March 31, 2005
Bloomberg
Freddie Mac, the second-biggest U.S. mortgage buyer, said 2004 profit fell 42 percent as the value of financial contracts used to protect against swings in interest rates declined.
Net income decreased to $2.8 billion, or $3.78 a share, from $4.9 billion, or $6.79 a share, in 2003, according to Michael Cosgrove, a company spokesman. The current, or fair, market value of the government-chartered company's assets minus liabilities rose 13 percent to $30.8 billion, less than the 20 percent jump in 2003.
The earnings report is just the second for Freddie Mac since an internal investigation found it understated net income by $5 billion from 2000 through 2002, leading to an overhaul of the company's accounting that is still under way. Some investors said they are ready to hear from Chief Executive Officer Richard Syron how he plans to move the company beyond accounting mistakes.
``They need to assure all those concerned that they know what they are earning by filing reports, and then how they can grow,'' James McGlynn, who owns Freddie Mac shares among the $6 billion in assets he oversees at Summit Investment Partners in Cincinnati, said before the release.
Net income fell below the projections of analysts including Credit Suisse First Boston's Moshe Orenbuch, who estimated it would be between $4 and $5 a share in 2004.
Freddie Mac had a $4.5 billion loss on derivatives used to protect its mortgage assets. The loss, compared with gains of $39 million in 2003 and $5.3 billion in 2002. Derivatives are contracts whose value is derived from debt or equity securities, commodities or currencies.
Interest Income
Freddie Mac and the larger Fannie Mae were chartered by Congress to make money more widely available for home loans. They profit by purchasing loans and mortgage securities for their investment portfolios, and from fees charged to lenders for guaranteeing credit on loans packaged into mortgage bonds.
Fannie Mae was created in 1938 and first sold shares to the public in 1970. That year Congress created Freddie Mac, which went public in 1989.
Interest income fell to $9.1 billion in 2004 from $9.5 billion. For 2005, the company said it expects to report net interest income that is ``materially lower'' than last year as its interest margin narrows and as yields offered on adjustable- rate mortgages it buys decline. Freddie Mac said its net interest yield fell to 1.24 percentage points from 1.30 percentage points.
Freddie Mac said it had net income of 46 cents a share in the fourth quarter, a loss of $2.25 a share in the third quarter, income of $3.89 in the second quarter and a profit of $1.68 in the first quarter.
Portfolio
The company's shares rose 26 percent in 2004 as Syron, who joined the company in December 2003, hired new managers and gained investor confidence. The performance compares with the 9 percent gain for the Standard & Poor's 500 Index and a 5 percent drop for the larger Fannie Mae.
Freddie Mac shares closed yesterday at $63.90 on the New York Stock Exchange, down 13 percent for the year. Of the 18 analysts covering the company, 12 rate it ``buy' and 6 say ``hold,'' according to data compiled by Bloomberg.
Freddie Mac's portfolio, which stands at about $655 billion, grew 1.3 percent last year, the slowest pace in at least five years as the company concentrated on rebuilding capital in the wake of its accounting mistakes.
The portfolio, which provides more than two-thirds of the= government-chartered company's profit, increased in February for the first month in seven, the company said last week.
Freddie Mac's fair value of assets increased from $27.4 billion in 2003. Fair value is company's assets minus liabilities at current market value, stripping out the effects of volatile earnings from unrealized changes in the values of financial contracts used to hedge swings in interest rates.
Fair Value
Fair value rose even as Freddie Mac's portfolio of mortgages increased just 1.3 percent in 2004, compared with 13.8 percent in 2003. The company on June 30 said it expected fair value growth to be ``significantly below'' that of gain for 2003 that was fueled by the increased mortgage holdings and expected profits between the investments and debt costs.
Fair value balance sheets parse out accounting inconsistencies by providing analysts with the current market value of assets minus the current market value of liabilities. Not all liabilities are revalued quarterly under generally accepted accounting principles.
Syron, 61, was president of the Federal Reserve Bank of Boston from 1989 to 1994. The former chief executive officer, Leland Brendsel, was ousted along with President David Glenn and Chief Financial Officer Vaughn Clarke for their roles in the accounting errors.
Since 2003, Syron has hired banking veterans including Chief Operating Officer Eugene McQuade from Bank of America Corp. to help shore up investor confidence. He also hired Patricia Cook from J.P. Morgan Fleming Asset Management to manage the company's portfolio
To contact the reporter on this story: Al Yoon in New York at at ayoon@bloomberg.net
To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net
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