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    FAF%20Annual%201997 FAF%20Annual%201997 Document Transcript

    • The First American Financial Corporation 1997 1997 ANNUAL REPORT MAKING NEWS
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S FIRST AMERICAN First American Profile profile The First American Financial Corporation is the leading provider of real estate-related financial and information services to real property buyers and mortgage lenders. The Company’s products and services include title insurance; information services which include tax monitoring, credit reporting, property data services, flood certification, field inspection services, appraisal services, mortgage loan servicing systems and mortgage document preparation; home warranty; and investment, trust and thrift operations. The title insurance and real estate information segments operate through networks of offices nationwide. The Company provides its title services through more than 300 offices and 4,000 agents throughout the United States. It also offers title services abroad in Australia, the Bahama Islands, Canada, Guam, Mexico, Puerto Rico, the U.S. Virgin Islands and the United Kingdom. Home warranty services are available in Arizona, California, Nevada, North Carolina, South Carolina, Texas, Utah and Washington. The investment, trust and thrift businesses operate in Southern California. First American, based in Santa Ana, California, celebrated its centennial in 1989. First American is dedicated to leading our industry — in customer satisfaction by providing consistently high-quality service; in innovation by developing and marketing new systems, products and services; in profitability by demanding efficiency; and in growth by searching out domestic and international opportunities. TA B L E O F contents First American’s accomplishments made news throughout a successful year. 2 Letter to Stockholders 4 Stock Performance 5 The Year in Review 8 Title Insurance 12 Real Estate Information Services 16 Home Warranty 18 Trust and Banking Fulfilling goals and adhering to our growth strategy led to powerful 1997 financial results. Management’s Discussion and Analysis 20 Selected Financial Data 24 Common Stock and Quarterly Data 25 Consolidated Balance Sheets 26 Consolidated Statements of Income 28 Consolidated Statements of Stockholders’ Equity 29 Consolidated Statements of Cash Flows 30 Notes to Consolidated Financial Statements 31 Report of Independent Accountants 37 The company’s people — throughout the nation and the world — were at the helm of our newsworthy success. 38 Board of Directors 39 Officers 40 Primary Companies 41 Shareholder Information
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S FINANCIAL Financial Highlights highlights (in thousands, except percent, per share amounts and employee data) Percent 1997 1996 Change Revenues $1,887,461 $1,597,566 18 Expenses 1,764,348 1,491,701 18 Income before premium and income taxes 123,113 105,865 16 Premium taxes 16,904 16,676 1 Income before income taxes 106,209 89,189 19 Income taxes 41,500 35,600 17 Net income $ 64,709 $ 53,589 21 Stockholders’ equity $ 411,412 $ 352,465 17 Return on average stockholders’ equity 16.9% 16.4% 3 Cash dividends $ 8,818 $ 7,928 11 Per share of common stock (Note A) — Net income: Basic $ 3.73 $ 3.12 20 Diluted $ 3.64 $ 3.09 18 Stockholders’ equity $ 23.68 $ 20.34 16 Cash dividends $ .51 $ .46 11 Number of common shares outstanding (Note A) — Weighted average during the year: Basic 17,362 17,179 1 Diluted 17,785 17,325 3 End of year 17,374 17,331 – Number of employees 12,930 11,611 11 Note A — After adjustment for 3-for-2 stock split effected January 15, 1998, and restatement for the adoption of Statement of Financial Accounting Standards No. 128, “Earnings per Share.” 01 O pe ra t in g Re ve Operating Revenues Pretax Profits nu by Business Segment by Business Segment e s Pr b et ax Title Insurance – 78% Title Insurance – 62% Pr o fit s Real Estate Information – 18% Real Estate Information – 29% Home Warranty – 3% Home Warranty – 6% Trust and Banking – 1% Trust and Banking – 3% Ti tle Ti tle In su Re Is ra R ur al nc ea a E e nc lE st Ho 7 at e H st m e om 62 at e In e % W e
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S D.P. Kennedy, chairman of the board Parker S. Kennedy, president LETTER TO Letter to Stockholders stockholders T his was a record year for our company in every 1. A greater emphasis on information. Customers today respect. The last time we experienced such outstanding growth seek a wide variety of information to support their real estate was 1993, which was a year of extraordinary transaction levels decisions and First American wants to be the company of caused by an unprecedented refinance boom. Strength and choice for these customers. Generally, title insurance balance marked 1997. Our strong performance was enhanced accompanies this information but often, as in the case of by strong and steady markets in lending, real estate brokerage, second mortgage lending, title information (when coupled with home building and commercial development. We continued borrower credit data, a flood zone determination and tax our strategy of providing a full array of informational products information) is enough. To meet this trend, First American has to these markets and were rewarded with strong revenues continued to expand its control of property data by purchasing and increased profits. Our dedicated team of employees is more than 20 title operations during 1997. Additionally, a huge to be commended. step was taken with the creation of the Experian joint venture. Revenues for the year were $1.887 billion. After-tax profits In combining most of our information services division with were $64.7 million, or $3.64 per diluted share, compared with Experian’s real estate information arm, First American gained an $3.09 per diluted share in 1996. Our stock price improved 80% 80 percent interest in the nation’s most extensive database of over the course of the year. title and property characteristic records as well as a national real estate tax database. This financially strong and valuable INDUSTRY TRENDS partnership has already provided substantial benefits by At the beginning of the decade, we viewed a markedly bringing excellent new people and technological capabilities 02 different landscape when compared with today. There were 10 to First American. national title insurance companies, each offering a very limited The strong profits and potential created by the Experian array of informational products, most relying heavily on data venture have exceeded expectations. Spanning nearly all of our and software owned outside the industry for production of its companies, this venture brings us closer to our goal of primary product. Title searches were produced county-by- operating our divisions as one enterprise. The acquisition county and practices and policy coverages were dictated by strategy of purchasing data bases needed to produce our local customs. Change was inevitable, and First American primary products helps ensure the long-term strength of our changed from a national title insurer to a full service provider company and our industry. of real estate information. 2. Lenders will play a stronger role in shaping our After a period of intense consolidation, there are now six products and product mix. Mortgage originators and national underwriters. Our industry now offers a menu of servicers continue to expand. As they grow and geographically informational products and databases which are, more often diversify, the need for efficient systems and uniform products is than not, controlled by title companies. The searching process is more urgent. Our strong working relationships with our lender becoming much more automated and central processing is clients will become even more important to us. common in several states, as national customers are demanding Our strategy of offering the most extensive array of products uniform policy coverages from state to state. to lender clients helps us strengthen our lender alliances. This process of transformation is far from over. We must Furthering this strategy during the year, First American acquired continue to look into the future and structure our company to Strategic Mortgage Services (SMS), a multiple product provider prosper in the world as it will be. As we look ahead, we see several of real estate information including mortgage credit important trends that will shape the future of First American: information, appraisal data and document preparation. By adding the SMS customers to our existing systems, our profits
    • were substantially improved in the mortgage credit reporting TRANSITIONS and appraisal businesses and we also were able to add the During the year, First American Records Management (FARM) mortgage document preparation business to our mix. On top of redeemed shares that had been held by The First American this, SMS operated an effective computer software company Financial Corporation. FARM, of which First American previously specializing in escrow closing and title plant systems. This unit is owned 35 percent, continues to be an excellent investment and evolving into the systems and software hub for our title division. we are pleased to retain 71/2 percent of the company. 3. Customers will require that they be able to order and It is with sadness that we report the passing of Robert receive all informational products electronically and McLain, our good friend and longtime board member. Bob was on a single system. An integral part of our strategy is the a homebuilder throughout his very successful career and completion of our ordering and delivery systems. We are enjoyed a reputation for the highest integrity. He was a loyal nearing the completion of a frame relay system allowing for and extremely supportive board member since joining in 1981, very high volume ordering and delivery of mortgage credit guiding us through many years of growth. We will miss Bob’s information, flood certifications, tax monitoring information friendship and wise counsel. and title products. We recently completed an Internet-based We are pleased to add D. Van Skilling to our board. Van order and delivery system for smaller volume users. In most began his career with TRW in 1970, rising to the level of cases, orders are now placed with multiple vendors using mail, executive vice president. When TRW sold its well-known credit fax machines, telephones or separate user interfaces. A single reporting division, Van continued to head the unit now known customer may deal with 20 or more vendors and their systems as Experian, and is now chairman and chief executive officer and the informational products are received in many forms. First of Experian’s North American operations. We welcome Van American’s systems, coupled with our extensive product mix, to our board. will lead to incredible efficiencies by allowing order entry and OUTLOOK delivery on a single system. This is First American’s primary New orders during the early part of 1998 are extremely initiative for 1998. strong. Mortgage rates are low and the national economy is In addition to completing these systems, another important robust, leading to record order levels in many parts of the initiative is to expand our national capability to produce title country. Many experts look for these conditions to continue. evidence, and then link our operations electronically. We We look to the future with confidence as we integrate and envision a day when policies are delivered electronically improve our real estate products and services. throughout the country. Each First American branch and agent 03 We will continue to expand into new businesses and work will be linked to the customer through a wide area network. diligently to improve our market shares and margins in all of This network is well underway, linking over 250 First American our divisions. offices. When complete, our major nationwide lender clients In December 1997, the board approved a three-for-two will receive policies electronically from all parts of the country. stock split which was effective in January 1998, increasing the 4. Cost efficiencies will become increasingly important. shares outstanding to 17.4 million. At its February 1998 Our customers, and indeed our own companies, strongly resist meeting, the board increased the quarterly dividend from price increases. This trend will continue, underscoring the need 131/3 cents a share to 15 cents a share. for efficiency. To facilitate a complete re-engineering of the title On behalf of the officers and directors of First American, searching and closing process, First American has been developing we thank you for your support. its FAST Title and Escrow system which will integrate and revolutionize our production processes. This system will be completed during 1998 and rolled out in 1999. Our ongoing effort to improve higher-margin businesses was realized during 1997. Our emphasis on commercial title D.P. Kennedy insurance, a primary company initiative for several years, has Chairman of the Board resulted in strong market share growth. A strong commercial market together with increases in market share in Dallas and Los Angeles, the acquisition of Settlers Abstract in Philadelphia, and continued strength in New York City and in our National Accounts Department, led to excellent results in 1997. Parker S. Kennedy President
    • S U B S I D I A R Y C O M PA N I E S S U B S I D I A R Y C O M PA N I E S STOCK THE Stock Performance T h e Ye a r i n R e v i e w performance year in review AND AND FIRST AMERICAN STOCK RISES AMID CONTINUED CORPORATE IT FIRST AMERICAN, WAS A SUCCESSFUL YEAR FOR AS OUR CORPORATION T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N GROWTH AND STRONG FINANCIAL PERFORMANCE — AND ITS OPERATING GROUPS MADE SOLID, STRATEGIC MOVES MOVES THAT FURTHERED OUR LEADERSHIP POSITION, AND OFTEN MADE NEWS. 1997 was a banner year for First American’s shareholders. The stock price ended the year 80 percent higher than in 1996. This substantial gain signals a recognition of the company’s successful expansion and initial integration of its real estate-related software and information businesses. It also reflects the achievements made by our operating groups individually. And, of course, First American’s financial performance contributed too, as our revenues and net income reached a historical high, exceeding analysts’ consensus estimates. Outside factors affected our company’s success during the year, as well. Low interest rates spurred increased real estate activity, benefiting many of our operations. Continuing consolidation within our industry also led to increased interest in our stock. Adherence to our growth plans, however, played the leading role in helping us to realize our 1997 financial accomplishments. We acquired, and formed alliances with, major information companies during the year. We continued our geographic expansion, increasing our company’s presence both nationally and internationally. And, we offered new products and services that allow us to increase business with our present customers and establish relationships with new ones. MAY Duff & Phelps Credit OCT A state-of-the-art call JAN First American opens a APR First American Financial SEP First American Home Buyers DEC A joint venture between Since First American became a public company in 1964, the stock has provided shareholders with a compound annual return that has consistently outperformed the S&P. It rose nearly 400 percent in the Rating Co., (DCR), reaffirms First center is opened by the home title office in Australia, becoming issues and sells $100 million of trust Protection Corporation is licensed to First American and Experian is formed. last five years. In 1997, our stock performance continued this history with exceptional results. Many of American Title’s ‘A-’ rating, implying warranty group, staffed with that nation’s first title insurer. preferred securities through First sell its services in Utah, expanding its The merged operations join the our activities during the year, noted here and in the following pages, made news. All of them 04 high claims-paying ability. additional customer service American Capital Trust I. reach to eight states. nation’s largest provider of real estate- contributed to our success. representatives trained to respond related data with the leading provider FEB The title company introduces rapidly to customer requests. OCT Property Financial Appraisal of real estate-related financial and JUL First American Financial APR First American Financial’s the EAGLE Policy. The policy, benefiting information services. 1,300 Services (PFS) is acquired, greatly reports record-breaking second first quarter operating profits exceed homeowners and lenders, is the first of OCT First American Financial 1,200 expanding First American’s appraisal quarter revenues. analysts’ consensus expectations. its type in the nation. 1,100 DEC First American Financial 1,000 Comparison of Cumulative reports record-breaking third quarter service presence in the Northeast. Total Return 900 Dollar Growth 800 revenues and net income. FEB First American Trust MAY First American acquires declares a 3-for-2 stock split. AUG First American Financial The First American 700 Financial Corporation OCT The purchase of Settlers 600 Company becomes a direct Strategic Mortgage Services (SMS), increases its dividend by 11 percent. 500 Custom Peer Group NOV An independent customer DEC First American becomes 400 participant with the Federal Reserve a leading provider of real estate Abstract in Philadelphia by First S&P Financial Index 300 200 S&P 500 Composite Index survey, commissioned by First American, Bank, enabling the group to wire information services to the mortgage American Title strengthens the the first to establish title insurance 100 prompts the Real Estate Information money directly into the bank’s system and title industries. The acquisition company’s commercial business. operations in the Republic of Ireland. 0 90 91 92 93 94 95 96 97 Services group to establish marketing while saving money for the company brings with it more than 800 employees In all, 22 offices nationwide are systems that mirror the way customers and its customers. and an $85 million revenue base. added by the title group in 1997. First Am. Financial use their services. Custom Peer Group S&P Financial S&P 500 Index
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S Parker S. Kennedy, president The First American Financial Corporation First American Title Insurance Company Gary L. Kermott, chief operating officer First American Title Insurance Company TITLE Title Insurance insurance Af fordable interest rates, low unemployment and high consumer confidence created a strong housing market in 1997, helping to set the pace for our title company’s profitable year. Pretax profit for 1997 totaled $95.6 million, a 45 percent increase over 1996. The title group ended the first quarter, a traditionally slow period for real estate activity, with a 9 percent increase in revenue over first quarter 1996. The year’s first quarter profits were less than half that of last year’s due to the cost of increased staffing needed to service the high level of orders opened during the last quarter of 1996 and the first quarter of 1997. Many of those orders then closed during the second quarter, helping the title division to realize a 9 percent gain in pretax income over the second quarter 1996. And, despite the Federal Reserve Board’s rate increase in March, orders opened during the second quarter increased to 306,000 from 259,000 in second quarter 1996. By the third quarter, stabilized interest rates spurred increased home sales and prompted a rise in refinance activity. This translated into increased title orders and an 86 percent jump in pretax income over the same period in 1996. The resurgence of resales and refinancing was especially evident by the end of the year, as the orders opened during the last quarter were nearly 25 percent higher than in the last quarter of 1996. The title company ended 1997 with $1.46 billion in revenues, up from $1.27 billion in 1996. 08 { } The title company‘s claims-paying ability continued to be highly regarded by independent rating firms. Our title company’s ‘A-’ rating was reaffirmed in 1997 by Duff & Phelps Credit Rating Co. (DCR). The rating implies high claims-paying ability and is based on the strength of our title and related services, continued favorable operating results, adequate capitalization and loss reserves, and conservative investment portfolio. Our title company has also received strong rankings from rating services including A.M. Best Company, which gave us an A (Excellent) rating, Demotech, Inc., which assigned an A’ (Unsurpassed) rating, and Moody’s Investors Service which credited us with an A3 (Exceptional) rating. The title company introduced the nation to a new title insurance product in 1997 when it debuted the EAGLE Policy. The policy was developed to offer customers additional coverages, many of which had never been issued through any standard policy. By year’s end, the EAGLE Policy was available in 29 states. Efforts by our underwriting team should result in adoption of the policy in more states throughout 1998.
