Freddie Mac 2004 Annual Report Download - page 48

Net Interest Income
Net interest income, or NII, our principal source of earnings, represents the diÅerence between Interest
income and Interest expense. Net interest income is aÅected by changes in the balance and contractual rates
associated with our interest-earning assets, interest-bearing liabilities and certain derivative contracts, as
adjusted for amortization of premiums, discounts, deferred hedging gains and losses and other basis
adjustments. We analyze Net interest income, and the related net interest yield, on a fully taxable-equivalent
basis to consistently reÖect income from taxable and tax-exempt investments based on a 35 percent marginal
tax rate.
Analysis of Annual Results
2004 versus 2003
Table 14 summarizes Net interest income and net interest yield for 2004 compared to 2003, and the
related analysis of the eÅect of changes in the rates and volumes of our interest-earning assets and interest-
bearing liabilities on the changes in Net interest income between 2004 and 2003.
Table 14 Ì Net Interest Income and Rate/Volume Analysis (2004 compared to 2003)
Year Ended December 31, Attributable to
2004 2003 Changes in(1)
Change to
Amounts Yield Amounts Yield Amounts Rate Volume
(dollars in millions)
Interest income:
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,007 6.51% $ 4,251 6.70% $ (244) $ (123) $ (121)
Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 28,460 4.82 29,051 5.34 (591) (2,921) 2,330
Total Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 32,467 4.98 33,302 5.48 (835) (3,044) 2,209
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,136 2.79 3,796 2.63 (660) 18 (678)
Total income on interest-earning assets ÏÏÏ 35,603 4.66 37,098 4.93 (1,495) (3,026) 1,531
Interest expense:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,908) (1.39) (2,785) (1.21) (123) (406) 283
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22,950) (4.32) (22,083) (4.62) (867) 1,472 (2,339)
Total interest expense on debt securities ÏÏ (25,858) (3.50) (24,868) (3.52) (990) 1,066 (2,056)
Due to Participation CertiÑcate investors ÏÏÏÏÏ (708) (5.71) (1,641) (6.26) 933 133 800
Total expense on interest-bearing
liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,566) (3.54) (26,509) (3.62) (57) 1,199 (1,256)
Income (expense) related to derivatives(2) ÏÏÏÏ 100 0.01 (1,091) (0.15) 1,191 1,191 Ì
Impact of net non-interest-bearing funding ÏÏÏÏ Ì 0.07 Ì 0.10 Ì Ì Ì
Total funding of interest-earning assets ÏÏÏ (26,466) (3.46) (27,600) (3.67) 1,134 2,390 (1,256)
Net interest income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,137 1.20 9,498 1.27 (361) (636) 275
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏ 267 0.03 227 0.03 40 38 2
Net interest income (fully taxable-equivalent
basis)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,404 1.24% $ 9,725 1.30% $ (321) $ (598) $ 277
(1) Combined rate/volume changes are allocated to the individual rate and volume changes based on their relative size.
(2) The changes in Income (expense) related to derivatives are fully attributed to rate as the derivatives have no associated principal
amounts recorded on the consolidated balance sheets.
(3) Yields may not sum due to rounding.
Net interest income on a fully taxable-equivalent basis decreased by $321 million to $9,404 million in
2004 from $9,725 million in 2003. During 2004, Interest income on Mortgage loans and Mortgage-related
securities declined by $835 million, or 3 percent. We earned lower Interest income on these investments
during 2004 compared to 2003 because we earned lower yields on newly acquired assets, primarily due to
purchases of lower-coupon non-agency mortgage-related securities (such as Öoating-rate securities that tend
to earn lower initial yields than Ñxed-rate securities), coupled with the continued liquidation of relatively
higher-coupon assets during 2004. The decline in our Retained portfolio yields during 2004 more than oÅset
the positive impact of 7 percent growth in the Retained portfolio's average unpaid principal balance. We also
earned lower interest income related to our Cash and investments portfolio during 2004 as compared to 2003.
Freddie Mac
36