Item 1. Business. - -----------------
The Company - -----------
The First American Financial Corporation (the "Company") was organized in 1894 as Orange County Title Company, succeeding to the business of two title abstract companies founded in 1889 and operating in Orange County, California. In 1924, the Company commenced issuing title insurance policies. In 1986, the Company began a diversification program by acquiring and developing business information companies closely related to the real estate transfer and closing process. In 1998, the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. The Company is a California corporation and has its executive offices at 1 First American Way, Santa Ana, California 92707-5913. The Company's telephone number is (714) 800-3000. Unless the context otherwise indicates, the "Company," as used herein, refers to The First American Financial Corporation and its subsidiaries.
General - -------
The Company, through its subsidiaries, is engaged in the business of providing business information and related products and services. The Company's three primary segments are title insurance and services, real estate information and services, and consumer information and services. The title insurance segment issues title insurance policies and provides other related services. The real estate information segment provides tax monitoring, mortgage credit reporting, property data services, flood certification, field inspection services, appraisal services, mortgage loan servicing systems, mortgage document preparation and other related services. The consumer information segment provides home warranties, property and casualty insurance, resident screening, pre-employment screening, specialized credit reporting, automotive insurance tracking, investment advisory, trust and banking services, and other related services. Financial information regarding each of the Company's business segments is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" of Part II of this report. The Company believes that its subsidiary, First American Title Insurance Company ("First American"), is one of the largest title insurers in the United States, based on operating revenues, and its subsidiary, First American Real Estate Information Services, Inc., is the nation's largest provider of flood zone determinations, based on the number of flood zone determination reports issued, the nation's largest mortgage credit reporting service, based on the number of credit reports issued, and the nation's second largest provider of tax monitoring services, based on the number of loans under service. The Company also believes that its subsidiary, First American Home Buyers Protection Corporation, was the second largest provider of home warranties in the United States, based on the number of home protection contracts under service. Substantially all of the revenues for the Company's title insurance and real estate information segments result from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. The majority of the revenues for the Company's consumer information segment result from non real estate-related activity. 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, a large portion of 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 the traditional real estate transfer and closing process.
Overview of Title Insurance Industry - ------------------------------------
Title to, and the priority of interests in, real estate are determined in accordance with applicable laws. In most real estate transactions, mortgage lenders and purchasers of real estate want to be protected from loss or damage in the event that title is not as represented. In most parts of the United States, title insurance has become accepted as the most efficient means of providing such protection.
Title Policies. Title insurance policies insure the interests of owners and their lenders in the title to real property against loss by reason of adverse claims to ownership of, or to defects, liens, encumbrances or other matters affecting such title which exist at the time a title insurance policy is issued and which were not excluded from the coverage of a title insurance policy. Title insurance policies are issued on the basis of a title report, which is prepared after a search of the public records, maps, documents and prior title policies to ascertain the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. In certain instances, a visual inspection of the property is also made. To facilitate the preparation of title reports, copies of public records, maps, documents and prior title policies may be compiled and indexed to specific properties in an area. This compilation is known as a "title plant."
The beneficiaries of title insurance policies are generally real estate buyers and mortgage lenders. A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase price of the property, but in some cases might insure for a greater amount where the buyer anticipates constructing improvements on the property. Coverage under a title insurance policy issued to a real property mortgage lender generally terminates upon the sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title.
Before issuing title policies, title insurers seek to limit their risk of loss by accurately performing title searches and examinations. The major expenses of a title company relate to such searches and examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not from claim losses as in the case of property and casualty insurers.
The Closing Process. Title insurance is essential to the real estate closing process in most transactions involving real property mortgage lenders. In a typical residential real estate sale transaction, title insurance is generally ordered on behalf of an insured by a real estate broker, lawyer, developer, lender or closer involved in the transaction. Once the order has been placed, a title insurance company or an agent conducts a title search to determine the current status of the title to the property. When the search is complete, the title company or agent prepares, issues and circulates a commitment or preliminary title report ("commitment") to the parties to the transaction. The commitment summarizes the current status of the title to the property, identifies the conditions, exceptions and/or limitations that the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated prior to closing.
The closing function, sometimes called an escrow in western states, is often performed by a lawyer, an escrow company or a title insurance company or agent (such person or entity, the "closer"). Once documentation has been prepared and signed, and mortgage lender payoff demands are in hand, the transaction is "closed." The closer records the appropriate title documents and arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued insuring the priority of the mortgage of the real property mortgage lender in the amount of its mortgage loan and the buyer in the amount of the purchase price. The time lag between the opening of the title order and the issuance of the title policy is usually between 30 and 90 days. The seller and the buyer bear the risk during this time lag. Any matter affecting title which is discovered during this period would have to be dealt with to the title insurers' satisfaction or the insurer would except the matter from the coverage afforded by the title policy. Before a closing takes place, however, the closer would request that the title insurer provide an update to the commitment to discover any adverse matters affecting title and, if any are found, would work with the seller to eliminate them so that the title insurer would issue the title policy subject only to those exceptions to coverage which are acceptable to the buyer and the buyer's lender.
Issuing the Policy: Direct vs. Agency. A title policy can be issued directly by a title insurer or indirectly on behalf of a title insurer through agents which are not themselves licensed as insurers. Where the policy is issued by a title insurer, the search is performed by or at the direction of the title insurer, and the premium is collected and retained by the title insurer. Where the policy is issued by an agent, the agent performs the search, examines the title, collects the premium and retains a portion of the premium. The remainder of the premium is remitted to the title insurer as compensation for bearing the risk of loss in the event a claim is made under the policy. The percentage of the premium retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent.
Premiums. The premium for title insurance is due and earned in full when the real estate transaction is closed. Premiums are generally calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state.
The Company's Title Insurance Operations - ----------------------------------------
Overview. The Company, through First American Title Insurance Company and its subsidiaries, transacts the business of title insurance through a network of both direct operations and agents. Through this network, the Company issues policies in all states (except Iowa), the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the Bahama Islands, Canada, Mexico, Bermuda, the United Kingdom and Australia. In Iowa, the Company provides abstracts of title only, because title insurance is not permitted. Through acquisitions and start-ups during the mid-1980s, the Company has grown from a large regional company to a nationwide company, becoming less dependent on operating revenues from any one state or region.
Based on industry statistics showing premiums written in the major areas in which the Company operates, in 1998, 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 21.5% in 1997 to 22.0% in 1998. Industry statistics for 1999 are not currently available.
The Company plans to continue increasing its share of the title insurance market through strategic acquisitions and further development of its existing branch office and agency operations. The Company also will continue to focus on expanding its share of the higher margin title insurance business conducted on behalf of commercial clients. The Company believes its national commercial market share has grown through programs directed at major developers, lenders and law firms.
Sales and Marketing. The Company markets its title insurance services to a broad range of customers. The Company believes that its primary source of business is from referrals from persons in the real estate community, such as independent escrow companies, real estate brokers, developers, mortgage brokers, mortgage bankers, financial institutions and attorneys. In addition to the referral market, the Company markets its title insurance services directly to large corporate customers and certain mortgage lenders. As title agents contribute a large portion of the Company's revenues, the Company also markets its title insurance services to independent agents. The Company's marketing efforts emphasize the quality and timeliness of its services and its national presence.
While virtually all personnel in the Company's title insurance business assist in marketing efforts, the Company maintains a sales force of approximately 1,000 persons dedicated solely to marketing. This sales force is located throughout the Company's branch office network. The Company provides its sales personnel with training in selling techniques, and each branch manager is responsible for hiring the sales staff and ensuring that sales personnel under his or her supervision are properly trained. In addition to this sales force, the Company has approximately 20 sales personnel in its national accounts department. One of the responsibilities of the national accounts department sales personnel is the coordination of marketing efforts directed at large real estate lenders and companies developing, selling, buying or brokering properties on a multistate basis. The Company also supplements the efforts of its sales force through general advertising in various trade and professional journals.
The Company's increased commercial sales effort during the past decade has enabled the Company to expand its commercial business base. Because commercial transactions involve higher coverage amounts and yield higher premiums, commercial title insurance business generates greater profit margins than does residential title insurance business. Accordingly, the Company plans to continue to emphasize its commercial sales program.
Although sales outside of the United States account for a small percentage of the Company's revenues, the Company believes that the acceptance of title insurance in foreign markets has increased in recent years. Accordingly, the Company plans to continue its international sales efforts, particularly in Canada, the United Kingdom and Australia.
Underwriting. Before a title insurance policy is issued, a number of underwriting decisions are made. For example, matters of record revealed during the title search may require a determination as to whether an exception should be taken in the policy. The Company believes that it is important for the underwriting function to operate efficiently and effectively at all decision making levels so that transactions may proceed in a timely manner. To perform this function, the Company has underwriters at the branch level, the regional level and the national level.
Agency Operations. The relationship between the Company and each agent is governed by an agency agreement which states the conditions under which the agent is authorized to issue title insurance policies on behalf of the Company. The agency agreement also prescribes the circumstances under which the agent may be liable to the Company if a policy loss is attributable to error of the agent. Such agency agreements typically have a term of one to five years and are terminable immediately for cause.
Due to the high incidence of agency fraud in the title insurance industry during the late 1980s, the Company instituted measures to strengthen its agent selection and audit programs. In determining whether to engage an independent agent, the Company investigates the agent's experience, background, financial condition and past performance. The Company maintains loss experience records for each agent and conducts periodic audits of its agents. The Company has also increased the number of agent representatives and agent auditors that it employs. Agent representatives periodically visit agents and examine their books and records. In addition to periodic audits, a full agent audit will be triggered if certain "warning signs" are evident. Warning signs that can trigger an audit include the failure to implement Company-required accounting controls, shortages of escrow funds and failure to remit underwriting fees on a timely basis.
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 $10.9 million, $2.7 million and $10.6 million, respectively, as of December 31, 1999.
Reinsurance and Coinsurance. The Company assumes and distributes large title insurance risks through mechanisms of reinsurance and coinsurance. In reinsurance agreements, in consideration for a portion of the premium, the reinsurer accepts that part of the risk which the primary insurer cedes to the reinsurer over and above the portion retained by the primary insurer. The primary insurer, however, remains liable for the total risk in the event that the reinsurer does not meet its obligation. As a general rule, the Company does not retain more than $40 million of coverage on any single policy. Under coinsurance agreements, each coinsurer is jointly and severally liable for the risk insured, or for so much thereof as is agreed to by the parties. The Company's reinsurance activities account for less than 1% of its total title insurance operating revenues.
