Fannie Mae reported 13.5% earnings growth in the fourth quarter. Its diluted earnings per share was 84 cents, up from 74 cents the year earlier.

Analysts' consensus had been 83 cents.

Net income was $888.5 million.

Fannie's mortgage portfolio grew to slightly over $415 billion in 1998, from $316 billion at the end of 1997. In the fourth quarter, mortgage purchases were $68.7 billion, an annualized growth rate of 41.6%.

Fannie had an "extraordinarily strong quarter," with its high mortgage portfolio growth and credit quality, said Thomas O'Donnell, a senior analyst at Salomon Smith Barney.

But when Fannie disclosed its earnings on Thursday, some investors thought certain financial maneuvers were similar to the writedowns that other financial services companies have taken, Mr. O'Donnell said. This led Fannie's stock to fall $1.875, to $68.625.

The actions included amortizing net premiums and prepaid fees, then offsetting this by recognizing low-income tax credits, Mr. O'Donnell said.

Investors "interpreted this as weakness, as opposed to strength," he said. But Mr. O'Donnell called the amortizations "discretionary and forward-looking" and said the company has "set themselves up with higher profitability down the line with amortization of premiums and prepaid fees."

He said Fannie is also better prepared to manage interest rate risk and to meet the Office of Federal Housing Enterprise Oversight's proposals for risk-based capital, which are due next month.

On Friday, Mr. O'Donnell repeated his "buy" rating and raised his estimates and target price. His target rose to $90, from $85, for the next 12 months. He increased his earnings estimate for 1999 to $3.68, from $3.65, and for 2000 to $4.15, from $4.10.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.