Fannie Mae 2004 Annual Report Download - page 74

remediation work remaining before we will be able to file periodic financial reports with the SEC and the
NYSE on a timely basis. However, we believe the actions described above are representative of our
commitment to making fundamental, lasting changes that will strengthen the governance, controls, operational
discipline and culture of our organization.
Summary of Our Financial Results
The financial performance discussed in this Annual Report on Form 10-K is based on our consolidated
financial results for the year ended December 31, 2004 and our restated consolidated financial results for the
years ended December 31, 2003 and 2002. Net income and diluted earnings per share totaled $5.0 billion and
$4.94, respectively, in 2004, compared with $8.1 billion and $8.08 in 2003, and $3.9 billion and $3.81 in
2002. Below are highlights of our performance.
2004 versus 2003
• Business volume down 54% from record level
of $1.7 trillion in 2003
• 5% growth in our book of business
• 7% decrease in net interest income to
$18.1 billion
• 25 basis point decrease in net interest yield to
1.87%
• 10% increase in guaranty fee income to
$3.6 billion
• Derivative fair value losses of $12.3 billion,
compared with derivative fair value losses of
$6.3 billion in 2003
• Losses of $152 million on debt extinguish-
ments, compared with losses of $2.7 billion
in 2003
2003 versus 2002
• Business volume up 59% to record level of
$1.7 trillion
• 20% growth in our book of business
• 6% increase in net interest income to
$19.5 billion
• 12 basis point decrease in net interest yield to
2.12%
• 30% increase in guaranty fee income to
$3.3 billion
• Derivative fair value losses of $6.3 billion,
compared with derivative fair value losses of
$12.9 billion in 2002
• Losses of $2.7 billion on debt extinguish-
ments, compared with losses of $814 million
in 2002
Our assets and liabilities consist predominately of financial instruments. We expect significant volatility from
period to period in our financial results, due in part to the various manners in which we account for our
financial instruments under GAAP. We routinely use fair value measures to make investment decisions and to
measure, monitor and manage our risk. As described more fully in “Critical Accounting Policies and
Estimates—Fair Value of Financial Instruments,” we use various methodologies to estimate fair value
depending on the nature of the instrument and availability of observable market information. However, under
GAAP we are required to measure and record some financial instruments at fair value, while other financial
instruments are recorded at historical cost. In addition, as summarized below, changes in the carrying values of
financial instruments that we report at fair value in our consolidated balance sheets under GAAP are
recognized in our results of operations in a variety of ways depending on the nature of the asset or liability.
• We record derivatives, mortgage commitments and trading securities at fair value in our consolidated
balance sheets and recognize changes in the fair value of those financial instruments in our net income.
• We record available-for-sale securities, retained interests and guaranty fee buy-ups at fair value in our
consolidated balance sheets and recognize changes in the fair value of those financial instruments in
accumulated other comprehensive income (“AOCI”), a component of stockholders’ equity.
• We record held for sale mortgage loans at the lower of cost or market (“LOCOM”) in our consolidated
balance sheets and recognize changes in the fair value (not to exceed the cost basis of these loans) in our
net income.
• At the inception of a guaranty contract, we estimate the fair value of the guaranty asset and guaranty
obligation and record each of those amounts in our consolidated balance sheet. In each subsequent period,
we reduce the guaranty asset for guaranty fees received and any impairment. We amortize the guaranty
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