Stewart Information Services Corp (STC) 2014 Q4 法說會逐字稿

Welcome to the Stewart Information Services fourth-quarter 2014 earnings conference call and webcast. Today's call is being recorded. (Operator Instructions).

I would now like to turn the call over to Nat Otis, the Director of Investor Relations. Please go ahead.

Thank you, Erica. Good morning. Thank you for joining us for our fourth-quarter 2014 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, and 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.

Let me now turn the call over to Matt.

Thanks, Nat. Appreciate everyone joining us today. Those of you that have been following Stewart Information Services know that we have been aggressively transforming our business over the last three years. And we welcome the opportunity to provide an update on the status of our strategic initiatives, as well as provide a bit more color on this quarter's results.

First, let me say we are pleased to report that we remain on target with the strategic objectives we have described over the last several quarters, including the value creation strategies announced in February of 2014. As of year-end, we have already achieved in excess of $10 million of annualized savings against our targeted $25 million of annualized savings, which we feel very confident will be achieved by the end of 2015, as previously reported.

By the end of 2015's quarter, we have sold or closed almost 40 underperforming direct offices, while continuing to expand in key markets, thereby continuing to drive margin improvement and transform the business.

In the past year, we completed several acquisitions that as part of our strategic plan have significantly enhanced our competitiveness in providing services all along the continuum of mortgage origination, servicing, and support. These acquisitions have also greatly expanded our capability to provide centralized title services, validated not only by the retention of existing contracts, but also the addition of several new contracts which will produce revenue starting in the second quarter of 2015.

Lastly, we began our share repurchase program earlier than previously expected, and, during 2014, acquired $22.1 million worth of shares against our target of $20 million, which by this year is -- and utilizing cash from operations.

In short, we're doing exactly what we said we would do, and our results demonstrate this progress. We believe the remaining initiatives around our cost management program, optimization of our mortgage services offerings, and share repurchase, are key to enhancing shareholder value moving forward.

In terms of title revenue, although total US lending volume is estimated to have declined approximately 18%, we did experience higher transaction volume in the fourth quarter 2014, paired to the year-ago quarter. The acquisitions completed in the second quarter contributed to this increase, allowing us to fully participate in the uptick in recent refinancing transactions.

As a result, direct title revenues increased 20.2% compared to the fourth quarter of 2013, but following the usual seasonal pattern, did decline 4.5% sequentially from the third quarter of 2014.

The title segment generated pre-tax earnings of $45.6 million, a decrease of 6.4% compared to the $48.8 million in fourth quarter of 2013. Building off the momentum of the third quarter, our US and Canadian commercial business grew 12.9% compared to the fourth quarter 2013. Beginning with this quarterly report, we are reporting commercial revenues outside of the US and Canada, which were $2.8 million for the fourth quarter 2014 and $13.9 million for the full year.

Revenues in our mortgage services segment were $70.1 million for the fourth quarter 2014, up $47.3 million from fourth quarter 2013's $22.8 million, with the increase due to the acquisitions completed earlier this year.

The current quarter's revenues include $7.4 million in net realized gains, and Allen will describe those in more detail later. Exclusive of the net realized gains, revenues of $63 million were similar to third quarter 2014's revenues of $62.8 million. All of our 2014 acquisitions are on track to produce margins in the mid-teens in the second half of 2015. The acquisition of the Allonhill assets in 2013 has not met expectations to date, given the lack of growth in the RMBS market.

Pre-tax earnings for the mortgage services segment were $7.4 million for the quarter compared to a pre-tax loss of $3.7 million in the prior-year fourth quarter and pre-tax earnings of $3.3 million in third quarter 2014.

With the foundation now in place, in accordance with our strategic plan for Stewart to offer broader services around the mortgage continuum, we have the depth and breadth of service offerings necessary for expanded growth in an increasingly regulated mortgage services market that values our trusted, third-party, unaffiliated component servicing.

So to summarize our financial results, total revenues for the fourth quarter 2014 were $522.3 million, an increase of $72.1 million or 16%, from $450.2 million for the fourth quarter 2013. Operating revenues increased 15.1% year-over-year to $512.5 million from $445.1 million. Pre-tax earnings for the fourth quarter 2014 were $16 million as compared to pre-tax earnings of $15.5 million for the fourth quarter 2013.

