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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 0-3658
THE FIRST AMERICAN FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
INCORPORATED IN CALIFORNIA 95-1068610
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
114 EAST FIFTH STREET, SANTA ANA, CALIFORNIA 92701-4642
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 558-3211
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON NEW YORK STOCK EXCHANGE
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON
WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
Indicate by check mark whether registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. (S)229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [_]
On March 6, 1997, the aggregate market value of voting stock held by non-
affiliates was $435,584,192.
On March 6, 1997, there were 11,800,229 shares of Common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement are incorporated by
reference in Part III of this report. The definitive proxy statement will be
filed no later than 120 days after the close of registrant's fiscal year.
This report includes 57 pages.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The First American Financial Corporation was organized in 1894 as Orange
County Title Company, succeeding to the business of two title abstract
companies founded in 1889 and operating in Orange County, California. In 1924,
the Company commenced issuing title insurance policies. In 1986, the Company
began a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process.
The Company is a California corporation with executive offices at 114 East
Fifth Street, Santa Ana, California 92701-4642. The Company's telephone number
is (714) 558-3211. Unless the context otherwise indicates, the "Company," as
used herein, refers to The First American Financial Corporation and its
subsidiaries.
GENERAL
The Company, through its subsidiaries, is engaged in the business of
providing real estate related financial and information services, including
title insurance, real estate tax monitoring, mortgage credit reporting, flood
zone determination, mortgage loan servicing systems, property information and
home warranty services, to real property buyers and mortgage lenders. The
Company also provides trust and limited banking services. Financial
information regarding each of the Company's primary business segments is
included in "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Item 8. Financial Statements and
Supplementary Data" of Part II of this report. Although industry-wide data for
1996 is not currently available, the Company believes that its wholly owned
subsidiary, First American Title Insurance Company ("First American"), was the
largest title insurer in the United States, based on gross title fees, and its
wholly owned subsidiary, First American Real Estate Information Services,
Inc., was the nation's largest provider of flood determinations, based on the
number of flood determination reports issued, the nation's largest mortgage
credit reporting service, based on the number of credit reports issued, and
the nation's second largest provider of tax monitoring services, based on the
number of loans under service. The Company also believes that its majority
owned subsidiary, First American Home Buyers Protection Corporation, was the
second largest provider of home warranties in the United States, based on the
number of home protection contracts under service. Substantially all of the
Company's title insurance, tax monitoring, credit reporting, flood zone
determination and property information business results from resales and
refinancings of real estate, including residential and commercial properties,
and from the construction and sale of new properties. The Company's home
warranty business results from residential resales and does not benefit from
refinancings or commercial transactions. Resales and refinancings of
residential properties constitute the major source of the Company's revenues.
Real estate activity is cyclical in nature and is affected greatly by the cost
and availability of long term mortgage funds. Real estate activity and, in
turn, the Company's revenue base, can be adversely affected during periods of
high interest rates and/or limited money supply. However, this adverse effect
is mitigated in part by the continuing diversification of the Company's
operations into areas outside of its traditional title insurance business.
OVERVIEW OF TITLE INSURANCE INDUSTRY
Title insurance has become increasingly accepted as the most efficient means
of determining title to, and the priority of interests in, real estate in
nearly all parts of the United States. Today, virtually all real property
mortgage lenders require their borrowers to obtain a title insurance policy at
the time a mortgage loan is made.
Title Policies. Title insurance policies are insured statements of the
condition of title to real property, showing priority of ownership as
indicated by public records, as well as outstanding liens, encumbrances and
other matters of record, and certain other matters not of public record. Title
insurance policies are issued on the basis of a title report, which is
prepared after a search of the public records, maps, documents and prior title
policies to ascertain the existence of easements, restrictions, rights of way,
conditions, encumbrances or other matters affecting the title to, or use of,
real property. In certain instances, a visual inspection of the property is
1
also made. To facilitate the preparation of title reports, copies of public
records, maps, documents and prior title policies may be compiled and indexed
to specific properties in an area. This compilation is known as a "title
plant."
The beneficiaries of title insurance policies are generally real estate
buyers and mortgage lenders. A title insurance policy indemnifies the named
insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically
excepted from its provisions. The policy typically provides coverage for the
real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price. Coverage under
a title insurance policy issued to a real property mortgage lender generally
terminates upon the sale of the insured property unless the owner carries back
a mortgage or makes certain warranties as to the title.
Unlike other types of insurance policies, title insurance policies do not
insure against future risk. Before issuing title policies, title insurers seek
to limit their risk of loss by accurately performing title searches and
examinations. The major expenses of a title company relate to such searches
and examinations, the preparation of preliminary reports or commitments and
the maintenance of title plants, and not from claim losses as in the case of
property and casualty insurers.
The Closing Process. Title insurance is essential to the real estate closing
process in most transactions involving real property mortgage lenders. In a
typical residential real estate sale transaction, title insurance is generally
ordered on behalf of an insured by a real estate broker, lawyer, developer,
lender or closer involved in the transaction. Once the order has been placed,
a title insurance company or an agent conducts a title search to determine the
current status of the title to the property. When the search is complete, the
title company or agent prepares, issues and circulates a commitment or
preliminary title report ("commitment") to the parties to the transaction. The
commitment summarizes the current status of the title to the property,
identifies the conditions, exceptions and/or limitations that the title
insurer intends to attach to the policy and identifies items appearing on the
title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is often
performed by a lawyer, an escrow company or by a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents
and arranges the transfer of funds to pay off prior loans and extinguish the
liens securing such loans. Title policies are then issued insuring the
priority of the mortgage of the real property mortgage lender in the amount of
its mortgage loan and the buyer in the amount of the purchase price. The time
lag between the opening of the title order and the issuance of the title
policy is usually between 30 and 90 days.
Issuing the Policy: Direct vs. Agency. A title policy can be issued directly
by a title insurer or indirectly on behalf of a title insurer through agents
which are not themselves licensed as insurers. Where the policy is issued by a
title insurer, the search is performed by or at the direction of the title
insurer, and the premium is collected and retained by the title insurer. Where
the policy is issued by an agent, the agent performs the search, examines the
title, collects the premium and retains a portion of the premium. The
remainder of the premium is remitted to the title insurer as compensation for
bearing the risk of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from region to region. A
title insurer is obligated to pay title claims in accordance with the terms of
its policies, regardless of whether it issues its policy directly or
indirectly through an agent.
Premiums. The premium for title insurance is due and earned in full when the
real estate transaction is closed. Premiums are generally calculated with
reference to the policy amount. The premium charged by a title insurer or an
agent is subject to regulation in most areas. Such regulations vary from state
to state.
Because the policy insures against matters that have occurred prior to its
issuance (rather than future occurrences, as with most other types of
insurance), the major portion of the premium is related to the service
performed in ascertaining the current status of title to the property.
2
THE COMPANY'S TITLE INSURANCE OPERATIONS
Overview. The Company, through First American and its subsidiaries,
transacts the business of title insurance through a network of more than 300
branch offices and over 4,000 independent agents. Through its branch office
and agent network, the Company issues policies in all states (except Iowa),
the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the
Bahama Islands, Canada, Mexico, Bermuda, the United Kingdom and Australia. In
Iowa, the Company provides abstracts of title only, because title insurance is
not permitted. Through acquisitions and start-ups during the mid-1980s, the
Company has grown from a large regional company to a nationwide company,
becoming less dependent on operating revenues from any one state or region.
Based on industry statistics showing gross title fees in the major areas in
which the Company operates, in 1995 the Company had the largest or second
largest share of the title insurance market in 33 states and in the District
of Columbia. In addition, the Company's national market share grew from 19.5%
in 1994 to 20.4% in 1995. Industry statistics for 1996 are not currently
available.
The Company plans to continue increasing its share of the title insurance
market through strategic acquisitions and further development of its existing
branch office and agency operations. The Company also will continue to focus
on expanding its share of the higher margin title insurance business conducted
on behalf of commercial clients. While commercial title business has been slow
for several years, the Company believes its national commercial market share
has grown through programs directed at major developers, lenders and law
firms.
Sales and Marketing. The Company markets its title insurance services to a
broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage
brokers, mortgage bankers, financial institutions and attorneys. In addition
to the referral market, the Company markets its title insurance services
directly to large corporate customers and certain mortgage lenders. As title
agents contribute a large portion of the Company's revenues, the Company also
markets its title insurance services to independent agents. The Company's
marketing efforts emphasize the quality and timeliness of its services and its
national presence.
While virtually all personnel in the Company's title insurance business
assist in marketing efforts, the Company maintains a sales force of
approximately 1,000 persons dedicated solely to marketing. This sales force is
located throughout the Company's branch office network. The Company provides
its sales personnel with training in selling techniques, and each branch
manager is responsible for hiring the sales staff and ensuring that sales
personnel under his or her supervision are properly trained. In addition to
this sales force, the Company has approximately 20 sales personnel in its
national accounts department. One of the responsibilities of the national
accounts department sales personnel is the coordination of marketing efforts
directed at large real estate lenders and companies developing, selling,
buying or brokering properties on a multistate basis. The Company also
supplements the efforts of its sales force through general advertising in
various trade and professional journals.
The Company's increased commercial sales effort during the past decade has
enabled the Company to expand its commercial business base. Because commercial
transactions involve higher coverage amounts and yield higher premiums,
commercial title insurance business generates greater profit margins than does
residential title insurance business. Accordingly, the Company plans to
continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small percentage
of the Company's revenues, the Company believes that the acceptance of title
insurance in foreign markets has increased in recent years. Accordingly, the
Company plans to continue its international sales efforts, particularly in
Canada.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed
during the title search may require a determination as to whether an exception
should be taken in the policy. The Company believes that it is important for
the underwriting function
3
to operate efficiently and effectively at all decision making levels so that
transactions may proceed in a timely manner. To perform this function, the
Company has underwriters at the branch level, the regional level and the
national level. Based on the low turnover and longevity of First American's
employees and its continuing training programs, the Company believes that its
underwriting personnel are among the most experienced and well trained in the
title insurance industry.
Agency Operations. The relationship between the Company and each agent is
governed by an agency agreement which states the conditions under which the
agent is authorized to issue title insurance policies on behalf of the
Company. The agency agreement also prescribes the circumstances under which
the agent may be liable to the Company if a policy loss is attributable to
error of the agent. Such agency agreements typically have a term of one to
five years and are terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance industry
during the late 1980s, the Company instituted measures to strengthen its agent
selection and audit programs. In determining whether to engage an independent
agent, the Company investigates the agent's experience, background, financial
condition and past performance. The Company maintains loss experience records
for each agent and conducts periodic audits of its agents. The Company has
also increased the number of agent representatives and agent auditors that it
employs. Agent representatives periodically visit agents and examine their
books and records. In addition to periodic audits, a full agent audit will be
triggered if certain "warning signs" are evident. Warning signs that can
trigger an audit include the failure to implement Company required accounting
controls, shortages of escrow funds and failure to remit underwriting fees on
a timely basis.
Title Plants. The Company's network of title plants constitutes one of its
principal assets. A title search is conducted by searching the public records
or utilizing a title plant. While public records are indexed by reference to
the names of the parties to a given recorded document, most title plants
arrange their records on a geographic basis. Because of this difference,
records of a title plant are generally easier to search. Most title plants
also index prior policies, adding to searching efficiency. Many title plants
are computerized. Certain offices of the Company utilize jointly owned plants
or utilize a plant under a joint user agreement with other title companies.
The Company believes its title plants, whether wholly or partially owned or
utilized under a joint user agreement, are among the best in the industry.
The Company's title plants are carried on its balance sheet at original
cost, which includes the cost of producing or acquiring interests in title
plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A
properly maintained title plant has an indefinite life and does not diminish
in value with the passage of time. Therefore, in accordance with generally
accepted accounting principles, no provision is made for depreciation of these
plants. Since each document must be reviewed and indexed into the title plant,
such maintenance activities constitute a significant item of expense. The
Company is able to offset title plant maintenance costs at its plants through
joint ownership and access agreements with other title insurers and title
agents.
Reserves for Claims and Losses. The Company provides for title insurance
losses based upon its historical experience by a charge to expense when the
related premium revenue is recognized. The resulting reserve for known claims
and incurred but not reported claims reflects management's best estimate of
the total costs required to settle all claims reported to the Company and
claims incurred but not reported, and is considered by the Company to be
adequate for such purpose.
In settling claims, the Company occasionally purchases and ultimately sells
the interest of the insured in the real property or the interest of the
claimant adverse to the insured. The assets so acquired are carried at the
lower of cost or estimated realizable value. Notes, real estate and other
assets purchased or otherwise acquired in settlement of claims, net of
valuation reserves, totaled $11.1 million, $7.2 million and $6.0 million,
respectively, as of December 31, 1996.
4
Reinsurance and Coinsurance. The Company assumes and distributes large title
insurance risks through mechanisms of reinsurance and coinsurance. In
reinsurance agreements, in consideration for a portion of the premium, the
reinsurer accepts that part of the risk which the primary insurer cedes to the
reinsurer over and above the portion retained by the primary insurer. The
primary insurer, however, remains liable for the total risk in the event that
the reinsurer does not meet its obligation. As a general rule, the Company
does not retain more than $25 million of coverage on any single policy. Under
coinsurance agreements, each coinsurer is jointly and severally liable for the
risk insured, or for so much thereof as is agreed to by the parties. The
Company's reinsurance activities account for less than 1% of its total title
insurance operating revenues.
Competition. The title insurance business is highly competitive. The number
of competing companies and the size of such companies varies in the different
areas in which the Company conducts business. Generally, in areas of major
real estate activity, such as metropolitan and suburban localities, the
company competes with many other title insurers. Approximately 90 title
insurance underwriters are members of the American Land Title Association, the
title insurance industry's national trade association. The Company's major
nationwide competitors in its principal markets include Chicago Title and
Trust Company (which also includes Ticor Title Insurance Company and Security
Union Title Insurance Company) Commonwealth Land Title Insurance Company,
Lawyers Title Insurance Company, Stewart Title Guaranty Company, Old Republic
Title Insurance Group and Fidelity National Title Insurance Company. In
addition to these nationwide competitors, numerous agency operations
throughout the country provide aggressive competition on the local level.
The Company believes that competition for title insurance business is based
primarily on the quality and timeliness of service, because parties to real
estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In those states where prices
are not established by regulatory authorities, the price of title insurance
policies is also an important competitive factor. The Company believes that it
provides quality service in a timely manner at competitive prices.
THE COMPANY'S RELATED BUSINESSES
As an adjunct to its title insurance business, in 1986 the company embarked
on a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process. To
date, these businesses include real estate tax monitoring, mortgage credit
reporting, flood zone determination, mortgage loan servicing systems, other
property information and home warranty services. The development of these
businesses has allowed the Company to become one of the nation's leading
companies offering a full range of services to real property buyers and
mortgage lenders. The Company also operates a trust and banking business in
southern California.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
zone determination, mortgage loan servicing systems and other property
information services.
