Fannie Mae 2006 Annual Report Download - page 64

2006 versus 2005 2005 versus 2004
• New business acquisitions decreased 2% from 2005
• 7% growth in our mortgage credit book of business
• 41% decrease in net interest income to $6.8 billion
• 46 basis points decrease in net interest yield to 0.85%
• 6% increase in guaranty fee income to $4.2 billion
• Derivative fair value losses of $1.5 billion, compared
with derivative fair value losses of $4.2 billion in
2005
• $961 million, or 45%, increase in administrative
expenses to $3.1 billion
• 83% increase in credit-related expenses to $783 million
• $2.2 billion increase in stockholders’ equity to
$41.5 billion
• $702 million increase in the non-GAAP estimated fair
value of our net assets (net of tax effect) to
$42.9 billion
• New business acquisitions decreased 16% from 2004
• 1% growth in our mortgage credit book of business
• 36% decrease in net interest income to $11.5 billion
• 55 basis points decrease in net interest yield to 1.31%
• 6% increase in guaranty fee income to $3.9 billion
• Derivative fair value losses of $4.2 billion, compared
with derivative fair value losses of $12.3 billion in
2004
• $459 million, or 28%, increase in administrative
expenses to $2.1 billion
• 18% increase in credit-related expenses to $428 million
• $0.4 billion increase in stockholders’ equity to
$39.3 billion
• $2.1 billion increase in the non-GAAP estimated
fair value of our net assets (net of tax effect) to
$42.2 billion
Both our GAAP net income and the fair value of net assets are affected by our business activities, as well as
changes in market conditions, including changes in the relative spread between our mortgage assets and debt,
changes in interest rates and changes in implied interest rate volatility. A detailed discussion of the impact of
these market variables on our financial performance and other key drivers of year-over-year changes can be
found in “Consolidated Results of Operations” and “Supplemental Non-GAAP Information-Fair Value Balance
Sheet.”
Because our assets and liabilities consist predominately of financial instruments that are recorded in a variety
of ways in our consolidated financial statements, we expect our earnings to vary, perhaps substantially, from
period to period and also result in volatility in our stockholders’ equity and regulatory capital. Specifically,
under GAAP we measure and record some financial instruments at fair value, while other financial
instruments are recorded at historical cost. We discuss the manner in which we recognize various financial
instruments in our financial statements in “Critical Accounting Policies—Fair Value of Financial Instruments.”
One of the major drivers of volatility in our financial performance measures, including GAAP net income, is
the accounting treatment for derivatives used to manage interest rate risk in our mortgage portfolio. When we
purchase mortgage assets, we use a combination of debt and derivatives to fund those assets and manage the
inherent interest rate risk in our mortgage investments. Our net income reflects changes in the fair value of the
derivatives we use to manage interest rate risk; however, it does not reflect offsetting changes in the fair value
of the majority of our mortgage investments or in any of our debt obligations.
We do not evaluate or manage changes in the fair value of our various financial instruments on a stand-alone
basis. Rather, we manage the interest rate exposure on our net assets, which includes all of our assets and
liabilities, on an aggregate basis regardless of the manner in which changes in the fair value of different types
of financial instruments are recorded in our consolidated financial statements. In “Supplemental Non-GAAP
Information—Fair Value Balance Sheet,” we provide a fair value balance sheet that presents all of our assets
and liabilities on a comparable basis. Management uses the fair value balance sheet, in conjunction with other
risk management measures, to assess our risk profile, evaluate the effectiveness of our risk management
strategies and adjust our risk management decisions as necessary. Because the fair value of our net assets
reflects the full impact of management’s actions as well as current market conditions, management uses this
information to assess performance and gauge how much management is adding to the long-term value of the
company.
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