather conditions and commodities prices) may place pressure
during 2000 on the credit quality of the System's loans. To maintain the credit quality of their portfolios,
System institutions are continuing to emphasize and enhance their programs to reduce or restructure their
nonperforming assets and to maintain prudent underwriting practices.
The continuation of the favorable earnings level achieved in 1999 is dependent upon a number of factors,
including the System's ability, within the uncertain agricultural economic environment, to maintain net
interest income, control operating expenses, sustain credit quality objectives, and maintain market share.
Accordingly, System institutions have established and continue to refine: asset/liability management tech-
niques to effectively manage interest rate risk; cost -containment programs to maintain or reduce operating
expenses; and new loan products, marketing plans and competitive pricing policies to maintain or increase
market share. Numerous Banks and Associations have instituted organizational restructuring plans, mergers,
joint management arrangements, or other cost -containment efforts over the past several years in an effort to
improve efficiencies and eliminate unnecessary expenses. The continued success of these System efforts, as
noted above, will depend to a significant extent on the various external factors affecting agriculture.
The following table summarizes the System institutions' organizational and structural changes over the
past five years.
Entities at January 1, 1995 ....................
Net changes through January 1, 1999 ...........
Entities at January 1, 1999 ....................
Net changes through January 1, 2000 ...........
Entities at January 1, 2000 ....................
Banks
Associations
FCBs
ACBs
BCs
ACAS
PCAs
FLCAs
FLBAs
Total
7
1
1
60
69
32
71
241
S1)
_
—
�)
L
1
32)
44)
6
1
1
54
63
33
39
197
—
—
�)
_)
L)
16
L
�)
6
1
49
57
49
17
179
Included in the above table are nine ACAs that have reorganized through the creation of FLCA and
PCA subsidiaries which handle long-term mortgage lending activities and short- and intermediate -term
lending activities, respectively. These subsidiaries and the ACA operate under a common board of directors
and joint management. These Associations are jointly obligated on each other's liabilities and are evaluated on
a consolidated basis for capital adequacy and other regulatory purposes. Accordingly, the ACA subsidiaries
are not included in the above table. Many of the remaining ACAs are planning to reorganize in 2000 in order
to take advantage of the tax-exempt status of the income from long-term mortgage lending activities of the
FLCA. The ACA and its PCA subsidiary will continue to be subject to taxation. In addition to the nine
ACAs that reorganized, 80 other Associations were operating under 39 joint management arrangements at
January 1, 2000. It is anticipated that the remaining FLBAs will become direct lenders through conversions to
FLCAs during 2000. On July 1, 1999, the St. Paul BC merged with CoBank, ACB, pursuant to a previously
approved merger plan. Since March 1, 1997, AgAmerica, FCB and Western FCB have operated under a joint
management arrangement.
27 i i-A
While certain costs are associated with the consolidation of the operations of merging Banks and
Associations, the potential benefits from such mergers include greater loan portfolio diversification and
improved long-term financial performance, primarily resulting from projected lower post -merger operating
expenses.
Combined Key Financial Ratios
Key financial ratios for each of the five years in the period ended December 31, 1999 are set forth below:
19" 1998 1997 19% 1995
Return on average assets ................... 1.44% 1.55% 1.66% 1.63% 1.71%
Return on average capital .................. 9.6 10.4 11.4 11.8 12.5
Net interest income as a percentage of
average earning assets ...................
Net loan charge -offs (recoveries) as a
percentage of average loans ..............
Allowance for loan losses as a percentage of
loans outstanding at year end .............
Capital as a percentage of total assets at
yearend ...............................
Debt to capital at year end .................
2.74
2.87
2.95
2.99
3.03
0.25
0.11
0.04
0.08
(0.01)
2.77
2.82
2.89
2.89
2.86
14.9
14.8
14.8
14.1
13.6
5.69:1
5.75:1
5.74:1
6.06:1
6.35:1
The 1999 and 1998 decreases in return on average assets and average capital, as compared with 1998 and
1997, respectively, resulted from the continued growth in average assets and average capital while net income
remained relatively unchanged. The 1997 increase in return on average assets, as compared with the prior
year, resulted from the growth rate in net income exceeding the growth rate in average assets. However, the
1997 decrease in return on average capital resulted from the growth rate of average capital exceeding the
growth rate of net income. Net loan charge -offs as a percentage of average loans increased in 1999, as
compared with 1998, due to charge -offs on a few large loans to processing and marketing cooperatives.
Results of Operations
Earnings Analysis
Changes in the key components impacting the System's results of operations over the past three years are
summarized below:
1999 1998 1997
VS. vs. VS.
1998 1997 19%
(in millions)
Favorable (unfavorable) variance in:
Interest income ............................................ $ 21 $ 180 $ 158
Interest expense ........................................... 8 127) (129)
Net interest income ........................................ 29 53 29
Provision for loan losses .................................... (27) (5 8) 49
Noninterest income ........................................ 19 47 38
Noninterest expense ........................................ (47) (64) (38)
Provision for income taxes .................................. 8 6 (12)
Net change in net income ..................................... 18) 6) $ 66
28
�...
Net Interest Income
Net interest income was $2.272 billion, $2.243 billion and $2.190 billion in 1999, 1998, and 1997,
respectively. The effects of changes in volume and interest rates on net interest income over the past three
years are presented in the following table. The table distinguishes between the changes in interest income and
interest expense related to average outstanding balances and to the levels of average interest rates. To the
extent changes in interest income and interest expense were attributable to changes in both volume and rate,
they have been allocated in proportion to the relationship of the absolute dollar amounts of the changes in
each.
1999 vs. 1998
1998 vs. 1997 1997 vs. 19%
Increase (decrease) Increase (decrease) Increase (decrease)
due to due to due to
Volume Rate Total Volume Rate Total Volume Rate Total
(in millions)
Interest income:
Loans ................................... $206 $(131) $ 75 $228 $(95) $133 $143 $(12) $131
Investments .............................. 51 (105) (54) 69 (22) 47 17 10 27
Total interest income ...................... 257 (236) 21 297 (117) 180 160 (2) 158
Interest expense:
Systemwide Debt Securities and other ........ 167 (175) (8) 178 (51) 127 67 62 129
Changes in net interest income ................ $ 90 $ (61) $ 29 $119 $ (66) $ 53 $ 93 $ (64) $ 29
The following chart illustrates the components underlying the System's net interest income for the past
five years. The table following the chart presents interest rate spreads, components of interest rate spreads, the
details of the changes in interest rates earned and paid, and the impact of those changes on interest rate
spreads:
3.50 %
3.00 %
2.50 %
2.00 %
1.50 %
1.00 %
1995 1996 1997 1998 1999
Net Interest Margin Net Interest Spread
29
Loans..................................
Cash, Federal funds sold and investments ...
Total earning assets ....................
Financed by:
Interest -bearing funds ..................
Interest -free funds .....................
Total investable funds ..................
Net interest spread (spread on interest -
bearing funds) ........................
Net interest margin (spread on total
investable funds) ......................
1999 Average 1998 Average 1997 Average
Balance
Rate
$68,788
7.93%
14,008
4.92
$82,796
7.42
Balance
Rate
(S in millions)
$65,303
8.24%
12,918
5.76
$78,221
7.83
Balance
Rate
$62,564
8.38%
11,730
5.94
$74,294
8.00
$69,984 5.53
$66,099 5.87
$63,073 5.95
12,812
12,122
11,221
$82,796 4.68
$78,221 4.96
$74,294 5.05
1.89
1.96
2.05
2.74
2.87
2.95
Earning assets consisted of loans (accrual and nonaccrual), cash, Federal funds sold and investments.
Earning assets were generally financed by Systemwide Debt Securities. In addition to these interest -bearing
funds, earning assets also were funded by interest -free funds (primarily capital stock and surplus). Variations
in average volume and the spreads earned on interest -bearing funds and total investable funds determine
changes in net interest income.
Net interest income increased in 1999, as compared with 1998, due primarily to income earned from a
higher level of average earning assets, funded, in part, by an increase in capital. Partially offsetting this
increase was a decline in the System's net interest margin from 2.87% in 1998 to 2.74% in 1999. This decrease
resulted primarily from a decline in net interest spread from 1.96% in 1998 to 1.89% in 1999. Factors
contributing to the decline in net interest spread included competitive loan pricing pressures in a lower interest
rate environment and a decrease in interest income recognized on nonaccrual loans.
In 1999, interest income recognized on cash -basis nonaccrual loans declined to $107 million as compared
with $140 million and $168 million in 1998 and 1997, respectively. Interest income is recognized on cash -basis
nonaccrual loans only as interest payments are received and certain other conditions are met. Nonaccrual
loans are reinstated to accrual status after a period of sustained payment performance if they are current as to
principal and interest and there is no longer reasonable doubt as to the collection of the remaining amounts of
principal and interest.
Net interest income increased in 1998, as compared with 1997, due primarily to income earned from a
higher level of average earning assets, funded, in part, by an increase in capital. Partially offsetting the increase
was a decline in the System's net interest margin to 2.87% in 1998 from 2.95% in 1997. This decrease resulted
primarily from a decline in net interest spread to 1.96% in 1998 from 2.05% in 1997, which was primarily
attributable to competitive loan pricing pressures and decreased interest income recognized on nonaccrual
loans.
Provision for Loan Losses
The System recorded provisions for loan losses of $177 million, $150 million and $92 million in 1999,
1998 and 1997, respectively. The 1999 provisions for loan losses were primarily attributable to credit quality
concerns in certain agricultural sectors, including specific and isolated credit events related to large loans to a
few processing and marketing cooperatives, and to growth in the System's loan volume. Provisions for loan
losses were recorded by all the Banks during 1999.
The 1998 provisions for loan losses reflected the determinations of System institutions' managements that
additional allowances for loan losses were necessary to provide for the credit risks associated with additional
loan volume, with the adverse economic conditions in certain agricultural sectors, and with a limited number
of loans to processing and marketing cooperatives and certain borrowers in the hog industry.
30�;
Provisions for loan losses, totaling $104 million, were recorded by seven of the eight Banks during 1997
and were primarily attributable to the System's additional loan volume and to operating weaknesses faced by a
limited number of borrowers, including certain processing and marketing cooperatives. These provisions were
partially offset by one Bank's aggregate negative provision of $12 million.
(As used in this section, references to a Bank mean the Bank and its related Associations on a combined
basis.)
Noninterest Income
Noninterest income for each of the three years in the period ended December 31, 1999 is detailed in the
following table:
For the year ended
December 31,
19"
1998
1997
(in millions)
Loan -related fee income ................................
$ 77
$ 81
$ 65
Fees for financially related services .......................
61
55
46
Income earned on Insurance Fund assets ..................
82
80
71
Mineral income .......................................
7
8
11
Gains on sale of investment securities and other assets ......
33
33
19
Miscellaneous .........................................
47
31
29
Total noninterest income ............................
$307
$288
$241
Noninterest income increased $19 million to $307 million for the year ended December 31, 1999, as
compared with the same period of the prior year. Noninterest income for 1999 included a nonrecurring gain of
$27 million recognized by certain Banks in connection with the sale of their investment in the Farm Credit
Leasing Services Corporation (FCL) to CoBank, ACB. By virtue of the purchases, CoBank, ACB acquired
the majority interest in the FCL and, therefore, consoldiated the FCL into its financial statements beginning
on July 1, 1999. Noninterest income for 1998 included a gain of $32 million recognized from the sale of
certain investments held to retire callable Financial Assistance Corporation bonds.
Noninterest income increased $47 million to $288 million for the year ended December 31, 1998, as
compared with the same period of the prior year. The increase was due primarily to an increase in fee income
(due to an increase in loan originations and refinancings), commissions on sales of insurance, and income
earned on assets in the Insurance Fund, and to the gain on the sale of Financial Assistance Corporation
investments.
Operating Expense
Operating expense for each of the three years in the period ended December 31, 1999 is summarized
below:
For the year ended
Percentage Increase
December 31,
(Decrease)
1999
1998
1997
1999/1998 1998/1997
($ in millions)
Salaries and employee benefits ............
$600
$550
$532
9.1% 3.4%
Occupancy and equipment expense .........
92
84
80
9.5 5.0
Other operating expense ..................
298
303
280
(1.7) 8.2
Total operating expense ..................
$990
$937
$892
5.7 5.0
Salaries and employee benefits for 1999 increased, as compared with 1998, due primarily to (1) sever-
ance and early retirement costs associated with the merger of St. Paul BC with CoBank, ACB and
31,
reorganizations by certain other System institutions and (2) merit increases and various compensation
initiatives. The aggregate number of System employees in 1999 remained at a level similar to the 1998 level.
The 1999 occupancy and equipment expense increased, as compared with 1998, due, in part, to information
technology improvements.
The 1998 and 1997 salaries and employee benefits and other operating expenses increased, as compared
with the respective prior year, due, in part, to certain hiring and training expenditures for strategic alliances,
for customer research and development efforts, and for the support and management of loan growth. The
increase in 1998 in other operating expense was due primarily to upgrades in information technology systems.
Operating expense statistics for the years ending December 31 are set forth below:
19"
1998
1997
($ in millions)
Excess of net interest income over operating expense ...
$1,282
$1,306
$1,298
Operating expense as a percentage of
net interest income ..............................
43.6%
41.8%
40.7%
Operating expense as a percentage of net interest
income and noninterest income ....................
38.4%
37.0%
36.7%
Operating expense as a percentage of
average earning assets ............................
1.20%
1.20%
1.20%
Provision for Income Taxes
As discussed in Note 2 to the accompanying combined financial statements, the System is comprised of
both taxable and tax-exempt entities. Taxable entities are generally eligible to operate as cooperatives for tax
purposes and thus may elect to deduct from taxable income certain amounts allocated to borrowers as
patronage in the form of cash, stock or allocated surplus.
The System recorded a provision for income taxes of $172 million for the year ended December 31, 1999,
as compared with $180 million for the same period of the prior year. The effective tax rate (the provision for
income taxes as a percentage of income before income taxes) decreased slightly to 12.2% for 1999, as
compared with 12.6% for 1998.
As addressed in Note 2, ACAs are not exempt from taxation. However, the ACAS have filed amended
Federal tax returns requesting refunds on taxes paid related to income generated from their long-term
mortgage lending activities. A lawsuit was initiated by the Internal Revenue Service (IRS) against one ACA
in the United States District Court for the District of North Dakota in order to resolve the ACAs' claims for
refunds on taxes paid on this income. In September 1998, the District Court ruled that those earnings are
exempt from taxation. The ruling was appealed to the Eighth Circuit Court of Appeals by the IRS. Taxes have
been provided on this income for all ACAs.
Action on the appeal is currently on hold because the ACAs entered into a settlement process to resolve
conclusively the status of all claimed refunds and the ongoing tax status of the ACAs, using a different ACA
as a model. It is anticipated that if there is a settlement, there would be a recovery of a portion of the tax
refunds claimed, plus interest. To date, no potential recovery has been recognized as income.
With the necessary approvals of their stockholders and the FCA, ACAs may reorganize to operate their
long-term mortgage lending activities through a newly created FLCA subsidiary and their short- and
intermediate -term lending activities through a newly created PCA subsidiary. Income earned by the FLCA
subsidiary is exempt from taxation. Nine ACAs have reorganized through January 1, 2000 and many of the
remaining ACAs are planning to reorganize in 2000. As a result, the effective tax rate for the System is
expected to be reduced in future years.
The provision for income taxes was $180 million for the year ended December 31, 1998, as compared
with $186 million for the same period of the prior year. The 1998 provision for income taxes was favorably
impacted by one Association's favorable settlement of $15 million with the IRS related to certain outstanding
32 r,
1 6 A
tax issues. The effective tax rate remained relatively stable at 12.6% for 1998, as compared with 12.8% for
1997.
Financial Condition and Quality of Loan Portfolio
Loans outstanding at December 31 for each of the past five years consisted of the following:
December 31,
19"
1998
1997 19%
19"
(in millions)
Long-term real estate loans (excluding
loans to cooperatives) .................... $34,187
$32,911
$30,657 $29,602
$28,428
Short- and intermediate -term loans to
agricultural producers .................... 17,872
17,910
16,640 15,109
13,804
Domestic loans to cooperatives .............. 15,309
14,792
14,065 13,844
13,598
Loans made in connection with
international transactions ................. 2,634
2,291
2,077 2,623
2,759
$70,002
$67,904
$63,439 $61,178
$58,589
Loans by type as a percentage of total loans for each of
the past five years are as follows:
December 31,
1999
1998 1997 19%
1995
Long-term real estate loans (excluding loans to
cooperatives) .....................................
48.8%
48.5% 48.3% 48.4%
48.5%
Short- and intermediate -term loans to agricultural
producers ........................................
25.5
26.3 26.2 24.7
23.6
Domestic loans to cooperatives ........................
21.9
21.8 22.2 22.6
23.2
Loans made in connection with international transactions..
3.8
3.4 3.3 4.3
4.7
100.0% 100.0% 100.0% 100.0% 100.0%
System loan volume has increased each year since 1994. The year-to-year increase in loan volume was
3.1% in 1999, 7.0% in 1998, 3.7% in 1997, 4.4% in 1996 and 7.2% in 1995. Despite a very competitive lending
environment, the System has maintained or increased slightly its aggregate market share of agricultural credit
over the past five years. This is largely attributable to the System's improved financial condition and to the
System's ability to extend competitively priced credit to its borrowers. System institutions have continued to
implement a number of measures, including competitive loan programs and fixed-rate financing plans,
designed to retain creditworthy borrowers and to attract new loan volume.
Long-term real estate loans (excluding loans to cooperatives) at December 31, 1999 increased
$1.276 billion, or 3.9%, as compared with December 31, 1998. The growth in the long-term real estate loans
was due to continued System marketing efforts, a relatively favorable long-term interest rate environment, and
strong demand for longer -term borrowings.
Short- and intermediate -term loans to agricultural producers at December 31, 1999 remained relatively
stable, as compared with December 31, 1998. Borrowers demand for these loans decreased or remained stable
in 1999 due to a general decline in the agricultural economic conditions, low commodity prices and a surplus
of certain commodities. Domestic loans to cooperatives increased $517 million, or 3.5%, at December 31,
1999, as compared with December 31, 1998, due to increased rural utility lending and the addition of the FCL
loan volume, offset, in part, by a decrease in agribusiness loans.
33 1
Loans made in connection with international transactions at December 31, 1999 increased $343 million,
or 15.0%, as compared with December 31, 1998 due primarily to increased lending to banks in Mexico. The
international portfolio continued to reflect a significant concentration in U.S. government -sponsored trade
financing programs. Overall, approximately 90% and 87% of the loans made in connection with international
transactions at December 31, 1999 and 1998, respectively, were guaranteed through the USDA's Commodity
Credit Corporation.
Nonperforming Assets
Nonperforming assets for each of the past five years
consisted
of the following:
December 31,
1999
1998
1997
1996
1995
(in millions)
Nonaccrual loans ..................................
$ 954
$1,200
$592
$645
$ 801
Accruing restructured loans .........................
122
150
200
246
320
Accruing loans 90 days or more past due .............
30
46
36
28
29
Total nonperforming loans ......................
1,106
1,396
828
919
1,150
Other property owned ..............................
25
32
31
55
63
Total nonperforming assets .....................
$1,131
$1,428
$859
$974
$1,213
2.0 %
1.5 %
1.0 %
0.5 %
0.0 %
Nonaccrual Loans Total Nonperforming Assets
as of December 31, as of December 31,
(as a % of total loans outstanding) (as a % of System combined capital)
1995 1996 1997 1998 1999
34
15%
10%
5%
0%
1995 1996 1997 1998 1 1999
The following table is a reconciliation of nonaccrual loan activity during the past three years:
For the year ended
December 31,
19" 1998 1997
(in millions)
Balance at beginning of period ................................ $1,200 $ 592 $645
Additions:
Gross amounts transferred into nonaccrual .................... 906 1,245 725
Recoveries ............................................... 16 12 13
Other, net ............................................... 64 53 23
Reductions:
Charge -offs .............................................. (199) (78) (38)
Transfers to other property owned ........................... (19) (20) (28)
Reinstatements to accrual status ............................ (88) (100) (96)
Repayments ............................................. (926) (504) 652)
Balance at end of period.................I.................... $ 954 $1,200 $592
Nonaccrual loans decreased 20.5% during 1999 and increased 103% during 1998. The decrease in
nonaccrual loans during 1999 was principally attributable to payments received and, to a lesser extent, charge -
offs on certain large nonaccrual loans to a few processing and marketing cooperatives. The increase in
nonaccrual loans during 1998 was due to deterioration in the credit quality of loans to a limited number of
processing and marketing cooperatives and, to a lesser extent, of loans to borrowers in the hog industry. During
1999, nonaccrual loans related to the System's long-term real estate portfolio increased slightly, while
nonaccrual loans related to short- and intermediate -term loans to agricultural producers increased by a larger
amount. Nonaccrual loans that were current as to principal and interest as a percentage of total nonaccrual
loans remained at a very high level of 66.1% at December 31, 1999, as compared with 67.1% at December 31,
1998. Nonaccrual loans contractually past due with respect to either principal or interest were $323 million at
December 31, 1999, as compared with $395 million at December 31, 1998.
While charge -offs increased significantly in 1999, as compared with 1998, they continued to remain at
low levels (0.25%, 0.11 % and 0.04% of average loans for 1999, 1998, and 1997, respectively) . Over recent
years, the System has been successful in dealing with nonaccrual loans, as evidenced by the high amounts of
repayments and reinstatements of nonaccrual loans to accrual status. There is no certainty, however, that
System institutions will continue to be as successful in resolving their nonaccrual loans in future periods.
Accruing restructured loans, including related accrued interest, declined $28 million and $50 million, or
18.7% and 25.0%, during 1999 and 1998, respectively. These declines in accruing restructured loans were
attributable to normal paydowns and settlements by borrowers. The restructured loans include only the year-
end balances of loans (and related accrued interest) on which monetary concessions have been granted to
borrowers and that are in accrual status. Restructured loans in the table do not include loans on which
extensions or other nonmonetary concessions have been granted, or restructured loans on which monetary
concessions have been granted but which remain in nonaccrual status. Upon restructuring, System institutions'
accounting policies generally require a period of performance during which there is compliance with the
restructured terms prior to transferring the loan to accruing restructured status.
In addition to the overall decline in nonperforming assets during 1999, various factors underlying the
determination of credit quality of the System's loan portfolio indicated that credit quality improved, although
borrowers in certain agricultural sectors experienced some financial stress due to commodity surpluses and
associated low commodity prices. Loan delinquencies at December 31, 1999 (accruing loans 30 days or more
past due) as a percentage of accrual loans decreased, as compared with the same percentage at December 31,
1998. Loans classified (under the uniform loan classification system utilized by the FCA in its examination
process of System institutions) as "acceptable" or "other assets especially mentioned" remained relatively
35
j r5
stable as a percentage of total loans at December 31, 1999, as compared with the- same percentage at
December 31, 1998.
Allowance for Loan Losses
The allowance for loan losses at December 31, 1999, 1998 and 1997 was $1.938 billion, $1.917 billion and
$1.835 billion, respectively, and was considered by the managements of System institutions to be adequate to
absorb estimated losses inherent in the loan portfolio. As more fully described in Note 2 to the accompanying
combined financial statements, the allowance for loan losses reflected the concentration of System loans to the
agricultural sector of the economy and uncertainties surrounding the future profitability of this sector. Net
charge -offs of $172 million, $68 million and $27 million were recorded in 1999, 1998 and 1997, respectively.
The 1999 charge -offs were primarily related to large loans to a few processing and marketing cooperatives.
The System's allowance for loan losses reflects the aggregate of each System entity's individual
evaluation of its allowance for loan losses requirements. The increases in the allowance for loan losses in 1999
and 1998 were based on Bank and Association managements' perceptions of increases in the credit risks
related to additional loan volume, to the impact on certain System borrowers of adverse economic conditions,
to a limited number of loans to processing and marketing cooperatives and to loans to certain borrowers in the
hog industry. Although the allowance for loan losses is considered by managements of System institutions to
be adequate to absorb estimated losses inherent in their loan portfolios at December 31, 1999, a continuation
or worsening of existing adverse agricultural economic conditions, without the continuation of significant
assistance from direct Federal government payments, could cause a deterioration in the credit quality of the
System's loan portfolio.
The allowance for loan losses as a percentage of loans outstanding and as a percentage of certain other
credit quality indicators are shown below:
December 31,
19" 1998 1997 19% 1995
Allowance for loan losses as a percentage of:
Total loans ...................................... 2.77% 2.82% 2.89% 2.89% 2.86%
Nonperforming loans ............................. 175 137 222 193 146
Nonaccrual loans ................................. 203 160 310 274 209
As a result of the general improvement in farmland values and the increased emphasis being placed by
System institutions on borrowers' repayment capacities and financial conditions in making credit decisions on
new loans, the farmers' financial positions have generally strengthened during the 1990s; however, current
adverse economic conditions in certain agricultural sectors are placing some stress on the credit quality of the
System's loan portfolio. A substantial portion of the credit risk associated with the short- and intermediate -
term loan portfolio is closely tied to the uncertainties surrounding the agricultural economy during the 2000
production cycle.
The table below sets forth the concentration of loans by dollar size:
December 31, 19"
Range ($ in thousands)
Amount
Number of Loans
($ in millions)
$1- $250......................................
$27,560
598,646
$251 - $500....................................
7,829
30,556
$501- $1,000...................................
5,604
12,026
$1,001 - $5,000.................................
8,728
11,552
$5,001 - $25,000................................
8,333
3,878
Over$25,000...................................
11,948
172
Total ..........................................
$70,002
656,830
36 � 133
The concentration of larger loans to relatively few borrowers continued to be a significant factor in
assessing the credit risk associated with domestic agribusiness loans to cooperatives and rural utility loans.
Credit risk on loans made in connection with international transactions remained relatively low, inasmuch as
approximately 909/o and 87% of these loans were guaranteed under Federal government programs as of
December 31, 1999 and 1998, respectively.
Capital Adequacy
System Capitalization
The table below sets forth changes in capital for the year ended December 31, 1999:
Balance at December 31, 1998 ........................
Net income ........................................
Capital stock and participation certificates issued .........
Capital stock and participation certificates and
surplus retired ................... .............. .
Patronage distributions ...............................
Change in unrealized losses on investments, net ..........
Balance at December 31, 1999 ........................