The tax monitoring service, established by the Company in 1987, advises real
property mortgage lenders of the status of property tax payments due on real
estate securing their loans. With the acquisition of TRTS Data Services, Inc.,
(now named First American Real Estate Tax Service, Inc.) in November 1991, the
Company believes that it is the second largest provider of tax monitoring
services in the United States.
Under a typical contract, a tax service provider monitors, on behalf of a
mortgage lender, the real estate taxes owing on properties securing such
lender's mortgage loans for the life of such loans. In general, providers of
tax monitoring services, such as the Company's tax service, indemnify mortgage
lenders against losses resulting from a failure to monitor delinquent taxes.
Where a mortgage lender requires that tax payments be impounded on behalf of
borrowers, providers of tax monitoring services, such as the Company's tax
service, may be required to monitor and oversee the transfer of these monies
to the taxing authorities and provide confirmation to lenders that such taxes
have been paid.
5
The Company's tax service business markets its product through a nationwide
sales staff which calls on servicers and originators of mortgage loans. The
Company's primary source of tax service business is from large multistate
mortgage lenders. The Company's only major nationwide competitor in the tax
service business is Transamerica Real Estate Tax Service. Because of its broad
geographic coverage and the large number of mortgage loans not being serviced
by a third party tax service provider, the Company believes that it is well
positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to region,
but generally falls within the $44 to $80 price range and is paid in full at
the time the contract is executed. The Company recognizes approximately 70% of
this fee in the year the contract is executed. The remaining 30% of the fee is
deferred over the remaining life of the contract. However, income taxes are
paid on the entire fee in the year the fee is received. The Company maintains
extremely small reserves for losses relating to its tax monitoring services
because historically the Company's losses relating to such services have been
negligible, and the Company is not presently aware of any reason why its
historical loss experience will not continue at current levels.
The Company's mortgage credit reporting service provides credit information
reports for mortgage lenders throughout the United States. These reports are
derived from two or more credit bureau sources and are summarized and prepared
in a standard form acceptable to mortgage loan originators and secondary
mortgage purchasers. The Company's mortgage credit reporting service has grown
primarily through acquisitions. In 1994, the Company acquired all of the
minority interests in its lower tier subsidiaries Metropolitan Credit
Reporting Services, Inc., and Metropolitan Property Reporting Services, Inc.
In 1994, the Company also acquired California Credit Data, Inc., and Prime
Credit Reports, Inc., and in 1995, the Company acquired Credco, Inc. (now
named First American Credco, Inc.). With the acquisition of First American
Credco, Inc., the Company believes that it is now the largest mortgage credit
reporting service in the United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now named
First American Flood Data Services, Inc.). This business furnishes to mortgage
lenders flood zone determination reports, which provide information on whether
or not property securing a loan is in a governmentally delineated special
flood hazard area. Federal legislation passed in 1994 requires that most
mortgage lenders obtain a determination of the current flood zone status at
the time each loan is originated and obtain updates during the life of the
loan. First American Flood Data Services, Inc., is the largest provider of
flood zone determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing
System (MLS), now known as Excelis, Inc. Excelis MLS is the only commercially
available real-time on-line servicing system that has been developed since
1990 to meet increasingly sophisticated market demands. The software employs
rules-based technology which enables the user to customize the system to fit
its individual servicing criteria and policies.
In December 1996, the Company acquired Ward Associates, now known as First
American Field Services. The company will be combined with First American's
existing field services company to provide comprehensive inspection and
property preservation services to mortgage lenders nationwide. With the
acquisition, the Company believes that it is now the second largest field
services company in the United States.
The Home Warranty Business. The Company's home warranty business commenced
operations in 1984, in part with the proceeds of a $1.5 million loan from the
Company which was, in 1986, converted to a majority equity interest. The
Company currently owns 79% of its home warranty business, which is operated as
a second tier subsidiary, with the balance owned by management of that
subsidiary. The Company's home warranty business issues one-year warranties
which protect homeowners against defects in household systems and appliances,
such as plumbing, water heaters and furnaces. The Company's home warranty
subsidiary currently charges approximately $245 to $295 for its basic home
warranty contract. Optional coverage is available for air conditioners, pools,
spas, washers, dryers and refrigerators for charges ranging from approximately
$25 to $125. For an additional charge, coverage is renewable annually at the
option of the homeowner upon approval by the home warranty subsidiary. Fees
for the warranties are paid at the closing of the home purchase and are
recognized ratably over a 12 month period. Home warranties are marketed
through real estate brokers and agents. This business is conducted in certain
counties of Arizona, California, Nevada, Texas and Washington. In early 1997,
the home warranty subsidiary expanded operations to North and South Carolina.
The principal competitor of the Company's home warranty business is American
Home Shield, a subsidiary of Service Master L.P.
6
The Trust Business. Since 1960, the Company has conducted a general trust
business in California, acting as trustee when so appointed pursuant to court
order or private agreement. In 1985, the Company formed a banking subsidiary
into which its subsidiary trust operation was merged. As of December 31, 1996,
the trust operation was administering fiduciary and custodial assets having a
market value in excess of $1 billion.
The Thrift Business. During 1988, the Company, through a majority owned
subsidiary, acquired an industrial loan corporation (the "Thrift") that
accepts thrift deposits and uses deposited funds to originate and purchase
loans secured by commercial properties in southern California. As of December
31, 1996, the Thrift had approximately $51.3 million of demand deposits and
$54.3 million of loans outstanding.
The loans made by the Thrift currently range in amount from $12,000 to
$1,000,000 with an average loan balance of $247,000. Loans are made only on a
secured basis, at loan-to-value percentages no greater than 75%. The Thrift
specializes in making commercial real estate loans and financing commercial
equipment leases. In excess of 91% of the Thrift's loans are made on a
variable rate basis. The average yield on the Thrift's loan portfolio as of
December 31, 1996, was 11%. A number of factors are included in the
determination of average yield, principal among which are loan fees and
closing points amortized to income, prepayment penalties recorded as income,
and amortization of discounts on purchased loans. The Thrift's primary
competitors in the southern California commercial real estate lending market
are other thrift and loan companies and, to a lesser extent, commercial banks.
In recent years, many of the commercial banks operating in southern California
have significantly reduced their involvement in the commercial real estate
lending market as a result of the regulatory requirements to which they are
subject. As a result, the Company has been able to enhance its competitive
position in this market and obtain relatively high yields on its loan
portfolio. In addition, the Company believes that many borrowers who might be
eligible for loans from commercial banks use thrift and loan companies, such
as the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months in duration.
The performance of the Thrift's loan portfolio is evaluated on an ongoing
basis by management of the Thrift. The Thrift places a loan on nonaccrual
status when two payments become past due. When a loan is placed on nonaccrual
status, the Thrift's general policy is to reverse from income previously
accrued but unpaid interest. Income on such loans is subsequently recognized
only to the extent that cash is received and future collection of principal is
probable. Interest income on nonaccrual loans which would have been recognized
during the year ended December 31, 1996, if all of such loans had been current
in accordance with their original terms, totaled $23,000. Interest income
actually recognized on these nonaccrual loans for the year ended December 31,
1996, was $10,000. The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994 1993 1992
---- ------ ------ ------ ------
($000)
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis...... $166 $1,956 $1,741 $1,833 $1,039
Accruing loans past due 90 or more days........
Troubled debt restructurings...................
---- ------ ------ ------ ------
Total........................................ $166 $1,956 $1,741 $1,833 $1,039
==== ====== ====== ====== ======
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,919,000 of potential problem
loans in existence as of December 31, 1996.
The Thrift's allowance for loan losses is established through charges to
earnings in the form of provision for loan losses. Loan losses are charged to,
and recoveries are credited to, the allowance for loan losses. The provision
for loan losses is determined after considering various factors, such as loan
loss experience, maturity of the portfolio, size of the portfolio, borrower
credit history, the existing allowance for loan losses, current
7
charges and recoveries to the allowance for loan losses, the overall quality
of the loan portfolio, and current economic conditions, as determined by
management of the Thrift, regulatory agencies and independent credit review
specialists. While many of these factors are essentially a matter of judgment
and may not be reduced to a mathematical formula, the Company believes that,
in light of the collateral securing its loan portfolio, the Thrift's current
allowance for loan losses is an adequate allowance against foreseeable losses.
The following table provides certain information with respect to the
Thrift's allowance for loan losses as well as charge-off and recovery
activity.
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994 1993 1992
------ ------ ---- ---- ----
($000)
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year............... $1,344 $ 950 $750 $500 $376
------ ------ ---- ---- ----
Charge-Offs:
Real estate-mortgage..................... (766) (194) (311) (66) (176)
Assigned lease payments.................. (5) (9) (9) (21) (57)
Other.................................... (44) (113)
------ ------ ---- ---- ----
(771) (203) (320) (131) (346)
------ ------ ---- ---- ----
Recoveries:
Real estate-mortgage..................... 26 55 3 14
Assigned lease payments.................. 18 35 28 32 64
Other.................................... 23 9
------ ------ ---- ---- ----
44 35 83 58 87
------ ------ ---- ---- ----
Net (charge-offs) recoveries............. (727) (168) (237) (73) (259)
Provision for losses..................... 433 562 437 323 383
------ ------ ---- ---- ----
Balance at end of year..................... $1,050 $1,344 $950 $750 $500
====== ====== ==== ==== ====
Ratio of net charge-offs during the year to
average loans outstanding during the year. 1.4% .4% .6% .2% .8%
====== ====== ==== ==== ====
The adequacy of the Thrift's allowance for loan losses is based on formula
allocations and specific allocations. Formula allocations are made on a
percentage basis which is dependent on the underlying collateral, the type of
loan and general economic conditions. Specific allocations are made as problem
or potential problem loans are identified and are based upon an evaluation by
the Thrift's management of the status of such loans. Specific allocations may
be revised from time to time as the status of problem or potential problem
loans changes.
The following table shows the allocation of the Thrift's allowance for loan
losses and the percent of loans in each category to total loans at the dates
indicated.
YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
($000)
LOAN CATEGORIES:
Real estate--mortgage.. $1,015 100 $1,300 99 $879 99 $635 98 $465 90
Real estate--
construction.......... 3 1 18 4
Assigned lease
payments.............. 34 41 71 1 95 1 15 5
Other.................. 1 20 1 2 1
------ --- ------ --- ---- --- ---- --- ---- ---
$1,050 100 $1,344 100 $950 100 $750 100 $500 100
====== === ====== === ==== === ==== === ==== ===
8
ACQUISITIONS
Commencing in the 1960s, the Company initiated a growth program with a view
to becoming a nationwide provider of title insurance. This program included
expansion into new geographic markets through internal growth and selective
acquisitions of over 100 local and regional title companies. During the mid-
1980s, the Company began expanding into other real estate related financial
services.
Since 1980, the Company has made strategic acquisitions designed to expand
not only its direct title operations, but also the range of services it can
provide to real property buyers and mortgage lenders. The following lists some
of the key acquisitions made in furtherance of this strategy:
YEAR OF
ACQUIRED ENTITY(1) ACQUISITION PRINCIPAL MARKET(S)
- ------------------ ----------- -------------------
TITLE INSURANCE:
Land Title Insurance Company of St. Louis(2) 1980 Missouri
St. Paul Title Insurance Corporation(3) 1982 Midwest
First American Title Guaranty Holding
Company(4) 1983 California
Midland Title Security, Inc. 1986 Ohio
Columbia Real Estate Title Insurance
Company(3) 1987 District of Columbia
The Port Lawrence Title Insurance and Trust
Company 1988 Ohio
Universal Title Insurance Company(3) 1988 Minnesota
Mortgage Guarantee and Title Company 1988 Rhode Island
Security Title & Trust Agency of Alaska,
Inc. 1989 Alaska
Southwest Title and Trust Company(2) 1990 Oklahoma
Preferred Land Title Services, Inc. 1992 New York City
Fidelity Title and Guaranty Company 1994 Florida
Republic Title of Texas, Inc. 1994 Texas
Consolidated Title & Abstract Company 1996 Minnesota
Superior Abstract & Title Company(5) 1996 Michigan
REAL ESTATE INFORMATION SERVICES:
Metropolitan Realty Tax Service(5) 1990 East Coast
TRTS Data Services, Inc. 1991 Nationwide
Metropolitan Credit Reporting Services, Inc. 1993 Northeast
Metropolitan Property Reporting Services,
Inc. 1993 Northeast
Credco, Inc. 1995 Nationwide
Flood Data Services, Inc. 1995 Nationwide
Excelis Mortgage Loan Servicing System(5) 1996 Nationwide
Cuffaro Appraisal Services 1996 West Coast
Ward Associates 1996 Nationwide
The Robertson Company 1996 West Coast
HOME WARRANTY:
First American Home Buyers Protection 1986 Arizona, California,
Corporation(6) Nevada, Texas and
Washington
- --------
(1)Unless otherwise indicated, all entities listed are wholly owned by the
Company.
(2)99% owned.
(3)Subsequently merged into First American Title Insurance Company.
(4)80% owned.
(5)Asset acquisition.
(6)79% owned.
9
REGULATION
The title insurance business is heavily regulated by state insurance
regulatory authorities. These authorities generally possess broad powers with
respect to the licensing of title insurers, the types and amounts of
investments that title insurers may make, insurance rates, forms of policies
and the form and content of required annual statements, as well as the power
to audit and examine title insurers. Under state laws, certain levels of
capital and surplus must be maintained and certain amounts of securities must
be segregated or deposited with appropriate state officials. Various state
statutes require title insurers to defer a portion of all premiums in a
reserve for the protection of policyholders and to segregate investments in a
corresponding amount. Further, most states restrict the amount of dividends
and distributions a title insurer may make to its shareholders.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, the
Company's trust company is regulated by the California Superintendent of Banks
and the Company's industrial loan company is regulated by the California
Commissioner of Corporations.
INVESTMENT POLICIES
The Company invests primarily in cash equivalents, federal and municipal
governmental securities, mortgage loans and investment grade debt and equity
securities. The largely fixed income portfolio is classified in the Company's
financial statements as "available for sale." In addition to the Company's
investment strategy, state laws impose certain restrictions upon the types and
amounts of investments that may be made by the Company's regulated
subsidiaries.
Additionally, on April 21, 1992, the Company entered into a $65 million
Credit Agreement with a syndicate of banks that includes The Chase Manhattan
Bank (National Association) as both lender and agent for the syndicate (the
"Credit Agreement"). Under the terms of the Credit Agreement, a term loan of
$65 million was made to the Company on April 27, 1992, and the proceeds
thereof were used to retire approximately $63 million of demand and term
indebtedness. The Credit Agreement, as amended contains investment
restrictions limiting the types and amounts of investments that the Company
and its subsidiaries may make. Such restrictions limit the investments in and
advances to subsidiaries and affiliated companies that the Company may make
and generally limit the Company's other investments to investment grade
securities, such as U.S. Treasury securities, insured bank time deposits or
certificates of deposit, repurchase obligations secured by U.S. Treasury
securities, bank commercial paper and secured money market funds. The Company
is, however, permitted to make certain additional investments not in excess of
25% of stockholders' equity, of which no more than 60% may be in equity
securities and no more than $5 million may be with any one issuer.
