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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
114 East Fifth Street, Santa Ana, California 92701-4642
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (714) 558-3211
Securities registered pursuant to Section 12(b) of the Act:
Common New York Stock Exchange
Rights to Purchase Series A Junior
Participating Preferred New York Stock Exchange
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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. 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 18, 1998, the aggregate market value of voting stock held by non-
affiliates was $887,616,253.
On March 18, 1998, there were 17,850,189 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 52 pages.
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PART I
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Item 1. Business.
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The Company
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The First American Financial Corporation (the "Company") was organized in
1894 as Orange County Title Company, succeeding to the business of two title
abstract companies founded in 1889 and operating in Orange County, California.
In 1924, the Company commenced issuing title insurance policies. In 1986, the
Company began a diversification program by acquiring and developing financial
service businesses closely related to the real estate transfer and closing
process. The Company is a California corporation and has its executive offices
at 114 East Fifth Street, Santa Ana, California 92701-4642. The Company's
telephone number is (714) 558-3211. Unless the context otherwise indicates, the
"Company," as used herein, refers to The First American Financial Corporation
and its subsidiaries.
General
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The Company, through its subsidiaries, is engaged in the business of
providing real estate-related financial and information services to real
property buyers and mortgage lenders. These services include title insurance,
tax monitoring, credit reporting, property data services, flood certification,
field inspection services, appraisal services, mortgage loan servicing systems,
mortgage document preparation and home warranty services. The Company also
provides investment, trust and thrift services. Financial information regarding
each of the Company's primary business segments is included in "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Item 8. Financial Statements and Supplementary Data" of Part
II of this report. Although industry-wide data for 1997 are not currently
available, the Company believes that its wholly owned subsidiary, First American
Title Insurance Company ("First American"), was the largest title insurer in the
United States, based on premiums written, and its wholly owned subsidiary, First
American Real Estate Information Services, Inc., was the nation's largest
provider of flood zone determinations, based on the number of flood zone
determination reports issued, the nation's largest mortgage credit reporting
service, based on the number of credit reports issued, and the nation's second
largest provider of tax monitoring services, based on the number of loans under
service. The Company also believes that its majority owned subsidiary, First
American Home Buyers Protection Corporation, was the second largest provider of
home warranties in the United States, based on the number of home protection
contracts under service. Substantially all of the Company's title insurance,
tax monitoring, credit reporting, flood zone determination and property
information business results from resales and refinancings of real estate,
including residential and commercial properties, and from the construction and
sale of new properties. The Company's home warranty business results from
residential resales and does not benefit from refinancings or commercial
transactions. Resales and refinancings of residential properties constitute the
major source of the Company's revenues. Real estate activity is cyclical in
nature and is affected greatly by the cost and availability of long term
mortgage funds. Real estate activity and, in turn, the Company's revenue base,
can be adversely affected during periods of high interest rates and/or limited
money supply. However, this adverse effect is mitigated in part by the
continuing diversification of the Company's operations into areas outside of its
traditional title insurance business.
Overview of Title Insurance Industry
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Title to, and the priority of interests in, real estate are determined in
accordance with applicable laws. In most real estate transactions, mortgage
lenders and purchasers of real estate want to be protected from loss or damage
in the event that title is not as represented. In most parts of the United
States, title insurance has become accepted as the most efficient means of
providing such protection.
Title Policies. Title insurance policies insure the interests of owners
and their lenders in the title to real property against loss by reason of
adverse claims to ownership of, or to defects, liens, encumbrances or other
matters affecting, such title which exist at the time a title insurance policy
is issued and which were not excluded from the coverage of a title insurance
policy. Title insurance policies are issued on the basis of a title report,
which is prepared after a search of the public records, maps, documents and
prior title policies to ascertain the existence of easements, restrictions,
rights of way, conditions, encumbrances or other matters affecting the title to,
or use of, real property. In certain instances, a visual inspection of the
property is also made. To facilitate the preparation of title reports, copies of
public records, maps, documents and prior title policies may be compiled and
indexed to specific properties in an area. This compilation is known as a "title
plant."
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The beneficiaries of title insurance policies are generally real estate
buyers and mortgage lenders. A title insurance policy indemnifies the named
insured and certain successors in interest against title defects, liens and
encumbrances existing as of the date of the policy and not specifically excepted
from its provisions. The policy typically provides coverage for the real
property mortgage lender in the amount of its outstanding mortgage loan balance
and for the buyer in the amount of the purchase price of the property, but in
some cases might insure for a greater amount where the buyer anticipates
constructing improvements on the property. Coverage under a title insurance
policy issued to a real property mortgage lender generally terminates upon the
sale of the insured property unless the owner carries back a mortgage or makes
certain warranties as to the title.
Before issuing title policies, title insurers seek to limit their risk of
loss by accurately performing title searches and examinations. The major
expenses of a title company relate to such searches and examinations, the
preparation of preliminary reports or commitments and the maintenance of title
plants, and not from claim losses as in the case of property and casualty
insurers.
The Closing Process. Title insurance is essential to the real estate
closing process in most transactions involving real property mortgage lenders.
In a typical residential real estate sale transaction, title insurance is
generally ordered on behalf of an insured by a real estate broker, lawyer,
developer, lender or closer involved in the transaction. Once the order has
been placed, a title insurance company or an agent conducts a title search to
determine the current status of the title to the property. When the search is
complete, the title company or agent prepares, issues and circulates a
commitment or preliminary title report ("commitment") to the parties to the
transaction. The commitment summarizes the current status of the title to the
property, identifies the conditions, exceptions and/or limitations that the
title insurer intends to attach to the policy and identifies items appearing on
the title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is
often performed by a lawyer, an escrow company or a title insurance company or
agent (such person or entity, the "closer"). Once documentation has been
prepared and signed, and mortgage lender payoff demands are in hand, the
transaction is "closed." The closer records the appropriate title documents and
arranges the transfer of funds to pay off prior loans and extinguish the liens
securing such loans. Title policies are then issued insuring the priority of
the mortgage of the real property mortgage lender in the amount of its mortgage
loan and the buyer in the amount of the purchase price. The time lag between
the opening of the title order and the issuance of the title policy is usually
between 30 and 90 days. The seller and the buyer bear the risk during this time
lag. Any matter affecting title which is discovered during this period would
have to be dealt with to the title insurers' satisfaction or the insurer would
except the matter from the coverage afforded by the title policy. Before a
closing takes place, however, the closer would request that the title insurer
provide an update to the commitment to discover any adverse matters affecting
title and, if any are found, would work with the seller to eliminate them so
that the title insurer would issue the title policy subject only to those
exceptions to coverage which are acceptable to the buyer and the buyer's lender.
Issuing the Policy: Direct vs. Agency. A title policy can be issued
directly by a title insurer or indirectly on behalf of a title insurer through
agents which are not themselves licensed as insurers. Where the policy is
issued by a title insurer, the search is performed by or at the direction of the
title insurer, and the premium is collected and retained by the title insurer.
Where the policy is issued by an agent, the agent performs the search, examines
the title, collects the premium and retains a portion of the premium. The
remainder of the premium is remitted to the title insurer as compensation for
bearing the risk of loss in the event a claim is made under the policy. The
percentage of the premium retained by an agent varies from region to region. A
title insurer is obligated to pay title claims in accordance with the terms of
its policies, regardless of whether it issues its policy directly or indirectly
through an agent.
Premiums. The premium for title insurance is due and earned in full when
the real estate transaction is closed. Premiums are generally calculated with
reference to the policy amount. The premium charged by a title insurer or an
agent is subject to regulation in most areas. Such regulations vary from state
to state.
The Company's Title Insurance Operations
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Overview. The Company, through First American Title Insurance Company and
its subsidiaries, transacts the business of title insurance through a network of
more than 300 branch offices and over 4,000 independent agents. Through its
branch office and agent network, the Company issues policies in all states
(except Iowa), the District of
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Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the Bahama Islands,
Canada, Mexico, Bermuda, the United Kingdom and Australia. In Iowa, the Company
provides abstracts of title only, because title insurance is not permitted.
Through acquisitions and start-ups during the mid-1980s, the Company has grown
from a large regional company to a nationwide company, becoming less dependent
on operating revenues from any one state or region.
Based on industry statistics showing premiums written in the major areas in
which the Company operates, in 1996, the Company had the largest or second
largest share of the title insurance market in 30 states and in the District of
Columbia. In addition, the Company's national market share grew from 20.1% in
1995 to 20.4% in 1996. Industry statistics for 1997 are not currently
available.
The Company plans to continue increasing its share of the title insurance
market through strategic acquisitions and further development of its existing
branch office and agency operations. The Company also will continue to focus on
expanding its share of the higher margin title insurance business conducted on
behalf of commercial clients. The Company believes its national commercial
market share has grown through programs directed at major developers, lenders
and law firms.
Sales and Marketing. The Company markets its title insurance services to a
broad range of customers. The Company believes that its primary source of
business is from referrals from persons in the real estate community, such as
independent escrow companies, real estate brokers, developers, mortgage brokers,
mortgage bankers, financial institutions and attorneys. In addition to the
referral market, the Company markets its title insurance services directly to
large corporate customers and certain mortgage lenders. As title agents
contribute a large portion of the Company's revenues, the Company also markets
its title insurance services to independent agents. The Company's marketing
efforts emphasize the quality and timeliness of its services and its national
presence.
While virtually all personnel in the Company's title insurance business
assist in marketing efforts, the Company maintains a sales force of
approximately 1,000 persons dedicated solely to marketing. This sales force is
located throughout the Company's branch office network. The Company provides
its sales personnel with training in selling techniques, and each branch manager
is responsible for hiring the sales staff and ensuring that sales personnel
under his or her supervision are properly trained. In addition to this sales
force, the Company has approximately 20 sales personnel in its national accounts
department. One of the responsibilities of the national accounts department
sales personnel is the coordination of marketing efforts directed at large real
estate lenders and companies developing, selling, buying or brokering properties
on a multistate basis. The Company also supplements the efforts of its sales
force through general advertising in various trade and professional journals.
The Company's increased commercial sales effort during the past decade has
enabled the Company to expand its commercial business base. Because commercial
transactions involve higher coverage amounts and yield higher premiums,
commercial title insurance business generates greater profit margins than does
residential title insurance business. Accordingly, the Company plans to
continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small percentage
of the Company's revenues, the Company believes that the acceptance of title
insurance in foreign markets has increased in recent years. Accordingly, the
Company plans to continue its international sales efforts, particularly in
Canada, the United Kingdom and Australia.
Underwriting. Before a title insurance policy is issued, a number of
underwriting decisions are made. For example, matters of record revealed during
the title search may require a determination as to whether an exception should
be taken in the policy. The Company believes that it is important for the
underwriting function to operate efficiently and effectively at all decision
making levels so that transactions may proceed in a timely manner. To perform
this function, the Company has underwriters at the branch level, the regional
level and the national level.
Agency Operations. The relationship between the Company and each agent is
governed by an agency agreement which states the conditions under which the
agent is authorized to issue title insurance policies on behalf of the Company.
The agency agreement also prescribes the circumstances under which the agent may
be liable to the Company if a policy loss is attributable to error of the agent.
Such agency agreements typically have a term of one to five years and are
terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance industry
during the late 1980s, the Company instituted measures to strengthen its agent
selection and audit programs. In determining whether to engage an independent
agent, the Company investigates the agent's experience, background, financial
condition and past performance. The Company maintains loss experience records
for each agent and conducts periodic audits of its
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agents. The Company has also increased the number of agent representatives and
agent auditors that it employs. Agent representatives periodically visit agents
and examine their books and records. In addition to periodic audits, a full
agent audit will be triggered if certain "warning signs" are evident. Warning
signs that can trigger an audit include the failure to implement Company-
required accounting controls, shortages of escrow funds and failure to remit
underwriting fees on a timely basis. Since strengthening its agent selection and
audit programs, the Company's average annual losses resulting from agent
defalcations have decreased by approximately 60%.
Title Plants. The Company's network of title plants constitutes one of its
principal assets. A title search is conducted by searching the public records
or utilizing a title plant. While public records are indexed by reference to
the names of the parties to a given recorded document, most title plants arrange
their records on a geographic basis. Because of this difference, records of a
title plant are generally easier to search. Most title plants also index prior
policies, adding to searching efficiency. Many title plants are computerized.
Certain offices of the Company utilize jointly owned plants or utilize a plant
under a joint user agreement with other title companies. The Company believes
its title plants, whether wholly or partially owned or utilized under a joint
user agreement, are among the best in the industry.
With the formation of a limited liability corporation ("LLC") with Experian
Group on January 1, 1998, the Company enhanced its investment in title plants.
Experian Group contributed to the LLC its real estate information division,
which the Company believes is the nation's leading operator of title plants,
with the second largest repository of imaged title documents.
The Company's title plants are carried on its balance sheet at original
cost, which includes the cost of producing or acquiring interests in title
plants or the appraised value of subsidiaries' title plants at dates of
acquisition for companies accounted for as purchases. Thereafter, the cost of
daily maintenance of these plants is charged to expense as incurred. A properly
maintained title plant has an indefinite life and does not diminish in value
with the passage of time. Therefore, in accordance with generally accepted
accounting principles, no provision is made for depreciation of these plants.
Since each document must be reviewed and indexed into the title plant, such
maintenance activities constitute a significant item of expense. The Company is
able to offset title plant maintenance costs at its plants through joint
ownership and access agreements with other title insurers and title agents.
Reserves for Claims and Losses. The Company provides for title insurance
losses based upon its historical experience by a charge to expense when the
related premium revenue is recognized. The resulting reserve for known claims
and incurred but not reported claims reflects management's best estimate of the
total costs required to settle all claims reported to the Company and claims
incurred but not reported, and is considered by the Company to be adequate for
such purpose.
In settling claims, the Company occasionally purchases and ultimately sells
the interest of the insured in the real property or the interest of the claimant
adverse to the insured. The assets so acquired are carried at the lower of cost
or fair value, less costs to sell. Notes, real estate and other assets
purchased or otherwise acquired in settlement of claims, net of valuation
reserves, totaled $12.2 million, $5.0 million and $3.9 million, respectively, as
of December 31, 1997.
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) Land America Title Insurance Company (formerly
Commonwealth Land Title Insurance
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Company and Lawyers Title Insurance Company), Stewart Title Guaranty Company,
Old Republic Title Insurance Group and Fidelity National Title Insurance
Company. In addition to these nationwide competitors, numerous agency
operations throughout the country provide aggressive competition on the local
level.
The Company believes that competition for title insurance business is based
primarily on the quality and timeliness of service, because parties to real
estate transactions are usually concerned with time schedules and costs
associated with delays in closing transactions. In those states where prices
are not established by regulatory authorities, the price of title insurance
policies is also an important competitive factor. The Company believes that it
provides quality service in a timely manner at competitive prices.
