Freddie Mac 2015 Annual Report Download - page 21

Management's Discussion and Analysis Consolidated Results of Operations | Net Interest Income
Freddie Mac 2015 Form 10-K 19
NET INTEREST INCOME
EXPLANATION OF KEY DRIVERS OF NET INTEREST INCOME
Net interest income consists of several primary components:
• Contractual net interest income - consists of two primary components:
The difference between the interest income earned on the assets in our investments portfolio
and the interest expense incurred on the liabilities used to fund those assets; and
Management and guarantee fees on loans held by consolidated trusts. We record interest income
on loans held by consolidated trusts and interest expense on the debt securities issued by the
trusts. The difference between the interest income on the loans and the interest expense on the
debt represents the management and guarantee fee income we receive as compensation for our
guarantee of the principal and interest payments of the issued debt securities. This difference
includes the legislated 10 basis point increase in management and guarantee fees that is
remitted to Treasury as part of the Temporary Payroll Tax Cut Continuation Act of 2011.
Contractual net interest income is primarily driven by the volume of assets in the mortgage-related
investments and guarantee portfolios and the interest rate differential between those interest-earning
assets and the related interest-bearing liabilities.
• Amortization of cost basis adjustments - consists of cost basis adjustments, such as premiums
and discounts on loans, investment securities, and debt that are amortized into interest income or
interest expense based on the effective yield over the contractual life of the associated financial
instrument.
The majority of our total net amortization relates to loans and debt securities of consolidated trusts,
while amortization related to investment securities, other debt, and other assets and liabilities makes
up a smaller portion. The net amortization of loans and debt securities of consolidated trusts is
primarily driven by actual prepayments on the underlying loans.
Net amortization of loans and debt securities of consolidated trusts generally increases net interest
income as it includes amortization of the upfront delivery fees we receive when we acquire a loan.
Increases in actual prepayments result in higher net amortization, while decreases in actual
prepayments result in lower net amortization. The timing of amortization of loans may differ from the
timing of amortization of the securities backed by the loans, as the proceeds received from the loans
backing these securities are remitted to the security holders at a date subsequent to the date
proceeds from the loans are received.
• Expense related to derivatives - consists of deferred gains and losses on closed cash flow hedges
related to forecasted debt issuances that are reclassified from AOCI to net interest income when the
related forecasted transaction affects net interest income.