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Stewart Information Services Corp. (STC -1.02%)
Q2Â 2020 Earnings Call
Jul 23, 2020, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Hello, and thank you for joining the Stewart Information Services Second Quarter 2020 Earnings Call. [Operator Instructions]
It is now my pleasure to turn today's conference over to Nat Otis, Head of Investor Relations. Please go ahead.
Nat Otis -- Director of Investor Relations, Senior Vice President-Finance
Good morning. Thank you for joining us today for Stewart's second quarter 2020 earnings conference call. We will be discussing results that were released yesterday after the close. Joining me today are CEO, Fred Eppinger; and CFO, David Hisey. To listen online, please go to the stewart.com website to access the link for this conference call.
I will remind participants that this conference call may contain forward-looking statements that involve a number of risks and uncertainties because such statements are based on an expectation of future financial operating results and are not statements of fact. Actual results may differ materially from those projected. The risks and uncertainties with forward-looking statements are subject to include, but are not limited to, the risks and other factors detailed in our press release published yesterday evening and in the statement regarding forward-looking information, risk factors and other sections of the company's Form 10-K and other filings with the SEC.
Let me now turn the call over to Fred.
Frederick H. Eppinger -- Chief Executive Officer & Director
Thanks, Nat. And thank you for joining us today and your interest in Stewart. Before discussing this quarter's results in greater detail, I'd like to once again take the opportunity to thank our employees. They have continued to prioritize the health and safety of our customers and peers while tirelessly conducting business under challenging conditions. I'd also like to thank our customers who have remained loyal to Stewart. We are gratified to see more agents returning their underwriting business to Stewart as a value be unparalleled service that defines our brand and our company. David will go through this quarter's financials in more detail in a minute, but first I would like to make a couple of observations on our performance.
First, I am pleased with the results and more importantly with the progress on our journey. We are continuing to see the emergence of the team's effort to create the new story, one that is focused on becoming the premier title services company. While it is clear that the residential market has been strong and has helped us, much of our improvement comes from a more focused approach to investments in our businesses and improving operating discipline. Although future conditions are very much and unknown, I believe Stewart is more prepared than ever to handle any uncertainty and when possible take advantage of opportunities that arise given our financial strength and appeal and improving operational performance.
Second, the cornerstone of Stewart's evolution is the belief that the company needs to invest and grow to maximize its operation potential. For too long, Stewart has been a mile wide and an inch deep. We need to invest in a few significant categories. First, attractive businesses and geographies where we can have the same success and where additional scale can more efficiently and effectively improve profitability. Second, we will further leverage our strengths by increasing investment in areas that are already in a strong competitive position. And lastly, we will continue to look for adjacent businesses and technologies that can help us further leverage our place in the ever-evolving real estate closing experience.
For example, we closed on our purchase of U.S. Appraisals at the end of May and with just one month of input in our quarter this acquisition helped to markedly improve our ancillary services results. In the end, U.S. Appraisals brought us closer to our customers, added technology that will be critical in driving future business and added scale and improved profitability. All of this at what we would view as a reasonable price, exactly the type of transaction we are looking for and we'll continue to look for.
We have a strong acquisition pipeline in each of these categories and expect to be opportunistic in our capital deployment while understanding the near term [Indecipherable] uncertainty in the market conditions.
Let me finish by noting that we are in extraordinary times with uncertainty dominating our daily lives for the foreseeable future. While the possibility exists that a full recovery may not take place until after the vaccine is found, a major part of it will as always, I believe, be grounded in the health and stability of our real estate market. Last quarter, Stewart will continue to put the safety of our employees, our customers and our communities first. And whether during or after this pandemic Stewart will be there ready to help lead this industry and support our real estate market.
Thank you for the time. And David will now go through the quarter's financials.
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Thank you, Fred, and good morning. Let me also thank our associates for their amazing and inspirational service and our customers for their support during these challenging times. The quarter started with slower spring real estate activity as national stay-at-home orders were in effect. However, unprecedented Federal reserve actions to lower rates caused a significant increase in refinance activity, real estate sales activity increased throughout the quarter. And today, we are seeing strong purchase in refinancing activity with 30-year mortgage interest rates in the 3% area. Commercial has been negatively impacted by economic conditions and we are mindful of the potential negative economic impact across our business due to recent increases in virus cases.