Capital
Combined
Combined
System
Banks
Associations
Combined
(in millions)
$5,987
$7,917
$12,446
538
806
1,233
96
271
272
(313)
(357) (438)
(362)
(193) (212)
(44)
—(46)
$5,902
$8,444 $13,255
Note: System Combined Capital reflected eliminations of approximately $2.1 billion and $2.2 billion of Bank equities held by
Associations as of December 31, 1999 and 1998, respectively. System Combined Capital also reflected net eliminations of transactions
between System entities, primarily related to capital assistance provided by the Financial Assistance Corporation, Capital Preservation
Agreement accruals, and surplus allocations by certain Banks to their Associations. Additionally, System Combined Capital included
restricted capital of $1.5 billion related to the Insurance Fund. (See Note 7 and supplemental combining information to the
accompanying combined financial statements.)
Over the past several years, the System has been able to build capital through net income earned and
retained by System institutions. Capital accumulated through earnings has been only partially offset by cash
distributions to stockholders as managements of System institutions have focused on building and
strengthening their institutions' capital levels. Accordingly, surplus is now the most significant component of
combined capital. As of December 31, 1999, surplus as a percentage of the System's combined capital
increased to 76.0%, as compared with 74.1% at December 31, 1998. Capital as a percentage of total System
assets was 14.9% and 14.8% at December 31, 1999 and 1998, respectively. Combined capital stock and
participation certificates declined during 1999, due principally to reductions in capital investment
requirements for borrowers by certain System institutions, partially offset by additional capital investments
related to the growth in loan volume. See Note 10 to the accompanying combined financial statements for
additional information related to the capitalization of System institutions.
37 _ ���
Bank Capital and Access to Association Capital
System Combined Capital,
Combined Bank Capital and Insurance Fund
as of December 31
$ in billions
$14 T
12
10
8
6
4
2
0
1995 19% 1997 1998 19"
System Combine/ Combiued Book lusunoee
Capital Capital Fwd
As noted earlier, only the Banks are liable, on a joint and several basis, for the payment of the principal of
and interest on Systemwide Debt Securities. Before the provisions of the Farm Credit Act providing for joint
and several liability can be invoked, available amounts in the Insurance Fund (designated as restricted capital
in the System's combined financial statements) would be called on to insure the timely payment of the
principal of and interest on such obligations (see Note 7 to the accompanying combined financial statements).
Bank capital has increased $397 million since December 31, 1995 and decreased $85 million since
December 31, 1998 to $5.902 billion at December 31, 1999. Bank capital as a percentage of System combined
capital has declined to 44.5% at December 31, 1999 from 56.7% at December 31, 1995 and from 48.1% at
December 31, 1998. While Bank capital and the Insurance Fund increased $908 million since December 31,
1995 and $41 million since December 31, 1998, Bank capital and the Insurance Fund as a percentage of
System combined capital declined to 56.1% at December 31, 1999 from 67.3% at December 31, 1995 and
from 59.4% at December 31, 1998. Bank capital and the Insurance Fund as a percentage of Systemwide Debt
Securities was 10.4% at December 31, 1999, as compared with 10.9% at December 31, 1998.
The following table presents activity of Combined Bank Capital for the past three years:
Balance at beginning of year ........................
Net income ......................................
Capital stock and participation certificates issued .......
Capital stock and participation certificates and
surplus retired ..................................
Patronage distributions .............................
Change in other comprehensive income ...............
Balance at end of year .............................
19"
1998
1997
(in millions)
$5,987
$5,929
$5,666
538
579
681
96
68
66
(313)
(151)
(105)
(362)
(414)
(394)
44)
24)
15
$5,902
$5,987
$5,929
38 r, t"
The retirement of capital stock and participation certificates and surplus increased during 1999 due
primarily to two Banks' distribution of capital to their related FLBAs that were converting to FLCAs and
assuming direct lending authority.
Over the past five years, Association capital levels have been strengthened through earnings retained in
response to the risks related to their direct -lending activities. The increased risk capital at the Association level
reduces the credit exposure that the Banks have with respect to the direct loan between the Banks and each of
their related Associations. However, capital in one Association is not available to address capital needs of
another Association or of a non -related Bank and, as more fully described in Note 10 to the accompanying
combined financial statements, there are various limitations and/or conditions with respect to each Bank's
access to the capital of its related Associations.
FCA Capital Requirements
FCA's capital regulations require that the Banks and Associations achieve and maintain permanent
capital of at least seven percent of risk -adjusted assets. In addition, FCA regulations require that: 1) all
System institutions achieve and maintain a total surplus ratio of at least seven percent of risk -adjusted assets
and a core surplus ratio of at least three and one-half percent of risk -adjusted assets and 2) all Banks achieve
and maintain a net collateral ratio of 103 percent of total liabilities. At December 31, 1999, all System
institutions reported compliance with these standards (see Note 10 to the accompanying combined financial
statements) .
Funding Sources and Liquidity
The System's primary source of funds is the sale of Systemwide Debt Securities. Aggregate issuances of
Systemwide Debt Securities and other bonds were $322.0 billion and $302.6 billion in 1999 and 1998,
respectively. In 1999 and 1998, substantially all proceeds of debt issuances were used to fund maturing debt.
The increase in Systemwide Debt Securities outstanding at December 31, 1999, as compared with
December 31, 1998, was used to fund the growth in loan volume and other earning assets. The System's
operating activities provided cash of $1.554 billion, $1.264 billion and $1.381 billion in 1999, 1998 and 1997,
respectively, which resulted primarily from the excess of net interest income over operating expenses.
A summary of activity of insured debt obligations (Systemwide Debt Securities) and uninsured debt
obligations (other bonds) for the past two years is presented below:
Systemwide Systemwide
Systemwide Medium -Term Discount Other
Bonds* Notes Notes Bonds Total
(in millions)
1999
Balance, beginning of year ......... $ 15,932 $ 33,846 $ 17,922 $ 944 $ 68,644
Issuances ....................... 34,007 14,696 272,602 737 322,042
Maturities/retirements ............ 27,202) 16,540) 273,809) 740) (318,291)
Balance, end of year .............. $ 22,737 $ 32,002 $ 16,715 $ 941 $ 72,395
1998
Balance, beginning of year ......... $ 17,263 $ 30,897 $ 14,039 $ 1,021 $ 63,220
Issuances ....................... 33,638 25,810 241,525 1,633 302,606
Maturities/retirements ............ 34,969) (22,861) 237,642) 1,710) 297,182)
Balance, end of year .............. $ 15,932 $ 33,846 $ 17,922 $ 944 $ 68,644
* During 1999, $1.775 billion of Systemwide Master Notes were issued and $1.883 billion were outstanding at December 31, 1999 and
are included with Systemwide Bonds. During 1998, $875 million of Systemwide Master Notes were issued and $405 million remained
outstanding at December 31, 1998. No Systemwide Global Debt Securities were outstanding at December 31, 1999 and 1998.
39
Information regarding weighted average interest rates and weighted average maturities follows:
Systemwide
Systemwide
Systemwide
Medium -Term
Discount
Other
Bonds
Notes
Notes
Bonds
Total
1999
At December 31:
Average interest rate ......
5.72%
5.86%
5.37%
4.12%
5.69%
Average remaining
maturity ..............
1.1 years
3.1 years
2.7 months
2.0 months
1.8 years
Issuances during the year:
Average interest rate ......
5.17%
5.90%
5.01 %
4.60%
5.06%
Average maturity at
issuance ..............
9.4 months
3.2 years
20 days
2.1 months
3.3 months
Systemwide
Systemwide
Systemwide
Medium -Term
Discount
Other
Bonds
Notes
Notes
Bonds
Total
1998
At December 31:
Average interest rate......
5.34%
5.55%
5.01%
4.56%
5.34%
Average remaining
maturity ..............
3.9 months
3.4 years
2.8 months
3.0 months
1.8 years
Issuances during the year:
Average interest rate ......
5.38%
5.69%
5.28%
4.77%
5.32%
Average maturity at
issuance ..............
5.5 months
3.9 years
25 days
1.0 month
5.2 months
The Farm Credit Act and FCA regulations require as a condition for a Bank's participation in the
issuance of Systemwide Debt Securities that the Bank maintain specified eligible assets, referred to in the
Farm Credit Act as "collateral," at least equal in value to the total amount of the debt securities outstanding
for which it is primarily liable. (See "Description of Debt Securities — Systemwide Debt Securities —
Collateral" for a description of eligible assets.) The collateral requirement does not provide holders of
Systemwide Debt Securities with a security interest in any assets of the Banks. At December 31, 1999, all
Banks reported compliance with the collateral requirement. (See Note 8 to the accompanying combined
financial statements.)
Each Bank determines its participation in each issue of Systemwide Debt Securities based on its funding
and operating requirements, subject to: (1) the, availability of eligible collateral (as described above),
(2) compliance with the conditions of participation as prescribed in the Market Access Agreement (MAA),
(3) determination by the Funding Corporation of the amounts, maturities, rates of interest and terms of each
issuance, and (4) FCA approval. No Bank is currently precluded from participation in issuances of
Systemwide Debt Securities. As required by the Farm Credit Act, Systemwide Debt Securities are issued
pursuant to authorizing resolutions adopted by the Board of Directors of each Bank. Under the MAA, each
Bank's ability to withdraw its authorizing resolution is restricted and, in certain circumstances, eliminated.
(See "Other Risk Management.")
The Banks and Associations, as permitted under FCA regulations, hold eligible investments for the
purposes of maintaining a liquidity reserve, managing short-term surplus funds, and managing interest rate
risk. The System's investment portfolio was $14.001 billion at December 31, 1999, as compared with
$12.734 billion at December 31, 1998. At December 31, 1999 and 1998, 32.3% and 28.1%, respectively, of
investments had maturities of less than one year and approximately 80% and 77%, respectively, of the
investments were scheduled to reprice within one year. Mortgage -backed securities comprised 48% and 55% of
the System's investment portfolio at December 31, 1999 and 1998, respectively.
40
Interest Rate Risk Management
Banks and Associations, in the course of their lending and investment activities, are subject to interest
rate risk. Interest rate risk is the risk that changes in interest rates may adversely affect the institution's
operating results and financial condition. This risk arises from differences in the timing between the
contractual maturity or the repricing characteristics of the assets and of the financing obtained to fund those
assets. Banks and Associations are responsible for developing institution -specific asset / liability management
policies and strategies to manage interest rate risk and for monitoring them on a regular basis. Integral to the
strategies employed by System institutions to manage interest rate risk are asset/liability management
techniques that adjust the effective interest rates, repricing characteristics and maturity mix of each
institution's assets and liabilities. These techniques include selecting investments and financing instruments of
varying types and maturities and may also include employing off -balance sheet derivative products (primarily
interest rate swaps) to synthetically alter the effective interest rate or the repricing intervals of the institution's
assets and liabilities.
The following table, an interest rate gap analysis, presents a comparison of interest -sensitive assets and
liabilities in defined time segments as of December 31, 1999. The table is based on the known repricing dates
of certain assets and liabilities and the assumed repricing dates of others. Various assets and liabilities may not
reprice in accordance with the assumptions utilized by System institutions for the purposes of their asset/
liability management strategies. It should be recognized that this is a static view of the System's interest -rate
sensitivity position and does not capture the dynamics of balance sheet, rate, and spread changes. Asset/
liability simulation models, discussed below, are employed to capture these dynamics and quantify earnings
variations under different potential interest rate environments.
Repricing Intervals
0-6
6 Months
Over
Months
to 1 Year
1-5 Years
5 Years
Total
($ in millions)
Earning assets:
Adjustable/indexed loans .......................
$10,929
$ 984
$ 1,512
$ 6
$13,431
Administered -rate loans ........................
18,229
22
18,251
Fixed-rate loans ..............................
9,541
3,282
15,321
9,222
37,366
Nonaccrual loans .............................
487
467
954
Total gross loans ..........................
38,699
4,288
17,320
9,695
70,002
Cash, Federal funds sold and investments .........
12,469
1,511
2,260
574
16,814
Total earning assets .......................
51,168
5,799
19,580
10,269
86,816
Interest -bearing liabilities:
Systemwide bonds and medium -term notes .......
26,285
4,374
17,138
6,942
54,739
Systemwide discount notes .....................
14,895
1,820
16,715
Financial Assistance Corporation bonds and
other interest -bearing liabilities ................
937
97
452
535
2,021
Total interest -bearing liabilities ..............
42,117
6,291
17,590
7,477
73,475
Effect of interest rate swaps and other derivatives ..
2,123
518)
(1,750)
145
Total interest -bearing liabilities adjusted for
swaps and other derivatives ...............
44,240
5,773
15,840
7,622
73,475
Interest rate sensitivity gap (total earning assets less
total interest -bearing liabilities adjusted for swaps
and other derivatives) .......................
$ 6,928
$ 26
$ 3,740
$ 2,647
$13,341
Cumulative gap ...............................
$ 6,928
$6,954
$10,694
$13,341
Cumulative gap as a percentage of total earning assets..
7.98%
8.01%
12.32%
15.37%
41 � ���
Consistent with the positive gap between the System's earning assets and interest -bearing liabilities as
reflected in the above table, the System's interest -rate sensitivity position at December 31, 1999 for repricing
intervals in the first six months of 2000 may generally be characterized as "asset sensitive" (i.e., interest rates
earned by Banks and Associations on earning assets may change or be changed more quickly than interest
rates on the interest -bearing liabilities used to fund these assets) . Typically, the net interest income of an
institution that is "asset sensitive" will be unfavorably impacted in a declining interest -rate environment and
favorably impacted in a rising interest -rate environment. A significant portion of the System's variable -rate
loans are management administered -rate loans that, unlike indexed loans, require definitive action at the
discretion of the lending Bank or Association to change the interest rates charged and may reflect
managements' assessments of whether rate changes are warranted or feasible in view of competitive market
conditions. The actual interest rates charged on such administered -rate loans typically lag the movement of
market interest rates, thereby moderating the overall net interest income impact of market fluctuations that
would otherwise exist for asset -sensitive institutions. During 1999, the System increased its asset sensitive
position in the 0-6 months repricing interval.
In addition to this static view of the System's interest -rate sensitivity, each Bank conducts simulations of
the combined net interest income and the combined market value of equity variations of the Bank and its
related Associations under different market interest rate environments. These simulations provide Bank
managements with an estimate of the sensitivity of earnings and market value of equity for given changes in
interest rates. The Banks' simulation modeling includes simulations that assume a static balance sheet, i.e.,
that hold constant the institutions' current business mix and balance sheet interest rate exposures. One of the
simulations produced under such assumptions is based on each Bank determining the impact of a 200 basis
point shock in interest rates (i.e., immediate, parallel changes upward and downward in the interest yield
curve, which changes are sustained over a 12-month period) on combined net interest income and on
combined market value of equity. Under this simulation, all Banks except one Bank reported as of
December 31, 1999 that projected combined net interest income would decline by no more than 7.5%, with the
one Bank accounting for less than 6.5% of the System's combined assets projecting a decline of no more than
10.5%. In addition, Bank managements' analyses indicated that projected combined market value of equity
would not decline by more than 5.0% for any one Bank. Certain Banks also perform simulations using an
option adjusted model, which considers other factors including the effect of prepayments.
Derivative Financial Instruments
Derivative products are an integral part of the Banks' interest rate risk management activities. To achieve
their risk management objectives, Banks enter into various derivative transactions with other financial
institutions. The aggregate notional amount of the System's derivative products, most of which consisted of
interest rate swaps, was $22.466 billion at December 31, 1999, as compared with $17.790 billion at
December 31, 1998. Notional amounts of these instruments, which are not included in the System's
Combined Statement of Condition, are indicators of the level of the System's activities in off -balance -sheet
derivative financial instruments but are not indicative of the level of credit risk associated with such
instruments. The credit risk exposure, which includes the current and potential replacement cost of derivative
financial instruments, is a small fraction of the notional amounts. Although the interest rate risk management
activities should be evaluated on an integrated basis, taking into consideration all on- and related off -balance
sheet instruments (and not focusing on any specific financial instruments), the interest rate table below
provides certain additional information concerning interest rate swaps and other derivatives that are utilized to
manage interest rate risk. The following table also summarizes the expected maturities and weighted -average
interest rates to be received and paid on derivative products utilized in the Banks' interest rate risk
management activities at December 31, 1999. The table was prepared under the assumption that variable
interest rates remain constant at December 31, 1999 levels and, accordingly, the actual interest rates to be
received or paid will be different to the extent that such variable rates fluctuate from December 31, 1999
levels. Variable rates presented are generally based on the short-term interest rates for the relevant interest
rate swap contracts (e.g., London Interbank Offered Rate (LIBOR)) . Floating -for -floating swaps are interest
rate swaps based on two floating rate indices (e.g., LIBOR and Prime).
42
v
Maturities of 1999 Derivative Products
2005-
there-
2000 2001 2002 2003 2004 after Total
($ in millions)
Receive fixed swaps
Notional value .......................
$3,895 $5,098 $2,758
$ 780
$ 895
$ 625
$14,051
Weighted average receive rate ..........
5.37% 5.76% 5.52%
6.07%
6.23%
6.40%
5.68%
Weighted average pay rate .............
6.06 6.04 6.11
6.12
5.87
5.93
6.05
Amortizing receive fixed swaps
Notional value .......................
$ 94
$ 109
$ 203
Weighted average receive rate ..........
5.24%
6.13%
5.72%
Weighted average pay rate .............
6.26
6.36
6.31
Pay fixed swaps
Notional value .......................
$ 162 $ 103 $ 267
$ 10
$ 140
$ 75
$ 757
Weighted average receive rate ..........
6.06% 6.13% 6.14%
6.12%
5.79%
5.48%
5.99%
Weighted average pay rate .............
5.99 6.14 6.47
6.05
6.38
5.78
6.23
Amortizing pay fixed swaps
Notional value .......................
$ 12
$ 3
$ 405
$ 420
Weighted average receive rate ..........
6.08%
6.11 %
5.96%
5.96%
Weighted average pay rate .............
5.55
7.20
6.23
6.23
Floating -for -floating swaps
Notional value .......................
$ 695 $ 200 $ 138
$ 1,033
Weighted average receive rate ..........
5.79% 6.09% 5.79%
5.84%
Weighted average pay rate .............
6.10 6.48 5.86
6.14
Amortizing floating -for -floating swaps
Notional value .......................
$ 56 $ 11 $ 32
$ 19
$ 193
$1,072
$ 1,383
Weighted average receive rate ..........
4.33% 6.45% 6.46%
6.46%
5.75%
5.57%
5.58%
Weighted average pay rate .............
5.38 6.63 6.62
6.62
6.25
5.50
5.66
Other derivative products
Notional value .......................
$19213 $ 883 $ 232
$ 419
$ 43
$1,829
$ 4,619
Total notional value ....................
$69115 $69295 $3,427
$1,240
$1,274
$4,115
$22,466
Total weighted average rates on swaps:
Receive rate .........................
5.44% 5.78% 5.60%
6.08%
6.11%
5.89%
5.70%
Pay rate ............................
6.06 6.06 6.13
6.12
5.99
5.81
6.04
Approximately one-half of the notional amounts of interest rate swaps outstanding at December 31, 1999
were entered into to create synthetic variable -rate funding instruments for the primary purpose of reducing the
cost of variable -rate funding. Most of the remaining interest rate swaps
outstanding at December 31, 1999
were entered into for other asset/liability management purposes. Net unamortized deferred losses related to
the early termination of derivative instruments were approximately $1 million at December 31, 1999.
Other Risk Management
Other risk management techniques employed by the System include the Market Access Agreement
(MAA) and the Amended and Restated Contractual Interbank Performance Agreement (CIPA), as more
fully described in the "Description of Business - Other Operations."
All the Banks and the Funding Corporation have entered into the MAA. Under the MAA, a Bank may
be placed in one of three categories if certain financial criteria are not met. As of December 31, 1999, all
Banks complied with the provisions of the MAA and none of the Banks were placed in any of the three
categories designated for Banks failing to meet the specified financial criteria.
43 '146
All the Banks, the Funding Corporation and the Financial Assistance Corporation have entered into the
CIPA. As of December 31, 1999, all Banks met the agreed -upon standard of financial condition and
performance required by the CIPA.
Quarterly Financial Information
Results of operations by quarter for the past three years are presented below:
Net interest income ..... ...................... .
Provision for loan losses .........................
Net noninterest expense .........................
Provision for income taxes .......................
Net income ....................................
Net interest income .............................
Provision for loan losses ................ ...... .
Net noninterest expense ........................ .
Provision for income taxes .......................
Net income ....................................
Net interest income .............................
Provision for loan losses .........................
Net noninterest expense .........................
Provision for income taxes .......................
Net income ....................................
Regulatory Matters
Examination, Enforcement and Other Actions of the FCA
1999 Quarter Ended
March 31
June 30
Sept. 30
Dec. 31
(in millions)
$ 556
$ 567
$ 576
$ 573
(81)
(27)
(30)
(39)
(173)
(177)
(159)
(181)
(33)
(40)
45)
54)
$ 269
$ 323
$ 342
$ 299
1998 Quarter Ended
March 31
June 30
Sept. 30
Dec. 31
(in millions)
$ 553
$ 566
$ 565
$ 559
(14)
(17)
(28)
(91)
(164)
(164)
(150)
(184)
38)
(56)
45)
41)
$ 337
$ 329
$ 342
$ 243
1997 Quarter Ended
March 31
June 30
Sept. 30
Dec. 31
(in millions)
$ 533
$ 537
$ 559
$ 561
(40)
(27)
(20)
(5)
(146)
(163)
(160)
(176)
_(44)
(43)
(51)
(48)
$ 303
$ 304
$ 328
$ 332
During 1999, the FCA terminated one cease and desist order with respect to the St. Paul BC. This action
was taken concurrent with the merger with CoBank, ACB. There were no enforcement actions in effect for the
Banks or Associations at December 31, 1999.
FCA Philosophy Statement
In July 1998, the FCA issued a philosophy statement stating that the FCA Board believed unrestricted
intra-System competition is beneficial for the customer and the long-term relevancy of the System. In
addition, the philosophy statement supported:
• the flexibility for Associations to choose their source of funding,
• initiatives brought to the FCA by the System that allow institutions to become more efficient and
relevant in the market place,
• removal of geographic boundaries of System entities,
44 141
• movement toward institutional structures that would encompass short-term lending, long-term lending,
and BC -type lending, and
• interpretations of the statutes that will enable System institutions to become more competitive.
The System has completed its initial analysis of the implications of the FCA philosophy statement and
provided comments to the FCA. While System institutions were not unanimous in their views, they generally
expressed support for the overall direction of the philosophy statement.
In connection with the FCA philosophy statement, in November 1998, the FCA published proposed
regulations that would permit Banks and Associations to make authorized loans and provide financially related
services beyond their designated territories, without securing the approval of the System institutions currently
serving the territory. The proposed regulations would continue to require each Bank and Association to fulfill
its obligation to service all eligible and creditworthy borrowers within its designated territory. The proposed
regulations would require any Bank or Association that conducts a material amount of business beyond its
designated territory to adopt a board policy and business plan that address these activities. The FCA Board
has postponed action on the proposed regulations. However, in March 2000, the FCA Board issued an
informational memorandum expressing an intent to (1) remove geographic barriers by granting national
charters to direct lender Associations and (2) consider allowing PCAs and FLCAs to convert to ACAS,
thereby granting both short- and intermediate -term lending authority and long-term lending authority to the
converting Associations.
FCA Regulations
In November 1999, the FCA re -published a proposed rule to amend the FCA regulations to allow a
System institution to terminate its charter and become a financial institution under another Federal or state
chartering authority. The proposed change will amend existing regulations so that they apply to all Banks and
Associations, and to make other changes. The proposed rule would establish certain criteria and conditions
that a terminating institution would have to meet in order to terminate its charter. The previously published
proposed termination rule was withdrawn. The System has provided comments on the proposed amendment to
the FCA regulations.
Insurance Fund
The Insurance Fund is included as a restricted asset and as restricted capital in the System's combined
financial statements. As of December 31, 1999, the Insurance Fund totaled $1.534 billion. The aggregate
amounts of additions to the Insurance Fund (consisting of premiums paid by System institutions and earnings
on Insurance Fund assets), and the related transfers from surplus to restricted capital, were $126 million,
$98 million and $141 million in 1999, 1998 and 1997, respectively. (See Note 7 to the accompanying
combined financial statements for further discussion of this matter and see the Supplemental Combining
Information on pages F-34 and F-35 for combining statements of condition and income that illustrate the
impact of including the Insurance Fund in the System's combined financial statements.)
Insurance premiums are due until the monies in the Insurance Fund reach the "secure base amount,"
which is defined in the Farm Credit Act as 2% of the aggregate insured obligations (adjusted to reflect the
System's reduced risk on loans guaranteed by Federal or state governments) or such other percentage of the
aggregate insured obligations as the Insurance Corporation in its sole discretion determines to be actuarially
sound. When the amount of the Insurance Fund exceeds the secure base amount, the Insurance Corporation is
required to reduce the premiums, but it still must ensure that reduced premiums are sufficient to maintain the
level of the Insurance Fund at the secure base amount. At December 31, 1999, the assets in the Insurance
Fund for which no specific use has been identified or designated by the Insurance Corporation were slightly
less than 2.0% of the aggregate insured obligations. In September 1999, the Insurance Corporation completed
a semiannual review of insurance premium rates and decreased insurance premiums on accrual loans to zero
percent from the prior rate of 0.045%, (the statutory rate is 0.15%), while keeping the premiums for
nonaccrual loans at the statutory rate of 0.25% and for government -guaranteed loans at the reduced rate of
zero percent, for the period from January 1, 2000, through June 30, 2000.
45 _ 14 2
Recent Accounting Developments
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activity — Deferral of
the Effective Date of FASB Statement No. 133." This Statement amended FASB Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activity," by delaying the implementation date for one
year to fiscal years beginning after June 15, 2000. The FASB issued an exposure draft in March 2000, which
addresses the accounting and reporting for certain derivative instruments and certain hedging activities and
would amend certain paragraphs of FASB Statement No. 133. FASB Statement No. 133 requires derivatives
to be reported on the balance sheet as assets and liabilities, measured at fair value. Changes in the values of
those derivatives will be accounted for as gains or losses or as a component of other comprehensive income
depending on the use of the derivative and whether it qualifies for hedge accounting. The impact on the
System of adopting this Standard has not yet been determined.
