Fannie Mae 2006 Annual Report Download - page 130

Third Quarter Ended September 30, 2006 versus Third Quarter Ended September 30, 2005
We recorded a net loss of $629 million for the third quarter of 2006 compared to net income of $1.7 billion
for the third quarter of 2005. The decrease in net income was due to recognition of a higher level of net
derivatives fair value losses and a lower level of net interest income offset by recognition of net investment
gains in the third quarter of 2006 compared to net investment losses in the third quarter of 2005.
Net interest income totaled $1.5 billion for the third quarter of 2006 as compared to $2.7 billion for the third
quarter of 2005. The reduction in net interest income was due primarily to lower average balances in our
mortgage portfolio for the third 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 $1.1 billion for the third quarter of 2006 as compared to $872 million for the
third quarter of 2005. The increase in guaranty fee income was due to the acceleration of amortization of
deferred fees net of impairment charges for guaranty assets resulting from a decline in interest rates in the
third quarter of 2006.
Net investment gains in the third quarter of 2006 totaled $550 million as compared to net investment losses of
$169 million for the third quarter of 2005. The net gains recorded in the third quarter of 2006 reflected net
unrealized holding gains on trading securities as interest rates declined during the quarter. The net investment
losses recorded in the third quarter of 2005 were attributable to net unrealized holding losses on trading
securities due to rising interest rates during the quarter.
We recorded net derivatives fair value losses of $3.4 billion for the third quarter of 2006 as compared to
$539 million for the third quarter of 2005. The net losses recorded in the third quarter of 2006 were due to a
decrease in the fair value of open derivative positions as of September 30, 2006 resulting from a decline in
interest rates. The net losses recorded in the third quarter of 2005 were attributable to a decline in the fair
value of open derivative positions as of September 30, 2005 and net interest costs on interest rate swaps.
Administrative expenses totaled $761 million for the third quarter of 2006 as compared to $567 million for the
third 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 $114 million higher in the third
quarter of 2006 as compared to the third 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.
The provision for credit losses totaled $145 million for the third quarter of 2006 as compared to $172 million
for the third quarter of 2005. The provision for credit losses for the third quarter of 2006 increased
sequentially from the second quarter of 2006 as we began to observe an increase in default rates. However, the
provision for credit losses in the third quarter of 2006 was slightly lower than the third quarter of 2005 as the
third quarter of 2005 included $106 million for our estimate of incurred losses related to Hurricane Katrina.
We recorded a provision for federal income tax benefit of $639 million for the third quarter of 2006 as
compared to a provision for federal income tax expense of $406 million for the third quarter of 2005. The
federal income tax benefit in the third quarter of 2006 relates to a loss before taxes for the third quarter of
2006 as compared to income before taxes for the third quarter of 2005 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.
Fourth Quarter Ended December 31, 2006 versus Fourth Quarter Ended December 31, 2005
We recorded net income of $604 million for the fourth quarter of 2006 compared to net income of $1.4 billion
for the fourth quarter of 2005. The decrease in net income was due to a lower level of net interest income and
recognition of a higher level of net derivatives fair value losses.
Net interest income totaled $1.3 billion for the fourth quarter of 2006 as compared to $2.2 billion for the
fourth quarter 2005. The reduction in net interest income was due primarily to a higher cost of funds in the
fourth quarter of 2006 resulting in a compressed net interest yield as compared to the fourth quarter of 2005.
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