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Lender Processing Services, Inc. (NYSE:LPS)

Q2 2011 Earnings Call

July 26, 2011 8:00 AM ET

Executives

Parag Bhansali – EVP, Corporate Development

Lee Kennedy – Chairman, Interim President and CEO

Thomas Schilling – EVP and CFO

Analysts

Carter Malloy – Stephens

Glenn Greene – Oppenheimer Securities

Kevin McVeigh – Macquarie Capital

Deforrest Pittman

Vincent Lin – Goldman Sachs & Co.

Operator

Please stand by as we are about to begin. Good day and welcome to the Lender Processing Services Second Quarter Earnings Conference Call. Today’s conference is being recorded. Your participation on this call is implied consent. If you do not wish to be recorded, then please disconnect at this time.

At this time, I would like to turn the conference over to Mr. Parag Bhansali, EVP of Corporate Development. Please go ahead, sir.

Parag Bhansali

Thank you. Good morning and welcome to LPS’s second quarter 2011 earnings conference call. Joining me today to review LPS’s second quarter results are Lee Kennedy, Chairman and Interim CEO and Tom Schilling, CFO.

Our discussion today will contain some references to non-GAAP results in order to provide a more meaningful presentation and comparison to prior period financials. Reconciliations between GAAP and non-GAAP results have been provided in the earnings release which is available on our website. Similar to prior quarters, we’ll be using a slide presentation to facilitate today’s review of second quarter results and guidance for the third quarter as well as some qualitative comments about full-year 2011. These slides are on our website as well for easy reference. At this time, I would like to remind you that some of the comments made on today’s call will contain forward-looking statements. These statements are subject to various risks and uncertainties as described in our earnings release, 10-K and other filings with the SEC. The company expressly disclaims any duty to update or revise those forward-looking statements, including quarterly guidance.

With that, I’ll turn the call over to Lee.

Lee Kennedy

Thanks, Parag, and good morning, everybody. Thanks for joining us today. I’ll kick-off today’s call with a brief summary of second quarter results, followed by an update on key customer wins and initiatives, our progress in resolving the regulatory and legal issues facing LPS and conclude with the review of my key priorities for the next few months. Tom Schilling will follow with a detailed review of the second quarter financial results, including key business strength and guidance for the third quarter.

First regarding second quarter results, trends in the mortgage industry remained volatile in the second quarter, as industry origination volumes slowed materially, compared to prior year. While regulatory issues at the federal and state level caused most major lenders to pull back meaningfully on foreclosure actions. Although we have quickly and carefully adjusted staffing levels consistent with the reduced volumes, it clearly remains a very difficult environment. These adverse trends materially impacted second quarter financial results, and will continue to pressure results for the remainder of the year.

If you will please turn to slide four, second quarter operating results were driven by weak volumes in the core origination and default markets. Revenues of $570 million were 12.8% below second quarter of 2010, which was disappointing but better than the 21% year-over-year decline in industry origination volume and the 36% year-over-year decline in default notices.

The difference between the industry volume declines and our second quarter results was driven by continuing market share gains, primarily in our other TD&A segment and steady MSP revenues. The adjusted EBIT margin of 16.5% in the quarter was down substantially year-over-year primarily due to lower volumes, mix-related changes and higher corporate expense, which Tom will discuss in greater detail later on the call. Adjusted free cash flow remained strong and totaled $82 million for the quarter and adjusted earnings per share came in at $0.56.

Next I’ll provide additional information on Jeff Carbiener’s departure. I know that many of you have expressed concerns for Jeff’s health. First, I want to reiterate that Jeff’s decision to step down as CEO was solely his own with the strong support of his doctors, his family, and our Board of Directors. We’d hope that Jeff would have been able to accept a leave of absence to allow time to get well, but unfortunately Jeff and his doctors and family did not believe that this was in his best interest.

Our Board of Directors and management team is very appreciative of the significant contributions that Jeff has made to LPS over the past three years. While we are very disappointed that he will not be able to continue as our CEO, we remain very supportive that his decision to focus on improving his health and we wish him a speedy and complete recovery. Second, we are fortunate to have a highly experienced, antecedent Board of Directors and a strong management team who I am confident will successfully lead LPS during this transition. I’ve had the opportunity to work with many of these individuals over the past several years and I have a great deal of respect for them.