Year 2000
To date, System institutions have not experienced, and do not anticipate experiencing, any disruptions in
business due to year 2000 issues. System institutions were involved in projects to reasonably assure that
computer systems would properly process transactions relating to year 2000 and beyond. Contingency plans
were developed in the event System institutions were unable to do business with borrowers or the Funding
Corporation due to year 2000 failures outside the System. The System incurred approximately $25 million of
costs related to these projects and these costs have been expensed as a component of other operating expenses
since 1996. These expenditures did not include certain technology costs that have been incurred for various
purposes that included, but were not limited to, year 2000 readiness. System institutions do not anticipate
additional material expenditures in the year 2000.
46 1413
INDEX TO COMBINED FINANCIAL STATEMENTS AND
SUPPLEMENTAL COMBINING INFORMATION
Page
Report of Independent Accountants...................................................... F-2
Combined Statement of Condition....................................................... F-3
Combined Statement of Income......................................................... F-4
Combined Statement of Changes in Capital ................................................ F-5
Combined Statement of Cash Flows ...................................................... F-6
Notes to Combined Financial Statements .................................................. F-7
Supplemental Combining Information..................................................... F-34
F-1 144
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARDS OF DIRECTORS AND STOCKHOLDERS
OF THE FARM CREDIT SYSTEM
We have audited the accompanying combined statement of condition of the Farm Credit System as of
December 31, 1999 and 1998, and the related combined statements of income, of changes in capital and of
cash flows for each of the three years in the period ended December 31, 1999. These financial statements are
the responsibility of the Farm Credit System's managements. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States.
Those standards 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. 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 reasonable basis for our opinion.
In our opinion, the combined financial statements appearing on pages F-3 through F-33 of this Annual
Information Statement present fairly, in all material respects, the financial position of the Farm Credit System
at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the
United States.
Our audits were made for the purpose of forming an opinion on the combined financial statements taken
as a whole. The supplemental combining information on pages F-34 and F-35 of this Annual Information
Statement is presented for purposes of additional analysis rather than to present financial position, results of
operations and cash flows of the entities comprising the Farm Credit System. Accordingly, we do not express
an opinion on the financial position, results of operations and cash flows of the individual entities, as presented.
However, the supplemental combining information on pages F-34 and F-35 of this Annual Information
Statement has been subjected to the auditing procedures applied in the audits of the combined financial
statements and, in our opinion, is fairly stated in all material respects in relation to the combined financial
statements taken as a whole.
PRICEWATERHOUSECOOPERS LLP
New York, NY
February 24, 2000
F-2
145
FARM CREDIT SYSTEM
COMBINED STATEMENT OF CONDITION
(in millions)
ASSETS
Cash.....................................................................
Federal funds sold and securities purchased under resale agreements ...............
Investments (Notes 3 and 9)
Available -for -sale ( amortized cost of $13,151 and $12,146, respectively) ..........
Held -to -maturity (fair value of $893 and $624, respectively) ....................
Loans(Note 4)...........................................................
Less: allowance for loan losses (Note 4)......................................
Netloans...............................................................
Accrued interest receivable on loans ......................................... .
Other property owned ......................................................
Premises and equipment (Note 5)............................................
Other assets (Notes 6, 11 and 12)............................................
Restricted assets (Note 7)..................................................
Totalassets .......................................................
LIABILITIES AND CAPITAL
Systemwide bonds, medium -term notes and master notes (Note 8) ................
Systemwide discount notes (Note 8)..........................................
Other bonds (Note 8)......................................................
Financial Assistance Corporation bonds (Note 9) ...............................
Notes payable and other interest -bearing liabilities ...............................
Accrued interest payable ....................................................
Other liabilities (Notes 6, 9, 11 and 12).......................................
Total liabilities....................................................
Commitments and contingencies (Notes 4, 12, 13 and 16)
Protected borrower capital (Note 10).........................................
Capital
December 31,
19" 1998
$ 462 $ 399
2,351 1,280
13,092
909
70,002
1,938
68,064
1,173
25
332
750
1,534
$88,692
$54,739
16,715
941
863
216
784
1,115
75,373
64
Capital stock and participation certificates (Note 10) .......................... 1,689
Restricted capital (Notes 7 and 10)........................................ 1,534
Accumulated other comprehensive income (Note 3) .......................... (48)
Allocated surplus (Note 10)............................................... 735
Unallocated surplus (Note 10)............................................. 9,345
Total capital ...................................................... 13,255
Total liabilities and capital .......................................... $88,692
The accompanying notes are an integral part of these combined financial statements.
F-3
12,147
587
67,904
1,917
65,987
1,230
32
314
755
1,408
$84,139
$49,778
17,922
944
1,020
207
681
1,065
71,617
76
1,823
1,408
(2)
679
8,538
12,446
$849139
146
FARM CREDIT SYSTEM
COMBINED STATEMENT OF INCOME
(in millions)
For Year Ended December 31,
19" 1998 1997
Interest income
Investments, Federal funds sold and securities
purchased under resale agreements ................................. $ 689 $ 743 $ 696
Loans............................................................ 5,454 5,379 5,246
Total interest income ............................................. 6,143 6,122 5,942
Interest expense
Systemwide bonds, medium -term notes and master notes ................. 2,953 2,881 2,812
Systemwide discount notes .......................................... 786 832 786
Other interest -bearing liabilities ...................................... 41 41 31
Financial Assistance Corporation bonds ................................ 91 125 123
Total interest expense ............................................. 3,871 3,879 3,752
Net interest income .................................................. 2,272 2,243 2,190
Provision for loan losses ............................................... 177 150 92
Net interest income after provision for loan losses ......................... 2,095 2,093 2,098
Noninterest income
Loan -related fee income ............................................ 77 81 65
Fees for financially related services ................................... 61 55 46
Income earned on Insurance Fund assets (Note 7) ...................... 82 80 71
Mineral income .................................................... 7 8 11
Gains on sales of investments, net and other assets ...................... 33 33 19
Miscellaneous..................................................... 47 31 29
Total noninterest income .......................................... 307 288 241
Noninterest expense
Salaries and employee benefits (Note 11) ............................. 600 550 532
Occupancy and equipment expense ................................... 92 84 80
Other operating expense ............................................ 298 303 280
Gains on other property owned, net ................................... (2) (11)
Miscellaneous..................................................... 7 15 5
Total noninterest expense ......................................... 997 950 886
Income before income taxes ........................................... 1,405 1,431 1,453
Provision for income taxes (Note 12)................................... 172 180 186
Net income ................................................... $1,233 $1,251 $1,267
The accompanying notes are an integral part of these combined financial statements.
F-4 147
FARM CREDIT SYSTEM
COMBINED STATEMENT OF CHANGES IN CAPITAL
(in millions)
Restricted
Capital Capital —
Accumulated
Stock and Farm Credit
Other
Participation Insurance
Comprehensive Allocated Unallocated
Total
Certificates Fund
Income Surplus Surplus
Capital
Balance at December 31, 1996 ................
$1,997 $1,169
$ 6 $520 $6,906
$10,598
Comprehensive Income
Net income ...........................
1,267
1,267
Unrealized gains on investments available -
for -sale, including net reclassification
adjustments of $2 .....................
41
41
Total comprehensive income ..............
41 1,267
1,308
Transfer of Insurance Fund premiums and other
income from surplus to restricted capital —
Farm Credit Insurance Fund ................
141
(141)
Capital stock and participation certificates issued ..
408
408
Capital stock and participation certificates
retired ...................................
(563)
(563)
Cash distributions .....................
(42) (124)
(166)
Capital stock, participation certificates and
surplus allocations .........................
69
120 (189)
Balance at December 31, 1997 ................
1,911 1,310
47 598 7,719
11,585
Comprehensive Income
Net income ........ ................ .
1,251
1,251
Unrealized losses on investments available -
for -sale, including net reclassification
adjustments of $(33) ..................
(49)
(49)
Total comprehensive income ..............
(49) 1,251
1,202
Transfer of Insurance Fund premiums and other
income from surplus to restricted capital —
Farm Credit Insurance Fund .. ............
98
(98)
Capital stock and participation certificates issued. ,
329
329
Capital stock and participation certificates
retired ...................................
(476)
(476)
Cash distributions . ........ ...............
(57) (137)
(194)
Capital stock, participation certificates and
surplus allocations .........................
59
138 (197)
Balance at December 31, 1998 ................
1,823 1,408
(2) 679 8,538
12,446
Comprehensive Income
Net income ......................
1,233
1,233
Unrealized losses on investments available -
for -sale, including net reclassification
adjustments of $0 .....................
(46)
(46)
Total comprehensive income ..............
(46) 1,233
1,187
Transfer of Insurance Fund premiums and other
income from surplus to restricted capital —
Farm Credit Insurance Fund ................
126
(126)
Capital stock and participation certificates issued ..
272
272
Capital stock and participation certificates
retired ...................................
(449)
(449)
Cash distributions . ........................
(75) (137)
(212)
Capital stock, participation certificates and
surplus allocations .........................
43
131 (163)
11
Balance at December 31, 1999 ................
$1,689 $1,534
$(48) $735 $9,345
$13,255
The accompanying notes are an integral part of these combined financial statements.
FS 1'iQ
FARM CREDIT SYSTEM
COMBINED STATEMENT OF CASH FLOWS
(in millions)
For the Year Ended December 31,
1999
1998
1997
Cash flows from operating activities
Net income ....... ..... ............... ...........................
$ 1,233
$ 1,251
$ 1,267
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses .............................................
177
150
92
Gains on other property owned, net ...................................
(2)
(11)
Depreciation and amortization on premises and equipment ................
48
45
42
Gains on sales of investments, net and other assets ......................
(33)
(33)
(19)
Income on Insurance Fund assets, net of expenses .......................
(80)
(78)
(69)
Decrease (increase) in accrued interest receivable on loans ...............
57
(22)
(42)
Decrease (increase) in other assets....... ...........................
5
(49)
(39)
Change in amortized discount on Systemwide discount notes
and Financial Assistance Corporation bonds ..........................
2
19
35
Increase (decrease) in accrued interest payable .........................
103
(15)
53
Increase (decrease) in other liabilities .................................
42
(2)
72
Net cash provided by operating activities .............................
1,554
1,264
1,381
Cash flows from investing activities
Increase in loans, net .................................................
(2,280)
(4,558)
(2,319)
(Increase) decrease in Federal funds sold and securities
purchased under resale agreements, net ................................
(1,071)
512
(325)
Investments available -for -sale:
Purchases.........................................................
(35,178)
(38,582)
(47,280)
Proceeds from maturities and payments ................................
33,749
35,588
46,300
Proceeds from sales .................................................
323
1,177
637
Investments held to maturity:
Purchases.........................................................
(269)
(154)
(99)
Proceeds from maturities and payments ................................
47
17
14
Premiums paid to the Insurance Fund ...................................
(20)
(71)
(86)
Purchases of premises and equipment, net of disposals .....................
(66)
(61)
(30)
Proceeds from sales of other property owned ..............................
33,
26
66
Proceeds from sales of other assets ......................................
33
17
Net cash used in investing activities .................................
(4,699)
(6,106)
(3,105)
Cash flows from financing activities
Systemwide bonds, medium -term notes and master notes issued .............
48,703
59,448
51,524
Systemwide bonds, medium -term notes and master notes retired .............
(43,742)
(57,830)
(49,435)
Systemwide discount notes issued .......................................
272,602
241,525
193,262
Systemwide discount notes retired ......................................
(273,811)
(237,660)
(192,906)
Consolidated bank debt securities and other bonds issued (retired), net .......
(3)
(77)
(344)
Financial Assistance Corporation bonds retired ............................
(157)
(240)
Increase (decrease) in notes payable and other interest -bearing liabilities, net ..
9
42
(8)
Protected borrower capital retired .......................................
(12)
(33)
(22)
Capital stock and participation certificates issued ..........................
272
329
408
Capital stock, participation certificates and surplus retired ..................
(438)
(476)
(563)
Cash distributions or patronage refunds paid ..............................
(215)
(184)
(148)
Net cash provided by financing activities .............................
3,208
4,844
1,768
Net increase in cash ....................................................
63
2
44
Cash at beginning of year ................................................
399
397
353
Cash at end of year .....................................................
$ 462
$ 399
$ 397
Supplemental schedule of non -cash investing and financing activities
Loans transferred to other property owned ................................
$ 26
$ 25
$ 31
Transfer of investments from held -to -maturity to available -for -sale ...........
100
299
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest...........................................................
3,752
3,858
3,655
Taxes............................................................
171
203
186
The accompanying notes are an integral part of these combined financial statements.
F-6
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS
(dollars in millions, except as noted)
NOTE 1— ORGANIZATION, OPERATIONS AND PRINCIPLES OF COMBINATION
Organization and Operations
The Farm Credit System (System) was established by Acts of Congress and is subject to the provisions
of the Farm Credit Act of 1971, as amended (Farm Credit Act). The Farm Credit Act provides authority for
changes in the organizational structure and operations of the System and its entities.
At December 31, 1999, the System consisted of. (i) six Farm Credit Banks (FCBs) and their related
Federal Land Bank Associations (FLBAs), Production Credit Associations (PCAs), Agricultural Credit
Associations (ACAs), and/or Federal Land Credit Associations (FLCAs), (ii) one Agricultural Credit Bank
(ACB) and its related ACAs, and (iii) various service and other organizations.
The ACB, the successor Bank resulting from a Bank for Cooperative (BC) /FCB merger, has specified
lending authorities nationwide under the BC lending authorities, and the FCBs and the ACB have specified
lending authorities within their chartered territories. The FCBs and the ACB are hereinafter referred to as
Banks. The chartered territories served by the FCBs and the ACB are sometimes referred to as Districts. Two
of the FCBs are jointly managed. Each District is also served by one or more of the FCB's or ACB's related
FLBAs, PCAs, ACAs and/or FLCAs (collectively referred to as Associations). Certain FLBAs or FLCAs
and PCAs or ACAs are jointly managed. Each Bank and each Association, including those operating under
joint -management arrangements, is a separately chartered legal entity with a separate board of directors,
except for those ACAs that have reorganized with a PCA and an FLCA subsidiary (as discussed in Note 2 —
Summary of Significant Accounting Policies — Income Taxes), which are governed by a common board of
directors.
The Banks and Associations make loans for qualified agricultural and other related purposes to or for the
benefit of eligible borrowers/stockholders. The Farm Credit Act sets forth the type of authorized lending
activity, persons eligible to borrow and financial services that can be offered by each type of Bank and
Association. Due to the statutorily required concentration of lending to agricultural concerns, the System's
earnings, loan growth and credit quality of the loan portfolio are impacted significantly by the general state of
the agricultural economy. The System's primary source of funding is through the sale to the public of Federal
Farm Credit Banks Consolidated Systemwide Bonds, Federal Farm Credit Banks Consolidated Systemwide
Discount Notes, Federal Farm Credit Banks Consolidated Systemwide Master Notes, Federal Farm Credit
Banks Global Debt Securities and Federal Farm Credit Banks Consolidated Systemwide Medium -Term
Notes (collectively, Systemwide Debt Securities).
The FCBs are jointly owned by their related Associations and certain other financing institutions (OFIs);
however, the Farm Credit Act authorizes each FCB to exercise certain control over the operating activities of
their related Associations. The FLBAs act as agents for the District FCB in originating and servicing loans
secured by first mortgages on real estate to eligible borrowers; loan amortization terms range from five to
40 years. The PCAs make short- and intermediate -term loans for agricultural production or operating
purposes. In most circumstances, PCA loans are secured by growing crops, equipment, real property or other
assets of the borrower, loan amortization terms generally cannot exceed ten years. An FLCA results from the
transfer by an FCB to an FLBA of the FCB's authority to make long-term real estate loans in the FLBA's
territory. ACAs are formed as a result of mergers between FLBAs or FLCAs and PCAs. ACAs have direct
lending authority for long-term real estate loans and short- and intermediate -term loans. In some cases in
which ACAs and FLCAs were formed, existing loans of the FCBs in such Associations' territories were sold to
these Associations. The PCAs, FLCAs and ACAs make loans primarily with funding from the District FCB
or the ACB. In addition, the FCBs lend to OFIs that, in turn, provide short- and intermediate -term credit to
their borrowers. Loans made by FCBs to OFIs are usually secured by pledges of certain assets of the OFIs or
notes of OR borrowers.
F-7
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 1— ORGANIZATION, OPERATIONS AND PRINCIPLES OF COMBINATION — (continued)
The ACB is owned by agricultural and aquatic cooperatives and rural utilities and its related ACAs that
are required to purchase equity in the ACB as a condition of borrowing. Under the BC lending authorities, the
ACB makes loans to or for the benefit of the cooperatives and utilities for the purpose of financing seasonal
and long-term capital requirements. The ACB also provides credit and related services to domestic and foreign
borrowers in connection with international export and import agricultural credit transactions. Loans made by
the ACB may be made on either an unsecured or a secured basis; however, long-term loans are generally
secured.
The Banks jointly own several organizations that were created to provide a variety of services for the
System. The Federal Farm Credit Banks Funding Corporation (Funding Corporation) provides for the
issuance, marketing and handling of Systemwide Debt Securities, using a network of investment dealers and
dealer banks, and prepares and distributes the Farm Credit System Annual and Quarterly Information
Statements. The Farm Credit System Building Association is a partnership of the Banks that owns premises
and other fixed assets that are leased to the Farm Credit Administration (FCA), the System's regulator. The
Farm Credit Leasing Services Corporation, previously jointly owned by the Banks, provides a variety of leasing
programs for agricultural -related equipment and facilities. On July 1, 1999, CoBank, ACB acquired a majority
interest in the Farm Credit Leasing Services Corporation and is consolidated with CoBank, ACB's financial
statements.
As more fully described in Note 9, the Farm Credit System Financial Assistance Corporation (Financial
Assistance Corporation) was established in 1988 pursuant to the Farm Credit Act to provide capital and other
assistance to System institutions experiencing financial difficulty. The authority to provide assistance expired
on December 31, 1992. The Financial Assistance Corporation's primary activities currently consist of the
collection and administration of funds to repay Financial Assistance Corporation bonds and related interest
and to repay interest advanced to the System by the U.S. Treasury.
The Farm Credit Act also provided for the establishment of the Farm Credit System Insurance
Corporation (Insurance Corporation). As more fully described in Note 7, the Farm Credit Insurance Fund
(Insurance Fund) is under the direct control of the Insurance Corporation.
The FCA is delegated authority by Congress to regulate and examine the activities of the Banks,
Associations and certain other System institutions. Accordingly, certain actions of System institutions are
subject to the FCA's prior approval or to FCA regulations. The FCA has statutory enforcement and related
authorities with respect to System institutions.
Principles of Combination
The accompanying System combined financial statements include the accounts of the Banks, the related
Associations, the Financial Assistance Corporation and the Insurance Fund and reflect the investments in, and
allocated earnings of, the service organizations owned jointly by the Banks. All significant intra-System
transactions and balances have been eliminated in combination. Combined financial statements of the System
are presented because of the financial and operational interdependence of Banks and Associations and for the
purpose of responding to the Banks' joint and several liability as to issuances of Systemwide Debt Securities.
Notwithstanding the presentation in the accompanying combined financial statements, the joint and several
liability for Systemwide Debt Securities is limited to the Banks, as more fully described in Note 8.
F-8 151
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles and Reporting Practices
The accounting and reporting policies of the System conform to accounting principles generally accepted
in the United States (GAAP) and prevailing practices within the banking industry. The preparation of
combined financial statements in conformity with GAAP requires the managements of System institutions to
make estimates and assumptions that affect the amounts reported in the financial statements and accompany-
ing notes. Significant estimates are discussed in these footnotes, as applicable. Actual results could differ from
those estimates. Certain amounts in prior years' combined financial statements have been reclassified to
conform to the current year presentation.
Investments
The Banks and Associations, as permitted under FCA regulations, hold eligible investments for the
purposes of maintaining a liquidity reserve, managing short-term surplus funds, and managing interest rate
risk. Investments available -for -sale, which are those securities that may be sold prior to maturity, are carried
at fair value and unrealized net gains and losses are reported as a separate component of capital, net of
applicable income taxes, in the Combined Statement of Condition until realized. Gains and losses on the sales
of investments available -for -sale are determined using the specific identification method. Neither the Banks
nor the Associations hold investments for trading purposes. Investments for which System institutions have
the positive intent and ability to hold to maturity are classified as held -to -maturity and carried at cost, adjusted
for the amortization of premiums and accretion of discounts. Premiums and discounts are amortized or
accreted into interest income using the straight-line method (which approximates the interest method) over
the term of the respective issues.
Loans and Allowance for Loan Losses
Loans are generally carried at their principal amount outstanding adjusted for any net charge -offs and any
deferred loan fees or costs. Loan origination fees and direct loan origination costs are capitalized, where
material to a System institution, and the net fee or cost is amortized over the life of the related loan as an
adjustment to interest income. Interest on loans is accrued and credited to interest income based on the daily
principal amount outstanding.
Impaired loans are loans for which it is probable that all principal and interest will not be collected
according to the original contractual terms. The carrying value of an impaired loan is based on the present
value of expected future cash flows discounted at the loan's effective interest rate, or at the fair value of the
collateral, if the loan is collateral dependent. Impaired loans also include those restructured loans whose terms
have been modified and on which concessions have been granted because of borrower financial difficulties.
Impaired loans are generally placed in nonaccrual status when principal or interest is delinquent for
90 days (unless well secured and in the process of collection) or when circumstances indicate that collection
of principal or interest is in doubt. Additionally, all loans over 180 days past due are placed in nonaccrual
status. When a loan is placed in nonaccrual status, accrued interest that is considered uncollectible is reversed
(if accrued in the current year) or charged against the allowance for loan losses (if accrued in the prior year).
When loans are in nonaccrual status, interest payments received in cash are generally recognized as
interest income if the collectibility of the loan is assured beyond a reasonable doubt and certain other criteria
are met. Otherwise, payments received on nonaccrual loans are applied against the recorded investment in the
loan asset. Nonaccrual loans may be transferred to accrual status when principal and interest are current and
collection of future payments is no longer in doubt.
F-9 I ?; e)
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
The allowance for loan losses is maintained at a level considered adequate by managements to provide for
estimated losses inherent in the loan portfolio. The allowance is increased through provisions for loan losses
and loan recoveries and is decreased through negative provisions for loan losses and loan charge -offs. The
allowance is based on a periodic evaluation of the loan portfolio in which numerous factors are considered,
including economic conditions, collateral values, loan portfolio composition and prior loan loss experience.
The allowance for loan losses encompasses various judgments, evaluations and appraisals with respect to
the System's loans and their underlying security that, by their nature, contain elements of uncertainty and
imprecision. Changes in the agricultural economy and its impact on borrower repayment capacity will cause
these various judgments, evaluations and appraisals to change over time. Accordingly, actual circumstances
could vary significantly from System institutions' expectations and predictions of those circumstances. The
System's concentration of lending in agriculture, combined with uncertainties associated with farmland values,
commodity prices, exports, government assistance programs, regional economic effects and weather -related
influences, are factors considered by managements in determining and supporting the levels of System
institutions' allowances for loan losses.
Other Property Owned
Other property owned, which is held for sale, represents loan collateral acquired through collection
actions and is recorded at fair value less estimated selling costs upon acquisition. Subsequent revisions to the
determinations of the fair value less estimated selling costs are reported as adjustments to the carrying amount
of the asset, provided that the adjusted value is not in excess of the carrying amount at acquisition. Income
and expenses from operations, adjustments to carrying value and realized gains and losses from dispositions of
such properties are included in gains on other property owned, net.
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation and amortization, which is
provided on the straight-line method over the estimated useful lives of the assets. Gains and losses on
dispositions are reflected in current operations. Maintenance and repairs are charged to operating expenses and
improvements are capitalized.
Other Assets
Amounts paid to dealers in connection with the sale of Systemwide Debt Securities are deferred and
amortized to interest expense using the straight-line method (which approximates the interest method) over
the term of the related indebtedness.
In connection with past foreclosure and sale proceedings, the FCBs have retained certain mineral
interests and equity positions in land from which they receive revenues in the form of lease bonuses, rentals
and leasing and production royalties. These intangible assets are recorded at nominal or no value in the
Combined Statement of Condition. The Farm Credit Act requires that mineral rights acquired through
foreclosure in 1986 and later years be sold to the buyer of the land surface rights.
Employee Benefit Plans
Substantially all employees of System institutions participate in various retirement plans. System
institutions generally provide defined benefit and/or defined contribution retirement plans for their employees.
In addition, several Districts offer a defined contribution thrift plan for their employees. For financial reporting
F-10
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
purposes, System institutions use the projected unit credit actuarial method for defined benefit retirement
plans.
The Banks and Associations provide certain healthcare and life insurance benefits to eligible retired
employees. Substantially all of the employees of System institutions become eligible for those benefits if they
reach normal retirement age while working for the institution. The Financial Accounting Standards Board's
(FASB) Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
requires the accrual of the expected cost of providing postretirement benefits other than pensions (primarily
healthcare benefits) to an employee and an employee's beneficiaries and covered dependents during the years
that the employee renders service necessary to become eligible for these benefits.
Income Taxes
The FCBs, FLBAs, FLCAs, Financial Assistance Corporation and the income related to the Insurance
Fund are exempt from Federal and other income taxes as provided in the Farm Credit Act. The ACB, PCAs,
ACAS and service organizations are not exempt from Federal and certain other income taxes. However, an
ACA may reorganize and create a taxable PCA subsidiary and a non-taxable FLCA subsidiary. In addition,
the taxable institutions are eligible to operate as cooperatives that qualify for tax treatment under Subchapter
T of the Internal Revenue Code. Under specified conditions, such cooperatives can exclude from taxable
income amounts distributed as patronage refunds in the form of cash, stock or allocated surplus. Provisions for
income taxes are made only on those earnings that will not be distributed as qualified patronage refunds.
System institutions generally record as deferred taxes a proportionate share of the tax effect of temporary
differences not allocated in the form of patronage; however, certain System institutions whose patronage
distributions are based on book income recognize the tax effect of all temporary differences based on the
assumption that these temporary differences are retained by the institution and will therefore impact future tax
payments.
Deferred income taxes have not been provided for by the PCAs and ACAs on pre-1993 earnings from
their related Bank when management's intent is to permanently invest these undistributed earnings in the
Bank and to indefinitely postpone their conversion to cash, or to pass through these earnings to Association
borrowers through qualified patronage allocations.
Deferred income taxes have not been provided for the Banks' post-1992 earnings allocated to ACAs and
PCAs to the extent that such earnings will be passed through to Association borrowers through qualified
patronage allocations. No deferred income taxes have been provided for the Banks' post-1992 unallocated
earnings. The Banks currently have no plans to distribute unallocated Bank earnings and do not contemplate
circumstances that, if distributions were made, would result in taxes being paid at the Association level.
