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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, 1995
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, 92701-4699
CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
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
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(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH
REGISTERED)
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (17 C.F.R. (S) 229.405) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [_]
On MARCH 20, 1996, the aggregate market value of voting stock held by non-
affiliates was $312,697,923.
On MARCH 20, 1996, there were 11,658,501 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 58 pages.
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PART I
ITEM 1. BUSINESS.
THE COMPANY
The First American Financial Corporation was organized in 1894 as Orange
County Title Company, succeeding to the business of two title abstract
companies founded in 1889 and operating in Orange County, California. In 1924,
the Company commenced issuing title insurance policies. In 1986, the Company
began a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process.
The Company is a California corporation and has its executive offices at 114
East Fifth Street, Santa Ana, California 92701-4699. The Company's telephone
number is (714) 558-3211. Unless the context otherwise indicates, the
"Company," as used herein, refers to The First American Financial Corporation
and its subsidiaries.
GENERAL
The Company, through its subsidiaries, is engaged in the business of
providing real estate related financial and information services, including
title insurance, real estate tax monitoring, mortgage credit reporting, flood
zone determination, property information and home warranty services, to real
property buyers and mortgage lenders. The Company also provides trust and
limited banking services. Financial information regarding each of the
Company's primary business segments is included in "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Item 8. Financial Statements and Supplementary Data" of Part II of this
report. Although industry-wide data for 1995 are not currently available, the
Company believes that its wholly owned subsidiary, First American Title
Insurance Company ("First American"), was the second largest title insurer in
the United States, based on gross title fees, and its wholly owned subsidiary,
First American Real Estate Information Services, Inc., was the nation's
largest provider of flood determinations, based on the number of flood
determination reports issued, and the nation's second largest provider of tax
monitoring services, based on the number of loans under service. The Company
also believes that its majority owned subsidiary, First American Home Buyers
Protection Corporation, was the third 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
sources of the Company's revenues. Real estate activity is cyclical in nature
and is affected greatly by the cost and availability of long term mortgage
funds. Real estate activity and, in turn, the Company's revenue base, can be
adversely affected during periods of high interest rates and/or limited money
supply. However, this adverse effect is mitigated in part by the continuing
diversification of the Company's operations into areas outside of its
traditional title insurance business.
OVERVIEW OF TITLE INSURANCE INDUSTRY
Title insurance has become increasingly accepted as the most efficient means
of determining title to, and the priority of interests in, real estate in
nearly all parts of the United States. Today, virtually all real property
mortgage lenders require their borrowers to obtain a title insurance policy at
the time a mortgage loan is made.
Title Policies. Title insurance policies are insured statements of the
condition of title to real property, showing priority of ownership as
indicated by public records, as well as outstanding liens, encumbrances and
other matters of record, and certain other matters not of public record. Title
insurance policies are issued on the basis of a title report, which is
prepared after a search of the public records, maps, documents and prior title
policies to ascertain the existence of easements, restrictions, rights of way,
conditions, encumbrances or other matters affecting the title to, or use of,
real property. In certain instances, a visual inspection of the property is
1
also made. To facilitate the preparation of title reports, copies of public
records, maps, documents and prior title policies may be compiled and indexed
to specific properties in an area. This compilation is known as a "title
plant."
The beneficiaries of title insurance policies are generally real estate
buyers and mortgage lenders. A title insurance policy indemnifies the named
insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically
excepted from its provisions. The policy typically provides coverage for the
real property mortgage lender in the amount of its outstanding mortgage loan
balance and for the buyer in the amount of the purchase price. Coverage under
a title insurance policy issued to a real property mortgage lender generally
terminates when the mortgage loan is repaid. Coverage under a title insurance
policy issued to an owner generally terminates upon the sale of the insured
property unless the owner carries back a mortgage or makes certain warranties
as to the title.
Unlike other types of insurance policies, title insurance policies do not
insure against future risk. Before issuing title policies, title insurers seek
to limit their risk of loss by accurately performing title searches and
examinations. The major expenses of a title company relate to such searches
and examinations, the preparation of preliminary reports or commitments and
the maintenance of title plants, and not from claim losses as in the case of
property and casualty insurers.
The Closing Process. Title insurance is essential to the real estate closing
process in most transactions involving real property mortgage lenders. In a
typical residential real estate sale transaction, title insurance is generally
ordered on behalf of an insured by a real estate broker, lawyer, developer,
lender or closer involved in the transaction. Once the order has been placed,
a title insurance company or an agent conducts a title search to determine the
current status of the title to the property. When the search is complete, the
title company or agent prepares, issues and circulates a commitment or
preliminary title report ("commitment") to the parties to the transaction. The
commitment summarizes the current status of the title to the property,
identifies the conditions, exceptions and/or limitations that the title
insurer intends to attach to the policy and identifies items appearing on the
title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is often
performed by a lawyer, an escrow company or by a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents
and arranges the transfer of funds to pay off prior loans and extinguish the
liens securing such loans. Title policies are then issued insuring the
priority of the mortgage of the real property mortgage lender in the amount of
its mortgage loan and the buyer in the amount of the purchase price. The time
lag between the opening of the title order and the issuance of the title
policy is usually between 30 and 90 days.
Issuing the Policy: Direct vs. Agency. A title policy can be issued directly
by a title insurer or indirectly on behalf of a title insurer through agents
which are not themselves licensed as insurers. Where the policy is issued by a
title insurer, the search is performed by or at the direction of the title
insurer, and the premium is collected and retained by the title insurer. Where
the policy is issued by an agent, the agent performs the search, examines the
title, collects the premium and retains a portion of the premium. The
remainder of the premium is remitted to the title insurer as compensation for
bearing the risk of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from region to region. A
title insurer is obligated to pay title claims in accordance with the terms of
its policies, regardless of whether it issues its policy directly or
indirectly through an agent.
Premiums. The premium for title insurance is due and earned in full when the
real estate transaction is closed. Premiums are generally calculated with
reference to the policy amount. The premium charged by a title insurer or an
agent is subject to regulation in most areas. Such regulations vary from state
to state.
Because the policy insures against matters that have occurred prior to its
issuance (rather than future occurrences, as with most other types of
insurance), the major portion of the premium is related to the service
performed in ascertaining the current status of title to the property.
2
THE COMPANY'S TITLE INSURANCE OPERATIONS
Overview. The Company, through First American and its subsidiaries,
transacts the business of title insurance through a network of more than 300
branch offices and over 4,000 independent agents. Through its branch office
and agent network, the Company issues policies in all states (except Iowa),
the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the
Bahama Islands, Canada, Mexico, Bermuda and the United Kingdom. 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.
The following table illustrates the Company's and the industry's growth
based on gross title fees in the ten largest title insurance markets (and all
states combined) during the ten year period from 1985 to 1994, and the
increase in the Company's share of the national title insurance market from
12.2% to 19.5% over the same period.
GROSS TITLE FEES AND MARKET SHARE(1)
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INDUSTRY ($000) FIRST AMERICAN ($000)
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COMPOUND COMPOUND MARKET
ANNUAL ANNUAL SHARE
GROWTH GROWTH -----------
STATE 1985(2) 1994(2) RATE 1985(2) 1994(2) RATE 1985 1994
- ----- --------- ---------- -------- -------- --------- -------- ----- -----
California.............. $ 496,259 $1,100,140 9.3% $ 77,744 $ 267,027 14.7% 15.7% 24.3%
Texas................... 485,216 669,550 3.6% 29,598 68,990 9.9% 6.1% 10.3%
Florida................. 176,042 605,504 14.7% 13,169 73,048 21.0% 7.5% 12.1%
New York................ 236,328 368,462 5.1% 36,467 69,959 7.5% 15.4% 19.0%
Pennsylvania............ 99,615 247,623 10.7% 6,528 30,892 18.9% 6.6% 12.5%
Illinois................ 88,015 216,592 10.5% 5,655 25,398 18.2% 6.4% 11.7%
Michigan................ 52,724 196,980 15.8% 12,691 40,747 13.8% 24.1% 20.7%
Arizona................. 85,775 186,150 9.0% 22,610 62,290 11.9% 26.4% 33.5%
Ohio.................... 61,385 184,738 13.0% 4,635 52,793 31.0% 7.6% 28.6%
Washington.............. 70,067 176,964 10.8% 7,167 33,015 18.5% 10.2% 18.7%
Total, all States(3).... 2,588,799 5,951,203 9.7% 316,905 1,157,685 15.5% 12.2% 19.5%
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(1)Source: American Land Title Association
(2)Based on gross title fees as statutorily defined.
(3)Includes all 50 states (except Iowa) and the District of Columbia.
Based on industry statistics showing gross title fees in the major areas in
which the Company operates, in 1994 the Company had the largest or second
largest share of the title insurance market in 33 states, including
California, New York and Pennsylvania, which are three of the five largest
markets in the United States, and in the District of Columbia. Industry
statistics for 1995 are not currently available.
The Company plans to continue increasing its share of the title insurance
market through strategic acquisitions and further development of its existing
branch office and agency operations. The Company also will continue to focus
on expanding its share of the higher margin title insurance business conducted
on behalf of commercial clients. While commercial title business has been slow
for several years, the Company believes its national commercial market share
has grown through programs directed at major developers, lenders and law
firms.
Sales and Marketing. The Company markets its title insurance services to a
broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage
brokers, mortgage bankers, financial institutions and attorneys. In addition
to the referral market, the Company markets its title insurance services
directly to large corporate customers and certain mortgage lenders. As title
agents contribute a large portion of the Company's revenues, the Company also
markets its title insurance services to independent agents. The Company's
marketing efforts emphasize the quality and timeliness of its services and its
national presence.
3
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 22 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. Although the commercial real estate
economy has been slow during the past several years, in particular with
respect to new construction, and may continue to be slow in the near future,
the Company has recently experienced an increase in commercial real estate
activity from workouts, refinancings and purchases driven by depressed
commercial real estate values. Because of this increase in activity and the
Company's belief that new commercial construction will eventually increase,
the Company plans to continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small percentage
of the Company's revenues, the Company believes that the acceptance of title
insurance in foreign markets has increased in recent years. Accordingly, the
Company plans to continue its international sales efforts, particularly in
Canada.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed
during the title search may require a determination as to whether an exception
should be taken in the policy. The Company believes that it is important for
the underwriting function to operate efficiently and effectively at all
decision making levels so that transactions may proceed in a timely manner. To
perform this function, the Company has underwriters at the branch level, the
regional level and the national level. Based on the low turnover and longevity
of First American's employees and its continuing training programs, the
Company believes that its underwriting personnel are among the most
experienced and well trained in the title insurance industry.
Agency Operations. The relationship between the Company and each agent is
governed by an agency agreement which states the conditions under which the
agent is authorized to issue title insurance policies on behalf of the
Company. The agency agreement also prescribes the circumstances under which
the agent may be liable to the Company if a policy loss is attributable to
error of the agent. Such agency agreements typically have a term of one to
five years and are terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance industry
during the late 1980s, the Company instituted measures to strengthen its agent
selection and audit programs. In determining whether to engage an independent
agent, the Company investigates the agent's experience, background, financial
condition and past performance. The Company maintains loss experience records
for each agent and conducts periodic audits of its agents. The Company has
also increased the number of agent representatives and agent auditors that it
employs. Agent representatives periodically visit agents and examine their
books and records. In addition to periodic audits, a full agent audit will be
triggered if certain "warning signs" are evident. Warning signs that can
trigger an audit include the failure to implement Company required accounting
controls, shortages of escrow funds and failure to remit underwriting fees on
a timely basis.
Title Plants. The Company's network of title plants constitutes one of its
principal assets. A title search is conducted by searching the public records
or utilizing a title plant. While public records are indexed by reference to
the names of the parties to a given recorded document, most title plants
arrange their records on a geographic basis. Because of this difference,
records of a title plant are generally easier to search. Most title plants
also index
4
prior policies, adding to searching efficiency. Many title plants are
computerized. Certain offices of the Company utilize jointly owned plants or
utilize a plant under a joint user agreement with other title companies. The
Company believes its title plants, whether wholly or partially owned or
utilized under a joint user agreement, are among the best in the industry.
The Company's title plants are carried on its balance sheet at original
cost, which includes the cost of producing or acquiring interests in title
plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A
properly maintained title plant has an indefinite life and does not diminish
in value with the passage of time. Therefore, in accordance with generally
accepted accounting principles, no provision is made for depreciation of these
plants. Since each document must be reviewed and indexed into the title plant,
such maintenance activities constitute a significant item of expense. The
Company is able to offset title plant maintenance costs at its plants through
joint ownership and access agreements with other title insurers and title
agents.
Reserves for Claims and Losses. The Company provides for title insurance
losses based upon its historical experience by a charge to expense when the
related premium revenue is recognized. Historically, major claims (i.e.,
claims greater than $0.5 million) were charged to expense as they became known
because the unique circumstances surrounding most major claims made it
inherently impractical to predict the incidence and amount of such claims. In
the fourth quarter 1995, the Company determined, with the assistance of an
actuarial study, that sufficient major claims data now exists to reasonably
estimate a reserve for incurred but not reported claims. Accordingly, the
reserve for incurred but not reported claims at December 31, 1995, includes
major claims. The reserve for known claims and incurred but not reported
claims reflects management's best estimate of the total costs required to
settle all claims reported to the Company and claims incurred but not
reported, and is considered by the Company to be adequate for such purpose.
In settling claims, the Company occasionally purchases and ultimately sells
the interest of the insured in the real property or the interest of the
claimant adverse to the insured. The assets so acquired are carried at the
lower of cost or estimated realizable value, net of any indebtedness thereon.
Notes, real estate and other assets purchased or otherwise acquired in
settlement of claims, net of valuation reserves, totaled $12.3 million, $5.8
million and $7.5 million, respectively, as of December 31, 1995.
Reinsurance and Coinsurance. The Company assumes and distributes large title
insurance risks through mechanisms of reinsurance and coinsurance. In
reinsurance agreements, in consideration for a portion of the premium, the
reinsurer accepts that part of the risk which the primary insurer cedes to the
reinsurer over and above the portion retained by the primary insurer. The
primary insurer, however, remains liable for the total risk in the event that
the reinsurer does not meet its obligation. As a general rule, the Company
does not retain more than $25 million of coverage on any single policy. Under
coinsurance agreements, each coinsurer is jointly and severally liable for the
risk insured, or for so much thereof as is agreed to by the parties. The
Company's reinsurance activities account for less than 1% of its total title
insurance operating revenues.
Competition. The title insurance business is highly competitive. The number
of competing companies and the size of such companies varies in the different
areas in which the Company conducts business. Generally, in areas of major
real estate activity, such as metropolitan and suburban localities, the
Company competes with many other title insurers. Approximately 90 title
insurance underwriters are members of the American Land Title Association, the
title insurance industry's national trade association. The Company's major
nationwide competitors in its principal markets include Chicago Title and
Trust Company (which also includes Ticor Title Insurance Company and Security
Union Title Insurance Company), Commonwealth Land Title Insurance Company,
Lawyers Title Insurance Company, Stewart Title Guaranty Company, Old Republic
Title Insurance Group and Fidelity National Title Insurance Company. In
addition to these nationwide competitors, numerous agency operations
throughout the country provide aggressive competition on the local level.