Competition. The title insurance business is highly competitive. The number of competing companies and the size of such companies varies in the different areas in which the Company conducts business. Generally, in areas of major real estate activity, such as metropolitan and suburban localities, the Company competes with many other title insurers. Approximately 90 title insurance underwriters are members of the American Land Title Association, the title insurance industry's national trade association. The Company's major nationwide competitors in its principal markets include Fidelity National Title Insurance Company (which also includes Chicago Title, Ticor Title Insurance Company and Security Union Title Insurance Company) Land America Title Insurance Company, Stewart Title Guaranty Company and Old Republic Title Insurance Group. In addition to these nationwide competitors, numerous agency operations throughout the country provide aggressive competition on the local level.
The Company believes that competition for title insurance business is based primarily on the quality and timeliness of service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In those states where prices are not established by regulatory authorities, the price of title insurance policies is also an important competitive factor. The Company believes that it provides quality service in a timely manner at competitive prices.
The Company's Related Businesses - --------------------------------
As an adjunct to its title insurance business, in 1986 the Company embarked on a diversification program by acquiring and developing business information companies closely related to the real estate transfer and closing process. In 1998, the Company expanded its diversification program to include business information companies outside of the real estate transfer and closing process. As a result of these diversification programs, the Company has become the nation's leading provider of business information and related products
The Real Estate Information and Services Business. The real estate information service business encompasses tax monitoring, mortgage credit reporting, flood certification, mortgage loan origination and servicing systems, mortgage document preparation and other property information services.
The tax monitoring service, established by the Company in 1987, advises real property mortgage lenders of the status of property tax payments due on real estate securing their loans. With the acquisition of TRTS Data Services, Inc., 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 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. 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.
The Company's mortgage credit reporting service provides credit information reports for mortgage lenders throughout the United States. These reports are derived from two or more credit bureau sources and are summarized and prepared in a standard form acceptable to mortgage loan originators and secondary mortgage purchasers. The Company's credit reporting service has grown primarily through acquisitions. In 1994, the Company acquired all of the minority interests in its lower tier subsidiaries Metropolitan Credit Reporting Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the Company also acquired California Credit Data, Inc., and Prime Credit Reports, Inc., and in 1995, the Company acquired Credco, Inc. (now named First American Credco, Inc.). With the acquisition of First American Credco, Inc., the Company believes that it is now the largest mortgage credit reporting service in the United States.
In January 1995, the Company acquired Flood Data Services, Inc. (now named First American Flood Data Services, Inc.). This business furnishes to mortgage lenders flood zone determination reports, which provide information on whether or not property securing a loan is in a governmentally delineated special flood hazard area. Federal legislation passed in 1994 requires that most mortgage lenders obtain a determination of the current flood zone status at the time each loan is originated and obtain updates during the life of the loan. First American Flood Data Services, Inc., is the largest provider of flood zone determinations in the United States.
In April 1996, the Company acquired the Excelis Mortgage Loan Servicing System (MLS), now known as Excelis, Inc. Excelis MLS is the only commercially available real-time on-line servicing system that has been developed since 1990 to meet increasingly sophisticated market demands. The software employs rules-based technology which enables the user to customize the system to fit its individual servicing criteria and policies.
In December 1996, the Company acquired Ward Associates, now known as First American Field Services. The company was combined with First American's existing field services company to provide comprehensive inspection and property preservation services to mortgage lenders nationwide. With the acquisition, the Company believes that it is now the second largest field services company in the United States.
In May 1997, the Company purchased all of the operations of SMS, other than SMS' flood zone determination business. SMS is a leading provider of real estate information services to the U.S. mortgage and title insurance industries. The acquired businesses include SMS' credit division, which the Company believes is the third largest provider of U.S. mortgage credit information; SMS' property appraisal division, which the Company believes is the second largest provider of U.S. appraisal services; SMS' title division, which provides title and closing services throughout the United States, servicing primarily home equity mortgage institutions; SMS' settlement services business, which provides title plant systems and accounting services, as well as escrow closing software, to the title industry; and a controlling interest in what is believed by the Company to be the largest mortgage document preparation firm.
On January 1, 1998, the Company and its real estate information service subsidiaries (other than Excelis, Inc.) (the "Real Estate Information Subsidiaries") consummated a business transaction with Experian Group ("Experian"), pursuant to which First American Real Estate Solutions LLC ("FARES") was established. Under the transaction, the Real Estate Information subsidiaries contributed substantially all of their assets and liabilities to FARES in exchange for an 80% ownership interest and Experian transferred substantially all of the assets and liabilities of its Real Estate Solutions division ("RES") to FARES in exchange for a 20% ownership interest. RES is believed to be the nation's foremost supplier of core real estate data, providing, among other things, property valuation information, title
information, tax information and imaged title documents. As a result of this transaction, the Company believes that FARES will become the nation's largest and most diverse provider of information technology and decision support solutions for the mortgage and real estate industries.
In April 1998, the Company acquired Contour Software. This business supplies mortgage loan origination software to the mortgage industry. Contour offers a complete line of software products for every facet of mortgage lending, from qualification to servicing.
In June 1998, the Company acquired Data Tree Corporation. Data Tree is a supplier of database management and document imaging systems to county recorders, other governmental agencies and the title industry.
In July 1998, the Company acquired ShadowNet Mortgage Technologies, LLC. ShadowNet is a provider of electronic mortgage preparation and delivery systems and now conducts business under the First American Nationwide Documents brand- name.
The Consumer Information and Services Business. In 1998 the Company created this business segment to provide non-cyclical, high margin services to a customer base outside the Company's traditional clientele and to expand the Company's opportunities for revenue consistency. This business segment markets a variety of services including automotive credit reporting, direct-to-consumer credit reporting, multi-family resident screening, pre-employment screening,, property and casualty insurance and other related services. This segment also provides home warranties and trust and thrift services.
The automotive and sub-prime automotive credit reporting service provides auto dealers and lenders with consumer credit reports tailored to the specific needs of the automotive market. This credit reporting service also offers credit reports directly to the consumer, accessing information from the nation's three largest credit bureaus.
The multi-family resident screening service provides landlords with information regarding a housing applicant's rental payment history, occupancy responsibilities, eviction actions, credit information and similar background data.
The pre-employment screening service offers employers a variety of reports on prospective employees, providing information on criminal records, warrants, motor vehicle reports, credit reports, drug screens, education, prior employment, professional licenses and more.
Property and casualty insurance is offered by the consumer information segment through Five Star Holdings and Great Pacific Insurance Company, both acquired in 1999.
The Company's home warranty business commenced operations in 1984, in part with the proceeds of a $1.5 million loan from the Company which was, in 1986, converted to a majority equity interest. The Company currently owns 90% of its home warranty business, which is operated as a second tier subsidiary, with the balance owned by management of that subsidiary. The Company's home warranty business issues one-year warranties which protect homeowners against defects in household systems and appliances, such as plumbing, water heaters and furnaces. The Company's home warranty subsidiary currently charges approximately $245 to $335 for its basic home warranty contract. Optional coverage is available for air conditioners, pools, spas, washers, dryers and refrigerators for charges ranging from approximately $25 to $125. For an additional charge, coverage is renewable annually at the option of the homeowner upon approval by the home warranty subsidiary. Fees for the warranties are paid at the closing of the home purchase and are recognized monthly over a 12-month period. Home warranties are marketed through real estate brokers and agents. This business is conducted in certain counties of Arizona, California, Georgia, Nevada, New Mexico, North Carolina, South Carolina, Texas, Utah and Washington. The principal competitor of the Company's home warranty business is American Home Shield, a subsidiary of Service Master L.P.
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. During August 1999, this subsidiary converted from a state-chartered bank to a federal savings bank. As of December 31, 1999, the trust operation was administering fiduciary and custodial assets having a market value in excess of $1.7 billion.
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, 1999, the Thrift had approximately $80.8 million of demand deposits and $87.3 million of loans outstanding.
Loans made or acquired during the current year, by the Thrift, ranged in amount from $10,000 to $1,775,000. The average loan balance outstanding at December 31, 1999, was $282,500. 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 97% 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, 1999, was 10%. A number of factors are included in the determination of average yield, principal among which are loan fees and closing points amortized to income, prepayment penalties recorded as income, and amortization of discounts on purchased loans. The Thrift's primary competitors in the Southern California commercial real estate lending market are local community banks, other thrift and loan companies and, to a lesser extent, commercial banks. The 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, 1999, if all of such loans had been current in accordance with their original terms, totaled $110,600.
The following table sets forth the amount of the Thrift's nonperforming loans as of the dates indicated.
Based on a variety of factors concerning the creditworthiness of its borrowers, the Thrift determined that it had $828,700 of potential problem loans in existence as of December 31, 1999.
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.
The following table provides certain information with respect to the Thrift's allowance for loan losses as well as charge-off and recovery activity.
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.
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 business information services. In 1998 the Company launched its Consumer Information and Services Division where a unique mix of products and services is directed toward non-real estate related markets. To date, the Company has made numerous strategic acquisitions designed to expand not only its direct title operations, but also the range of services it can provide to its customers.
During the current year, some of the key acquisitions made by the Company in furtherance of this strategy were:
(1) On January 1, 1999, the Company, through First American Title Insurance Company, formed a limited liability company, RELS Title Services LLC, with Norwest Mortgage, Inc. The purpose of RELS Title Services LLC is to provide title and escrow services. RELS Title Services LLC is 50% owned by First American Title Insurance Company and 50% owned by Norwest Mortgage, Inc.
(2) National Information Group was acquired in May 1999 in a transaction accounted for under the pooling-of-interests method of accounting.
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.
During 1999, the Company entered into the property casualty insurance business through the acquisitions of Great Pacific Insurance Company (included in the acquisition of National Information Group) and Five Star Holdings, Inc. The property and casualty business is subject to regulation by government agencies in the states in which they transact business. The nature and extent of such regulation may vary from jurisdiction to jurisdiction, but typically involves prior approval of the acquisition of "control" of an insurance company, regulation of certain transactions entered into by an insurance company with any of its affiliates, the payment of dividends by an insurance company, approval of premium rates and policy forms for many lines of insurance, standards of solvency and minimum amounts of capital and surplus which must be maintained. In order to issue policies on a direct basis in a state, the property and casualty insurer must generally be licensed by such state. In certain circumstances, such as dealings initiated directly by citizens or placements through licensed surplus lines brokers, it may conduct business without being admitted and without being subject to rate and/or policy forms approval. The Company is currently licensed to write property and casualty insurance in 46 states and the District of Columbia.
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, as a federal savings bank, the Company's trust company is regulated by the United States Department of the Treasury's Office of Thrift Supervision, and the Company's industrial loan company is regulated by the California Commissioner of Corporations.
Investment Policies - -------------------
The Company invests primarily in cash equivalents, federal and municipal governmental securities, mortgage loans and investment grade debt and equity securities. The largely fixed income portfolio is classified in the Company's financial statements as "available for sale." In addition to the Company's investment strategy, state laws impose certain restrictions upon the types and amounts of investments that may be made by the Company's regulated subsidiaries.
