FIRST AMERICAN FINANCIAL CORP – 10-Q

CERTAIN STATEMENTS IN THIS QUARTERLY REPORT ON FORM 10-Q ARE 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 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.

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 THE FACTORS SET FORTH ON PAGES 3-4 OF THIS QUARTERLY

REPORT. 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.

This Management’s Discussion and Analysis contains the financial measure

adjusted debt to capitalization ratio that is not presented in accordance with

generally accepted accounting principles (“GAAP”), as it excludes the effect of

secured financings payable. The Company is presenting this non-GAAP financial

measure because it provides the Company’s management and readers of this

Quarterly Report on Form 10-Q with additional insight into the financial

leverage of the Company. The Company does not intend for this non-GAAP financial

measure to be a substitute for any GAAP financial information. In this Quarterly

Report on Form 10-Q, this non-GAAP financial measure has been presented with,

and reconciled to, the most directly comparable GAAP financial measure. Readers

of this Quarterly Report on Form 10-Q should use this non-GAAP financial measure

only in conjunction with the comparable GAAP financial measure. Because not all

companies use identical calculations, the presentation of adjusted debt to

capitalization ratio may not be comparable to other similarly titled measures of

other companies.

CRITICAL ACCOUNTING ESTIMATES

A summary of the Company’s significant accounting policies that it considers to

be the most dependent on the application of estimates and assumptions can be

found in the Management’s Discussion and Analysis section of the Company’s

Annual Report on Form 10-K for the year ended December 31, 2021.

Results of Operations

Summary of First Quarter

Three Months Ended March 31,

(dollars in millions) 2022 2021 $ Change % Change

Revenues by Segment

Title insurance and services $ 1,998 $ 1,844 $ 154 8.4 %

Specialty insurance 115 136 (21 ) (15.4 )

Corporate and eliminations (79 ) 46 (125 ) (271.7 )

$ 2,034 $ 2,026 $ 8 0.4 %

A substantial portion of the revenues for the Company’s title insurance and

services segment results from the sale and refinancing of residential and

commercial real estate. In the Company’s specialty insurance segment, revenues

associated with the initial year of coverage in the home warranty operations are

impacted by volatility in residential purchase transactions. Traditionally, the

greatest volume of real estate activity, particularly residential purchase

activity, has occurred in the spring and summer months. However, changes in

interest rates, as well as other changes in general economic conditions in the

United States and abroad, can cause fluctuations in the traditional pattern of

real estate activity.

28

——————————————————————————–

The Company’s total revenues increased $8 million, or 0.4%, in the first quarter

of 2022 when compared with the first quarter of 2021. This increase was

primarily attributable to increases in agent premiums of $103 million, or 12.2%,

and an increase in information and other revenue of $30 million, or 10.8%,

offset by a decrease in net investment gains/losses of $110 million. Direct

premiums and escrow fees in the title insurance and services segment from

domestic commercial and residential purchase transactions increased $79 million,

or 48.3%, and $26 million, or 10.1%, respectively, while direct premiums and

escrow fees from domestic residential refinance transactions decreased $110

million, or 58.7%, in the first quarter of 2022 when compared to the first

quarter of 2021.

According to the Mortgage Bankers Association’s April 13, 2022 Mortgage Finance

Forecast (the “MBA Forecast”), residential mortgage originations in the United

States (based on the total dollar value of the transactions) decreased 37% in

the first quarter of 2022 when compared with the first quarter of

2021. According to the MBA Forecast, the dollar amount of purchase originations

increased 19.1% and refinance originations decreased 60.2%. This volume of

domestic residential mortgage origination activity contributed an increase in

direct premiums and escrow fees for the Company’s direct title operations of

10.1% from domestic residential purchase transactions and a decrease of 58.7%

from domestic refinance transactions in the first quarter of 2022 when compared

with the first quarter of 2021.

During the first quarter of 2022, the level of domestic title orders opened per

day by the Company’s direct title operations decreased 24.4% when compared with

the first quarter of 2021. Residential purchase and refinance opened orders per

day decreased 7.7% and 60.0%, respectively, partially offset by an increase of

6.6% in commercial opened orders when compared to the first quarter of 2021.