Moving to Q2 results, yesterday, Stewart reported total operating revenues of $507 million and net income of $34 million for the second quarter, which is another strong performance for Stewart. As detailed in the Appendix A of the press release, adjusted net income was $33 million with adjusted diluted earnings per share of $1.37 compared to adjusted net income of $22 million and adjusted diluted earnings per share of $0.91 for second quarter 2019.
Mark-to-market gains, partially offset by severance costs in the quarter accounted for the difference in diluted and adjusted earnings per share. Our title revenues for the quarter improved to $196 million or 8% from last year, driven by strong performance from domestic residential and agency operations, which were partially offset by lower revenues from commercial and international title operations. Pre-tax income for the title segment was $55 million, a 40% improvement from last year's quarter. Pre-tax title margin of 11% was helped by revenue growth and cost management focus.
With respect to our direct title business, direct residential revenues increased $14 million or 9%, primarily due to a significant improvement in refinancing transactions. Residential fee per file for the second quarter was approximately $1,800, lower than last year, also due to a higher refinance mix. Domestic commercial revenues declined $20 million as a result of the fewer commercial transactions and a lower fee per file of $9,800. Total open and closed orders improved 28% and 32%, respectively, compared to the prior year quarter, primarily to attributed to strong refinancing and improving purchase demand. We're currently seeing order trends above the June levels as we said at this point in July.
Our agency business increased revenue $47 million on increased business activity and agency remittance improved modestly to 17.5%. Regarding title losses, total title loss expense increased 15% primarily on increased title revenues. And as a percentage of title revenues, our total loss expense was 4.3% versus 4.1% in the prior year quarter.
As Fred noted, we acquired U.S. Appraisals at the end of May and the business generated $7 million of revenues in June. U.S. Appraisals added key valuation capabilities which allow our ancillary business to perform throughout the residential cycle as valuation work is strong during origination and delinquency periods and capital markets search picks up later in the cycle as various types of loan pools are sold.
Turning to operating expenses, which consists of employee and other operating costs, operating expenses declined as both employee costs net of severance and other operating costs declined due to continued management focus. Employee costs as a percent of revenue declined from 30% to 27% and other operating expenses declined from 18% to 15%.
On other matters, our financial position remains strong. Our total cash and investments on the balance sheet are over $400 million, above regulatory requirements, which along with $100 million available on our newly expanded credit line remain solid foundations to support our customers, employees and real estate markets. Stockholders' equity attributable to Stewart was $781 million at the end of the second quarter with book value per share of approximately $33. Lastly, net cash provided by operations during the quarter improved to $61 million from $31 million in the prior year.
I'll now turn the call back over to the operator to take questions.
Questions and Answers:
Operator
[Operator Instructions] And we can take our first question from Bose George with KBW. Please go ahead.
Frederick H. Eppinger -- Chief Executive Officer & Director
Good morning, Bose.
Bose George -- Keefe Bruyette & Woods -- Analyst
Yeah, good morning. Good quarter. Actually, let me -- first question is just on the strength in the agent channel, can you talk about what's happening there, have you recovered a lot of the share that you saw some move during the FNF merger period?
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah. Good observation, Bose, that's exactly right. So, obviously, the agency channel has some of the same good trends on refis that the -- that direct us, but for us, we also have the benefit of a number of agents that left us after the announcement of this Fidelity transaction are now coming back. I feel pretty good about that. We -- our team has done a great job, kind of with the -- kind of the laser focus on people that we've had relations with in the past. And I think the agents are thrilled that we're back and we're getting that business back. So, that's why you see a little bit of greater growth perhaps than some other folks, so.
Bose George -- Keefe Bruyette & Woods -- Analyst
Okay, great. Thanks. And then just given your comments about order trends being better in July versus June. Do you think your 3Q margins and earnings could look fairly similar to 2Q if nothing else changes in the market?
Frederick H. Eppinger -- Chief Executive Officer & Director
David, you want to take that?