Employees - ---------
The following table provides a summary of the total number of employees of the Company as of December 31, 1999:
Business Number of Employees
Title insurance 12,940 Real estate information 6,010 Consumer information 1,115 ------------------- Total 20,065 ===================
Item 2.
Item 2. Properties. - --------------------
In September 1999, the Company moved its executive offices to one of the newly constructed office buildings at MacArthur Place in Santa Ana, California. The Orange County branch and certain other operations of the Company's title insurance segment moved into the two other buildings constructed on the site later in 1999. The three new buildings are in a campus environment and total approximately 210,000 square feet. The Company continues to own the two adjacent buildings in Santa Ana, California, which previously housed its executive offices. That location, comprising approximately 105,000 square feet of floor space, continues as the home of the company's trust and banking division. In addition, there are plans to move certain other divisions into that complex as their existing leases expire. The Company also owns an 18,000 square foot building located across the street from that complex. This building is currently 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 1999, the Company completed the construction of two office buildings in Poway, California. The two buildings total approximately 152,000 square feet and are located on a 17 acre parcel of land. The buildings are occupied by various divisions of FAREISI. In addition, FAREISI and its subsidiaries lease office space in more than 75 locations throughout the United States, principally for their respective operations.
The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys, California, which contains a 20,000 square foot office building, a 7,000 square foot warehouse and a parking lot.
Each of the office facilities occupied by the Company or its subsidiaries is in good condition and adequate for its intended use.
Item 3.
Item 3. Legal Proceedings. - ---------------------------
On May 19, 1999, The People of the State of California, Kathleen Connell, Controller of the State of California, and Chuck Quackenbush, Insurance Commissioner of the State of California, filed a class action suit in the Sacramento Superior Court. The action seeks to certify as a class of defendants all "title insurers", all "underwritten title companies" and all "controlled escrow companies" (as those terms are defined in the California Insurance Code) -------------- and all "independent escrow companies" (as the term is defined in the California Financial Code) doing business in the State of California from 1970 to the - -------------- present who (i) hold dormant, unclaimed escrow funds; (ii) charged California home buyers and other escrow customers $10.00 or more for delivery services or administrative fees; (iii) charged California home buyers and other escrow customers reconveyance fees and/or (iv) earned interest (or its equivalent) from financial institutions on customers' deposited escrow funds.
The plaintiffs allege that the defendants unlawfully (i) failed to escheat unclaimed property to the Controller of the State of California on a timely basis; (ii) charged California home buyers and other escrow customers fees for services that were never performed or which cost less than the amount charged; and (iii) devised and carried out schemes with financial institutions to receive interest, or monies in lieu of interest, on escrow funds deposited by defendants with financial institutions in demand deposits.
In February 2000, the Company entered into an administrative settlement with the California Department of Insurance ("DOI"), whereby the DOI released the Company from any further claim of liability as to the Company's receipt of earnings credits or any alleged overcharges for various miscellaneous escrow fee items, such as courier, Federal Express or wire service fees. The DOI further agreed to direct the Attorney General to dismiss it as a plaintiff from the action brought by the State of California. In the settlement with the DOI, the Company agreed to (i) make a contribution to a consumer education fund and (ii) accept a new regulation to be promulgated by the DOI, whereby earnings credit programs will be authorized and regulated by the DOI and rate filings will be required for escrow fees including several specified miscellaneous fee items.
Subsequent to the filing of the action by the State of California, First American Title Insurance Company was named and served as a defendant in two private class actions. The allegations in the complaints include some, but not all, of the allegations contained in the class action filed by the State of California. The private class actions independently seek injunctive relief, attorneys' fees, damages and penalties in unspecified amounts. The private class actions have been stayed by court orders pending settlement negotiations relating to the class action filed by the State of California.
The Company does not believe that the ultimate resolution of these actions will have a materially adverse effect on its financial condition or results of operations.
The Company is involved in various routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a materially adverse effect on its financial condition or results of operations.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders. - ------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
Item 5.
Item 5. Market for 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 March 20, 2000, was 3,679.
High and low stock prices and dividends for the last two years were:
- ------------------------------------------------------------------------------ 1999 1998 --------------------------- --------------------------- Cash Cash - ---------------- Quarter Ended High-low Range Dividends High-low Range Dividends - ---------------- --------------- --------- --------------- --------- March 31 $34.81 - $15.81 $.06 $22.88 - $16.08 $.06 June 30 $20.69 - $13.88 $.06 $30.75 - $21.08 $.05 September 30 $19.25 - $12.00 $.06 $41.25 - $25.75 $.06 December 31 $15.13 - $11.50 $.06 $36.06 - $24.94 $.06 - ----------------------------------------------------------------------------
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 acquired on the dates listed below:
Consideration Date Of Sale Number Of Shares Received - -------------------------------------------------------------------- July 8, 1997 21,600 $ 192,600 November 17, 1997 23,265 $ 315,047 December 31, 1997 2,475 $ 40,630 April 15, 1998 726,564 $15,500,000 May 6, 1998 125,775 $ 2,587,167 May 7, 1998 27,090 $ 435,698 May 29, 1998 111,039 $ 2,850,000 September 15, 1998 17,925 $ 525,000 February 25, 1999 69,584 $ 1,955,000
Item 6.
Item 6. Selected Financial Data. - --------------------------------
The selected consolidated financial data for the Company for the five-year period ended December 31, 1999, 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
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations. -------------
Any statements in this document that look forward in time involve risks and uncertainties, including but not limited to the following: the effect of interest rate fluctuations; changes in the performance of the real estate markets; the effect of changing economic conditions; general volatility in the capital markets; the demand for and the acceptance of the Company's products; changes in applicable government regulations; continued consolidation among the Company's significant customers; consolidation among significant competitors; the impact of legal proceedings commenced by the California attorney general and related litigation; the continued ability to identify businesses to be acquired; and changes in the Company's ability to integrate businesses which it acquires. The Company's actual results, performance or achievement could differ materially from those expressed in, or implied by, any forward-looking statements. Accordingly, no assurances can be given that any of the events anticipated by the forward-looking statements will transpire or occur or, if any of them do, what impact they will have on the results of operations or financial condition of the Company.
Results of Operations - ---------------------
Overview - The majority of the revenues for the Company's title insurance and real estate information segments depend, in large part, upon the level of real estate activity and the cost and availability of mortgage funds. Revenues for these segments result primarily from resales and refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new housing. The majority of the revenues for the Company's consumer information segment result from activities not related to real estate. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, changes in interest rates, as well as other economic factors, can cause fluctuations in the traditional pattern of real estate activity. 1997 was a year in which relatively low mortgage interest rates, stability in the real estate marketplace and increasing property values prompted a resurgence in refinance and home equity transactions, primarily towards the latter part of the year. These factors, as well as market share increases in all of the Company's primary businesses, culminated in a record-setting year. Further rate declines started in the fourth quarter of 1997 and continued throughout 1998. This, coupled with higher consumer confidence, led to nationwide record-setting residential resale and refinance transactions, which, together with the particularly strong California real estate market, resulted in record-setting revenues and net income for the Company in 1998. The favorable conditions present throughout 1998 continued into 1999, resulting in record-setting revenues for the first half of the year. However, commencing in the second quarter 1999, new orders began to soften as rising interest rates led to a significant decline in refinance transactions, although residential resale and commercial activity remained relatively strong. During the second half of the year, the trend of higher interest rates continued. New orders, including residential resale orders, continued to decline. This, coupled with fourth quarter seasonal factors, led to a decrease in operating revenues. In response, the Company instituted personnel reductions and other cost- containment programs; however, because of separation costs, the benefits of the reductions in the latter part of the year will not be fully realized until 2000. Also impacting 1999 were a revenue recognition accounting change for the Company's tax service contracts, which decreased revenues by $22.7 million, and Y2K expenses of $24.8 million. See Operating Revenues in Note 1 to the consolidated financial statements for a detailed description of the accounting change. Results for 1998 and 1997 have been restated to reflect the 1999 acquisition of National Information Group (NAIG), accounted for under the pooling-of-interests method of accounting.
Operating revenues - A summary by segment of the Company's operating revenues is as follows:
Operating revenues from direct title operations decreased 2.8% in 1999 from 1998 and increased 44.1% in 1998 over 1997. The decrease in 1999 from 1998 was attributable to a decrease in the number of title orders closed by the Company's direct title operations, offset in part by an increase in the average revenues per order closed. The increase in 1998 over 1997 was attributable to an increase in the number of title orders closed by the Company's direct title operations, as well as an increase in the average revenues per order closed. The Company's direct title operations closed 1,119,900, 1,210,200 and 885,600 title orders during 1999, 1998 and 1997, respectively, representing a decrease of 7.5% in 1999 from 1998 and an increase of 36.7% in 1998 over 1997. The decrease in 1999 from 1998 was
primarily due to the significant decrease in refinance transactions experienced during the second half of 1999. The increase in 1998 over 1997 was primarily due to the continuation of lower mortgage interest rates which led to an increase in overall transaction volume nationwide (including California, a state highly concentrated with direct operations) and increases in the Company's title insurance national market share. The average revenues per order closed were $953, $907 and $860 for 1999, 1998 and 1997, respectively, representing increases of 5.1% in 1999 over 1998 and 5.5% in 1998 over 1997. These increases were primarily attributable to appreciating home values, an increased mix of resale activity and a resurgence in commercial real estate transactions. Operating revenues from agency title operations increased 12.6% in 1999 over 1998 and 37.9% in 1998 over 1997. These fluctuations were primarily attributable to the same factors affecting direct operations mentioned above, compounded by the inherent delay in the reporting of transactions by agents.
Real estate information operating revenues decreased 8.8% in 1999 from 1998 and increased 83.8% in 1998 over 1997. These fluctuations were primarily attributable to the same factors affecting title insurance mentioned above, as well as acquisition activity. In addition, the decrease in 1999 from 1998 was also due to a $22.7 million reduction in tax service operating revenues attributable to the change in revenue recognition policy. Operating revenues of $19.3 million and $141.0 million were contributed by new acquisitions in 1999 and 1998, respectively.
Consumer information operating revenues increased 19.7% in 1999 over 1998 and 35.6% in 1998 over 1997. These increases were primarily attributable to an increased awareness and acceptance of this business segment's products, increased market share and acquisition activity. Operating revenues of $8.1 million and $3.5 million were contributed by new acquisitions in 1999 and 1998, respectively.
