-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UX5G/aOEAh9mzlcAURXVIxWnyuoCb6lQxuWFMeCwvfvKRy5w9vCefVsJe4+C8mpv lfi8QN2B2UrfTKD4/a4FPQ== 0000898430-96-001107.txt : 19960402 0000898430-96-001107.hdr.sgml : 19960402 ACCESSION NUMBER: 0000898430-96-001107 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST AMERICAN FINANCIAL CORP CENTRAL INDEX KEY: 0000036047 STANDARD INDUSTRIAL CLASSIFICATION: TITLE INSURANCE [6361] IRS NUMBER: 951068610 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-03658 FILM NUMBER: 96542049 BUSINESS ADDRESS: STREET 1: 114 E FIFTH ST CITY: SANTA ANA STATE: CA ZIP: 92701-4699 BUSINESS PHONE: 7145583211 MAIL ADDRESS: STREET 1: 114 E FIFTH STREET CITY: SANTA ANA STATE: CA ZIP: 92701 FORMER COMPANY: FORMER CONFORMED NAME: FIRST AMERICAN TITLE INSURANCE & TRUST C DATE OF NAME CHANGE: 19690515 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-3658 THE FIRST AMERICAN FINANCIAL CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) INCORPORATED IN CALIFORNIA 95-1068610 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 114 EAST FIFTH STREET, SANTA ANA, 92701-4699 CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (714) 558-3211 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON NEW YORK STOCK EXCHANGE ----------------------------------- ----------------------------------- (TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED) Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (17 C.F.R. (S) 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] On MARCH 20, 1996, the aggregate market value of voting stock held by non- affiliates was $312,697,923. On MARCH 20, 1996, there were 11,658,501 shares of Common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement are incorporated by reference in Part III of this report. The definitive proxy statement will be filed no later than 120 days after the close of Registrant's fiscal year. This report includes 58 pages. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS. THE COMPANY The First American Financial Corporation was organized in 1894 as Orange County Title Company, succeeding to the business of two title abstract companies founded in 1889 and operating in Orange County, California. In 1924, the Company commenced issuing title insurance policies. In 1986, the Company began a diversification program by acquiring and developing financial service businesses closely related to the real estate transfer and closing process. The Company is a California corporation and has its executive offices at 114 East Fifth Street, Santa Ana, California 92701-4699. The Company's telephone number is (714) 558-3211. Unless the context otherwise indicates, the "Company," as used herein, refers to The First American Financial Corporation and its subsidiaries. GENERAL The Company, through its subsidiaries, is engaged in the business of providing real estate related financial and information services, including title insurance, real estate tax monitoring, mortgage credit reporting, flood zone determination, property information and home warranty services, to real property buyers and mortgage lenders. The Company also provides trust and limited banking services. Financial information regarding each of the Company's primary business segments is included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements and Supplementary Data" of Part II of this report. Although industry-wide data for 1995 are not currently available, the Company believes that its wholly owned subsidiary, First American Title Insurance Company ("First American"), was the second largest title insurer in the United States, based on gross title fees, and its wholly owned subsidiary, First American Real Estate Information Services, Inc., was the nation's largest provider of flood determinations, based on the number of flood determination reports issued, and the nation's second largest provider of tax monitoring services, based on the number of loans under service. The Company also believes that its majority owned subsidiary, First American Home Buyers Protection Corporation, was the third largest provider of home warranties in the United States, based on the number of home protection contracts under service. Substantially all of the Company's title insurance, tax monitoring, credit reporting, flood zone determination and property information business results from resales and refinancings of real estate, including residential and commercial properties, and from the construction and sale of new properties. The Company's home warranty business results from residential resales and does not benefit from refinancings or commercial transactions. Resales and refinancings of residential properties constitute the major sources of the Company's revenues. Real estate activity is cyclical in nature and is affected greatly by the cost and availability of long term mortgage funds. Real estate activity and, in turn, the Company's revenue base, can be adversely affected during periods of high interest rates and/or limited money supply. However, this adverse effect is mitigated in part by the continuing diversification of the Company's operations into areas outside of its traditional title insurance business. OVERVIEW OF TITLE INSURANCE INDUSTRY Title insurance has become increasingly accepted as the most efficient means of determining title to, and the priority of interests in, real estate in nearly all parts of the United States. Today, virtually all real property mortgage lenders require their borrowers to obtain a title insurance policy at the time a mortgage loan is made. Title Policies. Title insurance policies are insured statements of the condition of title to real property, showing priority of ownership as indicated by public records, as well as outstanding liens, encumbrances and other matters of record, and certain other matters not of public record. Title insurance policies are issued on the basis of a title report, which is prepared after a search of the public records, maps, documents and prior title policies to ascertain the existence of easements, restrictions, rights of way, conditions, encumbrances or other matters affecting the title to, or use of, real property. In certain instances, a visual inspection of the property is 1 also made. To facilitate the preparation of title reports, copies of public records, maps, documents and prior title policies may be compiled and indexed to specific properties in an area. This compilation is known as a "title plant." The beneficiaries of title insurance policies are generally real estate buyers and mortgage lenders. A title insurance policy indemnifies the named insured and certain successors in interest against title defects, liens and encumbrances existing as of the date of the policy and not specifically excepted from its provisions. The policy typically provides coverage for the real property mortgage lender in the amount of its outstanding mortgage loan balance and for the buyer in the amount of the purchase price. Coverage under a title insurance policy issued to a real property mortgage lender generally terminates when the mortgage loan is repaid. Coverage under a title insurance policy issued to an owner generally terminates upon the sale of the insured property unless the owner carries back a mortgage or makes certain warranties as to the title. Unlike other types of insurance policies, title insurance policies do not insure against future risk. Before issuing title policies, title insurers seek to limit their risk of loss by accurately performing title searches and examinations. The major expenses of a title company relate to such searches and examinations, the preparation of preliminary reports or commitments and the maintenance of title plants, and not from claim losses as in the case of property and casualty insurers. The Closing Process. Title insurance is essential to the real estate closing process in most transactions involving real property mortgage lenders. In a typical residential real estate sale transaction, title insurance is generally ordered on behalf of an insured by a real estate broker, lawyer, developer, lender or closer involved in the transaction. Once the order has been placed, a title insurance company or an agent conducts a title search to determine the current status of the title to the property. When the search is complete, the title company or agent prepares, issues and circulates a commitment or preliminary title report ("commitment") to the parties to the transaction. The commitment summarizes the current status of the title to the property, identifies the conditions, exceptions and/or limitations that the title insurer intends to attach to the policy and identifies items appearing on the title that must be eliminated prior to closing. The closing function, sometimes called an escrow in western states, is often performed by a lawyer, an escrow company or by a title insurance company or agent (such person or entity, the "closer"). Once documentation has been prepared and signed, and mortgage lender payoff demands are in hand, the transaction is "closed." The closer records the appropriate title documents and arranges the transfer of funds to pay off prior loans and extinguish the liens securing such loans. Title policies are then issued insuring the priority of the mortgage of the real property mortgage lender in the amount of its mortgage loan and the buyer in the amount of the purchase price. The time lag between the opening of the title order and the issuance of the title policy is usually between 30 and 90 days. Issuing the Policy: Direct vs. Agency. A title policy can be issued directly by a title insurer or indirectly on behalf of a title insurer through agents which are not themselves licensed as insurers. Where the policy is issued by a title insurer, the search is performed by or at the direction of the title insurer, and the premium is collected and retained by the title insurer. Where the policy is issued by an agent, the agent performs the search, examines the title, collects the premium and retains a portion of the premium. The remainder of the premium is remitted to the title insurer as compensation for bearing the risk of loss in the event a claim is made under the policy. The percentage of the premium retained by an agent varies from region to region. A title insurer is obligated to pay title claims in accordance with the terms of its policies, regardless of whether it issues its policy directly or indirectly through an agent. Premiums. The premium for title insurance is due and earned in full when the real estate transaction is closed. Premiums are generally calculated with reference to the policy amount. The premium charged by a title insurer or an agent is subject to regulation in most areas. Such regulations vary from state to state. Because the policy insures against matters that have occurred prior to its issuance (rather than future occurrences, as with most other types of insurance), the major portion of the premium is related to the service performed in ascertaining the current status of title to the property. 2 THE COMPANY'S TITLE INSURANCE OPERATIONS Overview. The Company, through First American and its subsidiaries, transacts the business of title insurance through a network of more than 300 branch offices and over 4,000 independent agents. Through its branch office and agent network, the Company issues policies in all states (except Iowa), the District of Columbia, Puerto Rico, Guam, the U.S. Virgin Islands, the Bahama Islands, Canada, Mexico, Bermuda and the United Kingdom. In Iowa, the Company provides abstracts of title only, because title insurance is not permitted. Through acquisitions and start-ups during the mid-1980s, the Company has grown from a large regional company to a nationwide company, becoming less dependent on operating revenues from any one state or region. The following table illustrates the Company's and the industry's growth based on gross title fees in the ten largest title insurance markets (and all states combined) during the ten year period from 1985 to 1994, and the increase in the Company's share of the national title insurance market from 12.2% to 19.5% over the same period.
GROSS TITLE FEES AND MARKET SHARE(1) --------------------------------------------------------------------- INDUSTRY ($000) FIRST AMERICAN ($000) ----------------------------- --------------------------------------- COMPOUND COMPOUND MARKET ANNUAL ANNUAL SHARE GROWTH GROWTH ----------- STATE 1985(2) 1994(2) RATE 1985(2) 1994(2) RATE 1985 1994 - ----- --------- ---------- -------- -------- --------- -------- ----- ----- California.............. $ 496,259 $1,100,140 9.3% $ 77,744 $ 267,027 14.7% 15.7% 24.3% Texas................... 485,216 669,550 3.6% 29,598 68,990 9.9% 6.1% 10.3% Florida................. 176,042 605,504 14.7% 13,169 73,048 21.0% 7.5% 12.1% New York................ 236,328 368,462 5.1% 36,467 69,959 7.5% 15.4% 19.0% Pennsylvania............ 99,615 247,623 10.7% 6,528 30,892 18.9% 6.6% 12.5% Illinois................ 88,015 216,592 10.5% 5,655 25,398 18.2% 6.4% 11.7% Michigan................ 52,724 196,980 15.8% 12,691 40,747 13.8% 24.1% 20.7% Arizona................. 85,775 186,150 9.0% 22,610 62,290 11.9% 26.4% 33.5% Ohio.................... 61,385 184,738 13.0% 4,635 52,793 31.0% 7.6% 28.6% Washington.............. 70,067 176,964 10.8% 7,167 33,015 18.5% 10.2% 18.7% Total, all States(3).... 2,588,799 5,951,203 9.7% 316,905 1,157,685 15.5% 12.2% 19.5%
- -------- (1)Source: American Land Title Association (2)Based on gross title fees as statutorily defined. (3)Includes all 50 states (except Iowa) and the District of Columbia. Based on industry statistics showing gross title fees in the major areas in which the Company operates, in 1994 the Company had the largest or second largest share of the title insurance market in 33 states, including California, New York and Pennsylvania, which are three of the five largest markets in the United States, and in the District of Columbia. Industry statistics for 1995 are not currently available. The Company plans to continue increasing its share of the title insurance market through strategic acquisitions and further development of its existing branch office and agency operations. The Company also will continue to focus on expanding its share of the higher margin title insurance business conducted on behalf of commercial clients. While commercial title business has been slow for several years, the Company believes its national commercial market share has grown through programs directed at major developers, lenders and law firms. Sales and Marketing. The Company markets its title insurance services to a broad range of customers. The Company believes that its primary source of business is from referrals from persons in the real estate community, such as independent escrow companies, real estate brokers, developers, mortgage brokers, mortgage bankers, financial institutions and attorneys. In addition to the referral market, the Company markets its title insurance services directly to large corporate customers and certain mortgage lenders. As title agents contribute a large portion of the Company's revenues, the Company also markets its title insurance services to independent agents. The Company's marketing efforts emphasize the quality and timeliness of its services and its national presence. 3 While virtually all personnel in the Company's title insurance business assist in marketing efforts, the Company maintains a sales force of approximately 1,000 persons dedicated solely to marketing. This sales force is located throughout the Company's branch office network. The Company provides its sales personnel with training in selling techniques, and each branch manager is responsible for hiring the sales staff and ensuring that sales personnel under his or her supervision are properly trained. In addition to this sales force, the Company has 22 sales personnel in its national accounts department. One of the responsibilities of the national accounts department sales personnel is the coordination of marketing efforts directed at large real estate lenders and companies developing, selling, buying or brokering properties on a multistate basis. The Company also supplements the efforts of its sales force through general advertising in various trade and professional journals. The Company's increased commercial sales effort during the past decade has enabled the Company to expand its commercial business base. Because commercial transactions involve higher coverage amounts and yield higher premiums, commercial title insurance business generates greater profit margins than does residential title insurance business. Although the commercial real estate economy has been slow during the past several years, in particular with respect to new construction, and may continue to be slow in the near future, the Company has recently experienced an increase in commercial real estate activity from workouts, refinancings and purchases driven by depressed commercial real estate values. Because of this increase in activity and the Company's belief that new commercial construction will eventually increase, the Company plans to continue to emphasize its commercial sales program. Although sales outside of the United States account for a small percentage of the Company's revenues, the Company believes that the acceptance of title insurance in foreign markets has increased in recent years. Accordingly, the Company plans to continue its international sales efforts, particularly in Canada. Underwriting. Before a title insurance policy is issued, a number of underwriting decisions are made. For example, matters of record revealed during the title search may require a determination as to whether an exception should be taken in the policy. The Company believes that it is important for the underwriting function to operate efficiently and effectively at all decision making levels so that transactions may proceed in a timely manner. To perform this function, the Company has underwriters at the branch level, the regional level and the national level. Based on the low turnover and longevity of First American's employees and its continuing training programs, the Company believes that its underwriting personnel are among the most experienced and well trained in the title insurance industry. Agency Operations. The relationship between the Company and each agent is governed by an agency agreement which states the conditions under which the agent is authorized to issue title insurance policies on behalf of the Company. The agency agreement also prescribes the circumstances under which the agent may be liable to the Company if a policy loss is attributable to error of the agent. Such agency agreements typically have a term of one to five years and are terminable immediately for cause. Due to the high incidence of agency fraud in the title insurance industry during the late 1980s, the Company instituted measures to strengthen its agent selection and audit programs. In determining whether to engage an independent agent, the Company investigates the agent's experience, background, financial condition and past performance. The Company maintains loss experience records for each agent and conducts periodic audits of its agents. The Company has also increased the number of agent representatives and agent auditors that it employs. Agent representatives periodically visit agents and examine their books and records. In addition to periodic audits, a full agent audit will be triggered if certain "warning signs" are evident. Warning signs that can trigger an audit include the failure to implement Company required accounting controls, shortages of escrow funds and failure to remit underwriting fees on a timely basis. Title Plants. The Company's network of title plants constitutes one of its principal assets. A title search is conducted by searching the public records or utilizing a title plant. While public records are indexed by reference to the names of the parties to a given recorded document, most title plants arrange their records on a geographic basis. Because of this difference, records of a title plant are generally easier to search. Most title plants also index 4 prior policies, adding to searching efficiency. Many title plants are computerized. Certain offices of the Company utilize jointly owned plants or utilize a plant under a joint user agreement with other title companies. The Company believes its title plants, whether wholly or partially owned or utilized under a joint user agreement, are among the best in the industry. The Company's title plants are carried on its balance sheet at original cost, which includes the cost of producing or acquiring interests in title plants or the appraised value of subsidiaries' title plants at dates of acquisition for companies accounted for as purchases. Thereafter, the cost of daily maintenance of these plants is charged to expense as incurred. A properly maintained title plant has an indefinite life and does not diminish in value with the passage of time. Therefore, in accordance with generally accepted accounting principles, no provision is made for depreciation of these plants. Since each document must be reviewed and indexed into the title plant, such maintenance activities constitute a significant item of expense. The Company is able to offset title plant maintenance costs at its plants through joint ownership and access agreements with other title insurers and title agents. Reserves for Claims and Losses. The Company provides for title insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized. Historically, major claims (i.e., claims greater than $0.5 million) were charged to expense as they became known because the unique circumstances surrounding most major claims made it inherently impractical to predict the incidence and amount of such claims. In the fourth quarter 1995, the Company determined, with the assistance of an actuarial study, that sufficient major claims data now exists to reasonably estimate a reserve for incurred but not reported claims. Accordingly, the reserve for incurred but not reported claims at December 31, 1995, includes major claims. The reserve for known claims and incurred but not reported claims reflects management's best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported, and is considered by the Company to be adequate for such purpose. In settling claims, the Company occasionally purchases and ultimately sells the interest of the insured in the real property or the interest of the claimant adverse to the insured. The assets so acquired are carried at the lower of cost or estimated realizable value, net of any indebtedness thereon. Notes, real estate and other assets purchased or otherwise acquired in settlement of claims, net of valuation reserves, totaled $12.3 million, $5.8 million and $7.5 million, respectively, as of December 31, 1995. Reinsurance and Coinsurance. The Company assumes and distributes large title insurance risks through mechanisms of reinsurance and coinsurance. In reinsurance agreements, in consideration for a portion of the premium, the reinsurer accepts that part of the risk which the primary insurer cedes to the reinsurer over and above the portion retained by the primary insurer. The primary insurer, however, remains liable for the total risk in the event that the reinsurer does not meet its obligation. As a general rule, the Company does not retain more than $25 million of coverage on any single policy. Under coinsurance agreements, each coinsurer is jointly and severally liable for the risk insured, or for so much thereof as is agreed to by the parties. The Company's reinsurance activities account for less than 1% of its total title insurance operating revenues. Competition. The title insurance business is highly competitive. The number of competing companies and the size of such companies varies in the different areas in which the Company conducts business. Generally, in areas of major real estate activity, such as metropolitan and suburban localities, the Company competes with many other title insurers. Approximately 90 title insurance underwriters are members of the American Land Title Association, the title insurance industry's national trade association. The Company's major nationwide competitors in its principal markets include Chicago Title and Trust Company (which also includes Ticor Title Insurance Company and Security Union Title Insurance Company), Commonwealth Land Title Insurance Company, Lawyers Title Insurance Company, Stewart Title Guaranty Company, Old Republic Title Insurance Group and Fidelity National Title Insurance Company. In addition to these nationwide competitors, numerous agency operations throughout the country provide aggressive competition on the local level. 5 The Company believes that competition for title insurance business is based primarily on the quality and timeliness of service, because parties to real estate transactions are usually concerned with time schedules and costs associated with delays in closing transactions. In those states where prices are not established by regulatory authorities, the price of title insurance policies is also an important competitive factor. The Company believes that it provides quality service in a timely manner at competitive prices. THE COMPANY'S RELATED BUSINESSES As an adjunct to its title insurance business, in 1986 the Company embarked on a diversification program by acquiring and developing financial service businesses closely related to the real estate transfer and closing process. These businesses included tax monitoring, home warranty, flood zone determination, and reporting of credit and property information. The development of these businesses has allowed the Company to become one of the nation's leading companies offering a full range of services to real property buyers and mortgage lenders. The Company also operates a trust and banking business in southern California. The Real Estate Information Service Business. The real estate information service business encompasses tax monitoring, mortgage credit reporting, flood zone determination and other property information services. The tax monitoring service, established by the Company in 1987, advises real property mortgage lenders of the status of property tax payments due on real estate securing their loans. With the acquisition of TRTS Data Services, Inc., (now named First American Real Estate Information Services, Inc.) in November 1991, the Company believes that it is the second largest provider of tax monitoring services in the United States. Under a typical contract, a tax service provider monitors, on behalf of a mortgage lender, the real estate taxes owing on properties securing such lender's mortgage loans for the life of such loans. In general, providers of tax monitoring services, such as the Company's tax service, indemnify mortgage lenders against losses resulting from a failure to monitor delinquent taxes. Where a mortgage lender requires that tax payments be impounded on behalf of borrowers, providers of tax monitoring services, such as the Company's tax service, may be required to monitor and oversee the transfer of these monies to the taxing authorities and provide confirmation to lenders that such taxes have been paid. The Company's tax service business markets its product through a nationwide sales staff which calls on servicers and originators of mortgage loans. The Company's primary source of tax service business is from large multistate mortgage lenders. The Company's only major nationwide competitor in the tax service business is Transamerica Real Estate Tax Service. Because of its broad geographic coverage and the large number of mortgage loans not being serviced by a third party tax service provider, the Company believes that it is well positioned to increase its market share in the tax service market. The fee charged to service each mortgage loan varies from region to region, but generally falls within the $55 to $80 price range and is paid in full at the time the contract is executed. The Company recognizes approximately 70% of this fee in the year the contract is executed. The remaining 30% of the fee is deferred over the remaining life of the contract. However, income taxes are paid on the entire fee in the year the fee is received. The Company maintains extremely small reserves for losses relating to its tax monitoring services because historically the Company's losses relating to such services have been negligible, and the Company is not presently aware of any reason why its historical loss experience will not continue at current levels. The Company's mortgage credit reporting service provides credit information reports for mortgage lenders throughout the United States. These reports are derived from two or more credit bureau sources and are summarized and prepared in a standard form acceptable to mortgage loan originators and secondary mortgage purchasers. The Company's mortgage credit reporting service has grown primarily through acquisitions. In 1994, the Company acquired all of the minority interests in its lower tier subsidiaries Metopolitan Credit Reporting Services, Inc., and Metropolitan Property Reporting Services, Inc. In 1994, the Company also acquired California Credit Data, Inc., and Prime Credit Reports, Inc., and in 1995, the Company acquired Credco, Inc. (now named 6 First American Credco, Inc.). With the acquisition of First American Credco, Inc., the Company believes that it is now the largest mortgage credit reporting service in the United States. In January 1995, the Company acquired Flood Data Services, Inc. (now named First American Flood Data Services, Inc.). This business furnishes to mortgage lenders flood zone determination reports, which provide information on whether or not property securing a loan is in a governmentally delineated special flood hazard area. Federal legislation passed in 1994 requires that most mortgage lenders obtain a determination of the current flood zone status at the time each loan is originated and obtain updates during the life of the loan. First American Flood Data Services, Inc., is the largest provider of flood zone determinations in the United States. The Home Warranty Business. The Company's home warranty business commenced operations in 1984, in part with the proceeds of a $1.5 million loan from the Company which was, in 1986, converted to a majority equity interest. The Company currently owns 79% of its home warranty business, which is operated as a second tier subsidiary, with the balance owned by management of that subsidiary. The Company's home warranty business issues one-year warranties which protect homeowners against defects in household systems and appliances, such as plumbing, water heaters and furnaces. The Company's home warranty subsidiary currently charges approximately $245 to $295 for its basic home warranty contract. Optional coverage is available for air conditioners, pools, spas, washers, dryers and refrigerators for charges ranging from approximately $25 to $125. For an additional charge, coverage is renewable annually at the option of the homeowner upon approval by the home warranty subsidiary. Home warranties are marketed through real estate brokers and agents. This business is conducted in certain counties of Arizona, California, Nevada, Texas and Washington. The principal competitor of the Company's home warranty business is American Home Shield, a subsidiary of Service Master L.P. Fees for these warranties are paid at the closing of the home purchase and are recognized monthly over a twelve month period. The Trust Business. Since 1960, the Company has conducted a general trust business in California, acting as trustee when so appointed pursuant to court order or private agreement. In 1985, the Company formed a banking subsidiary into which its subsidiary trust operation was merged. As of December 31, 1995, the trust operation was administering fiduciary and custodial assets having a market value of approximately $915 million. The Thrift Business. During 1988, the Company, through a majority owned subsidiary, acquired an industrial loan corporation (the "Thrift") that accepts thrift deposits and uses deposited funds to originate and purchase loans secured by commercial properties in southern California. As of December 31, 1995, the Thrift had approximately $43.4 million of demand deposits and $46.1 million of loans outstanding. The loans made by the Thrift currently range in amount from $4,000 to $825,000, with an average loan balance of $230,000. Loans are made only on a secured basis, at loan-to-value percentages no greater than 65%. The Thrift specializes in making commercial real estate loans, installment loans to individuals and financing commercial equipment leases. In excess of 90% of the Thrift's loans are made on a variable rate basis. The average yield on the Thrift's loan portfolio as of December 31, 1995, was 12%. A number of factors are included in the determination of average yield, principal among which are loan fees and closing points amortized to income, prepayment penalties recorded as income, and amortization of discounts on purchased loans. The Thrift's primary competitors in the southern California commercial real estate lending market are other thrift and loan companies and, to a lesser extent, commercial banks. In recent years, many of the commercial banks operating in southern California have significantly reduced their involvement in the commercial real estate lending market as a result of the regulatory requirements to which they are subject. As a result, the Company has been able to enhance its competitive position in this market and obtain relatively high yields on its loan portfolio. In addition, the Company believes that many borrowers who might be eligible for loans from commercial banks use thrift and loan companies, such as the Thrift, because, in general, thrift and loan companies offer longer maturity loans than do commercial banks, which typically offer one-year renewable loans. There is, however, a higher degree of risk associated with longer term loans than shorter term loans. The Thrift's average loan is 60 months in duration. 7 The performance of the Thrift's loan portfolio is evaluated on an ongoing basis by management of the Thrift. The Thrift places a loan on nonaccrual status when two payments become past due. When a loan is placed on nonaccrual status, the Thrift's general policy is to reverse from income previously accrued but unpaid interest. Income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is probable. Interest income on nonaccrual loans which would have been recognized during the year ended December 31, 1995, if all of such loans had been current in accordance with their original terms, totalled $232,000. Interest income actually recognized on these nonaccrual loans for the year ended December 31, 1995, was $76,000. The following table sets forth the amount of the Thrift's nonperforming loans as of the dates indicated.
YEAR ENDED DECEMBER 31 -------------------------------- 1991 1992 1993 1994 1995 ---- ------ ------ ------ ------ ($000) NONPERFORMING ASSETS: Loans accounted for on a nonaccrual basis...... $652 $1,039 $1,833 $1,741 $1,956 Accruing loans past due 90 or more days........ Troubled debt restructurings................... ---- ------ ------ ------ ------ Total......................................... $652 $1,039 $1,833 $1,741 $1,956 ==== ====== ====== ====== ======
Based on a variety of factors concerning the creditworthiness of its borrowers, the Thrift determined that it had $1,565,000 of potential problem loans in existence as of December 31, 1995. The Thrift's allowance for loan losses is established through charges to earnings in the form of provision for loan losses. Loan losses are charged to, and recoveries are credited to, the allowance for loan losses. The provision for loan losses is determined after considering various factors, such as loan loss experience, maturity of the portfolio, size of the portfolio, borrower credit history, the existing allowance for loan losses, current charges and recoveries to the allowance for loan losses, the overall quality of the loan portfolio, and current economic conditions, as determined by management of the Thrift, regulatory agencies and independent credit review specialists. While many of these factors are essentially a matter of judgment and may not be reduced to a mathematical formula, the Company believes that, in light of the collateral securing its loan portfolio, the Thrift's current allowance for loan losses is an adequate allowance against foreseeable losses. 8 The following table provides certain information with respect to the Thrift's allowance for loan losses as well as charge-off and recovery activity.
YEAR ENDED DECEMBER 31 ------------------------------------ 1991 1992 1993 1994 1995 ------ ----- ----- ----- ------- ($000) ALLOWANCE FOR LOAN LOSSES: Balance at beginning of year............. $ 398 $ 376 $ 500 $ 750 $ 950 ------ ----- ----- ----- ------- Charge-Offs: Real estate--mortgage................... (117) (176) (66) (311) (194) Assigned lease payments................. (111) (57) (21) (9) (9) Other................................... (113) (44) ------ ----- ----- ----- ------- (228) (346) (131) (320) (203) ------ ----- ----- ----- ------- Recoveries: Real estate--mortgage................... 22 14 3 55 Assigned lease payments................. 70 64 32 28 35 Other................................... 9 23 ------ ----- ----- ----- ------- 92 87 58 83 35 ------ ----- ----- ----- ------- Net (charge-offs) recoveries............ (136) (259) (73) (237) (168) Provision for losses.................... 114 383 323 437 562 ------ ----- ----- ----- ------- Balance at end of year................... $ 376 $500 $750 $950 $1,344 ====== ===== ===== ===== ======= Ratio of net charge-offs during the year to average loans outstanding during the year.................................... .6% .8% .2% .6% .4% ====== ===== ===== ===== =======
The adequacy of the Thrift's allowance for loan losses is based on formula allocations and specific allocations. Formula allocations are made on a percentage basis which is dependent on the underlying collateral, the type of loan and general economic conditions. Specific allocations are made as problem or potential problem loans are identified and are based upon an evaluation by the Thrift's management of the status of such loans. Specific allocations may be revised from time to time as the status of problem or potential problem loans changes. The following table shows the allocation of the Thrift's allowance for loan losses and the percent of loans in each category to total loans at the dates indicated.
