Freddie Mac 2005 Annual Report Download - page 37

returning excess capital to stockholders. At December 31, 2005, our estimated regulatory core capital was $36.0 billion,
with an estimated minimum capital surplus of $11.0 billion and an estimated surplus in excess of the 30 percent mandatory
target of approximately $3.5 billion. We expect to be able to maintain a surplus over both our regulatory minimum capital
requirement and the 30 percent mandatory target across a wide range of market conditions.
In 2005, we increased our quarterly common stock dividend on two occasions: a 17 percent increase in the Ñrst quarter
(from $0.30 per share to $0.35 per share) and an additional 34 percent increase in the fourth quarter (from $0.35 per share
to $0.47 per share). In October 2005, our board authorized us to repurchase up to $2 billion of outstanding shares of
common stock and to issue up to $2 billion of non-cumulative perpetual preferred stock. With the release of our 2005
Ñnancial results in May, we have moved forward with the repurchase of common stock and we expect to issue the authorized
preferred stock from time to time depending on market conditions and other factors.
Risk Management
Our portfolio investment and credit guarantee activities expose us to three broad categories of risk: (a) operational risks,
(b) interest-rate and other market risks, and (c) credit risks. Risk management is a critical aspect of our business.
EÅectively managing risk enables us to accomplish our mission and generate revenue and long-term value. Our strategies for
managing these risks are discussed in ""RISK MANAGEMENT.''
Operational Risks and Internal Controls
We have devoted substantial Ñnancial and personnel resources to improving our internal controls. We continue to
remediate material weaknesses and other deÑciencies in internal control over Ñnancial reporting. Although we accelerated a
number of previously planned control initiatives, we have a signiÑcant number of internal control deÑciencies that have not
been fully remediated and considerable challenges remain. See ""RISK MANAGEMENT Ì Operational Risks Ì
Internal Control over Financial Reporting'' and ""RISK FACTORS Ì Business and Operational Risks.''
Interest-Rate Risk
Our interest-rate risk remains low. For all of 2005 and through May of 2006, PMVS and duration gap have averaged
one percent and zero months, respectively. See ""RISK MANAGEMENT Ì Interest-Rate Risk and Other Market Risks''
for more information about these risks and our strategies for managing them.
Credit Risk
Our credit losses also remain low. Our single-family delinquency rate declined to 69 basis points at December 31, 2005
from 73 basis points at the end of 2004. At April 30, 2006 our single-family delinquency rate declined further to 56 basis
points. For 2005, our credit losses totaled $149 million or 1.1 basis points of our average Total mortgage portfolio. Our
credit-related expenses, which include changes in our provision for loan losses and expenses related to real estate owned, or
REO, increased in 2005 primarily as a result of Hurricane Katrina. See ""RISK MANAGEMENT Ì Credit Risks'' for
more information about these risks and our strategies for managing them.
Summary of 2005 Financial Results
GAAP Results
Changes in the level and volatility of interest rates continue to cause signiÑcant volatility in our reported Ñnancial results
primarily because only a portion of our balance sheet is marked to fair value. Net income after the cumulative eÅect of a
change in accounting principle was $2,130 million for 2005, down from $2,937 million for 2004. Diluted earnings per
common share after the cumulative eÅect of a change in accounting principle was $2.75 for 2005, down from $3.94 for
2004. The decline in net income for 2005 compared to 2004 was primarily due to lower net interest income as a result of
narrowing spreads on Ñxed-rate assets and a greater proportion of variable-rate assets purchased in 2005, an agreement to
settle the securities class action and shareholder derivative litigation, charges related to Hurricane Katrina, and the net
impact of certain accounting changes, partially oÅset by lower losses related to our derivative instruments not in qualifying
hedge accounting relationships. Our derivatives portfolio continued to be an eÅective component of our risk management
activities. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES'' to our consolidated Ñnancial
statements for information about our changes in accounting principles and changes in estimates.
Fair Value Balance Sheets
During 2005, the fair value of net assets attributable to common stockholders, before capital transactions, increased by
$1.0 billion, which represents a return on the average fair value of net assets attributable to common stockholders of
approximately 3.7 percent. The fair value of net assets attributable to common stockholders at December 31, 2005 was
unchanged, after capital transactions, at $26.8 billion, from December 31, 2004. Subsequent to the issuance of our
Information Statement Supplement dated May 30, 2006, we increased the fair value of net assets at December 31, 2005 by
$0.1 billion to correct an error in the calculation of the fair value of our debt securities issued.
21 Freddie Mac