Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 1998
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
Rights to Purchase Series A Junior
Participating Preferred 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. 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 4, 1999, the aggregate market value of voting stock held by non-
affiliates was $1,166,806,506.
On March 4, 1999, there were 60,656,670 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 53 pages.
PART I
------
Item 1. Business.
- ------------------
The Company
- -----------
The First American Financial Corporation (the "Company") 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 and has its 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 to real
property buyers and mortgage lenders. These services include title insurance,
tax monitoring, mortgage credit reporting, property data services, flood
certification, field inspection services, appraisal services, mortgage loan
origination and servicing systems, mortgage document preparation and home
warranty services. In addition, credit and various database-related services
are provided to automotive dealers, consumer lenders, employers and property
management companies. The Company also provides investment, trust and thrift
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. The Company
believes that its subsidiary, First American Title Insurance Company ("First
American"), is the largest title insurer in the United States, based on
operating revenues, and its subsidiary, First American Real Estate Information
Services, Inc., is the nation's largest provider of flood zone determinations,
based on the number of flood zone 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
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 to, and the priority of interests in, real estate are determined in
accordance with applicable laws. In most real estate transactions, mortgage
lenders and purchasers of real estate want to be protected from loss or damage
in the event that title is not as represented. In most parts of the United
States, title insurance has become accepted as the most efficient means of
providing such protection.
Title Policies. Title insurance policies insure the interests of owners
and their lenders in the title to real property against loss by reason of
adverse claims to ownership of, or to defects, liens, encumbrances or other
matters affecting such title which exist at the time a title insurance policy is
issued and which were not excluded from the coverage of a title insurance
policy. 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 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."
1
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 of the property, but in
some cases might insure for a greater amount where the buyer anticipates
constructing improvements on the property. 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.
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 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. The seller and the buyer bear the risk during this time
lag. Any matter affecting title which is discovered during this period would
have to be dealt with to the title insurers' satisfaction or the insurer would
except the matter from the coverage afforded by the title policy. Before a
closing takes place, however, the closer would request that the title insurer
provide an update to the commitment to discover any adverse matters affecting
title and, if any are found, would work with the seller to eliminate them so
that the title insurer would issue the title policy subject only to those
exceptions to coverage which are acceptable to the buyer and the buyer's lender.
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.
The Company's Title Insurance Operations
- ----------------------------------------
Overview. The Company, through First American Title Insurance Company 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 premiums written in the major areas in
which the Company operates, in 1997, the Company had the largest or second
largest share of the title insurance market in 29 states and in the District of
2
Columbia. In addition, the Company's national market share grew from 20.4% in
1996 to 21.5% in 1997. Industry statistics for 1998 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. 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, the United Kingdom and Australia.
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 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.
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. Since strengthening its agent selection and audit programs, the
Company's average annual losses resulting from agent defalcations have decreased
by approximately 60%.
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
3
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.
With the formation of a limited liability corporation ("LLC") with Experian
Group on January 1, 1998, the Company enhanced its investment in title plants.
Experian Group contributed to the LLC its real estate information division,
which the Company believes is the nation's leading operator of title plants,
with the second largest repository of imaged title documents.
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 fair value, less costs to sell. Notes, real estate and other assets
purchased or otherwise acquired in settlement of claims, net of valuation
reserves, totaled $11.8 million, $4.9 million and $0.3 million, respectively, as
of December 31, 1998.
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 $40 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), Land America 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 tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home warranty
services. The development of these businesses has allowed the Company to become
the nation's leading
4
company offering a full range of services to real property buyers and mortgage
lenders. The Company also provides investment, trust and thrift services.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
certification, mortgage loan origination and servicing systems, mortgage
document preparation 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 Information Services, 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.
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 $95 price range and is paid in full at the
time the contract is executed. The Company recognizes revenues from tax
service contracts over the estimated duration of the contracts as the related
servicing costs are estimated to occur. However, income taxes are paid on the
entire fee in the year the fee is received. Historically, the Company has
maintained minimal reserves for losses relating to its tax monitoring service
because its losses have been negligible. Given the uncertainties related to the
Company's ability, as well as the ability of its significant vendors, suppliers
and customers, to become Year 2000 compliant, losses relating to the Company's
tax monitoring service may increase.
The Company's 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 credit reporting service also provides prequalifying reports,
merged credit data, resident screening services, business reports, credit
scoring tools and personal credit reports. It also has recently branched into
the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home equity
lenders nationwide. The Company's 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 was 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.
In May 1997, the Company purchased all of the operations of SMS, other than
SMS' flood zone determination business. SMS is a leading provider of real
estate information services to the U.S. mortgage and title insurance industries.
The acquired businesses include SMS' credit division, which the Company believes
is the third largest
5
provider of U.S. mortgage credit information; SMS' property appraisal division,
which the Company believes is the second largest provider of U.S. appraisal
services; SMS' title division, which provides title and closing services
throughout the United States, servicing primarily home equity mortgage
institutions; SMS' settlement services business, which provides title plant
systems and accounting services, as well as escrow closing software, to the
title industry; and a controlling interest in what is believed by the Company to
be the largest mortgage document preparation firm.
On January 1, 1998, the Company and its real estate information service
subsidiaries (other than Excelis, Inc.) (the "Real Estate Information
Subsidiaries") consummated a business transaction with Experian Group
("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the transaction, the Real Estate Information
subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. RES is
believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents. As a result of this
transaction, the Company believes that FARES will become the nation's largest
and most diverse provider of information technology and decision support
solutions for the mortgage and real estate industries.
In April 1998, the Company acquired Contour Software. This business
supplies mortgage loan origination software to the mortgage industry. Contour
offers a complete line of software products for every facet of mortgage lending,
from qualification to servicing.
In June 1998, the Company acquired Data Tree Corporation. Data Tree is a
supplier of database management and document imaging systems to county
recorders, other governmental agencies and the title industry.
In July 1998, the Company acquired ShadowNet Mortgage Technologies, LLC.
ShadowNet is a provider of electronic mortgage preparation and delivery systems
and now conducts business under the First American Nationwide Documents brand-
name.
The Consumer Risk Management Business. In 1998 the Company created this
business segment by merging certain operations of the Company's existing
mortgage credit reporting business with the operations of recently acquired CIC,
Inc. and The Registry. This business segment provides non-cyclical, high margin
services to a customer base outside the Company's traditional clientele and is
designed to expand the Company's opportunities for revenue consistency. The
Consumer risk management business markets a variety of services including
automotive credit reporting, direct-to-consumer credit reporting, multi-family
resident screening and pre-employment screening.
The automotive and sub-prime automotive credit reporting service provides
auto dealers and lenders with consumer credit reports tailored to the specific
needs of the automotive market. This credit reporting service also offers
credit reports directly to the consumer, accessing information from the nation's
three largest credit bureaus.
The multi-family resident screening service provides landlords with
information regarding a housing applicant's rental payment history, occupancy
responsibilities, eviction actions, credit information and similar background
data.
The pre-employment screening service offers employers a variety of
reports on prospective employees, providing information on criminal records,
warrants, motor vehicle reports, credit reports, drug screens, education, prior
employment, professional licenses and more.
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 90% 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 $335 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
monthly 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, Georgia, Nevada, North Carolina, South Carolina, Texas, Utah and
Washington. The principal competitor of the Company's home warranty business is
American Home Shield, a subsidiary of Service Master L.P.
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, 1998,
the trust operation was administering fiduciary and custodial assets having a
market value in excess of $1.8 billion.
6
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, 1998, the
Thrift had approximately $67.4 million of demand deposits and $72.0 million of
loans outstanding.
The loans made or acquired by the Thrift currently range in amount from
$6,700 to $1,200,000 with an average loan balance of $270,700. 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. In excess of 94% 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, 1998, was 10%. 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 local community banks, other thrift and loan companies and, to a
lesser extent, commercial banks. 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, 1998, if all of such loans had been current in
accordance with their original terms, totaled $96,000. Interest income actually
recognized on these nonaccrual loans for the year ended December 31, 1998, was
$18,000.
The following table sets forth the amount of the Thrift's nonperforming
loans as of the dates indicated.
Year Ended December 31
----------------------------------------------------------------------------
(in thousands) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Nonperforming Assets:
Loans accounted for on a nonaccrual basis $ 898 $ 287 $ 166 $1,956 $1,741
Accruing loans past due 90 or more days
Troubled debt restructurings
------------ ------------ -------------- ------------ ------------
Total $ 898 $ 287 $ 166 $1,956 $1,741
============ ============ ============== ============ ============
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,063,000 of potential problem
loans in existence as of December 31, 1998.
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 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.
7
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
--------------------------------------------------------------------------------
(in thousands, except percentages) 1998 1997 1996 1995 1994
------------ ------------ ------------ ------------ ------------
Allowance for Loan Losses:
Balance at beginning of year $1,185 $1,050 $1,344 $ 950 $ 750
------------ ------------ ------------ ------------ ------------
Charge-Offs:
Real estate-mortgage (164) (136) (766) (194) (311)
Assigned lease payments (34) (5) (9) (9)
(198) (136) (771) (203) (320)
----------- ------------ ------------ ------------ ------------
Recoveries:
Real estate-mortgage 0 6 26 0 55
Assigned lease payments 4 22 18 35 28
4 28 44 35 83
----------- ------------ ------------ ------------ ------------
Net charge-offs (194) (108) (727) (168) (237)
Provision for losses 159 243 433 562 437
----------- ------------ ------------ ------------ ------------
Balance at end of year $1,150 $1,185 $1,050 $1,344 $ 950
----------- ------------ ------------ ------------ ------------
Ratio of net charge-offs during the year to
average loans outstanding during the year .3% .2% 1.4% .4% .6%
=========== ============ ============ ============ ============
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
-------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------------------------------------------------------------------------------------------------------
(in thousands, except % of % of % of % of % of
percentages) Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
-------------------------------------------------------------------------------------------------------
Loan Categories:
Real estate-mortgage $1,100 100 $1,116 100 $1,015 100 $1,300 99 $ 879 99
Real estate-construction 3 1
Assigned lease payments - 39 34 41 71 1
Other 50 30 1
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
$1,150 100 $1,185 100 $1,050 100 $1,344 100 $ 950 100
------ ---- ------ ---- ------ ---- ------ ---- ----- ----
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. In 1986 the Company began expanding into other real estate-
related financial services. In 1998 the Company launched its Consumer Risk
Management Division where a unique mix of products and services is directed
toward non-real estate related markets. To date, the Company has made numerous
strategic acquisitions designed to expand not only its direct title operations,
but also the range of services it can provide to its customers.
8
During the current year, some of the key acquisitions made by the Company in
furtherance of this strategy were:
Acquired Entity Principal Market(s)
- --------------------------------------------------------------------------------
Title Insurance:
Waco-McLennan County Abstract & Title Company Texas
Evans Title Companies, Inc. Wisconsin
Florida Title & Abstract Company Florida
Real Estate Information Services: (1)
Real Estate Solutions (1) Nationwide
Data Tree Corporation Nationwide
Contour Software, Inc. Nationwide
RELS LLC (2) Nationwide
Consumer Risk Management:
C.I.C., Inc. Nationwide
The Registry, Inc. Nationwide
- --------------------------------------------------------------------------------
(1) On January 1, 1998, the Company formed a limited liability company (FARES
LLC) with Experian Group (Experian). The purpose of FARES LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc., with Experian's Real Estate Solutions division
(RES). FARES LLC is 80% owned by the Company and 20% owned by Experian.
(2) On November 1, 1998, the Company, through FARES LLC, formed a limited
liability company (RELS LLC) with Norwest Mortgage. The purpose of RELS LLC
is to provide appraisal services and specialized credit information to the
real estate mortgage lending industry. RELS LLC is 50% owned by FARES LLC
and 50% owned by Norwest Mortgage.
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.
9
Employees
- ---------
The following table provides a summary of the total number of employees of
the Company as of December 31, 1998:
Business Number of Employees
-------- -------------------
Title insurance 14,277
Real estate information services 4,570
Home warranty 369
Consumer risk management 335
Trust and banking 118
------
Total 19,669
======
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 has acquired approximately 31 acres of
land at MacArthur Place in Santa Ana, California, to meet its current and
potential future expansion requirements. The Company is currently constructing
three office buildings in a campus environment, totaling approximately 210,000
square feet. The buildings are scheduled to be completed in 1999 and will be
occupied by the Company's executive offices, Orange County title insurance
branch operations and certain other operations. After the move to the new
facility, it is anticipated that the two existing office buildings in Santa Ana,
California, will continue to be occupied by the trust and banking subsidiary
along with certain other operations of the Company. The Company also owns an
18,000 square foot office building located across the street from its main
offices. This building is used primarily for storage.
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"), houses its national operations in
a leased 231,000 square foot office building in Dallas, Texas. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. The Company has acquired approximately 17 acres of land in
Poway, California, and is constructing two office buildings totaling
approximately 152,000 square feet. It is anticipated that the buildings will be
completed in March, 1999 and will be occupied primarily by various subsidiaries
of FAREISI. In addition, FAREISI and its subsidiaries lease office space in
more than 75 locations throughout the United States, principally for their
respective operations.
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.
- ---------------------------
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 have a
materially adverse effect on 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.
10
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 trades on the New York Stock Exchange (ticker
symbol FAF). The approximate number of record holders of common stock on
February 25, 1999, was 3,345.
