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Fannie Mae Reports Record Second Quarter 2001 Financial Results

Operating Net Income of $1.314 Billion up 19.8 Percent over Second Quarter 2000; Operating Earnings Per Diluted Common Share of $1.27 up 21.0 Percent

July 17, 2001

WASHINGTON, DC Fannie Mae (NYSE: FNM), the nation's largest source of financing for home mortgages, today reported operating net income for the second quarter of 2001 of $1.314 billion, or $1.27 per diluted common share. Operating net income was 19.8 percent above the second quarter of 2000, while operating earnings per diluted common share (operating EPS) rose 21.0 percent over the same period.

For the first six months of 2001 Fannie Mae's operating net income was $2.553 billion, or $2.47 per diluted common share, compared with $2.159 billion, or $2.08 per diluted common share, for the same period in 2000. Fannie Mae's operating EPS for the first six months of 2001 were 18.8 percent above the first six months of 2000.

Second Quarter
6 Months Ended June 30
2001
2000
change
operating net income (billions) $1.314 $1.097 19.8%
2001
2000
change
$2.553
$2.159
18.2%
operating eps (dollars)
$1.27
$1.05
21.0%
$2.47
$2.08
18.8%

Operating net income and 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 EPS for the second quarter of 2001, including FAS 133 market value changes, were $1.402 billion and $1.36, respectively. Net income and EPS for the six months ended June 30, 2001 including FAS 133 items were $2.696 billion and $2.61, respectively.

Franklin D. Raines, Fannie Mae's Chairman and Chief Executive Officer, said, "Slower economic growth, lower interest rates and contained inflation have combined to produce very favorable conditions for home buying and mortgage refinancing. In this environment Fannie Mae has been called upon to provide a greater volume of support to housing finance than at any time in the company's history."

Raines said that Fannie Mae's combined book of business -- its net mortgage portfolio and outstanding mortgage-backed securities -- grew at a 22.3 percent annual rate during the second quarter. At the same time, Raines noted, a rising net interest margin contributed to taxable-equivalent revenue growth of over 29 percent compared with the second quarter of 2000. Finally, Raines added, in spite of the slowing economy the company's credit losses fell to a 17-year quarterly low of $16.2 million. Said Raines, "With very strong business and revenue growth and well contained credit losses, Fannie Mae is extremely well-positioned to continue to play a critical role in providing mortgage credit to the economy, while extending our enviable record of superior financial performance."

Highlights of Fannie Mae's second quarter 2001 performance include:

  • Taxable-equivalent revenue growth of 29.1 percent versus the second quarter of 2000.
  • A net interest margin of 1.09 percent versus 1.02 percent in the second quarter of 2000.
  • Commitments to purchase mortgages of $65.6 billion, more than double the second quarter 2000.
  • Business volume of $165.7 billion compared with $62.0 billion in the second quarter of 2000.
  • Annualized book of business growth of 22.3 percent for the quarter and 19.6 percent year-to-date.
  • Credit losses of $16.2 million compared with $18.6 million in the second quarter of 2000.

Business volume
Fannie Mae's business volume -- mortgages purchased for portfolio plus mortgage-backed security (MBS) issues acquired by other investors--totaled a record $165.7 billion in the second quarter of 2001 compared with $62.0 billion in the second quarter of 2000 and $105.6 billion in the first quarter of 2001. Business volume for the first six months of 2001, at $271.3 billion, was more than double the $112.7 billion for the first six months of 2000. The second quarter's business volume consisted of $65.3 billion in portfolio purchases and $100.4 billion in MBS issues acquired by investors other than Fannie Mae's portfolio. Retained commitments to purchase mortgages were $65.6 billion in the second quarter of 2001 compared with $30.6 billion in the second 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 22.3 percent during the second quarter of 2001, ending the period at $1,437 billion. This growth was fueled by a 14.6 percent annualized growth rate in the net mortgage portfolio to $663 billion and a 29.3 percent rate of growth in outstanding MBS to $774 billion at June 30, 2001. For the first six months of 2001 the combined book of business grew at an annual rate of 19.6 percent.

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. That amortization, which prior to the adoption of FAS 133 was included in net interest income, is now included in the "purchased options income (expense)" line item, along with changes to the market value of these options. The amortization cost of purchased options was $100.1 million in the second quarter of 2001 and $164.2 million year-to-date.

Fannie Mae's adjusted net interest income of $1.799 billion in the second quarter of 2001 was 28.6 percent above the second quarter of 2000. This increase was driven by a 19.6 percent rise in the average net investment balance and a seven basis point increase in the average net interest margin. Adjusted net interest income for the first six months of 2001 was $3.443 billion, up 24.7 percent from $2.761 billion during the comparable period in 2000.

Fannie Mae's net investment balance -- consisting of the net mortgage portfolio and the company's liquid investments -- averaged $704 billion during the second quarter of 2001 compared with $589 billion during the second quarter of 2000. The net investment balance was $722 billion at June 30, 2001.

