Fannie Mae 2006 Annual Report Download - page 129

gains in the second quarter of 2006 as compared to net derivatives fair value losses in the second quarter of
2005. The increase was offset primarily by a lower level of net interest income and recognition of net
investment losses in the second quarter of 2006 as compared to net investment gains in the second quarter of
2005.
Net interest income totaled $1.9 billion for the second quarter of 2006 as compared to $2.9 billion for the
second quarter of 2005. The reduction in net interest income was due primarily to lower average balances in
our mortgage portfolio for the second quarter of 2006 as a result of our 2005 portfolio sales as well as to
liquidations and to continued compression of our net interest yield.
Guaranty fee income totaled $917 million for the second quarter of 2006 as compared to $1.2 billion for the
second quarter of 2005. The decrease in guaranty fee income was due to an increase in interest rates in the
second quarter of 2006 resulting in the deceleration of amortization of deferred fees net of impairment charges
for guaranty assets as opposed to a decline in interest rates in the second quarter of 2005 resulting in the
acceleration of amortization of deferred fees net of impairment charges. An increase in mortgage rates reduces
the rate of expected mortgage loan prepayments thereby increasing the average expected life of the guaranty
assets and slowing the rate of amortization of deferred fees.
Net investment losses totaled $633 million for the second quarter of 2006 as compared to net investment gains
of $596 million for the second quarter of 2005. The net losses recorded in the second quarter of 2006
reflected net unrealized holding losses on trading securities as interest rates rose during the second quarter of
2006 and other-than-temporary impairment charges on available-for-sale securities due to rising rates and an
intent to sell the securities. Net gains recorded in the second quarter of 2005 reflected net unrealized holding
gains on trading securities as interest rates declined during the second quarter of 2005.
We recorded net derivatives fair value gains of $1.6 billion for the second quarter of 2006 as compared to net
derivatives fair value losses of $2.6 billion for the second quarter of 2005. The net gains recorded in the
second quarter of 2006 were due to an increase in the fair value of open derivative positions as of June 30,
2006 resulting from an increase in interest rates combined with lower net interest costs on interest rate swaps.
The net losses recorded in the second quarter of 2005 were the result of losses in the fair value of open
derivative positions as of June 30, 2005 caused by a decrease in interest rates during the second quarter of
2005 and higher net interest costs on interest rate swaps.
Fee and other income totaled $62 million for the second quarter of 2006 as compared to $459 million for the
second quarter of 2005. The decrease in fee and other income was primarily the result of recognition of
foreign exchange losses on foreign-denominated debt in the second quarter of 2006 of $161 million as
compared to the recognition of foreign exchange gains in the second quarter of 2005 of $226 million. These
gains (losses) were offset by corresponding gains (losses) on foreign currency swaps recorded as a component
of “Derivatives fair value gains (losses), net in the consolidated statements of income as we eliminate our
exposure to fluctuations in foreign exchange rates by entering into foreign currency swaps to convert foreign-
denominated debt to U.S. dollars.
Administrative expenses totaled $780 million for the second quarter of 2006 as compared to $507 million for
the second quarter of 2005. The increase in administrative expenses was due to higher professional service
fees as a result of the restatement and reaudit of our financial results, which were $196 million higher in the
second quarter of 2006 as compared to the second quarter of 2005, as well as to higher salaries and employee
benefit expenses as a result of increasing our staffing to address the restatement and remediation efforts.
We recorded a provision for federal income tax expense of $610 million for the second quarter of 2006 as
compared to $333 million for the second quarter of 2005. The increase in provision for income taxes in the
second quarter of 2006 as compared to the second quarter of 2005 primarily relates to a $989 million increase
in income before taxes. The provision includes taxes accrued on income at the federal statutory rate of 35%
adjusted for tax credits recognized for our equity investments in affordable housing projects and tax benefits
resulting from our holdings of tax-exempt investments.
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