Nat Otis - Director of Investor Relations Matt Morris - Chief Executive Officer Allen Berryman - Chief Financial Officer.
Steve Stelmach - FBR Capital Markets John Campbell - Stephens Inc. Ryan Byrnes - Janney Capital Kevin Kaczmarek - Zelman & Associates.
Welcome to the Stewart Information Services First Quarter 2015 Earnings Conference Call and Webcast. Today’s call is being recorded. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation.
I would now like to turn the call over to Nat Otis, Director of Investor Relations. .
Thank you, Kevin. Good morning. Thank you for joining us for our first quarter 2015 earnings conference call. We will be discussing results that were released earlier this morning. Joining me today are CEO, Matt Morris; and CFO, Allen Berryman. Matt will begin with some brief remarks followed by a review of the quarter by Allen.
We will then open the call up for questions. 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 facts.
Actual results may differ materially from those projected.
The risk and uncertainties with forward-looking statements are subject to include, but are limited to, the risks and other factors detailed in our press release published this morning and in statements 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 Matt..
Thank you, Nat, and thanks everyone for joining us today. Those of you who have been following Stewart know that 2015 marked year four of our five-year strategic plan and the first quarter again were an explanation of the development since we execute on our transformation.
On the revenue front, we are pleased to report continued growth with total operating revenues increasing almost 14% over last year’s first quarter.
The 2014 acquisitions which were finalized in August of last year are generating promising revenues while our focus on smart growth is getting traction in our direct offices where we see market share gains in pursuit of our 50-50 direct and agency mix.
Order counts were up strongly over last year’s first quarter and we are also encouraged by the jump in open orders in March compared to February. We also remain on target with the strategic objectives described over the last several quarters including the value creation strategies announced in February of 2014.
As of quarter-end, we have achieved in excess of $17 million of annualized run rate savings against our original target of $25 million of annualized savings. And we’re pleased to report an upward revision of that estimate to $30 million which we feel confident achieving by the end of 2015.
As in the fourth quarter 2014, we continue to incur one-time cost primarily related to our cost management program consisting of consultants and severance payments as well as costs related previously announced settlement with the shareholder. The total for these costs were $7.3 million.
We also recorded a reserve strengthening charge of $11.8 million primarily related to policy years 2005 to 2007 which Allen will describe in more detail in a moment. In terms of title revenue, we experienced higher transaction volume in the first quarter 2015 compared to the year ago quarter.
The acquisitions completed in the second quarter 2014 contributed to this increase allowing us to participate fully in the recent uptick in refinancing transactions. As a result, direct title revenues increased 22.9% compared to the first quarter of 2014 but following the usual seasonal pattern declined 14.1% sequentially from fourth quarter of 2014.
The title segment generated pre-tax earnings of $19.6 million, an increase of 10.1% compared to $17.8 million in the first quarter of 2014. Excluding the reserve strengthening charge, title segment pre-tax results would have been $31.5 million. This is a increase of $13.6 million generated from an increase in revenue of $16.2 million.
Continuing the momentum seen in the second half of 2014 our United States commercial business grew by 14.4%.
Revenues in our mortgage services segment were $63.7 million for the first quarter 2015, up $38.5 million from first quarter of 2014 to $25.3 million, with the increase due to the acquisitions completed in the second and third quarters of 2014.
While first-quarter 2015 operating revenue run rate was similar to both third and fourth quarter of 2014 we didn’t see origination-based revenue continuing to grow due to increased refinancing volume offsetting ongoing declines in revenue.
Going forward we see a strong sales pipeline although we did just have a significant contract renew at lower pricing, which would put downward pressure on revenue starting in the second quarter.
We are achieving success cross-selling our comprehensive suite of product offerings across our customer base and are encouraged by continued diversification in both our customer and service offerings.
Pre-tax earnings for the mortgage services segment were $ 2.7 million, a 4.2% margin for the quarter, compared to a pre-tax loss of $1.9 million for the prior year first quarter.
With our initial acquisition synergies savings target of $5 million having been achieved as of year-end 2014, we are now executing a formal project plan to optimise operation across the entire segment and are beginning to see the impact as operation scale.
These cost reductions, operational improvements and sales opportunities have us on track to deliver margins in the mid-teens in the latter half of 2015.
With the foundation now in place in accordance with our strategic plan for Stewart’s offer broader services around the mortgage continuum we have the depth and breadth of service offering necessary for growth and an increasingly regulated mortgage services market. The values are trusted third party and affiliated component servicing.