Investment and other income - Investment and other income decreased $24.8 million in 1999 from 1998 and increased $47.7 million in 1998 over 1997. The decrease in 1999 from 1998 was primarily due to an investment gain of $32.4 million recognized in 1998 relating to the joint venture agreement with Experian, offset in part by a 24.8% increase in the average investment portfolio balance and a $5.2 million gain resulting from stock received in the demutualization of a life insurance company which insures a large portion of the Company's corporate-owned life insurance portfolio. The increase in 1998 over 1997 was primarily attributable to the investment gain of $32.4 million mentioned above, as well as a 36.9% increase in the average investment portfolio balance due to the investment of excess cash flow from operations and a portion of the proceeds from the Company's $100 million senior debentures (see Note 8 to consolidated financial statements).
Salaries and other personnel costs - A summary by segment of the Company's salaries and other personnel costs is as follows:
The Company's title insurance segment (primarily direct operations) is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. This expense component is affected by two competing factors: the need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. In addition, this segment's growth in operations that specialize in builder and lender business has created ongoing fixed costs required to service accounts.
Title insurance personnel expenses increased 10.7% in 1999 over 1998 and 32.3% in 1998 over 1997. The increase in 1999 over 1998 was primarily due to the relatively high number of employees added during the latter part of 1998 and the beginning of 1999 in order to service the volume of orders processed during those periods. The Company initiated personnel and other cost reduction programs in response to the subsequent decrease in business volume. During the fourth quarter and full year 1999, title insurance staffing levels were reduced by approximately 6% and 14%, respectively; however, because of separation costs, the benefits of the fourth quarter reductions will not be fully realized until 2000. Contributing to the increase in salaries and other personnel costs in 1999 were $20.8 million of personnel costs associated with new acquisitions. The increase in 1998 over 1997 was primarily attributable to the costs incurred servicing the increasing volume of business and $63.0 million of personnel costs associated with new acquisitions, offset in part by productivity gains as measured by new orders per person. Contributing to the increases for both 1999 and 1998 was an increased volume of labor-intensive residential resale transactions. The Company's direct title operations opened 1,334,100, 1,585,400 and 1,173,300 title orders in 1999, 1998 and 1997, respectively, representing a decrease of 15.9% in 1999 from 1998 and an increase of 35.1% in 1998 over 1997.
Real estate information personnel expenses increased 4.7% in 1999 over 1998 and 67.4% in 1998 over 1997. The increase in 1999 over 1998 was primarily attributable to $7.6 million of personnel costs associated with new acquisitions and costs incurred in connection with Y2K. The increase in 1998 over 1997 was primarily due to costs incurred servicing the increase in business volume and $61.9 million of costs associated with new acquisitions. Contributing to the increases in both 1999 and 1998 were higher overhead costs attributable to the integration of new acquisitions and costs associated with in-house development of new electronic communication delivery systems for information-based products to interface with customer needs.
Consumer information personnel expenses increased 14.9% in 1999 over 1998 and 25.8% in 1998 over 1997. These increases were primarily attributable to additional personnel required to service the increased business volume and acquisition activity. Personnel expenses associated with new acquisitions were $2.7 million and $1.1 million for 1999 and 1998 respectively.
Premiums retained by agents - A summary of agent retention and agent revenues is as follows:
(in thousands, except percentages) 1999 1998 1997 ---------- ----------- ----------
Agent Retention $ 871,036 $773,030 $563,137 ========== =========== ==========
Agent Revenues $1,086,746 $965,228 $700,193 ========== =========== ==========
% Retained by Agents 80.2% 80.1% 80.4% ========== =========== ==========
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:
Title insurance other operating expenses (principally direct operations) increased 6.6% in 1999 over 1998 and 24.0% in 1998 over 1997. The increase in 1999 over 1998 was primarily due to $9.7 million of costs associated with new acquisitions, Y2K expenses of $5.8 million, a $2.5 million charge resulting from a previously announced fine imposed by the California insurance commissioner, approximately $2.0 million in impaired asset write-offs, and general price-level increases, offset in part by a reduction in certain incremental costs associated with the decline in title order volume. The increase in 1998 over 1997 was primarily attributable to an increase in the incremental costs associated with the increased order volume, marginal price-level increases, Y2K costs and acquisition activity.
Real estate information other operating expenses decreased 1.5% in 1999 from 1998 and increased 73% in 1998 over 1997. The decrease in 1999 from 1998 was primarily due to a reduction in costs resulting from the Company's cost- containment programs initiated in response to the decline in business volume, offset in part by $6.9 million of costs associated with new acquisitions and Y2K expenses of $19.0 million. The increase in 1998 over 1997 was primarily attributable to costs incurred servicing the increased business activity, as well as $60.6 million of other operating costs relating to new acquisitions, offset in part by cost-containment programs.
Consumer information other operating expenses increased 25.3% in 1999 over 1998 and 77.4% in 1998 over 1997. These increases were primarily attributable to costs incurred servicing the increased business volume, as well as acquisition activity. Other operating expenses associated with new acquisitions were $3.3 million in 1999 and $1.8 million in 1998.
Corporate other operating expenses increased 98.9% in 1999 over 1998 and 36.2% in 1998 over 1997. The increase in 1999 over 1998 was primarily attributable to $10.8 million of nonrecurring merger-related charges incurred in the NAIG acquisition. The increase in 1998 over 1997 was primarily due to increased costs associated with supporting the overall growth of the Company's businesses.
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:
The provision for title insurance losses, expressed as a percentage of title insurance operating revenues, was 3.1% in 1999, 3.3% in 1998 and 3.6% in 1997. These decreases reflect ongoing improvement in title insurance claims experience. The provision for consumer information losses principally reflects home warranty claims, and to a lesser extent, property and casualty insurance claims. The provision for home warranty claims, expressed as a percentage of home warranty operating revenues, was 49.8% in 1999, 56.2% in 1998 and 58.3% in 1997. This decreasing trend reflects the relative change in the average number of claims per contract experienced during these periods. The provision for property and casualty insurance losses expressed as a percentage of property and casualty insurance operating revenues approximated 32.5% for the three-year period ended December 31, 1999.
Depreciation and amortization - Depreciation and amortization, as well as capital expenditures, are summarized in Note 19 to the consolidated financial statements.
Premium taxes - A summary by pertinent segment of the Company's premium taxes is as follows:
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 operating revenues. The Company's underwritten title company (noninsurance) 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 attributable to title insurance operations, as a percentage of title insurance operating revenues, were approximately 1% for the three- year period ended December 31, 1999.
Interest - Interest expense decreased 8.9% in 1999 from 1998 and increased 85.5% in 1998 over 1997. The decrease in 1999 from 1998 was primarily due to $2.5 million of capitalized interest expense related to the development of internal- use software and the construction of the Company's new corporate headquarters, offset in part by increased interest expense associated with debt incurred in connection with company acquisitions. The increase in 1998 over 1997 was primarily due to $5.5 million of interest expense related to the 7.55% senior debentures issued in April 1998, as well as incremental interest expense of $2.8 million related to the mandatorily redeemable preferred securities (outstanding for the full year 1998).
Income before income taxes, minority interests and cumulative effect of a change in accounting principle - A summary by segment is as follows:
The Company's profit margins vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. For example, in title insurance operations, commercial transactions tend to generate higher revenues and greater profit margins than
residential transactions. Further, profit margins from refinancing activities are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for, refinancing transactions. Cancellations of title orders adversely affect profits because costs are incurred in opening and processing such orders but revenues are not generated. Also, the Company's direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Company's direct title insurance business improve as the volume of title orders closed increases. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent. Real estate information profits are generally unaffected by the type of real estate activity but increase as the volume of residential real estate loan transactions increases. Consumer information profits increase as the volume of transactions increases and are not affected by real estate activity. 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 increase in net corporate expenses in 1999 over 1998 was primarily due to an investment gain of $32.4 million recognized in 1998 relating to the joint venture agreement with Experian; and in 1999, $10.8 million of nonrecurring merger-related charges incurred in the NAIG acquisition; and decreased equity in earnings of unconsolidated subsidiaries. The decrease in net corporate expenses in 1998 from 1997 was primarily attributable to the investment gain of $32.4 million mentioned above.
Income taxes - The Company's effective income tax rate, which includes a provision for state income and franchise taxes for non-insurance subsidiaries, was 36.7%, 35.2% and 37.5% for 1999, 1998 and 1997, respectively. The differences in the effective tax rate were primarily due to changes in the ratio of permanent differences to income before income taxes and minority interests and changes in state income and franchise taxes resulting from fluctuations in the Company's non insurance subsidiaries' contribution to pretax profits. Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 10 to the consolidated financial statements.
Minority interests -Minority interests in net income of consolidated subsidiaries decreased $16.0 million in 1999 from 1998 and increased $31.3 million in 1998 over 1997. These fluctuations were primarily due to the relative change in the operating results of the Company's joint venture with Experian.
Net income - Net income and per share information are summarized as follows:
Liquidity and Capital Resources - -------------------------------
Cash provided by operating activities amounted to $173.2 million, $361.6 million and $117.4 million for 1999, 1998 and 1997, respectively, after net claim payments of $119.3 million, $100.9 million and $88.1 million, respectively. The principal nonoperating uses of cash and cash equivalents for the three-year period ended December 31, 1999, were for capital expenditures, additions to the investment portfolio, company acquisitions in 1999 and 1997, dividends and the repayment of debt. The most significant nonoperating sources of cash and cash equivalents were proceeds from the sales and maturities of certain investments, proceeds in 1999 from the sale-leaseback of certain
property and equipment, proceeds in 1998 from the issuance of senior debentures and proceeds in 1997 from the issuance of mandatorily redeemable preferred securities. The net effect of all activities on total cash and cash equivalents was a decrease of $31.3 million for 1999, an increase of $197.9 million for 1998 and an increase of $8.3 million for 1997.
On April 7, 1998, the Company issued and sold $100.0 million of 7.55% senior debentures, due April 1, 2028. The Company used a portion of the net proceeds from the sale to repay certain obligations and purchase land for the Company's new corporate facilities. The remaining proceeds were invested in debt and equity securities.
On July 2, 1999, the Company increased its lines of credit to $175.0 million. Pursuant to the terms of the credit agreements, the Company is required to maintain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. The lines of credit are currently unused.
Notes and contracts payable, as a percentage of total capitalization, was 16.4%, as of December 31, 1999, as compared with 13% as of the prior year end. This increase was primarily attributable to debt incurred in connection with company acquisitions, offset, in part, by an increase in the capital base primarily due to shares issued in connection with company acquisitions and net income for the period. 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 2000 from its insurance subsidiaries is $133.1 million. Such restrictions have not had, nor are they expected to have, an impact on the Company's ability to meet its cash obligations.
During the latter part of 1999, the Company successfully completed its Y2K plan. The plan, which was created with the help of an outside consulting firm in January 1997, was completed at a total cost of $40.0 million.