    • First American Title Adds 22 Offices Nationwide, Continuing Growth Strategy * * * SANTA ANA, Calif. — Continuing a newsworthy pattern of national expansion that started more than 40 years ago, our company added title offices in 22 counties in 1997. The majority of these were acquired by First American, chosen for their strength in their communities or their prominence in specialized fields. Geographically, our 1997 acquisitions let us reach new customers in several population centers. Many brought us great financial and organizational benefits, as well, such as those we are already realizing with our acquisition of Long & Melone in Hawaii. Geographic expansion also strengthened our position as one of the select title companies that can service large clients on a national basis. Our national presence and revenues also grew in the commercial market. Of special importance was our purchase of Settlers Abstract in Philadelphia. This acquisition added significantly to our burgeoning commercial effort. Our continued commitment to expand our presence in this field led First American to increase its share of the commercial business within the nation’s major markets by more than 2 percent in 1997. * * *
    • Expanded Title Coverage Introduced by First American Is First in the Nation * * * SANTA ANA, Calif. — First American made news early in the year with the introduction of the EAGLE Policy, a title product never before offered in our industry. We created the policy to give homeowners and lenders the benefit of additional title protection. We did that by including more coverage automatically than any other policy in history. While the EAGLE Policy contains all of the protection of traditional policies, it also includes coverages that previously were available only by endorsement, and only when specifically requested. It also adds several completely new coverages, including some that protect homeowners in situations that occur after the policy is written — coverage unheard of before the introduction of the EAGLE Policy. And for all of this, our customers are charged an additional fee that is proving to be very reasonable. By developing a policy that better meets the needs of our customers, First American is continuing its role as industry leader and innovator. The policy was first offered in California alone, and by year’s end it was available in 29 states. We look forward to increasing enthusiasm for the EAGLE Policy by homeowners and lenders throughout the country in 1998. * * *
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S Our international expansion continued in 1997 as First American became the first title insurer in Australia. We still do extremely well in Canada as well, where we hold more than a 90 percent share of the market. We remain the leading title company in England, and began offering our services in Ireland and Scotland during the year. Title office additions within the U.S. flourished in 1997, continuing four decades of strategic national expansion. Our commercial market presence was strengthened with our purchase of Settlers Title Insurance Abstract in Philadelphia, a leader in commercial activity. Our acquisition of Hillam Title Agency gave us two new offices in Utah. We purchased Klamath County Title Company, a presence in the Oregon market since 1905. In September we announced the acquisition of Illini Title Services, Inc., Pekin Abstract & Title Company and Woodford County Abstract & Title, enhancing our services throughout central Illinois. Operations in the Midwest were expanded with our acquisition of 140-year-old Miller Abstract in Share of Total U.S. Market Kansas City. Two new offices in Texas came to us through our ($ in millions) acquisition of Donegan Abstract. First American expanded its business in the U.S. Virgin Islands with the purchase of Service Standard, which 25 serves the islands of St. Thomas, St. John and St. Croix. We also acquired operations in California, Hawaii, Ohio and South Carolina. 20 In all, First American added 22 title offices nationally throughout the year. First American divested its 17 percent interest in North American 15 Asset Development when Lennar Homes bought that company 92 93 94 95 96 in 1997. We retained a 50 percent interest in North American Share of US Market { } Plans for 1998 include the integration of several of our systems with those of SMS and Experian. 11 Title Insurance Company, which was owned by North American Asset Development. The other 50 percent is now owned by Lennar. North American Title Company, which operates throughout California and in Arizona and Colorado, is the primary agent for Title Revenues North American Title Insurance Company. This has been a ($ in millions) successful venture for all concerned. 1,600 Plans for 1998 include the integration of several of our systems 1,400 with those of SMS and Experian, two new members of the First 1,200 American team. The title company’s ability to deliver its products 1,000 800 more efficiently, for example, will be enhanced as we directly access 600 Experian’s title plant and image document capabilities. The title 400 and closing operations of SMS will also merge with those of 200 0 First American. 88 89 90 91 92 93 94 95 96 97 Title Revenues
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S John W. Long, president First American Real Estate Information Services, Inc. R E A L E S TAT E Real Estate Information Services information services F irst American Real Estate Information Services was built primarily through the acquisition of leading information service companies. The group plays a key role in First American’s efforts to offer our customers integrated services through a single source. In 1997, its operations were enhanced as First American acquired Strategic Mortgage Services (SMS) and announced our joint venture with Experian. SMS, our ninth major Information Services acquisition since 1995, had operations in fields similar to ours, including mortgage credit information, title, appraisal and escrow and title system software. By integrating these operations, we expanded our customer base and increased our efficiency. The SMS acquisition also brought us the nation’s largest mortgage document preparation service business. Previously, First American had no operations in this vital portion of the mortgage process. Joseph R. Reppert, former chairman of SMS, now acts as vice chairman of First American Real Estate Information Services. Our joint venture with Experian, which became effective in January of 1998, added the services of the nation’s largest provider of real estate-related data to our group. The efficiencies of having immediate access to this supply of raw data — information we use in many of our operations — will be enormous. Property Financial Appraisal Services (PFS) was also acquired by First American in 1997. The group has been integrated into First American Appraisal Services, a fast-growing division which uses technology and qualified appraisers to provide lenders with property value assessments 12 needed to measure loan risk. Prominent for many years in the New England area, PFS has expanded our appraisal service presence in the Northeast. { } Streamlining the deliver y of our ser vices should benefit our customers today and well into the future. First American Real Estate Information Services’ Excelis division completed its conversion of GMAC’s $54 billion portfolio onto its system in 1997. Excelis, the nation’s only commercially available real-time, on-line loan servicing system, was developed to handle the nation’s largest loan portfolios. During the second half of the year, First American Real Estate Information Services set out to further strengthen its efficiency and client satisfaction by learning more about its customers’ specific needs. The results of a customer survey, conducted by an independent research firm, led First American to structure the delivery of its services in a way that mirrors the way customers access them. To do so, the
    • First American and Experian Create Industry Powerhouse by Merging Substantial Operations * * * SANTA ANA, Calif. — The biggest news of the year, and perhaps of our history, came when we formed our joint venture with Experian Group. The agreement teamed Experian Real Estate Solutions, the nation’s largest provider of real estate-related data, with First American, the nation’s leading provider of real estate-related financial and information services. We have joined the industry’s biggest supplier of raw data with its biggest user of this information. The efficiencies, already being realized, will be substantial. This venture, which will begin operating under an independent name during 1998, will take the company in new directions. With the Experian resources, we will be able to greatly accelerate the pace of title searching innovation — integrating and automating a process which is currently very fragmented. The door to further acquisitions is open as we seek to integrate additional data and software. * * *
    • First American Acquires SMS, Integrating Significant Operations and an $85 Million Revenue Base * * * SANTA ANA, Calif. — In May of 1997 First American purchased Strategic Mortgage Services, Inc., (SMS), a leading provider of real estate information services to the mortgage and title industries. With the acquisition, which excluded SMS’ flood certification business, came more than 800 employees and an $85 million revenue base. SMS’ strategy was similar to ours, offering a variety of related services through a single source. We are now integrating those services with First American’s business lines. By merging our operations, we have been able to increase our national reach and create great economies of scale. The credit division of SMS was the nation’s third largest provider prior to the acquisition. Merged with First American’s CREDCO, our credit services now hold more than 35 percent of that market — far more than our next three closest competitors combined. We have also joined together SMS’ appraisal group, the nation’s second largest appraisal services provider, with First American’s appraisal operations. We absorbed the settlement services business of SMS, and have transformed this into First American Title’s primary technology company. First American also entered an entirely new field as we integrated SMS’ mortgage document preparation company, the largest firm in this business. * * *
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S Real Estate Information Services group has separated its origination services (those services needed to create a mortgage loan) from its servicing or administration services (those needed to administer a loan throughout its term). Streamlining the delivery of our services through groups focused separately on origination and servicing will benefit our customers today and well into the future. Another advantage for our customers will come with the full roll-out of RAPID, First American’s Real Estate Property Information Delivery system. This sophisticated system is scheduled to come on-line in 1998. RAPID will blend most of the company’s individual service delivery systems into one, allowing products such as appraisal, credit services, flood zone determination and tax services to be accessed through a single system. This delivery method’s efficiencies will strengthen customer relationships and encourage new business associations. { } RAPID will blend most of the company’s individual service delivery systems into one, allowing products to be accessed through a single system. First American Real Estate Information Services’ pretax profit declined in 1997, ending the year at $45.3 million, 14 percent less than its 1996 figure of $52.6 million. This downturn is attributable to higher overhead costs to integrate the new acquisitions, and the costs of relocating and consolidating certain operations in Dallas, Texas. Overall, the Information Services group excelled throughout 1997. Its credit services and flood zone determination divisions remain the leaders in their fields, and its Revenues appraisal division ranks as the nation’s second largest. By year’s end, ($ in millions) the group’s revenues rose more than 34 percent, from $246.7 million 350 in 1996 to $331.4 million in 1997. 300 15 250 200 150 100 50 0 93 94 95 96 97 Real Estate Revenues
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S Philip B. Branson, chairman Martin R. Wool, president First American Home Buyers Protection Corporation HOME Home Warranty warranty F irst American Home Buyers Protection Corporation set a new record in 1997 by writing more than $50 million in premiums. The group ended the year with 162,000 home warranties in force, up 30,000 from 1996. The group’s business is the sale of warranties covering Total Equity major operating systems and appliances in resale homes, and the ($ in millions) renewal of these service contracts. Repairs and replacements on 50 items under warranty are carried out by a network of qualified, licensed contractors. 40 In 1997, this group’s business grew in all states in which it 30 operates. Its growth was especially evident in Texas, where it realized 20 a 49 percent increase in sales. In California, where the company is 10 based, its business increased by 17 percent. 0 A state-of-the-art call center was opened by the group in 1997, 93 94 95 96 97 with additional customer service representatives trained to respond Total Equity rapidly to customer service requests. This has already resulted in increased efficiency and customer satisfaction. { } A new, advanced call center is available to 16 the group’s customers 24 hours a day, seven days a week. The group’s plans for 1998 include marketing its product through the mortgage process. The warranties will be sold to homeowners at the time the home loan is made. The costs will then be amortized over the warranty’s one-year period through the homeowner’s impound account. Continued national expansion is also planned for 1998, as the group begins offering its services in Utah early in the year. First American Home Buyers Protection Corporation’s 1997 revenues increased 22 percent over 1996. The group realized a pretax profit of $9.7 million, up 19 percent from the previous year. Its equity rose by 14 percent to $47.6 million.
