Hello, and thank you for joining the Stewart Information Services third quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. Later, you will have an opportunity to ask questions during the question-and-answer session. Instructions will be given at that time. Please note today's call is being recorded. Lastly, if you should require operator assistance, please press star zero. It is now my pleasure to turn the conference over to Mr. Brian Glaze, Principal Accounting Officer. Please go ahead, sir.
Thank you for joining us today for Stewart Information Service's third quarter 2022 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. This conference call may contain forward-looking statements that involve a number of risks and uncertainties. Please refer to the company's press release and other filings with the SEC for a discussion of the risks and uncertainties that could cause our actual results to differ materially. During our call, we will discuss some non-GAAP measures. For reconciliation of these non-GAAP measures, please refer to the appendix in today's earnings release, which is available on our website at stewart.com. Let me now turn the call over to Fred.
Thank you for joining us today for Stewart's third quarter 2022 earnings conference call. David will go over the quarterly financial results in a minute. Before that, I'd like to cover our overall view of Stewart in the current market. As I discussed before, much of the efforts over the last two and a half years have focused on fundamentally restructuring the company's operating approach to better position ourselves on our journey to becoming the premier title services company. The long-term goal has been to create a stronger and more resilient business that can perform better through all real estate cycles and economic conditions. We have focused on improving margins, growth, and resiliency by improving our scale, our operating capabilities, and our financial discipline.
While the third quarter was very challenging, I am pleased with how we are managing in this rapidly changing environment. We saw our economic headwinds coming early in the year, and it is now clear that the back half of 2022 and likely the first half of 2023 will be a very difficult environment for our industry. While we will be taking additional actions as needed to improve our structure and resource allocation, we remain focused on our long-term goals of building an improved competitive position and a more efficient and effective operating model that functions well throughout the real estate cycle. We've made significant progress in improving our talent, our technology, our customer experience, and our financial model, but more work still needs to be done. The market has transitioned, as you know, to a higher interest- rate environment, with rates rising at an unprecedented speed.
We are currently over 7% compared to 3% or 4% early in the year, putting significant pressure during the third quarter on housing affordability and driving a significant reduction in purchase orders as inventories remained low and our home prices slowly recede. We have been preparing for and continuing to adjust to these market changes. Consolidated adjusted margins came in just under 8% for the quarter, and adjusted title margins declined to just about 10%. I am pleased with the improvements we have made to our operating structure that allowed them to remain relatively strong. Margins in our real estate services businesses remained in the mid-single digits, and our adjusted margin exit capitalization is currently above 10%.
As a comparison, Stewart's pre-tax operating margins prior to beginning our restructuring journey was in the low- to- mid-single-digit % in a normal market, and in low- volume quarters or difficult years, like the first quarter, we consistently lost money. Our efforts to improve scale in our direct operations, improve our portfolio from acquisitions in real estate services, and improvements to our operating model have all allowed us to strengthen our margins, particularly in challenging markets. Obviously, there will be continued pressure from this market, but we are better positioned to manage this challenge while maintaining strong customer service. I'd like to reiterate that even though the market has transitioned, our journey continues. We remain focused on investing to make structural improvements, attaining critical scale in targeted markets, and investing in operating- model improvements to improve customer service, as well as reducing the cost of delivery.
Our efforts to enhance the customer experience through technology investments that meaningfully change the ease of use and expand our product offerings in our agencies, lender, and direct businesses made significant progress this quarter, and our efforts will continue. We are also balancing financial discipline with maintaining a high level of customer service, which Stewart is recognized for in the industry. To achieve our goal of becoming the premier title services company, we recognize that we must make thoughtful investments even in the current environment. We continue to evaluate opportunities to improve scale in targeted direct markets and add additional services that complement our existing lender services. We currently have significant capital resources to deploy as these opportunities arise. Our recently announced acquisition of FNC Title Services is a nationally recognized provider of title services for the reverse mortgage transaction.
