(4) Effective January 1994, FASB 115 changed the accounting treatment afforded the Company's investment portfolio wherein unrealized gains and losses on securities designated by the Company as available for sale are included net of deferred taxes, as a component of stockholders' equity.
Fremont has interests in large syndicated loans which are originated and serviced by other financial institutions. Syndicated loans generally carry lower yields than the Company's commercial finance loans since the borrowers under syndicated loans tend to be larger companies whose credit quality is generally higher than borrowers under the Company's commercial finance loans. These loans are secured by various assets of the borrower and, if applicable, of its subsidiaries. The syndicated loans are variable rate loans and are originated on both a revolving and fixed-term basis. The term loans are generally issued with terms not in excess of ten years. The Company finances these loans using thrift deposits, as well as financing through an unsecured revolving line of credit with a syndicated bank group, which is also used to finance Fremont's commercial finance loans that are not financed under the Company's asset securitization program. (See "Liquidity and Capital Resources.") The syndicated loan portfolio has grown to $360.2 million at December 31, 1998 from $146.8 million at December 31, 1997. This growth has been achieved primarily from development of the customer base through referrals from various financial institutions. (See "Item 1. Business -- Financial Services Operation -- Syndicated Loans.")
Fremont is subject to market risk resulting primarily from fluctuations in interest rates arising from balance sheet financial instruments such as investments, loans and debt. In the property and casualty insurance operation, the greatest interest rate risk exposure occurs where the interest rate of the financial instrument is fixed in nature and there is a difference between the fixed rate of the financial instrument and the market rate. The greatest interest rate risk exposure in the financial services operation occurs when interest rate gaps arise wherein assets are funded with liabilities having different repricing intervals or different market indices to which the instruments' interest rates are tied. Changes in interest rates will affect the Company's net investment income, loan interest, interest expense and total stockholders' equity. The objective of Fremont's asset and liability management activities is to provide the highest level of net interest income and to seek cost effective sources of capital, while maintaining acceptable levels of interest rate and liquidity risk. The Company has designated its entire investment portfolio as investments that would be available for sale in response to changing market conditions, liquidity requirements, interest rate movements and other investment factors. (See "Item 1. Business -- Investment Portfolio.") Fremont currently owns no derivative financial instruments and, consequently, is not subject to market risk for such off-balance sheet financial instruments. Furthermore, the Company does not have exposure to foreign currency or commodity price risk.
Office facilities and equipment -- Will the telephones, facsimile machines, copy machines, elevators, air conditioning and heating systems, and other utility systems used by Fremont in its leased and owned facilities function properly in the year 2000 and beyond?
Fremont has identified its key business partners, such as its critical banking, employee benefits, reinsurance, auditors, outside legal counsel, and other professional service relationships. The Company has been surveying all of these relationships as to their Year 2000 compliance, and will develop appropriate contingency plans in its effort to avoid significant disruption to Fremont's operations. The Company
In addition to key business partners, the Company's suppliers and vendors are concentrated into the areas of office supplies, office furniture and equipment, and computer hardware and software. With the exception of computer software, Fremont believes that there are many alternative suppliers for their office supply and furniture needs, as well as several alternative sources for computer hardware. Accordingly, the risk of a significant disruption to the Company's operations due to a supplier's inability to resolve its Year 2000 Problems is considered minimal since Fremont could select an alternate supplier. (With regard to computer software, refer to the separate discussion on the Company's internal computer systems.) In an effort to identify which suppliers may have Year 2000 compliance difficulties, the Company has identified its more significant suppliers/vendors and has been surveying them as to their Year 2000 compliance status. The results of these surveys will be evaluated and appropriate contingency plans will be developed if considered necessary. Fremont expects this process to be completed by June 30, 1999.