YEAR ENDED DECEMBER 31 ------------------------------------------------------------------------------- 1991 1992 1993 1994 1995 --------------- --------------- --------------- --------------- --------------- % OF % OF % OF % OF % OF ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS ALLOWANCE LOANS --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- ($000) LOAN CATEGORIES: Real estate-mortgage... $282 75 $465 90 $635 98 $879 99 $1,300 99 Real estate- construction.......... 45 12 18 4 3 1 Assigned lease payments.............. 45 12 15 5 95 1 71 1 41 Other.................. 4 1 2 1 20 1 ---- --- ---- --- ---- --- ---- --- ------ --- $376 100 $500 100 $750 100 $950 100 $1,344 100 ==== === ==== === ==== === ==== === ====== ===
9 ACQUISITIONS Commencing in the 1960s, the Company initiated a growth program with a view to becoming a nationwide provider of title insurance. This program included expansion into new geographic markets through internal growth and selective acquisitions of over 100 local and regional title companies. During the mid- 1980's, the Company began expanding into other real estate related financial services. Since 1980, the Company has made strategic acquisitions designed to expand not only its direct title operations, but also the range of services it can provide to real property buyers and mortgage lenders. The following lists some of the key acquisitions made in furtherance of this strategy:
YEAR OF ACQUIRED ENTITY(1) ACQUISITION PRINCIPLE MARKET(S) - ------------------ ----------- ------------------- TITLE INSURANCE: Land Title Insurance Company of St. Louis(2)................................... 1980 Missouri St. Paul Title Insurance Corporation(3)..... 1982 Midwest First American Title Guaranty Holding Company(4)................................. 1983 California Midland Title Security, Inc................. 1986 Ohio Columbia Real Estate Title Insurance Company(3)................................. 1987 District of Columbia The Port Lawrence Title Insurance and Trust Company.................................... 1988 Ohio Universal Title Insurance Company(3)........ 1988 Minnesota Mortgage Guarantee and Title Company........ 1988 Rhode Island Security Title & Trust Agency of Alaska, Inc........................................ 1989 Alaska Southwest Title and Trust Company(5)........ 1990 Oklahoma Preferred Land Title Services, Inc.......... 1992 New York City Fidelity Title and Guaranty Company......... 1994 Florida Republic Title of Texas, Inc................ 1994 Texas REAL ESTATE INFORMATION SERVICES: Metropolitan Realty Tax Service(6).......... 1990 East Coast TRTS Data Services, Inc. ................... 1991 Nationwide Metropolitan Credit Reporting Services, Inc. ...................................... 1993 Northeast Metropolitan Property Reporting Services, Inc. ...................................... 1993 Northeast Credco, Inc................................. 1995 Nationwide Flood Data Services, Inc. .................. 1995 Nationwide HOME WARRANTY: First American Home Buyers Protection 1986 Arizona, California, Nevada, Corporation(7)............................. Texas and Washington
- -------- (1)Unless otherwise indicated, all entities listed are wholly owned by the Company. (2)99% owned. (3)Subsequently merged into First American. (4)80% owned. (5)99% owned. (6)Asset acquisition. (7)79% owned. 10 REGULATION The title insurance business is heavily regulated by state insurance regulatory authorities. These authorities generally possess broad powers with respect to the licensing of title insurers, the types and amounts of investments that title insurers may make, insurance rates, forms of policies and the form and content of required annual statements, as well as the power to audit and examine title insurers. Under state laws, certain levels of capital and surplus must be maintained and certain amounts of securities must be segregated or deposited with appropriate state officials. Various state statutes require title insurers to defer a portion of all premiums in a reserve for the protection of policyholders and to segregate investments in a corresponding amount. Further, most states restrict the amount of dividends and distributions a title insurer may make to its shareholders. The National Association of Insurance Commissioners has recently announced that it intends to increase efforts to have its model insurance code adopted by state legislatures. The model insurance code contains restrictions limiting the ability of insurance companies to pay dividends to their shareholders. The dividend limitations in the model code are more restrictive than those set forth in most state insurance codes currently in effect, including the California Insurance Code which governs First American. The Company cannot predict whether the model insurance code or any provision thereof will be adopted in California. The Company's home warranty business also is subject to regulation by insurance authorities in the states in which it conducts such business. The Company's trust company and industrial loan company are both subject to regulation by the Federal Deposit Insurance Corporation. In addition, the Company's trust company is regulated by the California Superintendent of Banks and the Company's industrial loan company is regulated by the California Commissioner of Corporations. INVESTMENT POLICIES The Company invests primarily in cash equivalents, federal and municipal governmental securities, mortgage loans and investment grade debt and equity securities. The largely fixed income portfolio is classified in the Company's financial statements as "available for sale." In addition to the Company's investment strategy, state laws impose certain restrictions upon the types and amounts of investments that may be made by the Company's regulated subsidiaries. Additionally, on April 21, 1992, the Company entered into a $65 million Credit Agreement with a syndicate of banks that includes The Chase Manhattan Bank (National Association) as both lender and agent for the syndicate (the "Credit Agreement"). Under the terms of the Credit Agreement, a term loan of $65 million was made to the Company on April 27, 1992, and the proceeds thereof were used to retire approximately $63 million of demand and term indebtedness. The Credit Agreement, as amended, contains investment restrictions limiting the types and amounts of investments that the Company and its subsidiaries may make. Such restrictions limit the investments in and advances to subsidiaries and affiliated companies that the Company may make and generally limit the Company's other investments to investment grade securities, such as U.S. Treasury securities, insured bank time deposits or certificates of deposit, repurchase obligations secured by U.S. Treasury securities, bank commercial paper and secured money market funds. The Company is, however, permitted to make certain additional investments not in excess of 25% of stockholders' equity, of which no more than 60% may be in equity securities and no more than $5 million may be with any one issuer. 11 EMPLOYEES The following table provides a summary of the total number of employees of the Company as of December 31, 1995:
NUMBER OF BUSINESS EMPLOYEES -------- --------- Title insurance................................................ 8,269 Real estate information services............................... 1,607 Home warranty.................................................. 187 Trust and banking.............................................. 86 ------- Total......................................................... 10,149 =======
ITEM 2. PROPERTIES. The Company owns two adjacent office buildings in Santa Ana, California, which house its executive offices, its trust and banking subsidiary and the Orange County title insurance branch operations. This complex, which contains approximately 105,000 square feet of floor space and an enclosed parking area, comprises one city block. The Company also owns an 18,000 square foot office building, located across the street from its main offices, that will provide space for expansion of its home office operations. The Company's title insurance subsidiary, First American, and its subsidiaries, own or lease buildings or office space in more than 400 locations throughout the United States and Canada, principally for their respective title operations. The Company's real estate information subsidiary, First American Real Estate Information Services, Inc. ("FAREISI"), owns a building in Irving, Texas, which houses its national operations center. This building contains 70,000 square feet of office space and was purchased in September 1992. FAREISI's corporate headquarters are housed in a leased office building located in St. Petersburg, Florida. In addition, FAREISI and its subsidiaries lease office space in more than 75 locations throughout the United States, principally for their respective operations. The Company's home warranty subsidiary owns 1.7 acres of land in Van Nuys, California, which contains a 20,000 square foot office building, a 7,000 square foot warehouse and a parking lot. Each of the office facilities occupied by the Company or its subsidiaries is in good condition and adequate for its intended use. ITEM 3. LEGAL PROCEEDINGS. Set forth below is a brief description of material pending legal proceedings, other than ordinary routine litigation incidental to the Company's businesses, to which the Company or any of its subsidiaries is a party or of which any of their properties is the subject. Due to the nature of its businesses described in Item 1 above, the Company is involved in numerous routine legal proceedings incidental to such businesses. Some of these proceedings involve claims for damages in material amounts. At this time, however, the Company does not anticipate that the resolution of any of these proceedings will materially and adversely affect its financial condition. On April 13, 1990, a civil action entitled Brown, et al. v. Ticor Title Insurance Co., et al., Case No.Civ 90-0577 (PHX-SMM) (U.S. Dist. Ct. Ariz.), was filed in the U.S. District Court in Phoenix, Arizona, by Walter Thomas Brown and Jeffrey L. Dziewit, as purported representatives of title insurance purchasers in Arizona and Wisconsin, alleging violation by First American Title Insurance Company ("First American") and other title insurers of federal antitrust laws in the alleged fixing of rates for title insurance and for search and examination services by reason of defendants' participation in state-regulated rating bureaus in the two states. 12 On October 11, 1994, the Judicial Panel on Multi-district Litigation ordered that an action entitled Segall, et al. v. Stewart Title Guaranty Co., et al., be transferred from the U.S. District Court for the Eastern District of Wisconsin to the District of Arizona for coordinated or consolidated pretrial proceedings with Brown. These two actions are now consolidated and part of MDL-94-1027, under the title "In Re:Title Search and Examination Services Antitrust Litigation." Segall is a civil suit filed on behalf of a purported class of purchasers of title insurance in Wisconsin against certain title insurance companies and individuals. The Segall suit alleges that the defendants violated federal antitrust laws by reason of the defendants' participation in the state-regulated rating bureau in Wisconsin. The purported plaintiff class includes the Wisconsin plaintiff class members alleged in Brown as well as some additional purported class members. The Company does not believe that the ultimate resolution of this litigation will materially and adversely affect its financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS. COMMON STOCK MARKET PRICES AND DIVIDENDS The Company's common stock began trading on the New York Stock Exchange (ticker symbol FAF) on December 3, 1993. Prior to December 3, 1993, The Company's common stock was traded over-the-counter on the NASDAQ National Market System. The approximate number of record holders of common stock on February 29, 1996 was 3,274. High and low stock prices and dividends for the last two years were:
1995 1994 ------------------------ ------------------------ CASH CASH QUARTER ENDED HIGH-LOW RANGE DIVIDENDS HIGH-LOW RANGE DIVIDENDS ------------- -------------- --------- -------------- --------- March 31...................... $20.63--$16.75 $.15 $37.50--$31.00 $.15 June 30....................... $25.50--$19.13 $.15 $30.63--$23.13 $.15 September 30.................. $25.38--$22.75 $.15 $24.50--$20.25 $.15 December 31................... $27.38--$21.75 $.15 $20.50--$16.00 $.15
While the Company expects to continue its policy of paying regular quarterly cash dividends, future dividends will be dependent on future earnings, financial condition and capital requirements. The payment of dividends is subject to the restrictions described in Notes 2 and 8 to the consolidated financial statements included in "Item 8. Financial Statements and Supplementary Data" of Part II of this report. 13 ITEM 6. SELECTED FINANCIAL DATA. THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES
YEAR ENDED DECEMBER 31 ---------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues.................. $1,250,216 $1,376,393 $1,398,426 $1,115,467 $756,821 Income before cumulative effect of a change in ac- counting for income taxes (Note A)................. $ 7,587 $ 18,945 $ 62,091 $ 43,258 $ 3,005 Net income................ $ 7,587 $ 18,945 $ 66,291 $ 43,258 $ 3,005 Total assets.............. $ 873,778 $ 828,649 $ 786,448 $ 691,279 $533,357 Notes and contracts pay- able..................... $ 77,206 $ 89,600 $ 85,022 $ 81,981 $ 92,889 Stockholders' equity...... $ 302,767 $ 292,110 $ 283,718 $ 216,842 $137,950 Return on average stock- holders' equity.......... 2.6% 6.6% 26.5% 24.4% 2.1% Cash dividends on common shares................... $ 6,850 $ 6,869 $ 5,840 $ 3,989 $ 3,748 Per share of common stock (Note B)-- Income before cumulative effect of a change in accounting for income taxes (Note A).......... $ .67 $ 1.66 $ 5.47 $ 4.55 $ .32 Net Income............... $ .67 $ 1.66 $ 5.84 $ 4.55 $ .32 Stockholder's equity..... $ 26.53 $ 25.63 $ 24.93 $ 19.26 $ 15.64 Cash dividends........... $ .60 $ .60 $ .51 $ .41 $ .40 Number of common shares outstanding-- Weighted average during the year................ 11,403 11,447 11,353 9,502 9,478 End of year.............. 11,411 11,395 11,381 11,260 8,821 Title orders opened (Note C)....................... 894 873 1,218 1,048 819 Title orders closed (Note C)....................... 667 723 933 809 593 Number of employees....... 10,149 9,033 10,679 8,694 7,585
- -------- Note A--See Note 10 to the consolidated financial statements for description of a change in accounting for income taxes. Note B--Per share information relating to net income is based on the weighted average number of shares outstanding for the years presented. Per share information relating to stockholders' equity is based on shares outstanding at the end of each year. Note C--Title order volumes are those processed by the direct title operations of the Company and do not include orders processed by agents. 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS. RESULTS OF OPERATIONS OVERVIEW--As with all providers of real estate-related financial and informational services, the Company's revenues depend, in large part, upon the level of real estate activity and the cost and availability of mortgage funds. The majority of the Company's revenues for the title insurance and real estate information segments result from resales and refinancings of residential real estate, and to a lesser extent, from commercial transactions and the construction and sale of new properties. Revenues for the Company's home warranty segment result solely from residential resale activity and do not benefit from refinancings. Traditionally, the greatest volume of real estate activity, particularly residential resale, has occurred in the spring and summer months. However, numerous actions taken by the Federal Reserve Board during 1992 and 1993 to stimulate economic recovery caused unusual fluctuations in the traditional pattern of real estate activity. During 1993 mortgage interest rates fell to their lowest level in 25 years. This decline in rates caused an unprecedented volume of refinance transactions and the Company's title insurance and real estate information segments processed record order volumes. Due to inflationary concerns, the Federal Reserve Board began a succession of interest rate increases in February 1994. The resulting increase in mortgage interest rates adversely affected the Company's revenue base in the second half of 1994 (primarily the fourth quarter) as refinance activity came to a virtual halt. This, coupled with the persistently poor real estate economy in California and a return of the traditional seasonal real estate cycle, resulted in a low inventory of open transactions going into 1995. As a result, 1995 first quarter operating revenues experienced a 30% decline when compared with the same period of the prior year. In response to the severe decline in new orders, the Company instituted personnel reductions totaling 26% of the work force from March 1994 through February 1995. However, the cost cutting measures lagged the revenue declines resulting in a fourth quarter 1994 loss of $.25 per share and a first quarter 1995 loss per share of $1.11. Mortgage interest rates peaked in January 1995 and decreased throughout the remainder of the year and into 1996 helped by an easing of monetary policy by the Federal Reserve Board. During the last half of 1995, the national real estate markets improved and refinancing activity began to increase. These factors contributed to a 26% improvement in operating revenues in the last half of 1995 when compared to the first half of 1995 and resulted in earnings per share of $1.68 compared with a loss per share of $1.01. OPERATING REVENUES--A summary by segment of the Company's operating revenues is as follows:
1995 % 1994 % 1993 % ----------- --- ---------- --- ---------- --- (IN THOUSANDS, EXCEPT PERCENT) TITLE INSURANCE: Direct Operations................ $ 517,616 42 $ 562,566 41 $ 632,226 46 Agency Operations................ 517,173 42 659,015 49 618,353 45 ----------- --- ---------- --- ---------- --- 1,034,789 84 1,221,581 90 1,250,579 91 Real Estate Information........... 145,755 12 94,816 7 95,069 7 Home Warranty..................... 32,531 3 28,116 2 22,402 1 Trust and Banking................. 14,110 1 12,433 1 11,731 1 ----------- --- ---------- --- ---------- --- $ 1,227,185 100 $1,356,946 100 $1,379,781 100 =========== === ========== === ========== ===
Operating revenues from direct title operations decreased 8.0% in 1995 as compared with 1994. This decrease was primarily attributable to a 7.7% decrease in the number of title orders closed by the Company's direct operations. The Company's direct title operations closed 667,200 title orders during 1995, as compared with 722,900 title orders closed during 1994. This decrease was attributable to higher interest rates and inclement weather which resulted in reduced national real estate activity in the first half of 1995. Operating revenues from direct title operations decreased 11.0% in 1994 as compared with 1993. The decrease was primarily attributable to a 22.5% decline in the number of title orders closed, offset in part by an increase in the average revenues per order closed. The decrease in orders closed was due to a decline in refinance activity, the subsiding real estate economy in California (a state highly concentrated with direct title operations) and the return of the traditional, 15 seasonal real estate cycle in the fourth quarter 1994. The average revenues per order closed were $778 for 1994 as compared with $678 for 1993. The increase reflected a change in the Company's business mix from predominantly lower margin refinance transactions in 1993 to a more balanced mix in 1994, including higher margin resale transactions. Operating revenues from agency title operations, which are more concentrated in the midwestern and eastern sectors of the country, decreased 21.5% in 1995 from 1994. The decrease reflects a slow first half of 1995 as discussed above, compounded by the inherent delay in reporting by agents of the resurgence in business for the latter part of 1995. Operating revenues from agency title operations increased 6.6% in 1994 over 1993. This increase was primarily attributable to the high level of orders closed with our agents during the fourth quarter 1993 and not reported to the Company until the beginning of 1994, as well as the increase in resale activity, offset in part by the decline in refinance transactions. Real estate information operating revenues increased 53.7% in 1995 when compared with 1994. This increase was primarily attributable to $59.8 million of operating revenues contributed by new acquisitions, partially offset by the same economic factors affecting title insurance mentioned above. Operating revenues remained relatively constant for 1994 when compared with 1993; this constant level of revenues, in spite of a significant fourth quarter 1994 revenue reduction, was primarily attributable to the heavy volume of refinance transactions that continued through the end of 1993 and into the beginning of 1994, as well as approximately $6.0 million of revenues contributed by companies acquired during 1994. Home warranty operating revenues increased 15.7% in 1995 over 1994 and 25.5% in 1994 over 1993. These increases were primarily attributable to improvements in certain of the residential resale markets in which this segment operates, successful geographic expansion, increased consumer awareness and an increase in the number of annual renewals. INVESTMENT AND OTHER INCOME--Investment and other income increased 18.4% in 1995 over 1994 and 4.3% in 1994 over 1993. The increase in the current year was primarily attributable to gains on the sale of certain investments, a $.7 million fire insurance recovery and increased equity in earnings of affiliates of $.5 million, offset in part by a 9.3% decrease in the average investment portfolio balance. The increase in 1994 over 1993 was due to a 22.2% increase in the average investment portfolio balance, offset in part by a reduction of $1.4 million in equity in earnings of affiliates. See Note 9 to the consolidated financial statements for additional details on investment and other income. SALARIES AND OTHER PERSONNEL COSTS--A summary by segment of the Company's salaries and other personnel costs is as follows:
1995 % 1994 % 1993 % -------- --- -------- --- -------- --- (IN THOUSANDS, EXCEPT PERCENT) Title Insurance.......................... $352,745 82 $369,100 87 $354,343 89 Real Estate Information.................. 57,738 13 36,073 8 26,732 7 Home Warranty............................ 7,714 2 7,078 2 6,076 1 Trust and Banking........................ 4,799 1 4,087 1 3,962 1 Corporate................................ 8,988 2 6,990 2 6,789 2 -------- --- -------- --- -------- --- $431,984 100 $423,328 100 $397,902 100 ======== === ======== === ======== ===
The Company's title insurance segment is labor intensive; accordingly, a major variable expense component is salaries and other personnel costs. The expense component is affected by two competing factors: The need to monitor personnel changes to match corresponding or anticipated new orders, and the need to provide quality service. Commencing in the second quarter 1994 through the first quarter 1995, the Company's ability to match cost reductions with order declines was hampered by the continual upward adjustment of interest rates by the Federal Reserve Board. In addition, the Company's growth in operations servicing builder and lender business has created ongoing fixed costs required to service accounts, even when market conditions are producing fewer new orders. 16 Title insurance personnel expenses decreased 4.4% in 1995 from 1994. The decrease relates directly to the Company's intensified efforts during the latter part of 1994 and the beginning of 1995 to adjust personnel and related expense levels commensurate with new order counts. This cost-containment process stabilized the cost of the labor base at a more acceptable level as business improved during the second quarter 1995. This decrease was offset, in part, by acquisition activity and modest personnel increases in the second half of 1995. Personnel expenses increased 4.2% in 1994 over 1993. This increase was primarily attributable to the additional personnel needed to service the heavy volume of title orders (predominately refinance transactions) that continued through the end of 1993 into the first quarter of 1994 and, to a lesser extent, acquisition activity. This increase was partially offset by the effects of personnel reductions that commenced during the beginning of the second quarter 1994, and continued throughout the rest of 1994 in response to significantly reduced order counts; although, due to the costs associated with terminations, expense declines lagged behind personnel reductions. Real estate information personnel expenses increased 60.1% in 1995 over 1994. This increase was primarily due to $20.0 million of personnel costs associated with acquisitions, and to a lesser extent, in-house development of a new electronic communications delivery system for information based products. This was offset in part by personnel reductions associated with the decline in new tax service contracts which began in the last half of 1994 and continued into the first half of 1995. Personnel expenses increased 34.9% in 1994 over 1993. This increase was primarily due to personnel costs incurred servicing the heavy volume of business during the first half of 1994, costs associated with developing new and enhancing existing computer software to better service customer needs and $2.9 million of costs attributable to company acquisitions. This increase was partially offset by a 13.8% reduction in personnel in the last half of 1994, although, due to personnel separation costs, expense declines lagged behind personnel reductions. Home warranty personnel expenses increased 9.0% in 1995 over 1994 and 16.5% in 1994 over 1993. The increases were primarily due to the additional personnel required to service the increased business volume in the states the segment currently services, as well as new geographic expansion and modest salary increases. These increases were offset in part by ongoing efforts of management to maximize personnel efficiencies. In December 1990, the Financial Accounting Standards Board (FASB) issued Statement No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." This standard became effective in 1993 and requires the Company to accrue the cost of providing postretirement health care and life insurance benefits over the service lives of employees. Compliance with this standard did not materially affect the Company's results of operations or financial condition. In November 1992, the FASB issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." This standard became effective in 1994 and requires employers to accrue an obligation if the benefits are attributable to service already rendered, the benefits accumulate or vest, payment is probable, and the amounts can be reasonably estimated. Compliance with the standard did not materially affect the Company's results of operations or financial condition. PREMIUMS RETAINED BY AGENTS--A summary of agent retention and agent revenues is as follows:
1995 1994 1993 -------- -------- -------- (IN THOUSANDS, EXCEPT PERCENT) Agent Retention................................ $413,444 $533,598 $504,375 ======== ======== ======== Agent Revenues................................. $517,173 $659,015 $618,353 ======== ======== ======== % Retained by Agents........................... 80% 81% 82% ======== ======== ========
The premium split between underwriter and agents is in accordance with their respective agency contracts and can vary from region to region due to divergencies in real estate closing practices as well as rating structures. The decrease in the percentage amount of title premiums retained by agents was the direct result of changes in the geographic mix of agency revenues. 17 OTHER OPERATING EXPENSES--A summary by segment of the Company's other operating expenses is as follows:
1995 % 1994 % 1993 % -------- --- -------- --- -------- --- (IN THOUSANDS, EXCEPT PERCENT) Title Insurance.......................... $188,024 72 $184,723 79 $183,213 82 Real Estate Information.................. 61,167 23 37,479 16 29,556 13 Home Warranty............................ 1,843 1 1,901 1 1,299 1 Trust and Banking........................ 5,650 2 4,829 2 4,140 2 Corporate................................ 3,927 2 3,600 2 4,726 2 -------- --- -------- --- -------- --- $260,611 100 $232,532 100 $222,934 100 ======== === ======== === ======== ===
Title insurance other operating expenses remained relatively constant for the last three years. The modest percentage changes noted are due in part to marginal price level increases by vendors and acquisition activity, partially offset by successful cost-containment programs. Other operating expenses were also impacted by changes in incremental costs (i.e., office supplies, document reproduction, messenger services, plant maintenance and title search costs) associated with the relative changes in open order counts. Real estate information other operating expenses increased 63.2% in 1995 over 1994 and 26.8% in 1994 over 1993. The increase in 1995 was primarily attributable to $28.8 million relating to acquisitions, offset in part by cost-containment programs in light of a reduction in new tax service contracts in 1995. The increase in 1994 was attributable to the incremental costs incurred servicing the heavy volume of business during the first half of 1994, costs associated with developing and enhancing computer software, costs incurred in assimilating and expanding the mortgage credit reporting operations, and $2.0 million of other operating expenses attributable to acquisitions. PROVISION FOR TITLE LOSSES AND OTHER CLAIMS--A summary by segment of the Company's provision for title losses and other claims is as follows:
1995 % 1994 % 1993 % ------- --- -------- --- -------- --- (IN THOUSANDS, EXCEPT PERCENT) Title Insurance........................... $68,338 76 $ 93,012 84 $111,038 89 Real Estate Information................... 3,166 3 2,129 2 2,683 2 Home Warranty............................. 18,857 21 15,022 14 11,762 9 Trust and Banking......................... 26 67 105 ------- --- -------- --- -------- --- $90,387 100 $110,230 100 $125,588 100 ======= === ======== === ======== ===
The provision for title insurance losses expressed as a percentage of title insurance operating revenues was 6.6% in 1995, 7.6% in 1994, and 8.9% in 1993. The decreases were primarily attributable to an ongoing improvement in the Company's claims experience, as well as a reduction in major claims activity. The Company anticipates that the improvement over the past several years will continue in 1996. The provision for home warranty losses as a percentage of home warranty operating revenues was 58.0% in 1995, 53.4% in 1994, and 52.5% in 1993. These increases were primarily attributable to increases in the average number of claims per contract experienced during these periods, resulting from the home warranty operations offering extended coverages on its warranties. DEPRECIATION AND AMORTIZATION--Capital expenditures as well as depreciation and amortization are summarized in Note 14 to the consolidated financial statements. INTEREST--Interest expense remained relatively unchanged in 1995 when compared with 1994 primarily as the result of an average outstanding debt balance and comparable average interest rates. Interest expense increased 41.8% in 1994 over 1993 primarily due to $1.5 million of interest expense attributable to a 18 December 1993 trust deed note, which was paid off in November of 1994, and a higher average interest rate, offset in part by a 3.7% decrease in the average outstanding debt balance. The Company, at its option, has a reduced interest rate option on the variable rate indebtedness portion of the Company's credit facility. This agreement is described in Note 8 to the consolidated financial statements. MINORITY INTERESTS--Minority interests in net income of consolidated subsidiaries decreased 27.6% in 1995 from 1994 and 44.1% in 1994 from 1993. The decrease in 1995 over 1994 was primarily attributable to the Company's purchases of shares from minority shareholders. The decrease in 1994 over 1993 was due to a decline in the profitability of the Company's less than 100% owned subsidiaries, the August 1994 sale of the Company's remaining interest in North American Title Insurance Company and the purchases of shares from minority shareholders. PRETAX PROFITS--A summary by segment of the Company's pretax profits is as follows:
1995 % 1994 % 1993 % -------- --- ------- --- -------- --- (IN THOUSANDS, EXCEPT PERCENT) Title Insurance........................ $ 17,540 37 $37,819 58 $ 97,314 69 Real Estate Information................ 19,690 42 17,371 27 35,046 25 Home Warranty.......................... 6,828 14 6,709 10 5,477 4 Trust and Banking...................... 3,304 7 3,214 5 3,313 2 -------- --- ------- --- -------- --- 47,362 100 65,113 100 141,150 100 -------- === ------- === -------- === Corporate.............................. (19,948) (17,415) (19,542) -------- ------- -------- $ 27,414 $47,698 $121,608 ======== ======= ========
The Company's profit margins and pretax profits vary according to a number of factors, including the volume, composition (residential or commercial) and type (resale, refinancing or new construction) of real estate activity. For example, in title insurance operations, commercial transactions tend to generate higher revenues and greater profit margins than residential transactions. Further, profit margins from refinancing activities are lower than those from resale activities because in many states there are premium discounts on, and cancellation rates are higher for, refinancing transactions. Cancellations of title orders adversely affect pretax profits because costs are incurred and expensed in opening and processing such orders but revenues are not generated. Also, the Company's direct title insurance business has significant fixed costs in addition to its variable costs. Accordingly, profit margins from the Company's direct title insurance business improve as the volume of title orders closed increases. Title insurance profit margins are also affected by the percentage of operating revenues generated by agency operations. Profit margins from direct operations are generally higher than from agency operations due primarily to the large portion of the premium that is retained by the agent. Real estate information pretax profits are generally unaffected by the type of real estate activity but increase as the volume of residential real estate loan transactions increases. Home warranty pretax profits improve as the volume of residential resales increases. In general, the title insurance business is a lower margin business when compared to the Company's other segments. The lower margins reflect the high fixed cost of producing title evidence whereas the corresponding revenues are subject to regulatory and competitive pricing constraints. PREMIUM TAXES--A summary by pertinent segment of the Company's premium taxes is as follows:
1995 % 1994 % 1993 % ------- --- ------- --- ------- --- (IN THOUSANDS, EXCEPT PERCENT) Title Insurance............................. $13,016 96 $14,873 96 $17,119 97 Home Warranty............................... 611 4 580 4 498 3 ------- --- ------- --- ------- --- $13,627 100 $15,453 100 $17,617 100 ======= === ======= === ======= ===
19 Insurers are generally not subject to state income or franchise taxes. However, in lieu thereof, a "premium" tax is imposed on certain operating revenues, as defined by statute. Tax rates and bases vary from state to state; accordingly, the total premium tax burden is dependent upon the geographical mix of title insurance and home warranty operating revenues. Premium taxes for title insurance decreased 12.5% in 1995 from 1994 and 13.1% in 1994 from 1993. These changes correspond to the relative decreases in title insurance operating revenues. Premium taxes as a percent of title insurance operating revenues remained relatively constant at approximately 1.2%. Premium taxes for home warranty increased 5.3% in 1995 over 1994 and 16.5% in 1994 over 1993. These changes reflect the level of home warranty premiums written during the respective periods. INCOME TAXES--The Company's effective income tax rate, which includes a provision for state income and franchise taxes for non-insurance subsidiaries, was 45.0% for 1995, 41.2% for 1994 and 40.3% for 1993. The increases in effective rate were primarily attributable to the reduction in the deductibility of certain business expenses, as mandated by the Revenue Reconciliation Act of 1993, and increases in state income and franchise taxes which resulted from the Company's non-insurance subsidiaries' contribution to pretax profits. The increase in effective rate for 1994 was partially offset by the utilization of $1.8 million of capital loss carryforwards, for which the Company had previously established a valuation allowance, pursuant to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Information regarding items included in the reconciliation of the effective rate with the federal statutory rate is contained in Note 10 to the consolidated financial statements. In February 1992, the Financial Accounting Standards Board issued Statement No. 109, "Accounting for Income Taxes," which became effective for 1993. This statement prescribes the use of the liability method of accounting for income taxes, whereby deferred tax assets and liabilities are calculated at the balance sheet date using current tax laws and rates in effect. The cumulative effect of this change in accounting principal was recognized in the first quarter of 1993 in the form of a one-time benefit totaling $4.2 million. NET INCOME--Net income and per share information are summarized as follows:
1995 1994 1993 ------- ------- ------- (IN THOUSANDS, EXCEPT PERCENT) Income before cumulative effect of a change in account- ing for income taxes.................................. $ 7,587 $18,945 $62,091 ======= ======= ======= Net income............................................. $ 7,587 $18,945 $66,291 ======= ======= ======= Weighted average shares................................ 11,403 11,447 11,353 ======= ======= ======= Income per share before cumulative effect of a change in accounting for income taxes........................ $ 0.67 $ 1.66 $ 5.47 ======= ======= ======= Net income per share................................... $ 0.67 $ 1.66 $ 5.84 ======= ======= =======
LIQUIDITY AND CAPITAL RESOURCES Cash provided by operating activities amounted to $30.4 million, $53.9 million and $105.7 million for 1995, 1994 and 1993, respectively, after claim payments of $66.6 million, $87.6 million and $77.3 million, respectively. The principal non-operating uses of cash and cash equivalents for the three-year period ended December 31, 1995, were for additions to the investment portfolio, capital expenditures, company acquisitions and the repayment of debt. The most significant nonoperating sources of cash and cash equivalents were from proceeds from the sales and maturities of certain investments, and in 1994, proceeds from the sale of property and equipment and proceeds from the issuance of debt. The net effect of all activities on total cash and cash equivalents was a decrease of $8.3 million in 1995 and increases of $23.9 million and $10.5 million in 1994 and 1993, respectively. Notes and contracts payable as a percentage of total capitalization as of December 31, 1995, was 19.1% as compared with 22.1% as of the prior year end. The decrease was primarily attributable to a $12.4 million net 20 decrease in debt. As part of the Company's strategy to extend the maturity of, and provide a long-term amortization schedule for, its outstanding demand and term indebtedness, the Company entered into a credit agreement with the Chase Manhattan Bank as agent on April 21, 1992. Under the terms of the credit agreement, the company borrowed $65.0 million on April 27, 1992, and used the proceeds thereof to retire approximately $63 million of demand and near-term indebtedness. During 1994, the Company amended the credit agreement to borrow an additional $20.0 million of variable rate indebtedness to pay off an existing higher rate trust deed note. In addition, the amendment provided for a $30.0 million revolving line of credit which remained unused as of December 31, 1995. This credit agreement is more fully described in Note 8 to the consolidated financial statements. Pursuant to various insurance and other regulations, the maximum amount of dividends, loans and advances available to the Company in 1996 from its principle subsidiary, First American Title Insurance Company, is $44.6 million. Such restrictions have not had, nor are they expected to have, an impact on the Company's ability to meet its cash obligations. Due to the Company's significant liquid asset position and its consistent ability to generate cash flows from operations, management believes that its resources are sufficient to satisfy its anticipated cash requirements. The Company's strong financial position will enable management to react to future opportunities for acquisitions or other investments in support of the Company's continued growth and expansion. 21 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Separate financial statements for subsidiaries not consolidated and 50% or less owned persons accounted for by the equity method have been omitted because, if considered in the aggregate, they would not constitute a significant subsidiary.