High and low stock prices and dividends for the last two years were (Note
A):
1998 1997
---------------------------- ----------------------------
Cash Cash
Quarter Ended High-Low Range Dividends High-Low Range Dividends
- ------------- ---------------- --------- ---------------- ---------
March 31 $22.88 - $16.08 $.05 $ 9.92 - $ 8.36 $.037
June 30 $30.75 - $21.08 $.05 $ 8.86 - $ 6.97 $.037
September 30 $41.25 - $25.75 $.06 $13.40 - $ 8.67 $.043
December 31 $36.06 - $24.94 $.06 $16.42 - $13.28 $.043
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 Note 2 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.
The exemptions relied upon for these issuances were Section 4(2) of the
Securities Act and Rule 506 of Regulation D. Sellers were either accredited
investors or were sophisticated as to business or financial matters.
Number of
Shares Consideration
Date of Sale (Note A) Received
- --------------------------------------------------------------------------------
September 13, 1996 294,189 $ 2,173,719
December 10, 1996 752,145 $ 5,417,149
July 8, 1997 21,600 $ 192,600
November 17, 1997 23,265 $ 315,047
December 31, 1997 2,475 $ 40,630
April 15, 1998 726,564 $15,500,000
May 6, 1998 125,775 $ 2,587,167
May 7, 1998 27,090 $ 435,698
May 29, 1998 111,039 $ 2,850,000
September 15, 1998 17,925 $ 525,000
All consolidated results have been restated to reflect the 1998 acquisitions
accounted for under the pooling-of-interests method of accounting.
Note A -- After adjustment for 3-for-1 stock split effected July 17, 1998
11
Item 6. Selected Financial Data.
- ---------------------------------
The selected consolidated financial data for the Company for the five-year
period ended December 31, 1998, has been derived from the audited Consolidated
Financial Statements. The selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and Notes thereto,
"Item 1 -- Business -- Acquisitions," and "Item 7 -- Management's Discussion and
Analysis -- Results of Operations."
The First American Financial Corporation and Subsidiary Companies
- -----------------------------------------------------------------
(in thousands, except percentages, Year Ended December 31
per share amounts and employee data) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------
Revenues $2,877,328 $1,908,923 $1,614,293 $1,257,267 $1,381,971
Net income $ 198,710 $ 64,499 $ 54,492 $ 7,798 $ 19,698
Total assets $1,784,790 $1,153,635 $ 963,444 $ 855,156 $ 805,350
Notes and contracts payable $ 130,193 $ 42,119 $ 71,428 $ 77,430 $ 89,631
Mandatorily redeemable preferred securities
(Note A) $ 100,000 $ 100,000
Stockholders' equity $ 731,915 $ 415,003 $ 356,379 $ 305,778 $ 293,056
Return on average stockholders' equity 34.7% 16.7% 16.5% 2.8% 6.9%
Cash dividends on common shares $ 12,628 $ 8,931 $ 7,928 $ 6,850 $ 6,869
Per share of common stock (Notes B & C)--
Net income
Basic $ 3.46 $ 1.18 $ 1.01 $ .16 $ .37
Diluted $ 3.32 $ 1.16 $ 1.00 $ .16 $ .37
Stockholders' equity $ 12.13 $ 7.62 $ 6.56 $ 5.69 $ 5.46
Cash dividends $ .22 $ .16 $ .15 $ .13 $ .13
Number of common shares outstanding (Note B)--
Weighted average during the year
Basic 57,450 54,448 53,899 53,677 53,875
Diluted 59,822 55,717 54,337 53,677 53,875
End of year 60,332 54,484 54,355 53,713 53,641
Title orders opened (Note D) 1,585 1,173 1,027 894 873
Title orders closed (Note D) 1,210 886 775 667 723
Number of employees 19,669 13,156 11,611 10,149 9,033
All consolidated results have been restated to reflect the 1998 acquisitions
accounted for under the pooling-of-interests method of accounting.
Note A -- Mandatorily redeemable preferred securities of First American Capital
Trust I, a Delaware business trust controlled by the Company, whose
sole assets are $100,000,000 aggregate principal amount of the
Company's 8.5% deferrable interest debentures due 2012.
Note B -- After adjustment for 3-for-1 stock split effected July 17, 1998.
Note C -- 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 D -- Title order volumes are those processed by the direct title operations
of the Company and do not include orders processed by agents.
12
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations.
--------------
Any statements in this document looking forward in time involve risks and
uncertainties, including but not limited to the following: the effect of
interest rate fluctuations; changes in the performance of the real estate
markets; the effect of changing economic conditions; the demand for and the
acceptance of the Company's products; and contingencies associated with the Year
2000 issue.
Results of Operations
- ---------------------
Overview - As with all providers of real estate-related information
products and 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 housing. 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, in recent years, interest rate adjustments by the Federal Reserve
Board, as well as other economic factors, have caused fluctuations in the
traditional pattern of real estate activity. Mortgage interest rates peaked in
January 1995 and decreased throughout the remainder of the year prompted by
Federal Reserve Board actions to stimulate the economy. This resulted in a
resurgence of real estate activity in the last half of 1995, and generated a
high inventory of open transactions going into 1996. This, together with an
improving national real estate economy (including the beginnings of a recovery
in California) and the Company's successful integration of its diverse
businesses, resulted in strong revenues and profits for 1996. These favorable
conditions continued throughout 1997. Stability in the real estate marketplace
coupled with increasing prices prompted a resurgence in refinance and home
equity transactions, primarily towards the latter part of the year. These
factors, as well as market share increases in all of the Company's primary
business segments, culminated in a record-setting 1997. Further rate declines
started in the fourth quarter of 1997 and continued throughout 1998. This,
coupled with higher consumer confidence, led to nationwide record-setting
residential resale and refinance transactions in 1998. These factors, including
a particularly strong California real estate market, contributed to record-
setting revenues and net income for the Company in 1998.
Operating revenues - A summary by segment of the Company's operating revenues is
as follows:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-----------------------------------------------------------
Title Insurance:
Direct Operations $1,097,989 39 $ 761,774 41 $ 626,314 40
Agency Operations 965,228 35 700,193 37 641,919 40
-----------------------------------------------------------
2,063,217 74 1,461,967 78 1,268,233 80
Real Estate Information 598,832 21 311,838 17 239,434 15
Home Warranty 58,204 2 46,859 2 38,351 2
Consumer Risk 57,186 2 40,995 2 24,038 2
Trust and Banking 24,751 1 20,007 1 17,839 1
-----------------------------------------------------------
$2,802,190 100 $1,881,666 100 $1,587,895 100
===========================================================
Operating revenues from direct title operations increased 44.1% in 1998
over 1997 and 21.6% in 1997 over 1996. These increases were attributable to
increases in the number of title orders closed by the Company's direct
operations as well as increases in the average revenues per order closed. The
Company's direct operations closed 1,210,200, 885,600 and 775,100 title orders
during 1998, 1997 and 1996, respectively, representing increases of 36.7% in
1998 over 1997 and 14.3% in 1997 over 1996. These increases were primarily due
to the continuation of lower mortgage interest rates which led to an increase in
overall transaction volume nationwide (including California, a state highly
concentrated with direct operations) and increases in the Company's national
market share. The average revenues per order closed were $907, $860 and $808
for 1998, 1997 and 1996, respectively, representing increases of 5.5% in 1998
over 1997 and 6.4% in 1997 over 1996. These increases were primarily
attributable to appreciating home values, an increased mix of resale activity
and a resurgence in commercial real estate transactions. Operating revenues
from agency operations increased 37.9% in 1998 over 1997 and 9.1% in 1997 over
1996. These fluctuations were primarily attributable to the same factors
affecting direct operations mentioned above, compounded by the inherent delay in
the reporting of transactions by agents.
13
Real estate information operating revenues increased 92.0% in 1998 over
1997 and 30.2% in 1997 over 1996. These increases were primarily attributable
to the same factors affecting title insurance mentioned above and $144.5 million
and $53.8 million of operating revenues contributed by new acquisitions in 1998
and 1997, respectively. Effective January 1, 1999, the Company will implement a
change to its revenue recognition accounting policy for tax service contracts.
The new policy provides for a more ratable recognition of revenues, reducing the
amount recognized at the inception of the contract and recognizing it over the
expected service period. The Company estimates that adoption of this new policy
will reduce the revenue recognized in 1999 from new tax service orders by
approximately 50%. See Note 1 to the consolidated financial statements for a
more detailed description of the accounting change.
Home warranty operating revenues increased 24.2% in 1998 over 1997 and
22.2% in 1997 over 1996. 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
increases in the number of annual renewals.
Consumer risk management operating revenues increased 39.5% in 1998 over
1997 and 70.5% in 1997 over 1996. These increases were primarily attributable
to an increased awareness and acceptance of this business segment's products as
well as increased market share.
Investment and other income - Investment and other income increased $47.9
million in 1998 over 1997. This increase was primarily attributable to an
investment gain of $32.4 million recognized in the first quarter of 1998
relating to the joint venture agreement with Experian, as well as a 36.9%
increase in the average investment portfolio balance due to the investment of
excess cash flow from operations and a portion of the proceeds from the
Company's $100 million senior debentures (see Note 8 to consolidated financial
statements). Investment and other income increased a marginal 3.3% in 1997 over
1996. This increase was primarily attributable to a 4.8% increase in the
average investment portfolio balance and increased equity in earnings of
unconsolidated subsidiaries, offset in part by an increase of $0.9 million in
losses from the sales of fixed assets. See Note 9 to the consolidated financial
statements for further details of the composition of 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:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-----------------------------------------------------
Title Insurance $659,289 72 $498,424 76 $413,164 77
Real Estate Information 201,398 22 117,350 18 92,905 17
Home Warranty 13,765 2 11,430 2 9,075 2
Consumer Risk 18,323 2 14,081 2 6,389 1
Trust and Banking 7,721 1 7,061 1 6,621 1
Corporate 13,562 1 10,979 1 11,831 2
-----------------------------------------------------
$914,058 100 $659,325 100 $539,985 100
=====================================================
The Company's title insurance segment (primarily direct operations) 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 that specialize in builder and lender
business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses increased 32.3% in 1998 over 1997 and
20.6% in 1997 over 1996. These increases were primarily attributable to the
costs incurred servicing the increasing volume of title orders at the Company's
direct operations and, to a lesser extent, acquisition activity and salary
increases, offset in part by productivity gains as measured by new orders per
person. Contributing to the increases for 1998 and 1997 was an increased volume
of labor intensive residential resale transactions. The Company's direct
operations opened 1,585,400, 1,173,300 and 1,026,900 title orders in 1998, 1997,
and 1996, respectively, representing increases of 35.1% in 1998 over 1997 and
14.3% in 1997 over 1996.
Real estate information personnel expenses increased 71.6% in 1998 over
1997 and 26.3% in 1997 over 1996. These increases were primarily attributable
to costs incurred servicing the increase in business volume, $63.0 million and
$20.7 million of costs attributable to company acquisitions for 1998 and 1997,
respectively, as well as higher overhead costs attributable to the integration
of new acquisitions and transitioning new accounts. Contributing to the
increases were costs associated with in-house development of new electronic
communication delivery systems for information-based products to interface with
customer needs.
Home warranty personnel expenses increased 20.4% in 1998 over 1997 and
26.0% in 1997 over 1996. 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.
14
Consumer risk management personnel expenses increased 30.1% in 1998 over
1997 and 120.4% in 1997 over 1996. These increases were primarily attributable
to additional personnel required to service the increased business volume.
Premiums retained by agents - A summary of agent retention and agent revenues is
as follows:
(in thousands, except percentages) 1998 1997 1996
-------- -------- --------
Agent Retention $773,030 $563,137 $516,593
======== ======== ========
Agent Revenues $965,228 $700,193 $641,919
======== ======== ========
% Retained by Agents 80.1% 80.4% 80.5%
======== ======== ========
The premium split between underwriter and agents is in accordance with
their respective agency contracts and can vary from region to region due to
divergencies in real estate closing practices, as well as rating structures. As
a result, the percentage of title premiums retained by agents may 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:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-------- ------- -------- ------ -------- ------
Title Insurance $307,055 50 $247,579 59 $216,514 66
Real Estate Information 251,376 41 132,927 32 83,489 25
Home Warranty 3,726 1 2,071 - 1,323 -
Consumer Risk 25,481 4 19,795 5 14,576 5
Trust and Banking 9,270 2 8,093 2 6,982 2
Corporate 14,424 2 10,591 2 6,641 2
-------- ------- -------- ------ -------- ------
$611,332 100 $421,056 100 $329,525 100
======== ======= ======== ====== ======== ======
Title insurance other operating expenses (principally direct operations)
increased 24.0% in 1998 over 1997 and 14.3% in 1997 over 1996. 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 and acquisitions, offset in part by successful cost-containment
programs.
Real estate information other operating expenses increased 89.1% in 1998
over 1997 and 59.2% in 1997 over 1996. These increases were primarily
attributable to costs incurred servicing the increased business activity, as
well as $62.4 million and $33.5 million of other operating costs relating to
acquisitions in 1998 and 1997, respectively, offset in part by cost-containment
programs. Contributing to the increases were 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:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-------- ----- ------- ----- ------- -----
Title Insurance $ 68,697 58 $52,924 59 $58,909 68
Real Estate Information 17,428 15 9,874 11 4,453 5
Home Warranty 32,686 27 27,338 30 23,055 27
Trust and Banking (48) - 187 - 70 -
-------- ----- ------- ----- ------- -----
$118,763 100 $90,323 100 $86,487 100
======== ===== ======= ===== ======= =====
The provision for title insurance losses expressed as a percentage of
title insurance operating revenues was 3.3% in 1998, 3.6% in 1997 and 4.6% in
1996. These decreases reflect ongoing improvement in the Company's claims
experience. The provision for home warranty losses as a percentage of home
warranty operating revenues was 56.2% in 1998, 58.3% in 1997 and 60.1% in 1996.