    • International Expansion Continues as First American Becomes the First to Offer Title Services in Australia * * * SANTA ANA, Calif. — First American opened Australia’s first title insurance office in 1997, the most recent strategic step in our international expansion. Australia is experiencing new pressures to make the conveyancing process more efficient, just as Canada did several years ago. In Canada, these pressures led to the acceptance of the title insurance product and it appears certain that the same will happen in Australia. We are already enjoying pilot program success with some major lenders, including Citibank and Macquarie Bank. The news was also positive with our other international title operations. First American continues to maintain a dominant market share position in Canada, where our expanding operations process an average of 8,000 title orders per month. First Canadian Real Estate Tax Service introduced tax reporting and tax outsourcing services to Canada in March of 1996. The initial customers have been First American’s U.S. tax service clients whose portfolios contain Canadian loans. This has generated a high degree of interest among Canadian lending institutions. Also in 1997, First American introduced First Canadian Home Warranty Limited. We are the leading provider of title insured programs to lending institutions in England and Wales, where Abbey National’s subsidiary, Household Mortgage Company, recently joined our growing list of clients. During 1997 we introduced the Home Ownership Protection Policy, a new residential title product based on First American’s highly successful EAGLE Policy. We also began offering title insured products to national home builders. In late 1997 First American became the first company to start a title insurance operation in the Republic of Ireland and we continue to offer a comprehensive package of title services in Scotland. The company plans to prudently continue our expansion outside the U.S. by investigating opportunities in countries whose real estate conveyancing systems are well established. * * *
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S TRUST Tr u s t a n d B a n k i n g and banking TRUST OPERATIONS A n impressive 18 percent increase in assets under administration, from nearly $1.1 billion in 1996 to $1.3 billion in 1997, is reflective of First Fiduciary Assets at Market Value American Trust Company’s ($ in millions) successful year. The group 1,300 also realized $10.1 million in 1,200 1,100 revenues, a 33 percent increase 1,000 900 over the prior year. 800 700 The group, established 600 500 nearly 40 years ago, specializes 400 300 Jerald P. Lewis, 200 in trust administration for president and chief executive officer 100 First American Trust Company 0 corporations, nonprofit 93 94 95 96 97 organizations and individuals. Trust/Fiduciary Assets In 1997 it continued to advance its technological capabilities by adding a direct PC to fax option and integrating the newest Microsoft products. These computerized advances give our customers faster and more convenient ways to access information on their accounts. First American Trust Company also became a direct participant with the Federal Reserve Bank in 1997, enabling it to wire money directly into the bank’s system. Previously, we used a traditional 18 method of having a paid intermediary make the transfer. By transferring the money directly, costs are reduced for the company and our customers. The Trust Company plans to increase its presence in the Southern California market in 1998 by adding two offices in San Diego County. INVESTMENT SERVICES F irst American Capital Management, Inc. (FACM) continued to grow successfully throughout the year. This group had managed assets through the Trust Company’s investment division for more than three decades. In December 1995 it became a separate company, offering its services on a national basis. The group ended 1997 with $1.03 billion in actively managed portfolios. William C. Conrad, president and chief executive officer First American Capital Management, Inc.
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S Actively Managed Portfolios This SEC-registered investment group developed and offers First and First Choice Mutual Fund Choice Funds, a First American family of mutual funds. These Balances ($ in millions) proprietary funds are a mix of cash reserve and U.S. Treasury CD Accounts 401K Cash Bonds Stocks Reserve funds. We also offer individual securities, cash management products, 1,100 and short-term, client-directed invest- 1,000 900 ment products. FACM has been 800 700 successful in attracting individuals, 600 500 corporations and pension plan 400 300 providers, municipalities and banks 200 100 as investors. In 1998, we plan to 0 93 94 95 96 97 introduce to our investors the ability to track their funds on line via the company’s web site. Additional funds of varying CD Accnts 401K types are also planned for introduction during the year. Cash Bonds Stocks THRIFT AND LOAN SERVICES F ollowing a decade of consecutive yearly improvements, First Security Thrift again had its most successful year to date, ending with a pretax profit of $2.8 million, a 16 percent increase over 1996. This Southern California-based thrift organization also saw its deposits increase to $62.5 million from $51.3 million the prior year, an increase of 21 percent. Its loans receivable base rose by 16 percent to $65.5 million. An F.D.I.C.-insured Industrial Loan Corporation, the thrift 19 continues to attract high-grade borrowers with very few delinquencies when compared with industry norms. The loans are James Bresnan, primarily commercial and president and chief executive officer Summary of Year-End Deposits First Security Thrift industrial real estate-secured ($ in millions) transactions. First Security Thrift 70 has also maintained a stable group of local area depositors, and 60 plans to increase its representation soon in the San Diego area. The 50 group also expects to benefit from a projected increase in local 40 commercial building in 1998. 30 While the company enjoyed financial success in 1997, it also 20 suffered the loss of its founder and president, Richard (Dick) L. 10 0 Hulsizer, who passed away in October. Dick had led First Security 93 94 95 96 97 Thrift with professionalism and grace, playing a large role in the Summary of Year-End Deposits company’s reputation for personal service. He also formed and managed a team of professionals whose efforts are carrying on the company’s impressive operation. The majority of the staff has been with the company since the inception of First Security Thrift, including James Bresnan who succeeds Dick as president.
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S MANAGEMENT’S M a n a g e m e n t ’s D i s c u s s i o n a n d A n a l y s i s discussion and analysis Any statements in this document looking forward in time involve risks and Operating revenues — A summary by segment of the Company’s uncertainties, including but not limited to the following risks: the effect of operating revenues is as follows: interest rate fluctuations; changes in the performance of the real estate markets; the effect of changing economic conditions; and the demand for and the acceptance of the company’s products. (in thousands, except percent) 1997 % 1996 % 1995 % RESULTS OF OPERATIONS Title Insurance: Overview — As with all providers of real estate-related financial and Direct Operations $ 761,774 41 $ 626,314 40 $ 517,616 42 information services, the Company’s revenues depend, in large part, Agency Operations 700,193 38 641,919 41 517,173 42 upon the level of real estate activity and the cost and availability of 1,461,967 79 1,268,233 81 1,034,789 84 mortgage funds. The majority of the Company’s revenues for the title Real Estate Information 331,372 18 246,745 16 145,755 12 insurance and real estate information segments result from resales and Home Warranty 46,859 2 38,351 2 32,531 3 refinancings of residential real estate and, to a lesser extent, from commercial transactions and the construction and sale of new Trust and Banking 20,007 1 17,839 1 14,110 1 properties. Revenues for the Company’s home warranty segment result $1,860,205 100 $1,571,168 100 $1,227,185 100 primarily from residential resale activity and do not benefit from refinancings. Traditionally, the greatest volume of real estate activity, Operating Revenues ($ in millions) particularly residential resale, has occurred in the spring and summer months. However, in recent years, interest rate adjustments by the 2,000 Federal Reserve Board, as well as other economic factors, have caused 1,800 unusual fluctuations in the traditional pattern of real estate activity. 1,600 1,400 During 1994 the Federal Reserve Board raised interest rates. This, 1,200 coupled with the persistently poor real estate economy in California and 1,000 the effects of the traditional seasonal real estate cycle, resulted in a low 800 600 inventory of open transactions going into 1995. As a result, 1995 first 400 quarter operating revenues experienced a 30% decline when compared 200 0 with the same period of the prior year. In response to the severe decline 88 89 90 91 92 93 94 95 96 97 in new orders, the Company instituted personnel reductions. However, Operating revenues from direct title operations increased 21.6% in the cost-cutting measures lagged the revenue declines, resulting in Operating Revenues 1997 over 1996 and 21.0% in 1996 over 1995. These increases were losses for the first quarter 1995. Mortgage interest rates peaked in attributable to increases in the number of title orders closed by the January 1995 and decreased throughout the remainder of the year and Company’s direct operations, as well as increases in the average into 1996. This decrease, as well as increased consumer confidence, revenues per order closed. The Company’s direct operations closed contributed significantly to an improved national real estate economy 885,600, 775,100 and 667,200 title orders during 1997 1996 and , during the second half of 1995, and resulted in a 26% increase in 1995, respectively, representing increases of 14.3% in 1997 over 1996 operating revenues when compared with the first half of 1995. This 20 and 16.2% in 1996 over 1995. These increases were primarily due to resurgence in real estate activity generated a high inventory of open the continuation of lower mortgage interest rates, the improved transactions going into 1996, which, together with the continuation of national real estate economy (including California, a state highly lower mortgage interest rates, the improved national real estate concentrated with direct operations) and an increase in the Company’s economy (including the beginnings of a recovery in California) and the national market share. The average revenues per order closed were Company’s successful integration of its diverse businesses, resulted in $860, $808 and $776 for 1997, 1996 and 1995, respectively, strong revenues and profits for 1996. These favorable conditions representing increases of 6.4% in 1997 over 1996 and 4.1% in 1996 continued into 1997, contributing to record-setting residential resale over 1995. These increases were primarily attributable to an increased transactions, an increase in new home sales and renewed commercial mix of residential resale activity, appreciating home values and a activity. In addition, stability in the marketplace prompted an increase in resurgence in commercial real estate activity. Operating revenues from refinance and home equity transactions, primarily towards the latter agency operations increased 9.1% in 1997 over 1996 and 24.1% in part of the year. These factors, as well as market share increases in all 1996 over 1995. These fluctuations were primarily attributable to the of the Company’s primary business segments, culminated in 1997 same factors affecting direct operations mentioned above, compounded being the best year overall in the Company’s history. by the inherent delay in the reporting by agents. Fixed 30-Year Mortgage Rates Real estate information operating revenues increased 34.3% in 1997 (average per quarter) over 1996 and 69.3% in 1996 over 1995. These increases were primarily attributable to the same factors affecting title insurance mentioned 10% above and $64.8 million and $11.3 million of operating revenues 9% contributed by new acquisitions in 1997 and 1996, respectively. 8% 7% 6% 5% Q 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 94 95 96 97 Fixed 30-Year Mortgage Rates
    • Home warranty operating revenues increased 22.2% in 1997 over Premiums retained by agents — A summary of agent retention and 1996 and 17.9% in 1996 over 1995. These increases were primarily agent revenues is as follows: attributable to improvements in certain of the residential resale markets in (in thousands, except percent) which this segment operates, successful geographic expansion, increased 1997 1996 1995 consumer awareness and increases in the number of annual renewals. Agent Retention $563,137 $516,593 $413,444 Investment and other income — Investment and other income Agent Revenues $700,193 $641,919 $517,173 increased 3.3% in 1997 over 1996. This increase was primarily % Retained by Agents 80% 80% 80% attributable to a 4.8% increase in the average investment portfolio balance, increased equity in earnings of unconsolidated subsidiaries and The premium split between underwriter and agents is in accordance an increase in fixed income securities, offset in part by an increase of with their respective agency contracts and can vary from region to $0.9 million in losses from the sales of fixed assets. Investment and region due to divergencies in real estate closing practices as well as other income increased 14.6% in 1996 over 1995. This increase was rating structures. As a result, the percentage of title premiums retained primarily attributable to an increase in realized investment gains of $1.7 by agents may vary due to the geographical mix of revenues from million, as well as an increase in fixed income securities, offset in part agency operations. by a 5.4% decrease in the average investment portfolio balance. Other operating expenses — A summary by segment of the Salaries and other personnel costs — A summary by segment of the Company’s other operating expenses is as follows: Company’s salaries and other personnel costs is as follows: (in thousands, except percent) (in thousands, except percent) 1997 % 1996 % 1995 % 1997 % 1996 % 1995 % Title Insurance $247,579 60 $216,514 67 $186,876 72 Title Insurance $498,424 77 $413,164 78 $352,745 82 Real Estate Information 142,985 35 91,249 29 59,527 23 Real Estate Information 119,856 18 90,559 17 57,738 13 Home Warranty 2,071 – 1,323 – 1,843 1 Home Warranty 11,430 2 9,075 2 7,714 2 Trust and Banking 8,093 2 6,982 2 5,650 2 Trust and Banking 7,061 1 6,621 1 4,799 1 Corporate 10,591 3 6,641 2 3,927 2 Corporate 10,979 2 11,831 2 8,988 2 $411,319 100 $322,709 100 $257,823 100 $647,750 100 $531,250 100 $431,984 100 Title insurance other operating expenses increased 14.3% in 1997 over The Company’s title insurance segment is labor intensive; accordingly, a 1996 and 15.9% in 1996 over 1995. These increases were primarily the major variable expense component is salaries and other personnel costs. result of the impact created by the changes in incremental costs (i.e., This expense component is affected by two competing factors: the need office supplies, document reproduction, messenger services, plant to monitor personnel changes to match corresponding or anticipated maintenance and title search costs) associated with the relative changes in new orders, and the need to provide quality service. In addition, the title order volume. Also contributing to the increases were marginal price Company’s growth in operations which specialize in builder and lender level increases, offset in part by successful cost-containment programs. business has created ongoing fixed costs required to service accounts. Real estate information other operating expenses increased 56.7% Title insurance personnel expenses increased 20.6% in 1997 over in 1997 over 1996 and 53.3% in 1996 over 1995. These increases were 1996 and 17.1% in 1996 over 1995. These increases were primarily primarily attributable to costs incurred servicing the increased business attributable to the costs incurred servicing the increasing volume of title 21 activity, as well as $38.4 million and $7. 