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.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk - --------------------------------------------------------------------
The Company's primary exposure to market risk relates to interest rate risk associated with certain other financial instruments. Although the Company monitors its risk associated with fluctuations in interest rates, it does not currently use derivative financial instruments to hedge these risks. The table below provides information about certain assets and liabilities that are sensitive to changes in interest rates and presents cash flows and the related weighted average interest rates by expected maturity dates. The Company is also subject to equity price risk as related to its equity securities. At December 31, 1999, the Company had equity securities with a book value of $25.2 million and fair value of $39.3 million. Although the Company has operations in certain foreign countries, these operations, in the aggregate, are not material to the Company's financial condition or results of operations.
Item 8.
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 -----
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.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of The First American Financial Corporation:
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of The First American Financial Corporation and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedules listed in the accompanying index present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 1 to the financial statements, the Company changed its method of recognizing revenue for tax service contracts in 1999.
PricewaterhouseCoopers LLP Costa Mesa, California February 15, 2000
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
ASSETS
See Notes to Consolidated Financial Statements
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See Notes to Consolidated Financial Statements.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
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 business information and related products and services. The Company's three primary business segments are title insurance and services, real estate information and services and consumer information and services. The title insurance segment issues residential and commercial title insurance policies, and provides escrow services, equity loan services, tax-deferred exchanges and other related products. The real estate information segment provides tax monitoring, mortgage credit reporting, property data services, flood certification, field inspection services, appraisal services, mortgage loan servicing systems and mortgage document preparation. The consumer information segment provides home warranties, property and casualty insurance, resident screening, pre-employment screening, specialized credit reporting, automotive insurance tracking, investment advisory and trust and thrift services.
Significant Accounting Policies: Principles of consolidation
The consolidated financial statements include the accounts of The First American Financial Corporation and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. All consolidated results reflect the 1999 acquisition of National Information Group accounted for under the pooling-of-interests method of accounting. Certain 1997 and 1998 amounts have been reclassified to conform with the 1999 presentation.
Cash equivalents
The Company considers cash equivalents to be all short-term investments which have an initial maturity of 90 days or less and are not restricted for statutory deposit or premium reserve requirements. The carrying amount for cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.
Investments
Deposits with savings and loan associations and banks are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short- term nature.
Debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, various corporations and certain state and political subdivisions.
Equity securities are carried at fair value and consist primarily of investments in marketable common stocks of corporate entities in which the Company's ownership does not exceed 20%.
Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting, and notes receivable, which are carried at the lower of cost or fair value less costs to sell.
The Company classifies its debt and equity securities portfolio as available-for-sale and, accordingly, includes unrealized gains and losses, net of related tax effects, as a component of other comprehensive income. Realized gains and losses on investments are determined using the specific identification method.
Property and equipment
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." SOP 98-1 requires the Company to capitalize interest costs incurred and certain payroll-related costs of employees directly associated with developing software, in addition to incremental payments to third parties. The adoption of SOP 98-1 did not have a material effect on the Company's financial condition or results of operations.
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.
Depreciation on buildings and on furniture and equipment is computed using the straight-line method over estimated useful lives of 25 to 45 and three to 10 years, respectively. Capitalized software costs are amortized using the straight-line method over estimated useful lives of three to 10 years.
Title plants and other indexes
Title plants and other indexes are carried at original cost. The costs of daily maintenance (updating) of these plants and other indexes are charged to expense as incurred. Because properly maintained title plants and other indexes have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation.
Assets acquired in connection with claim settlements
In connection with settlement of title insurance and other claims, the Company sometimes purchases mortgages, deeds of trust, real property, or judgment liens. These assets, sometimes referred to as "salvage assets," are carried at the lower of cost or fair value less costs to sell.
Goodwill and other intangibles
Goodwill recognized in business combinations is amortized over its estimated useful life ranging from 20 to 40 years. Other intangibles, which include customer lists and covenants not to compete are amortized over their estimated useful lives, ranging from three to 20 years. The Company periodically evaluates the amortization period assigned to each intangible asset to ensure that there have not been any events or circumstances that warrant revised estimates of useful lives.
Impairment of goodwill, loans receivable and other long-lived assets
The Company periodically reviews the carrying value of goodwill, loans receivable and other long-lived assets for impairment when events or circumstances warrant such a review.
To the extent that the undiscounted cash flows related to the businesses underlying the goodwill are less than the carrying value of the related goodwill, such goodwill will be reduced to the amount of the undiscounted cash flows.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans receivable are measured at the present value of expected future cash flows discounted at the loan's effective interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair value of the collateral, if the loan is collateral-dependent.
To the extent that the undiscounted cash flows related to other long- lived assets are less than the assets' carrying value, the carrying value of such assets is reduced to the assets' fair value.
Reserve for known and incurred but not reported claims
The Company provides for title insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized. Title insurance losses and other claims associated with ceded reinsurance are provided for as the Company remains contingently liable in the event that the reinsurer does not satisfy its obligations. The reserve for known and incurred but not reported claims reflects management's best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported. The process applied to estimate claims costs is subject to many variables, including changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. It is reasonably possible that a change in the estimate will occur in the future.
The Company provides for claims 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 insurance - 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.
Real estate information - In December 1999, the Company adopted Staff Accounting Bulletin No. 101 (SAB), "Revenue Recognition in Financial Statements." The SAB, which became effective January 1, 1999, applies to the Company's tax service operations and requires the deferral of the tax service fee and the recognition of that fee as revenue ratably over the expected service period. The amortization rates applied to recognize the revenues assume a 10-year contract life and are adjusted to reflect prepayments. The Company periodically reviews its tax service contract portfolio to determine if there have been changes in contract lives and/or changes in the number and/or timing of prepayments. Accordingly, the Company may adjust the rates to reflect current trends. SAB No. 101 finalizes a series of changes instituted by the Securities and Exchange Commission concerning revenue recognition policies. As a result of adopting the SAB, in 1999, the Company reported a charge of $55.6 million, net of income taxes and minority interests, as a cumulative change in accounting principle, reduced net income by $10.9 million, or $.16 per diluted share and restated its quarterly information. Assuming the SAB had been adopted on January 1, 1997, pro forma net income and net income per diluted share for 1998 and 1997 would have been $188.3 million, or $3.00, and $59.8 million, or $1.02, respectively.
Consumer Information - 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, property and casualty insurance and home warranty companies, like other types of insurers, are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax based primarily on insurance premiums written. This premium tax is reported as a separate line item in the consolidated statements of income in order to provide a more meaningful disclosure of the taxation of the Company.
Income taxes
Taxes are based on income for financial reporting purposes and include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the Company's assets and liabilities.
Earnings per share
Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per share except that the weighted-average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if potential dilutive common shares had been issued.
The Company's only potential dilutive common shares are stock options (see Note 12). Stock options are reflected in diluted earnings per share by application of the treasury stock method.
Risk of real estate market
Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long-term mortgage funds. Real estate activity and, in turn, the Company's revenues can be adversely affected during periods of high interest rates and/or limited money supply.
Use of estimates
The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results could differ from the estimates and assumptions used.
Fiduciary assets and liabilities
Assets and liabilities of the trusts and escrows administered by the Company are not included in the consolidated balance sheets.
NOTE 2. Statutory Restrictions on Investments and Stockholders' Equity:
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, 1999.
Pursuant to insurance and other regulations of the various states in which the Company's insurance subsidiaries operate, the amount of dividends, loans and advances available to the Company is limited, principally for the protection of policyholders. Under such statutory regulations, the maximum amount of dividends, loans and advances available to the Company from its insurance subsidiaries in 2000 is $133.1 million.
The Company's title insurance subsidiary, First American Title Insurance Company, maintained statutory capital and surplus of $394.2 million and $301.6 million at December 31, 1999 and 1998, respectively. Statutory net income for the years ended December 31, 1999, 1998 and 1997 was $71.2 million, $137.3 million and $35.9 million, respectively.
NOTE 3. Debt and Equity Securities:
The amortized cost and estimated fair value of investments in debt securities are in the table below. The fair value of debt and equity securities was estimated using quoted market prices.
The amortized cost and estimated fair value of debt securities at December 31, 1999, by contractual maturities, are as follows:
The cost and estimated fair value of investments in equity securities are as follows:
Sales of debt and equity securities resulted in realized gains of $3.5 million, $1.4 million and $0.7 million; and realized losses of $1.6 million, $0.2 million and $0.3 million for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 4. Loans Receivable:
Loans receivable are summarized as follows:
Real estate loans are secured by properties located in California. The average yield on the Company's loan portfolio was 10% for the years ended December 31, 1999 and 1998. 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 $87.7 million and $72.2 million at December 31, 1999 and 1998, 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 risks in the portfolio.
NOTE 5. Assets Acquired in Connection with Claim Settlements:
December 31 (in thousands) 1999 1998 - ------------------------------------------------------------- Notes receivable $10,863 $11,833 Real estate 2,720 4,880 Judgments and other 10,613 338 - ------------------------------------------------------------- $24,196 $17,051 - -------------------------------------------------------------
The above amounts are net of valuation reserves of $4.9 million and $12.3 million at December 31, 1999 and 1998, respectively.
The fair value of notes receivable was $11.1 million and $12.2 million at December 31, 1999 and 1998, respectively, and was estimated based on the discounted value of future cash flows using the current rates at which similar loans would be made to borrowers of similar credit quality.
The activity in the valuation reserve is summarized as follows:
December 31 (in thousands) 1999 1998 - ------------------------------------------------------------- Balance at beginning of year $12,256 $11,135 Valuation reserve adjustments (6,093) 3,951 Dispositions (1,307) (2,830) - -------------------------------------------------------------- Balance at end of year $ 4,856 $12,256 - --------------------------------------------------------------
NOTE 6. Demand Deposits:
Passbook and investment certificate accounts are summarized as follows:
December 31 (in thousands except percentages) 1999 1998 - ---------------------------------------------------------------------- Passbook accounts $11,117 $12,502 - ---------------------------------------------------------------------- Certificate accounts: Less than one year 51,976 33,980 One to five years 17,750 20,922 - ---------------------------------------------------------------------- 69,726 54,902 - ---------------------------------------------------------------------- $80,843 $67,404 - ---------------------------------------------------------------------- Annualized interest rates: Passbook accounts 4%-5% 4%-5% Certificate accounts 5%-8% 5%-8%
The carrying value of the passbook accounts approximates fair value due to the short-term nature of this liability. The fair value of investment certificate accounts was $69.5 million and $55.4 million at December 31, 1999 and 1998, respectively, and was estimated based on the discounted value of future cash flows using a discount rate approximating current market for similar liabilities.