EMPLOYEES
The following table provides a summary of the total number of employees of
the Company as of December 31, 1996:
NUMBER OF
BUSINESS EMPLOYEES
-------- ---------
Title insurance................................................. 8,957
Real estate information services................................ 2,304
Home warranty................................................... 249
Trust and banking............................................... 101
------
Total......................................................... 11,611
======
10
ITEM 2. PROPERTIES.
The Company owns two adjacent office buildings in Santa Ana, California,
which house its executive offices, its trust and banking subsidiary and the
Orange County title insurance branch operations. This complex, which contains
approximately 105,000 square feet of floor space and an enclosed parking area,
comprises one city block. The Company also owns an 18,000 square foot office
building, located across the street from its main offices, that will provide
space for expansion of its home office operations.
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400
locations throughout the United States and Canada, principally for their
respective title operations.
The Company's real estate information subsidiary, First American Real Estate
Information Services, Inc. ("FAREISI"), owns a building in Irving, Texas,
which houses its national operations center. This building contains 70,000
square feet of office space and was purchased in September 1992. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In addition, FAREISI and its subsidiaries lease office
space in more than 75 locations throughout the United States, principally for
their respective operations.
In January 1997, FAREISI executed a lease for a 231,000 square foot office
building in Dallas, Texas. This building will provide FAREISI with the
adequate space needed to consolidate their expanded operations. Occupancy of
this building will commence in April 1997.
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys,
California, which contains a 20,000 square foot office building, a 7,000
square foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its subsidiaries is
in good condition and adequate for its intended use.
ITEM 3. LEGAL PROCEEDINGS.
Set forth below is a brief description of material pending legal
proceedings, other than ordinary routine litigation incidental to the
Company's business, to which the Company or any of its subsidiaries is a party
or of which any of their properties is the subject. The Company is involved in
numerous routine legal proceedings incidental to the businesses described in
Item 1 above. Some of these proceedings involve claims for damages in material
amounts. At this time, however, the Company does not anticipate that the
resolution of any of these proceedings will materially and adversely affect
its financial condition.
On April 13, 1990, a civil action entitled Brown, et al. v. Ticor Title
Insurance Co., et al., Case No. Civ 90-0577 (PHX-SMM) (U.S. Dist. Ct. Ariz.),
was filed in the U.S. District Court in Phoenix, Arizona, by Walter Thomas
Brown and Jeffrey L. Dziewit, as purported representatives of title insurance
purchasers in Arizona and Wisconsin, alleging violation by First American
Title Insurance Company ("First American") and other title insurers of federal
antitrust laws in the alleged fixing of rates for title insurance and for
search and examination services by reason of defendants' participation in
state-regulated rating bureaus in the two states. On October 11, 1994, the
Judicial Panel on Multi-district Litigation ordered that an action entitled
Segall, et al. v. Stewart Title Guaranty Co., et al., be transferred from the
U.S. District Court for the Eastern District of Wisconsin to the District of
Arizona for coordinated or consolidated pretrial proceedings with Brown. These
two actions are now consolidated and part of MDL-94-1027, under the title "In
Re: Title Search and Examination Services Antitrust Litigation." Segall is a
civil suit filed on behalf of a purported class of purchasers of title
insurance in Wisconsin against certain title insurance companies and
individuals. The Segall suit alleges that the defendants violated federal
antitrust laws by reason of the defendants' participation in the state-
regulated rating bureau in Wisconsin. The purported plaintiff class includes
the Wisconsin plaintiff class members alleged in Brown as well as some
additional purported class members. First American, along with the other
defendants in
11
these actions, has entered into an agreement with the plaintiffs to settle both
actions that has been approved by the District Court. The Court's order
approving the settlement agreement became final on July 24, 1996. The Company
does not believe that compliance with this agreement will materially and
adversely affect its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's common stock began trading on the New York Stock Exchange
(ticker symbol FAF) on December 3, 1993. Prior to December 3, 1993, the
Company's common stock was traded over-the-counter on the NASDAQ National
Market System. The approximate number of record holders of common stock on
February 21, 1997, was 3,087.
High and low stock prices and dividends for the last two years were:
1996 1995
----------------------- -----------------------
HIGH-LOW CASH HIGH-LOW CASH
QUARTER ENDED RANGE DIVIDENDS RANGE DIVIDENDS
- ------------- ------------- --------- ------------- ---------
March 31........................ $32.00-$25.13 $.15 $20.63-$16.75 $.15
June 30......................... $33.75-$24.88 $.18 $25.50-$19.13 $.15
September 30.................... $35.75-$29.25 $.18 $25.38-$22.75 $.15
December 31..................... $41.13-$33.63 $.18 $27.38-$21.75 $.15
While the Company expects to continue its policy of paying regular quarterly
cash dividends, future dividends will be dependent on future earnings,
financial condition and capital requirements. The payment of dividends is
subject to the restrictions described in Notes 2 and 8 to the consolidated
financial statements included in "Item 8. Financial Statements and
Supplementary Data" of Part II of this report.
RECENT SALES OF UNREGISTERED SECURITIES
In the last three years, the Company has issued unregistered shares of its'
common stock to the sellers of the businesses in the acquisitions listed below.
NUMBER CONSIDERATION
DATE OF SALE OF SHARES RECEIVED
- ------------ --------- -------------
March 1, 1994........................................... 65,265 $1,256,290
November 4, 1994........................................ 20,000 $ 397,500
September 14, 1995...................................... 45,000 $1,108,000
December 29, 1995....................................... 60,000 $1,605,000
September 13, 1996...................................... 65,375 $2,173,719
December 10, 1996....................................... 137,143 $5,417,149
12
ITEM 6. SELECTED FINANCIAL DATA.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
YEAR ENDED DECEMBER 31
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PERCENT, PER SHARE AMOUNTS AND
EMPLOYEE DATA)
Revenues................ $1,597,566 $1,250,216 $1,376,393 $1,398,426 $1,115,467
Income before cumulative
effect of a change in
accounting for income
taxes (Note A)......... $ 53,589 $ 7,587 $ 18,945 $ 62,091 $ 43,258
Net income.............. $ 53,589 $ 7,587 $ 18,945 $ 66,291 $ 43,258
Total assets............ $ 979,794 $ 873,778 $ 828,649 $ 786,448 $ 691,279
Notes and contracts
payable................ $ 71,257 $ 77,206 $ 89,600 $ 85,022 $ 81,981
Stockholders' equity.... $ 352,465 $ 302,767 $ 292,110 $ 283,718 $ 216,842
Return on average
stockholders' equity... 16.4% 2.6% 6.6% 26.5% 24.4%
Cash dividends on common
shares................. $ 7,928 $ 6,850 $ 6,869 $ 5,840 $ 3,989
Per share of common
stock (Note B)--
Income before
cumulative effect of a
change in accounting
for income taxes...... $ 4.68 $ .67 $ 1.66 $ 5.47 $ 4.55
Net income............. $ 4.68 $ .67 $ 1.66 $ 5.84 $ 4.55
Stockholders' equity... $ 30.51 $ 26.53 $ 25.63 $ 24.93 $ 19.26
Cash dividends......... $ .69 $ .60 $ .60 $ .51 $ .41
Number of common shares
outstanding--
Weighted average during
the year.............. 11,451 11,403 11,447 11,353 9,502
End of year............ 11,554 11,411 11,395 11,381 11,260
Title orders opened
(Note C)............... 1,027 894 873 1,218 1,048
Tile orders closed (Note
C)..................... 775 667 723 933 809
Number of employees..... 11,611 10,149 9,033 10,679 8,694
- --------
Note A--On January 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." As a
result, the Company recognized a benefit of $4.2 million, or $.37 per
share representing the cumulative effect of a change in accounting for
income taxes.
Note B--Per share information relating to net income is based on the weighted
average number of shares outstanding for the years presented. Per share
information relating to stockholders' equity is based on shares
outstanding at the end of each year.
Note C--Title order volumes are those processed by the direct title operations
of the Company and do not include orders processed by agents.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
Overview. As with all providers of real estate-related financial and
informational services, the Company's revenues depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
The majority of the Company's revenues for the title insurance and real estate
information segments result from resales and refinancings of residential real
estate, and to a lesser extent, from commercial transactions and the
construction and sale of new properties. Revenues for the Company's home
warranty segment result primarily from residential resale activity and do not
benefit from refinancings. Traditionally, the greatest volume of real estate
activity, particularly residential resale, has occurred in the spring and
summer months. However, numerous actions taken by the Federal Reserve Board
during 1992 and 1993 to stimulate economic recovery caused unusual
fluctuations in the traditional pattern of real estate activity. During 1993,
mortgage interest rates
13
fell to their lowest level in 25 years. This decline in rates caused an
unprecedented volume of refinance transactions and the Company's title
insurance and real estate information segments processed record order volumes.
Due to inflationary concerns, the Federal Reserve Board began a succession of
interest rate increases in February 1994. The resulting increase in mortgage
interest rates adversely affected the Company's revenue base in the second
half of 1994 (primarily the fourth quarter) as refinance activity came to a
virtual halt. This, coupled with the persistently poor real estate economy in
California and a return of the traditional seasonal real estate cycle,
resulted in a low inventory of open transactions going into 1995. As a result,
1995 first quarter operating revenues experienced a 30% decline when compared
with the same period of the prior year. In response to the severe decline in
new orders, the Company instituted personnel reductions totaling 26% of the
work force from March 1994 through February 1995. However, the cost-cutting
measures lagged the revenue declines resulting in losses for the fourth
quarter 1994 and the first quarter 1995. Mortgage interest rates peaked in
January 1995 and decreased throughout the remainder of the year and into 1996,
helped by an easing of monetary policy by the Federal Reserve Board. This
decrease in mortgage interest rates, as well as increased consumer confidence,
contributed significantly to an improved national real estate economy during
the second half of 1995, and resulted in a 26% improvement in operating
revenues when compared to the first half of 1995. This resurgence in real
estate activity generated a high inventory of open transactions going into
1996, which together with the continuation of lower mortgage interest rates,
the improved national real estate economy and the Company's successful
integration of its diverse businesses, resulted in record revenues and strong
profits for 1996.
Operating revenues. A summary by segment of the Company's operating revenues
is as follows:
1996 % 1995 % 1994 %
---------- --- ---------- --- ---------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance:
Direct Operations................ $ 626,314 40 $ 517,616 42 $ 562,566 41
Agency Operations................ 641,919 41 517,173 42 659,015 49
---------- --- ---------- --- ---------- ---
1,268,233 81 1,034,789 84 1,221,581 90
Real Estate Information............ 246,745 16 145,755 12 94,816 7
Home Warranty...................... 38,351 2 32,531 3 28,116 2
Trust and Banking.................. 17,839 1 14,110 1 12,433 1
---------- --- ---------- --- ---------- ---
$1,571,168 100 $1,227,185 100 $1,356,946 100
========== === ========== === ========== ===
Operating revenues from direct title operations increased 21.0% in 1996 when
compared with the same period of the prior year. This increase was
attributable to a 16.2% increase in the number of title orders closed by the
Company's direct operations, as well as a 4.1% increase in the average
revenues per order closed. The Company's direct operations closed 775,100
title orders during 1996, as compared with 667,200 title orders closed during
1995. This increase was primarily due to the continuation of lower mortgage
interest rates, the improved national real estate economy and an increase in
the Company's national market share. The average revenues per order closed
were $808 for 1996, as compared with $776 for the same period of the prior
year. This increase was primarily attributable to an increased mix of
residential resale activity and, to lesser extent, a resurgence in commercial
real estate activity. Operating revenues from direct title operations
decreased 8.0% in 1995 as compared with 1994. This decrease was primarily
attributable to a 7.7% decrease in the number of title orders closed by the
Company's direct operations. The Company's direct title operations closed
667,200 title orders during 1995, as compared with 722,900 title orders closed
during 1994. This decrease was attributable to higher interest rates and
inclement weather which resulted in reduced national real estate activity in
the first half of 1995. Operating revenues from agency title operations, which
are more concentrated in the midwestern and eastern sectors of the country,
increased 24.1% in 1996 over 1995 and decreased 21.5% in 1995 from 1994. These
fluctuations were primarily attributable to the same factors affecting direct
operations mentioned above, compounded by the inherent delay in the reporting
by agents.
14
Real estate information operating revenues increased 69.3% in 1996 over
1995. This increase was primarily attributable to the same factors affecting
title insurance mentioned above and, to a lesser extent, $11.3 million of
operating revenues contributed by new acquisitions. Real estate information
operating revenues increased 53.7% in 1995 over 1994. This increase was
primarily attributable to $59.8 million of operating revenues contributed by
new acquisitions.
Home warranty operating revenues increased 17.9% in 1996 over 1995 and 15.7%
in 1995 over 1994. These increases were primarily attributable to improvements
in certain of the residential resale markets in which this segment operates,
successful geographic expansion, increased consumer awareness and an increase
in the number of annual renewals.
Investment and other income. Investment and other income increased 14.6% in
1996 over 1995. This increase was primarily attributable to an increase in
realized investment gains of $1.7 million, as well as an increase in fixed
income securities, offset in part by a 5.4% decrease in the average investment
portfolio balance. Investment and other income increased 18.4% in 1995 over
1994. This increase was primarily due to a $.7 million fire insurance
recovery, an increase of $1.3 million in realized investment gains and
increased equity in earnings of affiliates, offset in part by a 9.3% decrease
in the average investment portfolio balance. See Note 9 to the consolidated
financial statements for additional details on investment and other income.
Salaries and other personnel costs. A summary by segment of the Company's
salaries and other personnel costs is as follows:
1996 % 1995 % 1994 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance.......................... $413,164 78 $352,745 82 $369,100 87
Real Estate Information.................. 90,559 17 57,738 13 36,073 8
Home Warranty............................ 9,075 2 7,714 2 7,078 2
Trust and Banking........................ 6,621 1 4,799 1 4,087 1
Corporate................................ 11,831 2 8,988 2 6,990 2
-------- --- -------- --- -------- ---
$531,250 100 $431,984 100 $423,328 100
======== === ======== === ======== ===
The Company's title insurance segment is labor intensive; accordingly, a
major variable expense component is salaries and other personnel costs. This
expense component is affected by two competing factors: the need to monitor
personnel changes to match corresponding or anticipated new orders, and the
need to provide quality service. In addition, the Company's growth in
operations servicing builder and lender business has created ongoing fixed
costs required to service accounts.
Title insurance personnel expenses increased 17.1% in 1996 over 1995. This
increase was primarily attributable to the costs incurred servicing the heavy
volume of title orders that commenced during the latter part of 1995 and
continued into 1996 and, to a lesser extent, acquisition activity. The
Company's direct operations opened 1,026,900 orders in 1996, an increase of
14.8% when compared with the 894,400 orders opened during 1995. Title
insurance personnel expenses decreased 4.4% in 1995 from 1994. This decrease
related directly to the Company's intensified efforts during the latter part
of 1994 and the beginning of 1995 to adjust personnel and related expense
levels commensurate with new order counts. This cost-containment process
stabilized the cost of the labor base at a more acceptable level as business
improved during the second quarter 1995. This decrease was offset, in part, by
acquisition activity and modest personnel increases in the second half of
1995.
