Q1 2024 First American Financial Corporation Earnings Call
[music].
Operator: Greetings and welcome to the First American Financial Corp. first quarter. At this time, opportunities are limited.
Greetings and welcome to the first American Financial Corporation first quarter earnings Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad, a copy of todays press release.
Operator: The brief question and answer session will follow the presentation. If anyone should require operator assistance during the conference, please press star zero. A copy of today's press release is available on First American's website at 1stam.com forward slash. Please note that this call is being recorded and will be available by dialing 877-660-6855 and entering the conference ID 1-374-5333. We will now turn the call over to Craig Barberio, Vice President. Thank you, operator. Good morning, everyone, and welcome to First American's earnings conference call for the first quarter of 2024.
Craig Barberio: It's available on first American's website at Www Dot first day, I'm dotcom forward Slash investor.
Operator: Note that this call is being recorded and will be available for replay from the Companys investor website and for a short time by dialing 8776606853, or 200 161 to 7415 and enter the conference I'd 137458.
Speaker Change: One five.
Operator: And we will now turn the call over to Craig Barberio, Vice President Investor Relations to make an introductory statement.
Speaker Change: Thank you operator, good morning, everyone and welcome to first American's earnings conference call for the first quarter of 2020 for.
Operator: Joining us today on the call will be our Chief Executive Officer, Ken DeGiorgio, and Mark Seaton, Executive Vice President and Chief Financial Officer. Some of the statements made today may contain forward-looking statements that do not relate strictly to historical or current events. The following four looking statements speak only as of the date they are made, and the company does not undertake to update them to reflect circumstances or events after the date on which they are made.
Craig Barberio: Joining us today on the call will be our Chief Executive Officer, Ken to Georgetown and Mark Seaton Executive Vice President and Chief Financial Officer.
Operator: Some of the statements made today may contain forward looking statements that do not relate strictly to historical or current facts.
Operator: These forward looking statements speak only as of the date. They are made and the company does not undertake to update forward looking statements to reflect circumstances or events that occur. After the date the Florida looking statements are made.
Craig Barberio: Risk and uncertainties exist that may cause results to differ materially from those set forth in these four sections. For more information on these risks and uncertainties, please refer to yesterday's Earnings, Form 10-K, and subsequent S.C. Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the current financial year. For more details on these non-GAAP financial... (inaudible) and Reconciliation II, the most directly comparable gap, please refer to yesterday's, which is available on our website. I will now turn the call over to Kenneth DeGiorgio. Thank you, Craig.
Operator: Risks and uncertainties exist that may cause results to differ materially from those set forth in these forward looking statements.
Kenneth David DeGiorgio: For more information on these risks and uncertainties. Please refer to yesterday's earnings release and the risk factors discussed on our Form 10-K, and subsequent SEC filings.
Kenneth David DeGiorgio: Our presentation today contains certain non-GAAP financial measures that we believe provide additional insight into the operational efficiency and performance of the company relative to earlier periods and relative to the company's competitors for more details on these non-GAAP financial measures, including presentation with and reconciliation to the most.
Kenneth David DeGiorgio: The comparable GAAP financials. Please refer to yesterday's earnings release, which is available on our website at www Dot first a M dot com dot com excuse me I will now turn the call over to Kenzie, Georgia.
Kenneth David DeGiorgio: Thank you Craig.
Kenneth David DeGiorgio: Market conditions in the real estate and mortgage industries continue to be a challenge in the seasonally weak first quarter. Elevated mortgage rates and low, albeit growing, inventory levels have caused transaction volumes to remain near historically low levels. During this period, we've maintained our focus on managing operating expenses while continuing to invest in long-term strategic initiatives, such as expanding our title plant assets and building technology solutions to increase efficiency, reduce risk, and enhance our customers' experience. Although our financial results this quarter were a function of the tough mortgage origination market, we have recently started to see signs of a measured recovery. In March, our open resale orders per day were up 5%.
Kenneth David DeGiorgio: Market conditions in the real estate and mortgage industries continued to be a challenge in the seasonally weak first quarter.
Kenneth David DeGiorgio: Elevated mortgage rates and low, albeit growing inventory levels have caused transaction volumes to remain near historically low levels.
Kenneth David DeGiorgio: During this period, we've maintained our focus on managing operating expenses.
Kenneth David DeGiorgio: While continuing to invest in long term strategic initiatives, such as expanding our title plant assets and building technology solutions to increase efficiency reduce risk and enhance our customers experience.
Kenneth David DeGiorgio: Although our financial results this quarter were a function of the tough mortgage origination market. We have recently started to see signs of a measured recovery.
Kenneth David DeGiorgio: In March our open resale orders per day were up 5% and that positive trend has continued so far in April with open resale orders up 2%.
Kenneth David DeGiorgio: And that positive trend has continued so far in April with open resale orders up 2%. Growth in our resale orders so far this year is the first positive change we've seen in this key market since June of 2021. We are also seeing improvement in our commercial business, with open orders up 1% in the first quarter, and we have seen further growth in April, with open orders up 5%. Our Home Warranty Segment had another strong quarter, delivering a pre-tax margin of 19%, and is positioned well for future growth.
Kenneth David DeGiorgio: Growth in our resale orders so far this year.
Kenneth David DeGiorgio: The first positive change we've seen in this key market since June of 2021.
Kenneth David DeGiorgio: We are also seeing improvement in our commercial business with open orders up 1% in the first quarter and we have seen further growth in April with open orders up 5%.
Kenneth David DeGiorgio: Our home warranty segment had another strong quarter, delivering a pretax margin of 19% and is positioned well for future growth.
Kenneth David DeGiorgio: On our last earnings call, we stated that we expect modest revenue growth this year and that we can achieve title margins similar to what we posted in 2023. After closing the books on the first quarter and looking at the order pipeline in April, our expectations remain unchanged.