To again summarize our financial results, total revenues for the first quarter 2015 were $448.9 million, an increase of 14% over the first quarter 2014. Operating revenues increased 13.9% year-over-year to $443.8 million. Pre-tax loss for the first quarter 2015 was $18.9 million as compared to pre-tax loss of $18.6 million for the first quarter 2014.
The first quarter 2015 includes $18.1 million of expense related to reserve strengthening, as well as incremental expense related to the cost manifest program and shareholder settlement.
First-quarter 2014 included approximately $3.5 million of aggregate incremental costs related to our shareholder settlement, as well as legal and other due diligent costs related to acquisitions.
As shown in the chart appended to the earnings release, excluding the above items, pre-tax results for the first quarter 2015 improved $15.3 million on a $55.3 million increase in revenues or an incremental margin of 27.7%.
Net loss attributable to Stewart for the first quarter 2015 was $12.4 million or $0.52 per diluted share, as compared to a net loss of $12.1 million or $0.54 per diluted share for the first quarter 2014.
Now in terms of the overall market, we see total residential lending volume in the first quarter 2015 estimated to increase by approximately 33% from the same period in 2014 rising from $240 billion to $321 billion. The first quarter of 2015 did post strong gains in refinance lending at 62% from year ago.
Purchase lending rose 8.1% from the same year-over-year comparison. Existing home sales in the first quarter 2015 are estimated to increase approximately 6% for first quarter 2014. March annualized existing home sales of $5.2 million was the highest seen since September 2013, a very encouraging trend we see for the remainder of 2015.
March housing sales dipped 2.5% from a year, while newly issued building permits increased 2.9% from March 2014. Starts however were up 2.5% sequentially from February 2015, while permits were down 5.7% in the same period. Median home prices continue to rise with March 2015 of 7.8% from a year ago.
Now I will turn it over to Allen for more detail on our financial results..
Thank you Nat, good morning everyone.
As a reminder, since the management team will oversees the mortgage services operation also oversees our centralized title operations catering to the large mortgage lenders, the acquired revenues pertaining to centralised title reported in the mortgage services segment, while the acquired revenues pertaining to local office operations were reported in the title segment.
This reporting is in accordance with generally accepted accounting principles and segment reporting rules. As would be expected the acquired revenues pertaining solely to the non-title operations are reported in the mortgage services segment.
The remainder of my comments unless I indicate otherwise will discuss results as reported on the consolidated statement of operations as that is the level at which the components of revenue are disclosed.
As Matt mentioned a moment ago, we recorded non-recurring charges as well as a title loss reserve strengthening charge during the quarter and while I will provide more detail as to the underlying drivers of these items as I discuss business unit results, I want to summarize them here to provide some context to the quarter’s overall results.
We incurred $7.3 million of expense relating to the cost management program as well as the previously announced settlement with a shareholder. $6.9 million of these costs were recorded in the corporate segment with the remaining $400,000 recorded in the mortgage services segment.
Of the cost recorded in the corporate segment, $3.5 million were incurred in reaching the shareholder settlement. The remaining $3.4 million relate to our cost management program and we expect to incur similar cost on this program in the second and third quarters of this year as we finalize execution of various project plans.
During the quarter, we continued executing against various project plans of our cost management program, including finalizing the contractual arrangement with our outsourcing provider of accounting and IT services and beginning the process of Dallas transfer.
As of quarter end, we had achieved approximately $17 million of annualized savings and have revised our estimates of total annualized savings to $30 million by the end of 2015, up $5 million from the previously announced $25 million.
We recorded a title policy loss strengthening charges of $11.8 million related to several large policy claims and escrow losses, including cost of settlement claims, which were the subject of adverse appellate rulings against us. These claims relate to policies issued principally in the years 2005 to 2007.
Our non-large claim losses continue to trend as expected, and we maintained the accrual rate established in third quarter 2014 for such losses. With that background, I will turn to our business unit results.
Looking first at our title operations, total title revenues increased 9.9% from first quarter 2015, but following the usual seasonal pattern, decreased sequentially 14.4% from the fourth quarter of 2014.
With respect to our direct operations, our direct revenues increased 22.9% from the first quarter 2014 and decreased sequentially 14.1% from the fourth quarter 2014. Our direct revenues include the acquired title operation’s revenues of DataQuick and LandSafe, which we closed during the second quarter of 2014.