The Board has created a succession committee to manage the search for a permanent CEO. Our efforts are well underway and we are very encouraged with the strong initial interest that we’ve received from qualified, seasoned executives. Although it is difficult to predict how long such a search of this type might take, you should know that it will stay as long as it takes to locate and transition the right individual.

Moving onto the customer update, it is important to note that despite the substantial regulatory and market challenges that LPS and the entire mortgage industry is facing, that we have not lost any major customers nor have we missed out on any material new business opportunity. In fact, most of our major customer relationships are becoming deeper and broader as more and more lenders leverage our technology to help them better serve their customers and meet consent order requirements.

Our technological capabilities remain a critical component as evidenced by the fact that 13 out of the top 14 mortgage institutions are running on our MSP and/or desktop platforms. Consistent with this, we have signed six new MSP customers over the last 90 days and our pipeline is at the highest level in over three years. The federal consent orders apply to both first and second liens, which is driving strong renewed interest in HELOC processing.

In the second quarter, we received a firm commitment from one of the top three financial institutions to convert a portion of their HELOC loan portfolio to MSP next year. In the last few months, we have also signed three new desktop customers and six new Empower contracts. While these new customers will not generate significant revenue this year because they require technology implementations, the signings demonstrate the critical need for strong flexible technology platforms that have robust data, reporting and control capabilities. Finally in the second quarter, we successfully brought Wells Fargo onto our desktop platform.

While the regulatory and legal challenges that we and our institution customers faced are significant, we are encouraged with the progress that we are making in reducing the number of claims and actions. I want you to know that we take each of these actions seriously and that one of my top priorities will be to do everything possible to resolve them as thoroughly and promptly as possible so that we can return to a more normal operating environment.

For example, the first three fee splitting cases filed against us last October have all either been dismissed with prejudice or resolved in our favorable – our favor by summary judgment. When we initially discussed these matters on our conference call last October, we stated that we believe these allegations were without merit. We are pleased that we’ve been able to successfully dispose of all three cases and we believe that we will achieve similar results in the remaining fee splitting complaints filed against us.

As I’ve already stated, the current regulatory environment has increased the demand for our technology solutions. We currently have over 200 full-time employees directly or indirectly working on regulatory changes and enhancements that will enable our customers to comply with the new regulatory requirements and to better control day-to-day servicing activities. As our history has shown, LPS will benefit from the new regulatory environment that is emerging in all aspects of its business over the long term.

For example, recent new regulatory requirements including Frank-Dodd, which is a 2,000 plus page bill with over 300 new rules and regulations. The federal consent orders issued to the top 14 servicers and an emerging consensus on national servicing standards will lead to reengineering of the manufacturing process which creates an initial loan, major changes to the servicing procedures which will have a meaningful impact on customer service, investor accounting, loss mitigation, foreclosure, bankruptcy and ED – OREO.

And finally, the creation of new data repositories and analytics to provide loan level transparency, which will allow regulators and investors to better assess systematic risk and the operating and quality practices of the various players involved. We believe that LPS will continue to play an important role in enabling institutions to redefine this critical mortgage process.

Finally, I’ll cover my three key priorities for my time in this role. First, completing our search for a new CEO. Second, I will continue – concentrate on making sure that our customer relationships are effectively managed and are strengthened. We have long-term deep relationships with our clients and we plan on providing the resources, products and services necessary to present to operate efficiently in what is very likely to be a very changed environment.

Third, we will focus on the resolution of the regulatory and legal issues facing LPS whenever it is practical and prudent to do so. This will include making sure that LPS swiftly and accurately complies with new regulatory requirements. Fourth, I’ll remain focused on our business to make sure that we manage expenses tightly and we quickly react to changing market conditions.

While we will continue to face near term challenges as an industry and as a company, our business model remains very strong. We continue to gain market share and we remain confident in our future.