Kenneth David DeGiorgio: On our last earnings call. We stated that we expect modest revenue growth this year and that we can achieve title margins similar to what we posted in 2023.
Kenneth David DeGiorgio: After closing the books on the first quarter and looking at the order pipeline in April our expectations remain unchanged.
Kenneth David DeGiorgio: I'd like to take a moment to address the recent attention our industry has received from Washington, D.C. This attention is the product of a broader effort, an effort which all of us at First American wholeheartedly support to make the purchase of a home more affordable. The focus on our industry as part of this effort reveals, however, that as an industry, we need to do a better job educating policymakers and other stakeholders about the critical role title insurance plays in protecting people's investments in their homes, which are the primary vehicle for wealth creation for a majority of Americans.
Kenneth David DeGiorgio: I'd like to take a moment to address the recent attention our industry has received from Washington D. C. This.
Kenneth David DeGiorgio: This attention is the product of a broader effort.
Kenneth David DeGiorgio: An effort, which all of us at first American wholeheartedly support to make the purchase of a home more affordable.
Kenneth David DeGiorgio: The focus on our industry as part of this effort reveals however that as an industry, we need to do a better job educating policymakers and other stakeholders about the critical role title insurance plays in protecting People's investments in their homes, which are the primary vehicle for wealth creation for a majority of Americans.
Kenneth David DeGiorgio: This role includes not only paying claims when they arise but also the extensive work we do to correct title defects before the transaction closes, the cost of which is not reflected in our industry's claims rate. This important curative work protects consumers and lenders, among others, from hundreds of billions of dollars of title risk exposure per year. Moreover, title and settlement fees are among the smallest cost components over the life of a mortgage and, as a result, are not a barrier to home ownership.
Kenneth David DeGiorgio: This role includes not only paying claims when they arise but also the extensive work we do to correct that title defects before the transaction closes the cost of which is not reflected in our industries claims rate.
Kenneth David DeGiorgio: This important curative worth protects consumers and lenders among others from hundreds of billions of dollars of title risk exposure per year.
Kenneth David DeGiorgio: Moreover, title and settlement fees are among the smallest cost components over the life of the mortgage and as a result are not a barrier to homeownership.
Kenneth David DeGiorgio: The discussions in Washington are still in early stages, and we believe that ultimately our industry will be successful in reaffirming the value of title insurance to policy makers. But irrespective, we are uniquely positioned to meet the demands of an evolving market, because of our growing leadership in tidal data, which is fueled by our proprietary data extraction technology, our National Clothing Platform and Deep Distribution Relationships, our extensive underwriting expertise, our commitment to and continued investment in cutting-edge technology such as Endpoint, our digital settlement platform, and automated underwriting for purchase transactions, and most importantly, our world-class workforce and culture, which recently resulted in our recognition as one of the 100 best companies to work for by Great Place to Work and Fortune Magazine for the ninth consecutive year.
Kenneth David DeGiorgio: The discussions in Washington are still in early stages, and we believe that ultimately our industry will be successful in reaffirming the value of title insurance to policymakers.
Kenneth David DeGiorgio: But irrespective we are uniquely positioned to meet the demands of an evolving market because of our growing leadership entitled data, which is fueled by our proprietary data extraction technology.
Kenneth David DeGiorgio: Our national closing, Pat platform and deep distribution relationships.
Kenneth David DeGiorgio: Our extensive underwriting expertise.
Kenneth David DeGiorgio: Our commitment to and continued investment in cutting edge technology, such as endpoint or digital settlement platform and automated underwriting for purchase transactions and most importantly, our world class workforce and culture, which recently resulted in our recognition as one of the hundred best.
Kenneth David DeGiorgio: Companies to work for by Great place to work in Fortune magazine for the ninth consecutive year.
Kenneth David DeGiorgio: Though we are the leader in the digital transformation of our industry, fundamentally, we are a people business. And it is the quality, talent, and dedication of our people that ensure our company's long-term success. Now, I'd like to turn the call over to Mark for a more detailed discussion of our financial results. Thank you, Ken.
Kenneth David DeGiorgio: So we are the leader in the digital transformation of our industry fundamentally we are a people business and it is the quality talent and dedication of our people that ensure our company's long term success.
Kenneth David DeGiorgio: Now I'd like to turn the call over to Mark for a more detailed discussion of our financial results.
Mark: Thank you Ken.
Mark Edward Seaton: This quarter we generated earnings of 45 cents per diluted share, adjusted to earnings per share, which excludes the impact of net investment gains and purchase-related amortization, was the same as our GAAP earnings at $0.45 per share, as $0.07 of realized gains were offset by $0.07 of purchase-related amortization. According to our title segment, revenue was $1.3 billion, down 2% compared with the same quarter of 2023. Purchase revenue was up 2% during the quarter, driven by a 2% increase in average revenue per order.
Mark: This quarter, we generated earnings of <unk> 45 cents per diluted share.
Mark Edward Seaton: Our adjusted earnings per share, which excludes the impact of net investment gains and purchase related amortization was the same as our GAAP earnings at 45 cents per share as seven cents of realized gains were offset by seven since our purchase related amortization.
Mark Edward Seaton: Turning to our title segment revenue was $1 3 billion down 2% compared with the same quarter of 2023.
Mark Edward Seaton: Purchase revenue was up 2% during the quarter driven by a 2% increase in the average revenue per order.
Mark Edward Seaton: Commercial revenue was $143 million, a 4% decline over last year. Though our closed commercial orders fell 4%, the average revenue per order for commercial transactions increased. Refinance revenue declined 13% relative to last year. With mortgage rates hovering around 7%, they are still at levels materially above what is needed to generate a significant rise in refinancing. In the agency business, revenue was $564 million, down 5% from last year.
Mark Edward Seaton: Commercial revenue was $143 million, a 4% decline over last year.