This the most recent example of our commitment to investing in the long-term growth of Stewart. I'd like to welcome the employees of FNC to our Stewart family. Regarding our direct operations, share growth in target MSA markets remains a key strategic objective. As I have mentioned before, we closed on more than 20 regional title companies during the past two years and continue to evaluate opportunities to deploy available capital. We made significant progress this quarter integrating these acquisitions into our production and other systems, which improves the customer experience as well as the overall operating efficiency that we've been building for several years.
Most importantly, we are managing our businesses in a disciplined manner for both the current environment and the long-term strength of Stewart. In our agency business, we believe our opportunities to scale in our growth markets and improve our share with the highest quality independent agents are as strong as ever . I'm pleased with the continued significant progress on our deployment of technology and services that provide greater connectivity, ease of use, and risk reduction for our agent partners. As the industry accelerates the implementation of online paperless transactions, we are identifying ways to better support our agents as they undergo this critical transition. We have been investing in our commercial operations to set them up for growth as they are an important component of our overall strategy.
We are optimistic regarding the commercial markets overall, although we recognize there may be some headwinds in the short term given the changing financial markets. Overall, we will manage our expenses and investments very carefully in this challenging market to ensure we are financially strong so that we can opportunistically take advantage of any opportunities that arise now or as we return to a more normal real estate market. I'll conclude by reiterating my positive long-term outlook on the real estate market and our ability at Stewart to become the premier title services company. I would also like to thank our associates for their hard work and our customers for their continued support. David will now update you, everyone, with the results.
Thank you, Fred, and good morning. Let me also thank our associates for their amazing service and our customers for their trusted support. During the home buying season, the residential market has been negatively impacted by 30-year mortgage rates now in the 7% range. Consumer sentiment is poor due to inflation, affordability, and recession concerns. Commercial real estate began to see the impact of rates and volatile capital markets. Yesterday, Stewart reported net income of $29 million and diluted earnings per share (EPS) of $1.08 on total revenues of $716 million.
After adjustments primarily for net unrealized gains and losses on equity securities and office closure and severance expenses, adjusted net income for the third quarter was $37 million or $1.37 per diluted share, compared to $86 million or $3.17 per diluted share in the last year's quarter. Compared to last year's quarter, total title revenues for the third quarter decreased $120 million or 16%, primarily due to lower market activity driven by higher interest rates. The title segment's pre-tax income for the third quarter was $52 million compared to $119 million in the third quarter of 2021. While on an adjusted basis, the segment's pre-tax income was $63 million compared to $119 million in the prior- year quarter.
Adjusted pre-tax margin for the third quarter was 9.6% compared to 15.4% last year. In regard to our direct title business, domestic commercial revenues were down $4 million or 5%, primarily as a result of reduced transaction size. Average fee per file was $13,700 compared to $15,400. Domestic residential revenues decreased $45 million or 18% due to lower purchase and refinance transactions. However, residential fee per file increased 12% to approximately $3,300 compared to $2,900 last year due to the higher purchase mix. Total international revenues decreased $11 million or 20% compared to last year, primarily due to lower transaction volumes in our Canadian operations and weaker foreign currency exchange rates against the U.S. dollar.
Total open and closed orders declined 40% and 39% respectively, primarily as a result of the elevated interest rate environment. Consistent with the softer market, third quarter revenues from our agency operations decreased $61 million or 15% compared to last year. The average agency remittance rate was slightly decreased to 17.6% compared to 17.9% last year due to geographic mix. On title losses, total title loss expense in the quarter decreased $5 million or 16%, primarily due to lower title revenues. As a percent of title revenues, the title loss expense was 3.9% compared to 4% last year. For the full year 2022, we anticipate our title losses will be approximately 4% of title revenues.