Thank you for your time, and I’ll now turn it over to Tom Schilling who will review the second-quarter results in greater detail. Tom?

Thomas Schilling

Thanks, Lee, and good morning. While we’ve operated in a challenging environment for the past 12 to 15 months, during the second quarter, those conditions intensified due to a number of factors. First, foreclosure delays continue to suppress our default-related revenues, including our LPS Desktop and Broker Price Opinion or BPO revenues within our other TD&A segment. Second, while we expected re-fi originations to decline in the quarter, we did not anticipate the significant and sudden decline in portfolio retention re-fis, which negatively impacted both revenue and margin beginning in May.

In addition, the cost associated with the consent order compliance significantly exceeded our initial expectations. As a result of these factors, we announced a reduction in our financial guidance for the second quarter on June 16th. In light of the changes in the industry, it’s important for us – it is important to ensure we remain focused on those products and services that are key to our future and either change or exit services that no longer work in the new business environment.

As we discussed on the June 16th call, during the second quarter we conducted an evaluation of our products and service portfolio to determine those that no longer fit within our key areas of focus. In addition, we have continued to do our cost reductions which began in the first quarter primarily focused on reducing personnel costs.

As a result, our second-quarter financial results include a charge totaling $39.8 million. The charge consists of non-cash impairments totaling $31.9 million related to the write-down of non-core business units we intend to exit. And the cash-based charge is $7.9 million related to the cost reduction initiatives.

The annualized savings from these initiatives along with a further tightening of discretionary expenses will be about $5 million annually. Coupled with the cost reductions announced in the first quarter, the company will realize approximately $32 million in annualized savings when fully realized in 2012. During the quarter, we reclassified our fraud services and capital markets units to discontinued operations and took a non-cash impairment charge totaling $26.6 million to adjust their carrying value. These units which were previously included in other TD&A will continue to be included in discontinued operations until they are either sold or shutdown. We also recognized a non-cash impairment charge totaling $5.2 million in our continuing operations to adjust the carrying value of net assets in certain operations included within our TD&A – our other TD&A, LFS and default segments.

As shown on slide five, including these charges, we reported net income of $21.4 million in the quarter or $0.25 per diluted share. My remaining comments regarding first quarter operating and financial performance exclude the impact of the charges identified in the GAAP to non-GAAP reconciliation provided in our earnings release.

On slide six, you see that revenue in the second quarter was $517 million and in line with our revised guidance. Revenue declined 12.8% compared to the second quarter of 2010 and 6.7% sequentially. EBIT was $85.4 million, a decline of 42% year-over-year and 31% sequentially as shown on slide seven. The year-over-year EBIT decline was primarily driven by higher corporate expenses, declines in both origination and default transactional volumes within our LTS segment and non-recurring items that benefited our second quarter 2010 TD&A EBIT.

On a sequential basis, volume declines and product mix within in our LTS segment along with higher corporate expenses resulted in revenue and EBIT declining by $37 million and $39 million respectively. Second quarter adjusted EPS was $0.56 and was within our updated guidance range of $0.54 to $0.56 per share.

On slide eight, adjusted free cash flow for the second quarter was $82 million compared to $69 million in the year-ago quarter. The improvement in cash flow year-over-year was largely due to improvements in working capital in our LTS segment.

During the quarter, we paid regular dividends of $8.7 million, repurchased two million shares of stock for $53 million, purchased $5 million of our long-term notes and made the mandatory repayments against our credit facility of $36 million.

Our cash balance at the end of the quarter was $22 million, and we have $78 million available under our revolving credit facility. Our outstanding debt balance at June 30, 2011, was $1.2 billion or 2.2 times our trailing 12-month EBITDA. The average interest rate for first quarter was 4.7%.

I’ll now turn to the performance within our key business segments. The second quarter TD&A revenue grew about 9% year-over-year fuelled by nearly 20% growth in other TD&A. Mortgage processing revenue was flat year-over-year as increased professional service fees offset about $6 million of non-recurring revenues in the year-ago quarter.

