Countrywide's Hedging Strategy Pays Off

Countrywide Credit Industries dodged a $100 million bullet in its fiscal first quarter.

Because of a new accounting rule, the company had to write down its mammoth portfolio of servicing rights by $106.7 million because of impairment in value resulting from the recent decline in interest rates.

But Countrywide, anticipating the vulnerability of its portfolio, adopted a hedging strategy at the beginning of the quarter that showed gains of $117 million.

David Loeb, chairman, said last week that a hedge might offset an accounting writedown but gave no indication the numbers would be so large.

As a result of the hedge, the company was able to report a profit of $36.2 million, or 39 cents a share, up slightly from the $33.7 million, or 37 cents a share, a year earlier. Countrywide pointed out, however, that the accounting rules prohibited retroactive application, so the year-to- year results are not directly comparable.

Nevertheless, the market responded strongly, sending the stock up as much as $1.50 on Monday, to $20. Refinancings represented 17% of total fundings in the first quarter, compared with 52% in the quarter last year.

"They had a very good quarter," said Michael A. Corasaniti, an analyst in New York with Alex. Brown & Sons, Baltimore. Net of all the changes, earnings were about 4 cents a share higher than he had estimated. He added that business volume improved and production margins were better than he had expected.

The profit for this year's period came despite a loss from mortgage originations of $1.5 million. Countrywide attributed the profit for the quarter to the increase in its servicing portfolio and the net effect of various other accounting changes

The biggest accounting plus was $18.6 million representing the originated servicing rights that now appear on the books.

The company's loan production for the quarter ended May 31 was $6.8 billion, compared with $9.4 billion for the 1994 quarter.

Countrywide's fixed-rate loan production amounted to $4.5 billion in the quarter, or 67% of total production, against $7.4 billion or 79% of total production in the first quarter.

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