The Company's Related Businesses
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As an adjunct to its title insurance business, in 1986 the Company embarked
on a diversification program by acquiring and developing financial service
businesses closely related to the real estate transfer and closing process. To
date, these businesses include tax monitoring, credit reporting, property data
services, flood certification, field inspection services, appraisal services,
mortgage loan servicing systems, mortgage document preparation and home warranty
services. The development of these businesses has allowed the Company to become
the nation's leading company offering a full range of services to real property
buyers and mortgage lenders. The Company also provides investment, trust and
thrift services.
The Real Estate Information Service Business. The real estate information
service business encompasses tax monitoring, mortgage credit reporting, flood
certification, mortgage loan servicing systems and other property information
services.
The tax monitoring service, established by the Company in 1987, advises
real property mortgage lenders of the status of property tax payments due on
real estate securing their loans. With the acquisition of TRTS Data Services,
Inc., (now named First American Real Estate Information Services, Inc.) in
November 1991, the Company believes that it is the second largest provider of
tax monitoring services in the United States.
Under a typical contract, a tax service provider monitors, on behalf of a
mortgage lender, the real estate taxes owing on properties securing such
lender's mortgage loans for the life of such loans. In general, providers of
tax monitoring services, such as the Company's tax service, indemnify mortgage
lenders against losses resulting from a failure to monitor delinquent taxes.
Where a mortgage lender requires that tax payments be impounded on behalf of
borrowers, providers of tax monitoring services, such as the Company's tax
service, may be required to monitor and oversee the transfer of these monies to
the taxing authorities and provide confirmation to lenders that such taxes have
been paid.
The Company's tax service business markets its product through a nationwide
sales staff which calls on servicers and originators of mortgage loans. The
Company's primary source of tax service business is from large multistate
mortgage lenders. The Company's only major nationwide competitor in the tax
service business is Transamerica Real Estate Tax Service. Because of its broad
geographic coverage and the large number of mortgage loans not being serviced by
a third party tax service provider, the Company believes that it is well
positioned to increase its market share in the tax service market.
The fee charged to service each mortgage loan varies from region to region,
but generally falls within the $44 to $95 price range and is paid in full at the
time the contract is executed. The Company recognizes revenues from tax
service contracts over the estimated duration of the contracts as the related
servicing costs are estimated to occur. However, income taxes are paid on the
entire fee in the year the fee is received. Historically, the Company has
maintained minimal reserves for losses relating to its tax monitoring service
because its losses have been negligible. Given the uncertainties related to the
Company's ability, as well as the ability of its significant vendors, suppliers
and customers, to become Year 2000 compliant, losses relating to the Company's
tax monitoring service may increase.
The Company's credit reporting service provides credit information reports
for mortgage lenders throughout the United States. These reports are derived
from two or more credit bureau sources and are summarized and prepared in a
standard form acceptable to mortgage loan originators and secondary mortgage
purchasers. The credit reporting service also provides prequalifying reports,
merged credit data, resident screening services, business reports, credit
scoring tools and personal credit reports. It also has recently branched into
the consumer lending and risk scoring areas, providing credit reporting and
information management services to automobile dealers, consumers and home equity
lenders nationwide. The Company's credit reporting service has grown primarily
through acquisitions. In 1994, the
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Company acquired all of the minority interests in its lower tier subsidiaries
Metropolitan Credit Reporting Services, Inc., and Metropolitan Property
Reporting Services, Inc. In 1994, the Company also acquired California Credit
Data, Inc., and Prime Credit Reports, Inc., and in 1995, the Company acquired
Credco, Inc. (now named First American Credco, Inc.). With the acquisition of
First American Credco, Inc., the Company believes that it is now the largest
mortgage credit reporting service in the United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now named
First American Flood Data Services, Inc.). This business furnishes to mortgage
lenders flood zone determination reports, which provide information on whether
or not property securing a loan is in a governmentally delineated special flood
hazard area. Federal legislation passed in 1994 requires that most mortgage
lenders obtain a determination of the current flood zone status at the time each
loan is originated and obtain updates during the life of the loan. First
American Flood Data Services, Inc., is the largest provider of flood zone
determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing
System (MLS), now known as Excelis, Inc. Excelis MLS is the only commercially
available real-time on-line servicing system that has been developed since 1990
to meet increasingly sophisticated market demands. The software employs rules-
based technology which enables the user to customize the system to fit its
individual servicing criteria and policies.
In December 1996, the Company acquired Ward Associates, now known as First
American Field Services. The company was combined with First American's
existing field services company to provide comprehensive inspection and property
preservation services to mortgage lenders nationwide. With the acquisition, the
Company believes that it is now the second largest field services company in the
United States.
In May 1997, the Company purchased all of the operations of SMS, other than
SMS' flood zone determination business. SMS is a leading provider of real
estate information services to the U.S. mortgage and title insurance industries.
The acquired businesses include SMS' credit division, which the Company believes
is the third largest provider of U.S. mortgage credit information; SMS' property
appraisal division, which the Company believes is the second largest provider of
U.S. appraisal services; SMS' title division, which provides title and closing
services throughout the United States, servicing primarily home equity mortgage
institutions; SMS' settlement services business, which provides title plant
systems and accounting services, as well as escrow closing software, to the
title industry; and a controlling interest in what is believed by the Company to
be the largest mortgage document preparation firm.
On January 1, 1998, the Company and its real estate information service
subsidiaries (other than Excelis, Inc.) (the "Real Estate Information
Subsidiaries") consummated a business transaction with Experian Group
("Experian"), pursuant to which First American Real Estate Solutions LLC
("FARES") was established. Under the transaction, the Real Estate Information
subsidiaries contributed substantially all of their assets and liabilities to
FARES in exchange for an 80% ownership interest and Experian transferred
substantially all of the assets and liabilities of its Real Estate Solutions
division ("RES") to FARES in exchange for a 20% ownership interest. RES is
believed to be the nation's foremost supplier of core real estate data,
providing, among other things, property valuation information, title
information, tax information and imaged title documents. As a result of this
transaction, the Company believes that FARES will become the nation's largest
and most diverse provider of information technology and decision support
solutions for the mortgage and real estate industries.
The Home Warranty Business. The Company's home warranty business commenced
operations in 1984, in part with the proceeds of a $1.5 million loan from the
Company which was, in 1986, converted to a majority equity interest. The
Company currently owns 79% of its home warranty business, which is operated as a
second tier subsidiary, with the balance owned by management of that subsidiary.
The Company's home warranty business issues one-year warranties which protect
homeowners against defects in household systems and appliances, such as
plumbing, water heaters and furnaces. The Company's home warranty subsidiary
currently charges approximately $245 to $295 for its basic home warranty
contract. Optional coverage is available for air conditioners, pools, spas,
washers, dryers and refrigerators for charges ranging from approximately $25 to
$125. For an additional charge, coverage is renewable annually at the option of
the homeowner upon approval by the home warranty subsidiary. Fees for the
warranties are paid at the closing of the home purchase and are recognized
monthly over a 12-month period. Home warranties are
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marketed through real estate brokers and agents. This business is conducted in
certain counties of Arizona, California, Nevada, Texas, Utah and Washington. In
early 1997, the home warranty subsidiary expanded operations to North and South
Carolina. The principal competitor of the Company's home warranty business is
American Home Shield, a subsidiary of Service Master L.P.
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, 1997,
the trust operation was administering fiduciary and custodial assets having a
market value in excess of $1.3 billion.
The Thrift Business. During 1988, the Company, through a majority owned
subsidiary, acquired an industrial loan corporation (the "Thrift") that accepts
thrift deposits and uses deposited funds to originate and purchase loans secured
by commercial properties in Southern California. As of December 31, 1997, the
Thrift had approximately $62.5 million of demand deposits and $65.5 million of
loans outstanding.
The loans made or acquired by the Thrift currently range in amount from
$20,000 to $1,105,000 with an average loan balance of $270,500. Loans are made
only on a secured basis, at loan-to-value percentages no greater than 75%. The
Thrift specializes in making commercial real estate loans. In excess of 93% 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, 1997, was 11%. A number of factors
are included in the determination of average yield, principal among which are
loan fees and closing points amortized to income, prepayment penalties recorded
as income, and amortization of discounts on purchased loans. The Thrift's
primary competitors in the Southern California commercial real estate lending
market are local community banks, other thrift and loan companies and, to a
lesser extent, commercial banks. The Company believes that many borrowers who
might be eligible for loans from commercial banks use thrift and loan companies,
such as the Thrift, because, in general, thrift and loan companies offer longer
maturity loans than do commercial banks, which typically offer one-year
renewable loans. There is, however, a higher degree of risk associated with
longer term loans than shorter term loans. The Thrift's average loan is 60
months in duration.
The performance of the Thrift's loan portfolio is evaluated on an ongoing
basis by management of the Thrift. The Thrift places a loan on nonaccrual
status when two payments become past due. When a loan is placed on nonaccrual
status, the Thrift's general policy is to reverse from income previously accrued
but unpaid interest. Income on such loans is subsequently recognized only to
the extent that cash is received and future collection of principal is probable.
Interest income on nonaccrual loans which would have been recognized during the
year ended December 31, 1997, if all of such loans had been current in
accordance with their original terms, totaled $35,000. Interest income actually
recognized on these nonaccrual loans for the year ended December 31, 1997, was
$24,000. The following table sets forth the amount of the Thrift's
nonperforming loans as of the dates indicated.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
($000)
<S> <C> <C> <C> <C> <C>
Nonperforming Assets:
Loans accounted for on a nonaccrual basis $ 287 $ 166 $1,956 $1,741 $1,833
Accruing loans past due 90 or more days
Troubled debt restructurings
------ ----- ------ ------ ------
Total $ 287 $ 166 $1,956 $1,741 $1,833
------ ----- ------ ------ ------
</TABLE>
Based on a variety of factors concerning the creditworthiness of its
borrowers, the Thrift determined that it had $1,419,000 of potential problem
loans in existence as of December 31, 1997.
The Thrift's allowance for loan losses is established through charges to
earnings in the form of provision for loan losses. Loan losses are charged to,
and recoveries are credited to, the allowance for loan losses. The provision
for loan losses is determined after considering various factors, such as loan
loss experience, maturity of the portfolio, size of the portfolio, borrower
credit history, the existing allowance for loan losses, current charges and
recoveries to the allowance for loan losses, the overall quality of the loan
portfolio, and current economic conditions, as determined by management of the
Thrift, regulatory agencies and independent credit review specialists. While
many of these factors are essentially a matter of judgment and may not be
reduced to a mathematical formula, the Company believes that, in light of the
collateral securing its loan portfolio, the Thrift's current allowance for loan
losses is an adequate allowance against foreseeable losses.
7
<PAGE>
The following table provides certain information with respect to the
Thrift's allowance for loan losses as well as charge-off and recovery activity.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
($000)
Allowance for Loan Losses:
Balance at beginning of year $1,050 $1,344 $ 950 $ 750 $ 500
------ ------ ------ ----- -----
Charge-Offs:
Real estate-mortgage (136) (766) (194) (311) (66)
Assigned lease payments (5) (9) (9) (21)
Other (44)
------ ------ ------ ----- -----
(136) (771) (203) (320) (131)
------ ------ ------ ----- -----
Recoveries:
Real estate-mortgage 6 26 55 3
Assigned lease payments 22 18 35 28 32
Other 23
------ ------ ------ ----- -----
28 44 35 83 58
------ ------ ------ ----- -----
Net (charge-offs) recoveries (108) (727) (168) (237) (73)
Provision for losses 243 433 562 437 323
------ ------ ------ ----- -----
Balance at end of year $1,185 $1,050 $1,344 $ 950 $ 750
====== ====== ====== ===== =====
Ratio of net charge-offs during the year to
average loans outstanding during the year .2% 1.4% .4% .6% .2%
====== ====== ====== ===== =====
</TABLE>
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.
<TABLE>
<CAPTION>
Year Ended December 31
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Allowance Loans Allowance Loans Allowance Loans Allowance Loans Allowance Loans
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
($000)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loan Categories:
Real estate-mortgage $1,116 100 $1,015 100 $1,300 99 $ 879 99 $ 635 98
Real estate-construction 3 1
Assigned lease payments 39 34 41 71 1 95 1
Other 30 1 20 1
------ ---- ------ ---- ------ ---- ----- ---- ----- ----
$1,185 100 $1,050 100 $1,344 100 $ 950 100 $ 750 100
====== ==== ====== ==== ====== ==== ===== ==== ===== ====
</TABLE>
Acquisitions
- ------------
Commencing in the 1960s, the Company initiated a growth program with a view
to becoming a nationwide provider of title insurance. This program included
expansion into new geographic markets through internal growth and selective
acquisitions. In 1986 the Company began expanding into other real estate-
related financial services. To date, the Company has made numerous strategic
acquisitions designed to expand not only its direct title operations, but also
the range of services it can provide to real property buyers and mortgage
lenders. During the current year, some of the key acquisitions made by the
Company in furtherance of this strategy were:
8
<PAGE>
Acquired Entity Principal Market(s)
- --------------------------------------------------------------------------
Title Insurance:
Settlers Abstract Pennsylvania
Hillam Title Agency Utah
Klamath County Title Company Oregon
Illini Title Services, Inc. Illinois
Pekin Abstract & Title Company Illinois
Woodford County Abstract & Title Illinois
Miller Abstract Missouri
Donegan Abstract Texas
Service Standard U.S. Virgin Islands
Real Estate Information Services: (1)
Strategic Mortgage Services, Inc. Nationwide
Real Estate Solutions (1) Nationwide
- --------------------------------------------------------------------------
(1) On January 1, 1998, the Company formed a limited liability corporation
(LLC) with Experian Group (Experian). The purpose of the LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc., with Experian's Real Estate Solutions division
(RES). The LLC is 80% owned by the Company and 20% owned by Experian.
Regulation
- ----------
The title insurance business is heavily regulated by state insurance
regulatory authorities. These authorities generally possess broad powers with
respect to the licensing of title insurers, the types and amounts of investments
that title insurers may make, insurance rates, forms of policies and the form
and content of required annual statements, as well as the power to audit and
examine title insurers. Under state laws, certain levels of capital and surplus
must be maintained and certain amounts of securities must be segregated or
deposited with appropriate state officials. Various state statutes require
title insurers to defer a portion of all premiums in a reserve for the
protection of policyholders and to segregate investments in a corresponding
amount. Further, most states restrict the amount of dividends and distributions
a title insurer may make to its shareholders.
The Company's home warranty business also is subject to regulation by
insurance authorities in the states in which it conducts such business. The
Company's trust company and industrial loan company are both subject to
regulation by the Federal Deposit Insurance Corporation. In addition, the
Company's trust company is regulated by the California Superintendent of Banks
and the Company's industrial loan company is regulated by the California
Commissioner of Corporations.