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Yeah. Thanks, Fred, and Bose. Yeah, I mean, I think as we -- today, we're seeing good demand. I think as I mentioned in my script, we're very mindful of what's happening with the coronavirus and the spikes. And so, I think, things are looking good on the order front now. We'll just have to see how the rest of the quarter in the year plays out.
Bose George -- Keefe Bruyette & Woods -- Analyst
Okay. Thanks. And then let me just ask one on longer term expectation, do you guys intend to put out any sort of longer-term margin expectation. And if not, are there other ways for us to kind of think about assessing your progress toward sort of where you are heading in terms of more efficiencies etc.?
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah. So, it's a great question. So, and you -- I think, you've heard me say some of this before. When I look at Stewart, for a decade, we underperformed the industry pretty materially, probably made between 4% and 5% margin. My view is and over this next three years, we are structurally changing things, so we're going to materially change that margin and it's not 1 point or 2 points, it's materially going to be better than that. It's going to be approaching our competitors, although I've said our competitors have a different business mix. So it's not going to reach all the way there, but it's going to be a material change and it's going to be structural. It's going to be consistent.
So, I feel like we're making good progress on that. We're not all the way there and obviously this quarter was particularly good given the bunch of things coming together. But we're doing the right things to kind of set ourselves up so that we can have a better consistent improved margin and that's what you're going to be able to expect from us. I think, we'll have value creation, we'll -- in the next -- over the next three years, we'll grow a little bit more than everybody else, and we'll also increase our margin. And so, I think, that's where the value creation will come from the company.
Bose George -- Keefe Bruyette & Woods -- Analyst
Okay. Okay, great. Thanks a lot guys.
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah.
Operator
Take our next question from Geoffrey Dunn with Dowling & Partners. Please go ahead.
Geoffrey M. Dunn -- Dowling & Partners -- Analyst
Thanks. Good morning.
Frederick H. Eppinger -- Chief Executive Officer & Director
Good morning.
Geoffrey M. Dunn -- Dowling & Partners -- Analyst
First question is with the savings initiative you announced in May, how much of that was Street's [Phonetic] annualized savings from the bottom line versus funds to be reinvested in the ongoing initiatives to turn the company around?
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah. Again, I think a number of the -- if you look at what we did, there was kind of three categories. One is a small portion was kind of temporary things that things like travel and things like that disciplined because of the new environment. A number of it was kind of structural things that really had nothing to do, it's targeted actions that we took as we're trying to get better as far as positioning the offices to be more successful etc. And then some of it was because of volume changes in various locations and exiting of offices because of their not strategic to the portfolio.
So, I would say that some portion of that I'll be reinvesting into the business. So I'll give you an example. So, since we started the journey we probably have closed or exited, say, 30, 40 locations. And those proceeds and those resources are being redeployed into areas of the company where we can grow and invest in folks and people. And again, so a lot of what we're doing right now is reinvesting. But I've said to you and I reiterate that we're not going to do all these things, make all these investments and wait for three years to improve, right. Every day we're going to get a little bit better. And so all of these actions help us get better, so we can be stronger and demonstrate that we are getting stronger.
But I'll tell you there's some significant portion of that that we are reinvesting back into the business. And again, I think, that the return is great on that and we will show improvement, but there will be reinvestment, right. I think, I can't tell you exactly what precise as a percent.
Geoffrey M. Dunn -- Dowling & Partners -- Analyst
Okay. And then I think both commercial and residential seem to bottom interim sooner than I was guessing, two, three months ago, but obviously there's a lot of macro challenges still out there and particularly consideration for the commercial market. So, can you give us some color on what's been going on in commercial, what's the pipeline in commercial look like. And what's the feel just looking out over the next whatever time frame you have visibility into, but even just the activity in the back half of the year?
Frederick H. Eppinger -- Chief Executive Officer & Director
David, why don't you start and I can finish.
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Yeah. Sure, Geoff. So, I think, the commercial market, we're expecting to be slower for a longer, I think, as you know from -- over time and commercial trying to track economic activity much more closely than necessarily rates just because of the structure of the financing there.
