10-Q 1 a20181q10q.htm 10-Q Document
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended March 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
For the transition period from                                        to
Commission File Number: 001-34139
primarylogoa02.jpg
Federal Home Loan Mortgage Corporation
(Exact name of registrant as specified in its charter)
Federally chartered
 
52-0904874
 
8200 Jones Branch Drive
 
22102-3110
 
(703) 903-2000
corporation
 
 
McLean, Virginia
 
 
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
(Address of principal executive offices)
 
(Zip Code)
 
(Registrant’s telephone number,
including area code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.    ý Yes    ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý Yes    ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ý
 
 
 
Accelerated filer  ¨
 
Non-accelerated filer (Do not check if a smaller reporting company)  ¨
 
Smaller reporting company  ¨
 
Emerging growth company  ¨
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
As of April 17, 2018, there were 650,058,775 shares of the registrant’s common stock outstanding.


Table of Contents

Table of Contents
 
Page
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
n    Introduction
n    Key Economic Indicators
n    Consolidated Results of Operations
n    Consolidated Balance Sheets Analysis
n    Our Business Segments
n    Risk Management
n    Liquidity and Capital Resources
n    Conservatorship and Related Matters
n    Regulation and Supervision
n    Off-Balance Sheet Arrangements
n    Forward-Looking Statements
FINANCIAL STATEMENTS
OTHER INFORMATION
CONTROLS AND PROCEDURES
EXHIBIT INDEX
SIGNATURES
FORM 10-Q INDEX

Freddie Mac Form 10-Q
 
i

Management's Discussion and Analysis
 
Introduction

Management's Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q includes forward-looking statements that are based on current expectations and are subject to significant risks and uncertainties. These forward-looking statements are made as of the date of this Form 10-Q. We undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date of this Form 10-Q. Actual results might differ significantly from those described in or implied by such statements due to various factors and uncertainties, including those described in the Forward-Looking Statements sections of this Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2017, or 2017 Annual Report, and the Business and Risk Factors sections of our 2017 Annual Report.
Throughout this Form 10-Q, we use certain acronyms and terms that are defined in the Glossary of our 2017 Annual Report.
You should read the following MD&A in conjunction with our 2017 Annual Report and our condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2018 included in Financial Statements. Throughout this Form 10-Q, we refer to the three months ended March 31, 2018, the three months ended December 31, 2017, the three months ended September 30, 2017, the three months ended June 30, 2017 and the three months ended March 31, 2017 as "1Q 2018," "4Q 2017," "3Q 2017," "2Q 2017" and "1Q 2017," respectively.
INTRODUCTION
Freddie Mac is a GSE chartered by Congress in 1970. Our public mission is to provide liquidity, stability and affordability to the U.S. housing market. We do this primarily by purchasing residential mortgage loans originated by lenders. In most instances, we package these loans into mortgage-related securities, which are guaranteed by us and sold in the global capital markets. We also invest in mortgage loans and mortgage-related securities. We do not originate loans or lend money directly to mortgage borrowers.
We support the U.S. housing market and the overall economy by enabling America’s families to access mortgage loan funding with better terms and by providing consistent liquidity to the multifamily mortgage market. We have helped many distressed borrowers keep their homes or avoid foreclosure. We are working with FHFA, our customers and the industry to build a better housing finance system for the nation.

Freddie Mac Form 10-Q
 
1

Management's Discussion and Analysis
 
Introduction

Business Results
Portfolio Balances

Guarantee Portfolios

chart-4f6666225c009b6d0b7.jpg
 
Investments Portfolios

chart-500bef5ce5c879a2fd6.jpg


Total Guarantee Portfolio
n
Our total guarantee portfolio grew $106 billion, or 5%, from March 31, 2017 to March 31, 2018, driven by a 3% increase in our single-family credit guarantee portfolio and a 30% increase in our multifamily guarantee portfolio.
l
The growth in our single-family credit guarantee portfolio was driven in part by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
l
The growth in our multifamily guarantee portfolio was primarily driven by an increase in U.S. multifamily mortgage debt outstanding due to strong multifamily market fundamentals and low interest rates, coupled with the growth in our share of new business volume due to our strategic pricing efforts, expansion of our new product offerings and an increase in purchase activity associated with certain targeted loans in underserved markets.

Freddie Mac Form 10-Q
 
2

Management's Discussion and Analysis
 
Introduction

Total Investments Portfolio
n
Our total investments portfolio declined $72 billion, or 19%, from March 31, 2017 to March 31, 2018, primarily due to repayments and the active disposition of less liquid assets.
l
We continue to reduce the mortgage-related investments portfolio as required by the Purchase Agreement and FHFA.
Consolidated Financial Results
Comprehensive income (loss) was $2.2 billion in 1Q 2018, relatively unchanged from 1Q 2017.
Key Drivers:
n
Continued growth in our single-family credit guarantee portfolio was more than offset by the continued reduction in the balance of our mortgage-related investments portfolio and lower amortization of debt securities of consolidated trusts due to lower prepayments driven by higher interest rates, which resulted in lower net interest income.
n
Benefit (provision) for credit losses was relatively unchanged.
n
Market-related items had minimal impact as interest rate-related fair value losses were partially offset by spread-related fair value gains.
n
Reduction in the statutory corporate income tax rate resulted in lower income tax expense.
Our total equity was $2.2 billion at March 31, 2018. Because our net worth was less than the $3.0 billion Capital Reserve Amount, we will not have a dividend obligation to Treasury in June 2018. Because our net worth was positive, we are not requesting a draw from Treasury under the Purchase Agreement for 1Q 2018. Our cumulative senior preferred stock dividend payments totaled $112.4 billion as of March 31, 2018.
At December 31, 2017, we had a net worth deficit of $312 million. As a result, FHFA, as Conservator, submitted a draw request, on our behalf, to Treasury. This draw request was funded in 1Q 2018, which increased the outstanding liquidation preference of the senior preferred stock at March 31, 2018 to $75.6 billion. In addition, the amount of available funding remaining under the Purchase Agreement was reduced to $140.2 billion and will be reduced by any future draws.
Conservatorship and Government Support for Our Business
Since September 2008, we have been operating in conservatorship, with FHFA as our Conservator. The conservatorship and related matters significantly affect our management, business activities, financial condition and results of operations. Our future is uncertain, and the conservatorship has no specified termination date. We do not know what changes may occur to our business model during or following conservatorship, including whether we will continue to exist.
Our Purchase Agreement with Treasury and the terms of the senior preferred stock we issued to Treasury also affect our business activities. Our ability to access funds from Treasury under the Purchase Agreement is critical to keeping us solvent and avoiding the appointment of a receiver by FHFA under statutory mandatory receivership provisions. We believe that the support provided by Treasury pursuant to the Purchase Agreement currently enables us to have adequate liquidity to conduct normal business activities.

Freddie Mac Form 10-Q
 
3

Management's Discussion and Analysis
 
Introduction

Treasury, as the holder of the senior preferred stock, is entitled to receive cumulative quarterly cash dividends, when, as and if declared by the Conservator, acting as successor to the rights, titles, powers and privileges of our Board of Directors. The dividends we have paid to Treasury on the senior preferred stock have been declared by, and paid at the direction of, the Conservator.
Under the August 2012 amendment to the Purchase Agreement, our dividend requirement each quarter is the amount, if any, by which our Net Worth Amount at the end of the immediately preceding fiscal quarter, less the applicable Capital Reserve Amount, exceeds zero. Pursuant to the December 2017 Letter Agreement, the Capital Reserve Amount is $3.0 billion. If for any reason we were not to pay our dividend requirement on the senior preferred stock in full in any future period, the unpaid amount would be added to the liquidation preference and our applicable Capital Reserve Amount would thereafter be zero, but this would not affect our ability to draw funds from Treasury under the Purchase Agreement.




Freddie Mac Form 10-Q
 
4

Management's Discussion and Analysis
 
Key Economic Indicators | Single-Family Home Prices


KEY ECONOMIC INDICATORS
The following graphs and related discussions present certain macroeconomic indicators that can significantly affect our business and financial results.
Single-Family Home Prices
National Home Prices
chart-e84826732d265412b63.jpg
Commentary
n
Home prices continued to appreciate, increasing by 2.5% and 2.2% during 1Q 2018 and 1Q 2017, respectively, based on our own non-seasonally adjusted price index of single-family homes funded by loans owned or guaranteed by us or Fannie Mae.
n
We expect the rate of home price growth in 2018 will moderate, driven by a gradual increase in housing supply and higher mortgage interest rates.
n
Increases in home prices typically result in lower delinquency rates and lower loss severity. Fewer loan delinquencies, loan workouts and foreclosure sales generally reduce estimated credit losses on our total mortgage portfolio.
n
Higher single-family home prices may also contribute to an increase in potential multifamily renters.