The company's average net interest margin was 109 basis points in the second quarter of 2001 compared with 102 basis points in the second quarter of 2000 and 103 basis points in the first quarter of 2001. Fannie Mae's net interest margin in 2001 has benefited from a sharp decline in short- and intermediate-term debt yields that allowed the company to call a large amount of higher cost debt. Pending an anticipated rise in liquidations, Fannie Mae refunded a portion of that debt in shorter maturities, temporarily boosting the margin. The company's interest margin declined from a high of 111 basis points in April to 106 basis points in June as liquidations increased during the second quarter and the company rebuilt the amount of option-based debt in its liability base.

Fannie Mae's net mortgage portfolio grew at an annual rate of 14.6 percent during the second quarter of 2001 compared with a 10.0 percent rate in the second quarter of 2000 and a 23.8 percent rate during the first quarter of 2001. For the first six months of 2001 the mortgage portfolio grew at a 19.1 percent annualized rate. Portfolio growth during the second quarter was low relative to the pace of commitments due to the fact that many commitments made during the quarter specified purchase settlements in later months. Outstanding mandatory delivery commitments to purchase mortgages were $37.8 billion on June 30, 2001. As these commitments settle in the third quarter, mortgage portfolio growth is expected to accelerate from the second quarter pace.

In the second quarter of 2001 the company realized net losses from debt calls and repurchases of $142.5 million ($92.5 million after tax). Debt called in the second quarter of 2001 was $33.3 billion compared with $0.6 billion in the second quarter of 2000 and $78.8 billion in the first quarter of 2001.

In March, Fannie Mae announced that on a periodic basis it would repurchase outstanding issues of Benchmark Notes® and Benchmark BondsSM. During the second quarter the company conducted two repurchases of Benchmark SecuritiesSM and one non-Benchmark repurchase for a total of $2.6 billion. The company periodically makes decisions to repurchase debt when it is economic to do so. These decisions can be part of the company?s overall asset/liability management program or designed to take advantage of pricing opportunities in the market.

Credit guaranty business results
Fannie Mae's credit guaranty business manages the company's credit risk. The primary indicators of the results of this business are guaranty fee income and credit-related losses. Guaranty fee income was $357.1 million in the second quarter of 2001, a 5.3 percent increase compared with the second quarter of 2000. Guaranty fee income was driven by a 9.2 percent rise in average outstanding MBS, partially offset by a decline in the effective guaranty fee rate. The effective guaranty fee rate in the second quarter of 2001 was 18.9 basis points compared with 19.1 basis points in the first quarter and 19.6 basis points in the second quarter of 2000. Recent declines in the effective guaranty fee rate have resulted from increased liquidations of older business with relatively high fee rates. The company expects the effective guaranty fee rate to stabilize as liquidations slow. Guaranty fee income for the first six months of 2001 was $700.2 million compared with $671.1 million for the first six months of 2000.

Credit-related losses -- foreclosed property expense plus charge-off recoveries -- improved despite the slowing economy, totaling $16.2 million compared with $18.6 million in the second quarter of 2000. Foreclosed property expense was $47.4 million in the second quarter of 2001 compared with $50.6 million in the second quarter of 2000. Charge-off recoveries were $31.2 million in the second quarter of 2001 compared with $32.0 million in the second quarter of 2000. Fannie Mae's credit loss rate -- credit-related losses as a percentage of the average combined book of business -- was 0.5 basis points in the second quarter of 2001 as compared with 0.6 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 $17.4 million in the second quarter of 2001, in line with credit-related losses. Fannie Mae's loss provision was a negative $30.0 million in both the second quarter of 2001 and the second quarter of 2000. The company's allowance for loan losses stood at $811 million at June 30, 2001 compared with $809 million at both December 31, 2000 and June 30, 2000.

Fee and other income
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. Fee and other income in the second quarter of 2001 totaled $24.5 million compared with a negative $45.8 million in the same period last year. Fee and other income in the second quarter of 2000 included a hedge loss on a Benchmark Note transaction. Fee and other income for the first six months of 2001 totaled $51.8 million compared with a negative $45.3 million for the first six months of 2000.

Efficiency
Administrative expenses totaled $254.4 million in the second quarter 2001, up 13.5 percent from the second quarter of 2000. The company's ratio of administrative expense to the average combined book of business was .073 percent. Fannie Mae's efficiency ratio -- administrative expense divided by taxable-equivalent revenue -- was 10.4 percent in the second quarter of 2001 compared with 11.8 percent for the same quarter a year ago.

Capital
Fannie Mae's core capital was $23.0 billion at June 30, 2001 compared with $21.5 billion at March 31, 2001 and $19.0 billion at June 30, 2000. The company did not repurchase any shares of common stock during the second quarter of 2001. Fannie Mae had 1,001.0 million shares of common stock outstanding as of June 30, 2001 compared with 1,001.1 million shares as of June 30, 2000.

The company issued $400 million of 5.81 percent preferred stock, Series H, during the second quarter of 2001. At June 30, 2001 preferred stock made up 10.0 percent of Fannie Mae's core capital. The company also issued $1.5 billion of subordinated debt during the second quarter, bringing year-to-date issues to $3.0 billion. 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 four percent of on-balance-sheet assets, after providing adequate capital to support off-balance sheet MBS.