Year 2000 Costs
- ---------------
Currently, many computer systems and software products are coded to accept
only two digit entries in the date code field. These date code fields will need
to accept four digit entries to distinguish 21st century dates from 20th century
dates. As a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such "Year 2000" requirements.
The Company and third parties with which the Company does business rely on
numerous computer programs in their day to day operations. The Company is
evaluating the Year 2000 issue as it relates to the Company's internal computer
systems and third party computer systems with which the Company interacts. The
Company expects to incur internal staff costs as well as consulting and other
expenses related to these issues; these costs will be expensed as incurred. In
addition, the appropriate course of action may include replacement or an upgrade
of certain systems or equipment at a substantial cost to the Company. There can
be no assurance that the Year 2000 issues will be resolved in 1998 or 1999. The
Company may incur significant costs in resolving its Year 2000 issues. If not
resolved, this issue could have a significant adverse impact on the Company's
operations.
Investment Policies
- -------------------
The Company invests primarily in cash equivalents, federal and municipal
governmental securities, mortgage loans and investment grade debt and equity
securities. The largely fixed income portfolio is classified in the Company's
financial statements as "available for sale." In addition to the Company's
investment strategy, state laws impose certain restrictions upon the types and
amounts of investments that may be made by the Company's regulated subsidiaries.
9
<PAGE>
Employees
- ---------
The following table provides a summary of the total number of employees of
the Company as of December 31, 1997:
<TABLE>
<CAPTION>
Business Number of Employees
- -------------------------------- -------------------
<S> <C>
Title insurance 10,424
Real estate information services 2,106
Home warranty 295
Trust and banking 105
-------------------
Total 12,930
===================
</TABLE>
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. This building is
used primarily for storage.
The Company's title insurance subsidiary, First American, and its
subsidiaries, own or lease buildings or office space in more than 400 locations
throughout the United States and Canada, principally for their respective title
operations.
The Company's real estate information subsidiary, First American Real
Estate Information Services, Inc. ("FAREISI"), houses its national operations in
a leased 231,000 square foot office building in Dallas, Texas. FAREISI's
corporate headquarters are housed in a leased office building located in St.
Petersburg, Florida. In addition, FAREISI and its subsidiaries lease office
space in more than 75 locations throughout the United States, principally for
their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys,
California, which contains a 20,000 square foot office building, a 7,000 square
foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its subsidiaries
is in good condition and adequate for its intended use.
Item 3. Legal Proceedings.
- ---------------------------
The Company is involved in numerous routine legal proceedings incidental to
such businesses described in Item 1 above. Some of these proceedings involve
claims for damages in material amounts. At this time, however, the Company does
not anticipate that the resolution of any of these proceedings will have a
materially adverse effect on its financial condition.
Item 4. Submission of Matters to a Vote of Security Holders.
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
10
<PAGE>
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
- -------------------------------------------------------------------------
Matters.
- --------
Common Stock Market Prices and Dividends
- ----------------------------------------
The Company's common stock trades on the New York Stock Exchange (ticker
symbol FAF). The approximate number of record holders of common stock on
February 25, 1998, was 3,033.
High and low stock prices and dividends for the last two years were (Note A):
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
1997 1996
------------------------------------------------------------------
Cash Cash
- ----------------------- -------------- --------- -------------- ---------
Quarter Ended High-Low Range Dividends High-Low Range Dividends
- ----------------------- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
March 31 $29.75 - $25.08 $ .12 $21.33 - $16.75 $.10
June 30 $26.58 - $20.92 $ .12 $22.50 - $16.59 $.12
September 30 $40.21 - $26.00 $.135 $23.83 - $19.50 $.12
December 31 $49.25 - $39.83 $.135 $27.42 - $22.42 $.12
- -----------------------------------------------------------------------------------------------
</TABLE>
While the Company expects to continue its policy of paying regular quarterly
cash dividends, future dividends will be dependent on future earnings, financial
condition and capital requirements. The payment of dividends is subject to the
restrictions described in Note 2 to the consolidated financial statements
included in "Item 8. Financial Statements and Supplementary Data" of Part II of
this report.
Recent Sales of Unregistered Securities
- ---------------------------------------
In the last three years, the Company has issued unregistered shares of its
common stock to the sellers of the businesses in the acquisitions listed below.
<TABLE>
<CAPTION>
Date of Sale Number of Shares (Note A) Consideration Received
- -------------------- ------------------------- -----------------------
<S> <C> <C>
September 14, 1995 67,500 $1,108,000
December 29, 1995 90,000 $1,605,000
September 13, 1996 98,063 $2,173,719
December 10, 1996 250,715 $5,417,149
July 8, 1997 7,200 $ 192,600
November 17, 1997 7,755 $ 315,047
December 31, 1997 825 $ 40,630
</TABLE>
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998
11
<PAGE>
Item 6. Selected Financial Data.
- ----------------------------------
The selected consolidated financial data for the Company for the five-year
period ended December 31, 1997, has been derived from the audited Consolidated
Financial Statements. The selected consolidated financial data should be read
in conjunction with the Consolidated Financial Statements and Notes thereto,
"Item 1--Business--Acquisitions," and "Item 7--Management's Discussion and
Analysis--Results of Operations."
The First American Financial Corporation and Subsidiary Companies
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31
- ---------------------------------------------------------------------------------------------------------------
(in thousands, except percent, per share 1997 1996 1995 1994 1993
amounts and employee data) ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $1,887,461 $1,597,566 $1,250,216 $1,376,393 $1,398,426
Net income $ 64,709 $ 53,589 $ 7,587 $ 18,945 $ 66,291
Total assets $1,168,144 $ 979,794 $ 873,778 $ 828,649 $ 786,448
Notes and contracts payable $ 41,973 $ 71,257 $ 77,206 $ 89,600 $ 85,022
Mandatorily redeemable preferred securities
(Note D) $ 100,000
Stockholders' equity $ 411,412 $ 352,465 $ 302,767 $ 292,110 $ 283,718
Return on average stockholders' equity 16.9% 16.4% 2.6% 6.6% 26.5%
Cash dividends on common shares $ 8,818 $ 7,928 $ 6,850 $ 6,869 $ 5,840
Per share of common stock (Notes A & B) -
Net income
Basic $ 3.73 $ 3.12 $ .44 $ 1.10 $ 3.89
Diluted $ 3.64 $ 3.09 $ .44 $ 1.10 $ 3.89
Stockholders' equity $ 23.68 $ 20.34 $ 17.69 $ 17.09 $ 16.62
Cash dividends $ .51 $ .46 $ .40 $ .40 $ .34
Number of common shares outstanding (Note A)--
Weighted average during the year
Basic 17,362 17,179 17,105 17,171 17,030
Diluted 17,785 17,325 17,105 17,171 17,030
End of year 17,374 17,331 17,117 17,093 17,072
Title orders opened (Note C) 1,173 1,027 894 873 1,218
Title orders closed (Note C) 886 775 667 723 933
Number of employees 12,930 11,611 10,149 9,033 10,679
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
Note A -- After adjustment for 3-for-2 stock split effected January 15, 1998,
and restatement for the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share."
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.
Note D -- Mandatorily redeemable preferred securities of First American Capital
Trust I, a Delaware business trust controlled by the Company, whose
sole assets are $100,000,000 aggregate principal amount of the
Company's 8.5% deferrable interest debentures due 2012.
Item 7. Management's Discussion and Analysis.
- -----------------------------------------------
Any statements in this document 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 changing economic conditions; and the demand for and the
acceptance of the Company's products.
Results of Operations
- ---------------------
Overview - As with all providers of real estate-related financial and
information 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
12
<PAGE>
sale of new properties. Revenues for the Company's home warranty segment result
primarily from residential resale activity and do not benefit from refinancings.
Traditionally, the greatest volume of real estate activity, particularly
residential resale, has occurred in the spring and summer months. However, in
recent years, interest rate adjustments by the Federal Reserve Board, as well as
other economic factors, have caused unusual fluctuations in the traditional
pattern of real estate activity. During 1994 the Federal Reserve Board raised
interest rates. This, coupled with the persistently poor real estate economy in
California and the effects 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. However, the cost-cutting
measures lagged the revenue declines, resulting in losses for the first quarter
1995. Mortgage interest rates peaked in January 1995 and decreased throughout
the remainder of the year and into 1996. This decrease, as well as increased
consumer confidence, contributed significantly to an improved national real
estate economy during the second half of 1995, and resulted in a 26% improvement
in operating revenues when compared to the first half of 1995. This resurgence
in real estate activity generated a high inventory of open transactions going
into 1996, which, together with the continuation of lower mortgage interest
rates, the improved national real estate economy (including the beginnings of a
recovery in California) and the Company's successful integration of its diverse
businesses, resulted in strong revenues and profits for 1996. These favorable
conditions continued into 1997, contributing to record-setting residential
resale transactions, an increase in new home sales and renewed commercial
activity. In addition, stability in the marketplace prompted an increase in
refinance and home equity transactions, primarily towards the latter part of the
year. These factors, as well as market share increases in all of the Company's
primary business segments, culminated in 1997 being the best year overall in the
Company's history.
Operating revenues - A summary by segment of the Company's operating revenues is
as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 % 1996 % 1995 %
---------- --- ---------- --- ---------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance:
Direct Operations $ 761,774 41 $ 626,314 40 $ 517,616 42
Agency Operations 700,193 38 641,919 41 517,173 42
---------- --- ---------- --- ---------- ---
$1,461,967 79 1,268,233 81 1,034,789 84
Real Estate Information 331,372 18 246,745 16 145,755 12
Home Warranty 46,859 2 38,351 2 32,531 3
Trust and Banking 20,007 1 17,839 1 14,110 1
---------- --- ---------- --- ---------- ---
$1,860,205 100 $1,571,168 100 $1,227,185 100
========== === ========== === ========== ===
</TABLE>
Operating revenues from direct title operations increased 21.6% in 1997
over 1996 and 21.0% in 1996 over 1995. These increases were attributable to
increases in the number of title orders closed by the Company's direct
operations, as well as increases in the average revenues per order closed. The
Company's direct operations closed 885,600, 775,100 and 667,200 title orders
during 1997, 1996 and 1995, respectively, representing increases of 14.3% in
1997 over 1996 and 16.2% in 1996 over 1995. These increases were primarily due
to the continuation of lower mortgage interest rates, the improved national real
estate economy (including California, a state highly concentrated with direct
operations) and an increase in the Company's national market share. The average
revenues per order closed were $860, $808 and $776 for 1997, 1996 and 1995,
respectively, representing increases of 6.4% in 1997 over 1996 and 4.1% in 1996
over 1995. These increases were primarily attributable to an increased mix of
residential resale activity, appreciating home values and a resurgence in
commercial real estate activity. Operating revenues from agency operations
increased 9.1% in 1997 over 1996 and 24.1% in 1996 over 1995. These fluctuations
were primarily attributable to the same factors affecting direct operations
mentioned above, compounded by the inherent delay in the reporting by agents.
Real estate information operating revenues increased 34.3% in 1997 over
1996 and 69.3% in 1996 over 1995. These increases were primarily attributable to
the same factors affecting title insurance mentioned above and $53.8 million and
$11.3 million of operating revenues contributed by new acquisitions in 1997 and
1996, respectively.
Home warranty operating revenues increased 22.2% in 1997 over 1996 and
17.9% in 1996 over 1995. These increases were primarily attributable to
improvements in certain of the residential resale markets in which this segment
operates, successful geographic expansion, increased consumer awareness and
increases in the number of annual renewals.
Investment and other income - Investment and other income increased 3.3% in 1997
over 1996. This increase was primarily attributable to a 4.8% increase in the
average investment portfolio balance and increased equity in earnings of
unconsolidated subsidiaries, offset in part by an increase of $0.9 million in
losses from the sales of fixed assets. Investment and other income increased
14.6% in 1996 over 1995. This increase was primarily attributable to an
13
<PAGE>
increase in realized investment gains of $1.7 million, as well as an increase in
fixed income securities, offset in part by a 5.4% decrease in the average
investment portfolio balance.
Salaries and other personnel costs - A summary by segment of the Company's
salaries and other personnel costs is as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $498,424 77 $413,164 78 $352,745 82
Real Estate Information 119,856 18 90,559 17 57,738 13
Home Warranty 11,430 2 9,075 2 7,714 2
Trust and Banking 7,061 1 6,621 1 4,799 1
Corporate 10,979 2 11,831 2 8,988 2
-------- --- -------- --- -------- ---
$647,750 100 $531,250 100 $431,984 100
======== === ======== === ======== ===
</TABLE>
The Company's title insurance segment is labor intensive; accordingly, a
major variable expense component is salaries and other personnel costs. This
expense component is affected by two competing factors: the need to monitor
personnel changes to match corresponding or anticipated new orders, and the need
to provide quality service. In addition, the Company's growth in operations
which specialize in builder and lender business has created ongoing fixed costs
required to service accounts.
Title insurance personnel expenses increased 20.6% in 1997 over 1996 and
17.1% in 1996 over 1995. These increases were primarily attributable to the
costs incurred servicing the increasing volume of title orders and, to a lesser
extent, acquisition activity and salary increases. Contributing to the increase
for 1997 was an increased mix of more labor intensive residential resale
transactions. The Company's direct operations opened 1,173,300, 1,026,900 and
894,400 title orders in 1997, 1996 and 1995, respectively, representing
increases of 14.3% in 1997 over 1996 and 14.8% in 1996 over 1995.
Real estate information personnel expenses increased 32.4% in 1997 over
1996 and 56.8% in 1996 over 1995. These increases were primarily attributable to
costs incurred servicing the increase in business volume, costs associated with
in-house development of new electronic communications delivery systems for
information-based products, and approximately $20.7 million and $8.6 million of
costs attributable to company acquisitions for 1997 and 1996, respectively.
Home warranty personnel expenses increased 26.0% in 1997 over 1996 and
17.6% in 1996 over 1995. These increases were primarily due to the additional
personnel required to service the increased business volume in the states this
segment currently services, as well as new geographic expansion and modest
salary increases.
Premiums retained by agents - A summary of agent retention and agent revenues is
as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Agent Retention $563,137 $516,593 $413,444
======== ======== ========
Agent Revenues $700,193 $641,919 $517,173
======== ======== ========
% Retained by Agents 80% 80% 80%
======== ======== ========
</TABLE>
The premium split between underwriter and agents is in accordance with
their respective agency contracts and can vary from region to region due to
divergencies in real estate closing practices as well as rating structures. As a
result, the percentage of title premiums retained by agents may vary due to the
geographical mix of revenues from agency operations.