As Lee mentioned, we signed six new MSP customers in the second quarter. While these are not top tier servicers and the implementations will not be completed until 2012, it’s an example of why we believe the changing regulatory landscape makes MSP a more compelling proposition than ever before. With the cost and the risk of compliance increasing from mortgage servicers, we believe MSP will increasingly be seen as a flight to safety.

Although TD&A revenue grew by $15 million compared to the year-ago quarter with about half of the growth driven by continued growth in the desktop implementation. The remaining growth is attributable to continued growth in our evaluation solutions segment which provides automated and BPO evaluations.

On a sequential basis, TD&A revenue was off by 1% compared to the first quarter. Mortgage processing remains flat, while other TD&A declined 3% due in large part to a sequential decline in default- related BPOs. TD&A EBIT declined at 10% compared to the second quarter of 2010, largely a result of the non-recurring benefit from the second quarter of 2010 within mortgage processing. Sequentially, EBIT declined 1% primarily due to the decrease in default- related evaluation along with increased implementation cost for our Empower origination software.

As Lee mentioned, we successfully converted Wells Fargo onto the desktop platform late in the second quarter. With Wells onboard, the LPS desktop platform now is used by the vast majority of mortgage servicers to manage their foreclosure workflow. LPS revenue decreased 22% compared to the second quarter of 2010 with a 19% decrease in LFS and a 24% decrease in default services revenue.

The 19% decline in LFS revenue was in line with our updated expectations and outperformed the overall industry. Overall originations declined an estimated 21% year-over-year according to the latest MVA stats. Our second quarter default services revenue declined 24% year-over-year and 5% sequentially as foreclosure delays continue to impact this segment. Again, we outperformed the market as RealtyTrac reported a decline of 36% year-over-year and 13% sequentially in the number of foreclosure proceedings initiated.

This level of market decline is also consistent with the activity we tracked within our desktop platform, which showed a sequential decline of 19%. The current inventory of seriously delinquent loans at June 30th is reported at $4.1 million by the LPS mortgage monitor. The average delinquency age of these loans now stands at over 500 days or nearly a year and half.

We continue to believe that the foreclosure delays represent a deferral of revenue and not a permanent loss. More than 36% of the 4.1 million seriously delinquent loans have been delinquent for more than two years. Therefore, we see no other reasonable alternative for dealing with these loans outside of the foreclosure process.

It’s important to note that we continue to believe in the power of the LPS business model. The thesis behind our business model is leveraging our strong core technologies to balance our cyclical transactional based businesses. From a macroeconomic standpoint, that basic thesis is proving out. Due to weak economic conditions, origination volumes are down and continue to decline. Countering the decline in originations, however, default-related activity has heightened and would be translating into higher revenue for LPS if not for the legal and regulatory intervention the industry has been facing.

We remain confident that as the industry works through the current regulatory challenges, that new servicing standards will be established and our business model will once again thrive. LTS EBIT declined 42% compared to the prior year quarter attributable to lower volumes and unfavorable product mix within LFS and ongoing legal and regulatory delays in foreclosure activity. Corporate and other expenses were $31.7 million in the current quarter, with about $9 million of that related to consent order and other elevated regulatory costs.

To summarize, our second-quarter financial results were disappointing but solid given the difficult market conditions in which we operate. In face of declining market volumes, we continue to outperform industry metrics and exercise strong cost management.

Also we announced yesterday that we are launching a refinancing of our existing senior credit facilities. The proposed financing is expected to consist of a $400 million revolving credit facility, a $350 million five-year term loan A and a $550 million seven-year term loan B. Proceeds will be used to pay-off existing credit facility, pay related fees and expenses and provide for general corporate purposes. The new senior secured credit facility is expected to provide enhanced liquidity, extend maturities, provide more operational and financial flexibility under the covenant and secure attractive long-term cost to capital. We expect the financing to close in mid-August.

We expect to incur approximately $8.5 million in one-time expenses to write-off unamortized debt issuance costs associated with our existing credit facility. We anticipate the new credit facility will increase our average interest rate by approximately 100 to 200 basis points depending upon how much we ultimately swap into fixed rate.

