Fidelity National Financial (FNF) Raymond R. Quirk on Q2 2016 Results - Earnings Call Transcript

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Fidelity National Financial, Inc. (NYSE:FNF)

Q2 2016 Earnings Call

July 21, 2016 10:30 am ET

Executives

Daniel Kennedy Murphy - Senior Vice President & Treasurer

William P. Foley II - Chairman

Raymond R. Quirk - Chief Executive Officer

Anthony J. Park - Chief Financial Officer

Michael J. Nolan - President

Analysts

Eric Beardsley - Goldman Sachs & Co.

Jeremy Campbell - Barclays Capital, Inc.

Bose George - Keefe, Bruyette & Woods, Inc.

John Campbell - Stephens, Inc.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Kevin Kaczmarek - Zelman & Associates

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Operator

Ladies and gentlemen, we'd like to thank you for standing by, and welcome to the FNF 2016 Second Quarter Earnings Teleconference Call. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session with instructions being given at that time. And as a reminder, today's call will be recorded.

I would now like to turn the conference over to our host and facilitator, Mr. Dan Murphy. Please go ahead, sir.

Daniel Kennedy Murphy - Senior Vice President & Treasurer

Thanks. Good morning, everyone, and thanks for joining us for our second quarter 2016 earnings conference call. Joining me today are our Chairman, Bill Foley; CEO, Randy Quirk; President, Mike Nolan; CFO, Tony Park; and Executive Vice President, Brent Bickett.

We'll begin with a brief strategic overview from Bill. Randy will review the title business, and Tony will finish with a review of the financial highlights. We'll then open the call for your questions and finish with some concluding remarks from Bill Foley. Please note that we're only focused on FNF on this call. We will have a separate FNFV call at 11:30 AM Eastern Time today.

This conference call may contain forward-looking statements that involve a number of risk and uncertainties. Statements that are not historical facts, including statements about our expectations, hopes, intentions or strategies regarding the future, are forward-looking statements. Forward-looking statements are based on management's beliefs as well as assumptions made by and information currently available to management. Because such statements are based on expectations as to future financial and operating results and are not statements of fact, actual results may differ materially from those projected. We undertake no obligation to update any forward-looking statements whether as a result of new information, future events or otherwise.

The risk and uncertainties, which forward-looking statements are subject to, include, but are not limited to, the risk and other factors detailed in our press release dated yesterday, and in the statement regarding forward-looking information, risk factors, and other sections of the company's Form 10-K and other filings with the SEC.

This conference call will be available for replay via webcast at our website at fnf.com, will also be available through phone replay beginning at 12:30 PM Eastern Time today through next Thursday, July, the 28. The replay number is 800-475-6701, with an access code of 396730.

Let me now turn the call over to our Chairman, Bill Foley.

William P. Foley II - Chairman

Thanks, Dan. This quarter clearly highlights the earnings power of our title insurance business. We experienced continued mid-single-digit growth in the purchase market, a slight decline in commercial revenue and lower refinance closings, yet we were still able to generate the 16.5% adjusted pre-tax title margin.

With the decline in interest rates in late June, we've already begun to see meaningful sequential increases in refinance openings in each of the last three weeks, which bodes for improved third quarter refinance closings. As we enter the second half of 2016, we will continue to strive to maximize earnings from our operations and remain the most-profitable title insurance company in the country.

Black Knight continued its strong financial performance, generating 10% revenue growth in the second quarter. Adjusted EBITDA was $114 million, $12 million increase, or 12% over the second quarter of 2015, and adjusted EBITDA margin was 45.2%, a 170 basis point improvement over the second quarter of 2015.

FNF's Black Knight ownership stake is currently worth approximately $3.2 billion or more than $11 per FNF share. During the second quarter, we consistently repurchased 50,000 shares of FNF's stock a day, other than during blackout periods around our first quarter earnings release in April.

For the second quarter, we repurchased a total of nearly 2.5 million shares at a total cost of $84 million. We also spent approximately $57 million on our quarterly cash dividend. On the acquisition front, we made seven smaller title acquisitions for a total cost of approximately $37 million. So, we continue to use our significant free cash flow to both return value to our shareholders and invest in the future of our title business.