5
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.
These businesses included tax monitoring, home warranty, flood zone
determination, and reporting of credit and property information. The
development of these businesses has allowed the Company to become one of the
nation's leading companies offering a full range of services to real property
buyers and mortgage lenders. The Company also operates a trust and banking
business in southern California.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
zone determination 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 $55 to $80 price range and is paid in full at
the time the contract is executed. The Company recognizes approximately 70% of
this fee in the year the contract is executed. The remaining 30% of the fee is
deferred over the remaining life of the contract. However, income taxes are
paid on the entire fee in the year the fee is received. The Company maintains
extremely small reserves for losses relating to its tax monitoring services
because historically the Company's losses relating to such services have been
negligible, and the Company is not presently aware of any reason why its
historical loss experience will not continue at current levels.
The Company's mortgage credit reporting service provides credit information
reports for mortgage lenders throughout the United States. These reports are
derived from two or more credit bureau sources and are summarized and prepared
in a standard form acceptable to mortgage loan originators and secondary
mortgage purchasers. The Company's mortgage credit reporting service has grown
primarily through acquisitions. In 1994, the Company acquired all of the
minority interests in its lower tier subsidiaries Metopolitan 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
6
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.
The Home Warranty Business. The Company's home warranty business commenced
operations in 1984, in part with the proceeds of a $1.5 million loan from the
Company which was, in 1986, converted to a majority equity interest. The
Company currently owns 79% of its home warranty business, which is operated as
a second tier subsidiary, with the balance owned by management of that
subsidiary. The Company's home warranty business issues one-year warranties
which protect homeowners against defects in household systems and appliances,
such as plumbing, water heaters and furnaces. The Company's home warranty
subsidiary currently charges approximately $245 to $295 for its basic home
warranty contract. Optional coverage is available for air conditioners, pools,
spas, washers, dryers and refrigerators for charges ranging from approximately
$25 to $125. For an additional charge, coverage is renewable annually at the
option of the homeowner upon approval by the home warranty subsidiary. Home
warranties are marketed through real estate brokers and agents. This business
is conducted in certain counties of Arizona, California, Nevada, Texas and
Washington. The principal competitor of the Company's home warranty business is
American Home Shield, a subsidiary of Service Master L.P. Fees for these
warranties are paid at the closing of the home purchase and are recognized
monthly over a twelve month period.
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, 1995,
the trust operation was administering fiduciary and custodial assets having a
market value of approximately $915 million.
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,
1995, the Thrift had approximately $43.4 million of demand deposits and $46.1
million of loans outstanding.
The loans made by the Thrift currently range in amount from $4,000 to
$825,000, with an average loan balance of $230,000. Loans are made only on a
secured basis, at loan-to-value percentages no greater than 65%. The Thrift
specializes in making commercial real estate loans, installment loans to
individuals and financing commercial equipment leases. In excess of 90% 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, 1995, was 12%. A number of factors
are included in the determination of average yield, principal among which are
loan fees and closing points amortized to income, prepayment penalties recorded
as income, and amortization of discounts on purchased loans. The Thrift's
primary competitors in the southern California commercial real estate lending
market are other thrift and loan companies and, to a lesser extent, commercial
banks. In recent years, many of the commercial banks operating in southern
California have significantly reduced their involvement in the commercial real
estate lending market as a result of the regulatory requirements to which they
are subject. As a result, the Company has been able to enhance its competitive
position in this market and obtain relatively high yields on its loan
portfolio. In addition, the Company believes that many borrowers who might be
eligible for loans from commercial banks use thrift and loan companies, such as
the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months in duration.
7
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, 1995, if all of such loans had been current
in accordance with their original terms, totalled $232,000. Interest income
actually recognized on these nonaccrual loans for the year ended December 31,
1995, was $76,000. The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
YEAR ENDED DECEMBER 31
--------------------------------
1991 1992 1993 1994 1995
---- ------ ------ ------ ------
($000)
NONPERFORMING ASSETS:
Loans accounted for on a nonaccrual basis...... $652 $1,039 $1,833 $1,741 $1,956
Accruing loans past due 90 or more days........
Troubled debt restructurings...................
---- ------ ------ ------ ------
Total......................................... $652 $1,039 $1,833 $1,741 $1,956
==== ====== ====== ====== ======
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,565,000 of potential problem
loans in existence as of December 31, 1995.
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.
8
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
------------------------------------
1991 1992 1993 1994 1995
------ ----- ----- ----- -------
($000)
ALLOWANCE FOR LOAN LOSSES:
Balance at beginning of year............. $ 398 $ 376 $ 500 $ 750 $ 950
------ ----- ----- ----- -------
Charge-Offs:
Real estate--mortgage................... (117) (176) (66) (311) (194)
Assigned lease payments................. (111) (57) (21) (9) (9)
Other................................... (113) (44)
------ ----- ----- ----- -------
(228) (346) (131) (320) (203)
------ ----- ----- ----- -------
Recoveries:
Real estate--mortgage................... 22 14 3 55
Assigned lease payments................. 70 64 32 28 35
Other................................... 9 23
------ ----- ----- ----- -------
92 87 58 83 35
------ ----- ----- ----- -------
Net (charge-offs) recoveries............ (136) (259) (73) (237) (168)
Provision for losses.................... 114 383 323 437 562
------ ----- ----- ----- -------
Balance at end of year................... $ 376 $500 $750 $950 $1,344
====== ===== ===== ===== =======
Ratio of net charge-offs during the year
to average loans outstanding during the
year.................................... .6% .8% .2% .6% .4%
====== ===== ===== ===== =======
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
-------------------------------------------------------------------------------
1991 1992 1993 1994 1995
--------------- --------------- --------------- --------------- ---------------
% OF % OF % OF % OF % OF
ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
($000)
LOAN CATEGORIES:
Real estate-mortgage... $282 75 $465 90 $635 98 $879 99 $1,300 99
Real estate-
construction.......... 45 12 18 4 3 1
Assigned lease
payments.............. 45 12 15 5 95 1 71 1 41
Other.................. 4 1 2 1 20 1
---- --- ---- --- ---- --- ---- --- ------ ---
$376 100 $500 100 $750 100 $950 100 $1,344 100
==== === ==== === ==== === ==== === ====== ===
9
ACQUISITIONS
Commencing in the 1960s, the Company initiated a growth program with a view
to becoming a nationwide provider of title insurance. This program included
expansion into new geographic markets through internal growth and selective
acquisitions of over 100 local and regional title companies. During the mid-
1980's, the Company began expanding into other real estate related financial
services.
Since 1980, the Company has made strategic acquisitions designed to expand
not only its direct title operations, but also the range of services it can
provide to real property buyers and mortgage lenders. The following lists some
of the key acquisitions made in furtherance of this strategy:
YEAR OF
ACQUIRED ENTITY(1) ACQUISITION PRINCIPLE MARKET(S)
- ------------------ ----------- -------------------
TITLE INSURANCE:
Land Title Insurance Company of St.
Louis(2)................................... 1980 Missouri
St. Paul Title Insurance Corporation(3)..... 1982 Midwest
First American Title Guaranty Holding
Company(4)................................. 1983 California
Midland Title Security, Inc................. 1986 Ohio
Columbia Real Estate Title Insurance
Company(3)................................. 1987 District of Columbia
The Port Lawrence Title Insurance and Trust
Company.................................... 1988 Ohio
Universal Title Insurance Company(3)........ 1988 Minnesota
Mortgage Guarantee and Title Company........ 1988 Rhode Island
Security Title & Trust Agency of Alaska,
Inc........................................ 1989 Alaska
Southwest Title and Trust Company(5)........ 1990 Oklahoma
Preferred Land Title Services, Inc.......... 1992 New York City
Fidelity Title and Guaranty Company......... 1994 Florida
Republic Title of Texas, Inc................ 1994 Texas
REAL ESTATE INFORMATION SERVICES:
Metropolitan Realty Tax Service(6).......... 1990 East Coast
TRTS Data Services, Inc. ................... 1991 Nationwide
Metropolitan Credit Reporting Services,
Inc. ...................................... 1993 Northeast
Metropolitan Property Reporting Services,
Inc. ...................................... 1993 Northeast
Credco, Inc................................. 1995 Nationwide
Flood Data Services, Inc. .................. 1995 Nationwide
HOME WARRANTY:
First American Home Buyers Protection 1986 Arizona, California, Nevada,
Corporation(7)............................. Texas and Washington
- --------
(1)Unless otherwise indicated, all entities listed are wholly owned by the
Company.
(2)99% owned.
(3)Subsequently merged into First American.
(4)80% owned.
(5)99% owned.
(6)Asset acquisition.
(7)79% owned.
10
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 National Association of Insurance Commissioners has recently announced
that it intends to increase efforts to have its model insurance code adopted
by state legislatures. The model insurance code contains restrictions limiting
the ability of insurance companies to pay dividends to their shareholders. The
dividend limitations in the model code are more restrictive than those set
forth in most state insurance codes currently in effect, including the
California Insurance Code which governs First American. The Company cannot
predict whether the model insurance code or any provision thereof will be
adopted in California.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, the
Company's trust company is regulated by the California Superintendent of Banks
and the Company's industrial loan company is regulated by the California
Commissioner of Corporations.
INVESTMENT POLICIES
The Company invests primarily in cash equivalents, federal and municipal
governmental securities, mortgage loans and investment grade debt and equity
securities. The largely fixed income portfolio is classified in the Company's
financial statements as "available for sale." In addition to the Company's
investment strategy, state laws impose certain restrictions upon the types and
amounts of investments that may be made by the Company's regulated
subsidiaries.
Additionally, on April 21, 1992, the Company entered into a $65 million
Credit Agreement with a syndicate of banks that includes The Chase Manhattan
Bank (National Association) as both lender and agent for the syndicate (the
"Credit Agreement"). Under the terms of the Credit Agreement, a term loan of
$65 million was made to the Company on April 27, 1992, and the proceeds
thereof were used to retire approximately $63 million of demand and term
indebtedness. The Credit Agreement, as amended, contains investment
restrictions limiting the types and amounts of investments that the Company
and its subsidiaries may make. Such restrictions limit the investments in and
advances to subsidiaries and affiliated companies that the Company may make
and generally limit the Company's other investments to investment grade
securities, such as U.S. Treasury securities, insured bank time deposits or
certificates of deposit, repurchase obligations secured by U.S. Treasury
securities, bank commercial paper and secured money market funds. The Company
is, however, permitted to make certain additional investments not in excess of
25% of stockholders' equity, of which no more than 60% may be in equity
securities and no more than $5 million may be with any one issuer.
11
EMPLOYEES
The following table provides a summary of the total number of employees of
the Company as of December 31, 1995:
NUMBER OF
BUSINESS EMPLOYEES
-------- ---------
Title insurance................................................ 8,269
Real estate information services............................... 1,607
Home warranty.................................................. 187
Trust and banking.............................................. 86
-------
Total......................................................... 10,149
=======
ITEM 2. PROPERTIES.
The Company owns two adjacent office buildings in Santa Ana, California,
which house its executive offices, its trust and banking subsidiary and the
Orange County title insurance branch operations. This complex, which contains
approximately 105,000 square feet of floor space and an enclosed parking area,
comprises one city block. The Company also owns an 18,000 square foot office
building, located across the street from its main offices, that will provide
space for expansion of its home office operations.
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400
locations throughout the United States and Canada, principally for their
respective title operations.
The Company's real estate information subsidiary, First American Real Estate
Information Services, Inc. ("FAREISI"), owns a building in Irving, Texas,
which houses its national operations center. This building contains 70,000
square feet of office space and was purchased in September 1992. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In addition, FAREISI and its subsidiaries lease office
space in more than 75 locations throughout the United States, principally for
their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys,
California, which contains a 20,000 square foot office building, a 7,000
square foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its subsidiaries is
in good condition and adequate for its intended use.
ITEM 3. LEGAL PROCEEDINGS.
Set forth below is a brief description of material pending legal
proceedings, other than ordinary routine litigation incidental to the
Company's businesses, to which the Company or any of its subsidiaries is a
party or of which any of their properties is the subject. Due to the nature of
its businesses described in Item 1 above, the Company is involved in numerous
routine legal proceedings incidental to such businesses. Some of these
proceedings involve claims for damages in material amounts. At this time,
however, the Company does not anticipate that the resolution of any of these
proceedings will materially and adversely affect its financial condition.
On April 13, 1990, a civil action entitled Brown, et al. v. Ticor Title
Insurance Co., et al., Case No.Civ 90-0577 (PHX-SMM) (U.S. Dist. Ct. Ariz.),
was filed in the U.S. District Court in Phoenix, Arizona, by Walter Thomas
Brown and Jeffrey L. Dziewit, as purported representatives of title insurance
purchasers in Arizona and Wisconsin, alleging violation by First American
Title Insurance Company ("First American") and other title insurers of federal
antitrust laws in the alleged fixing of rates for title insurance and for
search and examination services by reason of defendants' participation in
state-regulated rating bureaus in the two states.
12
On October 11, 1994, the Judicial Panel on Multi-district Litigation ordered
that an action entitled Segall, et al. v. Stewart Title Guaranty Co., et al.,
be transferred from the U.S. District Court for the Eastern District of
Wisconsin to the District of Arizona for coordinated or consolidated pretrial
proceedings with Brown. These two actions are now consolidated and part of
MDL-94-1027, under the title "In Re:Title Search and Examination Services
Antitrust Litigation." Segall is a civil suit filed on behalf of a purported
class of purchasers of title insurance in Wisconsin against certain title
insurance companies and individuals. The Segall suit alleges that the
defendants violated federal antitrust laws by reason of the defendants'
participation in the state-regulated rating bureau in Wisconsin. The purported
plaintiff class includes the Wisconsin plaintiff class members alleged in
Brown as well as some additional purported class members. The Company does not
believe that the ultimate resolution of this litigation will materially and
adversely affect its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
COMMON STOCK MARKET PRICES AND DIVIDENDS
The Company's common stock began trading on the New York Stock Exchange
(ticker symbol FAF) on December 3, 1993. Prior to December 3, 1993, The
Company's common stock was traded over-the-counter on the NASDAQ National
Market System. The approximate number of record holders of common stock on
February 29, 1996 was 3,274.
