Fannie Mae 2007 Annual Report Download - page 83

expenses. We provide a comparative discussion of the effect of our principal revenue sources and other listed
items on our consolidated results of operations for the three-year period ended December 31, 2007 below. We
also discuss other significant items presented in our consolidated statements of operations.
Net Interest Income
Net interest income, which is the difference between interest income and interest expense, is a primary source
of our revenue. Interest income consists of interest on our interest-earning assets, plus income from the
accretion of discounts for assets acquired at prices below the principal value, less expense from the
amortization of premiums for assets acquired at prices above principal value. Interest expense consists of
contractual interest on our interest-bearing liabilities and accretion and amortization of any cost basis
adjustments, including premiums and discounts, which arise in conjunction with the issuance of our debt. The
amount of interest income and interest expense recognized in the consolidated statements of operations is
affected by our investment activity, debt activity, asset yields and our cost of debt. We expect net interest
income to fluctuate based on changes in interest rates and changes in the amount and composition of our
interest-earning assets and interest-bearing liabilities. Table 4 presents an analysis of our net interest income
and net interest yield for 2007, 2006 and 2005.
As described below in “Derivatives Fair Value Losses, Net,” we supplement our issuance of debt with interest
rate-related derivatives to manage the prepayment and duration risk inherent in our mortgage investments. The
effect of these derivatives, in particular the periodic net interest expense accruals on interest rate swaps, is not
reflected in net interest income. See “Derivatives Fair Value Losses, Net” for additional information.
Table 4: Analysis of Net Interest Income and Yield
Average
Balance
(1)
Interest
Income/
Expense
Average
Rates
Earned/Paid
Average
Balance
(1)
Interest
Income/
Expense
Average
Rates
Earned/Paid
Average
Balance
(1)
Interest
Income/
Expense
Average
Rates
Earned/Paid
2007 2006 2005
For the Year Ended December 31,
(Dollars in millions)
Interest-earning assets:
Mortgage loans
(2)
........... $393,827 $22,218 5.64% $376,016 $20,804 5.53% $384,869 $20,688 5.38%
Mortgage securities . ........ 328,769 18,052 5.49 356,872 19,313 5.41 443,270 22,163 5.00
Non-mortgage securities
(3)
. . . . . 64,204 3,441 5.36 45,138 2,734 6.06 41,369 1,590 3.84
Federal funds sold and securities
purchased under agreements to
resell
(4)
................ 15,405 828 5.37 13,376 641 4.79 6,415 299 4.66
Advances to lenders . ........ 6,633 227 3.42 5,365 135 2.52 4,468 104 2.33
Total interest-earning assets . . . . . . $808,838 $44,766 5.53% $796,767 $43,627 5.48% $880,391 $44,844 5.09%
Interest-bearing liabilities:
Short-term debt ............ $176,071 $ 8,992 5.11% $164,566 $ 7,724 4.69% $246,733 $ 6,535 2.65%
Long-term debt ............ 605,498 31,186 5.15 604,555 29,139 4.82 611,827 26,777 4.38
Federal funds purchased and
securities sold under
agreements to repurchase . . . . 161 7 4.35 320 12 3.75 1,552 27 1.74
Total interest-bearing liabilities . . . $781,730 $40,185 5.14% $769,441 $36,875 4.79% $860,112 $33,339 3.88%
Impact of net non-interest bearing
funding ................. $ 27,108 0.18% $ 27,326 0.16% $ 20,279 0.10%
Net interest income/net interest
yield
(5)
................ $ 4,581 0.57% $ 6,752 0.85% $11,505 1.31%
(1)
Average balances for 2007 were calculated based on the average of the amortized cost amounts at the beginning of the
year and at the end of each month in the year for mortgage loans, advances to lenders, and short- and long-term debt.
Average balances for 2007 for all other categories have been calculated based on a daily average. Average balances for
2006 were calculated based on the average of the amortized cost amounts at the beginning of the year and at the end
of each quarter in the year. Average balances for 2005 were calculated based on the average of the amortized cost
amounts at the beginning and end of the year.
(2)
Includes nonaccrual loans with an average balance totaling $6.5 billion, $6.7 billion and $7.4 billion for the years
ended December 31, 2007, 2006 and 2005, respectively. Includes interest income related to SOP 03-3 loans of
$496 million, $361 million and $123 million for 2007, 2006 and 2005, respectively, primarily from accretion related to
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