and a negative rate variance of $2 million.The increase in the commercial and construction loans portfolio resulted from the Corporation’s strategy to diversify its asset base. 

For the investment portfolio, the average volume of mortgage backed secu- rities increased by $255 million in 2001. The tax equivalent yield on mort- gage backed securities was 7.37% in 2001 and 6.89% in 2000. The portfo- lio of mortgage backed securities contributed $18 million in interest income due to volume and $7 million in interest income due to rate. The average volume of corporate bonds increased by $196 million for 2001 as compared to 2000, causing an increase in interest income of $17 million totally due to volume. 

Interest expense increased by $8 million for 2001 as compared to 2000. This was the result of the increase in the average volume of interest bear- ing liabilities of $1,191 million for 2001 as compared to 2000 which gener- ated a negative volume variance of $63 million, partially offset by the decrease in the cost of interest bearing liabilities due to lower market rates, causing a positive rate variance of $55 million. The cost of interest bearing liabilities decreased from 5.83% for 2000 to 4.78% for 2001. 

## 2000 compared to 1999 

On a tax equivalent basis interest income increased by $91 million for 2000 as compared to 1999. On a tax equivalent basis the yield on earning assets was 9.21% for 2000 as compared to 9.29% for 1999. The increase in inter- est income results from the growth in the average volume of interest earn- ing assets of $1,023 million in 2000. On a rate/volume basis, the increase of $1 million in net interest income (on a tax equivalent basis) is the result of a positive volume variance of $36 million, net of a negative rate variance of $35 million. During 2000 the Federal Reserve Bank tightened the mon- etary policy, raising the federal fund rate by approximately 100 basis points. At the same time, long term rates fell during the latter part of the year as markets began to anticipate a slowdown (the ten year note fell 104 basis points from December, 1999 to December, 2000). These trends inverted the yield curve during the latter part of 2000, reducing the Corporation’s interest rate spread and net interest margin. 

For the loan portfolio, the growth in 2000 of $363 million in the average volume of commercial loans (including commercial real estate loans) rep- resented an increase of $33 million in interest income due to volume, and an increase of $2 million in interest income due to rate. The average port- folio of construction loans increased by $74 million for 2000, representing a positive volume variance of $8 million and a positive rate variance of $1 million. The average portfolio of residential mortgage loans increased by $246 million for 2000, representing a positive volume variance of $22 mil- lion. The average finance lease portfolio (mostly composed of consumer loans) increased by $35 million in 2000, representing a positive volume variance of $4 million. The increase of $12 million in the average volume of consumer loans in 2000, represented a positive variance in interest income due to volume of $2 million. The increase in the commercial real estate, construction and commercial loans portfolio resulted from the Corporation’s strategy to diversify its asset base, which was concentrated in higher risk consumer loans. 

For the investment portfolio, the average volume of mortgage backed secu- rities increased by $163 million in 2000. The tax equivalent yield on mort- gage backed securities was 6.89% in 2000 and 7.12% in 1999. The portfo- lio of mortgage backed securities contributed $11 million in interest income due to volume net of $3 million decrease in interest income due to rate. The average volume of government obligations increased by $113 million for 2000 as compared to 1999, causing a total increase in interest income of $11 million. 

Interest expense increased by $89 million for 2000 as compared to 1999. This was the result of the increase in the average volume of interest bear- 

