<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________________
Commission file number 0-3658
------
THE FIRST AMERICAN FINANCIAL CORPORATION
-------------------------------------------
(Exact name of registrant as specified in its charter)
Incorporated in California 95-1068610
- --------------------------------- ------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
114 East Fifth Street, Santa Ana, California 92701-4699
- -------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(714) 558-3211
----------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the 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
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports to be filed by Section 12,13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a
court.
Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
$1 par value - 11,452,283 as of May 6, 1996
<PAGE>
INFORMATION INCLUDED IN REPORT
------------------------------
Part I: Financial Information
Item 1. Financial Statements
A. Condensed Consolidated Statements of Income
B. Condensed Consolidated Balance Sheets
C. Condensed Consolidated Statements of Cash Flows
D. Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II: Other Information
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Items 1-3, and 5 have been omitted because they are not applicable with
respect to the current reporting period.
SIGNATURES
Pursuant to the requirements 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)
/s/ Thomas A. Klemens
---------------------
Thomas A. Klemens
Executive Vice President
Chief Financial Officer
(Principal Financial Officer and Duly
Authorized to Sign on Behalf of
Registrant)
Date: May 9, 1996
1
<PAGE>
Part I: Financial Information
---------------------
Item 1. Financial Statements
--------------------
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Income
-------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
---------------------------
1996 1995
------------ -------------
<S> <C> <C>
REVENUES
Operating revenues $340,879,000 $256,288,000
Investment and other income 6,497,000 4,866,000
------------ -------------
347,376,000 261,154,000
------------ -------------
EXPENSES
Salaries and other personnel costs 120,240,000 100,050,000
Premiums retained by agents 109,872,000 93,395,000
Other operating expenses 73,464,000 59,287,000
Provision for title losses and other claims 18,975,000 21,306,000
Depreciation and amortization 4,449,000 4,211,000
Interest 1,229,000 1,613,000
Minority interests 620,000 (20,000)
------------ -------------
328,849,000 279,842,000
------------ -------------
Income before premium and income taxes 18,527,000 (18,688,000)
Premium taxes 3,545,000 2,821,000
------------ -------------
Income (loss) before income taxes 14,982,000 (21,509,000)
Income taxes 6,400,000 (8,800,000)
------------ -------------
Net income (loss) $ 8,582,000 $(12,709,000)
============ =============
Net income (loss) per share $ .75 $ (1.11)
============ =============
Cash dividends per share $ .15 $ .15
============ =============
WEIGHTED AVERAGE NUMBER OF SHAREs 11,428,000 11,401,000
============ =============
</TABLE>
2
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Balance Sheets
-------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
------------------ ------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $129,059,000 $145,902,000
------------------ ------------------
Accounts and accrued income receivable, net 80,006,000 75,069,000
------------------ ------------------
Investments:
Deposits with savings and loan associations and banks 20,909,000 18,637,000
Debt securities 128,534,000 128,875,000
Equity securities 21,910,000 21,445,000
Other long-term investments 25,876,000 25,230,000
------------------ ------------------
197,229,000 194,187,000
------------------ ------------------
Loans receivable 48,767,000 46,134,000
------------------ ------------------
Property and equipment, at cost 197,234,000 192,496,000
Less- accumulated depreciation (75,665,000) (73,672,000)
------------------ ------------------
121,569,000 118,824,000
------------------ ------------------
Title plants and other indexes 84,537,000 82,454,000
------------------ ------------------
Assets acquired in connection with claim settlements
(net of valuation reserves of $12,160,000 and $11,246,000) 24,925,000 25,592,000
------------------ ------------------
Deferred income taxes 36,879,000 39,994,000
------------------ ------------------
Goodwill and other intangibles, net 71,738,000 71,825,000
------------------ ------------------
Deferred policy acquisition costs 23,650,000 24,342,000
------------------ ------------------
Other assets 53,261,000 49,455,000
------------------ ------------------
$871,620,000 $873,778,000
================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Demand deposits $ 44,826,000 $ 43,418,000
------------------ ------------------
Accounts payable and accrued liabilities 79,773,000 80,938,000
------------------ ------------------