0 million of other operating orders and, to a lesser extent, acquisition activity and salary increases. costs relating to acquisitions in 1997 and 1996, respectively, offset in Contributing to the increase for 1997 was an increased mix of more part by cost-containment programs. Contributing to the increases were labor intensive residential resale transactions. The Company’s direct costs incurred developing and enhancing new electronic communica- operations opened 1,173,300, 1,026,900 and 894,400 title orders in tions delivery systems for information-based products and costs 1997, 1996 and 1995, respectively, representing increases of 14.3% in associated with assimilating and expanding this segment’s increased 1997 over 1996 and 14.8% in 1996 over 1995. operations. Real estate information personnel expenses increased 32.4% in 1997 over 1996 and 56.8% in 1996 over 1995. These increases were Provision for title losses and other claims — A summary by segment primarily attributable to costs incurred servicing the increase in business of the Company’s provision for title losses and other claims is as follows: volume, costs associated with in-house development of new electronic communications delivery systems for information-based products, and (in thousands, except percent) approximately $26.6 million and $8.6 million of costs attributable to 1997 % 1996 % 1995 % company acquisitions for 1997 and 1996, respectively. Title Insurance $52,924 59 $58,909 68 $68,338 76 Home warranty personnel expenses increased 26.0% in 1997 over Real Estate Information 9,874 11 4,453 5 3,166 3 1996 and 17.6% in 1996 over 1995. These increases were primarily due Home Warranty 27,338 30 23,055 27 18,857 21 to the additional personnel required to service the increased business Trust and Banking 187 – 70 – 26 – volume in the states this segment currently services, as well as new geographic expansion and modest salary increases. $90,323 100 $86,487 100 $90,387 100
    • The provision for title insurance losses expressed as a percentage of title The Company’s profit margins and pretax profits vary according to a insurance operating revenues was 3.6% in 1997, 4.6% in 1996, and number of factors, including the volume, composition (residential or 6.6% in 1995. These decreases reflect an ongoing improvement in the commercial) and type (resale, refinancing or new construction) of real Company’s claims experience. The provision for home warranty losses estate activity. For example, in title insurance operations, commercial as a percentage of home warranty operating revenues was 58.3% in transactions tend to generate higher revenues and greater profit 1997, 60.1% in 1996 and 58.0% in 1995. These fluctuations were margins than residential transactions. Further, profit margins from primarily attributable to the relative changes in the average number of refinancing activities are lower than those from resale activities because claims per contract experienced during these periods. in many states there are premium discounts on, and cancellation rates are higher for, refinancing transactions. Cancellations of title orders Depreciation and amortization — Depreciation and amortization as adversely affect pretax profits because costs are incurred in opening well as capital expenditures are summarized in Note 16 to the and processing such orders but revenues are not generated. Also, the consolidated financial statements. Company’s direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Interest — Interest expense increased 108.4% in 1997 over 1996 and Company’s direct title insurance business improve as the volume of title decreased 23.2% in 1996 when compared with 1995. The increase in orders closed increases. Title insurance profit margins are also affected 1997 was primarily due to $5.7 million of interest expense related to by the percentage of operating revenues generated by agency the Company’s junior subordinated deferrable interest debentures, operations. Profit margins from direct operations are generally higher offset in part by a 23.7% reduction in the average outstanding debt than from agency operations due primarily to the large portion of the balance. The decrease in 1996 was primarily attributable to a 13.5% premium that is retained by the agent. Real estate information pretax reduction in the average outstanding debt balance and a reduced profits are generally unaffected by the type of real estate activity but interest rate option on the Company’s variable rate indebtedness. increase as the volume of residential real estate loan transactions For descriptions of the Company’s borrowings under its bank credit increases. Home warranty pretax profits improve as the volume of agreement and its junior subordinated deferrable interest debentures, residential resales increases. In general, the title insurance business is see Notes 8 and 13 to the consolidated financial statements, a lower margin business when compared to the Company’s other respectively. segments. The lower margins reflect the high fixed cost of producing Minority interests — Minority interests in net income of consolidated title evidence whereas the corresponding revenues are subject to subsidiaries increased 40.1% in 1997 over 1996 and 23.1% in 1996 regulatory and competitive pricing constraints. over 1995. These increases were attributable to the relatively strong The increases in corporate expenses were primarily attributable to operating results of the Company’s less than 100% owned subsidiaries, increased costs associated with supporting the overall growth of the offset in part by purchases of shares from minority shareholders. Company’s businesses, as well as additional unallocated interest expense for 1997 associated with the Company’s junior subordinated Pretax profits — A summary by segment of the Company’s pretax deferrable interest debentures, and certain unallocated expenses in profits is as follows: 1996 associated with employee benefit plans. (in thousands, except percent) Premium taxes — A summary by pertinent segment of the Company’s 1997 % 1996 % 1995 % premium taxes is as follows: Title Insurance $ 95,636 62 $ 66,056 51 $17,540 37 (in thousands, except percent) Real Estate Information 45,317 29 52,581 40 19,690 42 1997 % 1996 % 1995 % Home Warranty 9,741 6 8,178 6 6,828 14 Title Insurance $16,034 95 $ 15,927 96 $ 13,016 96 Trust and Banking 4,062 3 3,728 3 3,304 7 22 Home Warranty 870 5 749 4 611 4 154,756 100 130,543 100 47,362 100 $16,904 100 $ 16,676 100 $ 13,627 100 Corporate (31,643) (24,678) (19,948) $123,113 $105,865 $27,414 Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a “premium” tax is imposed on certain Pretax Profits operating revenues, as defined by statute. Tax rates and bases vary from ($ in millions) state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of title insurance and home warranty 130 120 operating revenues. The Company’s underwritten title company (non- 110 100 insurance) subsidiaries are subject to state income tax and do not pay 90 80 premium tax. Accordingly, the Company’s total tax burden at the state 70 60 level is composed of a combination of premium taxes and state income 50 40 taxes. Premium taxes as a percentage of title insurance operating 30 20 revenues were 1.1% in 1997 and 1.3% in 1996 and 1995. The 10 0 decrease in the current year was attributable to changes in the 88 89 90 91 92 93 94 95 96 97 geographical mix of title insurance revenues, as well as changes in the Company’s non-insurance subsidiaries’ contribution to revenues. Pretax Profits
    • Income taxes — The Company’s effective income tax rate, which Notes and contracts payable as a percentage of total capitalization includes a provision for state income and franchise taxes for non- as of December 31, 1997, was 7.3% as compared with 16.0% as of the insurance subsidiaries, was 39.1%, 39.9% and 45.0% for 1997, 1996 prior year end. The decrease was primarily attributable to an increase in and 1995, respectively. The differences in effective rate are primarily the capital base due to the issuance of junior subordinated deferrable due to changes in the ratio of permanent differences to income before interest debentures, net income for the year, and a net decrease in income taxes and changes in state income and franchise taxes resulting debt. The Company maintains a $75.0 million revolving line of credit from fluctuations in the Company’s non-insurance subsidiaries’ which remained unused as of December 31, 1997. This credit contribution to pretax profits. Information regarding items included in agreement is more fully described in Note 8 to the consolidated the reconciliation of the effective rate with the federal statutory rate is financial statements. contained in Note 10 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 Net income — Net income and per share information, which has been 1998 from its principal subsidiary, First American Title Insurance restated for the 3-for-2 stock split effected January 15, 1998, and the Company, is $52.1 million. Such restrictions have not had, nor are adoption of Statement of Financial Accounting Standards No. 128, they expected to have, an impact on the Company’s ability to meet “Earnings per Share,” are summarized as follows: its cash obligations. The Company is evaluating the Year 2000 issue as it relates to its (in thousands, except income per share) internal computer systems and third party computer systems with which 1997 1996 1995 the Company interacts. The Company expects to incur internal staff Net income $64,709 $53,589 $7,587 costs as well as consulting and other expenses related to this issue; Net income per share: these costs will be expensed as incurred. At this time the Company is Basic $ 3.73 $3.12 $.44 unable to reasonably estimate the total costs for this issue. Due to the Company’s significant liquid asset position and its Diluted $ 3.64 $3.09 $.44 consistent ability to generate cash flows from operations, management Weighted average shares: believes that its resources are sufficient to satisfy its anticipated cash Basic 17,362 17,179 17,105 requirements. The Company’s strong financial position will enable Diluted 17,785 17,325 17,105 management to react to future opportunities for acquisitions or other investments in support of the Company’s continued growth LIQUIDITY AND CAPITAL RESOURCES and expansion. Cash provided by operating activities amounted to $111.2 million, Cash Flows From $112.8 million and $38.5 million for 1997, 1996 and 1995, respectively, Operating Activities ($ in millions) after claim payments of $81.6 million, $78.0 million and $66.6 million, respectively. The principal nonoperating uses of cash and cash 120 equivalents for the three-year period ended December 31, 1997, were 110 100 for additions to the investment portfolio, capital expenditures, company 90 80 acquisitions and the repayment of debt. The most significant non- 70 60 operating sources of cash and cash equivalents were proceeds from the 50 sales and maturities of certain investments, and, in 1997, proceeds from 40 30 the issuance of junior subordinated deferrable interest debentures. The 20 10 net effect of all activities on total cash and cash equivalents were 0 23 88 89 90 91 92 93 94 95 96 97 increases of $8.1 million and $27.5 million for 1997 and 1996, respectively, and a decrease of $8.3 million for 1995. CashFlow/Operating Activites
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S SELECTED Selected Financial Data financial data (in thousands, except percent, per share amounts and employee data) Year Ended December 31 1997 1996 1995 1994 1993 Revenues $ 1,887,461 $1,597,566 $1,250,216 $1,376,393 $1,398,426 Net income $ 64,709 $ 53,589 $ 7,587 $ 18,945 $ 66,291 Total assets $ 1,168,144 $ 979,794 $ 873,778 $ 828,649 $ 786,448 Notes and contracts payable $ 41,973 $ 71,257 $ 77,206 $ 89,600 $ 85,022 Stockholders’ equity $ 411,412 $ 352,465 $ 302,767 $ 292,110 $ 283,718 Return on average stockholders’ equity 16.9% 16.4% 2.6% 6.6% 26.5% Cash dividends on common shares $ 8,818 $ 7,928 $ 6,850 $ 6,869 $ 5,840 Per share of common stock (Notes A and B) — Net income: Basic $ 3.73 $ 3.12 $ .44 $ 1.10 $ 3.89 Diluted $ 3.64 $ 3.09 $ .44 $ 1.10 $ 3.89 Stockholders’ equity $ 23.68 $ 20.34 $ 17.69 $ 17.09 $ 16.62 Cash dividends $ .51 $ .46 $ .40 $ .40 $ .34 Number of common shares outstanding (Note A) — Weighted average during the year: Basic 17,362 17,179 17,105 17,171 17,030 Diluted 17,785 17,325 17,105 17,171 17,030 End of year 17,374 17,331 17,117 17,093 17,072 Title orders opened (Note C) 1,173 1,027 894 873 1,218 Title orders closed (Note C) 886 775 667 723 933 Number of employees 12,930 11,611 10,149 9,033 10,679 Note A — After adjustment for 3-for-2 stock split effected January 15, 1998, and restatement for the adoption of Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Note B — Per share information relating to net income is based on the weighted average number of shares outstanding for the years presented. Per share information relating to stockholders’ equity is based on shares outstanding at the end of each year. Note C — Title order volumes are those processed by the direct title operations of the Company and do not include orders processed by agents. 24 Total Revenues Total Assets Stockholders’ Equity ($ in millions) ($ in millions) ($ in millions) 1,200 2,000 450 1,100 1,800 400 1,000 1,600 350 900 1,400 800 300 1,200 700 250 1,000 600 200 500 800 150 400 600 300 100 400 200 50 200 100 0 0 0 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 88 89 90 91 92 93 94 95 96 97 Stockholders Equity Total Assets Total Revenues
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S COMMON STOCK Common Stock and Quarterly Data prices and dividends The Company’s common stock trades on the New York Stock Exchange (ticker symbol FAF). The approximate number of record holders of common stock on February 25, 1998, was 3,033. High and low stock prices and dividends for the last two years were (Note A): 1997 1996 Cash Cash Quarter Ended High-Low Range Dividends High-Low Range Dividends March 31 $29.75-$25.08 $.12 $21.33-$16.75 $.10 June 30 $26.58-$20.92 $.12 $22.50-$16.59 $.12 September 30 $40.21-$26.00 $.135 $23.83-$19.50 $.12 December 31 $49.25-$39.83 $.135 $27.42-$22.42 $.12 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. Q U A RT E R LY financial data (in thousands except per share amounts) Quarter Ended March 31 June 30 September 30 December 31 Year Ended December 31, 1997 Revenues $382,877 $ 450,374 $501,848 $552,362 Income before income taxes $ 4,766 $ 30,216 $ 33,572 $ 37,655 Net income $ 2,866 $ 18,516 $ 20,572 $ 22,755 Net income per share (Note A): Basic $ .17 $ 1.06 $ 1.19 $ 1.31 Diluted $ .16 $ 1.05 $ 1.16 $ 1.27 Year Ended December 31, 1996 Revenues $347,376 $ 413,374 $411,304 $425,512 Income before income taxes $ 14,982 $ 32,827 $ 23,569 $ 17,811 Net income $ 8,582 $ 19,427 $ 13,769 $ 11,811 25 Net income per share (Note A): Basic $ .50 $ 1.13 $ .80 $ .69 Diluted $ .50 $ 1.13 $ .79 $ .67 The Company’s primary business segments are cyclical in nature, with the spring and summer months historically being the strongest. However, interest rate adjustments by the Federal Reserve Board, as well as other economic factors, can cause unusual fluctuations in the Company’s quarterly operating results. See Management’s Discussion and Analysis on pages 20–23 for further discussion of the Company’s results of operations. Note A — After adjustment for 3-for-2 stock split effected January 15, 1998, and restatement for the adoption of Statement of Financial Accounting Standards No. 128, “Earnings per Share.” Stock Prices Highs Lows $50 $45 $40 $35 $30 $25 $20 $15 $10 $5 $0 96 96 96 96 97 97 97 97 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Stock Prices / Highs&Lows Lows Lows Highs