Real estate information personnel expenses increased 56.8% in 1996 over
1995. This increase was primarily attributable to costs incurred servicing the
increase in business volume, as well as approximately $8.6 million of costs
attributable to company acquisitions. Personnel expenses increased 60.1% in
1995 over 1994. This increase was primarily due to $20.0 million of personnel
costs associated with company acquisitions, offset in part by personnel
reductions associated with the decline in tax service contracts which began in
the last half of 1994 and continued into the first half of 1995. Contributing
to the increases in 1996 and 1995 were costs associated with in-house
development of new electronic communications delivery systems for information-
based products.
15
Home warranty personnel expenses increased 17.6% in 1996 over 1995 and 9.0%
in 1995 over 1994. These increases were primarily due to the additional
personnel required to service the increased business volume in the states this
segment currently services, as well as new geographic expansion and modest
salary increases.
Premiums retained by agents. A summary of agent retention and agent revenues
is as follows:
1996 1995 1994
-------- -------- --------
(IN THOUSANDS, EXCEPT
PERCENT)
Agent Retention...................................... $516,593 $413,444 $533,598
======== ======== ========
Agent Revenues....................................... $641,919 $517,173 $659,015
======== ======== ========
% Retained by Agents................................. 80% 80% 81%
======== ======== ========
The premium split between underwriter and agents is in accordance with their
respective agency contracts and can vary from region to region due to
divergence's in real estate closing practices as well as rating structures. As
a result, the percentage of title premiums retained by agents can vary due to
the geographical mix of revenues from agency operations.
Other operating expenses. A summary by segment of the Company's other
operating expenses is as follows:
1996 % 1995 % 1994 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance.......................... $218,443 67 $188,024 72 $184,723 79
Real Estate Information.................. 93,932 29 61,167 23 37,479 16
Home Warranty............................ 1,323 1,843 1 1,901 1
Trust and Banking........................ 6,982 2 5,650 2 4,829 2
Corporate................................ 7,064 2 3,927 2 3,600 2
-------- --- -------- --- -------- ---
$327,744 100 $260,611 100 $232,532 100
======== === ======== === ======== ===
Title insurance other operating expenses increased 16.2% in 1996 over 1995
and 1.8% in 1995 over 1994. These increases were primarily the result of the
impact created by the changes in incremental costs (i.e., office supplies,
document reproduction, messenger services, plant maintenance and title search
costs) associated with the relative changes in title order volume. Also
contributing to the increases were marginal price level increases, offset in
part by successful cost-containment programs.
Real estate information other operating expenses increased 53.6% in 1996
over 1995 and 63.2% in 1995 over 1994. These increases were primarily
attributable to costs incurred servicing the increased business activity, as
well as $7.0 million and $28.8 million of other operating costs relating to
acquisitions in 1996 and 1995, respectively, offset in part by cost-
containment programs. Contributing to the increases were costs incurred
developing and enhancing new electronic communications delivery systems for
information-based products and costs associated with assimilating and
expanding this segment's increased operations.
Provision for title losses and other claims. A summary by segment of the
Company's provision for title losses and other claims is as follows:
1996 % 1995 % 1994 %
------- --- ------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance............................ $58,909 68 $68,338 76 $ 93,012 84
Real Estate Information.................... 4,453 5 3,166 3 2,129 2
Home Warranty.............................. 23,055 27 18,857 21 15,022 14
Trust and Banking.......................... 70 26 67
------- --- ------- --- -------- ---
$86,487 100 $90,387 100 $110,230 100
======= === ======= === ======== ===
16
The provision for title insurance losses expressed as a percentage of title
insurance operating revenues was 4.6% in 1996, 6.6% in 1995, and 7.6% in 1994.
These decreases reflect an ongoing improvement in the Company's claims
experience. The provision for home warranty losses as a percentage of home
warranty operating revenues was 60.1% in 1996, 58.0% in 1995 and 53.4% in
1994. These increases were primarily attributable to increases in the average
number of claims per contract experienced during these periods, resulting from
the home warranty operation offering extended coverages on its warranties.
Depreciation and amortization. Depreciation and amortization as well as
capital expenditures are summarized in Note 15 to the consolidated financial
statements.
Interest. Interest expense decreased 23.2% in 1996 when compared with 1995.
This decrease was primarily attributable to a 13.5% reduction in the average
outstanding debt balance and a reduced interest rate option on the Company's
variable rate indebtedness. See Note 8 to the consolidated financial
statements for a description of the Company's borrowings under its bank credit
agreement. Interest expense remained relatively unchanged in 1995 when
compared with 1994 primarily as the result of a constant average outstanding
debt balance and comparable average interest rates.
Minority interests. Minority interests in net income of consolidated
subsidiaries increased 23.1% in 1996 over 1995 and decreased 27.6% in 1995
from 1994. The increase in 1996 over 1995 was primarily attributable to the
relatively strong operating results of the Company's less than 100% owned
subsidiaries, offset in part by purchases of shares from minority
shareholders. The decrease in 1995 over 1994 was primarily attributable to the
Company's purchase of shares from minority shareholders.
Pretax profits. A summary by segment of the Company's pretax profits is as
follows:
1996 % 1995 % 1994 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance....................... $ 66,056 51 $ 17,540 37 $ 37,819 58
Real Estate Information............... 52,581 40 19,690 42 17,371 27
Home Warranty......................... 8,178 6 6,828 14 6,709 10
Trust and Banking..................... 3,728 3 3,304 7 3,214 5
-------- --- -------- --- -------- ---
130,543 100 47,362 100 65,113 100
-------- === -------- === -------- ===
Corporate............................. (24,678) (19,948) (17,415)
-------- -------- --------
$105,865 $ 27,414 $ 47,698
======== ======== ========
The Company's profit margins and pretax profits vary according to a number
of factors, including the volume, composition (residential or commercial) and
type (resale, refinancing or new construction) of real estate activity. For
example, in title insurance operations, commercial transactions tend to
generate higher revenues and greater profit margins than residential
transactions. Further, profit margins from refinancing activities are lower
than those from resale activities because in many states there are premium
discounts on, and cancellation rates are higher for, refinancing transactions.
Cancellations of title orders adversely affect pretax profits because costs
are incurred in opening and processing such orders but revenues are not
generated. Also, the Company's direct title insurance business has significant
fixed costs in addition to its variable costs. Accordingly, profit margins
from the Company's direct title insurance business improve as the volume of
title orders closed increases. Title insurance profit margins are also
affected by the percentage of operating revenues generated by agency
operations. Profit margins from direct operations are generally higher than
from agency operations due primarily to the large portion of the premium that
is retained by the agent. Real estate information pretax profits are generally
unaffected by the type of real estate activity but increase as the volume of
residential real estate loan transactions increases. Home warranty pretax
profits improve as the volume of residential resales increases. In general,
the title insurance business is a lower margin business when compared to the
Company's other segments. The lower margins reflect the high fixed cost of
producing title evidence whereas the corresponding revenues are subject to
regulatory and competitive pricing constraints.
17
The increases in corporate expenses were primarily attributable to increased
costs associated with supporting the overall growth of the Company's
businesses as well as unallocated expenses associated with employee benefit
plans.
Premium taxes. A summary by pertinent segment of the Company's premium taxes
is as follows:
1996 % 1995 % 1994 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance............................. $15,927 96 $13,016 96 $14,873 96
Home Warranty............................... 749 4 611 4 580 4
------- --- ------- --- ------- ---
$16,676 100 $13,627 100 $15,453 100
======= === ======= === ======= ===
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical
mix of title insurance and home warranty operating revenues. Premium taxes for
title insurance increased 22.4% in 1996 over 1995 and decreased 12.5% in 1995
from 1994. These changes correspond to the relative changes in title insurance
operating revenues. Premium taxes as a percent of title insurance operating
revenues remained relatively constant at approximately 1.2%. Premium taxes for
home warranty increased 22.6% in 1996 over 1995 and 5.3% in 1995 over 1994.
These changes reflect the level of home warranty premiums written during the
respective periods.
Income taxes. The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 39.9% for 1996, 45.0% for 1995 and 41.2% for 1994. The decrease in the
effective rate for the current year when compared with the prior year was
primarily attributable to changes in the ratio of permanent differences to
income before income taxes. The increase for 1995 when compared with 1994 was
primarily due to increases in state income and franchise taxes which resulted
from the Company's non-insurance subsidiaries' contribution to pretax profits.
Information regarding items included in the reconciliation of the effective
rate with the federal statutory rate is contained in Note 10 to the
consolidated financial statements.
Net income. Net income and per share information are summarized as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS, EXCEPT
INCOME PER SHARE)
Net income............................................. $53,589 $ 7,587 $18,945
======= ======= =======
Weighted average shares................................ 11,451 11,403 11,447
======= ======= =======
Net income per share................................... $ 4.68 $ 0.67 $ 1.66
======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $88.3 million, $30.4
million and $53.9 million for 1996, 1995 and 1994, respectively, after claim
payments of $78.0 million, $66.6 million and $87.6 million, respectively. The
principal non-operating uses of cash and cash equivalents for the three-year
period ended December 31, 1996, were for additions to the investment
portfolio, capital expenditures, company acquisitions and the repayment of
debt. The most significant nonoperating sources of cash and cash equivalents
were from proceeds from the sales and maturities of certain investments, and
in 1994, proceeds from the sale of property and equipment and proceeds from
the issuance of debt. The net effect of all activities on total cash and cash
equivalents was an increase of $27.5 million for 1996, a decrease of $8.3
million in 1995 and an increase of $23.9 million in 1994.
18
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1996, was 16.0% as compared with 19.1% as of the prior year end.
The decrease was primarily attributable to an increase in the capital base due
to the net income for the year, as well as a $5.9 million net decrease in
debt. The Company maintains a $30.0 million revolving line of credit which
remained unused as of December 31, 1996. This credit agreement is more fully
described in Note 8 to the consolidated financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 1997 from its
principal subsidiary, First American Title Insurance Company, is $49.7
million. Such restrictions have not had, nor are they expected to have, an
impact on the Company's ability to meet its cash obligations.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated cash requirements. The
Company's strong financial position will enable management to react to future
opportunities for acquisitions or other investments in support of the
Company's continued growth and expansion.
19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Separate financial statements for subsidiaries not consolidated and 50% or
less owned persons accounted for by the equity method have been omitted
because, if considered in the aggregate, they would not constitute a
significant subsidiary.
INDEX
PAGE
NO.
----
Report of Independent Accountants.......................................... 21
Financial Statements:
Consolidated Balance Sheets.............................................. 22
Consolidated Statements of Income........................................ 24
Consolidated Statements of Stockholders' Equity.......................... 25
Consolidated Statements of Cash Flows.................................... 26
Notes to Consolidated Financial Statements............................... 27
Unaudited Quarterly Financial Data......................................... 42
Financial Statement Schedules:
I.Summary of Investments--Other than Investments in Related Parties...... 43
II.Condensed Financial Information of Registrant......................... 44
III.Supplementary Insurance Information.................................. 48
IV.Reinsurance........................................................... 50
V.Valuation and Qualifying Accounts...................................... 51
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or in the notes thereto.