Regarding our Real Estate Solutions segment, pre-tax income increased 21% compared to last year due to the effect of our acquisitions. Pre-tax margin for the third quarter was 4.8%, or 13.1% including purchase- intangible amortization, compared to 4.3% and 10.8% respectively in last year's quarter. In regard to operating expenses, which consist of employee and other operating costs, total operating expenses for the quarter decreased primarily due to lower revenue-related costs, partially offset by higher salaries and an increased employee count due to acquisitions. We incurred approximately $4 million in office closure costs and severance as we evaluate the resources needed to serve the markets. Employee costs and other operating expenses as a percentage of operating revenues was 27% versus 21% last year.
For the third quarter, employee costs were 27% and other operating 21% compared to last year's 24% and 18% respectively, primarily because of lower revenues in the third quarter of 2022. Our financial position continues to provide strong support for our customers and employees in the real estate market in the current economic environment. Our total cash and investments as of September 30, 2022 are approximately $457 million under regulatory requirements, and we also have a fully available $200 million line- of- credit facility. At the end of the third quarter, total stockholders' equity attributable to Stewart was approximately $1.34 billion, and our book value per share was approximately $50, which is 4% higher than year-end.
Lastly, net cash provided by operations for the third quarter was $49 million, compared to $170 million from last year's quarter, primarily due to lower net income in the quarter. We are always grateful for and inspired by our customers and associates. We advocate for everybody's improved safety and prosperity and are confident in our superior real estate markets. I'll now turn it back to the Operator for questions.
Thank you, sir. At this time, if you would like to ask a question, please press star one on your touch-tone phone. You may remove yourself from the queue at any time by pressing star two. Once again, that is star one to ask a question. Our first question comes from John Campbell with Stephens. Your line is open, sir. Please go ahead.
Good morning, John.
Hey, guys. Good morning. On the FNC Title acquisition, David, are the reverse mortgage orders running through other or refinance?
Well, we're going to have to look at that, John. That closed actually on October first. None of that's reflected in any of our numbers. They are most likely purchase. I think we'll have to look at that presentation going forward.
Okay. I guess picking it up a level, could you maybe size up expected earnings contributions and any kind of early thoughts on the accretion potential?
Yeah, I mean, I think that anybody will actually call me when we announce it. You know, I think the way to think about that is much like some of the other title acquisitions we do. I mean, this one was, you know, is in the $40 million revenue area, you know, and, you know, probably north of $10 million in pre-tax contribution.
Okay. Sounds like a pretty healthy business. Some of your competitors provide an adjusted EPS metric where they're backing out the purchase amortization. You guys have obviously been very acquisitive. You're probably going to continue to be acquisitive. That's a, you know, that you've seen a pretty big step up. I wanted to check on the purchase amortization, what that was in the quarter, and then how much you expect that to step up next quarter with the FNC acquisition.
Yeah. Well, we're still doing the purchase accounting on FNC. As you know, on the title type items, you typically have mainly goodwill. You don't see as much amortization because this one has some customers, you could see a little bit more than on a traditional title deal. I think as a general matter, we're running about $30+ million in purchase amortization. We are aware of your comment, and that's something that we're taking a hard look at probably in 2023 in terms of how we might disclose that.
You know, I think, John, it makes a lot of sense, frankly, in the real estate services business. It's if we think about it that way, 'cause it's a material part of those deals, and it's why I referred to, you know, the margin here ex- amortization in those businesses is significantly north of 10%, right? So that's what affects it for us. We really need to consider more explicit disclosure of that.
Yeah, that'd be very helpful. Then final question. On the office closures and severance clause, I saw the $4.2 million charge. Any way to size up kinda what that estimated annual run rate savings is going to be? Then, it sounds like you guys, there's further actions probably on the come, so just wanted to get additional commentary on that as well.