Excluding these revenues the increase in direct revenues from the prior year quarter would have been approximately 10%, driven by higher residential resale orders as well as growth in our commercial business. Our direct revenues include domestic and international residential and commercial business.
Total worldwide commercial revenues for the quarter were $39.3 million, an increase of 10.4% from the first quarter of 2014. U.S.-only commercial revenues increased 14.4%, compared to the first quarter of 2014.
While quarter-to-quarter results for the commercial business can fluctuate considerably due to timing of when large transactions close, and fourth quarters are typically the strongest quarters of the year for commercial closings, our commercial operation continues to perform strongly and we believe we are well-positioned to benefit from the upcoming surge in commercial refinancing transactions over the next several years.
For the first quarter of 2015, total international revenues were $19.1 million, down 12.9% from $22 million in the first quarter of 2014. The entire revenue decline was due to change in foreign currency exchange rates as a result of strengthening in U.S. dollars.
Note that fluctuations in exchange rates affect our consolidated reporting only as our international operations were conducted wholly in local currencies.
Turning to our domestic business, total opened orders in the first quarter of 2015 increased 58.6% from the first quarter of 2014; commercial opened orders increased 25%; residential purchase opened orders increased 14.6%; and residential refinancing opened orders increased over 200% primarily due to the second quarter of 2014 acquisitions.
Total closed orders for first quarter of 2015 increased 55.1% with commercial closings up 25.1%; residential resale closings rising 15.8%; and residential refinancing closings increasing 175.7%.
Residential resale and residential refinancing closed orders were 45% and 38% of total closed orders respectively in first quarter of 2015, while they represented 54% and 30% respectively of total delivers in fourth quarter 2014. Overall our direct operations had a solid quarter from a revenue perspective.
Our direct offices reported strong revenue growth. The acquisitions are performing in-line with expectations. Our commercial business continues to show gains and our international business remained steady. Direct revenues constituted 47% of our total title revenues, similar to fourth quarter 2014 and are up from 42% in the prior year first quarter.
Turning to our agency operations, our independent agency revenues were essentially unchanged from first quarter 2014 increasing 50 basis points. Similar to our direct operations, independent agency revenues declined 14.5% sequentially from fourth quarter 2014.
Our remittance rate of 18.2% was unchanged from first quarter 2014 and decreased sequentially from the fourth quarter 2014’s 18.6%.
We were pleased with the performance of our independent agent network, consistent with our strategy for this channel our focus is on increasing profit margins in every state, expanding operations in states where minute rates are above 20% and maintaining the quality of our agency network, which we believe to be the industry's best in order to mitigate clients risk and drive consistent future performance.
While our market share is important and our agency operations channel is not as important as margins for remittance rate and risk litigation.
As an overall observation on the changing mix and the source of our titled revenues trailing 12-month revenues versus the same period a year ago were up in nine out of the 10 top 10 direct revenue states and in six out of the top 10 agency states. Net revenues were down.
Of our four states where net agency revenues increased during the trailing 12 months, three were up in states with the higher remittance rate than our overall rate.
Looking at title losses, our title losses were $33.1 million in the first quarter of 2015 or 8.2% of title revenues, as compared to $22.8 million in the first quarter of 2014 of 6.2% of title revenues. The 200 basis point increase is due to reserve strengthening charge for large losses described earlier.
Excluding the reserve strengthening charge the core title loss ratio is 5.3%, a decline of 9 basis points from the first quarter 2014 and consistent with the core loss ratio of fourth quarter 2014.
Remember that quarter-to-quarter fluctuations in the overall title laws ratio are not unusual due to any new large claims incurred, as well as adjustments to reserves for existing large claims or escrow losses.
Our total balance sheet policy loss reserves were $501.3 million at quarter-end and remained above the actuarial midpoint of total estimated policy loss reserves over the next 20 years.
Turning mortgage services and given the significance of the acquisitions to the mortgage services segment to the current quarter results our comments here will focus on total segment results rather than mortgage services revenues as reported in the consolidated statement of operations.
Total revenues from our mortgage services segment were $63.7 million for the first quarter of 2015, as compared to $25.3 million in the first quarter 2014 and $70.1 million in the fourth quarter 2014. Note however the fourth quarter 2015 included net realised gains of $7.4 million.
Excluding those gains operating revenues for this segment were $62.7 million. Relative to the prior year's quarter, operating revenues were favorable influenced by two principle factors, the acquisitions closed in both second and third quarters of 2014, as well as a new contract in the second quarter of 2014.