NOTE 7. Reserve for Known and Incurred But Not Reported Claims:
Activity in the reserve for known and incurred but not reported claims is summarized as follows:
December 31 (in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------- Balance at beginning of year $272,921 $254,058 $247,443 - ---------------------------------------------------------------------------- Provision related to: Current year 122,311 121,118 92,009 Prior years (6,093) 3,060 4,796 - ---------------------------------------------------------------------------- 116,218 124,178 96,805 - ---------------------------------------------------------------------------- Payments related to: Current year 58,915 52,164 43,226 Prior years 54,029 46,359 41,901 - ---------------------------------------------------------------------------- 112,944 98,523 85,127 - ---------------------------------------------------------------------------- Other (2,471) (6,792) (5,063) - ---------------------------------------------------------------------------- Balance at end of year $273,724 $272,921 $254,058 - ----------------------------------------------------------------------------
"Other" primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements. "Other" for 1999 includes $7,955 in purchase accounting adjustments related to Company acquisitions and $11,251 related to Company dispositions. Claims activity associated with reinsurance is not material and, therefore, not presented separately.
NOTE 8. Notes and Contracts Payable:
December 31
(in thousands) 1999 1998 - ------------------------------------------------------------------------------ 7.55% senior debentures, due April, 2028 $ 99,486 $ 99,468 Secured notes payable pursuant to amended credit agreement - 2,040
Trust deed notes with maturities through 2007, secured by land and buildings with a net book value of $3,437, average rate of 10.5% 3,022 3,952
Other notes and contracts payable with maturities through 2007, average rate of 7.5% 94,307 38,006 - ------------------------------------------------------------------------------ $196,815 $143,466 - ------------------------------------------------------------------------------
In April 1999, the Company paid off the fixed-rate indebtedness portion of the 1997 amended credit agreement. The $75.0 million line of credit established under the amended credit agreement remained in effect. In July 1999, the Company entered into a new credit agreement that provided for an additional $100.0 million line of credit. Under the terms of the credit agreements, the Company is required to maintain minimum levels of capital and earnings and meet predetermined debt-to-capitalization ratios. Both lines of credit expire in July 2002 and were unused at December 31, 1999.
In April 1998, the Company issued and sold $100.0 million of 7.55% senior debentures, due April 2028. The 30-year bonds were issued at 99.456% of the principal amount.
The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 1999, are as follows:
(in thousands) Year - ----------------------------------------------------------- 2000 $23,004 2001 $21,203 2002 $13,982 2003 $12,260 2004 $ 9,893
The fair value of notes and contracts payable was $195.7 million and $130.9 million at December 31, 1999 and 1998, respectively, and was estimated based on the current rates offered to the Company for debt of the same remaining maturities. The weighted-average interest rate for the Company's notes and contracts payable was 7.5% at December 31, 1999 and 1998.
NOTE 9. Investment and Other Income:
The components of investment and other income are as follows:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ Interest: Cash equivalents and deposits with savings and loan associations and banks $11,921 $10,706 $ 7,051 Debt securities 15,199 14,547 11,354 Other long-term investments 5,163 7,023 3,550 - ------------------------------------------------------------------------------ 32,283 32,276 21,955 - ------------------------------------------------------------------------------
Investment gain 5,160 32,449 - Dividends on marketable equity securities 630 409 469 Equity in earnings of unconsolidated affiliates 3,553 4,614 2,304 Net gain on sales of debt and equity securities 1,854 1,154 445 Other 8,493 5,871 3,923 - ------------------------------------------------------------------------------ $51,973 $76,773 $29,096 - ------------------------------------------------------------------------------
NOTE 10. Income Taxes:
Income taxes are summarized as follows:
(in thousands) 1999 1998 1997 - ---------------------------------------------------------------------------- Current: Federal $51,237 $101,238 $28,491 State 7,183 12,520 4,075 - ---------------------------------------------------------------------------- 58,420 113,758 32,566 - ---------------------------------------------------------------------------- Deferred: Federal 3,260 13,584 9,600 State 620 1,170 770 3,880 14,754 10,370 - ---------------------------------------------------------------------------- $62,300 $128,512 $42,936 - ----------------------------------------------------------------------------
Income taxes differ from the amounts computed by applying the federal income tax rate of 35%. A reconciliation of this difference is as follows:
in thousands 1999 1998 1997 - ---------------------------------------------------------------------------- Taxes calculated at federal rate $52,830 $115,514 $38,819 Tax exempt interest income (1,367) (1,684) (839) Tax effect of minority interests 826 1,273 1,286 State taxes, net of federal benefit 5,071 9,043 3,941 Exclusion of certain meals and entertainment expenses 4,519 3,794 2,889 Other items, net 421 572 (3,160) - ---------------------------------------------------------------------------- $62,300 $128,512 $42,936 - ----------------------------------------------------------------------------
The primary components of temporary differences which give rise to the Company's net deferred tax asset are as follows:
December 31
(in thousands) 1999 1998 - ---------------------------------------------------------------------------- Deferred tax assets: Deferred revenue $ 67,540 $25,952 Employee benefits 24,892 14,407 Bad debt reserves 7,291 7,412 Acquisition reserve 114 520 State taxes 872 2,262 Other 3,938 6,235 - ---------------------------------------------------------------------------- 104,647 56,788 - ----------------------------------------------------------------------------
Deferred tax liabilities: Depreciable and amortizable assets 31,616 21,426 Investment gain 11,357 11,357 Claims and related salvage 8,679 (3,139) Accumulated other comprehensive income 2,271 4,166 Other 2,440 6,654 - ---------------------------------------------------------------------------- 56,363 40,464 - ---------------------------------------------------------------------------- Net deferred tax asset $ 48,284 $16,324 - ----------------------------------------------------------------------------
NOTE 11. Employee Benefit Plans:
The Company has pension and other retirement benefit plans covering substantially all employees. The Company's principal pension plan, amended to be noncontributory effective January 1, 1995, is a qualified defined benefit plan with benefits based on the employee's years of service and the highest five consecutive years' compensation during the last 10 years of employment. The Company's policy is to fund all accrued pension costs. Contributions are intended to provide not only for benefits attributable to past service, but also for those benefits expected to be earned in the future. The Company also has nonqualified, unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are intended to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives.
Effective January 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." SFAS No. 132 revises employers' disclosures about pension and other postretirement benefit plans but does not change the measurement or recognition of those plans.
Net periodic pension cost for the Company's pension and other retirement benefit plans includes the following components:
(in thousands) 1999 1998 1997 - ------------------------------------------------------------------------------ Expense: Service Cost $ 23,726 $14,863 $10,550 Interest Cost 15,376 13,067 11,178 Actual Return on Plan Assets (11,751) (9,196) (7,421) Amortization of net transition obligation 309 309 309 Amortization of prior service cost 143 143 143 Amortization of net loss 1,746 1,408 945 - ------------------------------------------------------------------------------ $ 29,549 $20,594 $15,704 - ------------------------------------------------------------------------------
The following table provides a reconciliation of benefit obligations, plan assets and funded status of the plans at:
The rate of increase in future compensation levels for the plans of 4.5% and the weighted average discount rates of 7.5% and 6.75% were used in determining the actuarial present value of the projected benefit obligation at December 31, 1999 and 1998, 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 5,799,000 and 6,081,000 shares of the Company's common stock, representing 9% and 10% of the total shares outstanding at December 31, 1999 and 1998 respectively.
The Company also has a Stock Bonus Plan (the Plan) for key employees pursuant to which 154,000, 186,000 and 258,000 common shares were issued in 1999, 1998 and 1997, respectively, resulting in a charge to operations of $3.4 million, $2.7 million and $2.2 million, respectively. The Plan, as amended December 9, 1992, provides that a total of up to 1,350,000 common shares may be awarded in any one year.
Effective January 1, 1995, the Company adopted The First American Financial Corporation 401(k) Savings Plan (The Savings Plan), which is available to substantially all employees. The Savings Plan allows for employee-elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. The Company makes contributions to The Savings Plan based on profitability, as well as contributions of the participants.
The Company's expense related to The Savings Plan amounted to $13.7 million, $14.4 million and $6.4 million for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 12. Stock Option Plans:
On April 24, 1996, the Company implemented The First American Financial Corporation 1996 Stock Option Plan (the Stock Option Plan). Under the Stock Option Plan, options are granted to certain employees to purchase the Company's common stock at a price no less than the market value of the shares on the date of the grant. The maximum number of shares that may be subject to options is 11,625,000. Currently outstanding options become exercisable one to five years, and expire 10 years, from the grant date. On April 24, 1997, the Company implemented The First American Financial Corporation 1997 Directors' Stock Plan (the Directors' Plan). The Directors' Plan is similar to the employees' Stock Option Plan, except that the maximum number of shares that may be subject to options is 1,800,000 and the maximum number of shares that may be purchased pursuant to options granted shall not exceed 6,750 shares during any 12-consecutive-month period.
Effective January 1, 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." In accounting for its plan, the Company, as allowable under the provisions of SFAS No. 123, applies Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." As a result of this election, the Company does not recognize compensation expense for its stock option plans. Had the Company determined compensation cost based on the fair value for its stock options at grant date, as set forth under SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts as follows:
(in thousands, except per share amounts) 1999 1998 1997 - ---------------------------------------------------------------------------- Net income: As reported $33,003 $201,527 $67,765 Pro forma $21,790 $183,845 $66,533
Earnings per share: As reported Basic .51 $ 3.35 $ 1.19 Diluted .50 $ 3.21 $ 1.16
Pro forma Basic .34 $ 3.05 $ 1.17 Diluted .33 $ 2.93 $ 1.14
The fair value of each option grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1999, 1998 and 1997, respectively; dividend yield of 1.5%, 1% and 1.2%; expected volatility of 39.6%, 36% and 38.1%; risk-free interest rate of 5.8%, 5.7% and 6.3%; and expected life of seven years.
Transactions involving stock options are summarized as follows:
The following table summarizes stock options outstanding and exercisable at December 31, 1999:
(a) Average contractual life remaining in years
NOTE 13. Commitments and Contingencies:
The Company leases certain office facilities, automobiles and equipment under operating leases, which, for the most part, are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. In December 1999, the Company entered into a sale-leaseback agreement with regard to certain furniture and equipment with a net book value of $65.7 million. Proceeds from the sale amounted to $80.1 million and a gain of $14.4 million has been included in deferred revenue and will be amortized over the life of the lease. Under the agreement, the Company agreed to lease the equipment for five years with minimum annual lease payments of $15.2 million. At the end of the term of the lease, the Company has the option to acquire the equipment or return it to the lessor.
Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1999, are as follows:
(in thousands) Year - ------------------------------------------------------------ 2000 $114,880 2001 93,747 2002 77,027 2003 60,037 2004 46,901 Later Years 67,915 - ------------------------------------------------------------ $460,507 - ------------------------------------------------------------
Total rental expense for all operating leases and month-to-month rentals was $126.3 million, $110.3 million and $79.7 million for 1999, 1998 and 1997, respectively.
