Freddie Mac 2010 Annual Report Download - page 74

Table 11 summarizes components of our net interest income.
Table 11 — Net Interest Income
(1)
2010 2009 2008
Year Ended December 31,
(in millions)
Contractual amounts of net interest income
(2)
............................................. $17,684 $ 18,907 $ 9,001
Amortization income (expense), net:
(3)
Accretion of impairments on available-for-sale securities
(4)
.................................. 392 1,180 551
Asset-related amortization expense, net:
Mortgage loans held by consolidated trusts . . ......................................... (712) — —
Unsecured mortgage loans ...................................................... 311 233 52
Mortgage-related securities ...................................................... (272) (1,345) (311)
Other assets . . . . ............................................................ 36 30 —
Asset-related amortization expense, net . . . ......................................... (637) (1,082) (259)
Debt-related amortization expense, net:
Debt securities of consolidated trusts ............................................... 1,152 — —
Other long-term debt securities ................................................... (766) (809) (1,148)
Debt-related amortization expense, net . . . ......................................... 386 (809) (1,148)
Total amortization income (expense), net . . ......................................... 141 (711) (856)
Expense related to derivatives
(5)
...................................................... (969) (1,123) (1,349)
Net interest income . . ............................................................ 16,856 17,073 6,796
Provision for credit losses .......................................................... (17,218) (29,530) (16,432)
Net interest income (loss) after provision for credit losses . . . ................................. $ (362) $(12,457) $ (9,636)
(1) Our prospective adoption of the changes in accounting standards related to transfers of financial assets and consolidation of VIEs significantly impacted
the presentation of our financial results. Consequently, our financial results for 2010 are not directly comparable to our financial results for 2009 and
2008. For more information, see “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES.”
(2) Includes the reversal of interest income accrued, net of interest received on a cash basis related to mortgage loans that are on non-accrual status.
(3) 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.
(4) 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.
(5) 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 affects earnings. 2008 also includes the accrual of periodic cash settlements of all
derivatives in qualifying hedge accounting relationships.
Our adoption of the change to the accounting standards for transfers of financial assets and consolidation of VIEs, as
discussed above, had the following impact on net interest income and net interest yield for the year ended December 31,
2010, and will have similar effects on those items in future periods:
• we now include in net interest income both: (a) the interest income earned on the assets held in our consolidated
single-family trusts, comprised primarily of mortgage loans, restricted cash and cash equivalents and investments in
securities purchased under agreements to resell (the average balance of such assets was $1.7 trillion for the year ended
December 31, 2010); and (b) the interest expense related to the debt in the form of PCs and Other Guarantee
Transactions issued by consolidated trusts that are held by third parties (the average balance of such debt was
$1.5 trillion for the year ended December 31, 2010). Prior to January 1, 2010, we reflected the earnings impact of
these securitization activities as management and guarantee income, recorded within non-interest income on our
consolidated statements of operations, and as interest income on single-family PCs and on certain Other Guarantee
Transactions held for investment; and
• we reverse accrued but uncollected interest income recognized in prior periods on non-performing loans, where the
collection of principal and interest is not reasonably assured, and do not recognize any further interest income
associated with these loans upon their placement on non-accrual status except when cash payments are received.
Interest income that we did not recognize, which we refer to as forgone interest income, and reversals of previously
recognized interest income, net of cash received, related to non-performing loans was $4.7 billion during 2010,
compared to $349 million during 2009 on loans held at December 31, 2010 and 2009, respectively. The increase in
forgone interest income and the reversal of interest income reduced our net interest yield for the year ended
December 31, 2010, compared to the years ended December 31, 2009 and 2008, respectively. Prior to consolidation of
these trusts, we did not reverse interest income on non-performing loans for loans held by the trusts, and the forgone
interest income on non-performing loans of the trusts did not reduce net interest income or net interest yield, since it
was accounted for through a charge to provision for credit losses.
See “NOTE 2: CHANGE IN ACCOUNTING PRINCIPLES” for additional information.
Net interest income decreased by $217 million during the year ended December 31, 2010, compared to the year ended
December 31, 2009, due to: (a) a decrease in the average balance of mortgage-related securities; and (b) higher interest
71 Freddie Mac