Financial Instruments with Off -Balance -Sheet Risk
As more fully described in Note 13, the Banks are parties to derivative financial instruments, primarily
interest rate exchange agreements (interest rate swaps, caps and floor agreements), that are principally used to
manage interest rate risk inherent in the System's underlying assets or liabilities, to obtain lower -cost funding
or to diversify the System's investor base. Interest rate exchange agreements are linked to financial
instruments (assets or liabilities) and are accounted for on an accrual basis, except for those that are linked to
investments available for sale, which are carried at fair value. The differential of interest payments receivable
or payable on interest rate exchange agreements are recorded in the same statement of income category as
that arising from the related asset or liability over the periods covered by the agreements.
F-11
) 44
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES — (continued)
Realized gains and losses on interest rate exchange agreements and other derivative contracts that are
effective as hedges of existing assets or liabilities are deferred and recognized over the shorter of the expected
remaining life of the related asset or liability or the original term of the derivative contract. Realized gains and
losses related to hedges of anticipated transactions are also deferred and recognized in income in the same
period as the hedged transaction.
A derivative financial instrument's association with a designated asset or liability ceases upon the
disposition or termination of the underlying asset or liability or when the hedge no longer meets the
requirements for hedge accounting. Unrealized gains and losses (and deferred gains and losses) on derivative
contracts related to assets or liabilities that are sold or otherwise disposed of are recognized currently as an
adjustment to the disposition gains or losses on the underlying assets or liabilities.
New Accounting Pronouncements
In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and
Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133." This Statement amends
FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," by delaying the
implementation date for one year to fiscal years beginning after June 15, 2000. The FASB issued an exposure
draft in March 2000, which addresses the accounting and reporting for certain derivative instruments and
certain hedging activities and would amend certain paragraphs of Statement No. 133. Statement No. 133
requires derivatives to be reported on the balance sheet as assets and liabilities, measured at fair value.
Changes in the values of those derivatives would be accounted for as gains or losses or as a component of other
comprehensive income depending on the use of the derivative and whether it qualifies for hedge accounting.
For fair -value hedge transactions in which a Bank is hedging changes in an asset's, liability's, or firm
commitment's fair value, changes in the fair value of the derivative instrument will generally be offset in the
income statement by changes in the hedged item's fair value. For cash -flow hedge transactions, in which a
Bank is hedging the variability of cash flows related to a variable -rate asset, liability, or a forecasted
transaction, changes in the fair value of the derivative instrument will be reported in other comprehensive
income. The gains and losses of the derivative instrument that are reported in other comprehensive income
will be reclassified as earnings in the periods in which earnings are impacted by the variability of the cash flows
of the hedged item. The ineffective portion of all hedges will be recognized in current -period earnings. The
impact on the System of adoption of this Standard has not yet been determined.
F-12 lu5
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 3 — INVESTMENTS
Available -for -Sale
The following is a summary of investments available -for -sale:
December 31, 19"
Gross
Gross
Weighted
Amortized
Unrealized Unrealized
Fair
Average
Cost
Gains
Losses
Value
Yield
Bankers' acceptances, certificates of
deposit and other securities .........
$ 4,177
$1
$ (2)
$ 4,176
5.95%
U.S. Agency securities ..............
287
(2)
285
5.61
U.S. Treasury securities .............
108
(1)
107
5.87
Mortgage -backed securities ...........
6,487
2
(51)
6,438
6.23
Other asset -backed securities .........
2,093
1
(8)
2,086
5.93
Total .........................
$13,152
$4
IL64)
$13,092
6.08
December 31, 1998
Gross
Gross
Weighted
Amortized
Unrealized Unrealized
Fair
Average
Cost
Gains
Losses
Value
Yield
Bankers' acceptances, certificates of
deposit and other securities .........
$ 2,992
$ 1
$ 2,993
5.58%
U.S. Agency securities ..............
322
322
5.59
U.S. Treasury securities .............
300
1
301
4.70
Mortgage -backed securities ...........
6,954
20
$ (22)
6,952
5.93
Other asset -backed securities .........
1,578
2
(1)
1,579
5.63
Total .........................
$12,146
$24
$(23)
$12,147
5.77
The fair value of investments available -for -sale at December 31, 1999 and 1998 included the estimated
fair value of derivative financial instruments designated to such investments. The notional amount of such
derivatives was $1.115 billion at December 31, 1999, as compared with $1.431 billion at December 31, 1998.
The fair value of such derivative financial instruments included in the above tables resulted in a reduction in
the fair value of investments available -for -sale of $3 million and $12 million at December 31, 1999 and 1998,
respectively.
A summary of the maturity, amortized cost and fair value of investments available -for -sale at
December 31, 1999 is as follows:
Amortized Fair
Cost Value
In one year or less ....................................... $ 4,420 $ 4,414
After one year through five years ........................... 2,006 2,002
After five years through ten years ........................... 143 143
After ten years .......................................... 96 95
6,665 6,654
Mortgage -backed securities ................................ 6,487 6,438
Total ............................................... $13,152 $13,092
F-13 !,-- 6 v
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 3 — INVESTMENTS — (continued)
Substantially all mortgage -backed securities have contractual maturities in excess of ten years. However,
expected and actual maturities for mortgage -backed securities will differ from contractual maturities because
borrowers generally have the right to prepay the underlying mortgage obligations with or without prepayment
penalties.
Realized gross gains and gross losses on sales of investments available -for -sale were as follows:
Year Ended December 31,
19" 1998 1997
Realized gross gains .................................. $ $33 $4
Realized gross losses .................................. 2
Held -to -Maturity
The following is a summary of investments held -to -maturity:
December 31, 1999
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Yield
U.S. Treasury securities ...............
$561
$6
$ (9)
$558
6.33%
U.S. Agency securities ................
100
(13)
87
6.23
Mortgage -backed securities ............
248
_
248
6.93
Total ...........................
$909
$6
$(22)
$893
6.48
December 31, 1998
Gross
Gross
Amortized
Unrealized
Unrealized
Fair
Cost
Gains
Losses
Value
Yield
U.S. Treasury securities ...............
$489
$37
$
$526
4.62%
Mortgage -backed securities ............
98
98
6.98
Total ...........................
$587
$37
$
$624
5.02
A summary of the maturity, amortized cost and fair value of investments held -to -maturity at Decem-
ber 31, 1999 was as follows:
Amortized Fair
Cost Value
In one year or less .......................................... $107 $108
After one year through five years .............................. 454 450
After ten years ............................................. 100 87
661 645
Mortgage -backed securities ................................... 248 248
Total................................................. $909 $893
Included in U.S. Treasury securities held -to -maturity and available -for -sale as of December 31, 1999 and
1998 was $668 million and $748 million, respectively, of investments, all of which are maintained by the
Financial Assistance Corporation, whose use has been restricted for the following purposes. In accordance
F-14 1 �.
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 3 — INVESTMENTS — (continued)
with the Farm Credit Act, the Banks have irrevocably provided funds, including interest earned thereon, of
$151 million to repay Financial Assistance Corporation bonds issued to fund certain Capital Preservation
Agreement accruals and $228 million to repay interest advanced by the U.S. Treasury on Financial Assistance
Corporation bonds issued for purposes other than funding Capital Preservation Agreement accruals. In
addition, $160 million has been irrevocably set aside to repay Financial Assistance Corporation bonds issued to
fund the capital assistance to the FCB of Spokane (which merged with the FCB of Omaha to form
AgAmerica, FCB) and the FCB of Louisville (which merged into AgriBank, FCB) and a portion of the
capital assistance to AgriBank, FCB. Also, $107 million and $22 million are held in the Financial Assistance
Corporation Trust Fund (Trust Fund) and the Farm Credit Assistance Fund (Assistance Fund), respectively.
NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES
Loans outstanding consisted of the following:
December 31,
19"
19"
Long-term real estate loans (excluding loans to cooperatives) ....
$34,187
$32,911
Short- and intermediate -term loans to agricultural producers ....
17,872
17,910
Domestic loans to cooperatives ..............................
15,309
14,792
Loans made in connection with international transactions .......
2,634
2,291
$70,002 $67,904
Approximately 45% of the loan volume at December 31, 1999 contained provisions under which the
interest rate on the outstanding balance may be adjusted from time to time during the term of the loan. These
variable -rate loans are comprised of administered -rate loans that may be adjusted at the discretion of the
lending institution and adjustable/indexed loans that are periodically adjusted based on changes in specified
indices. Fixed-rate loans comprise the remaining 55% of loans outstanding.
The System is limited by statute to providing credit and related services nationwide to farmers, ranchers,
producers and harvesters of aquatic products, rural homeowners, certain farm related businesses, agricultural
and aquatic cooperatives (or to other entities for the benefit of such cooperatives) and their customers and
rural utilities, and engaging in certain international transactions related to agriculture as described below.
Accordingly, the borrowers' abilities to perform in accordance with their loan contracts are generally
dependent upon the performance of the agricultural economic sector. While the amounts in the table below
represent the maximum potential credit risk as it relates to recorded loan principal, a substantial portion of the
System's lending activities is collateralized, which reduces the exposure to credit risk associated with such
activities.
F-15 %J
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES — (continued)
The loan portfolio was distributed as follows:
December 31,
19" 19"
Long-term farm mortgage .................................. $32,394 $30,895
Production and intermediate -term ........................... 16,661 17,396
Domestic loans to agricultural cooperatives ................... 8,686 9,509
Loans made in connection with international transactions ....... 2,634 2,291
Rural utilities ............................................ 5,126 4,674
Rural home .............................................. 1,496 1,437
Lease receivables ......................................... 1,812 813
Other ................................................... 1,193 889
Total ............................................... $70,002 $67,904
As of December 31, 1999 and 1998, approximately 90% and 87%, respectively, of the loans made in
connection with international transactions, which are for the purpose of financing agricultural exports, are
guaranteed through the United States Department of Agriculture's Commodity Credit Corporation.
The following tables present information concerning impaired loans and include both the principal
outstanding and the related accrued interest receivable on such loans. Accruing restructured loans are those
loans whose terms have been modified and on which concessions have been granted because of borrower
financial difficulties. The balances do not include restructured loans on which extensions or other nonmonetary
concessions have been granted; also excluded are restructured loans on which monetary concessions have been
granted but which remain in nonaccrual status pending the determination that the borrowers are able to
perform according to the revised terms of the loan agreements.
December 31,
19"
1998
Nonaccrual:
Current as to principal and interest ..........................
$ 631
$ 805
Past due ................................................
323
395
Total nonaccrual............................................
954
1,200
Accrual:
Restructured .............................................
122
150
90 days or more past due ..................................
30
46
Total accrual ...............................................
152
196
Total impaired loans ........................................
$1,106
$1,396
December 31,
19" 1998
Impaired loans with related allowance .......................... $ 358 $ 646
Impaired loans with no related allowance ....................... 748 750
Total impaired loans ........................................ $1,106 $1,396
Allowance on impaired loans ................................. $ 71 $ 273
F-16
0 19
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 4 — LOANS AND ALLOWANCE FOR LOAN LOSSES — (continued)
The following table summarizes impaired loan information for the years ended December 31, 1999, 1998
and 1997.
19" 1998 1997
Average impaired loans ............................ $1,120 $1,002 $1,064
Interest income recognized on impaired loans .......... 131 164 191
Commitments to lend additional funds to debtors whose loans were classified as impaired were not
significant at December 31, 1999 and 1998.
A summary of changes in the allowance for loan losses follows:
19" 1998 1997
Balance at beginning of year ........................ $1,917 $1,835 $1,770
Provision for loan losses ............................ 177 150 92
Loans charged off ................................. (191) (80) (40)
Recoveries ....................................... 19 12 13
Other........................................... 16
Balance at end of year ............................. $1,938 $1,917 $1,835
NOTE 5 — PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
Land, buildings and improvements ...............................
Furniture and equipment ........................................
Less accumulated depreciation ...................................
December 31,
19" 19"
$368 $351
285 266
653 617
321 303
$332 $314
F-17 160
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 6 — OTHER ASSETS AND OTHER LIABILITIES
Other assets consisted of the following:
December 31,
19"
1998
Deferred tax assets, net .........................................
$241
$233
Prepaid pension costs ...........................................
111
105
Equipment held for lease .......................................
118
92
Equity investments in other System institutions .....................
59
90
Accrued interest receivable on investments ........................
55
64
Accounts receivable ............................................
68
60
Prepaid expenses ..............................................
27
58
Other........................................................
71
53
Total.................................................... $750 $755
Other liabilities consisted of the following:
December 31,
19" 1998
Liability to repay the U.S. Treasury for interest advanced .......... $ 399 $ 392
Employee benefit plan liabilities ................................ 156 144
Accounts payable ............................................ 143 122
Patronage payable ............................................ 118 121
Bank draft payable ........................................... 47 90
Deferred tax liabilities, net .................................... 15 21
Taxespayable ............................................... 26 19
Other...................................................... 211 156
Total................................................... $1,115 $1,065
NOTE 7 — FARM CREDIT INSURANCE FUND
The assets in the Insurance Fund and the capital related thereto are designated as "restricted assets" and
"restricted capital," respectively. The classification of the Insurance Fund as restricted assets (and as
restricted capital) in the System's combined financial statements is based on the statutory requirement that
the amounts in the Insurance Fund, which is under the direct control of the Insurance Corporation, an
independent U.S. Government -controlled corporation, and not under the control of any System institution, are
to be used solely for purposes specified in the Farm Credit Act, all of which benefit, directly or indirectly,
System institutions. The Insurance Corporation is directed by a board of directors consisting of the FCA
Board.
The Insurance Corporation's primary asset is the Insurance Fund. Initial funding for the Insurance Fund
was provided in 1989 through the transfer of the $260 million balance of a revolving fund previously
administered by the FCA. Through 1999, the primary source of funds for the Insurance Fund was the
assessment of Banks for premiums calculated under a formula based upon accruing and nonaccrual loan
volumes. Such premiums may be assessed as directed by the Insurance Corporation until the monies in the
Insurance Fund reach a specified base amount of 2% of the aggregate outstanding insured obligations
F-18 16.1
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 7 — FARM CREDIT INSURANCE FUND — (continued)
(Systemwide Debt Securities and Consolidated Bank Debt Securities) or such other percentage of the
aggregate obligations as the Insurance Corporation in its sole discretion determines to be actuarially sound.
The Farm Credit Act specifies certain mandatory and discretionary uses of the Insurance Fund as follows:
The mandatory uses of the Insurance Fund by the Insurance Corporation are —
(1) to insure the timely payment of the principal of and interest on Systemwide Debt Securities and
Consolidated Bank Debt Securities,
(2) to satisfy any defaults caused by a System institution's failure to redeem its preferred stock
issued to the Financial Assistance Corporation, to meet its principal and interest payment obligations
with respect to Financial Assistance Corporation bonds, or to pay the Financial Assistance Corporation's
assessment relating to the prefunding of the U.S. Treasury -advanced interest obligation, and
(3) to ensure the retirement of protected borrower stock at par value.
Subject to the "least -cost determination" described below, the Insurance Corporation is authorized, in its
sole discretion and on such terms and conditions as its board of directors may prescribe, to expend amounts in
the Insurance Fund —
(1) to cover the operating costs of the Insurance Corporation,
(2) to provide assistance to any Bank or direct -lending Association (i.e., an ACA, FLCA or PCA)
in order (a) to prevent the placing of the institution in receivership, (b) to restore the institution to
normal operation, or (c) to reduce the risk to the Insurance Corporation posed by the institution when
severe financial conditions threaten the stability of a significant number of Banks or direct -lending
Associations or of Banks or direct -lending Associations possessing significant financial resources,
(3) to make loans on the security of, or to purchase, and liquidate or sell, any part of the assets of,
any Bank or direct -lending Association that is placed in receivership because of the inability of the
institution to pay the principal of or interest on any of its notes, bonds, debentures, or other obligations in
a timely manner, or
(4) to provide assistance to facilitate (a) a merger of a financially stressed Bank or direct -lending
Association with another Bank or direct -lending Association, (b) the sale of stock or assets of a
financially stressed Bank or direct -lending Association, or (c) the assumption of the liabilities of a
financially stressed Bank or direct -lending Association by another Bank or direct -lending Association.
(For these purposes, a "financially stressed Bank or direct -lending Association" is any Bank or direct -
lending Association (i) that is in receivership, (ii) that is, in the sole discretion of the Insurance
Corporation's board of directors, in danger of being placed in receivership, or (iii) that requires assistance
under subparagraph (2) (c) above to lessen the risk to the Insurance Corporation posed by the institution
under such threat of instability.)
The Insurance Corporation cannot provide discretionary assistance to an eligible institution as described
above unless the means of providing the assistance is the least costly means of all possible alternatives
available to the Insurance Corporation, with such alternatives encompassing liquidation of the eligible
institution (taking into account, among other factors, payment of the insured obligations issued on behalf of
such institution) .
In the event of a default by a Bank on an insured debt obligation for which the Bank is primarily liable,
the Insurance Corporation must expend amounts in the Insurance Fund to the extent necessary to insure the
timely payment of principal of and interest on such debt obligation before the provisions of the Farm Credit
F-19 16 2
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 7 — FARM CREDIT INSURANCE FUND — (continued)
Act providing for joint and several liability of the Banks on such obligation can be invoked. However, because
of the other mandatory and discretionary uses of the Insurance Fund specified in the Farm Credit Act, there is
no assurance that any available amount in the Insurance Fund will be sufficient to fund the timely payment of
principal of or interest on an insured debt obligation in the event of a default by a Bank having the primary
liability thereon. The protection provided through use of the Insurance Fund is not an obligation of and is not a
guarantee by the United States or any agency or instrumentality thereof, other than the Insurance
Corporation.
Under the provisions of the Farm Credit Act relating to the mandatory use of the Insurance Fund to
retire, under certain circumstances, Financial Assistance Corporation bonds issued to provide preferred stock
assistance to System institutions, amounts available in the Insurance Fund will be used to repay, upon
maturity in 2003 and 2005, the Financial Assistance Corporation bonds issued to fund $374 million of
preferred stock issued by the Federal Land Bank (FLB) of Jackson to the extent funds of the Trust Fund are
not sufficient for this purpose. As of December 31, 1999, available funds in the Trust Fund amounted to
$107 million. It is improbable the Trust Fund will be used for other purposes prior to the maturity of the
Financial Assistance Corporation bonds issued to fund the purchase of the FLB of Jackson preferred stock;
accordingly, the entire Trust Fund has been used in calculating the present value, as shown in the table below,
of the estimated future obligation of the Insurance Corporation to repay these Financial Assistance
Corporation bonds.
As of December 31, 1999, the assets in the Insurance Fund aggregated $1.534 billion. These assets have
been identified for the following purposes:
Assets to be used, to the extent available, for the following identified purpose:
To repay, upon maturity in 2003 and 2005, the Financial Assistance
Corporation bonds issued to fund the purchase of $374 million of preferred
stock of the FLB of Jackson (determined by the Insurance Corporation on
the basis of the present value of the estimated future obligation) .......... $ 159
Assets for which no specific use has been identified or designated by the
Insurance Corporation .............................................. 1,375
Aggregate assets in the Insurance Fund .................................. $1,534
At December 31, 1999, assets in the Insurance Fund consisted of investments and related accrued
interest receivable of $1.483 billion, cash and cash equivalents of $6 million, and premiums receivable from
System institutions of $45 million. Investments held by the Insurance Fund must be obligations of the United
States or obligations guaranteed as to principal and interest by the United States.
F-20 1 6
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 8 — SYSTEMWIDE AND OTHER DEBT
Aggregate maturities of Systemwide Debt Securities are as follows at December 31, 1999:
Systemwide
Bonds Medium -term notes Discount notes Total
Weighted
average
Interest
rate Amount
2000.......................... 5.5091b $14,453
2001.......................... 5.95 4,573
2002.......................... 5.73 2,119
2003.......................... 7.36 261
2004.......................... 7.13 404
2005 and thereafter ............. 7.06 927
Total ..................... 5.72 $22,737
Weighted
Weighted
Weighted
average
average
average
interest
interest
interest
rate
Amount
rate
Amount rate
Amount
5.87%
$ 7,959
5.37%
$16,715 5.52%
$39,127
5.77
5,598
5.85
10,171
5.91
4,017
5.85
6,136
5.67
4,888
5.75
5,149
6.02
2,970
6.15
3,374
5.99
6,570
6.12
7,497
5.86
$32,002
5.37
$16,715 5.70
$71,454
Note: Weighted average interest rates include the effects of related derivative financial instruments. Included in Bonds are $1.883 billion
of Master Notes that mature in 2000.
Systemwide Debt Securities include callable debt issues consisting of the following:
Year of
Maturity
Amount
Range of First Call Dates
2000........................................
$ 2,099
2001.........................................
3,118
January 2000 - December 2000
2002........................................
2,537
January 2000 - April 2001
2003 .........................................
2,722
January 2000 - April 2001
2004........................................
2,050
January 2000- December 2002
2005 and thereafter ...........................
2,782
January 2000 - January 2008
Total ...................................
$15,308
Note: Callable debt may be called on the first call date and, generally, on each interest payment date thereafter.
The average maturity of Systemwide discount notes at December 31, 1999 was 2.7 months as compared
with 2.8 months at December 31, 1998. Pursuant to authorizations by the FCA, the maximum amount of
Systemwide discount notes, medium -term notes and global debt securities that Banks in the aggregate may
have outstanding at any one time is currently $25 billion, $40 billion and $5 billion, respectively.
Systemwide Debt Securities are the joint and several obligations of the Banks. Payments of principal and
interest to the holders of Systemwide Debt Securities with an outstanding balance aggregating $71.454 billion
at December 31, 1999 are insured by amounts held in the Insurance Fund as described in Note 7. Certain
other bonds issued directly by certain individual Banks are the obligations solely of the issuing Bank. At
December 31, 1999, the aggregate amount of bonds issued directly by the Banks was $941 million,
substantially all of which mature in 2000, and have a weighted average interest rate of 4.12%.
The Farm Credit Act and FCA regulations require each Bank to maintain specified eligible assets at least
equal in value to the total amount of debt securities outstanding for which it is primarily liable as a condition
for participation in the issuance of Systemwide Debt Securities. Each Bank was in compliance with these
requirements as of December 31, 1999. At December 31, 1999, the combined Banks had specified eligible
assets of approximately $79.021 billion, as compared with $73.179 billion of Systemwide Debt Securities and
F-21 164
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 8 — SYSTEMWIDE AND OTHER DEBT — (continued)
other bonds and accrued interest payable at that date. The specified eligible asset requirement does not
provide holders of such securities with a security interest in any assets of the Banks.
FCA regulations provide that, in the event a Bank is placed in liquidation, holders of Systemwide Debt
Securities have claims against the Bank's assets, whether or not such holders file individual claims. Under
these regulations, the claims of such holders are junior to claims relating to costs incurred by the receiver in
connection with the administration of the receivership, claims for taxes, claims of secured creditors and claims
of holders of bonds issued by the Bank individually to the extent such bonds are collateralized in accordance
with the requirements of the Farm Credit Act. These regulations further provide that the claims of holders of
Systemwide Debt Securities are senior to all claims of general creditors.
NOTE 9 — FINANCIAL ASSISTANCE CORPORATION BONDS
The Farm Credit Act provided for capital assistance to System institutions experiencing severe financial
stress through the issuance, prior to October 1, 1992, by the Financial Assistance Corporation of U.S.
Treasury -guaranteed 15-year bonds, of which $1.261 billion in principal amount were originally issued.
The following table sets forth outstanding Financial Assistance Corporation bonds and related restricted
funds set aside to repay the bonds as of December 31, 1999:
Funds
Amount of
Restricted
Maturity
Interest
First
Use of Proceeds
Issuance
for Repayment
Date
Rate
Call Date
Financial assistance, capital
preservation agreement
accruals and other .........
$450
$294
2003
9.38%
Not callable
Financial assistance and
unused proceeds ..........
325.
60
2005
8.80
Not callable
Financial assistance ..........
89
86
2005
9.20
September 2000
$864
$440
Of the financial assistance provided, the FLB of Jackson received $374 million (taking into account
$14 million in assets returned to the Financial Assistance Corporation upon liquidation) from the issuance of
preferred stock principally to fund the assumption by participating Banks of the full amount of the principal of
and interest on the remaining Systemwide Debt Securities and Consolidated Bank Debt Securities of the FLB
of Jackson. Upon maturity of the Financial Assistance Corporation bonds issued to fund the purchase of
preferred stock of the FLB of Jackson, available Insurance Fund assets will be used to pay the related bonds to
the extent that funds from the Trust Fund are not sufficient for this purpose (see Note 7). Assets of the Trust
Fund as of December 31, 1999 aggregated $107 million. All transactions related to assisted Banks are
eliminated in combination, as appropriate.
Pursuant to the Farm Credit Act, the U.S. Treasury paid $440 million, on behalf of the System, in
interest costs on $844 million of the Financial Assistance Corporation bonds issued for purposes other than
funding capital preservation agreement accruals. In 2005, the Financial Assistance Corporation, with funding
provided by the Banks, must repay the U.S. Treasury for all interest advanced. Included as restricted
investments at December 31, 1999, the Banks have irrevocably set aside funds, including interest thereon, of
$228 million to repay interest advanced by the U.S. Treasury. The System records interest expense on
Financial Assistance Corporation bonds based on an effective interest rate that represents the coupon rate
adjusted by the present value benefit of the U.S. Treasury's interest free funding of certain interest payments.
F-22 16 1
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 9 — FINANCIAL ASSISTANCE CORPORATION BONDS — (continued)
As of December 31, 1999, other liabilities included $399 million, reflecting the discounted obligation to repay
the U.S. Treasury for interest advanced.
NOTE 10 — CAPITAL STRUCTURE
In accordance with the Farm Credit Act, each borrower, as a condition of borrowing, is generally required
to invest in capital stock or participation certificates of the Association or ACB that makes the loan or through
which the loan is originated. The statutory minimum amount of capital investment required for borrowers is
2% of the loan or one thousand dollars, whichever is less. The Associations are required to purchase stock in
their related Bank. The different classes of capital stock and participation certificates and the manner in which
capital stock and participation certificates are issued, retired and transferred are set forth in the respective
Bank's or Association's bylaws. The Bank and/or Association generally has a first lien on the capital stock and
participation certificates as collateral for the repayment of the borrower/ stockholder loan.
