Fannie Mae Reports 2002 Financial Results; GAAP Net Income At $4,619 Million, Down 21.6 Percent; Net Income Per Diluted Common Share At $4.53, Down 20.8 Percent

Business Wire, Jan 15, 2003

Business Editors

WASHINGTON--(BUSINESS WIRE)--Jan. 15, 2003

Operating net income at $6,394 million, up 19.1 percent;

Operating net income per diluted common

share at $6.31, up 21.3 percent

Fannie Mae (FNM/NYSE), the nation's largest source of financing for home mortgages, today reported financial results for the year ended December 31, 2002.

                  GAAP Earnings                    Operating Earnings
               ---------------------               -------------------
                2002   2001  Change                 2002   2001 Change
               ------ ------ -------               ------ ----- ------
Net Income
 (in millions) $4,619 $5,894 (21.6)%  Net Income
                                      (in millions)$6,394 $5,367 19.1%
EPS                                   EPS
 (in dollars)   $4.53  $5.72 (20.8)%  (in dollars)  $6.31  $5.20 21.3%
               ------ ------ -------               ------ ----- ------

GAAP Earnings

Fannie Mae's net income was $4,619 million in 2002 compared with $5,894 million in 2001, and earnings per diluted common share (EPS) were $4.53 in 2002 compared with $5.72. For 2002 strong growth in net interest income of 30.6 percent and guaranty fee income of 22.5 percent were more than offset by a $4,507 million increase in mark-to-market losses in the time value of purchased options used to hedge the company's interest rate risk. These unrealized mark-to-market losses were recorded in accordance with Financial Accounting Standard No. 133 (FAS 133), Accounting for Derivative Instruments and Hedging Activities. For the fourth quarter of 2002 Fannie Mae's net income was $952 million, or $0.94 per diluted common share, compared with $1,969 million, or $1.92 per diluted common share, for the fourth quarter of 2001. In the fourth quarter of 2002 $1,881 million of mark-to-market losses on purchased options were recorded compared with $578 million of mark-to-market gains in the fourth quarter of 2001.

Operating Earnings

Operating net income and operating EPS are non-GAAP (generally accepted accounting principles) measures that are the primary performance measures used by Fannie Mae's management. Operating net income and EPS provide consistent accounting treatment for purchased options and the options embedded in callable debt by allocating the cost of purchased options over their expected lives, comparable to the accounting used for these items prior to the adoption of FAS 133. Fannie Mae's operating net income measure may not be comparable to similarly titled measures used by other companies. Page one of the attachments to this release provides a reconciliation of GAAP to operating net income. Management believes that operating net income and operating EPS more accurately reflect the financial results of the company than GAAP measures which include the FAS 133 treatment of purchased options.

Operating net income was $6,394 million in 2002 compared with $5,367 million in 2001. Operating EPS in 2002 was $6.31, or 21.3 percent above 2001. Operating net income for the fourth quarter of 2002 was $1,672 million, a 16.3 percent increase compared with the fourth quarter of 2001. For the fourth quarter of 2002 operating EPS of $1.66 rose 18.6 percent above the same period in 2001.

During 2002, GAAP net income was $1,775 million less than operating net income because of $4,545 million (on a pre-tax basis) in mark-to-market losses in the time value of purchased options - interest rate swaptions and interest rate caps. Mark-to-market losses on these options were the result of increased use of options and significant declines in interest rates during the year, mitigated by an increase in interest rate volatility. The unrealized mark-to-market losses in purchased option time value in 2002 were more than offset by increases in the intrinsic value of these options, which are not reflected in GAAP net income. Because Fannie Mae generally holds purchased options to maturity or exercise, quarterly fluctuations in time value will net to the initial option premium over the expected lives of these options, and total purchased options expense therefore will equal the purchased option amortization expense included in operating net income. In 2001 GAAP net income was $527 million more than operating net income.

2002 Financial Performance Summary

Highlights of Fannie Mae's 2002 financial performance include:

- Record total business volume of $848.9 billion, 38 percent higher than 2001;

- Growth in the total book of business of 16.4 percent, mortgage portfolio growth of 11.9 percent, and growth in outstanding MBS of 19.9 percent;

- Taxable-equivalent revenue of $11.9 billion, up 16.8 percent compared with 2001;

- An average net interest margin of 115 basis points compared with 111 basis points in 2001;

- Credit-related losses of $87.0 million compared with $81.3 million in 2001; and,

- Losses of $710.5 million from the call and repurchase of debt compared with $523.9 million in 2001.

Franklin D. Raines, Fannie Mae's Chairman and Chief Executive Officer, said, "In an extremely difficult business environment that affected virtually every company in America, Fannie Mae's operating results in 2002 were among the best in the company's history." Raines noted that in 2002 Fannie Mae reported a second consecutive year of growth in operating earnings per share in excess of 20 percent, and posted its 16th consecutive year of double-digit growth in operating earnings per share. Raines said credit-related losses remained at historically low levels in 2002, and that in spite of volatile interest rates the duration gap on the company's mortgage portfolio remained within its preferred range for all but three months of the year. Said Raines, "Fannie Mae's disciplined risk management in the fast-growing market of residential mortgage finance has enabled us to achieve a record of growth and consistency of earnings over the past decade and a half that is without equal in financial services."