I'll now turn the call to Randy Quirk to discuss the title insurance business.

Raymond R. Quirk - Chief Executive Officer

Thank you, Bill. As Bill mentioned, this was a strong quarter for our title operations as we again led the industry with a 16.5% adjusted pre-tax title margin. Our adjusted pre-tax title earnings of $300 million or a $17 million increase over the strong second quarter of 2015, while a 16.5% adjusted pre-tax title margin was equal to the prior year.

The agency growth continues to be stronger than direct with nearly 16% agency revenue growth over the second quarter of 2015 as some of the big agent markets in the Southeast and East Coast have continued to perform better than the West Coast this year. However, with the recent increase in refinance orders, that growth may shift more towards the direct operations in the Western states, in California, in particular, and where much of the refinance volume will take place.

In April, we added 146 positions in the title business due to the increased order volumes. However, despite continued seasonal orders rate during May and June, we actually reduced head count by 306 positions, as the operational impact of TRID declined significantly as the quarter progressed.

We feel confident saying that the negative TRID impact is now effectively behind us. In addition, we also reduced 113 corporate positions in the second quarter as a result of our overall corporate expense reduction plan.

For the second quarter, total open orders averaged approximately 9,000 per day, with April at 8,900, May at 9,000, and June at more than 9,100. The last week of June was actually at more than 9,600 orders per day.

FNTG purchase orders, opened and closed orders in the second quarter increased by 5% and 6%, respectively. The mix towards purchase transactions was approximately 57% and 58%, respectively, for open and closed orders during the quarter.

For the first two weeks of July, total open orders per day grew to more than 10,200 with last week's orders generate more than 10,500 open orders per day. Refinance represented 52% of those open orders, and FNTG purchase-related open orders increased by 3.5% versus the same two weeks in July of 2015.

We had another strong quarter in our commercial business, generating $244 million in total commercial revenue, a 5% decrease from the second quarter of 2015, driven by a 4% increase in closed commercial orders, offset by a 9% decline in the fee per file.

National commercial revenue of $144 million declined by 4%, as closed orders declined by 7% and the fee per file grew by 3%. In the first half of 2016, the commercial market remained strong, and we expect good commercial performance in the back half of 2016.

The total fee per file of $2,116 increased by 4% versus the second quarter of 2015, as the mix shifted to more purchase closings in the second quarter versus the second quarter of 2015. If the increase in refinance orders continues, we would expect the fee per file to decline.

Let me now turn the call over to Tony Park to review the financial highlights.

Anthony J. Park - Chief Financial Officer

Thank you, Randy. We generated more than $2.1 billion in total revenue in the second quarter with title generating $1.8 billion in total revenue, Black Knight contributing $256 million in total revenue, and our corporate and other segment generating $59 million, which is predominantly our real estate brokerage revenue.

Adjusted pre-tax title earnings were $300 million, a $17 million or 6% increase over the second quarter of 2015. And the adjusted pre-tax title margin was 16.5%. Adjusted net earnings were $207 million or $0.74 per diluted share.

The title segment generated $1.8 billion in total revenue for the second quarter, a 6% increase over the second quarter of 2015. Direct title premiums declined by 1%, while agency premiums increased by 16%.

Personnel costs increased by 3%. But as Randy mentioned, the 306 operational and 113 corporate head count reductions came in May and June, and we would not have seen much, if any, of that benefit in the second quarter. But we do expect to see the benefit of those actions in the third quarter. Other operating expenses declined by $1 million.

FNF Group debt outstanding was $2.5 billion with more than $1.6 billion of that debt at Black Knight. Our debt to total capital, on a consolidated basis, was approximately 29% at June 30. On an FNF-only basis the debt-to-cap ratio was approximately 17%, and 23% on the guarantee on the $400 million of Black Knight debt is included.

Total title claims paid were $73 million during the second quarter, an increase of $3 million or 4% from the second quarter of 2015. We continue to expect 2016 total claims paid to decline from 2015's total claims paid of $285 million. We're also $87 million above the actuarial midpoint of expected ultimate claims payments for all years, consistent with the first quarter and year-end 2015.