High and low stock prices and dividends for the last two years were:
1995 1994
------------------------ ------------------------
CASH CASH
QUARTER ENDED HIGH-LOW RANGE DIVIDENDS HIGH-LOW RANGE DIVIDENDS
------------- -------------- --------- -------------- ---------
March 31...................... $20.63--$16.75 $.15 $37.50--$31.00 $.15
June 30....................... $25.50--$19.13 $.15 $30.63--$23.13 $.15
September 30.................. $25.38--$22.75 $.15 $24.50--$20.25 $.15
December 31................... $27.38--$21.75 $.15 $20.50--$16.00 $.15
While the Company expects to continue its policy of paying regular quarterly
cash dividends, future dividends will be dependent on future earnings,
financial condition and capital requirements. The payment of dividends is
subject to the restrictions described in Notes 2 and 8 to the consolidated
financial statements included in "Item 8. Financial Statements and
Supplementary Data" of Part II of this report.
13
ITEM 6. SELECTED FINANCIAL DATA.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
YEAR ENDED DECEMBER 31
----------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues.................. $1,250,216 $1,376,393 $1,398,426 $1,115,467 $756,821
Income before cumulative
effect of a change in ac-
counting for income taxes
(Note A)................. $ 7,587 $ 18,945 $ 62,091 $ 43,258 $ 3,005
Net income................ $ 7,587 $ 18,945 $ 66,291 $ 43,258 $ 3,005
Total assets.............. $ 873,778 $ 828,649 $ 786,448 $ 691,279 $533,357
Notes and contracts pay-
able..................... $ 77,206 $ 89,600 $ 85,022 $ 81,981 $ 92,889
Stockholders' equity...... $ 302,767 $ 292,110 $ 283,718 $ 216,842 $137,950
Return on average stock-
holders' equity.......... 2.6% 6.6% 26.5% 24.4% 2.1%
Cash dividends on common
shares................... $ 6,850 $ 6,869 $ 5,840 $ 3,989 $ 3,748
Per share of common stock
(Note B)--
Income before cumulative
effect of a change in
accounting for income
taxes (Note A).......... $ .67 $ 1.66 $ 5.47 $ 4.55 $ .32
Net Income............... $ .67 $ 1.66 $ 5.84 $ 4.55 $ .32
Stockholder's equity..... $ 26.53 $ 25.63 $ 24.93 $ 19.26 $ 15.64
Cash dividends........... $ .60 $ .60 $ .51 $ .41 $ .40
Number of common shares
outstanding--
Weighted average during
the year................ 11,403 11,447 11,353 9,502 9,478
End of year.............. 11,411 11,395 11,381 11,260 8,821
Title orders opened (Note
C)....................... 894 873 1,218 1,048 819
Title orders closed (Note
C)....................... 667 723 933 809 593
Number of employees....... 10,149 9,033 10,679 8,694 7,585
- --------
Note A--See Note 10 to the consolidated financial statements for description
of a change in accounting for income taxes.
Note B--Per share information relating to net income is based on the
weighted average number of shares outstanding for the years presented. Per
share information relating to stockholders' equity is based on shares
outstanding at the end of each year.
Note C--Title order volumes are those processed by the direct title
operations of the Company and do not include orders processed by agents.
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS.
RESULTS OF OPERATIONS
OVERVIEW--As with all providers of real estate-related financial and
informational services, the Company's revenues depend, in large part, upon the
level of real estate activity and the cost and availability of mortgage funds.
The majority of the Company's revenues for the title insurance and real estate
information segments result from resales and refinancings of residential real
estate, and to a lesser extent, from commercial transactions and the
construction and sale of new properties. Revenues for the Company's home
warranty segment result solely from residential resale activity and do not
benefit from refinancings. Traditionally, the greatest volume of real estate
activity, particularly residential resale, has occurred in the spring and
summer months. However, numerous actions taken by the Federal Reserve Board
during 1992 and 1993 to stimulate economic recovery caused unusual
fluctuations in the traditional pattern of real estate activity. During 1993
mortgage interest rates fell to their lowest level in 25 years. This decline
in rates caused an unprecedented volume of refinance transactions and the
Company's title insurance and real estate information segments processed
record order volumes. Due to inflationary concerns, the Federal Reserve Board
began a succession of interest rate increases in February 1994. The resulting
increase in mortgage interest rates adversely affected the Company's revenue
base in the second half of 1994 (primarily the fourth quarter) as refinance
activity came to a virtual halt. This, coupled with the persistently poor real
estate economy in California and a return of the traditional seasonal real
estate cycle, resulted in a low inventory of open transactions going into
1995. As a result, 1995 first quarter operating revenues experienced a 30%
decline when compared with the same period of the prior year. In response to
the severe decline in new orders, the Company instituted personnel reductions
totaling 26% of the work force from March 1994 through February 1995. However,
the cost cutting measures lagged the revenue declines resulting in a fourth
quarter 1994 loss of $.25 per share and a first quarter 1995 loss per share of
$1.11. Mortgage interest rates peaked in January 1995 and decreased throughout
the remainder of the year and into 1996 helped by an easing of monetary policy
by the Federal Reserve Board. During the last half of 1995, the national real
estate markets improved and refinancing activity began to increase. These
factors contributed to a 26% improvement in operating revenues in the last
half of 1995 when compared to the first half of 1995 and resulted in earnings
per share of $1.68 compared with a loss per share of $1.01.
OPERATING REVENUES--A summary by segment of the Company's operating revenues
is as follows:
1995 % 1994 % 1993 %
----------- --- ---------- --- ---------- ---
(IN THOUSANDS, EXCEPT PERCENT)
TITLE INSURANCE:
Direct Operations................ $ 517,616 42 $ 562,566 41 $ 632,226 46
Agency Operations................ 517,173 42 659,015 49 618,353 45
----------- --- ---------- --- ---------- ---
1,034,789 84 1,221,581 90 1,250,579 91
Real Estate Information........... 145,755 12 94,816 7 95,069 7
Home Warranty..................... 32,531 3 28,116 2 22,402 1
Trust and Banking................. 14,110 1 12,433 1 11,731 1
----------- --- ---------- --- ---------- ---
$ 1,227,185 100 $1,356,946 100 $1,379,781 100
=========== === ========== === ========== ===
Operating revenues from direct title operations decreased 8.0% in 1995 as
compared with 1994. This decrease was primarily attributable to a 7.7%
decrease in the number of title orders closed by the Company's direct
operations. The Company's direct title operations closed 667,200 title orders
during 1995, as compared with 722,900 title orders closed during 1994. This
decrease was attributable to higher interest rates and inclement weather which
resulted in reduced national real estate activity in the first half of 1995.
Operating revenues from direct title operations decreased 11.0% in 1994 as
compared with 1993. The decrease was primarily attributable to a 22.5% decline
in the number of title orders closed, offset in part by an increase in the
average revenues per order closed. The decrease in orders closed was due to a
decline in refinance activity, the subsiding real estate economy in California
(a state highly concentrated with direct title operations) and the return of
the traditional,
15
seasonal real estate cycle in the fourth quarter 1994. The average revenues
per order closed were $778 for 1994 as compared with $678 for 1993. The
increase reflected a change in the Company's business mix from predominantly
lower margin refinance transactions in 1993 to a more balanced mix in 1994,
including higher margin resale transactions. Operating revenues from agency
title operations, which are more concentrated in the midwestern and eastern
sectors of the country, decreased 21.5% in 1995 from 1994. The decrease
reflects a slow first half of 1995 as discussed above, compounded by the
inherent delay in reporting by agents of the resurgence in business for the
latter part of 1995. Operating revenues from agency title operations increased
6.6% in 1994 over 1993. This increase was primarily attributable to the high
level of orders closed with our agents during the fourth quarter 1993 and not
reported to the Company until the beginning of 1994, as well as the increase
in resale activity, offset in part by the decline in refinance transactions.
Real estate information operating revenues increased 53.7% in 1995 when
compared with 1994. This increase was primarily attributable to $59.8 million
of operating revenues contributed by new acquisitions, partially offset by the
same economic factors affecting title insurance mentioned above. Operating
revenues remained relatively constant for 1994 when compared with 1993; this
constant level of revenues, in spite of a significant fourth quarter 1994
revenue reduction, was primarily attributable to the heavy volume of refinance
transactions that continued through the end of 1993 and into the beginning of
1994, as well as approximately $6.0 million of revenues contributed by
companies acquired during 1994.
Home warranty operating revenues increased 15.7% in 1995 over 1994 and 25.5%
in 1994 over 1993. These increases were primarily attributable to improvements
in certain of the residential resale markets in which this segment operates,
successful geographic expansion, increased consumer awareness and an increase
in the number of annual renewals.
INVESTMENT AND OTHER INCOME--Investment and other income increased 18.4% in
1995 over 1994 and 4.3% in 1994 over 1993. The increase in the current year
was primarily attributable to gains on the sale of certain investments, a $.7
million fire insurance recovery and increased equity in earnings of affiliates
of $.5 million, offset in part by a 9.3% decrease in the average investment
portfolio balance. The increase in 1994 over 1993 was due to a 22.2% increase
in the average investment portfolio balance, offset in part by a reduction of
$1.4 million in equity in earnings of affiliates. See Note 9 to the
consolidated financial statements for additional details on investment and
other income.
SALARIES AND OTHER PERSONNEL COSTS--A summary by segment of the Company's
salaries and other personnel costs is as follows:
1995 % 1994 % 1993 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance.......................... $352,745 82 $369,100 87 $354,343 89
Real Estate Information.................. 57,738 13 36,073 8 26,732 7
Home Warranty............................ 7,714 2 7,078 2 6,076 1
Trust and Banking........................ 4,799 1 4,087 1 3,962 1
Corporate................................ 8,988 2 6,990 2 6,789 2
-------- --- -------- --- -------- ---
$431,984 100 $423,328 100 $397,902 100
======== === ======== === ======== ===
The Company's title insurance segment is labor intensive; accordingly, a
major variable expense component is salaries and other personnel costs. The
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. Commencing in the second quarter 1994 through
the first quarter 1995, the Company's ability to match cost reductions with
order declines was hampered by the continual upward adjustment of interest
rates by the Federal Reserve Board. In addition, the Company's growth in
operations servicing builder and lender business has created ongoing fixed
costs required to service accounts, even when market conditions are producing
fewer new orders.
16
Title insurance personnel expenses decreased 4.4% in 1995 from 1994. The
decrease relates directly to the Company's intensified efforts during the
latter part of 1994 and the beginning of 1995 to adjust personnel and related
expense levels commensurate with new order counts. This cost-containment
process stabilized the cost of the labor base at a more acceptable level as
business improved during the second quarter 1995. This decrease was offset, in
part, by acquisition activity and modest personnel increases in the second
half of 1995. Personnel expenses increased 4.2% in 1994 over 1993. This
increase was primarily attributable to the additional personnel needed to
service the heavy volume of title orders (predominately refinance
transactions) that continued through the end of 1993 into the first quarter of
1994 and, to a lesser extent, acquisition activity. This increase was
partially offset by the effects of personnel reductions that commenced during
the beginning of the second quarter 1994, and continued throughout the rest of
1994 in response to significantly reduced order counts; although, due to the
costs associated with terminations, expense declines lagged behind personnel
reductions.
Real estate information personnel expenses increased 60.1% in 1995 over
1994. This increase was primarily due to $20.0 million of personnel costs
associated with acquisitions, and to a lesser extent, in-house development of
a new electronic communications delivery system for information based
products. This was offset in part by personnel reductions associated with the
decline in new tax service contracts which began in the last half of 1994 and
continued into the first half of 1995. Personnel expenses increased 34.9% in
1994 over 1993. This increase was primarily due to personnel costs incurred
servicing the heavy volume of business during the first half of 1994, costs
associated with developing new and enhancing existing computer software to
better service customer needs and $2.9 million of costs attributable to
company acquisitions. This increase was partially offset by a 13.8% reduction
in personnel in the last half of 1994, although, due to personnel separation
costs, expense declines lagged behind personnel reductions.
Home warranty personnel expenses increased 9.0% in 1995 over 1994 and 16.5%
in 1994 over 1993. The increases were primarily due to the additional
personnel required to service the increased business volume in the states the
segment currently services, as well as new geographic expansion and modest
salary increases. These increases were offset in part by ongoing efforts of
management to maximize personnel efficiencies.
In December 1990, the Financial Accounting Standards Board (FASB) issued
Statement No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions." This standard became effective in 1993 and requires the
Company to accrue the cost of providing postretirement health care and life
insurance benefits over the service lives of employees. Compliance with this
standard did not materially affect the Company's results of operations or
financial condition. In November 1992, the FASB issued Statement of Financial
Accounting Standards No. 112, "Employers' Accounting for Postemployment
Benefits." This standard became effective in 1994 and requires employers to
accrue an obligation if the benefits are attributable to service already
rendered, the benefits accumulate or vest, payment is probable, and the
amounts can be reasonably estimated. Compliance with the standard did not
materially affect the Company's results of operations or financial condition.
PREMIUMS RETAINED BY AGENTS--A summary of agent retention and agent revenues
is as follows:
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT
PERCENT)
Agent Retention................................ $413,444 $533,598 $504,375
======== ======== ========
Agent Revenues................................. $517,173 $659,015 $618,353
======== ======== ========
% Retained by Agents........................... 80% 81% 82%
======== ======== ========
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.
The decrease in the percentage amount of title premiums retained by agents was
the direct result of changes in the geographic mix of agency revenues.
17
OTHER OPERATING EXPENSES--A summary by segment of the Company's other
operating expenses is as follows:
1995 % 1994 % 1993 %
-------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance.......................... $188,024 72 $184,723 79 $183,213 82
Real Estate Information.................. 61,167 23 37,479 16 29,556 13
Home Warranty............................ 1,843 1 1,901 1 1,299 1
Trust and Banking........................ 5,650 2 4,829 2 4,140 2
Corporate................................ 3,927 2 3,600 2 4,726 2
-------- --- -------- --- -------- ---
$260,611 100 $232,532 100 $222,934 100
======== === ======== === ======== ===
Title insurance other operating expenses remained relatively constant for
the last three years. The modest percentage changes noted are due in part to
marginal price level increases by vendors and acquisition activity, partially
offset by successful cost-containment programs. Other operating expenses were
also impacted by changes in incremental costs (i.e., office supplies, document
reproduction, messenger services, plant maintenance and title search costs)
associated with the relative changes in open order counts.
Real estate information other operating expenses increased 63.2% in 1995
over 1994 and 26.8% in 1994 over 1993. The increase in 1995 was primarily
attributable to $28.8 million relating to acquisitions, offset in part by
cost-containment programs in light of a reduction in new tax service contracts
in 1995. The increase in 1994 was attributable to the incremental costs
incurred servicing the heavy volume of business during the first half of 1994,
costs associated with developing and enhancing computer software, costs
incurred in assimilating and expanding the mortgage credit reporting
operations, and $2.0 million of other operating expenses attributable to
acquisitions.