In light of the refinancing effort, I want to update you on our plans for capital deployment. As announced on June 16th, our board of directors has authorized the repurchase of up to $100 million in LPS stock through December 31, 2012. However, before we will be back in the market purchasing shares, we must achieve three important goals.

First and most importantly, we must have better clarity on our regulatory, legal, and operating environment before we make any capital deployment decisions beyond funding our ongoing capital investments in our business. Second, we want to return to a level of liquidity that includes at least a $100 million of cash on hand along with our undrawn revolving credit line. Third, once we have the first two goals – once the first two goals are achieved, our priority will be first to reduce our leverage back to below two times trailing EBITDA. Once those goals are met, we’ll begin to consider other capital deployment alternatives. We believe this financial policy and discipline is warranted given the volatile conditions in which we operate.

Finally, I want to update our guidance for the third quarter, as shown on slide 9. Given the uncertain market, particularly with regard to the continued foreclosure delays, we are only providing specific guidance for the third quarter. However, our expectations for the remainder of 2011, is that mortgage processing revenue will remain relatively flat. Other TD&A will experience modest growth. LFS revenue will continue to decline as origination volumes decline. And default volumes will remain delayed and therefore difficult to predict.

With that as the backdrop, we expect consolidated third quarter revenues to range from flat to down 2% sequentially and adjusted EPS to range from $0.53 to $0.55 per share. The EPS guidance includes the expected increase in interest expense from the credit facility refinancing, but does not include the one-time costs associated with the early payoff of our existing credit facility, which I discussed a moment ago.

We are providing EBITDA guidance this quarter, as this will be communicated in our credit facility refinancing process. We expect third-quarter EBITDA to range from $109 million to $113 million.

Now, I’ll turn the call over to the operator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you (Operator Instructions) And we’ll take our first question from Carter Malloy with Stephens.

Carter Malloy – Stephens

Yes, hey guys. So first of all, you talked about in the press release potential sale or wind-down of some businesses. I know you walked through some of that with us on the call already. But is there anything else as you look around your portfolio of businesses, anything else that could be divested there that’s meaningful or that you guys see as non-strategic business?

Thomas Schilling

We did a relatively thorough review during the second quarter to evaluate businesses. Now that’s a process, that will be an ongoing process obviously, but we believe we have identified everything in the near-term that is a candidate for disposition or wind-down.

Carter Malloy – Stephens

Okay. And then also with the increased cost and scope of the consent order reviews you guys are conducting internally, have there since our last – have there been any additional findings, either positive or negative?

Lee Kennedy

No, not really. I think the reviews in itself have been very thorough and very complete and we’re pleased with our progress, but no surprises at all throughout this whole project.

Carter Malloy – Stephens

Okay. And then just related to that, the costs there. They were certainly high in the last quarter. Do we expect those to continue to stay at that level for the rest of the year?

Thomas Schilling

Carter, yeah, our expectations for the corporate expenses, which is more of the legal and regulatory costs are contained. We would expect to not – for the remainder of the year to not be lower than where they were in the third quarter or in the second quarter.

Carter Malloy – Stephens

Okay, so you...

Thomas Schilling

Just to follow up on your question on recurring expenses, we mentioned we did have a few asset impairments that are part of our continuing operations. To the extent we sell off those units, we could have some additional charges in the third or fourth quarter to true those things up, but not materially.

Lee Kennedy

Yeah, they’re very small in nature.

Carter Malloy – Stephens

Okay, that’s very helpful. And then maybe one other real quickly is just on the capital deployment front. You guys have certainly taken a much more conservative stance. We – is that just something that you decided to do as you came into the business because I know three to six months ago we weren’t even talking about the potential for levered buyback and now we’re saying we’re going to take a very conservative stance to debt and to cash flow now?

Lee Kennedy

No, I really think that this has been evolving over the last several months, and just looking forward, we thought it was prudent to be conservative and stay on that path.

Carter Malloy – Stephens

Okay, thanks for the color.

Lee Kennedy

You’re welcome.

Operator

And we’ll hear next from Glenn Greene with Oppenheimer.