Under the terms of this contract we took on responsibility for certain facilities and employees of our customer thus generating revenues while assuming the associated operating expenses. We continue to target a mid-teens pre-tax margin for this segment on the latter half of 2015.
As mentioned earlier, we achieved our targeted 5 million of acquisition synergy savings as of year-end 2014 and we are now actively optimizing the acquired and legacy mortgage services systems and operations.
Although some of this work represents further integration of acquired operations, it also involves reviewing legacy operations with the aim of eliminating or done platforms, streamlining management and sales structures across the segments and better leveraging our existing offshore production centers.
We incur approximately 400,000 incremental costs related to this effort during the first quarter.
The segment reported pre-tax earnings of $2.7 million in the first quarter 2015, as compared to $1.9 million pre-tax loss in first quarter 2014 and pro-forma earnings of $1.8 million in the fourth quarter 2014 excluding the effect of the realized gains and acquisition integration cost.
Sequentially from fourth quarter 2014, the segment’s pretax margin improved to 4.2% from 2.9%. With respect to operating expenses, employee cost for the first quarter including acquisitions increased 14.5% from the first quarter 2014 and declined sequentially 2.5% from fourth quarter 2014.
While our cost management program is reducing certain employee expenses, incremental employee cost were generated in the first quarter 2015 by the 2014 acquisitions and the second quarter mortgage services contract described earlier.
Excluding the impact of the acquisitions, employee costs for the first quarter of 2015 were essentially unchanged from the first quarter 2014. In addition, we have a significant team dedicated to technology and process changes as well as training to implement Consumer Financial Protection Bureaus in the mortgage disclosure rules.
Cost to date have largely been internal although we do anticipate meaningful one-time spend in 2015 as we finalize compliance with the new rules. Other operating expenses increased by 31.1% in the first quarter 2015 compared to first quarter 2014 and declined 6.4% sequentially from the fourth quarter 2014.
As with employee cost, the 2014 acquisitions generated an incremental other operating expenses in the first quarter 2015 although elimination of certain third party transition service agreements laid in the fourth quarter 2014 in conjunction with the integration program resulted in lower run rate operating cost for the acquisitions.
We also incurred approximately $7.3 million of expense related to the previously announced shareholder settlement and cost management program which were recorded in other operating expenses. In the first quarter 2014, we incurred approximately $3.3 million in cost related to a shareholder settlement as well as acquisition due diligence cost.
Excluding the impact of these costs, our operating cost would have increased by approximately 1.6% from the prior year defensively to higher variable cost associated with higher title revenues and decreased 6% sequentially from the fourth quarter 2014 due to lower title revenues.
Depreciation and amortization expense was $7.1 million in the first quarter, an increase of $2.7 million compared with first quarter of 2014.
The increase is due to additional depreciation expense on fixed assets of the acquisitions, amortization expense on acquired intangibles in the mortgage services segment of $1.3 million, and $1.1 million of amortization expense relating to an underwriter production system placed into service July 01, 2014. Lastly, a few comments on other matters.
Cash used by operations was $26.9 million in the first quarter 2015 compared to $49.5 million for the same period in 2014, an improvement of 45.7%. The improvement is principally due to better results in our core operations, collection of receivables, a modest increase in payables and lower title loss payments.
Substantially all of the cost incurred in the cost management program are shareholder settlement were paid in cash during the quarter while the reserve strengthening charge did not influence cash. Notes payable at quarter-end totaled $65.2 million, down from $71.2 million as of year-end.
During the quarter, we’ve reclassified capital lease obligations from other accrued liabilities to notes payable and restated the balance as of December 31, 2014 accordingly. This reclassification had no effect on total liabilities.
Our debt to equity ratio at quarter end was approximately 10% below the 20% we have set as our unofficial internal limit on leverage. We don’t yet have the quarter end statutory balance sheet for our principal underwriter completed. As of year-end 2014, our statutory liquidity ratio was 0.96 to 1.
Our internal objective is to achieve a ratio of at least 1 to 1 as we believe that ratio was crucial from both the ratings agency and competitive perspective. During the first quarter, we announced an increase in our dividend from $0.10 per share paid annually to $1 per share to be paid $0.25 per share quarterly beginning in June 2015.