The fourth quarter of 2014 does include $6.3 million of aggregate one-time costs and third-party expenses relating to acquisitions integration projects as well as the cost management program.

Net earnings attributable to Stewart for the fourth quarter of 2014 were $11.9 million or $0.49 per diluted share as compared to net earnings of $17.5 million or $0.72 per diluted share for the fourth quarter of 2013. Both periods include adjustments to income tax expense, which Allen will discuss further in a moment.

In terms of the overall market, total residential lending volume in fourth quarter 2014 is estimated to have fallen by approximately 18% from the same period of 2013, dropping from $358 billion to $294 billion. However, we are seeing a recent pickup in refinance activity, which will benefit our growing, centralized title group.

Existing home sales in fourth quarter of 2014 are estimated to have increased 2.6% from fourth quarter 2013, while following the usual seasonal pattern, decreased 1% sequentially from third quarter 2014. December annualized existing home sales of 5 million were the highest seen this year, an encouraging trend we see continuing through 2015.

December housing starts rose 4.4% from November, and newly issued building permits decreased 1.9% from November. Median home prices continue to rise, with the most recent estimate indicating they are up 5.7% from a year ago.

I will now turn it over to Allen for more details on our financial results. Allen?

Thank you, Matt. Good morning, everyone. Just first a couple of reminders to keep in mind as you are reviewing the financial statements. The management team that oversees our mortgage services operations also oversees our centralized title operations catering to the large mortgage lenders. The acquired revenues pertaining to centralized title are reported in the mortgage services segment, while the acquired revenues pertaining to local office operations are reported in the title segment. This reporting is in accordance with GAAP as well as segment accounting rules.

As you would expect, the acquired revenues pertaining solely to non-title operations are reported in the mortgage services segment. So 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 the revenue are disclosed.

As Matt mentioned a moment ago, we recorded a number of non-recurring charges and gains in the quarter, and while I'll provide more detail on 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 current quarter's results.

We recorded net realized -- or realized gains totaling $9.1 million, which were somewhat offset by impairment charges of $2.7 million. $7.4 million of the net gains recorded in the mortgage services segment, while a $1 million charge is recorded in the corporate segment. We incurred $6.3 million of expense related to the acquisition integration and cost management programs. $1.8 million of these costs were recorded in the mortgage services segment, with the remaining $4.5 million recorded in the corporate segment.

In particular, activity around the cost management program intensified during the quarter, in accordance with the underlying project plans. We have achieved in excess of $10 million of annualized savings and remain confident we will achieve our goal of $25 million of savings on an annualized basis by year-end 2015.

We sharpened our focus on growth in key markets during the year. And in concert with that strategy, we sold or closed 28 of our underperforming direct offices, with an additional eight to be closed during the first quarter of 2015. Further rationalization of our direct office footprint may be necessary, but our expectation is that we will be opening more direct offices than closing in 2015.

During the fourth quarters of both 2014 and 2013, we reversed a portion of a valuation allowance of on our deferred tax assets due to an improved outlook for future taxable earnings, as well as recording certain other adjustments at lower income tax expense in fourth quarter 2013. As a result, income tax expense as recorded is not indicative of either the respective quarters' underlying tax rates or of our expectations going forward.

Our full-year effective tax rates were 31.2% and 31.1% for 2014 and 2013, respectively. Since substantially all of the previously recorded deferred tax asset valuation allowances have now been reversed due to our improved profitability, we expect effective tax rates of a more normal 38% to 41% in 2015.

So with that background, I will turn to our business unit results. Looking first at our title operations, total title revenues increased 10.8% from fourth quarter of 2013 and increased sequentially 2.1% from third quarter of 2014.

With respect to our direct operations, direct revenues increased 20.2% from the fourth quarter of 2013 and decreased 4.5% sequentially from third quarter 2014. Our direct revenues include the acquired title operations revenues of DataQuick and LandSafe, which closed during the second quarter of 2014. Excluding these revenues, the increase in direct revenues from the prior-year quarter would have been about 10.5%, driven by higher residential resale orders as well as growth in our commercial business.

