Fannie Mae 2005 Annual Report Download - page 80

Table 3: Condensed Consolidated Results of Operations
2005 2004 2003 $ % $ %
For the Year Ended December 31, 2005 vs. 2004 2004 vs. 2003
Variance
(Dollars in millions, except per share amounts)
Net interest income . . . . . . . . . . . . . . . . . . . . . . $11,505 $ 18,081 $19,477 $(6,576) (36)% $(1,396) (7)%
Guaranty fee income . . . . . . . . . . . . . . . . . . . . . 3,779 3,604 3,281 175 5 323 10
Fee and other income . . . . . . . . . . . . . . . . . . . . 1,526 404 340 1,122 278 64 19
Investment losses, net . . . . . . . . . . . . . . . . . . . . (1,334) (362) (1,231) (972) (269) 869 71
Derivatives fair value losses, net . . . . . . . . . . . . . (4,196) (12,256) (6,289) 8,060 66 (5,967) (95)
Debt extinguishment losses, net . . . . . . . . . . . . . (68) (152) (2,692) 84 55 2,540 94
Loss from partnership investments . . . . . . . . . . . (849) (702) (637) (147) (21) (65) (10)
Provision for credit losses . . . . . . . . . . . . . . . . . (441) (352) (365) (89) (25) 13 4
Other non-interest expense . . . . . . . . . . . . . . . . . (2,351) (2,266) (1,598) (85) (4) (668) (42)
Income before federal income taxes, extraordinary
gains (losses), and cumulative effect of change
in accounting principle . . . . . . . . . . . . . . . . . . 7,571 5,999 10,286 1,572 26 (4,287) (42)
Provision for federal income taxes . . . . . . . . . . . (1,277) (1,024) (2,434) (253) (25) 1,410 58
Extraordinary gains (losses), net of tax effect . . . . 53 (8) 195 61 763 (203) (104)
Cumulative effect of change in accounting
principle, net of tax effect. . . . . . . . . . . . . . . . — — 34 — — (34) (100)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,347 $ 4,967 $ 8,081 $ 1,380 28% $(3,114) (39)%
Diluted earnings per common share. . . . . . . . . . . $ 6.01 $ 4.94 $ 8.08 $ 1.07 22% $ (3.14) (39)%
Net income and diluted earnings per share (“EPS”) totaled $6.3 billion and $6.01, respectively, in 2005,
compared with $5.0 billion and $4.94 in 2004, and $8.1 billion and $8.08 in 2003. We expect high levels of
period-to-period volatility in our results of operations and financial condition as part of our normal business
activities. This volatility is primarily due to changes in market conditions that result in periodic fluctuations in
the estimated fair value of our derivative instruments, which we recognize in our consolidated statements of
income as “Derivatives fair value losses, net.” Although we use derivatives as economic hedges to help us
manage interest rate risk and achieve our targeted interest rate risk profile, we do not meet the criteria for
hedge accounting under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities
(“SFAS 133”). Accordingly, we record our derivative instruments at fair value as assets or liabilities in our
consolidated balance sheets and recognize the fair value gains and losses in our consolidated statements of
income without consideration of offsetting changes in the fair value of the economically hedged exposure. The
estimated fair value of our derivatives may fluctuate substantially from period to period because of changes in
interest rates, expected interest rate volatility and our derivative activity. Based on the composition of our
derivatives, we generally expect to report decreases in the aggregate fair value of our derivatives as interest
rates decrease.
Our business segments generate revenues from three principal sources: net interest income, guaranty fee
income, and fee and other income. Other significant factors affecting our net income include the timing and
size of investment and debt repurchase gains and losses, equity investments, the provision for credit losses,
and administrative expenses. We provide a comparative discussion of the impact of these items on our
consolidated results of operations for the three-year period ended December 31, 2005 below. We also discuss
other significant items presented in our consolidated statements of income.
Net Interest Income
Net interest income, which is the difference between interest income and interest expense, is a primary source
of our revenue. Interest income consists of interest on our consolidated interest-earning assets, plus income
from the amortization of discounts for assets acquired at prices below the principal value, less expense from
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