The Company recorded net investment losses of $43 million in the first quarter

of 2022, which included unrealized losses totaling $71 million related to the

Company’s venture investment portfolio, partially offset by a realized gain of

$51 million related to the sale of an investment in a title insurance

business. Included in unrealized losses in the venture investment portfolio were

losses of $44 million related to the Company’s investment in Offerpad Solutions

Inc. and losses of $31 million related to the Company’s investment in a

tech-enabled real estate company. Investments within the Company’s venture

portfolio are expected from time to time to cause material fluctuations in the

Company’s results of operations due to the recognition of gains or losses in

connection with observable price changes, such as from liquidity events,

subsequent equity sales, or price changes in investments that trade publicly,

which changes can be volatile.

Title Insurance and Services

Three Months Ended March 31,

(dollars in millions) 2022 2021 $ Change % Change

Revenues

Direct premiums and escrow fees $ 666 $ 658 $ 8 1.2 %

Agent premiums 948 845 103 12.2

Information and other 302 276 26 9.4

Net investment income 53 43 10 23.3

Net investment gains 29 22 7 31.8

1,998 1,844 154 8.4

Expenses

Personnel costs 583 504 79 15.7

Premiums retained by agents 758 671 87 13.0

Other operating expenses 305 265 40 15.1

Provision for policy losses and other claims 64 60 4 6.7

Depreciation and amortization 40 36 4 11.1

Premium taxes 23 21 2 9.5

Interest 5 7 (2 ) (28.6 )

1,778 1,564 214 13.7

Income before income taxes $ 220 $ 280 $ (60 ) (21.4 )%

Pretax margins 11.0 % 15.2 % (4.2 )% (27.6 )%

Direct premiums and escrow fees were $666 million for the three months ended

March 31, 2022, an increase of $8 million, or 1.2%, when compared with the same

period of the prior year. The increase was primarily due to an increase in

premiums in the Canadian operations. The increase in the average domestic

revenues per order, offset by a reduction in the number of domestic title orders

closed by the Company’s direct title operations, resulted in flat domestic

direct premium and escrow fees when compared to the prior year. The domestic

average revenues per order closed was $2,969 for the three months

29

——————————————————————————–

ended March 31, 2022, an increase of 40.2% when compared with $2,118 for the

three months ended March 31, 2021 due to higher average revenues per order from

commercial transactions, higher average revenues per order from residential

purchase transactions due to higher real estate values, an increase in

residential purchase escrow revenue attributed to recent acquisitions, and, to a

lesser extent, a shift in mix to higher premium commercial and purchase

transactions. The Company’s direct title operations closed 205,100 domestic

title orders during the three months ended March 31, 2022, a decrease of 28.7%

when compared with 287,600 domestic title orders closed during the same period

of the prior year, which was generally consistent with the changes in

residential mortgage origination activity in the United States as reported in

the MBA Forecast. Domestic residential refinance orders closed per day decreased

by 62.6% and domestic residential purchase orders closed per day decreased by

7.0%.

Agent premiums were $948 million for the three months ended March 31, 2022, an

increase of $103 million, or 12.2%, when compared with the same period of the

prior year. Agent premiums are recorded when notice of issuance is received from

the agent, which is generally when cash payment is received by the Company. As a

result, there is generally a delay between the agent’s issuance of a title

policy and the Company’s recognition of agent premiums. Therefore, current

quarter agent premiums typically reflect prior quarter mortgage origination

activity. The increase in agent premiums for the three months ended

March 31, 2022 is generally consistent with the 10.9% increase in the Company’s

direct premiums and escrow fees in the fourth quarter of 2021 as compared with

the fourth quarter of 2020.

Information and other revenues primarily consist of revenues generated from fees

associated with title search and related reports, title and other real property

records and images, other non-insured settlement services, and risk mitigation

products and services. These revenues generally trend with direct premiums and

escrow fees but are typically less volatile since a portion of the revenues are

subscription based and do not fluctuate with transaction volumes

Information and other revenues were $302 million for the three months ended

March 31, 2022, an increase of $26 million, or 9.4%, when compared with the same

period of the prior year. The increase was primarily attributable to the impact

of recent acquisitions, which was $25 million in the current quarter.

