Fannie Mae Reports Record 2001 Financial Results
January 16, 2002
Operating Net Income of $5.367 Billion up 20.7 Percent over 2000
WASHINGTON, DC ? Fannie Mae (FNM/NYSE), the nation's largest source of financing for home mortgages, today reported operating net income for 2001 of $5.367 billion, or $5.20 per diluted common share. Operating net income was 20.7 percent above 2000, while operating earnings per diluted common share rose 21.2 percent over the same period. For the fourth quarter of 2001 Fannie Mae's operating net income was $1.438 billion, or $1.40 per diluted common share, compared with $1.164 billion, or $1.12 per diluted common share, for the fourth quarter of 2000. The company's fourth quarter and full-year 2001 results include a commitment to contribute $300 million of Fannie Mae common stock to the Fannie Mae Foundation.
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Operating net income and operating earnings per common share exclude the variability in the market value of purchased options and the one-time cumulative change in accounting principle which resulted from the implementation of Financial Accounting Standard 133 (FAS 133) on January 1, 2001. Net income and earnings per share (EPS) for 2001 including FAS 133 items were $5.894 billion and $5.72, respectively. Net income and EPS for the fourth quarter of 2001, including FAS 133 market value changes, were $1.969 billion and $1.92, respectively. Page one of the attachments to this release provides a reconciliation of operating net income and net income.
2001 Financial Performance Summary
Highlights of Fannie Mae's 2001 financial performance include:
- Book of business growth of 19.0 percent versus 9.3 percent in 2000.
- Taxable-equivalent revenue growth of 30.2 percent compared with 12.2 percent in 2000.
- Growth in guarantee fee income of 9.7 percent versus 5.4 percent in 2000.
- Growth in adjusted net interest income of 32.2 percent versus 15.9 percent in 2000.
- Average net interest margin of 1.11 percent compared with 1.01 percent in 2000.
- Credit-related losses of $81.3 million compared with $89.1 million in 2000.
- After-tax losses of $340.5 million ($523.9 million pre-tax) from the call and repurchase of debt, compared with after-tax gains of $31.5 million ($48.5 million pre-tax) in 2000.
Franklin D. Raines, Fannie Mae's Chairman and Chief Executive Officer, said, "This was an extraordinary year for Fannie Mae in every respect. The company achieved 21 percent growth in operating earnings per share, greatly exceeding consensus expectations of 14 percent earnings growth at the beginning of the year. Very high levels of mortgage activity enabled us to increase our book of business by 19 percent, the fastest in nine years. Our net interest margin rose 10 basis points, and our credit losses continued to fall in spite of the onset of recession last March. With growth in our taxable-equivalent revenues exceeding 30 percent, we were able to make a $300 million stock contribution to the Fannie Mae Foundation, conduct repurchases of high-cost debt, and launch a significant upgrading of our technology infrastructure ? all of which will enhance our financial performance in the future."
Raines noted that the contribution to the Fannie Mae Foundation in the fourth quarter of 2001 would reduce the Foundation's need for company contributions over the next several years. In addition, Raines said, by making the contribution in Fannie Mae shares at a time the company believes the shares to be substantially undervalued, any future Foundation contributions should be reduced even further as the shares appreciate. Raines said the company expects to acquire the shares it will contribute to the Foundation through open market purchases by the end of the first quarter of 2002.
Raines said that the company's exceptional financial performance was likely to continue in 2002. "We expect growth in Fannie Mae's operating earnings per share in 2002 to again be significantly above the very positive long-term EPS trend we anticipate for the company," said Raines. Raines noted that the long-term trend for Fannie Mae's earnings would be built upon growth in the residential mortgage market. Raines said the company anticipates that growth in residential mortgage debt outstanding ? which averaged 7 percent per year during the decade of the 1990s ? will average between 8 and 10 percent per year during the current decade. Raines added that over this period Fannie Mae expects to continue to grow both its book of business and its earnings at rates that exceed the growth in mortgage debt.
Raines said that Fannie Mae's financial performance in 2001 and prospects for 2002 make it very likely that the company would achieve the goal it set in May 1999 of doubling its earnings per share between 1998 and 2003. "At the time we set this goal," said Raines, "few expected us to attain it. Not only are we very likely to, we will do so without increasing our risk profile, and with unwavering focus on our housing mission."
Fannie Mae's Executive Vice President and Chief Financial Officer, Timothy Howard, said that Fannie Mae's above-trend earnings prospects for 2002 stem from a variety of factors. Howard said that the recent sharp rebound in long-term interest rates was likely to significantly lower the volume of mortgage liquidations over the course of the first half of the year. This would mean, said Howard, that the company's net interest margin ? which had benefited from the call and refunding of a large volume of debt during 2001 ? would likely be at elevated levels for a longer period of time than previously anticipated.
