First American Financial Corp [FAF] Filings

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

10-Q 1 faf-10q_20220331.htm Q1 2022 FORM 10-Q faf-10q_20220331.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

☐	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 001-34580

FIRST AMERICAN FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		26-1911571
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

1 First American Way, Santa Ana, California		92707-5913
(Address of principal executive offices)		(Zip Code)

(714) 250-3000

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
Common stock, $0.00001 par value		FAF		New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

On April 25, 2022 there were 107,405,227 shares of common stock outstanding.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

INFORMATION INCLUDED IN REPORT

PART I: FINANCIAL INFORMATION

Item 1.	Financial Statements (unaudited)

	A. Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021	5

	B. Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021	6

	C. Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021	7

	D. Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2022 and 2021	8

	E. Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021	10

	F. Notes to Condensed Consolidated Financial Statements	11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	36

Item 4.	Controls and Procedures	36

PART II: OTHER INFORMATION

Item 1.	Legal Proceedings	37

Item 1A.	Risk Factors	37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 6.	Exhibits	48

Items 3 through 5 of Part II have been omitted because they are not applicable with respect to the current reporting period.

THIS QUARTERLY REPORT ON FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE FACT THAT THEY DO NOT RELATE STRICTLY TO HISTORICAL OR CURRENT FACTS AND MAY CONTAIN THE WORDS “BELIEVE,” “ANTICIPATE,” “EXPECT,” “INTEND,” “PLAN,” “PREDICT,” “ESTIMATE,” “PROJECT,” “WILL BE,” “WILL CONTINUE,” “WILL LIKELY RESULT,” OR OTHER SIMILAR WORDS AND PHRASES OR FUTURE OR CONDITIONAL VERBS SUCH AS “WILL,” “MAY,” “MIGHT,” “SHOULD,” “WOULD,” OR “COULD.” THESE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION, STATEMENTS REGARDING FUTURE OPERATIONS, PERFORMANCE, FINANCIAL CONDITION, PROSPECTS, PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS THAT MAY PROVE TO BE INCORRECT.

RISKS AND UNCERTAINTIES EXIST THAT MAY CAUSE RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE THE ANTICIPATED RESULTS TO DIFFER FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDE, WITHOUT LIMITATION:

•

INTEREST RATE FLUCTUATIONS;

•

CHANGES IN CONDITIONS OF THE REAL ESTATE MARKETS;

•

VOLATILITY IN THE CAPITAL MARKETS;

•

UNFAVORABLE ECONOMIC CONDITIONS;

•

IMPAIRMENTS IN THE COMPANY’S GOODWILL OR OTHER INTANGIBLE ASSETS;

•

FAILURES AT FINANCIAL INSTITUTIONS WHERE THE COMPANY DEPOSITS FUNDS;

•

REGULATORY OVERSIGHT AND CHANGES IN APPLICABLE LAWS AND GOVERNMENT REGULATIONS, INCLUDING PRIVACY AND DATA PROTECTION LAWS;

•

HEIGHTENED SCRUTINY BY LEGISLATORS AND REGULATORS OF THE COMPANY’S TITLE INSURANCE AND SERVICES SEGMENT AND CERTAIN OTHER OF THE COMPANY’S BUSINESSES;

•

REGULATION OF TITLE INSURANCE RATES;

•

LIMITATIONS ON ACCESS TO PUBLIC RECORDS AND OTHER DATA;

•

CLIMATE CHANGE, HEALTH CRISES, SEVERE WEATHER CONDITIONS AND OTHER CATASTROPHE EVENTS;

•

CHANGES IN RELATIONSHIPS WITH LARGE MORTGAGE LENDERS AND GOVERNMENT-SPONSORED ENTERPRISES;

•

CHANGES IN MEASURES OF THE STRENGTH OF THE COMPANY’S TITLE INSURANCE UNDERWRITERS, INCLUDING RATINGS AND STATUTORY CAPITAL AND SURPLUS;

•

LOSSES IN THE COMPANY’S INVESTMENT PORTFOLIO OR VENTURE INVESTMENT PORTFOLIO;

•

MATERIAL VARIANCE BETWEEN ACTUAL AND EXPECTED CLAIMS EXPERIENCE;

•

DEFALCATIONS, INCREASED CLAIMS OR OTHER COSTS AND EXPENSES ATTRIBUTABLE TO THE COMPANY’S USE OF TITLE AGENTS;

•

ANY INADEQUACY IN THE COMPANY’S RISK MANAGEMENT FRAMEWORK OR USE OF MODELS;