With the fourth quarter 2014 conversion as a senior convertible note, we are no longer restricted in the amount of dividend that can be paid to common shareholders and we are pleased to be in a position to advance competitive and sustainable dividend policy alongside our share repurchase program.
During the first quarter, we acquired 38,425 shares of our common stock for an aggregate purchase price of $1.4 million pursuant to the previously announced stock buyback program. Since program inception, we’ve acquired 723,670 shares for an aggregate purchase price of $23.4 million.
Our existing share repurchase authorization will remain in effect and be used opportunistically based on various factors such as the company's stock price, operational performance, macroeconomic environment, and other relevant criteria.
Going forward, we are committed to returning meaningful amounts of capital to stockholders on a regular basis while also maintaining our ratings and a capital base that supports the growth in our business and our obligation to our policyholders. With that, I will turn the call back over now to Kevin to take questions..
The floor is now open for questions. [Operator Instructions] Thank you. Our first question comes from Steve Stelmach with FBR. Your line is now open..
Hi, good morning, everybody.
Matt, real quick on the reserve strengthening charge, what was it about the timing that hit 1Q? Is that just simply the appellate ruling coming in 1Q or was there something else that’s launching the timing of that that charge?.
No, it really is the appellate ruling and there were couple of those, several of those and all in 1Q..
Got it.
And then anything of similar size as for appellate that’s subject to the pending litigation that we should be aware of?.
No. I mean as always, we set goals of where we think we are. So maybe we would have bought some one-time events in Q1..
And we always monitor litigation on an ongoing basis. Of course we don’t comment on any litigation in process, but we do monitor it and we share our reserves in accordance with the FAS 5 criteria. And in the quarter, we reached a point where some of the clients were reasonably add some balloon and therefore they were put up for accrual.
And as Matt said, the others were subject to adverse rulings in the court and therefore we put up accruals for those as well..
Yeah.
And so given the fact that this is until ’05 through ’07 books of businesses are under a prior regime, is it fair to say that maybe that sort of melting ice cubes and those are opportunities with the larger rulings is what dissipating, is that a fair bias in terms of assumptions?.
I think that’s fair. I mean ’05 and ’07, it’s been difficult for us and the industry overall, and I think everybody would stayed mute of stayed in the system probably longer than people would have expected, but....
Yeah. .
Should be getting through them..
Sometimes the judicial process takes a while to grind along..
Yeah. Understood. And maybe this is for Allen, on the mortgage services of revenue, you gave a lot of good tell on the acquisitions, but maybe thinking about a little bit differently and if you gave this I apologize that if you had owned those businesses in 1Q ’14 what would organic growth had looked like for the combined entity..
So let me try answering it, but thinking about it in the reverse, if we had not owned those acquisitions in 1Q ’15 revenues would have been down..
Okay..
If you think about what’s just the legacy default related business, that book of business continues to do decline certainly both in the absolute and obviously as a proportion of revenues..
Got it. And then that kind of leads I guess my last question on I think the guidance and that sort of downside bias on that revenue.
I think you mentioned lower fees with a bigger customer, what’s driving that? Is it because of that sort of opportunity on the pressure you were anticipating or is it competitive pressure eating away at similar the revenue opportunity?.
I think that was competitive pressure on the specific contracts we referenced yet again.
So we are seeing some normalizing of services that as it post downturn where new services being offered and see probably more normalization of margins in some of those contract, be offset by a third buyer very strong pipeline of potential opportunities out there..
Great. Alright guys. Thanks for the answers..
Absolutely, Steve..
Our next question comes from John Campbell with Stephens. Your line is now open..
Hey, guys. Good morning..
Good morning, John..
So just, in the press release, you expect mortgage services, you guys I think you said double digit margin in the press release in it. But Matt now, I think you guys both said kind of mid-teens margin. So not trying to put two final point on it, but should we for closing of 15% or so margins.
I think we’ve been looking for closure to 10% or so in the back half of the year, so that would be upside to us..
Yeah, and again I mean we are looking for mid-teens. As stated, that one contract significantly will put downward pressure on obtaining that, but still as we look at models and we look at the pipeline coming in, that’s what we’re targeting for.
And a lot of that again is not only counting on new revenue opportunities, there are significant cost reductions in that segment, which we will be able to provide more clarity on in Q2..
Got it. And I think you guys actually might have said mid-teen margins in the past, maybe even before you renewed that contract at the lower pricing.
So what other sides of the business, I guess, is it just cost saves that you just kind of just mentioned?.