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:
1995 % 1994 % 1993 %
------- --- -------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance........................... $68,338 76 $ 93,012 84 $111,038 89
Real Estate Information................... 3,166 3 2,129 2 2,683 2
Home Warranty............................. 18,857 21 15,022 14 11,762 9
Trust and Banking......................... 26 67 105
------- --- -------- --- -------- ---
$90,387 100 $110,230 100 $125,588 100
======= === ======== === ======== ===
The provision for title insurance losses expressed as a percentage of title
insurance operating revenues was 6.6% in 1995, 7.6% in 1994, and 8.9% in 1993.
The decreases were primarily attributable to an ongoing improvement in the
Company's claims experience, as well as a reduction in major claims activity.
The Company anticipates that the improvement over the past several years will
continue in 1996. The provision for home warranty losses as a percentage of
home warranty operating revenues was 58.0% in 1995, 53.4% in 1994, and 52.5%
in 1993. These increases were primarily attributable to increases in the
average number of claims per contract experienced during these periods,
resulting from the home warranty operations offering extended coverages on its
warranties.
DEPRECIATION AND AMORTIZATION--Capital expenditures as well as depreciation
and amortization are summarized in Note 14 to the consolidated financial
statements.
INTEREST--Interest expense remained relatively unchanged in 1995 when
compared with 1994 primarily as the result of an average outstanding debt
balance and comparable average interest rates. Interest expense increased
41.8% in 1994 over 1993 primarily due to $1.5 million of interest expense
attributable to a
18
December 1993 trust deed note, which was paid off in November of 1994, and a
higher average interest rate, offset in part by a 3.7% decrease in the average
outstanding debt balance. The Company, at its option, has a reduced interest
rate option on the variable rate indebtedness portion of the Company's credit
facility. This agreement is described in Note 8 to the consolidated financial
statements.
MINORITY INTERESTS--Minority interests in net income of consolidated
subsidiaries decreased 27.6% in 1995 from 1994 and 44.1% in 1994 from 1993.
The decrease in 1995 over 1994 was primarily attributable to the Company's
purchases of shares from minority shareholders. The decrease in 1994 over 1993
was due to a decline in the profitability of the Company's less than 100%
owned subsidiaries, the August 1994 sale of the Company's remaining interest
in North American Title Insurance Company and the purchases of shares from
minority shareholders.
PRETAX PROFITS--A summary by segment of the Company's pretax profits is as
follows:
1995 % 1994 % 1993 %
-------- --- ------- --- -------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance........................ $ 17,540 37 $37,819 58 $ 97,314 69
Real Estate Information................ 19,690 42 17,371 27 35,046 25
Home Warranty.......................... 6,828 14 6,709 10 5,477 4
Trust and Banking...................... 3,304 7 3,214 5 3,313 2
-------- --- ------- --- -------- ---
47,362 100 65,113 100 141,150 100
-------- === ------- === -------- ===
Corporate.............................. (19,948) (17,415) (19,542)
-------- ------- --------
$ 27,414 $47,698 $121,608
======== ======= ========
The Company's profit margins and pretax profits vary according to a number
of factors, including the volume, composition (residential or commercial) and
type (resale, refinancing or new construction) of real estate activity. For
example, in title insurance operations, commercial transactions tend to
generate higher revenues and greater profit margins than residential
transactions. Further, profit margins from refinancing activities are lower
than those from resale activities because in many states there are premium
discounts on, and cancellation rates are higher for, refinancing transactions.
Cancellations of title orders adversely affect pretax profits because costs
are incurred and expensed in opening and processing such orders but revenues
are not generated. Also, the Company's direct title insurance business has
significant fixed costs in addition to its variable costs. Accordingly, profit
margins from the Company's direct title insurance business improve as the
volume of title orders closed increases. Title insurance profit margins are
also affected by the percentage of operating revenues generated by agency
operations. Profit margins from direct operations are generally higher than
from agency operations due primarily to the large portion of the premium that
is retained by the agent. Real estate information pretax profits are generally
unaffected by the type of real estate activity but increase as the volume of
residential real estate loan transactions increases. Home warranty pretax
profits improve as the volume of residential resales increases. In general,
the title insurance business is a lower margin business when compared to the
Company's other segments. The lower margins reflect the high fixed cost of
producing title evidence whereas the corresponding revenues are subject to
regulatory and competitive pricing constraints.
PREMIUM TAXES--A summary by pertinent segment of the Company's premium taxes
is as follows:
1995 % 1994 % 1993 %
------- --- ------- --- ------- ---
(IN THOUSANDS, EXCEPT PERCENT)
Title Insurance............................. $13,016 96 $14,873 96 $17,119 97
Home Warranty............................... 611 4 580 4 498 3
------- --- ------- --- ------- ---
$13,627 100 $15,453 100 $17,617 100
======= === ======= === ======= ===
19
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical
mix of title insurance and home warranty operating revenues. Premium taxes for
title insurance decreased 12.5% in 1995 from 1994 and 13.1% in 1994 from 1993.
These changes correspond to the relative decreases in title insurance
operating revenues. Premium taxes as a percent of title insurance operating
revenues remained relatively constant at approximately 1.2%. Premium taxes for
home warranty increased 5.3% in 1995 over 1994 and 16.5% in 1994 over 1993.
These changes reflect the level of home warranty premiums written during the
respective periods.
INCOME TAXES--The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 45.0% for 1995, 41.2% for 1994 and 40.3% for 1993. The increases in
effective rate were primarily attributable to the reduction in the
deductibility of certain business expenses, as mandated by the Revenue
Reconciliation Act of 1993, and increases in state income and franchise taxes
which resulted from the Company's non-insurance subsidiaries' contribution to
pretax profits. The increase in effective rate for 1994 was partially offset
by the utilization of $1.8 million of capital loss carryforwards, for which
the Company had previously established a valuation allowance, pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." 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.
In February 1992, the Financial Accounting Standards Board issued Statement
No. 109, "Accounting for Income Taxes," which became effective for 1993. This
statement prescribes the use of the liability method of accounting for income
taxes, whereby deferred tax assets and liabilities are calculated at the
balance sheet date using current tax laws and rates in effect. The cumulative
effect of this change in accounting principal was recognized in the first
quarter of 1993 in the form of a one-time benefit totaling $4.2 million.
NET INCOME--Net income and per share information are summarized as follows:
1995 1994 1993
------- ------- -------
(IN THOUSANDS, EXCEPT
PERCENT)
Income before cumulative effect of a change in account-
ing for income taxes.................................. $ 7,587 $18,945 $62,091
======= ======= =======
Net income............................................. $ 7,587 $18,945 $66,291
======= ======= =======
Weighted average shares................................ 11,403 11,447 11,353
======= ======= =======
Income per share before cumulative effect of a change
in accounting for income taxes........................ $ 0.67 $ 1.66 $ 5.47
======= ======= =======
Net income per share................................... $ 0.67 $ 1.66 $ 5.84
======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities amounted to $30.4 million, $53.9
million and $105.7 million for 1995, 1994 and 1993, respectively, after claim
payments of $66.6 million, $87.6 million and $77.3 million, respectively. The
principal non-operating uses of cash and cash equivalents for the three-year
period ended December 31, 1995, were for additions to the investment
portfolio, capital expenditures, company acquisitions and the repayment of
debt. The most significant nonoperating sources of cash and cash equivalents
were from proceeds from the sales and maturities of certain investments, and
in 1994, proceeds from the sale of property and equipment and proceeds from
the issuance of debt. The net effect of all activities on total cash and cash
equivalents was a decrease of $8.3 million in 1995 and increases of $23.9
million and $10.5 million in 1994 and 1993, respectively.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1995, was 19.1% as compared with 22.1% as of the prior year end.
The decrease was primarily attributable to a $12.4 million net
20
decrease in debt. As part of the Company's strategy to extend the maturity of,
and provide a long-term amortization schedule for, its outstanding demand and
term indebtedness, the Company entered into a credit agreement with the Chase
Manhattan Bank as agent on April 21, 1992. Under the terms of the credit
agreement, the company borrowed $65.0 million on April 27, 1992, and used the
proceeds thereof to retire approximately $63 million of demand and near-term
indebtedness. During 1994, the Company amended the credit agreement to borrow
an additional $20.0 million of variable rate indebtedness to pay off an
existing higher rate trust deed note. In addition, the amendment provided for
a $30.0 million revolving line of credit which remained unused as of December
31, 1995. This credit agreement is more fully described in Note 8 to the
consolidated financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 1996 from its
principle subsidiary, First American Title Insurance Company, is $44.6
million. Such restrictions have not had, nor are they expected to have, an
impact on the Company's ability to meet its cash obligations.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated cash requirements. The
Company's strong financial position will enable management to react to future
opportunities for acquisitions or other investments in support of the
Company's continued growth and expansion.
21
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.
PAGE
INDEX NO.
----- ----
Report of Independent Accountants.......................................... 23
Financial Statements:
Consolidated Balance Sheets............................................... 24
Consolidated Statements of Income......................................... 26
Consolidated Statements of Stockholders' Equity........................... 27
Consolidated Statements of Cash Flows..................................... 28
Notes to Consolidated Financial Statements................................ 29
Unaudited Quarterly Financial Data......................................... 44
Financial Statement Schedules:
I.Summary of Investments--Other than Investments in Related Parties....... 45
II.Condensed Financial Information of Registrant.......................... 46
III.Supplementary Insurance Information................................... 50
IV.Reinsurance............................................................ 52
V.Valuation and Qualifying Accounts....................................... 53
Financial statement schedules not listed above are either omitted because
they are not applicable or the required information is shown in the
consolidated financial statements or in the notes thereto.
22
REPORT OF INDEPENDENT ACCOUNTANTS
ON THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
In our opinion, the consolidated financial statements and financial
statement schedules listed in the index on page 22 present fairly, in all
material respects, the financial position of The First American Financial
Corporation and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. These financial statements and financial
statement schedules are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedules 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.
As discussed in Note 10 to the consolidated financial statements, the
Company changed its method of accounting for income taxes in fiscal year 1993.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 28, 1996
23
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
DECEMBER 31
--------------------------
1995 1994
------------ ------------
Cash and Cash Equivalents.......................... $145,902,000 $154,234,000
------------ ------------
Accounts and Accrued Income Receivable,
less allowances ($5,970,000 and $4,022,000)....... 75,069,000 47,103,000
------------ ------------
Income Tax Receivable.............................. 7,324,000
------------
Investments:
Deposits with savings and loan associations and
banks........................................... 18,637,000 18,538,000
Debt securities.................................. 128,875,000 149,190,000
Equity securities................................ 21,445,000 21,813,000
Other long-term investments...................... 25,230,000 25,224,000
------------ ------------
194,187,000 214,765,000
------------ ------------
Loans Receivable................................... 46,134,000 40,546,000
------------ ------------
Property and Equipment, at cost:
Land............................................. 15,031,000 14,599,000
Buildings........................................ 73,580,000 70,073,000
Furniture and equipment.......................... 103,885,000 90,542,000
Less--accumulated depreciation................... (73,672,000) (64,659,000)
------------ ------------
118,824,000 110,555,000
------------ ------------
Title Plants and Other Indexes..................... 82,454,000 54,781,000
------------ ------------
Assets Acquired in Connection with Claim
Settlements....................................... 25,592,000 27,223,000
------------ ------------
Deferred Income Taxes.............................. 39,994,000 43,726,000
------------ ------------
Goodwill and Other Intangibles, less accumulated
amortization ($9,227,000 and $7,464,000).......... 71,825,000 61,322,000
------------ ------------
Deferred Policy Acquisition Costs.................. 24,342,000 26,060,000
------------ ------------
Other Assets....................................... 49,455,000 41,010,000
------------ ------------
$873,778,000 $828,649,000
============ ============
See Notes to Consolidated Financial Statements
24
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31
-------------------------
1995 1994
------------ ------------
Demand Deposits..................................... $ 43,418,000 $ 38,695,000
------------ ------------
Accounts Payable and Accrued Liabilities:
Accounts payable.................................. 6,289,000 5,329,000
Salaries and wages................................ 20,872,000 18,935,000
Other............................................. 53,777,000 36,542,000
------------ ------------
80,938,000 60,806,000
------------ ------------
Deferred Revenue.................................... 104,315,000 117,828,000
------------ ------------
Reserve for Known and Incurred But Not Reported
Claims............................................. 238,161,000 206,743,000
------------ ------------
Income Tax Payable.................................. 2,812,000
------------
Notes and Contracts Payable......................... 77,206,000 89,600,000
------------ ------------
Minority Interests in Consolidated Subsidiaries..... 24,161,000 22,867,000
------------ ------------
Commitments and Contingencies (Notes 12 and 13)
Stockholders' Equity:
Preferred stock, $1 par value
Authorized--500,000 shares
Outstanding--None
Common stock, $1 par value
Authorized--24,000,000 shares
Outstanding--11,411,000 and 11,395,000 shares.... 11,411,000 11,395,000
Additional paid-in capital........................ 44,270,000 44,013,000
Retained earnings................................. 243,093,000 242,356,000
Net unrealized gain (loss) on securities.......... 3,993,000 (5,654,000)
------------ ------------
Total Stockholders' Equity.......................... 302,767,000 292,110,000
------------ ------------
$873,778,000 $828,649,000
============ ============
See Notes to Consolidated Financial Statements
25
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
--------------------------------------------
1995 1994 1993
-------------- -------------- --------------
REVENUES
Operating revenues.............. $1,227,185,000 $1,356,946,000 $1,379,781,000
Investment and other income..... 23,031,000 19,447,000 18,645,000
-------------- -------------- --------------
1,250,216,000 1,376,393,000 1,398,426,000
-------------- -------------- --------------
EXPENSES
Salaries and other personnel
costs.......................... 431,984,000 423,328,000 397,902,000
Premiums retained by agents..... 413,444,000 533,598,000 504,375,000
Other operating expenses........ 260,611,000 232,532,000 222,934,000
Provision for title losses and
other claims................... 90,387,000 110,230,000 125,588,000
Depreciation and amortization... 18,002,000 19,796,000 16,333,000
Interest........................ 6,242,000 6,267,000 4,419,000
Minority interests.............. 2,132,000 2,944,000 5,267,000
-------------- -------------- --------------
1,222,802,000 1,328,695,000 1,276,818,000
-------------- -------------- --------------
Income before premium and income
taxes............................ 27,414,000 47,698,000 121,608,000
Premium taxes..................... 13,627,000 15,453,000 17,617,000
-------------- -------------- --------------
Income before income taxes........ 13,787,000 32,245,000 103,991,000
Income taxes...................... 6,200,000 13,300,000 41,900,000
-------------- -------------- --------------
Income before cumulative effect of
a change in accounting for income
taxes............................ 7,587,000 18,945,000 62,091,000
Cumulative effect of a change in
accounting for income taxes...... 4,200,000
-------------- -------------- --------------
Net income........................ $ 7,587,000 $ 18,945,000 $ 66,291,000
============== ============== ==============
Per share data--based upon the
weighted average number
of common shares outstanding
Income before cumulative effect of
a change in accounting for income
taxes............................ $ 0.67 $ 1.66 $ 5.47
Cumulative effect of a change in
accounting for income taxes...... 0.37
-------------- -------------- --------------