For the full year 2014, our direct title revenues, including the impact of acquisitions, increased 5.9%. Excluding the acquisitions, the direct title revenues would have been essentially unchanged from the prior year.

Our direct revenues include domestic and international residential and commercial business. The majority of our commercial revenues are generated in the United States and Canada. Commercial revenues from both sources increased 12.9% from fourth quarter 2013 and increased 15.9% sequentially from third quarter 2014.

While quarter-to-quarter results for commercial business can fluctuate considerably due to timing of when large transactions close, and fourth quarters are typically the strongest quarter 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 refinance transactions over the next several years.

During 2014, we refined our systems for tracking international revenues. And beginning with this quarterly report, we will also report on commercial revenues generated outside of the United States and Canada, which include Europe, Australia, the Caribbean, and Latin America.

Commercial revenues from those operations were $2.8 million for the fourth quarter 2014 and $14.8 million for the full year. For the fourth quarter of 2014, total international revenues were $28.3 million, up 1.3% from the $27.9 million in the fourth quarter of 2013.

Turning to our domestic business, as we mentioned in our press release, we have expanded our order count disclosures for 2014, but due to system constraints we are unable to provide year-over-year comparisons.

Sequentially, our closed orders decreased 1.5% from the third quarter of 2014, with commercial closed orders down 8.1%, residential purchased closed orders down 7.2%, and residential refinancing closed orders up 20.9%.

Revenue per order closed decreased to 1% from the third quarter of 2014 as higher refinancing activities partially offset by commercial business and continuing home price appreciation. Total opened orders for the quarter were down sequentially 11.5% from the third quarter as the seasonal reduction in purchase activity, which was down 14.7%, was somewhat offset by greater refinance activity, which was down only 3.3% sequentially.

Overall, our direct operations had a solid quarter from a revenue perspective. The acquisitions are performing in line with expectations, and we are making good progress towards our goal of having half of our title revenues generated by our direct offices and half by our independent agencies.

Turning to our agency operations, our independent agency revenues increased 3.8% from the fourth quarter 2013 and increased 8.8% sequentially from third quarter 2014. Substantially all of the sequential increase was due to an increase in our New York agency business, which we believe was driven by increased commercial business. On a full-year basis, independent agency revenues declined 13.4% from 2013.

Our remittance rate of 18.6% decline from fourth quarter 2013's rate of 20.8% but increased sequentially from the third quarter of 2014's 18.4%. For the full years of 2014 and 2013, our remittance rates were 18.5% and 18.9%, respectively, an improvement of 40 basis points -- or a decline of 40 basis points.

We are 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, increasing premium revenues in states where remittance 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 claims risk and drive consistent future performance, our market share is important in our agency operations channel. It is not as important as margins, remittance rates, and risk mitigation.

Looking now at title losses. Title losses were $31.3 million in the fourth quarter 2014 or 6.6% of title revenues, as compared to $26 million in the fourth quarter of 2013 or 6.1% of title revenues. Title losses for the fourth quarter of 2014 include approximately $6.9 million of accruals principally for two large claims relating to prior policy years. During the fourth quarter, we maintained our core title policy loss accrual rate of 5.2% that was established in the third quarter of 2014, a rate which we expect to continue in 2015.

On a full-year basis, title losses were 4.7% of title revenues. However, that ratio was favorably influenced by the third-quarter recovery of a portion of a large loss which was incurred in prior-year periods. Excluding that recovery, title losses were 5.6% of title revenues in 2014 as compared to 5.9% in 2013. Remember that quarter-over-quarter-fluctuations in the overall title loss ratio are not unusual due to any new large claims incurred, as well as adjustments to reserves for existing large claims [risk or] losses.

Our total balance sheet policy loss reserves were $495.4 million at December 31, 2014, and remained above the actuarial midpoint of total estimated policy loss reserves over the next 20 years.

Now, turning to mortgage services. Given the significance of the acquisitions to the mortgage services segment to both the current-quarter and year-to-date results, my comments here will focus on total segment revenues rather than mortgage services revenues, as reported in the consolidated statement of operations.

Total revenues from our mortgage services segment were $70.1 million for the fourth quarter 2014 as compared to $22.8 million in the fourth quarter 2013 and $62.8 million in the third quarter 2014. Excluding the net realized gains I will describe in a moment, operating revenues for the segment were $62.7 million.