That’s correct. It’s some of that, absolutely.
I mean we really look at – again, we talked about the synergy savings, but a lot of our planning on those acquisitions, if you look at the finalized closing in August of last year, we kind of get through one year of kind of private plans to rationalize all that expense, so kind of looking on that culminating around of August of this year.
That gives us kind of more consistent run rate..
Some of the longer involved processes of getting the acquisitions integrated around automated systems and computer infrastructure obviously take a little bit longer to get done, but that should be wrapped in the second quarter.
We are also working our way through some legacy facilities questions that should be wrapped up in the second quarter as well..
Got it, got it, thanks for that. And then on the March purchase opened orders, those were up I think 22% or so year-over-year. It’s a great indicator for the early stages of 2Q and that was actually well above the March existing home sales growth rates, that was good news.
But what’s April looking like thus far?.
April seems to flat out a little bit relative to March continuing to be up from prior years, but going into April, we see a little bit of flattening in revenues. Now remember that Easter hit us the very first week in April this year, which is a little different timing than last year. So, some of that could be just timing around the holiday..
Got it. And I would imagine maybe a little bit of pull forward into March from bad weather in February too. But I think the concern has been also on Texas, right, like with the energy, crude and oil crisis.
The stats we’re seeing from industry looks to be that I think Texas looks to be like it’s hanging in there, so are you guys seeing any kind of negative drawbacks or anything from anything in Texas?.
Really where we see the Texas is to interim some of the smaller accounts, which probably are more agent-centric for us. As far as major metros, Houston is probably the only major metro that we are watching very closely and could be impacted. Although, we look at kind of March housing sales year-over-year, they are actually up 4% from 2014 to 2015.
So we do see kind of a weaker high-ends and it slowdown in commercial construction. So we are watching it closely, but the market is holding up very well. And, again, as far as major metros, we don’t see that same potential distraction in either Austin or Dallas areas..
Got it. And just one more if I can.
The regulatory expense, just on a apples-to-apples basis versus last year, what was the increase that you guys saw? And then just curious how that’s going to pace throughout the year, you guys said that – Allen, I believe you said that you guys are going to take a good bit of cost, but just curious, I mean did you guys take the brunt of that cost in 1Q and it kind tapers off throughout the rest of the year, is that more of a run rate?.
No, I would say that it will probably ramp up in Q2 before it’s behind us. Remember that the actual implementation date is August 1, which hit you right at beginning of Q3 or middle part of Q3. So, we will continue to incur some cost in Q2 and likely some as well in July.
I would say that the plan is well progressed, things are on track, all the indicators are given in terms fairness and also working very closely with our lending partners as well as our independent agents and so far so good on that front..
So, fair to say that kind of tapers in 4Q and then tapers even more so into 2015 or into the 2016?.
The cost side certainly tapers off in Q3 and basically dissipates in Q4. The question in Q4 is really, what has the potential revenue disruption on closings and that sort of the great unknown at the moment..
Got it. Thanks for all questions guys..
Sure..
Our next question comes from Ryan Byrnes with Janney Capital. Your line is now open..
Thanks. Good morning everybody. Just had a question on the commercial strengths, I may have missed it earlier but obviously it was nice kind of year-over-year growth.
Was there any kind of a pull forward from later this year or I guess maybe some clean up from the fourth quarter? Just wanted to see if that strength is sustainable?.
No, I mean there were no transactions to stick out nor big pipeline of pull through in the prior year. We have good start to the year with year-over-year growth and what’s historically maybe it’s been a challenging commercial quarter. The pipeline looks solid in the second quarter.
Again beginning to see some of the CMBS refinancing activity, again timing of commercial closings is always can be different than residential orders, but no kind of one off events that would – take that away from an ongoing trend..
Okay, great. And then this could be my last one. In the press release, Matt, you note that you expect mortgage originations to decline in the second half of the year.
Just wanted to get a little more color on that, is that just expected I guess interest rates rising and lower Refi activity or is there something or again is there either something else there?.
I think there is some seasonality and there is interest rates. We talked about CFPB implementation, potential refinance going down. But I think Fannie numbers have Q2 at $367 billion going to $347 billion in Q3 down to $350 billion in Q4.
So somewhat just really cognisant of it as we look at our cost and our completed plans for the year as we are looking at that activity potentially turning down after Q2..
Okay, great. Thanks for the color guys..
Yeah..
Our next question comes from Kevin Kaczmarek with Zelman & Associates. Your line is now open..