Freddie Mac Form 10-Q
 
5

Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

Interest Rates
Key Market Interest Rates
chart-449d6c0c2b0050c6bf6.jpg chart-b72d78e1b63d5e98a39.jpg
Commentary
n
The quarterly ending and quarterly average 30-year Primary Mortgage Market Survey ("PMMS") interest rates were higher at March 31, 2018 than March 31, 2017. Increases in the PMMS rate typically result in decreases in refinance activity and U.S. single-family loan originations.
n
The 10-year LIBOR and 2-year LIBOR quarterly ending interest rates increased more during 1Q 2018 than during 1Q 2017. Changes in the 10-year and 2-year LIBOR interest rates affect the fair value of certain of our assets and liabilities, including derivatives, measured at fair value. A larger interest rate fluctuation from period to period generally results in larger fair value gains and losses, while a smaller fluctuation from period to period generally results in smaller fair value gains and losses. However, the majority of these fair value changes are offset by our hedge accounting programs.

Freddie Mac Form 10-Q
 
6

Management's Discussion and Analysis
 
Key Economic Indicators | Interest Rates

n
The quarterly ending and quarterly average short-term interest rates, as indicated by the 3-month LIBOR rate, were higher at March 31, 2018 than March 31, 2017. An increase in short-term interest rates generally increases the interest earned on our short-term investments and interest expense on our short-term funding.
n
For additional information on the effect of LIBOR rates on our financial results, see Our Business Segments - Capital Markets - Market Conditions.





Freddie Mac Form 10-Q
 
7

Management's Discussion and Analysis
 
Key Economic Indicators | Unemployment Rate

Unemployment Rate
Unemployment Rate and Job Creation(1) 
chart-a1e08ec5697a571f9d5.jpg
Source: U.S. Bureau of Labor Statistics
(1) Excludes Puerto Rico and the U.S. Virgin Islands.
Commentary
n
Average monthly net new jobs (non-farm) were higher in 1Q 2018 than 1Q 2017.
n
The national unemployment rate was lower in 1Q 2018 than 1Q 2017.
n
Changes in monthly net new jobs and the national unemployment rate can affect several market factors, including the demand for both single-family and multifamily housing and the level of loan delinquencies.
n
Decreases in the national unemployment rate typically result in lower levels of delinquencies, which generally result in a decrease in estimated credit losses on our total mortgage portfolio.

Freddie Mac Form 10-Q
 
8

Management's Discussion and Analysis
 
Consolidated Results of Operations


CONSOLIDATED RESULTS OF OPERATIONS
You should read this discussion of our consolidated results of operations in conjunction with our condensed consolidated financial statements and accompanying notes.
The table below compares our summarized consolidated results of operations.
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Net interest income
 

$3,018


$3,795

 

($777
)
(20
)%
Benefit (provision) for credit losses
 
(63
)
116

 
(179
)
(154
)
Net interest income after benefit (provision) for credit losses
 
2,955

3,911

 
(956
)
(24
)
Non-interest income (loss):
 
 
 
 




Gains (losses) on extinguishment of debt
 
110

218

 
(108
)
(50
)
Derivative gains (losses)
 
1,830

(302
)
 
2,132

706

Net impairment of available-for-sale securities recognized in earnings
 

(13
)
 
13

100

Other gains (losses) on investment securities recognized in earnings
 
(232
)
56

 
(288
)
(514
)
Other income (loss)
 
121

415

 
(294
)
(71
)
Total non-interest income (loss)
 
1,829

374

 
1,455

389

Non-interest expense:
 
 
 
 




Administrative expense
 
(520
)
(511
)
 
(9
)
(2
)
REO operations expense
 
(34
)
(56
)
 
22

39

Temporary Payroll Tax Cut Continuation Act of 2011 expense
 
(359
)
(321
)
 
(38
)
(12
)
Other expense
 
(197
)
(76
)
 
(121
)
(159
)
Total non-interest expense
 
(1,110
)
(964
)
 
(146
)
(15
)
Income (loss) before income tax (expense) benefit
 
3,674

3,321

 
353

11

Income tax (expense) benefit
 
(748
)
(1,110
)
 
362

33

Net income (loss)
 
2,926

2,211

 
715

32

Total other comprehensive income (loss), net of taxes and reclassification adjustments
 
(776
)
23

 
(799
)
(3,474
)
Comprehensive income (loss)
 

$2,150


$2,234

 

($84
)
(4
)%

Freddie Mac Form 10-Q
 
9

Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income

Net Interest Income
Net Interest Yield Analysis
The table below presents an analysis of interest-earning assets and interest-bearing liabilities.
 
 
 
1Q 2018
 
1Q 2017
 
(Dollars in millions)
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Average
Balance
Interest
Income
(Expense)(1)
Average
Rate
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 

$7,015


$11

0.60
 %
 

$12,053


$9

0.29
 %
 
Securities purchased under agreements to resell
 
51,732

197

1.52

 
54,406

88

0.66

 
Advances to lenders and other secured lending
 
990

6

2.59

 
617

4

2.40

 
Mortgage-related securities:
 
 
 
 
 
 
 
 
 
Mortgage-related securities
 
150,267

1,580

4.21

 
175,955

1,663

3.78

 
Extinguishment of PCs held by Freddie Mac
 
(90,814
)
(843
)
(3.71
)
 
(88,539
)
(820
)
(3.71
)
 
Total mortgage-related securities, net
 
59,453

737

4.96

 
87,416

843

3.85

 
Non-mortgage-related securities
 
14,775

73

1.97

 
21,061

71

1.36

 
Loans held by consolidated trusts(1)
 
1,776,708

14,859

3.35

 
1,708,039

14,599

3.42

 
Loans held by Freddie Mac(1)
 
103,451

1,092

4.22

 
124,217

1,366

4.40

 
Total interest-earning assets
 
2,014,124

16,975

3.37

 
2,007,809

16,980

3.38

 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
Debt securities of consolidated trusts including PCs held by Freddie Mac
 
1,803,122

(13,356
)
(2.96
)
 
1,730,728

(12,541
)
(2.90
)
 
Extinguishment of PCs held by Freddie Mac
 
(90,814
)
842

3.71

 
(88,539
)
820

3.71

 
Total debt securities of consolidated trusts held by third parties
 
1,712,308

(12,514
)
(2.92
)
 
1,642,189

(11,721
)
(2.86
)
 
Other debt:
 
 
 
 
 
 
 
 
 
Short-term debt
 
67,970

(229
)
(1.35
)
 
73,467

(96
)
(0.52
)
 
Long-term debt
 
228,981

(1,214
)
(2.12
)
 
279,519

(1,368
)
(1.96
)
 
Total other debt
 
296,951

(1,443
)
(1.94
)
 
352,986

(1,464
)
(1.66
)
 
Total interest-bearing liabilities
 
2,009,259

(13,957
)
(2.78
)
 
1,995,175

(13,185
)
(2.64
)
 
Impact of net non-interest-bearing funding
 
4,865


0.01

 
12,634


0.02

 
Total funding of interest-earning assets
 

$2,014,124


($13,957
)
(2.77
)%
 

$2,007,809


($13,185
)
(2.62
)%
 
Net interest income/yield
 
 

$3,018

0.60
 %
 
 

$3,795

0.76
 %
 
 
 
 
 
 
 
 
 
 
 
(1) Loan fees, primarily consisting of amortization of upfront fees, included in interest income were $574 million and $506 million for loans held by consolidated trusts and $22 million and $62 million for loans held by Freddie Mac during 1Q 2018 and 1Q 2017, respectively.