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S C O N S O L I D AT E D Consolidated Balance Sheets balance sheets December 31 Assets 1997 1996 Cash and Cash Equivalents $ 181,531,000 $173,439,000 Accounts and Accrued Income Receivable, less allowances ($7,602,000 and $5,351,000) 128,017,000 89,355,000 Investments: Deposits with savings and loan associations and banks 29,029,000 21,674,000 Debt securities 151,503,000 130,576,000 Equity securities 13,904,000 8,517,000 Other long-term investments 35,047,000 30,414,000 229,483,000 191,181,000 Loans Receivable 63,378,000 54,256,000 Property and Equipment, at cost: Land 17,059,000 15,869,000 Buildings 84,935,000 77,265,000 Furniture and equipment 221,071,000 164,762,000 Less—accumulated depreciation (122,688,000) (100,258,000) 200,377,000 157,638,000 Title Plants and Other Indexes 100,626,000 94,226,000 Assets Acquired in Connection With Claim Settlements 21,119,000 24,270,000 Deferred Income Taxes 31,563,000 38,401,000 Goodwill and Other Intangibles, less accumulated amortization ($13,093,000 and $11,116,000) 132,361,000 87,189,000 Deferred Policy Acquisition Costs 25,016,000 24,753,000 Other Assets 54,673,000 45,086,000 $1,168,144,000 $979,794,000 26
    • December 31 Liabilities and Stockholders’ Equity 1997 1996 Demand Deposits $ 62,475,000 $ 51,321,000 Accounts Payable and Accrued Liabilities: Accounts payable 12,220,000 7,218,000 Salaries and other personnel costs 55,973,000 37,270,000 Pension costs 39,431,000 32,592,000 Other 60,509,000 53,245,000 168,133,000 130,325,000 Deferred Revenue 104,124,000 104,133,000 Reserve for Known and Incurred But Not Reported Claims 250,826,000 245,245,000 Income Taxes Payable 3,987,000 2,554,000 Notes and Contracts Payable 41,973,000 71,257,000 Minority Interests in Consolidated Subsidiaries 25,214,000 22,494,000 Commitments and Contingencies (Note 12) Guaranteed Preferred Beneficial Interests in Company’s Junior Subordinated Deferrable Interest Debentures (Note 13) 100,000,000 Stockholders’ Equity: Preferred stock, $1 par value Authorized —500,000 shares; Outstanding — None Common stock, $1 par value (Note 14) Authorized — 36,000,000 shares Outstanding — 17,374,000 and 17,331,000 shares 17,374,000 17,331,000 Additional paid-in capital 43,953,000 43,643,000 Retained earnings 344,645,000 288,754,000 Net unrealized gain on securities 5,440,000 2,737,000 Total Stockholders’ Equity 411,412,000 352,465,000 $1,168,144,000 $979,794,000 See notes to consolidated financial statements. 27
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S C O N S O L I D AT E D Consolidated Statements of Income statements of income Year Ended December 31 1997 1996 1995 Revenues Operating revenues $1,860,205,000 $1,571,168,000 $1,227,185,000 Investment and other income 27,256,000 26,398,000 23,031,000 1,887,461,000 1,597,566,000 1,250,216,000 Expenses Salaries and other personnel costs 647,750,000 531,250,000 431,984,000 Premiums retained by agents 563,137,000 516,593,000 413,444,000 Other operating expenses 411,319,000 322,709,000 257,823,000 Provision for title losses and other claims 90,323,000 86,487,000 90,387,000 Depreciation and amortization 38,149,000 27,242,000 20,790,000 Interest 9,994,000 4,796,000 6,242,000 Minority interests 3,676,000 2,624,000 2,132,000 1,764,348,000 1,491,701,000 1,222,802,000 Income before premium and income taxes 123,113,000 105,865,000 27,414,000 Premium taxes 16,904,000 16,676,000 13,627,000 Income before income taxes 106,209,000 89,189,000 13,787,000 Income taxes 41,500,000 35,600,000 6,200,000 Net income $ 64,709,000 $ 53,589,000 $ 7,587,000 Net income per common share (Note 1): Basic $3.73 $ 3.12 $ 0.44 Diluted $3.64 $ 3.09 $ 0.44 Weighted average common shares outstanding (Note 1): Basic 17,362,000 17,179,000 17,105,000 Diluted 17,785,000 17,325,000 17,105,000 See notes to consolidated financial statements. 28
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S C O N S O L I D AT E D S TAT E M E N T S O F Consolidated Statements of Stockholders’ Equity stockholders’ equity Net Additional unrealized Common paid-in Retained gain (loss) Shares Stock capital earnings on securities Balance at December 31, 1994, as previously reported 11,395,000 $11,395,000 $44,013,000 $242,356,000 $(5,654,000) 3-for-2 stock split (Note 14) 5,698,000 5,698,000 (5,698,000) Balance at December 31, 1994, as restated 17,093,000 17,093,000 38,315,000 242,356,000 (5,654,000) Net income for 1995 7,587,000 Cash dividends on common shares (6,850,000) Shares issued in connection with company acquisitions 157,000 157,000 2,555,000 Shares issued in connection with benefit and savings plans 98,000 98,000 1,055,000 Purchase of Company shares (231,000 ) (231,000) (3,361,000) Net unrealized gain on securities 9,647,000 Balance at December 31, 1995 17,117,000 17,117,000 38,564,000 243,093,000 3,993,000 Net income for 1996 53,589,000 Cash dividends on common shares (7,928,000) Shares issued in connection with company acquisitions 300,000 300,000 7,258,000 Shares issued in connection with benefit and savings plans 75,000 75,000 1,195,000 Purchase of Company shares (161,000 ) (161,000) (3,374,000) Net unrealized loss on securities (1,256,000) Balance at December 31, 1996 17,331,000 17,331,000 43,643,000 288,754,000 2,737,000 Net income for 1997 64,709,000 Cash dividends on common shares (8,818,000) Shares issued in connection with company acquisitions 16,000 16,000 532,000 Shares issued in connection with benefit and savings plans 209,000 209,000 4,759,000 Purchase of Company shares (182,000 ) (182,000) (4,981,000) Net unrealized gain on securities 2,703,000 29 Balance at December 31, 1997 17,374,000 $17,374,000 $43,953,000 $344,645,000 $ 5,440,000 See notes to consolidated financial statements.
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S C O N S O L I D AT E D S TAT E M E N T S Consolidated Statements of Cash Flows of cash flows Year Ended December 31 1997 1996 1995 Cash flows from operating activities: Net income $ 64,709,000 $ 53,589,000 $ 7,587,000 Adjustments to reconcile net income to cash provided by operating activities — Provision for title losses and other claims 90,323,000 86,487,000 90,387,000 Depreciation and amortization 38,149,000 27,242,000 20,790,000 Minority interests in net income 3,676,000 2,624,000 2,132,000 Other, net 933,000 (366,000) 207,000 Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions — Claims paid, including assets acquired, net of recoveries (81,603,000) (78,048,000) (66,639,000) Net change in income tax accounts 11,974,000 381,000 10,777,000 Increase in accounts and accrued income receivable (25,704,000) (11,324,000) (22,943,000) Increase in accounts payable and accrued liabilities 17,708,000 34,314,000 11,190,000 Decrease in deferred revenue (9,000) (426,000) (13,588,000) Other, net (9,001,000) (1,630,000) (1,418,000) Cash provided by operating activities 111,155,000 112,843,000 38,482,000 Cash flows from investing activities: Net cash effect of company acquisitions (49,336,000) (12,097,000) (31,054,000) Net (increase) decrease in deposits with banks (7,355,000) (3,037,000) 901,000 Purchases of debt and equity securities (80,241,000) (68,498,000) (19,513,000) Proceeds from sales of debt and equity securities 39,240,000 46,506,000 41,066,000 Proceeds from maturities of debt securities 18,842,000 31,291,000 19,278,000 Net (increase) decrease in other long-term investments (1,117,000) (2,575,000) 2,761,000 Net increase in loans receivable (9,122,000) (8,122,000) (5,588,000) Capital expenditures (74,486,000) (48,785,000) (29,643,000) Net proceeds from sale of property and equipment 1,646,000 3,245,000 757,000 Cash used for investing activities (161,929,000) (62,072,000) (21,035,000) Cash flows from financing activities: Net increase in demand deposits 11,154,000 7,903,000 4,723,000 Repayment of debt (40,940,000) (19,674,000) (20,060,000) 30 Proceeds from the issuance of junior subordinated deferrable interest debentures 100,000,000 Purchase of Company shares (5,163,000) (3,535,000) (3,592,000) Proceeds from exercise of stock options 1,653,000 Proceeds from issuance of stock to employee savings plan 980,000 Cash dividends (8,818,000) (7,928,000) (6,850,000) Cash provided by (used for) financing activities 58,866,000 (23,234,000) (25,779,000) Net increase (decrease) in cash and cash equivalents 8,092,000 27,537,000 (8,332,000) Cash and cash equivalents — Beginning of year 173,439,000 145,902,000 154,234,000 Cash and cash equivalents — End of year $181,531,000 $173,439,000 $145,902,000 Supplemental information Cash paid during the year for: Interest $ 8,223,000 $ 5,044,000 $ 6,108,000 Premium taxes $ 18,103,000 $ 14,146,000 $ 14,048,000 Income taxes $ 31,292,000 $ 36,682,000 $ 6,580,000 Noncash investing and financing activities: Shares issued for benefits plans $ 2,335,000 $ 1,270,000 $ 1,153,000 Company acquisitions in exchange for common stock $ 548,000 $ 7,558,000 $ 2,712,000 Net unrealized gain (loss) on securities $ 2,703,000 $ (1,256,000) $ 9,647,000 Liabilities in connection with company acquisitions $ 48,294,000 $ 32,180,000 $ 20,345,000 See notes to consolidated financial statements.
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S N O T E S T O C O N S O L I D AT E D Notes to Consolidated Financial Statements financial statements NOTE 1. maintained title plants and other indexes have indefinite lives and do Description of the Company: not diminish in value with the passage of time, no provision has been The First American Financial Corporation (the Company), through its made for depreciation. subsidiaries, is engaged in the business of providing real estate-related Assets acquired in connection with claim settlements financial and information services, including title insurance, tax In connection with settlement of title insurance and other claims, the monitoring, credit reporting, property data services, flood certification, Company sometimes purchases mortgages, deeds of trust, real property, field inspection services, appraisal services, mortgage loan servicing or judgment liens. These assets, sometimes referred to as “salvage systems, mortgage document preparation and home warranties, to real assets,” are carried at the lower of cost or fair value less costs to sell. property buyers and mortgage lenders. The Company also provides Goodwill and other intangibles investment, trust and thrift services. Goodwill recognized in business combinations is amortized over its estimated useful life ranging from 20 to 40 years. Other intangibles, Significant Accounting Policies: which include customer lists, covenants not to compete and Principles of consolidation organization costs, are amortized over their estimated useful lives, The consolidated financial statements include the accounts of The ranging from 3 to 20 years. First American Financial Corporation and all majority-owned subsidiaries. Impairment of goodwill, loans receivable and other All significant intercompany transactions and balances have been long-lived assets eliminated. Certain 1995 and 1996 amounts have been reclassified to The Company periodically reviews the carrying value of goodwill, conform with the 1997 presentation. loans receivable and other long-lived assets for impairment when events Cash equivalents or circumstances warrant such a review. The Company considers cash equivalents to be all short-term To the extent that the undiscounted cash flows related to the investments which have an initial maturity of 90 days or less and are businesses underlying the goodwill are less than the carrying value of not restricted for statutory deposit or premium reserve requirements. the related goodwill, such goodwill will be reduced to the amount of The carrying amount for cash equivalents is a reasonable estimate of the undiscounted cash flows. fair value due to the short-term maturity of these investments. A loan is impaired when, based on current information and events, it Investments is probable that the Company will be unable to collect all amounts due Deposits with savings and loan associations and banks are according to the contractual terms of the loan agreement. Impaired short-term investments with initial maturities of more than 90 days. loans receivable are measured at the present value of expected future The carrying amount of these investments is a reasonable estimate cash flows discounted at the loan’s effective interest rate. As a practical of fair value due to their short-term nature. expedient, the loan may be valued based on its observable market price Debt securities are carried at fair value and consist primarily of or the fair value of the collateral, if the loan is collateral dependent. investments in obligations of the United States Treasury, various To the extent that the undiscounted cash flows related to other long- corporations and certain state and political subdivisions. lived assets are less than the assets’ carrying value, the carrying value of Equity securities are carried at fair value and consist primarily of such assets is reduced to the assets’ fair value. investments in marketable common stocks of corporate entities in Deferred policy acquisition costs which the Company’s ownership does not exceed 20%. 31 Deferred policy acquisition costs are directly related to the Other long-term investments consist primarily of investments in procurement of tax service and home warranty contracts. These costs affiliates, which are accounted for under the equity method of are deferred and amortized to expense in the same manner as contract accounting, and notes receivable, which are carried at the lower of fees are recognized as revenues. cost or fair value less costs to sell. Reserve for known and incurred but not reported claims The Company classifies its debt and equity securities portfolio as The Company provides for title insurance losses based upon its available-for-sale and, accordingly, includes unrealized gains and losses, historical experience by a charge to expense when the related premium net of related tax effects, as a separate component of stockholders’ revenue is recognized. Title insurance losses and other claims associated equity. Realized gains and losses on investments are determined using with ceded reinsurance are provided for as the Company remains the specific identification method. contingently liable in the event that the reinsurer does not satisfy its Property and equipment obligations. The reserve for known and incurred but not reported claims Furniture and equipment includes computer software acquired and reflects management’s best estimate of the total costs required to settle developed for internal use and for use with the Company’s products. all claims reported to the Company and claims incurred but not Software development costs are capitalized from the time technological reported. The process applied to estimate claims costs is subject to feasibility is established until the software is ready for use. Capitalized many variables, including changes and trends in the type of title development costs for internal use software include only incremental insurance policies issued, the real estate market and the interest rate expenses paid to third parties. environment. It is reasonably possible that a change in the estimate will Depreciation on buildings and on furniture and equipment is computed occur in the future. using the straight-line method over estimated useful lives of 25 to 45 and The Company provides for claim losses relating to its home warranty 3 to 10 years, respectively. Capitalized software costs are amortized using business based on the average cost per claim as applied to the total of the straight-line method over estimated useful lives of 3 to 10 years. new claims incurred. The average cost per claim is calculated using the Title plants and other indexes average of the most recent 12 months of claims experience. Title plants and other indexes are carried at original cost. Appraised Operating revenues values are used in conjunction with the acquisition of purchased subsidiaries. The costs of daily maintenance (updating) of these plants Title premiums on policies issued directly by the Company are and other indexes are charged to expense as incurred. Because properly recognized on the effective date of the title policy and escrow fees are