PAGE INDEX NO. ----- ---- Report of Independent Accountants.......................................... 23 Financial Statements: Consolidated Balance Sheets............................................... 24 Consolidated Statements of Income......................................... 26 Consolidated Statements of Stockholders' Equity........................... 27 Consolidated Statements of Cash Flows..................................... 28 Notes to Consolidated Financial Statements................................ 29 Unaudited Quarterly Financial Data......................................... 44 Financial Statement Schedules: I.Summary of Investments--Other than Investments in Related Parties....... 45 II.Condensed Financial Information of Registrant.......................... 46 III.Supplementary Insurance Information................................... 50 IV.Reinsurance............................................................ 52 V.Valuation and Qualifying Accounts....................................... 53
Financial statement schedules not listed above are either omitted because they are not applicable or the required information is shown in the consolidated financial statements or in the notes thereto. 22 REPORT OF INDEPENDENT ACCOUNTANTS ON THE CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES In our opinion, the consolidated financial statements and financial statement schedules listed in the index on page 22 present fairly, in all material respects, the financial position of The First American Financial Corporation and its subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three fiscal years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. These financial statements and financial statement schedules are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 10 to the consolidated financial statements, the Company changed its method of accounting for income taxes in fiscal year 1993. PRICE WATERHOUSE LLP Costa Mesa, California February 28, 1996 23 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31 -------------------------- 1995 1994 ------------ ------------ Cash and Cash Equivalents.......................... $145,902,000 $154,234,000 ------------ ------------ Accounts and Accrued Income Receivable, less allowances ($5,970,000 and $4,022,000)....... 75,069,000 47,103,000 ------------ ------------ Income Tax Receivable.............................. 7,324,000 ------------ Investments: Deposits with savings and loan associations and banks........................................... 18,637,000 18,538,000 Debt securities.................................. 128,875,000 149,190,000 Equity securities................................ 21,445,000 21,813,000 Other long-term investments...................... 25,230,000 25,224,000 ------------ ------------ 194,187,000 214,765,000 ------------ ------------ Loans Receivable................................... 46,134,000 40,546,000 ------------ ------------ Property and Equipment, at cost: Land............................................. 15,031,000 14,599,000 Buildings........................................ 73,580,000 70,073,000 Furniture and equipment.......................... 103,885,000 90,542,000 Less--accumulated depreciation................... (73,672,000) (64,659,000) ------------ ------------ 118,824,000 110,555,000 ------------ ------------ Title Plants and Other Indexes..................... 82,454,000 54,781,000 ------------ ------------ Assets Acquired in Connection with Claim Settlements....................................... 25,592,000 27,223,000 ------------ ------------ Deferred Income Taxes.............................. 39,994,000 43,726,000 ------------ ------------ Goodwill and Other Intangibles, less accumulated amortization ($9,227,000 and $7,464,000).......... 71,825,000 61,322,000 ------------ ------------ Deferred Policy Acquisition Costs.................. 24,342,000 26,060,000 ------------ ------------ Other Assets....................................... 49,455,000 41,010,000 ------------ ------------ $873,778,000 $828,649,000 ============ ============
See Notes to Consolidated Financial Statements 24 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS LIABILITIES AND STOCKHOLDERS' EQUITY
DECEMBER 31 ------------------------- 1995 1994 ------------ ------------ Demand Deposits..................................... $ 43,418,000 $ 38,695,000 ------------ ------------ Accounts Payable and Accrued Liabilities: Accounts payable.................................. 6,289,000 5,329,000 Salaries and wages................................ 20,872,000 18,935,000 Other............................................. 53,777,000 36,542,000 ------------ ------------ 80,938,000 60,806,000 ------------ ------------ Deferred Revenue.................................... 104,315,000 117,828,000 ------------ ------------ Reserve for Known and Incurred But Not Reported Claims............................................. 238,161,000 206,743,000 ------------ ------------ Income Tax Payable.................................. 2,812,000 ------------ Notes and Contracts Payable......................... 77,206,000 89,600,000 ------------ ------------ Minority Interests in Consolidated Subsidiaries..... 24,161,000 22,867,000 ------------ ------------ Commitments and Contingencies (Notes 12 and 13) Stockholders' Equity: Preferred stock, $1 par value Authorized--500,000 shares Outstanding--None Common stock, $1 par value Authorized--24,000,000 shares Outstanding--11,411,000 and 11,395,000 shares.... 11,411,000 11,395,000 Additional paid-in capital........................ 44,270,000 44,013,000 Retained earnings................................. 243,093,000 242,356,000 Net unrealized gain (loss) on securities.......... 3,993,000 (5,654,000) ------------ ------------ Total Stockholders' Equity.......................... 302,767,000 292,110,000 ------------ ------------ $873,778,000 $828,649,000 ============ ============
See Notes to Consolidated Financial Statements 25 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 -------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- REVENUES Operating revenues.............. $1,227,185,000 $1,356,946,000 $1,379,781,000 Investment and other income..... 23,031,000 19,447,000 18,645,000 -------------- -------------- -------------- 1,250,216,000 1,376,393,000 1,398,426,000 -------------- -------------- -------------- EXPENSES Salaries and other personnel costs.......................... 431,984,000 423,328,000 397,902,000 Premiums retained by agents..... 413,444,000 533,598,000 504,375,000 Other operating expenses........ 260,611,000 232,532,000 222,934,000 Provision for title losses and other claims................... 90,387,000 110,230,000 125,588,000 Depreciation and amortization... 18,002,000 19,796,000 16,333,000 Interest........................ 6,242,000 6,267,000 4,419,000 Minority interests.............. 2,132,000 2,944,000 5,267,000 -------------- -------------- -------------- 1,222,802,000 1,328,695,000 1,276,818,000 -------------- -------------- -------------- Income before premium and income taxes............................ 27,414,000 47,698,000 121,608,000 Premium taxes..................... 13,627,000 15,453,000 17,617,000 -------------- -------------- -------------- Income before income taxes........ 13,787,000 32,245,000 103,991,000 Income taxes...................... 6,200,000 13,300,000 41,900,000 -------------- -------------- -------------- Income before cumulative effect of a change in accounting for income taxes............................ 7,587,000 18,945,000 62,091,000 Cumulative effect of a change in accounting for income taxes...... 4,200,000 -------------- -------------- -------------- Net income........................ $ 7,587,000 $ 18,945,000 $ 66,291,000 ============== ============== ============== Per share data--based upon the weighted average number of common shares outstanding Income before cumulative effect of a change in accounting for income taxes............................ $ 0.67 $ 1.66 $ 5.47 Cumulative effect of a change in accounting for income taxes...... 0.37 -------------- -------------- -------------- Net income........................ $ 0.67 $ 1.66 $ 5.84 ============== ============== ==============
See Notes to Consolidated Financial Statements 26 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
NET ADDITIONAL LONG-TERM UNREALIZED COMMON PAID-IN RETAINED DEBT OF GAIN (LOSS) SHARES STOCK CAPITAL EARNINGS ESOT ON SECURITIES ---------- ----------- ----------- ------------ ----------- ------------- BALANCE AT DECEMBER 31, 1992................... 11,260,000 $11,260,000 $39,662,000 $169,829,000 $(5,196,000) $ 1,287,000 Net income for 1993..... 66,291,000 Cash dividends on common shares................. (5,840,000) Shares issued in connection with company acquisitions........... 141,000 141,000 3,897,000 Shares issued in connection with stock bonus plan............. 46,000 46,000 1,154,000 Purchase of Company shares................. (66,000) (66,000) (1,572,000) Decrease in ESOT debt... 2,599,000 Net unrealized gain on securities............. 226,000 ---------- ----------- ----------- ------------ ----------- ----------- BALANCE AT DECEMBER 31, 1993................... 11,381,000 11,381,000 43,141,000 230,280,000 (2,597,000) 1,513,000 Net income for 1994..... 18,945,000 Cash dividends on common shares................. (6,869,000) Shares issued in conneciton with company acquisitions........... 85,000 85,000 2,596,000 Shares issued in connection with stock bonus plan............. 55,000 55,000 1,855,000 Purchase of Company shares................. (126,000) (126,000) (3,579,000) Decrease in ESOT debt... 2,597,000 Net unrealized loss on securities............. (7,167,000) ---------- ----------- ----------- ------------ ----------- ----------- BALANCE AT DECEMBER 31, 1994................... 11,395,000 11,395,000 44,013,000 242,356,000 (5,654,000) Net income for 1995..... 7,587,000 Cash dividends on common shares................. (6,850,000) Shares issued in conneciton with company acquisitions........... 105,000 105,000 2,607,000 Shares issued in connection with stock bonus plan............. 65,000 65,000 1,088,000 Purchase of Company shares................. (154,000) (154,000) (3,438,000) Net unrealized loss on securities............. 9,647,000 ---------- ----------- ----------- ------------ ----------- ----------- BALANCE AT DECEMBER 31, 1995................... 11,411,000 $11,411,000 $44,270,000 $243,093,000 $ 3,993,000 ========== =========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements 27 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ----------------------------------------- 1995 1994 1993 ------------ ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income......................... $ 7,587,000 $ 18,945,000 $ 66,291,000 Adjustments to reconcile net income to cash provided by operating activities-- Cumulative effect of a change in accounting for income taxes..... (4,200,000) Provision for title losses and other claims.................... 90,387,000 110,230,000 125,588,000 Depreciation and amortization.... 18,002,000 19,796,000 16,333,000 Minority interests in net income. 2,132,000 2,944,000 5,267,000 Other, net....................... 207,000 1,673,000 (1,639,000) Changes in assets and liabilities excluding effects of company acquisitions and noncash transactions-- Claims paid, including assets acquired, net of recoveries..... (66,639,000) (87,579,000) (77,305,000) Net change in income tax accounts........................ 10,777,000 (19,159,000) (32,956,000) (Increase) decrease in accounts and accrued income receivable... (22,943,000) 17,809,000 (15,954,000) Increase (decrease) in accounts payable and accrued liabilities. 11,057,000 (5,140,000) 5,450,000 (Decrease) increase in deferred revenue......................... (13,588,000) 8,544,000 23,341,000 Other, net....................... (6,542,000) (14,148,000) (4,488,000) ------------ ------------ ------------- CASH PROVIDED BY OPERATING ACTIVITIES........................ 30,437,000 53,915,000 105,728,000 ------------ ------------ ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net cash effect of company acquisitions...................... (30,921,000) (9,075,000) (3,803,000) Net decrease in deposits with banks............................. 901,000 2,864,000 1,822,000 Purchases of debt and equity securities........................ (19,513,000) (94,826,000) (105,147,000) Proceeds from sales of debt and equity securities................. 41,066,000 40,755,000 33,799,000 Proceeds from maturities of debt securities........................ 19,278,000 57,122,000 30,411,000 Net decrease (increase) in other long-term investments............. 2,761,000 (1,643,000) (503,000) Net increase in loans receivable... (5,588,000) (7,226,000) (2,501,000) Capital expenditures............... (21,731,000) (34,562,000) (36,161,000) Net proceeds from sale of property and equipment..................... 757,000 32,367,000 3,885,000 ------------ ------------ ------------- CASH USED FOR INVESTING ACTIVITIES. (12,990,000) (14,224,000) (78,198,000) ------------ ------------ ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Net change in demand deposits...... 4,723,000 6,185,000 3,217,000 Proceeds from insurance of debt.... 20,000,000 Repayment of debt.................. (20,060,000) (31,366,000) (12,769,000) Purchase of Company shares......... (3,592,000) (3,705,000) (1,638,000) Cash dividends..................... (6,850,000) (6,869,000) (5,840,000) ------------ ------------ ------------- CASH USED FOR FINANCING ACTIVITIES. (25,779,000) (15,755,000) (17,030,000) ------------ ------------ ------------- Net (decrease) increase in cash and cash equivalents................... (8,332,000) 23,936,000 10,500,000 Cash and cash equivalents--Beginning of year............................ 154,234,000 130,298,000 119,798,000 ------------ ------------ ------------- CASH AND CASH EQUIVALENTS--END OF YEAR.............................. $145,902,000 $154,234,000 $ 130,298,000 ============ ============ ============= SUPPLEMENTAL INFORMATION: Cash paid during the year for: Interest.......................... $ 6,108,000 $ 6,153,000 $ 5,098,000 Premium taxes..................... $ 14,048,000 $ 18,478,000 $ 16,237,000 Income taxes...................... $ 6,580,000 $ 36,374,000 $ 73,549,000 Noncash investing and financing activities: Shares issued for stock bonus plan............................. $ 1,153,000 $ 1,910,000 $ 1,200,000 Company acquisitions in exchange for common stock................. $ 2,712,000 $ 2,681,000 $ 4,038,000 Net unrealized gain (loss) on securities....................... $ 9,647,000 $ (7,167,000) $ 226,000 Liabilities in connection with company acquisitions............. $ 20,345,000 $ 12,956,000 $ 20,011,000 Increase in equity due to reduction of long-term debt of ESOT............................. $ 2,597,000 $ 2,599,000 Debt incurred in connection with purchase of real property........ $ 3,750,000 Debt incurred in connection with the purchase of other investments...................... $ 4,870,000
See Notes to Consolidated Financial Statements 28 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include the accounts of The First American Financial Corporation and all majority-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. Certain 1993 and 1994 amounts have been reclassified to conform with the 1995 presentation. Cash equivalents The Company considers cash equivalents to be all short-term investments which have an initial maturity of 90 days or less and are not restricted for statutory deposit or premium reserve requirements. The carrying amount for cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments. Investments Deposits with savings and loan associations and banks are short-term investments with initial maturities of more than 90 days. The carrying amount of these investments is a reasonable estimate of fair value due to their short-term nature. Debt securities are carried at fair value and consist primarily of investments in obligations of the United States Treasury, various corporations and certain state and political subdivisions. Equity securities are carried at fair value and consist primarily of investments in marketable common and preferred stocks of corporate entities in which the Company's ownership does not exceed 20%. Other long-term investments consist primarily of investments in affiliates, which are accounted for under the equity method of accounting, and notes receivable, which are carried at the lower of cost or estimated realizable value. Realized gains and losses on investments are determined using the specific identification method. Unrealized gains or losses on debt and equity securities are included, net of related tax effects, as a separate component of stockholders' equity. Property and equipment Depreciation on buildings and furniture and equipment is computed using the declining balance and straight-line methods over estimated useful lives of 25 to 45 and 3 to 10 years, respectively. Title plants and other indexes Title plants and other indexes are carried at original cost. Appraised values are used in conjunction with the acquisition of purchased subsidiaries. The cost of daily maintenance (updating) of these plants and other indexes are charged to expense as incurred. Because properly maintained title plants and other indexes have indefinite lives and do not diminish in value with the passage of time, no provision has been made for depreciation. Assets acquired in connection with claim settlements In connection with settlement of title insurance and other claims, the Company sometimes purchases mortgages, deeds of trust, real property, or judgment liens. These assets, sometimes referred to as "salvage assets," are carried at the lower of cost or estimated realizable value, net of any indebtedness thereon. Judgment liens primarily represent funds expended by the Company to purchase judgments to satisfy title claims. 29 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Goodwill and other intangibles Goodwill recognized in business combinations is amortized over its estimated useful life ranging from 30 to 40 years. Other intangibles, which include customer lists, covenants not to compete and organization costs, are amortized over their estimated useful lives, ranging from 3 to 20 years. Deferred policy acquisition costs Deferred policy acquisition costs are directly related to the procurement of home warranty and tax service contracts. These costs are deferred and amortized to expense in the same pattern as contract fees are recognized as revenues. Reserve for known and incurred but not reported claims The Company provides for title insurance losses based upon its historical experience by a charge to expense when the related premium revenue is recognized. Historically, major claims (i.e., claims greater than $0.5 million) were charged to expense as they became known because the unique circumstances surrounding most major claims made it inherently impractical to predict the incidence and amount of such claims. In the fourth quarter 1995, the Company determined, with the assistance of an actuarial study, that sufficient major claims data now exists to reasonably estimate a reserve for incurred but not reported claims. Accordingly, the reserve for incurred but not reported claims at December 31, 1995, includes major claims. The inclusion of major claims did not have a material effect on the Company's financial condition or results of operations. Title insurance losses and other claims associated with ceded reinsurance are provided for as the company remains contingently liable in the event that the reinsurer does not satisfy its obligations. The reserve for known and incurred but not reported claims reflects management's best estimate of the total costs required to settle all claims reported to the Company and claims incurred but not reported. The process applied to estimate claims costs is subject to many variables, including changes and trends in the type of title insurance policies issued, the real estate market and the interest rate environment. It is reasonably possible that a change in the estimate will occur in the future. The Company provides for claim losses relating to its home warranty business based on the average cost per claim as applied to the total of new claims incurred. The average cost per claim is calculated using the average of the most recent twelve months of claims experience. Operating revenues Title premiums on policies issued directly by the Company are recognized on the effective date of the title policy and escrow fees are recorded upon close of the escrow. Revenues from title policies issued by independent agents are recorded when notice of issuance is received from the agent. Revenues from tax service contracts are recognized proportionately over the estimated duration of the contracts as the related servicing costs are estimated to occur. The majority of the servicing costs, approximately 70%, is incurred in the year the contract is executed, with the remaining 30% incurred over the remaining service life of the contract. Revenues from home warranty contracts are recognized ratably over the 12- month duration of the contracts. Interest on loans with the Company's thrift subsidiary is recognized on the outstanding principal balance on the accrual basis. Loan origination fees and related direct loan origination costs are deferred and recognized over the life of the loan. 30 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Premium taxes Title insurance and home warranty companies, like other types of insurers, are generally not subject to state income or franchise taxes. However, in lieu thereof, most states impose a tax based primarily on insurance premiums written. This premium tax is reported as a separate line item in the consolidated statements of income in order to provide a more meaningful disclosure of the taxation of the Company. Income taxes Taxes are based on income for financial reporting purposes and include deferred taxes applicable to temporary differences between the financial statement carrying amount and the tax basis of certain of the Company's assets and liabilities. Use of Estimates Certain amounts and disclosures included in the consolidated financial statements require management to make estimates which could differ from actual results. Fiduciary assets and liabilities Assets and liabilities of the trusts and escrows administered by the Company are not included in the consolidated balance sheets. NOTE 2. STATUTORY RESTRICTIONS ON STOCKHOLDERS' EQUITY AND INVESTMENTS: Pursuant to insurance and other regulations of the various states in which the Company's title insurance subsidiary, First American Title Insurance Company (FATICO), operates, the amount of dividends, loans and advances available to the parent company from FATICO is limited, principally for the protection of policyholders. Under such statutory regulations, the maximum amount of dividends, loans and advances available to the parent company from FATICO in 1996 is $44.6 million. Investments carried at $12.8 million were on deposit with state treasurers in accordance with statutory requirements for the protection of policyholders at December 31, 1995. FATICO maintained statutory capital and surplus of $205.6 million and $212.5 million at December 31, 1995 and 1994, respectively. Statutory net income for the years ended December 31, 1995, 1994 and 1993 was $11.4 million, $15.5 million and $83.0 million respectively. FATICO, domiciled in the state of California, prepares its statutory financial statements in accordance with prescribed accounting practices which include a variety of publications of the National Association of Insurance Commissioners, state laws, regulations and general administrative rules. Permitted statutory accounting practices encompass all accounting practices not so prescribed. NOTE 3. DEBT AND EQUITY SECURITIES: Effective January 1, 1994, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires that all debt and equity securities, other than those that the Company has the ability and intent to hold to maturity, be carried at fair value. The Company has classified its securities portfolio as available-for-sale and, in accordance with SFAS No. 115, has included fair value adjustments as a separate component of stockholders' equity, net of tax. Prior to January 1, 1994, the Company reported only its equity securities at fair value with adjustments included, net of tax, as a separate component of stockholders' equity. 31 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The amortized cost and estimated fair value of investments in debt securities are as follows:
GROSS UNREALIZED ESTIMATED AMORTIZED -------------- FAIR COSTS GAINS LOSSES VALUE --------- ------ ------- --------- (IN THOUSANDS) DECEMBER 31, 1995 U.S. Treasury securities................... $ 42,325 $1,189 $ (68) $ 43,446 Corporate securities....................... 36,927 1,041 (72) 37,896 Obligations of states and political subdivisions.............................. 39,644 291 (228) 39,707 Mortgage-backed securities................. 7,861 66 (101) 7,826 -------- ------ ------- -------- $126,757 $2,587 $ (469) $128,875 ======== ====== ======= ======== DECEMBER 31, 1994 U.S. Treasury securities................... $ 51,586 $ 179 $(1,949) $ 49,816 Corporate securities....................... 36,773 20 (2,752) 34,041 Obligations of states and political subdivisions.............................. 57,203 426 (2,932) 54,697 Mortgage-backed securities................. 11,722 32 (1,118) 10,636 -------- ------ ------- -------- $157,284 $ 657 $(8,751) $149,190 ======== ====== ======= ========
The amortized cost and estimated fair value of debt securities at December 31, 1995, by contractual maturities, are as follows:
ESTIMATED AMORTIZED FAIR COST VALUE --------- --------- (IN THOUSANDS) Due in one year or less.................................. $ 22,315 $ 22,379 Due after one year through five years.................... 53,670 54,543 Due after five years through ten years................... 36,107 37,610 Due after ten years...................................... 6,804 6,517 -------- -------- 118,896 121,049 Mortgage-backed securities............................... 7,861 7,826 -------- -------- $126,757 $128,876 ======== ========
32 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The cost and estimated fair value of investments in equity securities are as follows:
GROSS UNREALIZED -------------- ESTIMATED COST GAINS LOSSES FAIR VALUE ------- ------ ------- ---------- (IN THOUSANDS) DECEMBER 31, 1995 Common stocks: Public utilities........................... $12,971 $2,510 $ (441) $15,040 Other...................................... 3,393 1,941 (27) 5,307 ------- ------ ------- ------- 16,364 4,451 (468) 20,347 Preferred stocks............................. 1,057 41 1,098 ------- ------ ------- ------- $17,421 $4,492 $ (468) $21,445 ======= ====== ======= ======= DECEMBER 31, 1994 Common stocks: Public utilities........................... $16,280 $ 842 $(2,006) $15,116 Other...................................... 5,976 938 (384) 6,530 ------- ------ ------- ------- 22,256 1,780 (2,390) 21,646 Preferred stocks............................. 162 5 167 ------- ------ ------- ------- $22,418 $1,785 $(2,390) $21,813 ======= ====== ======= =======
Sales of debt and equity securities resulted in realized gains of $1,316,000, $108,000 and $332,000 and realized losses of $358,000, $457,000 and $38,000 for the years ended December 31, 1995, 1994 and 1993, respectively. The fair value of debt and equity securities was estimated using quoted market prices. NOTE 4. LOANS RECEIVABLE: Loans receivable are summarized as follows:
DECEMBER 31 ----------------- 1995 1994 -------- ------- (IN THOUSANDS) Real estate-mortgage...................................... $ 48,899 $43,035 Assigned lease payments................................... 135 223 Other..................................................... 62 126 -------- ------- 49,096 43,384 Unearned income on lease contracts........................ (41) (63) Allowance for loan losses................................. (1,344) (950) Participations sold....................................... (872) (1,017) Deferred loan fees, net................................... (705) (808) -------- ------- (2,962) (2,838) -------- ------- $ 46,134 $40,546 ======== =======
33 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Real estate loans are secured by properties located in Southern California. The average yields on the Company's loan portfolio for the years ended December 31, 1995 and 1994, were 12% and 11%, respectively. Average yields are affected by amortization of discounts on loans purchased from other institutions, prepayment penalties recorded as income, loan fees amortized to income, and the market interest rates charged by thrift and loan institutions. The fair value of loans receivable was $47.2 million and $41.7 million at December 31, 1995 and 1994, respectively, and was estimated based on the discounted value of the future cash flows using the current rates being offered for loans with similar terms to borrowers of similar credit quality. The allowance for loan losses is maintained at a level that is considered appropriate by management to provide for known and inherent risks in the portfolio. In May 1993, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 became effective in the current year. This standard requires that an impaired loan be measured at the present value of expected future cash flows discounted at the loan's effective interest rate. As a practical expedient, the loan may be valued based on its observable market price or the fair value of the collateral, if the loan is collateral dependent. Adoption of this standard did not have a materially adverse effect on the Company's financial condition or results of operations. NOTE 5. ASSETS ACQUIRED IN CONNECTION WITH CLAIM SETTLEMENTS:
DECEMBER 31 --------------- 1995 1994 ------- ------- (IN THOUSANDS) Notes receivable............................................. $12,335 $10,313 Real estate.................................................. 5,796 7,240 Judgements and other......................................... 7,461 9,670 ------- ------- $25,592 $27,223 ======= =======
The above amounts are net of valuation reserves of $11.2 million and $12.4 million at December 31, 1995 and 1994, respectively. The fair value of notes receivable was $12.0 million and $9.7 million at December 31, 1995 and 1994, respectively, and was estimated based on the discounted value of the future cash flows using the current rates at which similar loans would be made to borrowers of similar credit quality. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement will become effective for the Company's 1996 fiscal year and requires companies to assess for potential impairments of long-lived assets and certain identifiable intangibles when there is evidence that events or changes in circumstances have made recovery of an asset's carrying value unlikely. The Company believes that adoption of this standard will not have a materially adverse effect on its financial condition or results of operations. 34 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The activity in the valuation reserve is summarized as follows:
DECEMBER 31 ---------------- 1995 1994 ------- ------- (IN THOUSANDS) Balance at beginning of year............................... $12,354 $11,581 Provision for losses....................................... 3,019 3,674 Dispositions............................................... (4,127) (2,901) ------- ------- Balance at end of year..................................... $11,246 $12,354 ======= =======
NOTE 6. DEMAND DEPOSITS: Passbook and investment certificate accounts are summarized as follows:
DECEMBER 31 --------------- 1995 1994 ------- ------- (IN THOUSANDS) Passbook.................................................... $12,053 $11,107 Certificate accounts: Less than one year......................................... 17,690 18,762 One to five years.......................................... 13,675 8,826 ------- ------- $43,418 $38,695 ======= ======= Annualized interest rates: Passbook................................................... 5%-6% 4%-5% Certificate accounts....................................... 5%-8% 4%-9%
The fair value of investment certificate accounts was $31.6 million and $25.6 million at December 31, 1995 and 1994, respectively, and was estimated based on the discounted value of the future cash flows using a discount rate approximating current market for similar liabilities. The carrying value of the passbook account approximates fair value due to the short-term nature of this liability. NOTE 7. RESERVE FOR KNOWN AND INCURRED BUT NOT REPORTED CLAIMS: Activity in the reserve for known and incurred but not reported claims is summarized as follows:
DECEMBER 31 --------------------------- 1995 1994 1993 -------- -------- -------- (IN THOUSANDS) Balance at beginning of year....................... $206,743 $180,333 $135,212 -------- -------- -------- Provision related to: Current year..................................... 82,632 98,900 112,652 Prior years...................................... 7,755 11,330 12,936 -------- -------- -------- Total provision.................................... 90,387 110,230 125,588 -------- -------- -------- Payments related to: Current year..................................... 25,039 23,314 18,552 Prior year....................................... 40,934 56,832 56,664 -------- -------- -------- Total payments..................................... 65,973 80,146 75,216 -------- -------- -------- Other.............................................. 7,004 (3,674) (5,251) -------- -------- -------- Balance at end of year............................. $238,161 $206,743 $180,333 ======== ======== ========
35 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) "Other" primarily represents reclassifications to the reserve for assets acquired in connection with claim settlements. Included in "Other" for 1995 is $10.0 million in purchase accounting adjustments. Claims activity associated with reinsurance is not material and, therefore, not presented separately. NOTE 8. NOTES AND CONTRACTS PAYABLE:
DECEMBER 31 --------------- 1995 1994 ------- ------- (IN THOUSANDS) Secured notes payable pursuant to amended credit agreement..... $49,250 $61,000 Trust deed notes with maturities through 2017, secured by land and buildings with a net book value of $13,266, average rate of 8 1/2%..................................................... 9,386 10,783 Other notes and contracts payable with maturities through 2004, average rate of 7 1/2%........................................ 18,570 17,817 ------- ------- $77,206 $89,600 ======= =======
At December 31, 1995, the Company's borrowings under its bank credit agreement consisted of $7.6 million of fixed rate indebtedness ($8.4 million at December 31, 1994), maturing in April 1999 and bearing interest at 9.38% per annum; and $41.6 million of variable rate indebtedness ($52.6 million at December 31, 1994), maturing in October 2000 and bearing interest at the higher of Chase Manhattan Bank's prime lending rate or the federal funds rate plus 1/2%. The Company may, at its election, use a reduced interest rate option of LIBOR plus 1 1/4% for the majority of the variable rate indebtedness. During November 1994, the Company amended the credit agreement to borrow an additional $20.0 million of variable rate indebtedness to pay off an existing higher rate trust deed note. In addition, the amendment provided for a $30.0 million revolving line of credit which was unused as of December 31, 1995. In February 1996, the Company further amended the credit agreement to provide for more favorable pricing for its LIBOR option. The applicable margins range from .50% to 1.00% depending on claims paying or financial strength ratings or the Company's adjusted leverage ratio. The amendment also provides for the elimination and/or relaxation of certain restrictive covenants. The terms of the amended credit agreement provide for quarterly amortization of all credit agreement indebtedness. The minimum quarterly payment is $1.7 million and the maximum quarterly payment is $3.0 million. The Company has the right to prepay the variable rate indebtedness but may prepay the fixed rate indebtedness only with the consent of the holder thereof. In addition, pursuant to the terms of the credit agreement, the Company must satisfy a number of financial convenants and has agreed to be bound by certain restrictive covenants. These covenants include, among others, limitations on the incurrence of additional indebtedness and/or liens, as well as restrictions on defined investments, acquisitions, dispositions, payments of dividends and capital expenditures. Further, the Company is required to maintain minimum levels of capital and earnings and meet predetermined debt to equity ratios and fixed charge coverage ratios. As security for its obligations to the lenders under the credit agreement, the Company has pledged the capital stock of its direct wholly owned operating subsidiaries, First American Title Insurance Company, First American Trust Company and First American Real Estate Information Services, Inc., which, in the aggregate, represent substantially all of its assets. 36 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 1995, are as follows (in thousands): 1996.............................................................. $19,504 1997.............................................................. $16,852 1998.............................................................. $14,342 1999.............................................................. $12,375 2000.............................................................. $ 8,358
The fair value of notes and contracts payable was $77.7 million and $86.0 million at December 31, 1995 and 1994, respectively, and was estimated based on the current rates offered to the Company for debt of the same remaining maturities. The weighted average interest rate for the Company's notes and contracts payable was 7 1/2% and 8% at December 31, 1995 and 1994, respectively. NOTE 9. INVESTMENT AND OTHER INCOME: The components of investment and other income are as follows:
DECEMBER 31 ------------------------ 1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Interest: Cash equivalents and deposits with savings and loan associations and banks............................. $ 3,308 $ 2,695 $ 2,627 Debt securities..................................... 9,270 9,424 8,157 Other long-term investments......................... 2,401 1,785 1,390 ------- ------- ------- 14,979 13,904 12,174 Dividends on equity securities........................ 1,088 925 521 Equity in earnings of unconsolidated affiliates....... 748 199 1,557 Net gain (loss) on sales of debt and equity securities........................................... 958 (349) 294 Other................................................. 5,258 4,768 4,099 ------- ------- ------- $23,031 $19,447 $18,645 ======= ======= =======
NOTE 10. INCOME TAXES: Income taxes are summarized as follows:
DECEMBER 31 ------------------------ 1995 1994 1993 ------ ------- -------- (IN THOUSANDS) Current: Federal....................................... $3,442 $13,033 $ 51,522 State......................................... 1,810 2,271 8,250 ------ ------- -------- 5,252 15,304 59,772 ------ ------- -------- Deferred: Federal....................................... 70 (684) (17,288) State......................................... 878 (1,320) (584) ------ ------- -------- 948 (2,004) (17,872) ------ ------- -------- $6,200 $13,300 $ 41,900 ====== ======= ========
37 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Income taxes differ from the amounts computed by applying the Federal income tax rate of 35%. A reconciliation of this difference is as follows:
DECEMBER 31 ------------------------- 1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Taxes calculated at federal rate.............. $ 4,825 $11,286 $36,397 Tax exempt interest income.................... (719) (720) (330) Tax effect of minority interests.............. 746 985 1,844 State taxes, net of federal benefit........... 2,456 618 4,778 Use of federal capital loss carryforward...... (648) Exclusion of certain meals and entertainment expenses..................................... 2,391 2,630 916 Change in tax reserves........................ (2,301) Other items, net.............................. (1,198) (851) (1,705) ------- ------- ------- $ 6,200 $13,300 $41,900 ======= ======= =======
Effective January 1, 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." SFAS No. 109 provides that deferred tax assets and liabilities be recognized for temporary differences between the financial statement carrying amount and the tax basis of certain of the Company's assets and liabilities. In addition, SFAS No. 109 requires that deferred tax assets and liabilities be measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The impact on deferred taxes of changes in tax rates and laws, if any, is reflected in the financial statements in the period of enactment. In some situations, SFAS No. 109 permits the recognition of expected benefits of utilizing net operating loss and tax credit carryforwards. Pursuant to the method prescribed under Accounting Principles Board Opinion (APB) No. 11, "Accounting for Income Taxes," which was effective for years ending prior to January 1, 1993, deferred income taxes were recognized for income and expense items reported in different periods for financial reporting and income tax purposes using the applicable tax rate for the year in which the differences originated. Deferred taxes under APB No. 11 were not permitted to be adjusted for subsequent changes in tax rates. The Company did not restate its financial statements for prior years since such restatement is not required under SFAS No. 109. Instead, the Company recognized a benefit of $4.2 million, or $.37 per share, representing the cumulative effect of a change in accounting for income taxes. The cumulative effect represented the adjustment of previously recorded deferred tax assets and liabilities to reflect lower prevailing tax rates, and the related adjustment of certain other balance sheet accounts. The effect of the adjustments to other balance sheet accounts was to increase deferred revenue by $11.5 million, accrued expenses by $3.0 million and reserves for claims by $0.8 million, and to decrease goodwill by $1.9 million. 38 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The primary components of temporary differences which give rise to the Company's net deferred tax asset are as follows:
DECEMBER 31 ---------------- 1995 1994 ------- ------- (IN THOUSANDS) Deferred tax assets: Deferred revenue...................................... $25,474 $29,504 Employee benefits..................................... 8,433 8,431 Title claims and related salvage...................... 14,612 8,251 Unrealized loss on securities......................... 3,045 Federal capital loss carryforward..................... 1,898 Bad debt reserves..................................... 2,467 1,730 Federal net operating loss carryforward............... 1,251 1,251 Other................................................. 4,459 3,532 Valuation allowance................................... (856) (2,880) ------- ------- Total deferred tax assets............................ 55,840 54,762 ------- ------- Deferred tax liabilities: Depreciable and amortizable assets.................... 10,540 8,939 Unrealized gain on securities......................... 2,150 Sale leaseback........................................ 1,066 52 Other................................................. 2,090 2,045 ------- ------- Total deferred tax liabilities....................... 15,846 11,036 ------- ------- Net deferred tax asset.................................. $39,994 $43,726 ======= =======
The Company has federal net operating loss carryforwards of approximately $3.6 million at December 31, 1995, that expire in 1999. The utilization of these net operating losses is limited to future federal taxable income of First American Real Estate Information Services, Inc., a wholly owned subsidiary of the Company. The utilization of the loss carryforward is also subject to limitations prescribed by Section 382 of the Internal Revenue Code. The Company maintains a valuation allowance for certain temporary differences for which it is more likely than not the Company will not receive benefits. NOTE 11. EMPLOYEE BENEFIT PLANS: The Company has pension and other retirement benefit plans covering substantially all employees. The Company's principal pension plan, amended to be noncontributory effective January 1, 1995, is a qualified defined benefit plan with benefits based on the employee's years of service and the highest five consecutive years' compensation during the last ten years of employment. The Company's policy is to fund all accrued pension costs. Contributions are intended to provide not only for benefits attributable to past service, but also for those benefits expected to be earned in the future. The Company also has non-qualified unfunded supplemental benefit plans covering certain key management personnel. Benefits under these plans are intended to be funded with proceeds from life insurance policies purchased by the Company on the lives of the executives. 39 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Net pension cost for the Company's pension and other retirement benefit plans includes the following components:
1995 1994 1993 ------- ------- ------- (IN THOUSANDS) Service cost--benefits earned during the year........................................ $ 7,798 $ 5,400 $ 3,758 Interest cost on projected benefit obligation.................................. 8,741 7,631 6,727 Actual (gain) loss on plan assets............ (9,636) 1,065 (4,495) Net amortization and deferral................ 4,674 (5,740) (62) ------- ------- ------- Net periodic pension cost.................... $11,577 $ 8,356 $ 5,928 ======= ======= =======
The following table sets forth the plans' status at:
DECEMBER 31 --------------------------------------------- 1995 1994 ---------------------- ---------------------- UNFUNDED UNFUNDED FUNDED SUPPLEMENTAL FUNDED SUPPLEMENTAL PENSION BENEFIT PENSION BENEFIT PLANS PLANS PLANS PLANS -------- ------------ -------- ------------ (IN THOUSANDS) Present value of benefit obligation: Vested benefits.......... $(68,977) $(15,100) $(51,414) $(12,972) Non-vested benefits...... (5,250) (3,828) (5,918) (2,782) -------- -------- -------- -------- Accumulated benefit obliga- tion...................... (74,227) (18,928) (57,332) (15,754) Value of future pay in- creases................... (25,165) (5,374) (23,730) (4,546) -------- -------- -------- -------- Total projected benefit ob- ligation.................. (99,392) (24,302) (81,062) (20,300) Plan assets at fair value.. 71,929 65,537 -------- -------- -------- -------- Plan assets less than pro- jected benefit obligation. (27,463) (24,302) (15,525) (20,300) Unrecognized net (asset) obligation at transition............. (359) 2,162 (409) 2,522 Prior service cost not yet recognized................ (543) 495 (236) 559 Unrecognized net loss...... 21,065 4,091 16,459 1,691 Adjustment to recognize minimum liability......... (1,374) (226) -------- -------- -------- -------- Prepaid (accrued) pension costs..................... $ (7,300) $(18,928) $ 289 $(15,754) ======== ======== ======== ========
The rates of increase in future compensation levels for the plans of 4 1/2% and 5% and the weighted average discount rates of 7 3/4% and 8 1/4% were used in determining the actuarial present value of the projected benefit obligation at December 31, 1995 and 1994, respectively. The majority of pension plan assets are invested in U.S. government securities, time deposits and common stocks with projected long-term rates of return of 9%. The Company's principal profit sharing plan was amended effective January 1, 1995, to discontinue future contributions. The plan holds 1,675,000 and 1,844,000 shares of the Company's common stock, representing 15% and 16% of the total shares outstanding at December 31, 1995, and 1994, respectively. Contributions to the Company's profit sharing plans totaled $2.0 million and $3.0 million for 1994 and 1993, respectively. The Company also has a Stock Bonus Plan for key employees pursuant to which 65,000, 55,000 and 46,000 common shares were awarded for 1995, 1994 and 1993, respectively, resulting in a charge to operations of $1.2 million, $1.9 million and $1.2 million respectively. The Plan, as amended December 9, 1992, provides that a total of up to 200,000 common shares may be awarded in any one year. 40 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Effective January 1, 1995, the Company adopted The First American Financial Corporation 401(k) Savings Plan ("The Savings Plan"), which is available to substantially all employees. The Savings Plan allows for employee elective contributions up to the maximum deductible amount as determined by the Internal Revenue Code. In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions." This standard was effective for 1993 and focuses principally on postretirement health care and life insurance benefits and requires accrual of the expected cost of providing those benefits over the service lives of the employees. Compliance with this standard did not have a materially adverse effect on the Company's financial condition or results of operations. In November 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits." This standard was effective for 1994 and focuses principally on benefits provided to former or inactive employees after employment but before retirement. Compliance with this standard did not have a materially adverse effect on the Company's financial condition or results of operations. NOTE 12. COMMITMENTS: The Company leases certain office facilities, automobiles and equipment under operating leases, which for the most part are renewable. The majority of these leases also provide that the Company will pay insurance and taxes. In December 1994, the Company entered into a sale-leaseback agreement with regard to certain furniture and equipment with a net book value of $22.4 million. Proceeds from the sale amounted to $31.4 million and a gain of $9.0 million has been included in deferred revenue and will be amortized over the life of the lease. Under the agreement, the Company has agreed to lease the equipment for four years with minimum annual lease payments of $8.3 million. Future minimum rental payments under operating leases that have initial or remaining noncancelable lease terms in excess of one year as of December 31, 1995, are as follow (in thousands): 1996............................................................. $ 47,623 1997............................................................. 40,193 1998............................................................. 33,163 1999............................................................. 23,012 2000............................................................. 11,321 Later years...................................................... 20,707 -------- $176,019 ========
Total rental expense for all operating leases and month-to-month rentals was $58.6 million, $50.1 million and $46.0 million for 1995, 1994 and 1993, respectively. NOTE 13. LITIGATION: On April 13, 1990, a class action was filed in the United States District Court in Phoenix, Arizona, against First American Title Insurance Company and a number of other title insurers. This action seeks damages and injunctive relief based on the defendants' participation in rating bureaus in Arizona and Wisconsin. 41 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The case is now before the District Court for coordinated or consolidated pretrial proceedings with an action that was filed in the United States District Court for the Eastern District of Wisconsin. The Wisconsin federal action presents claims on behalf of a purported class of purchasers of title insurance in Wisconsin, and seeks damages and other forms of relief, similar to those involved in the federal action filed in Arizona, with respect to participation in the rating bureau in Wisconsin. The Company does not believe that the ultimate resolution of these actions will have a materially adverse effect on its financial condition or results of operations. The Company is involved in various routine legal proceedings related to its operations. While the ultimate disposition of each proceeding is not determinable, the Company does not believe that any of such proceedings will have a materially adverse effect on its financial condition or results of operations. NOTE 14. SEGMENT FINANCIAL INFORMATION: The Company's operations include four reportable segments: title insurance, real estate information, home warranty and trust and banking. The title insurance segment issues policies which are insured statements of the condition of title to real property. The real estate information segment provides to lender customers the status of tax payments on real property securing their loans, credit information derived from at lease two credit bureau sources and flood zone determination reports which provide information on whether or not a property is in a special flood hazard area. The home warranty segment issues one-year warranties which protect homeowners against defects in home fixtures. The trust and banking segment provides full-service trust and depository services, accepts deposits and makes real estate secured loans. The title insurance and real estate information segments operate through networks of offices nationwide. The Company offers its title services through both direct operations and agents throughout the Unites States. It also provides title services abroad in the Bahama Islands, Bermuda, Canada, Guam, Mexico, Puerto Rico, the U.S. Virgin Islands, and the United Kingdom. Home warranty services are available in Arizona, California, Nevada, Texas and Washington. The trust, banking and thrift businesses operate in Southern California. 42 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Selected financial information about the Company's operations by segment for each of the past three years is as follows:
DEPRECIATION PRETAX AND CAPITAL REVENUES PROFIT (LOSS) ASSETS AMORTIZATION EXPENDITURES ---------- ------------- -------- ------------ ------------ (IN THOUSANDS) 1995 Title Insurance......... $1,052,823 $ 17,540 $532,697 $12,208 $18,130 Real Estate Information. 147,004 19,690 182,499 4,565 2,294 Home Warranty........... 35,531 6,828 56,637 289 118 Trust and Banking....... 14,110 3,304 63,416 331 1,189 Corporate............... 748 (19,948) 38,529 609 ---------- -------- -------- ------- ------- $1,250,216 $ 27,414 $873,778 $18,002 $21,731 ========== ======== ======== ======= ======= 1994 Title Insurance......... $1,236,663 $ 37,819 $546,103 $16,070 $27,694 Real Estate Information. 96,113 17,371 139,680 2,916 5,979 Home Warranty........... 30,985 6,709 53,834 275 170 Trust and Banking....... 12,433 3,214 55,423 236 719 Corporate............... 199 (17,415) 33,609 299 ---------- -------- -------- ------- ------- $1,376,393 $ 47,698 $828,649 $19,796 $34,562 ========== ======== ======== ======= ======= 1993 Title Insurance......... $1,264,565 $ 97,314 $530,438 $13,839 $30,141 Real Estate Information. 95,685 35,046 139,487 1,668 5,412 Home Warranty........... 24,888 5,477 49,508 274 558 Trust and Banking....... 11,731 3,313 48,155 211 50 Corporate............... 1,557 (19,542) 18,860 341 ---------- -------- -------- ------- ------- $1,398,426 $121,608 $786,448 $16,333 $36,161 ========== ======== ======== ======= =======
Corporate consists primarily of unallocated interest expense, minority interests, equity in earnings of affiliated companies, employee benefit contributions and personnel and other operating expenses associated with the Company's home office facilities. 43 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED ------------------------------------------- MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 -------- -------- ------------ ----------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) YEAR ENDED DECEMBER 31, 1995 Revenues............................ $261,154 $293,240 $331,328 $364,494 ======== ======== ======== ======== Income (loss) before income taxes... $(21,509) $ 1,837 $ 15,520 $ 17,939 ======== ======== ======== ======== Net income (loss)................... $(12,709) $ 1,137 $ 9,320 $ 9,839 ======== ======== ======== ======== Net income (loss) per share......... $ (1.11) $ 0.10 $ 0.81 $ 0.87 ======== ======== ======== ======== YEAR ENDED DECEMBER 31, 1994 Revenues............................ $372,436 $369,011 $334,870 $300,076 ======== ======== ======== ======== Income (loss) before taxes.......... $ 16,498 $ 13,434 $ 7,090 $ (4,777) ======== ======== ======== ======== Net income (loss)................... $ 9,398 $ 7,634 $ 4,790 $ (2,877) ======== ======== ======== ======== Net income (loss) per share......... $ 0.82 $ 0.67 $ 0.42 $ (0.25) ======== ======== ======== ========
The Company's primary business segments are cyclical in nature, with the spring and summer months historically being the strongest. However, interest rate adjustment by the Federal Reserve Board during the last few years have caused unusual fluctuations in the Company's quarterly operating results. See Management's Discussion and Analysis on page 15 of this report for further discussion of the Company's results of operations. 44 SCHEDULE I 1 OF 1 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES SUMMARY OF INVESTMENTS--OTHER THAN INVESTMENTS IN RELATED PARTIES DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D -------- ------------ ------------ --------------- AMOUNT AT WHICH SHOWN IN THE TYPE OF INVESTMENT COST MARKET VALUE BALANCE SHEET ------------------ ------------ ------------ --------------- Deposits with savings and loan asso- ciations and banks: Registrant........................ $ 50,000 $ 50,000 $ 50,000 ------------ ------------ ------------ Consolidated...................... $ 18,637,000 $ 18,637,000 $ 18,637,000 ------------ ------------ ------------ Debt securities: Registrant--None Consolidated-- U.S. Treasury securities.......... $ 42,325,000 $ 43,446,000 $ 43,446,000 Corporate securities............ 36,927,000 37,896,000 37,896,000 Obligations of states and political subdivisions......... 39,644,000 39,707,000 39,707,000 Mortgage-backed securities...... 7,861,000 7,826,000 7,826,000 ------------ ------------ ------------ $126,757,000 $128,875,000 $128,875,000 ------------ ------------ ------------ Equity securities: Registrant--None Consolidated...................... $ 17,421,000 $ 21,445,000 $ 21,445,000 ------------ ------------ ------------ Other long-term investments: Registrant--None Consolidated...................... $ 25,230,000 $ 25,230,000 $ 25,230,000 ------------ ------------ ------------ Total Investments: Registrant........................ $ 50,000 $ 50,000 $ 50,000 ============ ============ ============ Consolidated...................... $188,045,000 $194,187,000 $194,187,000 ============ ============ ============
45 SCHEDULE II 1 OF 4 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY BALANCE SHEETS ASSETS
DECEMBER 31 -------------------------- 1995 1994 ------------ ------------ Cash and cash equivalents.......................... $ 19,415,000 $ 15,178,000 ------------ ------------ Stock of subsidiaries, at equity................... 469,511,000 446,672,000 ------------ ------------ Deposits with savings and loan associations and banks............................................. 50,000 ------------ Equity securities.................................. 1,708,000 ------------ Property and equipment, at cost: Land............................................. 425,000 425,000 Buildings and building improvements.............. 5,006,000 5,006,000 Less--accumulated depreciation................... (4,256,000) (4,071,000) ------------ ------------ 1,175,000 1,360,000 ------------ ------------ Other assets....................................... 4,924,000 5,427,000 ------------ ------------ $495,075,000 $470,345,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Dividends payable.................................. $ 1,742,000 $ 1,740,000 ------------ ------------ Accrued expenses................................... 524,000 519,000 ------------ ------------ Payable to subsidiaries............................ 130,281,000 105,094,000 ------------ ------------ Notes and contracts payable........................ 59,761,000 70,882,000 ------------ ------------ Stockholders' equity: Preferred stock, $1 par value Authorized--500,000 shares; Outstanding--None Common stock, $1 par value Authorized--24,000,000 shares; Outstanding--11,411,000 and 11,395,000 shares... 11,411,000 11,395,000 Additional paid-in capital....................... 44,270,000 44,013,000 Retained earnings................................ 243,093,000 242,356,000 Net unrealized gain (loss) on securities......... 3,993,000 (5,654,000) ------------ ------------ Total stockholders' equity......................... 302,767,000 292,110,000 ------------ ------------ $495,075,000 $470,345,000 ============ ============
See Notes to Parent Company Financial Statements 46 SCHEDULE II 2 OF 4 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 ----------------------------------- 1995 1994 1993 ----------- ----------- ----------- Revenues: Interest and other income................ $ 837,000 $ 846,000 $ 477,000 Equity in earnings of subsidiaries....... 25,803,000 33,249,000 82,126,000 ----------- ----------- ----------- 26,640,000 34,095,000 82,603,000 ----------- ----------- ----------- Expenses: Interest................................. 5,040,000 3,781,000 3,976,000 Depreciation............................. 185,000 186,000 186,000 Other administrative expenses............ 13,828,000 11,183,000 12,150,000 ----------- ----------- ----------- 19,053,000 15,150,000 16,312,000 ----------- ----------- ----------- Net income................................. $ 7,587,000 $18,945,000 $66,291,000 =========== =========== =========== Net income per share, based upon the weighted average number of shares outstanding............................... $ 0.67 $ 1.66 $ 5.84 =========== =========== ===========
See Notes to Parent Company Financial Statements 47 SCHEDULE II 3 OF 4 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT PARENT COMPANY STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ---------------------------------------- 1995 1994 1993 ------------ ------------ ------------ Cash flows from operating activities: Net income......................... $ 7,587,000 $ 18,945,000 $ 66,291,000 Adjustments to reconcile net income to cash provided by operating activities-- Depreciation..................... 185,000 186,000 186,000 Expense relating to stock bonus plan............................ 1,153,000 1,910,000 1,200,000 Equity in earnings of subsidiaries, net of dividends.. (25,802,000) (24,249,000) (82,126,000) Other............................ (225,000) Changes in assets and liabilities, excluding effects of company acquisitions and noncash transactions-- Decrease (increase) in other assets........................ 503,000 310,000 (300,000) Increase (decrease) in dividends payable and accrued expenses...................... 7,000 123,000 (851,000) Increase in intercompany ac- counts........................ 40,509,000 21,086,000 32,152,000 ------------ ------------ ------------ Cash provided by operating activi- ties................................ 23,917,000 18,311,000 16,552,000 ------------ ------------ ------------ Cash flows from investing activities: Net decrease (increase) in deposits with banks........................ (50,000) 100,000 Purchases of equity securities..... (1,957,000) Sales of equity securities......... 1,933,000 ------------ ------------ ------------ Cash provided by (used for) investing activities.......................... 1,883,000 (1,957,000) 100,000 ------------ ------------ ------------ Cash flows from financing activities: Proceeds from issuance of debt..... 20,000,000 Repayment of debt.................. (11,121,000) (11,245,000) (10,910,000) Purchase of Company shares......... (3,592,000) (3,705,000) (1,638,000) Cash dividends..................... (6,850,000) (6,869,000) (5,840,000) ------------ ------------ ------------ Cash used for financing activities... (21,563,000) (1,819,000) (18,388,000) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents.................... 4,237,000 14,535,000 (1,736,000) Cash and cash equivalents-- Beginning of year.................. 15,178,000 643,000 2,379,000 ------------ ------------ ------------ End of year........................ $ 19,415,000 $ 15,178,000 $ 643,000 ============ ============ ============ Supplementary information: Cash paid during the year for interest.......................... $ 4,986,000 $ 3,654,000 $ 4,556,000 Noncash investing and financing activities: Shares issued for stock bonus plan. $ 1,153,000 $ 1,910,000 $ 1,200,000 Company acquisitions in exchange for common stock.................. $ 2,712,000 $ 2,681,000 $ 4,038,000 Increase in equity due to reduction of long-term debt of ESOT......... $ 2,597,000 $ 2,599,000 Liabilities in connection with com- pany acquisitions................... $ 7,027,000
See Notes to Parent Company Financial Statements 48 SCHEDULE II 4 OF 4 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTES TO PARENT COMPANY FINANCIAL STATEMENTS NOTE A The composition of the Notes and Contracts Payable consists of:
DECEMBER 31 ----------------------- 1995 1994 ----------- ----------- Secured notes payable to financial institutions........ $49,250,000 $61,000,000 Trust deed notes with maturities through 2002, average rate of 10%. Secured by land and buildings with an ag- gregate net book value of $899,000.................... 895,000 1,866,000 Other notes and contracts payable with maturities through 2000, average rate of 7 1/4%........................................ 9,616,000 8,016,000 ----------- ----------- $59,761,000 $70,882,000 =========== ===========
The aggregate annual maturities for notes and contracts payable in each of the five years after December 31, 1995, are $14,803,000, $14,450,000, $12,324,000, $10,667,000, and $7,302,000 respectively. NOTE B The parent company files a consolidated tax return with its subsidiary companies in which it owns 80% or more of the outstanding stock. The current and cumulative tax effects relating to the operations of the parent company are reflected in the accounts of First American Title Insurance Company. 49 SCHEDULE III 1 OF 2 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES SUPPLEMENTARY INSURANCE INFORMATION BALANCE SHEET CAPTIONS
COLUMN A COLUMN B COLUMN C COLUMN D -------- ----------- ------------ ------------ DEFERRED POLICY ACQUISITION CLAIMS DEFERRED SEGMENT COSTS RESERVES REVENUES ------- ----------- ------------ ------------ 1995 Title Insurance........................... $232,081,000 $ 6,641,000 Real Estate Information................... $22,078,000 3,686,000 82,581,000 Home Warranty............................. 2,264,000 2,394,000 15,093,000 Trust and Banking......................... Corporate................................. ----------- ------------ ------------ Total................................... $24,342,000 $238,161,000 $104,315,000 =========== ============ ============ 1994 Title Insurance........................... $202,069,000 $ 8,896,000 Real Estate Information................... $24,312,000 2,841,000 95,985,000 Home Warranty............................. 1,748,000 1,833,000 12,947,000 Trust and Banking......................... Corporate................................. ----------- ------------ ------------ Total................................... $26,060,000 $206,743,000 $117,828,000 =========== ============ ============
50 SCHEDULE III 2 OF 2 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES SUPPLEMENTARY INSURANCE INFORMATION INCOME STATEMENT CAPTIONS
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J -------- -------------- ----------- ------------ ------------ ------------ AMORTIZATION OF DEFERRED NET POLICY OTHER OPERATING INVESTMENT LOSS ACQUISITION OPERATING SEGMENT REVENUES INCOME PROVISION COSTS EXPENSES ------- -------------- ----------- ------------ ------------ ------------ 1995 Title Insurance......... $1,034,789,000 $18,034,000 $ 68,338,000 $188,024,000 Real Estate Information. 145,755,000 1,249,000 3,166,000 $5,891,000 55,276,000 Home Warranty........... 32,531,000 3,000,000 18,857,000 1,748,000 95,000 Trust and Banking....... 14,110,000 26,000 5,650,000 Corporate............... 748,000 3,927,000 -------------- ----------- ------------ ---------- ------------ Total................. $1,227,185,000 $23,031,000 $ 90,387,000 $7,639,000 $252,972,000 ============== =========== ============ ========== ============ 1994 Title Insurance......... $1,221,581,000 $15,082,000 $ 93,012,000 $184,723,000 Real Estate Information. 94,816,000 1,297,000 2,129,000 $4,536,000 32,943,000 Home Warranty........... 28,116,000 2,869,000 15,022,000 1,447,000 454,000 Trust and Banking....... 12,433,000 67,000 4,829,000 Corporate............... 199,000 3,600,000 -------------- ----------- ------------ ---------- ------------ Total................. $1,356,946,000 $19,447,000 $110,230,000 $5,983,000 $226,549,000 ============== =========== ============ ========== ============ 1993 Title Insurance......... $1,249,322,000 $15,243,000 $111,038,000 $183,213,000 Real Estate Information. 95,069,000 616,000 2,683,000 $3,448,000 26,108,000 Home Warranty........... 22,402,000 2,486,000 11,762,000 1,178,000 121,000 Trust and Banking....... 11,731,000 105,000 4,140,000 Corporate............... 1,557,000 4,726,000 -------------- ----------- ------------ ---------- ------------ Total................. $1,378,524,000 $19,902,000 $125,588,000 $4,626,000 $218,308,000 ============== =========== ============ ========== ============
51 SCHEDULE IV 1 OF 1 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES REINSURANCE
TITLE INSURANCE OPERATING TITLE REVENUES CEDED TO ASSUMED INSURANCE PERCENTAGE OF BEFORE OTHER FROM OTHER OPERATING AMOUNT ASSUMED TO SEGMENT REINSURANCE COMPANIES COMPANIES REVENUES OPERATING REVENUES - ------- -------------- ---------- ---------- -------------- ------------------ 1995 $1,034,435,000 $2,840,000 $3,194,000 $1,034,789,000 .3% ============== ========== ========== ============== === 1994 $1,220,581,000 $4,362,000 $5,362,000 $1,221,581,000 .4% ============== ========== ========== ============== === 1993 $1,247,657,000 $2,542,000 $4,207,000 $1,249,322,000 .3% ============== ========== ========== ============== ===
52 SCHEDULE V 1 OF 3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1995
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ------------ ---------------------- ----------- ------------ ADDITIONS ---------------------- BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING OF COSTS AND OTHER FROM END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD ----------- ------------ ----------- ---------- ----------- ------------ Reserve deducted from accounts receivable: Registrant--None Consolidated.......... $ 4,022,000 $ 2,965,000 $ 1,017,000(A) $ 5,970,000 ============ =========== =========== ============ Reserve for title losses and other claims: Registrant--None Consolidated.......... $206,743,000 $90,387,000 $7,004,000(B) $65,973,000(C) $238,161,000 ============ =========== ========== =========== ============ Reserve deducted from loans receivable: Registrant--None Consolidated.......... $ 950,000 $ 562,000 $ 168,000(A) $ 1,344,000 ============ =========== =========== ============ Reserve deducted from other investments: Registrant--None Consolidated.......... $ 353,000 $ 353,000 ============ ============ Reserve deducted from assets acquired in connection with claim settlements: Registrant--None Consolidated.......... $ 12,354,000 $3,019,000 $ 4,127,000(D) $ 11,246,000 ============ ========== =========== ============ Reserve deducted from deferred income taxes: Registrant--None Consolidated.......... $ 2,880,000 $ 2,024,000(E) $ 856,000 ============ =========== ============ Reserve deducted from other assets: Registrant--None Consolidated.......... $ 1,342,000 $ 84,000 $ 6,000 $ 1,420,000 ============ =========== =========== ============
Note A--Amount represents accounts written off, net of recoveries. Note B--Amount represents $10,023,000 in purchase accounting adjustments, net of a reclassification of $3,019,000 to the reserve for assets acquired in connection with claim settlements. Note C--Amount represents claim payments, net of recoveries. Note D--Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset. Note E--Amount represents elimination of reserve in connection with the expiration of the related temporary differences. 53 SCHEDULE V 2 OF 3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1994
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ------------ ------------------------ ----------- ------------ ADDITIONS ------------------------ BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE AT BEGINNING COSTS AND OTHER FROM END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS RESERVE PERIOD ----------- ------------ ------------ ----------- ----------- ------------ Reserve deducted from accounts receivable: Registrant--None Consolidated.......... $ 4,098,000 $ 2,604,000 $ 2,680,000(A) $ 4,022,000 ============ ============ =========== ============ Reserve for title losses and other claims: Registrant--None Consolidated.......... $180,333,000 $110,230,000 $(3,674,000)(B) $80,146,000(C) $206,743,000 ============ ============ =========== =========== ============ Reserve deducted from loans receivable: Registrant--None Consolidated.......... $ 750,000 $ 437,000 $ 237,000(A) $ 950,000 ============ ============ =========== ============ Reserve deducted from other investments: Registrant--None Consolidated.......... $ 353,000 $ 353,000 ============ ============ Reserve deducted from assets acquired in connection with claim settlements: Registrant--None Consolidated.......... $ 11,581,000 $ 3,674,000(B) $ 2,901,000(D) $ 12,354,000 ============ =========== =========== ============ Reserve deducted from deferred income taxes: Registrant--None Consolidated.......... $ 3,304,000 $ 424,000(E) $ 2,880,000 ============ =========== ============ Reserve deducted from other assets: Registrant--None Consolidated.......... $ 1,177,000 $ 258,000 $ 93,000 $ 1,342,000 ============ ============ =========== ============
Note A--Amount represents accounts written off, net of recoveries. Note B--Amount represents a reclassification to the reserve for assets acquired in connection with claim settlements. Note C--Amount represents claim payments, net of recoveries. Note D--Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset. Note E--Amount represents elimination of reserve in connection with utilization of the related temporary differences. 54 SCHEDULE V 3 OF 3 THE FIRST AMERICAN FINANCIAL CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS YEAR ENDED DECEMBER 31, 1993
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E -------- ------------ --------------------------- ----------- ------------ ADDITIONS --------------------------- BALANCE CHARGED TO CHARGED TO DEDUCTIONS BALANCE BEGINNING OF COSTS AND OTHER FROM AT END OF DESCRIPTION PERIOD EXPENSES ACCOUNTS RESERVE PERIOD ----------- ------------ ------------ ----------- ----------- ------------ Reserve deducted from accounts receivable: Registrant--None Consolidated.......... $ 3,623,000 $ 1,661,000 $ 1,186,000(A) $ 4,098,000 ============ ============ =========== ============ Reserve for title losses and other claims: Registrant--None Consolidated.......... $135,212,000 $125,588,000 $(5,251,000)(B) $75,216,000(C) $180,333,000 ============ ============ =========== =========== ============ Reserve deducted from loans receivable: Registrant--None Consolidated.......... $ 500,000 $ 323,000 $ 73,000(A) $ 750,000 ============ ============ =========== ============ Reserve deducted from other investments: Registrant--None Consolidated.......... $ 460,000 $ 107,000(D) $ 353,000 ============ =========== ============ Reserve deducted from assets acquired in connection with claim settlements: Registrant--None Consolidated.......... $ 6,899,000 $ 5,251,000 (B) $ 569,000(D) $ 11,581,000 ============ =========== =========== ============ Reserve deducted from deferred income taxes: Registrant--None Consolidated.......... $ 3,304,000(E) $ 3,304,000 ============ ============ Reserve deducted from other assets: Registrant--None Consolidated.......... $ 1,047,000 $ 130,000 $ 1,177,000 ============ ============ ============