Each borrower purchasing capital stock is generally entitled to one vote as a stockholder regardless of the
number of shares held. In the case of Associations, the borrower usually does not purchase capital stock for
cash; rather, the purchase of such stock is typically made by adding the aggregate par value of the stock to the
principal amount of the related loan obligation.
Protection of certain borrower capital is provided under the Farm Credit Act, which requires System
institutions, when retiring protected borrower capital, to retire such capital at par or stated value regardless of
its book value. Protected borrower capital includes borrower capital stock, participation certificates and
allocated equities that were outstanding as of January 6, 1988, or that were issued or allocated prior to
October 6, 1988. If a System institution is unable to retire protected borrower capital at par or stated value due
to the liquidation of the institution, amounts required to retire protected borrower capital would be obtained
from the Insurance Fund, as discussed in Note 7. As a result of the borrower capital protection mechanisms
contained in the Farm Credit Act, the at -risk characteristics necessary for such protected borrower capital to
be classified as permanent equity have been substantially reduced. Accordingly, such protected borrower
capital has been classified between liabilities and capital in the accompanying Combined Statement of
Condition.
Regulations concerning capitalization bylaws and the issuance and retirement of System equities provide
that equities issued on or after October 6, 1988 must qualify as at -risk capital of System institutions. The
retirement of at -risk capital must be solely at the discretion of the board of directors and not based on a date
certain or on the occurrence of any event, such as the repayment of the borrower's loan.
The boards of directors of individual Banks and Associations generally may authorize the payment of
dividends or patronage refunds as provided for in their respective bylaws. Such payment of dividends and/or
distribution of earnings are subject to regulations that establish minimum at -risk capital standards, as
discussed below.
F-23
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS - (continued)
(dollars in millions, except as noted)
NOTE 10 - CAPITAL STRUCTURE - (continued)
Capital consisted of the following at December 31, 1999:
Combined
Combined
System
Banks
Associations
Combined
Capital stock and participation certificates ...............
$2,900
$ 857
$ 1,689
Restricted capital - Farm Credit Insurance Fund ........
1,534
Accumulated other comprehensive income ..............
(47)
(48)
Surplus ............................................
3,049
7,587
10,080
Total capital ....................................
$5,902
$8,444
$13,255
Combined System surplus reflects net eliminations of approximately $550 million representing transac-
tions between the Banks, the Associations, the Financial Assistance Corporation and/or the Insurance Fund
primarily related to Capital Preservation Agreement accruals and surplus allocations by certain FCBs to their
Associations offset, in part, by the elimination of Insurance Fund premiums accrued by Banks. Capital stock
and participation certificates of the Banks amounting to approximately $2.1 billion were owned by the
Associations. These amounts have been eliminated in the accompanying combined financial statements.
Restricted capital is only available for the uses described in Note 7 and is not available for payment of
dividends or patronage refunds.
As discussed in Note 8, only the Banks are statutorily liable for the payment of principal of and interest
on Systemwide Debt Securities. Under each FCB's bylaws, the FCB is authorized under certain circum-
stances to require its related Associations and certain other equity holders to purchase additional FCB
equities. In most cases, however, the Banks are limited as to the amounts of such purchases that may be
required, generally with reference to a percentage of the Association's or other equity holder's direct loan from
the Bank, and calls for additional equity investments may be subject to other conditions. The FCBs also
generally possess indirect access to certain financial resources of their related Associations through loan -
pricing provisions and through Bank -influenced District operating and financing policies. (As used in this
paragraph, references to FCBs mean the FCBs and the ACB.)
FCA's capital regulations require that the Banks and Associations achieve and maintain permanent
capital of at least seven percent of risk -adjusted assets. Failure to meet the minimum seven percent capital
standard can result in certain mandatory and possibly additional discretionary actions by the FCA that, if
undertaken, could have a direct material effect on the entities' financial statements. In addition, FCA
regulations require that: 1) all System institutions achieve and maintain a total surplus ratio of at least seven
percent of risk -adjusted assets and a core surplus ratio of at least three and one-half percent of risk -adjusted
assets and 2) all Banks achieve and maintain a net collateral ratio of 103 percent of total liabilities. At
December 31, 1999, all System institutions reported compliance with these standards. Ranges of capital ratios
reported by System institutions at December 31, 1999 were as follows:
Permanent
Total Surplus
Core Surplus
System Institutions
Capital Ratio
Ratio
Ratio
Banks .............
9.9% - 22.7%
9.6% - 18.6%
3.9% -16.3%
PCAs ..............
12.7% - 40.8%
10.7% - 37.7%
3.6% - 32.4%
ACAs .............
10.0010 - 26.6%
9.6% - 25.8%
5.0% - 25.8%
FLCAs ............
10.9% - 23.4%
9.5% - 22.1%
9.5% - 22.1%
FLBAs ............
20.1 % - 56.9%
15.4% - 56.9%
15.4% - 56.9%
Minimum required ..
7.0%
7.0%
3.5%
Net Collateral Ratio
104.1 % - 109.1 %
n/a
n/a
n/a
n/a
103%
F-za 16.7
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 10 — CAPITAL STRUCTURE — (continued)
System institutions are prohibited from reducing capital by retiring stock (other than protected borrower
stock) or making certain distributions to shareholders if, after or due to such retirement or distribution, the
institution would not meet the minimum capital adequacy standards established by the FCA under the Farm
Credit Act.
By regulation the FCA is empowered to direct a transfer of funds or equities by one or more Banks or
Associations to another Bank or Association, respectively, under specified circumstances. The System has
never been called on to initiate any transfers pursuant to this regulation and is not aware of any proposed
action under this regulation.
NOTE 11— EMPLOYEE BENEFIT PLANS
The Banks and Associations participate in districtwide defined benefit Retirement Plans. These
Retirement Plans are noncontributory and benefits are based on salary and years of service. In addition,
System institutions provide certain health care and other postretirement benefits to eligible retired employees.
Substantially all of the employees of System institutions may become eligible for those benefits if they reach
normal retirement age while working for the System.
The change in the projected benefit obligation for defined benefit plans and other postretirement benefit
plans in the combined Statement of Condition for the years ended December 31, 1999 and 1998 is set forth in
the following table:
Pension Benefits
Other Benefits
December 31,
December 31,
19"
1998
19"
1998
Benefit obligation at beginning of year ............
$883
$777
$124
$118
Service cost ...................................
30
25
3
2
Interest cost ..................................
64
58
9
9
Actuarial loss .................................
26
63
21
11
Benefits paid ..................................
(49)
(43)
(14)
(14)
Plan amendments ..............................
2
8
(2)
Other........................................
14
(5)
Benefit obligation at end of year ................. $970 $883 $143 $124
As of December 31, 1999, the plan assets of all but one of the Banks' defined benefit plans were in excess
of the projected benefit obligation. In the remaining plan, the excess of the projected benefit obligation over
plan assets aggregated $6.8 million at December 31, 1999. The following table sets forth the retirement plans
F-25 1 G
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 11— EMPLOYEE BENEFIT PLANS — (continued)
and other postretirement benefit plans funded status reconciled with the amount shown in the System's
Combined Statement of Condition.
Pension Benefits
Other Benefits
December 31,
December 31,
1998
1998
19"
1998
Fair value of plan assets at beginning of year ..........
$1,035
$1,040
$ 10
$ 11
Actual return on plan assets ........................
152
38
1
1
Employer contribution .............................
14
9
12
12
Benefits paid .....................................
(49)
(43)
(14)
(14)
Transfers ........................................
9
_ (9)
Fair value of plan assets at end of year ...............
$1,161
$1,035
$ 9
$ 10
Funded status .....................................
$ 191
$ 152
$(134)
$(114)
Unrecognized net actuarial gain .....................
(115)
(72)
(13)
(38)
Unrecognized prior service cost .....................
35
35
(12)
(1)
Unrecognized net (asset) or obligation ...............
(21)
(27)
24
26
Prepaid benefit cost (accrued pension liability) ........
$ 90
$ 88
$ 135)
$(127)
Banks with prepaid pension costs (included in other
assets) ........................................
$ 111
$ 105
Banks with pension liabilities (included in other
liabilities) .....................................
(21)
17)
$ 90
$ 88
Weighted -average assumptions for pension benefits:
1999
1998
Discount rate ....................................
6.50
- 7.50%
6.50 -
7.90%
Expected return on plan assets ......................
7.00
- 9.25
7.00 -
9.00
Rate of compensation increase ......................
3.60
- 5.00
3.60 -
5.00
The weighted average discount rate for other benefits ranged from 6.75% to 7.50% and•6.50% to 8.00% as
of December 31, 1999 and 1998, respectively. For measurement purposes, annual rates of increase ranging
from 6.00% to 11.00% in the per capita cost of covered health care benefits were assumed for 1999. The rates
were assumed to decrease gradually to a range of 5.00% to 6.00% and remain at that level thereafter.
F-26 169
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 11— EMPLOYEE BENEFIT PLANS — (continued)
The net periodic pension expense for defined benefit plans and other postretirement benefits included in
the Combined Statement of Income is comprised of the following:
Pension Other
Benefits Benefits
for the for the
Years Ended Years Ended
December 31, December 31,
1999 1998 19" 1998
Components of net periodic benefit cost
Service cost .................................. $ 30 $ 25 $ 3 $ 2
Interest cost .................................. 64 58 9 9
Expected return on plan assets .................. (87) (82)
Net amortization and deferral ................... 4 3 1 (3)
Amortization of transition obligation ............. 1
Net periodic benefit cost ......................... $ 11 $ 4 $13 $ 9
Health care cost trend rates have an impact on the amounts reported. For example, increasing the
assumed health care trend rate by one percentage point in each year for each plan would increase the
accumulated postretirement benefit obligation as of December 31, 1999 by approximately $12.2 million, and
the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for the
year ended December 31, 1999 by approximately $1.6 million.
NOTE 12 — INCOME TAXES
The provision for income taxes was comprised of the following amounts:
Current:
Federal............................................
State and local ......................................
Deferred:
Federal............................................
Provision for income taxes ............................. .
For the Years Ended
December 31,
19" 1998 1997
$157 $171 $169
9 17 17
6 (8)
$172 $180 $186
F-27 170
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 12 — INCOME TAXES — (continued)
Deferred income tax provision (benefit) results from differences between amounts of assets and liabilities
as measured for income tax return and financial reporting purposes. The significant components of deferred
tax assets and liabilities at December 31, 1999 and 1998 were as follows:
December 31,
19"
1998
Allowance for loan losses .....................................
$ 327
$ 306
Nonqualified patronage distributions ............................
12
14
Unrealized net losses on investments available -for -sale .............
12
Liability for U.S. Treasury -advanced interest .....................
5
7
Nonaccrual loan interest ......................................
8
9
Employee benefit plan obligations ..............................
24
20
Other......................................................
48
46
Gross deferred tax assets ......................................
436
402
Less valuation allowance ......................................
15)
(14)
Deferred tax assets, net of valuation allowance ...................
421
388
Patronage allocated by Banks to Associations ....................
(22)
(22)
Direct financing leases ........................................
(97)
(71)
Depreciation ................................................
(36)
(29)
Unrealized net gains on investments available -for -sale .............
(3 )
Other......................................................
(40)
51).
Gross deferred tax liabilities ...................................
(195)
176)
Net deferred tax asset ........................................
$ 226
$ 212
System entities with net deferred tax assets (included in other
assets) ...................................................
$ 241
$ 233
System entities with net deferred tax liabilities (included in other
liabilities) ................................................
(15)
21)
$ 226
$ 212
The provision for income taxes differs from the amount of income tax determined by applying the
applicable U.S. statutory federal income tax rate to pretax income from continuing operations as a result of the
following differences:
Year Ended December 31,
19"
1998
1997
Federal tax at statutory rate ..................................
$ 478
$ 486
$ 494
State tax, net ..............................................
16
15
16
Effect of nontaxable entities ..................................
(271)
(258)
(271)
Patronage distributions allocated by taxable entities ..............
(90)
(101)
(104)
Patronage allocated from tax-exempt Banks to taxable Associations ...
48
38
55
Other.....................................................
(9)
—(4)
Provision for income taxes ...................................
$ 172
$ 180
$ 186
F-28 171
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 12 — INCOME TAXES — (continued)
As addressed in Note 2, ACAs are not exempt from taxation. However, the ACAS have filed amended
Federal tax returns requesting refunds on taxes paid related to income generated from their long-term
mortgage lending activities. A lawsuit was initiated by the Internal Revenue Service (IRS) against one ACA
in the United States District Court for the District of North Dakota in order to resolve the ACAs' claims for
refunds on taxes paid on this income. In September 1998, the District Court ruled that those earnings are
exempt from taxation. The ruling was appealed to the Eighth Circuit Court of Appeals by the IRS. Taxes have
been provided on this income for all ACAs.
Action on the appeal is currently on hold because the ACAs entered into a settlement process to resolve
conclusively the status of all claimed refunds and the ongoing tax status of the ACAs, using a different ACA
as a model. It is anticipated that if there is a settlement, there would be a recovery of a portion of the tax
refunds claimed, plus interest. To date, no potential recovery has been recognized as income.
NOTE 13 — OFF -BALANCE -SHEET AND OTHER DERIVATIVE FINANCIAL INSTRUMENTS
The Banks and Associations are parties to financial instruments with off -balance -sheet risk. These
financial instruments were entered into to manage the institutions' exposures to interest -rate risks and to
satisfy the financing needs of the institutions' borrowers. These financial instruments include commitments to
extend credit, standby letters of credit, and derivative financial instruments, primarily interest -rate swap
contracts. While the notional amounts of derivative contracts are indicative of the extent of involvement in
particular classes of instruments, they do not represent the amounts exchanged by the parties, and thus are not
a measure of the credit and market exposures of the Banks with respect to their uses of derivatives. The
amounts exchanged by the parties are normally based on the notional amounts and the other terms of the
derivative agreements. The value of off -balance -sheet financial instruments is derived from the terms of each
instrument and changes in the relevant underlying rates or prices. The Banks and Associations do not hold or
issue derivative financial instruments for trading purposes.
Derivative Financial Instruments
Banks enter into derivative transactions, primarily interest rate swaps, to lower funding costs, to diversify
the System's investor base, or to alter interest rate exposures arising from mismatches between assets and
liabilities. Under an interest rate swap arrangement, the Bank and counterparty agree to exchange, at specified
intervals, payment streams calculated on a specified notional principal amount, with at least one payment
stream based on a specified floating-rate index. Substantially all derivative financial instruments are
designated as hedges of assets or liabilities. Accordingly, any change in the fair value of derivatives resulting
from changes in interest rates are expected to be offset by changes in the fair value of the related hedged asset
or liability.
A substantial amount of the System's assets (principally loans and investments) are short-term or have a
floating or adjustable rate. Funding strategies employed to manage the repricing risk associated with these
assets generally include a combination of short-term debt, floating-rate debt, and intermediate -term fixed-rate
debt. To more effectively match the cash flows of the assets with the liabilities, interest rate swaps can also be
executed whereby the Bank pays a floating rate that more closely matches the repricing characteristics of the
assets to reduce the impact of interest rate fluctuations on the Bank's net interest income and/or market value
of equity. Because the size of swap positions needed to reduce the impact of market fluctuations varies over
time, the Banks also enter into swaps in which they receive a floating rate and pay a fixed rate (pay fixed
swaps), when necessary, to modify their net positions. In addition, the Banks will also enter into floating -for -
floating swaps in which they receive and pay floating rates to better match the funding rate, or its repricing
frequency, with the interest rate received on assets.
F-29 r!
# t ...
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 13 — OFF -BALANCE -SHEET AND OTHER DERIVATIVE FINANCIAL
INSTRUMENTS — (continued)
The Banks also enter into interest rate swaps simultaneously with the issuance of certain debt securities in
order to convert the characteristics of those debt issues into more traditional floating-rate characteristics.
Many of such debt securities and swaps have embedded caps, floors and other options, such as call features.
Interest rate swaps entered into in connection with the issuance of this debt typically result in synthetic
funding with interest rates that are more favorable to the Banks than rates available through the issuance of
traditional floating-rate debt.
The Banks may also purchase interest rate options such as caps, floors and collars to reduce the impact of
rising or falling interest rates on loans, investments or debt securities with embedded interest rate options. The
premiums paid for interest rate options on loans and debt securities are included in other assets in the balance
sheet, and are amortized to interest expense or as an offset to interest income over the terms of the
agreements. At December 31, 1999 and 1998 unamortized premiums were not significant.
Net deferred gains and losses on derivative contracts are included in the Combined Statement of
Condition as part of the carrying amounts of the related assets and liabilities and are not material.
A summary of the derivative financial instruments follows:
December 31, 19"
December 31, 1998
Notional
Credit
Notional
Credit
Amount
Exposure
Amount
Exposure
Interest rate swap contracts .................... $17,847
$35
$12,976
$61
Forward contracts ............................ 40
Interest rate cap, floor, and other options contracts .. 4,579
32
4,814
6
The Banks are exposed to credit -related risk in the event of nonperformance by counterparties to the
derivative financial instruments. Current credit exposure with respect to derivative financial instruments is the
net replacement cost of derivative contracts in a gain position.
To minimize the risk of credit losses, the Banks deal principally with counterparties that have an
investment grade or better credit rating from a major rating agency, and also monitor the credit standing of
and levels of exposure to individual counterparties. The Banks do not anticipate nonperformance by any of
these counterparties. The Banks typically enter into master agreements that contain netting provisions. These
provisions allow the Banks to require the net settlement of covered contracts with the same counterparty in the
event of default by the counterparty on one or more contracts. A number of swaps are supported by collateral
arrangements with counterparties.
Commitments to Extend Credit and Standby Letters of Credit
A summary of the contractual amount of credit -related instruments are presented in the following table.
December 31, December 31,
19" 1998
Commitments to extend credit ........................ $23,948 $24,096
Standby letters of credit .............................. 615 548
Commitments to extend credit are agreements to lend to a borrower as long as there is not a violation of
any condition established in the contract. At any time, the Banks and Associations have outstanding a
significant number of commitments to extend credit. The Banks and Associations also provide standby letters
of credit to guarantee the performance by customers to third parties. Commitments and letters of credit
F-30 173
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 13 — OFF -BALANCE -SHEET AND OTHER DERIVATIVE FINANCIAL
INSTRUMENTS — (continued)
generally have fixed expiration dates or other termination clauses and may require payment of a fee. Credit -
related financial instruments have off -balance -sheet credit risk because only origination fees, if any, for these
instruments are recognized in the balance sheet (as other liabilities) until the commitments are fulfilled or
expire. Since many of the commitments are expected to expire without being drawn upon, the total
commitments do not necessarily represent future cash requirements.
The credit risk involved in issuing commitments and letters of credit is essentially the same as that
involved in extending loans to customers, and the same credit policies are applied by management. Upon
funding of the commitment, the credit risk amounts are equal to the contract amounts, assuming that
borrowers fail completely to meet their obligations and the collateral or other security is of no value. The
amount of collateral obtained, if deemed necessary upon extension of credit, is based on management's credit
evaluation of the borrower.
NOTE 14 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the System's financial instruments at
December 31, 1999 and 1998. The fair value of a financial instrument is generally defined as the amount at
which the instrument could be exchanged in a current transaction between willing parties, other than in a
forced or liquidation sale. Quoted market prices are generally not available for certain System financial
instruments, as described below. Accordingly, fair values are based on judgments regarding anticipated cash
flows, future expected loss experience, current economic conditions, risk characteristics of various financial
instruments, and other factors. These estimates involve uncertainties and matters of judgment, and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
The estimated fair values of the combined System financial instruments are as follows:
December 31, 19"
December 31, 1998
Carrying Fair
Carrying Fair
Amount Value
Amount Value
Financial assets:
Cash, Federal funds sold and securities purchased
under resale agreements ........................
$ 2,813 $ 2,813
$ 1,679 $ 1,679
Investments* ....................................
14,001 13,985
12,734 12,771
Loans ..........................................
70,002 68,664
67,904 68,770
Allowance for loan losses .........................
(1,938)
(1,917)
Net loans .....................................
68,064 68,664
65,987 68,770
Financial liabilities:
Systemwide debt securities and other bonds ............
(72,395) (71,750)
(68,644) (69,202)
Financial Assistance Corporation bonds .............
(863) (928)
(1,020) (1,177)
Unrecognized financial instruments:
Interest rate swaps ...............................
(1) (187)
(3 )
Interest rate cap, floor, and other
options contracts ...............................
7 25
1 5
Commitments to extend credit .....................
(12)
(15 )
Standby letters of credit ..........................
(6)
Note: The carrying amount for unrecognized derivative financial instruments includes net amounts receivable and payable on interest rate
swaps and unamortized premiums on options; asset amounts are included in other assets and liability amounts are included in other
liabilities. Derivatives designated to investments available -for -sale are included
as an adjustment to the
carrying amount and fair value of
investments (see Note 3).
F-31 174
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 14 — DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS — (continued)
A description of the methods and assumptions used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate that value follows:
A. Cash, Federal Funds Sold and Securities Purchased Under Resale Agreements.- For cash and
overnight investments, the carrying value is a reasonable estimate of fair value. The fair value of term
Federal funds sold and securities purchased under resale agreements is based on currently quoted market
prices.
B. Investment Securities. The fair value is based on currently quoted market prices.
C. Loans. Because no active market exists for the Systems loans, fair value is estimated by
discounting the expected future cash flows using the Banks' and/or the Associations' current interest
rates at which similar loans would be made to borrowers with similar credit risk. As the discount rates are
based on the Banks' loan rates as well as managements' estimates of credit risk, management has no basis
to determine whether the fair values presented would be indicative of the value negotiated in an actual
sale.
For purposes of determining fair value of accruing loans, the loan portfolio is segregated into pools of
loans with homogeneous characteristics. Expected future cash flows, primarily based on contractual
terms, and interest rates reflecting appropriate credit risk are separately determined for each individual
pool.
Fair value of loans in nonaccrual status that are current as to principal and interest is estimated as
described above, with appropriately higher interest rates which reflect the uncertainty of continued cash
flows. For noncurrent nonaccrual loans, it is assumed that collection will result only from the disposition
of the underlying collateral. Fair value of these loans is estimated to equal the aggregate net realizable
value of the underlying collateral, discounted at an interest rate which appropriately reflects the
uncertainty of the expected future cash flows over the average disposal period. Where the net realizable
value of the collateral exceeds the legal obligation for a particular loan, the legal obligation is generally
used in place of net realizable value.
D. Bonds and Notes. Systemwide Debt Securities and Financial Assistance Corporation bonds are
not all traded in the secondary market and those that are traded may not have readily available quoted
market prices. To the extent that quoted prices are not readily available, the fair value of the instruments
is estimated by calculating the discounted value of the expected future cash flows. The discount rates
used are based on the sum of quoted market yields for the Treasury yield curve and an estimated yield -
spread relationship between System debt instruments and Treasury issues.
E. Unrecognized Financial Instruments.- The fair value of derivative financial instruments is the
estimated amount that a Bank would receive or pay to replace the instruments at the reporting date,
considering the current interest rate environment and the current creditworthiness of the counterparties.
Where such quoted market prices do not exist, these values are generally provided by sources outside the
respective Bank.
F. Commitments to Extend Credit and Standby Letters of Credit: The fair value of commitments
is estimated using the fees currently charged for similar agreements, taking into account the remaining
terms of the agreements and the creditworthiness of the counterparties. For fixed-rate loan commitments,
estimated fair value also considers the difference between current levels of interest rates and the
committed rates. The fair value of letters of credit is estimated based on the cost to terminate the
agreement or fees currently charged for similar agreements.
F-32 17
J
FARM CREDIT SYSTEM
NOTES TO COMBINED FINANCIAL STATEMENTS — (continued)
(dollars in millions, except as noted)
NOTE 15 — RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Banks and Associations may enter into loan transactions with their
officers and directors and other organizations with which such persons are associated. Such loans are subject to
special approval requirements contained in FCA regulations and are, in the view of System institutions'
managements, made on the same terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with unrelated borrowers. Total loans outstanding to such persons were
$2.2 billion and $2.4 billion at December 31, 1999 and 1998, respectively. During 1999 and 1998, $3.4 billion
and $7.7 billion of new loans were made to such persons and repayments totaled $3.6 billion and $7.9 billion,
respectively. In the opinions of Bank managements, substantially all of such loans outstanding at
December 31, 1999 and 1998 did not involve more than a normal risk of collectibility.
NOTE 16 — CONTINGENCIES
In the normal course of business, the Banks and Associations have various commitments and contingent
liabilities, such as letters of credit and commitments to extend credit, which are not reflected in the
accompanying combined financial statements. No material losses are anticipated as a result of these
transactions.
In December 1996, Orange County, California filed a lawsuit against all System Banks in the United
States District Court for the Central District of California, Southern Division. Similar lawsuits were also filed
against other government -sponsored enterprises, Merrill Lynch & Co., Inc. (Merrill Lynch) and others. The
lawsuits arose out of the December 1994 municipal bankruptcy of Orange County. Pursuant to a settlement
between Orange County and Merrill Lynch, the lawsuit against the System Banks has been dismissed with
prejudice by order dated September 24, 1999..
At December 31, 1999, various other lawsuits were pending or threatened against System institutions,
including actions in which claims for significant amounts of monetary damages have been or may be asserted
against such institutions. Based on representations from managements of System institutions, the ultimate
outcomes of these other damage actions pending or threatened against System institutions are not expected to
have a material adverse impact on the System's combined results of operations or financial position.
F-33 176
FARM CREDIT SYSTEM
SUPPLEMENTAL COMBINING INFORMATION
The following condensed Combining Statements of Condition and of Income present Bank -only and
Insurance Fund information, as well as information related to the other entities included in the System's
combined financial statements. (As part of the combining process, all significant transactions between the
Banks, the Associations, and the Financial Assistance Corporation, including loans made by the Banks to the
Associations and the interest income/interest expense related thereto, and investments of the Associations in
the Banks and the earnings related thereto, have been eliminated.)
COMBINING STATEMENT OF CONDITION (Condensed)
December 31, 1999
Combined
Financial without
Combined Combined Assistance Insurance Insurance Combination
Banks Associations Corporation Eliminations Fund Fund Entries Combined
Cash, Federal funds
sold and securities
purchased under
resale agreements
and investments ....
$15,621
Net loans ............
63,113
Restricted assets ......
Other assets .........
1,398
Total assets ......
$80,132
Systemwide debt
securities and other
bonds .............