FAS 133
Fannie Mae adopted Financial Accounting Standard No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities, on January 1, 2001. FAS 133 requires that Fannie Mae mark to market only its purchased options and none of its option-based debt or the mortgage investments it hedges with purchased options. At adoption, the mark-to-market of the time value of the purchased options that the company uses as a substitute for callable debt resulted in a cumulative gain of $258.3 million, or $167.9 million after tax. The change in the market value of Fannie Mae's purchased options during the second quarter of 2001 was a net gain of $35.4 million. This amount includes $100.1 million in option cost amortization that formerly was included in net interest income.

FAS 133 also requires that the company record certain derivatives, primarily interest rate swaps it uses as substitutes for non-callable debt, on the balance sheet at their fair values, with an offsetting entry recorded in a separate component of stockholders' equity called other comprehensive income, or OCI. At June 30, 2001, the OCI component of stockholders' equity included a $3.7 billion reduction, or 0.6 percent of the net mortgage balance. The comparable reduction to OCI was $5.7 billion at March 31, 2001. Other comprehensive income is not a component of core capital.

Outlook
Timothy Howard, Fannie Mae's Executive Vice President and Chief Financial Officer, said that the company's very strong start to the year had improved its financial prospects for both the near term and beyond.

Howard said the company was comfortable with the current security analyst consensus for Fannie Mae's earnings per share for both 2001 and 2002. Howard added, "Our expectation for operating earnings per share growth for the full year 2001 is that it should be in the range of the EPS growth rates we have reported for the quarter and for the year-to-date. For 2002, we expect operating EPS growth to be consistent with the mid-teens growth rates that have characterized the past several years."

On specific items, Howard:

  • reaffirmed the company's previous guidance that it expects high-teens growth in its mortgage portfolio in 2001;
  • said that credit-related losses might be at or near their low point. He added, however, that any near-term increases in credit-related losses would likely be small, and have little perceptible effect on Fannie Mae's net income growth;
  • noted that after the sharp and unexpected increases earlier in the year, the company's net interest margin should move lower over the next several quarters, due to the impact of increased liquidations and as debt with lower-than-average costs runs off. Howard said, however, that it was likely that the company's interest margin would remain above its 99 basis point average of the fourth quarter of 2000 throughout much of 2002.

Voluntary disclosures
As part of Fannie Mae's voluntary market discipline, liquidity and safety and soundness initiatives of October 19, 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 five 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 June 30, 2001 Fannie Mae?'s ratio of liquid assets to total assets was 8.0 percent, compared with 6.4 percent at March 31, 2001. The company has committed to maintain a portfolio of high-quality, liquid, non-mortgage securities equal to at least five percent of total assets.

At March 31, 2001 Fannie Mae's net sensitivity of future credit losses, taking into account the beneficial effect of credit enhancements, was $307 million. This compares with $295 million at December 31, 2000. The March 31 figure reflects a gross credit loss sensitivity of $1,061 million without the effect of credit enhancements, and is net of projected credit risk sharing proceeds of $754 million.

At March 31, 2001 the company passed its internal interim risk-based capital test with a capital cushion that exceeded 30 percent of total capital. At December 31, 2000 Fannie Mae passed its risk-based capital test with a cushion of between 10 and 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 which are included with the company?s Monthly Summary statistics, are detailed on the fourth page of the attachments to this release. For more information about Fannie Mae's voluntary disclosures, please refer to our Web site at http://www.fanniemae.com.

MortgageDaily.com
Fannie Mae is a New York Stock Exchange company and the largest non-bank financial services company in the world. It operates pursuant to a federal charter and is the nation's largest source of financing for home mortgages. Fannie Mae is working to shrink the nation's "homeownership gaps" through a $2 trillion "American Dream Commitment" to increase homeownership rates and serve 18 million targeted American families by the end of the decade. Since 1968, Fannie Mae has provided more than $3.0 trillion of mortgage financing for 38 million families. More information about Fannie Mae can be found on the Internet at http://www.fanniemae.com.

Benchmark Notes is a registered mark and Benchmark Bonds and Benchmark Securities are service marks of Fannie Mae. Unauthorized use of these marks is prohibited.

Forward-looking statements
Fannie Mae will host a live conference call on Tuesday, July 17, 2001 at 4:00 p.m. EST. Fannie Mae will provide an audio webcast of the conference call, which interested parties can access from Fannie Mae's Web site. A replay of the conference call will be available on Fannie Mae's Web site for two weeks starting July 17, 2001 at 7:00 p.m. EST.

This release includes forward-looking statements based on management's estimates of trends and economic factors in the markets in which Fannie Mae is active as well as the company's business plans. Such estimates and plans may change without notice and future results may vary from expected results if there are significant changes in economic, regulatory, or legislative conditions affecting Fannie Mae or its competitors. Investors should review the most recent Information Statement dated March 30, 2001 and the Supplement dated May 15, 2001 (available at www.fanniemae.com) for a discussion of these factors.

Shareholder information about Fannie Mae is available 24 hours a day. Please call us toll free at 1-800-FNM-2-YOU (1-800-399-2968) or access our Web site.

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