Fannie Mae 2002 Annual Report Download - page 30

28 FANNIE MAE 2002 ANNUAL REPORT
net interest income in 2001 does not include all of the cost
of purchased options. However, our taxable-equivalent net
interest income in 2000 includes $231 million of expense
related to the amortization of purchased options premiums
on a straight-line basis. Prior to the adoption of FAS 133, we
recorded purchased options premiums as interest expense in
our reported net interest income. FAS 133 changed our
accounting for purchased options, requiring that we report
changes in the fair value of the time value of purchased
options instead of expensing purchased options premiums
on a straight-line basis. We report changes in the fair value of
the time value of our purchased options in a separate income
statement category “purchased options expense.” Our
taxable-equivalent net interest income in 2001 also benefited
from 19 percent growth in our average net mortgage
portfolio and a significant decrease in our debt costs that
elevated our net interest yield. A reduction in intermediate-
term rates during 2001 boosted mortgage refinancings and
originations, fueling an increase in the supply of mortgage
assets in the secondary market and attractive mortgage-to-
debt spreads.
Table 2 shows the changes in our reported and taxable-
equivalent net interest income between 2002 and 2001 and
2001 and 2000 attributable to changes in rates and volume
on our mortgage assets, nonmortgage investments, and debt.
TABLE 2: RATE/VOLUME ANALYSIS OF REPORTED NET INTEREST INCOME
Increase Attributable to Changes in1
Dollars in millions (Decrease) Volume Rate
2002 vs. 2001
Interest income:
Mortgage portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,787 $5,292 $(2,505)
Nonmortgage investments and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,104) 394 (1,498)
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,683 5,686 (4,003)
Interest expense2:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,919) 194 (3,113)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,126 4,959 (2,833)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (793) 5,153 (5,946)
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,476 $ 533 $ 1,943
Change in taxable-equivalent adjustment on tax-exempt investments3 . . . . . . . . . . . . . . . . . . . . 32
Change in taxable-equivalent net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,508
2001 vs. 2000
Interest income:
Mortgage portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,075 $ 7,393 $ (318)
Nonmortgage investments and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (686) 434 (1,120)
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,389 7,827 (1,438)
Interest expense2:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,693 2,945 (1,252)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,280 2,868 (588)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,973 5,813 (1,840)
Change in net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$2,416 $2,014 $ 402
Change in taxable-equivalent adjustment on tax-exempt investments3 . . . . . . . . . . . . . . . . . . . . . 56
Change in taxable-equivalent net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,472
1Combined rate/volume variances, a third element of the calculation, are allocated to the rate and volume variances based on their relative size.
2Classification of interest expense and interest-bearing liabilities as short-term or long-term is based on effective maturity or repricing date, taking into consideration the effect of derivative financial instruments.
3Reflects non-GAAP adjustments to permit comparison of yields on tax-exempt and taxable assets based on a 35 percent marginal tax rate.
Guaranty Fee Income
Guaranty fee income reported in our total corporate results and our
average guaranty fee rate primarily include guaranty fees we receive on
mortgage-related securities we issue that are held by other investors. We
classify guaranty fees on Fannie Mae mortgage-related securities held in
our portfolio as net interest income. The guaranty fee income allocated
for line of business reporting purposes to the Credit Guaranty business
on mortgage-related securities held in our portfolio is eliminated by an
equal and offsetting allocation of guaranty expense to the Portfolio
Investment business. We exclude the administrative costs of managing
outstanding MBS and other mortgage-related securities from guaranty
fee income.