20
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of The First American Financial Corporation and its subsidiaries at
December 31, 1996 and 1995, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 11, 1997
21
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
--------------------------
1996 1995
------------ ------------
ASSETS
------
Cash and Cash Equivalents.......................... $173,439,000 $145,902,000
------------ ------------
Accounts and Accrued Income Receivable, less
allowances ($5,351,000 and $5,970,000)............ 89,355,000 75,069,000
------------ ------------
Investments:
Deposits with savings and loan associations and
banks........................................... 21,674,000 18,637,000
Debt securities.................................. 130,576,000 128,875,000
Equity securities................................ 8,517,000 21,445,000
Other long-term investments...................... 30,414,000 25,230,000
------------ ------------
191,181,000 194,187,000
------------ ------------
Loans Receivable................................... 54,256,000 46,134,000
------------ ------------
Property and Equipment, at cost:
Land............................................. 15,869,000 15,031,000
Buildings........................................ 77,265,000 73,580,000
Furniture and equipment.......................... 129,783,000 103,885,000
Less--accumulated depreciation................... (92,451,000) (73,672,000)
------------ ------------
130,466,000 118,824,000
------------ ------------
Title Plants and Other Indexes..................... 94,226,000 82,454,000
------------ ------------
Assets Acquired in Connection with Claim
Settlements....................................... 24,270,000 25,592,000
------------ ------------
Deferred Income Taxes.............................. 38,401,000 39,994,000
------------ ------------
Goodwill and Other Intangibles, less accumulated
amortization ($11,116,000 and $9,227,000)......... 87,189,000 71,825,000
------------ ------------
Deferred Policy Acquisition Costs.................. 24,753,000 24,342,000
------------ ------------
Other Assets....................................... 72,258,000 49,455,000
------------ ------------
$979,794,000 $873,778,000
============ ============
See Notes to Consolidated Financial Statements
22
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
DECEMBER 31
-------------------------
1996 1995
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Demand Deposits...................................... $ 51,321,000 $ 43,418,000
------------ ------------
Accounts Payable and Accrued Liabilities:
Accounts payable................................... 7,218,000 6,289,000
Salaries and wages................................. 32,553,000 20,872,000
Pension costs...................................... 32,592,000 26,228,000
Other.............................................. 57,962,000 27,549,000
------------ ------------
130,325,000 80,938,000
------------ ------------
Deferred Revenue..................................... 104,133,000 104,315,000
------------ ------------
Reserve for Known and Incurred But Not Reported
Claims.............................................. 245,245,000 238,161,000
------------ ------------
Income Taxes Payable................................. 2,554,000 2,812,000
------------ ------------
Notes and Contracts Payable.......................... 71,257,000 77,206,000
------------ ------------
Minority Interests in Consolidated Subsidiaries...... 22,494,000 24,161,000
------------ ------------
Commitments and Contingencies (Notes 13 and 14)
Stockholders' Equity:
Preferred stock, $1 par value
Authorized--500,000 shares
Outstanding--None
Common stock, $1 par value
Authorized--24,000,000 shares
Outstanding--11,554,000 and 11,411,000 shares.... 11,554,000 11,411,000
Additional paid-in capital......................... 49,420,000 44,270,000
Retained earnings.................................. 288,754,000 243,093,000
Net unrealized gain on securities.................. 2,737,000 3,993,000
------------ ------------
Total Stockholders' Equity........................... 352,465,000 302,767,000
------------ ------------
$979,794,000 $873,778,000
============ ============
See Notes to Consolidated Financial Statements
23
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------------------
1996 1995 1994
-------------- -------------- --------------
Revenues
Operating revenues.............. $1,571,168,000 $1,227,185,000 $1,356,946,000
Investment and other income..... 26,398,000 23,031,000 19,447,000
-------------- -------------- --------------
1,597,566,000 1,250,216,000 1,376,393,000
-------------- -------------- --------------
Expenses
Salaries and other personnel
costs.......................... 531,250,000 431,984,000 423,328,000
Premiums retained by agents..... 516,593,000 413,444,000 533,598,000
Other operating expenses........ 327,744,000 260,611,000 232,532,000
Provision for title losses and
other claims................... 86,487,000 90,387,000 110,230,000
Depreciation and amortization... 22,207,000 18,002,000 19,796,000
Interest........................ 4,796,000 6,242,000 6,267,000
Minority interests.............. 2,624,000 2,132,000 2,944,000
-------------- -------------- --------------
1,491,701,000 1,222,802,000 1,328,695,000
-------------- -------------- --------------
Income before premium and income
taxes............................ 105,865,000 27,414,000 47,698,000
Premium taxes..................... 16,676,000 13,627,000 15,453,000
-------------- -------------- --------------
Income before income taxes........ 89,189,000 13,787,000 32,245,000
Income taxes...................... 35,600,000 6,200,000 13,300,000
-------------- -------------- --------------
Net income........................ $ 53,589,000 $ 7,587,000 $ 18,945,000
============== ============== ==============
Per share data--based upon the
weighted average number of common
shares outstanding............... $4.68 $0.67 $1.66
============== ============== ==============
See Notes to Consolidated Financial Statements
24
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
UNREALIZED
ADDITIONAL LONG-TERM GAIN (LOSS)
COMMON PAID-IN RETAINED DEBT OF ON
SHARES STOCK CAPITAL EARNINGS ESOT SECURITIES
---------- ----------- ----------- ------------ ----------- -----------
Balance at December 31,
1993................... 11,381,000 $11,381,000 $43,141,000 $230,280,000 $(2,597,000) $ 1,513,000
Net income for 1994..... 18,945,000
Cash dividends on common
shares................. (6,869,000)
Shares issued in
connection with company
acquisitions........... 85,000 85,000 2,596,000
Shares issued in
connection with stock
bonus plan............. 55,000 55,000 1,855,000
Purchase of Company
shares................. (126,000) (126,000) (3,579,000)
Decrease in ESOT debt... 2,597,000
Net unrealized loss on
securities............. (7,167,000)
---------- ----------- ----------- ------------ ----------- -----------
Balance at December 31,
1994................... 11,395,000 11,395,000 44,013,000 242,356,000 -- (5,654,000)
Net income for 1995..... 7,587,000
Cash dividends on common
shares................. (6,850,000)
Shares issued in
connection with company
acquisitions........... 105,000 105,000 2,607,000
Shares issued in
connection with stock
bonus plan............. 65,000 65,000 1,088,000
Purchase of Company
shares................. (154,000) (154,000) (3,438,000)
Net unrealized gain on
securities............. 9,647,000
---------- ----------- ----------- ------------ ----------- -----------
Balance at December 31,
1995................... 11,411,000 11,411,000 44,270,000 243,093,000 -- 3,993,000
Net income for 1996..... 53,589,000
Cash dividends on common
shares................. (7,928,000)
Shares issued in
connection with company
acquisitions........... 200,000 200,000 7,358,000
Shares issued in
connection with stock
bonus plan............. 50,000 50,000 1,220,000
Purchase of Company
shares................. (107,000) (107,000) (3,428,000)
Net unrealized loss on
securities............. (1,256,000)
---------- ----------- ----------- ------------ ----------- -----------
Balance at December 31,
1996................... 11,554,000 $11,554,000 $49,420,000 $288,754,000 $ -- $ 2,737,000
========== =========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements
25
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income.......................... $ 53,589,000 $ 7,587,000 $ 18,945,000
Adjustments to reconcile net income
to cash provided by operating
activities--
Provision for title losses and
other claims..................... 86,487,000 90,387,000 110,230,000
Depreciation and amortization..... 22,207,000 18,002,000 19,796,000
Minority interests in net income.. 2,624,000 2,132,000 2,944,000
Other, net........................ (366,000) 207,000 1,673,000
Changes in assets and liabilities
excluding effects of company
acquisitions and noncash
transactions--
Claims paid, including assets
acquired, net of recoveries...... (78,048,000) (66,639,000) (87,579,000)
Net change in income tax accounts. 381,000 10,777,000 (19,159,000)
(Increase) decrease in accounts
and accrued income receivable.... (11,324,000) (22,943,000) 17,809,000
Increase (decrease) in accounts
payable and accrued liabilities.. 28,844,000 11,057,000 (5,140,000)
(Decrease) increase in deferred
revenue.......................... (426,000) (13,588,000) 8,544,000
Other, net........................ (15,688,000) (6,542,000) (14,148,000)
------------ ------------ ------------
Cash provided by operating
activities......................... 88,280,000 30,437,000 53,915,000
------------ ------------ ------------
Cash flows from investing activities:
Net cash effect of company
acquisitions....................... (6,627,000) (30,921,000) (9,075,000)
Net (increase) decrease in deposits
with banks......................... (3,037,000) 901,000 2,864,000
Purchases of debt and equity
securities......................... (68,498,000) (19,513,000) (94,826,000)
Proceeds from sales of debt and
equity securities.................. 46,506,000 41,066,000 40,755,000
Proceeds from maturities of debt
securities......................... 31,291,000 19,278,000 57,122,000
Net (increase) decrease in other
long-term investments.............. (2,575,000) 2,761,000 (1,643,000)
Net increase in loans receivable.... (8,122,000) (5,588,000) (7,226,000)
Capital expenditures................ (29,692,000) (21,731,000) (34,562,000)
Net proceeds from sale of property
and equipment...................... 3,245,000 757,000 32,367,000
------------ ------------ ------------
Cash used for investing activities.. (37,509,000) (12,990,000) (14,224,000)
------------ ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits..... 7,903,000 4,723,000 6,185,000
Proceeds from insurance of debt..... 20,000,000
Repayment of debt................... (19,674,000) (20,060,000) (31,366,000)
Purchase of Company shares.......... (3,535,000) (3,592,000) (3,705,000)
Cash dividends...................... (7,928,000) (6,850,000) (6,869,000)
------------ ------------ ------------
Cash used for financing activities.. (23,234,000) (25,779,000) (15,755,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 27,537,000 (8,332,000) 23,936,000
Cash and cash equivalents--Beginning
of year............................. 145,902,000 154,234,000 130,298,000
------------ ------------ ------------
Cash and cash equivalents--End of
year............................... $173,439,000 $145,902,000 $154,234,000
============ ============ ============
Supplemental information:
Cash paid during the year for:
Interest.......................... $ 5,044,000 $ 6,108,000 $ 6,153,000
Premium taxes..................... $ 14,146,000 $ 14,048,000 $ 18,478,000
Income taxes...................... $ 36,682,000 $ 6,580,000 $ 36,374,000
Noncash investing and financing
activities:
Shares issued for stock bonus
plan............................. $ 1,270,000 $ 1,153,000 $ 1,910,000
Company acquisitions in exchange
for common stock................. $ 7,558,000 $ 2,712,000 $ 2,681,000
Net unrealized (loss) gain on
securities....................... $ (1,256,000) $ 9,647,000 $ (7,167,000)
Liabilities in connection with
company acquisitions............. $ 32,180,000 $ 20,345,000 $ 12,956,000
Increase in equity due to
reduction of long-term debt of
ESOT............................. $ 2,597,000
Debt incurred in connection with
purchase of real property........ $ 3,750,000
Debt incurred in connection with
the purchase of other
investments...................... $ 4,870,000
See Notes to Consolidated Financial Statements
26
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of The First
American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain 1994 and 1995 amounts have been reclassified to conform with the 1996
presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments
which have an initial maturity of 90 days or less and are not restricted for
statutory deposit or premium reserve requirements. The carrying amount for
cash equivalents is a reasonable estimate of fair value due to the short-term
maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term
investments with initial maturities of more than 90 days. The carrying amount
of these investments is a reasonable estimate of fair value due to their
short-term nature.
Debt securities are carried at fair value and consist primarily of
investments in obligations of the United States Treasury, various corporations
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common and preferred stocks of corporate entities in
which the Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in affiliates,
which are accounted for under the equity method of accounting, and notes
receivable, which are carried at the lower of cost or estimated realizable
value.
The Company classifies its debt and equity securities portfolio as
available-for-sale and, accordingly, includes unrealized gains and losses, net
of related tax effects, as a separate component of stockholders' equity.
Realized gains and losses on investments are determined using the specific
identification method.
Property and equipment
Depreciation on buildings and furniture and equipment is computed using the
straight-line method over estimated useful lives of 25 to 45 and 3 to 10
years, respectively.
Title plants and other indexes
Title plants and other indexes are carried at original cost. Appraised
values are used in conjunction with the acquisition of purchased subsidiaries.
The costs of daily maintenance (updating) of these plants and other indexes
are charged to expense as incurred. Because properly maintained title plants
and other indexes have indefinite lives and do not diminish in value with the
passage of time, no provision has been made for depreciation.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the
Company sometimes purchases mortgages, deeds of trust, real property, or
judgment liens. These assets, sometimes referred to as "salvage assets," are
carried at the lower of cost or estimated realizable value.
27
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and other intangibles.
Goodwill recognized in business combinations is amortized over its estimated
useful life ranging from 20 to 40 years. Other intangibles, which include
customer lists, covenants not to compete and organization costs, are amortized
over their estimated useful lives, ranging from 3 to 20 years. The Company
continually reviews these assets for recoverability and impairment.
Deferred policy acquisition costs
Deferred policy acquisition costs are directly related to the procurement of
tax service and home warranty contracts. These costs are deferred and
amortized to expense in the same pattern as contract fees are recognized as
revenues.
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical
experience by a charge to expense when the related premium revenue is
recognized. Title insurance losses and other claims associated with ceded
reinsurance are provided for as the Company remains contingently liable in the
event that the reinsurer does not satisfy its obligations. The reserve for
known and incurred but not reported claims reflects management's best estimate
of the total costs required to settle all claims reported to the Company and
claims incurred but not reported. The process applied to estimate claims costs
is subject to many variables, including changes and trends in the type of
title insurance policies issued, the real estate market and the interest rate
environment. It is reasonably possible that a change in the estimate will
occur in the future.
The Company provides for claim losses relating to its home warranty business
based on the average cost per claim as applied to the total of new claims
incurred. The average cost per claim is calculated using the average of the
most recent twelve months of claims experience.
Operating revenues
Title premiums on policies issued directly by the Company are recognized on
the effective date of the title policy and escrow fees are recorded upon close
of the escrow. Revenues from title policies issued by independent agents are
recorded when notice of issuance is received from the agent.
Revenues from tax service contracts are recognized proportionately over the
estimated duration of the contracts as the related servicing costs are
estimated to occur. The majority of the servicing costs, approximately 70%, is
incurred in the year of the contract is executed, with the remaining 30%
incurred over the remaining service life of the contract.
Revenues from home warranty contracts are recognized ratably over the 12-
month duration of the contracts.
Interest on loans with the Company's thrift subsidiary is recognized on the
outstanding principal balance on the accrual basis. Loan origination fees and
related direct loan origination costs are deferred and recognized over the
life of the loan.
Premium taxes
Title insurance and home warranty companies, like other types of insurers,
are generally not subject to state income or franchise taxes. However, in lieu
thereof, most states impose a tax based primarily on insurance premiums
written. This premium tax is reported as a separate line item in the
consolidated statements of income in order to provide a more meaningful
disclosure of the taxation of the Company.
28
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes
Taxes are based on income for financial reporting purposes and include
deferred taxes applicable to temporary differences between the financial
statement carrying amount and the tax basis of certain of the Company's assets
and liabilities.
Use of Estimates
Certain amounts and disclosures included in the consolidated financial
statements require management to make estimates which could differ from actual
results.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the Company
are not included in the consolidated balance sheets.
NOTE 2. STATUTORY RESTRICTIONS ON STOCKHOLDERS' EQUITY AND INVESTMENTS:
Pursuant to insurance and other regulations of the various states in which
the Company's title insurance subsidiary, First American Title Insurance
Company (FATICO), operates, the amount of dividends, loans and advances
available to the parent company from FATICO is limited, principally for the
protection of policyholders. Under such statutory regulations, the maximum
amount of dividends, loans and advances available to the parent company from
FATICO in 1997 is $49.7 million.
Investments carried at $14.5 million were on deposit with state treasurers
in accordance with statutory requirements for the protection of policyholders
at December 31, 1996.
FATICO maintained statutory capital and surplus of $208.3 million and $205.6
million at December 31, 1996 and 1995, respectively. Statutory net income for
the years ended December 31, 1996, 1995 and 1994 was $34.6 million, $11.4
million and $15.5 million, respectively.
29
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3. DEBT AND EQUITY SECURITIES:
The amortized cost and estimated fair value of investments in debt
securities are as follow:
GROSS
UNREALIZED ESTIMATED
AMORTIZED ------------- FAIR
COST GAINS LOSSES VALUE
--------- ------ ------ ---------
(IN THOUSANDS)
December 31, 1996
U.S. Treasury securities..................... $ 42,956 $ 621 $(146) $ 43,431
Corporate securities......................... 37,636 87 (165) 37,558
Obligations of state and political
subdivisions................................ 38,544 290 (23) 38,811
Mortgage-backed securities................... 11,038 37 (299) 10,776
-------- ------ ----- --------
$130,174 $1,035 $(633) $130,576
======== ====== ===== ========
December 31, 1995
U.S. Treasury securities....................... $ 42,325 $1,189 $ (68) $ 43,446
Corporate securities........................... 36,927 1,041 (72) 37,896
Obligations of state and political
subdivisions.................................. 39,644 291 (228) 39,707
Mortgage-backed securities..................... 7,861 66 (101) 7,826
-------- ------ ----- --------
$126,757 $2,587 $(469) $128,875
======== ====== ===== ========
The amortized cost and estimated fair value of debt securities at December
31, 1996, by contractual maturities, are as follows:
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
Due in one year or less.................................. $ 18,232 $ 18,256
Due after one year through five years.................... 56,284 56,810
Due after five years through ten years................... 41,408 41,488
Due after ten years...................................... 3,212 3,246
-------- --------
119,136 119,800
Mortgage-backed securities............................... 11,038 10,776
-------- --------
$130,174 $130,576
======== ========
30
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost and estimated fair value of investments in equity securities are as
follows:
GROSS
UNREALIZED
------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ------ ------ ----------
(IN THOUSANDS)
December 31, 1996
Common stocks:
Public utilities............................. $ 78 $ 56 $ $ 134
Corporate Securities......................... 4,614 3,838 (82) 8,370
------- ------ ----- -------
4,692 3,894 (82) 8,504
Preferred stocks............................... 13 13
------- ------ ----- -------
$ 4,705 $3,894 $ (82) $ 8,517
======= ====== ===== =======
December 31, 1995
Common stocks:
Public utilities............................. $12,971 $2,510 $(441) $15,040
Corporate Securities......................... 3,393 1,941 (27) 5,307
------- ------ ----- -------
16,364 4,451 (468) 20,347
Preferred stocks............................... 1,057 41 1,098
------- ------ ----- -------
$17,421 $4,492 $(468) $21,445
======= ====== ===== =======
Sales of debt and equity securities resulted in realized gains of $3,257,000,
$1,316,000 and $108,000 and realized losses of $646,000, $358,000 and $457,000
for the years ended December 31, 1996, 1995 and 1994, respectively. The fair
value of debt and equity securities was estimated using quoted market prices.
