Fannie Mae 2006 Annual Report Download - page 77

Table 5 presents the change, or variance, in our net interest income between 2006 and 2005 and between 2005
and 2004 that is attributable to changes in the volume of our interest-earning assets and interest-bearing
liabilities and changes in interest rates.
Table 5: Rate/Volume Analysis of Net Interest Income
Total
Variance Volume Rate
Total
Variance Volume Rate
Variance Due to:
(1)
Variance Due to:
(1)
2006 vs. 2005 2005 vs. 2004
(Dollars in millions)
Interest income:
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 116 $ (482) $ 598 $ (702) $ (845) $ 143
Mortgage securities . . . . . . . . . . . . . . . . . . . . . . . . (2,850) (4,570) 1,720 (3,139) (3,557) 418
Non-mortgage securities . . . . . . . . . . . . . . . . . . . . . 1,144 156 988 581 (121) 702
Federal funds sold and securities purchased under
agreements to resell . . . . . . . . . . . . . . . . . . . . . . 342 333 9 215 (23) 238
Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . 31 22 9 71 (2) 73
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . (1,217) (4,541) 3,324 (2,974) (4,548) 1,574
Interest expense:
Short-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,189 (2,683) 3,872 2,155 (1,355) 3,510
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,362 (322) 2,684 1,439 (552) 1,991
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . . . (15) (32) 17 8 (13) 21
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . 3,536 (3,037) 6,573 3,602 (1,920) 5,522
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $(4,753) $(1,504) $(3,249) $(6,576) $(2,628) $(3,948)
(1)
Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.
Net interest income of $6.8 billion for 2006 decreased 41% from $11.5 billion in 2005, driven by a 9%
decrease in our average interest-earning assets and a 35% (46 basis points) decline in our net interest yield to
0.85%. The decrease in our average interest-earning assets was due to a lower level of mortgage asset
purchases relative to the level of sales and liquidations during 2006. Sales, liquidations, and reduced purchases
had the net effect of reducing our average interest-earning assets and resulted in a decrease of 1% in the
balance of our net mortgage portfolio to $726.1 billion as of December 31, 2006. Lower portfolio balances
have the effect of reducing the net interest income generated by our portfolio. We continued to experience
compression in our net interest margin as the cost of our debt increased due to the interest rate environment.
As the Federal Reserve raised the short-term Federal Funds target rate by 100 basis points to 5.25%, the
highest level since 2001, the yield curve remained flat-to-inverted throughout 2006 and the cost of our short-
term debt rose significantly. The overall increase in the average cost of our debt of 91 basis points more than
offset a 39 basis point increase in the average yield on our interest-earning assets in 2006.
Net interest income of $11.5 billion for 2005 decreased 36% from $18.1 billion in 2004, driven by a 10%
decrease in our average interest-earning assets and a 30% (55 basis points) decline in our net interest yield to
1.31%. The decrease in our average interest-earning assets was due to a lower volume of interest-earning
assets attributable to liquidations and a significant increase in the sale of fixed-rate mortgage assets from our
portfolio, coupled with a reduced level of mortgage purchases. Sales, liquidations, and reduced purchases had
the net effect of reducing our average interest-earning assets and resulted in a decrease of 20% in the balance
of our net mortgage portfolio to $736.5 billion as of December 31, 2005. While our overall debt funding needs
declined in 2005, our net interest yield was compressed because of a 78 basis point increase in our average
debt funding costs in 2005 that primarily resulted from increases of short-term interest rates by the Federal
Reserve of 200 basis points from year end 2004 to year end 2005 and a significant flattening of the yield
curve. The increased cost of our debt more than offset an 18 basis point increase in the average yield on our
interest-earning assets in 2005.
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