Fannie Mae earned $1.062 billion in the first quarter, up 2.3% from the same period last year, the company said Wednesday.

The secondary mortgage market giant earned $1.02 per share, a cent more than the average of estimates from analysts polled by First Call/Thomson Financial.

"The report is a pleasant surprise," said Thomas O'Donnell, an analyst at Salomon Smith Barney.

After the better-than-expected results were released, Fannie's stock surged amid a rally for financial stocks. Fannie shares closed Wednesday at $63.0625, up 6.21% from Tuesday's close.

Fannie's net interest income from its mortgage portfolio was $1.362 billion, up 17% from the first quarter of 1999. Net interest margin - the difference between the interest Fannie earns on its portfolio and its borrowing costs - was 1.02 percentage points, the same as in the first quarter of last year.

Fannie's mortgage portfolio grew 21.7% from the end of the first quarter 1999, to $537 billion.

Income from Fannie's other chief business, guaranteeing mortgage-backed securities, was $332.1 million, up 3.8% from last year. The average guaranty fee rate was 19.4 basis points, the same as in the first quarter of last year, but the outstanding volume of mortgage-backed bonds guaranteed by Fannie grew 3.7%, to $685 billion.

Fannie earned only $500,000 of fee income in the first quarter, compared with $45 million in the fourth quarter and $58 million in the first quarter of 1999. In a press statement, Fannie's chief financial officer, Timothy Howard, attributed the shortfall to increased losses on Fannie's low-income-housing equity investments.

However, Mr. Howard said, those losses were more than offset by an associated reduction in federal income taxes.

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