And so a lot of what's going to drive that is how do places reopen, how do we go back to work as companies rethink space needs and the like, what does that ultimately play out at? And a lot of those questions are still unanswered and then you've also got the various differences by property class, right. So, some of the bigger cities like New York, the activity significantly curtailed, some of the smaller markets, maybe not as much. And then you've got different things happening in different sectors, right, like the leisure and hospitality is quite slow.
And so when you sort of put all that together, it just calls for a much longer recovery and that's sort of what we're thinking about right now. So, Fred, I don't know if you have anything else to add to that. Yeah.
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah, the only point, I would say is that we're still bullish on commercial long term for the company and that I think that you're going to see perhaps the lower end recovered at different phase than kind of the higher end commercial. And I think we're well positioned both in our direct offices and kind of our secondary city approach in our commercial services group.
And I feel like we've lined up our resources pretty well. I think the same is true for Canada where we've been building out our capabilities. And so we are being obviously prudent and I agree with David, that there is some time before this kind of corrects itself, but I think we're pretty well positioned across the board as this evolves.
And again, I think, we taken for the disciplined steps till that resources are appropriately aligned right now too. So, but it will be a long, it's going to be a long recovery.
Geoffrey M. Dunn -- Dowling & Partners -- Analyst
Okay. And just last question, in terms of the trends, was April the commercial bottom and you saw strengthening like you did in residential in July versus June as well?
Frederick H. Eppinger -- Chief Executive Officer & Director
David, you got that?
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Yeah. I mean, I don't know, so if it bottom, I mean, we're going to be down for a bit. I don't know that bottoms have been called at this stage. I'd expect a slow recovery as we said.
Geoffrey M. Dunn -- Dowling & Partners -- Analyst
Okay. All right. Thank you.
Frederick H. Eppinger -- Chief Executive Officer & Director
Thank you.
Operator
[Operator Instructions] We'll go next to John Campbell with Stephens Inc. Please go ahead.
Frederick H. Eppinger -- Chief Executive Officer & Director
Good morning, John.
John R. Campbell -- Stephens Inc. -- Analyst
Hey, good morning, guys. Congrats on a great quarter.
Frederick H. Eppinger -- Chief Executive Officer & Director
Thank you. Thank you.
John R. Campbell -- Stephens Inc. -- Analyst
Yeah. So, I mean, really, really good results you had. It looks like title margin expansion over 200 bps versus last year, obviously commercial is a pretty high margin business for you guys, it's down 40%. You also had a little bit higher reserve. So, just trying to unpack the outperformance just as best you guys can, I mean, there was obviously a little bit of strength from purchase in refi, but anything kind of unique or one time in there. And then if you guys can maybe talk to how much some of the office closures and maybe reinvesting in some of the better margin potential offices help.
Frederick H. Eppinger -- Chief Executive Officer & Director
Well, David, why don't you...?
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Yeah. Maybe I'll just cost speak first to the quarter, Fred, and then if you want to maybe talk a little bit about the how you see the office closures. I would say, the -- first of all on that, that wasn't significant to the quarter, a lot of what Fred talked about where we were in a number of smaller areas and just trying to get refocused and then it was sort of driving that.
I think with respect to the quarter, the two things that really drove the performance was the strength of the domestic residential business and then the strength of agency. And when you sort of -- on the revenue side, and then when you sort of couple of those with the cost management and focus initiatives, you just had a much higher amount dropping, so the pre-tax margin line as you talked about. And so that really drove the quarter and that, by far, offset the weakness that [Indecipherable] commercial and then to a lesser degree in international.
So, I don't know, Fred, if you had anything else to say, but I guess that's sort of whatever [Speech Overlap]. Yeah.
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah. I think, that's right, David. I mean, again, since we started this journey we've been trying to make sure that we are -- every place we are, we're committed to winning there. And that we're going to have the right resources to be, have the scale to manage it appropriately through the cycle. And what we saw is an inch deep and a mile wide in a lot of places. And so we're not all the way there everywhere, but we picked our spots and we said, here's the places we're really going to be able to win and commit to our people and deliver.
And we exited the other places that we're chronically underperforming and we're never going to win and have reallocated those resources to the better places. And yes, the marketing has helped us with the volume and our people have delivered extraordinarily well. We have a lot of offices that are at probably [Indecipherable]. And so people did that in a very effective way.