 
 

Freddie Mac Form 10-Q
 
10

Management's Discussion and Analysis
 
Consolidated Results of Operations | Net Interest Income

Components of Net Interest Income
The table below presents the components of net interest income.
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Contractual net interest income:
 
 
 
 
 
 
Guarantee fee income
 

$834


$792

 

$42

5
 %
Guarantee fee income related to the Temporary Payroll Tax Cut Continuation Act of 2011
 
347

316

 
31

10

Other contractual net interest income
 
1,457

1,759

 
(302
)
(17
)
Total contractual net interest income
 
2,638

2,867

 
(229
)
(8
)
Net amortization - loans and debt securities of consolidated trusts
 
748

953

 
(205
)
(22
)
Net amortization - other assets and debt
 
5

18

 
(13
)
(72
)
Hedge accounting impact
 
(373
)
(43
)
 
(330
)
(767
)
Net interest income
 

$3,018


$3,795

 

($777
)
(20
)%
Key Drivers:
n
Guarantee fee income
l
1Q 2018 vs. 1Q 2017 - increased during 1Q 2018 primarily due to higher average guarantee fee rates, as well as the continued growth in the size of the Core single-family loan portfolio. Average guarantee fee rates are generally higher on mortgage loans in our Core single-family loan portfolio compared to those in our Legacy and relief refinance single-family loan portfolio.
n
Other contractual net interest income
l
1Q 2018 vs. 1Q 2017 - decreased during 1Q 2018 due to the continued reduction in the balance of our mortgage-related investments portfolio pursuant to the portfolio limits established by the Purchase Agreement and FHFA. See Conservatorship and Related Matters - Reducing Our Mortgage-Related Investments Portfolio Over Time for a discussion of the key drivers of the decline in our mortgage-related investments portfolio.
n
Net amortization of loans and debt securities of consolidated trusts
l
1Q 2018 vs. 1Q 2017 - decreased during 1Q 2018 primarily due to a decrease in amortization of debt securities of consolidated trusts driven by a decrease in prepayments as a result of higher interest rates, partially offset by an increase in amortization from higher upfront fees on mortgage loans.
n
Hedge Accounting Impact
l
1Q 2018 vs. 1Q 2017 - losses increased primarily due to the inclusion of fair value hedge accounting results within net interest income in 1Q 2018 but not in 1Q 2017, due to our adoption of amended hedge accounting guidance in 4Q 2017. In 1Q 2017, this activity was included in other income and derivative gains (losses).

Freddie Mac Form 10-Q
 
11

Management's Discussion and Analysis
Consolidated Results of Operations | Benefit (Provision) for Credit Losses


Benefit (Provision) for Credit Losses
Components of Benefit (Provision) for Credit Losses
The benefit (provision) for credit losses predominantly relates to single-family loans and includes components for both collectively and individually impaired loans.
The table below presents the components of our benefit (provision) for credit losses.
 
 
 
 
 
Change
(Dollars in billions)
 
1Q 2018
1Q 2017
 
$
%
Benefit (provision) for newly impaired loans
 

($0.1
)

($0.2
)
 

$0.1

50
 %
Amortization of interest rate concessions
 
0.1

0.2

 
(0.1
)
(50
)
Reclassifications between held-for-investment loans and held-for-sale loans
 
(0.1
)

 
(0.1
)
N/A

Other, including changes in estimated default probability and loss severity
 

0.1

 
(0.1
)
(100
)
Benefit (provision) for credit losses
 

($0.1
)

$0.1

 

($0.2
)
(200
)%
Key Drivers:
n 1Q 2018 vs. 1Q 2017 - remained relatively unchanged.



Freddie Mac Form 10-Q
 
12

Management's Discussion and Analysis
 
Consolidated Results of Operations | Derivative Gains (Losses)


Derivative Gains (Losses)
Components of Derivative Gains (Losses)
We continue to align our derivative portfolio with the changing duration of our assets and liabilities so as to economically hedge their interest-rate risk. We manage our exposure to interest-rate risk on an economic basis to a low level as measured by our models. We believe the impact of derivatives on our GAAP financial results should be considered in the context of our overall interest-rate risk profile, including our PMVS and duration gap results. For more information about our interest-rate risk management activities and the sensitivity of reported earnings to those activities, see Risk Management - Market Risk.
Derivative gains (losses) includes the fair value changes and the accrual of periodic cash settlements for derivatives while not designated in qualifying hedge relationships. In addition, prior to our adoption of amended hedge accounting guidance in 4Q 2017, we included the accrual of periodic cash settlements on derivatives in qualifying hedge relationships in derivatives gains (losses).
The table below presents the components of derivative gains (losses).
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Fair value change in interest-rate swaps
 

$1,514


$673

 

$841

125
 %
Fair value change in option-based derivatives
 
(455
)
(430
)
 
(25
)
(6
)
Fair value change in other derivatives
 
916

(78
)
 
994

1,274

Accrual of periodic cash settlements
 
(145
)
(467
)
 
322

69

Derivative gains (losses)
 

$1,830


($302
)
 

$2,132

706
 %
Key Drivers:
n
1Q 2018 vs. 1Q 2017 - Derivative fair value gains increased as long-term interest rates increased more during 1Q 2018. The 10-year par swap rate increased 39 basis points during 1Q 2018 and 7 basis points during 1Q 2017. The larger interest rate increase in 1Q 2018 resulted in larger fair value gains in our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures, partially offset by larger fair value losses in our receive-fixed swaps.

Freddie Mac Form 10-Q
 
13

Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Income (Loss)


Other Income (Loss)
Components of Other Income (Loss)
The table below presents the components of other income (loss).
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Other income (loss)
 
 
 
 
 
 
Gains (losses) on loans(1)
 

($320
)

$14

 

($334
)
(2,386
)%
Gains (losses) on held-for-sale loan purchase commitments(1)
 
105

224

 
(119
)
(53
)
Gains (losses) on debt(1)
 
11

(89
)
 
100

112

All other
 
325

227

 
98

43

 Fair value hedge accounting
 
 
 
 
 

Change in fair value of derivatives in qualifying hedge relationships
 
N/A

65

 
(65
)
N/A

Change in fair value of hedged items in qualifying hedge relationships
 
N/A

(26
)
 
26

N/A

Total other income (loss)
 

$121


$415

 

($294
)
(71
)%
(1)
Includes fair value gains (losses) on loans, held-for-sale loan purchase commitments and debt for which we have elected the fair value option.
Key Drivers:
n 1Q 2018 vs. 1Q 2017 - Other income (loss) declined in 1Q 2018 compared to 1Q 2017 primarily driven by:
l Greater interest rate-related fair value losses on multifamily mortgage loans and commitments for which we have elected the fair value option due to a larger increase in long-term interest rates, coupled with spread widening on certain K Certificate products that are issued with less frequency.
l An accounting policy change effective beginning in 4Q 2017 resulted in fair value changes for derivatives and hedged items in qualifying hedge relationships no longer being recognized in other income (loss). See Note 9 for more information.
This decrease was partially offset by:
l Decreased fair value losses on STACR debt notes as market spreads between STACR yields and LIBOR remained relatively unchanged in 1Q 2018, while spreads tightened in 1Q 2017.

Freddie Mac Form 10-Q
 
14

Management's Discussion and Analysis
 
Consolidated Results of Operations | Other Comprehensive Income (Loss)

Other Comprehensive Income (Loss)
Explanation of Key Drivers of Other Comprehensive Income (Loss)
The following table presents the attribution of total other comprehensive income (loss), net of taxes and reclassification adjustments reported in our condensed consolidated statements of comprehensive income.
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Other comprehensive income (loss), excluding certain items
 

($402
)

$163

 

($565
)
(347
)%
Excluded items:
 
 
 
 
 
 
Accretion due to significant increases in expected cash flows on previously impaired available-for-sale securities
 
(88
)
(54
)
 
(34
)
(63
)
Realized (gains) losses reclassified from AOCI
 
(286
)
(86
)
 
(200
)
(233
)
Total excluded items
 
(374
)
(140
)

(234
)
(167
)
Total other comprehensive income (loss)
 

($776
)

$23

 

($799
)
(3,474
)%
Key Drivers:
n Other comprehensive income, excluding certain items
l
1Q 2018 vs. 1Q 2017 - decreased primarily due to higher fair value losses on agency and non-agency mortgage-related securities classified as available-for-sale as long-term interest rates increased more in 1Q 2018, coupled with smaller fair value gains from less market spread tightening on our agency mortgage-related securities.
Excluded items:
n Realized (gains) losses reclassified from AOCI
l
1Q 2018 vs. 1Q 2017 - reflected larger amounts of reclassified gains during 1Q 2018 due to spread tightening on sales of non-agency mortgage-related securities classified as available-for-sale.

Freddie Mac Form 10-Q
 
15

Management's Discussion and Analysis
Consolidated Results of Operations | Other Key Drivers

Other Key Drivers
Explanation of Other Key Drivers
Key Drivers:
n Gains (losses) on extinguishment of debt
l
1Q 2018 vs. 1Q 2017 - declined primarily due to a decrease in the amount of debt securities of consolidated trusts (i.e., PCs) repurchased.
n Other gains (losses) on investment securities recognized in earnings
l
1Q 2018 vs. 1Q 2017 - decreased primarily driven by larger fair value losses on our mortgage and non-mortgage-related securities classified as trading as interest rates increased more during 1Q 2018, partially offset by larger fair value gains driven by spread tightening on our sales of non-agency mortgage-related securities classified as available-for-sale.
n Other expense
l
1Q 2018 vs. 1Q 2017 - increased primarily due to the recovery in 1Q 2017 of amounts previously recognized in other expense. This activity did not repeat in 1Q 2018.
n Income tax (expense) benefit
l
1Q 2018 vs. 1Q 2017 - decreased due to a reduction in the statutory corporate income tax rate.