These fluctuations were primarily attributable to the relative changes in the
average number of claims per contract experienced during these periods.
Depreciation and amortization - Depreciation and amortization as well as capital
expenditures are summarized in Note 18 to the consolidated financial statements.
15
Premium taxes - A summary by pertinent segment of the Company's premium taxes is
as follows:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-------- ----- -------- ----- ------- -----
Title Insurance $19,959 95 $16,034 95 $15,927 96
Home Warranty 953 5 870 5 749 4
------- ----- -------- ----- ------- -----
$20,912 100 $16,904 100 $16,676 100
======= ===== ======== ===== ======= =====
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. The Company's
underwritten title company (non-insurance) subsidiaries are subject to state
income tax and do not pay premium tax. Accordingly, the Company's total tax
burden at the state level is composed of a combination of premium taxes and
state income taxes. Premium taxes as a percentage of title insurance operating
revenues were 1.0% in 1998, 1.1% in 1997 and 1.3% in 1996. These decreases were
attributable to changes in the geographical mix of title insurance revenues, as
well as changes in the Company's non-insurance subsidiaries' contribution to
revenues.
Interest - Interest expense increased 79.8% in 1998 over 1997 and 108.3% in 1997
over 1996. The increase for 1998 was primarily due to $5.5 million of interest
expense related to the senior debentures as well as incremental interest expense
of $2.8 million related to the mandatorily redeemable preferred securities
(outstanding for full year). The increase in 1997 was primarily due to $5.7
million of interest expense related to the mandatorily redeemable preferred
securities (outstanding for eight months), offset in part by a 23.7% reduction
in the average outstanding debt balance. See Note 8 to the consolidated
financial statements for a description of the Company's borrowings under its
bank credit agreement and its senior debentures and Note 14 to the consolidated
financial statements for the description of the mandatorily redeemable preferred
securities.
Income before income taxes and minority interests - A summary by segment of the
Company's income before income taxes and minority interests is as follows:
(in thousands, except percentages) 1998 % 1997 % 1996 %
-------- ----- -------- ----- -------- -----
Title Insurance $227,906 63 $ 79,602 58 $ 50,129 44
Real Estate Information 103,057 28 38,139 28 50,531 44
Home Warranty 11,406 3 8,871 6 7,429 6
Consumer Risk 13,276 4 6,968 5 2,953 3
Trust and Banking 7,156 2 4,062 3 3,728 3
-------- ---- -------- ---- -------- ----
362,801 100 137,642 100 114,770 100
======== ==== ======== ==== ======== ====
Corporate (1,379) (27,967) (22,054)
-------- -------- --------
$361,422 $109,675 $ 92,716
======== ======== ========
The Company's profit margins 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 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
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 profits improve as the volume of residential resales increases.
16
Consumer risk management profits increase as the volume of transactions
increase. 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.
The decrease in corporate expenses for 1998 from 1997 was primarily due to
an investment gain of $32.4 million (see Note 17 to the consolidated financial
statements). The increase in corporate expense for 1997 over 1996 was primarily
attributable to increased costs associated with supporting the overall growth of
the Company's businesses, as well as additional unallocated interest expense
associated with the Company's mandatorily redeemable preferred securities.
Income taxes - The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 35.3%, 37.8% and 38.4% for 1998, 1997 and 1996, respectively. The
differences in effective rate were primarily due to changes in the ratio of
permanent differences to income before income taxes and minority interests and
changes in state income and franchise taxes resulting from fluctuations in 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.
Minority interests - Minority interests in net income of consolidated
subsidiaries increased $31.3 million in 1998 over 1997 and $1.1 million in 1997
over 1996. The increase for 1998 was primarily due to the strong operating
results of the Company's joint venture with Experian.
Net income - Net income and per share information, which has been restated for
the 3-for-1 stock split effected July 17, 1998, are summarized as follows:
(in thousands, except per share amounts) 1998 1997 1996
-------- ------- -------
Net income $198,710 $64,499 $54,492
======== ======= =======
Net income per share:
Basic $ 3.46 $ 1.18 $ 1.01
======== ======= =======
Diluted $ 3.32 $ 1.16 $ 1.00
======== ======= =======
Weighted average shares:
Basic 57,450 54,448 53,899
======== ======= =======
Diluted 59,822 55,517 54,337
======== ======= =======
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $361.6 million, $112.4
million and $114.3 million for 1998, 1997 and 1996, respectively, after claim
payments of $95.4 million, $81.6 million and $78.0 million, respectively. The
principal nonoperating uses of cash and cash equivalents for the three-year
period ended December 31, 1998, were for additions to the investment portfolio,
capital expenditures, company acquisitions in 1997 and 1996 and the repayment of
debt. The most significant nonoperating sources of cash and cash equivalents
were proceeds from the sales and maturities of certain investments, proceeds in
1998 from the issuance of senior debentures and proceeds in 1997 from the
issuance of mandatorily redeemable preferred securities. The net effect of all
activities on total cash and cash equivalents were increases of $193.2 million,
$8.4 million and $27.5 million for 1998, 1997 and 1996, respectively.
On April 7, 1998, the Company issued and sold $100.0 million of 7.55%
senior debentures, due April 1, 2028. The Company used a portion of the net
proceeds from the sale to repay certain obligations and purchase land for the
Company's new corporate facilities. The remaining proceeds were invested in
debt and equity securities.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1998, was 12.3% as compared with 7.2% as of the prior year end.
This increase was primarily attributable to the issuance and sale of the $100.0
million senior debentures, offset in part by an increase in the capital base
primarily due to shares issued in connection with company acquisitions,
increased minority interests and net income for the period. The Company
maintains a $75.0 million line of credit which remained unused as of December
31, 1998. Notes and contracts payable are 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 1999 from its
principal subsidiary, First American Title Insurance Company, is $158.5
17
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 operational 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.
Year 2000 Issue
- ---------------
Overview - With the help of an outside consulting firm, in January 1997 the
Company created a Year 2000 Program Management Office and adopted a five-step
plan to address the Year 2000 Problem. The five steps of the plan are: (1)
awareness, (2) inventory/assessment, (3) renovation, (4) testing, and (5)
implementation. To implement the plan, the Company was divided into business
units comprised of: (a) the reporting regions of the title insurance
subsidiaries, (b) the subsidiary companies of the real estate information
services business, (c) the home warranty subsidiaries, (d) the trust and banking
subsidiaries and (e) various other subsidiaries.
The awareness phase involves communicating the nature and scope of the Year
2000 Problem to the management of the business units in order to engender strong
management support for its resolution. The inventory/assessment phase involves
the identification of information systems and non-information systems that
require renovation or replacement to become Year 2000 compliant. The renovation
phase involves the repair and/or replacement of the systems identified in the
prior phase. The testing phase involves the testing of repaired and replaced
systems. The implementation phase involves the integration of tested systems
into daily operations.
All phases of the plan are currently active. The awareness phase will
continue throughout 1999. June 30, 1998 was the target date for completion of
the inventory/assessment phase; that phase is substantially complete. However,
all of the phases of the plan must be revisited each time the Company acquires a
new business. Accordingly, the inventory/assessment phase remains active.
December 31, 1998 was the initial target date for completion of renovation. As
of such date, 79% of the business units had completed 80% or more of their
renovations, 61% of the business units had completed 90% or more of their
renovations and 24% had met the target date and completed 100% of their
renovations. The Company plans to complete the renovation phase as soon as
practicable. Based on current knowledge, the Company has established the
following general target dates for the remaining phases: April 30, 1999 for
completion of testing and June 30, 1999 for completion of implementation. In
each case, completion of the applicable phase is subject to the limitation noted
above for newly acquired businesses. Additionally, a limited number of business
units have target dates for renovation, testing and implementation that are
later than the general dates described above. The Company makes no assurance
that it will be able to meet these target dates.
The Company's efforts to survey the Year 2000 readiness of its significant
vendors, suppliers and customers continues. To date, the Company has not
received sufficient information from these parties about their Year 2000 plans
to predict the outcome of their efforts. Even after responses are received,
there can be no assurance that the systems of significant vendors, suppliers and
customers will be timely renovated.
Costs for the year 2000 problem - To date the Company has spent approximately
$11.6 million in implementing the Year 2000 plan. The Company expects to incur
an additional $15 million to $25 million in completing the Year 2000 plan.
About half the costs will be for hardware and software replacement and about
half will be for labor. The costs for hardware and software will be capitalized
and amortized over their estimated useful lives. Labor costs will be expensed
as incurred. Year 2000 plan costs are being funded through operating cash flow.
Contingency plans - Company-wide and business unit contingency plans for
unexpected systems failures as a result of the Year 2000 problem were targeted
to be in effect by the end of 1998. The company-wide plan and the contingency
plans for 82% of the Company's business units have been completed. The Company
is currently working to complete the balance of the business unit contingency
plans.
Review of the year 2000 plan - The Company engaged a consultant to review its
Year 2000 plan. Under the terms of this engagement, the consultant (1) reviewed
the operations of the Year 2000 Program Management Office, (2) reviewed the
Company's Year 2000 plan, and (3) reviewed the implementation of the Year 2000
plan at selected locations. From time to time during the review, the consultant
reported its findings to the Audit Committee of the Company's Board of Directors
and appropriate actions were taken by the Company in response.
Assurances - The costs to implement the Year 2000 plan and the target dates for
completion of the various phases of the Year 2000 plan are based on current
estimates. These estimates reflect numerous assumptions about future events,
including the continued availability of certain resources, the timing and
effectiveness of third party renovation plans and
18
other factors. The Company can give no assurance that these estimates will be
achieved, and actual results could differ materially from these estimates.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
- --------------------------------------------------------------------
The Company's primary exposure to market risk relates to interest rate risk
associated with certain other financial instruments. Although the Company
monitors its risk associated with fluctuations in interest rates, it does not
currently use derivative financial instruments to hedge these risks. The table
below provides information about certain assets and liabilities that are
sensitive to changes in interest rates and presents cash flows and the related
weighted average interest rates by expected maturity dates. The Company is also
subject to equity price risk as related to its equity securities. At December
31, 1998, the Company had equity securities with a book value of $18.8 million
and a fair value of $27.3 million. Although the Company has operations in
certain foreign countries, these operations, in the aggregate, are not material
to the Company's financial condition or results of operations.
Fair
(in thousands, except percentages) 1999 2000 2001 2002 2003 Thereafter Total Value
- ----------------------------------------------------------------------------------------------- ---------------------
Interest-Rate Sensitive Assets
- ------------------------------
Deposits with Savings and
Loan Associations and Banks
Book Value $28,028 $ 4,946 $ 32,974 $ 32,974
Average Interest Rate 4.01% 4.67% 100%
Debt Securities
Book Value $19,284 $22,008 $10,940 $23,553 $29,385 $117,481 $222,651 $227,685
Average Interest Rate 6.53% 5.69% 5.88% 5.95% 5.61% 5.93% 102.26%
Loans Receivable
Book Value $ 3,707 3,415 5,214 2,825 3,097 55,942 $ 72,035 $ 72,200
Average Interest Rate 10.34% 9.71% 10.64% 9.48% 9.30% 9.78% 100.23%
Interest-Rate Sensitive Liabilities
- -----------------------------------
Variable Rate Demand Deposits
Book Value $12,502 $ 12,502 $ 12,502
Average Interest Rate 4.60% 100.90%
Fixed Rate Demand Deposits
Book Value $33,980 $12,964 $ 3,852 $ 1,629 $ 2.477 $ 54,902 $ 55.400
Average Interest Rate 5.93% 6.06% 6.10% 6.49% 6.20% 100.90%
Notes and Contracts Payable
Book Value $12,664 $ 6,484 $ 5,001 $ 1,750 $ 629 $103,665 $130,193 $130,900
Average Interest Rate 7.51% 7.53% 7.57% 7.60% 7.65% 7.65% 100.54%
Mandatorily Redeemable
Preferred Securities
Book Value $100,000 $100,000 $100,000
Average Interest Rate 8.50% 100.00%
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
III. Supplementary Insurance Information 44
IV. Reinsurance 46
V. Valuation and Qualifying Accounts 47
Financial statement schedules not listed 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 accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of The First
American Financial Corporation and its subsidiaries at December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, 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.