So, it's -- things are coming together, again, it's a strange time with everything that's going on and the uncertainty. But, again, I think our company is getting better and more focused and it's allocating resources a little bit more precisely about where the opportunities are and we are doing a heck of a job in my view reaching back out to our customers that we kind of were distracted from over the last few months and quarters. And we're now reconnecting and starting to win back that business.
So, I think, we're in a good place and we have more to go and we need to continue to get better. But I think we're making really good strides in improving the performance and frankly the growth prospects for the company.
John R. Campbell -- Stephens Inc. -- Analyst
Okay. That's helpful. And then obviously you guys don't provide guidance, there is way too many moving parts here, but I mean if we're assuming the commercial maybe picks up a little bit in the next quarter. I think, purchase is going to be stronger, refi probably maybe down a little bit, but I know that's kind of a lower margin business, but this quarter was a record EPS type quarter for you guys. Is there any reason why assuming those assumptions are correct why you wouldn't put up a higher EPS number next quarter?
Frederick H. Eppinger -- Chief Executive Officer & Director
David, I'm going to let you take that.
David Hisey -- Chief Financial Officer, Secretary and Treasurer
I mean, I think, we've [Indecipherable] responses, I think, we stand fine as we are today, but mindful of spikes and other things happening, election coming up in the fall. I mean, there's a lot of moving pieces as you said. So, things look fine now and we're just managing through it every day.
John R. Campbell -- Stephens Inc. -- Analyst
Okay. [Indecipherable] shot there. Last one from me, on the U.S. Appraisals business that seems like a really good acquisition for you guys. Just a little bit more details there. I guess, I'm assuming that almost all of that's transactional revenue, but any sense for kind of next 12 months type revenue potential. And then if you could maybe talk to the margin profile, is that accretive to the underlying title margin?
Frederick H. Eppinger -- Chief Executive Officer & Director
Yeah. Let me just start with them [Phonetic], we are thrilled about it. And Aaron Fowler [Phonetic] and his team, it's just a great add and for a lot of reasons, not just for the business, I think, they're going to bring a lot to this institution. So, David, you want to run with the impact?
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Yeah, I mean, I think we're one month in, right. So, let's sort of see how it plays out. I guess, the way we looked at it and I mentioned some stuff in my remarks, it did about $7 million in revenue in June. It is a transactional business, it's appraisal orders. And so their business is going to benefit by the trends that we've been seeing overall in terms of overall order count increase and what's happening in the origination market, generally.
And I think, again, the way we sort of think about that is, we didn't really have a first mortgage product in our services business, now we have one. I think, it will allow us to sort of drive revenue in that sector while the market is going well as it is today on originations. I think, when -- if delinquencies were to pick up either later this year or next year with all the forbearance activity rolling, there is a lot of valuation work there. And so -- the new numbers probably a little high because of what's going on in terms of an annual run rate. And I think the margin, as we will see over time should be consistent with our overall margins.
John R. Campbell -- Stephens Inc. -- Analyst
Okay. That's very helpful. And I don't know if you guys disclosed this, but how much did you pay for it.
David Hisey -- Chief Financial Officer, Secretary and Treasurer
We didn't disclose it. But if you look at the changes in the balance sheet, you might be able to figure it out.
John R. Campbell -- Stephens Inc. -- Analyst
Got it. Thanks, guys.
Frederick H. Eppinger -- Chief Executive Officer & Director
Thank you.
Operator
And it does appear we have no further questions, I'll return the floor to our presenters for closing remarks.
Frederick H. Eppinger -- Chief Executive Officer & Director
I just want to say thank you for everybody to joining the call.
Operator
[Operator Closing Remarks]
Duration: 27 minutes
Call participants:
Nat Otis -- Director of Investor Relations, Senior Vice President-Finance
Frederick H. Eppinger -- Chief Executive Officer & Director
David Hisey -- Chief Financial Officer, Secretary and Treasurer
Bose George -- Keefe Bruyette & Woods -- Analyst
Geoffrey M. Dunn -- Dowling & Partners -- Analyst
John R. Campbell -- Stephens Inc. -- Analyst