Net investment income totaled $53 million for the three months ended

March 31, 2022, an increase of $10 million, or 23.3%, when compared with the

same period of the prior year. The increase was primarily attributable to an

increase in interest income from the Company’s investment portfolio due to

higher balances.

Net investment gains of $29 million for the three months ended March 31, 2022

were primarily attributable to a gain realized on the sale of an investment in a

title insurance business, partially offset by changes in the fair values of

marketable equity securities. Net investment gains of $22 million for the three

months ended March 31, 2021 were primarily attributable to changes in the fair

values of marketable equity securities. Net investment gains of $42 million for

the three months ended March 31, 2021 related to certain non-marketable

investments previously reported in the first quarter of 2021 have been

reclassified to the corporate segment.

Personnel costs were $583 million for the three months ended March 31, 2022, an

increase of $79 million, or 15.7%, when compared with the same period of the

prior year. The increase was primarily attributable to the impact of recent

acquisitions, which was $39 million, and higher salaries and incentive

compensation expense. The increase in salary expense was due to higher headcount

and higher average salaries. The increase in incentive compensation expense was

due to higher revenue and profitability in our commercial business and an

increase in share-based compensation related to restricted stock awards.

Agents retained $758 million of title premiums generated by agency operations

for the three months ended March 31, 2022, which compares with $671 million for

the same period of the prior year. The percentage of title premiums retained by

agents was 80.0% and 79.4% for the three months ended March 31, 2022 and 2021,

respectively.

Other operating expenses for the title insurance and services segment were

$305 million for the three months ended March 31, 2022, an increase of

$40 million, or 15.1%, when compared with the same period of the prior year. The

increase was primarily attributable to the impact of recent acquisitions, which

was $17 million, and higher professional services and software expense.

The provision for policy losses and other claims, expressed as a percentage of

title premiums and escrow fees, was 4.0% for the three months ended

March 31, 2022 and 2021. The 4.0% loss rate reflects the ultimate loss rate for

both the 2022 and 2021 policy years and no change in the loss reserve estimates

for prior policy years.

30

——————————————————————————–

Depreciation and amortization expense was $40 million for the three months ended

March 31, 2022, an increase of $4 million, or 11.1%, when compared with the same

period of the prior year. The increase was primarily due to higher amortization

of software and intangible assets related to recent acquisitions.

Premium taxes were $23 million and $21 million for the three months ended

March 31, 2022 and 2021, respectively. Premium taxes as a percentage of title

insurance premiums and escrow fees was 1.4% for the three months ended

March 31, 2022 and 2021.

Interest expense was $5 million for the three months ended March 31, 2022, a

decrease of $2 million, or 28.6%, when compared with the same period of the

prior year. The decrease was primarily attributable to lower interest paid on

secured financings payable due to lower average balances outstanding.

Pretax margins for the title insurance business reflect the high cost of

performing the essential services required before insuring title, whereas the

corresponding revenues are subject to regulatory and competitive pricing

restraints. Due to the relatively high proportion of fixed costs in the title

insurance business, pretax margins generally improve as closed order volumes

increase. Pretax margins for the segment are also impacted by (1) net investment

income and net investment gains or losses, which may not move in the same

direction as closed order volumes, (2) the composition (residential or

commercial) and type (resale, refinancing or new construction) of real estate

activity and (3) by the percentage of title insurance premiums generated by

agency operations as 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. The title insurance and services segment recorded pretax

margins of 11.0% and 15.2% for the three months ended March 31, 2022 and 2021,

respectively.

