For Immediate Release
March
31,
2005
Contact:
corprel@freddiemac.com
or (703) 903-3933
FREDDIE MAC REPORTS 2004 FINANCIAL RESULTS
Fair Value of Net Assets Grows; Company Maintains Strong Capital Surplus
McLean, VA – Freddie Mac (NYSE:FRE) today reported quarterly and full-year
financial results for the year ended December 31, 2004.
The company reported net income of $2.8 billion in 2004, compared to $4.8 billion
in 2003. Fair value of net assets attributable to common stockholders, net of
tax effect, grew by $3.8 billion – to $26.7 billion – a 17 percent
increase from year-end 2003, compared to growth of $4.6 billion, or 25 percent,
in 2003. Freddie Mac's regulatory minimum capital surplus is estimated
at $10.8 billion at year-end 2004, with an estimated $3.5 billion in excess
of the 30-percent target surplus set by the Office of Federal Housing Enterprise
Oversight (OFHEO), the company's federal safety and soundness regulator.
"Throughout 2004, and continuing today, we are making significant progress
in accomplishing our top priorities: serving our mission; increasing market
share; streamlining operations and seizing business opportunities; and returning
to timely financial reporting," said Richard F. Syron, Freddie Mac chairman
and chief executive officer. "We accomplished a great deal in 2004, and
I am particularly pleased that we met our commitment to the market to publish
our 2004 financial results on our announced timeline."
In 2004, Freddie Mac financed homes for more than 3.7 million families, and
we have reported attaining all of our regulatory affordable housing goals for
2004. Our market share recovered to historic levels, as we forged new relationships
with mortgage lenders and other key business partners.
"We are instilling in Freddie Mac a true sense of urgency to do more
in 2005 to strengthen our business and serve our mission," Syron said.
"While today we are operating in a challenging, lower-growth environment,
we believe that Freddie Mac will continue to produce value for both our investors
and America's families."
"While 2004 held some significant challenges for our company, we begin
2005 with growing momentum," said Eugene M. McQuade, Freddie Mac president
and chief operating officer. "We maintained a strong balance sheet and
increased our capital surplus position. We grew the fair value of net assets.
We positioned ourselves to do more business with our lending customers. Our
interest-rate and credit risk results remained impressive. And we took steps
toward our goal of getting a better handle on our administrative expenses. We
are well positioned to deliver long-term value to the market and our stockholders."
2004 SUMMARY OF FINANCIAL RESULTS
Net income was $2.8 billion for 2004, down from $4.8 billion for 2003. Diluted
earnings per common share were $3.78 for 2004, down from diluted earnings per
common share of $6.68 for 2003. The change in net income for 2004 was primarily
due to a decrease of $4.5 billion related to our derivative instruments not
in qualifying hedge accounting relationships. However, these derivatives continued
to be an effective component of our risk management activities.
Net interest income was $9.1 billion in 2004, compared to $9.5 billion in
2003. Net interest yield on a fully tax equivalent basis decreased to 124 basis
points in 2004 from 130 basis points in 2003. Management and guarantee income,
which is a component of "Non-interest income (loss)" on the consolidated
statements of income, was $1.4 billion in 2004, compared to $1.7 billion in
2003. The total management and guarantee income rate recognized in 2004 was
17.5 basis points, down compared to the 23.3 basis points recognized in 2003,
primarily due to decreases in amortization of deferred fees. Non-interest income
(loss), excluding management and guarantee income, totaled ($4.4) billion in
2004, compared to ($1.9) billion in 2003. The increased loss was primarily due
to the aforementioned losses on derivative instruments not in qualifying hedge
accounting relationships.
Non-interest expense totaled $2.4 billion in 2004, compared to $2.2 billion
in 2003. Administrative expenses, which are a component of non-interest expense,
totaled $1.6 billion in 2004, compared to $1.2 billion in 2003. This increase
was primarily due to costs related to our financial reporting remediation activities.
Our objective in 2005 is to keep administrative expenses relatively flat compared
to 2004.
For 2005, we expect to report net interest income materially lower than that
reported for 2004, primarily due to compression in net interest margins on our
existing portfolio and lower nominal margins on floating-rate mortgage-related
security purchases. However, we expect this decrease to be significantly offset
by decreased losses in non-interest income (loss), assuming current forward
rates are realized.
For additional details on our earnings and performance for 2004, see our Supplemental
Disclosure Package [PDF
468K
], available on the Investor Relations page of our Web site at
www.FreddieMac.com/investors.
FAIR VALUE BALANCE SHEETS AT DECEMBER 31, 2004
At December 31, 2004, the fair value of net assets (net of tax effect) was
$30.8 billion, a $3.5 billion, or 13 percent, increase from December 31, 2003.
For the same period, the fair value of net assets attributable to common stockholders
(representing the fair value balance sheet total net assets less the fair value
of net assets attributable to preferred stockholders) was $26.7 billion, a $3.8
billion, or 17 percent, increase from December 31, 2003, compared to growth
of $4.6 billion, or 25 percent, in 2003. The fair value of net assets attributable
to common stockholders, before common dividends and capital transactions, increased
by $4.6 billion, or 20 percent, from December 31, 2003, a return that exceeds
our long-term expectations.
