First American Financial Earnings Call INSIGHTS: Managing Capacity and Expenses, Commercial Revenue Progress

On Thursday, First American Financial Corp (NYSE:FAF) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Managing Capacity and Expenses

Mark DeVries – Barclays: Dennis, could you talk about how you think about managing capacity and expenses in an uncertain environment like this where industry forecast are for soft volume, but government and Fed stimulus keeps these activities so strong. How are you kind of managing your capacity with that kind of overhang?

Dennis J. Gilmore – CEO: Thanks for the question Mark. We have been doing it pretty straightforward. We operate, regardless to the market we’re operating in. We look for operating leverage on the business and so we’re controlling our expenses very closely, and we look for growth in our core markets, so just watching our expenses very closely and again, looking for operating leverage out of the business.

Mark DeVries – Barclays: What percentage of your expenses would you say are going to fix at this point and what percent would be variable?

Mark E. Seaton – SVP, Finance: Hey Mark, this is Mark. So, if you just looked at our expenses in the last quarter, I would say about 20% of our personnel costs are variable, which is really our commissions and bonuses and incentive compensation. If you look at our other operating expense line item about 50% of that is variable, which is really some of our production costs and then of course our loss provision, our premium tax and our agency retention expenses are 100% variable.

Mark DeVries – Barclays: What percentage of your open and closed orders were refi during the quarter?

Mark E. Seaton – SVP, Finance: In the quarter – in the second quarter in terms of open 65% was refi and on the closed side 60% was refi, so we’re seeing a pick-up in the refi percentage over the last couple of quarters.

Commercial Revenue Progress

Jim Ryan – Morningstar Inc.: Good progress on the commercial revenue. I’m wondering if you could give us some kind of an idea of the effect that has on the margins. For example, if commercial continues to rise is that a driving factor for the margin development, any thought you have on that?

Dennis J. Gilmore – CEO: Sure. This is Dennis. Commercial has been a very strong performer for us over the last seven or eight quarters. I would actually look to see that the commercial market is more of a normalized market for us now. We do anticipate that the commercial market will remain strong to at least throughout 2012. With regards to margin, it does run at a higher incremental margin for the Company, so it clearly is a good performer for us.

Jim Ryan – Morningstar Inc.: In terms of — with the increases in revenue, any certain types of deals you are seeing, is it more workout type transactions or is there any new development going on?

Dennis J. Gilmore – CEO: Again, I’d classify that market is more of a normalized market right now. No one piece of the market is dominating our order line right now or order flow.