Specialty Insurance

Three Months Ended March 31,

(dollars in millions) 2022 2021 $ Change % Change

Revenues

Direct premiums $ 108 $ 128 $ (20 ) (15.6 )%

Information and other 7 3 4 133.3

Net investment income 1 2 (1 ) (50.0 )

Net investment (losses) gains (1 ) 3 (4 ) (133.3 )

115 136 (21 ) (15.4 )

Expenses

Personnel costs 22 24 (2 ) (8.3 )

Other operating expenses 21 22 (1 ) (4.5 )

Provision for policy losses and other claims 58 80 (22 ) (27.5 )

Depreciation and amortization 1 2 (1 ) (50.0 )

Premium taxes 1 2 (1 ) (50.0 )

103 130 (27 ) (20.8 )

Income before income taxes $ 12 $ 6 $ 6 100.0 %

Pretax margins 10.4 % 4.4 % 6.0 % 136.4 %

Direct premiums were $108 million for the three months ended March 31, 2022, a

decrease of $20 million, or 15.6%, when compared with the same period of the

prior year. The decrease was primarily attributable to a $24 million decline in

in direct premiums in the property and casualty business due to lower policy

volumes resulting from the decision in 2020 to exit the business, partially

offset by a $4 million increase in premiums in the home warranty business driven

by an increase in the average price charged per contract.

Net investment (losses) gains for the specialty insurance segment totaled losses

of $1 million and gains of $3 million for the three months ended March 31, 2022

and 2021, respectively, and were primarily from changes in the fair values of

marketable equity securities.

Personnel costs and other operating expenses were $43 million and $46 million

for the three months ended March 31, 2022 and 2021, respectively, a decrease of

$3 million, or 6.5%. The decrease was primarily attributable to a decrease in

agent commissions, incentive compensation, and salaries expense in the property

and casualty business, partially offset by higher professional services expense

in the home warranty business.

31

——————————————————————————–

The provision for home warranty claims, expressed as a percentage of home

warranty premiums, was 46.5% and 53.6% for the three months ended March 31, 2022

and 2021, respectively. The decrease in the claims rate was primarily

attributable to lower claims frequency.

The Company is continuing its wind-down of the property and casualty insurance

business through the transfer and non-renewal of policies. The Company’s

policies in force have declined by approximately 87% from prior year as of

March 31, 2022 and it expects the transfers to be completed by the end of the

third quarter of 2022.

The property and casualty insurance business recorded revenues of $12 million

and $35 million for the three months ended March 31, 2022 and 2021,

respectively. Losses before income taxes for the three months ended

March 31, 2022 and 2021 were $4 million and $7 million, respectively.

Premium taxes were $1 million and $2 million for the three months ended

March 31, 2022 and 2021, respectively. Premium taxes as a percentage of

specialty insurance segment premiums were 0.9% and 1.6% for the three months

ended March 31, 2022 and 2021, respectively.

A large part of the revenues for the specialty insurance businesses are

generated by renewals and are not dependent on the level of real estate activity

in the year of renewal. With the exception of loss expense, the majority of the

expenses for this segment are variable in nature and therefore generally

fluctuate consistent with revenue fluctuations. Accordingly, pretax margins for

this segment (before loss expense) are relatively constant, although as a result

of some fixed expenses, profit margins (before loss expense) should nominally

improve as premium revenues increase. Specialty insurance pretax margins are

also impacted by the segment’s net investment income and net investment gains or

losses, which may not move in the same direction as premium revenues. The

specialty insurance segment recorded pretax margins of 10.4% and 4.4% for the

three months ended March 31, 2022 and 2021, respectively.

Corporate

Three Months Ended March 31,

(dollars in millions) 2022 2021 $ Change % Change

Revenues

Net investment (losses) income $ (8 ) $ 5 $ (13 ) (260.0 )%

Net investment (losses) gains

(71 ) 42 (113 ) (269.0 )

(79 ) 47 (126 ) (268.1 )

Expenses

Personnel costs (3 ) 7 (10 ) (142.9 )

Other operating expenses 11 9 2 22.2

Interest 15 11 4 36.4

23 27 (4 ) (14.8 )

(Loss) income before income taxes $ (102 ) $ 20 $ (122 ) NM 1%

(1) Not meaningful

Net investment (losses) income totaled losses of $8 million and income of

$5 million for the three months ended March 31, 2022 and 2021, respectively. The

decrease in net investment (losses) income for the three months ended

March 31, 2022 was primarily attributable to lower earnings on investments

associated with the Company’s deferred compensation plan when compared to the

same period of 2021.