•

SYSTEMS DAMAGE, FAILURES, INTERRUPTIONS, CYBERATTACKS AND INTRUSIONS, OR UNAUTHORIZED DATA DISCLOSURES;

•

INNOVATION EFFORTS OF THE COMPANY AND OTHER INDUSTRY PARTICIPANTS AND ANY RELATED MARKET DISRUPTION;

•

ERRORS AND FRAUD INVOLVING THE TRANSFER OF FUNDS;

•

FAILURES TO RECRUIT AND RETAIN QUALIFIED PERSONNEL;

•

THE COMPANY’S USE OF A GLOBAL WORKFORCE;

•

INABILITY OF THE COMPANY’S SUBSIDIARIES TO PAY DIVIDENDS OR REPAY FUNDS; AND

•

OTHER FACTORS DESCRIBED IN THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING UNDER THE CAPTION “RISK FACTORS” IN ITEM 1A OF PART II.

THE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE THEY ARE MADE. THE COMPANY DOES NOT UNDERTAKE TO UPDATE FORWARD-LOOKING STATEMENTS TO REFLECT CIRCUMSTANCES OR EVENTS THAT OCCUR AFTER THE DATE THE FORWARD-LOOKING STATEMENTS ARE MADE.

PART I: FINANCIAL INFORMATION

Item 1.Financial Statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Balance Sheets

(in millions, except par values)

(unaudited)

	March 31, 2022			December 31, 2021
Assets
Cash and cash equivalents	$	1,704		$	1,228
Accounts and accrued income receivable, less allowances of $14 and $14		464			441
Income taxes receivable		92			11
Investments:
Deposits with banks		56			58
Debt securities, includes pledged securities of $89 and $91 (amortized cost of $9,388 and $9,317)		8,937			9,362
Equity securities		1,094			1,176
		10,087			10,596
Secured financings receivable		606			565
Property and equipment, net		523			506
Operating lease assets		243			249
Title plants and other indexes		588			587
Deferred income taxes		14			14
Goodwill		1,598			1,588
Other intangible assets, net		208			218
Other assets		400			448
	$	16,527		$	16,451
Liabilities and Equity
Deposits	$	5,773		$	5,069
Accounts payable and accrued liabilities		1,051			1,262
Deferred revenue		201			224
Reserve for known and incurred but not reported claims		1,301			1,284
Income taxes payable		6			24
Deferred income taxes		345			345
Operating lease liabilities		266			274
Secured financings payable		558			538
Notes and contracts payable		1,647			1,648
		11,148			10,668
Commitments and contingencies (Note 16)
Stockholders’ equity:
Preferred stock, $0.00001 par value; Authorized—0.5 shares; Outstanding—none		—			—
Common stock, $0.00001 par value; Authorized—300.0 shares; Outstanding—108.7 shares and 109.7 shares		—			—
Additional paid-in capital		2,103			2,179
Retained earnings		3,721			3,680
Accumulated other comprehensive loss		(461	)		(92	)
Total stockholders’ equity		5,363			5,767
Noncontrolling interests		16			16
Total equity		5,379			5,783
	$	16,527		$	16,451

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Income

(in millions, except per share amounts)

(unaudited)

	Three Months Ended March 31,
	2022			2021
Revenues
Direct premiums and escrow fees	$	774		$	786
Agent premiums		948			845
Information and other		309			279
Net investment income		46			49
Net investment (losses) gains (realized gains of $50 and $5)		(43	)		67
		2,034			2,026
Expenses
Personnel costs		602			535
Premiums retained by agents		758			671
Other operating expenses		337			296
Provision for policy losses and other claims		122			140
Depreciation and amortization		41			38
Premium taxes		24			23
Interest		20			17
		1,904			1,720
Income before income taxes		130			306
Income taxes		32			72
Net income	$	98		$	234
Net income per share (Note 10):
Basic	$	0.89		$	2.10
Diluted	$	0.88		$	2.10
Cash dividends declared per share	$	0.51		$	0.46
Weighted-average common shares outstanding (Note 10):
Basic		110.4			111.1
Diluted		110.8			111.4

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Comprehensive Income

(in millions)

(unaudited)

	Three Months Ended March 31,
	2022			2021
Net income	$	98		$	234
Other comprehensive income (loss), net of tax:
Unrealized losses on debt securities		(371	)		(100	)
Foreign currency translation adjustment		1			3
Pension benefit adjustment		1			1
Total other comprehensive loss, net of tax		(369	)		(96	)
Comprehensive (loss) income	$	(271	)	$	138