Finally, our FNF Group investment portfolio totaled approximately $5 billion at June 30. From a regulated standpoint, we have $1.7 billion in statutory reserves, $1.4 billion in regulated cash and investment, and $1.1 billion in secured trust deposits, for a total of $4.2 billion in regulated cash and investments.

From an unregulated perspective we have $470 million of unregulated cash at FNF Group as of June 30. There is also $150 million in consolidated cash and investments at Black Knight and ServiceLink, and $70 million in cash at subsidiaries, both of which are restricted by minimum working capital, other regulatory requirements, or to let those businesses run themselves autonomously.

Let me now turn the call back to our operator to allow for any questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, we'll now begin our question-and-answer session period. Our first question will come from the line of Eric Beardsley of Goldman Sachs. Please go ahead.

Eric Beardsley - Goldman Sachs & Co.

Hi. Thank you. Just want to follow-up on the head count reductions for May and June. You mentioned that really didn't see much of an impact in the second quarter numbers. I guess, how should we think about the impact on the personnel line as we go into the third quarter and how much of a margin benefit might that be?

Raymond R. Quirk - Chief Executive Officer

Yeah. This is Randy. As we said, most of these reductions were done in the back half of the second quarter in May and June. So we really did see very little impact in the second quarter. With the 306 reductions and 113 on the corporate, all-in, we see an expense reduction of over $30 million on an annualized basis. So, that should, obviously, start hitting in the third quarter.

Now, we'll also be looking at this very significant increase in refinance orders. So, we may have to make some staffing moves to cover that volume as we move through the third quarter, somewhat offsetting those reductions. But we've calculated up to about $30 million, between $30 million and $35 million overall.

Eric Beardsley - Goldman Sachs & Co.

Got it. I guess, just on the refi point, I guess, what kind of impact do you think that would have on the margins? Is this something where you're able to get through these orders pretty quickly or are we going to have some lagged effect where you start to see some trickle into the fourth quarter as well in terms of the closings?

Raymond R. Quirk - Chief Executive Officer

Well, if they continue at the rate they are, I mean they've really spiked up significantly in the last two weeks. We're up 15%, our order volume, over the back end of June. So, if they continue another three weeks or four weeks, that's going to press nicely into the fourth quarter. It's going to depend, to some degree, on how quickly the lenders will be able to process this type of volume. But it should help us a lot in the third quarter in terms of revenue and, obviously, closings and push into fourth quarter.

Eric Beardsley - Goldman Sachs & Co.

Okay. Great. Thank you.

Operator

Next question will come from the line of Jeremy Campbell of Barclays. Please go ahead.

Jeremy Campbell - Barclays Capital, Inc.

Hey. Thanks, guys. Just wanted to touch base on the agent premiums. Once again, that channel grew at a much faster pace than the direct channel. I know you guys spoke a little bit about how refi can drive some of the direct volumes higher. But how should we think about the growth rate in premiums on year-over-year basis between agency and direct?

Michael J. Nolan - President

Hey, Jeremy, this is Mike. As you know, we've really enhanced our focus on growing the agency channel the past couple of years. And in the past 18 months, we signed closed to 500 new agents, a little less than 300 last year, and 100 in each of the first two quarters this year. So, I think, that combined with the pretty good real estate activity in the East, Midwest and Southeast, where we have very strong agency market share, is really paying a lot of dividends for us. And I think we've had now four quarters of 15% to 20% growth over the prior years. So, hard to predict if that rate continues, but we would expect agency to perform very well throughout the rest of the year and into next year, really.

Jeremy Campbell - Barclays Capital, Inc.

Got it. And then just to piggyback on Eric's question a little bit. On the first half of last year, when we had a little mini refi boom, you guys did not really need to staff up very much. How do you think about trying to staff up for these volumes that look like they're going to be coming and benefiting 3Q and 4Q?