Net income........................ $ 0.67 $ 1.66 $ 5.84
============== ============== ==============
See Notes to Consolidated Financial Statements
26
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET
ADDITIONAL LONG-TERM UNREALIZED
COMMON PAID-IN RETAINED DEBT OF GAIN (LOSS)
SHARES STOCK CAPITAL EARNINGS ESOT ON SECURITIES
---------- ----------- ----------- ------------ ----------- -------------
BALANCE AT DECEMBER 31,
1992................... 11,260,000 $11,260,000 $39,662,000 $169,829,000 $(5,196,000) $ 1,287,000
Net income for 1993..... 66,291,000
Cash dividends on common
shares................. (5,840,000)
Shares issued in
connection with company
acquisitions........... 141,000 141,000 3,897,000
Shares issued in
connection with stock
bonus plan............. 46,000 46,000 1,154,000
Purchase of Company
shares................. (66,000) (66,000) (1,572,000)
Decrease in ESOT debt... 2,599,000
Net unrealized gain on
securities............. 226,000
---------- ----------- ----------- ------------ ----------- -----------
BALANCE AT DECEMBER 31,
1993................... 11,381,000 11,381,000 43,141,000 230,280,000 (2,597,000) 1,513,000
Net income for 1994..... 18,945,000
Cash dividends on common
shares................. (6,869,000)
Shares issued in
conneciton with company
acquisitions........... 85,000 85,000 2,596,000
Shares issued in
connection with stock
bonus plan............. 55,000 55,000 1,855,000
Purchase of Company
shares................. (126,000) (126,000) (3,579,000)
Decrease in ESOT debt... 2,597,000
Net unrealized loss on
securities............. (7,167,000)
---------- ----------- ----------- ------------ ----------- -----------
BALANCE AT DECEMBER 31,
1994................... 11,395,000 11,395,000 44,013,000 242,356,000 (5,654,000)
Net income for 1995..... 7,587,000
Cash dividends on common
shares................. (6,850,000)
Shares issued in
conneciton with company
acquisitions........... 105,000 105,000 2,607,000
Shares issued in
connection with stock
bonus plan............. 65,000 65,000 1,088,000
Purchase of Company
shares................. (154,000) (154,000) (3,438,000)
Net unrealized loss on
securities............. 9,647,000
---------- ----------- ----------- ------------ ----------- -----------
BALANCE AT DECEMBER 31,
1995................... 11,411,000 $11,411,000 $44,270,000 $243,093,000 $ 3,993,000
========== =========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements
27
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
-----------------------------------------
1995 1994 1993
------------ ------------ -------------
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income......................... $ 7,587,000 $ 18,945,000 $ 66,291,000
Adjustments to reconcile net income
to cash provided by operating
activities--
Cumulative effect of a change in
accounting for income taxes..... (4,200,000)
Provision for title losses and
other claims.................... 90,387,000 110,230,000 125,588,000
Depreciation and amortization.... 18,002,000 19,796,000 16,333,000
Minority interests in net income. 2,132,000 2,944,000 5,267,000
Other, net....................... 207,000 1,673,000 (1,639,000)
Changes in assets and liabilities
excluding effects of company
acquisitions and noncash
transactions--
Claims paid, including assets
acquired, net of recoveries..... (66,639,000) (87,579,000) (77,305,000)
Net change in income tax
accounts........................ 10,777,000 (19,159,000) (32,956,000)
(Increase) decrease in accounts
and accrued income receivable... (22,943,000) 17,809,000 (15,954,000)
Increase (decrease) in accounts
payable and accrued liabilities. 11,057,000 (5,140,000) 5,450,000
(Decrease) increase in deferred
revenue......................... (13,588,000) 8,544,000 23,341,000
Other, net....................... (6,542,000) (14,148,000) (4,488,000)
------------ ------------ -------------
CASH PROVIDED BY OPERATING
ACTIVITIES........................ 30,437,000 53,915,000 105,728,000
------------ ------------ -------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Net cash effect of company
acquisitions...................... (30,921,000) (9,075,000) (3,803,000)
Net decrease in deposits with
banks............................. 901,000 2,864,000 1,822,000
Purchases of debt and equity
securities........................ (19,513,000) (94,826,000) (105,147,000)
Proceeds from sales of debt and
equity securities................. 41,066,000 40,755,000 33,799,000
Proceeds from maturities of debt
securities........................ 19,278,000 57,122,000 30,411,000
Net decrease (increase) in other
long-term investments............. 2,761,000 (1,643,000) (503,000)
Net increase in loans receivable... (5,588,000) (7,226,000) (2,501,000)
Capital expenditures............... (21,731,000) (34,562,000) (36,161,000)
Net proceeds from sale of property
and equipment..................... 757,000 32,367,000 3,885,000
------------ ------------ -------------
CASH USED FOR INVESTING ACTIVITIES. (12,990,000) (14,224,000) (78,198,000)
------------ ------------ -------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net change in demand deposits...... 4,723,000 6,185,000 3,217,000
Proceeds from insurance of debt.... 20,000,000
Repayment of debt.................. (20,060,000) (31,366,000) (12,769,000)
Purchase of Company shares......... (3,592,000) (3,705,000) (1,638,000)
Cash dividends..................... (6,850,000) (6,869,000) (5,840,000)
------------ ------------ -------------
CASH USED FOR FINANCING ACTIVITIES. (25,779,000) (15,755,000) (17,030,000)
------------ ------------ -------------
Net (decrease) increase in cash and
cash equivalents................... (8,332,000) 23,936,000 10,500,000
Cash and cash equivalents--Beginning
of year............................ 154,234,000 130,298,000 119,798,000
------------ ------------ -------------
CASH AND CASH EQUIVALENTS--END OF
YEAR.............................. $145,902,000 $154,234,000 $ 130,298,000
============ ============ =============
SUPPLEMENTAL INFORMATION:
Cash paid during the year for:
Interest.......................... $ 6,108,000 $ 6,153,000 $ 5,098,000
Premium taxes..................... $ 14,048,000 $ 18,478,000 $ 16,237,000
Income taxes...................... $ 6,580,000 $ 36,374,000 $ 73,549,000
Noncash investing and financing
activities:
Shares issued for stock bonus
plan............................. $ 1,153,000 $ 1,910,000 $ 1,200,000
Company acquisitions in exchange
for common stock................. $ 2,712,000 $ 2,681,000 $ 4,038,000
Net unrealized gain (loss) on
securities....................... $ 9,647,000 $ (7,167,000) $ 226,000
Liabilities in connection with
company acquisitions............. $ 20,345,000 $ 12,956,000 $ 20,011,000
Increase in equity due to
reduction of long-term debt of
ESOT............................. $ 2,597,000 $ 2,599,000
Debt incurred in connection with
purchase of real property........ $ 3,750,000
Debt incurred in connection with
the purchase of other
investments...................... $ 4,870,000
See Notes to Consolidated Financial Statements
28
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements include the accounts of The First
American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain 1993 and 1994 amounts have been reclassified to conform with the 1995
presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments
which have an initial maturity of 90 days or less and are not restricted for
statutory deposit or premium reserve requirements. The carrying amount for
cash equivalents is a reasonable estimate of fair value due to the short-term
maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term
investments with initial maturities of more than 90 days. The carrying amount
of these investments is a reasonable estimate of fair value due to their
short-term nature.
Debt securities are carried at fair value and consist primarily of
investments in obligations of the United States Treasury, various corporations
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common and preferred stocks of corporate entities in
which the Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in affiliates,
which are accounted for under the equity method of accounting, and notes
receivable, which are carried at the lower of cost or estimated realizable
value.
Realized gains and losses on investments are determined using the specific
identification method. Unrealized gains or losses on debt and equity
securities are included, net of related tax effects, as a separate component
of stockholders' equity.
Property and equipment
Depreciation on buildings and furniture and equipment is computed using the
declining balance and straight-line methods over estimated useful lives of 25
to 45 and 3 to 10 years, respectively.
Title plants and other indexes
Title plants and other indexes are carried at original cost. Appraised
values are used in conjunction with the acquisition of purchased subsidiaries.
The cost of daily maintenance (updating) of these plants and other indexes are
charged to expense as incurred. Because properly maintained title plants and
other indexes have indefinite lives and do not diminish in value with the
passage of time, no provision has been made for depreciation.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the
Company sometimes purchases mortgages, deeds of trust, real property, or
judgment liens. These assets, sometimes referred to as "salvage assets," are
carried at the lower of cost or estimated realizable value, net of any
indebtedness thereon. Judgment liens primarily represent funds expended by the
Company to purchase judgments to satisfy title claims.
29
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its estimated
useful life ranging from 30 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.
Deferred policy acquisition costs
Deferred policy acquisition costs are directly related to the procurement of
home warranty and tax service contracts. These costs are deferred and
amortized to expense in the same pattern as contract fees are recognized as
revenues.
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical
experience by a charge to expense when the related premium revenue is
recognized. Historically, major claims (i.e., claims greater than $0.5
million) were charged to expense as they became known because the unique
circumstances surrounding most major claims made it inherently impractical to
predict the incidence and amount of such claims. In the fourth quarter 1995,
the Company determined, with the assistance of an actuarial study, that
sufficient major claims data now exists to reasonably estimate a reserve for
incurred but not reported claims. Accordingly, the reserve for incurred but
not reported claims at December 31, 1995, includes major claims. The inclusion
of major claims did not have a material effect on the Company's financial
condition or results of operations. Title insurance losses and other claims
associated with ceded reinsurance are provided for as the company remains
contingently liable in the event that the reinsurer does not satisfy its
obligations. The reserve for known and incurred but not reported claims
reflects management's best estimate of the total costs required to settle all
claims reported to the Company and claims incurred but not reported. The
process applied to estimate claims costs is subject to many variables,
including changes and trends in the type of title insurance policies issued,
the real estate market and the interest rate environment. It is reasonably
possible that a change in the estimate will occur in the future.
The Company provides for claim losses relating to its home warranty business
based on the average cost per claim as applied to the total of new claims
incurred. The average cost per claim is calculated using the average of the
most recent twelve months of claims experience.
Operating revenues
Title premiums on policies issued directly by the Company are recognized on
the effective date of the title policy and escrow fees are recorded upon close
of the escrow. Revenues from title policies issued by independent agents are
recorded when notice of issuance is received from the agent.
Revenues from tax service contracts are recognized proportionately over the
estimated duration of the contracts as the related servicing costs are
estimated to occur. The majority of the servicing costs, approximately 70%, is
incurred in the year the contract is executed, with the remaining 30% incurred
over the remaining service life of the contract.
Revenues from home warranty contracts are recognized ratably over the 12-
month duration of the contracts.
Interest on loans with the Company's thrift subsidiary is recognized on the
outstanding principal balance on the accrual basis. Loan origination fees and
related direct loan origination costs are deferred and recognized over the
life of the loan.
30
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
Use of Estimates
Certain amounts and disclosures included in the consolidated financial
statements require management to make estimates which could differ from actual
results.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the Company
are not included in the consolidated balance sheets.
NOTE 2. STATUTORY RESTRICTIONS ON STOCKHOLDERS' EQUITY AND INVESTMENTS:
Pursuant to insurance and other regulations of the various states in which
the Company's title insurance subsidiary, First American Title Insurance
Company (FATICO), operates, the amount of dividends, loans and advances
available to the parent company from FATICO is limited, principally for the
protection of policyholders. Under such statutory regulations, the maximum
amount of dividends, loans and advances available to the parent company from
FATICO in 1996 is $44.6 million.
Investments carried at $12.8 million were on deposit with state treasurers
in accordance with statutory requirements for the protection of policyholders
at December 31, 1995.
FATICO maintained statutory capital and surplus of $205.6 million and $212.5
million at December 31, 1995 and 1994, respectively. Statutory net income for
the years ended December 31, 1995, 1994 and 1993 was $11.4 million, $15.5
million and $83.0 million respectively.
FATICO, domiciled in the state of California, prepares its statutory
financial statements in accordance with prescribed accounting practices which
include a variety of publications of the National Association of Insurance
Commissioners, state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices
not so prescribed.
NOTE 3. DEBT AND EQUITY SECURITIES:
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." This standard requires that all debt and equity
securities, other than those that the Company has the ability and intent to
hold to maturity, be carried at fair value. The Company has classified its
securities portfolio as available-for-sale and, in accordance with SFAS No.
115, has included fair value adjustments as a separate component of
stockholders' equity, net of tax. Prior to January 1, 1994, the Company
reported only its equity securities at fair value with adjustments included,
net of tax, as a separate component of stockholders' equity.
31
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The amortized cost and estimated fair value of investments in debt
securities are as follows:
GROSS
UNREALIZED ESTIMATED
AMORTIZED -------------- FAIR
COSTS GAINS LOSSES VALUE
--------- ------ ------- ---------
(IN THOUSANDS)
DECEMBER 31, 1995
U.S. Treasury securities................... $ 42,325 $1,189 $ (68) $ 43,446
Corporate securities....................... 36,927 1,041 (72) 37,896
Obligations of states and political
subdivisions.............................. 39,644 291 (228) 39,707
Mortgage-backed securities................. 7,861 66 (101) 7,826
-------- ------ ------- --------
$126,757 $2,587 $ (469) $128,875
======== ====== ======= ========
DECEMBER 31, 1994
U.S. Treasury securities................... $ 51,586 $ 179 $(1,949) $ 49,816
Corporate securities....................... 36,773 20 (2,752) 34,041
Obligations of states and political
subdivisions.............................. 57,203 426 (2,932) 54,697
Mortgage-backed securities................. 11,722 32 (1,118) 10,636
-------- ------ ------- --------
$157,284 $ 657 $(8,751) $149,190
======== ====== ======= ========
The amortized cost and estimated fair value of debt securities at December
31, 1995, by contractual maturities, are as follows:
ESTIMATED
AMORTIZED FAIR
COST VALUE
--------- ---------
(IN THOUSANDS)
Due in one year or less.................................. $ 22,315 $ 22,379
Due after one year through five years.................... 53,670 54,543
Due after five years through ten years................... 36,107 37,610
Due after ten years...................................... 6,804 6,517
-------- --------
118,896 121,049
Mortgage-backed securities............................... 7,861 7,826
-------- --------
$126,757 $128,876
======== ========
32
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The cost and estimated fair value of investments in equity securities are as
follows:
GROSS
UNREALIZED
-------------- ESTIMATED
COST GAINS LOSSES FAIR VALUE
------- ------ ------- ----------
(IN THOUSANDS)
DECEMBER 31, 1995
Common stocks:
Public utilities........................... $12,971 $2,510 $ (441) $15,040
Other...................................... 3,393 1,941 (27) 5,307
------- ------ ------- -------
16,364 4,451 (468) 20,347
Preferred stocks............................. 1,057 41 1,098
------- ------ ------- -------
$17,421 $4,492 $ (468) $21,445
======= ====== ======= =======
DECEMBER 31, 1994
Common stocks:
Public utilities........................... $16,280 $ 842 $(2,006) $15,116
Other...................................... 5,976 938 (384) 6,530
------- ------ ------- -------
22,256 1,780 (2,390) 21,646
Preferred stocks............................. 162 5 167
------- ------ ------- -------
$22,418 $1,785 $(2,390) $21,813
======= ====== ======= =======
Sales of debt and equity securities resulted in realized gains of $1,316,000,
$108,000 and $332,000 and realized losses of $358,000, $457,000 and $38,000 for
the years ended December 31, 1995, 1994 and 1993, 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
-----------------
1995 1994
-------- -------
(IN THOUSANDS)
Real estate-mortgage...................................... $ 48,899 $43,035
Assigned lease payments................................... 135 223
Other..................................................... 62 126
-------- -------
49,096 43,384
Unearned income on lease contracts........................ (41) (63)
Allowance for loan losses................................. (1,344) (950)
Participations sold....................................... (872) (1,017)
Deferred loan fees, net................................... (705) (808)
-------- -------
(2,962) (2,838)
-------- -------
$ 46,134 $40,546
======== =======
33
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Real estate loans are secured by properties located in Southern California.