Relative to the prior year's quarter, our operating revenues were favorably influenced by two principal factors: the acquisitions closed in both the 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.

Excluding the acquisitions and this contract, operating revenues for the segment would have increased 7.3% over the prior-year quarter. Also, as mentioned earlier, fourth-quarter 2014 revenues for this segment include net realized gains of $7.4 million, primarily due to a gain on the sale of a subsidiary, as well as a reduction of an earn-out accrual relating to a 2013 acquisition which yielded a net gain under current accounting rules. These gains were partially offset by the impairment of an intangible asset related to a customer relationship associated with that same acquisition.

We also incurred operating costs relative to acquisition integration, principally severance and lease and other contract termination fees, of $1.8 million.

The segment reported pre-tax earnings of $7.4 million in the fourth quarter of 2014 as compared to a $3.7 million loss in the fourth quarter 2013 and pre-tax earnings of $3.3 million in the third quarter of 2014. Adjusting for the items mentioned above, pro forma pre-tax earnings in the quarter of $1.8 million on operating revenues of $62.7 million.

As mentioned earlier, we have achieved our targeted $5 million of synergy savings from the acquisitions. But we will continue to optimize those businesses with those of the legacy Stewart lender services businesses, as well as the broader Stewart organization, with the segment target margin in the mid-teens by the third quarter 2015.

With respect to operating expenses, while our cost management program is reducing certain employee expenses, incremental employee costs of $18.2 million were generated in the fourth quarter of 2014, by the 2014 acquisitions and the second-quarter mortgage services contract described earlier.

Employee costs for the fourth quarter, including the acquisitions, increased 18.5% from the fourth quarter 2013 and sequentially 1.4% from the third quarter of 2014. Employee costs for the fourth quarter 2014, excluding recent acquisitions and the integration-related severance costs, increased 5% from fourth quarter 2013, due principally to increased commissions on higher title and commercial revenues, and increased less than 1% sequentially from the third quarter of 2014.

In addition, we have a significant team dedicated to technology and process changes as well as training to implement the Consumer Financial Protection Bureau's mortgage disclosure rules. Costs to date have been largely internal, although we do anticipate meaningful one-time spend in 2015 as we finalize compliance with the new rules.

Other operating expenses increased by 34.8% in the fourth quarter of 2014 compared to the fourth quarter 2013, and declined approximately 1% sequentially from the third quarter of 2014.

The 2014 acquisitions generated incremental other operating expenses of $15.5 million. Elimination of certain third-party transition services agreements late in the fourth quarter in conjunction with the integration program will result in lower run rate operating costs for the acquisitions.

We also incurred approximately $5.4 million of costs related to acquisition integration activities and the cost management program, which were recorded in other operating expenses. Excluding the impact of the incremental and integration expenses of the acquisitions, other operating costs would have increased approximately 5% from the prior year, due principally to higher variable cost associated with higher title revenues, and increased 3.2% sequentially from the third quarter of 2014.

Depreciation and amortization expense was $8.2 million in the fourth quarter, an increase of $3 million compared to the fourth quarter 2013. 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 $2.1 million, and $1.1 million of amortization expense relating to an underwriter production system placed into service July 1, 2014. We would expect a similar level of depreciation and amortization expense in the first quarter 2015.

During the fourth quarter of 2014, activities surrounding our cost management program intensified. We implemented the less-complex projects identified earlier this year. And by year-end, we had achieved in excess of $10 million of run rate savings.

Due to the complexity of the remaining initiatives, which involve significant changes to processes and technology, we expect the majority of the remaining projects to not be completed until the second half of 2015.

We expect to incur costs of implementation and transition through the first three quarters of 2015, with costs ramping down in the third quarter of 2015. We are confident of achieving our stated goal of $25 million of annualized cost savings, exclusive of market conditions, by the end of 2015.

Lastly, a few comments on other matters. Cash provided by operations was $38.2 million in the fourth quarter of 2014 compared to $16.3 million for the same period in 2013. The increase is principally due to the receipt of the insurance recovery of a prior-year title loss described in our third-quarter earnings release, collections of receivables, and lower title loss payments. Substantially all of the costs included in the acquisition integration efforts and cost management program were paid in cash during the quarter.