Deferred revenue 101,554,000 104,315,000
------------------ ------------------
Reserve for known and incurred but not reported claims 236,563,000 238,161,000
------------------ ------------------
Income taxes payable 2,330,000 2,812,000
------------------ ------------------
Notes and contracts payable 75,303,000 77,206,000
------------------ ------------------
Minority interests in consolidated subsidiaries 21,532,000 24,161,000
------------------ ------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $1 par value
Authorized - 500,000 shares; outstanding - none
Common stock, $1 par value
Authorized - 24,000,000 shares
Outstanding - 11,459,000 and 11,411,000 shares 11,459,000 11,411,000
Additional paid-in capital 45,465,000 44,270,000
Retained earnings 249,956,000 243,093,000
Net unrealized gain on securities 2,859,000 3,993,000
------------------ ------------------
309,739,000 302,767,000
------------------ ------------------
$871,620,000 $873,778,000
================== ==================
</TABLE>
3
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Condensed Consolidated Statements of Cash Flows
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
For the Three Months Ended
March 31
1996 1995
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 8,582,000 $ (12,709,000)
Adjustments to reconcile net income (loss) to cash provided by
(used for) operating activities-
Provision for title losses and other claims 18,975,000 21,306,000
Depreciation and amortization 4,449,000 4,211,000
Minority interests in net income (loss) 620,000 (20,000)
Other, net (784,000) 1,307,000
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (19,859,000) (13,822,000)
Net change in income tax accounts 2,991,000 (3,765,000)
Increase in accounts and accrued income receivable (4,937,000) (3,795,000)
Decrease in accounts payable and accrued liabilities (2,760,000) (7,365,000)
Decrease in deferred revenue (2,761,000) (4,304,000)
Other, net (2,057,000) (2,658,000)
------------- -------------
Cash provided by (used for) operating activities 2,459,000 (21,614,000)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash effect of company acquisitions (1,548,000) (29,828,000)
Net increase in deposits with banks (2,272,000) (362,000)
Net increase in loans receivable (2,633,000) (2,099,000)
Purchases of debt and equity securities (18,207,000) (3,533,000)
Proceeds from sales of debt and equity securities 15,326,000 10,327,000
Proceeds from maturities of debt securities 1,013,000 6,366,000
Net decrease in other investments 257,000 1,220,000
Capital expenditures (6,940,000) (4,751,000)
Proceeds from sale of property and equipment 638,000 37,000
------------- -------------
Cash used for investing activities (14,366,000) (22,623,000)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in demand deposits 1,408,000 (210,000)
Repayment of debt (4,597,000) (4,436,000)
Purchase of Company shares (28,000) (690,000)
Cash dividends (1,719,000) (1,713,000)
------------- -------------
Cash used for financing activities (4,936,000) (7,049,000)
------------- -------------
Net decrease in cash and cash equivalents (16,843,000) (51,286,000)
Cash and cash equivalents- Beginning of year 145,902,000 154,234,000
- End of first quarter ------------- -------------
$129,059,000 $ 102,948,000
============= =============
SUPPLEMENTAL INFORMATION:
Cash paid during the first quarter for:
Interest $ 1,209,000 $ 1,898,000
Premium taxes $ 3,529,000 $ 3,465,000
Income taxes $ 2,937,000 $ 1,122,000
Noncash investing and financing activities:
Shares issued for stock bonus plan $ 1,271,000 $ 1,115,000
Liabilities incurred in connection with company acquisitions $ 4,393,000 $ 11,276,000
Net unrealized (loss) gain on securities $( 1,134,000) $ 3,444,000
</TABLE>
4
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
------------------------
Notes to Condensed Consolidated Financial Statements
----------------------------------------------------
(Unaudited)
Note 1 - Basis of Condensed Consolidated Financial Statements
- -------------------------------------------------------------
The condensed consolidated financial information included in this report has
been prepared in conformity with the accounting principles and practices
reflected on the consolidated financial statements included in the annual report
filed with the Commission for the preceding calendar year. All adjustments are
of a normal recurring nature and are, in the opinion of management, necessary to
a fair statement of the consolidated results for the interim periods. Any
statements in this report looking forward in time involve risks and
uncertainties, including but not limited to the following risks: the effect of
interest rate fluctuations; changes in the performance of the real estate
markets; the effect of change economic conditions; and the demand for and the
acceptance of our products. This report should be read in conjunction with the
Company's 1995 Annual Report to Stockholders and the Company's Annual Report on
Form 10-K for the year ended December 31, 1995.
