Fannie Mae 2001 Annual Report Download - page 25

options in the income statement, but not the options in
callable debt or mortgages. Prior to the adoption of FAS 133,
Fannie Mae amortized premiums on purchased options into
interest expense on a straight-line basis over the life of the
option. Without these adjustments, net income and
diluted EPS grew 33 percent to $5.894 billion and $5.72,
respectively. Table 1 reconciles 2001 net income to operating
net income.
TABLE 1: RECONCILIATION OF NET INCOME
TO OPERATING NET INCOME
Year Ended
December 31,
Dollars in millions 2001
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,894
Cumulative after-tax gain upon adoption of FAS 133 . . . . . . . (168)
After-tax expense from the change in the fair value
of the time value of purchased options . . . . . . . . . . . . . . . . 24
After-tax amortization expense of purchased
options premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (383)
Operating net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,367
Fannie Mae had several other key accomplishments
during 2001:
•implementing voluntary safety and soundness
initiatives to enhance market discipline, liquidity,
and capital;
•surpassing all statutory housing goals and significantly
exceeding all annual corporate purchasing goals for
Fannie Mae’s ten-year, $2 trillion American Dream
CommitmentSM;
•providing record liquidity to the housing market in
conjunction with lending partners to help ensure the
housing finance system operated smoothly following
the events of September 11; the September 11
terrorist attacks did not significantly disrupt
Fannie Mae’s business operations or impact its
financial results;
•contributing $10 million to relief funds for the
victims and the families of victims affected by the
events of September 11 and $300 million in
Fannie Mae common stock to the Fannie Mae
Foundation;
•working with lending partners to launch several new
products, processes, and partnerships that deliver
mortgage credit to people previously underserved,
through products such as Expanded Approval/Timely
Payment RewardsSM; and
•launching of a major initiative to re-engineer
Fannie Mae’s core technology infrastructure that will
increase its ability to meet the needs of its customers
by significantly enhancing transaction processing,
product development, and risk management.
Results of Operations for 2001
Taxable-Equivalent Revenues
Taxable-equivalent revenues represent total revenues adjusted to
reflect the benefits of tax-exempt income and investment tax credits
based on applicable federal income tax rates.
In 2001, Fannie Mae generated taxable-equivalent revenue
of $10.187 billion, a 30 percent increase over 2000. The
increase in taxable-equivalent revenues was largely
attributable to strong growth in the mortgage portfolio and
net interest margin, which boosted net interest income.
Table 2 compares 2001 and 2000 taxable-equivalent revenues
and its components.
TABLE 2: TAXABLE-EQUIVALENT REVENUES
Year Ended December 31,
Dollars in millions 2001 2000
Net interest income . . . . . . . . . . . . . . . . . . . . . . . $8,090 $5,674
Purchased options premium amortization . . . . (590) –
Adjusted net interest income . . . . . . . . . . . . . . . 7,500 5,674
Guaranty fee income . . . . . . . . . . . . . . . . . . . . . . 1,482 1,351
Fee and other income (expense) . . . . . . . . . . . . . 151 (44)
Total adjusted revenues . . . . . . . . . . . . . . . . . 9,133 6,981
Taxable-equivalent adjustments:
Investment tax credits . . . . . . . . . . . . . . . . . . 584 430
Tax-exempt investments . . . . . . . . . . . . . . . 470 414
Total taxable-equivalent revenues1 . . . . . . . . . . $10,187 $7,825
1Taxable-equivalent revenues include: (a) revenues net of amortization expense of purchased options
premiums that would have been recorded prior to the adoption of FAS 133, (b) operating losses on certain
tax-advantaged investments, and (c) taxable-equivalent adjustments for tax-exempt income and
investment tax credits using the applicable federal income tax rate of 35 percent.
Net Interest Income
Net interest income is the difference between interest income and
interest expense. Adjusted net interest income includes reported net
interest income less amortization expense related to purchased options
premiums. Prior to the adoption of FAS 133, reported net interest
income included the amortization expense of purchased options
premiums on a straight line basis over the life of the option. With the
adoption of FAS 133, this expense is now included in the change in the
fair value of the time value of purchased options that is reported in the
income statement in the category “purchased options expense.”
Management believes adjusted net interest income is a more
meaningful measure of performance and is comparable with reported
net interest income in prior periods.
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