/s/ PricewaterhouseCoopers LLP
Costa Mesa, California
February 9, 1999
21
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31
1998 1997
- ---------------------------------------------------------------------------------------------
Cash and Cash Equivalents $ 375,440,000 $ 182,234,000
- ---------------------------------------------------------------------------------------------
Accounts and Accrued Income Receivable,
less allowances ($10,715,000 and $7,602,000) 191,122,000 130,863,000
- ---------------------------------------------------------------------------------------------
Investments:
Deposits with savings and loan associations and banks 32,974,000 29,029,000
Debt securities 227,685,000 151,503,000
Equity securities 27,338,000 13,904,000
Other long-term investments 63,244,000 35,047,000
- ---------------------------------------------------------------------------------------------
351,241,000 229,483,000
- ---------------------------------------------------------------------------------------------
Loans Receivable 72,035,000 63,378,000
- ---------------------------------------------------------------------------------------------
Property and Equipment, at cost:
Land 34,578,000 17,059,000
Buildings 110,133,000 84,935,000
Furniture and equipment 335,342,000 222,897,000
Less - accumulated depreciation (166,414,000) (123,462,000)
- ---------------------------------------------------------------------------------------------
313,639,000 201,429,000
- ---------------------------------------------------------------------------------------------
Title Plants and Other Indexes 216,711,000 100,626,000
- ---------------------------------------------------------------------------------------------
Assets Acquired in Connection with Claim Settlements 17,051,000 21,119,000
- ---------------------------------------------------------------------------------------------
Deferred Income Taxes 12,859,000 31,563,000
- ---------------------------------------------------------------------------------------------
Goodwill and Other Intangibles, less accumulated
amortization ($19,017,000 and $13,093,000) 171,790,000 132,361,000
- ---------------------------------------------------------------------------------------------
Other Assets 62,902,000 60,579,000
- ---------------------------------------------------------------------------------------------
$1,784,790,000 $1,153,635,000
See Notes to Consolidated Financial Statements
22
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31
1998 1997
- -------------------------------------------------------------------------------------------------------
Demand Deposits $ 67,404,000 $ 62,475,000
- -------------------------------------------------------------------------------------------------------
Accounts Payable and Accrued Liabilities:
Accounts payable 21,249,000 12,550,000
Salaries and other personnel costs 88,314,000 55,973,000
Pension costs 50,100,000 39,431,000
Other 97,044,000 61,633,000
- -------------------------------------------------------------------------------------------------------
256,707,000 169,587,000
- -------------------------------------------------------------------------------------------------------
Deferred Revenue 105,496,000 84,424,000
- -------------------------------------------------------------------------------------------------------
Reserve for Known and Incurred But Not Reported Claims 270,436,000 250,826,000
- -------------------------------------------------------------------------------------------------------
Income Taxes Payable 22,734,000 3,987,000
- -------------------------------------------------------------------------------------------------------
Notes and Contracts Payable 130,193,000 42,119,000
- -------------------------------------------------------------------------------------------------------
Minority Interests in Consolidated Subsidiaries 99,905,000 25,214,000
- -------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 13)
- -------------------------------------------------------------------------------------------------------
Mandatorily Redeemable Preferred Securities of the Company's
Subsidiary Trust Whose Sole Assets Are the Company's $100,000,000
8.5% Deferrable Interest Subordinated Notes Due 2012 (Note 14) 100,000,000 100,000,000
- -------------------------------------------------------------------------------------------------------
Stockholders' Equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; Outstanding - None
Common stock, $1 par value (Note 15)
Authorized - 108,000,000 shares
Outstanding - 60,332,000 and 54,484,000 shares 60,332,000 54,484,000
Additional paid-in capital 129,664,000 6,864,000
Retained earnings 534,297,000 348,215,000
Accumulated other comprehensive income (Note 16) 7,622,000 5,440,000
- -------------------------------------------------------------------------------------------------------
Total Stockholders' Equity 731,915,000 415,003,000
- -------------------------------------------------------------------------------------------------------
$1,784,790,000 $1,153,635,000
See Notes to Consolidated Financial Statements
23
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
Revenues
Operating revenues $2,802,190,000 $1,881,666,000 $1,587,895,000
Investment and other income 75,138,000 27,257,000 26,398,000
- -------------------------------------------------------------------------------------------------------------
2,877,328,000 1,908,923,000 1,614,293,000
- -------------------------------------------------------------------------------------------------------------
Expenses
Salaries and other personnel costs 914,058,000 659,325,000 539,985,000
Premiums retained by agents 773,030,000 563,137,000 516,593,000
Other operating expenses 611,332,000 421,056,000 329,525,000
Provision for title losses and other claims 118,763,000 90,323,000 86,487,000
Depreciation and amortization 59,804,000 38,489,000 27,503,000
Premium Taxes 20,912,000 16,904,000 16,676,000
Interest 18,007,000 10,014,000 4,808,000
- -------------------------------------------------------------------------------------------------------------
2,515,906,000 1,799,248,000 1,521,577,000
- -------------------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 361,422,000 109,675,000 92,716,000
Income taxes 127,700,000 41,500,000 35,600,000
- -------------------------------------------------------------------------------------------------------------
Income before minority interests 233,722,000 68,175,000 57,116,000
Minority interests 35,012,000 3,676,000 2,624,000
- -------------------------------------------------------------------------------------------------------------
Net income $ 198,710,000 $ 64,499,000 $ 54,492,000
Other comprehensive income (loss), net of tax (Note 16) 2,182,000 2,703,000 (1,256,000)
- -------------------------------------------------------------------------------------------------------------
Comprehensive income 200,892,000 67,202,000 53,236,000
Net income per common share (Note 1):
Basic $ 3.46 $ 1.18 $ 1.01
Diluted $ 3.32 $ 1.16 $ 1.00
Weighted average common shares outstanding (Note 1):
Basic 57,450,000 54,448,000 53,899,000
Diluted 59,822,000 55,717,000 54,337,000
See Notes to Consolidated Financial Statements
24
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Additional other
Common paid-in Retained comprehensive
Shares Stock capital earnings income
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 53,713,000 $53,713,000 $ 1,989,000 $246,083,000 $ 3,993,000
Net income for 1996 54,492,000
Cash dividends on common shares (7,928,000)
Shares issued in connection with
company acquisitions 900,000 900,000 6,658,000
Shares issued in connection with
benefit and savings plans 225,000 225,000 1,045,000
Purchase of Company shares (483,000) (483,000) (3,052,000)
Other comprehensive income (1,256,000)
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 54,355,000 54,355,000 6,640,000 292,647,000 2,737,000
Net income for 1997 64,499,000
Cash dividends on common shares (8,931,000)
Shares issued in connection with
company acquisitions 48,000 48,000 500,000
Shares issued in connection with
benefit and savings plan 627,000 627,000 4,341,000
Purchase of Company shares (546,000) (546,000) (4,617,000)
Other comprehensive income 2,703,000
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 54,484,000 54,484,000 6,864,000 348,215,000 5,440,000
Net income for 1998 198,710,000
Cash dividends on common shares (12,628,000)
Shares issued in connection with
company acquisitions 4,458,000 4,458,000 100,854,000
Shares issued in connection with
benefit and savings plan 1,390,000 1,390,000 21,946,000
Other comprehensive income 2,182,000
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 60,332,000 $60,332,000 $129,664,000 $534,297,000 $ 7,622,000
See Notes to Consolidated Financial Statements.
25
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 198,710,000 $ 64,499,000 $ 54,492,000
Adjustments to reconcile net income to cash
provided by operating activities-
Provision for title losses and other claims 118,763,000 90,323,000 86,487,000
Depreciation and amortization 59,804,000 38,489,000 27,503,000
Minority interests in net income 35,012,000 3,676,000 2,624,000
Investment gain (32,449,000)
Other, net 2,226,000 933,000 (366,000)
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (95,440,000) (81,603,000) (78,048,000)
Net change in income tax accounts 34,730,000 11,974,000 381,000
Increase in accounts and accrued income receivable (41,966,000) (26,014,000) (11,887,000)
Increase in accounts payable and accrued liabilities 70,845,000 18,708,000 34,561,000
Increase (decrease) in deferred revenue 10,433,000 (9,000) (426,000)
Other, net 964,000 (8,571,000) (1,061,000)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by operating activities 361,632,000 112,405,000 114,260,000
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Net cash effect of company acquisitions 11,562,000 (49,336,000) (12,097,000)
Net increase in deposits with banks (3,771,000) (7,355,000) (3,037,000)
Purchases of debt and equity securities (134,348,000) (80,241,000) (68,498,000)
Proceeds from sales of debt and equity securities 27,512,000 39,240,000 46,506,000
Proceeds from maturities of debt securities 22,434,000 18,842,000 31,291,000
Net increase in other long-term investments (1,580,000) (1,117,000) (2,575,000)
Net increase in loans receivable (8,657,000) (9,122,000) (8,122,000)
Capital expenditures (155,642,000) (75,007,000) (49,076,000)
Net proceeds from sale of property and equipment 3,361,000 1,646,000 3,245,000
- ----------------------------------------------------------------------------------------------------------------
Cash used for investing activities (239,129,000) (162,450,000) (62,363,000)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits 4,929,000 11,154,000 7,903,000
Repayment of debt (26,990,000) (40,965,000) (19,749,000)
Proceeds from issuance of senior debentures 99,456,000
Proceeds from the issuance of mandatorily redeemable
preferred securities 100,000,000
Purchase of Company shares (5,163,000) (3,535,000)
Proceeds from exercise of stock options 2,554,000 1,653,000
Proceeds from issuance of stock to employee savings plan 18,144,000 980,000
Distributions to minority shareholders (14,762,000) (299,000) (1,121,000)
Cash dividends (12,628,000) (8,931,000) (7,928,000)
- ----------------------------------------------------------------------------------------------------------------
Cash provided by (used for) financing activities 70,703,000 58,429,000 (24,430,000)
- ----------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 193,206,000 8,384,000 27,467,000
Cash and cash equivalents - Beginning of year 182,234,000 173,850,000 146,383,000
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents - End of year $ 375,440,000 $ 182,234,000 $173,850,000
- ----------------------------------------------------------------------------------------------------------------
Supplemental information:
Cash paid during the year for:
Interest $ 16,309,000 $ 8,243,000 $ 5,056,000
Premium taxes $ 18,433,000 $ 18,103,000 $ 14,146,000
Income taxes $ 96,440,000 $ 31,292,000 $ 36,682,000
Noncash investing and financing activities:
Shares issued for benefits plans $ 2,638,000 $ 2,335,000 $ 1,270,000
Company acquisitions in exchange for common stock $ 105,312,000 $ 548,000 $ 7,558,000
Liabilities in connection with company acquisitions $ 118,718,000 $ 48,294,000 $ 32,180,000
See Notes to Consolidated Financial Statements
26
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
Description of the Company:
The First American Financial Corporation (the Company), through its
subsidiaries, is engaged in the business of providing real estate-related
financial and information services to real property buyers and mortgage lenders.
These services include title insurance, tax monitoring, mortgage credit
reporting, property data services, flood certification, field inspection
services, appraisal services, mortgage loan servicing systems, mortgage document
preparation and home warranties. In addition, credit and various database-
related services are provided to automotive dealers, consumer lenders, employers
and property management companies. The Company also provides investment, trust
and thrift services.
Significant Accounting Policies:
Principles of consolidation
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. All
consolidated results have been restated to reflect the 1998 acquisitions of
three separate entities accounted for under the pooling-of-interests method of
accounting. Certain 1996 and 1997 amounts have been reclassified to conform
with the 1998 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 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 fair value less
costs to sell.
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 component of other comprehensive income. Realized
gains and losses on investments are determined using the specific identification
method.
Property and equipment
Furniture and equipment includes computer software acquired and
developed for internal use and for use with the Company's products. Software
development costs are capitalized from the time technological feasibility is
established until the software is ready for use. Capitalized development costs
for internal-use software include only incremental payments to third parties.
Depreciation on buildings and on furniture and equipment is computed
using the straight-line method over estimated useful lives of 25 to 45 and 3 to
10 years, respectively. Capitalized software costs are amortized using the
straight-line method over estimated useful lives of 3 to 10 years.
Effective January 1, 1999, the Company will adopt Statement of
Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." SOP 98-1 will require the Company to capitalize
interest costs incurred and certain payroll-related costs of employees directly
associated with developing software, in addition to incremental payments to
third parties. The Company does not believe that the adoption of SOP 98-1 will
have a material effect on its financial condition or results of operations.
27
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 fair value less costs to sell.
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 periodically evaluates the amortization period assigned to each
intangible asset to ensure that there have not been any events or circumstances
that warrant revised estimates of useful lives.
Impairment of goodwill, loans receivable and other long-lived assets
The Company periodically reviews the carrying value of goodwill, loans
receivable and other long-lived assets for impairment when events or
circumstances warrant such a review.
To the extent that the undiscounted cash flows related to the
businesses underlying the goodwill are less than the carrying value of the
related goodwill, such goodwill will be reduced to the amount of the
undiscounted cash flows.
A loan is impaired when, based on current information and events, it
is probable that the Company will be unable to collect all amounts due according
to the contractual terms of the loan agreement. Impaired loans receivable are
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.
To the extent that the undiscounted cash flows related to other long-
lived assets are less than the assets' carrying value, the carrying value of
such assets is reduced to the assets' fair value.
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 12 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.
The Company recognized revenues from tax service contracts over the
estimated duration of the contracts as the related servicing costs were
estimated to occur. The majority of the servicing costs, approximately 70%, are
incurred in the year the contract is executed, with the remaining 30% incurred
over the remaining service life of the contract.
Effective January 1, 1999, the Company will implement a change to the
accounting policy for tax service contracts. The new accounting policy will be
adopted prospectively and will apply to all new loans serviced beginning January
1, 1999. The new policy provides for a more ratable recognition of revenues,
reducing the amount recognized at the inception of the contract and recognizing
it over the expected service period. The amortization rates applied to
recognize the revenues assume a 10-year contract life and are adjusted to
reflect prepayments. The resulting rates by year (starting with year one) are
32%, 24%, 14%, 9%, 7%, 5%, 4%, 2%, 2% and 1%. The Company periodically reviews
its tax service contract portfolio to determine if there have been changes in
contract lives and/or changes in the
28
number and/or timing of prepayments; accordingly, the Company may adjust the
rates to reflect current trends. The Company estimates that adoption of this new
policy will result in a decrease in diluted earnings per share for 1999 of $0.25
to $0.35. This estimate is heavily dependent on the volume of tax service
contracts entered into in 1999. Assuming the new accounting policy had been
consistently applied in prior years, the Company would have reported diluted
earnings per share of $3.10, $1.02, $0.90, $0.17 and $0.42 for the years ended
December 31, 1998, 1997, 1996, 1995 and 1994, respectively.