Mark Edward Seaton: So we're in closed commercial orders fell 4% the average revenue per order for commercial transactions increased 1%.
Mark Edward Seaton: Refinance revenue declined 13% relative to last year.
Mark Edward Seaton: With mortgage rates hovering around 7%, they're still at levels material about materially above what is needed to generate a significant rise in refinance activity.
Mark Edward Seaton: And the agency business revenue was $564 million down 5% from last year, given the reporting lag in Egypt revenues of approximately one quarter. These results primarily reflect remittances related to Q4 economic activity.
Mark Edward Seaton: Given the reporting lag and agent revenues of approximately one quarter, these results primarily reflect remittances related to Q4 economic activity. Our information and other revenues were $217 million, down 2% relative to last year. This decline was primarily due to an increase in the capture rate of title premiums from an affiliated titling company, which caused a decline in information and other revenue and a comparable increase in direct premium and escrow. Investment income within the title insurance and services segment was $117 million, down $8 million relative to the prior year due to lower average interest-bearing balances in the company's escrow and tax deferred property exchange business that were partly offset by higher interest income from the company's warehouse lending business.
Mark Edward Seaton: Our information and other revenues were $217 million down 2% relative to last year.
Mark Edward Seaton: This decline was primarily due to an increase in the capture rate of title premiums from an affiliate entitled lesion, which caused the decline in information and other revenue and a comparable increase to direct premium and escrow fees.
Mark Edward Seaton: Investment income within the title insurance and services segment was $117 million down 8 million relative to the prior year due to lower average interest bearing balances in the company's escrow and tax deferred property exchange business that were partly offset by higher interest income from the company's warehouse lending business.
Mark Edward Seaton: The provision for policy losses and other claims was $29 million in the first quarter, or 3.0% of title premiums and has, down from the 3.5% loss provision rate in the prior year. The 3.0% loss rate reflects an ultimate loss rate of 3.75% for the current year, with a $7 million release from the prior policy. Over the last several quarters, we have highlighted the margin drag in the title segment related to both endpoint and instant decisioning for purchase transactions.
Mark Edward Seaton: The provision for policy losses, and other claims was 29 million in the first quarter or 3.0% of title premiums and escrow fees down from the three 5% loss provision rate in the prior year.
Mark Edward Seaton: The 3.0% loss rate reflects an ultimate loss rate of 375% for the current year was $7 million release from prior policy years.
Mark Edward Seaton: Over the last several quarters, we have highlighted the margin drag in the title segment related to both endpoint and instant decisioning for purchase transactions.
Mark Edward Seaton: Together, these two strategic initiatives reduced our pre-tax margin in the title segment by 150 basis points. Pre-tax margin in the title segment was 5.5% or 4.8% on an adjusted basis. These margins reflect a $6.2 million write-off of uncollectible balances, impacting the margins by 50%. Total revenue in our home warranty business totaled $105 million, a 1% increase compared with last year. Pre-tax Income and Home Warranty was $20 million, up 28% from the prior year.
Mark Edward Seaton: Together these two strategic initiatives reduced our pre tax margin in the title segment by 150 basis points this quarter.
Mark Edward Seaton: Pre tax margin in the title segment was five 5% or four 8% on adjusted basis.
Mark Edward Seaton: These margins reflect a $6 $2 million write off of uncollectible balances impacting the margins by 50 basis points.
Mark Edward Seaton: Total revenue at our home warranty business totaled 105, million% to 1% increase compared with last year.
Mark Edward Seaton: Pretax income and home warranty was 20 minutes up 28% from the prior year.
Mark Edward Seaton: The loss ratio at home warranty was 42%, down from 47% in 2023, driven by lower frequency and severity of claims. Adjusted pre-tax margin in the home warranty segment was 18.8%, up from 15.2% in 2023. The effective tax rate for the quarter was 19.9%, lower than our normalized rate of 24%, due primarily to research and development tax credits recognized during the quarter.
Mark Edward Seaton: The loss ratio and home warranty was 42% down from 47% in 2023, driven by lower frequency and severity of claims.
Mark Edward Seaton: Adjusted pre tax margin in the home warranty segment was 18, 8% up from 15, 2% in 2023.
Mark Edward Seaton: The effective tax rate for the quarter was 19.9% lower than our normalized rate of 24% due primarily to research and development tax credits recognized during the quarter.
Mark Edward Seaton: In the first quarter, we repurchased 58,600 shares for a total of $3.5 million at an average price of $59.37. Our debt-to-capital ratio as of March 31st was 30.3%. Excluding secured financings payable, our debt-to-capital ratio was 22.5%. Now, I would like to turn the call back over to the operator to take your questions. Thank you. We will now be conducting a question. I would like to ask you a question. Press 1 on your telephone keypad. A confirmation tone will indicate that your line is in the queue. You may press Star 2.
Mark Edward Seaton: In the first quarter, we repurchased 58600 shares for a total of three and a half million dollars at an average price of $59.37 are.
Mark Edward Seaton: Our debt to capital ratio as of March 31 was 33% excluding secured financings payable our debt to capital ratio was 22, 5% now I would like to turn the call back over to the operator to take your questions.
Mark Edward Seaton: Yes.
Mark Edward Seaton: Thank you we will now be conducting a question and answer session.
Mark Edward Seaton: Like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue.
Mark Edward Seaton: Press Star two if you'd like to remove a question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star.
Operator: One moment, please, while we poll for any questions. And the first question comes from the line of Bose George. Hey, everyone. Good morning.
Mark Edward Seaton: One moment, please poll for any questions.
Operator: Yes.
Operator: And the first question comes from the line of Bose George with <unk>. Please.
Bose Thomas George: Please proceed with your question.
Bose Thomas George: Hey, everyone. Good morning. Thanks, I wanted to first ask just about investment income Mark you noted the reduction year over year with lower escrow and I think a 10 31 balances can you just dig into some of the drivers of that.