Other operating expenses - A summary by segment of the Company's other operating
expenses is as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $247,579 60 $216,514 67 $186,876 72
Real Estate Information 142,985 35 91,249 29 59,527 23
Home Warranty 2,071 1,323 1,843 1
Trust and Banking 8,093 2 6,982 2 5,650 2
Corporate 10,591 3 6,641 2 3,927 2
-------- --- -------- --- -------- ---
$411,319 100 $322,709 100 $257,823 100
======== === ======== === ======== ===
</TABLE>
14
<PAGE>
Title insurance other operating expenses increased 14.3% in 1997 over 1996
and 15.9% in 1996 over 1995. These increases were primarily the result of the
impact created by the changes in incremental costs (i.e., office supplies,
document reproduction, messenger services, plant maintenance and title search
costs) associated with the relative changes in title order volume. Also
contributing to the increases were marginal price level increases, offset in
part by successful cost-containment programs.
Real estate information other operating expenses increased 56.7% in 1997
over 1996 and 53.3% in 1996 over 1995. These increases were primarily
attributable to costs incurred servicing the increased business activity, as
well as $33.5 million and $7.0 million of other operating costs relating to
acquisitions in 1997 and 1996, respectively, offset in part by cost-containment
programs. Contributing to the increases were costs incurred developing and
enhancing new electronic communications delivery systems for information-based
products and costs associated with assimilating and expanding this segment's
increased operations.
Provision for title losses and other claims - A summary by segment of the
Company's provision for title losses and other claims is as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $52,924 59 $58,909 68 $68,338 76
Real Estate Information 9,874 11 4,453 5 3,166 3
Home Warranty 27,338 30 23,055 27 18,857 21
Trust and Banking 187 70 26
------- --- ------- --- ------- ---
$90,323 100 $86,487 100 $90,387 100
======= === ======= === ======= ===
</TABLE>
The provision for title insurance losses expressed as a percentage of title
insurance operating revenues was 3.6% in 1997, 4.6% in 1996, and 6.6% in 1995.
These decreases reflect an ongoing improvement in the Company's claims
experience. The provision for home warranty losses as a percentage of home
warranty operating revenues was 58.3% in 1997, 60.1% in 1996 and 58.0% in 1995.
These fluctuations were primarily attributable to the relative changes in the
average number of claims per contract experienced during these periods.
Depreciation and amortization - Depreciation and amortization as well as capital
expenditures are summarized in Note 16 to the consolidated financial statements.
Interest - Interest expense increased 108.4% in 1997 over 1996 and decreased
23.2% in 1996 when compared with 1995. The increase in 1997 was primarily due to
$5.7 million of interest expense related to the Company's junior subordinated
deferrable interest debentures, offset in part by a 23.7% reduction in the
average outstanding debt balance. The decrease in 1996 was primarily
attributable to a 13.5% reduction in the average outstanding debt balance and a
reduced interest rate option on the Company's variable rate indebtedness. For
descriptions of the Company's borrowings under its bank credit agreement and its
junior subordinated deferrable interest debentures, see Notes 8 and 13 to the
consolidated financial statements, respectively.
Minority interests - Minority interests in net income of consolidated
subsidiaries increased 40.1% in 1997 over 1996 and 23.1% in 1996 over 1995.
These increases were attributable to the relatively strong operating results of
the Company's less than 100% owned subsidiaries, offset in part by purchases of
shares from minority shareholders.
Pretax profits - A summary by segment of the Company's pretax profits is as
follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 % 1996 % 1995 %
-------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $ 95,636 62 $ 66,056 51 $ 17,540 37
Real Estate Information 45,317 29 52,581 40 19,690 42
Home Warranty 9,741 6 8,178 6 6,828 14
Trust and Banking 4,062 3 3,728 3 3,304 7
-------- --- -------- --- -------- ---
154,756 100 130,543 100 47,362 100
-------- === -------- === -------- ===
Corporate (31,643) (24,678) (19,948)
-------- -------- --------
$123,113 $105,865 $ 27,414
======== ======== ========
</TABLE>
15
<PAGE>
The Company's profit margins and pretax profits vary according to a number
of factors, including the volume, composition (residential or commercial) and
type (resale, refinancing or new construction) of real estate activity. For
example, in title insurance operations, commercial transactions tend to generate
higher revenues and greater profit margins than residential transactions.
Further, profit margins from refinancing activities are lower than those from
resale activities because in many states there are premium discounts on, and
cancellation rates are higher for, refinancing transactions. Cancellations of
title orders adversely affect pretax profits because costs are incurred in
opening and processing such orders but revenues are not generated. Also, the
Company's direct title insurance business has significant fixed costs in
addition to its variable costs. Accordingly, profit margins from the Company's
direct title insurance business improve as the volume of title orders closed
increases. Title insurance profit margins are also affected by the percentage of
operating revenues generated by agency operations. Profit margins from direct
operations are generally higher than from agency operations due primarily to the
large portion of the premium that is retained by the agent. Real estate
information pretax profits are generally unaffected by the type of real estate
activity but increase as the volume of residential real estate loan transactions
increases. Home warranty pretax profits improve as the volume of residential
resales increases. In general, the title insurance business is a lower margin
business when compared to the Company's other segments. The lower margins
reflect the high fixed cost of producing title evidence whereas the
corresponding revenues are subject to regulatory and competitive pricing
constraints.
The increases in corporate expenses were primarily attributable to
increased costs associated with supporting the overall growth of the Company's
businesses, as well as additional unallocated interest expense for 1997
associated with the Company's junior subordinated deferrable interest
debentures, and certain unallocated expenses in 1996 associated with employee
benefit plans.
Premium taxes - A summary by pertinent segment of the Company's premium taxes is
as follows:
<TABLE>
<CAPTION>
(in thousands, except percent) 1997 % 1996 % 1995 %
------- --- ------- --- ------- ---
<S> <C> <C> <C> <C> <C> <C>
Title Insurance $16,034 95 $15,927 96 $13,016 96
Home Warranty 870 5 749 4 611 4
------- --- ------- --- ------- ---
$16,904 100 $16,676 100 $13,627 100
======= === ======= === ======= ===
</TABLE>
Insurers are generally not subject to state income or franchise taxes.
However, in lieu thereof, a "premium" tax is imposed on certain operating
revenues, as defined by statute. Tax rates and bases vary from state to state;
accordingly, the total premium tax burden is dependent upon the geographical mix
of title insurance and home warranty operating revenues. The Company's
underwritten title company (non-insurance) subsidiaries are subject to state
income tax and do not pay premium tax. Accordingly, the Company's total tax
burden at the state level is composed of a combination of premium taxes and
state income taxes. Premium taxes as a percentage of title insurance operating
revenues were 1.1% in 1997 and 1.3% in 1996 and 1995. The decrease in the
current year was attributable to changes in the geographical mix of title
insurance revenues, as well as changes in the Company's non-insurance
subsidiaries' contribution to revenues.
Income taxes - The Company's effective income tax rate, which includes a
provision for state income and franchise taxes for non-insurance subsidiaries,
was 39.1%, 39.9% and 45.0% for 1997, 1996 and 1995, respectively. The
differences in effective rate were primarily due to changes in the ratio of
permanent differences to income before income taxes and changes in state income
and franchise taxes resulting from fluctuations in the Company's non-insurance
subsidiaries' contribution to pretax profits. Information regarding items
included in the reconciliation of the effective rate with the federal statutory
rate is contained in Note 9 to the consolidated financial statements.
16
<PAGE>
Net income - Net income and per share information, which has been restated for
the 3-for-2 stock split effected January 15, 1998, and the adoption of Statement
of Financial Accounting Standards No. 128, "Earnings per Share," are summarized
as follows:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Net income $64,709 $53,589 $7,587
======= ======= ======
Net income per share:
Basic $ 3.73 $ 3.12 $ 0.44
======= ======= ======
Diluted $ 3.64 $ 3.09 $ 0.44
======= ======= ======
Weighted average shares:
Basic 17,362 17,179 17,105
======= ======= ======
Diluted 17,785 17,325 17,105
======= ======= ======
</TABLE>
Liquidity and Capital Resources
- -------------------------------
Cash provided by operating activities amounted to $111.2 million, $112.8
million and $38.5 million for 1997, 1996 and 1995, respectively, after claim
payments of $81.6 million, $78.0 million and $66.6 million, respectively. The
principal non-operating uses of cash and cash equivalents for the three-year
period ended December 31, 1997, 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 proceeds from
the sales and maturities of certain investments and, in 1997, proceeds from the
issuance of junior subordinated deferrable interest debentures. The net effect
of all activities on total cash and cash equivalents were increases of $8.1
million and $27.5 million for 1997 and 1996, respectively, and a decrease of
$8.3 million for 1995.
Notes and contracts payable as a percentage of total capitalization as of
December 31, 1997, was 7.3% as compared with 16.0% as of the prior year end. The
decrease was primarily attributable to an increase in the capital base due to
the issuance of junior subordinated deferrable interest debentures, net income
for the year, and a net decrease in debt. The Company maintains a $75.0 million
revolving line of credit which remained unused as of December 31, 1997. Notes
and contracts payable are more fully described in Note 8 to the consolidated
financial statements.
Pursuant to various insurance and other regulations, the maximum amount of
dividends, loans and advances available to the Company in 1998 from its
principal subsidiary, First American Title Insurance Company, is $52.1 million.
Such restrictions have not had, nor are they expected to have, an impact on the
Company's ability to meet its cash obligations.
The Company is evaluating the Year 2000 issue as it relates to its internal
computer systems and third party computer systems with which the Company
interacts. The Company expects to incur internal staff costs as well as
consulting and other expenses related to this issue; these costs will be
expensed as incurred. At this time the Company is unable to reasonably estimate
the total costs for this issue.
Due to the Company's significant liquid asset position and its consistent
ability to generate cash flows from operations, management believes that its
resources are sufficient to satisfy its anticipated operational cash
requirements. The Company's strong financial position will enable management to
react to future opportunities for acquisitions or other investments in support
of the Company's continued growth and expansion.
17
<PAGE>
Item 8. Financial Statements and Supplementary Data.
- ------------------------------------------------------
Separate financial statements for subsidiaries not consolidated and 50% or less
owned persons accounted for by the equity method have been omitted because, if
considered in the aggregate, they would not constitute a significant subsidiary.
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Report of Independent Accountants 19
Financial Statements:
Consolidated Balance Sheets 20
Consolidated Statements of Income 22
Consolidated Statements of Stockholders' Equity 23
Consolidated Statements of Cash Flows 24
Notes to Consolidated Financial Statements 25
Unaudited Quarterly Financial Data 38
Financial Statement Schedules:
I. Summary of Investments - Other than Investments in Related Parties 39
II. Condensed Financial Information of Registrant 40
III. Supplementary Insurance Information 44
IV. Reinsurance 46
V. Valuation and Qualifying Accounts 47
</TABLE>
Financial statement schedules not listed are either omitted because they
are not applicable or the required information is shown in the consolidated
financial statements or in the notes thereto.