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.
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.
Earnings per share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS No. 128 became effective for 1997 and requires the presentation of
basic and diluted earnings per share on the face of the income statement. Basic
earnings per share are computed by dividing net income available to common
stockholders by the weighted-average number of common shares outstanding. The
computation of diluted earnings per share is similar to the computation of basic
earnings per share except that the weighted-average number of common shares
outstanding is increased to include the number of additional common shares that
would have been outstanding if potential dilutive common shares had been issued.
The Company's only potential dilutive common shares are stock options
(see Note 12). Stock options are reflected in diluted earnings per share by
application of the treasury stock method. All earnings per share amounts
presented have been restated to reflect the adoption of SFAS No. 128.
Risk of real estate market
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 revenues, can be adversely affected during periods
of high interest rates and/or limited money supply.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the statements. Actual results could differ from the
estimates and assumptions used.
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 1999 is $158.5 million.
Investments carried at $17.3 million were on deposit with state
treasurers in accordance with statutory requirements for the protection of
policyholders at December 31, 1998.
29
FATICO maintained statutory capital and surplus of $301.6 million and
$210.3 million at December 31, 1998 and 1997, respectively. Statutory net
income for the years ended December 31, 1998, 1997 and 1996 was $137.3 million,
$35.9 million and $34.6 million, respectively.
NOTE 3.
Debt and Equity Securities:
The amortized cost and estimated fair value of investments in debt
securities are as follows:
Amortized Gross Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- -------------------------------------------------------------------------------
December 31, 1998
- -----------------
U.S. Treasury securities $ 36,875 $1,158 $ (11) $ 38,022
Corporate securities 74,546 1,736 (25) 76,257
Obligations of states and
political subdivisions 89,825 2,215 (48) 91,992
Mortgage-backed securities 21,405 77 (68) 21,414
- -------------------------------------------------------------------------------
$222,651 $5,186 $(152) $227,685
- -------------------------------------------------------------------------------
December 31, 1997
- -----------------
U.S. Treasury securities $ 38,972 $ 792 $ (46) $ 39,718
Corporate securities 54,884 717 (22) 55,579
Obligations of states and
political subdivisions 38,977 1,092 - 40,069
Mortgage-backed securities 16,186 36 (85) 16,137
- -------------------------------------------------------------------------------
$149,019 $2,637 $(153) $151,503
- -------------------------------------------------------------------------------
The amortized cost and estimated fair value of debt securities at
December 31, 1998, by contractual maturities, are as follows:
Amortized Estimated
(in thousands) Cost Fair Value
- -------------------------------------------------------------------------------
Due in one year or less $ 19,284 $ 19,438
Due after one year through five years 85,886 88,498
Due after five years through ten years 68,892 70,655
Due after ten years 27,184 27,680
- ------------------------------------------------------------------------------
201,246 206,271
Mortgage-backed securities 21,405 21,414
- ------------------------------------------------------------------------------
$222,651 $227,685
- ------------------------------------------------------------------------------
The cost and estimated fair value of investments in equity securities
are as follows:
Gross Unrealized Estimated
(in thousands) Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------
December 31, 1998
- -----------------
Common stocks:
Corporate securities $18,576 $9,429 $(996) $27,009
Other 214 115 - 329
- --------------------------------------------------------------------------------
$18,790 $9,544 $(996) $27,338
- --------------------------------------------------------------------------------
December 31, 1997
- -----------------
Common stocks:
Corporate securities $ 7,941 $5,856 $ (82) $13,715
Other 78 111 - 189
- --------------------------------------------------------------------------------
$ 8,019 $5,967 $ (82) $13,904
- --------------------------------------------------------------------------------
30
Sales of debt and equity securities resulted in realized gains of $1.3
million, $0.7 million and $3.3 million and realized losses of $0.2 million, $0.3
million and $0.7 million for the years ended December 31, 1998, 1997 and 1996,
respectively. The fair value of debt and equity securities was estimated using
quoted market prices.
NOTE 4.
Loans Receivable:
Loans receivable are summarized as follows:
December 31
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Real estate-mortgage $74,093 $65,384
Other 107 86
- --------------------------------------------------------------------------------
74,200 65,470
- --------------------------------------------------------------------------------
Unearned income on lease contracts (15) (18)
Allowance for loan losses (1,150) (1,185)
Participations sold (770) (481)
Deferred loan fees, net (230) (408)
- --------------------------------------------------------------------------------
$72,035 $63,378
- --------------------------------------------------------------------------------
Real estate loans are secured by properties located in California.
The average yield on the Company's loan portfolio was 10% and 11% for the years
ended December 31, 1998 and 1997, 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 $72.2 million and $64.2 million
at December 31, 1998 and 1997, 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.
NOTE 5.
Assets Acquired in Connection with Claim Settlements:
December 31
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Notes receivable $11,833 $12,177
Real estate 4,880 5,013
Judgments and other 338 3,929
- --------------------------------------------------------------------------------
$17,051 $21,119
- --------------------------------------------------------------------------------
The above amounts are net of valuation reserves of $12.3 million and
$11.1 million at December 31, 1998 and 1997, respectively.
The fair value of notes receivable was $12.2 million and $12.5 million
at December 31, 1998 and 1997, 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.
The activity in the valuation reserve is summarized as follows:
December 31
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Balance at beginning of year $11,135 $10,278
Provision for losses 3,951 4,678
Dispositions (2,830) (3,821)
- -------------------------------------------------------------------------------
Balance at end of year $12,256 $11,135
- -------------------------------------------------------------------------------
31
NOTE 6.
Demand Deposits:
Passbook and investment certificate accounts are summarized as follows:
December 31
(in thousands) 1998 1997
- -------------------------------------------------------------------------------
Passbook accounts $12,502 $13,209
- -------------------------------------------------------------------------------
Certificate accounts:
Less than one year 33,980 28,798
One to five years 20,922 20,468
- -------------------------------------------------------------------------------
54,902 49,266
- -------------------------------------------------------------------------------
$67,404 $62,475
- -------------------------------------------------------------------------------
Annualized interest rates:
Passbook accounts 4%-5% 5%
Certificate accounts 5%-8% 6%-8%
The carrying value of the passbook accounts approximates fair value
due to the short-term nature of this liability. The fair value of investment
certificate accounts was $55.4 million and $49.4 million at December 31, 1998
and 1997, respectively, and was estimated based on the discounted value of the
future cash flows using a discount rate approximating current market for similar
liabilities.
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
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Balance at beginning of year $250,826 $245,245 $238,161
- -------------------------------------------------------------------------------
Provision related to:
Current year 114,812 85,645 81,539
Prior years 3,951 4,678 4,948
- -------------------------------------------------------------------------------
118,763 90,323 86,487
- -------------------------------------------------------------------------------
Payments related to:
Current year 48,228 39,934 29,680
Prior years 44,133 39,745 43,967
- -------------------------------------------------------------------------------
92,361 79,679 73,647
- -------------------------------------------------------------------------------
Other (6,792) (5,063) (5,756)
- -------------------------------------------------------------------------------
Balance at end of year $270,436 $250,826 $245,245
- -------------------------------------------------------------------------------
"Other" primarily represents reclassifications to the reserve for
assets acquired in connection with claim settlements. Claims activity
associated with reinsurance is not material and, therefore, not presented
separately.
NOTE 8.
Notes and Contracts Payable:
December 31
(in thousands) 1998 1997
- ------------------------------------------------------------------------------
7.55% senior debentures, due April, 2028 $ 99,468 -
Secured notes payable pursuant to amended
credit agreement 2,040 $ 5,320
Trust deed notes with maturities through
2007, secured by land and buildings with a net
book value of $4,931, average rate of 10 1/4% 3,952 7,359
Other notes and contracts payable with
maturities through 2007, average rate of 6 3/4% 24,733 29,440
- ------------------------------------------------------------------------------
$130,193 $42,119
- ------------------------------------------------------------------------------
32
In April 1998, the Company issued and sold $100.0 million of 7.55%
senior debentures, due April 2028. The 30-year bonds were issued at 99.456% of
the principal amount.
In April 1997, the Company paid off the variable rate indebtedness
portion of the amended credit agreement with proceeds received from its
mandatorily redeemable preferred securities (see Note 14).
At December 31, 1998, the Company's remaining borrowings under its
amended bank credit agreement consisted of fixed rate indebtedness of $2.0
million, maturing in April 1999 and bearing interest at 9.38% per annum.
During July 1997, the Company amended the credit agreement to relax
and/or eliminate certain restrictive covenants and increase the revolving line
of credit to $75.0 million which was unused as of December 31, 1998. In
November 1997, the Company further amended the credit agreement to issue a
letter of credit to secure its fixed rate obligation and release as security the
capital stock of its wholly owned subsidiaries.
Pursuant to the terms of the credit agreement, the Company is required
to maintain minimum levels of capital and earnings and meet predetermined debt
to capitalization ratios.
The aggregate annual maturities for notes and contracts payable in
each of the five years after December 31, 1998, are as follows:
(in thousands)
- -----------------------------------------------------------------
1999 $12,664
2000 $ 6,484
2001 $ 5,001
2002 $ 1,750
2003 $ 629
The fair value of notes and contracts payable was $130.9 million and $44.3
million at December 31, 1998 and 1997, 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 1/2% and 8% at December 31, 1998 and 1997, respectively.
NOTE 9.
Investment and Other Income:
The components of investment and other income are as follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest:
Cash equivalents and deposits
with savings and loan associations and banks $10,293 $ 6,396 $ 4,742
Debt securities 13,395 10,307 7,887
Other long-term investments 7,023 3,550 3,161
- --------------------------------------------------------------------------------
30,711 20,253 15,790
- --------------------------------------------------------------------------------
Investment gain on Experian
joint venture 32,449 - -
Dividends on equity securities 409 469 554
Equity in earnings of
unconsolidated affiliates 4,614 2,304 1,043
Net gain on sales of debt
and equity securities 1,074 358 2,611
Other 5,881 3,873 6,400
- --------------------------------------------------------------------------------
$75,138 $27,257 $26,398
- --------------------------------------------------------------------------------
33
NOTE 10.
Income Taxes:
Income taxes are summarized as follows:
(in thousands) 1998 1997 1996
- -------------------------------------------------------------------------------
Current:
Federal $100,251 $27,234 $28,535
State 12,411 3,925 6,038
112,662 31,159 34,573
- -------------------------------------------------------------------------------
Deferred:
Federal 13,759 9,747 232
State 1,279 594 795
15,038 10,341 1,027
- -------------------------------------------------------------------------------
$127,700 $41,500 $35,600
- -------------------------------------------------------------------------------
Income taxes differ from the amounts computed by applying the federal income tax
rate of 35%. A reconciliation of this difference is as follows:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Taxes calculated at federal rate $114,244 $37,173 $31,216
Tax exempt interest income (1,503) (651) (669)
Tax effect of minority interests 1,273 1,286 918
State taxes, net of federal benefit 8,898 3,706 4,442
Exclusion of certain meals and
entertainment expenses 3,794 2,889 2,429
Other items, net 994 (2,903) (2,736)
- --------------------------------------------------------------------------------
$127,700 $41,500 $35,600
- --------------------------------------------------------------------------------
The primary components of temporary differences which give rise to the Company's
net deferred tax asset are as follows:
December 31
(in thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred revenue $21,987 $23,066
Employee benefits 14,407 11,021
Claims and related salvage 3,102 6,943
Bad debt reserves 7,412 4,952
Acquisition reserve 520 3,970
State taxes 2,262 346
Other 5,471 3,249
- --------------------------------------------------------------------------------
55,161 53,547
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciable and amortizable assets 21,179 15,116
Investment gain 11,357 -
Accumulated other comprehensive income 4,754 2,929
Sale leaseback - 1,327
Other 5,012 2,612
- --------------------------------------------------------------------------------
42,302 21,984
- --------------------------------------------------------------------------------
Net deferred tax asset $12,859 $31,563
- --------------------------------------------------------------------------------
34
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 10 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
nonqualified 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.
Effective January 1, 1998 the Company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits." SFAS No. 132 revises employers' disclosures about
pension and other postretirement benefit plans but does not change the
measurement or recognition of those plans.