NOTE 14. Mandatorily Redeemable Preferred Securities:
On April 22, 1997, the Company issued and sold $100.0 million of 8.5% trust preferred securities, due in 2012, through its wholly owned subsidiary, First American Capital Trust. In connection with the subsidiary's issuance of the preferred securities, the Company issued to the subsidiary trust 8.5% subordinated interest notes, due 2012. The sole assets of the subsidiary are and will be the subordinated interest notes. The Company's obligations under the subordinated interest notes and related agreements, taken together, constitute a full and unconditional guarantee by the Company of the subsidiary's obligations under the preferred securities. Distributions payable on the securities are included as interest expense in the Company's consolidated income statement.
NOTE 15. Stockholders' Equity:
In December 1999, the Company announced plans to repurchase up to 5% of its then issued and outstanding shares. The amount of any share repurchases will depend on, among other factors, the market performance of the shares; the availability of, and alternate uses of, the Company's funds; and Securities and Exchange Commission regulations. Pursuant to the terms of the repurchase program, the Company had repurchased and retired 140,000 of its issued and outstanding shares as of December 31, 1999.
On October 23, 1997, the Company adopted a Shareholder Rights Plan (the 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.
NOTE 16. Other Comprehensive Income:
Comprehensive income is a more inclusive financial reporting methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of net income.
Components of other comprehensive income are as follows:
The change in other unrealized gains (losses) on debt and equity securities includes reclassification adjustments of $3.7 million, $1.2 million and $0.4 million of net realized gains for the years ended December 31, 1999, 1998 and 1997, respectively.
NOTE 17. Litigation
On May 19, 1999, The People of the State of California, Kathleen Connell, Controller of the State of California, and Chuck Quackenbush, Insurance Commissioner of the State of California, filed a class action suit in the Sacramento Superior Court. The action seeks to certify as a class of defendants all "title insurers", all "underwritten title companies" and all "controlled escrow companies" (as those terms are defined in the California Insurance Code) -------------- and all "independent escrow companies" (as the term is defined in the California Financial Code) doing business in the State of California from 1970 to the - -------------- present who (i) hold dormant, unclaimed escrow funds; (ii) charged California home buyers and other escrow customers $10.00 or more for delivery services or administrative fees; (iii) charged California home buyers and other escrow customers reconveyance fees and/or (iv) earned interest (or its equivalent) from financial institutions on customers' deposited escrow funds.
The plaintiffs allege that the defendants unlawfully (i) failed to escheat unclaimed property to the Controller of the State of California on a timely basis; (ii) charged California home buyers and other escrow customers fees for services that were never performed or which cost less than the amount charged; and (iii) devised and carried out schemes with financial institutions to receive interest, or monies in lieu of interest, on escrow funds deposited by defendants with financial institutions in demand deposits.
In February 2000, the Company entered into an administrative settlement with the California Department of Insurance (DOI), whereby the DOI released the Company from any further claim of liability as to the Company's receipt of earnings credits or any alleged overcharges for various miscellaneous escrow fee items, such as courier, Federal Express or wire service fees. The DOI further agreed to direct the attorney general to dismiss it as a plaintiff from the action brought by the State of California. In the settlement with the DOI, the Company agreed to (i) make a contribution to a consumer education fund and (ii) accept a new regulation to be promulgated by the DOI, whereby earnings credit programs will be authorized and regulated by the DOI and rate filings will be required for escrow fees including several specified miscellaneous fee items.
Subsequent to the filing of the action by the State of California, First American Title Insurance Company was named and served as a defendant in two private class actions. The allegations in the complaints include some, but not all, of the allegations contained in the class action filed by the State of California. The private class actions independently seek injunctive relief, attorneys' fees, damages and penalties in unspecified amounts. The private class actions have been stayed by court orders pending settlement negotiations relating to the class action filed by the State of California.
The Company does not believe that the ultimate resolution of these actions will have a materially adverse effect on its financial condition or results of operations.
The Company is involved in various routine legal proceedings related to its operations. While the ultimate disposition each proceeding is not determinable, the Company does not believe that any such proceedings will have a materially adverse effect on its financial condition or results of operations.
NOTE 18. Business Combinations:
Effective May 14, 1999, the Company completed its merger of National Information Group (NAIG). Under the terms of the definitive merger agreement, each of the NAIG shareholders received .67 of a share of the Company's common stock for each NAIG common share they owned. To complete the merger, the Company issued 3,004,800 shares, in exchange for 100% of the outstanding common stock of NAIG. The information services provided by NAIG include outsourcing services, flood zone determination services, real estate tax tracking, hazard and motor vehicle insurance tracking, lender-placed insurance and flood insurance. This merger was accounted for under the pooling-of-interests method of accounting and, as a result, the Company has restated all previously reported results to reflect this merger.
Included in other operating expenses for the 12 months ended December 31, 1999, were merger-related charges of $10.8 million, $7.0 million after tax, or 10 cents per diluted share. These nonrecurring charges include severance payments, lease terminations and consulting services. Combined and separate results of the Company and NAIG during the periods preceding the acquisitions were as follows:
During the year ended December 31, 1999, the Company acquired 25 companies. The purchase method of accounting was used for 24 of the acquisitions and the pooling-of-interests method was used for one.
The 24 acquisitions accounted for under the purchase method of accounting were individually not material and are included in the following business segments; 20 in the title insurance segment, three in the real estate information services segment and one in the consumer information segment. Their aggregate purchase price was $71.8 million in cash, $53.5 million in notes and 1,119,321 shares of the Company's common stock. The purchase price for each was allocated to the assets acquired and liabilities assumed based on estimated fair values and approximately $110.7 million in goodwill was recorded. Goodwill is being amortized on a straight-line basis over its estimated useful
life ranging from 20 to 30 years. The operating results of these acquired companies were included in the Company's consolidated financial statements from their respective acquisition dates. Assuming these acquisitions had occurred January 1, 1998, pro forma revenues, net income and net income per diluted share would have been $3.07 billion, $36.8 million and $.55, respectively, for the year ended December 31, 1999; and $3.08 billion, $207.6 million and $3.25, respectively, for the year ended December 31, 1998. All pro forma results include amortization of goodwill and interest expense on acquisition debt. The pro forma results are not necessarily indicative of the operating results that would have been obtained had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.
On January 1, 1998, the Company formed a limited liability corporation (LLC) with Experian Group (Experian). The purpose of the LLC is to combine certain operations of the Company's subsidiary, First American Real Estate Information Services, Inc. (FAREISI), with Experian's Real Estate Solutions division (RES). The LLC is 80% owned by the Company and 20% owned by Experian. RES is a supplier of core real estate data, providing, among other things, property valuation information, title and tax information and imaged title documents. The Company treated the transaction as an acquisition of the assets and liabilities of RES in consideration for a 20% interest in FAREISI. As a result of the transaction, the Company recognized an investment gain of $32.4 million in the first quarter 1998. The operating results of the LLC are included in the Company's consolidated financial statements commencing January 1, 1998.
NOTE 19. Segment Financial Information:
The Company's operations include three reportable segments: title insurance and services, real estate information and services and consumer information and services. The title insurance segment issues policies, which are insured statements of the condition of title to real property, and provides other related services. The real estate information property and casualty insurance segment provides to lender customers the status of tax payments on real property securing their loans, mortgage credit information derived from at least two credit bureau sources, flood zone determination reports that provide information on whether or not a property is in a special flood hazard area, as well as other real estate-related information services. The consumer information segment provides home warranties, which protect homeowners against defects in home fixtures; automotive tracking services; resident screening; pre-employment screening; property and casualty insurance; trust and banking services; investment advisory and other related services.
The title insurance and real estate information segments operate through networks of offices nationwide. The Company provides its title services through both direct operations and agents throughout the United States. It also offers title services abroad in Australia, the Bahama Islands, Canada, England, Guam, Ireland, Mexico, Puerto Rico, Scotland, South Korea, and the U.S. Virgin Islands. To date, the international title operations have not been material to the Company's financial condition or results of operations. The consumer information segment provides home warranty services in Arizona, California, Georgia, Nevada, North Carolina, South Carolina, Texas, Utah and Washington. Trust, banking and thrift services are provided in Southern California. Investment advisory, automotive tracking, resident screening, pre-employment screening and lender-placed flood and hazard insurances are offered nationwide.
Selected financial information about the Company's operations by segment for each of the past three years is as follows:
Corporate consists primarily of unallocated interest expense, minority interests, equity in earnings of affiliated companies and personnel and other operating expenses associated with the Company's home office facilities.
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
Quarterly Financial Data (Unaudited)
In December, 1999, the Company adopted Staff Accounting Bulletin No. 101 (SAB), "Revenue Recognition in Financial Statements", which became effective January 1, 1999. In conformity with the SAB the Company has restated its results for the first three quarters of 1999. See Note 1 to the consolidated financial statements for further discussion.
All financial results presented include the effect of the 1999 acquisition of NAIG accounted for under the pooling of interests method of accounting.
SCHEDULE I 1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1999
SCHEDULE III 1 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
BALANCE SHEET CAPTIONS
Column A Column B Column C Column D -------- -------- -------- --------
Deferred Policy Claims Deferred Segment Acquisition Costs Reserves Revenues ------- ----------------- -------- --------
- ----
Title Insurance $ 245,376,000 $ 14,429,000 Real Estate Information 16,600,000 213,880,000 Consumer Information 11,534,000 11,748,000 51,457,000 Corporate ----------- ------------- ------------- Total $11,534,000 $ 273,724,000 $ 279,766,000 =========== ============= =============
- ----
Title Insurance $ 248,723,000 Real Estate Information 17,857,000 $ 83,801,000 Consumer Information 7,590,000 6,341,000 35,401,000 Corporate ----------- ------------- ------------- Total $ 7,590,000 $ 272,921,000 $ 119,202,000 =========== ============= =============
SCHEDULE III 2 OF 2
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
SUPPLEMENTARY INSURANCE INFORMATION
INCOME STATEMENT CAPTIONS
SCHEDULE IV 1 OF 1
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
REINSURANCE
SCHEDULE V 1 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1999
Note A - Amount represents accounts written off, net of recoveries. Note B - Amount represents net $7,955,000 in purchase accounting adjustments, $11,251,000 related to the disposition of a subsidiary and $6,093,000 from 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.
SCHEDULE V 2 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1998
Note A - Amount represents accounts written off, net of recoveries. Note B - Amount represents $355,000 in purchase accounting adjustments, net of a reclassification of $3,951,000 to the reserve for assets acquired in connection with claim settlements. Note C - Amount represents claim payments, net of recoveries. Note D - Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset.
