third-quarter earnings nearly tripled because of swings in the value of the derivatives it uses to hedge its mortgage book. Backing those markups out, the company saw quarterly earnings rise 12% year over year despite the cost of numerous debt buybacks the company carried out as interest rates rose.
The government-sponsored, publicly traded mortgage market-maker earned $2.67 billion, or $2.69 a share, in the third quarter of 2003, up 168% over earnings of $994 million, or 98 cents a share, in the third quarter of 2002. The latest quarter included $472 million of unrealized, mark-to-market derivatives gains, while the year-ago period had a $1.38 billion derivatives loss.
On a core basis that backs the derivatives out, Fannie Mae earned $1.83 billion, or $1.83 a share, in the latest quarter compared with $1.63 billion, or $1.62 a share, last year. The improvement in core earnings reflected a 21.7% increase in core net interest income and a 32.6% increase in fees for backing mortgage securities.
Analysts were forecasting core earnings of $1.75 a share.
Third-quarter net interest income on a reported basis was $3.49 billion, up almost 35% from a year ago because of a 15.3% jump in the size of Fannie's investment portfolio and a 21-basis-point improvement in the net interest yield.
The company's net interest yield, which measures the rough difference between the company's finance costs and investment return, averaged 156 basis points in the third quarter of 2003 compared with 135 basis points in the third quarter of 2002. The improvement reflected the company's increasing use of purchased options to finance its mortgage book; under new accounting rules, they don't have to be expensed in calculating the metric.
Fannie booked $902 million in losses calling and repurchasing debt in the quarter compared with a loss of $138 million in the year-ago period. The company said it was able to capitalize on favorable spreads between the cost of mortgage bonds and its financing costs during the quarter as well as "intermittent selling of mortgage-backed securities by banks and other investors."
"In a quarter marked by historic levels of volatility in the fixed-income markets, our company continued to benefit from the disciplined strategies for growth that have resulted in consistently strong financial performance through a wide range of economic and financial environments," Fannie said in a release.
"The 21.9% year-to-date growth rate in our mortgage portfolio was achieved even as refinancing activity slowed and portfolio liquidations reached an all-time high," the company said.