Yeah, I mean, it'll be, you know, some multiples to that, obviously. I mean, I think we continue to reevaluate the where we need to serve the markets, both from a footprint perspective on offices and then from a people perspective. Fred, I don't know if you have anything
Yeah, John, you know, obviously, we've been hustling for the last couple years on trying to build more scale for the company because we were, you know, pretty spread out in some scale. You talk about a mile wide and an inch deep. We've been sprinting at that. We've made tremendous progress. We saw from the numbers and how much money we make in the first quarter now and stuff like that. We're a much better and stronger company.
Mm-hmm.
There were certain offices that I think are attractive markets and attractive locations, and we were giving it a shot to try to build a little scale. I just had looked at the outlook for the next couple of years, and we made a decision to say there's a few of these we cut back on.
Mm-hmm.
I think we've done most of the office-related work. There's a couple places that we're considering because we have potential transactions to change the profile. But I don't see a lot of office closures ahead of us, unless, again, we did some kind of transaction that had redundancy, et cetera. But again, we as you know, our whole premise is that if we can get our scale at the MSA level, and we can get the scale of the real estate services business, we can manage through the cycle more effectively. That's why we made the call on a couple of those. I didn't see where we could get there as good as we want it to be.
Okay. All very helpful. Thank you, guys.
Yep.
Once again, if you would like to ask a question, please press star one on your touchtone phone. We'll go next to Geoffrey Dunn with Dowling & Partners. Your line is open. Please go ahead.
Morning, Jeff.
Thanks. Good morning. I have a few questions. First, I wanted to dig into the title expenses. You know, whether it's sequential or year-over-year, your personnel costs came down, but obviously lagged the revenue decline, which is typical as you adjust to the market. What was a little more surprising was operating expenses, even trying to back out the charge, looked like they might have been flat sequentially. Is there something going on in that line that maybe there's a lag effect there? Are the acquisitions a bit of a challenge? Are you maybe thinking about the longer run, and maybe not cutting as expenses as aggressively as you might normally, if you were in that structural position you wanted to be?
Can you just maybe elaborate what's going on in those lines a little bit more?
Yeah. Hey, Geoffrey, it's David. On the personnel side, I think your latter comment is probably accurate. I think we're trying to balance our service capabilities with a rapidly changing market. There probably is a little bit of a lag to the extent there's going to be any other action. But I think with respect to other operating, you know, most of that is. We're going to take a hard look at all that stuff, much like we did going into the pandemic, and you've got travel and promotional and stuff like that, and there may be some opportunities there. But the vast majority of that number is in third-party costs, where we're buying data and other things for our real estate services business.
You know, with some of the acquisitions and everything coming on online, you know, it's not really stepping down as much because you've actually got increases, you know, year-over-year in some of those revenues. I think we're going to definitely take a hard look at all those expenses.
Yeah. Jeffrey, yeah, but again, a really good question, actually. The way I think about it is twofold. One, and just to your point, the lag, we're chasing some of this a little bit, and it's very purposeful. In the lender space, particularly in the centralized title space, a lot of what happens when the market shrinks is that the lenders decrease their panel. I want to be very careful about our service metrics so that, and what we believe is we've been on the winning side of that with every one of our major customers, which is going to be important to us both now and into the future as things come back. We purposely have lagged some of the actions.
The same is true in some of the offices where, you know, to me, one of the most unique things about this quarter was that, in August, we had a little dip down in rates, and our orders pumped up a little bit, and then it did a sprint from 5% to 7%. That's a very rapid, dramatic decrease in orders pretty rapidly. The other thing it did is our close rate on orders decayed pretty materially in that same period. In an office, you saw some offices go from 70% to 50%. That shrinkage of work that was very quick, right? It's something that you're chasing a little bit.
You know, you're lagging a little bit, and we have to be thoughtful, again, about how we do that and how we service it. On the other side, I would tell you, and I've mentioned this in a couple of calls, we still have. This year we spent incrementally about $20 million on significant improvements. Data management, I've got some stuff going on, some integrations that we have. We have some centralization that's going to help us on our delivery costs. We bought the company in India, as you know, to kind of rebalance kind of our source costs. We've got a number of investments that are mid-flight or, you know, coming that are in there that we're continuing that are going to help us tremendously in the long run.
