Freddie Mac 2015 Annual Report Download - page 69

Management's Discussion and Analysis Our Business Segments | Multifamily
Freddie Mac 2015 Form 10-K 67
FINANCIAL RESULTS
The table below presents the components of the Segment Earnings and comprehensive income for our
Multifamily segment.
Year Ended December 31, Change 2015 - 2014 Change 2014 - 2013
(dollars in millions) 2015 2014 2013 $ % $ %
Net interest income $ 927 $ 948 $ 1,186 $(21) (2)% $ (238)(20)%
Benefit for credit losses 26 55 218 (29) (53)% (163)(75)%
Non-interest income:
Management and guarantee fee income 339 254 206 85 33 % 48 23 %
Gains (losses) on loans (93) 870 (336)(963) (111)% 1,206 (359)%
Derivative gains 372 335 1,281 37 11 % (946)(74)%
Other non-interest income 17 234 1,203 (217) (93)% (969)(81)%
Total non-interest income 635 1,693 2,354 (1,058) (62)% (661)(28)%
Non-interest expense:
Administrative expense (325)(274)(257)(51) 19 % (17) 7 %
REO operations (expense) income (4) 9 16 (13) (144)% (7) (44)%
Other non-interest expense (56) (23) (24)(33) 143 % 1(4)%
Total non-interest expense (385)(288)(265)(97) 34 % (23) 9 %
Segment Earnings before income tax
expense 1,203 2,408 3,493 (1,205) (50)% (1,085) (31)%
Income tax expense (376)(772)(443)396 (51)% (329) 74 %
Segment Earnings, net of taxes 827 1,636 3,050 (809) (49)% (1,414) (46)%
Total other comprehensive income (loss),
net of tax (261)(177) (1,595) (84) 47 % 1,418 (89)%
Total comprehensive income $ 566 $ 1,459 $1,455 $(893) (61)% $ 4— %
Key Drivers:
• Net interest income declined in 2015 compared to 2014 primarily due to a segment allocation in
2015 of debt extinguishment costs related to the transfer of $1.2 billion of seasoned mortgage loans
to a consolidated K Certificate trust. This decline was partially offset by higher net interest income in
2015 due to changes in the composition of our multifamily portfolio, as lower yielding legacy loans
and securities were replaced with purchases of higher-yielding loans to support future securitizations.
The decline in 2014 compared to 2013 was primarily due to lower average multifamily portfolio
balances of interest-earning assets.
• Benefit for credit losses declined each year. The credit performance of the multifamily mortgage
portfolio remained strong each year and the number of loans subject to a loan loss reserve has
declined over time. Loans purchased for securitization are recorded at fair value and are therefore not
subject to a loan loss reserve.
• Management and guarantee fee income increased each year, primarily due to higher average
multifamily guarantee portfolio balances as a result of ongoing issuances of K Certificates.
• Gains (losses) on loans was a loss in 2015 as loans are sensitive to changes in K Certificate
benchmark spreads observed in the market as well as to interest rate-related fair value changes (for
which resulting gains (losses) are offset in derivatives gains (losses)). The significant widening of K
Certificate benchmark spreads coupled with higher loan purchase and securitization volume resulted
in losses on loans in 2015, as compared to gains on loans recognized in 2014 when spreads
tightened. The change from losses in 2013 to gains in 2014 was attributable to interest rate-related