Net periodic pension cost for the Company's pension and other
retirement benefit plans includes the following components:
(in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Expense:
Service Cost $14,863 $10,550 $ 9,186
Interest Cost 13,067 11,178 9,764
Actual Return on Plan Assets (9,196) (7,421) (10,477)
Amortization of net transition obligation 309 309 309
Amortization of prior service cost 143 143 143
Amortization of net loss 1,408 945 5,318
- --------------------------------------------------------------------------------
$20,594 $15,704 $ 14,243
- --------------------------------------------------------------------------------
35
The following table provides a reconciliation of benefit obligations, plan
assets and funded status of the plans at:
December 31
(in thousands) 1998 1997
- ------------------------------------------------------------------------------------------------
Unfunded Unfunded
Funded Supplemental Funded Supplemental
Pension Benefit Pension Benefit
Plans Plans Plans Plans
- -----------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at
beginning of year $141,689 $ 32,134 $111,678 $ 29,240
Service costs 13,772 1,091 9,731 819
Interest costs 10,586 2,481 8,939 2,239
Actuarial losses 23,590 3,895 17,504 1,012
Benefits paid (5,240) (1,425) (6,163) (1,176)
- ------------------------------------------------------------------------------------------------
Projected benefit obligation
at end of year 184,397 38,176 141,689 32,134
- ------------------------------------------------------------------------------------------------
Change in plan assets:
Plan assets at fair value
at beginning of year 109,358 - 87,096 -
Actual return on plan assets 26,857 - 20,475 -
Company contributions 10,258 - 7,949 -
Benefits paid (5,240) - (6,163) -
- ------------------------------------------------------------------------------------------------
Plan assets at fair value
at end of year 141,233 - 109,357 -
- ------------------------------------------------------------------------------------------------
Reconciliation of funded status:
Funded status of the plans (43,164) (38,176) (32,332) (32,134)
Unrecognized net actuarial loss 23,543 9,856 18,682 6,280
Unrecognized prior service cost (412) 1,426 (457) 1,614
Unrecognized net transition
(asset) obligation (204) 1,081 (255) 1,441
- ------------------------------------------------------------------------------------------------
Accrued pension cost (20,237) (25,813) (14,362) (22,799)
- ------------------------------------------------------------------------------------------------
Amounts recognized in the statement
of financial position consist of:
Accrued benefit liability (20,237) (29,863) (14,362) (25,069)
Intangible asset - 2,194 - 2,270
Minimum pension liability
adjustment - 1,856 - -
- ------------------------------------------------------------------------------------------------
$(20,237) $(25,813) $(14,362) $(22,799)
- ------------------------------------------------------------------------------------------------
The rate of increase in future compensation levels for the plans of
4 1/2% and the weighted average discount rates of 6 3/4% and 7 1/4% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1998 and 1997, respectively. 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 plan holds 6,081,000
and 6,576,000 shares of the Company's common stock, representing 10% and 12% of
the total shares outstanding at December 31, 1998, and 1997 respectively.
The Company also has a Stock Bonus Plan for key employees pursuant to
which 186,000, 258,000 and 225,000 common shares were awarded for 1998, 1997 and
1996, respectively, resulting in a charge to operations of $2.7 million, $2.2
million and $1.3 million, respectively. The Plan, as amended December 9, 1992,
provides that a total of up to 1,350,000 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.
36
NOTE 12.
Stock Option Plans:
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 certain employees 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 8,625,000. Currently outstanding options become exercisable one to
five years, and expire 10 years, from the grant date. On April 24, 1997, the
Company implemented The First American Financial Corporation 1997 Directors'
Stock Plan (the Directors' Plan). The Directors' Plan is similar to the
employees' Stock Option Plan, except that the maximum number of shares that may
be subject to options is 1,800,000 and the maximum number of shares that may be
purchased pursuant to options granted shall not exceed 6,750 shares during any
12-consecutive-month period.
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (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 its stock option plans. Had the Company
determined compensation cost based on the fair value for its stock options at
grant date, as set forth under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts as follows:
(in thousands, except per share amounts) 1998 1997 1996
- ----------------------------------------------------------------------------
Net income:
As reported $198,710 $64,499 $54,492
Pro forma $181,632 $63,699 $53,973
Earnings per share:
As reported
Basic $ 3.46 $ 1.18 $ 1.01
Diluted $ 3.32 $ 1.16 $ 1.00
Pro forma
Basic $ 3.16 $ 1.17 $ 1.00
Diluted $ 3.04 $ 1.14 $ 0.99
The fair value of each option grant is estimated at the grant date
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998, 1997 and 1996, respectively; dividend yield
of 1.0%, 1.2% and 1.9%; expected volatility of 36.0%, 38.1% and 41.0%; risk-free
interest rate of 5.7%, 6.3% and 6.5%; and expected life of six years. The
weighted-average fair value of options granted during 1998, 1997 and 1996 was
$9.71, $4.26 and $2.19, respectively.
Transactions involving stock options are summarized as follows:
Weighted
Average
Number Exercise
(in thousands, except weighted-average exercise price) Outstanding Price
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1995 - -
Granted during 1996 3,015 $ 5.69
Forfeited during 1996 - -
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1996 3,015 $ 5.69
Granted during 1997 207 $10.50
Exercised during 1997 (291) $ 5.69
Forfeited during 1997 (132) $ 5.69
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1997 2,799 $ 6.05
Granted during 1998 4,158 $23.64
Exercised during 1998 (478) $ 5.90
Forfeited during 1998 (183) $14.20
- --------------------------------------------------------------------------------------------------
Balance at December 31, 1998 6,296 $17.48
- --------------------------------------------------------------------------------------------------
37
At December 31, 1998, the range of exercise prices was $5.69 - $32.00
and the weighted-average remaining contractual life of outstanding options was
six years. The number of options exercisable was 593,046 and the weighted-
average exercise price of those options was $6.05.
NOTE 13.
Commitments and Contingencies:
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 1998, the Company satisfied its obligation under the terms of a sale-
leaseback agreement with regard to certain furniture and equipment.
Future minimum rental payments under operating leases that have
initial or remaining noncancelable lease terms in excess of one year as of
December 31, 1998, are as follows:
(in thousands)
1999 $ 75,628
2000 58,134
2001 42,501
2002 31,314
2003 24,828
Later Years 47,706
- ------------------------------------
$280,111
- ------------------------------------
Total rental expense for all operating leases and month-to-month
rentals was $107.5 million, $78.3 million and $63.9 million for 1998, 1997, and
1996, respectively.
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 14.
Mandatorily Redeemable Preferred Securities:
On April 22, 1997, the Company issued and sold $100.0 million of 8.5%
trust preferred securities, due in 2012, through its wholly owned subsidiary,
First American Capital Trust. In connection with the subsidiary's issuance of
the preferred securities, the Company issued to the subsidiary trust 8.5%
subordinated interest notes, due 2012. The sole assets of the subsidiary are
and will be the subordinated interest notes. The Company's obligations under
the subordinated interest notes and related agreements, taken together,
constitute a full and unconditional guarantee by the Company of the subsidiary's
obligations under the preferred securities. Distributions payable on the
securities are included as interest expense in the Company's consolidated income
statement.
NOTE 15.
Stockholders' Equity:
On October 23, 1997, the Company adopted a Shareholder Rights Plan.
Under the Rights Plan, after the close of business on November 15, 1997, each
holder of the Company's common shares received a dividend distribution of one
Right for each common share held. Each Right entitles the holder thereof to buy
a preferred share fraction equal to 1/100,000 of a share of Series A Junior
Participating Preferred Shares of the Company at an exercise price of $265 per
preferred share fraction. Each fraction is designed to be equivalent in voting
and dividend rights to one common share.
The Rights will be exercisable and will trade separately from the
common shares only if a person or group, with certain exceptions, acquires
beneficial ownership of 15% or more of the Company's common shares or commences
a tender or exchange offer that would result in such person or group
beneficially owning 15% or more of the common shares then outstanding. The
Company may redeem the Rights at $0.001 per Right at any time prior to the
occurrence of one of these events. All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's then-
current exercise price, preferred share fractions (or other securities of the
Company) having a value of twice the Right's exercise price. This amounts to
the right to buy preferred share fractions of the Company at half price. Rights
owned by the party triggering the exercise of Rights will be void and therefore
will not be exercisable.
In addition, if after any person has become a 15%-or-more stockholder,
the Company is involved in a merger or other business combination transaction
with another person in which the Company's common shares are changed or
converted, or if the Company sells 50% or more of its assets or earning power to
another person, each Right will entitle
38
its holder to purchase, at the Right's then-current exercise price, common stock
of such other person (or its parent) having a value of twice the Right's
exercise price.
On January 15, 1998, the Company distributed a 3-for-2 common stock
split in the form of a 50% stock dividend. This resulted in an increase of
5,791,492 common shares outstanding with the par value of these additional
shares being capitalized by a transfer from additional paid-in capital to the
common stock account. All references to common stock, additional paid-in
capital, number of shares of common stock and per share amounts for this stock
split were restated in the Company's consolidated financial statements for the
year ended December 31, 1997. On July 17, 1998, the Company distributed a 3-
for-1 common stock split in the form of a 200% stock dividend. This resulted in
an increase of 37,895,936 common shares outstanding with the par value of these
additional shares being capitalized by a transfer from additional paid-in
capital to the common stock account. This stock split has been reflected in the
consolidated statements of stockholder's equity on a retroactive basis as of
December 31, 1995. In order to effect the stock split, the Company increased
its authorized shares from 36,000,000 to 108,000,000. All references in the
consolidated financial statements with regards to common stock, additional paid-
in capital, number of shares of common stock and per share amounts have been
restated to reflect the July 17, 1998 stock split.
NOTE 16.
Other Comprehensive Income:
On January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
requires the reporting of comprehensive income in addition to net income.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the calculation of net income. Prior year financial
statements have been reclassified to conform to the SFAS 130 requirements.
Components of other comprehensive income are as follows:
Minimum Accumulated
Unrealized Pension Other
Gains on Liability Comprehensive
(in thousands) Securities Adjustment Income
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $ 3,993 - $ 3,993
Before tax change (1,932) - (1,932)
Tax benefit 676 - 676
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1996 2,737 - 2,737
Before tax change 4,158 - 4,158
Tax expense (1,455) - (1,455)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1997 5,440 - 5,440
Before tax change 5,213 $(1,856) 3,357
Tax (expense) benefit (1,825) 650 (1,175)
- -------------------------------------------------------------------------------------------------
Balance at December 31, 1998 $ 8,828 $(1,206) $ 7,622
- -------------------------------------------------------------------------------------------------
The change in other unrealized gains (losses) on debt and equity
securities includes reclassification adjustments of $1.1 million, $0.4 million
and $2.6 million of realized gains for the years ended December 31, 1998, 1997
and 1996, respectively.
NOTE 17.
Business Combinations:
On January 1, 1998, the Company formed a limited liability corporation
(LLC) with Experian Group (Experian). The purpose of the LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc. (FAREISI), with Experian's Real Estate Solutions
division (RES). The LLC is 80% owned by the Company and 20% owned by Experian.
RES is a supplier of core real estate data, providing, among other things,
property valuation information, title and tax information and imaged title
documents. The Company treated the transaction as an acquisition of the assets
and liabilities of RES in consideration of a 20% interest in FAREISI. This
business combination has been accounted for under the purchase method of
accounting and, accordingly, the purchase price was allocated to the assets
acquired and liabilities assumed based on the estimated fair values at January
1, 1998. In addition, as a result of the transaction, the Company recognized an
investment gain of $32.4 million in the first quarter 1998. The operating
results of the LLC are included in the Company's consolidated financial
statements commencing January 1, 1998. Assuming the combination had occurred
January 1, 1997, pro forma revenues, net income and net income per diluted share
would have been $2,001.6 million, $69.6 million and
39
$1.25, respectively, for the year ended December 31, 1997. Pro forma results for
the year ended December 31, 1998 are not presented because the combination
occurred January 1, 1998.
In addition, during the year ended December 31, 1998, the Company also
acquired 27 companies. The purchase method of accounting was used for 24 of the
acquisitions and the pooling of interests method was used for three.
The 24 acquisitions accounted for under the purchase method of
accounting were individually not material and all in the title insurance or real
estate information services business. Their aggregate purchase price was $8.8
million in cash, $1.5 million in notes and 3,114,508 shares of the Company's
stock. The purchase price for each was allocated to the assets acquired and
liabilities assumed based on estimated fair values and approximately $30.8
million in goodwill was recorded. Goodwill is being amortized on a straight-
line basis over its estimated useful life ranging from 20 to 30 years. The
operating results of these acquired companies were included in the Company's
consolidated financial statements from their respective acquisition dates.
Assuming these acquisitions had occurred January 1, 1997, pro forma revenues,
net income and net income per diluted share would have been $2,908.9 million,
$199.8 million and $3.27, respectively, for the year ended December 31, 1998,
and $2,045.7 million, $71.7 million and $1.22, respectively, for the year ended
December 31, 1997 (the 1997 pro forma results include the business combination
with Experian mentioned above). All pro forma results include amortization of
goodwill and interest expense on acquisition debt. The pro forma results are
not necessarily indicative of the operating results that would have been
obtained had the acquisitions occurred at the beginning of the periods
presented, nor are they necessarily indicative of future operating results.
The three acquisitions accounted for under the pooling of interests
method of accounting were individually not material. In the aggregate, the
Company issued 2,362,178 shares of its common stock in exchange for 100% of the
outstanding stock of each acquired company. Two of the companies are in the
consumer risk management business and one is in the real estate information
business. The Company has restated prior year results to reflect these three
acquisitions. Costs incurred to consummate the acquisitions were not material.
Combined and separate results of First American and the three acquisitions
during the periods preceding the acquisitions were as follows:
Nine Months Ended Year Ended Year Ended
(in thousands) September 30, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------
Revenues:
First American $2,062,633 $1,887,461 $1,597,566
Acquisitions 17,414 21,462 16,727
- ----------------------------------------------------------------------------------------------
$2,080,047 $1,908,923 $1,614,293
- ----------------------------------------------------------------------------------------------
Net income:
First American $ 145,919 $ 64,709 $ 53,589
Acquisitions (227) (210) 903
- ----------------------------------------------------------------------------------------------
$ 145,692 $ 64,499 $ 54,492
- ----------------------------------------------------------------------------------------------
Net income (loss) per diluted share:
First American $ 2.56 $ 1.21 $ 1.03
Acquisitions (0.09) (0.05) (0.03)
- ----------------------------------------------------------------------------------------------
$ 2.47 $ 1.16 $ 1.00
- ----------------------------------------------------------------------------------------------
In November 1998, the Company entered into a definitive merger
agreement with National Information Group (NAIG). Under the terms of the
agreement, which the boards of directors of both companies unanimously approved,
the NAIG shareholders will receive .67 of a share of the Company's common stock
for each NAIG common share they own. In the merger, the Company expects to
issue approximately 3.2 million shares of its common stock. This business
combination will be accounted for under the pooling of interests method of
accounting and is expected to close by the end of the second quarter 1999. NAIG
provides insurance tracking services for mortgage and auto lenders and auto
leasing companies. NAIG also provides outsourcing services, lender-placed
insurance products, flood zone determinations and real estate tax services.