I think they might be somewhat incremental to what you would normally see because we were a little bit behind in some of those areas. I'm pretty comfortable about how we're managing costs. I would say we are lagging. We've taken lots of actions, and we're going to, you know, I think, take a lot more. Again, one of the other things I'd say about kind of margins in general during this small period is just, you know, we're not in an event that's like a 20-year event, right? What you're seeing is, you know, the orders kind of drop pretty dramatically, and we just got to be thoughtful as we take actions that we're not affecting our capabilities to be prepared for when the market comes back, right?
In the next you know, if it's a three-to-four- year experience, we got to just manage ourselves through it, and we will. Again, I just feel like we're so much stronger, right? I can look at the P&L office by office. I can look at the way we manage our cost categories, and we're fine. We just have to manage ourselves through it, and it's going to be a little bit more challenging. Again, we're at the part of the cycle where the margins could be a little less. So I'm comfortable with where we are, but to your point, we have to manage it all. We have to really be focused on it and make sure we're on top of it. Okay. Then to follow up on, I wanted to ask about commercial.
You did note that you're starting to see some impact from the increase in rates, and you obviously, I think we saw the average deal size come down year-over-year. Can you elaborate a little bit more on what you're seeing today in the commercial market implications for the pipeline, not only into Q4 but into 2023? I think we're still on track for potentially a record year, but.
Yeah
It's more about what's coming down the pike here. So can you talk about what you're seeing today and what the implications you think at this point are for next year?
Yeah. I mean, we're bullish on commercial in general. I mean, but it is true that what's happening in the financial market, there's been some, you know, some pause, retrading of value. I mean, obviously, this changes the economics of a lot of commercial projects, when you see this kind of change. So there might be a little bit of, I'll call it retrading or pausing or delaying certain projects. But we see orders be strong, right? I mean, you know, we're like you.
We think the commercial segment is going to be, in general, strong over the next couple of years here. It's just a little bit choppy as people are kind of restructuring and resetting. But we like it. What's interesting for us is we have been pretty aggressive and thoughtful about investments. We just picked up a team in the Northwest. You know, this is a classic case where there's some disruption from our competitors. This is a challenging time. It creates some opportunity. Given our circle of strength and our position of strength, I see this as an opportunity for us, if we stay focused. We generally like the market. David, you can talk about the sectors. I mean, obviously different by sector.
Yeah.
Yeah. We're still just holding on much better. To your point, the front end of the year is so great, you know, the overall year is going to look a lot better. But it's still, you know, a relatively solid position for us.
Yeah. Just to drill into that a little bit more, Jeffrey, I mean, the, you know, it's performing obviously relatively better than, you know, the residential, which is down a little bit. I think that supports, you know, Fred's comment on it being strong. I think where we're seeing activity is in the energy space, in industrial, and apartments are also classified in commercial. There's a lot of activity in those different segments, you know, less so in office. Every now and then, there's a retail deal, things like that. There's still good activity across the asset classes. We're more focused on a few than others. You know, some of these deals fund in the capital markets, right? And because of that volatility, you know, it's been a little choppier, as Fred said.
Yeah.
Maybe to paraphrase, softening near term, but no red flag downturn signs.
Yeah. Again, I would say exactly. I would say for us, it's still a major focus for growth, right? I mean, for us, it's a place where we're investing in capability because it, again, it's, you know, people will run to strength during this kind of cycle. The bigger players that have the more skills are going to have some advantages here.
Okay. All right. Thank you.
With no other questions holding, I'd like to turn the conference back to management for any additional or closing comments.
I just wanna thank everybody for their attention today and giving us your time as we went through the quarter. Thank you so much. Appreciate it.
That will conclude today's program. We thank you for your participation. You may disconnect at this time.