Raymond R. Quirk - Chief Executive Officer

Well, we're going to be very cautious in staffing up, as you know, we're very metrics driven. So, the staffing we're going to do in the third quarter will be in a temporary-type environment, because we don't know that this is going to last very long. Again, it came up so quickly in the last two weeks we don't know if we've already peaked and it gradually declines, or if it holds at this pace. So we're going to be very cautious, very diligent and not get ourselves caught being overstaffed.

Jeremy Campbell - Barclays Capital, Inc.

Great. And then just finally, with Black Knight doing so well on a fundamentals basis, can you just update us on any of your cross-selling opportunities and initiatives that you may have realized thus far, whether they're kind of tracking as you'd had hoped?

Raymond R. Quirk - Chief Executive Officer

Well, sure. With the ServiceLink group and Black Knight, we do have a very aggressive cross-selling program in place. We've identified upwards of 50 or 60 opportunities that are currently being pursued. This is a relatively new program. We're just two months or three months into it. So the results are still in the future. But we're pushing it hard and we believe it's going to be very successful. A lot of verification from one company over to the other with some mutual clients is beginning to pay off for us.

Jeremy Campbell - Barclays Capital, Inc.

Is there any way to size that addressable market of 50 or 60 opportunities from a revenue perspective?

William P. Foley II - Chairman

Well, I think we've got to – we just got to wait and get through this year, the next six months or so, and then we can give you an update on some of the types of customer wins that we'd be able to achieve, whether it'd be in title or going to be default, or flood, or tax, or homeowner appraisals, home inspections. We have got a lot of different opportunities with a lot of different lenders. And all these lenders really need to do is to give us – make us one of five or one of four. And there are many of these lenders that Black Knight has heavy influence with that we're not – that the ServiceLink is not even penetrating. So, very hopeful about this initiative. As Randy said, it's early. We do have a task force dedicated and the task force is following up consistently. So, we've got focus on it and we're confident we'll have good news in about six months.

Jeremy Campbell - Barclays Capital, Inc.

Great. Thanks a lot, guys.

Operator

Our next question will come from the line of Bose George of KBW. Please go ahead

Bose George - Keefe, Bruyette & Woods, Inc.

Hey, guys. Good morning. Actually, the first one just on the title margin outlook. You noted the direct volume potentially picks up in 3Q as refis pick up. You also have benefit from the employee head count reductions. So, I mean, do you think title margins could keep trending up from the levels you hit quarter?

Raymond R. Quirk - Chief Executive Officer

Well, we were very pleased with our second quarter numbers. We fully expect that we can catch that in the third quarter. Assuming that the commercial continues to run at the rate that it is currently, which we do believe we'll get this additional influx as the revenue closes on the refinance side, and the purchase seems to be holding. We're up about 5% year-over-year as we moved into very early on into the third quarter, but that seems to be holding.

So, if all those three things play out the way we expect that they will, we do get the benefit of these expense reductions that we had in the second quarter. And again, like I said, we're diligent on our staffing levels. We should be able to match second quarter and our thinking would be that we can do a bit better.

Bose George - Keefe, Bruyette & Woods, Inc.

Okay. Great. Thanks. And then, actually just in the corporate segment, it looks like there was a tax benefit. What's the good run rate for that segment's earnings going?

Anthony J. Park - Chief Financial Officer

Yeah, Bose, this is Tony. Yeah, we did have a slight decline in the tax rate to about 33.9% in the second quarter. That was due to some stock option exercise activity that we saw in the quarter. And as you know, that's now run through the tax provision.

A good run rate estimate for Q3 would be 35%, which is where we guided for Q2. And then maybe Q4, because we typically have some restricted stock vesting in Q4, it probably comes down a little bit in Q4 to about 34%.

Bose George - Keefe, Bruyette & Woods, Inc.

Okay. Great. And actually just one more. There's an industry source on commercial, Real – it's called Real Capital Analytics, which I think a lot of people track. And it shows a pretty decent decline in commercial volume. I mean do you have a feel for why the data from that is different from what you guys and other title insurers are reporting, which is commercial volumes still being reasonably good?

Michael J. Nolan - President

Yeah. This is Mike. I don't know that we can reconcile what Real Capital Analytics has against some of the other outlooks. But for example, MBA just forecast commercial in early July at a rate comparable to last year and actually growth in 2017 and 2018.