Hey guys, just had a couple of questions on the mortgage services pipeline. I think you mentioned that it was looking robust, but I was just trying to get a sense of how large the new contracts might be and what kind of businesses they are in, the length of them in potential margins. I am just trying to get a sense of future growth here..
Yeah. I don’t know how much we can go into overall. What I would say is, somewhat as I alluded to diversified clients to this, the contractor not near large as they used to be and the clients we have are much more diversified and services are more diversified.
So I don’t know that we give more color as it starts to get pretty segmented there, but the activity we are seeing in our piece around various types of services continue to increase.
Honestly we think part of that is market and part of it is just where somewhat of a new insert to that market, now that we have a full suite of products and services that have a feed of that table and we’ll let features go up with lenders..
That’s been nice to see on that front as just the success of cross selling gaining additional wallet share of a particular customer that’s either new customer to us and we are selling a legacy product or vice versa to where we have an existing customer that [indiscernible] the product set that came along with the acquisitions and that’s driving a lot of the upside opportunity for us as we had hoped it would..
Okay, great.
And on the year-over-year purchase cost, do you have sense of what that might have been without the acquisitions?.
The acquisitions were principally centralized platforms which are largely refinancing driven. There was a fairly modest component I would say, this is what I would call core title offices that we acquired. So I would attribute a large proportion of the increase in the residential orders to acquisitions..
Okay.
And then one last one, on the $5 million of extra restructuring expense says, where might you expect those to come from?.
Those would be around the areas of – of course we are having up to our estimate of savings from some of the outsourcing activities, but they would also come in the areas of additional vendor renegotiation through the procurement team probably some additional office optimization in terms of our footprint of offices.
It’s really no particular individual project that we indentified it was sort of additional activities around existing projects that expanded the scope of the overall cost savings number..
Yes. Kevin I will just clarify. I think that’s not necessarily new, the additional five aren’t new projects. They are basically existing projects that are achieving better results from the expected. .
Okay great, thanks..
And it appears we have no further questions at this time, I will turn the floor back over to Matt Morris for some closing remarks..
Thank you. Again thank everyone for joining us. The first quarter 2015 was one of the great things from a revenue perspective, obviously strong growth in both our direct and mortgage services operations, while January and February time regulated to somewhat lacklustre, they rebounded strongly in March.
Combined now with a strong sequential increase and open to orders in March, we are poised for continued revenue growth in second quarter. While the reserve strengthening charge for large time losses was disappointing. The related policy years of 2005 to 2007 has been problematic for both in the industry as a whole.
Our recent policy years continue to exhibit favorable loss rates and so we are able to maintain our target and co-provision rate going forward. Setting a slightly reserve strengthening, margins improved significantly in our title segment.
Our focus on discipline and accountable sales growth, closing underperforming offices, opening new offices in key markets, agency betting commercial growth and cost management are gaining traction to improve margins, reduced risks, and managed cycles.
We are also encouraged by the continued progress made in the transformation of our mortgage services business. As demonstrated by its improving margins.
These operations are closely [indiscernible] strategic plan and we are well positioned at premier providers of complete set of solutions to support the ongoing loan origination and serving support needs of lenders in a complex and changing regulatory environment.
We see this segment as a growing contributor to our margin expansion and we are confident it will bring significant sustainable value to Stewart. We do remain mindful of every changing industry conditions, while we saw positive signs during the first quarter.
We are cognisant of general economic volatility, as well as the expected decline in mortgage origination volume in the second half of the year. 2015 will bring most significant changes in the industries history with the implementation of the new PSPB regulations.
These regulations which will go into effect August of 2015 not only are adding regulatory expense at one-time implementation cost this year, but also had its potential to cause temporary operational delays across the industry in late 2015.
Our [indiscernible] and we fully expect to be prepared internally for business as usual, but order opened after the August 1 timeline begin to close.
As we’ve noted before we are very focused on minimizing the impact to our customers of any destructions and also leveraging the pending changes to gain market share, while rethinking these process to increase efficiencies Overall we feel like we are doing exactly what we are committed to do and our results demonstrate continued progress.
We believe the remaining initiatives that run just upon sales growth, optimization of our mortgage services offerings continued the improvement in cost management program and balance capital management are key to enhancing shareholder value going forward. Again, thank you very much for your time..
Thank you. This does conclude today’s teleconference please disconnect your lines at this time and have a wonderful day..