18
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
The First American Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of The First
American Financial Corporation and its subsidiaries at December 31, 1997 and
1996, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Costa Mesa, California
February 9, 1998
19
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
December 31
------------------------------
1997 1996
-------------- -------------
<S> <C> <C>
Cash and Cash Equivalents $ 181,531,000 $ 173,439,000
-------------- -------------
Accounts and Accrued Income Receivable,
less allowances ($7,602,000 and $5,351,000) 128,017,000 89,355,000
-------------- -------------
Investments:
Deposits with savings and loan associations and banks 29,029,000 21,674,000
Debt securities 151,503,000 130,576,000
Equity securities 13,904,000 8,517,000
Other long-term investments 35,047,000 30,414,000
-------------- -------------
229,483,000 191,181,000
-------------- -------------
Loans Receivable 63,378,000 54,256,000
-------------- -------------
Property and Equipment, at cost:
Land 17,059,000 15,869,000
Buildings 84,935,000 77,265,000
Furniture and equipment 221,071,000 164,762,000
Less - accumulated depreciation (122,688,000) (100,258,000)
-------------- -------------
200,377,000 157,638,000
-------------- -------------
Title Plants and Other Indexes 100,626,000 94,226,000
-------------- -------------
Assets Acquired in Connection with Claim Settlements 21,119,000 24,270,000
-------------- -------------
Deferred Income Taxes 31,563,000 38,401,000
-------------- -------------
Goodwill and Other Intangibles, less accumulated
amortization ($13,093,000 and $11,116,000) 132,361,000 87,189,000
-------------- -------------
Deferred Policy Acquisition Costs 25,016,000 24,753,000
-------------- -------------
Other Assets 54,673,000 45,086,000
-------------- -------------
$1,168,144,000 $ 979,794,000
============== =============
</TABLE>
See Notes to Consolidated Financial Statements
20
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
December 31
-----------------------------
1997 1996
-------------- ------------
<S> <C> <C>
Demand Deposits $ 62,475,000 $ 51,321,000
-------------- ------------
Accounts Payable and Accrued Liabilities:
Accounts payable 12,220,000 7,218,000
Salaries and other personnel costs 55,973,000 37,270,000
Pension costs 39,431,000 32,592,000
Other 60,509,000 53,245,000
-------------- ------------
168,133,000 130,325,000
-------------- ------------
Deferred Revenue 104,124,000 104,133,000
-------------- ------------
Reserve for Known and Incurred But Not Reported Claims 250,826,000 245,245,000
-------------- ------------
Income Taxes Payable 3,987,000 2,554,000
-------------- ------------
Notes and Contracts Payable 41,973,000 71,257,000
-------------- ------------
Minority Interests in Consolidated Subsidiaries 25,214,000 22,494,000
-------------- ------------
Commitments and Contingencies (Note 12)
Mandatorily Redeemable Preferred Securities of the
Company's Subsidiary Trust Whose Sole Assets are
the Company's $100,000,000 8.5% Deferrable Interest
Subordinated Notes Due 2012 (Note 13) 100,000,000
--------------
Stockholders' Equity:
Preferred stock, $1 par value
Authorized - 500,000 shares
Outstanding - None
Common stock, $1 par value (Note 14)
Authorized - 36,000,000 shares
Outstanding - 17,374,000 and 17,331,000 shares 17,374,000 17,331,000
Additional paid-in capital 43,953,000 43,643,000
Retained earnings 344,645,000 288,754,000
Net unrealized gain on securities 5,440,000 2,737,000
-------------- ------------
Total Stockholders' Equity 411,412,000 352,465,000
-------------- ------------
$1,168,144,000 $979,794,000
============== ============
</TABLE>
See Notes to Consolidated Financial Statements
21
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Revenues
Operating revenues $1,860,205,000 $1,571,168,000 $1,227,185,000
Investment and other income 27,256,000 26,398,000 23,031,000
-------------- -------------- --------------
1,887,461,000 1,597,566,000 1,250,216,000
-------------- -------------- --------------
Expenses
Salaries and other personnel costs 647,750,000 531,250,000 431,984,000
Premiums retained by agents 563,137,000 516,593,000 413,444,000
Other operating expenses 411,319,000 322,709,000 257,823,000
Provision for title losses and other claims 90,323,000 86,487,000 90,387,000
Depreciation and amortization 38,149,000 27,242,000 20,790,000
Interest 9,994,000 4,796,000 6,242,000
Minority interests 3,676,000 2,624,000 2,132,000
-------------- -------------- --------------
1,764,348,000 1,491,701,000 1,222,802,000
-------------- -------------- --------------
Income before premium and income taxes 123,113,000 105,865,000 27,414,000
Premium taxes 16,904,000 16,676,000 13,627,000
-------------- -------------- --------------
Income before income taxes 106,209,000 89,189,000 13,787,000
Income taxes 41,500,000 35,600,000 6,200,000
-------------- -------------- --------------
Net income $ 64,709,000 $ 53,589,000 $ 7,587,000
============== ============== ==============
Net income per common share (Note 1):
Basic $ 3.73 $ 3.12 $ 0.44
Diluted $ 3.64 $ 3.09 $ 0.44
Weighted average common shares outstanding (Note 1):
Basic 17,362,000 17,179,000 17,105,000
Diluted 17,785,000 17,325,000 17,105,000
</TABLE>
See Notes to Consolidated Financial Statements
22
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
Additional unrealized
Common paid-in Retained gain (loss)
Shares Stock capital earnings on securities
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1994, as previously reported 11,395,000 $11,395,000 $44,013,000 $242,356,000 $(5,654,000)
3-for-2 stock split (Note 14) 5,698,000 5,698,000 (5,698,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1994, as restated 17,093,000 17,093,000 38,315,000 242,356,000 (5,654,000)
Net income for 1995 7,587,000
Cash dividends on common shares (6,850,000)
Shares issued in connection with company acquisitions 157,000 157,000 2,555,000
Shares issued in connection with benefit and savings plans 98,000 98,000 1,055,000
Purchase of Company shares (231,000) (231,000) (3,361,000)
Net unrealized gain on securities 9,647,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 17,117,000 17,117,000 38,564,000 243,093,000 3,993,000
Net income for 1996 53,589,000
Cash dividends on common shares (7,928,000)
Shares issued in connection with company acquisitions 300,000 300,000 7,258,000
Shares issued in connection with benefit and savings plans 75,000 75,000 1,195,000
Purchase of Company shares (161,000) (161,000) (3,374,000)
Net unrealized loss on securities (1,256,000)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 17,331,000 17,331,000 43,643,000 288,754,000 2,737,000
Net income for 1996 64,709,000
Cash dividends on common shares (8,818,000)
Shares issued in connection with company acquisitions 16,000 16,000 532,000
Shares issued in connection with benefit and savings plans 209,000 209,000 4,759,000
Purchase of Company shares (182,000) (182,000) (4,981,000)
Net unrealized gain on securities 2,703,000
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 17,374,000 $17,374,000 $43,953,000 $344,645,000 $ 5,440,000
=====================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------
1997 1996 1995
------------- ------------ -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 64,709,000 $ 53,589,000 $ 7,587,000
Adjustments to reconcile net income to cash provided by
operating activities-
Provision for title losses and other claims 90,323,000 86,487,000 90,387,000
Depreciation and amortization 38,149,000 27,242,000 20,790,000
Minority interests in net income 3,676,000 2,624,000 2,132,000
Other, net 933,000 (366,000) 207,000
Changes in assets and liabilities excluding effects of
company acquisitions and noncash transactions-
Claims paid, including assets acquired, net of recoveries (81,603,000) (78,048,000) (66,639,000)
Net change in income tax accounts 11,974,000 381,000 10,777,000
Increase in accounts and accrued income receivable (25,704,000) (11,324,000) (22,943,000)
Increase in accounts payable and accrued liabilities 17,708,000 34,314,000 11,190,000
Decrease in deferred revenue (9,000) (426,000) (13,588,000)
Other, net (9,001,000) (1,630,000) (1,418,000)
------------- ------------ ------------
Cash provided by operating activities 111,155,000 112,843,000 38,482,000
------------- ------------ ------------
Cash flows from investing activities:
Net cash effect of company acquisitions (49,336,000) (12,097,000) (31,054,000)
Net (increase) decrease in deposits with banks (7,355,000) (3,037,000) 901,000
Purchases of debt and equity securities (80,241,000) (68,498,000) (19,513,000)
Proceeds from sales of debt and equity securities 39,240,000 46,506,000 41,066,000
Proceeds from maturities of debt securities 18,842,000 31,291,000 19,278,000
Net (increase) decrease in other long-term investments (1,117,000) (2,575,000) 2,761,000
Net increase in loans receivable (9,122,000) (8,122,000) (5,588,000)
Capital expenditures (74,486,000) (48,785,000) (29,643,000)
Net proceeds from sale of property and equipment 1,646,000 3,245,000 757,000
------------- ------------ ------------
Cash used for investing activities (161,929,000) (62,072,000) (21,035,000)
------------- ------------ ------------
Cash flows from financing activities:
Net increase in demand deposits 11,154,000 7,903,000 4,723,000
Repayment of debt (40,940,000) (19,674,000) (20,060,000)
Proceeds from the issuance of mandatorily redeemable
preferred securities 100,000,000
Purchase of Company shares (5,163,000) (3,535,000) (3,592,000)
Proceeds from exercise of stock options 1,653,000
Proceeds from issuance of stock to employee savings plan 980,000
Cash dividends (8,818,000) (7,928,000) (6,850,000)
------------- ------------ ------------
Cash provided by (used for) financing activities 58,866,000 (23,234,000) (25,779,000)
------------- ------------ ------------
Net increase (decrease) in cash and cash equivalents 8,092,000 27,537,000 (8,332,000)
Cash and cash equivalents - Beginning of year 173,439,000 145,902,000 154,234,000
------------- ------------ ------------
Cash and cash equivalents - End of year $ 181,531,000 $173,439,000 $145,902,000
============= ============ ============
Supplemental information:
Cash paid during the year for:
Interest $ 8,223,000 $ 5,044,000 $ 6,108,000
Premium taxes $ 18,103,000 $ 14,146,000 $ 14,048,000
Income taxes $ 31,292,000 $ 36,682,000 $ 6,580,000
Noncash investing and financing activities:
Shares issued for benefits plans $ 2,335,000 $ 1,270,000 $ 1,153,000
Company acquisitions in exchange for common stock $ 548,000 $ 7,558,000 $ 2,712,000
Net unrealized gain (loss) on securities $ 2,703,000 $(1,256,000) $ 9,647,000
Liabilities in connection with company acquisitions $ 48,294,000 $ 32,180,000 $ 20,345,000
</TABLE>
See Notes to Consolidated Financial Statements
24
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1.
Description of the Company:
The First American Financial Corporation ("the Company"), through its
subsidiaries, is engaged in the business of providing real estate-related
financial and information services to real property buyers and mortgage lenders.
These services include title insurance, tax monitoring, credit reporting,
property data services, flood certification, field inspection services,
appraisal services, mortgage loan servicing systems, mortgage document
preparation and home warranties. The Company also provides investment, trust
and thrift services.
Significant Accounting Policies:
Principles of consolidation
The consolidated financial statements include the accounts of The First
American Financial Corporation and all majority-owned subsidiaries. All
significant intercompany transactions and balances have been eliminated.
Certain 1995 and 1996 amounts have been reclassified to conform with the 1997
presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments
which have an initial maturity of 90 days or less and are not restricted for
statutory deposit or premium reserve requirements. The carrying amount for cash
equivalents is a reasonable estimate of fair value due to the short-term
maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term
investments with initial maturities of more than 90 days. The carrying amount
of these investments is a reasonable estimate of fair value due to their short-
term nature.
Debt securities are carried at fair value and consist primarily of
investments in obligations of the United States Treasury, various corporations
and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of
investments in marketable common stocks of corporate entities in which the
Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in affiliates,
which are accounted for under the equity method of accounting, and notes
receivable, which are carried at the lower of cost or fair value less costs to
sell.
The Company classifies its debt and equity securities portfolio as
available-for-sale and, accordingly, includes unrealized gains and losses, net
of related tax effects, as a separate component of stockholders' equity.
Realized gains and losses on investments are determined using the specific
identification method.
Property and equipment
Furniture and equipment includes computer software acquired and developed
for internal use and for use with the Company's products. Software development
costs are capitalized from the time technological feasibility is established
until the software is ready for use. Capitalized development costs for internal
use software include only incremental payments to third parties.
Depreciation on buildings and on furniture and equipment is computed using
the straight-line method over estimated useful lives of 25 to 45 and 3 to 10
years, respectively. Capitalized software costs are amortized using the
straight-line method over estimated useful lives of 3 to 10 years.
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 fair value less costs to sell.
25
<PAGE>
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its
estimated useful life ranging from 20 to 40 years. Other intangibles, which
include customer lists, covenants not to compete and organization costs, are
amortized over their estimated useful lives, ranging from 3 to 20 years. The
Company periodically evaluates the amortization period assigned to each
intangible asset to ensure that there not been any events or circumstances that
warrant revised estimates of useful lives.
Impairment of goodwill, loans receivable and other long-lived assets
The Company periodically reviews the carrying value of goodwill, loans
receivable and other long-lived assets for impairment when events or
circumstances warrant such a review.
To the extent that the undiscounted cash flows related to the businesses
underlying the goodwill are less than the carrying value of the related
goodwill, such goodwill will be reduced to the amount of the undiscounted cash
flows.
A loan is impaired when, based on current information and events, it is
probable that the Company will be unable to collect all amounts due according to
the contractual terms of the loan agreement. Impaired loans receivable are
measured at the present value of expected future cash flows discounted at the
loan's effective interest rate. As a practical expedient, the loan may be
valued based on its observable market price or the fair value of the collateral,
if the loan is collateral dependent.
To the extent that the undiscounted cash flows related to other long-lived
assets are less than the assets' carrying value, the carrying value of such
assets is reduced to the assets' fair value.
Deferred policy acquisition costs
Deferred policy acquisition costs are directly related to the procurement
of tax service and home warranty contracts. These costs are deferred and
amortized to expense in the same manner as contract fees are recognized as
revenues.
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical
experience by a charge to expense when the related premium revenue is
recognized. Title insurance losses and other claims associated with ceded
reinsurance are provided for as the Company remains contingently liable in the
event that the reinsurer does not satisfy its obligations. The reserve for
known and incurred but not reported claims reflects management's best estimate
of the total costs required to settle all claims reported to the Company and
claims incurred but not reported. The process applied to estimate claims costs
is subject to many variables, including changes and trends in the type of title
insurance policies issued, the real estate market and the interest rate
environment. It is reasonably possible that a change in the estimate will occur
in the future.
The Company provides for claim losses relating to its home warranty
business based on the average cost per claim as applied to the total of new
claims incurred. The average cost per claim is calculated using the average of
the most recent 12 months of claims experience.
Operating revenues
Title premiums on policies issued directly by the Company are recognized on
the effective date of the title policy and escrow fees are recorded upon close
of the escrow. Revenues from title policies issued by independent agents are
recorded when notice of issuance is received from the agent.
Revenues from tax service contracts are recognized over the estimated
duration of the contracts as the related servicing costs are estimated to occur.
Revenues from home warranty contracts are recognized ratably over the 12-
month duration of the contracts.
Interest on loans with the Company's thrift subsidiary is recognized on the
outstanding principal balance on the accrual basis. Loan origination fees and
related direct loan origination costs are deferred and recognized over the life
of the loan.
Premium taxes
Title insurance and home warranty companies, like other types of insurers,
are generally not subject to state income or franchise taxes. However, in lieu
thereof, most states impose a tax based primarily on insurance premiums written.
This premium tax is reported as a separate line item in the consolidated
statements of income in order to provide a more meaningful disclosure of the
taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include
deferred taxes applicable to temporary differences between the financial
statement carrying amount and the tax basis of certain of the Company's assets
and liabilities.
26
<PAGE>
Earnings per share
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS
No. 128 became effective for 1997 and requires the presentation of basic and
diluted earnings per share on the face of the income statement. Basic earnings
per share are computed by dividing net income available to common stockholders
by the weighted-average number of common shares outstanding. The computation of
diluted earnings per share is similar to the computation of basic earnings per
share except that the weighted-average number of common shares outstanding is
increased to include the number of additional common shares that would have been
outstanding if potential dilutive common shares had been issued.
The Company's only potential dilutive common shares are stock options (see
Note 11). Stock options are reflected in diluted earnings per share by
application of the treasury stock method. All earnings per share amounts
presented have been restated to reflect the adoption of SFAS No. 128.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income." This statement is effective for 1998 and requires the reporting of
comprehensive income in addition to net income. Comprehensive income is a more
inclusive financial reporting methodology that includes disclosure of certain
financial information that historically has not been included in the calculation
of net income. Currently, the only item that would effect the Company is
unrealized gains and losses on debt and equity securities. Accordingly, had SFAS
No. 130 been in effect for the year ended December 31, 1997, comprehensive
income would have been $67,412,000.
Risk of real estate market
Real estate activity is cyclical in nature and is affected greatly by the
cost and availability of long-term mortgage funds. Real estate activity and, in
turn, the Company's revenue base, can be adversely affected during periods of
high interest rates and/or limited money supply.
Use of estimates
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the statements. Actual results could differ from the
estimates and assumptions used.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the
Company are not included in the consolidated balance sheets.
NOTE 2.
Statutory Restrictions on Stockholders' Equity and Investments:
Pursuant to insurance and other regulations of the various states in which
the Company's title insurance subsidiary, First American Title Insurance Company
(FATICO), operates, the amount of dividends, loans and advances available to the
parent company from FATICO is limited, principally for the protection of
policyholders. Under such statutory regulations, the maximum amount of
dividends, loans and advances available to the parent company from FATICO in
1998 is $52.1 million.
Investments carried at $16.5 million were on deposit with state treasurers
in accordance with statutory requirements for the protection of policyholders at
December 31, 1997.
FATICO maintained statutory capital and surplus of $210.3 million and
$208.3 million at December 31, 1997 and 1996, respectively. Statutory net
income for the years ended December 31, 1997, 1996 and 1995 was $35.9 million,
$34.6 million and $11.4 million, respectively.
27
<PAGE>
NOTE 3.