Net investment (losses) gains totaling losses of $71 million and gains of

$42 million for the three months ended March 31, 2022 and 2021, respectively,

were recognized on certain non-marketable equity investments, which were

classified within the title insurance and services segment in the prior year.

Corporate personnel costs and other operating expenses were $8 million and

$16 million for the three months ended March 31, 2022 and 2021,

respectively. The decrease was primarily attributable to lower expense related

to the Company’s deferred compensation plan, partially offset by higher legal

expense.

Interest expense was $15 million for the three months ended March 31, 2022, an

increase of $4 million, or 36.4%, when compared with the prior year. The

increase was due to the additional interest accrued on the $650 million of 2.4%

senior unsecured notes issued by the Company in August 2021.

32

——————————————————————————–

Eliminations

The Company’s inter-segment eliminations were not material for the three months

ended March 31, 2022 and 2021.

INCOME TAXES

The Company’s effective income tax rates (income tax expense as a percentage of

income before income taxes) were 24.4% and 23.4% for the three months ended

March 31, 2022 and 2021, respectively. The difference in the effective tax rates

is primarily due to additional state income taxes related to non-insurance

income in the current year and benefits related to foreign tax law changes in

the prior year.

The Company evaluates the realizability of its deferred tax assets by assessing

the valuation allowance and makes adjustments to the allowance as necessary. The

factors used in assessing the likelihood of realization include forecasts of

future taxable income and available tax planning strategies that could be

implemented. The Company’s ability or inability to achieve forecasted taxable

income in the applicable taxing jurisdictions could affect the ultimate

realization of its deferred tax assets. Based on future operating results in

certain jurisdictions, it is possible that the current valuation allowance

positions of those jurisdictions could be adjusted during the next 12 months.

NET INCOME

Net income for the three months ended March 31, 2022 and 2021 was $98 million

and $234 million, or $0.88 and $2.10 per diluted share, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Cash requirements. The Company generates cash primarily from the sale of its

products and services and investment income. The Company’s current cash

requirements include operating expenses, taxes, payments of principal and

interest on its debt, capital expenditures, dividends on its common stock, and

may include business acquisitions, investments in private companies, primarily

those in the venture-stage, and repurchases of its common stock. Management

forecasts the cash needs of the holding company and its primary subsidiaries and

regularly reviews their short-term and long-term projected sources and uses of

funds, as well as the asset, liability, investment and cash flow assumptions

underlying such forecasts. Based on the Company’s ability to generate cash flows

from operations, its liquid-asset position and amounts available on its

revolving credit facility, management believes that its resources are sufficient

to satisfy its anticipated operational cash requirements and obligations for at

least the next twelve months.

The substantial majority of the Company’s business is dependent upon activity in

the real estate and mortgage markets, which are cyclical and seasonal. Periods

of increasing interest rates and reduced mortgage financing availability

generally have an adverse effect on residential real estate activity and

therefore typically decrease the Company’s revenues. In contrast, periods of

declining interest rates and increased mortgage financing availability generally

have a positive effect on residential real estate activity, which typically

increases the Company’s revenues. Residential purchase activity is typically

slower in the winter months with increased volumes in the spring and summer

months. Residential refinance activity is typically more volatile than purchase

activity and is highly impacted by changes in interest rates. Commercial real

estate volumes are less sensitive to changes in interest rates but fluctuate

based on local supply and demand conditions for space and mortgage financing

availability.

33

——————————————————————————–

Cash provided by operating activities totaled $40 million and $224 million for

the three months ended March 31, 2022 and 2021, respectively, after claim

payments, net of recoveries, of $101 million and $118 million, respectively. The

principal nonoperating uses of cash and cash equivalents for the three months

ended March 31, 2022 and 2021 were advances and repayments related to secured

financing transactions, purchases of debt and equity securities, repurchases of

Company shares and dividends to common stockholders. The principal nonoperating

sources of cash and cash equivalents for the three months ended March 31, 2022

and 2021 were borrowings and collections related to secured financing

transactions, proceeds from the sales and maturities of debt and equity

securities and increases in the deposit balances at the Company’s banking

operations. The net effect of all activities on cash and cash equivalents were

increases of $476 million and $751 million for the three months ended

March 31, 2022 and 2021, respectively.

