Fannie Mae 2004 Annual Report Download - page 109

Table 14: Rate/Volume Analysis of Net Interest Income
Total
Variance Volume Rate
Total
Variance Volume Rate
Variance Due to:
(1)
Variance Due to:
(1)
2004 vs. 2003 2003 vs. 2002
(Dollars in millions)
Interest income:
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20 $2,164 $(2,144) $ 1,500 $3,692 $(2,192)
Mortgage securities . . . . . . . . . . . . . . . . . . . . . . . . . (1,181) 1,006 (2,187) (2,961) 2,340 (5,301)
Non-mortgage securities . . . . . . . . . . . . . . . . . . . . . (60) 48 (108) (391) (185) (206)
Federal funds sold and securities purchased under
agreements to resell . . . . . . . . . . . . . . . . . . . . . . . 52 11 41 (11) 29 (40)
Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . (77) (58) (19) 3 (15) 18
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . (1,246) 3,171 (4,417) (1,860) 5,861 (7,721)
Interest expense:
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 171 242 (1,406) 539 (1,945)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (237) 1,797 (2,034) (1,524) 3,251 (4,775)
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . . . . (26) (22) (4) 19 (4) 23
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . 150 1,946 (1,796) (2,911) 3,786 (6,697)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . (1,396) $1,225 $(2,621) 1,051 $2,075 $(1,024)
Taxable-equivalent adjustment on tax-exempt
investments
(2)
........................... 29 (2)
Taxable-equivalent net interest income . . . . . . . . . . . . . $(1,367) $ 1,049
(1)
Combined rate/volume variances are allocated to the rate and volume variances based on their relative size.
(2)
Represents adjustment to permit comparison of yields on tax-exempt and taxable assets calculated using a 35%
marginal tax rate for each of the years presented.
Taxable-equivalent net interest income of $18.2 billion for 2004 decreased 7% from 2003, driven by a 12%
(25 basis points) decline in our taxable-equivalent net interest yield to 1.87% that was partially offset by a 6%
increase in average interest-earning assets. The average yield on our interest-earning assets declined 42 basis
points to 4.91%, which exceeded the benefit we received from a 16 basis point decrease in the average yield
on our interest-bearing liabilities to 3.10%. During 2004, our mortgage asset purchases consisted of a greater
proportion of floating-rate and ARM products, which tend to earn lower initial yields than fixed-rate mortgage
assets. Partially offsetting this reduction in average yield on our mortgage investments was a slower rate of
amortization of premiums in 2004 relative to 2003 due to slower prepayment rates. The yield on our total
average debt decreased in 2004 due to the repurchase and call of a significant amount of higher cost long-term
debt during 2003 and the issuance of new long-term debt at lower rates. However, as short-term interest rates
began to increase in 2004, the yield on our short-term debt began to rise.
Taxable-equivalent net interest income of $19.5 billion for 2003 increased 6% over 2002, driven by a 11%
increase in average interest-earning assets that was partially offset by a 5% (12 basis points) decline in our
taxable-equivalent net interest yield to 2.12%. Although liquidations of our mortgage assets reached a record
level during 2003, we experienced growth in our average interest-earning assets due in part to the low interest
rate environment and related increase in mortgage refinancing volumes, which contributed to a record level of
mortgage asset purchases. The interest income generated from a larger volume of mortgage assets was partially
offset by a reduction in the average yield on those assets as we replaced higher yielding assets with lower
yielding assets. The decline in interest rates during the first half of 2003 resulted in faster prepayment rates
relative to 2002, which accelerated the amortization of premiums and contributed to a substantial reduction in
the average yield on our mortgage assets. The decrease in the yield on our interest-earning assets was partially
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