Notes payable at year end totaled $65.5 million, up slightly from $64.1 million as of third-quarter end. Our debt to equity ratio at year-end was approximately 10%, below the 20% we have set as our unofficial, internal limit on leverage.

We believe maintaining access to a meaningful amount of liquidity is important due to continued uncertainty surrounding the 2015 outlook for housing, as well as potential for an industry disruption in closings with the third quarter 2015 implementation of the new CFPB regulations. We don't yet have the year-end statutory balance sheet for our principal underwriter completed.

As of the end of the third quarter, our statutory liquidity ratio was 0.97 to 1. Our internal objective is to achieve a ratio of at least 1 to 1, as we believe that ratio is crucial from both a ratings agency and competitive perspective.

On an ongoing basis, this ratio will largely guide our decisions as to how much cash we would dividend up from the underwriter to the parent company, with the general expectation that we will maintain a ratio of no lower than 1 to 1.

During the fourth quarter we acquired 166,880 shares of our common stock for an aggregate purchase price of $5.8 million, pursuant to the previously announced stock buyback program. In 2014 we acquired 685,245 shares for an aggregate purchase price of $22.1 million. We remain committed to our previously announced $70 million stock repurchase plan to be completed by year-end 2015, which will be accomplished through cash generated by improving operations.

And with that, I will turn the call back over to the moderator to take some questions.

(Operator Instructions). John Campbell, Stephens Inc.

Allen, could you touch again on the closing and opening of the offices? The main thing we're just trying to pinpoint is the average costs associated with the closing and openings. And I believe you said that you guys were going to basically close eight more offices this year, but you'll see a net gain in direct offices. So just trying to bracket the costs associated with those. And then, are you guys simply just closing those offices? Or are you selling them, and that's basically accounted for in some of the realized gains?

Well, there really wasn't much of a realized gains associated with these. These were smaller offices. And we either closed them, or in some cases, we had the opportunity to sell them to a local agent. So I would say that the cost to, either positive or negative on that front, wasn't terribly meaningful.

Really this was more about pursuing our smart growth strategy and focusing in on key markets. And some of these local operations that we sold or closed just didn't fit within that strategy. We do expect that over the course of 2015, we will continue to pursue that, and we will probably trim off some additional office locations. But the overall expectation is that we will grow our offices.

It's not an expensive thing to open an office under our current platform. It's pretty much just renting some storefront space, opening -- putting in a couple of offices, and plugging your computer into the Internet, and you're ready to go. So that's not a terribly incremental expensive proposition.

And John, just to clarify, we did -- some of those are acquisitions, but I think if you are looking at net, I think we had 30-plus new locations opened up in 2014 as well. So again, we're really looking at market by market, where we want our market presence to be; shutting down underperforming offices or selling them to independent agents, as you mentioned; and looking at growing where we want to grow.

Got it. That's helpful. And then just on the inclusions of international commercial revenue, just structurally -- and I know the margin is going to swing with the ticket price of the commercial bill -- but on an apples-to-apples basis, or just same-size commercial bill, is there any major difference to point out on the margin profile as you guys look across each region?

No, none that we would think is meaningful enough to point out.

Okay. And then just last one for me. First American was out with their January open orders, so I think they were up 30% or 31% year-over-year. They've got a much higher exposure to refi, and that's probably a big driver of that good result.

But Matt, I might have missed that in your prepared remarks, but what did you guys see for January? Is a pretty similar acceleration?

Yes. Yes, we're seeing good acceleration? And I would just point out, as well, that due to our new centralized title group, we should have the same improvement in the refinance orders, where we haven't historically had that in the past.

Okay, super. Thanks, guys.

Ryan Byrnes, Janney Capital.

Allen, I think I heard you mention that there could be a meaningful expense buildout for this new CFPB changes. Just want to chat about that a little bit. And also maybe just talk about what kind of opportunities this presents for Stewart as well.

I will comment on the first half of the question, and then let Matt comment on the second. We've really assembled a pretty large team internally to be working on this project. It seems that some of the requirements of the lenders have been evolving over the last few weeks, and are just now coming into focus for us. So, from the expectation of spend in 2015, we're still trying to scope that out fully. But as we go through the year, we will be certain to provide updates on it.