Note A--Amount represents accounts written off, net of recoveries. Note B--Amount represents a reclassification to the reserve for assets acquired in connection with claim settlements. Note C--Amount represents claim payments, net of recoveries. Note D--Amount represents elimination of reserve in connection with disposition and/or revaluation of the related asset. Note E--Amount represents the valuation allowance established for certain temporary differences for which it is more likely than not the Company will not receive future benefits. The valuation allowance is in accordance with the provisions set forth in SFAS 109, which was adopted by the Company in the current year. 55 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III The information required by Items 10 through 13 of this report is set forth in the sections entitled "Security Ownership of Certain Beneficial Owners," "Election of Directors," "Security Ownership of Management," "Executive Compensation," "Report of the Compensation Committee on Executive Compensation," "Comparative Cumulative Total Return to Shareholders," "Executive Officers" and "Compliance With Section 16(a) of the Securities Exchange Act of 1934" in the Company's definitive proxy statement, which sections are incorporated in this report and made a part hereof by reference. The definitive proxy statement will be filed no later than 120 days after close of Registrant's fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. & 2. Financial Statements and Financial Statement Schedules The Financial Statements and Financial Statement Schedules filed as part of this report are listed in the accompanying index at page 20 in "Item 8" of Part II of this report. 3. Exhibits (Each management contract or compensatory plan or arrangement in which any director or named executive officer of The First American Financial Corporation, as defined by Item 402(a)(3) of Regulation S-K (17 C.F.R. (S)229.402(a)(3)), participates that is included among the exhibits listed below is identified by an asterisk (*).) (3) (a) Restated Articles of Incorporation of The First American Financial Corporation dated November 8, 1989, incorporated by reference herein from Exhibit 3.1 of Amendment No. 3, dated October 16, 1992, to Registration Statement on Form S-2. (3) (b) Certificate of Amendment of Restated Articles of Incorporation of The First American Financial Corporation dated September 21, 1992, incorporated by reference herein from Exhibit 3.2 of Amendment No. 3, dated October 16, 1992, to Registration Statement on Form S-2. (3) (c) Bylaws, as amended. (4) (a) Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Amendment No. 1, dated July 26, 1993, to Quarterly Report on Form 10-Q for the quarter ended March 31, 1993. (4) (b) Amendment No. 1 dated as of March 31, 1994, to Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1994. (4) (c) Amendment No. 2 dated as of November 22, 1994, to Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Current Report on Form 8-K dated December 14, 1994. 56 (4) (d) Amendment No. 3 dated as of March 31, 1995, to Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (4) (e) Amendment No. 4 dated as of June 1, 1995, to Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (4) (f) Amendment No. 5 dated as of February 16, 1996, to Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992. *(10) (a) Description of Stock Bonus Plan, as amended, incorporated by reference herein from Exhibit 10(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992. *(10) (b) Executive Supplemental Benefit Plan dated April 10, 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10)(b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988. *(10) (c) Amendment No. 2, dated March 22, 1990, to Executive Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989. *(10) (d) Management Supplemental Benefit Plan dated July 20, 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992. *(10) (e) Pension Restoration Plan (effective as of January 1, 1994). (10) (f) Pledge Agreement dated as of April 27, 1992, incorporated by reference herein from Exhibit (2) of Current Report on Form 8-K dated May 8, 1992. (21) Subsidiaries of the registrant. (27) Financial Data Schedule (b)Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this report. 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE FIRST AMERICAN FINANCIAL CORPORATION (Registrant) By:/S/ PARKER S. KENNEDY ---------------------------------------------------------------------------- Parker S. Kennedy, President (Principal Executive Officer) Date: March 28, 1996 ---------------------------------------------------------------------------- By:/S/ THOMAS A. KLEMENS ---------------------------------------------------------------------------- Thomas A. Klemens, Vice President, Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 28, 1996 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. By/S/ D.P. KENNEDY ---------------------------------------------------------------------------- D.P. Kennedy, Chairman and Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ PARKER S. KENNEDY ---------------------------------------------------------------------------- Parker S. Kennedy, President and Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ THOMAS A. KLEMENS ---------------------------------------------------------------------------- Thomas A. Klemens, Vice President, Chief Financial Officer Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ GEORGE L. ARGYROS ---------------------------------------------------------------------------- George L. Argyros, Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ J. DAVID CHATHAM ---------------------------------------------------------------------------- J. David Chatham, Director Date March 28, 1996 ---------------------------------------------------------------------------- By ---------------------------------------------------------------------------- William G. Davis, Director Date ---------------------------------------------------------------------------- By/S/ JAMES L. DOTI ---------------------------------------------------------------------------- James L. Doti, Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ LEWIS W. DOUGLAS, JR. ---------------------------------------------------------------------------- Lewis W. Douglas, Jr., Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ PAUL B. FAY, JR. ---------------------------------------------------------------------------- Paul B. Fay, Jr., Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ ROBERT B. MCLAIN ---------------------------------------------------------------------------- Robert B. McLain, Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ ANTHONY R. MOISO ---------------------------------------------------------------------------- Anthony R. Moiso, Director Date March 28, 1996 ---------------------------------------------------------------------------- By ---------------------------------------------------------------------------- Rudolph J. Munzer, Director Date ---------------------------------------------------------------------------- By/S/ FRANK O'BRYAN ---------------------------------------------------------------------------- Frank O'Bryan, Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ ROSLYN B. PAYNE ---------------------------------------------------------------------------- Roslyn B. Payne, Director Date March 28, 1996 ---------------------------------------------------------------------------- By/S/ VIRGINIA UEBERROTH ---------------------------------------------------------------------------- Virginia Ueberroth, Director Date March 28, 1996 ---------------------------------------------------------------------------- 58 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NO. DESCRIPTION PAGE ------- ----------- ------------ (3) (a) Restated Articles of Incorporation of The First S American Financial Corporation dated November 8, 1989, incorporated by reference herein from Exhibit 3.1 of Amendment No. 3, dated October 16, 1992, to Registration Statement on Form S-2 (3) (b) Certificate of Amendment of Restated Articles of S Incorporation of The First American Financial Corporation dated September 21, 1992, incorporated by reference herein from Exhibit 3.2 of Amendment No. 3, dated October 16, 1992, to Registration Statement on Form S-2 (3) (c) Bylaws, as amended S (4) (a) Amendment and Restatement dated as of April 28, 1993, S of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Amendment No. 1, dated July 26, 1993, to Quarterly Report on Form 10-Q for the quarter ended March 31, 1993 (4) (b) Amendment No. 1 dated as of March 31, 1994, to S Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1994 (4) (c) Amendment No. 2 dated as of November 22, 1994, to S Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Current Report on Form 8-K dated December 14, 1994 (4) (d) Amendment No. 3 dated as of March 31, 1995, to S Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992, incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended March 31, 1995. (4) (e) Amendment No. 4 dated as of June 1, 1995, to S Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992 incorporated by reference herein from Exhibit (4) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (4) (f) Amendment No. 5 dated as of February 16, 1996, to S Amendment and Restatement dated as of April 28, 1993, of Credit Agreement dated as of April 21, 1992. *(10) (a) Description of Stock Bonus Plan, as amended, S incorporated by reference herein from Exhibit 10(a) of Annual Report on Form 10-K for the fiscal year ended December 31, 1992 *(10) (b) Executive Supplemental Benefit Plan dated April 10, S 1986, and Amendment No. 1 thereto dated October 1, 1986, incorporated by reference herein from Exhibit (10) (b) of Annual Report on Form 10-K for the fiscal year ended December 31, 1988 *(10) (c) Amendment No. 2, dated March 22, 1990, to Executive S Supplemental Benefit Plan, incorporated by reference herein from Exhibit (10)(c) of Annual Report on Form 10-K for the fiscal year ended December 31, 1989 *(10) (d) Management Supplemental Benefit Plan dated July 20, S 1988, incorporated by reference herein from Exhibit (10) of Quarterly Report on Form 10-Q for the quarter ended June 30, 1992 *(10) (e) Pension Restoration Plan (effective as of January 1, S 1994) (10) (f) Pledge Agreement dated as of April 27, 1992, S incorporated by reference herein from Exhibit (2) of Current Report on Form 8-K dated May 8, 1992 (21) Subsidiaries of the registrant S (27) Financial Data Schedule S
EX-3.C 2 BYLAWS Exhibit (3)(c) BYLAWS OF THE FIRST AMERICAN FINANCIAL CORPORATION ARTICLE I OFFICES Section l. PRINCIPAL OFFICES. The location of the principal executive office of the corporation is 114 East Fifth Street, Santa Ana, California. The board of directors may change the location of the principal executive office to any place within or outside the State of California. If the principal executive office is located outside this state, and the corporation has one or more business offices in this state, the board of directors shall fix and designate a principal business office in the State of California. Section 2. OTHER OFFICES. The board of directors may at any time establish branch or subordinate offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF SHAREHOLDERS Section l. PLACE OF MEETINGS. Meetings of shareholders shall be held at any place within or outside the State of California designated by the board of directors. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the corporation. Section 2. ANNUAL MEETING. The annual meeting of share holders shall be held each year on a date and at a time desig nated by the board of directors. At each annual meeting, directors shall be elected, and any other proper business may be transacted. Section 3. SPECIAL MEETING. A special meeting of the shareholders may be called at any time by the board of directors, or by the chairman of the board, or by the 1 president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at that meeting. If a special meeting is called by any person or persons other than the board of directors, the request shall be in writing, specifying the time of such meeting and the general nature of the business proposed to be transacted, and shall be delivered personally or sent by registered mail or by telegraphic or other facsimile transmission to the chairman of the board, the president, any vice president, or the secretary of the corporation. The officer receiving the request shall cause notice to be promptly given to the shareholders entitled to vote, in accordance with the provisions of Sections 4 and 5 of this Article II, that a meeting will be held at the time requested by the person or persons calling the meeting, not less than thirty-five (35) nor more than sixty (60) days after the receipt of the request. If the notice is not given within twenty (20) days after receipt of the request, the person or persons requesting the meeting may give notice. Nothing contained in this paragraph of this Section 3 shall be construed as limiting, fixing or affecting the time when a meeting of shareholders called by action of the board of directors may be held. Section 4. NOTICE OF SHAREHOLDERS' MEETING. All notices of meetings of shareholders shall be sent or otherwise given in accordance with Section 5 of this Article II not less than ten (10) nor more than sixty (60) days before the date of the meeting. The notice shall specify the place, date and hour of the meeting and (i) in the case of a special meeting, the general nature of the business to be transacted, or (ii) in the case of the annual meeting, those matters which the board of directors, at the time of giving the notice, intends to present for action by the shareholders. The notice of any meeting at which directors are to be elected shall include the name of any nominee or nominees whom, at the time of the notice, management intends to present for election. If action is proposed to be taken at any meeting for approval of (i) a contract or transaction in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) an 2 amendment of the articles of incorporation, pursuant to Section 902 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, (iv) a voluntary dissolution of the corporation, pursuant to Section 1900 of that code, or (v) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall also state the general nature of that proposal. Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of shareholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the shareholder at the address of that shareholder appearing on the books of the corporation or given by the shareholder to the corporation for the purpose of notice. If no such address appears on the corporation's books or is given, notice shall be deemed to have been given if sent to that shareholder by first- class mail or telegraphic or other written communication to the corporation's principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. If any notice addressed to a shareholder at the address of that shareholder appearing on the books of the corporation is returned to the corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the shareholder at that address, all future notices or reports shall be deemed to have been given without further mailing if these shall be available to the shareholder on written demand of the shareholder at the principal executive office of the corporation for a period of one year from the date of the giving of the notice. An affidavit of the mailing or other means of giving any notice of any shareholders' meeting shall be executed by the secretary, assistant secretary, or any transfer agent of the corporation giving the notice, and shall be filed and maintained in the minute book of the corporation. 3 Section 6. QUORUM. The presence in person or by proxy of the holders of a majority of the shares entitled to vote at any meeting of shareholders shall constitute a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. Section 7. ADJOURNED MEETING NOTICE. Any shareholders' meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at that meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at that meeting, except as provided in Section 6 of this Article II. When any meeting of shareholders, either annual or special, is adjourned to another time or place; notice need not be given of the adjourned meeting if the time and place are announced at a meeting at which the adjournment is taken, unless a new record date for the adjourned meeting is fixed, or unless the adjournment is for more than forty-five (45) days from the date set forth for the original meeting, in which case the board of directors shall set a new record date. Notice of any such adjourned meeting shall be given to each shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 4 and 5 of this Article II. At any adjourned meeting the corporation may transact any business which might have been transacted at the original meeting. Section 8. VOTING. The shareholders entitled to vote at any meeting of shareholders shall be determined in accordance with the provisions of Section ll of this Article II, subject to the provisions of Sections 702 to 704 inclusive, of the Corporations Code of California (relating to voting shares held by a fiduciary in the name of a corporation, or in joint ownership). The shareholders' vote may be by voice vote or by ballot; provided however, that any election for directors must be by ballot if demanded by any shareholder before the voting has begun. On any matter other than elections of directors, 4 any shareholder may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the shareholder fails to specify the number of shares which the shareholder is voting affirmatively, it will be conclusively presumed that the shareholder's approving vote is with respect to all shares that the shareholder is entitled to vote. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on any matter (other than the election of directors) shall be the act of the shareholders, unless the vote of a greater number or voting by classes is required by California General Corporation Law or by the articles of incorporation. At a shareholders' meeting at which directors are to be elected, no shareholder shall be entitled to cumulate votes (i.e., cast for any one or more candidates a number of votes greater than the number of the shareholder's shares) unless the candidates' names have been placed in nomination prior to commencement of the voting and a shareholder has given notice prior to commencement of the voting of the shareholder's intention to cumulate votes. If any shareholder has given such a notice, then every shareholder entitled to vote may cumulate votes for candidates in nomination and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which that shareholder's shares are entitled, or distribute the shareholder's votes on the same principle among any or all of the candidates, as the shareholder thinks fit. The candidates receiving the highest number of votes, up to the number of directors to be elected, shall be elected. Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT SHARE HOLDERS. The transactions of any meeting of shareholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, who was not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any 5 annual or special meeting of shareholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of the proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance by a person at a meeting shall also constitute a waiver of notice of that meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice of the meeting if that objection is expressly made at the meeting. Section 10. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any annual or special meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all shares entitled to vote on that action were present and voted. In the case of election of directors, such a consent shall be effective only if signed by the holders of all outstanding shares entitled to vote for the election of directors; provided, however, that a director may be elected at any time to fill a vacancy on the board of directors that has not been filled by the directors, by the written consent of the holders of a majority of the outstanding shares entitled to vote for the election of directors. All such consents shall be filed with the secretary of the cor poration and shall be maintained in the corporate records. Any shareholder giving a written consent, or the shareholder's proxy holders, or a transferee of the shares or a personal representative of the shareholder or their respective proxy holders, may revoke the consent by a writing received by the secretary of the corporation before written consents of the number of shares required to authorize the proposed action have been filed with the secretary. 6 If the consents of all shareholders entitled to vote have not been solicited in writing, and if the unanimous written consent of all such shareholders shall not have been received, the secretary shall give prompt notice of the corporate action approved by the shareholders without a meeting. This notice shall be given in the manner specified in Section 5 of this Article II. In the case of approval of (i) contracts or trans actions in which a director has a direct or indirect financial interest, pursuant to Section 310 of the Corporations Code of California, (ii) indemnification of agents of the corporation, pursuant to Section 317 of that Code, (iii) a reorganization of the corporation, pursuant to Section 1201 of that Code, and (iv) a distribution in dissolution other than in accordance with the rights of outstanding preferred shares, pursuant to Section 2007 of that Code, the notice shall be given at least ten (10) days before the consummation of any action authorized by that approval. Section ll. RECORD DATE FOR SHAREHOLDER NOTICE, VOTING, AND GIVING CONSENTS. For purposes of determining the share holders entitled to notice of any meeting or to vote or entitled to give consent to corporate action without a meeting, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days before the date of any such meeting nor more than sixty (60) days before any such action without a meeting, and in this event only shareholders of record on the date so fixed are entitled to notice and to vote or to give consents, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date: (a) The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held. (b) The record date for determining shareholders entitled to give consent to corporate action in writing without 7 a meeting, (i) when no prior action by the board has been taken, shall be the day on which the first written consent is given, or (ii) when prior action of the board has been taken, shall be at the close of business on the day on which the board adopts the resolution relating to that action, or the sixtieth (60th) day before the date of such other action, whichever is later. Section 12. PROXIES. Every person entitled to vote for directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the secretary of the corporation. A proxy shall be deemed signed if the shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission, or otherwise) by the shareholder or the shareholder's attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it, before the vote pursuant to that proxy, by a writing delivered to the corporation stating that the proxy is revoked, or by a subsequent proxy executed by, or attendance at the meeting and voting in person by, the person executing the proxy; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the corporation before the vote pursuant to that proxy is counted; provided, however, that no proxy shall be valid after the expiration of eleven (ll) months from the date of the proxy, unless otherwise provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Sections 705(e) and 705(f) of the Corporations Code of California. Section 13. INSPECTORS OF ELECTION. Before any meeting of shareholders, the board of directors may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are so appointed, the chairman of the meeting may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (l) or three (3). If inspectors are appointed at a meeting on the request of one or more shareholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine 8 whether one (l) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the chairman of the meeting may, and upon the request of any shareholder or a shareholder's proxy shall, appoint a person to fill that vacancy. These inspectors shall: (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies; (b) Receive votes, ballots, or consents; (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote; (d) Count and tabulate all votes or consents; (e) Determine when the polls shall close; (f) Determine the result; and (g) Do any other acts that may be proper to conduct the election or vote with fairness to all shareholders. ARTICLE III DIRECTORS Section l. POWERS. Subject to the provisions of the California General Corporation Law and any limitations in the articles of incorporation and these bylaws relating to action required to be approved by the shareholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. Without prejudice to these general powers, and subject to the same limitations, the directors shall have the power to: 9 (a) Select and remove all officers, agents, and employees of the corporation; prescribe any powers and duties for them that are consistent with law, with the articles of incorporation, and with these bylaws; fix their compensation; and require from them security for faithful service. (b) Change the principal executive office or the principal business office in the State of California from one location to another; cause the corporation to be qualified to do business in any other state, territory, dependency, or country and to conduct business within or without the State of California; and designate any place within or without the State of California for the holding of any shareholders' meeting, or meetings, including annual meetings. (c) Adopt, make, and use a corporate seal; prescribe the forms of certificates of stock; and alter the form of the seal and certificates. (d) Authorize the issuance of shares of stock of the corporation on any lawful terms, in consideration of money paid, labor done, services actually rendered, debts or securities cancelled, or tangible or intangible property actually received. (e) Borrow money and incur indebtedness on behalf of the corporation, and cause to be executed and delivered for the corporation's purposes, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, and other evidences of debt and securities. Section 2. NUMBER AND QUALIFICATION OF DIRECTORS. The number of directors of the corporation shall be no less than 9 nor more than 17. The exact number of directors shall be 14 until changed, within the limits specified above, by a bylaw amending this Section 2, duly adopted by the board of directors or by the shareholders. The indefinite number of directors may be changed, or a definite number fixed without provision for an indefinite number, by a duly adopted amendment to the articles of incorporation; provided, however, that an amendment reducing the number or the minimum number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting of the shareholders, or the shares not 10 consenting in the case of action by written consent, are equal to more than 16 2/3% of the outstanding shares entitled to vote. No amendment may change the stated maximum number of authorized directors to a number greater than two times the stated minimum number of directors minus one. Section 3. ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the shareholders to hold office until the next annual meeting. Each director, including a director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified. Section 4. VACANCIES. Vacancies in the board of directors may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director, except that a vacancy created by the removal of a director by the vote or written consent of the shareholders or by court order may be filled only by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of holders of a majority of the outstanding shares entitled to vote. Each director so elected shall hold office until the next annual meeting of the shareholders and until a successor has been elected and qualified. A vacancy or vacancies in the board of directors shall be deemed to exist in the event of the death, resignation, or removal of any director, or if the board of directors by resolution declares vacant the office of a director who has been declared of unsound mind by an order of court or convicted of a felony, or if the authorized number of directors is increased, or if the shareholders fail, at any meeting of shareholders at which any director or directors are elected, to elect the number of directors to be voted for at that meeting. The shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the direc tors, but any such election by written consent shall require the consent of a majority of the outstanding shares entitled to vote. Any director may resign effective on giving written notice 11 to the chairman of the board, the president, the secretary, or the board of directors, unless the notice specifies a later time for that resignation to become effective. If the resignation of a director is effective at a future time, the board of directors may elect a successor to take office when the resignation becomes effective. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. Section 5. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. Regular meetings of the board of directors may be held at any place within or outside the State of California that has been designated from time to time by resolution of the board. In the absence of such a designation, regular meetings shall be held at the principal executive office of the corporation. Special meetings of the board shall be held at any place within or outside the State of California that has been designated in the notice of the meeting or, if not stated in the notice or there is no notice, at the principal executive office of the corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all directors participating in the meeting can hear one another, and all such directors shall be deemed to be present in person at the meeting. Section 6. ANNUAL MEETING. Immediately following each annual meeting of shareholders, the board of directors shall hold a regular meeting for the purpose of organization, any desired election of officers, and the transaction of other business. Notice of this meeting shall not be required. Section 7. OTHER REGULAR MEETINGS. Other regular meetings of the board of directors shall be held without call at such time as shall from time to time be fixed by the board of directors. Such regular meetings may be held without notice. Section 8. SPECIAL MEETINGS. Special meetings of the board of directors for any purpose or purposes may be called at any time by the chairman of the board or the president or the secretary or any two directors. 12 Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. In case the notice is mailed, it shall be deposited in the United States mail at least four (4) days before the time of the holding of the meeting. In case the notice is delivered personally, or by telephone or telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the corporation. Section 9. QUORUM. A majority of the authorized number of directors shall constitute a quorum for the transaction of business, except to adjourn as provided in Section ll of this Article III. Every act done or decision made by a majority of the directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the board of directors, subject to the provisions of Section 310 of the Corporations Code of California (as to approval of contracts or transactions in which a director has a direct or indirect material financial interest), Section 311 of that Code (as to appointment of committees), and Section 317(e) of that Code (as to indemnification of directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. Section 10. WAIVER OF NOTICE. The transactions of any meeting of the board of directors, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes. The waiver of notice or consent need not specify the purpose of 13 the meeting. All such waivers, consents, and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any director who attends the meeting without protesting before or at its commencement, the lack of notice to that director. Section ll. ADJOURNMENT. A majority of the directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place. Section 12. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four hours, in which case notice of the time and place shall be given before the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the directors who were not present at the time of the adjournment. Section 13. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the board of directors may be taken without a meeting, if all members of the board shall individually or collectively consent in writing to that action. Such action by written consent shall have the same force and effect as a unanimous vote of the board of directors. Such written consent or consents shall be filed with the minutes of the proceedings of the board. Section 14. FEES AND COMPENSATION OF DIRECTORS. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement of expenses, as may be fixed or determined by resolution of the board of directors. This Section 14 shall not be construed to preclude any director from serving the corporation in any other capacity as an officer, agent, employee, or otherwise, and receiving compensation for those services. ARTICLE IV COMMITTEES Section l. COMMITTEES OF DIRECTORS. The board of 14 directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the board. The board may designate one or more directors as alternate members of any committee who may replace any absent member at any meeting of the committee. Any committee, to the extent provided in the resolution of the board, shall have all the authority of the board, except with respect to: (a) the approval of any action which, under the General Corporation Law of California, also requires shareholders' approval or approval of the outstanding shares; (b) the filling of vacancies on the board of directors or in any committee; (c) the fixing of compensation of the directors for serving on the board or on any committee; (d) the amendment or repeal of bylaws or the adoption of new bylaws; (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable; (f) a distribution to the shareholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the board of directors; or (g) the appointment of any other committees of the board of directors or the members of these committees. Section 2. MEETINGS AND ACTION OF COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Sections 5 (place of meetings), 7 (regular meetings), 8 (special meetings and notice), 9 (quorum), 10 (waiver of notice), 11 (adjournment), 12 (notice of adjournment), and 13 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of 15 directors and its members, except that the time of regular meetings of committees may be determined either by resolution of the board of directors or by resolution of the committee; special meetings of committees may also be called by resolution of the board of directors; and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V OFFICERS Section l. OFFICERS. The officers of the corporation shall be a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, a chairman of the board, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article V. Any number of offices may be held by the same person. Section 2. ELECTION OF OFFICERS. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be chosen by the board of directors, and each shall serve at the pleasure of the board, subject to the rights, if any, of any officer under any contract of employment. Section 3. SUBORDINATE OFFICERS. The board of directors may appoint, and may empower the president to appoint, such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the board of directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION OF OFFICERS. Subject 16 to the rights, if any, of any officer under any contract of employment, any officer may be removed, either with or without cause, by the board of directors, at any regular or special meeting of the board, or, except in the case of an officer chosen by the board of directors, by an officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to that office. Section 6. CHAIRMAN OF THE BOARD. The chairman of the board, if such an officer be elected, shall, if present, preside at meetings of the board of directors and exercise and perform such powers and duties as may be from time to time assigned to him by the board of directors or prescribed by the bylaws. If there is no president, the chairman of the board shall, in addition be the chief executive officer of the corporation and shall have the powers and duties prescribed in Section 7 of this Article V. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, if there be such an officer, the president shall be the chief executive officer of the corporation and shall, subject to the control of the board of directors, have general supervision, direction, and control of the business and the officers of the corporation. He shall preside at all meetings of the shareholders and, in the absence of the chairman of the board, or if there be none, at all meetings of the board of directors. He shall have the general powers and duties of management usually vested in the office of president of a corporation, and shall have such other powers 17 and duties as may be prescribed by the board of directors or by the bylaws. Section 8. VICE PRESIDENT. In the absence or disability of the president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president, and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform other duties as from time to time may be prescribed for them respectively by the board of directors or the bylaws, and the president, or the chairman of the board. Section 9. SECRETARY. The secretary shall keep or cause to be kept, at the principal executive office or such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and shareholders, with the time and place of holding, whether regular or special, and, if special, how authorized, the notice given, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at shareholders' meetings, and the proceedings. The secretary shall keep, or cause to be kept, at the principal executive office or at the office of the corporation's transfer agent or registrar, as determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all shareholders and their addresses, the number of classes of shares held by each, the number and date of certificates issued for the same, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the shareholders and of the board of directors required by the bylaws or by law to be given, and he shall keep the seal of the corporation if one be adopted, in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. 