NOTE 18.
Segment Financial Information:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This statement is effective
for 1998 and requires certain information about a company's operating segments
and products and services.
The Company's operations include five reportable segments: title
insurance, real estate information, home warranty, consumer risk management 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, mortgage credit information derived from at
40
least two credit bureau sources, flood zone determination reports that 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 consumer risk management segment provides credit and various
database-related services primarily to automotive dealers, consumer lenders,
employers and property management companies. 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 provides its title services
through both direct operations and agents throughout the United States. It also
offers title services abroad in Australia, the Bahama Islands, Canada, England,
Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, and the U.S. Virgin
Islands. Home warranty services are available in Arizona, California, Georgia,
Nevada, North Carolina, South Carolina, Texas, Utah and Washington. The
consumer risk management segment serves customers nationwide. The trust,
banking and thrift businesses are located in Southern California; its investment
services are offered across the U. S.
Selected financial information about the Company's operations by
segment for each of the past three years is as follows:
Income (Loss)
Before Income Depreciation
Taxes and and Capital
(in thousands) Revenues Minority Interests Assets Amortization Expenditures
- ------------------------------------------------------------------------------------------------------------------
1998
- ------------------------------------------------------------------------------------------------------------------
Title Insurance $2,087,106 $227,906 $ 858,326 $29,375 $100,560
Real Estate
Information 601,413 103,057 597,629 26,710 53,374
Home Warranty 63,020 11,406 95,605 484 445
Consumer Risk 57,408 13,276 4,182 295 290
Trust and Banking 24,751 7,156 98,113 652 973
Corporate 43,630 (1,379) 130,935 2,288 -
- ------------------------------------------------------------------------------------------------------------------
$2,877,328 $361,422 $1,784,790 $59,804 $155,642
- ------------------------------------------------------------------------------------------------------------------
1997
- ------------------------------------------------------------------------------------------------------------------
Title Insurance $1,482,993 $ 79,602 $ 656,622 $23,501 $ 39,190
Real Estate
Information 311,545 38,139 295,123 12,504 33,518
Home Warranty 51,005 8,871 81,444 424 768
Consumer Risk 41,069 6,968 3,034 205 605
Trust and Banking 20,007 4,062 83,423 604 676
Corporate 2,304 (27,967) 33,989 1,251 250
- ------------------------------------------------------------------------------------------------------------------
$1,908,923 $109,675 $1,153,635 $38,489 $ 75,007
- ------------------------------------------------------------------------------------------------------------------
1996
- ------------------------------------------------------------------------------------------------------------------
Title Insurance $1,288,947 $ 50,129 $ 584,800 $17,236 $ 30,082
Real Estate
Information 240,432 50,531 207,013 8,367 16,927
Home Warranty 41,927 7,429 67,622 296 277
Consumer Risk 24,105 2,953 2,164 175 424
Trust and Banking 17,839 3,728 72,473 438 1,366
Corporate 1,043 (22,054) 29,372 991 -
- ------------------------------------------------------------------------------------------------------------------
$1,614,293 $ 92,716 $ 963,444 $27,503 $ 49,076
- ------------------------------------------------------------------------------------------------------------------
Corporate consists primarily of unallocated interest expense, minority
interests, equity in earnings of affiliated companies 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
(Unaudited)
Quarter Ended
(in thousands, except per share amounts) March 31 June 30 September 30 December 31
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1998
- ----------------------------
Revenues $612,237 $709,776 $758,034 $797,281
Income before income taxes and minority interests $ 81,886 $ 84,017 $100,952 $ 94,567
Net income $ 44,733 $ 45,699 $ 55,260 $ 53,018
Net income per share (Note A):
Basic $ 0.82 $ 0.82 $ 0.94 $ 0.88
Diluted $ 0.79 $ 0.79 $ 0.89 $ 0.85
- -----------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
- ----------------------------
Revenues $387,979 $456,176 $507,802 $556,966
Income before income taxes and minority interests $ 5,426 $ 31,918 $ 35,364 $ 36,967
Net income $ 3,214 $ 19,235 $ 21,372 $ 20,678
Net income per share (Note A):
Basic $ 0.06 $ 0.35 $ 0.39 $ 0.38
Diluted $ 0.06 $ 0.35 $ 0.38 $ 0.37
The company's primary business segments are cyclical in nature, with the spring
an 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 20-23 for further discussion of
the Company's results of operations.
All consolidated results have been restated to reflect the 1998 acquisitions of
three separate entities accounted for under the pooling-of-interest method of
accounting.
Note A - After adjustment for 3-for-1 stock split effected July 17, 1998.
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, 1998
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 $ 32,974,000 $ 32,974,000 $ 32,974,000
------------ ------------ ------------
Debt securities:
Registrant -
Obligations of states and political
subdivisions $ 45,050,000 $ 45,928,000 $ 45,928,000
------------ ------------ ------------
Consolidated -
U.S. Treasury securities $ 36,875,000 $ 38,022,000 $ 38,022,000
Corporate securities 74,546,000 76,257,000 76,257,000
Obligations of states and political
subdivisions 89,824,000 91,992,000 91,992,000
Mortgage-backed securities 21,405,000 21,414,000 21,414,000
------------ ------------ ------------
$222,650,000 $227,685,000 $227,685,000
------------ ------------ ------------
Equity securities:
Registrant - None
Consolidated $ 18,790,000 $ 27,338,000 $ 27,338,000
------------ ------------ ------------
Other long-term investments:
Registrant - None
Consolidated $ 63,244,000 $ 63,244,000 $ 63,244,000
------------ ------------ ------------
Total Investments:
Registrant $ 45,100,000 $ 45,978,000 $ 45,978,000
============ ============ ============
Consolidated $337,658,000 $351,241,000 $351,241,000
============ ============ ============
43
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
------- ----------------- -------- --------
1998
- ----
Title Insurance $248,723,000
Real Estate Information 17,857,000 75,540,000
Home Warranty 5,392,000 3,856,000 29,956,000
Consumer Risk
Trust and Banking
Corporate
---------- ------------ ------------
Total $5,392,000 $270,436,000 $105,496,000
========== ============ ============
1997
- ----
Title Insurance $238,141,000 $ 2,151,000
Real Estate Information 9,238,000 55,691,000
Home Warranty 5,316,000 3,357,000 26,582,000
Consumer Risk
Trust and Banking 90,000
Corporate
----------- ------------ ------------
Total $ 5,316,000 $250,826,000 $ 84,424,000
=========== ============ ============
44
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
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
------- -------------- ------------ ------------- ------------ -------------
1998
- ----
Title Insurance $2,063,217,000 $23,889,000 $ 68,697,000 $307,055,000
Real Estate Information 598,832,000 2,581,000 17,428,000 251,376,000
Home Warranty 58,204,000 4,816,000 32,686,000 1,375,000 2,351,000
Consumer Risk 57,186,000 222,000 25,481,000
Trust and Banking 24,751,000 (48,000) 9,270,000
Corporate 43,630,000 14,424,000
-------------- ----------- ------------ ---------- ------------
Total $2,802,190,000 $75,138,000 $118,763,000 $1,375,000 $609,957,000
============== =========== ============ ========== ============
1997
- ----
Title Insurance $1,461,967,000 $21,026,000 $ 52,924,000 $247,579,000
Real Estate Information 311,838,000 (293,000) 9,874,000 132,927,000
Home Warranty 46,859,000 4,146,000 27,338,000 562,000 1,509,000
Consumer Risk 40,995,000 73,000 19,795,000
Trust and Banking 20,007,000 187,000 8,093,000
Corporate 2,304,000 10,591,000
-------------- ----------- ------------ ---------- ------------
Total $1,881,666,000 $27,256,000 $ 90,323,000 $ 562,000 $420,494,000
============== =========== ============ ========== ============
1996
- ----
Title Insurance $1,268,233,000 $20,714,000 $ 58,909,000 $216,091,000
Real Estate Information 239,434,000 998,000 4,453,000 83,489,000
Home Warranty 38,351,000 3,576,000 23,055,000 665,000 658,000
Consumer Risk 24,038,000 67,000 14,576,000
Trust and Banking 17,839,000 70,000 6,982,000
Corporate 1,043,000 7,064,000
-------------- ----------- ------------ ---------- ------------
Total $1,587,895,000 $26,398,000 $ 86,487,000 $ 665,000 $328,860,000
============== =========== ============ ========== ============
45
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
Title insurance Percentage
operating Ceded to Assumed Title insurance of amount
revenues before other from other operating assumed to
Segment reinsurance companies companies revenues operating revenues
- ------- --------------- ----------- ----------- --------------- ------------------
1998 $2,062,679,000 $4,151,000 $4,689,000 $2,063,217,000 0.2%
============== ========== ========== ============== ====
1997 $1,461,551,000 $3,609,000 $4,025,000 $1,461,967,000 0.3%
============== ========== ========== ============== ====
1996 $1,267,309,000 $2,094,000 $3,018,000 $1,268,233,000 0.2%
============== ========== ========== ============== ====
46
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1998
Column A Column B Column C Column D Column E
- ------------------------ ------------- ----------------------------- ------------ -------------
Additions
-----------------------------
Balance at Charged to Charged Deductions Balance
beginning costs and to other from at end
Description of period expenses accounts reserve of period
- ------------------------ ------------- ------------- ------------ ------------ -------------
Reserve deducted from
accounts receivable:
Registrant - None
Consolidated $ 7,602,000 $ 11,095,000 $ 7,982,000(A) $ 10,715,000
============ ============ =========== ============
Reserve for title losses
and other claims:
Registrant - None
Consolidated $250,826,000 $118,763,000 $(3,596,000)(B) $95,557,000(C) $270,436,000
============ ============ =========== =========== ============
Reserve deducted from
loans receivable:
Registrant - None
Consolidated $ 1,185,000 $ 159,000 $ 194,000(A) $ 1,150,000
============ ============ =========== ============
Reserve deducted from
assets acquired in
connection with
claim settlements:
Registrant - None
Consolidated $ 11,135,000 $ 3,951,000 $ 2,830,000(D) $ 12,256,000
============ =========== =========== ============
Reserve deducted from
other assets:
Registrant - None
Consolidated $ 1,807,000 $ 263,000 $ 136,000(D) $ 1,934,000
============ ============ =========== ============
Note A - Amount represents accounts written off, net of recoveries.
Note B - Amount represents $355,000 in purchase accounting adjustments, net of a
reclassification of $3,951,000 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.
47
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1997
Column A Column B Column C Column D Column E
- --------------------------- ------------- -------------------------------- ------------ -------------
Additions
--------------------------------
Balance at Charged to Charged Deductions Balance
beginning costs and to other from at end
Description of period expenses accounts reserve of period
- --------------------------- ------------- ------------- ------------ ------------ -------------
Reserve deducted from
accounts receivable:
Registrant - None
Consolidated $ 5,351,000 $ 4,510,000 $ 2,259,000(A) $ 7,602,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant - None
Consolidated $245,245,000 $90,323,000 $(4,633,000)(B) $80,109,000(C) $250,826,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant - None
Consolidated $ 1,050,000 $ 243,000 $ 108,000(A) $ 1,185,000
============ =========== =========== ============
Reserve deducted from
assets acquired in
connection with
claim settlements:
Registrant - None
Consolidated $ 10,278,000 $ 4,678,000 $ 3,821,000(D) $ 11,135,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant - None
Consolidated $ 438,000 $ 438,000(E)
============ ===========
Reserve deducted from
other assets:
Registrant - None
Consolidated $ 1,387,000 $ 640,000 $ 220,000(D) $ 1,807,000
============ =========== =========== ============
Note A - Amount represents accounts written off, net of recoveries.
Note B - Amount represents $45,000 in purchase accounting adjustments, net of a
reclassification of $4,678,000 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.
48
SCHEDULE V
3 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 at Charged to Charged Deductions Balance
beginning costs and to other from at end of
Description of 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.
49
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," "Transactions with Management and Others," "Security
Ownership of Management," "Executive Compensation," "Report of the Compensation
Committee on Executive Compensation," "Comparative Cumulative Total Return to
Shareholders," "Executive Officers" and "Compliance With Section 16(a) of the
Securities Exchange Act of 1934" 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 17 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 (*).)
(2) Agreement and Plan of Merger, dated as of November 17,
1998, among The First American Financial Corporation,
National Insurance Group, and Pea Soup Acquisition Corp.,
incorporated by reference herein from Exhibit 2.1 of
Form 8-K filed by National Information Group on November
25, 1998.
(3)(a) Restated Articles of Incorporation of The First American
Financial Corporation dated July 14, 1998, incorporated by
reference herein from Exhibit 3.1 of Amendment No. 1,
dated July 28, 1998 to the Company's Registration
Statement No. 333-53681 on Form S-4.
(3)(b) Bylaws of The First American Financial Corporation, as
amended.
(4)(a) Rights Agreement, dated as of October 23, 1997,
incorporated by reference herein from Exhibit 4 of
Registration Statement on Form 8-A dated November 7, 1997.
