Freddie Mac

(FRE)

, whose $5 billion profit restatement has caused havoc with its financial reporting, released results for the first two quarters of 2005 Tuesday showing a sharp decline in earnings due to losses in the company's derivatives portfolio.

The mortgage merchant earned $1.64 billion for the first six months of 2005, down from $4.07 billion in the year-earlier period. Earnings were $769 million, or $1.03 a share, in the second quarter ended June 30, and $875 million, or $1.19 a share, in the first quarter ended March 31.

The company said its regulatory core capital grew to $36.1 billion at the end of June, leaving its minimum capital surplus at $12.1 billion, roughly $4.8 billion above a target surplus set by the Office of Federal Housing Enterprise.

Freddie stopped reporting earnings in a timely fashion in 2003 following an accounting scandal that resulted in a $5 billion restatement, the ouster of two CEOs and the payment of a $125 million fine. Wednesday's are the first quarterly financial statements the company has published since discovering accounting problems.

Freddie Mac said its net interest income was $3.07 billion in the first half of 2005, down from $4.76 billion a year ago. The net interest yield measuring the profitability of its loan holdings was 87 basis points in 2005, down from 129 basis points a year ago.

"Net interest income, which we previously indicated was expected to be materially lower in 2005, declined primarily due to a change in the asset mix of the retained portfolio, specifically the shift from higher yielding, fixed-rate assets to lower yielding, floating-rate assets," the company said.

Freddie posted a loss of $747 million on derivatives the latest six months, compared with a gain of $521 million in the year-ago period. Partially offsetting that was a $287 million gain on investment activity in the 2005 period compared with a loss of $377 million a year ago.

"For full-year 2005, we continue to expect to report net interest income materially lower than that reported for full-year 2004, primarily due to compression in net interest margins on our existing portfolio and lower nominal margins on floating-rate mortgage-related security purchases," Freddie said.

"However, on a full-year basis, we also continue to expect this decrease to be significantly offset by decreased losses in non-interest income (loss), assuming current forward rates are realized."