18 Section 10. CHIEF FINANCIAL OFFICER. The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, retained earnings and shares. The books of the account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit moneys and other valuables in the name and to the credit of the corporation with such depositaries as may be designated by the board of direc tors. He shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or the bylaws. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND OTHER AGENTS; INSURANCE OF DIRECTORS AND OFFICERS Section 1. INDEMNIFICATION. (i) The corporation shall indemnify its Officers and Directors to the fullest extent permitted by law, including those circumstances in which indemnification would otherwise be discretionary; (ii) the corporation is required to advance expenses to its Officers and Directors as incurred, including expenses relating to obtaining a determination that such Officers and Directors are entitled to indemnification, provided that they undertake to repay the amount advanced if it is ultimately determined that they are not entitled to indemnification; (iii) an Officer or Director may bring suit against the corporation if a claim for indemnification is not timely paid; (iv) the corporation may not retroactively amend this Section 1 in a way which is adverse to its Officers and Directors; (v) the provisions of subsections (i) through (iv) above shall apply to all past and present Officers and Directors of the corporation. 19 Indemnification of Agents of the corporation who are not its Officers and Directors shall be in accordance with the provisions of Section 317 of the Corporations Code of California. The corporation may enter into indemnification agreements with its Directors, Officers and other Agents upon such terms and conditions as are deemed to be in the best interests of the corporation by its board of directors. The other provisions of this Section 1 to the contrary notwithstanding, the corporation shall not be obligated: (a) to indemnify or advance expenses to an Officer, Director or Agent with respect to proceedings or claims initiated or brought voluntarily by such Officer, Director or Agent and not by way of defense, except with respect to proceedings brought to establish or enforce a right to indemnification under an indemnification agreement or any statute or law or otherwise as required under Section 317 of the Corporations Code of California, but such indemnification or advancement of expenses may be provided by the corporation in specific cases if the board of directors has approved the bringing of such suit; (b) to indemnify an Officer, Director or Agent for any expenses incurred with respect to any proceeding instituted by such Officer, Director or Agent to enforce or interpret provis ions of an indemnity agreement or this Section 1, if a court of competent jurisdiction determines that each of the material assertions made by the Officer, Director or Agent in such proceeding was not made in good faith or was frivolous; (c) to indemnify an Officer, Director or Agent for expenses or liabilities of any type whatsoever (including, but not limited to, judgments, fines, ERISA excise taxes or penalties, and amounts paid in settlement) which have been paid or satisfied by an insurance carrier under a policy of officers' and directors' liability insurance maintained by the corporation; provided that the corporation shall be obligated to remit to the Officer, Director or Agent any insurance proceeds received in respect of expenses or liabilities previously paid or satisfied by such Officer, Director or 20 Agent; (d) to indemnify an Officer, Director or Agent for expenses, judgments, fines or penalties sustained, or for an accounting of profits made from, the purchase and sale by such Officer, Director or Agent of securities of the corporation in violation of the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, the rules and regulations promulgated thereunder, any amendments thereto or any similar provisions of any federal, state or local statutory law; or (e) in the event a court of competent jurisdiction finally determines that such indemnification is unlawful. The term "Officer" as used in this Section 1 shall mean each person who is, or was, appointed to the office of Chairman of the Board, President, Vice President, Secretary, Assistant Secretary, Chief Financial Officer Treasurer, Assistant Treasurer, and such other office of the corporation as the board shall designate from time to time. The term "Director" as used in this Section 1 shall mean any person who is, or was, appointed to serve on the board of directors either by the shareholders or the remaining board members. The term "Agent" as used in this Section 1 shall have the same meaning as that set forth in Section 317(a) of the Corporations Code of California, except that it shall not include Officers and Directors. Section 2. INSURANCE. The corporation may purchase and maintain insurance on behalf of its Directors, Officers and Agents, against any liability asserted against, or incurred by, any of them by reason of the fact that such person is, or was, a Director, Officer or Agent of the corporation, whether or not the corporation would have the power to indemnify such persons against such liability under the General Corporation Law of California. ARTICLE VII RECORDS AND REPORTS Section l. MAINTENANCE AND INSPECTION OF SHARE REGISTER. 21 The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the board of directors, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of shares held by each shareholder. A shareholder or shareholders of the corporation holding at least five percent (5%) in the aggregate of the outstanding voting shares of the corporation may (i) inspect and copy the records of shareholders' names and addresses and shareholdings during usual business hours on five days prior written demand on the corporation, and (ii) obtain from the transfer agent of the corporation, on written demand and on the tender of such transfer agent's usual charges for such list, a list of the shareholders' names and addresses, who are entitled to vote for the election of directors, and their shareholdings, as of the most recent record date for which that list has been compiled or as of a date specified by the shareholder after the date of demand. This list shall be made available to any such shareholder by the transfer agent on or before the latter of five (5) days after the demand is received or the date specified in the demand as the date as of which the list is to be compiled. The record of shareholders shall be open to inspection on the written demand of any shareholder or holder of a voting trust certificate, at any time during the usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. Any inspection and copying under this Section l may be made in person or by an agent or attorney of the shareholder or holder of a voting trust certificate making the demand. Section 2. MAINTENANCE AND INSPECTION OF BYLAWS. The corporation shall keep at its principal executive office or, if its principal executive office is not in the State of California, at its principal business office in this state, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California and the corporation has no principal business office in this state, the Secretary shall, upon the written request of 22 any shareholder, furnish to that shareholder a copy of the bylaws as amended to date. Section 3. MAINTENANCE AND INSPECTION OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the shareholders and the board of directors and any committee or committees of the board of directors shall be kept at such place or places designated by the board of directors or, in the absence of such designation, at the principal executive office of the corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form. The minutes and accounting books and records shall be open to inspection upon the written demand of any shareholder or holder of a voting trust certificate, at any reasonable time during the usual business hours, for a purpose reasonably related to the holder's interests as a shareholder or as the holder of a voting trust certificate. The inspection may be made in person or by an agent or attorney, and shall include the right to copy and make extracts. These rights of inspection shall extend to the records of each subsidiary corporation of the corporation. Section 4. INSPECTION BY DIRECTORS. Every director shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the corporation and each of its subsidiary corporations. This inspection by a director may be made in person, or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents. Section 5. ANNUAL REPORT TO SHAREHOLDERS. The board of directors shall cause an annual report to be sent to the shareholders not later than one hundred twenty days (120) after the close of the fiscal year adopted by the corporation. This report shall be sent at least fifteen (15) days before the annual meeting of shareholders to be held during the next fiscal year and in the manner specified in Section 5 of Article II of these bylaws for giving notice to shareholders of the corporation. The annual report shall contain a balance sheet as of the end of the fiscal year and an income statement and statement of changes in financial position for the fiscal year, accompanied by any report of independent accountants or, if 23 there is no such report, the certificate of an authorized officer of the corporation that the statements were prepared without audit from the books and records of the corporation. Section 6. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the corporation for each fiscal year, and any accompanying balance sheet of the corporation as of the end of each such period that has been prepared by the corporation, shall be kept on file in the principal executive office of the corporation for twelve (12) months and each such statement shall be exhibited at any reasonable time to any shareholder demanding an examination of any such statement or a copy shall be mailed to any such shareholder. If a shareholder or shareholders holding at least five percent (5%) of the outstanding shares of any class of stock of the corporation makes a written request to the corporation for an income statement of the corporation for the three-month, six-month or nine-month period of the then current fiscal year ended more than thirty (30) days before the date of the request, and a balance sheet of the corporation as of the end of that period, the chief financial officer shall cause that statement to be prepared, if not already prepared, and shall deliver personally or mail that statement or statements to the person making the request within thirty (30) days after the receipt of the request. If the corporation has not sent to the shareholders its annual report for the last fiscal year, this report shall likewise be delivered or mailed to the shareholder or shareholders within thirty (30) days after the request. The corporation shall also, on the written request of any shareholder, mail to the shareholder a copy of the last annual, semi-annual or quarterly income statement which it has prepared, and a balance sheet as of the end of that period. The quarterly income statements and balance sheets referred to in this section shall be accompanied by the report, if any, of any independent accountants engaged by the corporation or the certificate of an authorized officer of the corporation that the financial statements were prepared without audit from the books and records of the corporation. 24 Section 7. ANNUAL STATEMENT OF GENERAL INFORMATION. The corporation shall, during the period commencing on April l and ending on September 30 in each year, file with the Secretary of State of the State of California, on the prescribed form, a statement setting forth the authorized number of directors, the names and complete business or residence addresses of the chief executive officer, secretary and chief financial officer, the street address of its principal executive office or principal business office in this state and the general type of business activity of the corporation, together with a designation of the agent of the corporation for the purpose of service of process, all in compliance with Section 1502 of the Corporations Code of California. ARTICLE VIII GENERAL CORPORATE MATTERS Section l. RECORD DATE FOR PURPOSES OTHER THAN NOTICE AND VOTING. For purposes of determining the shareholders entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action (other than action by shareholders by written consent without a meeting), the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) days before any such action, and in that case only shareholders of record on the date so fixed are entitled to receive the dividend, distribution, or allotment of rights or to exercise the rights, as the case may be, not withstanding any transfer of any shares on the books of the corporation after the record date so fixed, except as otherwise provided in the California General Corporation Law. If the board of directors does not so fix a record date, the record date for determining shareholders for any such purpose shall be at the close of business on the day on which the board adopts the applicable resolution or the sixtieth (60th) day before the date of that action, whichever is later. Section 2. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes, or other evidences of indebtedness, issued in the name 25 of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the board of directors. Section 3. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation, and this authority may be general or confined to specific instances; and, unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. Section 4. CERTIFICATES FOR SHARES. A certificate or certificates for shares of the capital stock of the corporation shall be issued to each shareholder when any of these shares are fully paid, and the board of directors may authorize the issuance of certificates or shares as partly paid provided that these certificates shall state the amount of the consideration to be paid for them and the amount paid. All certificates shall be signed in the name of the corporation by the chairman of the board or vice chairman of the board or president or vice president and by the chief financial officer or an assistant treasurer or the secretary or an assistant secretary, certifying the number of shares and the class or series of shares owned by the shareholder. Any or all of the signatures on the certificates may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be that officer, transfer agent, or registrar before that certificate is issued, it may be issued by the corporation with the same effect as if that person were an officer, transfer agent, or registrar at the date of issue. Section 5. LOST CERTIFICATES. Except as provided in this Section 5, no new certificates for shares shall be issued to replace an old certificate unless the latter is surrendered to the corporation and cancelled at the same time. The board of 26 directors may, in case any share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and condi tions as the board may require, including provision for in demnification of the corporation secured by a bond or other adequate security sufficient to protect the corporation against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate. Section 6. REPRESENTATION OF SHARES OF OTHER CORPOR ATIONS. The chairman of the board, the president, or any vice president, or any other person authorized by resolution of the board of directors or by any of the foregoing designated officers, is authorized to vote on behalf of the corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the corporation. The authority granted to these officers to vote or represent on behalf of the corporation any and all shares held by the corporation in any other corporation or corporations may be exercised by any of these officers in person or by any person authorized to do so by a proxy duly executed by these officers. Section 7. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the California General Corpor ation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. ARTICLE IX AMENDMENTS Section l. AMENDMENT BY SHAREHOLDERS. New bylaws may be adopted or these bylaws may be amended or repealed by the vote or written consent of holders of a majority of the outstanding shares entitled to vote; provided, however, that if the articles of incorporation of the corporation set forth the 27 number of authorized directors of the corporation, the authorized number of directors may be changed only by an amendment of the articles of incorporation. Section 2. AMENDMENT BY DIRECTORS. Subject to the rights of the shareholders as provided in Section l of this Article IX to adopt, amend or repeal bylaws, bylaws may be adopted, amended or repealed by the board of directors; provided, however, that the board of directors may adopt a bylaw or amendment of a bylaw changing the authorized number of directors only for the purpose of fixing the exact number of directors within the limits specified in the articles of incorporation or in Section 2 of Article III of these bylaws. 28 EX-4.F 3 AMENDMENT TO THE CREDIT AGREEMENT Exhibit (4)(f) AMENDMENT NO. 5 AMENDMENT NO. 5 dated as of February 16, 1996 to the AMENDMENT AND RESTATEMENT dated as of April 28, 1993 of CREDIT AGREEMENT dated as of April 21, 1992 between THE FIRST AMERICAN FINANCIAL CORPORATION (the "Company"), the ------- lenders party thereto (the "Lenders") and THE CHASE MANHATTAN BANK (NATIONAL ------- ASSOCIATION), as agent (the "Agent") for the Lenders (such Amendment and ----- Restatement, as amended by Amendment No. 1 thereto dated as of June 1, 1994, Amendment No. 2 thereto dated as of November 22, 1994, Amendment No. 3 thereto dated as of March 31, 1995 and Amendment No. 4 thereto dated as of June 1, 1995, being herein called the "Credit Agreement"). ---------------- The Company has requested that the Lenders agree to certain amendments of the Credit Agreement. The Lenders are willing to do so on the terms and conditions contained herein. Accordingly, the parties hereto hereby agree as follows: Section 1. Definitions. Terms defined in the Credit ----------- Agreement shall have the same meanings when used herein. Section 2. Amendments of Credit Agreement. Effective as of the ------------------------------ date, and subject to the conditions, set forth in Section 3 hereof, the Credit Agreement is hereby amended as follows: A. Section 1.01 of the Credit Agreement is amended by inserting the following new defined terms in the appropriate alphabetical order: "Amendment No. 5" shall mean Amendment No. 5 dated as --------------- of February 16, 1996 to this Agreement. "Arbitrage Loans" shall mean loans made by any financial --------------- institution (a "lender") which is, at the time of the making of such loan, a depository of the Company or any Subsidiary of the Company, to the Company or any such Subsidiary in an amount not exceeding the amount of the deposits of the Company or any such Subsidiary held by such depository, the proceeds of which are invested in U.S. Government securities and/or certificates of deposit rated -2- A-1 or P-1 and having a term not exceeding the maturity date of such loan (but in no event longer than 92 days), provided that (i) the relevant borrower shall have a right of offset against such investment (in the case of certificates of deposit) and (ii) all such loans must be off the balance sheet of the Company and its Subsidiaries at the last day of any quarterly fiscal period. "Insured Depository Subsidiary" shall mean any subsidiary of ----------------------------- the Company that is an "insured depository institution" within the meaning of 12 U.S.C. ss.1813(c)(2). B. Section 1.01 of the Credit Agreement is amended by changing the defined terms "Applicable Margin" and "Capital Expenditures" to read as follows: "Applicable Margin" shall mean, with respect to Bank ----------------- Loans: (a) with respect to such Loans that are Base Rate Loans, zero; and (b) with respect to such Loans that are Eurodollar Loans, (i) for any period commencing on the first date of a fiscal quarter of the Company (the "Current Fiscal Quarter") ---------------------- immediately following the date on which the Company shall have delivered a certificate of a senior financial officer of the Company demonstrating in reasonable detail (based upon financial statements of the Company for the fiscal quarter most recently ended that have been delivered to the Lenders pursuant to Section 8.01(a) or (b) hereof) (each a "Rate ---- Certificate") that the Pro Forma Fixed Charge Coverage Ratio ----------- for the most recently completed Computation Period is less than 1.40:1.0 to and including the last day of the Current Fiscal Quarter, 1% per annum; (ii) if the Company shall have delivered a Rate Certificate demonstrating in reasonable detail that the Pro Forma Fixed Charge Coverage Ratio for the most recently completed Computation Period is equal to or -3- greater than 1.40:1.0, then for the Current Fiscal Quarter, (x) for each day of the Current Fiscal Quarter on which the Company shall have either or both of an S&P Claims Paying Rating and a Moody's Financial Strength Rating, the per annum margin set forth below opposite the relevant ratings category for such day: Ratings Category Applicable Margin ---------------- ----------------- S&P Claims Paying Rating 0.50% is A or above and Moody's Financial Strength Rating is A2 or above ("Category A ---------- Period") ------ S&P Claims Paying Rating 0.625% is A- or above and Moody's Financial Strength Rating is A3 or above ("Category B ---------- Period"), but a Category A ------ Period is not in effect S&P Claims Paying Rating 0.75% is BBB or above and Moody's Financial Strength Rating is Baa2 or above ("Category C Period"), ----------------- but neither a Category A Period nor a Category B Period is in effect S&P Claims Paying Rating 1.00%, is BBB- or below or the Moody's Financial Strength Rating is Baa3 or below ("Category D Period") ----------------- provided that (A) if the Company shall have only one such rating on any such day, the Applicable Margin set forth above opposite such rating shall apply for such day and (B) if the Company shall have an S&P Claims -4- Paying Rating and a Moody's Financial Strength Rating in different ratings category for any such day, the Applicable Margin set forth above for the lower ratings category shall apply for such day; and (iii) if the Company shall have neither an S&P Claims Paying Rating nor a Moody's Financial Strength Rating on any day during the Current Fiscal Quarter, the per annum margin set forth below opposite the Adjusted Leverage Ratio, measured as at the end of the immediately preceding fiscal quarter of the Company (based upon financial statements of the Company for the fiscal quarter most recently ended that have been delivered to the Lenders pursuant to Section 8.01(a) or (b) hereof and set forth in reasonable detail in the certificate of a senior financial officer of the Company delivered pursuant to the last paragraph of Section 8.01 hereof): Adjusted Leverage Ratio Applicable Margin ----------------------- ----------------- < 30% 0.80% - > 30% 1.00%. "Capital Expenditures" shall mean, for any period, -------------------- expenditures (including, without limitation, the aggregate amount of Capital Lease Obligations incurred during such period) made by the Company or any of its Consolidated Subsidiaries to acquire or construct fixed assets, plant and equipment (including renewals, improvements and replacements, but excluding (a) repairs, (b) asset purchases of title plants, (c) expenditures made pursuant to the Riverside Acquisition, (d) expenditures made in connection with the replacement, substitution or restoration of assets to the extent financed from insurance proceeds or with awards of compensation arising from a taking by eminent domain or condemnation, (e) the FARETSI Building Purchase and (f) expenditures made in respect of the purchase of real property by the Company or any of its Subsidiaries for occupancy or use in their respective businesses) during such period computed in accordance with GAAP. -5- "Moody's Financial Strength Rating" shall mean the --------------------------------- rating assigned to an insurance company by Moody's Investors Services, Inc. with regard to its "financial strength". "S&P Claims Paying Rating" shall mean the rating assigned to ------------------------ an insurance company by Standard & Poor's Corporation with regard to its "claims paying ability". C. Section 3.02(d) of the Credit Agreement (which was added to the Credit Agreement by Section 3.J of Amendment No. 2 thereto dated as of November 22, 1994) is deleted in its entirety. D. Section 8 of the Credit Agreement is amended and restated in its entirety to read as follows: "Section 8. Covenants of the Company. The Company covenants ------------------------ and agrees with the Lenders and the Agent that, so long as any Loan is outstanding and until payment in full of all amounts payable by the Company hereunder: 8.01 Financial Statements, Etc. The Company will ------------------------- deliver to each of the Lenders: (a) as soon as available and in any event within 45 days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Company, consolidated and consolidating statements of income and consolidated statements of stockholders' equity and cash flow of the Company and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated and consolidating balance sheets of the Company and its Consolidated Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries, and said consolidating statements of income and balance sheets, to the extent that they relate to the Company on a parent -6- company stand alone basis, fairly present the individual unconsolidated financial condition and results of operations of the Company, in each case in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (b) as soon as available and in any event within 90 days after the end of each fiscal year of the Company, consolidated and consolidating statements of income and consolidated statements of stockholders' equity and cash flow of the Company and its Consolidated Subsidiaries for such fiscal year and the related consolidated and consolidating balance sheets of the Company and its Consolidated Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated and consolidating figures for the preceding fiscal year, and accompanied (i) in the case of said consolidated statements and balance sheet of the Company, by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of the Company and its Consolidated Subsidiaries as at the end of, and for, such fiscal year in accordance with generally accepted accounting principles, and a certificate of such accountants stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default, and (ii) in the case of said consolidating statements and balance sheets, to the extent that they relate to the Company on a parent company stand alone basis, by a certificate of a senior financial officer of the Company, which certificate shall state that said consolidating statements of income and balance sheets fairly present the individual unconsolidated financial condition and results of operations of the Company, in each case in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; (c) as soon as available and in any event within 45 days after the end of each of the first three quarterly fiscal periods of each fiscal year of each Material -7- Subsidiary which is not an Insurance Company, but only to the extent that consolidated statements are prepared by such Material Subsidiary for such period, consolidated statements of income and consolidated statements of stockholders' equity of such Material Subsidiary and its Consolidated Subsidiaries for such period and for the period from the beginning of the respective fiscal year to the end of such period, and the related consolidated balance sheets of such Material Subsidiary and its Consolidated Subsidiaries as at the end of such period, setting forth in each case in comparative form the corresponding consolidated figures for the corresponding period in the preceding fiscal year, accompanied by a certificate of a senior financial officer of such Material Subsidiary, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of such Material Subsidiary and its Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such period (subject to normal year-end audit adjustments); (d) as soon as available and in any event within 90 days after the end of each fiscal year of each Material Subsidiary which is not an Insurance Company, consolidated statements of income and consolidated statements of stockholders' equity and cash flow of such Material Subsidiary and its Consolidated Subsidiaries for such fiscal year and the related consolidated balance sheets of such Material Subsidiary and its Consolidated Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by a certificate of a senior financial officer of such Material Subsidiary, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of such Material Subsidiary and its Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; (e) as soon as available and in any event within 45 days after the end of each of the first three quarterly -8- fiscal periods of each fiscal year of each Insurance Company which is a Material Subsidiary (other than an indirect Material Subsidiary of the Company which is not required to file a Statutory Statement with any Applicable Insurance Regulatory Authority), Statutory Statements of such Insurance Company (prepared in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority) for such fiscal period, accompanied by (i) a certificate of a senior financial officer of such Insurance Company which certificate shall state that such financial statements present the financial condition of such Insurance Company in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority and (ii) a certificate of a senior financial officer of such Insurance Company, affirming the adequacy of Reserves of such Insurance Company as at the end of such fiscal quarter; (f) as soon as available and in any event within 60 days after the end of each fiscal year of each Insurance Company which is a Material Subsidiary (other than an indirect Material Subsidiary of the Company which is not required to file a Statutory Statement with any Applicable Insurance Regulatory Authority), the annual Statutory Statement of such Insurance Company (prepared in accordance with statutory accounting practices required or permitted by the Applicable Insurance Regulatory Authority) for such year and as filed with the Insurance Department of the applicable state, accompanied by (i) a certificate of a senior financial officer of such Insurance Company stating that said Statutory Statement presents the financial condition of such Insurance Company in accordance with the statutory accounting practices required or permitted by the applicable Insurance Regulatory Authority, and (ii) a certificate of a senior financial officer of such Insurance Company, affirming the adequacy of Reserves of such Insurance Company as at the end of such fiscal year; (g) to the extent prepared by the Company and as soon as available and in any event within 90 days after the end of each fiscal year of each Material Subsidiary which is an Insurance Company which is not required to file a Statutory Statement with any Applicable Insurance Regulatory Authority (i) except with respect to Midland Title Security, Inc. and -9- First American Title Company of Nevada, consolidated statements of income and consolidated statements of stockholders' equity of such Material Subsidiary and its Consolidated Subsidiaries for such fiscal year and the related consolidated balance sheets of such Material Subsidiary and its Consolidated Subsidiaries as at the end of such fiscal year, setting forth in each case in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by a certificate of a senior financial officer of such Material Subsidiary, which certificate shall state that said consolidated financial statements fairly present the consolidated financial condition and results of operations of such Material Subsidiary and its Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of, and for, such fiscal year; and (ii) with respect to each of Midland Title Security, Inc. and First American Title Company of Nevada, consolidated balance sheets of such Material Subsidiary and its Consolidated Subsidiaries as at the end of such fiscal year, setting forth in comparative form the corresponding consolidated figures for the preceding fiscal year, and accompanied by a certificate of a senior financial officer of such Material Subsidiary, which certificate shall state that said consolidated balance sheets fairly present the consolidated financial condition of such Material Subsidiary and its Consolidated Subsidiaries in accordance with generally accepted accounting principles, consistently applied, as at the end of such fiscal year; (h) promptly upon their becoming available, copies of all registration statements and regular periodic reports, if any, which the Company shall have filed with the Securities and Exchange Commission (or any governmental agency substituted therefor) or any national securities exchange; (i) promptly upon the mailing thereof to the shareholders of the Company generally, copies of all financial statements, reports and proxy statements so mailed; (j) as soon as possible, and in any event within 20 days after the Company knows or has reason to believe that any of the events or conditions specified below with -10- respect to any Plan or Multiemployer Plan has occurred or exists, a statement signed by a senior financial officer of the Company setting forth details respecting such event or condition and the action, if any, that the Company or its ERISA Affiliate proposes to take with respect thereto (and a copy of any report or notice required to be filed with or given to PBGC by the Company or an ERISA Affiliate with respect to such event or condition): (i) any reportable event, as defined in Section 4043(b) of ERISA and the regulations issued thereunder, with respect to a Plan, as to which PBGC has not by regulation waived the requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event (provided that a failure to meet the minimum funding standard -------- of Section 412 of the Code or Section 302 of ERISA, including, without limitation, the failure to make on or before its due date a required installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall be a reportable event regardless of the issuance of any waivers in accordance with Section 412(d) of the Code); and any request for a waiver under Section 412(d) of the Code for any Plan; (ii) the distribution of a notice of intent to terminate any Plan pursuant to Section 4041(c) of ERISA or any action taken by the Company or an ERISA Affiliate to terminate any Plan pursuant to Section 4041(c) of ERISA; (iii) the institution by PBGC of proceedings under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Plan, or the receipt by the Company or any ERISA Affiliate of a notice from a Multiemployer Plan that such action has been taken by PBGC with respect to such Multiemployer Plan; (iv) the complete or partial withdrawal from a Multiemployer Plan by the Company or any ERISA Affiliate that results in liability of the Company or any ERISA Affiliate in excess of $250,000 under Section 4201 or 4204 of ERISA (including the obligation -11- to satisfy secondary liability as a result of a purchaser default) or the receipt by the Company or any ERISA Affiliate of notice from a Multiemployer Plan that it is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that it intends to terminate or has terminated under Section 4041A of ERISA; (v) the institution of a proceeding by a fiduciary of any Multiemployer Plan against the Company or any ERISA Affiliate to enforce Section 515 of ERISA, which proceeding will or could reasonably be expected to result in any material liability of the Company or any ERISA Affiliate, which material liability will be, or could reasonably be expected to be, payable while this Agreement is in effect and which proceeding is not dismissed within 30 days; and (vi) the adoption of an amendment to any Plan that, pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA, would result in the loss of tax-exempt status of the trust of which such Plan is a part if the Company or an ERISA Affiliate fails to timely provide security to the Plan in accordance with the provisions of said Sections; (k) as soon as received by the Company, a copy of any final financial examination report (including, without limitation, any report in respect of any tri-annual examination conducted by any Applicable Insurance Regulatory Authority) or market conduct examination report issued by or prepared for any governmental authority (including any Applicable Insurance Regulatory Authority and NAIC) with respect to any Insurance Company; and (ii) to the extent disclosure to the Lenders is permitted by law, a copy of any financial examination report issued by or prepared for any governmental authority (including any Applicable Bank Regulatory Authority) with respect to the Company, First American Trust or First Security Thrift; (l) immediately, notice of actual (or threatened action that could lead to the) suspension, termination or revocation of any License of any Insurance Company which is -12- a Material Subsidiary by any governmental authority (including any Applicable Insurance Regulatory Authority), including any notice by any governmental authority of the commencement of any proceeding, hearing or administrative action to suspend, terminate or revoke any such License as a result of the failure by any such Insurance Company to take or refrain from taking, any action which adversely affects the authority of such Insurance Company to conduct its business after notice thereof by such governmental authority (including any such Applicable Insurance Regulatory Authority); (m) promptly after the Company knows or has reason to believe that any insurance, banking or other regulator having jurisdiction over the Company or any of its Material Subsidiaries has commenced any proceeding, issued any order, given notice of a formal hearing, sought relief from any court or taken any similar action with respect to the Company or any of its Material Subsidiaries that seeks to, or would, result in the revocation of any license or authorization of the Company or any of its Material Subsidiaries or materially restrict the ability of the Company or any of its Material Subsidiaries to do business in any jurisdiction, a notice describing in reasonable detail such proceeding, order, hearing or similar action; (n) at the time it furnishes statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company which certificate shall (i) list all Subject Property (as such term is defined in Section 8.23 hereof) acquired by the Company and its Subsidiaries during the most recently ended fiscal quarter and (ii) list all Investments made by the Company and its Subsidiaries pursuant to Section 8.08(d) hereof during the most recently ended fiscal quarter; (o) promptly upon their becoming available, each Call Report of each Bank Subsidiary prepared for or filed with any Applicable Bank Regulatory Authority; (p) immediately, but in any event no later than five days after the Company knows that any Applicable Bank -13- Regulatory Authority's specification by regulation of capital levels results in First Security Thrift being designated an "undercapitalized," "significantly undercapitalized" or "critically undercapitalized" institution pursuant to 12 U.S.C. ss.1831o, a notice identifying such designation and describing in reasonable detail the computations necessary to determine such designation; (q) promptly after the Company knows or has reason to believe that any Default has occurred, a notice of such Default describing the same in reasonable detail and, together with such notice or as soon thereafter as possible, a description of the action that the Company has taken or proposes to take with respect thereto; and (r) from time to time such other information regarding the financial condition, operations, business or prospects of the Company or any of its Subsidiaries (including, without limitation, any Plan or Multiemployer Plan and any reports or other information required to be filed under ERISA) as any Lender or the Agent may reasonably request. The Company will furnish to each Lender, at the time it furnishes each set of financial statements pursuant to paragraph (a) or (b) above, a certificate of a senior financial officer of the Company (i) to the effect that no Default has occurred and is continuing (or, if any Default has occurred and is continuing, describing the same in reasonable detail and describing the action that the Company has taken or proposes to take with respect thereto) and (ii) setting forth in reasonable detail the computations necessary to determine (x) Deferred Revenues (but only to the extent not already reflected as a discrete item in the set of financial statements furnished with such certificate) and (y) whether the Company is in compliance with Sections 8.07, 8.08, 8.09, 8.10, 8.11, 8.12, 8.13 and 8.14 hereof, as of the end of the respective quarterly fiscal period or fiscal year (such certificate to include, with respect to said Section 8.11, (I) a description in reasonable detail of the assumptions underlying the estimates used in determining Pro Forma Fixed Charges for the Computation Period commencing on the day next following the last day of such fiscal period or fiscal year and a certification that -14- such assumptions and estimates are reasonable and were made in good faith and (II) if such Computation Period commences on or after July 1, 1995, a description in reasonable detail of any material differences between such assumptions and the corres ponding assumptions underlying the estimates used in determining Pro Forma Fixed Charges for the then next preceding Computation Period and the reasons therefor). 