$72,395
Financial Assistance
Corporation bonds . .
Other liabilities .....
1,835
Total liabilities ...
74,230
Protected borrower
capital ............
Restricted capital .....
Capital stock and
participation
certificates .........
2,900
Surplus and other .....
3,002
Total liabilities
and capital .... $80,132
(in millions)
$ 525
$ 668
$16,814
$16,814
42,891
$(37,940)
68,064
68,064
$1,534
1,534
4,188
511
(3,657)
2,440
$_(160) (a)
2,280
$47,604
$1,179
$(41,597)
$87,318
$1,534
$(160)
$88,692
$72,395
$72,395
$ 863
863
863
$39,096
316
$(39,132)
2,115
$ 160
$(160) (a)
2,115
39,096
1,179
(39,132)
75,373
160
(160)
75,373
64
64
64
1,374
160 (b)
1,534
857
56
(2,124)
1,689
1,689
7,587
(56)
(341)
10,192
160) (b)
10,032
$47,604
$1,179
$(41,597)
$87,318
$1,534
$(160) -
$88,692
Combination entry (a) eliminates the amount to be received by the Financial Assistance Corporation and the
related payable recorded by the Insurance Fund to repay, upon maturity in 2003 and 2005, the Financial
Assistance Corporation debt issued to fund $374 million of preferred stock issued by the FLB of Jackson
(determined by the Insurance Corporation on the basis of the present value of the estimated future
obligation). Combination entry (b) transfers from surplus to restricted capital the capital identified to repay
the estimated payable discussed in combination entry (a) .
In the event of a default by a Bank on Systemwide Debt Securities for which the Bank is primarily liable,
the Insurance Corporation must expend amounts in the Insurance Fund to the extent necessary to insure the
timely payment of principal of and interest on such debt obligations. The provisions of joint and several
liability of the Banks with respect to such obligations cannot be invoked until the amounts in the Insurance
F-34 177
Fund have been exhausted. However, because of the other authorized uses of the Insurance Fund, there is no
assurance that amounts in the Insurance Fund will be available and sufficient to fund the timely payment of
principal of and interest on such debt obligations in the event of a default by a Bank. (See Note 7 to
accompanying combined financial statements.)
COMBINING STATEMENT OF INCOME (Condensed)
For the Year Ended December 31, 1999
Combined
Financial without
Combined Combined Assistance Insurance Insurance Combination
Banks Associations Corporation Eliminations Fund Fund Entries Combined
(in millions)
Net interest income .... $1,006 $1,332 $ 8 $ (74) $ 2,272 $ 2,272
Provision for loan
losses ............... (136) (115) 74 (177) (177)
Noninterest income..... 127 558 (460) 225 $127 $(45)(c) 307
Noninterest expense .... (459) (969) (8) 223 (1,213) (12) 56 (c) (1,169)
Net income ....... $ 538 $ 806 $ $(237) $ 1,107 $115 $ 11 $ 1,233
Noninterest expense includes the provision for income taxes. Combination entry (c) eliminates the
Insurance Fund premiums expensed by the Banks in 1999 and the related income recognized by the Insurance
Corporation, and the expense related to the increase in the payable recorded by the Insurance Fund, which
payable is referenced in combination entry (a).
F-35 178
INDEX TO ANNUAL INFORMATION STATEMENT
Category
Description of Business
Federal Regulation and Insurance
Description of Legal Proceedings and
Enforcement Actions
Description of Debt Securities
Description of Liabilities
Description of Capital
Selected Financial Data
Discussion and Analysis
Directors and Management
Compensation of Bank Directors and
Senior Officers
Related Party Transactions
Relationship with Independent Accountant
Financial Statements
Supplemental Information
System Audit Committee
Location*
Pages 4 — 10, 26 — 28, 32, 33 and Notes 1, 2, 4, 7,
8, 10, 16 and Inside Back Cover
Pages 10 — 18, 44 — 45 and Notes 1, 7, 8 and 9
Pages 32, 44 and Notes 12 and 16
Pages 16 — 18, 39 — 40 and Note 8
Pages 16 — 18, 39 — 40 and Notes 6, 8 and 9
Pages 37 — 39 and Note 10
Pages 3 and 28
Pages 26 — 46
Pages 19 — 25
Page 25
Note 15
Not applicable; no change in or disagreement with
independent accountant
Pages F-1 — F-33
Pages F-34 — F-35
Page 24
* As used herein, the references to "Notes" mean the Notes to Combined Financial Statements found on
pages F-7 through F-33 of this Information Statement.
I-1 180
CERTAIN FARM CREDIT SYSTEM ENTITIES
BANKS
OTHER ENTITIES
AgAmerica, FCB
Farm Credit Leasing Services Corporation
P.O. Box 13106
1600 Colonnade
Sacramento, CA 95813-4106
5500 Wayzata Blvd.
(916) 485-6000
Minneapolis, MN 55416-1252
(612) 797-7400
AgFirst Farm Credit Bank
P.O. Box 1499
Farm Credit System Financial
Columbia, SC 29202-1499
Assistance Corporation
(803) 799-5000
10 Exchange Place, Suite 1401
Jersey City, NJ 07302-3913
AgriBank, FCB
(201) 200-8000
P.O. Box 64949
Federal Farm Credit Banks
St. Paul, MN 55164-0949
Funding Corporation
(651) 282-8800
10 Exchange Place, Suite 1401
CoBank, ACB
Jersey City, NJ 07302-3913
P.O. Box 5110
(201) 200-8000
Denver, CO 80217-5110
FCS Building Association
(303) 740-4000
1501 Farm Credit Drive
Farm Credit Bank of Texas
McLean, VA 22102-5090(
P.O. Box 15919
703) 883-4000
Austin, TX 78761-5919
The Farm Credit Council
(512) 465-0400
50 F Street, NW
Washington, DC 20001-1530(202)
Farm Credit Bank of Wichita
626-8710
P.O. Box 2940
Wichita, KS 67201-2940
(316) 266-5100
Western Farm Credit Bank
P.O. Box 13106
Sacramento, CA 95813-4106
(916) 485-6000
183
INVESTMENT ADVISORY BOARD
Meeting Date: October 11, 2000
TITLE:
Month End Cash Report - September 2000 and
other selected Financial Data
BACKGROUND:
Correspondence & Written
Material Item A
This cash report is not a complete Treasury Report (exclude petty cash, deferred
compensation and fiscal agent balances, ) but would report in a timely fashion
selected cash balances.
This month the staff report includes financial data used in the forecast of
revenues. Staff is completing the expenditure data which will be in future
agendas.
RECOMMENDATION:
Information item only.
r, Finance Director
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FRB: H.15--Selected Interested Rate ... y Daily Update-- September 29, 2000
http://www.federalreserve.gov/Releases/H 15/update/
Federal ResenFe Static ica1 Release
H.15
Selected Interest Rates
Release Date: September 29, 2000
H.15: Release I Release dates About ASCII I Historical data I Daily update
H.15 Daily Update
The weekly release is posted on Monday. Daily updates of the weekly release are posted
Tuesday through Friday on this site.
H.15 DAILY UPDATE: WEB RELEASE ONLY
SELECTED INTEREST RATES
Yields in percent per annum
Instruments
SELECTED INTEREST RATES
Federal funds (effective) 1 2 3
Commercial paper 3 4 5 6
Nonfinancial
1-month
2-month
3-month
Financial
1-month
2-month
3-month
CDs (secondary market) 3 7
1-month
3-month
6-month
Eurodollar deposits (London) 3 8
.1-month
3-month
6-month
Bank prime loan 2 3 9
Discount window borrowing 2 10
U.S. Government securities
Treasury bills (secondary market) 3 4
3-month
6-month
1-year
Treasury constant maturities 11
3-month
For immediate release
September 29, 2000
Mon Tue Wed Thu
Sep 25 Sep 26 Sep 27 Sep 28
6.54
6.50
6.50
6.59
6.48
6.49
6.49
6.52
6.46
6.49
6.48
6.48
6.47
6.47
6.46
6.47
6.50
6.49
6.50
6.49
6.47
6.49
6.49
6.48
6.48
6.46
6.49
6.46
6.56
6.56
6.57
6.57
6.58
6.58
6.59
6.71
6.66
6.66
6.67
6.67
6.54
6.54
6.54
6.53
6.56
6.58
6.58
6.69
6.66
6.68
6.68
6.68
9.50
9.50
9.50
9.50
6.00
6.00
6.00
6.00
5.99
6.00
6.02
6.07
5.98
5.97
6.01
6.03
5.76
5.75
5.75
5.77
6.18
6.18
6.20
6.25
1 of 3 10/02/2000 9:01 AM
FRB: H.15--Selected Interested Rate...y Daily Update-- September 29, 2000
http://www.federalreserve.gov/Releases/H 15/update/
6-month 6.25 6.24 6.28 6.30
1-year 6.09 6.08 6.07 6.09
2-year 6.11 6.07 6.00 6.02
3-year 6.05 6.01 5.94 5.96
5-year 5.94 5.90 5.89 5.90
7-year 5.99 5.95 5.96 5.96
10-year 5.84 5.81 5.83 5.82
20-year 6.16 6.12 6.15 6.14
30-year 5.90 5.86 5.90 5.89
Interest rate swaps 12
1-year 6.78 6.78 6.77 6.78
2-year 6.78 6.76 6.75 6.74
3-year 6.80 6.78 6.77 6.75
4-year 6.82 6.81 6.80 6.78
5-year 6.86 6.84 6.83 6.81
7-year 6.93 6.91 6.89 6.88
10-year 7.00 6.98 6.96 6.95
30-year 7.04 7.02 7.02 7.02
Corporate bonds
Moody's seasoned
Aaa 7.66 7.63 7.67 7.64
Baa 8.37 8.33 8.37 8.32
State & local bonds 13 5.63
Conventional mortgages 14
FOOTNOTES
1. The daily effective federal funds rate is a weighted average of rates
on trades through N.Y. brokers.
2. Weekly figures are averages of 7 calendar days ending on Wednesday of
the current week; monthly figures include each calendar day in the
month.
3. Annualized using a 360-day year or bank interest.
4. On a discount basis.
5. Interest rates interpolated from data on certain commercial paper
trades settled by The Depository Trust Company. The trades represent
sales of commercial paper by dealers or direct issuers to investors
(that is, the offer side). See Board's Commercial Paper Web pages
(http://www.federalreserve.gov/releases/cp) for more information.
6. The 1-, 2-, and 3-month rates are equivalent to the 30-, 60-, and
90-day dates reported on the Board's Commercial Paper Web page.
7. An average of dealer offering rates on nationally traded certificates
of deposit.
8. Bid rates for Eurodollar deposits collected around 9:30 a.m. Eastern time.
9. Rate posted by a majority of top 25 (by assets in domestic offices)
insured U.S.-chartered commercial banks. Prime is one of several base
rates used by banks to price short-term business loans.
10. Rate for the Federal Reserve Bank of New York.
11. Yields on actively traded issues adjusted to constant maturities.
Source: U..S. Treasury.
12. International Swaps and Derivatives Association (ISDA) mid -market
par swap rates. Rates are for a Fixed Rate Payer in return for
receiving three month LIBOR, and are based on rates collected at
11:00 a.m. by Garban Intercapital plc and published on Reuters
Page ISDAFIXI. Source: Reuters Limited.
13. Bond Buyer Index, general obligation, 20 years to maturity, mixed
quality; Thursday quotations.
14. Contract interest rates on commitments for fixed-rate first mortgages. Y 12
2 of 3 10/02/2000 9:01 AM
FRB: H.15--Selected Interested Rate ... y Daily Update-- September 29, 2000 http://www.federalreserve.gov/Releases/H15/update/
Source: FHLMC.
DESCRIPTION OF THE TREASURY CONSTANT MATURITY SERIES
Yields on Treasury securities at "constant maturity" are interpolated
by the U.S. Treasury from the daily yield curve. This curve, which
relates the yield on a security to its time to maturity, is based on
the closing market bid yields on actively traded Treasury securities in
the over-the-counter market. These market yields are calculated from
composites of quotations obtained by the Federal Reserve Bank of New
York. The constant maturity yield values are read from the yield curve
at fixed maturities, currently 3 and 6 months and 1, 2, 3, 5, 7, 10, 20,
and 30 years. This method.provides a yield for a 10-year maturity, for
example, even if no outstanding security has exactly 10 years remaining
to maturity. In estimating the 20-year constant maturity, the Treasury
incorporates the prevailing market yield on an outstanding Treasury bond
with approximately 20 years remaining to maturity.
H.15: Release I Release dates I About I ASCII I Historical data I Daily update
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Last update: September 29, 2000
013
3 of 3 10/02/2000 9:01 AM
FRB: Commercial Paper Rates and Outstandings
http://www.federalreserve.gov/Releases/CP/
F; ederal Reserve Release
MEWM5AT -11
of
Release I About I Outstandings I Historical discount rates I Historical outstandings
Data as of September 29, 2000 Volume
Commercial Paper Rates and Outstandings 200otic3
Derived from data supplied by The Depository Trust Company
Posted October 2, 2000
Discount rates
AA
AA
A2/P2
Ter.mI financial
I
nonfinancial
nonfinancial
6.68
6.70 _
6.96
7 dad i 6.55
6.54
6.87
1Sdy 6.53
6.53
�6.79
F�
3.0-day 6.49
6.49
6.74
E
60-day $ 6.47
6.49
6.71
90-day E 6.47
6.47
6.61
Yield curve
Money market basis
Percent
1 7 15 30 Go 90
Days to Maturity
Financial — — — Nonfinancial A3/P2
Discount rate spread
Thirty -day A2/P2 less AA nonfinancial commercial paper (daily)
Basis points
7.00
6.95
6.90
6.85
6.80
6.75
6.70
6.65
6.60
6.55
6.50
110
100
90
80
70
60
50
4)
w
20
10
01 MAY98 09AL1098 17NOV98 25FE999 05JU N99 13SEP99 22DEC99 31 FMAR00 09JlJLOD 170CTOO
--- A3/P2spread, 5—day moving average
014
1 of 3
10/02/2000 9:02 AM
FRB:Commercial Paper Rates and Outstandings
http://www.federalreserve.gov/Releases/CP/
Discount rate history
Thirty -day commercial paper (daily)
Percent
8
7
8
W
I r4
� T
O 1 MAY98 09AUG98 17NOV96 25 FE899 05J U N 99 13S EP99 22 ❑ EC99 31 MAROD O9J U LOO 170CTOO
FinancaI — — — Nonfinancial ••••• A2/P2
Outstandings
Weekly (Wednesday), seasonally adjusted
Billions of dollars
Billions of dollars
1..s�
360
350
340
120 D 330
320
310
1 100 30Q
290
230
1 �,� � 270
260
940
2W
220
210
&DCI
O MIIAY98 09AUG98 17 NOV98 25FE999 OW U N99 13SE P99 220EC99 31 MAROO 09J U LOO 170CTOO
Fina ncia I — — — Nonfina na a I
The daily commercial paper release will usually be available before 11:00am EST. However, the
Federal Reserve makes no guarantee regarding the timing of the daily commercial paper release.
When the Federal Reserve is closed on a business day, yields for the previous business day will
appear in the historical discount rates table. This policy is subject to change at any time without
notice.
015
2 of 3 10/02/2000 9:02 AM
FRB:Commercial Paper Rates and Outstandings http://www.federalreserve.gov/Releases/CP/
Commercial paper outstanding
Commercial paper outstanding, miscellaneous cate og ries
Release I About I Outstandings I Historical discount rates I Historical outstandings
Home I Statistical releases
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Last update: October 2, 2000
06
3 of 3 10/02/2000 9:02 AM
LAIF Performance Report http://www.treasurer.ca.gov/Stolperfhtm
Philip Aredes, State Treasurer
Inside the State Treasurer's Office
101
Reporting Date:
Effective Date:
Quarter Yield:
Daily:
Year:
no
Quarter Ending 06/30/00
Apportionment Rate:
Earnings Ratio:
Fair Value Factor:
Monthly Average For August:
-IST911 -Iff 0=1
09/27/00
09/27/00
6.48%
6.51%
6.48%
191
6.18%
.00016875759188261
.998865556
6.505%
0 17
1 of 2
10/02/2000 9:02 AM
LAIF Performance Report
http://www.treasurer.ca.gov/Stolperf htm
Corpoi
Boni
5.981
Commercia
Paper
17.91 %
Bankers
Acceptance
0.09%
Pooled Money Investment Account
Portfolio Composition
$41.2 Billion
0 131100
Reverses
Leans -3.70% Treasuries
6.59% 13.30%
CD's/BN's
22.81 %
e Deposits
9.38%
Mortgages
0.03%
encies
T.61 %
■Treasuries
❑ Time Deposits
■ Mortgages
Ei Agencies
■ CD's1BN's
Ei Bankers Acceptances
■ Repo
■ Commercial Paper
■ Corporate Bonds
Ei Loans
■ Reverses
018
2 of 2 10/02/2000 9:02 AM
INVESTMENT ADVISORY BOARD
Meeting Date: October 11, 2000
TITLE:
Pooled Money Investment Board Report
for July 2000
BACKGROUND:
Correspondence & Written
Material Item B
The Pooled Money Investment Board Report for July 2000 is included in the
agenda packet.
RECOMMENDATION:
Receive & File
n M. Falconer, Finance Director
STATE OF CALIFORNIA
STATE TREASURER'S OFFICE
POOLED MONEY INVESTMENT BOARD REPORT
JULY 2000
TABLE OF CONTENTS
SUMMARY...........................................................................1
SELECTED INVESTMENT DATA.............................................2
PORTFOLIO COMPOSITION...................................................3
INVESTMENT TRANSACTIONS...............................................4
TIMEDEPOSITS..................................................................17
BANK DEMAND DEPOSITS ...................................................
29
POOLED MONEY INVESTMENT BOARD DESIGNATION .......... 30
POOLED MONEY INVESTMENT ACCOUNT
SUMMARY OF INVESTMENT DATA
A COMPARISON OF JULY 2000 WITH JULY 1999
(DOLLARS IN THOUSANDS)
....... ... ... . ....... ............ ...... .
znoa . .i��.vt9e9 ct+al�c�
Average Daily Portfolio
$ 41,566,053 $
34,345,259
+7,220,794
Accrued Earnings
$ 227,465 $
150,626
+76,839
Effective Yield
6.443
5.178
+1.265
Average Life -Month End (In Days) 191 223 -32 1
Total Security Transactions
Amount
$
16,255,529
$
16,369,385
-113,856
Number
347
363
-16
Total Time Deposit Transactions
Amount
$
1,227,590
$
1,388,790
-161,200
Number
138
95
+43
Average Workday Investment Activity
$
874,156
$
845,627
+28,529
Prescribed Demand Account Balances
For Services
$
178,457
$
213,042
-34,585
For Uncollected Funds
$
169,862
$
153,985
+15,877
1
PHILIP ANGELIDES
TREASURER
STATE OF CALIFORNIA
INVESTMENT DIVISION SELECTED INVESTMENT DATA
ANALYSIS OF THE POOLED MONEY INVESTMENT ACCOUNT PORTFOLIO
(000 OMITTED)
JULY 31, 2000
PERCENTAGE
CHANGE FROM
TYPE OF SECURITY
AMOUNT
PERCENT
PRIOR MONTH
Government
Bills
$
2,223,185
5.47
+.31
Bonds
0
0.00
0.00
Notes
2,323,200
5.71
+.31
Strips
0
0.00
0.00
Total Government
$
4,546,385
11.18
+.62
Federal Agency Coupons
$
3,478,626
8.55
+.91
Certificates of Deposit
7,095,263
17.44
+.66
Bank Notes
1,235,005
3.04
-1.42
Bankers' Acceptances
$
36,707
0.09
0.00
Repurchases
0
0.00
0.00
Federal Agency Discount Notes
7,440,078
18.29
+1.33
Time Deposits
3,747,440
9.21
+.73
GNMAs
1,253
0.00
0.00
Commercial Paper
10,016,615
24.62
+.34
.FHLMC
12,407
0.03
0.00
Corporate Bonds
2,468,959
6.07
+.34
Pooled Loans
1,991,921
4.90
-.09
GF Loans
0
0.00
0.00
Reversed Repurchases
(1,391,765)
-3.42
+3.42
Total (All Types)
$
40,678,894
100.00
INVESTMENT ACTIVITY
JULY,
2000
JUNE, 2000
NUMBER
AMOUNT
NUMBER
AMOUNT
Pooled Money
347 $
16,255,529
573
$ 26,387,241
Other
6
579224
31
310,185
Time Deposits
138
1,227,590
98
785,440
Totals
491 $
17,540,343
702
$ 27,482,866
PMIA Monthly Average Effective Yield
6.443
6.349
Year to Date Yield Last Day of Month
6.443
5.708
2
Pooled Money Investment Account
Portfolio Composition
$40.6 Billion
Corporate
Bonds
6.07% -4
Commercial
Paper
24.62%
Bankers
Acceptances
0.09%
Loans
4.90%
Reverses
-3.42% Treasuries
11.18%
CD's/BN's
20.48%
Time Deposits
9.21 %
Mortgages
0.03%
Agencies
26.84%
7/31 /0 0
8 Treasuries
B Time Deposits
■ Mortgages
0 Agencies
® CD's/BN's
0 Bankers Acceptances
■ Repo
0 Commercial Paper
* Corporate Bonds
* Loans
O Reverses
3
07/01/00 REDEMPTIONS
MTN B/A 9.750% 07/01/00 5.580 $5,300 388 $325,358.17 5.581
NO PURCHASES
07/03/00 RRS
Treas
Bills
03/01/01
5.390
50,000
Treas
Bills
03/01 /01
5.390
50,000
REDEMPTIONS
CID
Salomon
07/03/00
6.530
50,000
18
163,250.00
6.642
CID
Salomon
07/03/00
6.530
50,000
18
163,250.00
6.642
CID
Salomon
07/03/00
6.530
50,000
18
163,250.00
6.642
CID
GMAC
07/03/00
6.270
50,000
62
539,916.67
6.426
CID
GMAC
07/03/00
6.060
10,000
76
127,933.33
6.223
CID
GMAC
07/03/00
6.060
50,000
76
639,666.67
6.223
CP
GMAC
07/03/00
6.060
50,000
76
639,666.67
6.223
CID
GMAC
07/03/00
6.060
50,000
76
639,666.67
6.223
CID
GMAC
07/03/00
6.070
50,000
82
691,305.56
6.240
CP
W/F
07/03/00
6.090
50,000
87
735,875.00
6.266
CID
W/F
07/03/00
6.090
50,000
87
735,875.00
6.266
CID
SRAC
07/03/00
6.150
50,000
95
811,458.33
6.338
CID
GMAC
07/03/00
6.080
50,000
102
861,333.33
6.272
CID
GMAC
07/03/00
6.080
50,000
102
861,333.33
6.272
CID
GMAC
07/03/00
6.080
50,000
102
861,333.33
6.272
CID
GMAC
07/03/00
6.080
50,000
102
861,333.33
6.272
CID
GMAC
07/03/00
6.080
50,000
105
886,666.67
6.275
CID
GMAC
07/03/00
6.080
50,000
105
886,666.67
6.275
CP.
GMAC
07/03/00
6.070
50,000
108
910,500.00
6.268
CID
GMAC
07/03/00
6.070
50,000
108
910,500.00
6.268
CID
GMAC
07/03/00
5.930
50,000
129
1,062,458.33
6.142
CID
GMAC
07/03/00
5.930
50,000
129
1,062,458.33
6.142
CID
GMAC
07/03/00
5.910
30,000
138
679,650.00
6.130
CID
GMAC
07/03/00
5.910
50,000
138
1,132,750.00
6.130
CID
GMAC
07/03/00
5.910
50,000
138
1,132,750.00
6.130
PURCHASES g/
CD
Nat W.Mstr
6.610% 09/01/00
6.590
50,000
CD
Nat W.Mstr
6.610% 09/01/00
6.590
50,000
PURCHASES
CID
Amer Exp
07/05/00
7.000
50,000
CID
Amer Exp
07/05/00
7.000
50,000
4
CP
Amer Exp
07/05/00
7.000
50,000
CP
Assoc
07/05/00
7.000
50,000
CP
Assoc
07/05/00
7.000
50,000
07/03/00 PURCHASES (continued)
CP
GMAC
07/05/00
7.000
50,000
CP
GMAC
07/05/00
7.000
50,000
CP
GMAC
07/05/00
7.000
50,000
CP
GMAC
07/05/00
7.000
50,000
07/05/00 REDEMPTIONS
CP
Amer Exp
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
Amer Exp
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
Amer Exp
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
Assoc
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
Assoc
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
GMAC
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
GMAC
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
GMAC
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
GMAC
07/05/00
7.000
50,000
2
19,444.44
7.099
CP
GECC
07/05/00
6.700
50,000
9
83,750.00
6.804
CP
G.ECC
07/05/00
6.700
50,000
9
83,750.00
6.804
CP
GECC
07/05/00
6.700
50000
9
83,750.00
6.804
CP
GECC
07/05/00
6.700
50,000
9
83,750.00
6.804
CP
W/F
07/05/00
6.500
50,000
49
442,361.11
6.649
CP
OF
07/05/00
6.500
50,000
49
442,361.11
6.649
CP
Assoc
07/05/00
6.250
50,000
64
555,555.56
6.408
CP
SRAC
07/05/00
6.200
50,000
90
775,000.00
6.385
CP
GMAC
07/05/00
6.070
50,000
110
927,361.11
6.270
CP
GMAC
07/05/00
6.070
50,000
110
927,361.11
6.270
PURCHASES
CD
Deutsche
6.680%
11 /13/00
6.680
50,000
CD
Deutsche
6.680%
11/13/00
6.680
50,000
CD
Soc Gen
6.680%
11 /17/00
6.680
50,000
CP
Amer Exp
07/06/00
6.620
50,000
CP
Amer Exp
07/06/00
6.620
50,000
CP
Amer Exp
07/06/00
6.620
50,000
CP
Amer Exp
07/06/00
6.620
50,000
CP
Country
07/10/00
6.570
50,000
CP
Country
07/10/00
6.570
50,000
CP
SRAC
08/29/00
6.850
50,000
CP
Salomon
10/10/00
6.550
50,000
CP
Salomon
10/10/00
6.550
50,000
FHLB
7.050%
07/05/01
7.050
50,000
FHLB
7.050%
07/05/01
7.050
50,000
07/06/00 RRS
Treas Bills
03/01 /01
5.050
50,000
Treas Bills
03/01 /01
5.050
50,000
07/06/00 REDEMPTIONS
CP Amer Exp
07/06/00
6.620
50,000
1
9,194.44
6.713
CP Amer Exp
07/06/00
6.620
50,000
1
9,194.44
6.713
CP Amer Exp
07/06/00
6.620
50,000
1
9,194.44
6.713
CP Amer Exp
07/06/00
6.620
50,000
1
9,194.44
6.713
Disc Notes FHLMC
07/06/00
5.800
50,000
183
1,474,166.67
6.059
Disc Notes FHLMC
07/06/00
5.800
50,000
183
1,474,166.67
6.059
Disc Notes FHLMC
07/06/00
5.800
50,000
183
1,474,166.67
6.059
PURCHASES gI
Disc Notes FHLB
08/25/00
6.390
50,000
Disc Notes FHLB
08/25/00
6.390
50,000
PURCHASES
CD Stnrd Ch
6.620% 09/08/00
6.620
50,000
CD Stnrd Ch
6.620% 09/08/00
6.620
50,000
CP Heller
10/02/00
6.650
25,000
CP W/F
10/02/00
6.510
50,000
CP W/F
10/02/00
6.510
50,000
CP FMCC
10/02/00
6.520
50,000
CP FMCC
10/02/00
6.520
50,000
CP FMCC
10/02/00
6.520
50,000
CP Merrill
10/06/00
6.540
20,000
CP Merrill
10/06/00
6.540
50,000
CP U/B Calif
10/10/00
6.540
50,000
CP U/B Calif
10/10/00
6.540
50,000
CP GECC
10/16/00
6.540
35,000
07/07/00 REDEMPTIONS
CP Salomon
07/07/00
6.330
50,000
66
580,250.00
6.493
CP Bear
07/07/00
6.130
50,000
91
774,763.89
6.312
CP Bear
07/07/00
6.130
50,000
91
774,763.89
6.312
CP Bear
07/07/00
6.110
50,000
108
916,500.00
6.310
CP Bear
07/07/00
6.110
50,000
108
916,500.00
6.310
PURCHASES
CP GECC
07/10/00
6.450
50,000
6
CID GECC
CID GECC
07/10/00 REDEMPTIONS
CID
GECC
CID
GECC
CID
GECC
CP
Country
07/10/00 REDEMPTIONS (continued)
CID
Country
CID
ConAgra
CID
Salomon
CID
GMAC
CID
GMAC
CID
Household
CID
GECC
CID
GECC
NO PURCHASES
07/11/00 RRS
Treas Bills
Treas Bills
REDEMPTIONS
CID
Country
CID
Country
CID
Hertz
CID
Salomon
CID
Salomon.
