Updated from 7:42 a.m. EDT

Fannie Mae's

earnings shot up in the first quarter, both before and after esoteric adjustments for its massive derivatives book, as the company's mortgage bond portfolio expanded and grew more profitable.

Fannie Mae, a business sponsored by the government to create a secondary market in home loans, said it earned $1.94 billion, or $1.93 a share, in the latest quarter, up from $1.2 billion, or $1.17 per share, a year earlier. Excluding mark-to-market adjustments to its hedging instruments, the company earned $1.85 billion, or $1.84 a share. Analysts had been predicting $1.73 a share on that basis.

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Fannie Mae benefited from sharply higher net interest income as its total book of business grew at a 25% annualized rate and commercial banks and other investors created strong demand for fixed-rate mortgages.

The company also had lower costs, as uncertainty over mass refinancings led it to maintain an unusually higher percentage of cheaper, shorter-term financing. "This higher percentage of short-term debt, coupled with its lower cost, caused the company's net interest margin to rise further in the first quarter, rather than falling as had been anticipated," Fannie Mae said.

Among other highlights, core taxable-equivalent revenue rose 27% to $3.6 billion, while average net interest margin was 125 basis points, up from 115 basis points a year ago. Core net interest income shot up 23% to $2.6 billion.

The company expects earnings for the rest of the year to rise more than the 12% to 13% this year, given the better-than-expected earnings in the first quarter. "We now expect to see a moderately higher growth rate in core business earnings this year compared with our previous projection," the company said.

It also said the much-watched duration gap, or the number of months by which the average maturity of its assets exceeds the average maturity of its liabilities, closed to two months from five months.

Fannie Mae's shares were recently up $1.40, or 2%, to $70.41.