Bose Thomas George: I wanted to first ask just about investment income. Mark, you noted that the reduction year over year was on lower escrow and, I think, on 1031 balances. Can you just dig into some of the drivers of that? Thanks for both.
Mark: Sure Bose.
Mark Edward Seaton: So one of the things we've seen here as interest rates have risen is that more of our customers are electing to earn interest on their escrow deposits. We have two, I'm simplifying here, but we have two basic types of deposits: savings deposits and checking deposits. And more of our customers are electing for savings deposits. And in itself, that shouldn't really have an impact on our investment income because one of the advantages that we have is we can monetize savings deposits when a lot of our peers can't because of our bank.
Bose Thomas George: So one of the things we've we've seen here as interest rates have risen is that more of our customers are electing to earn interest on their escrow deposits. We have to simplifying here, but we have two basic types of deposits savings deposits and checking deposits and more of our customers are electing for savings deposits.
Mark Edward Seaton: And in itself that shouldn't really have a an impact on our investment income because one of the advantages that we have is we can monetize savings deposits when a lot of our peers can't because of our bank, but the second dynamic that's happening. In addition to the shift of savings deposits is it more of those savings deposits are going to third party banks.
Mark Edward Seaton: But the second dynamic that's happening, in addition to the shift to savings deposits, is that more of those savings deposits are going to third-party banks as opposed to our own bank, First American Trust. A lot of it is related to economic reasons because, you know, third-party banks will pay a higher interest rate than First American Trust. And so if we have a higher mix of our deposits at third-party banks, we can't earn interest on those.
Mark Edward Seaton: As opposed to our own bank first American Trust a lot of it is related to economic reasons, because you know third party banks will pay a higher rate than first American trust and so if we have a higher mix of our our deposits at third party banks.
Mark Edward Seaton: We we can't earn interest Domino. So when you look at the total mix of deposits that we don't earn interest on today, it's 30% a year ago was 18%. So that's that mix shift is a has been a little bit of a headwind for us for them and for investment income and then the second factor of course is just the 10 31 businesses our volumes of our are lower today.
Mark Edward Seaton: If you look at the total mix of deposits that we don't earn interest on today, it's 30 percent. A year ago, it was 18 percent. So that mix shift has been a little bit of a headwind for us in terms of investment income. And then, of course, the second factor is just that the 1031 businesses' volumes are lower today than they were a year ago. Okay, yeah, great. That's helpful. And just to be clear, are it the commercial customers who have the ability to, you know, kind of direct that escrow versus the residential, or how does that work? Everybody has the ability to do it, whether you're a consumer or a large commercial client. You have the ability to request a savings account, but typically, commercial customers are the ones that really drive that trend.
Speaker Change: A year ago.
Speaker Change: Okay, Great. That's helpful and just to be clear is it the commercial customers who have the ability to you know.
Speaker Change: It kind of direct that escrow versus the residential or how does that work.
Mark Edward Seaton: Everybody has the ability to do it whether you're a consumer or a large commercial client you have the ability to request a savings account, but typically commercial commercial customers are the ones that really drive that trend.
Mark Edward Seaton: Okay, great. And then just in terms of sort of expectations for that investment income line item for the remainder of the year, can you just talk about that? Yeah, sure. So, um... When we look out the next couple quarters, we think our investment income in the title segment will be somewhere between $120 and $125 million per quarter. We'll probably be at the higher end of that range in Q2 and a little bit lower as the year goes on in that range. And that assumes a couple of things.
Speaker Change: Great and then just in terms of.
Mark Edward Seaton: What are the expectations for that investment income line item for the remainder of the air can you just talk about that.
Speaker Change: Yeah sure so.
Mark Edward Seaton: You know when we look out the next couple of quarters.
Mark Edward Seaton: We think our investment income in our title segment will be somewhere between 120 and $125 million per quarter will probably be at the higher end of that range in Q2, and a little bit lower as the year goes on and in that range and that assumes a couple of things. One is just the normal seasonality of the business typically Q1s.
Mark Edward Seaton: One, just the normal seasonality of the business. Typically, Q1's kind of the low point in terms of investment income, just because escrow balances are lower there. The second thing is we talked about these home point balances, and we expect the home point balances to stay somewhere around Q2. So that assumes that home point balances will leave. That's going to be about $20 million of annualized investment income. And by the way, it's also going to be about $20 million of annualized interest expense. So it sort of washes out on a net basis.
Mark Edward Seaton: That's kind of a low point in terms of investment income just because of escrow balances are lower there.
Mark Edward Seaton: The second thing is we have are there we know we've talked about these home point balances and we expect our the whole point balances that leaves you know somewhere around Q2. So that assumes did home point balances will leave that's going to be about $20 million of oven of annualized investment income and by the way it is.
Mark Edward Seaton: Also going to be about $20 million of annualized interest expense. So it's sort of washes on a net basis, but if you're just looking at our investment income.
Mark Edward Seaton: But if you're just looking at our investment income, it'll go down about $5 million a quarter once we lose those balances. And the third thing it assumes is just, you know, two Fed rate cuts. Now, I know I was looking at it this morning, and Mark is assuming one Fed rate cut, but we had two Fed rate cuts at the end of the year. So when you mix that all together, we think we should be somewhere between 120 and 125 per quarter in the title segment. OK, great. Thank you. Thank you both.
Mark Edward Seaton: Go down about 5 million a quarter once we move those balances and the third thing. It assumes is just oh.
Mark Edward Seaton: Two fed rate cuts.
Mark Edward Seaton: No I was looking at this morning, and as markets, assuming one fed rate cut, but we had two fed rate cuts at the end of year. So when you mix that all together, we think we should be somewhere between $1 20, and 125 per quarter in the title segment.
Speaker Change: Okay, great. Thank you.
Speaker Change: Thanks Ross.
Terry Ma: And the next question comes from the line of Terry Ma with Barclays. Hey, thanks. Good morning.
