Freddie Mac 2004 Annual Report Download - page 55

net premiums and other security-related basis adjustments and the impact of moving a signiÑcant amount of
our pay-Ñxed swaps to no hedge designation, eÅective at the beginning of the second quarter. The reduction in
amortization expense related to net premiums and other security-related basis adjustments resulted from an
increase in long-term market interest rates from the Ñrst quarter of 2004. The increase in net interest yield was
driven by the reduction in amortization expense and the movement of the pay-Ñxed swaps as described above.
1Q04 vs. 4Q03
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
decreased $323 million and 11 basis points, respectively, during the Ñrst quarter of 2004 compared to the
fourth quarter of 2003. Net interest income declined as lower interest income on our interest-earning assets
and higher amortization expense related to net premiums and other security-related basis adjustments was
partially oÅset by higher interest income related to the accrual of periodic settlements on derivatives in hedge
accounting relationships. The decline in interest income on our interest-earning assets resulted primarily from
a $32 billion decline in the related average balance from the fourth quarter of 2003. The higher amortization
expense related to net premiums and other security-related basis adjustments was driven by a decline in
market interest rates from the fourth quarter of 2003. Net interest yield declined as a result of the higher
amortization expense related to net premiums and other security-related basis adjustments, partially oÅset by
the higher interest income related to the accrual of periodic settlements on derivatives in hedge accounting
relationships.
During the Ñrst quarter of 2004, we implemented enhancements to certain assumptions and calculations
in the amortization process for deferred fees recorded as basis adjustments on assets in our Retained portfolio.
The eÅect on Net interest income of these enhancements, which were treated as a change in estimate, was the
recognition of $86 million of additional amortization expense during the Ñrst quarter of 2004.
4Q03 vs. 3Q03
Net interest income, on a fully taxable-equivalent basis, increased by $10 million during the fourth
quarter of 2003 as compared to the third quarter of 2003. Net interest yield, on a fully taxable-equivalent basis,
decreased by 1 basis point for the same periods. The increase to Net interest income was due to increased
interest income recognized on the Retained portfolio as its average balance increased by 5 percent quarter-
over-quarter. This increase to net interest income was oÅset by increased long-term debt expense related to
the funding of the Retained portfolio growth. Net interest yield remained relatively Öat as improved funding
costs were oÅset by lower asset yields.
3Q03 vs. 2Q03
Net interest income and net interest yield, both of which are presented on a fully taxable-equivalent basis,
increased by $253 million and 1 basis point, respectively, during the third quarter of 2003 compared to the
second quarter of 2003. These increases were driven by lower amortization expense resulting from adjustments
to the amortization of the related deferred premiums in the Retained portfolio as mortgage rates and estimates
of weighted average mortgage lives increased. Net interest income also beneÑted from decreases in long-term
debt expense and net growth in the Retained portfolio. Interest expense on derivative contracts increased with
purchases of additional pay-Ñxed swaps, which were acquired in a rising rate environment and designated in
hedge accounting relationships. Net interest yield remained relatively Öat as the decline in our debt costs was
oÅset by the decline in asset yields and an increase in expense related to derivatives.
2Q03 vs. 1Q03
Net interest income and net interest yield, both of which are presented on an fully taxable-equivalent
basis, decreased by $213 million and 14 basis points, respectively, during the second quarter of 2003 compared
to the Ñrst quarter of 2003. These decreases were driven by increases in amortization expense related to
deferred premiums on mortgage investment purchases. As discussed above in ""Amortization of premiums and
discounts,'' the deferred amount related to the total Retained portfolio was in an increasing net premium
position and liquidations increased in the quarter. Also, increased liquidations on PCs outstanding generated
timing diÅerences between amounts due from servicers and amounts due to PC investors resulting in increased
interest expense. These negative eÅects were partially oÅset by lower long-term debt expense due to large debt
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