31
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4. LOANS RECEIVABLE:
Loans receivable are summarized as follows:
DECEMBER 31
----------------
1996 1995
------- -------
(IN THOUSANDS)
Real estate-mortgage....................................... $55,835 $48,899
Assigned lease payments.................................... 81 135
Other...................................................... 139 62
------- -------
56,055 49,096
Unearned income on lease contracts......................... (33) (41)
Allowance for loan losses.................................. (1,050) (1,344)
Participations sold........................................ (140) (872)
Deferred loan fees, net.................................... (576) (705)
------- -------
(1,799) (2,962)
------- -------
$54,256 $46,134
======= =======
Real estate loans are secured by properties located in Southern California.
The average yields on the Company's loan portfolio for the years ended
December 31, 1996 and 1995, were 11% and 12% respectively. Average yields are
affected by amortization of discounts on loans purchased from other
institutions, prepayment penalties recorded as income, loan fees amortized to
income, and the market interest rates charged by thrift and loan institutions.
The fair value of loans receivable was $54.3 million and $47.2 million at
December 31, 1996 and 1995, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates being
offered for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered
appropriate by management to provide for known and inherent risks in the
portfolio.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." This standard was effective for 1995 and requires that
an impaired loan be measured at the present value of expected future cash
flows discounted at the loan's effective interest rate. As a practical
expedient, the loan may be valued based on its observable market price or the
fair value of the collateral, if the loan is collateral dependent. Adoption of
this standard did not have a materially adverse effect on the Company's
financial condition or results of operations.
NOTE 5. ASSETS ACQUIRED IN CONNECTION WITH CLAIM SETTLEMENT:
DECEMBER 31
---------------
1996 1995
------- -------
(IN THOUSANDS)
Notes receivable............................................. $11,083 $12,335
Real estate.................................................. 7,156 5,796
Judgments and other.......................................... 6,031 7,461
------- -------
$24,270 $25,592
======= =======
32
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The above amounts are net of valuation reserves of $10.3 million and $11.2
million at December 31, 1996 and 1995, respectively.
The fair value of notes receivable was $10.1 million and $12.0 million at
December 31, 1996 and 1995, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates at which
similar loans would be made to borrowers of similar credit quality.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No.
121 became effective for 1996 and requires companies to assess for potential
impairments of long-lived assets and certain identifiable intangibles when
there is evidence that events or changes in circumstances have made recovery
of an asset's carrying value unlikely. Adoption of this standard did not have
a materially adverse effect on the Company's financial condition or results of
operations.
The activity in the valuation reserve is summarized as follows:
DECEMBER 31
----------------
1996 1995
------- -------
(IN THOUSANDS)
Balance at beginning of year............................... $11,246 $12,354
Provisions for losses...................................... 4,948 3,019
Dispositions............................................... (5,916) (4,127)
------- -------
Balance at end of year..................................... $10,278 $11,246
======= =======
NOTE 6. DEMAND DEPOSITS:
Passbook and investment certificate accounts are summarized as follows:
DECEMBER 31
----------------
1996 1995
------- -------
(IN THOUSANDS)
Passbook.................................................. $13,335 $12,053
Certificate accounts:
Less than one year...................................... 23,753 17,690
One to five years....................................... 14,233 13,675
------- -------
$51,321 $43,418
======= =======
Annualized interest rates:
Passbook................................................ 5% 5%-6%
Certificate accounts.................................... 5%-8% 5%-8%
The carrying value of the passbook account approximates fair value due to
the short-term nature of this liability. The fair value of investment
certificate accounts was $38.0 million and $31.6 million at December 31, 1996
and 1995, respectively, and was estimated based on the discounted value of the
future cash flows using a discount rate approximating current market for
similar liabilities.
33
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7. RESERVE FOR KNOWN AND INCURRED BUT NOT REPORTED CLAIMS:
Activity in the reserve for known and incurred but not reported claims is
summarized as follows:
DECEMBER 31
---------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year.................... $238,161 $206,743 $180,333
-------- -------- --------
Provision related to:
Current year.................................. 81,539 82,632 98,900
Prior years................................... 4,948 7,755 11,330
-------- -------- --------
Total provision................................. 86,487 90,387 110,230
-------- -------- --------
Payments related to:
Current year.................................. 29,680 25,039 23,314
Prior year.................................... 43,967 40,934 56,832
-------- -------- --------
Total payments.................................. 73,647 65,973 80,146
-------- -------- --------
Other........................................... (5,756) 7,004 (3,674)
-------- -------- --------
Balance at end of year.......................... $245,245 $238,161 $206,743
======== ======== ========
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements. Included in 1995 is $10.0
million in purchase accounting adjustments. Claims activity associated with
reinsurance is not material and, therefore, not presented separately.
NOTE 8. NOTES AND CONTRACTS PAYABLE:
DECEMBER 31
---------------
1996 1995
------- -------
(IN THOUSANDS)
Secured notes payable pursuant to amended credit agreement. $37,250 $49,250
Trust deed notes with maturities through 2017, secured by
land and buildings with a net book value of $11,791,
average rate of 8 1/2%.................................... 8,630 9,386
Other notes and contracts payable with maturities through
2004, average rate of 7 1/2%.............................. 25,377 18,570
------- -------
$71,257 $77,206
======= =======
At December 31, 1996, the Company's borrowings under its amended bank credit
agreement consisted of $6.8 million of fixed rate indebtedness ($7.6 million
at December 31, 1995), maturing in April 1999 and bearing interest at 9.38%
per annum; and $30.5 million of variable rate indebtedness ($41.6 million at
December 31, 1995), maturing in October 2000 and bearing interest at the
higher of Chase Manhattan Bank's prime lending rate or the federal funds rate
plus 1/2%. The Company may, at its election, use a LIBOR interest rate option
with margins from .50% to 1.00% depending on claims paying or financial
strength ratings or the Company's adjusted leverage ratio. In addition, the
amended credit agreement provides for a $30.0 million revolving line of credit
which was unused at December 31, 1996, and expires on November 22, 1997.
The terms of the amended credit agreement provide for quarterly amortization
of all credit agreement indebtedness. The minimum quarterly payment is $1.7
million and the maximum quarterly payment is
34
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$3.0 million. The Company has the right to prepay the variable rate
indebtedness but may prepay the fixed rate indebtedness only with the consent
of the holder thereof. In addition, pursuant to the terms of the credit
agreement, the Company must satisfy a number of financial covenants and has
agreed to be bound by certain restrictive covenants. These covenants include,
among others, limitations on the incurrence of additional indebtedness and/or
liens, as well as restrictions on defined investments, acquisitions,
dispositions, payments of dividends and capital expenditures. Further, the
Company is required to maintain minimum levels of capital and earnings and
meet predetermined debt to equity ratios and fixed charge coverage ratios.
As security for its obligations to the lenders under the credit agreement,
the Company has pledged the capital stock of its direct wholly owned operating
subsidiaries, First American Title Insurance Company, First American Trust
Company and First American Real Estate Information Services, Inc., which, in
the aggregate, represent substantially all of its assets.
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1996, are as follows (in thousands):
1997............................................................... $20,179
1998............................................................... $17,324
1999............................................................... $15,484
2000............................................................... $10,405
2001............................................................... $ 2,761
The fair value of notes and contracts payable was $70.6 million and $77.7
million at December 31, 1996 and 1995, respectively, and was estimated based
on the current rates offered to the Company for debt of the same remaining
maturities. The weighted average interest rate for the Company's notes and
contracts payable was 7 1/4% and 7 1/2% at December 31, 1996 and 1995,
respectively.
35
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9. INVESTMENT AND OTHER INCOME:
The components of investment and other income are as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Interest:
Cash equivalents and deposits with savings and
loan associations and banks..................... $ 4,742 $ 3,308 $ 2,695
Debt securities.................................. 7,887 9,270 9,424
Other long-term investments...................... 3,161 2,401 1,785
------- ------- -------
15,790 14,979 13,904
Dividends on equity securities..................... 554 1,088 925
Equity in earnings of unconsolidated affiliates.... 1,043 748 199
Net gain (loss) on sales of debt and equity
securities......................................... 2,611 958 (349)
Other.............................................. 6,400 5,258 4,768
------- ------- -------
$26,398 $23,031 $19,447
======= ======= =======
NOTE 10. INCOME TAXES:
Income taxes are summarized as follows:
1996 1995 1994
------- ------ -------
(IN THOUSANDS)
Current:
Federal............................................ $28,535 $3,442 $13,033
State.............................................. 6,038 1,810 2,271
------- ------ -------
34,573 5,252 15,304
------- ------ -------
Deferred:
Federal............................................ 232 70 (684)
State.............................................. 795 878 (1,320)
------- ------ -------
1,027 948 (2,004)
------- ------ -------
$35,600 $6,200 $13,300
======= ====== =======
36
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes differ from the amounts computed by applying the federal income
tax rate of 35%. A reconciliation of this difference is as follows:
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Taxes calculated at federal rate................. $31,216 $ 4,825 $11,286
Tax exempt interest income....................... (669) (719) (720)
Tax effect of minority interests................. 918 746 985
State taxes, net of federal benefit.............. 4,442 2,456 618
Use of federal capital loss carryforward......... (648)
Exclusion of certain meals and entertainment
expenses........................................ 2,429 2,391 2,630
Change in tax reserves........................... (2,301)
Other items, net................................. (2,736) (1,198) (851)
------- ------- -------
$35,600 $ 6,200 $13,300
======= ======= =======
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
DECEMBER 31
----------------
1996 1995
------- -------
(IN THOUSANDS)
Deferred tax assets:
Deferred revenue......................................... $25,709 $25,474
Employee benefits........................................ 9,811 8,433
Title claims and related salvage......................... 11,934 14,612
State taxes.............................................. 441 11
Bad debt reserves........................................ 3,382 2,467
Federal net operating loss carryforward.................. 603 1,251
Other.................................................... 6,350 4,448
Valuation allowance...................................... (438) (856)
------- -------
Total deferred tax assets.............................. $57,792 $55,840
Deferred tax liabilities:
Depreciable and amortizable assets....................... 13,611 10,540
Unrealized gain on securities............................ 1,475 2,150
Sale leaseback........................................... 1,462 1,066
Other.................................................... 2,843 2,090
------- -------
Total deferred tax liabilities......................... 19,391 15,846
------- -------
Net deferred tax asset..................................... $38,401 $39,994
======= =======
The Company has federal net operating loss carryforwards of approximately
$1.7 million at December 31, 1996, which expire in 1999. The utilization of
these net operating losses is limited to future federal taxable income of
First American Real Estate Information Services, Inc., a wholly owned
subsidiary of the Company. The utilization of the loss carryforward is also
subject to limitations prescribed by Section 382 of the Internal Revenue Code.
37
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company maintains a valuation allowance for certain temporary
differences for which it is more likely than not the Company will not receive
benefits.
NOTE 11. EMPLOYEE BENEFIT PLANS:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan, amended to
be noncontributory effective January 1, 1995, is a qualified defined benefit
plan with benefits based on the employee's years of service and the highest
five consecutive years' compensation during the last ten years of employment.
The Company's policy is to fund all accrued pension costs. Contributions are
intended to provide not only for benefits attributable to past service, but
also for those benefits expected to be earned in the future. The Company also
has non-qualified unfunded supplemental benefit plans covering certain key
management personnel. Benefits under these plans are intended to be funded
with proceeds from life insurance policies purchased by the Company on the
lives of the executives.
Net pension cost for the Company's pension and other retirement benefit
plans includes the following components:
1996 1995 1994
-------- ------- -------
(IN THOUSANDS)
Service cost--benefits earned during the year... $ 9,186 $ 7,798 $ 5,400
Interest cost on projected benefit obligation... 9,764 8,741 7,631
Actual (gain) loss on plan assets............... (10,517) (9,636) 1,065
Net amortization and deferral................... 5,810 4,674 (5,740)
-------- ------- -------
Net periodic pension cost....................... $ 14,243 $11,577 $ 8,356
======== ======= =======
The following table sets forth the plans' status at:
DECEMBER 31
----------------------------------------------
1996 1995
----------------------- ----------------------
UNFUNDED UNFUNDED
FUNDED SUPPLEMENTAL FUNDED SUPPLEMENTAL
PENSION BENEFIT PENSION BENEFIT
PLANS PLANS PLANS PLANS
--------- ------------ -------- ------------
(IN THOUSANDS)
Present value of benefit
obligation:
Vested benefits................ $ (74,536) $(17,137) $(68,977) $(15,100)
Non-vested benefits............ (7,479) (5,068) (5,250) (3,828)
--------- -------- -------- --------
Accumulated benefit obligation.. (82,015) (22,205) (74,227) (18,928)
Value of future pay increases... (29,663) (7,046) (25,165) (5,374)
--------- -------- -------- --------
Total projected benefit
obligation..................... (111,678) (29,251) (99,392) (24,302)
Plan assets at fair value....... 87,096 71,929
--------- -------- -------- --------
Plan assets less than projected
benefits obligation............ (24,582) (29,251) (27,463) (24,302)
Unrecognized net (asset)
obligation at transition....... (307) 1,801 (359) 2,162
Prior service cost not yet
recognized..................... (503) 1,802 (543) 495
Unrecognized net loss........... 15,005 5,419 21,065 4,091
Adjustment to recognize minimum
liability...................... (1,976) (1,374)
--------- -------- -------- --------
Accrued pension costs........... $ (10,387) $(22,205) $ (7,300) $(18,928)
========= ======== ======== ========
38
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The rate of increase in future compensation levels for the plans of 4 1/2%
and the weighted average discount rate of 7 3/4% were used in determining the
actuarial present value of the projected benefit obligation at December 31,
1996 and 1995. The majority of pension plan assets are invested in U.S.
government securities, time deposits and common stocks with projected long-
term rates of return of 9%.
The Company's principal profit sharing plan was amended effective January 1,
1995, to discontinue future contributions. The plans holds 1,594,000 and
1,675,000 shares of the Company's common stock, representing 14% and 15% of
the total shares outstanding at December 31, 1996, and 1995 respectively.
Contributions to the Company's profit sharing plans totaled $2.0 million for
1994.
The Company also has a Stock Bonus Plan for key employees pursuant to which
50,000, 65,000 and 55,000 common shares were awarded for 1996, 1995 and 1994,
respectively, resulting in a charge to operations of $1.3 million, $1.2
million and $1.9 million, respectively. The Plan, as amended December 9, 1992,
provides that a total of up to 300,000 common shares may be awarded in any one
year.