Mark Edward Seaton: And the next question comes from the line of Terry MA with Barclays. Please proceed with your question.
Terry Ma: Hey, Thanks. Good morning can you maybe just speak at a high level about your confidence level in achieving the revenue growth and margin guide, it's a pretty uncertain macro and interest rate outlook.
Kenneth David DeGiorgio: Can you maybe just speak at a high level about your confidence level in achieving the Revenue Growth and Margin Guide? It's a pretty uncertain macro and interest rate outlook. Yeah, Terry, thanks for it. Thanks for the question. This is Ken.
Kenneth David DeGiorgio: Yeah, Terry Thanks for thanks for the question. This is Ken Yeah, I mean listen we think that you know that the challenging conditions will persist for the year.
Kenneth David DeGiorgio: Yeah, I mean, listen, we think that, you know, the challenging conditions will persist for the year, though we think, you know, 2024 will be slightly, slightly better. And I think we have a high degree of confidence in that. But again, I want to emphasize that it's slightly better.
Kenneth David DeGiorgio: And we think you know 2024 will be slightly slightly better and I think we have a high degree of confidence in that but again I want to emphasize it's slightly better and we look at things like the commercial business, while it was weak in the first quarter.
Kenneth David DeGiorgio: And we look at things like, you know, the commercial business, which was, you know, weak in the first quarter. You know, we're seeing open orders, as we mentioned, up 1% in the quarter, up 5% in April so far. You know, in the commercial business, our ARPA, while it had the typical seasonal decline, was up 1% over the prior year, which suggests that, you know, maybe the price discovery has concluded or is at least well along the way.
Kenneth David DeGiorgio: You know, we're seeing open orders as we mentioned up 1% in the quarter up 5% in April so far.
Kenneth David DeGiorgio: You know in our commercial business, our ARPA, while it had the typical seasonal decline that is up 1% over the prior year, which suggests that you know maybe the price discovery has has concluded or is at least well along the way and I. You know I noted that there was an article in the Wall Street Journal earlier. This week about you know black.
Kenneth David DeGiorgio: And I noted that there was an article in the Wall Street Journal earlier this week about Blackstone thinks that commercial real estate has hit bottom, and obviously they have their finger on the pulse of the commercial real estate market.
Kenneth David DeGiorgio: Stone thinks that that commercial real estate has hit bottom and obviously they have their finger on the pulse of the commercial real estate market. So that gives us some confidence on the on the on the purchase more on the commercial market you know on the purchase market. Yeah affordability will continue to be a challenge with mortgage rates prices you know low supply.
Kenneth David DeGiorgio: So that gives us some confidence in the commercial market. You know, on the purchase market, affordability will continue to be a challenge with mortgage rates, prices, you know, and low supply. But, you know, we are seeing some, you know, some green shoots there, with, as I had mentioned, open resale orders up 5% in March and 2% so far in April. So, again, we're pretty confident that 2024 will be better than 23, but it isn't going to be meaningfully better. I got it.
Kenneth David DeGiorgio: But you know we are seeing some you know some green shoots there was you know as I had mentioned open resale orders up 5% in March and 2%. So far in April. So again, we're pretty confident that it'll the 'twenty 'twenty four it'll be better than 'twenty three but it is.
Kenneth David DeGiorgio: I'm gonna be meaningfully better.
Kenneth David DeGiorgio: That's helpful, Culler. And then my second question, just on the margin drag from endpoint and instant decision, I think you said it was 150 basis points this quarter. I think you guys quoted 130 last quarter.
Speaker Change: Got it that's helpful color and then my second question just on the margin drag from en Pointe. An instance decision I think you said it was 160 basis points this quarter.
Speaker Change: You guys quoted 130 last quarter, so what drove the delta and how should we think about that drag kind of evolving throughout the throughout the rest of the year.
Kenneth David DeGiorgio: So what drove the delta? And how should we think about that drag kind of evolving throughout the rest of the year? Really what drilled the drag was, you know, we had a little bit less revenue at end point and a little bit more expenses at both end point and kind of our, you know, instant decisioning for purchase transactions. We're making a lot of progress with both. The drag should be less going forward just because, you know, Q1 is typically the lowest revenue.
Kenneth David DeGiorgio: Oh really what drove that the drag was we had a little bit less revenue with endpoint and a little bit more expenses at both endpoint and in our kind of our instant decisioning for purchase transactions, we're making a lot of progress with both would the drag should be less going forward just because of you.
Kenneth David DeGiorgio: Q1, typically the lowest revenue and so just the fact that you know our revenue at the title segment is going to improve from here on out that that's just just because of the math is going to reduce the drag from from here on out.
Kenneth David DeGiorgio: So just the fact that, you know, our revenue at the title segment is going to improve from here on out is just because the math is going to reduce the drag from here on out.
Speaker Change: Got it that makes sense. Thank you.
Kenneth David DeGiorgio: That makes sense. Thank you. Thank you. And the next question comes from the line of Soham Bhonsle with BTIG. Hey, good morning, guys. Hope you're all doing well.
Speaker Change: Thanks Jerry.
Kenneth David DeGiorgio: Yeah.
Soham Jairaj Bhonsle: And the next question comes from the line of so harm bonds with BTG. Please proceed with your question.
Soham Jairaj Bhonsle: Hey, good morning, guys hope, you're all doing well Mark I, just wanted to dig a little bit on the margin guide if.
Soham Jairaj Bhonsle: Mark, I just want to dig a little bit into the margin guide. So, you know, if I sort of take what you're implying, right, sort of flattish margins for this year, that would imply, you know, margins for every quarter sort of going forward are just, I guess, higher from last year to hit that double-digit margin. So can you just walk us through some of the moving parts? I think you just mentioned some of the drag stuff.
Soham Jairaj Bhonsle: If I sort of take what youre, implying right sort of flattish margins for this year.