All we can really say is that our order levels are very consistent with last year. They're basically flat year-over-year. And we're still seeing a lot of good activity in the national segment. We've seen some good pickup and interest in energy and some of the segments that have been kind of quiet, like hospitality and retail. So we're still optimistic that commercial remains strong for the second half.

Bose George - Keefe, Bruyette & Woods, Inc.

Okay. Great. Thanks a lot.

Operator

Our next question comes from the line of John Campbell of Stephens, Inc. Please go ahead.

John Campbell - Stephens, Inc.

Hey, guys. Good morning. Congrats on a great quarter.

Raymond R. Quirk - Chief Executive Officer

Thank you, sir.

William P. Foley II - Chairman

Thanks.

John Campbell - Stephens, Inc.

Just back to the commercial business, you guys said that you do expect good performance in the back half. I know 2015 was a really good year. It does look like the comps are easing up a little bit, maybe in the back half. But not trying to put too fine of a point on it, but just curious about how do you guys characterize good performance? Is that just kind of modest growth off of last year? Or maybe just kind of holding that flat?

Raymond R. Quirk - Chief Executive Officer

Well we've been looking in the first half. And it seems to be the conventional thinking that commercial is softening from a record year of 2015. We're off only slightly. Our field people are telling us it's going to be a very strong second half.

So again, like Mike said, we're very optimistic. Some of the projections are even for better commercial in 2017 and 2018. So we're not giving up anything yet on commercial. So matching what we did in 2015 would be real good for us. But if not it will be the second best year ever.

William P. Foley II - Chairman

We are finding that energy is playing a force now in the commercial market, as some large energy transactions are pending. A few of the metropolitan areas that you'd expect to be soft, such as Houston, are soft. But there are many of the other secondary cities that are very, very strong, continuing to have good growth. So we aren't really matching up on those analytics yet.

John Campbell - Stephens, Inc.

Got it. That's helpful. And then on the reserves, Tony, I think you said you're $87 million or so above the actuary point estimate. You guys are currently at the – I guess the 5.5% range. I imagine you're probably booking the current book of business at closer to 5%. At what point do you get a little bit more comfort in bringing that ratio down on the P&L?

Anthony J. Park - Chief Financial Officer

Yeah. Thanks, John. This is Tony. Yeah. So we're $87 million above the actuary's central estimate. And we've really been there all year. We were there at year-end and then again at Q1. So we're kind of treading water in a good spot, though, with an $87 million cushion. So 5.5% is probably slightly higher than what we expect the current book to look like, to your point. And we've had a little bit of erosion or adverse development in 2006 and 2007 years.

So it just slight (24:10) numbers. And I'd call it maybe $10 million of adverse development, offset by $10 million of too much provision in the current year. So at this level at – if we continue to stay where we are, 5.5% is probably the right number. But to the extent that 2006 and 2007 become nearly fully mature, and then that cushion builds at all, we're probably going to have to take another look and maybe dial that current provision rate back.

John Campbell - Stephens, Inc.

Yeah. That's helpful. And then last one for me, just on the Black Knight spend, just think about the dynamics there. Could you run us back through what the guarantee of the debt is? And then maybe what prohibits you from doing that today versus maybe several quarters from now?

William P. Foley II - Chairman

Well, the first element is the guarantee of $390 million of Black Knight debt that FNF took on as part of the acquisition of LPS to ensure that LPS remained investment-grade. It's kind of very prohibiting prepayment penalty. So it's kind of an October 2017 timeframe before we can realistically prepay that debt. It does go down every month. We are monitoring it. The rates are working in our direction. So those are all good things.

We also would have to go through the process of filing for spin and we've got a few complications the way Black Knight was acquired with our ownership interest and the THL ownership interest. So we have to work our way through those things. And honestly, what we want to do right now is we want to really execute against this cross-sell opportunity, because we have a partially-owned subsidiary – majority-owned subsidiary that is very good at cross-selling, and we've asked them to participate actively in our cross-sell activity for ServiceLink.