Freddie Mac Form 10-Q
 
16

Management's Discussion and Analysis
 
Consolidated Balance Sheets Analysis


CONSOLIDATED BALANCE SHEETS ANALYSIS
The table below compares our summarized consolidated balance sheets.
 
 
 
 
 
Change
(Dollars in millions)
 
3/31/2018
12/31/2017
 
$
%
Assets:
 
 
 
 
 
 
Cash and cash equivalents(1)
 

$8,617


$9,811

 

($1,194
)
(12
)%
Securities purchased under agreements to resell
 
41,828

55,903

 
(14,075
)
(25
)
Subtotal
 
50,445

65,714

 
(15,269
)
(23
)
Investments in securities, at fair value
 
75,501

84,318

 
(8,817
)
(10
)
Mortgage loans, net
 
1,868,351

1,871,217

 
(2,866
)

Accrued interest receivable
 
6,381

6,355

 
26


Derivative assets, net
 
454

375

 
79

21

Deferred tax assets, net
 
8,313

8,107

 
206

3

Other assets
 
13,038

13,690

 
(652
)
(5
)
Total assets
 

$2,022,483


$2,049,776

 

($27,293
)
(1
)%
 
 
 
 
 
 
 
Liabilities and Equity:
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
Accrued interest payable
 

$6,058


$6,221

 

($163
)
(3
)%
Debt, net
 
2,004,807

2,034,630

 
(29,823
)
(1
)
Derivative liabilities, net
 
345

269

 
76

28

Other liabilities
 
9,123

8,968

 
155

2

Total liabilities
 
2,020,333

2,050,088

 
(29,755
)
(1
)
Total equity
 
2,150

(312
)
 
2,462

(789
)
Total liabilities and equity
 

$2,022,483


$2,049,776

 

($27,293
)
(1
)%
(1) The current and prior period presentation has been modified to include restricted cash and cash equivalents due to recently adopted accounting guidance.
Key Drivers:
As of March 31, 2018 compared to December 31, 2017:
n
Cash and cash equivalents and securities purchased under agreements to resell affect one another and changes in the balances should be viewed together (e.g., cash and cash equivalents can be invested in securities purchased under agreements to resell or other investments). The decrease in the combined balance was primarily due to lower near term cash needs for fewer upcoming maturities and anticipated calls of other debt.
n Investments in securities, at fair value decreased as we continued to reduce the mortgage-related investments portfolio during 2018 as required by the Purchase Agreement and FHFA.
n Total equity increased primarily as a result of higher comprehensive income in 1Q 2018 compared to 4Q 2017, combined with our ability to retain equity as a result of an increase in the applicable Capital Reserve Amount, which is $3.0 billion as of January 1, 2018.

Freddie Mac Form 10-Q
 
17

Management's Discussion and Analysis
 
Our Business Segments | Segment Earnings


OUR BUSINESS SEGMENTS
We have three reportable segments, which are based on the way we manage our business.
n
Single-family Guarantee - reflects results from our purchase, securitization and guarantee of single-family loans and the management of single-family mortgage credit risk.
n
Multifamily - reflects results from our purchase, sale, securitization and guarantee of multifamily loans and securities, our investments in those loans and securities and the management of multifamily mortgage credit risk and market spread risk.
n
Capital Markets - reflects results from managing our mortgage-related investments portfolio (excluding Multifamily segment investments, single-family seriously delinquent loans and the credit risk of single-family performing and reperforming loans), treasury function, single-family securitization activities and interest-rate risk.
Certain activities that are not part of a reportable segment, such as material corporate-level activities that are infrequent in nature and based on decisions outside the control of the management of our reportable segments, are included in the All Other category.
Segment Earnings
We present Segment Earnings by reclassifying certain credit guarantee-related activities and investment-related activities between various line items on our GAAP condensed consolidated statements of comprehensive income and allocating certain revenues and expenses to our three reportable segments. For more information on our segment reclassifications, see Note 13.
Segment Comprehensive Income
The graph below shows our comprehensive income by segment.
chart-ec0a85d6c1175c9a81c.jpg

Freddie Mac Form 10-Q
 
18

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Guarantee
Market Conditions

The graphs and related discussion below present certain market indicators that can significantly affect the business and financial results of our Single-family Guarantee segment.
U.S. Single-Family Originations
chart-fe7ecee61a9e5f15a39.jpgSource: Inside Mortgage Finance dated April 27, 2018 (latest available IMF purchase/refinance information).

 
Single-Family Serious Delinquency Rates
chart-12c6c13bbcc65ad1950.jpg

Source: National Delinquency Survey from the Mortgage Bankers Association. Data as of February 8, 2018 (latest available NDS information).

Commentary
n U.S. single-family loan origination volumes decreased to $375 billion in 1Q 2018 from $385 billion in 1Q 2017, driven by lower refinance volume as a result of higher mortgage interest rates in 1Q 2018. Mortgage origination data is from Inside Mortgage Finance as of April 27, 2018.
n We expect continued growth in U.S. single-family home purchase volume due to a gradual increase in housing supply, while a moderate increase in mortgage interest rates is expected to result in a lower refinance volume. Freddie Mac's single-family loan purchase volumes typically follow a similar trend.
n The single-family serious delinquency rate in the U.S. increased during 4Q 2017 due to the impact of the hurricanes in 3Q 2017. Freddie Mac's serious delinquency rate followed a similar trend resulting

Freddie Mac Form 10-Q
 
19

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

in higher loan workout activities, which increased our expected credit losses on our total single-family credit guarantee portfolio.

Freddie Mac Form 10-Q
 
20

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Business Results

The following tables, graphs and related discussion present the business results of our Single-family Guarantee segment.
New Business Activity
UPB of Single-Family Loan Purchases and Guarantees by Loan Purpose

(In billions)
chart-daf6beda19be5c5991b.jpg
 
Percentage of Single-Family Loan Purchases and Guarantees by Loan Purpose
chart-0a38bbc68ee25cce904.jpg
Commentary
n
Our loan purchase and guarantee activity decreased in 1Q 2018 compared to 1Q 2017 primarily due to lower refinance volume driven by higher average mortgage interest rates.



Freddie Mac Form 10-Q
 
21

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Credit Guarantee Portfolio
Single-Family Credit Guarantee Portfolio
chart-c9acd940559b5bd3afa.jpg
Commentary
n
The single-family credit guarantee portfolio increased from December 31, 2017 to March 31, 2018, driven by an increase in U.S. single-family mortgage debt outstanding as a result of continued home price appreciation. New business acquisitions had a higher average loan size compared to older vintages that continued to run off.
n
The Core single-family loan portfolio grew to 79% of the single-family credit guarantee portfolio at March 31, 2018, compared to 78% at December 31, 2017.
n
The Legacy and relief refinance single-family loan portfolio declined to 21% of the single-family credit guarantee portfolio at March 31, 2018, compared to 22% at December 31, 2017, driven primarily by liquidations.

Freddie Mac Form 10-Q
 
22

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Guarantee Fees
We receive fees for guaranteeing the payment of principal and interest to investors in our mortgage-related securities. These fees consist primarily of a combination of base contractual guarantee fees paid on a monthly basis and initial upfront payments. The average portfolio Segment Earnings guarantee fee rate recognizes upfront fee income over the contractual life of the related loans (usually 30 years). If the related loans prepay, the remaining upfront fee income is recognized immediately. In contrast, the average guarantee fee rate charged on new acquisitions recognizes upfront fee income over the estimated life of the related loans using our expectations of prepayments and other liquidations. See MD&A - Our Business Segments - Single-family Guarantee - Business Overview - Guarantee Fees in our 2017 Annual Report for more information on our guarantee fees.
Average Portfolio Segment Earnings Guarantee Fee Rate(1)(2) chart-3d60de4db58b53f58d2.jpg
 
Average Guarantee Fee Rate(1) Charged on New Acquisitions chart-cbc0dfb498e45ed9a79.jpg

(1) Excludes the legislated 10 basis point increase in guarantee fees.
(2) Reflects an average rate for our total single-family credit guarantee portfolio and is not limited to purchases in the applicable period.
Commentary
n
The average portfolio Segment Earnings guarantee fee rate increased slightly in 1Q 2018 compared to 1Q 2017 primarily due to older vintages being replaced by new loan acquisitions with higher guarantee fees.
n
The average guarantee fee rate charged on new acquisitions decreased in 1Q 2018 compared to 1Q 2017 due to competitive pricing.