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Stockholders’ Equity

(in millions)

(unaudited)

	First American Financial Corporation Stockholders
	Shares			Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity			Noncontrolling interests		Total
Balance at December 31, 2021		109.7		$	—	$	2,179		$	3,680		$	(92	)	$	5,767		$	16	$	5,783
Net income		—			—		—			98			—			98			—		98
Dividends on common shares		—			—		—			(56	)		—			(56	)		—		(56	)
Repurchases of Company shares		(1.6	)		—		(108	)		—			—			(108	)		—		(108	)
Shares issued in connection with share-based compensation		0.6			—		(11	)		(1	)		—			(12	)		—		(12	)
Share-based compensation		—			—		43			—			—			43			—		43
Other comprehensive loss		—			—		—			—			(369	)		(369	)		—		(369	)
Balance at March 31, 2022		108.7		$	—	$	2,103		$	3,721		$	(461	)	$	5,363		$	16	$	5,379

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Stockholders’ Equity – (Continued)

(in millions)

(unaudited)

	First American Financial Corporation Stockholders
	Shares			Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income (loss)			Total stockholders’ equity			Noncontrolling interests			Total
Balance at December 31, 2020		110.4		$	—	$	2,215		$	2,655		$	40		$	4,910		$	12		$	4,922
Net income		—			—		—			234			—			234			—			234
Dividends on common shares		—			—		—			(51	)		—			(51	)		—			(51	)
Repurchases of Company shares		(1.2	)		—		(65	)		—			—			(65	)		—			(65	)
Shares issued in connection with share-based compensation		0.5			—		(7	)		(1	)		—			(8	)		—			(8	)
Share-based compensation		—			—		31			—			—			31			—			31
Net activity related to noncontrolling interests		—			—		—			—			—			—			(1	)		(1	)
Other comprehensive loss		—			—		—			—			(96	)		(96	)		—			(96	)
Balance at March 31, 2021		109.7		$	—	$	2,174		$	2,837		$	(56	)	$	4,955		$	11		$	4,966

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION

AND SUBSIDIARY COMPANIES

Condensed Consolidated Statements of Cash Flows

(in millions)

(unaudited)

	Three Months Ended March 31,
	2022			2021
Cash flows from operating activities:
Net income	$	98		$	234
Adjustments to reconcile net income to cash provided by operating activities:
Provision for policy losses and other claims		122			140
Depreciation and amortization		41			38
Amortization of premiums and accretion of discounts on debt securities, net		11			11
Net investment losses (gains)		43			(67	)
Share-based compensation		43			31
Equity in earnings of affiliates, net		(4	)		(1	)
Dividends from equity method investments		2			3
Changes in assets and liabilities excluding effects of acquisitions and noncash transactions:
Claims paid, including assets acquired, net of recoveries		(101	)		(118	)
Net change in income tax accounts		25			64
Decrease (increase) in accounts and accrued income receivable		6			(8	)
Decrease in accounts payable and accrued liabilities		(246	)		(82	)
Decrease in deferred revenue		(24	)		(19	)
Other, net		24			(2	)
Cash provided by operating activities		40			224
Cash flows from investing activities:
Net cash effect of acquisitions/dispositions		(9	)		—
Net decrease in deposits with banks		2			—
Purchases of debt securities		(742	)		(1,408	)
Proceeds from sales of debt securities		296			191
Proceeds from maturities of debt securities		368			432
Purchases of equity securities		(22	)		(19	)
Proceeds from sales of equity securities		83			68
Net change in other investments		1			(19	)
Advances under secured financing agreements		(5,381	)		(6,282	)
Collections of secured financings receivable		5,339			6,285
Capital expenditures		(43	)		(29	)
Proceeds from sales of property and equipment		—			1
Proceeds from insurance settlement		1			1
Cash used for investing activities		(107	)		(779	)
Cash flows from financing activities:
Net change in deposits		704			1,304
Borrowings under secured financing agreements		5,369			5,235
Repayments of secured financings payable		(5,351	)		(5,106	)
Repayments of other notes and contracts payable		(2	)		(2	)
Net activity related to noncontrolling interests		(1	)		(2	)
Net payments in connection with share-based compensation		(12	)		(8	)
Repurchases of Company shares		(108	)		(65	)
Payments of cash dividends		(56	)		(51	)
Cash provided by financing activities		543			1,305
Effect of exchange rate changes on cash		—			1
Net increase in cash and cash equivalents		476			751
Cash and cash equivalents—Beginning of period		1,228			1,275
Cash and cash equivalents—End of period	$	1,704		$	2,026
Supplemental information:
Cash paid during the period for:
Interest	$	18		$	11
Premium taxes	$	44		$	29
Income taxes	$	7		$	7

See notes to condensed consolidated financial statements.