And we have one other initiative that we're working on that we'll be talking about sometime in the next few weeks, if we're successful in making this particular acquisition, that ties into Black Knight and also ties into FNF. It is not really outside of our strike zone relative to real estate financial services type activity. So, we need a little time. It is an agenda item that pops up in our board meetings and we've been deferring it for the time being.

John Campbell - Stephens, Inc.

That's helpful. Thanks guys.

Operator

Our next question will come from the line of Geoffrey Dunn of Dowling & Partners. Please go ahead.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Thank you. Good morning.

William P. Foley II - Chairman

Good morning.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Just on the Black Knight/ServiceLink effort, I kind of imagine you're talking to two very different people historically. So, how do you really facilitate that cross-sell when you're dealing with kind of the executives on the BKFS side and probably some of the much lower on the chain from a ServiceLink side? So, how do you get the bank to receive that cross-sell?

William P. Foley II - Chairman

Well, actually Geoff, you've hit on one of the exact elements of this cross-sell activity. Black Knight does start as the executive suite, whether the Chairman, the CEO, the President, the EVP of mortgage, if it's a large bank. But those individuals have the influence to help us down on the transaction side, and that's exactly how we're investing it. And we've found that Black Knight is very, very effective at the higher-level executive – with the higher-level executive. And now, we're just asking them to free up some of their business that's on the title side, and default side, or flood. Some are easier than others. Some of the appraisal fees, it's pretty easy to accomplish. Floods, easy to accomplish. Titles, more complicated.

That's why I said, we just need about six months just to see how those effort pans out. We've had some good early success particularly with one large lender that's in the process of moving a fair amount of business just because of the Black Knight relationship. So, give us a little time.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Okay. And then, could you give a little color on the acquisitions? I think you said you made seven agency deals, I'm assuming, in the quarter. You what type of size are we talking about, geography? Is there any common theme there?

Raymond R. Quirk - Chief Executive Officer

Yeah. This is Randy. The acquisitions are, geographically, a little bit random. We made a nice midsized title operation acquisition up in the mid-Atlantic, the Northeast. We're doing some infilling down in the South Florida with the title operation with an agent that we purchased down there. And then some small infill agency operations around there, tying these acquisitions together. We just made a nice acquisition out in Oregon over in the Northwest that will fill in some areas where we didn't have a presence. So, we go where the opportunity is and we'll continue to do so. We still have a few more that we're looking. So we'll keep the pipelines filled up. But it's really where the opportunity presents itself, that's where we take it.

William P. Foley II - Chairman

These acquisitions, Geoff, are all designed to enhance market share and market penetration to take – in the traditional sense, take out the redundancy in the back-office, accounting, finance, legal and so on. And the Oregon acquisition, if we handle it right and do well with it, had about 170 people when we acquired the business. It's going to add five or six points to our market share in the state of Oregon, which puts us over 60% market share in Oregon. And every time we're going to accomplish something like that, then we're just continuing to drive our market share and become a more dominant player in the various parts of the county.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

And obviously, I think all three of the major title companies have now expressed an interest in growing agency. What's your experience with the valuations in the marketplace?

William P. Foley II - Chairman

I mean there are still people that own agencies. They're selling those agencies, or private companies, as a general rule, and they are pricing their businesses in that 4x to 6x EBITDA range and so it's very affordable. And particularly, once we get through activating some synergies. So, this is a pretty good time for us to grow our business and expand our base and to do it fairly economically.

Geoffrey Murray Dunn - Dowling & Partners Securities LLC

Okay. Thank you.

Operator

And we have a question from the line of Mark Hughes of SunTrust. Please go ahead.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Yeah. Thank you. I wonder if you could give some directional thoughts on Black Knight sales and EBITDA margin. You had a nice acceleration in 2Q, 10% top line. Is that the new baseline? Does the sales backlog make it look like that will be better?