Soham Jairaj Bhonsle: Would imply you know margins for every quarter sort of going forward or just I guess higher from last year to hit that double digit margin. So can you just walk us through some of that some of the moving parts. I think you. Just mentioned you know some of the drag stuff, but like can you just a little bit more detail there would be helpful.
Mark Edward Seaton: But like, can you give me just a little bit more detail on that? Would that be helpful? Yes, sure. So with our margin outlook, there are a few things going on. I mean, just to reiterate, I mean, we think that the margins will be comparable to last year. It's still early in the year.
Mark Edward Seaton: Yeah.
Mark Edward Seaton: Oh, Yeah sure so just with our margin outlook.
Mark Edward Seaton: Oh look theres, a few things going on I mean, just to just to reiterate I mean, we think that the margins will be comparable to last year.
Mark Edward Seaton: It's still early in the year, there's still a lot of things that are that are moving around you know on the positive side. You know we've got we're off the bottom now and we were just talking about is we've got open orders up and that's going to bode well for later in the year. So we finally feel like after two years of having negative growth.
Mark Edward Seaton: There's still a lot of things that are moving around, you know, on the positive side, we've got, we're off the bottom now, we just talked about this, we've got open orders up, and that's going to bode well for later in the year. So we finally feel like after two years of, you know, having, you know, negative growth, we're bumping up off the bottom, and we're going to expect growth in our core businesses of purchasing commercial real estate. We've got tailwinds with respect to the loss rate. We've got tailwinds with respect to a lot of the cost-cutting efforts we did last year. And then we've got headwinds.
Mark Edward Seaton: We're bumping up off the bottom and we're going to expect growth in our core businesses are purchasing commercial we've got tailwind with respect to the loss rate. We've got tail wins with respect to a lot of the cost cutting efforts, we did last year.
Mark Edward Seaton: And then we got headwinds we've got we're going to have about 20 million more of depreciation this year because of some of that.
Mark Edward Seaton: We're going to have about $20 million more in depreciation this year because of some of the capital expenditures we've made in the past. And some of these projects are going live, so that's going to be a headwind. And some of our benefits and 401k matches and things like that kind of get reset.
Mark Edward Seaton: Capital expenditures, we've made in the past in some of these projects are going live so that's going to be a headwind.
Mark Edward Seaton: Some of our benefits and four one K matches and things like that kind of get reset and then we just talked about earlier on the call. How we have some headwinds for investment income.
Mark Edward Seaton: And then we just talked about earlier on the call how we have some headwinds for investment. So, I think that for the second quarter, it's going to be tough to beat where we were a year ago, but we expect that the margins, you know, in the second half of the year will be kind of better than we had last year. And when you mix that all together, we should be in line.
Mark Edward Seaton: So I think that for the you know I think the second quarter is going to be tough to beat where we were a year ago, but we expect that the margins second half of the year will be kind of better than we had last year and when you mix that all together, we should be in line with last year.
Mark Edward Seaton: Okay, got it. And then just on investment income, you know, so you sort of noted, you know, non interest-bearing deposits may be moving out of FAA-trusted third-party banks. Should we, I guess, in the guy that you gave the 120, I believe, are you sort of baking in, you know, a continuation of that? Or, you know, do you sort of see more normalization there after this quarter? Um, yeah, thanks for that.
Speaker Change: Okay got it and then just on investment income.
Mark Edward Seaton: Everyone noted noninterest bearing deposits me moving out of as a trusted third party banks should we I guess, even the guy that you gave the 100 and Wednesday I believe are you sort of baking in you know.
Mark Edward Seaton: Continuation of that or you know do you sort of see more normalization there after this quarter.
Speaker Change: Yeah. Thanks for that first of all other interest bearing accounts are going to use third parties, just I just want to correct that and.
Mark Edward Seaton: First of all, they're interest-bearing accounts, they're going to these third parties. Just, I just want to correct that, and in our, in our, in our guide here, we don't assume that the 30% mix stays the same. So that's a risk.
Mark Edward Seaton: And in our in our in our guide here, we don't we assume that 3% mix stayed the same.
Mark Edward Seaton: So that's a risk I mean, it's a 3% keeps climbing I mean, that's going to be a risk to our 121 21 25 million guide, but we also are kind of in the very early stages of coming up with plans to kind of reverse that trend by paying more at the bank. So I think you know the assuming a 3% mix with third parties is a reasonable.
Operator: I mean, if the 30% keeps climbing, that's going to be a risk to our $120 to $125 million guide. But we are also in the very early stages of coming up with plans to kind of reverse that trend by paying more at the bank. So I think, you know, assuming a 30% mix of third parties is a reasonable assumption, but it could go, you know; it could go higher or lower depending on what happens.
Operator: Function, but it could go you know it could go higher and lower depending on what happens in the market.
Speaker Change: Okay. Thanks, guys.
Operator: Okay, thanks guys. Thank you. As a reminder, if you would like to ask a question, please press star 1. Confirmation. You may press star two to remove a question from the queue. For participants using speaker equipment.
Speaker Change: Thank you.
Speaker Change: Thank you as a reminder, if you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two term have a question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Operator: Our next question comes from the line of Mark. Yeah, thank you. Good morning.
Operator: Our next question comes from the line of Mark Hughes with Jewish Securities. Please proceed with your question.
Mark: Yeah. Thank you good morning.
Mark: Good morning, Eddie.
Mark: Any more detail you can discuss on potential regulatory changes if buyers are not required to purchase title insurance, but it's bundled in with the mortgage? How do you view that as a competitive evolution in the business? Yeah, and I assume you're talking about, Mark, the CFPB, you know, the request for information for prohibiting lenders from passing through the cost of title. I mean, this has been, you know, this was tried before by HUD, and it didn't get off the ground.
Mark: More detail you can.
Mark: Scott on the potential regulatory changes if.
