Freddie Mac 2005 Annual Report Download - page 40

adjustments. For securities in the Cash and investments portfolio classiÑed as trading during 2004 and 2003, we calculated average balances based on
their fair values.
(3) May not sum due to rounding.
(4) Average rates for securities classiÑed as available-for-sale are calculated on the historical cost basis, which is not aÅected by the change in fair value
that is reÖected in the Accumulated other comprehensive income, or AOCI, component of Stockholders' equity.
(5) Certain amounts for 2004 and 2003 have been revised to conform with the 2005 presentation.
(6) Non-accrual loans are included in average balances.
(7) Loan fees included in mortgage loan interest income were $371 million, $223 million and $120 million for the years ended December 31, 2005, 2004
and 2003, respectively.
(8) A change in estimate resulted in a net pre-tax reduction in Net interest income of $(166) million in the Ñrst quarter of 2005. Of this amount,
$(92) million relates to Mortgage interest income and $(74) million relates to mortgage-related securities interest income. See ""Net Interest
Income Ì 2005 versus 2004.''
(9) Average rates calculated on a fully taxable-equivalent basis were 4.90 percent, 4.86 percent and 5.37 percent for the years ended December 31, 2005,
2004 and 2003, respectively, based upon related income of $29,966 million, $28,688 million and $29,246 million, respectively.
(10) For 2005, investments consist of Cash and cash equivalents and the Non-mortgage-related securities subtotal of Cash and Investments as reported on
our consolidated balance sheets. 2004 and 2003 also include Mortgage-related securities held in the Cash and Investments portfolio.
(11) Includes current portion of long-term debt. See ""NOTE 8: DEBT SECURITIES AND SUBORDINATED BORROWINGS'' to our consolidated
Ñnancial statements for a reconciliation of Senior debt, due within one year on our consolidated balance sheets.
(12) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements of all derivatives in
qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives'' to our
consolidated Ñnancial statements for more information.
(13) The determination of Net interest income/yield (fully taxable-equivalent basis), which reÖects 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 statutory tax rate of 35 percent.
(14) Combined rate/volume changes are allocated to the individual rate and volume change based on their relative size.
Table 8 summarizes components of our Net interest income.
Table 8 Ì Net Interest Income Year Ended December 31,
2005 2004 2003
(in millions)
Contractual amounts of Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 8,877 $11,746 $12,990
Deferred item amortization expense, net:(1)
Asset-related amortization expense, netÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,003) (1,408) (1,422)
Debt-related amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,446) (1,301) (979)
Total deferred item amortization expense, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (2,449) (2,709) (2,401)
Income (expense) related to derivatives:(2)
Amortization of deferred balances in AOCI, net ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,966) (1,814) (1,482)
Accrual of periodic settlements of derivativesÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 908 1,914 391
Total income (expense) related to derivatives ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ (1,058) 100 (1,091)
Net interest income ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 5,370 9,137 9,498
Fully taxable-equivalent adjustment ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ 339 267 227
Net interest income (fully taxable-equivalent basis) ÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏÏ $ 5,709 $ 9,404 $ 9,725
(1) Amortization relates to premiums, discounts, deferred fees and other basis adjustments to the carrying value of our Ñnancial instruments and the
reclassiÑcation of previously deferred balances from AOCI for certain derivatives in cash Öow hedge relationships related to individual debt issuances
and mortgage purchase transactions.
(2) Includes amortization of deferred balances related to certain cash Öow hedges and the accrual of periodic cash settlements of all derivatives in
qualifying hedge accounting relationships. See ""NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Ì Derivatives'' to our
consolidated Ñnancial statements for more information.
2005 versus 2004
Net interest income and net interest yield on a fully taxable-equivalent basis both decreased in 2005 due to narrowing
spreads on Ñxed-rate assets and a greater proportion of variable-rate assets purchased in 2005. Net interest yield declined
47 basis points to 76 basis points for 2005 from 123 basis points for 2004, on a fully taxable-equivalent basis. This
compression of the net interest yield and the decline in Net interest income reÖected the impact of a Öattening yield curve
driven by increases in short-term interest rates. Because the repricing of our variable-rate assets lagged the increase in the
cost of our short-term debt, the impact of the rising short-term rates on our short-term debt was only partially oÅset by the
impact of rising rates on our variable-rate assets. Also, the decline in Net interest income for 2005 reÖected the change in
the asset mix, as the composition of our Retained portfolio shifted to a greater percentage of lower-yielding, variable-rate
assets, and higher interest expense on derivatives in qualifying hedge accounting relationships. Another factor in the decline
in Net interest income for 2005 was the result of our decision to cease the PC market-making and support activities
conducted through our Securities Sales and Trading Group, or SS&TG, business unit and our external Money Manager
program during the fourth quarter of 2004. This result is reÖected in the $28.6 billion, or 35 percent, decline in the average
balance of our Investments portfolio. These negative factors were partially oÅset by a $20.9 billion, or 3 percent, increase in
the average balance of our Retained portfolio.
Interest income related to our Retained portfolio increased by $1,254 million for 2005, as compared to 2004, as a result
of the increase in the average balance of the portfolio as well as the rising rate environment. These positive factors were
partially oÅset by the shift in the composition of the portfolio to lower-yielding, variable-rate non-agency securities. Interest
income for the Retained portfolio in the Ñrst quarter of 2005 also includes the eÅect of enhancements to certain models
24 Freddie Mac