William P. Foley II - Chairman

Well I'd rather have Tom Sanzone answer the question, I guess – I thought he might actually be here. Well, what's happening is the new sales that are occurring at Black Knight, particularly with on the MSP platform, in their LoanSphere business, are coming at very high margins, because the business base – the base requirements to run the business are already in place and that's why you're seeing this EBITDA margin expansion. Also, the Empower platform has been refined, and updated, and integrated. And so, now we sell Empower, the margins on those sales are very, very high. So, I'd really have you talked to Kirk about margin expansion going forward. But obviously, this 170 basis points year-over-year is gigantic and we have a lot of – we have a very, very large pipeline of large transactions, particularly in Empower and MSP, that bodes well for future margin expansion.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

And then, just a quick follow-up on the agency business, it sounds like you're taking share. There was a mix shift this quarter. You're kind of lapping your jump in agency in the third quarter of last year. How should we think about the potential for that elevated growth to be sustained in the back half? Will there be more market share gains or will that kind of moderate a bit?

Michael J. Nolan - President

Well, we've been really focused on 15 key states in our market share efforts and we've seen – I think in 2015, we had pretty good market share gains in, I think, 10 of the 15. With the agent signings and the focus we've had continuing on those states, we would expect to continue to take a little bit more market share out.

Mark Douglas Hughes - SunTrust Robinson Humphrey, Inc.

Thank you.

Operator

Our next question will come from the line of Jason Deleeuw of Piper Jaffray.

Please go ahead.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Thank you and good work on the quarter. Question on the margins for the second quarter, on the first quarter earnings call, you had kind of tempered the outlook for the margins, and then we had a surprise beat this quarter, I think, versus what most people are expecting on the margins. So, what kind of transpired during the quarter in terms of driving the better margins and then I think kind of the commentary that we had on the first quarter?

Raymond R. Quirk - Chief Executive Officer

Well, I think as the closing shifted to the purchase side, it was really a bit more significant than we thought it was going to be in the second quarter, and the commercial held strong.

So you're correct. We were pushing to get to a 15% or 15%-plus number. And with the agency revenue coming in the way it did, a lot of things came together for us and pushed us up in that mid-16% range. But I think probably what was most significant was the purchase transaction. So the closings relative to purchase. They built as we moved through the third quarter. And we ended up with a very significant June.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Okay. Got it. So it sounds like you had set some sort of conservatism on the margin outlook, just partly on the commercial, but also just kind of on the purchase trend. So I mean I think, is that kind of when we think going forward on the margins, we did this 16.5% this quarter?

William P. Foley II - Chairman

I'll tell you, Randy sort of – you hit it right. And also you have to remember that the last couple quarters had TRID in there. So you had extra people.

And every so often, every couple years, companies get off their game a little bit. And maybe you have a few extra people that they have to take a look at and kind of tighten their belt. And that's really what Randy and Mike and Tony did, after we really examined and dug into the first quarter operating results and margins. And the result of that was 90 days later those margins popped back up more in a direction where we like to see them. Is that fair enough, Randy?

Raymond R. Quirk - Chief Executive Officer

Yeah, it is. And we knew that we were going to be working through TRID in the second quarter. That was our expectations all the way along. And we were able to move through it more quickly. The banks came in and embraced the technology. Our folks were all trained up for it. And the real estate brokers and agents, they got on board with it more quickly than we thought. So I think you're exactly right. TRID got us a little bit confused here at the back end of the first quarter.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

All right. Thanks for all that. And then just to remind us on the local versus national commercial margins, is there a big difference between those two?

Michael J. Nolan - President

Well, so on the national offices, we can measure margins very carefully. And we tend to run with 30%-plus margin, so that's really our highest-margin business. In our distributed offices, they're working on local commercial deals, residential deals, resell, refi. So we can't really cost account and break out what the specific margin would be in a local office.

What we do know, though, is that local commercial deals are smaller. And so the average fee per file is less. And you'd probably expect that the margin would be a little bit lower.

Jason S. Deleeuw - Piper Jaffray & Co. (Broker)

Okay. Thank you for that.

Operator

And our next question will come from the line of Kevin Kaczmarek of Zelman & Company – & Associates. Please go ahead.

Kevin Kaczmarek - Zelman & Associates

Thanks, guys, for taking my questions. I guess amongst the new agents that you've been acquiring, is there a particular concentration in order type, such as purchase? And any sense of how much those deals would have added to the direct order counts that you report?