5
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
RESULTS OF OPERATIONS
Three months ended March 31:
OVERVIEW
Beginning in the second quarter 1994, increased mortgage interest rates caused a
downward trend in new order counts and closings as refinance transactions came
to a virtual halt. Due to seasonal considerations, this condition intensified
at yearend 1994 resulting in a low inventory of new orders going into the first
quarter 1995. As a result, operating revenues for the first quarter 1995 were
adversely affected and the Company reported a first quarter 1995 loss of $12.7
million, or $1.11 per share. Mortgage interest rates peaked in January 1995 and
decreased throughout the remainder of the year and into 1996, helped by an
easing of monetary policy by the Federal Reserve Board. This, together with an
improved real estate economy (including the beginnings of a modest recovery in
California), contributed to an increase in closed transactions and operating
revenues for the first quarter 1996 and resulted in net income of $8.6 million,
or $0.75 per share.
OPERATING REVENUES
Set forth below is a summary of operating revenues for each of the Company's
segments.
<TABLE>
<CAPTION>
Three Months Ended
March 31
----------------------------------------
($000)
1996 % 1995 %
--------- ----- -------- -----
<S> <C> <C> <C> <C>
Title Insurance:
Direct Operations $137,490 40 $104,291 41
Agency Operations 136,364 40 115,026 45
--------- ----- -------- -----
$273,854 80 219,317 86
Real Estate Information 54,394 16 26,105 10
Home Warranty 8,739 3 7,389 3
Trust and Banking 3,892 1 3,477 1
--------- ----- -------- -----
Total $340,879 100 $256,288 100
========= ===== ======== =====
</TABLE>
TITLE INSURANCE. Operating revenues from direct operations increased 31.8% when
compared with the same quarter of the prior year. This increase was primarily
attributable to a 31.3% increase in the number of title orders closed by the
Company's direct operations. The Company's direct operations closed 177,600
title orders during the current quarter, as compared with 135,300 title orders
closed during the same period of the prior year. This increase was primarily
attributable to the factors mentioned above. Operating revenues from agency
operations increased 18.6% when compared with the same period of the prior year.
This increase was primarily due to the same factors affecting direct operations,
offset in part by the effects of the seasonal pattern of residential resale
activity, which is more pronounced in the agency concentrated midwest and
eastern sectors of the country, and by the inherent delay in reporting by
agents.
REAL ESTATE INFORMATION. Real estate operating revenues increased 108.4% when
compared with the same period of the prior year. This increase was primarily
due to the same factors affecting title insurance, as well as increases in
market penetration, primarily by the Company's flood determination and credit
reporting divisions.
HOME WARRANTY. Home warranty operating revenues increased 18.3% when compared
with the same period of the prior year. This increase was primarily attributable
to improvements in the residential resale markets in which this business segment
operates.
6
<PAGE>
INVESTMENT AND OTHER INCOME
Investment and other income increased $1.6 million, or 33.5%, when compared with
the same period of the prior year. This increase was primarily attributable to
an increase in equity in earnings of affiliates and gains on the sales of
certain investments, partially offset by a 12.3% reduction in the average
investment portfolio balance.
