Countrywide Credit shares bounce back after public offering.

As June ended, the common stock price of Pasadena-based Countrywide Credit Industries Inc. was recovering smartly from the decline suffered after the Feb. 6 public offering of another 3.43 million shares at $43.25 a share.

Indeed, Countrywide common was one of the biggest percentage gainers -- up 5.7 percent or $1.75 a share to $32.25 -- on June 25 when the stock was ex-dividend and the Dow Jones Average of 30 industrial stocks fell 6.69 points. Last Monday the price of the mortgage banker's shares rose 87.5 cents and on Tuesday, the last day of June, jumped $1.50 to close at $34.75 a share on the New York Stock Exchange.

A lot of people got interested in the stock when interest rates were going down but decided to get out when it appeared the economy was strengthening and interest rates might rise, said E. Gareth Plank. It is perceived the company will do better when interest rates are stable or going down, as opposed to when rates rise, added the San Francisco analyst who covers Countrywide at Dean Witter Reynolds, a nationwide brokerage house.

As June was ending, though, people perceived the economy was not as robust as had been thought, and that removed pressure for higher interest rates, Plank continued, a bullish perception for Countrywide. The analyst last week was recommending the stock for purchase as he projected the share price would climb to the "mid to high 40s" within 12 months.

His recommendation, Plank indicated, was based on his projection that Countrywide's net earnings should leap 71 percent to $3.25 a share in the fiscal year ending Feb. 28, 1993, from $1.90 last fiscal year.

Indeed, the company reported fully diluted earnings per share soared 127 percent to 75 cents for the fiscal first quarter ended May 31, on 37 percent more shares, from 33 cents in last year's May quarter. Net earnings rocketed 219 percent to $28.97 million from $9.07 million on a 137-percent increase in revenues to $103.65 million from $43.68 million.

That represented a widening of the net profit margin to 28 percent from 21 percent. Return on equity fattened to 20 percent for the trailing 12 months ended May 31 from 17 percent in the like prior-year period, calculated Stanford L. Kurland, Countrywide's chief operating officer and senior managing director.

Coupled with the June 10 earnings announcement, David S. Loeb, chairman and chief executive officer, announced another increase in the quarterly cash dividend and a 3-for-2 stock split, subject to shareholder approval. The dividend was hiked to 14 cents a share (record July 1 before the split's July 2 effective date) from 12 cents, 11 cents, a dime and 8 cents in the four preceding quarters, respectively, Kurland noted.

Shareholders approved the split by voting June 24 to increase the authorized number of common shares to 240 million from 40 million. As a result of the split, Kurland said, Countrywide's outstanding shares increased to 50.6 million from about 33.7 million.

Asked about the big increase in authorized but unissued shares, Kurland replied the company simply was out of uncommitted shares after the Feb. 6 public offering. "No acquisition is planned," he asserted.

Countrywide's first-quarter performance was supported by record loan production, which reached $6.5 billion, up 261 percent from the year earlier's $1.8 billion. Refinancings accounted for 72 percent of total fundings, comparable to the level of the last quarter of the prior fiscal year but up from the 44 percent of the May 31 quarter last year, Kurland said.

That, of course, raises the question of what Countrywide will do as refinancings eventually slacken. At their peak, Kurland responded, refinancings represented 80 percent of loan applications but now represent 60 percent.

More than taking up any refinancing slack, he indicated, is Countrywide's increasing share of the single-family home mortgage market. The consolidation and woes of the savings and loan industry have made it no longer the primary provider of such loans, he said, leaving a niche for Countrywide.

To help capitalize on this industry restructuring, Kurland said, Countrywide has been increasing its network of branch offices to originate loans. Fifteen new offices are planned for this fiscal year to increase the total to 122 in 23 states from 107 at the end of last fiscal year, he said.

As a result, Kurland related, the company's pipeline of loans-in-process totaled $4.5 billion at May 31, up from $4.4 billion a quarter earlier and more than three times last fiscal year's comparable pipeline of $1.3 billion.

Besides Countrywide's own branches' originating loans, he pointed out, the company has picked up the pace of purchasing loans from mortgage loan brokers and other lenders. After originating or purchasing mortgages, Kurland explained, Countrywide packages them into pools that are "securitized," and those mortgage-backed securities then are sold to investors.

In the process, though, he emphasized, Countrywide retains the servicing -- collecting mortgage payments and paying them to investors in the mortgage-collateralized securities. The company's loan servicing portfolio nearly doubled to $33.4 billion at May 31 from $17.1 billion a year earlier, Kurland observed.

Countrywide collects servicing fees averaging 43 basis points (1 percent equals 100 basis points) on the outstanding balance, he said, which nets out to 20 basis points after all servicing costs. Besides the servicing fee, though, Countrywide makes cash deposits in a bank of the payments received from people paying their mortgages, Kurland said, before paying the funds to investors.

Countrywide's current portfolio of about $35 billion generates about $500 million in deposits, he said, which the company, in effect, uses as "compensating balances" to reduce its cost of funds. Kurland put the company's average cost of funds at 4.75 percent compared to the weighted average interest charged by Countrywide of 6.875 percent -- a "spread" of nearly 213 basis points.

It is this operation, Kurland contended, that actually will improve if interest rates rise and so offset the part of Countrywide's operations that could be hurt by rising rates but have benefited from lower rates. Thus, regardless of what happens to interest rates, Kurland concluded, "we expect the company's earnings to continue to grow."