Effective January 1, 1995, the Company adopted The First American Financial
Corporation 401(k) Savings Plan ("The Savings Plan"), which is available to
substantially all employees. The Savings Plan allows for employee elective
contributions up to the maximum deductible amount as determined by the
Internal Revenue Code.
NOTE 12. STOCK OPTION PLAN:
On April 24, 1996, the Company implemented The First American Financial
Corporation 1996 Stock Option Plan ("The Stock Option Plan"). Under The Stock
Option Plan, options are granted to purchase the Company's common stock at a
price no less than the market value of the shares on the date of the grant.
The maximum number of shares that may be subject to options is 1,250,000.
Currently outstanding options become exercisable one to five years and expire
10 years from the grant date.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standard Board (SFAS) No. 123, "Accounting for Stock-Based
Compensation." In accounting for its plan, the Company, in accordance with the
provisions of SFAS No. 123, applies Accounting Principles Board Opinion No 25,
"Accounting for Stock Issued to Employees." As a result of this election, the
Company does not recognize compensation expense for The Stock Option Plan. The
Company's net income and earnings per share would not be materially different
if it had elected to recognize compensation expense based on the fair value
method prescribed by SFAS No. 123.
The fair value for these options was estimated at the grant date using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1996: dividend yield of 2.8%; expected
volatility of 41.0%; risk-free interest rate of 6.5%; and expected life of six
years. The weighted average fair value of options granted during 1996 was
$9.86.
Transactions involving stock options are summarized as follows:
WEIGHTED
AVERAGE
NUMBER EXERCISE
OUTSTANDING PRICE
----------- --------
Balance at January 1, 1996
Granted during 1996..................................... 670,000 $25.63
------- ------
Balance at December 31, 1996............................ 670,000 $25.63
======= ======
The options awarded under The Stock Option Plan are not exercisable until
April 24, 1997, at which time 134,000 of the options outstanding at December
31, 1996 may be exercised.
39
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13. COMMITMENTS:
The Company leases certain office facilities, automobiles and equipment
under operating leases, which for the most part are renewable. The majority of
these leases also provide that the Company will pay insurance and taxes. In
1994, the Company entered into a sale-leaseback agreement with regard to
certain furniture and equipment. Under the agreement, the Company agreed to
lease the equipment for four years with minimum annual lease payments of $8.3
million.
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1996, are as follows (in thousands):
1997............................................................. $ 58,901
1998............................................................. 50,742
1999............................................................. 35,626
2000............................................................. 22,710
2001............................................................. 21,297
Later years...................................................... 57,951
--------
$247,227
========
Total rental expense for all operating leases and month-to-month rentals was
$63.9 million, $58.6 million and $50.1 million for 1996, 1995 and 1994,
respectively.
NOTE 14. LITIGATION:
On April 13, 1990, a class action was filed in the United States District
Court in Phoenix, Arizona (the "District Court"), against First American Title
Insurance Company and a number of other title insurers. This action sought
damages and injunctive relief based on the defendants' participation in rating
bureaus in Arizona and Wisconsin. This action was consolidated in the District
Court, for pretrial matters, with an action filed in the United States
District Court for the Eastern District of Wisconsin that presented claims on
behalf of a purported class of purchasers of title insurance in Wisconsin.
First American Title Insurance Company, along with the other defendants in
these actions, entered into a settlement agreement with the plaintiffs to
settle both actions. This settlement agreement was approved by the District
Court on July 24, 1996. Compliance with this settlement agreement will not
have a materially adverse effect on the Company's financial condition or
results of operations.
The Company is involved in various routine legal proceedings related to its
operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
NOTE 15. SEGMENT FINANCIAL INFORMATION:
The Company's operations include four reportable segments: title insurance,
real estate information, home warranty and trust and banking. The title
insurance segment issues policies which are insured statements of the
condition of title to real property. The real estate information segment
provides to lender customers the status of tax payments on real property
securing their loans, credit information derived from at least two credit
bureau
40
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
sources, flood zone determination reports which provide information on whether
or not a property is in a special flood hazard area, as well as other real
estate-related information services. The home warranty segment issues one-year
warranties which protect homeowners against defects in home fixtures. The
trust and banking segment provides full-service trust and depository services,
accepts deposits and makes real estate secured loans.
The title insurance and real estate information segments operate through
networks of offices nationwide. The Company offers its title services through
both direct operations and agents throughout the United States. It also
provides title services abroad in Australia, the Bahama Islands, Bermuda,
Canada, Guam, Mexico, Puerto Rico, the U.S. Virgin Islands and the United
Kingdom. Home warranty services are available in Arizona, California, Nevada,
North Carolina, South Carolina, Texas and Washington. The trust, banking and
thrift businesses operate in Southern California.
Selected financial information about the Company's operations by segment for
each of the past three years is as follows:
DEPRECIATION
PRETAX AND CAPITAL
REVENUES PROFIT (LOSS) ASSETS AMORTIZATION EXPENDITURES
---------- ------------- -------- ------------ ------------
(IN THOUSANDS)
1996
Title Insurance......... $1,288,947 $ 66,056 $584,800 $15,307 $23,454
Real Estate Information. 247,810 52,581 225,527 5,598 4,717
Home Warranty........... 41,927 8,178 67,622 296 155
Trust and Banking....... 17,839 3,728 72,473 438 1,366
Corporate............... 1,043 (24,678) 29,372 568
---------- -------- -------- ------- -------
$1,597,566 $105,865 $979,794 $22,207 $29,692
========== ======== ======== ======= =======
1995
Title Insurance......... $1,052,823 $ 17,540 $532,697 $12,208 $18,130
Real Estate Information. 147,004 19,690 182,499 4,565 2,294
Home Warranty........... 35,531 6,828 56,637 289 118
Trust and Banking....... 14,110 3,304 63,416 331 1,189
Corporate............... 748 (19,948) 38,529 609
---------- -------- -------- ------- -------
$1,250,216 $ 27,414 $873,778 $18,002 $21,731
========== ======== ======== ======= =======
1994
Title Insurance......... $1,236,663 $ 37,819 $546,103 $16,070 $27,694
Real Estate Information. 96,113 17,371 139,680 2,916 5,979
Home Warranty........... 30,985 6,709 53,834 275 170
Trust and Banking....... 12,433 3,214 55,423 236 719
Corporate............... 199 (17,415) 33,609 299
---------- -------- -------- ------- -------
$1,376,393 $ 47,698 $828,649 $19,796 $34,562
========== ======== ======== ======= =======
Corporate consists primarily of unallocated interest expense, minority
interest, equity in earnings of affiliated companies, employee benefit
contributions and personnel and other operating expenses associated with the
Company's home office facilities.
41
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended December 31, 1996
Revenues............................ $347,376 $413,374 $411,304 $425,512
======== ======== ======== ========
Income before income taxes.......... $ 14,982 $ 32,827 $ 23,569 $ 17,811
======== ======== ======== ========
Net income ......................... $ 8,582 $ 19,427 $ 13,769 $ 11,811
======== ======== ======== ========
Net income per share................ $ .75 $ 1.70 $ 1.20 $ 1.03
======== ======== ======== ========
Year Ended December 31, 1995
Revenues............................ $261,154 $293,240 $331,328 $364,494
======== ======== ======== ========
Income (loss) before income taxes... $(21,509) $ 1,837 $ 15,520 $ 17,939
======== ======== ======== ========
Net income (loss)................... $(12,709) $ 1,137 $ 9,320 $ 9,839
======== ======== ======== ========
Net income (loss) per share......... $ (1.11) $ 0.10 $ 0.81 $ 0.87
======== ======== ======== ========
The Company's primary business segments are cyclical in nature, with the
spring and summer months historically being the strongest. However, interest
rate adjustments by the Federal Reserve Board, as well as other economic
factors, can cause unusual fluctuations in the Company's quarterly operating
results. See Management's Discussion and Analysis on pages 13-19 of this
report for further discussion of the Company's results of operations.
42
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ------------ ------------ ---------------
AMOUNT AT WHICH
SHOWN IN THE
TYPE OF INVESTMENT COST MARKET VALUE BALANCE SHEET
------------------ ------------ ------------ ---------------
Deposits with savings and loan
associations and banks:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated...................... $ 21,674,000 $ 21,674,000 $ 21,674,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated--
U.S. Treasury securities........ $ 42,956,000 $ 43,431,000 $ 43,431,000
Corporate securities............ 37,636,000 37,558,000 37,558,000
Obligations of states and
political subdivisions......... 38,544,000 38,811,000 38,811,000
Mortgage-backed securities...... 11,038,000 10,776,000 10,776,000
------------ ------------ ------------
$130,174,000 $130,576,000 $130,576,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated...................... $ 4,705,000 $ 8,517,000 $ 8,517,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated...................... $ 30,414,000 $ 30,414,000 $ 30,414,000
------------ ------------ ------------
Total Investments:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated...................... $186,967,000 $191,181,000 $191,181,000
============ ============ ============
43
SCHEDULE II
1 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
DECEMBER 31
--------------------------
1996 1995
------------ ------------
ASSETS
Cash and cash equivalents.......................... $ 8,983,000 $ 19,415,000
------------ ------------
Stock of subsidiaries, at equity................... 532,128,000 469,511,000
------------ ------------
Deposits with savings and loan associations and
banks............................................. 50,000 50,000
------------ ------------
Property and equipment, at cost:
Land............................................. 425,000 425,000
Buildings and building improvements.............. 5,006,000 5,006,000
Less--accumulated depreciation................... (4,442,000) (4,256,000)
------------ ------------
989,000 1,175,000
------------ ------------
Other assets....................................... 4,471,000 4,924,000
------------ ------------
$546,621,000 $495,075,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable.................................. $ 2,118,000 $ 1,742,000
------------ ------------
Accrued expenses................................... 322,000 524,000
------------ ------------
Payable to subsidiaries............................ 146,268,000 130,281,000
------------ ------------
Notes and contracts payable........................ 45,448,000 59,761,000
------------ ------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized--500,000 shares;
Outstanding--None
Common stock, $1 par value
Authorized--24,000,000 shares;
Outstanding--11,554,000 and 11,411,000 shares.. 11,554,000 11,411,000
Additional paid-in capital....................... 49,420,000 44,270,000
Retained earnings................................ 288,754,000 243,093,000
Net unrealized gain on securities................ 2,737,000 3,993,000
------------ ------------
Total stockholders' equity......................... 352,465,000 302,767,000
------------ ------------
$546,621,000 $495,075,000
============ ============
See Notes to Parent Company Financial Statements
44
SCHEDULE II
2 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
PARENT COMPANY STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------
1996 1995 1994
----------- ----------- -----------
Revenues:
Interest and other income................ $ 891,000 $ 837,000 $ 846,000
Equity in earnings of subsidiaries....... 75,696,000 25,803,000 33,249,000
----------- ----------- -----------
76,587,000 26,640,000 34,095,000
----------- ----------- -----------
Expenses:
Interest................................. 3,635,000 5,040,000 3,781,000
Depreciation............................. 186,000 185,000 186,000
Other administrative expenses............ 19,177,000 13,828,000 11,183,000
----------- ----------- -----------
22,998,000 19,053,000 15,150,000
----------- ----------- -----------
Net income................................. $53,589,000 $ 7,587,000 $18,945,000
=========== =========== ===========
Net income per share, based upon the
weighted average number of shares
outstanding............................... $ 4.68 $ 0.67 $ 1.66
=========== =========== ===========
See Notes to Parent Company Financial Statements
45
SCHEDULE II
3 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
PARENT COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
------------ ------------ ------------
Cash flows from operating
activities:
Net income..................... $ 53,589,000 $ 7,587,000 $ 18,945,000
Adjustments to reconcile net
income to cash provided by
operating activities--
Depreciation................. 186,000 185,000 186,000
Expense relating to stock
bonus plan.................. 1,270,000 1,153,000 1,910,000
Equity in earnings of
subsidiaries, net of
dividends................... (63,697,000) (25,802,000) (24,249,000)
Other........................ (225,000)
Changes in assets and
liabilities, excluding
effects of company
acquisitions and noncash
transactions--
Decrease in other assets... 453,000 503,000 310,000
Increase in dividends
payable and accrued
expenses.................. 174,000 7,000 123,000
Increase in intercompany
accounts.................. 23,369,000 40,509,000 21,086,000
------------ ------------ ------------
Cash provided by operating
activities...................... 15,344,000 23,917,000 18,311,000
------------ ------------ ------------
Cash flows from investing
activities:
Net increase in deposits with
banks......................... (50,000)
Purchases of equity securities. (1,957,000)
Sales of equity securities..... 1,933,000
------------ ------------
Cash provided by (used for)
investing activities............ 1,883,000 (1,957,000)
------------ ------------
Cash flows from financing
activities:
Proceeds from issuance of debt. 20,000,000
Repayment of debt.............. (14,313,000) (11,121,000) (11,245,000)
Purchase of Company shares..... (3,535,000) (3,592,000) (3,705,000)
Cash dividends................. (7,928,000) (6,850,000) (6,869,000)
------------ ------------ ------------
Cash used for financing
activities...................... (25,776,000) (21,563,000) (1,819,000)
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents............ (10,432,000) 4,237,000 14,535,000
Cash and cash equivalents--
Beginning of year.............. 19,415,000 15,178,000 643,000
------------ ------------ ------------ ---
End of year.................... $ 8,983,000 $ 19,415,000 $ 15,178,000
============ ============ ============
Supplementary information:
Cash paid during the year for
interest...................... $ 3,835,000 $ 4,986,000 $ 3,654,000
Noncash investing and financing
activities:
Shares issued for stock bonus
plan.......................... $ 1,270,000 $ 1,153,000 $ 1,910,000
Company acquisitions in
exchange for common stock..... $ 7,558,000 $ 2,712,000 $ 2,681,000
Increase in equity due to
reduction of long-term debt of
ESOT.......................... $ 2,597,000
Liabilities in connection with
company acquisitions.......... $ 7,027,000
See Notes to Parent Company Financial Statements
46
SCHEDULE II
4 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE A
The composition of the Notes and Contracts Payable consists of:
DECEMBER 31
-----------------------
1996 1995
----------- -----------
Secured notes payable to financial institutions........ $37,250,000 $49,250,000
Trust deed notes with maturities through 2002, average
rate of 10%. Secured by land and buildings with an
aggregate net book value of $597,000.................. 759,000 895,000
Other notes and contracts payable with maturities
through 2000, average rate of 7 1/4%.................. 7,439,000 9,616,000
----------- -----------
$45,448,000 $59,761,000
=========== ===========
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1996, are $14,714,000, $12,374,000,
$10,831,000, $7,313,000, and $136,000, respectively.
NOTE B
The parent company files a consolidated tax return with its subsidiary
companies in which it owns 80% or more of the outstanding stock. The current
and cumulative tax effects relating to the operations of the parent company
are reflected in the accounts of First American Title Insurance Company.