Howard added that Fannie Mae's very high levels of business activity during the second half of 2001 would have beneficial carryover effects in the current year. Howard noted that the company ended 2001 with $55 billion in outstanding commitments to purchase mortgages, compared with $16 billion in outstanding commitments at December 31, 2000. As this $39 billion in additional commitments settle, Howard said, it will add over five percentage points to portfolio growth in 2002. Howard also said that Fannie Mae's MBS outstandings on January 1, 2002 were 10 percent above the average MBS balance for 2001. Said Howard, "If average guaranty fee rates simply remain stable this year, the company will not need to add any additional MBS balances to produce double-digit growth in guaranty fee income in 2002."
Howard said that while credit losses may rise somewhat in the aftermath of the recession, they are likely to remain low in 2002. Howard noted that the company's book of business is backed by homes with average equity exceeding 40 percent of market value. In addition, Howard said, 35 percent of the mortgages the company owns or guarantees benefit from some form of third-party credit enhancement. Howard added that Fannie Mae's taxable equivalent revenues of $10.2 billion during 2001 were well over one hundred times the $81.3 million in credit-related losses the company recorded during the same period. "Even if Fannie Mae's credit losses were to double this year ? which is highly unlikely ? it would take less than one percentage point off the company's 2002 EPS growth," said Howard.
Finally, Howard said that Fannie Mae's administrative expenses in 2002 were likely to grow at a mid- to high-teens rate due to an initiative begun last year to upgrade the company's operating infrastructure. "This important technology initiative will significantly enhance Fannie Mae's transaction processing, product development and risk management efficiencies, and increase the company's ability to meet the needs of its customers," said Howard. Howard added that the company's guidance for 2002 EPS growth fully reflected the impact of higher-than-normal administrative costs related to this technology project.
"Fannie Mae had an exceptional year in 2001, and we are poised for another exceptional year in 2002," said Howard.
Details of Fannie Mae's 2001 financial performance follow:
Fannie Mae's business volume - mortgages purchased for portfolio plus mortgage-backed security (MBS) issues acquired by other investors ? totaled $615.3 billion in 2001, a 137 percent increase compared with 2000. Business volume in 2001 consisted of $270.6 billion in portfolio purchases and $344.7 billion in MBS issues acquired by investors other than Fannie Mae's portfolio, compared with $154.2 billion and $105.4 billion, respectively, in 2000. Retained commitments to purchase mortgages were $296.5 billion in 2001 compared with $151.9 billion in 2000. Business volume in the fourth quarter of 2001 was $185.2 billion compared with $80.0 billion in the fourth quarter of 2000.
Fannie Mae's combined book of business ? the net mortgage portfolio and outstanding MBS held by investors other than Fannie Mae's portfolio ? grew at a compound annual rate of 19.0 percent during 2001, ending the period at $1.564 trillion. This growth was fueled by a 16.1 percent annualized growth rate in the net mortgage portfolio to $705.2 billion and a 21.5 percent rate of growth in outstanding MBS to $858.9 billion at December 31, 2001. For the fourth quarter of 2001 the combined book of business grew at an annual rate of 17.1 percent compared with 13.8 percent in the comparable time period in 2000.
Portfolio Investment Business Results
Fannie Mae's portfolio investment business manages the interest rate risk of the company's mortgage portfolio and other investments. The results of this business are largely reflected in adjusted net interest income, which is net interest income less the amortization of purchased options expense. Adjusted net interest income for 2001 was $7.500 billion, up 32.2 percent from $5.674 billion in 2000. This increase was driven by an 18.5 percent rise in the average net investment balance and a 10 basis point increase in the average net interest margin. Adjusted net interest income was $2.165 billion in the fourth quarter of 2001, or 45.8 percent above the fourth quarter of 2000.
Fannie Mae's net investment balance ? consisting of the net mortgage portfolio and the company's liquid investments ? averaged $717 billion during 2001 compared with $605 billion during 2000. The net investment balance was $781 billion at December 31, 2001.
The company's net interest margin averaged 111 basis points in 2001, up from 101 basis points in 2000. The net interest margin averaged 121 basis points in the fourth quarter of 2001 compared with 99 basis points in the fourth quarter of 2000 and 110 basis points in the third quarter of 2001. Fannie Mae's net interest margin benefited from this year's sharp declines in short-term interest rates, which enabled the company to call debt early in the year in amounts that substantially exceeded the timing and volume of mortgage liquidations. Much of this debt was reissued with short-term maturities in anticipation of a subsequent rise in mortgage repayments. Although most of Fannie Mae's short-term or variable-rate debt has some form of protection against a rise in interest rates, the company's interest costs declined as interest rates fell, and its net interest margin rose as a result. Fannie Mae's interest margin also benefited from attractive spreads on new mortgage purchases during 2001.