The average yields on the Company's loan portfolio for the years ended
December 31, 1995 and 1994, were 12% and 11%, 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 $47.2 million and $41.7 million at
December 31, 1995 and 1994, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates being
offered for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered
appropriate by management to provide for known and inherent risks in the
portfolio.
In May 1993, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for
Impairment of a Loan." SFAS No. 114 became effective in the current year. This
standard requires that an impaired loan be measured at the present value of
expected future cash flows discounted at the loan's effective interest rate.
As a practical expedient, the loan may be valued based on its observable
market price or the fair value of the collateral, if the loan is collateral
dependent. Adoption of this standard did not have a materially adverse effect
on the Company's financial condition or results of operations.
NOTE 5. ASSETS ACQUIRED IN CONNECTION WITH CLAIM SETTLEMENTS:
DECEMBER 31
---------------
1995 1994
------- -------
(IN THOUSANDS)
Notes receivable............................................. $12,335 $10,313
Real estate.................................................. 5,796 7,240
Judgements and other......................................... 7,461 9,670
------- -------
$25,592 $27,223
======= =======
The above amounts are net of valuation reserves of $11.2 million and $12.4
million at December 31, 1995 and 1994, respectively.
The fair value of notes receivable was $12.0 million and $9.7 million at
December 31, 1995 and 1994, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates at which
similar loans would be made to borrowers of similar credit quality.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement
will become effective for the Company's 1996 fiscal year and requires
companies to assess for potential impairments of long-lived assets and certain
identifiable intangibles when there is evidence that events or changes in
circumstances have made recovery of an asset's carrying value unlikely. The
Company believes that adoption of this standard will not have a materially
adverse effect on its financial condition or results of operations.
34
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The activity in the valuation reserve is summarized as follows:
DECEMBER 31
----------------
1995 1994
------- -------
(IN THOUSANDS)
Balance at beginning of year............................... $12,354 $11,581
Provision for losses....................................... 3,019 3,674
Dispositions............................................... (4,127) (2,901)
------- -------
Balance at end of year..................................... $11,246 $12,354
======= =======
NOTE 6. DEMAND DEPOSITS:
Passbook and investment certificate accounts are summarized as follows:
DECEMBER 31
---------------
1995 1994
------- -------
(IN THOUSANDS)
Passbook.................................................... $12,053 $11,107
Certificate accounts:
Less than one year......................................... 17,690 18,762
One to five years.......................................... 13,675 8,826
------- -------
$43,418 $38,695
======= =======
Annualized interest rates:
Passbook................................................... 5%-6% 4%-5%
Certificate accounts....................................... 5%-8% 4%-9%
The fair value of investment certificate accounts was $31.6 million and
$25.6 million at December 31, 1995 and 1994, respectively, and was estimated
based on the discounted value of the future cash flows using a discount rate
approximating current market for similar liabilities. The carrying value of
the passbook account approximates fair value due to the short-term nature of
this liability.
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
---------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Balance at beginning of year....................... $206,743 $180,333 $135,212
-------- -------- --------
Provision related to:
Current year..................................... 82,632 98,900 112,652
Prior years...................................... 7,755 11,330 12,936
-------- -------- --------
Total provision.................................... 90,387 110,230 125,588
-------- -------- --------
Payments related to:
Current year..................................... 25,039 23,314 18,552
Prior year....................................... 40,934 56,832 56,664
-------- -------- --------
Total payments..................................... 65,973 80,146 75,216
-------- -------- --------
Other.............................................. 7,004 (3,674) (5,251)
-------- -------- --------
Balance at end of year............................. $238,161 $206,743 $180,333
======== ======== ========
35
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements. Included in "Other" for 1995 is
$10.0 million in purchase accounting adjustments. Claims activity associated
with reinsurance is not material and, therefore, not presented separately.
NOTE 8. NOTES AND CONTRACTS PAYABLE:
DECEMBER 31
---------------
1995 1994
------- -------
(IN THOUSANDS)
Secured notes payable pursuant to amended credit agreement..... $49,250 $61,000
Trust deed notes with maturities through 2017, secured by land
and buildings with a net book value of $13,266, average rate
of 8 1/2%..................................................... 9,386 10,783
Other notes and contracts payable with maturities through 2004,
average rate of 7 1/2%........................................ 18,570 17,817
------- -------
$77,206 $89,600
======= =======
At December 31, 1995, the Company's borrowings under its bank credit
agreement consisted of $7.6 million of fixed rate indebtedness ($8.4 million
at December 31, 1994), maturing in April 1999 and bearing interest at 9.38%
per annum; and $41.6 million of variable rate indebtedness ($52.6 million at
December 31, 1994), maturing in October 2000 and bearing interest at the
higher of Chase Manhattan Bank's prime lending rate or the federal funds rate
plus 1/2%. The Company may, at its election, use a reduced interest rate
option of LIBOR plus 1 1/4% for the majority of the variable rate
indebtedness.
During November 1994, the Company amended the credit agreement to borrow an
additional $20.0 million of variable rate indebtedness to pay off an existing
higher rate trust deed note. In addition, the amendment provided for a $30.0
million revolving line of credit which was unused as of December 31, 1995.
In February 1996, the Company further amended the credit agreement to
provide for more favorable pricing for its LIBOR option. The applicable
margins range from .50% to 1.00% depending on claims paying or financial
strength ratings or the Company's adjusted leverage ratio. The amendment also
provides for the elimination and/or relaxation of certain restrictive
covenants.
The terms of the amended credit agreement provide for quarterly amortization
of all credit agreement indebtedness. The minimum quarterly payment is $1.7
million and the maximum quarterly payment is $3.0 million. The Company has the
right to prepay the variable rate indebtedness but may prepay the fixed rate
indebtedness only with the consent of the holder thereof. In addition,
pursuant to the terms of the credit agreement, the Company must satisfy a
number of financial convenants and has agreed to be bound by certain
restrictive covenants. These covenants include, among others, limitations on
the incurrence of additional indebtedness and/or liens, as well as
restrictions on defined investments, acquisitions, dispositions, payments of
dividends and capital expenditures. Further, the Company is required to
maintain minimum levels of capital and earnings and meet predetermined debt to
equity ratios and fixed charge coverage ratios.
As security for its obligations to the lenders under the credit agreement,
the Company has pledged the capital stock of its direct wholly owned operating
subsidiaries, First American Title Insurance Company, First American Trust
Company and First American Real Estate Information Services, Inc., which, in
the aggregate, represent substantially all of its assets.
36
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1995, are as follows (in thousands):
1996.............................................................. $19,504
1997.............................................................. $16,852
1998.............................................................. $14,342
1999.............................................................. $12,375
2000.............................................................. $ 8,358
The fair value of notes and contracts payable was $77.7 million and $86.0
million at December 31, 1995 and 1994, 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, 1995 and 1994,
respectively.
NOTE 9. INVESTMENT AND OTHER INCOME:
The components of investment and other income are as follows:
DECEMBER 31
------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Interest:
Cash equivalents and deposits with savings and loan
associations and banks............................. $ 3,308 $ 2,695 $ 2,627
Debt securities..................................... 9,270 9,424 8,157
Other long-term investments......................... 2,401 1,785 1,390
------- ------- -------
14,979 13,904 12,174
Dividends on equity securities........................ 1,088 925 521
Equity in earnings of unconsolidated affiliates....... 748 199 1,557
Net gain (loss) on sales of debt and equity
securities........................................... 958 (349) 294
Other................................................. 5,258 4,768 4,099
------- ------- -------
$23,031 $19,447 $18,645
======= ======= =======
NOTE 10. INCOME TAXES:
Income taxes are summarized as follows:
DECEMBER 31
------------------------
1995 1994 1993
------ ------- --------
(IN THOUSANDS)
Current:
Federal....................................... $3,442 $13,033 $ 51,522
State......................................... 1,810 2,271 8,250
------ ------- --------
5,252 15,304 59,772
------ ------- --------
Deferred:
Federal....................................... 70 (684) (17,288)
State......................................... 878 (1,320) (584)
------ ------- --------
948 (2,004) (17,872)
------ ------- --------
$6,200 $13,300 $ 41,900
====== ======= ========
37
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income taxes differ from the amounts computed by applying the Federal income
tax rate of 35%. A reconciliation of this difference is as follows:
DECEMBER 31
-------------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Taxes calculated at federal rate.............. $ 4,825 $11,286 $36,397
Tax exempt interest income.................... (719) (720) (330)
Tax effect of minority interests.............. 746 985 1,844
State taxes, net of federal benefit........... 2,456 618 4,778
Use of federal capital loss carryforward...... (648)
Exclusion of certain meals and entertainment
expenses..................................... 2,391 2,630 916
Change in tax reserves........................ (2,301)
Other items, net.............................. (1,198) (851) (1,705)
------- ------- -------
$ 6,200 $13,300 $41,900
======= ======= =======
Effective January 1, 1993, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No.
109 provides that deferred tax assets and liabilities be recognized for
temporary differences between the financial statement carrying amount and the
tax basis of certain of the Company's assets and liabilities. In addition,
SFAS No. 109 requires that deferred tax assets and liabilities be measured
using enacted tax rates expected to apply to taxable income in the years in
which the temporary differences are expected to be recovered or settled. The
impact on deferred taxes of changes in tax rates and laws, if any, is
reflected in the financial statements in the period of enactment. In some
situations, SFAS No. 109 permits the recognition of expected benefits of
utilizing net operating loss and tax credit carryforwards.
Pursuant to the method prescribed under Accounting Principles Board Opinion
(APB) No. 11, "Accounting for Income Taxes," which was effective for years
ending prior to January 1, 1993, deferred income taxes were recognized for
income and expense items reported in different periods for financial reporting
and income tax purposes using the applicable tax rate for the year in which
the differences originated. Deferred taxes under APB No. 11 were not permitted
to be adjusted for subsequent changes in tax rates.
The Company did not restate its financial statements for prior years since
such restatement is not required under SFAS No. 109. Instead, the Company
recognized a benefit of $4.2 million, or $.37 per share, representing the
cumulative effect of a change in accounting for income taxes. The cumulative
effect represented the adjustment of previously recorded deferred tax assets
and liabilities to reflect lower prevailing tax rates, and the related
adjustment of certain other balance sheet accounts. The effect of the
adjustments to other balance sheet accounts was to increase deferred revenue
by $11.5 million, accrued expenses by $3.0 million and reserves for claims by
$0.8 million, and to decrease goodwill by $1.9 million.
38
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The primary components of temporary differences which give rise to the
Company's net deferred tax asset are as follows:
DECEMBER 31
----------------
1995 1994
------- -------
(IN THOUSANDS)
Deferred tax assets:
Deferred revenue...................................... $25,474 $29,504
Employee benefits..................................... 8,433 8,431
Title claims and related salvage...................... 14,612 8,251
Unrealized loss on securities......................... 3,045
Federal capital loss carryforward..................... 1,898
Bad debt reserves..................................... 2,467 1,730
Federal net operating loss carryforward............... 1,251 1,251
Other................................................. 4,459 3,532
Valuation allowance................................... (856) (2,880)
------- -------
Total deferred tax assets............................ 55,840 54,762
------- -------
Deferred tax liabilities:
Depreciable and amortizable assets.................... 10,540 8,939
Unrealized gain on securities......................... 2,150
Sale leaseback........................................ 1,066 52
Other................................................. 2,090 2,045
------- -------
Total deferred tax liabilities....................... 15,846 11,036
------- -------
Net deferred tax asset.................................. $39,994 $43,726
======= =======
The Company has federal net operating loss carryforwards of approximately
$3.6 million at December 31, 1995, that expire in 1999. The utilization of
these net operating losses is limited to future federal taxable income of
First American Real Estate Information Services, Inc., a wholly owned
subsidiary of the Company. The utilization of the loss carryforward is also
subject to limitations prescribed by Section 382 of the Internal Revenue Code.
The Company maintains a valuation allowance for certain temporary
differences for which it is more likely than not the Company will not receive
benefits.
NOTE 11. EMPLOYEE BENEFIT PLANS:
The Company has pension and other retirement benefit plans covering
substantially all employees. The Company's principal pension plan, amended to
be noncontributory effective January 1, 1995, is a qualified defined benefit
plan with benefits based on the employee's years of service and the highest
five consecutive years' compensation during the last ten years of employment.
The Company's policy is to fund all accrued pension costs. Contributions are
intended to provide not only for benefits attributable to past service, but
also for those benefits expected to be earned in the future. The Company also
has non-qualified unfunded supplemental benefit plans covering certain key
management personnel. Benefits under these plans are intended to be funded
with proceeds from life insurance policies purchased by the Company on the
lives of the executives.