    • Investments carried at $16.5 million were on deposit with state recorded upon close of the escrow. Revenues from title policies issued treasurers in accordance with statutory requirements for the protection by independent agents are recorded when notice of issuance is received of policyholders at December 31, 1997. from the agent. FATICO maintained statutory capital and surplus of $210.3 million Revenues from tax service contracts are recognized over the and $208.3 million at December 31, 1997 and 1996, respectively. estimated duration of the contracts as the related servicing costs are Statutory net income for the years ended December 31, 1997, 1996 and estimated to occur. 1995, was $35.9 million, $34.6 million and $11.4 million, respectively. Revenues from home warranty contracts are recognized ratably over the 12-month duration of the contracts. NOTE 3. Interest on loans with the Company’s thrift subsidiary is recognized Debt and Equity Securities: on the outstanding principal balance on the accrual basis. Loan The amortized cost and estimated fair value of investments in debt origination fees and related direct loan origination costs are deferred securities are as follows: and recognized over the life of the loan. Premium taxes (in thousands) Title insurance and home warranty companies, like other types of Amortized Gross Unrealized Estimated insurers, are generally not subject to state income or franchise taxes. Cost Gains Losses Fair Value However, in lieu thereof, most states impose a tax based primarily on December 31, 1997 insurance premiums written. This premium tax is reported as a separate U.S. Treasury securities $ 38,972 $ 792 $ (46) $ 39,718 line item in the consolidated statements of income in order to provide a Corporate securities 54,884 717 (22) 55,579 more meaningful disclosure of the taxation of the Company. Obligations of states and political subdivisions 38,977 1,092 40,069 Income taxes Mortgage-backed securities 16,186 36 (85) 16,137 Taxes are based on income for financial reporting purposes and $149,019 $2,637 $(153) $151,503 include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the December 31, 1996 Company’s assets and liabilities. U.S. Treasury securities $ 42,956 $ 621 $(146) $ 43,431 Earnings per share Corporate securities 37,636 87 (165) 37,558 In February 1997, the Financial Accounting Standards Board issued Obligations of states and political subdivisions 38,544 290 (23) 38,811 Statement of Financial Accounting Standards (SFAS) No. 128, “Earnings Mortgage-backed securities 11,038 37 (299) 10,776 per Share.” SFAS No. 128 became effective for 1997 and requires the presentation of basic and diluted earnings per share on the face of the $130,174 $1,035 $(633) $ 130,576 income statement. Basic earnings per share are computed by dividing The amortized cost and estimated fair value of debt securities at net income available to common stockholders by the weighted-average December 31, 1997, by contractual maturities, are as follows: number of common shares outstanding. The computation of diluted earnings per share is similar to the computation of basic earnings per (in thousands) share except that the weighted-average number of common shares Amortized Estimated Cost Fair Value outstanding is increased to include the number of additional common Due in one year or less $ 17,055 $ 17,220 shares that would have been outstanding if potential dilutive common Due after one year through five years 63,304 63,726 shares had been issued. Due after five years through ten years 47,268 49,102 The Company’s only potential dilutive common shares are stock Due after ten years 5,206 5,318 options (see Note 11). Stock options are reflected in diluted earnings 32 132,833 135,366 per share by application of the treasury stock method. All earnings per share amounts presented have been restated to reflect the adoption Mortgage-backed securities 16,186 16,137 of SFAS No. 128. $149,019 $151,503 Risk of real estate market The cost and estimated fair value of investments in equity securities Real estate activity is cyclical in nature and is affected greatly by the are as follows: cost and availability of long-term mortgage funds. Real estate activity and, in turn, the Company’s revenue base, can be adversely affected (in thousands) during periods of high interest rates and/or limited money supply. Gross Unrealized Estimated Use of estimates Cost Gains Losses Fair Value December 31, 1997 The preparation of financial statements in accordance with generally Common stocks: accepted accounting principles requires management to make estimates and assumptions that affect the statements. Actual results Corporate securities $7,941 $5,856 $(82) $13,715 could differ from the estimates and assumptions used. Other 78 111 189 Fiduciary assets and liabilities $8,019 $5,967 $(82) $13,904 Assets and liabilities of the trusts and escrows administered by the December 31, 1996 Company are not included in the consolidated balance sheets. Common stocks: Corporate securities $4,614 $3,838 $(82) $ 8,370 NOTE 2. Other 91 56 147 Statutory Restrictions on Stockholders’ Equity and Investments: $4,705 $3,894 $(82) $ 8,517 Pursuant to insurance and other regulations of the various states in which the Company’s title insurance subsidiary, First American Title Sales of debt and equity securities resulted in realized gains of Insurance Company (FATICO), operates, the amount of dividends, loans $706,000, $3,257,000 and $1,316,000 and realized losses of and advances available to the parent company from FATICO is limited, $348,000, $646,000 and $358,000 for the years ended December 31, principally for the protection of policyholders. Under such statutory 1997, 1996 and 1995, respectively. The fair value of debt and equity regulations, the maximum amount of dividends, loans and advances securities was estimated using quoted market prices. available to the parent company from FATICO in 1998 is $52.1 million.
    • NOTE 6. NOTE 4. Demand Deposits: Loans Receivable: Loans receivable are summarized as follows: Passbook and investment certificate accounts are summarized as follows: (in thousands) December 31 (in thousands) 1997 1996 December 31 Real estate—mortgage $65,384 $55,835 1997 1996 Assigned lease payments 50 81 Passbook accounts $13,209 $ 13,335 Other 36 139 Certificate accounts: 65,470 56,055 Less than one year 28,798 23,753 Unearned income on lease contracts (18) (33) One to five years 20,468 14,233 Allowance for loan losses (1,185) (1,050) Total certificate accounts 49,266 37,986 Participations sold (481) (140) $62,475 $ 51,321 Deferred loan fees, net (408) (576) Annualized interest rates: (2,092) (1,799) Passbook accounts 5% 5% $63,378 $54,256 Certificate accounts 6%-8% 5%-8% Real estate loans are secured by properties located in Southern The carrying value of the passbook accounts approximates fair value California. The average yield on the Company’s loan portfolio was 11% due to the short-term nature of this liability. The fair value of for the years ended December 31, 1997 and 1996. Average yields are investment certificate accounts was $49.4 million and $38.0 million at affected by amortization of discounts on loans purchased from other December 31, 1997 and 1996, respectively, and was estimated based institutions, prepayment penalties recorded as income, loan fees on the discounted value of the future cash flows using a discount rate amortized to income, and the market interest rates charged by thrift approximating current market for similar liabilities. and loan institutions. NOTE 7. The fair value of loans receivable was $64.2 million and $54.3 Reserve for Known and Incurred But Not Reported Claims: million at December 31, 1997 and 1996, respectively, and was estimated based on the discounted value of the future cash flows using Activity in the reserve for known and incurred but not reported claims is the current rates being offered for loans with similar terms to borrowers summarized as follows: of similar credit quality. (in thousands) The allowance for loan losses is maintained at a level that is December 31 considered appropriate by management to provide for known and 1997 1996 1995 inherent risks in the portfolio. Balance at beginning of year $245,245 $238,161 $206,743 Provision related to: NOTE 5. Current year 85,645 81,539 82,632 Assets Acquired in Connection With Claim Settlements: Prior years 4,678 4,948 7,755 Total provision 90,323 86,487 90,387 (in thousands) December 31 Payments related to: 1997 1996 Current year 39,934 29,680 25,039 Notes receivable $12,177 $11,083 33 Prior years 39,745 43,967 40,934 Real estate 5,013 7,156 Total payments 79,679 73,647 65,973 Judgments and other 3,929 6,031 Other (5,063) (5,756) 7,004 $21,119 $24,270 Balance at end of year $250,826 $245,245 $238,161 The above amounts are net of valuation reserves of $11.1 million “Other” primarily represents reclassifications to the reserve for assets and $10.3 million at December 31, 1997 and 1996, respectively. acquired in connection with claim settlements. Included in 1995 is The fair value of notes receivable was $12.5 million and $10.1 $10.0 million in purchase accounting adjustments. Claims activity million at December 31, 1997 and 1996, respectively, and was associated with reinsurance is not material and, therefore, not estimated based on the discounted value of the future cash flows using presented separately. 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: (in thousands) December 31 1997 1996 Balance at beginning of year $10,278 $11,246 Provision for losses 4,678 4,948 Dispositions (3,821) (5,916) Balance at end of year $11,135 $10,278
    • NOTE 8. Income taxes differ from the amounts computed by applying the Notes and Contracts Payable: federal income tax rate of 35%. A reconciliation of this difference is as follows: (in thousands) December 31 (in thousands) 1997 1996 1997 1996 1995 Secured notes payable pursuant to amended Taxes calculated at federal rate $37,173 $31,216 $ 4,825 credit agreement $ 5,320 $37,250 Tax exempt interest income (651) (669) (719) Trust deed notes with maturities through Tax effect of minority interests 1,286 918 746 2017, secured by land and buildings with a net book value of $11,739, average rate of 81/2% 7,359 8,630 State taxes, net of federal benefit 3,706 4,442 2,456 Other notes and contracts payable with Exclusion of certain meals and maturities through 2005, average rate of 71/2% 29,294 25,377 entertainment expenses 2,889 2,429 2,391 $41,973 $71,257 Change in tax reserves (2,301) Other items, net (2,903) (2,736) (1,198) In April 1997, the Company paid off the variable rate indebtedness $41,500 $35,600 $ 6,200 portion of the amended credit agreement with proceeds received from its junior subordinated interest debentures (see Note 13). The primary components of temporary differences which give rise to At December 31, 1997, the Company’s remaining borrowings under the Company’s net deferred tax asset are as follows: its amended bank credit agreement consisted of fixed rate indebtedness of $5.3 million, maturing in April 1999 and bearing interest at 9.38% (in thousands) December 31 per annum. 1997 1996 During July 1997, the Company amended the credit agreement to Deferred tax assets: relax and/or eliminate certain restrictive covenants and increase the Deferred revenue $23,066 $25,709 revolving line of credit to $75.0 million which was unused as of Employee benefits 11,021 9,811 December 31, 1997. In October 1997, the Company further amended Title claims and related salvage 3,183 11,934 the credit agreement to issue a letter of credit in the amount of $5.7 Bad debt reserves 4,952 3,382 million to secure its fixed rate obligation and release as security the Acquisition reserve 3,970 2,254 capital stock of its wholly owned subsidiaries. State taxes 346 441 Pursuant to the terms of the credit agreement, the Company is Other 7,009 4,261 required to maintain minimum levels of capital and earnings and meet Total deferred tax assets 53,547 57,792 predetermined debt to capitalization ratios. Deferred tax liabilities: The aggregate annual maturities for notes and contracts payable in Depreciable and amortizable assets 15,116 13,611 each of the five years after December 31, 1997, are as follows: Unrealized gain on securities 2,929 1,475 (in thousands) Sale leaseback 1,327 1,462 1998 $13,503 Other 2,612 2,843 1999 $11,813 Total deferred tax liabilities 21,984 19,391 2000 $ 5,599 Net deferred tax asset $31,563 $38,401 2001 $ 4,381 2002 $ 1,723 NOTE 10. 34 Employee Benefit Plans: The fair value of notes and contracts payable was $44.3 million and $70.6 million at December 31, 1997 and 1996, respectively, and was The Company has pension and other retirement benefit plans covering estimated based on the current rates offered to the Company for debt substantially all employees. The Company’s principal pension plan, of the same remaining maturities. The weighted average interest rate amended to be noncontributory effective January 1, 1995, is a qualified for the Company’s notes and contracts payable was 8% and 71/4% at defined benefit plan with benefits based on the employee’s years of December 31, 1997 and 1996, respectively. service and the highest five consecutive years’ compensation during the last 10 years of employment. The Company’s policy is to fund all NOTE 9. accrued pension costs. Contributions are intended to provide not only Income Taxes: for benefits attributable to past service, but also for those benefits Income taxes are summarized as follows: expected to be earned in the future. The Company also has nonqualified unfunded supplemental benefit plans covering certain key (in thousands) management personnel. Benefits under these plans are intended to be 1997 1996 1995 funded with proceeds from life insurance policies purchased by the Current: Company on the lives of the executives. Federal $27,234 $28,535 $3,442 Net pension cost for the Company’s pension and other retirement State 3,925 6,038 1,810 benefit plans includes the following components: 31,159 34,573 5,252 Deferred: (in thousands) 1997 1996 1995 Federal 9,747 232 70 Service cost—benefits earned State 594 795 878 during the year $10,550 $ 9,186 $ 7,798 10,341 1,027 948 Interest cost on projected $41,500 $35,600 $6,200 benefit obligation 11,178 9,764 8,741 Actual gain on plan assets (20,555) (10,517) (9,636) Net amortization and deferral 14,531 5,810 4,674 Net periodic pension cost $15,704 $14,243 $11,577