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES

Notes to Condensed Consolidated Financial Statements
(unaudited)

Note 1 – Basis of Condensed Consolidated Financial Statements

Basis of Presentation

The condensed consolidated financial information included in this report has been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with the First American Financial Corporation (the “Company”) Annual Report on Form 10-K for the year ended December 31, 2021. The condensed consolidated financial statements included herein are unaudited; however, in the opinion of management, they contain all normal recurring adjustments necessary for a fair statement of the consolidated results for the interim periods. All material intercompany transactions and balances have been eliminated upon consolidation.

Note 2 –Trust Assets, Escrow and Other Deposits

The Company administers escrow deposits and trust assets as a service to its customers. Escrow deposits totaled $15.2 billion and $10.8 billion at March 31, 2022 and December 31, 2021, respectively, of which $5.4 billion and $4.9 billion, respectively, were held at First American Trust, FSB (“FA Trust”). The escrow deposits held at FA Trust are temporarily invested in cash and cash equivalents and debt securities, with offsetting liabilities included in deposits in the accompanying condensed consolidated balance sheets. The remaining escrow deposits were held at third-party financial institutions.

Trust assets held or managed by FA Trust totaled $4.4 billion and $4.6 billion at March 31, 2022 and December 31, 2021, respectively. Escrow deposits held at third-party financial institutions and trust assets are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation. The Company could be held contingently liable for the disposition of these assets.

In conducting its operations, the Company often holds customers’ assets in escrow, pending completion of real estate transactions and, as a result, the Company has ongoing programs for realizing economic benefits with various financial institutions. The results from these programs are included as income or a reduction in expense, as appropriate, in the consolidated statements of income based on the nature of the arrangement and benefit received.

The Company facilitates tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code and tax-deferred reverse exchanges pursuant to Revenue Procedure 2000-37. As a facilitator and intermediary, the Company holds the proceeds from sales transactions and takes temporary title to property identified by the customer to be acquired with such proceeds. Upon the completion of each such exchange, the identified property is transferred to the customer or, if the exchange does not take place, an amount equal to the sales proceeds or, in the case of a reverse exchange, title to the property held by the Company is transferred to the customer. Like-kind exchange funds administered by the Company totaled $5.7 billion and $6.0 billion at March 31, 2022 and December 31, 2021, respectively. The like-kind exchange deposits are held at third-party financial institutions and, due to the structure utilized to facilitate these transactions, the proceeds and property are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation. The Company could be held contingently liable to the customer for the transfers of property, disbursements of proceeds and the returns on such proceeds.

FIRST AMERICAN FINANCIAL CORPORATION
AND SUBSIDIARY COMPANIES
Notes to Condensed Consolidated Financial Statements – (Continued)
(unaudited)

In conducting its residential mortgage loan servicing, subservicing, originations and sales operations, the Company administers cash deposits on behalf of investors, mortgagors and subservicing clients. Cash deposits, which are held at third-party financial institutions, totaled $526 million and $433 million at March 31, 2022 and December 31, 2021, respectively. These cash deposits are not considered assets of the Company and, therefore, are not included in the accompanying condensed consolidated balance sheets. All such amounts are placed in deposit accounts insured, up to applicable limits, by the Federal Deposit Insurance Corporation. The Company could be held contingently liable for the disposition of these assets. In connection with certain accounts, the Company has ongoing programs for realizing economic benefits with various financial institutions whereby it earns economic benefits either as income or as a reduction in expense.

Note 3 – Debt Securities

Investments in debt securities, classified as available-for-sale, are as follows:

(in millions)	Amortized cost		Gross unrealized					Estimated fair value
(in millions)	Amortized cost		Gains		Losses			Estimated fair value
March 31, 2022
U.S. Treasury bonds	$	94	$	—	$	(6	)	$	88
Municipal bonds		1,596		12		(87	)		1,521
Foreign government bonds		235		—		(12	)		223
Governmental agency bonds		153		—		(6	)		147
Governmental agency mortgage-backed securities		5,668		11		(298	)		5,381
U.S. corporate debt securities		1,141		4		(49	)		1,096
Foreign corporate debt securities		501		2		(22	)		481
	$	9,388	$	29	$	(480	)	$	8,937