Debt and Equity Securities:
The amortized cost and estimated fair value of investments in debt
securities are as follow:
<TABLE>
<CAPTION>
(in thousands) Gross Unrealized
Amortized ---------------- Estimated
Cost Gains Losses Fair Value
--------- ------- ------ ----------
<S> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury securities $ 38,972 $ 792 $ (46) $ 39,718
Corporate securities 54,884 717 (22) 55,579
Obligations of state and
political subdivisions 38,977 1,092 40,069
Mortgage-backed securities 16,186 36 (85) 16,137
-------- ------ ----- --------
$149,019 $2,637 $(153) $151,503
======== ====== ===== ========
December 31, 1996
U.S. Treasury securities $ 42,956 $ 621 $(146) $ 43,431
Corporate securities 37,636 87 (165) 37,558
Obligations of state and
political subdivisions 38,544 290 (23) 38,811
Mortgage-backed securities 11,038 37 (299) 10,776
-------- ------ ----- --------
$130,174 $1,035 $(633) $130,576
======== ====== ===== ========
</TABLE>
The amortized cost and estimated fair value of debt securities at December
31, 1997, by contractual maturities, are as follows:
<TABLE>
<CAPTION>
(in thousands) Amortized Estimated
Cost Fair Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 17,055 $ 17,220
Due after one year through five years 63,304 63,726
Due after five years through ten years 47,268 49,102
Due after ten years 5,206 5,318
-------- --------
132,833 135,366
Mortgage-backed securities 16,186 16,137
-------- --------
$149,019 $151,503
======== ========
</TABLE>
The cost and estimated fair value of investments in equity securities are
as follows:
<TABLE>
<CAPTION>
(in thousands) Gross Unrealized
---------------- Estimated
Cost Gains Losses Fair Value
-------- ------- ------ ----------
<S> <C> <C> <C> <C>
December 31, 1997
Common stocks:
Corporate securities $7,941 $5,856 $(82) $13,715
Other 78 111 189
------ ------ ---- -------
8,019 5,967 (82) 13,904
Preferred stocks
------ ------ ---- -------
$8,019 $5,967 $(82) $13,904
====== ====== ==== =======
December 31, 1996
Common stocks:
Corporate securities $4,614 $3,838 $(82) $ 8,370
Other 91 56 147
------ ------ ---- -------
$4,705 $3,894 $(82) $ 8,517
====== ====== ==== =======
</TABLE>
Sales of debt and equity securities resulted in realized gains of $706,000,
$3,257,000 and $1,316,000 and realized losses of $348,000, $646,000 and $358,000
for the years ended December 31, 1997, 1996 and 1995, respectively. The fair
value of debt and equity securities was estimated using quoted market prices.
28
<PAGE>
NOTE 4.
Loans Receivable:
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Real estate-mortgage $65,384 $55,835
Assigned lease payments 50 81
Other 36 139
------- -------
65,470 56,055
------- -------
Unearned income on lease contracts (18) (33)
Allowance for loan losses (1,185) (1,050)
Participations sold (481) (140)
Deferred loan fees, net (408) (576)
------- -------
(2,092) (1,799)
------- -------
$63,378 $54,256
======= =======
</TABLE>
Real estate loans are secured by properties located in Southern California.
The average yield on the Company's loan portfolio was 11% for the years ended
December 31, 1997 and 1996. 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 $64.2 million and $54.3 million at
December 31, 1997 and 1996, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates being offered
for loans with similar terms to borrowers of similar credit quality.
The allowance for loan losses is maintained at a level that is considered
appropriate by management to provide for known and inherent risks in the
portfolio.
NOTE 5.
Assets Acquired in Connection with Claim Settlements:
<TABLE>
<CAPTION>
(in thousands) December 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Notes receivable $12,177 $11,083
Real estate 5,013 7,156
Judgments and other 3,929 6,031
------- -------
$21,119 $24,270
======= =======
</TABLE>
The above amounts are net of valuation reserves of $11.1 million and $10.3
million at December 31, 1997 and 1996, respectively.
The fair value of notes receivable was $12.5 million and $10.1 million at
December 31, 1997 and 1996, respectively, and was estimated based on the
discounted value of the future cash flows using the current rates at which
similar loans would be made to borrowers of similar credit quality.
The activity in the valuation reserve is summarized as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Balance at beginning of year $10,278 $11,246
Provision for losses 4,678 4,948
Dispositions (3,821) (5,916)
------- -------
Balance at end of year $11,135 $10,278
======= =======
</TABLE>
29
<PAGE>
NOTE 6.
Demand Deposits:
Passbook and investment certificate accounts are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
----------------------
1997 1996
-------- --------
<S> <C> <C>
Passbook $13,209 $13,335
Certificate accounts:
Less than one year 28,798 23,753
One to five years 20,468 14,233
------- -------
$62,475 $51,321
======= =======
Annualized interest rates:
Passbook 5% 5%
Certificate accounts 6%-8% 5%-8%
</TABLE>
The carrying value of the passbook accounts approximates fair value due to
the short-term nature of this liability. The fair value of investment
certificate accounts was $49.4 million and $38.0 million at December 31, 1997
and 1996, respectively, and was estimated based on the discounted value of the
future cash flows using a discount rate approximating current market for similar
liabilities.
NOTE 7.
Reserve for Known and Incurred But Not Reported Claims:
Activity in the reserve for known and incurred but not reported claims is
summarized as follows:
<TABLE>
<CAPTION>
(in thousands) Year Ended December 31
--------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of year $245,245 $238,161 $206,743
-------- -------- --------
Provision related to:
Current year 85,645 81,539 82,632
Prior years 4,678 4,948 7,755
-------- -------- --------
Total provision 90,323 86,487 90,387
-------- -------- --------
Payments related to:
Current year 39,934 29,680 25,039
Prior year 39,745 43,967 40,934
-------- -------- --------
Total payments 79,679 73,647 65,973
-------- -------- --------
Other (5,063) (5,756) 7,004
-------- -------- --------
Balance at end of year $250,826 $245,245 $238,161
======== ======== ========
</TABLE>
"Other" primarily represents reclassifications to the reserve for assets
acquired in connection with claim settlements. Included in 1995 is $10.0
million in purchase accounting adjustments. Claims activity associated with
reinsurance is not material and, therefore, not presented separately.
NOTE 8.
Notes and Contracts Payable:
<TABLE>
<CAPTION>
(in thousands) December 31
------------------
1997 1996
-------- --------
<S> <C> <C>
Secured notes payable pursuant to amended
credit agreement $ 5,320 $37,250
Trust deed notes with maturities through 2017, secured
by land and buildings with a net book value of $11,739,
average rate of 8 1/2% 7,359 8,630
Other notes and contracts payable with maturities
through 2005, average rate of 7 1/2% 29,294 25,377
------- -------
$41,973 $71,257
======= =======
</TABLE>
30
<PAGE>
In April 1997, the Company paid off the variable rate indebtedness portion
of the amended credit agreement with proceeds received from its junior
subordinated interest debentures (see Note 13).
At December 31, 1997, the Company's remaining borrowings under its amended
bank credit agreement consisted of fixed rate indebtedness of $5.3 million,
maturing in April 1999 and bearing interest at 9.38% per annum.
During July 1997, the Company amended the credit agreement to relax and/or
eliminate certain restrictive covenants and increase the revolving line of
credit to $75.0 million which was unused as of December 31, 1997. In November
1997, the Company further amended the credit agreement to issue a letter of
credit in the amount of $5.7 million to secure its fixed rate obligation and
release as security the capital stock of its wholly owned subsidiaries.
Pursuant to the terms of the credit agreement, the Company is required to
maintain minimum levels of capital and earnings and meet predetermined debt to
capitalization ratios.
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998 $13,503
1999 $11,813
2000 $ 5,599
2001 $ 4,381
2002 $ 1,723
</TABLE>
The fair value of notes and contracts payable was $44.3 million and $70.6
million at December 31, 1997 and 1996, 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 8% and 7 1/4% at December 31, 1997 and 1996, respectively.
NOTE 9.
Income Taxes:
Income taxes are summarized as follows:
<TABLE>
<CAPTION>
(in thousands)
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Current:
Federal $27,234 $28,535 $3,442
State 3,925 6,038 1,810
------- ------- ------
31,159 34,573 5,252
------- ------- ------
Deferred:
Federal 9,747 232 70
State 594 795 878
------- ------- ------
10,341 1,027 948
------- ------- ------
$41,500 $35,600 $6,200
======= ======= ======
</TABLE>
Income taxes differ from the amounts computed by applying the federal income tax
rate of 35%. A reconciliation of this difference is as follows:
<TABLE>
<CAPTION>
(in thousands)
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Taxes calculated at federal rate $37,173 $31,216 $ 4,825
Tax exempt interest income (651) (669) (719)
Tax effect of minority interests 1,286 918 746
State taxes, net of federal benefit 3,706 4,442 2,456
Exclusion of certain meals and
entertainment expenses 2,889 2,429 2,391
Change in tax reserves (2,301)
Other items, net (2,903) (2,736) (1,198)
------- ------- -------
$41,500 $35,600 $ 6,200
======= ======= =======
</TABLE>
31
<PAGE>
The primary components of temporary differences which give rise to the Company's
net deferred tax asset are as follows:
<TABLE>
<CAPTION>
(in thousands) December 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets:
Deferred revenue $23,066 $25,709
Employee benefits 11,021 9,811
Title claims and related salvage 3,183 11,934
Bad debt reserves 4,952 3,382
Acquisition reserve 3,970 2,254
State taxes 346 441
Other 7,009 4,261
------- -------
Total deferred tax assets 53,547 57,792
------- -------
Deferred tax liabilities:
Depreciable and amortizable assets 15,116 13,611
Unrealized gain on securities 2,929 1,475
Sale leaseback 1,327 1,462
Other 2,612 2,843
------- -------
Total deferred tax liabilities 21,984 19,391
------- -------
Net deferred tax asset $31,563 $38,401
======= =======
</TABLE>
NOTE 10.
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
nonqualified unfunded supplemental benefit plans covering certain key management
personnel. Benefits under these plans are intended to be funded with proceeds
from life insurance policies purchased by the Company on the lives of the
executives.
Net pension cost for the Company's pension and other retirement benefit
plans includes the following components:
<TABLE>
<CAPTION>
(in thousands)
------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Service cost - benefits earned
during the year $ 10,550 $ 9,186 $ 7,798
Interest cost on projected
benefit obligation 11,178 9,764 8,741
Actual gain on plan assets (20,555) (10,517) (9,636)
Net amortization and deferral 14,531 5,810 4,674
-------- -------- -------
Net periodic pension cost $ 15,704 $ 14,243 $11,577
======== ======== =======
</TABLE>
32
<PAGE>
The following table sets forth the plans' status at:
<TABLE>
<CAPTION>
(in thousands) December 31
-------------------------------------------------
1997 1996
------------------------- ----------------------
Unfunded Unfunded
Funded Supplemental Funded Supplemental
Pension Benefit Pension Benefit
Plans Plans Plans Plans
---------- ------------ -------- ------------
<S> <C> <C> <C> <C>
Present value of
benefit obligation:
Vested benefits $ 97,463 $19,766 $ 74,536 $17,137
Non-vested benefits 8,619 5,303 7,479 5,068
--------- ------- -------- -------
Accumulated benefit obligation 106,082 25,069 82,015 22,205
Value of future pay increases 35,607 7,065 29,663 7,046
--------- ------- -------- -------
Total projected benefit obligation 141,689 32,134 111,678 29,251
Plan assets at fair value (109,357) (87,096)
--------- ------- -------- -------
Plan assets less than projected
benefits obligation 32,332 32,134 24,582 29,251
Unrecognized net (asset)
obligation at transition 255 (1,441) 307 (1,801)
Prior service cost not yet recognized 457 (1,614) 503 (1,802)
Unrecognized net loss (18,682) (6,280) (15,005) (5,419)
Adjustment to recognize
minimum liability 2,270 1,976
--------- ------- -------- -------
Accrued pension costs $ 14,362 $25,069 $ 10,387 $22,205
========= ======= ======== =======
</TABLE>
The rate of increase in future compensation levels for the plans of 4 1/2%
and the weighted average discount rates of 7 1/4% and 7 3/4% were used in
determining the actuarial present value of the projected benefit obligation at
December 31, 1997 and 1996, 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 2,192,000 and
2,391,000 shares of the Company's common stock, representing 13% and 14% of the
total shares outstanding at December 31, 1997, and 1996 respectively.
The Company also has a Stock Bonus Plan for key employees pursuant to which
86,000, 75,000 and 98,000 common shares were awarded for 1997, 1996 and 1995,
respectively, resulting in a charge to operations of $2.2 million, $1.3 million
and $1.2 million, respectively. The Plan, as amended December 9, 1992, provides
that a total of up to 450,000 common shares may be awarded in any one year.
Effective January 1, 1995, the Company adopted The First American Financial
Corporation 401(k) Savings Plan ("The Savings Plan"), which is available to
substantially all employees. The Savings Plan allows for employee elective
contributions up to the maximum deductible amount as determined by the Internal
Revenue Code.
NOTE 11.
Stock Option Plans:
On April 24, 1996, the Company implemented The First American Financial
Corporation 1996 Stock Option Plan ("the Stock Option Plan"). Under the Stock
Option Plan, options are granted to certain employees to purchase the Company's
common stock at a price no less than the market value of the shares on the date
of the grant. The maximum number of shares that may be subject to options is
1,875,000. Currently outstanding options become exercisable one to five years,
and expire 10 years, from the grant date. On April 24, 1997, the Company
implemented The First American Financial Corporation 1997 Directors' Stock Plan
("the Directors' Plan"). The Directors' Plan is similar to the employees' Stock
Option Plan, except that the maximum number of shares that may be subject to
options is 600,000 and the maximum number of shares that may be purchased
pursuant to options granted shall not exceed 2,250 shares during any 12-
consecutive-month period.
33
<PAGE>
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accounting for its plan, the Company, in accordance with the provisions of
SFAS No. 123, applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." As a result of this election, the Company does
not recognize compensation expense for its stock option plans. Had the Company
determined compensation cost based on the fair value for its stock options at
grant date, as set forth under SFAS No. 123, the Company's net income and
earnings per share would have been reduced to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
(in thousands, except per share amounts) 1997 1996
-------- --------
<S> <C> <C>
Net income:
As reported $64,709 $53,589
Pro forma $63,909 $53,070
Earnings per share:
As reported
Basic $ 3.73 $ 3.12
Diluted $ 3.64 $ 3.09
Pro forma
Basic $ 3.68 $ 3.09
Diluted $ 3.59 $ 3.06
</TABLE>
The fair value of each option grant is estimated at the grant date using
the Black-Scholes option-pricing method with the following weighted-average
assumptions used for grants in 1997 and 1996, respectively: dividend yield of
1.2% and 1.9%; expected volatility of 38.1% and 41.0%; risk-free interest rate
of 6.3% and 6.5%; and expected life of six years. The weighted-average fair
value of options granted during 1997 and 1996 was $12.79 and $6.57,
respectively.
Transactions involving stock options are summarized as follows:
<TABLE>
<CAPTION>
Weighted
Average
(in thousands, except weighted-average exercise price) Number Exercise
Outstanding Price
----------- --------
<S> <C> <C>
Balance at December 31, 1995
Granted during 1996 1,005 $17.08
------ ------
Balance at December 31, 1996 1,005 $17.08
Granted during 1997 69 $31.50
Exercised during 1997 97 $17.08
Forfeited during 1997 44 $17.08
------ ------
Balance at December 31, 1997 933 $18.15
====== ======
</TABLE>
At December 31, 1997, the range of exercise prices was $17.08 - $39.83 and
the weighted-average remaining contractual life of outstanding options was six
years. The number of options exercisable was 104,250 and the weighted-average
exercise price of those options was $17.08. There were no options exercisable
at December 31, 1996.