Raymond R. Quirk - Chief Executive Officer

Well, no, we don't go after it, relative to what kind of a mix that they have. I mean when we're acquiring one of these agents, which is another title company for us, it's typically a pretty standard mix, much like we have in our own organization. So we don't look at it in that regard.

What we do, as Bill had already mentioned, is bring the organizations in, find the synergies, improve the margins, and put them into our mix to increase our market share.

Kevin Kaczmarek - Zelman & Associates

And do have a sense for how much – I guess what I'm trying to get at is how much of the order growth, I guess including purchase and refi, is kind of organic? And how much has been acquired (38:07)?

Raymond R. Quirk - Chief Executive Officer

Well, we don't have a real number for you, but these acquisitions were in the back end of the second quarter. And one of them just actually has taken place in the first two weeks here of the third quarter. So not significant whatsoever.

Kevin Kaczmarek - Zelman & Associates

Okay. All right. And on the investment income, it seemed a few million higher, excluding the realized gains. Is that a good run rate going forward? Or is there something special?

Anthony J. Park - Chief Financial Officer

No. Kevin, this is Tony. That's actually a little high. Every second quarter, we get some dividends from some investments we have in title plant that's kind of a one-time thing. It's not something we can accrue, because we don't know the exact number. But that shows up in Q2, as it did this quarter and as it did in the second quarter of 2015. So I would ratchet the run rate on investment income down to where we've been trending over the last four quarters.

Kevin Kaczmarek - Zelman & Associates

Okay. And I guess, you mentioned big acquisition or effort that you're working on with ServiceLink and Black Knight. Can you tell us a little bit more about that? Was that an acquisition or is that under FNF or will that be under Black Knight?

William P. Foley II - Chairman

It will be under FNF, but it will be – a lot of the software development activities will be handled by Black Knight and Black Knight will participate in the effort, and then also expand Black Knight's product suite if it comes together. So, we should have an announcement within the next few weeks if it's going to happen. We're pretty far along with it. That's about all I can say on that particular subject.

Kevin Kaczmarek - Zelman & Associates

Okay. Great. Thanks a lot. That's all I had.

Operator

And our next question is a follow-up from the line of Bose George of KBW. Please go ahead.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

This is actually Chas Tyson jumping on for Bose. Just wanted to follow up very quickly on two items. CapEx look like it was a little bit higher than it's been running at. Is there any reason for why that would be a little higher this quarter?

Anthony J. Park - Chief Financial Officer

Yeah. This is Tony. We had an acquisition of our corporate headquarters office in Jacksonville. We had an off-balance sheet synthetic lease that came due and so we had a $71 million purchase to buy that out of that lease arrangement. The good news there is that we did not use parent company cash flow for that acquisition. We were actually able to admit that within one of our regulated insurance subsidiaries. So, the full $71 million came from that and not from parent company.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. And then, on the higher – I guess the deal that you had been looking at on the FNF side, but it's cross-selling with Black Knight, is that – I mean, is there a way to think about the size, the potential? I mean, is it kind of bigger than some of the deals that you've been – that the agency that you've acquired on a dollars basis?

William P. Foley II - Chairman

We'd rather wait just (41:06) for a couple weeks, we'll have a release if it comes together. And you'll be hearing about it shortly if it works.

Chas Tyson - Keefe, Bruyette & Woods, Inc.

Okay. Fair enough. Thanks.

William P. Foley II - Chairman

Thanks.

Operator

There are no further questions in queue at this time. I would now like to turn the conference over to Mr. William Foley for any closing remarks.

William P. Foley II - Chairman

Thank you. This quarter clearly highlights the earnings power of our title insurance business. As we enter the second half of 2016, we will continue to strive to maximize earnings from our operations and remain the most-profitable title insurance company in the company country.

Thanks for joining us today.

Operator

Ladies and gentlemen, it does conclude our conference call for today. On behalf of today's panel, we'd like to thank you for your participation in today's teleconference call and thank you for using AT&T. Have a wonderful day. You may now disconnect.

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