Fannie Mae's net mortgage portfolio grew at an annual rate of 16.1 percent during 2001, ending the year at $705 billion. For the fourth quarter of 2001 the mortgage portfolio grew at an 11.1 percent annualized rate compared with a 27.7 percent rate in the fourth quarter of 2000 and a 15.2 percent rate during the third quarter of 2001. During the second half of the year an unusually large number of portfolio commitments were made for settlement a number of months forward. As a result, portfolio growth in 2001 was lower than normally would have been the case given the volume of commitments, while portfolio growth in 2002 will be correspondingly higher.
For the full year 2001 the company realized net losses from debt repurchases and debt calls of $523.9 million ($340.5 million after tax), compared with net gains of $48.5 million ($31.5 million after tax) in 2000. During the year the company realized losses on debt repurchases of $405.5 million ($263.5 million after tax) and losses on debt calls of $118.4 million ($77.0 million after tax). For the fourth quarter of 2001 the company had realized losses on debt repurchases of $70.3 million ($45.7 million after tax) and losses on debt calls of $20.9 million ($13.5 million after tax).
Credit Guaranty Business Results
Fannie Mae's credit guaranty business manages the company's credit risk. The results of this business are primarily reflected in guaranty fee income and credit-related losses. Guaranty fee income was $1.482 billion in 2001, a 9.7 percent increase compared with 2000. Guaranty fee income was driven by a 12.3 percent rise in average outstanding MBS, partially offset by a decline in the average effective guaranty fee rate compared with the previous year. The effective guaranty fee rate in 2001 was 19.0 basis points compared with 19.5 basis points in 2000. Guaranty fee income for the fourth quarter of 2001 was $398.3 million compared with $339.3 million in the fourth quarter of 2000. The effective guaranty fee rate in the fourth quarter of 2001 was 18.9 basis points compared with 19.3 basis points in the fourth quarter of 2000.
Credit-related losses ? foreclosed property expense plus charge-off recoveries ? improved despite the slowing economy, totaling $81.3 million compared with $89.1 million in 2000. Foreclosed property expense was $192.7 million in 2001 compared with $214.0 million in 2000. Charge-off recoveries were $111.4 million in 2001 compared with $124.9 million in 2000. Fannie Mae's credit loss rate ? credit-related losses as a percentage of the average combined book of business ? was 0.6 basis points in 2001 compared with 0.7 basis points in 2000. Credit-related losses were $17.5 million in the fourth quarter of 2001 compared with $23.0 million in the fourth quarter of 2000. Foreclosed property expense was $45.8 million in the fourth quarter of 2001 compared with $51.1 million in the fourth quarter of 2000. Charge-off recoveries were $28.3 million in the fourth quarter of 2001 compared with $28.1 million in the fourth quarter of 2000. For the fourth quarter of 2001, the credit loss rate was 0.5 basis points compared with 0.7 basis points in the year-ago quarter.
Credit-related expense, which includes foreclosed property expense and the provision for losses and is the amount recorded on the company's income statement, totaled $77.7 million in 2001, in line with credit-related losses. Fannie Mae's loss provision was a negative $115.0 million in 2001 compared with a negative $120.0 million in 2000. In the fourth quarter of 2001, credit-related expense totaled $15.8 million compared with $21.1 million in the fourth quarter of 2000. Fannie Mae's loss provision was a negative $30.0 million in the fourth quarter of 2001, unchanged from the fourth quarter of 2000. The company's allowance for loan losses stood at $806 million at December 31, 2001 compared with $809 million at December 31, 2000.
Fee and other incom
Fee and other income in 2001 totaled $151.0 million compared with a negative $43.5 million in 2000. The change between 2001 and 2000 resulted primarily from increases in volume-related technology and transaction fees and the absence of a hedging loss. Fee and other income in the fourth quarter of 2001 totaled $50.2 million compared with $0.8 million in the same period last year.
Fee and other income includes technology fees, transaction fees, multifamily fees and other miscellaneous items, and is net of operating losses from certain tax-advantaged investments ? primarily investments in affordable housing which qualify for the low income housing tax credit. Tax credits associated with these investments are recorded in the federal income tax line.
Administrative expenses totaled $1.018 billion in 2001, up 12.4 percent from 2000. Expenses in 2001 included a $10 million contribution to the September 11 disaster relief effort and incremental costs related to a multi-year investment in the company's core infrastructure systems. In 2001, the company launched a major modernization of its core technology infrastructure designed to enhance its ability to process and manage the risk on mortgage assets.