CP
Bear
CID
Merrill
CID
Merrill
PURCHASES g/
CP
Morg Stan
CP
Morg Stan
PURCHASES
CID NCAT
CID NCAT
07/10/00 6.450 50,000
07/10/00 6.450 50,000
07/10/00
6.450
50,000
3
26,875.00
6.543
07/10/00
6.450
50,000
3
26,875.00
6.543
07/10/00
6.450
50,000
3
26,875.00
6.543
07/10/00
6.570
50,000
5
45,625.00
6.667
07/10/00
6.570
50,000
5
45,625.00
6.667
07/10/00
6.700
34,864
28
181,680.18
6.828
07/10/00
6.330
50,000
69
606,625.00
6.496
07/10/00
6.110
50,000
94
797,694.44
6.295
07/10/00
6.110
50,000
94
797,694.44
6.295
07/10/00
6.100
50,000
95
804,861.11
6.285
07/10/00
6.170
45,000
102
786,675.00
6.367
07/10/00
6.170
50,000
102
874,083.33
6.367
05/31 /01 5.800 50,000
05/31 /01 5.800 50,000
07/11/00
6.850
14,733
13
36,443.72
6.962
07/11/00
6.850
50,000
13
123,680.56
6.962
07/11/00
6.540
50,000
26
236,166.67
6.662
07/11/00
6.140
50,000
84
716,333.33
6.315
07/11/00
6.140
50,000
84
716,333.33
6.315
07/11/00
6.130
50,000
90
766,250.00
6.311
07/11/00
6.110
15,000
96
244,400.00
6.297
07/11/00
6.110
50,000
96
814,666.67
6.297
09/01 /00 6.490 50,000
09/01 /00 6.490 50,000
07/12/00 6.480 50,000
07/12/00 6.480 50,000
[A
07/12/00 REDEMPTIONS
CID NCAT
07/12/00
CID NCAT
07/12/00
CP FMCC
07/12/00
CID FMCC
07/12/00
CID Hertz
07/12/00
PURCHASES
CD Austria
6.640%
11 /13/00
CD Austria
6.640%
11/13/00
07/12/00 PURCHASES (continued)
CID SRAC
07/25/00
CID SRAC
08/15/00
CID ConAgra
08/18/00
07/13/00 NO SALES
NO PURCHASES
07/14/00 REDEMPTIONS
CD U/B Calif
6.130%
07/14/00
CD U/B Calif
6.130%
07/14/00
CID ConAgra
07/14/00
CID Armstrong
07/14/00
CID ConAgra
07/14/00
CID CAFCO
07/14/00
CID CAFCO
07/14/00
CID Heller
07/14/00
CID Heller
07/14/00
CID Salomon
07/14/00
CID Salomon
07/14/00
CID Bear
07/14/00
CID Bear
07/14/00
CID FMCC
07/14/00
CID FMCC
07/14/00
PURCHASES
CID GECC
07/17/00
CID GECC
07/17/00
07/17/00 RRS
Treas Bills 10/12/00
6.480
50,000
1
9,000.00
6.571
6.480
50,000
1
9,000.00
6.571
6.600
50,000
13
119,166.67
6.707
6.600
50,000
13
119,166.67
6.707
6.540
50,000
27
245,250.00
6.663
6.640 50,000
6.640 50,000
6.600
50,000
6.650
30,000
6.650
20,000
6.130
5,000
158
134,519.44
6.215
6.130
50,000
158
1,345,194.44
6.215
6.730
50,000
25
233,680.56
6.855
6.780
20,800
29
113,602.67
6.911
6.730
23,991
29
130,064.54
6.860
6.540
10,000
29
52,683.33
6.665
6.540
50,000
29
263,416.67
6.665
6.180
25,000
98
420,583.33
6.373
6.180
50,000
98
841,166.67
6.373
6.100
50,000
98
830,277.78
6.289
6.100
50,000
98
830,277.78
6.289
6.030
50,000
136
1,139,000.00
6.256
6.030
50,000
136
1,139,000.00
6.256
5.980
50,000
141
1,171,083.33
6.208
5.980
50,000
141
1,171,083.33
6:208
6.420 50,000
6.420 50,000
6.100 50,000
0
- Treas Bills
03/01/01
5.350
Treas Bills
03/01/01
5.350
REDEMPTIONS
CID GECC
07/17/00
6.420
CID GECC
07/17/00
6.420
CID GMAC
07/17/00
6.140
CID GMAC
07/17/00
6.140
PURCHASES g/
CD Den Danske
6.540%
09/01/00
6.530
CD Den Danske
6.540%
09/01/00
6.530
CID Morg Stan
10/12/00
6.520
07/17/00 PURCHASES
CD U/B Switz
6.800%
01 /29/01
6.795
CD U/B Switz
6.800%
01/29/01
6.795
CID Amer Exp
08/29/00
6.490
CID Amer Exp
08/29/00
6.490
CID Amer Exp
08/29/00
6.490
07/18/00 RRS
Treas Bills
10/12/00
6.090
Treas Bills
10/12/00
6.090
Treas Bills
03/01/01
5.100
Treas Bills
03/01/01
5.100
Treas Bills
03/01/01
5.100
Treas Bills
03/01/01
5.100
REDEMPTIONS
CID ConAgra
07/18/00
6.840
CID ConAgra
07/18/00
6.840
PURCHASES 9/
CD Svenska
6.655%
10/12/00
6.640
CD Svenska
6.655%
10/12/00
6.640
Disc Notes FHLMC
08/15/00
6.390
Disc Notes FHLMC
08/15/00
6.390
Disc Notes FHLMC
08/15/00
6.390
Disc Notes FHLMC
08/15/00
6.390
PURCHASES
50,000
50,000
50,000 3
26,750.00 6.512
50,000 3
26,750.00 6.512
50,000 91
776,027.78 6.323
50,000 91
776,027.78 6.323
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
50,000
38,000 22 158,840.00
50,000 22 209,000.00
50,000
50,000
50,000
50,000
50,000
50,000
6.964
6.964
9
FHLB 7.000% 07/18/01 7.000 50,000
FHLB 7.000% 07/18/01 7.000 50,000
07/19/00 RRS
Treas
Bills
Treas
Bills
Treas
Bills
Treas
Bills
PURCHASES g/
CP
GMAC
CP
GMAC
Disc Notes
FNMA
Disc Notes
FNMA
07/19/00 PURCHASES
CP
GECC
CP
GECC
CP
GECC
CP
Assoc
CP.
Assoc
CP
GMAC
CP
GMAC
07/20/00 RRS
Treas
Bills
Treas
Bills
Treas
Bills
Treas
Bills
REDEMPTIONS
CP
GECC
CP
GECC
CP
GECC
CP
Assoc
CP
Assoc
PURCHASES
g/
CD
Barclays
CD
Barclays
CP
Morg Stan
03/01/01
5.350
50,000
03/01 /01
5.350
50,000
03/01 /01
5.350
50,000
03/01 /01
5.350
50,000
09/01/00
6.490
50,000
09/01/00
6.490
50,000
09/01/00
6.380
50,000
09/01/00
6.380
50,000
07/20/00
6.450
50,000
07/20/00
6.450
50,000
07/20/00
6.450
50,000
07/20/00
6.450
50,000
07/20/00
6.450
50,000
07/27/00
6.460
50,000
07/27/00
6.460
50,000
05/31 /01
5.790
50,000
05/31/01
5.790
50,000
05/31 /01
5.800
50,000
05/31 /01
5.800
50,000
07/20/00
6.450
50,000
1
8,958.33
6.540
07/20/00
6.450
50,000
1
8,958.33
6.540
07/20/00
6.450
50,000
1
8,958.33
6.540
07/20/00
6.450
50,000
1
8,958.33
6.540
07/20/00
6.450
50,000
1
8,958.33
6.540
6.540% 09/01/00 6.530 50,000
6.540% 09/01/00 6.530 50,000
09/01/00 6.490 50,000
10
CP Morg Stan 09/01/00 6.490 50,000
PURCHASES
CP
GECC
07/21/00
6.450
50,000
CP
GECC
07/21/00
6.450
50,000
CP
FMCC
08/03/00
6.480
15,000
CP
FMCC
08/03/00
6.480
50,000
CP
Country
08/04/00
6.530
39,845
CP
Hertz
08/04/00
6.490
50,000
CP
Hertz
08/04/00
6.490
50,000
CP
ConAgra
08/10/00
6.650
20,000
CP
ConAgra
08/11/00
6.650
25,000
PURCHASES .c/
Treas
Notes
6.375% 09/30/01
6.380
2,520
Treas
Notes
5.500% 03/31 /03
6.380
50,000
Treas
Notes
5.500% 03/31 /03
6.380
50,000
07/21/00 REDEMPTIONS
CP
GECC
07/21/00
6.450
50,000
1
8,958.33
6.540
CP
GECC
07/21/00
6.450
50,000
1
8,958.33
6.540
SALES �Q/
Treas
Notes
6.375%
09/30/01
6.380
2,520
1
445.18
6.468
Treas
Notes
5.500%
03/31/03
6.380
50,000
1
8,638.52
6.468
Treas
Notes
5.500%
03/31 /03
6.380
50,000
1
8,638.52
.6.468
PURCHASES
CP
GECC
07/24/00
6.460
50,000
CP
GECC
07/24/00
6.460
50,000
CP
GECC
07/24/00
6.460
50,000
CP
GECC
07/24/00
6.460
50,000
CP
W/F
08/16/00
6.480
50,000
CP
W/F
08/16/00
6.480
50,000
CP
Heller
08/16/00
6.620
50,000
CP
Helier
08/16/00
6.620
50,000
CP
Assoc
08/29/00
6.480
40,000
MTN
AT&T
6.500%
09/15/02
7.110
10,000
07/24/00 REDEMPTIONS
CP
GECC
07/24/00
6.460
50,000
3
26,916.67
6.553
11
CP GECC
07/24/00
6.460
50,000
3
26,916.67
6.553
CP GECC
07/24/00
6.460
50,000
3
26,916.67
6.553
CP GECC
07/24/00
6.460
50,000
3
26,916.67
6.553
CP Heller
07/24/00
6.650
50,000
42
387,916.67
6.795
PURCHASES
CP Country
07/25/00
6.540
46,281
CP Assoc
07/25/00
6.530
50,000
CP Assoc
08/03/00
6.480
50,000
CP Assoc
08/03/00
6.480
50,000
CP GMAC
08/08/00
6.480
40,000
CP GMAC
08/08/00
6.480
50,000
CP GMAC
08/08/00
6.480
50,000
CP Hertz
08/10/00
6.490
50,000
CP Country
08/14/00
6.520
17,000
CP Country
08/14/00
6.520
50,000
CP Heller
08/15/00
6.600
50,000
CP FMCC
08/21/00
6.480
50,000
CP FMCC
08/21 /00
6.480
50,000
07/25/00 REDEMPTIONS
CP Country
07/25/00
6.540
46,281
1
8,407.71
6.632
07/25/00 REDEMPTIONS (continued)
CP Assoc
07/25/00
6.530
50,000
1
9,069.44
6.621
CP SRAC
07/25/00
6.600
50,000
13
119,166.67
6.707
CP Country
07/25/00
6.690
50,000
27
250,875.00
6.817
CP Country
07/25/00
6.690
50,000
27
250,875.00
6.817
NO PURCHASES
07/26/00 RRS
Treas Bills
05/31/01
5.900
50,000
Treas Bills
05/31 /01
5.900
50,000
PURCHASES g/
CD Den Danske 6.525%
09/05/00
6.510
50,000
CD Den Danske 6.525%
09/05/00
6.510
50,000
PURCHASES
CP FMCC
08/29/00
6.480
50,000
CP FMCC
08/29/00
6.480
50,000
CP GECC
08/29/00
6.480
50,000
12
CP GECC 08/29/00 6.480 50,000.
07/27/00 REDEMPTIONS
07/27/00
BN
Banc One
6.130%
07/27/00
6.130
35,000
183
1,090,629.17
6.215
BN
Banc One
6.130%
07/27/00
6.130
50,000
183
1,558,041.67
6.215
BN
B/A
6.110%
07/27/00
6.110
50,000
196
1,663,277.78
6.194
BN
B/A
6.110%
07/27/00
6.110
50,000
196
1,663,277.78
6.194
BN
B/A
6.050%
07/27/00
6.050
50,000
204
1,714,166.67
6.134
BN
B/A
6.050%
07/27/00
6.050
50,000
204
1,714,166.67
6.134
CD
Montreal
6.110%
07/27/00
6.110
5,000
150
127,291.67
6.194
CD
Montreal
6.110%
07/27/00
6.110
50,000
150
1,272,916.67
6.194
CD
ANZ
6.140%
07/27/00
6.130
35,000
174
1,037,040.35
6.215
CD
ANZ
6.140%
07/27/00
6.130
50,000
174
1,481,486.21
6.215
CD
Wachovia
6.100%
07/27/00
6.100
50,000
174
1,474,166.67
6.184
CD
Mellon
6.050%
07/27/00
6.050
35,000
185
1,088,159.72
6.134
CD
Mellon
6.050%
07/27/00
6.050
50,000
185
1,554,513.89
6.134
CD
US Bank
6.100%
07/27/00
6.100
50,000
189
1,601,250.00
6.184
CD
US Bank
6.100%
07/27/00
6.100
50,000
189
1,601,250.00
6.184
CD
Banc One
6.120%
07/27/00
6.120
50,000
191
1,623,500.00
6.120
CD
Banc One
6.120%
07/27/00
6.120
50,000
191
1,623,500.00
6.120
CD
Nova Scot
6.050%
07/27/00
6.050
50,000
199
1,672,152.78
6.134
CD
Nova Scot
6.050%
07/27/00.
6.050
50,000
199
1,672,152.78
6.134
CD
Deutsche
6.060%
07/27/00
6.050
50,000
199
1,672,242.22
6.134
CD
Deutsche
6.060%
07/27/00
6.050
50,000
199
1,672,242.22
6.134
CD
BNParis
6.090%
07/27/00
6.085
50,000
202
1,707,226.87
6.169
CD
BNParis
6.090%
07/27/00
6.080
50,000
203
1,714,315.72
6.164
REDEMPTIONS (continued)
CD
BNParis
6.090%
07/27/00
6.080
50,000
203
1,714,315.72
6.164
CD
Banc One
6.100%
07/27/00
6.100
50,000
203
1,719,861.11
6.184
CD
Banc One
6.100%
07/27/00
6.100
50,000
203
1,719,861.11
6.184
CD
Soc Gen
6.110%
07/27/00
6.105
50,000
204
1,729,797.37
6.189
CD
Soc Gen
6.110%
07/27/00
6.105
50,000
204
1,729,797.37
6.189
CD
Bayer Ver
6.070%
07/27/00
6.065
50,000
205
1,726,887.80
6.149
CD
Bayer Ver
6.070%
07/27/00
6.065
50,000
205
1,726,887.80
6.149
CD
CIBC
6.090%
07/27/00
6.090
50,000
205
1,733,958.33
6.174
CD
CIBC
6.090%
07/27/00
6.090
50,000
205
1,733,958.33
6.174
CP
GMAC
07/27/00
6.460
50,000
8
71,777.78
6.559
CID
GMAC
07/27/00
6.460
50,000
8
71,777.78
6.559
CID
Enron
07/27/00
6.750
50,000
29
271,875.00
6.881
CP
GMAC
07/27/00
6.390
50,000
86
763,250.00
6.579
CP
GMAC
07/27/00
6.390
50,000
86
763,250.00
6.579
CID
Bear
07/27/00
6.140
25,000
100
426,388.89
6.333
Disc Notes
FNMA
07/27/00
6.150
10,000
91
155,458.33
6.333
Disc Notes
FNMA
07/27/00
6.150
50,000
91
777,291.67
6.333
Disc Notes
FNMA
07/27/00
6.150
50,000
91
777,291.67
6.333
13
PURCHASES
CP
ConAgra
08/29/00
CP
GMAC
08/29/00
CP
GMAC
08/29/00
CP
GMAC
08/29/00
07/28/00 RRS
Treas
Bills
05/31 /01
Treas
Bills
05/31 /01
Treas
Bills
05/31 /01
Treas
Bills
05/31 /01
PURCHASES g/
CD
CommerzBk
6.560%
09/07/00
CD
CommerzBk
6.560%
09/07/00
CP
Morg Stan
09/07/00
CP
Morg Stan
09/07/00
PURCHASES
CP
SRAC
08/10/00
CP
Country
08/11 /00
CP
Amer Exp
08/16/00
CP
Amer Exp
08/16/00
CP
Amer Exp
08/16/00
CP
Amer Exp
08/16/00
CP
Merrill
08/29/00
07/28/00 PURCHASES (continued) '
CP
Merrill
08/29/00
CP
Household
08/29/00
CP
Household
08/29/00
CP
GMAC
09/01 /00
CP
GMAC
09/01 /00
CID
GMAC
09/01 /00
CP
FMCC
09/01 /00
CP
FMCC
09/01 /00
07/31/00 REDEMPTIONS
BN
Banc One
6.150%
07/31/00
BN
Banc One
6.150%
07/31/00
BN
Banc One
6.120%
07/31/00
BN
Banc One
6.120%
07/31/00
BN
Banc One
6.120%
07/31/00
6.650
27,300
6.490
50,000
6.490
50,000
6.490
50,000
5.930
50,000
5.930
50,000
5.950
50,000
5.950
50,000
6.550
50,000
6.550
50,000
6.480
50,000
6.480
50,000
6.600
50,000
6.540
45,000
6.480
50,000
6.480
50,000
6.480
50,000
6.480
50,000
6.480
18,000
6.480
50,000
6.490
50,000
6.490
50,000
6.490
15,000
6.490
50,000
6.490
50,000
6.470
50,000
6.470
50,000
6.150
50,000
200
1,708,333.33
6.235
6.150
50,000
200
1,708,333.33
6.235
6.120
50,000
203
1,725,500.00
6.205
6.120
50,000
203
1,725,500.00
6.205
6.120
50,000
206
1,751,000.00
6.205
14
BN Banc One 6.120% 07/31 /00 6.120 50,000 206 1,751,000.00 6.205
NO PURCHASES
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 securites 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 DEPOSITS
DEPOSIT PAR MATURITY
NAME DATE YIELD AMOUNT ($) DATE
AGOURA HILLS
Pacific Crest Bank
06/01/00
5.790
5,000,000.00
08/31/00
Pacific Crest Bank
07/06/00
6.030
8,000,000.00
10/04/00
Pacific Crest Bank
10/12/99
5.390
5,000,000.00
10/16/00
Pacific Crest Bank
07/17/00
6.220
5,000,000.00
10/16/00
Pacific Crest Bank
11/30/99
5.740
5,000,000.00
12/01/00
Pacific Crest Bank
12/28/99
5.980
5,000,000.00
12/27/00
ALHAMBRA
Grand National Bank
05/08/00
5.950
3,000,000.00
08/07/00
Grand National Bank
03/06/00
6.060
3,000,000.00
09/06/00
Grand National Bank
07/20/00
6.360
3,095,000.00
01 /16/01
Grand National Bank
06/23/00
6.170
1,000,000.00
06/25/01
Grand National Bank
07/14/00
6.120
2,000,000.00
07/13/01
Omni -Bank
05/30/00
5.870
2,000,000.00
08/30/00
Omni Bank
06/05/00
5.750
6,000,000.00
09/05/00
Omni Bank
07/31/00
6.230
300,000.00
10/30/00
Omni Bank
07/24/00
6.140
1,000,000.00
10/30/00
ARROYO GRANDE
Mid -State Bank
07/17/00
6.270
5,000,000.00
10/16/00
Mid -State Bank
07/17/00
6.270
5,000,000.00
01/12/01
BEVERLY HILLS
City National Bank
09/15/99
5.280
20,000,000.00
09/15/00
City National Bank
03/31/00
6.200
50,000,000.00
09/29/00
City National Bank
10/12/99
5.360
25,000,000.00
10/16/00
City National Bank
05/03/00
6.170
25,000,000.00
10/31/00
City National Bank
02/28/00
6.220
20,000,000.00
02/28/01
CAMERON PARK
Western Sierra National Bank
02/03/00
6.040
3,000,000.00
08/01/00
CHICO
North State National Bank
08/24/99
5.210
1,000,000.00
08/24/00
North State National Bank
09/07/99
5.240
500,000.00
09/01/00
North State National Bank
08/30/99
5.160
1,000,000.00
09/01/00
North State National Bank
07/07/00
6.220
3,000,000.00
01/05/01
North State National Bank
04/06/00
6.170
1,000,000.00
04/06/01
17
NAME
CHICO (continued
North State National Bank
Tri Counties Bank
Tri Counties Bank
Tri Counties Bank
Tri Counties Bank
CITY OF INDUSTRY
EverTrust Bank
EverTrust Bank
EverTrust Bank
EverTrust Bank
EverTrust Bank
DUBLIN
Operating Engineers FCU
Operating Engineers FCU
EL CENTRO
Valley Independent Bank
Valley Independent Bank
Valley Independent Bank
Valley Independent Bank
FRESNO
United Security Bank
United Security Bank
FULLERTON
Fullerton Community Bank
Fullerton Community Bank
INGLEWOOD
Imperial Bank
Imperial Bank
Imperial Bank
Imperial Bank
TIME DEPOSITS
DEPOSIT PAR
DATE YIELD AMOUNT ($)
04/07/00
06/07/00
06/13/00
06/20/00
07/10/00
06/12/00
06/19/00
06/26/00
01 /20/00
07/18/00
6.170
6.050
5.930
5.850
6.050
5.910
5.790
5.830
6.050
6.110
1,000,000.00
10,000,000.00
10,000,000.00
10,000,000.00
10,000,000.00
1,000,000.00
3,000,000.00
2,000,000.00
3,000,000.00
3,000,000.00
MATURITY
DATE
04/06/01
09/06/00
09/12/00
09/19/00
10/10/00
09/11 /00
09/11 /00
09/25/00
10/16/00
07/18/01
06/19/00
5.830
10,000,000.00
09/19/00
06/02/00
6.290
5,000,000.00
11 /30/00
08/11/99
5.250
3,750,000.00
08/11/00
05/02/00
6.140
15,000,000.00
10/31/00
07/31 /00
6.330
5,000,000.00
01 /29/01
05/15/00
6.410
3,750,000.00
05/15/01
05/17/00
6.120
10,000,000.00
08/15/00
07/31 /00
6.240
15,000,000.00
11 /01 /00
05/22/00
5.950
9,000,000.00
08/21 /00
01/19/00
6.160
8,000,000.00
01/19/01
02/24/00
6.040
18,000,000.00
08/10/00
01 /27/00
5.930
25,000,000.00
08/17/00
03/02/00
6.110
25,000,000.00
09/14/00
02/03/00
6.120
50,000,000.00
09/14/00
18
TIME DEPOSITS
DEPOSIT PAR MATURITY
NAME DATE YIELD AMOUNT ($) DATE
INGLEWOOD (continued)
Imperial Bank
04/13/00
6.100
20,000,000.00
10/05/00
Imperial Bank
03/09/00
6.190
25,000,000.00
10/12/00
Imperial Bank
05/18/00
6.420
25,000,000.00
10/19/00
Imperial Bank
06/13/00
6.140
15,000,000.00
11/02/00
Imperial Bank
03/30/00
6.320
18,000,000.00
11/09/00
Imperial Bank
05/25/00
6.460
25,000,000.00
11/16/00
Imperial Bank
04/27/00
6.150
26,000,000.00
12/07/00
Imperial Bank
07/06/00
6.260
25,000,000.00
02/01/01
Imperial Bank
06/22/00
6.010
20,000,000.00
03/01/01
LAGUNA HILLS
Eldorado Bank
07/25/00
6.190
20,000,000.00
10/23/00
LODI
Bank of Lodi
05/16/00
6.150
2,000,000.00
08/14/00
Bank of Lodi
06/22/00
5.850
3,000,000.00
09/21/00
Farmers & Merchant Bk Cen CA
07/06/00
6.000
10,000,000.00
10/04/00
LOS ANGELES
Broadway Federal Bank
09/29/99
5.230
2,500,000.00
10/02/00
Broadway Federal Bank
06/30/00
6.250
1,250,000.00
01/08/01
Broadway Federal Bank
07/07/00
6.230
1,250,000.00
01 /08/01
California Chohung Bank
07/19/00
6.320
1,000,000.00
01/17/01
Cathay Bank
06/19/00
5.840
9,000,000.00
09/19/00
Cathay Bank
06/28/00
5.860
10,000,000.00
09/26/00
Eastern International Bank
05/09/00
6.380
900,000.00
11/06/00
General Bank
04/28/00
5.800
28,000,000.00
08/01/00
General Bank
05/02/00
5.840
15,000,000.00
08/02/00
General Bank
05/15/00
6.190
15,000,000.00
08/08/00
General Bank
06/01/00
5.800
10,000,000.00
08/30/00
General Bank
06/08/00
6.010
25,000,000.00
09/08/00
General Bank
07/24/00
6.210
7,000,000.00
10/23/00
Hanmi Bank
06/27/00
6.210
25,000,000.00
01/02/01
Manufacturers Bank
05/08/00
5.960
10,000,000.00
08/07/00
Manufacturers Bank
06/05/00
5.750
10,000,000.00
09/05/00
Manufacturers Bank
03/13/00
6.110
10,000,000.00
09/11/00
Manufacturers Bank
06/26/00
5.860
10,000,000.00
09/25/00
Preferred Bank
05/15/00
6.170
4,000,000.00
08/14/00
Preferred Bank
05/31/00
5.780
7,000,000.00
08/30/00
Preferred Bank
06/12/00
5.920
9,000,000.00
09/11/00
Preferred Bank
06/20/00
5.830
9,000,000.00
09/18/00
W,
TIME DEPOSITS
DEPOSIT PAR MATURITY
NAME DATE YIELD AMOUNT ($) DATE
LOS ANGELES (continued
Preferred Bank
07/03/00
5.860
3,000,000.00
10/02/00
Preferred Bank
07/17/00
6.180
3,000,000.00
10/16/00
Sae Han Bank
04/20/00
6.040
3,000,000.00
10/17/00
State Bank of India
11/19/99
5.600
2,000,000.00
11/30/00
State Bank of India
01/20/00
6.110
2,000,000.00
01/19/01
State Bank of India
06/12/00
6.230
2,000,000.00
06/12/01
Wilshire State Bank
08/31/99
5.290