SCHEDULE V 3 OF 3
THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1997
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.
Item 9.
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 "Who are the Largest Principal Shareholders Outside of Management?" "Election of Directors," "Transactions with Management and Others," "Security Ownership of Management," "Executive Compensation," "Report of the Compensation Committee on Executive Compensation," "Comparative Cumulative Total Return to Shareholders," "Executive Officers", "Section 16(a) Beneficial Ownership Reporting Compliance," "Compensation Committee Interlocks and Insider Participation," "Stock Option Exercises," "Pension Plan," "Supplemental Benefit Plan," "Change of Control Arrangements" and "Directors Compensation" 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.
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 21 in Item 8 of Part II of this report.
3. Exhibits (Each management contract or compensatory plan or arrangement in which any director or named executive officer of The First American Financial Corporation, as defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. (S)229.402(a)(3)), participates that is included among the exhibits listed below is identified by an asterisk (*).)
(2) Agreement and Plan of Merger, dated as of November 17, 1998, among The First American Financial Corporation, National Insurance Group, and Pea Soup Acquisition Corp., incorporated by reference herein from Exhibit 2.1 of Form 8-K filed by National Information Group on November 25, 1998.
(3)(a) Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Company's Registration Statement No. 333-53681 on Form S-4.
(3)(b) Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(3)(c) Bylaws of The First American Financial Corporation, as amended.
(4)(a) Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997.
(4)(b) Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(4)(c) Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(d) Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(e) Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(4)(f) Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(g) Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(h) Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
*(10)(a) Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
*(10)(d) Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(e) Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan.
*(10)(f) 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)(g) Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(h) Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan.
*(10)(i) Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(e) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
*(10)(j) 1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996.
*(10)(k) Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(l) Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(m) Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(n) Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
*(10)(o) Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan.
*(10)(p) Change in Control Agreement (Executive Form) dated November 12, 1999.
*(10)(q) Change in Control Agreement (Management Form) dated November 12, 1999.
*(10)(r) 1997 Directors' Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997.
*(10)(s) Amendment No. 1 to 1997 Directors' Stock Plan dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(t) Amendment No. 2 to 1997 Directors' Stock Plan dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(10)(u) Registration Rights Agreement, dated April 22, 1997, incorporated by reference herein from Exhibit (10.1) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
*(10)(v) The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000.
(10)(w) The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated March 10, 2000.
(10)(x) Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(y) Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(z) Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(aa) Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(bb) Amendment to Reseller Services Agreement For Resales to Consumers dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(cc) Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(dd) Amended and Restated Credit Agreement dated as of July 29, 1997, incorporated by reference herein from Exhibit (4.4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(10)(ee) 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.
(10)(ff) Credit Agreement dated as of July 2, 1999, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
During the last quarter of the period covered by this report, the Company filed a current report on Form 8-K dated December 21, 1999, reporting on earnings expectations for the fourth quarter of 1999 and the first quarter of 2000, and announcing a program for repurchasing a portion of the Company's issued and outstanding Common shares.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE FIRST AMERICAN FINANCIAL CORPORATION (Registrant)
By /S/ PARKER S. KENNEDY -------------------------------------------------------------------- Parker S. Kennedy, President (Principal Executive Officer)
Date: March 28, 2000 -------------------------------------------------------------------- By: /S/ THOMAS A. KLEMENS -------------------------------------------------------------------- Thomas A. Klemens, Executive Vice President, Chief Financial Officer Financial and Accounting Officer)
Date: March 28, 2000 --------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
By: /S/ D.P. KENNEDY By: /S/ JAMES L. DOTI --------------------------- ----------------------------- D.P. Kennedy James L. Doti, Director Chairman and Director Date March 28, 2000 Date: March 28, 2000 --------------------------- -----------------------------
By: /S/ PARKER S. KENNEDY By /S/ LEWIS W. DOUGLAS, JR. --------------------------- ----------------------------- Parker S. Kennedy, Lewis W. Douglas, Jr., President and Director Director Date: March 28, 2000 Date: March 28, 2000 --------------------------- -----------------------------
By: /S/ THOMAS A. KLEMENS By: /S/ PAUL B. FAY, JR. --------------------------- ----------------------------- Thomas A. Klemens Paul B. Fay, Jr., Director Executive Vice President Date: March 28, 2000 Chief Financial Officer -----------------------------
Date: March 28, 2000 By: /S/ FRANK O'BRYAN --------------------------- ----------------------------- Frank O'Bryan, Director By: /S/ GEORGE L. ARGYROS Date: March 28, 2000 --------------------------- ----------------------------- George L. Argyros, Director Date: March 28, 2000 By: /S/ ROSLYN B. PAYNE --------------------------- ----------------------------- Roslyn B. Payne, Director By: /S/ GARY J. BEBAN Date: March 28, 2000 --------------------------- ----------------------------- Gary J. Beban, Director Date: March 28, 2000 By: /S/ D. VAN SKILLING --------------------------- ----------------------------- D. Van Skilling, Director By: /S/ J. DAVID CHATHAM Date: March 28, 2000 --------------------------- ----------------------------- J. David Chatham, Director Date: March 28, 2000 By: /S/ VIRGINIA UEBERROTH --------------------------- ----------------------------- Virginia Ueberroth, Director By: Date: March 28, 2000 --------------------------- ----------------------------- William G. Davis, Director
Date: ---------------------------
EXHIBIT INDEX
Sequentially Exhibit No. Description Numbered Page - ----------- ----------- -------------
(2) Agreement and Plan of Merger, dated as of November 17, 1998, among The First American Financial Corporation, National Insurance Group, and Pea Soup Acquisition Corp., incorporated by reference herein from Exhibit 2.1 of Form 8-K filed by National Information Group on November 25, 1998.
(3)(a) Restated Articles of Incorporation of The First American Financial Corporation dated July 14, 1998, incorporated by reference herein from Exhibit 3.1 of Amendment No. 1, dated July 28, 1998, to the Company's Registration Statement No. 333-53681 on Form S-4.
3(b) Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated April 23, 1999, incorporated by reference herein from Exhibit (3) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
(3)(c) Bylaws of The First American Financial Corporation, as amended.
(4)(a) Rights Agreement, dated as of October 23, 1997, incorporated by reference herein from Exhibit 4 of Registration Statement on Form 8-A dated November 7, 1997.
(4)(b) Junior Subordinated Indenture, dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.2) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(4)(c) Form of New 8.50% Junior Subordinated Deferrable Interest Debenture, incorporated by reference herein from Exhibit 4.2 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(d) Certificate of Trust of First American Capital Trust I, incorporated by reference herein from Exhibit 4.3 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(e) Amended and Restated Declaration of Trust of First American Capital Trust I dated as of April 22, 1997, incorporated by reference herein from Exhibit (4.3) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(4)(f) Form of New 8.50% Capital Security (Liquidation Amount $1,000 per Capital Security), incorporated by reference herein from Exhibit 4.6 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(g) Form of New Guarantee Agreement, incorporated by reference herein from Exhibit 4.7 of Registration Statement No. 333-35945 on Form S-4 dated September 18, 1997.
(4)(h) Senior Indenture, dated as of April 7, 1998, between The First American Financial Corporation and Wilmington Trust Company as Trustee, incorporated by reference herein from Exhibit (4) of the Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
*(10)(a) Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit (10)(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
*(10)(b) Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988.
*(10)(c) Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989.
*(10)(d) Amendment No. 3, dated July 7, 1998, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(d) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(e) Amendment No. 4, dated March 22, 2000, to Executive Supplemental Benefit Plan.
*(10)(f) 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)(g) Amendment No. 1, dated July 7, 1998, to Management Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(f) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(h) Amendment No. 2, dated March 22, 2000, to Management Supplemental Benefit Plan.
*(10)(i) Pension Restoration Plan (effective as of January 1, 1994), incorporated by reference herein from Exhibit (10)(e) of Annual Report on Form 10-K for the fiscal year ended December 31, 1996.
*(10)(j) 1996 Stock Option Plan, incorporated by reference herein from Exhibit 4 of Registration Statement No. 333-19065 on Form S-8 dated December 30, 1996.
*(10)(k) Amendment No. 1, dated February 26, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(i) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(l) Amendment No. 2, dated June 22, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(j) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(m) Amendment No. 3, dated July 7, 1998, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(k) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(n) Amendment No. 4, dated April 22, 1999, to 1996 Stock Option Plan, incorporated by reference herein from Exhibit (10)(a) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
*(10)(o) Amendment No. 5, dated February 29, 2000, to 1996 Stock Option Plan.
*(10)(p) Change in Control Agreement (Executive Form) dated November 12, 1999.
*(10)(q) Change in Control Agreement (Management Form) dated November 12, 1999.
*(10)(r) 1997 Directors' Stock Plan, incorporated by reference herein from Exhibit 4.1 of Registration Statement No. 333-41993 on Form S-8 dated December 11, 1997.
*(10)(s) Amendment No. 1 to 1997 Directors' Stock Plan dated February 26, 1998, incorporated by reference herein from Exhibit (10)(m) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
*(10)(t) Amendment No. 2 to 1997 Directors' Stock Plan dated July 7, 1998, incorporated by reference herein from Exhibit (10)(n) of Annual Report on Form 10-K for the fiscal year ended December 31, 1998.
(10)(u) Registration Rights Agreement, dated April 22, 1997, incorporated by reference herein from Exhibit (10.1) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
*(10)(v) The First American Financial Corporation Deferred Compensation Plan dated March 10, 2000.
(10)(w) The First American Financial Corporation Deferred Compensation Plan Trust Agreement dated as of March 10, 2000.
(10)(x) Contribution and Joint Venture Agreement By and Among The First American Financial Corporation and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(a) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(y) Operating Agreement for First American Real Estate Solutions LLC, a California Limited Liability Company, By and Among First American Real Estate Information Services, Inc., and Experian Information Solutions, Inc., et al., dated November 30, 1997, incorporated by reference herein from Exhibit (10)(b) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(z) Data License Agreement dated November 30, 1997, incorporated by reference herein from Exhibit (10)(d) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(aa) Reseller Services Agreement dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(g) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(bb) Amendment to Reseller Services Agreement For Resales to Consumers dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(h) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(cc) Trademark License Agreement, dated as of November 30, 1997, incorporated by reference herein from Exhibit (10)(i) of the Quarterly Report on Form 10-Q for the quarter ended March 31, 1998.
(10)(dd) Amended and Restated Credit Agreement dated as of July 29, 1997, incorporated by reference herein from Exhibit (4.4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
(10)(ee) 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.
(10)(ff) Credit Agreement dated as of July 2, 1999, incorporated by reference herein from Exhibit (10)(b) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(21) Subsidiaries of the registrant.
(23) Consent of Independent Accountants.
(27) Financial Data Schedule.