It's obviously a big deal for the industry, a big deal for the Company, and something that we'll just dedicate whatever resources we need to dedicate to it to get it right. And like I said, so far that has involved a very sizable internal team that we've dedicated 100% to the effort.

Yes, just a further comment on that. We do have -- so this relates to the new three-day rule, closing disclosure form, other process changes. And two things I think to comment on. There is incremental spent, but it's a large area of focus that we have to get right, so two things on here. We are, one -- we have to make sure the changes are in place, and that we're raring to go prior to August 1. We'll be testing those systems and integration, training our associates on that.

We do see this as an opportunity going forward. We've been out front training our customers, training the market on what these changes mean, how we can support them in a transaction. So we do see it as an opportunity for us.

However, we look at latter part of this year, and the last change that the market experienced was a change to the HUD-1 in 2010, and we saw a quarter blip. These changes are much more significant than that. I think the industry will be more prepared for it. But we want to make sure that not only are we fully compliant, but we are taking advantage of the opportunity to be that trusted third-party to ensure that transactions are happening successfully.

Okay, great. Thanks for the color. And then just quickly want to also touch on the agency revenue. Obviously, the second and third quarters were pretty light, and it sounded like the fourth quarter was helped, I guess, by New York; and I guess your thoughts there were commercial. Any other color there? Again, if I think New York commercial being -- I view that more as a fourth-quarter type item. Were there any other potential explanations for the strength in the agency?

No. That seems to be the driver of the fourth-quarter results. I can say that with respect to the full-year results, when you look and the falloff in revenue at a state-by-state level, and you'll see this when the Form 9 is filed, it was pretty widespread across the nation. Obviously there were certain states that fell off more than others, but there wasn't a -- that's discernible, anyway -- a particular, singular event that drove the decline in revenues at the agency level.

I will reiterate what I said in my prepared remarks, is that we are really more focused on the margins of the agents than we are on the market share of the agents. Our goal is to get to that 50-50 direct/agency mix, and do so in a manner that's more profitable than today. So, obviously agency is a big component of our business, with our focus on smart growth in our direct offices is equally important.

Right, and just to clarify, too. Part of the CFPB compliance is really this additional liability placed on the lender. And I think as we have stated previously, we have been largely vetting our agency network. And I think even we said last quarter that that is largely done. We're obviously holding our agents to much higher standards, but we really have shifted to more of a growth mode.

And so, as Allen stated, I think we aren't seeing all the effects of that; but we do anticipate more of a growth strategy as it relates to all of our business lines going forward in 2015, now that largely things have been restructured either on the direct side, on the agency side, mortgage services, et cetera.

Okay, great. And then my last one. I realize it may be too early to tell, but with the energy prices declining pretty meaningfully over the last couple of quarters -- I'm sorry; the last couple of months, excuse me -- and you guys being a Texas-based operation with a good chunk of your revenue coming from Texas, have you seen any impact yet or slowdown in Texas-based business? And I think The Wall Street Journal had an article on slowdown in commercial offices being built in Houston. Just want to see if you guys have seen any real impact from that yet, and also how you guys adjust for that.

Yes, there is definitely a lot of talk around it. I will say single-family home sales -- I think the last number up 6.1%, and you still have pretty limited supply even here in Houston, which would be the capital of everything that is going on, energy-related.

We are seeing some slowdown in the higher-end market. And I think as we look at -- and Houston has been through this before -- you look at a significant drop in oil prices, and you do see sales start to fall off six months later. So we are cautious of it. We will continue to monitor our order accounts and volumes. You are seeing some new construction slowdown, potentially not closing.

Yet, that being said, there is still significant growth in the market and a lot of -- as Allen mentioned, I believe -- refinance type activity in the commercial space going forward.

And the other side of that is we see uptick in most other places in the country when the consumer has a little bit more money in their pockets. We think it's probably an overall net positive for us in the industry.

Okay, great. Thanks for the color, guys.

Pat Keeley, FBR.