Freddie Mac Form 10-Q
 
23

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Risk Transfer (CRT) Activities
We transfer credit risk on a portion of our single-family credit guarantee portfolio to the private market, which reduces the risk of future losses to us and taxpayers when borrowers go into default. In our STACR debt note and ACIS transactions, we pay interest to investors or premiums to insurers in exchange for their taking on a portion of the credit risk on the mortgage loans in the related reference pool. These payments effectively reduce our guarantee fee income from the PCs backed by the mortgage loans in the related reference pools. See MD&A - Our Business Segments - Single-Family Guarantee - Business Overview - Credit Risk Transfer Transactions in our 2017 Annual Report for more information on our CRT transactions.
The following charts present the issuance amounts for the STACR debt note and ACIS transactions that occurred during 1Q 2018 and the cumulative issuance amounts for all STACR debt note, ACIS and Deep MI CRT transactions as of March 31, 2018 by loss position and the party holding each loss position.
New STACR Debt Note and ACIS Transactions during 1Q 2018(1) 
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$73.3
 
Reference Pool(3)

$76.3
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac

$0.2
 
ACIS(3)


$0.4
 
STACR Debt Notes

                                                                                                                                                                                     $1.6
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
Loss
 
Freddie Mac
$0.4
 
ACIS(3)

$0.1
 
STACR
Debt Notes
$0.3
 
 
Cumulative STACR Debt Note, ACIS and Deep MI CRT Transactions as of March 31, 2018(1)(2)  
 
 
(In billions)
 
 
Senior
 
Freddie Mac


$900.1
 
Reference Pool

$942.4
 
 
 
 
 
 
 
 
 
 
Mezzanine
 
Freddie Mac


$2.3
 
ACIS



$7.9
 
STACR Debt Notes

$23.6
 
Deep MI CRT


$0.2
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
First
 Loss
 
Freddie Mac
$5.1
 
ACIS

$1.0
 
STACR
Debt Notes
$2.2
 

(1)
The amounts represent the UPB upon issuance of STACR debt notes and execution of ACIS and Deep MI CRT transactions. There were no Deep MI CRT transactions in 1Q 2018.
(2)
For the current outstanding coverage provided by our STACR debt note and ACIS transactions, see Credit Enhancements.
(3) Excludes additional ACIS transactions of $1.0 billion related to reference pools in transactions executed in prior periods.
Commentary
n
During 1Q 2018, we transferred a portion of credit risk associated with $81.6 billion in UPB of loans in our single-family credit guarantee portfolio through STACR debt note, ACIS and senior subordinate securitization structure transactions.
n
As of March 31, 2018, we had transferred a significant portion of credit risk on 39% of our single-family credit guarantee portfolio.

Freddie Mac Form 10-Q
 
24

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

l
Calculated as the current balance of single-family CRT reference pool UPB divided by the single-family credit guarantee portfolio UPB.
n
We expect to reduce by approximately 60% the modeled capital required for credit risk on the quarter's $66 billion of new originations.
l
Calculated as modeled credit capital expected to be released from the underlying single-family CRT reference pool divided by total modeled credit capital on quarterly new originations.
l
The modeled capital requirement is per FHFA's Conservatorship Capital Framework (CCF) and internal methods that use stress scenarios which are generally consistent with the 2017 Dodd-Frank Act Stress Test (DFAST) "severely adverse" scenario.
n
Our expected guarantee fee income on the PCs related to the STACR debt note and ACIS reference pools has been effectively reduced by approximately 29%, on average, for all transactions executed through March 31, 2018.
n
As of March 31, 2018, we had experienced minimal write-downs on our STACR debt notes and have filed minimal claims for reimbursement of losses under our ACIS transactions. We expect losses may increase on loans in the reference pools in our existing CRT transactions as a result of the hurricanes in 3Q 2017.
We continue to evaluate our credit risk transfer strategy and to make changes depending on market conditions and our business strategy. The aggregate cost of our credit risk transfer activity will continue to increase as we continue to transfer risk on new originations.


Freddie Mac Form 10-Q
 
25

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Enhancements
The table below provides information on the total current and protected UPB and maximum coverage associated with credit enhanced loans in our single-family credit guarantee portfolio as of March 31, 2018 and December 31, 2017, respectively. The table includes all types of single-family credit enhancements. See Note 6 for additional information about our single-family credit enhancements.
 
 
March 31, 2018
 
December 31, 2017
(In millions)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
 
Total Current and Protected UPB(1)
Maximum Coverage(2)
Primary mortgage insurance
 

$338,457


$86,622

 

$334,189


$85,429

STACR debt note(3)
 
661,399

19,183

 
604,356

17,788

ACIS transactions(4)
 
650,420

7,148

 
617,730

6,736

Senior subordinate securitization structures
 
16,986

2,211

 
12,283

1,913

Other(5)
 
15,641

6,362

 
15,975

6,479

Less: UPB with more than one type of credit enhancement
 
(842,161
)

 
(775,751
)

Single-family credit guarantee portfolio with credit enhancement
 
840,742

121,526

 
808,782

118,345

Single-family credit guarantee portfolio without credit enhancement
 
995,217


 
1,020,098


Total
 

$1,835,959


$121,526

 

$1,828,880


$118,345

(1)
Except for the majority of our STACR debt notes and ACIS transactions, our credit enhancements generally provide protection for the first, or initial, credit losses associated with the related loans. For subordination, total current and protected UPB represents the UPB of the guaranteed securities. For STACR debt notes and ACIS transactions, total current and protected UPB represents the UPB of the assets included in the reference pool.
(2)
Except for subordination, this represents the remaining amount of loss recovery that is available subject to the terms of counterparty agreements. For subordination, this represents the UPB of the securities that are subordinate to our guarantee and held by third parties, which could provide protection by absorbing first losses.
(3)
Maximum coverage amounts represent the outstanding balance of STACR debt notes held by third parties.
(4)
Maximum coverage amounts represent the remaining aggregate limit of insurance purchased from third parties in ACIS transactions.
(5)
Includes seller indemnification, Deep MI CRT, lender recourse and indemnification agreements, pool insurance, HFA indemnification and other credit enhancements.
Commentary
n We had coverage remaining of $121.5 billion and $118.3 billion on our single-family credit guarantee portfolio as of March 31, 2018 and December 31, 2017, respectively. Credit risk transfer transactions provided 23.5% and 22.4% of the coverage remaining at those dates, respectively.

Freddie Mac Form 10-Q
 
26

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Mortgage Loan Credit Risk
Certain combinations of loan attributes can indicate a higher degree of credit risk, such as loans with both higher LTV ratios and lower credit scores. The following table presents the combination of credit score and current LTV (CLTV) ratio attributes of loans in our single-family credit guarantee portfolio.
 
 
March 31, 2018
 
 
CLTV ≤ 80

CLTV > 80 to 100

CLTV > 100

All Loans
(Credit score)
 
% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)

% Portfolio
SDQ Rate(1)
% Modified
Core single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
0.2
%
2.62
%
 
%
NM

 
%
NM

 
0.2
%
2.85
%
3.3
%
620 to 659
 
1.9

1.45

 
0.3

1.74
%
 

NM

 
2.2

1.48

1.5

≥ 660
 
67.4

0.25

 
8.9

0.43

 

NM

 
76.3

0.27

0.2

Not available
 
0.1

1.87

 

NM

 

NM

 
0.1

3.49

3.6

Total
 
69.6
%
0.29
%
 
9.2
%
0.50
%
 
%
NM

 
78.8
%
0.32
%
0.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Legacy and relief refinance single-family loan portfolio:
 
 
 
 
 
 
 
 
 
 
 
 
 
< 620
 
1.2
%
5.12
%
 
0.3
%
9.63
%
 
0.1
%
15.55
%
 
1.6
%
6.10
%
23.5
%
620 to 659
 
1.9

3.83

 
0.4

7.71

 
0.2

12.99

 
2.5

4.59

20.3

≥ 660
 
14.6

1.38

 
1.8

4.15

 
0.6

6.62

 
17.0

1.69

7.3

Not available
 
0.1

5.40

 

NM

 

NM

 
0.1

5.80

18.2

Total
 
17.8
%
1.97
%
 
2.5
%
5.34
%
 
0.9
%
8.95
%
 
21.2
%
2.41
%
10.1
%
(1)
NM - Not meaningful due to the percentage of the portfolio rounding to zero.