Glenn Greene – Oppenheimer Securities

Thanks. Good morning. A couple of questions, maybe first one for Tom. Maybe you could just update us on sort of the trends you saw in July and where I’m getting at is sort of the sense of visibility toward the Q3 guide, more specifically on the origination and default side.

Thomas Schilling

Yeah. Without getting into too much on the third quarter other than what we provided, we’re seeing trends similar to what, I think, are in the marketplace and being reported is origination volumes on re-fi and purchase are continuing to decline into the third quarter. On the volumes related to default, we’re currently at an annualized basis, at a declining rate of about 36% year-over-year on the notices of default. There’s nothing in the first two to three weeks of July that indicates that there’s anything different than that right now.

We expect those trends, as I mentioned, on the default side to be very difficult to predict because the – just the nature of some of the delays that we’ve run into have not been ones that you can just predict, so we expect that to be a little bit choppy over the third quarter, but at this point given where we are from our overall view of the business, we feel comfortable with the guidance we’ve provided for overall revenue in the third quarter.

Glenn Greene – Oppenheimer Securities

All right. And then just related to default, and I know it’s sort of been a frequent refrain of the team here that there’s sort of 4 million seriously delinquent loans and this is sort of just a deferral and a delay. But I know you guys are sort of skewed more towards the front end, and when I sort of look at the 90-day delinquents, they’re down, order of magnitude more than 35% since the beginning of 2010. And so, I guess I’m just struggling to understand why this is just a deferral as opposed to the pool shrinking?

Thomas Schilling

To your point in terms of what has happened though on these delays is the front end of the process hasn’t started. So a lot of these loans have been remaining out in the seriously delinquent status without actually having the foreclosure process start, and that means running through everything from a notice of default through to ultimately an REO status. So those processes still have to start on the bulk of those 4.1 million loans.

Glenn Greene – Oppenheimer Securities

Okay. And then just quickly on one of the legal issues. Maybe just sort of walk us through sort of the logistics and the timing and the process as it relates to specifically the FDIC suit. I’m not sort of talking about the merits of the suit, but just sort of the timeline and the process here.

Thomas Schilling

Yeah, the process there will be – first, we will be filing a motion to dismiss and then the process will – the core process is probably four months before we hear anything after or on that to rule on that motion to dismiss on the FDIC claim.

Glenn Greene – Oppenheimer Securities

Okay. Thank you.

Operator

(Operator Instructions) And we will hear next from Kevin McVeigh with Macquarie.

Kevin McVeigh – Macquarie Capital

Great, thank you. I wonder if you could give us a sense in albeit a very cloudy outlook, what type of origination market you would expect for 2011 overall and if possible just any sense of where that market settles any time in 2012, if you have any sense and preferably if you could talk about refinance versus new?

Thomas Schilling

Kevin, we’re going to stay away from that longer term projection. As we said, the market conditions at this point have been – as we all know very volatile and we’re going to hold back from trying to speculate on further industry trends beyond what we already talked about in the prepared remarks, which is we expect origination volumes to continue to decline through the end of the year.

We expect default volumes to continue to be delayed and therefore just very unpredictable from month-to-month and week-to-week. And the technology side, we are expecting modest growth in our other TD&A and flatness within MSP.

Kevin McVeigh – Macquarie Capital

Great.

Lee Kennedy

Yeah. I think a lot of this is really going to be driven on how long it takes the banks or the financial institutions to work their way through the various consent orders and develop their ability to comply with them. That’s what they’re diverted on today and as long as they continue in that direction, we’ll see depressed volumes. There will be an end to this. They will get it resolved, but at this point in time, it’s a little bit uncertain as to when exactly that will happen. And as soon as we get an indication of when that starts to break and become more clear, we’ll definitely communicate that back to the marketplace.

Kevin McVeigh – Macquarie Capital

Great. In terms of – from a cost structure, what type of run rate, kind of revenue side do you have the business run for – kind of scale for and do you anticipate any additional kind of one-time charges as a result of cost takeouts going forward?

Thomas Schilling

At this point, we don’t expect additional one-times, but as we react to market conditions, it’s sort of conditions on the ground. I can’t – we’re not going to say we won’t have anything else in the future, but in terms of the scale of the business, I mean it’s a good point because we were on the default side of our business. We were running at about $300 million a quarter just two years ago on the default services revenue.

