Freddie Mac 2004 Annual Report Download - page 50

an improvement in the yield on the Cash and investments portfolio as short-term interest rates increased
during 2004. The yield on interest-bearing liabilities declined due to the maturity and repurchase of higher
cost long-term debt and the issuance of new long-term debt at lower rates, coupled with lower costs associated
with the amounts of interest expense Due to Participation CertiÑcate investors. This decline was partially
oÅset by higher short-term debt yields as average short-term rates were higher in 2004 as compared to 2003.
Income (expense) related to derivatives improved during 2004, as we moved a signiÑcant amount of our pay-
Ñxed swaps to no hedge designation and the related net interest expense was reported as Derivative gains
(losses) eÅective at the beginning of the second quarter of 2004 (as described above). The impact of this
movement was slightly oÅset by the movement of a signiÑcant amount of our receive-Ñxed swaps to no hedge
designation in the fourth quarter of 2004 and the recording of the related Net interest income in Derivative
gains (losses) in periods subsequent to the move.
2003 versus 2002
Table 15 summarizes Net interest income and net interest yield for 2003 as compared to 2002, 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 2003 and 2002.
Table 15 Ì Net Interest Income and Rate/Volume Analysis (2003 compared to 2002)
Year Ended December 31, Attributable to
2003 2002 Changes in(1)
Change to
Amounts Yield Amounts Yield Amounts Rate Volume
(dollars in millions)
Interest income:
Mortgage loans ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 4,251 6.70% $ 4,290 7.02% $ (39) $ (199) $ 160
Mortgage-related securities ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 29,051 5.34 30,039 6.39 (988) (5,330) 4,342
Total Retained portfolioÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 33,302 5.48 34,329 6.46 (1,027) (5,529) 4,502
Cash and investmentsÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 3,796 2.63 4,147 3.41 (351) (718) 367
Total income on interest-earning assets ÏÏÏ 37,098 4.93 38,476 5.89 (1,378) (6,247) 4,869
Interest expense:
Short-term debt ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,785) (1.21) (4,303) (2.03) 1,518 1,849 (331)
Long-term debtÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (22,083) (4.62) (21,337) (5.24) (746) 2,725 (3,471)
Total interest expense on debt securities ÏÏ (24,868) (3.52) (25,640) (4.15) 772 4,574 (3,802)
Due to Participation CertiÑcate investors ÏÏÏÏÏ (1,641) (6.26) (1,236) (6.82) (405) 110 (515)
Total expense on interest-bearing
liabilitiesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (26,509) (3.62) (26,876) (4.23) 367 4,684 (4,317)
Income (expense) related to derivatives(2) ÏÏÏÏ (1,091) (0.15) (2,075) (0.32) 984 984 Ì
Impact of net non-interest-bearing funding ÏÏÏÏ Ì 0.10 Ì 0.13 Ì Ì Ì
Total funding of interest-earning assets ÏÏÏ (27,600) (3.67) (28,951) (4.43) 1,351 5,668 (4,317)
Net interest income(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 9,498 1.27 9,525 1.46 (27) (579) 552
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏ 227 0.03 252 0.04 (25) 9 (34)
Net interest income (fully taxable-equivalent
basis)(3) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 9,725 1.30% $ 9,777 1.50% $ (52) $ (570) $ 518
(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 $52 million to $9,725 million in 2003
from $9,777 million in 2002. During 2003, interest income on mortgage-related securities declined by
$988 million, or 3 percent. The interest income generated by the 14 percent growth in the average unpaid
principal balance of the Retained portfolio was more than oÅset by the accelerated amortization of net
premiums on Retained portfolio securities, lower yields on assets acquired due to the low interest-rate
environment during 2003, and the continued liquidation of higher-yielding assets. Net interest income and net
interest yield were reduced as the yield on interest-earning assets declined at a faster rate than the cost of debt
funding during 2003. During the Ñrst quarter of 2003, we reÑned the assumptions and calculations for the
amortization of certain deferred fees recorded as basis adjustments on assets in our Retained portfolio. The
Freddie Mac
38