This is actually Steve Stelmach. Can you talk a little bit about the capital management? I know you said that predicated on [re-ascertained] earnings throughout the year. Is that how we should think about buybacks, or a pro rata per quarter is based on the sort of income that you generate? Or is there a bias, so that's sort of front-end loaded or back-end loaded? Any sort of timing aspect that we should be thinking about?

Yes, I think the bias is a more towards being opportunistic, as buying opportunities present us at reasonable price for the stock. We do have some internal targets for share buyback, but we're not rigidly adhering to those targets. We're going to be very, very mindful of market conditions as we go through the buyback period, and also mindful of the impact on our underwriter as we move cash up from it. So, I guess not a strong bias towards a particular number of shares in a particular quarter, but just trying to be more mindful of overall conditions.

Got it, okay. And then, Matt, just on the title -- in the title business, sort of margins going forward -- this is maybe tough question to answer. But we sort of wrestle with the first-time homebuyer going back and the benefits of that in terms of volume and operating leverage on the business model versus what may be is smaller typically sort of policies and probably lower leverage on the policy level. How should we think about operating margins? And to the extent the first-time guys ever come back in any sort of (technical difficulty). Is that accretive, dilutive, net-neutral to you guys?

I think we would definitely say it's accretive. The changes we are making to our structure, and even some of the cost management programs, et cetera -- we think the model -- again, if you followed this story over the last several years, we have centralized a lot of those processes, reduced our costs. But some of those costs are becoming more fixed, and so you are going to be able to put more through the pipeline. And so, growth in the market, growth in the overall mortgage origination, which we see trending over the next several years, should definitely be an incremental improvement to operating margins on the title segment.

Got it. And on the services side, I think you guys said that you are thinking about mid-teens for those acquired assets by third quarter. Now, how does that mid-teens margin compare with your expectations for the legacy business? Is that better than, or in-line with, the legacy business?

Well, it would be consistent with the legacy business. So again, I think we've seen definitely the trough and an uptick in legacy business. Again, if you exclude not only the acquisitions, but even the one-time big contract we talked about, there's still been an uptick in revenue in that business. And I think as we look at the acquisitions, we really are integrating.

Again, we talked about the synergies we have achieved, which we have achieved. But if you look at what we'll be doing over the next six months here, a lot of it is coordinating and rationalizing, automating some of those processes with the traditional business, and leveraging some of those assets in management. And so, we think it will be consistent with our legacy business there.

Great. All right. Thanks, guys.

At this time, I would like to our call back over to Matt Morris for closing remarks.

Thank you. Again, I appreciate everyone joining us this morning. 2014 was a very active year for us, as we completed year three of our five-year strategic plan. We saw significant progress with cost management, with acquisitions, with office closures and office openings, our share repurchase program, agency vetting, balance sheet strengthening, and commercial growth, all of which are transforming our Company to improve margins, reduce risks, and manage the cycles we see in our industry.

We will maintain that focus in 2015 while accelerating our efforts towards completion of the remaining elements of our plan. While we are encouraged by the success so far of our cost management efforts, we recognize that cost management is not a one-time program, but a continuous effort. We do believe that the investments we're making today are laying the groundwork for new cost efficiencies, well beyond the specific program of today.

We're also encouraged by the progress made in the transformation of our mortgage services segment, while acknowledging that progress has been somewhat slower and more uneven than expected. Mortgage services is a critical component of our strategic plan, and we are confident will bring significant and sustainable revenue to Stewart.

On a final note, we remain mindful of ever-changing industry conditions. While we are seeing positive signs going into 2015, we are mindful of general economic volatility.

In addition, as we discussed in the questions, 2015 will bring the most significant changes in the industry's history with the implementation of the new CFPB regulations. These regulations, which go into effect August 2015, are not only adding some regulatory costs and one-time implementation expenses this year, but they also have the potential to cause temporary operational delays across the industry later in 2015.

And we're very focused on minimizing the impact of any disruptions and leveraging the pending changes to actually gain market share, while rethinking new processes to increase efficiencies and the model for our customers. Given these expected market conditions, we believe dedication to our strategic plan and CFPB mortgage rule implementation is imperative to 2015, and its successful execution will ensure the offerings and financial stability our customers expect and the financial reward our shareholders expect.

We appreciate your time today. Thank you very much.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time, and have a wonderful (technical difficulty).