39
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Net pension cost for the Company's pension and other retirement benefit
plans includes the following components:
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Service cost--benefits earned during the
year........................................ $ 7,798 $ 5,400 $ 3,758
Interest cost on projected benefit
obligation.................................. 8,741 7,631 6,727
Actual (gain) loss on plan assets............ (9,636) 1,065 (4,495)
Net amortization and deferral................ 4,674 (5,740) (62)
------- ------- -------
Net periodic pension cost.................... $11,577 $ 8,356 $ 5,928
======= ======= =======
The following table sets forth the plans' status at:
DECEMBER 31
---------------------------------------------
1995 1994
---------------------- ----------------------
UNFUNDED UNFUNDED
FUNDED SUPPLEMENTAL FUNDED SUPPLEMENTAL
PENSION BENEFIT PENSION BENEFIT
PLANS PLANS PLANS PLANS
-------- ------------ -------- ------------
(IN THOUSANDS)
Present value of benefit
obligation:
Vested benefits.......... $(68,977) $(15,100) $(51,414) $(12,972)
Non-vested benefits...... (5,250) (3,828) (5,918) (2,782)
-------- -------- -------- --------
Accumulated benefit obliga-
tion...................... (74,227) (18,928) (57,332) (15,754)
Value of future pay in-
creases................... (25,165) (5,374) (23,730) (4,546)
-------- -------- -------- --------
Total projected benefit ob-
ligation.................. (99,392) (24,302) (81,062) (20,300)
Plan assets at fair value.. 71,929 65,537
-------- -------- -------- --------
Plan assets less than pro-
jected benefit obligation. (27,463) (24,302) (15,525) (20,300)
Unrecognized net (asset)
obligation
at transition............. (359) 2,162 (409) 2,522
Prior service cost not yet
recognized................ (543) 495 (236) 559
Unrecognized net loss...... 21,065 4,091 16,459 1,691
Adjustment to recognize
minimum liability......... (1,374) (226)
-------- -------- -------- --------
Prepaid (accrued) pension
costs..................... $ (7,300) $(18,928) $ 289 $(15,754)
======== ======== ======== ========
The rates of increase in future compensation levels for the plans of 4 1/2%
and 5% and the weighted average discount rates of 7 3/4% and 8 1/4% were used
in determining the actuarial present value of the projected benefit obligation
at December 31, 1995 and 1994, 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 1,675,000 and
1,844,000 shares of the Company's common stock, representing 15% and 16% of
the total shares outstanding at December 31, 1995, and 1994, respectively.
Contributions to the Company's profit sharing plans totaled $2.0 million and
$3.0 million for 1994 and 1993, respectively.
The Company also has a Stock Bonus Plan for key employees pursuant to which
65,000, 55,000 and 46,000 common shares were awarded for 1995, 1994 and 1993,
respectively, resulting in a charge to operations of $1.2 million, $1.9
million and $1.2 million respectively. The Plan, as amended December 9, 1992,
provides that a total of up to 200,000 common shares may be awarded in any one
year.
40
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In December 1990, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions." This standard was effective for
1993 and focuses principally on postretirement health care and life insurance
benefits and requires accrual of the expected cost of providing those benefits
over the service lives of the employees. Compliance with this standard did not
have a materially adverse effect on the Company's financial condition or
results of operations.
In November 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 112, "Employers' Accounting for
Postemployment Benefits." This standard was effective for 1994 and focuses
principally on benefits provided to former or inactive employees after
employment but before retirement. Compliance with this standard did not have a
materially adverse effect on the Company's financial condition or results of
operations.
NOTE 12. COMMITMENTS:
The Company leases certain office facilities, automobiles and equipment
under operating leases, which for the most part are renewable. The majority of
these leases also provide that the Company will pay insurance and taxes. In
December 1994, the Company entered into a sale-leaseback agreement with regard
to certain furniture and equipment with a net book value of $22.4 million.
Proceeds from the sale amounted to $31.4 million and a gain of $9.0 million
has been included in deferred revenue and will be amortized over the life of
the lease. Under the agreement, the Company has agreed to lease the equipment
for four years with minimum annual lease payments of $8.3 million.
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1995, are as follow (in thousands):
1996............................................................. $ 47,623
1997............................................................. 40,193
1998............................................................. 33,163
1999............................................................. 23,012
2000............................................................. 11,321
Later years...................................................... 20,707
--------
$176,019
========
Total rental expense for all operating leases and month-to-month rentals was
$58.6 million, $50.1 million and $46.0 million for 1995, 1994 and 1993,
respectively.
NOTE 13. LITIGATION:
On April 13, 1990, a class action was filed in the United States District
Court in Phoenix, Arizona, against First American Title Insurance Company and
a number of other title insurers. This action seeks damages and injunctive
relief based on the defendants' participation in rating bureaus in Arizona and
Wisconsin.
41
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The case is now before the District Court for coordinated or consolidated
pretrial proceedings with an action that was filed in the United States
District Court for the Eastern District of Wisconsin. The Wisconsin federal
action presents claims on behalf of a purported class of purchasers of title
insurance in Wisconsin, and seeks damages and other forms of relief, similar
to those involved in the federal action filed in Arizona, with respect to
participation in the rating bureau in Wisconsin.
The Company does not believe that the ultimate resolution of these actions
will have a materially adverse effect on its financial condition or results of
operations.
The Company is involved in various routine legal proceedings related to its
operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
NOTE 14. SEGMENT FINANCIAL INFORMATION:
The Company's operations include four reportable segments: title insurance,
real estate information, home warranty and trust and banking. The title
insurance segment issues policies which are insured statements of the
condition of title to real property. The real estate information segment
provides to lender customers the status of tax payments on real property
securing their loans, credit information derived from at lease two credit
bureau sources and flood zone determination reports which provide information
on whether or not a property is in a special flood hazard area. The home
warranty segment issues one-year warranties which protect homeowners against
defects in home fixtures. The trust and banking segment provides full-service
trust and depository services, accepts deposits and makes real estate secured
loans.
The title insurance and real estate information segments operate through
networks of offices nationwide. The Company offers its title services through
both direct operations and agents throughout the Unites States. It also
provides title services abroad in the Bahama Islands, Bermuda, Canada, Guam,
Mexico, Puerto Rico, the U.S. Virgin Islands, and the United Kingdom. Home
warranty services are available in Arizona, California, Nevada, Texas and
Washington. The trust, banking and thrift businesses operate in Southern
California.
42
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Selected financial information about the Company's operations by segment for
each of the past three years is as follows:
DEPRECIATION
PRETAX AND CAPITAL
REVENUES PROFIT (LOSS) ASSETS AMORTIZATION EXPENDITURES
---------- ------------- -------- ------------ ------------
(IN THOUSANDS)
1995
Title Insurance......... $1,052,823 $ 17,540 $532,697 $12,208 $18,130
Real Estate Information. 147,004 19,690 182,499 4,565 2,294
Home Warranty........... 35,531 6,828 56,637 289 118
Trust and Banking....... 14,110 3,304 63,416 331 1,189
Corporate............... 748 (19,948) 38,529 609
---------- -------- -------- ------- -------
$1,250,216 $ 27,414 $873,778 $18,002 $21,731
========== ======== ======== ======= =======
1994
Title Insurance......... $1,236,663 $ 37,819 $546,103 $16,070 $27,694
Real Estate Information. 96,113 17,371 139,680 2,916 5,979
Home Warranty........... 30,985 6,709 53,834 275 170
Trust and Banking....... 12,433 3,214 55,423 236 719
Corporate............... 199 (17,415) 33,609 299
---------- -------- -------- ------- -------
$1,376,393 $ 47,698 $828,649 $19,796 $34,562
========== ======== ======== ======= =======
1993
Title Insurance......... $1,264,565 $ 97,314 $530,438 $13,839 $30,141
Real Estate Information. 95,685 35,046 139,487 1,668 5,412
Home Warranty........... 24,888 5,477 49,508 274 558
Trust and Banking....... 11,731 3,313 48,155 211 50
Corporate............... 1,557 (19,542) 18,860 341
---------- -------- -------- ------- -------
$1,398,426 $121,608 $786,448 $16,333 $36,161
========== ======== ======== ======= =======
Corporate consists primarily of unallocated interest expense, minority
interests, equity in earnings of affiliated companies, employee benefit
contributions and personnel and other operating expenses associated with the
Company's home office facilities.
43
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
QUARTERLY FINANCIAL DATA
(UNAUDITED)
QUARTER ENDED
-------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, 1995
Revenues............................ $261,154 $293,240 $331,328 $364,494
======== ======== ======== ========
Income (loss) before income taxes... $(21,509) $ 1,837 $ 15,520 $ 17,939
======== ======== ======== ========
Net income (loss)................... $(12,709) $ 1,137 $ 9,320 $ 9,839
======== ======== ======== ========
Net income (loss) per share......... $ (1.11) $ 0.10 $ 0.81 $ 0.87
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Revenues............................ $372,436 $369,011 $334,870 $300,076
======== ======== ======== ========
Income (loss) before taxes.......... $ 16,498 $ 13,434 $ 7,090 $ (4,777)
======== ======== ======== ========
Net income (loss)................... $ 9,398 $ 7,634 $ 4,790 $ (2,877)
======== ======== ======== ========
Net income (loss) per share......... $ 0.82 $ 0.67 $ 0.42 $ (0.25)
======== ======== ======== ========
The Company's primary business segments are cyclical in nature, with the
spring and summer months historically being the strongest. However, interest
rate adjustment by the Federal Reserve Board during the last few years have
caused unusual fluctuations in the Company's quarterly operating results. See
Management's Discussion and Analysis on page 15 of this report for further
discussion of the Company's results of operations.
44
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
DECEMBER 31, 1995
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 asso-
ciations and banks:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated...................... $ 18,637,000 $ 18,637,000 $ 18,637,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated--
U.S. Treasury securities.......... $ 42,325,000 $ 43,446,000 $ 43,446,000
Corporate securities............ 36,927,000 37,896,000 37,896,000
Obligations of states and
political subdivisions......... 39,644,000 39,707,000 39,707,000
Mortgage-backed securities...... 7,861,000 7,826,000 7,826,000
------------ ------------ ------------
$126,757,000 $128,875,000 $128,875,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated...................... $ 17,421,000 $ 21,445,000 $ 21,445,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated...................... $ 25,230,000 $ 25,230,000 $ 25,230,000
------------ ------------ ------------
Total Investments:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated...................... $188,045,000 $194,187,000 $194,187,000
============ ============ ============
45
SCHEDULE II
1 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
ASSETS
DECEMBER 31
--------------------------
1995 1994
------------ ------------
Cash and cash equivalents.......................... $ 19,415,000 $ 15,178,000
------------ ------------
Stock of subsidiaries, at equity................... 469,511,000 446,672,000
------------ ------------
Deposits with savings and loan associations and
banks............................................. 50,000
------------
Equity securities.................................. 1,708,000
------------
Property and equipment, at cost:
Land............................................. 425,000 425,000
Buildings and building improvements.............. 5,006,000 5,006,000
Less--accumulated depreciation................... (4,256,000) (4,071,000)
------------ ------------
1,175,000 1,360,000
------------ ------------
Other assets....................................... 4,924,000 5,427,000
------------ ------------
$495,075,000 $470,345,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Dividends payable.................................. $ 1,742,000 $ 1,740,000
------------ ------------
Accrued expenses................................... 524,000 519,000
------------ ------------
Payable to subsidiaries............................ 130,281,000 105,094,000
------------ ------------
Notes and contracts payable........................ 59,761,000 70,882,000
------------ ------------
Stockholders' equity:
Preferred stock, $1 par value
Authorized--500,000 shares;
Outstanding--None
Common stock, $1 par value
Authorized--24,000,000 shares;
Outstanding--11,411,000 and 11,395,000 shares... 11,411,000 11,395,000
Additional paid-in capital....................... 44,270,000 44,013,000
Retained earnings................................ 243,093,000 242,356,000
Net unrealized gain (loss) on securities......... 3,993,000 (5,654,000)
------------ ------------
Total stockholders' equity......................... 302,767,000 292,110,000
------------ ------------
$495,075,000 $470,345,000
============ ============
See Notes to Parent Company Financial Statements
46
SCHEDULE II
2 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31
-----------------------------------
1995 1994 1993
----------- ----------- -----------
Revenues:
Interest and other income................ $ 837,000 $ 846,000 $ 477,000
Equity in earnings of subsidiaries....... 25,803,000 33,249,000 82,126,000
----------- ----------- -----------
26,640,000 34,095,000 82,603,000
----------- ----------- -----------
Expenses:
Interest................................. 5,040,000 3,781,000 3,976,000
Depreciation............................. 185,000 186,000 186,000
Other administrative expenses............ 13,828,000 11,183,000 12,150,000
----------- ----------- -----------
19,053,000 15,150,000 16,312,000
----------- ----------- -----------
Net income................................. $ 7,587,000 $18,945,000 $66,291,000
=========== =========== ===========
Net income per share, based upon the
weighted average number of shares
outstanding............................... $ 0.67 $ 1.66 $ 5.84
=========== =========== ===========
See Notes to Parent Company Financial Statements
47
SCHEDULE II
3 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
----------------------------------------
1995 1994 1993
------------ ------------ ------------
Cash flows from operating activities:
Net income......................... $ 7,587,000 $ 18,945,000 $ 66,291,000
Adjustments to reconcile net income
to cash provided by operating
activities--
Depreciation..................... 185,000 186,000 186,000
Expense relating to stock bonus
plan............................ 1,153,000 1,910,000 1,200,000
Equity in earnings of
subsidiaries, net of dividends.. (25,802,000) (24,249,000) (82,126,000)
Other............................ (225,000)
Changes in assets and
liabilities, excluding effects
of company acquisitions and
noncash transactions--
Decrease (increase) in other
assets........................ 503,000 310,000 (300,000)
Increase (decrease) in
dividends payable and accrued
expenses...................... 7,000 123,000 (851,000)
Increase in intercompany ac-
counts........................ 40,509,000 21,086,000 32,152,000
------------ ------------ ------------
Cash provided by operating activi-
ties................................ 23,917,000 18,311,000 16,552,000
------------ ------------ ------------
Cash flows from investing activities:
Net decrease (increase) in deposits
with banks........................ (50,000) 100,000
Purchases of equity securities..... (1,957,000)
Sales of equity securities......... 1,933,000
------------ ------------ ------------
Cash provided by (used for) investing
activities.......................... 1,883,000 (1,957,000) 100,000
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from issuance of debt..... 20,000,000
Repayment of debt.................. (11,121,000) (11,245,000) (10,910,000)
Purchase of Company shares......... (3,592,000) (3,705,000) (1,638,000)
Cash dividends..................... (6,850,000) (6,869,000) (5,840,000)
------------ ------------ ------------
Cash used for financing activities... (21,563,000) (1,819,000) (18,388,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 4,237,000 14,535,000 (1,736,000)
Cash and cash equivalents--
Beginning of year.................. 15,178,000 643,000 2,379,000
------------ ------------ ------------
End of year........................ $ 19,415,000 $ 15,178,000 $ 643,000
============ ============ ============
Supplementary information:
Cash paid during the year for
interest.......................... $ 4,986,000 $ 3,654,000 $ 4,556,000
Noncash investing and financing
activities:
Shares issued for stock bonus plan. $ 1,153,000 $ 1,910,000 $ 1,200,000
Company acquisitions in exchange
for common stock.................. $ 2,712,000 $ 2,681,000 $ 4,038,000
Increase in equity due to reduction
of long-term debt of ESOT......... $ 2,597,000 $ 2,599,000
Liabilities in connection with com-
pany acquisitions................... $ 7,027,000
See Notes to Parent Company Financial Statements
48
SCHEDULE II
4 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO PARENT COMPANY FINANCIAL STATEMENTS
NOTE A
The composition of the Notes and Contracts Payable consists of:
DECEMBER 31
-----------------------
1995 1994
----------- -----------
Secured notes payable to financial institutions........ $49,250,000 $61,000,000
Trust deed notes with maturities through 2002, average
rate of 10%. Secured by land and buildings with an ag-
gregate net book value of $899,000.................... 895,000 1,866,000
Other notes and contracts payable with maturities
through 2000, average
rate of 7 1/4%........................................ 9,616,000 8,016,000
----------- -----------
$59,761,000 $70,882,000
=========== ===========
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1995, are $14,803,000, $14,450,000,
$12,324,000, $10,667,000, and $7,302,000 respectively.