Freddie Mac Form 10-Q
 
27

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Alt-A and Subprime Loans
While we have referred to certain loans as subprime or Alt-A for purposes of the discussion below and elsewhere in this Form 10-Q, there is no universally accepted definition of subprime or Alt-A, and the classification of such loans may differ from company to company. We do not rely on these loan classifications to evaluate the credit risk exposure relating to such loans in our single-family credit guarantee portfolio.
Participants in the mortgage market have characterized single-family loans based upon their overall credit quality at the time of origination, including as prime or subprime. While we have not historically characterized the loans in our single-family credit guarantee portfolio as either prime or subprime, we monitor the amount of loans we have guaranteed with characteristics that indicate a higher degree of credit risk. In addition, we estimate that approximately $1.0 billion and $1.1 billion of security collateral underlying our other securitization products at March 31, 2018 and December 31, 2017, respectively, were identified as subprime based on information provided to us when we entered into these transactions.
Mortgage market participants have classified single-family loans as Alt-A if these loans have credit characteristics that range between the prime and subprime categories, if they are underwritten with lower or alternative income or asset documentation requirements compared to a full documentation loan, or both. Although we have discontinued new purchases of loans with lower documentation standards, we continue to purchase certain amounts of such loans in cases where the loan was either purchased pursuant to a previously issued guarantee, as part of our relief refinance initiative, or as part of another refinance loan initiative and the pre-existing loan was originated under less than full documentation standards. In the event we purchase a refinance loan and the original loan had been previously identified as Alt-A, such refinance loan may no longer be categorized or reported as an Alt-A loan in this Form 10-Q and our other financial reports because the new refinance loan replacing the original loan would not be identified by the seller/servicer as an Alt-A loan. As a result, our reported Alt-A balances may be lower than would otherwise be the case had such refinancing not occurred. From the time the relief refinance initiative began in 2009 to March 31, 2018, we have purchased approximately $36.1 billion of relief refinance loans that were previously categorized as Alt-A loans in our portfolio, including $0.2 billion in 1Q 2018.
The table below contains information on Alt-A loans in our single-family credit guarantee portfolio.
 
 
March 31, 2018
 
December 31, 2017
(Dollars in billions)
 
UPB
CLTV
% Modified
SDQ Rate
 
UPB
CLTV
% Modified
SDQ Rate
Alt-A
 

$26.3

65
%
24.2
%
5.40
%
 

$27.1

67
%
24.1
%
5.62
%
The UPB of Alt-A loans in our single-family credit guarantee portfolio declined during 1Q 2018 primarily due to borrowers refinancing into other mortgage products, foreclosure sales and other liquidation events. Significant portions of the Alt-A loans in our portfolio are concentrated in Arizona, California, Florida and Nevada.

Freddie Mac Form 10-Q
 
28

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Single-Family Loan Performance
Serious Delinquency Rates chart-d618d7997ef95e2f8a7.jpg
 
Delinquency Rates for Loans One Month and Two Months Past Due
chart-c6aba222b9fc76113bd.jpg

Commentary
n
Serious delinquency rates on our single-family credit guarantee portfolio were higher as of March 31, 2018 compared to March 31, 2017 due to the impact of the hurricanes in 3Q 2017. As a result, we expect an increase in our loan workout activities as well as our expected credit losses. Outside of the areas affected by the hurricanes, our single-family serious delinquency rates declined due to our continued loss mitigation efforts and sales of certain seriously delinquent loans, as well as home price appreciation and a low unemployment rate. This improvement was also driven by the continued shift in the single-family credit guarantee portfolio mix, as the Legacy and relief refinance loan portfolio runs off and we add high credit quality loans to our Core single-family loan portfolio.
n
Delinquency rates increased for both loans one month past due and loans two months past due as of March 31, 2018 compared to March 31, 2017. These increases were due to the impact of the hurricanes in 3Q 2017.

Freddie Mac Form 10-Q
 
29

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Credit Performance
The table below contains certain credit performance metrics for our single-family credit guarantee portfolio.
(Dollars in millions)
 
1Q 2018
1Q 2017
Charge-offs, gross
 

$372


$740

Recoveries
 
(96
)
(97
)
Charge-offs, net
 
276

643

REO operations expense
 
34

56

Total credit losses
 

$310


$699

 
 
 
 
Total credit losses (in bps)
 
6.7

15.6

The table below summarizes the carrying value for individually impaired single-family loans on our condensed consolidated balance sheets for which we have recorded an allowance determined on an individual basis.
 
 
March 31, 2018
 
March 31, 2017
(Dollars in millions)
 
Loan Count
Amount
 
Loan Count
Amount
TDRs, at January 1
 
364,704


$54,415

 
485,709


$78,869

New additions
 
23,699

3,800

 
10,838

1,486

Repayments and reclassifications to held-for-sale
 
(8,908
)
(1,522
)
 
(15,881
)
(3,290
)
Foreclosure sales and foreclosure alternatives
 
(2,083
)
(282
)
 
(2,774
)
(373
)
TDRs, at March 31
 
377,412

56,411

 
477,892

76,692

Loans impaired upon purchase
 
4,364

290

 
7,165

485

Total impaired loans with an allowance recorded
 
381,776

56,701

 
485,057

77,177

Allowance for loan losses
 
 
(6,968
)
 
 
(11,268
)
Net investment, at March 31
 
 

$49,733

 
 

$65,909

The tables below present information about the UPB of single-family TDRs and non-accrual loans on our condensed consolidated balance sheets.
(In millions)
 
March 31, 2018
December 31, 2017
TDRs on accrual status
 

$53,271


$51,644

Non-accrual loans
 
15,962

17,748

Total TDRs and non-accrual loans
 

$69,233


$69,392

 
 
 
 
Allowance for loan losses associated with:
 
 
 
  TDRs on accrual status
 

$5,457


$5,257

  Non-accrual loans
 
1,933

1,883

Total
 

$7,390


$7,140

 
 
 
 
(In millions)
 
1Q 2018
1Q 2017
Foregone interest income on TDRs and non-accrual loans(1)
 

$446


$554

(1)
Represents the amount of interest income that we would have recognized for loans outstanding at the end of each period had the loans performed according to their original contractual terms.

Freddie Mac Form 10-Q
 
30

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Commentary
n
As of March 31, 2018, 50% of the allowance for loan losses for single-family mortgage loans related to interest rate concessions provided to borrowers as part of loan modifications.
n
Most of our modified single-family loans, including TDRs, were current and performing at March 31, 2018.
n
We expect our allowance for loan losses associated with existing single-family TDRs to decline over time as we continue to sell reperforming loans. In addition, the allowance for loan losses will decline as borrowers continue to make monthly payments under the modified terms and interest rate concessions are amortized into earnings.
n
See Note 4 for information on our single-family allowance for loan losses.




Freddie Mac Form 10-Q
 
31

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Loss Mitigation Activities
Loan Workout Activity(1)  
(UPB in billions, number of loan workouts in thousands)
chart-489a14eff3b7a8d4503.jpg
(1)
Foreclosure alternatives consist of short sales and deeds in lieu of foreclosure. Home retention actions consist of forbearance agreements, repayment plans and loan modifications.
Commentary
n
Our loan workout activity increased in 1Q 2018 compared to 1Q 2017, consistent with the increase in the number of delinquent loans in the single-family credit guarantee portfolio due to the impact of the hurricanes in 3Q 2017.
n
We continue our loss mitigation efforts through our relief refinance, modification and other initiatives.

Freddie Mac Form 10-Q
 
32

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

REO Activity
The table below presents a summary of our single-family REO activity.
 
 
1Q 2018
 
1Q 2017
(Dollars in millions)
 
Number of Properties
Amount
 
Number of Properties
Amount
Beginning balance — REO
 
8,299


$900

 
11,418


$1,215

Additions
 
2,620

246

 
3,545

346

Dispositions
 
(3,201
)
(306
)
 
(4,025
)
(399
)
Ending balance — REO
 
7,718

840

 
10,938

1,162

Beginning balance, valuation allowance
 
 
(14
)
 
 
(17
)
Change in valuation allowance
 
 
5

 
 
(2
)
Ending balance, valuation allowance
 


(9
)
 


(19
)
Ending balance — REO, net
 



$831

 



$1,143

Commentary
n
Our REO ending inventory declined in 1Q 2018 primarily due to a decrease in REO acquisitions driven by fewer loans in foreclosure and a large proportion of property sales to third parties at foreclosure.

Freddie Mac Form 10-Q
 
33

Management's Discussion and Analysis
Our Business Segments | Single-Family Guarantee

Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Single-family Guarantee segment.
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Guarantee fee income
 

$1,513


$1,418

 

$95

7
 %
Benefit (provision) for credit losses
 
28

39

 
(11
)
(28
)
Other non-interest income (loss)
 
94

319

 
(225
)
(71
)
Administrative expense
 
(336
)
(333
)
 
(3
)
(1
)
REO operations expense
 
(39
)
(59
)
 
20

34

Other non-interest expense
 
(379
)
(318
)
 
(61
)
(19
)
Segment Earnings before income tax expense
 
881

1,066

 
(185
)
(17
)
Income tax expense
 
(179
)
(356
)
 
177

50

Segment Earnings, net of taxes
 
702

710

 
(8
)
(1
)
Total other comprehensive income (loss), net of tax
 
(4
)
(2
)
 
(2
)
(100
)
Total comprehensive income
 

$698


$708

 

($10
)
(1
)%
Key Business Drivers:
n 1Q 2018 vs. 1Q 2017
l Continued growth in our single-family credit guarantee portfolio and higher upfront fee amortization income resulted in increased guarantee fee income.
l Benefit for credit losses remained relatively unchanged.
l Decreased fair value losses on STACR debt notes as market spreads between STACR yields and LIBOR remained relatively unchanged in 1Q 2018, while spreads tightened in 1Q 2017.




