Freddie Mac 2009 Annual Report Download - page 95

Table 21 presents the Segment Earnings of our Investments segment.
Table 21 — Segment Earnings and Key Metrics — Investments
2009 2008 2007
Year Ended December 31,
(dollars in millions)
Segment Earnings:
Net interest income . . . ......................................................... $ 7,641 $ 3,734 $ 3,300
Non-interest income (loss) . . . . ................................................... (8,090) (4,304) 40
Non-interest expense:
Administrative expenses . . . . ................................................... (512) (473) (515)
Other non-interest expense . . ................................................... (32) (1,111) (31)
Total non-interest expense . ................................................... (544) (1,584) (546)
Segment Earnings (loss) before income tax (expense) benefit ............................... (993) (2,154) 2,794
Income tax (expense) benefit . . ................................................... 347 754 (978)
Segment Earnings (loss), net of taxes . . . . . . ...................................... (646) (1,400) 1,816
Reconciliation to GAAP net income (loss):
Derivative and debt-related adjustments . . . . . . . . ...................................... 4,274 (13,205) (5,640)
Credit guarantee-related adjustments . ............................................... — — 1
Investment sales, debt retirements and fair value-related adjustments .......................... 4,146 (10,415) 987
Fully taxable-equivalent adjustment . . ............................................... (387) (419) (388)
Tax-related adjustments
(1)
....................................................... 107 (2,344) 2,020
Total reconciling items, net of taxes ............................................... 8,140 (26,383) (3,020)
GAAP net income (loss). . . . ................................................... $ 7,494 $ (27,783) $ (1,204)
Key metrics — Investments:
Growth:
Purchases of securities — Mortgage-related investments portfolio:
(2)(3)
Guaranteed PCs and Structured Securities . . . ...................................... $182,157 $219,045 $141,059
Non-Freddie Mac mortgage-related securities:
Agency mortgage-related securities . . . . . . ...................................... 45,995 68,053 12,033
Non-agency mortgage-related securities . . . ...................................... 180 699 52,384
Total purchases of securities — Mortgage-related investments portfolio .................. $228,332 $287,797 $205,476
Growth rate of mortgage-related investments portfolio (annualized).......................... (8.73)% 11.67% (2.48)%
Return:
Net interest yield — Segment Earnings basis . . . ...................................... 1.03% 0.55% 0.50%
(1) 2009 and 2008 includes an allocation of the non-cash charge related to the establishment of the partial valuation allowance against our deferred tax
assets, net that are not included in Segment Earnings.
(2) Based on unpaid principal balance and excludes mortgage-related securities traded, but not yet settled.
(3) Excludes single-family mortgage loans.
Segment Earnings (loss) for our Investments segment increased $754 million to $(646) million for 2009 compared to
$(1.4) billion for 2008. The loss in Segment Earnings for our Investments segment for 2008 was higher than the loss in 2009
primarily as a result of our recognition of a loss of $1.1 billion during 2008 related to the Lehman short-term transaction.
Net impairment of available-for-sale securities recognized in earnings increased to $8.3 billion during 2009 due to an
increase in expected credit-related losses on our non-agency mortgage-related securities, compared to $4.3 billion of net
impairment of available-for-sale securities recognized in earnings during 2008. Among the securities impaired during 2009
are securities backed by subprime, option ARM, Alt-A and other loans impaired due to expected credit-related losses.
Commencing in the second quarter of 2009, security impairments that reflect expected or realized credit-related losses are
realized in earnings immediately pursuant to GAAP and in Segment Earnings. In contrast, non-credit-related security
impairments are recorded in our GAAP results in AOCI, but are not recorded in Segment Earnings. Impairments on
securities we intend to sell or more likely than not will be required to sell prior to anticipated recovery are recorded in
GAAP earnings but also excluded from Segment Earnings.
Segment Earnings net interest income increased $3.9 billion and Segment Earnings net interest yield increased 48 basis
points to 103 basis points for 2009 compared to 2008. The primary drivers underlying the increases in Segment Earnings net
interest income and Segment Earnings net interest yield were (a) a decrease in funding costs as a result of the replacement of
higher cost short- and long-term debt with lower cost debt and (b) an increase in the average size of our investments in
single-family mortgage loans and mortgage-related securities, including an increase in our holdings of fixed-rate assets. In
addition, net interest income and net interest yield during 2009 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, which are not reflected in Segment
Earnings.
Partially offsetting these increases was an increase in derivative interest carry expense on net pay-fixed interest rate
swaps, which is recognized within net interest income in Segment Earnings, due to short-term interest rate declines and
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