8.02 Litigation. The Company will promptly give to each Lender ---------- notice of all legal or arbitral proceedings, and of all proceedings by or before any governmental or regulatory authority or agency, and any material development in respect of such legal or other proceedings, affecting the Company or any of its Subsidiaries, except proceedings which, if adversely determined, would not have a Material Adverse Effect. Without limiting the generality of the foregoing, the Company will give to each Lender notice of the assertion of any Environmental Claim by any Person against, or with respect to the activities of, the Company or any of its Subsidiaries and notice of any alleged violation of or non-compliance with any Environmental Laws or any permits, licenses or authorizations, other than any Environmental Claim or alleged violation which, if adversely determined, would not have a Material Adverse Effect. 8.03 Existence, Etc. (a) The Company will, and will -------------- cause each of its Material Subsidiaries to: (i) preserve and maintain its legal existence and all of its material rights, privileges, licenses and franchises (provided that -------- nothing in this Section 8.03 shall prohibit any transaction expressly permitted under Section 8.05 hereof); and (ii) maintain all of its Properties used or useful (in the good faith opinion of the Company) in its business in good working order and condition, ordinary wear and tear excepted. (b) The Company will, and will cause each of its Subsidiaries to: -15- (i) comply with the requirements of all applicable laws, rules, regulations and orders of governmental or regulatory authorities if failure to comply with such requirements could have a Material Adverse Effect; (ii) pay and discharge all taxes, assessments and governmental charges or levies imposed on it or on its income or profits or on any of its Property prior to the date on which penalties attach thereto, except for any such tax, assessment, charge or levy the payment of which is being contested in good faith and by proper proceedings and against which adequate reserves (as required by generally accepted accounting principles or statutory accounting practices, as the case may be) are being maintained; (iii) keep adequate records and books of account, in which complete entries will be made in accordance with generally accepted accounting principles or statutory accounting practices, as the case may be, consistently applied; and (iv) permit representatives of any Lender or the Agent, during normal business hours under guidance from officers of the Company or its Subsidiaries, to examine, copy and make extracts from its books and records, to inspect any of its Properties, and to discuss its business and affairs with its officers, all to the extent reasonably requested by such Lender or the Agent (as the case may be). 8.04 Insurance. The Company will, and will cause each of its --------- Subsidiaries to, keep insured by financially sound and reputable insurers all Property of a character usually insured by corporations engaged in the same or similar business similarly situated against loss or damage of the kinds and in the amounts customarily insured against by such corporations and carry such other insurance as is usually carried by such corporations. 8.05 Prohibition of Fundamental Changes. ---------------------------------- (a) The Company will not, nor will it permit any of its Material Subsidiaries to, enter into any transaction of merger or consolidation or amalgamation, or liquidate, wind up or -16- dissolve itself (or suffer any liquidation or dissolution). The Company will not, nor will it permit any of its Subsidiaries to, acquire any business or Property (including, without limitation, title plant assets) from, or capital stock (including, without limitation, the capital stock of any Subsidiary of the Company held by minority shareholders) of, or be a party to any acquisition of, any Person except for: (i) any such acquisition (which acquisition may be an Investment in a Corporate Affiliate), the consideration for which is paid solely in shares of common stock of the Company with a Book Value which, on the date of such acquisition (when added to the Book Value of all such other common stock issued as consideration pursuant to this clause (i)) does not exceed 15% of the total assets of the Company and its Subsidiaries (on a consolidated basis) on such date; (ii) any such acquisition which is required to be made by FATICO, First American Home Buyers Protection Corporation or First American Title Guaranty Holding Company under the Minority Stockholders Put Documents, and then only on or after the date so required to be made; (iii) any such acquisition (which acquisition may be an Investment in a Corporate Affiliate, but shall not include an acquisition referred to in clause (ii) above) made after the date of Amendment No. 5, the consideration for which is either paid in cash or through the assumption of Indebtedness; provided that (x) in the case -------- of each such acquisition (the "Subject Acquisition"), the sum of all ------------------- such consideration paid or assumed pursuant to this clause (iii) for the Subject Acquisition and all other such acquisitions effected on or after the date of Amendment No. 5 does not exceed a total aggregate amount of $100,000,000, (y) for any Subject Acquisition for which the consideration paid or assumed equals or exceeds $35,000,000, the Majority Lenders shall have consented thereto and (z) the aggregate amount of Investments permitted under this clause (iii) in First Security Thrift shall not exceed $5,000,000 in the aggregate; -17- (iv) purchases of inventory and office supplies to be sold or used in the ordinary course of business; (v) the Riverside Acquisition; (vi) Investments permitted under Section 8.08 hereof; and (vii) Capital Expenditures permitted under Section 8.14 hereof. (b) The Company will not, nor will it permit any of its Material Subsidiaries to, convey, sell, lease, transfer or otherwise dispose of, in one transaction or a series of transactions, all or a substantial part of its business or Property, whether now owned or hereafter acquired (including, without limitation, receivables and leasehold interests), provided that the -------- Company and its Material Subsidiaries may sell or dispose of any Property in the ordinary course of business and obsolete or worn-out Property no longer used or useful in its business. (c) Notwithstanding the foregoing provisions of this Section 8.05: (i) any Subsidiary of the Company (other than FATICO, First American Trust and FARETSI) may be merged or consolidated with or into: (x) the Company if the Company shall be the continuing or surviving corporation or (y) any other such Subsidiary; provided that if any such -------- transaction shall be between a Subsidiary and a Wholly Owned Subsidiary, the Wholly Owned Subsidiary shall be the continuing or surviving corporation; (ii) any Subsidiary of the Company may sell, lease, transfer or otherwise dispose of any or all of its Property (upon voluntary liquidation or otherwise) to the Company or a Wholly Owned Subsidiary of the Company; and (iii) the Company or any Subsidiary of the Company may merge or consolidate with any other Person (which is not a Subsidiary of the Company) if (x) in the case of a merger or -18- consolidation of the Company, the Company is the surviving corporation and, in any other case, the surviving corporation is a Wholly Owned Subsidiary of the Company and (y) after giving effect thereto no Default would exist hereunder. 8.06 Limitation on Liens. The Company will not, nor will it ------------------- permit any of its Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its Property, whether now owned or hereafter acquired, except: (a) Liens created pursuant to the Pledge Agreement; (b) Liens in existence on September 30, 1994 and, to the extent that any such Lien secures Indebtedness the aggregate principal or face amount of which equals or exceeds (or may equal or exceed) $1,000,000, listed in Schedule I to Amendment No. 2; (c) Liens imposed by any governmental authority for taxes, assessments or charges not yet due or which are being contested in good faith and by appropriate proceedings if adequate reserves with respect thereto are maintained on the books of the Company or the affected Subsidiaries, as the case may be, in accordance with generally accepted accounting principles (or, in the case of an Insurance Company, statutory accounting practices); (d) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings and Liens securing judgments but only to the extent for an amount and for a period not resulting in an Event of Default under Section 9(h) hereof; (e) pledges or deposits under worker's compensation, unemployment insurance and other social security legislation; -19- (f) deposits to secure the performance of bids, trade contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds, casualty insurance policies of the type usually carried by corporations engaged in businesses or activities that are the same as or similar to those of the Company and its Subsidiaries and other obligations of a like nature incurred in the ordinary course of business; (g) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business and encumbrances consisting of zoning restrictions, easements, licenses, restrictions on the use of Property or minor imperfections in title thereto which, in the aggregate, are not material in amount, and which do not in any case materially detract from the value of the Property subject thereto or interfere with the ordinary conduct of the business of the Company or any of its Subsidiaries; (h) Liens upon Property of any corporation which becomes a Subsidiary of the Company after April 21, 1992, provided that such Liens are in existence at the time such corporation becomes a Subsidiary of the Company and were not created in anticipation thereof; (i) Liens upon real and/or tangible personal Property used primarily in the ordinary course of the business of the Company and its Subsidiaries and acquired after April 21, 1992; (j) Liens upon the real and/or tangible personal Property acquired by FATICO pursuant to the Riverside Acquisition created no later than 90 days from the date of such acquisition solely for the purpose of securing the Indebtedness permitted by Section 8.07(e) hereof representing, or incurred to finance, the cost of such Property; provided that no such Lien shall extend to or cover any Property of -------- FATICO other than the Property so acquired and improvements thereon; (k) Liens upon the Property of First American Trust and Southwest Title and Trust Company which are created in -20- the ordinary course of their respective financial services businesses as such businesses are conducted as of April 21, 1992; (l) Liens upon Property of any Subsidiary of the Company securing Indebtedness of such Subsidiary to the Company or another Subsidiary of the Company that is the direct or indirect parent entity of such Subsidiary permitted by Section 8.07 hereof; (m) Liens upon Property of the Company or any of its Subsidiaries securing Arbitrage Loans; provided that no such Lien shall extend to or cover any such Property other than the securities and/or other investments in which the proceeds of such Arbitrage Loans have been invested; and (n) any extension, renewal or replacement of the foregoing, provided however, that the Liens permitted hereunder shall not be spread to cover any additional Indebtedness or Property (other than a substitution of like Property). 8.07 Indebtedness. The Company will not, nor will it permit ------------ any of its Subsidiaries to, create, incur, assume or suffer to exist any Indebtedness except: (a) Indebtedness to the Lenders hereunder; (b) Indebtedness outstanding on September 30, 1994 and, to the extent that any such Indebtedness has an aggregate principal or face amount which equals or exceeds (or may equal or exceed) $1,000,000, listed in Schedule I to Amendment No. 2; (c) Indebtedness of the Company and its Subsidiaries secured by Liens permitted under Section 8.06(i) hereof up to but not exceeding $45,000,000 at any one time outstanding; (d) Indebtedness of the Company incurred or assumed pursuant to any acquisition expressly permitted by clause (iii) of Section 8.05(a) hereof; -21- (e) Indebtedness of FATICO incurred pursuant to the Riverside Acquisition in an aggregate amount up to but not exceeding $6,000,000 at any one time outstanding; provided that the aggregate principal amount of Indebtedness permitted by this clause (e) shall not exceed 75% of the fair market value (as determined in good faith by a senior financial officer of the Company) of the real and/or tangible personal Property acquired by FATICO pursuant to the Riverside Acquisition; (f) Indebtedness of the Company to any Subsidiary of the Company, Indebtedness of any Subsidiary of the Company (the "Debtor ------ Subsidiary") to the Company or another Subsidiary of the Company that ---------- is the direct or indirect parent entity of the Debtor Subsidiary, and Indebtedness of direct Wholly Owned Subsidiaries of the Company to their respective Wholly Owned Subsidiaries; (g) Indebtedness of FATICO to FARETSI; (h) Arbitrage Loans; (i) Indebtedness representing Capital Lease Obligations to the extent permitted by Section 8.14 hereof; (j) Indebtedness of FATICO, First American Title Guaranty Holding Company and First American Home Buyers Protection Corporation with respect to Minority Stockholders Put Obligations; (k) Indebtedness of FARETSI and FATICO to the Company representing intercompany loans made by the Company from net proceeds received by the Company from its Equity Issuances; (l) additional Indebtedness of the Insurance Companies in respect of letters of credit (or similar instruments) and Guarantees issued in the ordinary course of the title insurance business in connection with settlement of title insurance claims, so long as the aggregate amount of all such Indebtedness does not exceed $10,000,000 at any one time outstanding; -22- (m) Indebtedness of the Company or any of its Subsidiaries in respect of letters of credit (or similar instruments) and guarantees issued in connection with settlement or administration of claims made against the Company or any of its Subsidiaries under insurance policies of the type usually carried by corporations engaged in businesses or activities that are the same as or similar to those of the Company and its Subsidiaries; (n) additional Indebtedness of the Company and its Subsidiaries (other than to each other) up to but not exceeding $25,000,000 at any one time outstanding; and (o) any extension, renewal or refinancing of the foregoing. 8.08 Investments. The Company will not, nor will it permit any ----------- of its Subsidiaries to, make or permit to remain outstanding any Investments except: (a) The Company may make or have outstanding the following: (i) Permitted Investments; (ii) operating deposit accounts with banks; (iii) Investments by the Company in capital stock of Subsidiaries of the Company to the extent outstanding on the Amendment No. 2 Effective Date (as defined in Amendment No. 2), and disclosed on Schedule II thereto; (iv) Investments by the Company in FATICO as contemplated by Section 8.18 hereof; (v) Interest Rate Protection Agreements (including those required by Section 8.15 hereof) so long as the aggregate outstanding notional principal amount of all transactions under such Agreements does not exceed an amount equal to the sum of the aggregate outstanding principal amount -23- of the Bank Loans plus the aggregate outstanding unused amount of the New Revolving Credit Commitments at any time; (vi) [intentionally omitted] (vii) Investments by the Company in its capacity as a "qualified intermediary" (as such term is defined on April 21, 1992 in Internal Revenue Service Reg. section 1.103(k)-1(g)(4)) in tax deferred exchanges arranged by First American Trust in the ordinary course of First American Trust's financial services business; (viii) Investments by the Company required to be made in any Subsidiary of the Company by any Applicable Bank Regulatory Authority or any Applicable Insurance Regulatory Authority; and (ix) Investments of the Company outstanding on December 31, 1991, so long as any such Investments (other than any such Investments in its Subsidiaries) are not "rolled over", renewed or extended subsequent to such date. (b) Any Insurance Company may make or have outstanding the following: (i) Permitted Investments (without regard to maturity limitations); (ii) operating deposit accounts with banks; (iii) Investments by such Insurance Company in capital stock of Subsidiaries of such Insurance Company to the extent outstanding on the Amendment No. 2 Effective Date (as defined in Amendment No. 2) and disclosed on Schedule II thereto and additional Investments by FATICO, First American Title Guaranty Holding Company and First American Home Buyers Protection Corporation in the capital stock of First American Title Guaranty Holding -24- Company and First American Home Buyers Protection Corporation required to be made pursuant to Minority Stockholders Put Obligations; (iv) Investments in Investment Grade Debt Securities, provided that the aggregate amount of all such Investments made by the Insurance Companies in the securities of any one issuer does not exceed 5% of the Combined Investment Portfolio; (v) Investments made in the ordinary course of the title insurance business in connection with settlement of title insurance claims (subject to the requirements of Section 8.23 hereof); (vi) [intentionally omitted] (vii) Investments required to be made in any Subsidiary of any Insurance Company by any Applicable Bank Regulatory Authority or any Applicable Insurance Regulatory Authority; (viii) Investments of such Insurance Company outstanding on December 31, 1991, so long as any such Investments (other than Investments in its Subsidiaries) are not "rolled over", renewed or extended subsequent to such date; and (ix) FATICO may (notwithstanding Section 8.05 hereof) exchange the capital stock of North American Title Insurance Company held by it for approximately 17% of the capital stock of North American Asset Development Corporation. (c) Any Subsidiary of the Company which is not an Insurance Company (other than First Security Thrift) may make or have outstanding the following: (i) Permitted Investments (without regard to maturity limitations); -25- (ii) operating deposit accounts with banks; (iii) Investments by such Subsidiary in capital stock of Subsidiaries of such Subsidiary to the extent outstanding on the Amendment No. 2 Effective Date (as defined in Amendment No. 2) and disclosed on Schedule II thereto; (iv) [intentionally omitted] (v) Investments by FARETSI with respect to the intercompany Indebtedness permitted by clause (g) of Section 8.07 hereof; (vi) Investments made by First American Trust and Southwest Title and Trust Company in the ordinary course of their respective financial services businesses as such businesses are conducted on April 21, 1992; (vii) Investments in Investment Grade Debt Securities, provided that any such Investment does not result in any such Subsidiary holding Investments of more than $1,000,000 in any one issuer; (viii) Investments required to be made in any Subsidiary of such Subsidiary by any Applicable Bank Regulatory Authority or any Applicable Insurance Regulatory Authority; and (ix) Investments of such Subsidiary out standing on December 31, 1991, so long as any such Investments (other than Investments in its Subsidiaries) are not "rolled over", renewed or extended subsequent to such date. (d) Additional Investments (including, without limitation, Investments in Corporate Affiliates) may be made by the Company and its Subsidiaries (other than First Security Thrift) in an aggregate amount not exceeding an amount equal to 25% of Stockholders' -26- Equity, provided that (w) with respect to Investments made by -------- the Insurance Companies, such Investments are admitted assets, assets acquired in settlement of claims, or non-admitted assets in an aggregate amount not exceeding $5,000,000, (x) the aggregate amount of all such Investments made by the Company and its Subsidiaries in any one issuer shall not exceed $5,000,000, (y) no more than 60% of the aggregate amount permitted for such Investments in this subsection (d) shall be in equity securities and (z) any such Investment in equity securities otherwise permitted by clause (y) above shall not result in either the Company or any of its Subsidiaries holding more than a 20% ownership interest in any one issuer of equity securities. (e) First Security Thrift may make or have outstanding the following: (i) Permitted Investments (without regard to maturity limitations); (ii) operating deposit accounts with banks; (iii) Investments in Investment Grade Debt Securities, provided that the aggregate amount of all -------- such Investments made by First Security Thrift in the securities of any one issuer does not exceed $1,000,000; (iv) Investments in commercial and residential real estate loans or mortgages, provided -------- that any such Investments shall be within the legal lending guidelines prescribed by the Federal Deposit Insurance Corporation (or any successor thereto); (v) Investments made in the ordinary course of the secured lending business in connection with foreclosures on secured loans (subject to the requirements of Section 8.23 hereof); and -27- (vi) Investments of First Security Thrift outstanding on December 31, 1991. (f) In addition to the other Investments permitted by this Section 8.08, the Company and its Subsidiaries may make Investments in their respective direct or indirect Subsidiaries, provided that any Investments in First Security -------- Thrift after the date of Amendment No. 5 shall be subject to the limitation set forth in Section 8.05(a)(iii)(z) hereof. (g) In addition to the other Investments permitted by this Section 8.08, the Company and its Subsidiaries may (1) make any Investment which is expressly permitted to be made pursuant to clauses (i) and (iii) of Section 8.05(a) hereof and (2) contribute shares of capital stock of a Subsidiary acquired by the Company in an acquisition referred to in clause (i) or (iii) of Section 8.05(a) hereof to any other Subsidiary of the Company (either directly or indirectly through other Subsidiaries of the Company) and such Subsidiary may hold the resulting Investment in such acquired Subsidiary (but may not increase the same except to the extent permitted by paragraph (f) above). (h) In addition to the other Investments permitted by this Section 8.08, each of the Company and its Subsidiaries may make Investments in intercompany Indebtedness that is permitted to be owed to it under Section 8.07 hereof. (i) In addition to the other Investments permitted by this Section 8.08, the Company and its Subsidiaries may make new loans and advances subsequent to April 21, 1992 (in addition to those loans and advances already outstanding pursuant to clauses (a)(ix), (b)(viii) and (c)(ix) of this Section 8.08), maturing not more than 90 days from the respective dates such new loans and advances are made, to their respective officers, employees and agents in the ordinary course of business, provided that (x) the aggregate -------- amount (as to the Company and all of its -28- Subsidiaries) of all such new loans and advances shall not exceed $2,500,000 at any one time outstanding and (y) any such new loan or advance to any such officer or employee shall not exceed $250,000 at any one time outstanding. (j) In addition to the other Investments permitted by this Section 8.08, the interests of (i) First American Title Company of Los Angeles in The 520 North Central Joint Venture, (ii) National Survey Services, Inc. in the Bock & Clark Partnership, (iii) First American Title Guaranty Holding Company in the Harrison-Webster Investment Group and (iv) Southwest Title Land Company in the joint ventures and limited partnerships specified in Schedule II to Amendment No. 2. (k) In addition to the other Investments permitted by this Section 8.08, the Company or any of its Subsidiaries may be a general partner in a partnership or joint venture after the date of Amendment No. 5, provided that (i) the aggregate -------- amount of Indebtedness of each such partnership or joint venture shall be included in the Adjusted Leverage Ratio and (ii) the amount of Investments by each such partnership or joint venture shall be subject to the other limitations set forth in this Section 8.08. (l) In addition to the other Investments permitted by this Section 8.08, the Company and its Subsidiaries may incur Arbitrage Loans. 8.09 Stockholders' Equity. The Company will not permit -------------------- Stockholders' Equity to be less than $265,000,000 at any time. 8.10 Adjusted Leverage Ratio. The Company will not permit the ----------------------- Adjusted Leverage Ratio to exceed 0.40 to 1 at any time. 8.11 Pro Forma Fixed Charge Coverage Ratio. The Company will ------------------------------------- not permit the Pro Forma Fixed Charge Coverage Ratio -29- for the Computation Period commencing on the first day of any fiscal quarter of the Company to be less than 1.25 to 1. 8.12 Minimum Combined Earnings. The Company will not permit, ------------------------- as at the last day of each fiscal year of the Company (commencing with the fiscal year ending on December 31, 1996), the Combined Earnings to be less than $20,000,000 plus (for each fiscal year ending after December 31, 1996) an ---- additional $20,000,000. 8.13 Minimum FATICO Surplus, Etc.. The Company will not permit --------------------------- (a) FATICO Surplus to be less than $150,000,000 at any time and (b) FATICO Unassigned Surplus to be less than $80,000,000 at any time. 8.14 Capital Expenditures. The Company will not permit the -------------------- aggregate amount of Capital Expenditures by the Company and its Consolidated Subsidiaries at any time during any fiscal year to exceed 20% of the Base Amount for such fiscal year less Dividend Payments paid in such fiscal year (other than any such Dividend Payments made with the proceeds of New Loans not later than five Business Days after the Borrowing thereof under Amendment No. 2). 8.15 Interest Rate Protection Agreements. At all times during ----------------------------------- the three-year period following the date that the Company entered into the Interest Rate Protection Agreement required by Section 8.15 of the Existing Credit Agreement, the Company will maintain in full force and effect such Interest Rate Protection Agreement or one or more Interest Rate Protection Agreements with one or more of the Lenders (and/or with a bank or other financial institution having capital, surplus and undivided profits of at least $500,000,000), which effectively enables the Company (in a manner satisfactory to the Majority Lenders), as at any date, to protect itself against the Prime Rate exceeding 9% per annum as to a notional principal amount at least equal to $22,500,000. 8.16 Lines of Business. The Company will not permit, nor will ----------------- it permit any of its Subsidiaries to, (a) engage to any substantial extent in any line or lines of business activity other than the businesses it was engaged in on the date of -30- Amendment No. 5 or (b) expand into any new markets or product lines substantially different from those in which it was engaged as of the date of Amendment No. 5. Notwithstanding the foregoing, (i) no Insurance Subsidiary shall engage in any business other than the ownership and management of insurance operations and businesses reasonably related or incidental thereto, (ii) First Security Thrift shall not engage in any business other than the ownership and management of thrift operations and businesses reasonably related or incidental thereto and (iii) First American Capital Management, Inc. ("First ----- American Capital Management"), a Wholly Owned Subsidiary of the Company, may - --------------------------- provide investment advisory services to First American Trust and a proprietary family of mutual funds and, in that connection, First American Capital Management and First American Trust may engage in activities reasonably related or incidental thereto. 8.17 Transactions with Affiliates. Except as expressly ---------------------------- permitted by this Agreement, the Company will not, nor will it permit any of its Subsidiaries to, directly or indirectly: (a) make any Investment in an Affiliate (other than Investments required to be made in (i) The 520 North Central Joint Venture by First American Title Company of Los Angeles pursuant to the express terms of The 520 North Central Joint Venture Agreement, (ii) the Bock & Clark Partnership by National Survey Services, Inc. pursuant to the express terms of the Bock & Clark Partnership Agreement and (iii) the Harrison-Webster Investment Group by First American Title Guaranty Holding Company pursuant to the express terms of the Harrison-Webster Partnership Agreement); (b) transfer, sell, lease, assign or otherwise dispose of any Property to an Affiliate; (c) merge into or consolidate with or purchase or acquire Property from an Affiliate; or (d) enter into any other transaction directly or indirectly with or for the benefit of an Affiliate (including, without limitation, guarantees and assumptions of obligations of an Affiliate); provided that (x) any Affiliate who is an -------- individual may serve as a director, officer or employee of the Company or any of its Subsidiaries and receive reasonable compensation (whether paid in cash, securities or other benefits) for his or her services in such capacity and (y) the Company and its Subsidiaries may enter into transactions (other than extensions of credit by the Company or any of its Subsidiaries to -31- an Affiliate) providing for the leasing of Property, the rendering or receipt of services or the purchase or sale of inventory and other Property in the ordinary course of business if the monetary or business consideration arising therefrom would be substantially as advantageous to the Company and its Subsidiaries as the monetary or business consideration which would obtain in a comparable transaction with a Person not an Affiliate. 8.18 Use of Proceeds, Etc. The Company confirms that it used -------------------- the proceeds of the Loans hereunder solely to repay the Specified Debt (together with all fees, commissions and expenses payable in connection with such repayment) in compliance with all applicable legal and regulatory requirements and to make capital contributions in FATICO; provided that neither the Agent nor any Lender shall have any responsibility as to the use of any of such proceeds. 8.19 Certain Obligations Respecting Subsidiaries. The Company ------------------------------------------- will, and will cause each of its Material Subsidiaries to, take such action from time to time as shall be necessary to ensure that the Company and each of its Material Subsidiaries at all times owns (subject only to the Lien of the Pledge Agreement) (a) at least the same percentage of the issued and outstanding shares of each class of stock of each of its Wholly Owned Subsidiaries and its Material Subsidiaries as was owned on April 21, 1992 and (b) at least 90% of the issued and outstanding shares of each class of stock of each of its other Material Subsidiaries as was owned on April 21, 1992. Without limiting the generality of the foregoing, except as expressly permitted by Section 8.05 hereof, the Company will not and will not permit any of its Material Subsidiaries to sell, transfer or otherwise dispose of any shares of stock or any other ownership interest in any Material Subsidiary owned by them, any of FATICO, First American Trust and FARETSI or permit any of its Material Subsidiaries to issue any shares of stock of any class whatsoever to any Person (other than to the Company or any Material Subsidiary of the Company which owns 100% of the issued and outstanding capital stock of such Material Subsidiary). In the event that any such additional shares of stock shall be issued by any of FATICO, First American Trust and FARETSI, the Company agrees forthwith to deliver to the Agent pursuant to the Pledge -32- Agreement the certificates evidencing such shares of stock, accompanied by undated stock powers executed in blank and shall take such other action as the Agent shall request to perfect the security interest created therein pursuant to the Pledge Agreement. The Company will not permit any of its Material Subsidiaries to enter into, after the date hereof, any indenture, agreement, instrument or other arrangement (other than an arrangement mandated by Applicable Bank Regulatory Authorities or Applicable Insurance Regulatory Authorities) that, directly or indirectly, prohibits or restrains, or has the effect of prohibiting or restraining, or imposes materially adverse conditions upon, the incurrence or payment of Indebtedness, the granting of Liens, the declaration or payment of dividends, the making of loans, advances or Investments or the sale, assignment, transfer or other disposition of Property. In addition (to the extent not required by applicable law), the Company will not, and will not permit any of its Material Subsidiaries to, enter into any capital maintenance or other agreement which requires the Company or such Material Subsidiary to make a cash equity or other capital contribution to any Material Subsidiary. 8.20 Modifications of Certain Documents. ---------------------------------- (a) The Company will not, nor will it permit any of its Subsidiaries to, without the prior consent of the Agent (with the approval of the Majority Lenders), consent to any modification, supplement or waiver of any of the material provisions of the Minority Stockholders Put Documents, any documents governing the ESOT Indebtedness, any of the Tax Sharing Agreements, The 520 North Central Joint Venture Agreement, the Bock & Clark Partnership Agreement or the Harrison-Webster Partnership Agreement or the joint venture or partnership agreement for any Investment by Southwest Title Land Company referred to in Section 8.08(j) hereof. (b) The Company will not, nor will it permit any of its Subsidiaries to, without the prior consent of the Agent (with the approval of the Majority Lenders), enter into or consent to any amendment, supplement or other modification of any of the Outstanding Debt Documents that: -33- (i) increases or extends the term of the commitments thereunder, or extends the time or waives any requirement for the reduction or termination of such commitments; (ii) extends the date fixed for the payment of principal of or interest on any loan or fee thereunder (other than pursuant to any extension, renewal or refinancing permitted under Section 8.07(o) hereof); (iii) increases the amount of any such payment of principal; (iv) increases the rate at which interest is payable thereon or any fee is payable thereunder; (v) alters the rights or obligations of the Company to prepay any loans thereunder; or (vi) modifies the number or percentage of lenders or holders of subject debt required to make any determinations or waive any rights thereunder or modify any provisions thereof. 