The company's ratio of administrative expense to the average combined book of business in 2001 was .071 percent compared with .072 percent in 2000. Fannie Mae's efficiency ratio ? administrative expense divided by taxable-equivalent revenue ? was 10.0 percent in 2001 compared with 11.6 percent in 2000. Administrative expenses totaled $251.3 million in the fourth quarter 2001, up 8.4 percent from the fourth quarter of 2000.
Fannie Mae's core capital was $25.2 billion at December 31, 2001 compared with $23.8 billion at September 30, 2001 and $20.8 billion at December 31, 2000.
The company repurchased 6.0 million shares of common stock during 2001 compared with 25.2 million shares in 2000. The company repurchased 3.3 million shares in the fourth quarter of 2001. Fannie Mae had 997.2 million shares of common stock outstanding as of December 31, 2001 compared with 998.8 million shares as of December 31, 2000. The company issued $400 million of preferred stock and called $375 million of preferred stock in 2001. At December 31, 2001 preferred stock made up 9.1 percent of Fannie Mae's core capital.
The company issued $5.0 billion of subordinated debt during 2001. Subordinated debt serves as an important supplement to Fannie Mae's equity capital, although it is not a component of core capital. Earlier this year Fannie Mae announced that by the end of 2003 it would issue sufficient subordinated debt to bring the sum of total capital and outstanding subordinated debt to at least 4 percent of on-balance-sheet assets, after providing adequate capital to support off-balance sheet MBS. On this basis Fannie Mae's capital and outstanding subordinated debt, as a percent of on-balance sheet assets was 3.4 percent at December 31, 2001.
As part of Fannie Mae's voluntary market discipline, liquidity and safety and soundness initiatives of October 2000, the company now discloses on a quarterly basis its liquid assets as a percent of total assets, the sensitivity of its future credit losses to an immediate 5 percent decline in home prices, and whether it has passed or failed an internal interim version of the risk-based capital stress test based on its interpretation of the Federal Housing Enterprises Financial Safety and Soundness Act of 1992.
At December 31, 2001 Fannie Mae's ratio of liquid assets to total assets was 9.5 percent, compared with 7.8 percent at September 30, 2001. The company has committed to maintain a portfolio of high-quality, liquid, non-mortgage securities, equal to at least 5 percent of total assets.
At September 30, 2001 the present value of Fannie Mae's net sensitivity of future credit losses to an immediate 5 percent decline in home prices was $467 million, taking into account the beneficial effect of third-party credit enhancements. This compares with $332 million at June 30, 2001. The September 30 figure reflects a gross credit loss sensitivity of $1,349 million before the effect of credit enhancements, and is net of projected credit risk sharing proceeds of $882 million.
At both September 30, 2001 and June 30, 2001, the company passed its internal interim risk-based capital test with a capital cushion that exceeded 30 percent of total capital. The company intends to manage its risks so that the cushion between total capital and internally calculated risk-based capital is at least 10 percent of total capital.
Fannie Mae's quarterly disclosures, together with the monthly interest rate risk disclosures are included with the company's Monthly Summary statistics.
During 2001 Fannie Mae adopted Financial Accounting Standard No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. FAS 133 resulted in changes to accounting presentations on both the company's income statement and balance sheet.
FAS 133 requires that Fannie Mae mark to market on its income statement the changes in the time value of its purchased options. FAS 133 requires that only the company's purchased options be marked to market, but none of its option-based debt or mortgage investments. The change in the time value of Fannie Mae's purchased options during 2001 was a net loss of $37.4 million. This amount includes $590.1 million in option cost amortization expense that formerly was included in net interest income and is currently included in adjusted net interest income. The company recorded a cumulative gain of $258.3 million, or $167.9 million after tax upon adoption of FAS 133 on January 1, 2001.
At December 31, 2001 the notional balance of Fannie Mae's purchased options ? consisting of pay-fixed interest rate swaptions, receive-fixed interest rate swaptions, and interest rate caps ? totaled $219.9 billion. At December 31, 2000 the notional balance of Fannie Mae's purchased options was $82.5 billion.
FAS 133 also requires that the company record any change in the fair values of certain derivatives, primarily interest rate swaps it uses as substitutes for non-callable debt, on the balance sheet in a separate component of stockholders' equity called other comprehensive income, or OCI. FAS 133 does not require non-callable debt to be marked to market. At December 31, 2001, the OCI component of stockholders' equity included a $7.4 billion reduction, or 1.0 percent of the net mortgage balance, from the marking to market of derivatives. The comparable reductions to OCI were $10.6 billion at September 30, 2001 and $3.7 billion at June 30, 2001. Other comprehensive income is not a component of core capital.
At December 31, 2001 Fannie Mae had $281.8 billion in interest rate swaps that were marked to market through other comprehensive income. The company had $202.5 billion in comparable derivatives at December 31, 2000.
Source: Fannie Mae