Fannie Mae 2009 Annual Report Download - page 90

Table 5: Rate/Volume Analysis of Changes in Net Interest Income
Total
Variance Volume Rate
Total
Variance Volume Rate
Variance Due to:
(1)
Variance Due to:
(1)
2009 vs. 2008 2008 vs. 2007
(Dollars in millions)
Interest income:
Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(1,171) $ 491 $ (1,662) $ 474 $ 1,258 $ (784)
Mortgage securities . . . . . . . . . . . . . . . . . . . . . . . . . (114) 765 (879) (708) 200 (908)
Non-mortgage securities
(2)
. . . . . . . . . . . . . . . . . . . . (1,501) (171) (1,330) (1,693) (201) (1,492)
Federal funds sold and securities purchased under
agreements to resell . . . . . . . . . . . . . . . . . . . . . . . (898) 103 (1,001) 330 886 (556)
Advances to lenders . . . . . . . . . . . . . . . . . . . . . . . . (84) 44 (128) (46) (132) 86
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . (3,768) 1,232 (5,000) (1,643) 2,011 (3,654)
Interest expense:
Short-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . (5,501) 76 (5,577) (1,186) 3,873 (5,059)
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3,987) 849 (4,836) (4,660) (2,760) (1,900)
Federal funds purchased and securities sold under
agreements to repurchase . . . . . . . . . . . . . . . . . . . (8) (6) (2) 2 7 (5)
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (9,496) 919 (10,415) (5,844) 1,120 (6,964)
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,728 $ 313 $ 5,415 $ 4,201 $ 891 $ 3,310
(1)
Combined rate/volume variances are allocated to both rate and volume based on the relative size of each variance.
(2)
Includes cash equivalents.
Net interest income and net interest yield increased during 2009 compared with 2008, driven by lower funding
costs and by growth in the average size of our mortgage portfolio. The significant reduction in the average
cost of our debt was primarily attributable to a decline in borrowing rates as we replaced higher cost debt with
lower cost debt. In addition, net interest income and net interest yield benefited from funds we received from
Treasury under the senior preferred stock purchase agreement as the cost of these funds is included in
dividends rather than interest expense. Additionally, 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 but is included in our results as a component of “Fair Value Gains (Losses)”
and is shown in Table 7. If we had included the economic impact of adding the net contractual interest
accruals on our interest rate swaps in our interest expense, our funding costs would have increased by 40 basis
points in 2009 compared with an 18 basis point increase in 2008.
Although our interest-earning assets were lower as of December 31, 2009 compared with December 31, 2008,
our average interest-earning assets for 2009 were higher compared with 2008. During 2008, we increased our
portfolio balance as mortgage-to-debt spreads reached historic highs, and liquidations were reduced due to the
disruption of the housing and credit markets. As a result, we began 2009 with a substantially higher balance of
interest-earning assets compared with the beginning of 2008. Although portfolio actions and high liquidation
levels reduced our balance of interest-earning assets during the course of 2009, the higher beginning balance
resulted in a higher average balance of interest-earning assets for the full year of 2009 compared with 2008.
The increase in our net interest income and expansion of our net interest yield in 2008 compared with 2007
was largely attributable to a reduction in our short-term debt costs, a shift in our funding mix to more short-
term debt, and early redemption of our step-rate debt securities in 2008. In addition, our regulator’s reduction
in our capital surplus requirement on March 1, 2008 provided us with flexibility to take advantage of
opportunities to purchase mortgage assets at attractive prices and spreads. If we had included the economic
impact of adding the net contractual interest accruals on our interest rate swaps in our interest expense, our
funding costs would have increased by 18 basis points in 2008 compared with a 3 basis point decline in 2007.
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