8.21 [intentionally omitted] 8.22 Sale/Leaseback Transactions. The Company will not, nor --------------------------- will it permit any of its Subsidiaries to, enter into any arrangement with any Person whereby the Company or any of its Subsidiaries shall sell or otherwise transfer any of its Property and thereafter rent or lease such Property or similar Property for substantially the same use or uses as the Property sold or transferred if, as a result thereof, the aggregate amount of rent and lease payments payable in any fiscal year by the Company and its Subsidiaries under all such arrangements would exceed $15,000,000. 8.23 Foreclosure; Etc. The Company will not, nor will it ---------------- permit any of its Subsidiaries to, acquire ownership or control of any commercial real property which is used for commercial purposes by means of the exercise of any right of foreclosure, power of sale or similar remedy it may avail itself of by way of any indenture of mortgage or similar instrument -34- relating to such commercial real property (the "Subject Property"), or accept a ---------------- deed to the Subject Property in lieu of foreclosure or in settlement of any title insurance claim against it, unless the Company shall have theretofore caused a Phase I Environmental Review (as defined below) with respect to the Subject Property to be conducted. As used herein, the term "Phase I ------- Environmental Review" shall mean an environmental survey and assessment prepared - -------------------- by an independent engineer selected by the Company expert in the identification and analysis of environmental risks (such engineer and his agents being referred to as the "Environmental Consultant"), such survey and assessment to (a) ------------------------ estimate current liabilities and assess potential sources of future liabilities of any owner or operator of, or any other Person having control of, the Subject Property arising under the Comprehensive Response, Compensation and Liability Act, the Superfund Amendments and Reauthorization Act of 1986, the Resource Conservation and Recovery Act, in each case as amended, and any other act or regulation of any Federal, state or local environmental authority having authority in respect of the Subject Property and (b) be based upon (i) a physical on-site inspection by the Environmental Consultant of the Subject Property (without any excavation of the Subject Property), (ii) interviews by the Environmental Consultant of individuals who have direct managerial responsibility for operations on the Subject Property, (iii) a review by the Environmental Consultant of records relating to current and historical operations conducted at the Subject Property and (iv) as deemed appropriate by the Environmental Consultant, interviews by the Environmental Consultant of individuals in the area in which the Subject Property is located who may have knowledge of current and historical operations conducted at the Subject Property. The Company agrees to provide to any Lender a copy of such Environmental Review within 60 days of any request by such Lender therefor. 8.24 Communication with Accountants. The Company agrees to ------------------------------ permit the Agent (on behalf of the Lenders) to communicate through a financial officer of the Company with its independent certified public accountants (if no Event of Default has occurred and is continuing), after the Agent obtains the prior consent of the Company (which consent may be oral or written) and further agrees to authorize such accountants on a -35- case by case basis to disclose to the Lenders through the Agent any and all financial statements and other supporting financial documents and schedules, including copies of any management letter with respect to the business, financial condition, and other affairs of the Company and any of its Subsidiaries which may be reasonably requested; provided however, that, after -------- ------- the occurrence and during the continuance of any Event of Default, the Agent shall not be required to obtain the consent of the Company in order to engage in any direct discussions with such accountants, but the Agent shall be required to provide the Company with the opportunity to participate in such meetings. 8.25 [intentionally omitted] 8.26 [intentionally omitted] 8.27 [intentionally omitted] 8.28 [intentionally omitted]" E. Section 9 of the Credit Agreement is amended by (i) inserting the word "or" at the end of clause (m) thereof and (ii) inserting the following new clauses (n) and (o), immediately following said clause (m), to read as follows: "(n) Any Insured Depository Subsidiary shall be or become "undercapitalized", "significantly undercapitalized" or "critically undercapitalized" within the meaning of 12 U.S.C. ss.1831o(b), as amended, restated or redesignated from time to time; or (o) The Borrower or any of its Subsidiaries (including, without limitation, any Insured Depository Subsidiary) shall submit a "capital restoration plan" under 12 U.S.C. ss.1831o(e)(2), as amended, restated or redesignated from time to time, with respect to any Insured Depository Subsidiary;". F. Each reference in the Credit Agreement to the Credit Agreement (including references such as "herein", "hereunder" and the like) is amended to refer to the Credit -36- Agreement as amended hereby and (unless the context otherwise requires) to this Amendment. G. Each reference in the Credit Agreement to any section which, pursuant to this Amendment or any prior amendment to the Credit Agreement, has been "intentionally omitted" shall be deleted. H. Except as hereby expressly amended, the Credit Agreement shall remain in full force and effect. Section 3. Effectiveness of Amendments. The amend ments --------------------------- provided for by Section 2 hereof shall become effective as of December 31, 1995 (except for the amendments to the definition of "Applicable Margin" which shall take effect on the date of this Amendment) upon the satisfaction of the following conditions precedent: (a) the execution and delivery by the Agent of a counterpart of this Amendment and the receipt by the Agent of counterparts of this Amendment executed and delivered by the Company and each of the Lenders (other than the Fixed Rate Lender); and (b) the receipt by the Agent of a certificate of a senior officer of the Company to the effect that no Default under the Credit Agreement (as amended hereby) has occurred and is continuing. The Agent will advise the Company and the Lenders when such conditions have been so satisfied. Section 4. Expenses. The Company hereby confirms its -------- obligations under Section 11.03(a)(ii) of the Credit Agreement with respect to the reasonable out-of-pocket costs and expenses of the Agent (including, without limitation, the reasonable fees and expenses of Milbank, Tweed, Hadley & McCloy) in connection with the negotiation, preparation, execution and delivery of this Amendment). Section 5. Counterparts. This Amendment may be executed in any ------------ number of counterparts, all of which taken together shall constitute one and the same instrument, and any of the parties hereto may execute this Amendment by executing any such counterpart. -37- Section 6. New York Law. This Amendment shall be governed by ------------ and construed in accordance with the laws of the State of New York. -38- IN WITNESS WHEREOF, the parties hereto have executed and delivered this Amendment as of the date first above written. THE FIRST AMERICAN FINANCIAL CORPORATION By /s/ PARKER S. KENNEDY ------------------------------ Title: President By /s/ THOMAS A. KLEMENS ------------------------------ Title: Vice President Chief Financial Officer -39- THE CHASE MANHATTAN BANK, N.A. By /s/ ROBERT A. FOSTER --------------------------- Title: Vice President -40- FIRST INTERSTATE BANK OF CALIFORNIA By /s/ MARLA W. JOHNSON --------------------------- Title: Vice President -41- IMPERIAL BANK By /s/ ARNOLD ONAGA ------------------------ Title: Vice President -42- SANWA BANK CALIFORNIA By /s/ ART DUNBAR ---------------------------- Title: Vice President -43- UNION BANK By /s/ SUSAN M. RUSSELL --------------------------- Title: -44- NBD BANK By /s/ RICHARD J. JOHNSEN ---------------------------- Title: Vice President -45- THE CANADA LIFE ASSURANCE COMPANY INCE & CO., as Nominee for The Canada Life Assurance Company By /s/ H. VON SORPE ----------------------------------- Title: Partner -46- THE CHASE MANHATTAN BANK, N.A., as Agent By /s/ ROBERT A. FOSTER ------------------------------ Title: Vice President EX-10.E 4 PENSION RESTORATION PLAN Exhibit (10)(e) The First American Financial Corporation Pension Restoration Plan (Effective as of January 1, 1994) The First American Financial Corporation Pension Restoration Plan (Effective as of January 1, 1994) Contents - -------------------------------------------------------------------------------- Section Page Article 1. Establishment of Plan 1.1 Adoption and Name of Plan 1 1.2 Purpose of Plan 1 1.3 Application of Plan 1 Article 2. Definitions 2.1 Definitions 2 2.2 Gender and Number 2 Article 3. Restoration Plan Benefit 3.1 Restoration Benefit 3 3.2 Payment of Restoration Benefits 3 Article 4. Form and Timing of Benefit Payments 4.1 Retirement Benefits 4 4.2 Death Benefits 4 4.3 Tax Withholding 5 Article 5. Administration 5.1 Committee 6 5.2 Costs and Expenses 6 5.3 Claims Procedure 6 5.4 Effect of a Mistake 7 5.5 Indemnity 7 Article 6. Amendment and Termination 6.1 Amendment or Discontinuance of the Plan 8 6.2 Reorganization of the Company or an Employer 8 6.3 Protected Benefits 8 i The First American Financial Corporation Pension Restoration Plan (Effective as of January 1, 1994) Contents - -------------------------------------------------------------------------------- Section Page Article 7. Miscellaneous 7.1 Nonalienation 9 7.2 No Implied Trust 9 7.3 Data 9 7.4 Notice of Address 9 7.5 Records 10 7.6 Incompetency 10 7.7 Employment Rights 10 7.8 No Individual Liability 10 7.9 Illegality of Particular Provision 11 7.10 Applicable Law 11 ii Article 1. Establishment of Plan 1.1 Adoption and Name of Plan Effective as of January 1, 1994, The First American Financial Corporation (the "Company") establishes this restoration retirement plan for eligible executives of Employers to be known as The First American Financial Corporation Pension Restoration Plan (the "Plan"). Capitalized terms used in this Article shall have the meanings set forth in Article 2 of this Plan. 1.2 Purpose of Plan This Plan is established to provide eligible executives with restoration benefits solely from the general assets of the Company equal to the amount of benefits which cannot be paid from the Pension Plan: (a) Because of the limitations imposed by Code section 415 relating to contributions and benefits provided under tax-qualified plans; and (b) Because of the limitations imposed by Code section 401(a)(17) on the amount of Compensation that may be taken into account under tax-qualified plans. With respect to section 1.2(a), the Plan is intended to be an "excess benefit plan", as defined by ERISA section 3(36). With respect to section 1.2(b), the Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees, as determined under ERISA sections 201(2), 301(3) and 401(a)(1). Accordingly, the Plan is not tax-qualified for purposes of the Code and is exempt from the participation, vesting, funding, and fiduciary requirements of Title 1 of ERISA. 1.3 Application of Plan The terms of this Plan apply only to eligible Employees who are in the employ of the Company on or after January 1, 1994. Any Employee whose employment relationship terminates before January 1, 1994 shall not be entitled to benefits under this Plan. 1 Article 2. Definitions 2.1 Definitions These definitions are in addition to the definitions of any other terms that appear elsewhere in this Plan or in the Pension Plan. Whenever used in the Plan, the following capitalized terms shall have the respective meanings set forth below unless otherwise required by the context in which they are used: (a) "Effective Date" means January 1, 1994. (b) "Member" shall mean any Employee or former Employee: (1) Who was a Participant in the Pension Plan on January 1, 1994, and (2) Whose Accrued Benefit under the Pension Plan is limited or reduced under Code section 401(a)(17) or Code section 415. (c) "Pension Plan" means The First American Financial Corporation Pension Plan, as presently in effect and as it may be amended from time to time. (d) "Plan" means The First American Financial Corporation Pension Restoration Plan, as presently in effect and as it may be amended from time to time. (e) "Plan Year" means the calendar year. (f) "Restoration Benefit" means the benefit determined under Article 3 of this Plan and paid from the general assets of the Company. Except as otherwise explicitly provided in this Plan, all other capitalized terms shall have the meaning set forth in the Pension Plan. 2.2 Gender and Number Except when otherwise indicated by the context, any masculine or feminine terminology shall also include the neuter and other gender, and the use of any term in the singular or plural shall also include the opposite number. 2 Article 3. Restoration Plan Benefit 3.1 Restoration Benefit The Restoration Benefit provided under this Plan shall be the amount, if any, by which (a) exceeds (b), where: (a) Is the amount of the vested Accrued Benefit which would have been payable to the Member or, if the Member has died, the Beneficiary under the Pension Plan if such benefit were determined: (1) Without regard to any limitation on Compensation imposed by Code section 401(a)(17), but disregarding any Compensation in excess of $275,000, and (2) Without regard to any limitation under Code section 415 on benefits that may be paid from a tax-qualified plan; and (b) Is the vested Accrued Benefit actually provided to the Member or, if the Member has died, the Beneficiary under the Pension Plan (determined after giving effect to any applicable limitations imposed by Code section 401(a)(17) and section 415). 3.2 Payment of Restoration Benefits The obligation of the Company to pay Restoration Benefits and the Member's right to receive such a benefit shall not arise until: (a) Benefit payments commence under the Pension Plan; and (b) It has been determined that a Restoration Benefit is payable under Plan section 3.1. Once it has been determined that the Member or, if the Member has died, the Beneficiary is entitled to such a benefit, the Restoration Benefit shall be paid only in accordance with the provisions of Article 4 of this Plan. 3 Article 4. Form and Timing of Benefit Payments 4.1 Retirement Benefits After the Member has properly applied for retirement benefits under section 4.4 of the Pension Plan, the Committee shall determine the time and form in which any Restoration Benefit payable from this Plan shall be paid to the Member. In making this determination, the Committee shall consider, but not be bound by, the payment form elected by the Member with respect to his or her Accrued Benefit under the Pension Plan. The Committee may authorize one or more of its members to make individually the determination described in this section 4.1. In computing the Restoration Benefit, the same reduction factors, if any, that apply to the Accrued Benefit for early commencement of benefits shall also apply to the Restoration Benefit. The Actuarial Equivalent assumptions and factors which would be used under the Pension Plan to convert the Accrued Benefit to an optional form shall also be used to convert the Restoration Benefit to that same form, if and when the Committee determines to pay the Restoration Benefit in such form. 4.2 Death Benefits (a) Preretirement Spousal Benefit. Upon the death of a Member whose spouse is entitled to survivor annuity benefits under the preretirement death benefit provisions of section 5.1 of the Pension Plan, such spouse shall be entitled to a survivor annuity under this Plan. The survivor annuity payable from this Plan on account of the Member's death shall be paid at the same time as the survivor's annuity is paid for such period from the Pension Plan. The amount of the survivor annuity payable from this Plan shall be the amount that would have been paid to the surviving spouse under a qualified joint and survivor annuity, as defined in Code section 417(b), which is the Actuarial Equivalent of the Restoration Benefit determined as of the Member's death under Plan section 3.1. The same reduction factors that apply to any early commencement of the survivor's annuity determined under the Pension Plan shall also apply to the survivor's annuity determined under this Plan. (b) Postretirement Death Benefit. If a Member dies after payment of the Restoration Benefit has commenced, the Member's Beneficiary shall receive the death benefit payments hereunder, if any, called for by the payment form in effect for the Restoration Benefit. Any death benefits payable under this Plan section 4.2(b) shall be paid at the time and in the form provided by the payment form determined under Plan section 4.1. 4.3 Tax Withholding Any federal, state or local taxes, including FICA tax amounts, required by law to be withheld with respect to benefits earned and vested under this Plan or any other 4 compensation arrangement may be withheld from the Member's Restoration Benefit, salary, wages or other amounts paid by the Company and reasonably available for withholding. Prior to making or authorizing any benefit payment under this Plan, the Company may require such documents from any taxing authority, or may require such indemnities or surety bond from any Member or Beneficiary, as the Company shall reasonably consider necessary for its protection. 5 Article 5. Administration 5.1 Committee The Plan shall be administered by the Committee which administers the Pension Plan. The Committee shall be authorized to construe and interpret all provisions of the Plan, to prescribe, amend and rescind rules and practices concerning its administration, to decide all claims pursuant to Plan section 5.3, and to make all other determinations necessary to carry out the purposes of this Plan. The interpretations, constructions, and determinations of the Committee shall be conclusive and binding on all parties. Without limiting the generality of the foregoing, the Committee shall have the authority to calculate all benefit amounts under this Plan and shall have the authority to delegate responsibility for the performance of ministerial functions necessary for administration of the Plan to such persons as the Committee shall in its discretion deem appropriate. No Committee member may participate in an action of the Committee on a matter in which such member has an individual interest as a Member. Such matters will be determined by the remaining Committee members or by an independent individual or group appointed by the Company for such purpose. 5.2 Costs and Expenses The costs of benefit payments from this Plan and the expenses of administering the Plan shall be paid by the Company from its general assets. 5.3 Claims Procedure (a) If a Member or Beneficiary believes that a payment is due under Article 4 of this Plan and such payment has not been received, a claim for a benefit may be submitted by writing to the Committee. The Committee shall make all determinations as to the rights of any person to benefits hereunder. (b) Any denial of a claim for benefits under the Plan shall be stated in writing by the Committee and delivered or mailed to the Member or Beneficiary. (c) Each Member or Beneficiary whose claim is denied, or the duly authorized representative of such person, may appeal the denial to the Committee, in accordance with the procedures set forth in section 8.8 of the Pension Plan. 5.4 Effect of a Mistake In the event of a mistake or misstatement as to the eligibility, participation or service of any Member, or the amount of payments made or to be made to a Member, spouse or Beneficiary, the Committee shall, if possible, cause such withholding, acceleration or other adjustment of payments to be made as will, in the sole judgment of the Committee, 6 result in the Member, spouse or Beneficiary receiving the proper amount of payments under the Plan. 5.5 Indemnity The Company shall, through the purchase of insurance or otherwise, indemnify each member of the Board (or board of directors of an Affiliate), each member of the Committee, and any other Employees to whom any responsibility with respect to the Plan is allocated or delegated, from and against any and all claims, losses, damages, and expenses, including attorneys' fees, and any liability, including any amounts paid in settlement with the Company's approval, arising from the individual's action or failure to act, except when the same is judicially determined to be attributable to the gross negligence or willful misconduct of such person. The right of indemnity described in the preceding sentence shall be conditioned upon (i) the timely receipt of notice by the Company of any claim asserted against the individual, which notice, in the event of a lawsuit, shall be given within ten days after receipt by the individual of the complaint, and (ii) the receipt by the Company from the individual of an offer for the Company to participate in the settlement or defense of such claim. 7 Article 6. Amendment and Termination 6.1 Amendment or Discontinuance of the Plan This Plan may be amended, modified or terminated at any time by the Board. In addition, the Committee may, in its discretion, amend this Plan, prospectively or retroactively, if it finds that the amendment will not significantly increase or decrease costs or benefits, or if it finds that the amendment is required by law. Any amendment, modification or termination of this Plan shall be subject only to the contractual rights of Members or Beneficiaries to Restoration Benefits which have already accrued at the effective date of such amendment, modification or termination, to the extent that such benefits remain payable from this Plan when payment of the corresponding Accrued Benefit begins under the Pension Plan. 6.2 Reorganization of the Company or an Employer In the event of a merger or consolidation of the Company or an Employer, or the transfer of substantially all of the assets or stock of an Employer to another entity, such continuing, resulting or transferee entity shall have the right to continue and carry on the Plan and to assume all liabilities of the Company hereunder without obtaining the consent of any Member or Beneficiary. If such successor shall assume the liabilities of the Company hereunder, then, notwithstanding any Plan provision to the contrary, the Company shall be relieved of all such liability, and no Member or Beneficiary shall have the right to assert any claim against the Company for benefits under or in connection with this Plan. 6.3 Protected Benefits Upon a complete or partial termination of this Plan, or if liabilities accrued hereunder up to the date of an event specified in Plan section 6.2 are not assumed by the successor to the Company, the rights of all affected Members and their Beneficiaries shall terminate, except that the Committee shall establish reasonable procedures to determine the value of each Member's Restoration Benefit, as of the last day of the Plan Year coinciding with or next following the termination, and payment shall be made to the Member or Beneficiary in accordance with Article 4 of this Plan. 8 Article 7. Miscellaneous 7.1 Nonalienation To the extent permitted by law, the Company shall not make any payment or distribution under this Plan to any assignee or creditor of a Member or Beneficiary. Prior to the time of a benefit payment under this Plan, a Member or Beneficiary shall have no rights by way of anticipation or otherwise to assign or dispose of any interest under this Plan, nor shall rights be assigned or transferred by operation of law or otherwise, including, but without limitation, by execution, levy, garnishment, attachment, pledge, lien, or bankruptcy. 7.2 No Implied Trust Nothing contained in this Plan, and no action taken pursuant to any provision of this Plan, shall create or be construed to create a trust of any kind, or a fiduciary relationship among the Company, Members, Beneficiaries or any other persons. Furthermore, no Member or Beneficiary shall have any interest in any specific asset of the Company by operation of this Plan. 7.3 Data All persons entitled to benefits from the Plan must furnish to the Committee such documents, evidence or information as the Committee considers necessary or appropriate for the purpose of administering the Plan, including information concerning marital status; and it shall be a condition of the Plan that each such person must furnish such information and sign such documents as the Committee may require before any benefits become payable from the Plan. The Committee shall be entitled to pay benefits to a nonspouse Beneficiary in reliance upon the signed statement of a Member that he or she is not married, without any further liability to a spouse if such statement is false. 7.4 Notice of Address Any payment to a Member or Beneficiary, at the last known post office address on file with the Company, shall constitute a complete discharge to the Company with respect thereto unless the Company shall have received prior written notice of any change in the address, condition, or status of the distributee. Neither the Company nor any director or officer shall have any duty or obligation to search for or ascertain the whereabouts of any Member or his Beneficiary. 7.5 Records The records of the Committee with respect to this Plan shall be conclusive on all Members, Beneficiaries, and other persons. 9 7.6 Incompetency Every person receiving or claiming benefits under this Plan shall be conclusively presumed to be mentally competent and of age until the Committee receives written notice, in a form and manner acceptable to it, that such person is incompetent or a minor, and that a guardian, conservator, statutory committee, or other person legally vested with the care of the person or estate has been appointed; provided, however, that if the Committee shall find that any person to whom a benefit is payable under this Plan is unable to properly care for such person's own affairs because of incompetency, or is a minor, then any payment due (unless a prior claim therefor shall have been made by a duly appointed legal representative) may be paid to the spouse, a child, a parent, a brother or sister, or other person legally entitled to payment. In the event a guardian of the estate of any person receiving or claiming benefits under this Plan shall be appointed by a court of competent jurisdiction, payment shall be made to such guardian provided that proper proof of appointment is furnished in a form and manner acceptable to the Committee. To the extent permitted by law, any such payment so made shall be a complete discharge of liability therefor under this Plan. 7.7 Employment Rights The establishment of this Plan shall not be construed as conferring any legal rights upon any Member or any other person for continuation of employment, nor shall it interfere with the rights of the Company to discharge any person or to deal with such person without regard to the effect such treatment might have upon benefits arising under this Plan. 7.8 No Individual Liability It is declared to be the express purpose and intention of this Plan that no liability whatsoever shall attach to or be incurred by the shareholders, officers, or directors of the Company, or any representatives appointed hereunder, by reason of any term or condition of this Plan. 7.9 Illegality of Particular Provision If any particular provision of this Plan shall be found to be illegal or unenforceable, such provision shall not affect any other provision, but this Plan shall be construed in all respects as if such invalid provision were omitted. 7.10 Applicable Law This Plan shall be construed in accordance with and governed by the laws of the State of California to the extent not superseded by the laws of the United States of America. 10 In Witness Whereof, The First American Financial Corporation has caused its duly authorized officers to execute this Plan on the 21 day of February, 1996. The First American Financial Corporation By /s/ PARKER S. KENNEDY ------------------------------------ Its President ------------------------------------ By /s/ MARK R. ARNESEN ------------------------------------ Its Secretary ------------------------------------ 11 EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT (21) SUBSIDIARIES OF THE REGISTRANT
PERCENT OF STOCK OWNED BENEFICIALLY STATE UNDER LAWS BY COMPANY OR NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY ------------------ ------------------ ------------------ Consolidated subsidiaries of: Registrant-- First American Loan Servicing Corporation Texas 100% First American Management Company Washington 100% First American Property Data Services, Inc. California 100% First American Real Estate Information Services, Inc. California 100% First American Title Insurance Company California 100% First American Trust Company California 100% Consolidated subsidiaries of First American Title Insurance Company-- Albany County Title, Inc. Wyoming 100% Attorneys Abstract, Inc. New York 100% Bienville Properties, Inc. Louisiana 100% Burton Abstract & Title Company Michigan 100% Consolidated Title and Abstract Co. Minnesota 100% Eaton County Abstract & Title Company Michigan 100% Eureka Title Company California 100% Fidelity Title & Guaranty Company Florida 100% First American Abstract Company Mississippi 100% First American Abstract Company of Louisiana Louisiana 100% First American Exchange Corporation Louisiana 100% First American Title Agency, Inc. Virginia 100% First American Title Company of Alaska Alaska 100% First American Title Company of Clark County Washington 100% First American Title Company of Colorado Colorado 100% First American Title Company of Dallas Texas 100% First American Title Company of Florida, Inc. Florida 100% First American Title Company of Hawaii, Inc. Hawaii 100% First American Title Company of Idaho, Inc. Idaho 100% First American Title Company of Los Angeles California 100% First American Title Company of Nevada Nevada 100% First American Title Company of Thurston County Washington 100% First American Title Company of Utah Utah 100% First American Title Guaranty Agency of Carbon County Wyoming 100% First American Title Insurance Agency of Coconino, Inc. Arizona 100% First American Title Insurance Agency of Gila, Inc. Arizona 100% First American Title Insurance Company Ltd. (UK) England 100% First American Title Insurance Company of New York New York 100% First American Title Insurance Company of Texas Texas 100% First Exchange of Arizona, Inc. Arizona 100% Fremont County Title Company Wyoming 100% Guardian Title Company of Maryland Maryland 100% Jefferson-Pilot Title Insurance Company North Carolina 100% Land Title Associates, Inc. Oklahoma 100% Land Title Company of St. Louis, Inc. Missouri 100%
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
PERCENT OF STOCK OWNED BENEFICIALLY STATE UNDER LAWS BY COMPANY OR NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY ------------------ ------------------ ------------------ Massachusetts Abstract Company, Inc. Massachusetts 100% Memphis Title Company Tennessee 100% Midland Title Security, Inc. Ohio 100% New York Abstract Company, Inc. New York 100% Ohio Title Corporation Ohio 100% Pioneer of Philadelphia, Ltd. Pennsylvania 100% Port Lawrence National Agency, Inc. Ohio 100% Republic Title of Texas, Inc. Texas 100% Security Title Company of Southern Utah Utah 100% Standard Title Insurance Company Oklahoma 100% The Inland Empire Service Corporation California 100% The Port Lawrence Agency, Inc. Ohio 100% The Port Lawrence Title and Trust Company Ohio 100% Ticore, Inc. Oregon 100% Washakie Abstract Company Wyoming 100% First American Auto Title Transfer, L.L.C. Louisiana 99% First American Title Company of Bellingham Washington 99% First American Title Insurance Agency of Yuma, Inc. Arizona 99% Land Title Insurance Company of St. Louis Missouri 99% Peoples Abstract Company Iowa 99% Southwest Title & Trust Company Oklahoma 99% First American Title Insurance Agency of Pinal Arizona 96% First American Title Guaranty Agency of Cheyenne Wyoming 92% First American Title Insurance Agency of Mohave, Inc. Arizona 88% First American Title Insurance Agency, Inc. (Navajo) Arizona 85% First Canadian Title Canada 85% First American Title Insurance Agency of Yavapai, Inc. Arizona 84% First American Title Company of New Mexico New Mexico 80% First American Title Company of Spokane Washington 80% First American Title Company of St. Lucie County, Inc. Florida 80% First American Title Guaranty Agency of Hot Springs County Wyoming 80% First American Title Guaranty Holding Company California 80% First American Home Buyers Protection Corporation California 79% First American Title Guaranty Agency of Sublette County Wyoming 79% First American Title Guaranty Agency of Crook County Wyoming 78% Teton Land Title Company Wyoming 76% Converse Land Title Company (a partnership) Wyoming 74% First American Title Company of Magic Valley, Inc. Idaho 70% Goshen County Abstract & Title Wyoming 69% Mid Valley Title and Escrow Company California 59% Campbell County Abstract Company Wyoming 57% First American Title Company of Mendocino County California 54% Johnson County Title Company, Inc. Wyoming 54% Big Horn Land Title Company Wyoming 53% Wyoming Land Title Company Wyoming 53% Shoshone Title Insurance and Abstract Company Wyoming 52% North American Title Insurance Company California 50%
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
PERCENT OF STOCK OWNED BENEFICIALLY STATE UNDER LAWS BY COMPANY OR NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY ------------------ ------------------ ------------------ Consolidated subsidiaries of First American Real Estate Information-- Services, Inc.-- First American CREDCO, Inc. Washington 100% First American Credit Services, Inc. New York 100% First American Equity Loan Services, Inc. Ohio 100% First American Flood Data Services, Inc. Texas 100% First American Property Services, Inc. New York 100% Pasco Enterprises, Inc. Texas 100% Prime Credit Reports, Inc. California 100% Realty Tax & Service Company California 100% Consolidated subsidiary of First American Equity Loan Service, Inc. Docu-Search, Inc. Kentucky 100% Consolidated subsidiary of Mid Valley Title & Escrow Company-- Mt. Shasta Title & Escrow Company California 65% Consolidated subsidiaries of Ticore, Inc.-- Eagle Exchange Corporation Oregon 100% Escrow Automated Systems, Inc. Oregon 100% Title Insurance Company of Oregon Oregon 100% Consolidated subsidiaries of Title Insurance Company of Oregon-- Deschutes County Title Company Oregon 100% Willamette Valley Title Company Oregon 100% Consolidated subsidiary of Massachusetts Abstract Company, Inc.-- Massachusetts Title Insurance Company Massachusetts 65% Consolidated Subsidiaries of First American Title Company of Utah-- Utah First Exchange, Inc. Utah 100% Consolidated subsidiaries of First American Title Guaranty Holding Company-- First Escrow Accounting Services Company California 100% First Guaranty Bancorp California 100% First Guaranty Exchange Company California 100% Superior Trustee's Services Company Inc. California 100% First American Title Guaranty Company California 99% Harrison-Webster Investment Group (a partnership) California 75% Stanley Building Associates (a partnership) California 75% Consolidated subsidiaries of First Guaranty Bancorp-- F. S. T. Financial Services California 100% First Security Thrift Company California 100% Consolidated subsidiary of Land Title Associates, Inc.-- First American Title & Abstract Co. Oklahoma 100%
SUBSIDIARIES OF THE REGISTRANT (CONTINUED)
PERCENT OF STOCK OWNED BENEFICIALLY STATE UNDER LAWS BY COMPANY OR NAME OF SUBSIDIARY OF WHICH ORGANIZED SUBSIDIARY ------------------ ------------------ ------------------ Consolidated subsidiaries of Midland Title Security, Inc.-- Commerce Title Agency, Inc. Ohio 100% Lawyers Mortgage and Title Company, Inc. Ohio 100% Midland Exchange Services, Inc. Ohio 100% National Survey Service, Inc. Delaware 100% R. E. Services, Inc. Ohio 100% MCM Title Services, Inc. Ohio 67% Consolidated Subsidiaries of Mortgage Guarantee and Title Company-- GR Title Services, Inc. Rhode Island 100% Consolidated subsidiary of First American Home Buyers Protection Corporation-- First American Home Buyers Protection Corporation (Delaware) Delaware 50% Consolidated subsidiary of Land Title Insurance Company of St. Louis-- Property Data, Inc. Missouri 100% The Trust Company of St. Louis County Missouri 99% Consolidated subsidiaries of First American Title Insurance Company of Texas-- Corpus Christi Title Company Texas 100% Fort Bend Title Company Texas 100% Heart of Texas Title Company Texas 51% Consolidated subsidiaries of Fort Bend Title Company-- Citizens Title Company Texas 100% Peareson Fort Bend Abstract Company Texas 100% Consolidated subsidiaries of First American Title Insurance Company of New York-- First American Exchange Corporation New York 100% Mortgage Guarantee & Title Rhode Island 100% Preferred Land Title Services, Inc. New York 100% Consolidated subsidiaries of Republic Title of Texas, Inc.-- American Escrow Company Texas 100% Texas Escrow Company Texas 100% Title Software Corporation Texas 100% Consolidated subsidiary of Southwest Title & Trust Company-- Southwest Title Land Company Oklahoma 100% Consolidated subsidiary of the Port Lawrence Title and Trust Company Landimer Title Agency Ohio 100%
EX-27 6 FINANCIAL DATA SCHEDULE
7 YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 128,875,000 0 0 21,445,000 0 0 194,187,000 145,902,000 0 24,342,000 873,778,000 238,161,000 0 0 0 77,206,000 0 0 11,411,000 291,356,000 0 1,227,185,000 22,073,000 958,000 0 90,387,000 7,639,000 0 13,787,000 6,200,000 7,587,000 0 0 0 7,587,000 0.67 0 206,743,000 82,632,000 7,755,000 25,039,000 33,930,000 238,161,000 0 Includes purchase accounting adjustments and reclassifications to the reserve for assets acquired in connection with claim settlements.
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