    • The following table sets forth the plans’ status at: number of shares that may be purchased pursuant to options granted shall not exceed 2,250 shares during any 12-consecutive-month period. (in thousands) Effective January 1, 1996, the Company adopted Statement of December 31 Financial Accounting Standard Board (SFAS) No. 123, “Accounting for 1997 1996 Stock-Based Compensation.” In accounting for its plan, the Company, Unfunded Unfunded Funded Supplemental Funded Supplemental in accordance with the provisions of SFAS No. 123, applies Accounting Pension Benefit Pension Benefit Plans Plans Plans Plans Principles Board Opinion No. 25, “Accounting for Stock Issued to Present value of Employees.” As a result of this election, the Company does not benefit obligation: recognize compensation expense for its stock option plans. Had the Vested benefits $ 97,463 $19,766 $ 74,536 $17,137 Company determined compensation cost based on the fair value for its Non-vested benefits 8,619 5,303 7,479 5,068 stock options at grant date, as set forth under SFAS No. 123, the Accumulated benefit Company’s net income and earnings per share would have been obligation 106,082 25,069 82,015 22,205 reduced to the pro forma amounts indicated below: Value of future pay increases 35,607 7,065 29,663 7,046 Total projected (in thousands, except per share amounts) benefit obligation 141,689 32,134 111,678 29,251 1997 1996 Plan assets at fair value (109,357) (87,096) Net income: Plan assets less than projected As reported $64,709 $53,589 benefit obligation 32,332 32,134 24,582 29,251 Pro forma $63,909 $53,070 Unrecognized net (asset) Earnings per share: obligation at transition 255 (1,441) 307 (1,801) As reported Prior service cost not yet recognized 457 (1,614) 503 (1,802) Basic $ 3.73 $ 3.12 Unrecognized net loss (18,682) (6,280) (15,005) (5,419) Diluted $ 3.64 $ 3.09 Adjustment to recognize Pro forma minimum liability 2,270 1,976 Basic $ 3.68 $ 3.09 Accrued pension costs $ 14,362 $25,069 $ 10,387 $22,205 Diluted $ 3.59 $ 3.06 The rate of increase in future compensation levels for the plans of 41/2% and The fair value of each option grant is estimated at the grant date the weighted average discount rates of 71/4% and 73/4% were used in using the Black-Scholes option-pricing model with the following determining the actuarial present value of the projected benefit obligation at weighted-average assumptions used for grants in 1997 and 1996, December 31, 1997 and 1996, respectively. The majority of pension plan respectively: dividend yield of 1.2% and 1.9%; expected volatility of assets are invested in U.S. government securities, time deposits and common 38.1% and 41.0%; risk-free interest rate of 6.3% and 6.5%; and stocks with projected long-term rates of return of 9%. expected life of six years. The weighted-average fair value of options The Company’s principal profit sharing plan was amended granted during 1997 and 1996 was $12.79 and $6.57, respectively. effective January 1, 1995, to discontinue future contributions. Transactions involving stock options are summarized as follows: The plan holds 2,192,000 and 2,391,000 shares of the Company’s (in thousands, except weighted-average exercise price) common stock, representing 13% and 14% of the total shares Weighted outstanding at December 31, 1997 and 1996, respectively. Average Number Exercise The Company also has a Stock Bonus Plan for key employees Outstanding Price pursuant to which 86,000, 75,000 and 98,000 common shares were 35 Balance at December 31, 1995 awarded for 1997, 1996 and 1995, respectively, resulting in a charge to Granted during 1996 1,005 $17.08 operations of $2.2 million, $1.3 million and $1.2 million, respectively. Balance at December 31, 1996 1,005 $17.08 The Plan, as amended December 9, 1992, provides that a total of up to Granted during 1997 69 $31.50 450,000 common shares may be awarded in any one year. Exercised during 1997 97 $17.08 Effective January 1, 1995, the Company adopted The First American Forfeited during 1997 44 $17.08 Financial Corporation 401(k) Savings Plan (The Savings Plan), which is Balance at December 31, 1997 933 $18.15 available to substantially all employees. The Savings Plan allows for employee elective contributions up to the maximum deductible amount At December 31, 1997, the range of exercise prices was $17.08 – $39.83 as determined by the Internal Revenue Code. and the weighted-average remaining contractual life of outstanding NOTE 11. options was six years. The number of options exercisable was 104,250 Stock Option Plans: and the weighted-average exercise price of those options was $17.08. There were no options exercisable at December 31, 1996. On April 24, 1996, the Company implemented The First American Financial Corporation 1996 Stock Option Plan (the Stock Option Plan). NOTE 12. Under the Stock Option Plan, options are granted to certain employees Commitments and Contingencies: to purchase the Company’s common stock at a price no less than the The Company leases certain office facilities, automobiles and market value of the shares on the date of the grant. The maximum equipment under operating leases, which for the most part are number of shares that may be subject to options is 1,875,000. Currently renewable. The majority of these leases also provide that the Company outstanding options become exercisable one to five years, and expire will pay insurance and taxes. In 1994, the Company entered into a sale- 10 years, from the grant date. On April 24, 1997, the Company leaseback agreement with regard to certain furniture and equipment. implemented The First American Financial Corporation 1997 Directors’ Under the agreement, the Company agreed to lease the equipment for Stock Plan (the Directors’ Plan). The Directors’ Plan is similar to the four years with minimum annual lease payments of $8.3 million. employees’ Stock Option Plan, except that the maximum number of shares that may be subject to options is 600,000 and the maximum
    • Future minimum rental payments under operating leases that have or more of its assets or earning power to another person, each Right initial or remaining noncancelable lease terms in excess of one year as will entitle its holder to purchase, at the Right’s then-current exercise of December 31, 1997, are as follows: price, common stock of such other person (or its parent) having a value of twice the Right’s exercise price. (in thousands) On January 15, 1998, the Company distributed a 3-for-2 common 1998 $ 71,522 stock split in the form of a 50% stock dividend. This resulted in an 1999 53,280 increase of 5,791,492 common shares outstanding with the par value 2000 31,836 of these additional shares being capitalized by a transfer from 2001 21,535 additional paid-in capital to the common stock account. This stock split 2002 16,889 has been reflected in the consolidated statements of stockholders’ Later years 43,015 equity on a retroactive basis as of December 31, 1994. In order to $238,077 effect the stock split, the Company increased its authorized shares from 24,000,000 to 36,000,000. All references in the consolidated financial Total rental expense for all operating leases and month-to-month statements with regards to common stock, additional paid-in capital, rentals was $78.3 million, $63.9 million and $58.6 million for 1997, number of shares of common stock and per share amounts have been 1996 and 1995, respectively. restated to reflect the stock split. The Company is involved in various routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is NOTE 15. not determinable, the Company does not believe that any of such Subsequent Event: proceedings will have a materially adverse effect on its financial On January 1, 1998, the Company formed a limited liability corporation condition or results of operations. (LLC) with Experian Group (Experian). The purpose of the LLC is to combine certain operations of the Company’s subsidiary, First American NOTE 13. Real Estate Information Services, Inc., with Experian’s Real Estate Junior Subordinated Deferrable Interest Debentures: Solutions division (RES). The LLC is 80% owned by the Company and On April 22, 1997, the Company issued and sold $100.0 million of 8.5% 20% owned by Experian. RES is a supplier of core real estate data, trust preferred securities, due in 2012, through its wholly owned providing, among other things, property valuation information, title subsidiary, First American Capital Trust I. In connection with the insurance, tax information and imaged title documents. subsidiary’s issuance of the preferred securities, the Company issued to This business combination has been accounted for under the the subisidary trust 8.5% subordinated interest notes, due 2012. The sole purchase method of accounting and, accordingly, the purchase price assets of the subsidiary are and will be the subordinated interest notes. will be allocated to the assets acquired and liabilities assumed based on The Company’s obligations under the subordinated interest notes and the estimated fair values at January 1, 1998. In addition, as a result of related agreements, taken together, consititute a full and unconditional the transaction, the Company will recognize a pretax gain of $33.0 guarantee by the Company of the subsidiary’s obligations under the million in the first quarter 1998. The operating results of the LLC will be preferred securities. Distributions payable on the securities are included as included in the Company’s consolidated financial statements interest expense in the Company’s consolidated income statement. commencing January 1, 1998. NOTE 14. NOTE 16. Stockholders’ Equity: Segment Financial Information: On October 23, 1997, the Company adopted a Shareholder Rights Plan. The Company’s operations include four reportable segments: title Under the Rights Plan, after the close of business on November 15, 36 insurance, real estate information, home warranty and trust and banking. 1997, each holder of the Company’s common shares received a The title insurance segment issues policies which are insured statements dividend distribution of one Right for each common share held. Each of the condition of title to real property. The real estate information Right entitles the holder thereof to buy a preferred share fraction equal segment provides to lender customers the status of tax payments on real to 1/100,000 of a share of Series A Junior Participating Preferred Shares property securing their loans, credit information derived from at least two of the Company at an exercise price of $265 per preferred share credit bureau sources, flood zone determination reports which provide fraction. Each fraction is designed to be equivalent in voting and information on whether or not a property is in a special flood hazard dividend rights to one common share. area, as well as other real estate-related information services. The home The Rights will be exercisable and will trade separately from the warranty segment issues one-year warranties which protect homeowners common shares only if a person or group, with certain exceptions, against defects in home fixtures. The trust and banking segment provides acquires beneficial ownership of 15% or more of the Company’s full-service trust and depository services, accepts deposits and makes real common shares or commences a tender or exchange offer that would estate-secured loans. result in such person or group beneficially owning 15% or more of the The title insurance and real estate information segments operate common shares then outstanding. The Company may redeem the through networks of offices nationwide. The Company provides its title Rights at $0.001 per Right at any time prior to the occurrence of one of services through both direct operations and agents throughout the these events. All Rights expire on October 23, 2007. United States. It also offers title services abroad in Australia, the Bahama Each Right will entitle its holder to purchase, at the Right’s then- Islands, Canada, Guam, Mexico, Puerto Rico, the U.S. Virgin Islands and current exercise price, preferred share fractions (or other securities of the United Kingdom. Home warranty services are available in Arizona, the Company) having a value of twice the Right’s exercise price. This California, Nevada, North Carolina, South Carolina, Texas, Utah and amounts to the right to buy preferred share fractions of the Company Washington. The trust, banking and thrift businesses operate in at half price. Rights owned by the party triggering the exercise of Rights Southern California. will be void and therefore will not be exercisable. In June 1997, the Financial Accounting Standards Board issued In addition, if after any person has become a 15%-or-more Statement of Financial Accounting Standards (SFAS) No. 131, stockholder, the Company is involved in a merger or other business “Disclosures about Segments of an Enterprise and Related Information.” combination transaction with another person in which the Company’s This statement is effective for 1998 and requires certain information common shares are changed or converted, or if the Company sells 50%
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S about a company’s operating segments and products and services. The REPORT OF Company believes that the adoption of SFAS No. 131 will not materially independent Report of Independent Accountants alter its segment disclosures and related information. accountants Selected financial information about the Company’s operations by segment for each of the past three years is as follows: (in thousands) Depreciation Pretax and Capital Revenues Profit (Loss) Assets Amortization Expenditures LLP 1997 Title Insurance $1,482,993 $ 95,636 $ 656,622 $23,501 $39,190 Real Estate To the Stockholders and Board of Directors of The First American Information 331,152 45,317 312,666 12,369 33,602 Financial Corporation: Home Warranty 51,005 9,741 81,444 424 768 Trust and Banking 20,007 4,062 83,423 604 676 In our opinion, the accompanying consolidated balance Corporate 2,304 (31,643) 33,989 1,251 250 sheets and the related consolidated statements of income, of $1,887,461 $123,113 $1,168,144 $38,149 $74,486 stockholders’ equity and of cash flows present fairly, in all material 1996 respects, the financial position of The First American Financial Title Insurance $ 1,288,947 $ 66,056 $ 584,800 $17,236 $30,082 Corporation and its subsidiaries at December 31, 1997 and 1996, Real Estate Information 247,810 52,581 225,527 8,281 17,060 and the results of their operations and their cash flows for each of Home Warranty 41,927 8,178 67,622 296 277 the three years in the period ended December 31, 1997, in Trust and Banking 17,839 3,728 72,473 438 1,366 conformity with generally accepted accounting principles. These Corporate 1,043 (24,678) 29,372 991 financial statements are the responsibility of the Company’s $1,597,566 $105,865 $ 979,794 $27,242 $48,785 management; our responsibility is to express an opinion on these 1995 financial statements based on our audits. We conducted our Title Insurance $1,052,823 $ 17,540 $ 532,697 $13,356 $20,321 audits of these statements in accordance with generally accepted Real Estate auditing standards which require that we plan and perform the Information 147,004 19,690 182,499 6,205 7,984 audit to obtain reasonable assurance about whether the financial Home Warranty 35,531 6,828 56,637 289 149 statements are free of material misstatement. An audit includes Trust and Banking 14,110 3,304 63,416 331 1,189 examining, on a test basis, evidence supporting the amounts and Corporate 748 (19,948) 38,529 609 disclosures in the financial statements, assessing the accounting $1,250,216 $ 27,414 $ 873,778 $20,790 $29,643 principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We Corporate consists primarily of unallocated interest expense, minority believe that our audits provide a reasonable basis for the opinion interests, equity in earnings of affiliated companies and personnel and expressed above. other operating expenses associated with the Company’s home office facilities. 37 Costa Mesa, California February 9, 1998