(4)(b) Junior Subordinated Indenture, dated as of April 22, 1997,
incorporated by reference herein from Exhibit (4.2) of
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
(4)(c) Form of New 8.50% Junior Subordinated Deferrable Interest
Debenture, incorporated by reference herein from Exhibit
4.2 of Registration Statement No. 333-35945 on Form S-4
dated September 18, 1997.
(4)(d) Certificate of Trust of First American Capital Trust I,
incorporated by reference herein from Exhibit 4.3 of
Registration Statement No. 333-35945 on Form S-4 dated
September 18, 1997.
(4)(e) Amended and Restated Declaration of Trust of First
American Capital Trust I dated as of April 22, 1997,
incorporated by reference herein from Exhibit (4.3) of
Quarterly Report on Form 10-Q for the quarter ended June
30, 1997.
(4)(f) Form of New 8.50% Capital Security (Liquidation Amount
$1,000 per Capital Security), incorporated by reference
herein from Exhibit 4.6 of Registration Statement No. 333-
35945 on Form S-4 dated September 18, 1997.
(4)(g) Form of New Guarantee Agreement, incorporated by reference
herein from Exhibit 4.7 of Registration Statement No. 333-
35945 on Form S-4 dated September 18, 1997.
50
(4)(h) Senior Indenture, dated as of April 7, 1998, between The
First American Financial Corporation and Wilmington Trust
Company as Trustee, incorporated by reference herein from
Exhibit (4) of the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
*(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) Amendment No. 3, dated July 7, 1998, to Executive
Supplemental Benefit Plan.
*(10)(e) 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 30,
1992.
*(10)(f) Amendment No. 1, dated July 7, 1998, to Management
Supplemental Benefit Plan.
*(10)(g) Pension Restoration Plan (effective as of January 1, 1994),
incorporated by reference herein from Exhibit (10)(e) of
Annual Report on Form 10-K for the fiscal year ended
December 31, 1996.
*(10)(h) 1996 Stock Option Plan, incorporated by reference herein
from Exhibit 4 of Registration Statement No. 333-19065 on
Form S-8 dated December 30, 1996.
*(10)(i) Amendment No. 1, dated February 26, 1998, to 1996 Stock
Option Plan.
*(10)(j) Amendment No. 2, dated June 22, 1998, to 1996 Stock Option
Plan.
*(10)(k) Amendment No. 3, dated July 7, 1998, to 1996 Stock Option
Plan.
*(10)(l) 1997 Directors' Stock Plan, incorporated by reference herein
from Exhibit 4.1 of Registration Statement No. 333-41993 on
Form S-8 dated December 11, 1997.
*(10)(m) Amendment No. 1 to 1997 Directors' Stock Plan dated February
26, 1998.
*(10)(n) Amendment No. 2 to 1997 Directors' Stock Plan dated July 7,
1998.
(10)(o) Registration Rights Agreement, dated April 22, 1997,
incorporated by reference herein from Exhibit (10.1) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
(10)(p) The First American Financial Corporation Deferred
Compensation Plan dated October 1, 1997.
(10)(q) The First American Financial Corporation Deferred
Compensation Plan Trust
51
Agreement dated as of October 1, 1997.
(10)(r) Contribution and Joint Venture Agreement By and Among The
First American Financial Corporation and Experian
Information Solutions, Inc., et al., dated November 30,
1997, incorporated by reference herein from Exhibit (10)(a)
of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
(10)(s) Operating Agreement for First American Real Estate
Solutions LLC, a California Limited Liability Company, By
and Among First American Real Estate Information Services,
Inc., and Experian Information Solutions, Inc., et al.,
dated November 30, 1997, incorporated by reference herein
from Exhibit (10)(b) of the Quarterly Report on Form 10-Q
for the quarter ended March 31, 1998.
(10)(t) Data License Agreement dated November 30, 1997,
incorporated by reference herein from Exhibit (10)(d) of the
Quarterly Report on Form 10-Q for the quarter ended March
31, 1998.
(10)(u) Experian Transition Agreement dated as of November 30,
1997, incorporated by reference herein from Exhibit (10)(f)
of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
(10)(v) Reseller Services Agreement dated as of November 30,
1997, incorporated by reference herein from Exhibit (10)(g)
of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
(10)(w) Amendment to Reseller Services Agreement For Resales to
Consumers dated as of November 30, 1997, incorporated by
reference herein from Exhibit (10)(h) of the Quarterly
Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(x) Trademark License Agreement, dated as of November 30,
1997, incorporated by reference herein from Exhibit (10)(i)
of the Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
(10)(Y) Amended and Restated Credit Agreement dated as of July 29,
1997, incorporated by reference herein from Exhibit (4.4) of
Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
(10)(Z) Amendment No.1 dated as of November 10, 1997, to Amended and
Restated Credit Agreement dated as of July 29, 1997,
incorporated by reference herein from Exhibit (4.1) of
Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company
filed a current report on Form 8-K dated October 22, 1998, reporting on
certain information and issues involving the "Year 2000 Problem."
+ An instrument defining the rights of security holders has been omitted in
accordance with Item 601(b)(4)(iii)(A) of Regulation S-K. The Company
agrees to furnish a copy of this instrument to the SEC upon request.
52
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)
By /S/ PARKER S. KENNEDY
--------------------------------------------------------------------
Parker S. Kennedy, President
(Principal Executive Officer)
Date: March 18, 1999
--------------------------------------------------------------------
By: /S/ THOMAS A. KLEMENS
--------------------------------------------------------------------
Thomas A. Klemens, Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 18, 1999
--------------------------------------------------------------------
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 and in the capacities and on the date indicated.
By: /S/ D.P. KENNEDY By:
------------------------------- -------------------------------
D.P. Kennedy Paul B. Fay, Jr., Director
Chairman and Director
Date: March 18, 1999 Date:
------------------------------- -------------------------------
By: /S/ PARKER S. KENNEDY By: /S/ ANTHONY R. MOISO
------------------------------- -------------------------------
Parker S. Kennedy, Anthony R. Moiso, Director
President and Director
Date: March 18, 1999 Date: March 18, 1999
------------------------------- -------------------------------
By: /S/ THOMAS A. KLEMENS By:
------------------------------- -------------------------------
Thomas A. Klemens Frank O'Bryan, Director
Executive Vice President,
Chief Financial Officer
Date: March 18, 1999 Date:
------------------------------- -------------------------------
By: By: /S/ ROSLYN B. PAYNE
------------------------------- -------------------------------
George L. Argyros, Director Roslyn B. Payne, Director
Date: Date: March 18, 1999
------------------------------- -------------------------------
By: By:
------------------------------- -------------------------------
Gary J. Beban, Director D. Van Skilling, Director
Date: Date:
------------------------------- -------------------------------
By: /S/ J. DAVID CHATHAM By: /S/ VIRGINIA UEBERROTH
------------------------------- -------------------------------
J. David Chatham, Director Virginia Ueberroth, Director
Date: March 18, 1999 Date: March 18, 1999
------------------------------- -------------------------------
By: /S/ WILLIAM G. DAVIS
------------------------------- -------------------------------
William G. Davis, Director
Date: March 18, 1999
------------------------------- -------------------------------
By: /S/ JAMES L. DOTI
------------------------------- -------------------------------
James L. Doti, Director
Date: March 18, 1999
------------------------------- -------------------------------
By: /S/ LEWIS W. DOUGLAS, JR.
------------------------------- -------------------------------
Lewis W. Douglas, Jr., Director
Date: March 18, 1999
------------------------------- -------------------------------
53
EXHIBIT INDEX
Sequentially
Exhibit No. Description Numbered Page
- ----------- ----------- -------------
(2) Agreement and Plan of Merger, dated as of
November 17, 1998, among The First American
Financial Corporation, National Insurance Group,
and Pea Soup Acquisition Corp., incorporated by
reference herein from Exhibit 2.1 of Form 8-K
filed by National Information Group on November
25, 1998.
(3)(a) Restated Articles of Incorporation of The First
American Financial Corporation dated July 14,
1998, incorporated by reference herein from
Exhibit 3.1 of Amendment No. 1, dated July 28,
1998 to the Company's Registration Statement
No. 333-53681 on Form S-4.
(3)(b) Bylaws of The First American Financial
Corporation, as amended.
(4)(a) Rights Agreement, dated as of October 23, 1997,
incorporated by reference herein from Exhibit 4
of Registration Statement on Form 8-A dated
November 7, 1997.
(4)(b) Junior Subordinated Indenture, dated as of
April 22, 1997, incorporated by reference herein
from Exhibit (4.2) of Quarterly Report on Form
10-Q for the quarter ended June 30, 1997.
(4)(c) Form of New 8.50% Junior Subordinated Deferrable
Interest Debenture, incorporated by reference
herein from Exhibit 4.2 of Registration
Statement No. 333-35945 on Form S-4 dated
September 18, 1997.
(4)(d) Certificate of Trust of First American Capital
Trust I, incorporated by reference herein from
Exhibit 4.3 of Registration Statement No.
333-35945 on Form S-4 dated September 18, 1997.
(4)(e) Amended and Restated Declaration of Trust of
First American Capital Trust I dated as of
April 22, 1997, incorporated by reference
herein from Exhibit (4.3)
of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4)(f) Form of New 8.50% Capital Security (Liquidation
Amount $1,000 per Capital Security),
incorporated by reference herein from Exhibit
4.6 of Registration Statement No. 333-35945 on
Form S-4 dated September 18, 1997.
(4)(g) Form of New Guarantee Agreement, incorporated
by reference herein from Exhibit 4.7 of
Registration Statement No. 333-35945 on Form S-4
dated September 18, 1997.
(4)(h) Senior Indenture, dated as of April 7, 1998,
between The First American Financial Corporation
and Wilmington Trust Company as Trustee,
incorporated by reference herein from Exhibit
(4) of the Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998.
*(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) Amendment No. 3, dated July 7, 1998, to
Executive Supplemental Benefit Plan.
*(10)(e) 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 30, 1992.
*(10)(f) Amendment No. 1, dated July 7, 1998, to
Management Supplemental Benefit Plan.
*(10)(g) Pension Restoration Plan (effective as of
January 1, 1994), incorporated by reference
herein from Exhibit (10)(e) of Annual Report on
Form 10-K for the fiscal year ended December 31,
1996.
*(10)(h) 1996 Stock Option Plan, incorporated by
reference herein from Exhibit 4 of Registration
Statement No. 333-19065 on Form S-8 dated
December 30, 1996.
*(10)(i) Amendment No. 1, dated February 26, 1998, to
1996 Stock Option Plan.
*(10)(j) Amendment No. 2, dated June 22, 1998, to 1996
Stock Option Plan.
*(10)(k) Amendment No. 3, dated July 7, 1998, to 1996
Stock Option Plan.
*(10)(l) 1997 Directors' Stock Plan, incorporated by
reference herein from Exhibit 4.1 of
Registration Statement No. 333-41993 on Form
S-8 dated December 11, 1997.
*(10)(m) Amendment No. 1 to 1997 Directors' Stock Plan
dated February 26, 1998.
*(10)(n) Amendment No. 2 to 1997 Directors' Stock Plan
dated July 7, 1998.
(10)(o) Registration Rights Agreement, dated April 22,
1997, incorporated by reference herein from
Exhibit (10.1) of Quarterly Report on Form 10-Q
for the quarter ended June 30, 1997.
(10)(p) The First American Financial Corporation
Deferred Compensation Plan dated October 1,
1997.
(10)(q) The First American Financial Corporation
Deferred Compensation Plan Trust Agreement dated
as of October 1, 1997.
(10)(r) Contribution and Joint Venture Agreement By and
Among The First American Financial Corporation
and Experian Information Solutions, Inc., et
al., dated November 30, 1997, incorporated by
reference herein from Exhibit (10)(a) of the
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
(10)(s) Operating Agreement for First American Real
Estate Solutions LLC, a California Limited
Liability Company, By and Among First American
Real Estate Information Services, Inc., and
Experian Information Solutions, Inc., et al.,
dated November 30, 1997, incorporated by
reference herein from Exhibit (10)(b) of the
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1998.
(10)(t) Data License Agreement dated November 30,
1997, incorporated by reference herein from
Exhibit (10)(d) of the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(10)(u) Experian Transition Agreement dated as of
November 30, 1997, incorporated by reference
herein from Exhibit (10)(f) of the Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1998.
(10)(v) Reseller Services Agreement dated as of
November 30, 1997, incorporated by reference
herein from Exhibit (10)(g) of the Quarterly
Report on Form 10-Q for the quarter ended
March 31, 1998.
(10)(w) Amendment to Reseller Services Agreement For
Resales to Consumers dated as of November 30,
1997, incorporated by reference herein from
Exhibit (10)(h) of the Quarterly Report on
Form 10-Q for the quarter ended March 31, 1998.
(10)(x) Trademark License Agreement, dated as of
November 30, 1997, incorporated by reference
herein from Exhibit (10)(i) of the Quarterly
Report on Form 10-Q for the quarter ended March
31, 1998.
(10)(y) Amendment and Restated Credit Agreement dated as
of July 29, 1997, incorporated by reference herein
from Exhibit (4.4) of Quarterly Report on Form 10-
Q for the quarter ended June 30, 1997.
(10)(Z) Amendment No.1 dated as of November 10, 1997 to
Amended and Restated Credit Agreement dated as of
July 29, 1997, incorporated by reference herein
from Exhibit (4.1) of Quarterly Report on Form 10-
Q for the quarter ended September 30, 1997.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.