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97
FANNIE MAE 2002 ANNUAL REPORT
Stock-Based Compensation
At December 31, 2002, we had five stock-based
compensation or benefits programs that we describe in
Footnote 8, Stock-Based Compensation Plans. Financial
Accounting Standard No. 123, Accounting for Stock-Based
Compensation (FAS 123), gives companies the option of either
recording an expense for all stock compensation awards
based on the fair value at grant date or continuing to follow
Accounting Principles Board No. 25 (APB 25). Companies
that follow APB 25 must disclose, in a footnote, pro forma
net income and earnings per share as if they had adopted
the expense recognition provisions of FAS 123. Prior to
January 2003, we elected to apply APB 25 and related
interpretations in accounting for our plans. As a result of
applying APB 25, we did not recognize compensation
expense for nonqualified stock options and the Employee
Stock Purchase Plan. We have elected to change our
accounting for stock-based compensation and will record
expense for all future stock compensation awards at fair value
at grant date under FAS 123 beginning on January 1, 2003.
We estimate that the impact of adopting the expense
recognition provisions of FAS 123 will result in additional
expense of approximately $28 million in 2003.
In accordance with the disclosure requirements of Financial
Accounting Standard No. 148, Accounting for Stock-Based
Compensation—Transition and Disclosure (FAS 148), the
following table summarizes our net income available to
common stockholders and reported basic and diluted
earnings per common share for the years 2000-2002 under
APB 25, as well as pro forma net income available to common
stockholders and basic and diluted earnings per common
share if we had recognized compensation expense according
to FAS 123.
Dollars in millions, except per share amounts 2002 2001 2000
Net income available to common
stockholders, as reported . . . . . . . . . . . $4,520 $5,756 $4,327
Plus: stock-based employee
compensation expense recorded
under APB 25, net of related
tax effects . . . . . . . . . . . . . . . . . . . . . . . 25 27 31
Less: stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects . . . . . . . . . . . . . . . . (105) (96) (80)
Pro forma net income available to
common stockholders . . . . . . . . . . . . . $4,440 $5,687 $4,278
Earnings per share:
Basic—as reported . . . . . . . . . . . . . . . . . . $4.56 $5.75 $ 4.31
Basic—pro forma . . . . . . . . . . . . . . . . . . . 4.47 5.69 4.26
Diluted—as reported . . . . . . . . . . . . . . . . 4.53 5.72 4.29
Diluted—pro forma . . . . . . . . . . . . . . . . . 4.45 5.65 4.24
We determined the fair value of our stock-based
compensation using a Black-Scholes pricing model.
The following table summarizes the major assumptions
used in the model.
2002 2001 2000
Risk-free rate1 . . . . . 3.235–4.995% 3.885–5.155% 5.085–6.815%
Volatility . . . . . . . . . 31–33% 33–34% 29–34%
Dividend2 . . . . . . . . . $1.32 $1.20 $1.12
Average expected
life . . . . . . . . . . . 6 yrs. 5 yrs. 5 yrs.
1The synthetic 6-year zero-coupon U.S. Treasury strip yield formed by interpolating between the
5-year and 7-year zero-coupon U.S. Treasury strip yields in 2002.
2Dividend rate on common stock at date of grant. Dividend rate assumed to remain constant over
the option life.
2. Mortgage Portfolio, Net
The mortgage portfolio, net is composed of whole loans and
securities backed by loans. The following presents the
composition of these two components at December 31,