47
SCHEDULE III
1 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
COLUMN A COLUMN B COLUMN C COLUMN D
-------- ----------------- ------------ ------------
DEFERRED POLICY CLAIMS DEFERRED
SEGMENT ACQUISITION COSTS RESERVES REVENUES
------- ----------------- ------------ ------------
1996
Title Insurance.................... $237,596,000 $ 4,396,000
Real Estate Information............ $20,889,000 4,880,000 79,401,000
Home Warranty...................... 3,864,000 2,769,000 20,336,000
Trust and Banking..................
Corporate..........................
----------- ------------ ------------
Total............................ $24,753,000 $245,245,000 $104,133,000
=========== ============ ============
1995
Title Insurance.................... $232,081,000 $ 6,641,000
Real Estate Information............ $22,078,000 3,686,000 82,581,000
Home Warranty...................... 2,264,000 2,394,000 15,093,000
Trust and Banking..................
Corporate..........................
----------- ------------ ------------
Total............................ $24,342,000 $238,161,000 $104,315,000
=========== ============ ============
48
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION--(CONTINUED)
INCOME STATEMENT CAPTIONS
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J
-------- -------------- ----------- ------------ ------------ ------------
AMORTIZATION
OF DEFERRED
NET POLICY OTHER
OPERATING INVESTMENT LOSS ACQUISITION OPERATING
SEGMENT REVENUES INCOME PROVISION COSTS EXPENSES
------- -------------- ----------- ------------ ------------ ------------
1996
Title Insurance......... $1,268,233,000 $20,714,000 $ 58,909,000 $218,443,000
Real Estate Information. 246,745,000 1,065,000 4,453,000 $7,113,000 86,819,000
Home Warranty........... 38,351,000 3,576,000 23,055,000 665,000 658,000
Trust and Banking....... 17,839,000 70,000 6,982,000
Corporate............... 1,043,000 7,064,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,571,168,000 $26,398,000 $ 86,487,000 $7,778,000 $319,966,000
============== =========== ============ ========== ============
1995
Title Insurance......... $1,034,789,000 $18,034,000 $ 68,338,000 $188,024,000
Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 55,276,000
Home Warranty........... 32,531,000 3,000,000 18,857,000 1,748,000 95,000
Trust and Banking....... 14,110,000 26,000 5,650,000
Corporate............... 748,000 3,927,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,227,185,000 $23,031,000 $ 90,387,000 $7,639,000 $252,972,000
============== =========== ============ ========== ============
1994
Title Insurance......... $1,221,581,000 $15,082,000 $ 93,012,000 $184,723,000
Real Estate Information. 94,816,000 1,297,000 2,129,000 $4,536,000 32,943,000
Home Warranty........... 28,116,000 2,869,000 15,022,000 1,447,000 454,000
Trust and Banking....... 12,433,000 67,000 4,829,000
Corporate............... 199,000 3,600,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,356,946,000 $19,447,000 $110,230,000 $5,983,000 $226,549,000
============== =========== ============ ========== ============
49
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
TITLE
INSURANCE PERCENTAGE
OPERATING TITLE OF AMOUNT
REVENUES CEDED TO ASSUMED INSURANCE ASSUMED TO
BEFORE OTHER FROM OTHER OPERATING OPERATING
SEGMENT REINSURANCE COMPANIES COMPANIES REVENUES REVENUES
- ------- -------------- ---------- ---------- -------------- ----------
1996........... $1,267,309,000 $2,094,000 $3,018,000 $1,268,233,000 .2%
============== ========== ========== ============== =====
1995........... $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 .3%
============== ========== ========== ============== =====
1994........... $1,220,581,000 $4,362,000 $5,362,000 $1,221,581,000 .4%
============== ========== ========== ============== =====
50
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ----------------------- ----------- ------------
ADDITIONS
-----------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND OTHER FROM AT END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ----------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 5,970,000 $ 4,386,000 $ 5,005,000(A) $ 5,351,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $238,161,000 $86,487,000 $(4,915,000)(B) $74,488,000(C) $245,245,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 1,344,000 $ 433,000 $ 727,000(A) $ 1,050,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000(D)
============ ===========
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 11,246,000 $ 4,948,000 $ 5,916,000(D) $ 10,278,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 856,000 $ 418,000(E) $ 438,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,420,000 $ 2,000 $ 35,000(D) $ 1,387,000
============ =========== =========== ============
- -------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $33,000 in purchase accounting adjustments, net of a
reclassification of $4,948,000 to the reserve for assets acquired in
connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
51
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND OTHER FROM AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE OF PERIOD
----------- ------------ ----------- ---------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 4,022,000 $ 2,965,000 $ 1,017,000(A) $ 5,970,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $206,743,000 $90,387,000 $7,004,000(B) $65,973,000(C) $238,161,000
============ =========== ========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 950,000 $ 562,000 $ 168,000(A) $ 1,344,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 12,354,000 $3,019,000 $ 4,127,000(D) $ 11,246,000
============ ========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 2,880,000 $ 2,024,000(E) $ 856,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,342,000 $ 84,000 $ 6,000 $ 1,420,000
============ =========== =========== ============
- -------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $10,023,000 in purchase accounting adjustments, net
of a reclassification of $3,019,000 to the reserve for assets acquired
in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
52
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS--(CONTINUED)
YEAR ENDED DECEMBER 31, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ------------ ------------------------ ----------- ------------
ADDITIONS
------------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND OTHER FROM AT END
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE OF PERIOD
----------- ------------ ------------ ----------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 4,098,000 $ 2,604,000 $ 2,680,000(A) $ 4,022,000
============ ============ =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $180,333,000 $110,230,000 $(3,674,000)(B) $80,146,000(C) $206,743,000
============ ============ =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 750,000 $ 437,000 $ 237,000(A) $ 950,000
============ ============ =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 11,581,000 $ 3,674,000 (B) $ 2,901,000(D) $ 12,354,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 3,304,000 $ 424,000(E) $ 2,880,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,177,000 $ 258,000 $ 93,000 $ 1,342,000
============ ============ =========== ============
- -------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents a reclassification to the reserve for assets acquired
in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with disposition
and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with utilization
of the related temporary differences.
53
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Security Ownership of Certain Beneficial Owners,"
"Election of Directors," "Security Ownership of Management," "Executive
Compensation," "Report of the Compensation Committee on Executive
Compensation," "Comparative Cumulative Total Return to Shareholders,"
"Executive Officers" and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company's definitive proxy statement, which sections are
incorporated in this report and made a part hereof by reference. The definitive
proxy statement will be filed no later than 120 days after close of
Registrant's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1. & 2. Financial Statements and Financial Statement Schedules
The Financial Statements and Financial Statement Schedules filed as part of
this report are listed in the accompanying index at page 20 in "Item 8" of
Part II of this report.
3. Exhibits (Each management contract or compensatory plan or arrangement in which
any director or named executive officer of The First American Financial
Corporation, as defined by Item 402(a)(3) of Regulation S-K (17 C.F.R.
(S)229.402(a)(3)), participates that is included among the exhibits listed
below is identified by an asterisk (*).)
(3)(a) Restated Articles of Incorporation of The First American Financial
Corporation dated November 8, 1989, incorporated by reference herein
from Exhibit 3.1 of Amendment No. 3, dated October 16, 1992, to
Registration Statement on Form S-2.
(3)(b) Certificate of Amendment of Restated Articles of Incorporation of The
First American Financial Corporation dated September 21, 1992,
incorporated by reference herein from Exhibit 3.2 of Amendment No. 3,
dated October 16, 1992, to Registration Statement on Form S-2.
(3)(c) Bylaws, as amended.
(4)(a) Amendment and Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by reference herein
from Exhibit (4) of Amendment No. 1, dated July 26, 1993, to Quarterly
Report on Form 10-Q for the quarter ended March 31, 1993. Amendment and
Restatement dated as of April 28, 1993, of Credit Agreement dated as of
April 21, 1992, incorporated by reference herein from Exhibit (4) of
Amendment No. 1, dated July 26, 1993, to Quarterly Report on Form 10-Q
for the quarter ended March 31, 1993.
(4)(b) Amendment No. 1 dated as of March 31, 1994, to Amendment and
Restatement dated as of April 28, 1993, of Credit Agreement dated as of
April 21, 1992, incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended March 31, 1994.
(4)(c) Amendment No. 2 dated as of November 22, 1994, to Amendment and
Restatement dated as of April 28, 1993, of Credit Agreement dated as of
April 21, 1992, incorporated by reference herein from Exhibit (4) of
Current Report on Form 8-K dated December 14, 1994.
(4)(d) Amendment No. 3 dated as of March 31, 1995, to Amendment and
Restatement dated as of April 28, 1993, of Credit Agreement dated as of
April 21, 1992, incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended March 31, 1995.
54
(4)(e) Amendment No. 4 dated as of June 1, 1995, to Amendment and
Restatement dated as of April 28, 1993, of Credit Agreement
dated as of April 21, 1992, incorporated by reference herein
from Exhibit (4) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1995.
(4)(f) Amendment No. 5 dated as of February 16, 1996, to Amendment and
Restatement dated as of April 28, 1993, of Credit Agreement
dated as of April 21, 1992.
*(10)(a) Description of Stock Bonus Plan, as amended, incorporated by
reference herein from Exhibit 10(a) of Annual Report on Form 10-
K for the fiscal year ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan dated April 10, 1986, and
Amendment No. 1 thereto dated October 1, 1986, incorporated by
reference herein from Exhibit (10)(b) of Annual Report on Form
10-K for the fiscal year ended December 31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990, to Executive Supplemental
Benefit Plan, incorporated by reference herein from Exhibit
(10)(c) of Annual Report on Form 10-K for the fiscal year ended
December 31, 1989.
*(10)(d) Management Supplemental Benefit Plan dated July 20, 1988,
incorporated by reference herein from Exhibit (10) of Quarterly
Report on Form 10-Q for the quarter ended June 20, 1992.
*(10)(e) Pension Restoration Plan (effective as of January 1, 1994).
*(10)(f) 1996 Stock Option Plan, incorporated by reference herein from
Exhibit 4 of Registration Statement on Form S-8 dated December
30, 1996.
(10)(g) Pledge Agreement dated as of April 27, 1992, incorporated by
reference herein from Exhibit (2) of Current Report on Form 8-K
dated May 8, 1992.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants
(27) Financial Data Schedule.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
THE FIRST AMERICAN FINANCIAL
CORPORATION
(Registrant)
Date: March 27, 1997 By /s/ Parker S. Kennedy
___________________________________
Parker S. Kennedy, President
(Principal Executive Officer)
Date: March 27, 1997 By /s/ Thomas A. Klemens
___________________________________
Thomas A. Klemens
Executive Vice President, Chief
Financial Officer
(Principal Financial and
Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
By /s/ D.P. Kennedy Chairman and Director March 27, 1997
____________________________________
D.P. Kennedy
By /s/ Parker S. Kennedy President and Director March 27, 1997
____________________________________
Parker S. Kennedy
By /s/ Thomas A. Klemens Executive Vice President, March 27, 1997
____________________________________ Chief Financial Officer
Thomas A. Klemens
By Director
____________________________________
George L. Argyros
By /s/ Gary J. Beban Director March 27, 1997
____________________________________
Gary J. Beban
By /s/ J. David Chatham Director March 27, 1997
____________________________________
J. David Chatham
By /s/ William G. Davis Director March 27, 1997
____________________________________
William G. Davis
By /s/ James L. Doti Director March 27, 1997
____________________________________
James L. Doti
56
SIGNATURE TITLE DATE
--------- ----- ----
By /s/ Lewis W. Douglas, Jr. Director March 27, 1997
____________________________________
Lewis W. Douglas, Jr.
By /s/ Paul B. Fay, Jr. Director March 27, 1997
____________________________________
Paul B. Fay, Jr.
By /s/ Dale F. Frey Director March 27, 1997
____________________________________
Dale F. Frey
By /s/ Robert B. McLain Director March 27, 1997
____________________________________
Robert B. McLain
By /s/ Anthony R. Moiso Director March 27, 1997
____________________________________
Anthony R. Moiso
By Director
____________________________________
Rudolph J. Munzer
By /s/ Frank E. O'Bryan Director March 27, 1997
____________________________________
Frank E. O'Bryan
By /s/ Roslyn B. Payne Director March 27, 1997
____________________________________
Roslyn B. Payne
By /s/ Virginia Ueberroth Director March 27, 1997
____________________________________
Virginia Ueberroth
57
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
(3)(a) Restated Articles of Incorporation of The First S
American Financial Corporation dated November 8,
1989, incorporated by reference herein from Exhibit
3.1 of Amendment No. 3, dated October 16, 1992, to
Registration Statement on Form S-2
(3)(b) Certificate of Amendment of Restated Articles of S
Incorporation of The First American Financial
Corporation dated September 21, 1992, incorporated by
reference herein from Exhibit 3.2 of Amendment No. 3,
dated October 16, 1992, to Registration Statement on
Form S-2
(3)(c) Bylaws, as amended S
(4)(a) Amendment and Restatement dated as of April 28, 1993, S
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Amendment No.
1, dated July 26, 1993, to Quarterly Report on Form
10-Q for the quarter ended March 31, 1993
(4)(b) Amendment No. 1 dated as of March 31, 1994, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994
(4)(c) Amendment No. 2 dated as of November 22, 1994, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Current Report on Form 8-K dated December 14, 1994
(4)(d) Amendment No. 3 dated as of March 31, 1995, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995
(4)(e) Amendment No. 4 dated as of June 1, 1995, to Amendment S
and Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report
on Form 10-Q for the quarter ended June 30, 1995
(4)(f) Amendment No. 5 dated as of February 16, 1996, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992
*(10)(a) Description of Stock Bonus Plan, as amended, S
incorporated by reference herein from Exhibit 10(a)
of Annual Report on Form 10-K for the fiscal year
ended December 31, 1992
*(10)(b) Executive Supplemental Benefit Plan dated April 10, S
1986, and Amendment No. 1 thereto dated October 1,
1986, incorporated by reference herein from
Exhibit (10)(b) of Annual Report on Form 10-K for the
fiscal year ended December 31, 1988
*(10)(c) Amendment No. 2, dated March 22, 1990, to Executive S
Supplemental Benefit Plan, incorporated by reference
herein from Exhibit (10) (c) of Annual Report on
Form 10-K for the fiscal year ended December 31, 1989
*(10)(d) Management Supplemental Benefit Plan dated July 20, S
1988, incorporated by reference herein from Exhibit
(10) of Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992
*(10)(e) Pension Restoration Plan (effective as of January 1, S
1994)
*(10)(f) 1996 Stock Option Plan, incorporated by reference S
herein from Exhibit 4 of Registration Statement on
Form S-8 dated December 30, 1996
(10)(g) Pledge Agreement dated as of April 27, 1992, S
incorporated by reference herein from Exhibit (2) of
Current Report on Form 8-K dated May 8, 1992
(21) Subsidiaries of the registrant S
(23) Consent of Independent Accountants S
(27) Financial Data Schedule S