TOTAL OPERATING EXPENSES
TITLE INSURANCE. Salaries and other personnel costs were $95.1 million, an
increase of 16.3% when compared with the same period of the prior year. This
increase was primarily due to the costs incurred processing the high number of
title orders opened with the Company's direct operations, offset in part by
personnel efficiencies. The Company's direct operations opened 272,500 orders
during the first quarter 1996, an increase of 43.0% when compared with the
190,600 orders opened during the same period of the prior year.
Agents retained $109.9 million, or 80.6%, and $93.4 million, or 81.2%, of the
title premiums generated by agency operations for the first quarter 1996 and
1995, respectively. The percentage of title premiums retained by agents varies
from region to region; accordingly, the geographical mix of revenues from agency
operations accounts for the variation in the percentage amount of title premiums
retained by agents.
Other operating expenses were $49.8 million, an increase of 15.8% when compared
with the same period of the prior year. This increase was primarily
attributable to the incremental costs associated with processing the high number
of title orders opened during the current quarter, offset in part by successful
cost containment programs.
The provision for title losses as a percentage of title insurance operating
revenues was 4.9% for the current quarter and 7.6% for the same period of the
prior year. The decrease in the current quarter was primarily due to an ongoing
improvement in the Company's loss experience.
REAL ESTATE INFORMATION. Real estate information personnel and other operating
expenses were $38.3 million, an increase of 47.4% when compared with the same
period of the prior year. This increase was primarily due to costs incurred
servicing the increase in business volume as well as costs incurred expanding
the flood determination and credit reporting divisions, partially offset by cost
containment programs.
HOME WARRANTY. Home warranty personnel and other operating expenses were $2.7
million, an increase of 8.0% when compared with the same period of the prior
year. This increase was primarily attributable to costs incurred servicing the
increased business volume, offset in part by cost containment programs. The
provision for home warranty losses expressed as a percentage of home warranty
operating revenues was 51.7% and 54.2% for the first quarter 1996 and 1995,
respectively. The decrease in loss ratio was primarily attributable to a
decrease in the average number of claims per contract.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (continued)
- ----------------------
PRETAX PROFITS (LOSSES)
Set forth below is a summary of pretax profits (losses) for each of the
Company's segments.
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------------------------
($000)
1996 % 1995 %
---------- ----- --------- -----
<S> <C> <C> <C> <C>
Title Insurance $ 8,159 33 $(14,561) 108
Real Estate Information 13,782 55 (1,380) 10
Home Warranty 2,288 9 1,528 (11)
Trust and Banking 779 3 932 (7)
---------- ----- --------- -----
Total before corporate 25,008 100 (13,481) 100
===== =====
Corporate (6,481) (5,207)
---------- ---------
Total $18,527 $(18,688)
========== =========
</TABLE>
In general, the title insurance business is a lower profit margin business when
compared to the Company's other segments. The lower profit margins reflect the
high cost of producing title evidence whereas the corresponding revenues are
subject to regulatory and competitive pricing restraints. Due to this
relatively high proportion of fixed costs, title insurance profit margins
generally improve as closed order volumes increase. In addition, title
insurance profit margins are affected by the composition (residential or
commercial) and type (resale, refinancing or new construction) of real estate
activity. Profit margins from resale and new construction transactions are
generally higher than from refinancing transactions because in many states there
are premium discounts on, and cancellation rates are higher for, refinance
transactions. 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.
PREMIUM TAXES
Premium taxes were $3.5 million, an increase of 25.7% when compared with the
same period of the prior year. This increase corresponds to the relative
increase in title insurance premium revenues. Premium taxes as a percentage of
title insurance operating revenues remained constant at 1.3%.
INCOME TAXES
The effective income tax rate was 42.7% for the current quarter and 40.9% for
the first quarter 1995. The increase in effective rate was primarily
attributable to an increase in state income taxes resulting from the Company's
non-insurance subsidiaries' increase in contribution to pretax profits.