Freddie Mac Form 10-Q
 
34

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily
Market Conditions
The graphs and related discussion below present certain multifamily market indicators that can significantly affect the business and financial results of our Multifamily segment.
Change in Effective Rents
chart-72322b9d467e5237876.jpgSource: REIS, Inc.

 
Apartment Vacancy Rates

chart-6a67b15eb371560e967.jpgSource: REIS, Inc.
Commentary
n
Growth in effective rent (i.e., the average rent paid by the tenant over the term of the lease, adjusted for concessions by the landlord and costs borne by the tenant) for 1Q 2018 remained strong relative to the long-term average, primarily due to an increase in potential renters driven by healthy employment, higher single-family home prices and a growing demand for rental housing due to lifestyle changes and demographic trends.
n
While vacancy rates rose slightly during 1Q 2018 compared to 4Q 2017, these rates remain well below the long-term average. Net absorptions continued to lag new apartment completions in 1Q 2018 partially due to seasonality impacts during the winter months. Although we expect continued strong demand, it may take longer to absorb new units compared to prior quarters.
n
Our financial results for 1Q 2018 were not significantly affected by these relatively stable market conditions.

Freddie Mac Form 10-Q
 
35

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


K Certificate Benchmark Spreads
chart-d39c5382507ab10d670.jpg
Source: Independent dealers

Commentary
n
The valuation of our securitization pipeline and the profitability of our primary credit risk transfer securitization product, the K Certificate, are affected by changes in K Certificate benchmark spreads as well as deal-specific attributes, such as tranche size, risk distribution and collateral characteristics (loan term, coupon type, prepayment restrictions and underlying property type). These market spread movements and deal-specific attributes contribute to our earnings volatility, which we manage by controlling the size of our securitization pipeline and by entering into certain spread-related derivatives.
n
K Certificate benchmark spreads are market-quoted spreads over the U.S. swap curve. The 10-year fixed-rate spread represents the spread for the largest guaranteed class of a typical fixed-rate K Certificate, while the 7-year ARM spread represents the spread for the largest guaranteed class of a typical floating-rate K Certificate.
n
K Certificate benchmark spreads generally tightened during 1Q 2018 and 1Q 2017. Overall, this tightening had a positive effect in 1Q 2018 and 1Q 2017 on the valuation of our securitization pipeline and K Certificate profitability. However, for certain of our K Certificate products that are issued with less frequency, spreads widened resulting in a negative effect on the valuation of loans designated as collateral for those products.

Freddie Mac Form 10-Q
 
36

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Business Results
The graphs, tables and related discussion below present the business results of our Multifamily segment.
New Business Activity
Multifamily New Business Activity
chart-fa3be74392fa5dd981e.jpg
Commentary
n
The 2018 Conservatorship Scorecard production cap decreased to $35.0 billion from $36.5 billion in 2017. The production cap is subject to reassessment throughout the year by FHFA to determine whether an increase in the cap is appropriate based on a stronger than expected overall market. Reclassifications between new business activity subject to the production cap and new business activity not subject to the production cap may occur during 2018.
n
Outstanding purchase commitments were $17.5 billion and $14.0 billion as of March 31, 2018 and March 31, 2017, respectively. Both periods include purchase commitments for which we have elected the fair value option.
n
Our new business activity and outstanding purchase commitments were higher during 1Q 2018 compared to 1Q 2017 due to overall growth of the multifamily mortgage market resulting from continued strong demand for multifamily loan products and our strategic pricing efforts.

Freddie Mac Form 10-Q
 
37

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


n
Approximately 48% of our multifamily new business activity during 1Q 2018 counted towards the 2018 Conservatorship Scorecard production cap, while the remaining 52% was considered uncapped.
n
Our uncapped new business volume increased slightly in 1Q 2018 compared to 1Q 2017 as we continued our efforts to support borrowers in certain property types and communities that meet the criteria for affordability and to support the overall growth of the multifamily market.
n
Approximately 90% and 88% of our 1Q 2018 and 1Q 2017 new business volume was intended for our securitization pipeline. Combined with market demand for our securities, our 1Q 2018 new business volume will be the primary driver of and collateral for credit risk transfer securitizations in 2Q 2018 and 3Q 2018.




Freddie Mac Form 10-Q
 
38

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Multifamily Portfolio and Market Support
Total Multifamily Portfolio
chart-1923e9f895915caca58.jpg
 
Multifamily Mortgage Investments Portfolio
chart-4ba95e8256365138b4d.jpg

Multifamily Market Support
The following table summarizes our support of the multifamily market.
(UPB in millions)
 
March 31, 2018
December 31, 2017
Unsecuritized mortgage loans held-for-sale
 

$16,383


$20,537

Unsecuritized mortgage loans held-for-investment
 
16,213

17,702

Unsecuritized non-mortgage loans(1)
 
332

473

Mortgage-related securities(2)
 
7,449

7,451

Guarantee portfolio
 
213,141

203,074

Total multifamily portfolio
 
253,518

249,237

Add: Unguaranteed securities(3)
 
32,250

30,890

Less: Acquired mortgage-related securities(4)
 
(7,141
)
(7,109
)
Total multifamily market support
 

$278,627


$273,018

(1)
Reflects the UPB of financing provided to whole loan investment funds.
(2)
Includes mortgage-related securities from our credit risk transfer transactions. We have not invested in unguaranteed securities that are in a first loss position.
(3)
Reflects the UPB of unguaranteed securities issued as part of our securitization products and amounts related to whole loan investment funds not financed by Freddie Mac.
(4)
Reflects the UPB of mortgage-related securities that were both issued and acquired by us. This UPB must be removed to avoid double-counting the exposure, as it is already reflected within the guarantee portfolio and/or unguaranteed securities.

Freddie Mac Form 10-Q
 
39

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Commentary
n
Our total multifamily portfolio increased in 1Q 2018 primarily due to new loan purchases. The vast majority of the growth in our guarantee portfolio was associated with ongoing credit risk transfer securitizations, primarily K Certificates and SB Certificates.
n
At March 31, 2018, the UPB of our unsecuritized held-for-sale loans and mortgage-related securities, which are measured at fair value or lower-of-cost-or-fair-value, decreased from December 31, 2017. The decrease was primarily driven by ongoing credit risk transfer securitizations, partially offset by new held-for-sale loan purchases.
n
At March 31, 2018, approximately 69% of our held-for-sale loans and held-for sale loan commitments were fixed-rate, while the remaining 31% were floating rate.
n
We expect our guarantee portfolio to continue to grow as a result of ongoing credit risk transfer securitizations, which we expect to be driven by continued strong new business volume.

Freddie Mac Form 10-Q
 
40

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Net Interest Yield and Weighted Average Portfolio Balance
Net Interest Yield Earned
chart-2a1039648cfb360ab0e.jpg

Commentary
n
Net interest yield increased during 1Q 2018 compared to 1Q 2017 primarily due to higher prepayment income received from interest-only securities, coupled with an increase in our interest-only holdings which generally have higher yields relative to our non-interest-only securities.
n
The weighted average portfolio balance of interest-earning assets decreased due to the run-off of our legacy held-for-investment loans and non-agency CMBS.