The primary contributors to the increase in fair value of net assets in 2004
were core spread income from the Retained portfolio (defined as the estimated
income resulting from the spread between mortgage-related investments and debt,
calculated on an option-adjusted basis), fee-based income (including guarantee
fees and credit fees related to our PCs and Structured Securities) and a gain
in the fair value of our guarantees related to our outstanding PCs and Structured
Securities. The fair value increase also included gains resulting from tighter
mortgage-to-debt option-adjusted spreads. In 2004 we made improvements to our
fair value estimation methodologies, including refinements that better capture
available market data relevant to determining the fair value of our debt. The
implementation of these improvements resulted in net increases in the fair value
of total net assets of approximately $0.6 billion (after-tax).
RISK MANAGEMENT
In 2004, our interest-rate risk remained low. For full-year 2004, Portfolio
Market Value Sensitivity and duration gap averaged two percent and zero months,
respectively. Our total credit losses rose slightly in 2004 but were still quite
low, totaling approximately 1.1 basis points, compared to approximately 0.8
basis points for 2003. Although we expect credit losses in 2005 to increase
from their recent levels, we expect credit losses to remain low relative to
historic levels.
CAPITAL
We have submitted to OFHEO amended minimum capital reports for 2004, including
estimates of our capital surpluses. Based on these estimates, we believe that
Freddie Mac was in compliance with its regulatory capital requirements throughout
the year. The estimated minimum capital surplus at December 31, 2004, as reported
to OFHEO in our amended minimum capital reports, was approximately $10.8 billion.
Our estimated surplus in excess of the 30 percent target surplus at December
31, 2004 was approximately $3.5 billion. We currently expect to be able to maintain
a surplus over both our minimum regulatory capital requirement and the 30 percent
target surplus across a wide range of market conditions.
OTHER MATTERS
GSE Regulatory Oversight Legislation
Freddie Mac faces an uncertain regulatory environment in light of legislative
reforms currently being discussed. Freddie Mac strongly supports enactment of
regulatory oversight legislation that ensures our regulator has authority to
conduct effective oversight. We believe appropriate regulatory oversight legislation
would strengthen market confidence and promote the company's mission.
We will continue to work with the Congress, the Administration and other interested
parties toward enacting such legislation.
We cannot predict the contents, timing or prospects for enactment of any legislation.
As discussed under "GSE Regulatory Oversight Legislation" in the
Supplemental Disclosure Package, it is possible that resolution of the legislative
issues under consideration could adversely affect our financial condition and
results of our operations in future years. Potential legislative or regulatory
outcomes could also cause us to lose the ability to fulfill the goals and responsibilities
of our housing mission while providing adequate returns to our stockholders.
Additional Information
For more information, see the discussion in our Supplemental Disclosure Package
available on the Investor Relations page of our Web site at www.FreddieMac.com/investors.
Additional information about Freddie Mac and its business is also set forth
in our Information Statement dated September 24, 2004 and related Information
Statement Supplements, available on the Investor Relations page of our Web site
at www.FreddieMac.com/investors.
Announcement of Conference Call and Webcast
We will host a conference call discussing today's announcement at 8:00
a.m. Eastern Time today. Domestic investors should call 1-888-428-4480 and international
investors can access the call at 651-291-5254. The conference call will be webcast
live on our Web site. During the call our Chief Financial Officer, Martin F.
Baumann, will be referring to a slide presentation that we have posted on the
Web site this morning. You can find a link to these slides at the end of our
press release on our Web site. We encourage you to have this presentation available
so that you can better follow Mr. Baumann's remarks during the call. A
telephone recording of this conference call will be available continuously beginning
at approximately 5:00 p.m. Eastern Time on March 31, 2005 until midnight on
April 14, 2005. To access this recording in the United States, call 1-800-475-6701
and use access code 774781. Outside of the United States, call 320-365-3844
and use access code 774781.
This release summarizes financial and company information for 2004. Additional
materials, including financial statements and the accompanying Supplemental
Disclosure Package, which provides important disclosures and analyses, are available
on our Web site. Freddie Mac encourages all investors and interested members
of the public to review these materials for a more complete understanding of
its financial results and related company disclosures.
The information in this press release and the Supplemental Disclosure Package
will be included in our Information Statement Supplement dated March 31, 2005,
which will be posted on the Investor Relations page of our Web site. Freddie
Mac's earnings releases and other financial disclosures are also available
on the Investor Relations page of our Web site.
Freddie Mac's press releases sometimes contain forward-looking statements
pertaining to management's current expectations as to our future business
plans, results of operations and/or financial condition. Management's expectations
for the company's future necessarily involve a number of assumptions and
estimates, and various factors could cause actual results to differ materially
from these expectations. These assumptions and factors are discussed in our Information
Statement dated September 24, 2004 and our Supplemental Disclosure Package, which
are available on the Investor Relations page of our Web site at www.FreddieMac.com/investors.
Freddie Mac is a stockholder-owned company established by Congress in 1970
to support homeownership and rental housing. Freddie Mac fulfills its mission
by purchasing residential mortgages and mortgage-related securities, which it
finances primarily by issuing mortgage-related securities and debt instruments
in the capital markets. Over the years, Freddie Mac has made home possible for one in six homebuyers and two million renters in America.
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