NET INCOME
Net income for the current quarter was $8.6 million, or $0.75 per share,
compared with a net loss for the first quarter 1995 of $12.7 million, or $1.11
per share.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations (continued)
- ----------------------
LIQUIDITY AND CAPITAL RESOURCES
Total cash and cash equivalents decreased $16.8 million and $51.3 million for
the three months ended March 31, 1996 and 1995, respectively. The decrease for
the current period was primarily attributable to capital expenditures and the
repayment of debt. The decrease in the prior year period was primarily due to
cash used for operating activities and the net cash effect of company
acquisitions.
Notes and contracts payable as a percentage of total capitalization decreased to
18.5% at March 31, 1996, from 19.1% at December 31, 1995. The decrease was
primarily due to the net income contribution to equity as well as the reduction
of debt.
Management believes that all of its anticipated cash requirements for the
immediate future will be met from internally generated funds.
9
<PAGE>
Part II: Other Information
-----------------
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) The annual meeting of shareholders (the "Meeting") of The First
American Financial Corporation (the "Company") was held on
Wednesday, April 24, 1996.
(b) The names of the persons who were nominated to serve as directors
of the Company for the ensuing year are listed below, together with
a tabulation of the results of the voting with respect to each
nominee. Each of the persons named was nominated by management of
the Company and all such nominees were elected.
Name of Nominee Votes For Votes Withheld
--------------- --------- ---------------
George L. Argyros 8,388,070 309,651
J. David Chatham 8,686,804 10,917
William G. Davis 8,364,345 333,376
James L. Doti 8,682,792 14,929
Lewis W. Douglas, Jr. 8,369,728 327,993
Paul B. Fay, Jr. 8,666,893 30,828
D.P. Kennedy 8,667,975 29,746
Parker S. Kennedy 8,686,188 11,533
Robert B. McLain 8,667,674 30,047
Anthony R. Moiso 8,388,165 309,556
R. J. Munzer 8,368,371 329,350
Frank E. O'Bryan 8,674,706 23,015
Roslyn B. Payne 8,682,955 14,766
Virginia M. Ueberroth 8,685,204 12,517
(c) At the Meeting, the holders of a majority of the Company's Common
shares voted "FOR" the proposal to approve the Company's 1996 Stock
Option Plan. The results of the voting of this proposal are set
forth below.
Votes For Votes Against Votes Withheld Broker Nonvotes
--------- ------------- -------------- ---------------
5,685,955 1,605,748 158,070 1,247,948
No other matters were voted upon at the Meeting or during the
quarter for which this report is filed.
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits
(10) The First American Financial Corporation 1996 Stock Option
Plan, incorporated by reference herein from definitive Proxy
Statement dated March 25, 1996.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K dated April 23, 1996 (the
"Form 8-K"), subsequent to the quarterly period covered by this
report. The Form 8-K contains Item 5, describing the Company's
acquisition of certain assets and liabilities of Residential
Information Services Limited Partnership.
10
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
(10) The First American Financial Corporation
1996 Stock Option Plan, incorporated by
reference herein from definitive Proxy
Statement dated March 25, 1996
(27) Financial Data Schedule
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 128,534,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,910,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 197,229,000
<CASH> 129,059,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 23,650,000
<TOTAL-ASSETS> 871,620,000
<POLICY-LOSSES> 236,563,000
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 75,303,000
11,459,000
0
<COMMON> 0
<OTHER-SE> 298,280,000
<TOTAL-LIABILITY-AND-EQUITY> 871,620,000
340,879,000
<INVESTMENT-INCOME> 5,894,000
<INVESTMENT-GAINS> 603,000
<OTHER-INCOME> 0
<BENEFITS> 18,975,000
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 14,982,000
<INCOME-TAX> 6,400,000
<INCOME-CONTINUING> 8,582,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,582,000
<EPS-PRIMARY> .75
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