Freddie Mac Form 10-Q
 
41

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Credit Risk Transfer Activity
Credit Risk Transfer Activity and New Business Activity
chart-428d3d8bb772dfb07f0.jpg
 
Credit Risk Transfer Activity(1) chart-28e859055f9d9013f2d.jpg
(1) The amounts disclosed in the bar graph above represent the UPB of credit risk transferred to third parties.
Commentary
n
The structures for credit risk transfer transactions, primarily the K Certificate and SB Certificate structures, vary by deal. Structural deal features such as term, type of underlying loan product, and subordination levels generally influence the deal's size and risk profile, which ultimately affect the guarantee fee rate set by Freddie Mac, as Guarantor, at the time of securitization.
n
We executed $16 billion in UPB of credit risk transfer transactions during 1Q 2018 and $265 billion in UPB since 2009. Through these transactions, we transferred a large majority of the expected and stress credit losses of the underlying assets, primarily by issuing unguaranteed subordinated

Freddie Mac Form 10-Q
 
42

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


securities, as part of our K Certificate and SB Certificate transactions. Also, we began selling certain of our loans to investment funds in 3Q 2017, resulting in the transfer of the associated credit risk of those loans to third parties.
n
The UPB of our credit risk transfer transactions was higher during 1Q 2018 compared to 1Q 2017, primarily due to a larger average balance in our securitization pipeline, which was driven by strong new loan purchase volume during the latter part of 2017.
n
As of March 31, 2018, we had transferred a large majority of credit risk on 90% of the multifamily guarantee portfolio.
l
Calculated as the current balance of multifamily credit risk transfer transactions (primarily K Certificates and SB Certificates) divided by the multifamily guarantee portfolio UPB.
n
We expect to reduce by approximately 90% the modeled capital required for credit risk on the quarter's $13 billion of new originations.
l
Calculated as modeled credit capital expected to be released from credit risk transfer transactions (primarily through K Certificates and SB Certificates) divided by total modeled credit capital on quarterly new originations.
l
The modeled capital requirement is per FHFA's CCF and internal methods that use stress scenarios which are generally consistent with the 2017 DFAST "severely adverse" scenario.
n
In addition to transferring a large majority of expected and stress credit risk, nearly all of our credit risk transfer transactions also shifted non-credit risks associated with the underlying assets, such as interest-rate risk and liquidity risk, away from Freddie Mac to third-party investors.
n
Based on the strength of our new business volume for 4Q 2017 and 1Q 2018, we expect our credit risk transfer activity for 2Q 2018 to exceed our 2Q 2017 activity.
n
While our K Certificate and SB Certificate issuances continue to be our primary mechanism to transfer multifamily mortgage credit and non-credit risk, we expect to continue to develop new credit risk transfer initiatives throughout 2018.


Freddie Mac Form 10-Q
 
43

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Financial Guarantee Activity
Guarantee Assets
chart-aafc622b355a581b9bf.jpg
 
Unearned Guarantee Fees
chart-3b5d059ba537c505e97.jpg

Commentary
n
We generally recognize a guarantee asset on our balance sheets each time we enter into a financial guarantee contract. This asset represents the present value of guarantee fees we expect to receive in cash in the future from those guarantee transactions. We recognize these fees in segment earnings over the expected remaining guarantee term. While we expect to collect these future fees based on historical performance, the actual amount collected will depend on the performance of the underlying collateral subject to our financial guarantee.
n
New guarantee assets recognized in 1Q 2018 exceeded those recognized in 1Q 2017, primarily due to an increase in the UPB of our credit risk transfer securitizations, coupled with higher average guarantee fee rates due to underlying loan products that, by their nature and design, have more risk.
n
The balance of unearned guarantee fees remained relatively flat during 1Q 2018, as the increase attributable to the growth of our credit risk transfer securitization volume was mostly offset by the seasoning and run-off of prior credit risk transfer securitizations.

Freddie Mac Form 10-Q
 
44

Management's Discussion and Analysis
 
Our Business Segments | Multifamily


Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Multifamily segment.
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Net interest income
 

$271


$271

 

$—

 %
Guarantee fee income
 
195

151

 
44

29

Benefit (provision) for credit losses
 
16

6

 
10

167

Gains (losses) on loans and other non-interest income
 
(430
)
236

 
(666
)
(282
)
Derivative gains (losses)
 
655

127

 
528

416

Administrative expense
 
(100
)
(95
)
 
(5
)
(5
)
Other non-interest expense
 
(14
)
(21
)
 
7

33

Segment Earnings before income tax expense
 
593

675

 
(82
)
(12
)
Income tax expense
 
(121
)
(226
)
 
105

46

Segment Earnings, net of taxes
 
472

449

 
23

5

Total other comprehensive income (loss), net of tax
 
(68
)
(4
)
 
(64
)
(1,600
)
Total comprehensive income (loss)
 

$404


$445

 

($41
)
(9
)%
Key Business Drivers:
n
1Q 2018 vs. 1Q 2017
l
Higher net interest yields, offset by a decline in our weighted average portfolio balance of interest-earning assets, resulted in net interest income being flat.
l
Continued growth in our multifamily guarantee portfolio and higher average guarantee fee rates on new guarantee business volume resulted in increased guarantee fee income.
l
Spread widening on certain of our K Certificate products that we issue with less frequency coupled with the effects of strategic pricing, partially offset by larger average balances of held-for-sale commitments and securitization pipeline loans, resulted in lower spread-related fair value gains.
l
Derivative gains (losses) are largely offset by interest rate-related fair value changes on the loans and investment securities being economically hedged, resulting in interest rate changes having a minimal net impact on total comprehensive income.





Freddie Mac Form 10-Q
 
45

Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Capital Markets
Market Conditions
The following graphs and related discussion present the par swap rate curves as of the end of each comparative period. Changes in par swap rates can significantly affect the fair value of our debt, derivatives and mortgage and non-mortgage-related securities. However, the majority of these fair value changes are offset by our hedge accounting programs.
Par Swap Rate Curves
chart-8f9a7813ec125d99a5c.jpg
Source: BlackRock

 
chart-ef191294d2075ce6a9b.jpg

Commentary
n
Long-term interest rates increased more during 1Q 2018 than 1Q 2017. In addition, during 1Q 2018, the 2-year interest rate increased more than the 10-year interest rate, resulting in the yield curve flattening. These yield curve changes resulted in larger fair value gains for our pay-fixed interest rate swaps, forward commitments to issue PCs, and futures, partially offset by larger fair value losses for our receive-fixed interest rate swaps and the vast majority of our investments in securities. The net amount of these changes in fair value was mostly offset by the change in fair value of the hedged items attributable to interest-rate risk in our hedge accounting programs.

Freddie Mac Form 10-Q
 
46

Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Business Results
The graphs and related discussion below present the business results of our Capital Markets segment.
Investing Activity
The following graphs present the Capital Markets segment's total investments portfolio and the composition of its mortgage investments portfolio by liquidity category.
Investments Portfolio
chart-dcfd46ae6f12517ca09.jpg
 
Mortgage Investments Portfolio
chart-feb7d0fadb76506e943.jpg
Commentary
n
We continue to reduce the size of our mortgage investments portfolio in order to comply with the mortgage-related investments portfolio year-end limits. The balance of our mortgage investments portfolio declined 2.9% from December 31, 2017 to March 31, 2018.
n
The balance of our other investments and cash portfolio declined by 21.8%, primarily due to reduced near term cash needs as of March 31, 2018 compared to December 31, 2017.
n
The percentage of less liquid assets relative to our total mortgage investments portfolio declined from 28.4% at December 31, 2017 to 27.8% at March 31, 2018, primarily due to repayments, sales and securitizations of our less liquid assets. We continued to actively reduce the size of our less liquid assets during 1Q 2018 by selling $1.7 billion of non-agency mortgage-related securities and $1.8 billion of reperforming loans. Our sales of reperforming loans involved securitization of the loans using senior subordinate structures.
n
The overall liquidity of our mortgage investments portfolio continued to improve as our less liquid assets decreased at a faster pace than the overall decline of our mortgage investments portfolio.

Freddie Mac Form 10-Q
 
47

Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Net Interest Yield and Average Balances
Net Interest Yield & Average Investments Portfolio Balances
(UPB in billions)
chart-603918613453a290922.jpg
Commentary
n
Net Interest Yield
l
1Q 2018 vs. 1Q 2017 - Increased 8 basis points primarily due to changes in our investment and funding mix as we reduce our less liquid assets, coupled with an increase in the yield on our other investments and cash portfolio as short-term interest rates increased. These increased yields were partially offset by an increase in our funding costs.
l
Capital Markets segment net interest yield in the graph above is not impacted by our hedge accounting programs. See Note 13 in our 2017 Annual Report for more information.


Freddie Mac Form 10-Q
 
48

Management's Discussion and Analysis
 
Our Business Segments | Capital Markets


Financial Results
The table below presents the components of Segment Earnings and comprehensive income for our Capital Markets segment.
 
 
 
 
 
Change
(Dollars in millions)
 
1Q 2018
1Q 2017
 
$
%
Net interest income
 

$817


$929

 

($112
)
(12
)
Net impairment of available-for-sale securities recognized in earnings
 
111

73

 
38

52

Derivative gains (losses)
 
1,302

52

 
1,250

2,404

Gains (losses) on trading securities
 
(471
)
(135
)
 
(336
)
(249
)
Other non-interest income
 
525

744

 
(219
)
(29
)
Administrative expense
 
(84
)
(83
)
 
(1
)
(1
)
Segment Earnings before income tax expense
 
2,200

1,580

 
620

39

Income tax expense
 
(448
)
(528
)
 
80

15

Segment Earnings, net of taxes