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S BOARD OF Board of Directors directors D.P. Kennedy Parker S. Kennedy George L. Argyros Gary J. Beban J. David Chatham The Hon. William G. Davis Dr. James L. Doti Lewis W. Douglas, Jr. 38 Paul B. Fay, Jr. Dale F. Frey Anthony R. Moiso R.J. Munzer Frank E. O’Bryan Roslyn B. Payne D. Van Skilling Virginia M. Ueberroth
    • BOARD OF DIRECTORS D.P. Kennedy The Hon. William G. Davis R.J. Munzer Chairman of the Board, The First American P.C., C.C., Q.C.; Counsel, Tory Tory Retired Chairman of the Board, Petrolane Financial Corporation and First American Title DesLauriers & Binnington and retired Premier Incorporated, Long Beach, California. Insurance Company, Santa Ana, California. of Ontario, Toronto, Ontario, Canada. Director since 1962. Director since 1956. Director since 1992. Frank E. O’Bryan Parker S. Kennedy Dr. James L. Doti Chairman of the Board, WMC Mortgage President, The First American Financial President and Professor of Economics, Corp., Irvine, California. Director since 1994. Corporation and First American Title Insurance Chapman University, Orange, California. Roslyn B. Payne Company, Santa Ana, California. Director since 1993. President, Jackson Street Partners, Ltd., Director since 1987. Lewis W. Douglas, Jr. real estate venture capital and investments, George L. Argyros Oil Exploration, Denver, Colorado. San Francisco, California. Director since 1988. Chairman and Chief Executive Officer, Arnel & Director since 1971 (earlier 1961–1967). D. Van Skilling Affiliates, diversified investment company, Paul B. Fay, Jr. Chairman and Chief Executive Officer, Costa Mesa, California. Director since 1988. President, The Fay Improvement Company, Experian, Orange, California. Gary J. Beban financial consulting and business ventures, Director since 1998. President and Senior Operating Officer, San Francisco, California. Director since 1967. Virginia M. Ueberroth CB Commercial Real Estate Group, Inc., President, Ueberroth Family Foundation, Dale F. Frey Los Angeles, California. Director since 1996. Laguna Beach, California. Director since 1988. Retired Chief Executive Officer, GE J. David Chatham Investments, Stamford, Connecticut. President and Chief Executive Officer, Director since 1997. Chatham Holdings Corporation, real estate Anthony R. Moiso development and associated industries, President and Chief Executive Officer, Rancho Atlanta, Georgia. Director since 1989. Mission Viejo, ranching and real estate development, San Juan Capistrano, California. Director since 1990. OFFICERS D.P. Kennedy, 79, Chairman of the Board Thomas A. Klemens, 47, Executive Vice before joining the company. Most recently, he Named chairman of First American Financial in President, Chief Financial Officer had served as executive vice president and 1993. Served as president from 1963 to 1993. Joined First American Title in 1985 as vice chief operating officer of First Environmental Has been a director since 1956. Joined First president/controller. Appointed principal Review Insurance Company. He is a graduate American Title in 1948 as associate counsel for accounting officer of First American Financial of the University of Southern California and 39 the firm’s predecessor, Orange County Title and First American Title in 1992 and vice Loyola University School of Law. He also holds Company, and served as vice president and president/chief financial officer in 1993. a L L.M. in taxation from the University of executive vice president. He became president Named executive vice president of First San Diego School of Law. of First American Title in 1963 and was named American Financial in 1996. Previously served Mark R Arnesen, 45, Vice President, chairman in 1989. He is a graduate of Stanford several years in public accounting with Price Secretary, Corporate Counsel University and the University of Southern Waterhouse and as chief financial officer for Started with First American Title as assistant California School of Law. various real estate-related companies. He is counsel in 1979. Named associate corporate a certified public accountant and a graduate Parker S. Kennedy, 50, President counsel in 1982 and vice president in 1989. of California Polytechnic State University at Named president of First American Financial in Has been vice president, secretary and San Luis Obispo. 1993 after serving as executive vice president corporate counsel for First American Financial since 1986. He has been a director since 1987. Craig I. DeRoy, 45, Executive Vice President, and First American Title since 1992. He is a Joined First American Title in 1977 and served General Counsel graduate of the University of California, as county manager of a branch office and Named vice president-general counsel, a new San Diego, and Yale Law School. then as vice president-national sales director position, for First American Financial and First on corporate staff. He was appointed American Title in 1993. He executive vice president of First American Title was promoted to executive in 1983 and named president in 1989. He has vice president of First served as a director since 1981. He is a American Financial in 1996. graduate of the University of Southern He had 15 years of legal and California and Hastings College of the Law. management experience Thomas A. Klemens Craig I. DeRoy Mark R Arnesen
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S PRIMARY Primary Companies companies CORPORATE HEADQUARTERS Ted Moore Phillip A. Poitevin Timothy P. Sullivan California Mississippi General Counsel, The First American Financial National Claims Counsel Corporation Peter C. Norden Marvin P. Ripp 114 East Fifth Street Northeast Region Wisconsin Patricia Stout Santa Ana, California 92701 General Counsel, Associate Joseph J. Oddo Greg Scanio (714) 558-3211 California South Carolina Stephanie D. May http://www.firstam.com Interactive Division James M. Orphanides Craig F. Thomsen D.P. Kennedy New York Utah, Agency Operations William T. Heslington Chairman of the Board National Accounts Richard P. Pauletich Rudy E. Wahlsten Parker S. Kennedy California Minnesota, South Dakota Walter M. Reeves President National Accounts– Ernest Phillips Dave Whitton Senior Underwriter Thomas A. Klemens New Mexico Oklahoma Chief Financial Officer Scott Morey Dennie L. Rowland Jim P. Williams National Accounts–Sales Supervisor Craig I. DeRoy Hawaii West Virginia General Counsel Albert Rush James Stipanovich Peter Zuk National Counsel Mark R Arnesen Kentucky, Ohio Vermont Secretary, Corporate Counsel Robert W. Duff Don R. Wangberg National Subdivision International Managers California Agencies First American Title John Hollenbeck Patrick J. Chetcuti Insurance Company State Managers, National Title Processes Director Edward G. Frackowiak 114 East Fifth Street Vice Presidents Canada Nancy M. Pettus Santa Ana, California 92701 Julie A. Adams Personnel Counsel Thomas H. Grifferty (714) 558-3211 Maine Regional Vice President Gary Anderson Australia, Canada, United Lawrence “Buddy” Adams Printing Regional Vice Presidents Kingdom, Republic of Ireland Tennessee Karen Ebbing Robert L. Bailey Harry Melkonian Janine Andriole Risk Management Wyoming Australia Maryland Gregory Schreiber Robert G. Bannon Turalu Brady Murdock Richard A. Angelo Subdivision Title Officer, Senior Mid-Atlantic Region Caribbean Operations District of Columbia Thomas R. Wawersich John R. Bethell Jose Palli Robert Bauchle Tax Director, National Midwest Region Mexico North Carolina Steve Oswald Tom Blackwell David M. Thorpe Sherrie Bowers-Walker Tax Manager Texas United Kingdom and Republic of Georgia Oscar H. Beasley Melville R. Bois Ireland Gordon R. Burmeister, Jr. Title Counsel, Senior Minnesota, North Dakota, Indiana South Dakota Clifford L. Morgan Administrative Staff John S. Christiansen Underwriting Director Robert M. Bowen Paul W. Knutson Arizona Nevada K. Gene Aalseth Accounting–Assistant Controller Richard A. Dickson Underwriter, Associate Senior Thomas J. Brusca Harry Fisher New Hampshire Alaska, Oregon, Washington Wayne A. Condict Accounting–Audit Services Allen J. Exelby Underwriter, Associate Senior John N. Casbon Kelly J. Caskey 40 Delaware, New Jersey Southeast Region Richard W. Flory Accounting–Senior Corporate Michael K. Ferrin Underwriter, Associate Senior Mike Conway Accountant Idaho, Montana Florida Paul L. Hammann Patricia A. L’Heureux Brinkley K. Gaia Underwriter, Associate Senior James M. Costello Accounting–Special Projects Arkansas Illinois Anne Nelson Lanphar Joel R. Parker Steven R. Jewett Underwriter, Associate Senior Michael F. Frederick, Jr. Accounting–Special Projects Alaska North Atlantic Region Roy H. Minnick Barbara Willis Peter C. Keenan Underwriting, Tidelands Richard E. Garlick Accounting–Statutory Louisiana and Waterways Colorado John A. Buehler Maxwell Link Lane Gidney Administration, Employee Benefits First American Equity Loan Alabama Oklahoma, Utah Steven L. Bennett Services Elia W. Long Thomas H. Grifferty Chief Information Officer One Erieview Plaza Hawaii International Operations Gary L. Kermott Cleveland, Ohio 44114 John T. McGrath Michael B. Hopkins Chief Operating Officer (216) 241-1278 Virginia Equity Loan Services, James J. Dufficy Michael B. Hopkins Lenders Advantage Robert A. Meredith Claims Counsel, Senior National President Michigan Thomas M. Kelley Robert H. Hull California Christopher Montalbano Claims Counsel, Senior National SMS Rhode Island Gary L. Kermott Kathy M. Snyder 1004 West Taft Avenue Arizona, California, Idaho, Jonathan D. Nichols Communications, Orange, California 92865 Montana Connecticut Shareholder Relations (714) 998-1111 A.J. Lagomarsino Charles J. O’Rourke Mary Powell Carl Bauchle California Oregon Electronic Underwriting, President J.W. McNamara, Jr. Support Specialist Richard P. Pauletich Robert W. Carlile Iowa, Nebraska California Max O. Valdes Chief Executive Officer Robert G. Meckfessel Finance–Chief Financial Officer Michael A. Paul Kansas, Missouri Ohio William G. Ergas Finance–Treasurer
    • T H E F I R S T A M E R I C A N F I N A N C I A L C O R P O R AT I O N A N D S U B S I D I A R Y C O M PA N I E S SHAREHOLDER Shareholder Information information First American Real Estate Bruce J. Frey STOCK LISTING Division President The First American Financial Corporation’s common stock is traded on the Information Services, Inc. New York Stock Exchange. 150 Second Avenue, North St. Petersburg, Florida 33701 First American Nationwide Common Stock Price (813) 895-4915 Documents New York Stock Exchange Symbol: FAF 11902 Burnet Road, Suite 200 John W. Long Austin, Texas 78758 President Fiscal 1997 (800) 729-8064 High Low First American Real Estate George M. Shanks, Jr. First Quarter $29.75 $25.08 Chairman Second Quarter $26.58 $20.92 Tax Service Third Quarter $40.21 $26.00 8435 Stemmons Freeway Mark D. Rogers Fourth Quarter $49.25 $39.83 Dallas, Texas 75247 Division President (214) 879-5000 SHAREHOLDER AND INVESTOR INQUIRIES David C. Yavorsky Experian RES Additional copies of this Annual Report and other information about the Division President 5601 La Palma Avenue Company are available from Shareholder Relations at Corporate Anaheim, California 92807 Headquarters, (800) 854-3643. (714) 701-2100 First American CREDCO Institutional investors and security analysts wishing more information about Dennis J. Gilmore 5625 Ruffin Road, Suite 200 The First American Financial Corporation may contact Thomas Klemens, President San Diego, California 92123 executive vice president and chief financial officer, at Corporate (619) 637-3770 Headquarters, (800) 854-3643. First American Home Buyers Donald A. Robert Protection Corporation TRANSFER AGENT, REGISTRAR AND Division President 7833 Haskell Avenue DIVIDEND DISBURSING AGENT Kathy Manzione Van Nuys, California 91406 First American Trust Company Executive Vice President and (818) 781-5050 P.O. Box 267 Chief Operating Officer Santa Ana, California 92702 Philip B. Branson (714) 647-2116 Chairman First American Flood Data Any change of a stockholder’s address should be sent to the Transfer Agent Martin R. Wool Services and Registrar at the address above. President 11902 Burnet Road, Suite 400 Austin, Texas 78758 DUPLICATE MAILINGS First American Trust Company (512) 834-9595 To avoid receiving duplicate mailings of the Annual Report or Quarterly 421 North Main Street William Sherakas Report, please contact Shareholder Relations at Corporate Headquarters. Santa Ana, California 92701 Executive Vice President and Duplications can be eliminated by sending in the mailing labels. (800) 854-3643 Chief Operating Officer DIVIDEND PAYMENT DATES Jerald P. Lewis Quarterly dividends on common stock are paid, following declaration by the President and Chief Executive First American Field Services Board of Directors, on or about the 15th of January, April, July and October. Officer 1125 Ocean Avenue The Company has paid a cash dividend every year since 1909. Lakewood, New Jersey 08701 David O. Rahn (732) 363-3626 Chief Operating Officer ANNUAL MEETING John B. Ward The Annual Meeting of Stockholders will be held First American Capital Division President at 2 p.m. on Thursday, April 23, 1998, Management, Inc. at First American Corporate Headquarters, 567 San Nicolas Place, Suite 101 114 East Fifth Street, Santa Ana, California. First American Tax Valuation Newport Beach, California 92660 8435 Stemmons Freeway SAFE HARBOR STATEMENT (714) 719-4546 Dallas, Texas 75247 Safe Harbor Statement under the Private Securities Litigation Reform Act of (214) 879-5000 William C. Conrad 1995: Any statements in this document looking forward in time involve risks President and Chief Executive S. Lewis Hill and uncertainties, including but not limited to the following risks: the effect Officer Division President of interest rate fluctuations; changes in the performance of the real estate Deborah A. Castellani markets; the effect of changing economic conditions; and the demand for Excelis, Inc. Chief Operating Officer and the acceptance of the company’s products. 8435 Stemmons Freeway Dallas, Texas 75247 First Security Thrift (214) 879-5000 803 East Katella Avenue First American and the eagle logo are registered service marks. Orange, California 92867 First American Appraisal (714) 538-3481 Editor: Kathy Munson Snyder Services Design: Ervin Advertising and Design James Bresnan 3570 Camino Del Rio North Printer: The Dot Printer President and Chief Executive San Diego, California 92108 Officer (619) 281-5500 Anand Nallathambi First American Records Division President Management 559 Charcot Avenue Joseph A. Cuffaro, Jr. San Jose, California 95131 Executive Vice President– (408) 435-8141 Support Services Gordon R. Clark Douglas K. Mew William T. Jalbert Executive Vice President and Chief Executive Officers Chief Operating Officer First American Loss Mitigation Services 205 Worth Avenue, Suite 202 Palm Beach, Florida 33480 (561) 659-5844
    • The First American Financial Corporation 114 East Fifth Street Santa Ana, CA 92701 (714) 558-3211 http://www.firstam.com