Mark: Buyers are not.
Mark: Yeah.
Mark: Required to purchase the title insurance, but it's bundled in with the mortgage how do you view that as they are competitive evolution in the business.
Speaker Change: Yeah, I mean, I assume you're talking about Martha CFPB.
Mark: Request for information for prohibiting lenders from passing through the cost of title.
Mark: This is Ben you know try this was tried before by HUD in it and it didn't it didn't get off the ground.
Kenneth David DeGiorgio: You know, and I think probably a big reason for that, and I think it'll be a big reason for why it probably won't get off the ground this time around either, is the lack of transparency. So, you know, I think policymakers prefer that the borrowers know exactly what they're paying for, because ultimately, borrowers will still pay for lenders' title insurance policies. It'll just be wrapped up into the interest rate or loan level price adjustments or what have you.
Mark: You know what I think probably a big reason for that and I think it'll be a big reason for why it probably wont get off the ground. This this time around either it's the lack of transparency.
Kenneth David DeGiorgio: So.
Kenneth David DeGiorgio: I think policymakers prefer that the borrowers know exactly what they're paying for because ultimately borrowers will still pay for lenders title insurance policy that it'll just be wrapped up into the interest rate or loan level price adjustments or what have you. So I don't think ultimately it will take off but if it does you know I think you know that the value prop.
Kenneth David DeGiorgio: So I don't think, ultimately, it'll take off, but if it does, I think, you know, the value proposition of title insurance to lenders is well established, and I, you know, I think, again, we have to keep a close eye on developments, but I don't think it'll ultimately have a significant impact on the lender side of our title insurance business or the industry, for that matter. Thank you for that.
Kenneth David DeGiorgio: Position of title insurance to lenders as is well established and I.
Kenneth David DeGiorgio: I think again, we have to keep a close eye on developments, but I don't think it will ultimately have a significant impact on on you know on the lender side of our of our title insurance business or the industry for that matter.
Kenneth David DeGiorgio: Yeah.
Speaker Change: Thank you for that the commercial our Po.
Kenneth David DeGiorgio: The commercial RPO, you suggested that was a, and the indication of price discovery is progressing. Is there a mixed shift to part of that? Bigger deals started happening. Because of price discovery, is that the idea? Yeah, the bigger deals are always, you know, a component that we look at. We had... for what we call mega deals with a premium over a million in the most recent quarter. So that always has an effect on the commercial ARPO.
Kenneth David DeGiorgio: Suggested that was up.
Kenneth David DeGiorgio: An indication of the price discovery is the <unk>.
Kenneth David DeGiorgio: Progressing.
Kenneth David DeGiorgio: Was there.
Kenneth David DeGiorgio: Mix shift part of that bigger deals started happening.
Kenneth David DeGiorgio: Because of the price discovery is that.
Kenneth David DeGiorgio: The idea.
Kenneth David DeGiorgio: Yes, the bigger deals are always a component that we look at you know we had.
Kenneth David DeGiorgio: For what we call Mega deals with premium over a million dollars and are in the most recent quarter. So that always has an effect on on the commercial ARPA, but as a general statement, we think that you know.
Kenneth David DeGiorgio: But as a general statement, we think that, again, after seeing declines in commercial ARPO for several quarters now, it's finally leveled off, which is a good sign. Kind of mirrors the bottom end we've seen on the resistance. Yeah, and then the purchase ARPO, this wasn't much movement, but last quarter was up four, this quarter up two. Any detail on that? Was that just a geographic makeshift?
Kenneth David DeGiorgio: After again after seeing declines in commercial ARVO for several quarters now, it's finally leveled off with which is a good sign kind of mirrors the bottom and we've seen on the residential side.
Kenneth David DeGiorgio: Yeah, and then the purchase or pose this wasn't much movement.
Kenneth David DeGiorgio: Last quarter it was up for this quarter or two.
Kenneth David DeGiorgio: Any detail.
Kenneth David DeGiorgio: Detail on that was that just good geographic mix shift.
Mark Edward Seaton: What do you see there? It's kind of what we think. There are two things that drive it. One is housing prices. Housing prices are still rising. I think given the fact that where housing prices are, and the increase in housing prices, we would expect kind of a 2% fee profile. The other thing that can drive it, depending on the quarter, is just the mix.
Kenneth David DeGiorgio: What do you see there.
Mark Edward Seaton: It's it's kind of what we've what we think I mean, there's two things that drive it one as you know housing prices housing prices are still rising I think given the fact that warehousing prices are the increase in housing prices, what we would expect kind of a 2% fee per file the other thing that can drive it depending on the.
Mark Edward Seaton: Or is just the mix I mean, if we get a lot more business in California, which has a higher fee per file that could that could drive things, but really it's more of a function of warehousing prices are.
Mark Edward Seaton: I mean, if we get a lot more business in California, which has a higher fee profile, that could drive things. But really, it's more a function of where housing prices are. Thank you. Thanks a lot, Mark. And our next question comes from the line of John... Hey guys, good morning.
John: Thank you.
John: Thanks, a lot more.
Mark Edward Seaton: And our next question comes from the line of John Campbell with Stephens. Please proceed with your question.
John: Hey, guys good morning.
John: Just back to the transition of the homepoint loans, it sounds like you're expecting some of that offboarding to take place in 2Q. I guess first, will that be the bulk of it? And secondly, can you maybe talk about the offboarding fees, maybe the size and timing of those?
John: Just back to the transition of the home point loans, it sounds like Youre expecting some of that off boarding to take place in <unk> I guess first of all that'd be the bulk of it and then secondly can you maybe talk to the off boarding fees, maybe the size and timing of those.
Mark Edward Seaton: Uh, yeah. Thanks, John. So today, we've got roughly $380 million in deposits, give or take. I mean, it changes by the day.
Speaker Change: Oh, yeah. Thanks, Thanks, John.