4,000,000.00
08/31/00
Wilshire State Bank
01/12/00
6.090
4,000,000.00
01/12/01
Wilshire State Bank
03/17/00
6.230
4,000,000.00
03/19/01
Wilshire State Bank
04/18/00
6.090
5,000,000.00
04/18/01
Wilshire State Bank
05/17/00
6.370
2,000,000.00
05/17/01
Wilshire State Bank
06/07/00
6.290
2,000,000.00
06/07/01
MERCED
County Bank
03/15/00
6.180
5,000,000.00
09/11/00
County Bank
04/20/00
6.050
5,000,000.00
10/17/00
County Bank
07/19/00
6.340
5,000,000.00
01/18/01
County Bank
03/09/00
6.200
5,000,000.00
03/09/01
MONTEREY PARK
Trust Bank FSB
03/27/00
6.180
4,000,000.00
10/02/00
Trust Bank FSB
06/26/00
6.220
2,000,000.00
01/02/01
NORWALK
Cerritos Valley Bank
06/01/00
5.780
2,000,000.00
08/30/00
Cerritos Valley Bank
07/06/00
6.020
1,000,000.00
10/05/00
OAKDALE
Oak Valley Community Bank
02/04/00
5.830
500,000.00
08/02/00
Oak Valley Community Bank
08/10/99
5.220
500,000.00
08/09/00
Oak Valley Community Bank
05/22/00
5.940
500,000.00
08/21/00
Oak Valley Community Bank
09/27/99
5.190
500,000.00
09/29/00
Oak Valley Community Bank
06/30/00
5.830
1,000,000.00
09/29/00
Oak Valley Community Bank
07/31/00
6.230
1,000,000.00
10/31/00
Oak Valley Community Bank
05/01/00
6.090
1,000,000.00
10/31/00
Oak Valley Community Bank
03/24/00
6.230
1,000,000.00
03/23/01
20
TIME DEPOSITS
DEPOSIT PAR MATURITY
NAME DATE YIELD AMOUNT ($) DATE
ONTARIO
Citizens
Business
Bank
08/10/99
5.220
10,000,000.00
08/09/00
Citizens
Business
Bank
03/22/00
6.180
10,000,000.00
09/18/00
Citizens
Business
Bank
04/06/00
6.160
10,000,000.00
10/05/00
Citizens
Business
Bank
04/06/00
6.160
10,000,000.00
10/05/00
Citizens
Business
Bank
05/10/00
6.480
10,000,000.00
11/06/00
Citizens
Business
Bank
05/25/00
6.450
20,000,000.00
12/07/00
Citizens
Business
Bank
06/15/00
6.260
10,000,000.00
12/15/00
Citizens
Business
Bank
07/06/00
6.270
5,000,000.00
01/12/01
Citizens
Business
Bank
03/08/00
6.240
5,000,000.00
03/08/01
PALM SPRINGS
Canyon
National Bank
06/16/00
5.860
95,000.00
09/14/00
PALO ALTO
Bay Area Bank
05/05/00
5.940
5,000,000.00
08/04/00
Bay Area Bank
07/26/00
6.300
5,000,000.00
01/22/01
Bay Bank of Commerce
05/05/00
5.940
5,000,000.00
08/04/00
Coast Commercial Bank
06/12/00
5.940
20,000,000.00
09/11/00
Coast Commercial Bank
07/20/00
6.240
5,000,000.00
10/18/00
Cupertino National Bank
02/04/00
5.870
10,000,000.00
08/02/00
Cupertino National Bank
05/05/00
5.940
25,000,000.00
08/04/00
Cupertino National Bank
06/05/00
5.750
20,000,000.00
09/01/00
Cupertino National Bank
03/22/00
6.180
10,000,000.00
09/18/00
Golden Gate Bank
06/05/00
5.750
9,000,000.00
09/01/00
Mid -Peninsula Bank
02/04/00
5.870
15,000,000.00
08/02/00
Mid -Peninsula Bank
05/05/00
5.940
20,000,000.00
08/04/00
Mid -Peninsula Bank
06/05/00
5.750
5,000,000.00
09/01/00
Mid -Peninsula Bank
03/24/00
6.150
10,000,000.00
09/20/00
Peninsula Bank of Commerce
03/13/00
6.110
15,000,000.00
09/11/00
PALOS VERDES ESTATES
Malaga Bank 03/28/00 6.250 6,000,000.00 09/26/00
Malaga Bank 07/19/00 6.350 2,000,000.00 01/19/01
PASADENA
Community Bank
08/11/99
5.230
15,000,000.00
08/11/00
Community Bank
10/25/99
5.490
5,000,000.00
10/27/00
Community Bank
12/07/99
5.700
5,000,000.00
12/08/00
Community Bank
12/13/99
5.650
10,000,000.00
12/15/00
21
TIME DEPOSITS
DEPOSIT
PAR
MATURITY
NAME
DATE
YIELD
AMOUNT ($)
DATE
PASADENA (continued)
Community Bank
01/10/00
6.040
20,000,000.00
01/12/01
Community Bank
06/22/00
6.110
5,000,000.00
06/22/01
PETALUMA
Bank of Petaluma
07/24/00
6.200
2,500,000.00
10/23/00
Bank of Petaluma
02/07/00
6.210
1,000,000.00
02/07/01
PICO RIVERA
Pacific West National Bank
11 /23/99
5.650
1,000,000.00
11 /30/00
PLACERVILLE
El Dorado Savings Bank
02/08/00
6.230
5,000,000.00
02/08/01
El Dorado Savings Bank
03/22/00
6.250
5,000,000.00
03/22/01
El Dorado Savings Bank
04/13/00
6.150
5,000,000.00
04/13/01
El Dorado Savings Bank
05/02/00
6.180
5,000,000.00
05/02/01
El Dorado Savings Bank
06/16/00
6.150
5,000,000.00
06/18/01
POMONA
PFF Bank and Trust
11/30/99
5.900
8,000,000.00
12/01/00
PFF Bank and Trust
03/10/00
6.450
10,000,000.00
03/09/01
PORTERVILLE
Bank of the Sierra
07/28/00
6.300
10,000,000.00
01/24/01
RED BLUFF
Tehama Bank
06/08/00
5.980
4,000,000.00
09/08/00
Tehama Bank
06/28/00
6.260
5,000,000.00
01/05/01
REDDING
North Valley Bank
03/22/00
6.190
3,000,000.00
09/18/00
RICHMOND
Mechanics Bank
08/12/99
5.250
10,000,000.00
08/11/00
Mechanics Bank
10/07/99
5.330
10,000,000.00
10/13/00
Mechanics Bank
03/07/00
6.230
10,000,000.00
03/07/01
22
TIME DEPOSITS
DEPOSIT PAR MATURITY
NAME DATE YIELD AMOUNT ($) DATE
RICHMOND_(continued
Mechanics Bank
04/04/00
6.260
10,000,000.00
04/06/01
Mechanics Bank
04/25/00
6.080
10,000,000.00
04/25/01
Mechanics Bank
05/05/00
6.190
10,000,000.00
05/07/01
Mechanics Bank
06/12/00
6.230
10,000,000.00
06/12/01
SACRAMENTO
American River Bank
03/27/00
6.200
3,000,000.00
09/26/00
American River Bank
04/03/00
6.190
1,000,000.00
10/02/00
American River Bank
12/28/99
5.960
1,000,000.00
12/27/00
American River Bank
06/26/00
6.180
1,000,000.00
06/26/01
Bank of Sacramento
02/16/00
6.240
1,000,000.00
02/16/01
Bank of Sacramento
03/03/00
6.290
500,000.00
03/05/01
Golden One Credit Union
07/28/00
6.160
10,000,000.00
10/27/00
Golden One Credit Union
03/24/00
6.180
20,000,000.00
03/23/01
Golden One Credit Union
06/08/00
6.230
20,000,000.00
06/08/01
Merchants National Bank
07/24/00
6.120
2,000,000.00
10/24/00
Merchants National Bank
07/24/00
6.270
2,000,000.00
01/22/01
River City Bank
08/18/99
5.210
5,000,000.00
08/18/00
River City Bank
04/10/00
6.170
5,000,000.00
10/06/00
River City Bank
01/31/00
6.140
5,000,000.00
10/27/00
Sanwa Bank of California
08/16/99
5.190
50,000,000.00
08/15/00
Sanwa Bank of California
08/23/99
5.180
10,000,000.00
08/22/00
Sanwa Bank of California
07/14/00
6.280
10,000,000.00
01 /10/01
Sanwa Bank of California
02/07/00
6.180
7,000,000.00
02/09/01
Sanwa Bank of California
07/26/00
6.290
5,000,000.00
07/26/01
Union Bank of California
03/28/00
6.220
100,000,000.00
09/25/00
Union Bank of California
04/25/00
6.000
50,000,000.00
10/24/00
Union Bank of California
05/02/00
6.130
100,000,000.00
10/31/00
Union Bank of California
05/16/00
6.530
50,000,000.00
11/14/00
Union Bank of California
05/23/00
6.380
100,000,000.00
11/21/00
SALINAS
Community Bk Central California
05/31/00
5.770
10,000,000.00
08/31/00
Community Bk Central California
06/06/00
5.870
8,000,000.00
09/07/00
Community Bk Central California
07/26/00
6.160
12,000,000.00
10/24/00
Community Bk Central California
07/31/00
6.210
10,000,000.00
11/06/00
23
NAME
SAN DIEGO
TIME DEPOSITS
DEPOSIT PAR MATURITY
DATE YIELD AMOUNT ($) DATE
First United Bank
11/30/99
5.700
1,500,000.00
12/01/00
First United Bank
06/21/00
6.110
1,500,000.00
06/21/01
Mission Federal Credit Union
06/23/00
5.840
10,000,000.00
09/21/00
Neighborhood National Bank
02/02/00
6.240
1,000,000.00
02/09/01
San Diego First Bank
08/04/99
5.150
1,000,000.00
08/07/00
Scripps Bank
06/19/00
5.840
5,000,000.00
09/18/00
Scripps Bank
06/27/00
5.880
5,000,000.00
10/02/00
Scripps Bank
06/21/00
6.100
10,000,000.00
11/02/00
Scripps Bank
06/15/00
6.260
5,000,000.00
12/12/00
SAN FRANCISCO
Bank of Canton California
09/01/99
5.280
5,000,000.00
09/01/00
Bank of Canton California
11/10/99
5.430
15,000,000.00
09/01/00
Bank of Canton California
09/13/99
5.290
5,000,000.00
09/13/00
Bank of Canton California
05/12/00
6.400
5,000,000.00
11/02/00
Bank of Canton California
05/05/00
6.240
5,000,000.00
11/03/00
Bank of Canton California
11/10/99
5.460
10,000,000.00
11/10/00
Bank of Canton California
07/21/00
6.310
5,000,000.00
01/12/01
Bank of Canton California
05/31/00
6.430
10,000,000.00
01/12/01
Bank of Canton California
05/22/00
6.230
10,000,000.00
05/22/01
Bank of the West
05/22/00
5.930
50,000,000.00
08/21/00
Bank of the West
03/02/00
6.070
50,000,000.00
09/01/00
Bank of the West
04/14/00
6.170
50,000,000.00
04/16/01
Bank of the West
05/01/00
6.140
25,000,000.00
04/27/01
Bank of the West
04/28/00
6.140
51,500,000.00
04/27/01
Bank of the West
05/05/00
6.190
25,000,000.00
05/04/01
Bank of the West
05/16/00
6.400
25,000,000.00
05/18/01
Bank of the West
05/25/00
6.230
142,000,000.00
05/25/01
Bank of the West
07/03/00
6.080
34,000,000.00
07/06/01
California Federal Bank
01/05/00
6.080
8,000,000.00
01/05/01
California Federal Bank
07/17/00
6.290
100,000,000.00
01/17/01
Millennium Bank
06/01/00
5.790
1,000,000.00
08/30/00
Millennium Bank
03/03/00
6.090
1,000,000.00
08/30/00
Millennium Bank
05/01/00
6.110
2,000,000.00
10/31/00
Millennium Bank
07/31/00
6.340
1,000,000.00
01/29/01
Oceanic Bank
03/07/00
6.230
2,000,000.00
03/15/01
Oceanic Bank
03/15/00
6.210
2,000,000.00
03/15/01
Trans Pacific National Bank
03/17/00
6.250
800,000.00
03/19/01
United Commercial Bank
05/11/00
6.130
20,000,000.00
08/10/00
United Commercial Bank
09/03/99
5.310
20,000,000.00
09/01/00
24
NAME
SAN FRANCISCO _(continued
United Commercial Bank
United Commercial Bank
United Commercial Bank
United Commercial Bank
SAN JOSS
Heritage Bank of Commerce
Meriwest Credit Union
Santa Clara Co. Fed. C.U.
SAN LUIS OBISPO
First Bank of San Luis Obispo
First Bank of San Luis Obispo
First Bank of San Luis Obispo
First Bank of San Luis Obispo
First Bank of San Luis Obispo
First Bank of San Luis Obispo
Mission Community Bank
Mission Community Bank
San Luis Trust Bank
San Luis Trust Bank
SAN MARINO
East West Federal Bank
East West Federal Bank
East West Federal Bank
East West Federal Bank
SAN RAFAEL
Westamerica Bank
Westamerica Bank
Westamerica Bank
Westamerica Bank
Westamerica Bank
Westamerica Bank
Westamerica Bank
TIME DEPOSITS
DEPOSIT PAR MATURITY
DATE YIELD AMOUNT ($) DATE
07/07/00
6.020
30,000,000.00
10/06/00
10/07/99
5.360
10,000,000.00
10/13/00
07/26/00
6.300
20,000,000.00
01 /22/01
03/20/00
6.240
25,000,000.00
03/20/01
05/22/00 5.930 2,000,000.00 08/21/00
07/26/00 6.310 14,000,000.00 01 /22/01
05/12/00 6.140 15,000,000.00 08/10/00
05/05/00
5.950
3,600,000.00
08/03/00
05/10/00
6.180
2,000,000.00
08/08/00
05/22/00
5.940
2,500,000.00
08/21/00
06/19/00
5.850
5,000,000.00
09/18/00
07/12/00
6.130
1,000,000.00
10/10/00
07/24/00
6.140
1,000,000.00
10/23/00
07/10/00
6.050
1,000,000.00
10/10/00
01 /10/00
6.060
500,000.00
01 /12/01
01 /31 /00
5.930
1,000,000.00
08/04/00
07/11/00
6.240
350,000.00
01/08/01
04/13/00
5.840
35,000,000.00
08/03/00
05/11/00
6.120
38,000,000.00
08/09/00
07/05/00
5.880
12,000,000.00
10/05/00
05/04/00
6.200
35,000,000.00
05/04/01
01 /31 /00
5.910
25,000,000.00
08/07/00
06/19/00
5.830
25,000,000.00
09/19/00
07/25/00
6.160
25,000,000.00
10/25/00
07/31 /00
6.310
25,000,000.00
01 /30/01
04/18/00
6.080
25,000,000.00
04/18/01
05/15/00
6.400
50,000,000.00
05/15/01
07/14/00
6.080
25,000,000.00
07/13/01
25
TIME DEPOSITS
DEPOSIT
PAR
MATURITY
NAME
DATE
YIELD
AMOUNT ($)
DATE
SAN RAMON
EBTEL Federal Credit Union
07/06/00
6.030
1,750,000.00
10/06/00
EBTEL Federal Credit Union
07/06/00
6.240
1,750,000.00
01/05/01
SANTA BARBARA
FNB of Central California
02/07/00
5.870
5,000,000.00
08/07/00
FNB of Central California
03/31/00
6.080
5,000,000.00
08/07/00
FNB of Central California
06/07/00
6.050
10,000,000.00
09/07/00
FNB of Central California
04/21/00
6.040
10,000,000.00
10/18/00
FNB of Central California
07/10/00
6.230
10,000,000.00
01/08/01
Santa Barbara Bank & Trust
01/21/00
5.900
5,000,000.00
08/11/00
Santa Barbara Bank & Trust
02/11/00
6.030
5,000,000.00
08/11/00
Santa Barbara Bank & Trust
03/03/00
6.070
5,000,000.00
09/08/00
Santa Barbara Bank & Trust
03/17/00
6.170
5,000,000.00
09/08/00
Santa Barbara Bank & Trust
04/07/00
6.160
5,000,000.00
10/10/00
Santa Barbara Bank & Trust
04/17/00
6.100
5,000,000.00
10/10/00
Santa Barbara Bank & Trust
07/14/00
6.290
10,000,000.00
01/10/01
Santa Barbara Bank & Trust
07/21/00
6.250
10,000,000.00
01/22/01
Santa Barbara Bank & Trust
06/09/00
6.260
10,000,000.00
06/08/01
Santa Barbara Bank & Trust
07/07/00
6.080
10,000,000.00
07/06/01
SANTA CLARA
Bank of Santa Clara
05/12/00
6.140
9,000,000.00
08/10/00
Bank of Santa Clara
05/23/00
5.880
5,000,000.00
08/22/00
Bank of Santa Clara
03/17/00
6.170
2,000,000.00
09/13/00
Bank of Santa Clara
03/17/00
6.230
2,000,000.00
03/19/01
SANTA CLARITA
Valencia Bank & Trust
09/23/99
5.280
1,000,000.00
9/22/00
SANTA ROSA
National Bank of the Redwoods
05/03/00
6.250
10,000,000.00
10/30/00
STOCKTON
Pacific State Bank
07/18/00
6.200
1,000,000.00
10/16/00
Pacific State Bank
07/18/00
6.340
1,000,000.00
01/12/01
26
TIME DEPOSITS
DEPOSIT PAR MATURITY
NAME DATE YIELD AMOUNT ($) DATE
STOCKTON (continued)
Union Safe Deposit Bank
05/16/00
6.170
10,000,000.00
08/14/00
Union Safe Deposit Bank
03/15/00
6.260
10,000,000.00
03/15/01
Union Safe Deposit Bank
04/13/00
6.200
10,000,000.00
04/13/01
Washington Mutual Bank
09/17/99
5.260
15,000,000.00
09/15/00
Washington Mutual Bank
03/21/00
6.160
15,000,000.00
09/15/00
Washington Mutual Bank
10/13/99
5.370
15,000,000.00
10/27/00
Washington Mutual Bank
04/21/00
6.030
15,000,000.00
10/27/00
Washington Mutual Bank
11/08/99
5.420
15,000,000.00
11/13/00
Washington Mutual Bank
06/01/00
6.330
15,000,000.00
11/13/00
Washington Mutual Bank
12/20/99
5.940
15,000,000.00
12/28/00
Washington Mutual Bank
07/14/00
6.120
15,000,000.00
01/23/01
Washington Mutual Bank
07/14/00
6.250
15,000,000.00
01/23/01
Washington Mutual Bank
02/18/00
6.210
15,000,000.00
02/22/01
SUNNYVALE
Asiana Bank
TORRANCE
07/07/00 6.050 1,500,000.00 10/06/00
China Trust Bank (USA)
05/15/00
6.190
5,000,000.00
08/14/00
China Trust Bank (USA)
05/15/00
6.190
5,000,000.00
08/14/00
China Trust Bank (USA)
06/05/00
5.750
10,000,000.00
09/05/00
China Trust Bank (USA)
06/07/00
6.050
10,000,000.00
09/05/00
China Trust Bank (USA)
06/16/00
5.850
5,000,000.00
09/14/00
China Trust Bank (USA)
07/07/00
6.020
10,000,000.00
10/06/00
China Trust Bank (USA)
07/24/00
6.210
15,000,000.00
10/23/00
South Bay Bank
06/12/00
5.940
2,000,000.00
09/13/00
South Bay Bank
05/01/00
6.090
2,000,000.00
10/31/00
South Bay Bank
07/17/00
6.32
2,000,000.00
01/16/01
South Bay Bank
07/31 /00
6.330
1,000,000.00
01 /29/01
TUSTIN
First Fidelity Investment & Loan
05/11/00
6.120
6,000,000.00
08/10/00
First Fidelity Investment & Loan
07/17/00
6.180
10,000,000.00
10/17/00
First Fidelity Investment & Loan
07/27/00
6.290
4,000,000.00
01/25/01
First Fidelity Investment & Loan
03/01/01
6.210
15,000,000.00
03/01/01
Sunwest Bank
03/08/00
6.100
1,000,000.00
09/08/00
Sunwest Bank
07/17/00
6.040
3,500,000.00
10/12/00
Sunwest Bank
07/19/00
6.180
2,500,000.00
10/20/00
Sunwest Bank
07/31/00
6.310
2,500,000.00
01/25/01
Sunwest Bank
07/27/00
6.290
3,300,000.00
01/25/01
27
TIME DEPOSITS
DEPOSIT PAR
NAME DATE YIELD AMOUNT ($)
WATSONVILLE
Monterey Bay Bank 07/06/00
WHITTIER
Quaker City Bank 06/06/00
Quaker City Bank 07/03/00
Quaker City Bank 07/12/00
Quaker City Bank 04/18/00
5.940 8,000,000.00
5.900
25,000,000.00
5.830
15,000,000.00
6.260
7,000,000.00
6.090
8,000,000.00
TOTAL TIME DEPOSITS AS OF 07/31/00 3,747,440,000.00
MATURITY
DATE
09/29/00
09/08/00
10/02/00
01 /08/01
04/18/01
28
BANK DEMAND DEPOSITS
J U LY 2000
($ in thousands)
DAY OF
BALANCES
WARRANTS
MONTH
PER BANKS
OUTSTANDING
1
$ 773,395
$ 2,722,408
2
773,395
2,722,408
3
787,917 "
3,504,830
4
787,917
3,504,830
5
733,151
5,817,758
6
266,033
5,428,369
7
232,059
5,455,620
8
232,059
514559620
9
232,059
5,455,620
10
387,430
5,327,106
11
192,552
5,268,944
12
291,367
5,254,956
13
255,103
5,267,880
14
148,504
5,262,390
15
148,504
5,262,890
16
148,504
59269,337
17
291,378
5,020,302
18
526,403
5,055,420
19
364,218
5,037,551
20
306,335
5,196,922
21
392,459
4,736,590
22
392,459
4,736,590
23
392,459
4,736,590
24
219579
4,6579812
25
454,247
4,958,252
26
174,250
4,863,536
27
149,523
4,859,992
28
339073
4,750,445
29
33,073
4,750,445
30
33,073
4,750,445
31
587,268
4,373,672
AVERAGE DOLLAR DAYS a/
a/ The prescribed bank balance for July was $348,318 . This consisted of
$178,457 in compensating balances for services, balances for uncollected
funds of $173,773 and a deduction of $3,912 for June delayed deposit
credit.
29
DESIGNATION BY POOLED MONEY INVESTMENT BOARD
OF TREASURY POOLED MONEY INVESTMENTS AND DEPOSITS
No. 1613
In accordance with sections 16480 through 16480.8 of the Government Code, the Pooled Money Investment Board, at its
meeting on July 19, 2000, 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-
actions, 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
$ 176,368,000
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 heavy 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 Transactions
( 1) 07/17/2000 07/21 /2000
(2) 07/24/2000 07/28/2000
(3) 07/31/2000 08/04/2000
(4) 08/07/2000 08/11/2000
(5) 08/14/2000 08/18/2000
$ 500,000,000
$ (628,700,000)
$ 272,700,000
$ 6,400,000
$ 357,700,000
Time Deposits in
Various Financial
Institutions
In Securities
(sections 16503a
(section 16430)*
and 16602)*
$ 38,331,660,000
$ 3,700,440,000
$ 37,702,960,000
$ 3,700,440,000
$ 37,975,660,000
$ 3,700,440,000
$ 37,982,060,000
$ 3,700,440,000
$ 38,339,760,000
$ 3,700,440,000
Estimated
Total
$ 42,032,100,000
$ 41,403,400,000
$ 41,676,100,000
$ 41,682,500,000
$ 42,040,200,000
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 $ 176,368,000.
Dated: July 19, 2000
* Government Code
POOLED MONEY INVESTMENT BOARD:
Chairperson n
Member I ��--'
30
Member
+s,