NOTE 12.
Commitments and Contingencies:
The Company leases certain office facilities, automobiles and equipment
under operating leases, which for the most part are renewable. The majority of
these leases also provide that the Company will pay insurance and taxes. In
1994, the Company entered into a sale-leaseback agreement with regard to certain
furniture and equipment. Under the agreement, the Company agreed to lease the
equipment for four years with minimum annual lease payments of $8.3 million.
34
<PAGE>
Future minimum rental payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of December 31,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
------------- --------
<S> <C>
1998 $ 71,522
1999 53,280
2000 31,836
2001 21,535
2002 16,889
Later Years 43,015
--------
$238,077
========
</TABLE>
Total rental expense for all operating leases and month-to-month rentals
was $78.3 million, $63.9 million and $58.6 million for 1997, 1996 and 1995,
respectively.
The Company is involved in various routine legal proceedings related to its
operations. While the ultimate disposition of each proceeding is not
determinable, the Company does not believe that any of such proceedings will
have a materially adverse effect on its financial condition or results of
operations.
NOTE 13.
Mandatorily Redeemable Preferred Securities:
On April 22, 1997, the Company issued and sold $100.0 million of 8.5%
preferred securities, due in 2012, through its wholly owned subsidiary, First
American Capital Trust I. In connection with the subsidiary's issuance of the
preferred securities, the Company issued to the subsidiary trust 8.5%
subordinated interest notes, due 2012. The sole assets of the subsidiary are
and will be the subordinated interest notes. The Company's obligations under
the subordinated interest notes and related agreements, taken together,
constitute a full and unconditional guarantee by the Company of the subsidiary's
obligations under the preferred securities. Distributions payable on the
securities are included as interest expense in the Company's consolidated income
statement.
NOTE 14.
Stockholders' Equity:
On October 23, 1997, the Company adopted a Shareholder Rights Plan. Under
the Rights Plan, after the close of business on November 15, 1997, each holder
of the Company's common shares received a dividend distribution of one Right for
each common share held. Each Right entitles the holder thereof to buy a
preferred share fraction equal to 1/100,000 of a share of Series A Junior
Participating Preferred Shares of the Company at an exercise price of $265 per
preferred share fraction. Each fraction is designed to be equivalent in voting
and dividend rights to one common share.
The Rights will be exercisable and will trade separately from the common
shares only if a person or group, with certain exceptions, acquires beneficial
ownership of 15% or more of the Company's common shares or commences a tender or
exchange offer that would result in such person or group beneficially owning 15%
or more of the common shares then outstanding. The Company may redeem the
Rights at $0.001 per Right at any time prior to the occurrence of one of these
events. All Rights expire on October 23, 2007.
Each Right will entitle its holder to purchase, at the Right's then-current
exercise price, preferred share fractions (or other securities of the Company)
having a value of twice the Right's exercise price. This amounts to the right
to buy preferred share fractions of the Company at half price. Rights owned by
the party triggering the exercise of Rights will be void and therefore will not
be exercisable.
In addition, if after any person has become a 15%-or-more stockholder, the
Company is involved in a merger or other business combination transaction with
another person in which the Company's common shares are changed or converted, or
if the Company sells 50% or more of its assets or earning power to another
person, each Right will entitle its holder to purchase, at the Right's then-
current exercise price, common stock of such other person (or its parent) having
a value of twice the Right's exercise price.
On January 15, 1998, the Company distributed a 3-for-2 common stock split
in the form of a 50% stock dividend. This resulted in an increase of 5,791,492
common shares outstanding with the par value of these additional shares being
capitalized by a transfer from additional paid-in capital to the common stock
account. This stock split has been reflected in the consolidated statements of
stockholders' equity on a retroactive basis as of December 31, 1994. In order
to effect the stock split, the Company increased its authorized shares from
24,000,000 to 36,000,000. All references in the consolidated financial
statements with regards to common stock, additional paid-in capital, number of
shares of common stock and per share amounts have been restated to reflect the
stock split.
35
<PAGE>
NOTE 15.
Acquisitions:
During 1997 the Company acquired 15 companies, all of which were in the
title insurance or real estate information services business, for an aggregate
of $30.8 million in cash and $7.1 million in notes. Each of the acquisitions
was accounted for under the purchase method of accounting and, accordingly, the
purchase price was allocated to the assets acquired and liabilities assumed
based on estimated fair values. As a result of the acquisitions, the Company
recorded approximately $50.4 million in goodwill and other intangible assets.
Goodwill is amortized on a straight-line basis over its estimated useful life
ranging from 20 to 40 years. The operating results of the acquired companies
were included in the Company's consolidated financial statements from their
respective acquisition dates.
The following unaudited pro forma consolidated operating results have
been prepared as if the acquisitions had occurred at the beginning of 1997 and
1996:
<TABLE>
<CAPTION>
(in thousands) 1997 1996
---------- ----------
<S> <C> <C>
Revenues $1,921,449 $1,703,696
Net income $ 62,840 $ 53,303
Net income per diluted share $ 3.53 $ 3.08
</TABLE>
The pro forma results include amortization of goodwill and interest
expense on acquisition debt. The pro forma results are not necessarily
indicative of the operating results that would have been obtained had the
acquisitions occurred at the beginning of the periods presented, nor are they
necessarily indicative of future operating results.
NOTE 16.
Subsequent Events:
On January 1, 1998, the Company formed a limited liability corporation
("LLC") with Experian Group ("Experian"). The purpose of the LLC is to combine
certain operations of the Company's subsidiary, First American Real Estate
Information Services, Inc., with Experian's Real Estate Solutions division
("RES"). The LLC is 80% owned by the Company and 20% owned by Experian. RES is
a supplier of core real estate data, providing, among other things, property
valuation information, title insurance, tax information and imaged title
documents.
This business combination has been accounted for under the purchase method
of accounting and, accordingly, the purchase price will be allocated to the
assets acquired and liabilities assumed based on the estimated fair values at
January 1, 1998. In addition, as a result of the transaction, the Company will
recognize a pretax gain of $33.0 million in the first quarter 1998. The
operating results of the LLC will be included in the Company's consolidated
financial statements commencing January 1, 1998.
NOTE 17.
Segment Financial Information:
The Company's operations include four reportable segments: title insurance,
real estate information, home warranty and trust and banking. The title
insurance segment issues policies which are insured statements of the condition
of title to real property. The real estate information segment provides to
lender customers the status of tax payments on real property securing their
loans, credit information derived from at least two credit bureau sources, flood
zone determination reports which provide information on whether or not a
property is in a special flood hazard area, as well as other real estate-related
information services. The home warranty segment issues one-year warranties
which protect homeowners against defects in home fixtures. The trust and
banking segment provides full-service trust and depository services, accepts
deposits and makes real estate secured loans.
The title insurance and real estate information segments operate through
networks of offices nationwide. The Company provides its title services through
both direct operations and agents throughout the United States. It also offers
title services abroad in Australia, the Bahama Islands, Canada, Guam, Mexico,
Puerto Rico, the U.S. Virgin Islands and the United Kingdom. Home warranty
services are available in Arizona, California, Nevada, North Carolina, South
Carolina, Texas, Utah and Washington. The trust, banking and thrift businesses
operate in Southern California.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement is effective for 1998 and
requires certain information about a company's operating segments and products
and services. The
36
<PAGE>
Company believes that the adoption of SFAS No. 131 will not materially alter its
segment disclosures and related information.
Selected financial information about the Company's operations by segment
for each of the past three years is as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
(in thousands) Depreciation
Pretax and Capital
Revenues Profit (loss) Assets Amortization Expenditures
---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
Title Insurance $1,482,993 $ 95,636 $ 656,622 $23,501 $39,190
Real Estate Information 331,152 45,317 312,666 12,369 33,602
Home Warranty 51,005 9,741 81,444 424 768
Trust and Banking 20,007 4,062 83,423 604 676
Corporate 2,304 (31,643) 33,989 1,251 250
---------- -------- ---------- ------- -------
$1,887,461 $123,113 $1,168,144 $38,149 $74,486
========== ======== ========== ======= =======
1996
Title Insurance $1,288,947 $ 66,056 $ 584,800 $17,236 $30,082
Real Estate Information 247,810 52,581 225,527 8,281 17,060
Home Warranty 41,927 8,178 67,622 296 277
Trust and Banking 17,839 3,728 72,473 438 1,366
Corporate 1,043 (24,678) 29,372 991
---------- -------- ---------- ------- -------
$1,597,566 $105,865 $ 979,794 $27,242 $48,785
========== ======== ========== ======= =======
1995
Title Insurance $1,052,823 $ 17,540 $ 532,697 $13,356 $20,321
Real Estate Information 147,004 19,690 182,499 6,205 7,984
Home Warranty 35,531 6,828 56,637 289 149
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 $20,790 $29,643
========== ======== ========== ======= =======
</TABLE>
Corporate consists primarily of unallocated interest expense, minority
interest, equity in earnings of affiliated companies and personnel and other
operating expenses associated with the Company's home office facilities.
37
<PAGE>
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
UNAUDITED QUARTERLY FINANCIAL DATA
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------
March 31 June 30 September 30 December 31
-------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Year Ended December 31, 1997
Revenues.......................... $382,877 $450,374 $501,848 $552,362
======== ======== ======== ========
Income before income taxes........ $ 4,766 $ 30,216 $ 33,572 $ 37,655
======== ======== ======== ========
Net income........................ $ 2,866 $ 18,516 $ 20,572 $ 22,755
======== ======== ======== ========
Net income per share (Note A):
Basic........................... $ .17 $ 1.06 $ 1.19 $ 1.31
======== ======== ======== ========
Diluted......................... $ .16 $ 1.05 $ 1.16 $ 1.27
======== ======== ======== ========
Year Ended December 31, 1996
Revenues.......................... $347,376 $413,374 $411,304 $425,512
======== ======== ======== ========
Income before income taxes........ $ 14,982 $ 32,827 $ 23,569 $ 17,811
======== ======== ======== ========
Net income........................ $ 8,582 $ 19,427 $ 13,769 $ 11,811
======== ======== ======== ========
Net income per share (Note A):
Basic........................... $ .50 $ 1.13 $ 0.80 $ 0.69
======== ======== ======== ========
Diluted......................... $ .50 $ 1.13 $ 0.79 $ 0.67
======== ======== ======== ========
</TABLE>
The Company's primary business segments are cyclical in nature, with the
spring and summer months historically being the strongest. However, interest
rate adjustments by the Federal Reserve Board, as well as other economic
factors, can cause unusual fluctuations in the Company's quarterly operating
results. See Management's Discussion and Analysis in Part 1, Item 7 of this
report for further discussion of the Company's results of operations.
Note A--After adjustment for 3-for-2 stock split effected January 15, 1998,
and restatement for the adoption of Statement of Financial Accounting
Standards No. 128, "Earnings per Share."
