The fact that Fannie Mae (NYSE:FNM) finally filed its 2005 annual report seemed reason enough for shares to add 0.9% yesterday.
Since the company's accounting scandal was made public in 2004, it's been working on cleaning up its mess and providing accurate financials. Last December, it filed its 2004 annual report, which eliminated $6.3 billion in earnings previously reported for the period 2001-2004. Compared to that release, the 2005 report and attendant second dividend increase in five months seemed downright cheery.
Fannie Mae provides financial products and services helping low-, moderate-, and middle-income families buy homes.
Fannie -- an Inside Value recommendation -- reported a 26% jump in profit to $6.3 billion, up from its $5 billion earnings in 2004, but below the $8.1 billion level reached in 2003. Parsing out the underlying reasons accounting for this growth is complicated. Income from guaranty fees rose 5%, largely because of an increase in average outstanding mortgage-backed securities and other guaranties. The dollar's strength against the yen also gave it a large increase in fee and other income from gains on foreign-denominated debt. Charges related to regulatory problems and the restatement took their toll, and net interest income declined.
Filing the 2005 report was a critical step on the company's path to filing timely reports. Guidance will be provided in the coming weeks as to the accelerated timing of its 2006 filing expected later this year. While management indicated that it's expecting weaker 2006 figures, it's more important to focus on what 2007 may bring.
On the company's earnings call, management stressed that it's not just trying to fix past problems, but seeking to build a stronger company as well. While interest rate volatility will undoubtedly affect earnings and credit losses are expected to increase, Fannie continues to state that it has limited exposure to subprime troubles. Cost-cutting measures are also on tap to ease expenses, and the company has an orderly managerial succession in mind as it announced a new CFO to take over at the end of the year.
Earlier this week, the SEC announced it would begin paying out a $357 million settlement to investors hurt by the company's alleged accounting fraud. With Fannie focusing on the future while taking steps toward returning to timely reporting, investors seem poised for better days ahead.
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Fool contributor S.J. Caplan does not own shares of the company. The Fool has a disclosure policy.