Mark Edward Seaton: So we're gonna.
Speaker Change: Today, we've got roughly about $380 million of deposits give or take I mean, it changes by the day.
Mark Edward Seaton: And we think $50 million we'll leave around May 1, and $330 million we'll leave on July 1. And at that point, we won't have any more of the Home Point loans. And as I mentioned earlier, when we lose those deposits at our bank, we'll lose $20 million on an annualized basis in investment income because we're really just earning Fed funds, and we're also paying out Fed funds. So we'll lose about $20 million of annualized expenses as well.
Speaker Change: And we think 50 million will leave around my first in $330 million and leave on July one and at that point, we won't have any more of the home point loans and as I as I mentioned earlier.
Mark Edward Seaton: When we lose those deposits at our bank, we will lose $20 million on an annualized basis of our investment income because we're really just drink fed funds and we're also paying out fed funds. So we will lose about $20 million of annualized expense them as well.
Mark Edward Seaton: Okay, and then are there fees associated with that off-boarding that are paid to you? There are deboarding fees, you know. I would say they're pretty de minimis, though, I mean, less than a million dollars. So there are deboarding fees, but it's not, it won't pay.
Mark Edward Seaton: Okay, and then are there fees associated with that off boarding that are paid to you.
Mark Edward Seaton: They're they're already boarding fees, you know I would say, they're pretty de Minimis, though I mean less than a million dollars. So they're already boarding fees, but it's not it won't be material.
Mark Edward Seaton: Okay, that's helpful. And then from a CapEx standpoint, last quarter, Mark, I think you mentioned expecting 30 million or so in relief just from the winding down of some software projects. Honestly, that's been ramped up, and you expect higher depreciation from here. But just from a overall CapEx standpoint, kind of what you're expecting for this year, and maybe if you got visibility next year, what that looks like for next year. So we think our CapEx has peaked.
Mark Edward Seaton: That's helpful and then from a Capex standpoint last quarter, Mark I think you mentioned expecting $30 million or Silverleaf, just from the wind down of some software projects.
Mark Edward Seaton: Honestly, that's been ramped and you expect higher depreciation from here, but just from a overall capex standpoint kind of what you're expecting for this year. It may be if you got visibility next year, what that what that looks like for next year.
Mark Edward Seaton: So we think our Capex has peaked last year, we were $260 million of Capex.
Mark Edward Seaton: Last year, we were 260 million in CapEx. (Inaudible] We think CapEx will be down somewhere between 15 and 20% this year. You know, and a lot of that has to do with some of these big, you know, initiatives that are never done, but, you know, the sort of pig's been pushed through the python, if you will, and we're, we're kind of over the hump. And also, we're doing things a lot more efficiently.
Mark Edward Seaton: We think capex will be down somewhere between 15 and 20%. This year you know in a lot of that has to do with some of these big initiatives, you're never done, but you know the sort of the pigs been pushed through the Python, if you will and where we're kind of over the hump and also we're doing things.
Mark Edward Seaton: More efficiently now we've we've found that you know just hiring great Tech talent great engineers.
Mark Edward Seaton: Now, we've found that, you know, just hiring great tech talent, great engineers, it's just a better way to build products as opposed to going to third parties where you're paying more and not quite getting the same value.
Mark Edward Seaton: It is.
Mark Edward Seaton: Just a better way to build products as opposed to go into to third parties, where you're paying more not quite getting the same value. So that's been a big initiative for us and it's it's we're seeing you know early signs of success, but we feel really good about the direction of where we're going from a tech perspective, and not only is that going to help us from a from a performance in terms of building products. It's also going to have.
Mark Edward Seaton: So that's been a big initiative for us, and we're seeing early signs of success. So we feel really good about the direction of where we're going from a tech perspective. And not only is that going to help us in terms of performance in terms of building products, but it's also going to have the effect of saving dollars, particularly CapEx dollars. So, a 15 to 20% decline this year, and that's with still making all the strategic investments that we feel like we need to make.
Mark Edward Seaton: The effective.
Mark Edward Seaton: Of saving dollars, particularly capex dollars, so 15% to 20% decline this year and that's we're still making all of the strategic investments that we feel like we need to make.
Mark Edward Seaton: Okay, that's helpful. And if I could squeeze in one more, I think I might have missed this. But did you comment on the April refi orders? The April refi orders are, we're running at about 371 per day. And it's about the same as where it was last year and about 6% over last month.
Speaker Change: Okay. That's helpful and if I could squeeze one more I think I might have missed this but did you comment on the April refi a month to date orders.
Mark Edward Seaton: The April refi orders are we're running at about 371 per day.
Mark Edward Seaton: And it's about the same as where it was last year and about 6% over last month.
Mark Edward Seaton: Okay, great. Thank you, guys. Thanks, John. And as a reminder, if you'd like to ask a question... One moment, please, while we pull. And at this time, there are no additional questions. That'll be all. We'd like to remind listeners that today's call will be available for replay on the website or by dialing the conference ID number 1-37-4566. The company would like to thank you for your participation. This concludes today's conference call. You may now... (inaudible)
Speaker Change: Okay, great. Thank you guys.
Speaker Change: Thanks, John.
Mark Edward Seaton: Sure.
Mark Edward Seaton: And as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Mark Edward Seaton: Please poll for any additional questions.
Mark Edward Seaton:
Mark Edward Seaton: Yeah.
Mark Edward Seaton: Yeah.
Mark Edward Seaton: And at this time there are no additional questions that also concludes this morning's call we'd like to remind listeners that today's call will be available for replay on the company's website or by dialing 870, 76606853 or 200 161 to seven.
Mark Edward Seaton: For one five and enter the conference I'd number 13745815.
Mark Edward Seaton: The company would like to thank you for your participation. This concludes today's conference call you may now disconnect.
Mark Edward Seaton: Yeah.
Mark Edward Seaton: [music].