38
<PAGE>
SCHEDULE I
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1997
<TABLE>
<CAPTION>
Column A Column B Column C Column D
-------- ------------ ------------ ---------------
Amount at which
shown in the
Type of Investment Cost Market Value balance sheet
------------------ ------------ ------------ ---------------
<S> <C> <C> <C>
Deposits with savings and loan
associations and banks:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
------------ ------------ ------------
Consolidated...................... $ 29,029,000 $ 29,029,000 $ 29,029,000
------------ ------------ ------------
Debt securities:
Registrant--None
Consolidated
U.S. Treasury securities........ $ 38,972,000 $ 39,718,000 $ 39,718,000
Corporate securities............ 54,884,000 55,579,000 55,579,000
Obligations of states and
political subdivisions......... 38,977,000 40,069,000 40,069,000
Mortgage-backed securities...... 16,186,000 16,137,000 16,137,000
------------ ------------ ------------
$149,019,000 $151,503,000 $151,503,000
------------ ------------ ------------
Equity securities:
Registrant--None
Consolidated...................... $ 8,019,000 $ 13,904,000 $ 13,904,000
------------ ------------ ------------
Other long-term investments:
Registrant--None
Consolidated...................... $ 35,047,000 $ 35,047,000 $ 35,047,000
------------ ------------ ------------
Total Investments:
Registrant........................ $ 50,000 $ 50,000 $ 50,000
============ ============ ============
Consolidated...................... $221,114,000 $229,483,000 $229,483,000
============ ============ ============
</TABLE>
39
<PAGE>
SCHEDULE II
1 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY BALANCE SHEETS
<TABLE>
<CAPTION>
December 31
--------------------------
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
------
Cash and cash equivalents.......................... $ 9,657,000 $ 8,983,000
------------ ------------
Stock of subsidiaries, at equity................... 624,690,000 532,128,000
------------ ------------
Deposits with savings and loan associations and
banks............................................. 50,000 0,000
------------ ------------
Property and equipment, at cost:
Land............................................. 425,000 425,000
Buildings and building improvements.............. 5,006,000 5,006,000
Less--accumulated depreciation................... (4,628,000) (4,442,000)
------------ ------------
803,000 989,000
------------ ------------
Other assets....................................... 5,217,000 4,471,000
------------ ------------
$640,417,000 546,621,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Dividends payable.................................. $ 2,376,000 $ 2,118,000
------------ ------------
Accrued expenses................................... 1,798,000 322,000
------------ ------------
Payable to subsidiaries............................ 114,143,000 146,268,000
------------ ------------
Notes and contracts payable........................ 10,688,000 45,448,000
------------ ------------
Mandatorily redeemable preferred securities of the
Company's subsidiary trust whose sole assets are
the Company's $100,000,000 8.5% deferrable
interest subordinated notes due 2012.............. 100,000,000
------------
Stockholders' equity:
Preferred stock, $1 par value; Authorized--
500,000 shares;
Outstanding--None
Common stock, $1 par value; Authorized--
36,000,000 shares;
Outstanding--17,374,000 and 17,331,000 shares... 17,374,000 17,331,000
Additional paid-in capital....................... 43,953,000 43,643,000
Retained earnings................................ 344,645,000 288,754,000
Net unrealized gain on securities................ 5,440,000 2,737,000
------------ ------------
Total stockholders' equity..................... 411,412,000 352,465,000
------------ ------------
$640,417,000 $546,621,000
============ ============
</TABLE>
See Notes to Parent Company Financial Statements
40
<PAGE>
SCHEDULE II
2 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended December 31
-----------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues:
Interest and other income................. $ 501,000 $ 891,000 $ 837,000
Equity in earnings of subsidiaries........ 94,479,000 75,696,000 25,803,000
----------- ----------- -----------
94,980,000 76,587,000 26,640,000
----------- ----------- -----------
Expenses:
Interest.................................. 7,450,000 3,635,000 5,040,000
Depreciation.............................. 186,000 186,000 185,000
Other administrative expenses............. 22,635,000 19,177,000 13,828,000
----------- ----------- -----------
30,271,000 22,998,000 19,053,000
----------- ----------- -----------
Net income.................................. $64,709,000 $53,589,000 $ 7,587,000
=========== =========== ===========
Net income per share:
Basic..................................... $ 3.73 $ 3.12 $ 0.44
=========== =========== ===========
Diluted................................... $ 3.64 $ 3.09 $ 0.44
=========== =========== ===========
Weighted Average Shares:
Basic..................................... 17,362,000 17,179,000 17,105,000
=========== =========== ===========
Diluted................................... 17,785,000 17,325,000 17,105,000
=========== =========== ===========
</TABLE>
See Notes to Parent Company Financial Statements
41
<PAGE>
SCHEDULE II
3 OF 4
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PARENT COMPANY STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------------
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income......................... $ 64,709,000 $ 53,589,000 $ 7,587,000
Adjustments to reconcile net income
to cash (used for) provided by
operating activities--
Depreciation..................... 186,000 186,000 185,000
Expense relating to stock plans.. 2,335,000 1,270,000 1,153,000
Equity in earnings of
subsidiaries, net of dividends.. (76,808,000) (63,697,000) (25,802,000)
Other............................ (225,000)
Changes in assets and liabilities,
excluding effects of company
acquisitions and noncash
transactions--
(Increase) decrease in other
assets.......................... (746,000) 453,000 503,000
Increase in dividends payable and
accrued expenses................ 1,734,000 174,000 7,000
(Decrease) increase in
intercompany accounts........... (23,286,000) 23,369,000 40,509,000
------------ ------------ ------------
Cash (used for) provided by
operating activities.......... (31,876,000) 15,344,000 23,917,000
------------ ------------ ------------
Cash flows from investing activities:
Capital contribution to subsidiary. (21,342,000)
Net increase in deposits with
banks............................. (50,000)
Sales of equity securities......... 1,933,000
------------ ------------
Cash (used for) provided by
investing activities.......... (21,342,000) 1,883,000
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of
mandatorily redeemable preferred
securities........................ 100,000,000
Proceeds from exercise of stock
options........................... 1,653,000
Proceeds from issuance of stock to
employee savings plan............. 980,000
Repayment of debt.................. (34,760,000) (14,313,000) (11,121,000)
Purchase of Company shares......... (5,163,000) (3,535,000) (3,592,000)
Cash dividends..................... (8,818,000) (7,928,000) (6,850,000)
------------ ------------ ------------
Cash provided by (used for)
financing activities.......... 53,892,000 (25,776,000) (21,563,000)
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents.................... 674,000 (10,432,000) 4,237,000
Cash and cash equivalents--
Beginning of year.................. 8,983,000 19,415,000 15,178,000
------------ ------------ ------------
End of year........................ $ 9,657,000 $ 8,983,000 $ 19,415,000
============ ============ ============
Supplementary information:
Cash paid during the year for
interest.......................... $ 5,973,000 $ 3,835,000 $ 4,986,000
Noncash investing and financing
activities:
Shares issued for benefits plans... $ 2,335,000 $ 1,270,000 $ 1,153,000
Company acquisitions in exchange
for common stock.................. $ 548,000 $ 7,558,000 $ 2,712,000
</TABLE>
See Notes to Parent Company Financial Statements
42
<PAGE>
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 Notes and Contracts Payable consists of:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
----------- -----------
<S> <C> <C>
Secured notes payable to financial institutions.... $ 5,320,000 $37,250,000
Trust deed notes with maturities through 2002,
average rate of 10%. Secured by land and buildings
with an aggregate net book
value of $872,000................................. 623,000 759,000
Other notes and contracts payable with maturities
through 2000,
average rate of 7%................................ 4,745,000 7,439,000
----------- -----------
$10,688,000 $45,448,000
=========== ===========
</TABLE>
The aggregate annual maturities for notes and contracts payable in each of
the five years after December 31, 1997, are $5,711,000, $4,180,000, $582,000,
$136,000, and $79,000, 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.
43
<PAGE>
SCHEDULE III
1 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
<TABLE>
<CAPTION>
Column A Column B Column C Column D
- -------- ----------------- ------------ ------------
Deferred Policy Claims Deferred
Segment Acquisition Costs Reserves Revenues
- ------- ----------------- ------------ ------------
<S> <C> <C> <C>
1997
Title Insurance..................... $238,141,000 $ 2,151,000
Real Estate Information............. $19,700,000 9,238,000 75,391,000
Home Warranty....................... 5,316,000 3,357,000 26,582,000
Trust and Banking................... 90,000
Corporate...........................
----------- ------------ ------------
Total............................. $25,016,000 $250,826,000 $104,124,000
=========== ============ ============
1996
Title Insurance..................... $237,596,000 $ 4,396,000
Real Estate Information............. $20,889,000 4,880,000 79,401,000
Home Warranty....................... 3,864,000 2,769,000 20,336,000
Trust and Banking...................
Corporate...........................
----------- ------------ ------------
Total............................. $24,753,000 $245,245,000 $104,133,000
=========== ============ ============
</TABLE>
44
<PAGE>
SCHEDULE III
2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
<TABLE>
<CAPTION>
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
------- -------------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
1997
Title Insurance......... $1,461,967,000 $21,026,000 $52,924,000 $247,579,000
Real Estate Information. 331,372,000 (220,000) 9,874,000 $7,532,000 135,453,000
Home Warranty........... 46,859,000 4,146,000 27,338,000 562,000 1,509,000
Trust and Banking....... 20,007,000 187,000 8,093,000
Corporate............... 2,304,000 10,591,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,860,205,000 $27,256,000 $90,323,000 $8,094,000 $403,225,000
============== =========== =========== ========== ============
1996
Title Insurance......... $1,268,233,000 $20,714,000 $58,909,000 $216,091,000
Real Estate Information. 246,745,000 1,065,000 4,453,000 $7,113,000 84,136,000
Home Warranty........... 38,351,000 3,576,000 23,055,000 665,000 658,000
Trust and Banking....... 17,839,000 70,000 6,982,000
Corporate............... 1,043,000 7,064,000
-------------- ----------- ----------- ---------- ------------
Total................. $1,571,168,000 $26,398,000 $86,487,000 $7,778,000 $314,931,000
============== =========== =========== ========== ============
1995
Title Insurance......... $1,034,789,000 $18,034,000 $68,338,000 $186,876,000
Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 53,636,000
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 $250,184,000
============== =========== =========== ========== ============
</TABLE>
45
<PAGE>
SCHEDULE IV
1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
REINSURANCE
<TABLE>
<CAPTION>
Title
insurance
operating Title Percentage
revenues Ceded to Assumed insurance of amount
before other from other operating assumed to
Segment reinsurance companies companies revenues operating revenues
- ------- -------------- ---------- ---------- -------------- ------------------
<S> <C> <C> <C> <C> <C>
1997.... $1,461,551,000 $3,609,000 $4,025,000 $1,461,967,000 0.3%
============== ========== ========== ============== ===
1996.... $1,267,309,000 $2,094,000 $3,018,000 $1,268,233,000 0.2%
============== ========== ========== ============== ===
1995.... $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 0.3%
============== ========== ========== ============== ===
</TABLE>
46
<PAGE>
SCHEDULE V
1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ----------------------- ----------- ------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated.......... $ 5,351,000 $ 4,510,000 $ 2,259,000(A) $ 7,602,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated.......... $245,245,000 $90,323,000 $(4,633,000)(B) $80,109,000(C) $250,826,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated.......... $ 1,050,000 $ 243,000 $ 108,000(A) $ 1,185,000
============ =========== =========== ============
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated.......... $ 10,278,000 $ 4,678,000 $ 3,821,000(D) $ 11,135,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated.......... $ 438,000 $ 438,000(E)
============ ===========
Reserve deducted from
other assets:
Registrant--None
Consolidated.......... $ 1,387,000 $ 640,000 $ 220,000(D) $ 1,807,000
============ =========== =========== ============
</TABLE>
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $45,000 in purchase accounting adjustments, net of a
reclassification of $4,678,000 to the reserve for assets acquired in
connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
47
<PAGE>
SCHEDULE V
2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ----------------------- ------------ ------------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS FROM RESERVE PERIOD
----------- ------------ ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Reserve deducted from
accounts receivable:
Registrant--None
Consolidated......... $ 5,970,000 $ 4,386,000 $ 5,005,000(A) $ 5,351,000
============ =========== =========== ============
Reserve for title losses
and other claims:
Registrant--None
Consolidated......... $238,161,000 $86,487,000 $(4,915,000)(B) $74,488,000(C) $245,245,000
============ =========== =========== =========== ============
Reserve deducted from
loans receivable:
Registrant--None
Consolidated......... $ 1,344,000 $ 433,000 $ 727,000(A) $ 1,050,000
============ =========== =========== ============
Reserve deducted from
other investments:
Registrant--None
Consolidated......... $ 353,000 $ 353,000(D)
============ ===========
Reserve deducted from
assets acquired in
connection with claim
settlements:
Registrant--None
Consolidated......... $ 11,246,000 $ 4,948,000 $ 5,916,000(D) $ 10,278,000
============ =========== =========== ============
Reserve deducted from
deferred income taxes:
Registrant--None
Consolidated......... $ 856,000 $ 418,000(E) $ 438,000
============ =========== ============
Reserve deducted from
other assets:
Registrant--None
Consolidated......... $ 1,420,000 $ 2,000 $ 35,000(D) $ 1,387,000
============ =========== =========== ============
</TABLE>
- --------
Note A--Amount represents accounts written off, net of recoveries.
Note B--Amount represents $33,000 in purchase accounting adjustments, net of a
reclassification of $4,948,000 to the reserve for assets acquired in
connection with claim settlements.
Note C--Amount represents claim payments, net of recoveries.
Note D--Amount represents elimination of reserve in connection with
disposition and/or revaluation of the related asset.
Note E--Amount represents elimination of reserve in connection with the
expiration of the related temporary differences.
48
<PAGE>
SCHEDULE V
3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ------------ ---------------------- ----------- ------------
ADDITIONS
----------------------
BALANCE AT CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT
BEGINNING COSTS AND OTHER FROM END OF
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD
----------- ------------ ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
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
============ =========== =========== ============
</TABLE>
- --------
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.
49
<PAGE>
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.
50
<PAGE>
(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 20, 1992.
*(10)(e) Pension Restoration Plan (effective as of
January 1, 1994).
*(10)(f) 1996 Stock Option Plan, incorporated by reference
herein from Exhibit 4 of Registration Statement on
Form S-8 dated December 30, 1996.
*(10)(g) Pledge Agreement dated as of April 27, 1992,
incorporated by reference herein from Exhibit (2)
of Current Report on Form 8-K dated May 8, 1992.
(21) Subsidiaries of the registrant, incorporated by
reference herein from Exhibit 21 of Annual Report
on Form 10-K for the fiscal year ended December 31,
1997.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule, incorporated by reference
herein from Exhibit 27 of Annual Report on Form
10-K for the fiscal year ended December 31, 1997.
(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.
51
<PAGE>
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: February 12, 1999
--------------------------------------------------------------------
By: /s/ THOMAS A. KLEMENS
--------------------------------------------------------------------
Thomas A. Klemens, Executive Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: February 12, 1999
--------------------------------------------------------------------
52
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
(3)(a) Restated Articles of Incorporation of The First
American Financial Corporation dated January 1,
1998, incorporated by reference herein from exhibit
(3)(a) of Annual Report on Form 10-K for the year
ended December 31, 1997.
(4)(a) Amended and Restated Credit Agreement dated as of July
29, 1997, incorporated by reference herein from
Exhibit (4.4) of Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997.
(4)(b) Amendment No. 1 dated as of November 10, 1997, to
Amended and Restated Credit Agreement dated as of July
29, 1997, incorporated by reference herein from
Exhibit (4.1) of Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
(4)(c) Rights Agreement, dated as of October 23, 1997,
incorporated by reference herein from Exhibit 4 of
Registration Statement on Form 8-A dated November 7,
1997.
(4)(d) Junior Subordinated Indenture, dated as of April 22,
1997, incorporated by reference herein from Quarterly
Report on Form 10-Q for the quarter ended June 30,
1997.
(4)(e) Form of New 8.50% Junior Subordinated Deferrable
Interest Debenture, incorporated by reference herein
from Exhibit 4.2 of Registration Statement on Form S-4
dated September 18, 1997.
(4)(f) Certificate of Trust of First American Capital Trust
I, incorporated by reference herein from Exhibit 4.3
of Registration Statement on Form S-4 dated September
18, 1997.
(4)(g) Declaration of Trust of First American Capital Trust I
dated as of April 11, 1997, incorporated by reference
herein from Exhibit 4.4 of Registration Statement on
Form S-4 dated September 18, 1997.
(4)(h) Amended and Restated Declaration of Trust of First
American Capital Trust I dated as of April 22, 1997,
incorporated by reference herein from Exhibit 4.3 of
Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(4)(i) Form of New 8.50% Capital Security (Liquidation Amount
$1,000 per Capital Security), incorporated by
reference herein from Exhibit 4.6 of Registration
Statement on Form S-4 dated September 18, 1997.
(4)(j) Form of New Guarantee Agreement, incorporated by
reference herein from Exhibit 4.7 of Registration
Statement on Form S-4 dated September 18, 1997.
*(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), incorporated by reference herein from Exhibit
(10)(e) of Annual Report on Form 10-K for the fiscal
year ended December 31, 1996.
</TABLE>
<PAGE>
EXHIBIT INDEX--(Continued)
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Description Page
------- ----------- ------------
<C> <S> <C>
*(10)(f) 1996 Stock Option Plan, incorporated by reference
herein from Exhibit 4 of Registration Statement on
Form S-8 dated December 30, 1996.
*(10)(g) 1997 Directors' Stock Plan, incorporated by reference
herein from Exhibit 4.1 of Registration Statement on
Form S-8 dated December 11, 1997.
(10)(h) Registration Rights Agreement dated April 22, 1997,
incorporated by reference herein from Exhibit (10.1)
of Quarterly Report on Form 10-Q for the quarter ended
June 30, 1997.
(21) Subsidiaries of the registrant incorporated by reference herein from
exhibit 21 of Annual Report on Form 10-K for the year ended December
31, 1997.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule incorporated by reference herein from
exhibit 27 of Annual Report on Form 10-K for the year ended December
31, 1997.
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-8 (Nos. 33-19065 and
333-41993) and Form S-4 (Nos. 333-35945 and 333-45459) of The First American
Financial Corporation of our report dated February 9, 1998 appearing on page 19
of this Form 10-K/A.
PricewaterhouseCoopers LLP
Costa Mesa, California
January 29, 1999