NOTE B
The parent company files a consolidated tax return with its subsidiary
companies in which it owns 80% or more of the outstanding stock. The current
and cumulative tax effects relating to the operations of the parent company
are reflected in the accounts of First American Title Insurance Company.
49
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
ACQUISITION CLAIMS DEFERRED
SEGMENT COSTS RESERVES REVENUES
------- ----------- ------------ ------------
1995
Title Insurance........................... $232,081,000 $ 6,641,000
Real Estate Information................... $22,078,000 3,686,000 82,581,000
Home Warranty............................. 2,264,000 2,394,000 15,093,000
Trust and Banking.........................
Corporate.................................
----------- ------------ ------------
Total................................... $24,342,000 $238,161,000 $104,315,000
=========== ============ ============
1994
Title Insurance........................... $202,069,000 $ 8,896,000
Real Estate Information................... $24,312,000 2,841,000 95,985,000
Home Warranty............................. 1,748,000 1,833,000 12,947,000
Trust and Banking.........................
Corporate.................................
----------- ------------ ------------
Total................................... $26,060,000 $206,743,000 $117,828,000
=========== ============ ============
50
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
------- -------------- ----------- ------------ ------------ ------------
1995
Title Insurance......... $1,034,789,000 $18,034,000 $ 68,338,000 $188,024,000
Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 55,276,000
Home Warranty........... 32,531,000 3,000,000 18,857,000 1,748,000 95,000
Trust and Banking....... 14,110,000 26,000 5,650,000
Corporate............... 748,000 3,927,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,227,185,000 $23,031,000 $ 90,387,000 $7,639,000 $252,972,000
============== =========== ============ ========== ============
1994
Title Insurance......... $1,221,581,000 $15,082,000 $ 93,012,000 $184,723,000
Real Estate Information. 94,816,000 1,297,000 2,129,000 $4,536,000 32,943,000
Home Warranty........... 28,116,000 2,869,000 15,022,000 1,447,000 454,000
Trust and Banking....... 12,433,000 67,000 4,829,000
Corporate............... 199,000 3,600,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,356,946,000 $19,447,000 $110,230,000 $5,983,000 $226,549,000
============== =========== ============ ========== ============
1993
Title Insurance......... $1,249,322,000 $15,243,000 $111,038,000 $183,213,000
Real Estate Information. 95,069,000 616,000 2,683,000 $3,448,000 26,108,000
Home Warranty........... 22,402,000 2,486,000 11,762,000 1,178,000 121,000
Trust and Banking....... 11,731,000 105,000 4,140,000
Corporate............... 1,557,000 4,726,000
-------------- ----------- ------------ ---------- ------------
Total................. $1,378,524,000 $19,902,000 $125,588,000 $4,626,000 $218,308,000
============== =========== ============ ========== ============
51
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
TITLE
INSURANCE
OPERATING TITLE
REVENUES CEDED TO ASSUMED INSURANCE PERCENTAGE OF
BEFORE OTHER FROM OTHER OPERATING AMOUNT ASSUMED TO
SEGMENT REINSURANCE COMPANIES COMPANIES REVENUES OPERATING REVENUES
- ------- -------------- ---------- ---------- -------------- ------------------
1995 $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 .3%
============== ========== ========== ============== ===
1994 $1,220,581,000 $4,362,000 $5,362,000 $1,221,581,000 .4%
============== ========== ========== ============== ===
1993 $1,247,657,000 $2,542,000 $4,207,000 $1,249,322,000 .3%
============== ========== ========== ============== ===
52
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING OF COSTS AND OTHER FROM END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ---------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 4,022,000 $ 2,965,000 $ 1,017,000(A) $ 5,970,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $206,743,000 $90,387,000 $7,004,000(B) $65,973,000(C) $238,161,000
============ =========== ========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 950,000 $ 562,000 $ 168,000(A) $ 1,344,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 12,354,000 $3,019,000 $ 4,127,000(D) $ 11,246,000
============ ========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 2,880,000 $ 2,024,000(E) $ 856,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,342,000 $ 84,000 $ 6,000 $ 1,420,000
============ =========== =========== ============
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $10,023,000 in purchase accounting adjustments, net
of a reclassification of $3,019,000 to the reserve for assets acquired
in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
53
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ------------------------ ----------- ------------
ADDITIONS
------------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ------------ ----------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 4,098,000 $ 2,604,000 $ 2,680,000(A) $ 4,022,000
============ ============ =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $180,333,000 $110,230,000 $(3,674,000)(B) $80,146,000(C) $206,743,000
============ ============ =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 750,000 $ 437,000 $ 237,000(A) $ 950,000
============ ============ =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 353,000 $ 353,000
============ ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 11,581,000 $ 3,674,000(B) $ 2,901,000(D) $ 12,354,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 3,304,000 $ 424,000(E) $ 2,880,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,177,000 $ 258,000 $ 93,000 $ 1,342,000
============ ============ =========== ============
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents a reclassification to the reserve for assets
acquired in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with
utilization of the related temporary differences.
54
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ --------------------------- ----------- ------------
ADDITIONS
---------------------------
BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE
BEGINNING OF COSTS AND OTHER FROM AT END OF
DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ------------ ----------- ----------- ------------
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 3,623,000 $ 1,661,000 $ 1,186,000(A) $ 4,098,000
============ ============ =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $135,212,000 $125,588,000 $(5,251,000)(B) $75,216,000(C) $180,333,000
============ ============ =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 500,000 $ 323,000 $ 73,000(A) $ 750,000
============ ============ =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated.......... $ 460,000 $ 107,000(D) $ 353,000
============ =========== ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 6,899,000 $ 5,251,000 (B) $ 569,000(D) $ 11,581,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 3,304,000(E) $ 3,304,000
============ ============
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,047,000 $ 130,000 $ 1,177,000
============ ============ ============
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents a reclassification to the reserve for assets
acquired in connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents the valuation allowance established for certain
temporary differences for which it is more likely than not the Company
will not receive future benefits. The valuation allowance is in
accordance with the provisions set forth in SFAS 109, which was adopted
by the Company in the current year.
55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
The information required by Items 10 through 13 of this report is set forth
in the sections entitled "Security Ownership of Certain Beneficial Owners,"
"Election of Directors," "Security Ownership of Management," "Executive
Compensation," "Report of the Compensation Committee on Executive
Compensation," "Comparative Cumulative Total Return to Shareholders,"
"Executive Officers" and "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 20 in "Item 8" of Part II of this report.
3. Exhibits (Each management contract or compensatory plan or
arrangement in which any director or named executive officer of
The First American Financial Corporation, as defined by Item
402(a)(3) of Regulation S-K (17 C.F.R. (S)229.402(a)(3)),
participates that is included among the exhibits listed below is
identified by an asterisk (*).)
(3) (a) Restated Articles of Incorporation of The First American
Financial Corporation dated November 8, 1989, incorporated
by reference herein from Exhibit 3.1 of Amendment No. 3,
dated October 16, 1992, to Registration Statement on Form
S-2.
(3) (b) Certificate of Amendment of Restated Articles of
Incorporation of The First American Financial Corporation
dated September 21, 1992, incorporated by reference herein
from Exhibit 3.2 of Amendment No. 3, dated October 16,
1992, to Registration Statement on Form S-2.
(3) (c) Bylaws, as amended.
(4) (a) Amendment and Restatement dated as of April 28, 1993, of
Credit Agreement dated as of April 21, 1992, incorporated
by reference herein from Exhibit (4) of Amendment No. 1,
dated July 26, 1993, to Quarterly Report on Form 10-Q for
the quarter ended March 31, 1993.
(4) (b) Amendment No. 1 dated as of March 31, 1994, to Amendment
and Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report on
Form 10-Q for the quarter ended March 31, 1994.
(4) (c) Amendment No. 2 dated as of November 22, 1994, to
Amendment and Restatement dated as of April 28, 1993, of
Credit Agreement dated as of April 21, 1992, incorporated
by reference herein from Exhibit (4) of Current Report on
Form 8-K dated December 14, 1994.
56
(4) (d) Amendment No. 3 dated as of March 31, 1995, to Amendment
and Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report on
Form 10-Q for the quarter ended March 31, 1995.
(4) (e) Amendment No. 4 dated as of June 1, 1995, to Amendment and
Restatement dated as of April 28, 1993, of Credit
Agreement dated as of April 21, 1992, incorporated by
reference herein from Exhibit (4) of Quarterly Report on
Form 10-Q for the quarter ended June 30, 1995.
(4) (f) Amendment No. 5 dated as of February 16, 1996, to
Amendment and Restatement dated as of April 28, 1993, of
Credit Agreement dated as of April 21, 1992.
*(10) (a) Description of Stock Bonus Plan, as amended, incorporated
by reference herein from Exhibit 10(a) of Annual Report on
Form 10-K for the fiscal year ended December 31, 1992.
*(10) (b) Executive Supplemental Benefit Plan dated April 10, 1986,
and Amendment No. 1 thereto dated October 1, 1986,
incorporated by reference herein from Exhibit (10)(b) of
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988.
*(10) (c) Amendment No. 2, dated March 22, 1990, to Executive
Supplemental Benefit Plan, incorporated by reference
herein from Exhibit (10)(c) of Annual Report on Form 10-K
for the fiscal year ended December 31, 1989.
*(10) (d) Management Supplemental Benefit Plan dated July 20, 1988,
incorporated by reference herein from Exhibit (10) of
Quarterly Report on Form 10-Q for the quarter ended June
30, 1992.
*(10) (e) Pension Restoration Plan (effective as of January 1,
1994).
(10) (f) Pledge Agreement dated as of April 27, 1992, incorporated
by reference herein from Exhibit (2) of Current Report on
Form 8-K dated May 8, 1992.
(21) Subsidiaries of the registrant.
(27) Financial Data Schedule
(b)Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period covered
by this report.
57
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 28, 1996
----------------------------------------------------------------------------
By:/S/ THOMAS A. KLEMENS
----------------------------------------------------------------------------
Thomas A. Klemens, Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 28, 1996
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
D.P. Kennedy,
Chairman and Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ PARKER S. KENNEDY
----------------------------------------------------------------------------
Parker S. Kennedy,
President and Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ THOMAS A. KLEMENS
----------------------------------------------------------------------------
Thomas A. Klemens,
Vice President, Chief Financial Officer
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ GEORGE L. ARGYROS
----------------------------------------------------------------------------
George L. Argyros, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ J. DAVID CHATHAM
----------------------------------------------------------------------------
J. David Chatham, Director
Date March 28, 1996
----------------------------------------------------------------------------
By
----------------------------------------------------------------------------
William G. Davis, Director
Date
----------------------------------------------------------------------------
By/S/ JAMES L. DOTI
----------------------------------------------------------------------------
James L. Doti, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ LEWIS W. DOUGLAS, JR.
----------------------------------------------------------------------------
Lewis W. Douglas, Jr., Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ PAUL B. FAY, JR.
----------------------------------------------------------------------------
Paul B. Fay, Jr., Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ ROBERT B. MCLAIN
----------------------------------------------------------------------------
Robert B. McLain, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ ANTHONY R. MOISO
----------------------------------------------------------------------------
Anthony R. Moiso, Director
Date March 28, 1996
----------------------------------------------------------------------------
By
----------------------------------------------------------------------------
Rudolph J. Munzer, Director
Date
----------------------------------------------------------------------------
By/S/ FRANK O'BRYAN
----------------------------------------------------------------------------
Frank O'Bryan, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ ROSLYN B. PAYNE
----------------------------------------------------------------------------
Roslyn B. Payne, Director
Date March 28, 1996
----------------------------------------------------------------------------
By/S/ VIRGINIA UEBERROTH
----------------------------------------------------------------------------
Virginia Ueberroth, Director
Date March 28, 1996
----------------------------------------------------------------------------
58
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
(3) (a) Restated Articles of Incorporation of The First S
American Financial Corporation dated November 8,
1989, incorporated by reference herein from Exhibit
3.1 of Amendment No. 3, dated October 16, 1992, to
Registration Statement on Form S-2
(3) (b) Certificate of Amendment of Restated Articles of S
Incorporation of The First American Financial
Corporation dated September 21, 1992, incorporated by
reference herein from Exhibit 3.2 of Amendment No. 3,
dated October 16, 1992, to Registration Statement on
Form S-2
(3) (c) Bylaws, as amended S
(4) (a) Amendment and Restatement dated as of April 28, 1993, S
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Amendment No.
1, dated July 26, 1993, to Quarterly Report on Form
10-Q for the quarter ended March 31, 1993
(4) (b) Amendment No. 1 dated as of March 31, 1994, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1994
(4) (c) Amendment No. 2 dated as of November 22, 1994, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Current Report on Form 8-K dated
December 14, 1994
(4) (d) Amendment No. 3 dated as of March 31, 1995, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992,
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
March 31, 1995.
(4) (e) Amendment No. 4 dated as of June 1, 1995, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992
incorporated by reference herein from Exhibit (4) of
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1995.
(4) (f) Amendment No. 5 dated as of February 16, 1996, to S
Amendment and Restatement dated as of April 28, 1993,
of Credit Agreement dated as of April 21, 1992.
*(10) (a) Description of Stock Bonus Plan, as amended, S
incorporated by reference herein from Exhibit 10(a)
of Annual Report on Form 10-K for the fiscal year
ended December 31, 1992
*(10) (b) Executive Supplemental Benefit Plan dated April 10, S
1986, and Amendment No. 1 thereto dated October 1,
1986, incorporated by reference herein from Exhibit
(10) (b) of Annual Report on Form 10-K for the fiscal
year ended December 31, 1988
*(10) (c) Amendment No. 2, dated March 22, 1990, to Executive S
Supplemental Benefit Plan, incorporated by reference
herein from Exhibit (10)(c) of Annual Report on Form
10-K for the fiscal year ended December 31, 1989
*(10) (d) Management Supplemental Benefit Plan dated July 20, S
1988, incorporated by reference herein from Exhibit
(10) of Quarterly Report on Form 10-Q for the quarter
ended June 30, 1992
*(10) (e) Pension Restoration Plan (effective as of January 1, S
1994)
(10) (f) Pledge Agreement dated as of April 27, 1992, S
incorporated by reference herein from Exhibit (2) of
Current Report on Form 8-K dated May 8, 1992
(21) Subsidiaries of the registrant S
(27) Financial Data Schedule S