Freddie Mac 2009 Annual Report Download - page 79

Table 12 summarizes components of our net interest income.
Table 12 — Net Interest Income
2009 2008 2007
Year Ended December 31,
(in millions)
Contractual amounts of net interest income . . .............................................. $18,907 $ 9,001 $ 6,038
Amortization income (expense), net:
(1)
Accretion of impairments on available-for-sale securities
(2)
.................................... 1,180 551 4
Asset-related amortization .......................................................... (1,082) (259) (272)
Long-term debt-related amortization . .................................................. (809) (1,148) (1,342)
Total amortization income (expense), net .............................................. (711) (856) (1,610)
Expense related to derivatives:
Amortization of deferred balances in AOCI
(3)
............................................. (1,123) (1,257) (1,329)
Accrual of periodic settlements of derivatives:
(4)
Pay-fixed swaps ............................................................... — (92) —
Total accrual of periodic settlements of derivatives ...................................... — (92) —
Total expense related to derivatives . . . . .................................................. (1,123) (1,349) (1,329)
Net interest income ................................................................ 17,073 6,796 3,099
Fully taxable-equivalent adjustments
(5)
................................................... 388 404 392
Net interest income (fully taxable-equivalent basis) ........................................... $17,461 $ 7,200 $ 3,491
(1) Represents amortization related to premiums, discounts, deferred fees and other adjustments to the carrying value of our financial instruments and the
reclassification of previously deferred balances from AOCI for certain derivatives in cash flow hedge relationships related to individual debt issuances
and mortgage purchase transactions.
(2) The portion of the impairment charges recognized in earnings expected to be recovered is recognized as net interest income. Upon our adoption of an
amendment to the accounting standards for investments in debt and equity securities on April 1, 2009, previously recognized non-credit-related
other-than-temporary impairments are no longer accreted into net interest income.
(3) Represents changes in fair value of derivatives in cash flow hedge relationships that were previously deferred in AOCI and have been reclassified to
earnings as the associated hedged forecasted issuance of debt and mortgage purchase transactions affect earnings.
(4) Reflects the accrual of periodic cash settlements of all derivatives in qualifying hedge accounting relationships.
(5) The determination of net interest income (fully taxable-equivalent basis), which reflects fully taxable-equivalent adjustments to interest income, involves
the conversion of tax-exempt sources of interest income to the equivalent amounts of interest income that would be necessary to derive the same net
return if the investments had been subject to income taxes using our federal statutory tax rate of 35%.
Net interest income and net interest yield on a fully taxable-equivalent basis increased significantly during 2009
compared to 2008 primarily due to: (a) a decrease in funding costs as a result of the replacement of higher cost short- and
long-term debt with new lower cost debt; and (b) an increase in the average balance of our investments in mortgage loans
and mortgage-related securities, including an increase in our holdings of fixed-rate assets. These items were partially offset
by the impact of declining short-term interest rates on floating-rate mortgage-related and non-mortgage-related securities. Net
interest income and net interest yield during 2009 also benefited from the funds we received from Treasury under the
Purchase Agreement. These funds generate net interest income, because the costs of such funds are not reflected in interest
expense, but instead are reflected as dividends paid on senior preferred stock.
During 2009, spreads on our debt and our access to the debt markets improved. We believe the Federal Reserve’s
purchases in the secondary market of our long-term debt under its purchase program contributed to this improvement. As a
result, we were able to replace some higher cost short- and long-term debt with lower cost floating-rate long-term debt and
short-term debt, resulting in a decrease in our funding costs. Consequently, our concentrations of floating rate debt returned
to more historical levels as of December 31, 2009. Due to our limited ability to issue long-term and callable debt during the
second half of 2008 and the first few months of 2009, we increased our use of the strategy of combining derivatives and
floating-rate long-term debt or short-term debt to synthetically create the substantive economic equivalent of various longer-
term fixed rate debt funding structures. See “Non-Interest Income (Loss) — Derivative Overview” for additional information.
We acquired and held increased amounts of mortgage loans and mortgage-related securities during the first half of 2009
to provide additional liquidity to the mortgage market. Also, primarily during the first quarter of 2009, continued liquidity
concerns in the market caused spreads to widen resulting in more favorable investment opportunities for agency mortgage-
related securities. In response, our purchase activities increased, resulting in an increase in the average balance of our
interest-earning assets. However, during the second half of 2009, the unpaid principal balance of our investments in
mortgage-related securities declined due to tightened spreads on mortgage assets, which made investment opportunities less
favorable. We believe these tightened spreads resulted from the Federal Reserve and Treasury actively purchasing agency
mortgage-related securities in the secondary market. For information on the potential impact of the termination of these
purchase programs and the requirement to reduce our mortgage-related investments portfolio by 10% annually, beginning in
2010, see “LIQUIDITY AND CAPITAL RESOURCES — Liquidity” and “NOTE 6: INVESTMENTS IN SECURITIES —
Impact of the Purchase Agreement and FHFA Regulation on the Mortgage-Related Investments Portfolio” to our consolidated
financial statements.
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