We’re now down to about $210 million. So there was some increase as those volumes went up. We did have some increase in what we call our fixed cost component, the infrastructure component of that business and we believe – if we really believed that our current volume trends were anything but temporary, then we would begin managing those longer term costs or those more fixed costs and infrastructure costs down and we will have the ability to do that out in the future sometime when we actually will, hopefully, from a U.S. economy standpoint see fewer and fewer foreclosure activities out in the future. But currently as we’re in this holding pattern, we are not at the optimal volume level for our default businesses. And nor are we at the optimal level on our LFS business.

But, as I mentioned in my prepared remarks, the – the sort of counter- cyclical strategy behind LPS would be working right now because we should be having heightened default-related revenues that would more than overcome the loss of gale that we’re experiencing on the origination side.

Unfortunately, because of the delays that we’re experiencing on the regulatory front, we’re having the sort of double negative market conditions that we’re operating in right now which are affecting our margins largely from a volume standpoint.

Kevin McVeigh – Macquarie Capital

Understood and if I could just sneak one more in, what drove the decision to kind of buy the bonds in the market and then ultimately refinance the balance sheet at this point?

Thomas Schilling

It was the bonds that flipped down to a relatively attractive level and well below par. And given the rate that we’re going to be refinancing at, it seemed like a fairly compelling opportunistic buy.

Kevin McVeigh – Macquarie Capital

And just at that, was it just an opportunity to term that out or...

Thomas Schilling

Yeah, we’re – like we spoke, it gives us – it’s going to extend our maturities, it’s going to give us significantly more operational and financial flexibility as we move forward and doing it at what are still historically various rapid costs to capital.

Kevin McVeigh – Macquarie Capital

Great. Thank you.

Operator

(Operator Instructions) And we’ll hear next from Deforrest Pittman.

Deforrest Pittman

Hi, I had a couple of questions. Can you just say again what the two businesses – the two main businesses that are being reported as discontinued operations? I heard one was fraud services and what was the other one?

Thomas Schilling

Capital markets.

Deforrest Pittman

Okay. And were any of those businesses being discontinued or impaired as mandated by regulators?

Thomas Schilling

No. Those are both issues where in one case we had essentially gotten – trailed the market in terms of capabilities in a service that has largely been commoditized in pricing, and therefore as we assessed the future of financial liability in that particular line of business, we just determined it was not strategic and not something that we wanted to continue to try and invest to become a market leader in.

On the other side on the capital markets, essentially that was a business that was designed around providing portfolio analysis of various mortgage portfolios. That business has essentially dried up. The business dried up at the end of 2010. We didn’t write it off immediately as we looked at market conditions to see if we thought there was a realistic chance that it could come back. At this point in time, we don’t believe that there’s a realistic opportunity for that business to come back in any sort of meaningful way. So we felt that it was necessary to go ahead and write down those assets.

Deforrest Pittman

All right. And my last question is on the legal expense that is running through the income statement, we’re seeing that but at the same time, are we taking any balance sheet accruals for any type of anticipated settlements?

Thomas Schilling

No, we are not.

Deforrest Pittman

Okay. Thank you.

Thomas Schilling

You bet.

Operator

And we will hear next from Julio Quinteros with Goldman Sachs.

Vincent Lin – Goldman Sachs & Co.

Thanks. It’s Vincent sitting in for Julio. Just one clarification on the 3Q EPS guidance. Sounds like the $0.53 to $0.55 includes the refinancing, but it does not assume any incremental share buyback. Is that correct?

Thomas Schilling

That’s correct.

Vincent Lin – Goldman Sachs & Co.

Okay. That’s all I have. Thanks.

Operator

And there are no further questions at this time. Mr. Bhansali, I’d like to turn the conference back over to you for any additional or closing remarks.

Parag Bhansali

Excellent, thank you. Thanks everybody. And if there are other questions, feel free to give us a call.

Operator

And that does conclude today’s conference. We do thank you for your participation.

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