The Company continually assesses its capital allocation strategy, including

decisions relating to dividends, stock repurchases, capital expenditures,

acquisitions and investments. In March 2022, the Company paid a first quarter

cash dividend of 51 cents per common share. Management expects that the Company

will continue to pay quarterly cash dividends at or above the current level. The

timing, declaration and payment of future dividends, however, falls within the

discretion of the Company’s board of directors and will depend upon many

factors, including the Company’s financial condition and earnings, the capital

requirements of the Company’s businesses, restrictions imposed by applicable law

and any other factors the board of directors deems relevant from time to time.

The Company maintains a stock repurchase plan with authorization up to

$600 million, of which $335 million remained as of March 31, 2022. Purchases may

be made from time to time by the Company in the open market at prevailing market

prices or in privately negotiated transactions. During the three months ended

March 31, 2022, the Company repurchased and retired 1.6 million shares of its

common stock for a total purchase price of $108 million and, as of

March 31, 2022, had repurchased and retired 4.4 million shares of its common

stock under the current authorization for a total purchase price of

$265 million.

Holding Company. First American Financial Corporation is a holding company that

conducts all of its operations through its subsidiaries. The holding company’s

current cash requirements include payments of principal and interest on its

debt, taxes, payments in connection with employee benefit plans, dividends on

its common stock and other expenses. The holding company is dependent upon

dividends and other payments from its operating subsidiaries to meet its cash

requirements. The Company’s target is to maintain a cash balance at the holding

company equal to at least twelve months of estimated cash requirements. At

certain points in time, the actual cash balance at the holding company may vary

from this target due to, among other factors, the timing and amount of cash

payments made and dividend payments received. Pursuant to insurance and other

regulations under which the Company’s insurance subsidiaries operate, the amount

of dividends, loans and advances available to the holding company is limited,

principally for the protection of policyholders. As of March 31, 2022, under

such regulations, the maximum amount available to the holding company from its

insurance subsidiaries for the remainder of 2022, without prior approval from

applicable regulators, was dividends of $681.7 million and loans and advances of

$125.8 million. However, the timing and amount of dividends paid by the

Company’s insurance subsidiaries to the holding company falls within the

discretion of each insurance subsidiary’s board of directors and will depend

upon many factors, including the level of total statutory capital and surplus

required to support minimum financial strength ratings by certain rating

agencies. Such restrictions have not had, nor are they expected to have, an

impact on the holding company’s ability to meet its cash obligations.

As of March 31, 2022, the holding company’s sources of liquidity included

$813 million of cash and cash equivalents and $700 million available on the

Company’s revolving credit facility. Management believes that liquidity at the

holding company is sufficient to satisfy anticipated cash requirements and

obligations for at least the next twelve months.

Financing. The Company maintains a credit agreement with JPMorgan Chase Bank,

N.A. in its capacity as administrative agent and the lenders party thereto. The

credit agreement, which is comprised of a $700 million revolving credit

facility, includes an expansion option that permits the Company, subject to

satisfaction of certain conditions, to increase the revolving commitments and/or

add term loan tranches in an aggregate amount not to exceed $350 million. Unless

terminated earlier, the credit agreement will terminate on April 30, 2024. The

obligations of the Company under the credit agreement are neither secured nor

guaranteed. Proceeds under the credit agreement may be used for general

corporate purposes. At March 31, 2022, the Company had no outstanding borrowings

under the facility.

34

——————————————————————————–

In addition to amounts available under its credit facility, certain subsidiaries

of the Company maintain separate financing arrangements. The primary financing

arrangements maintained by subsidiaries of the Company are as follows:

• FirstFunding, Inc., a specialized warehouse lender to correspondent

mortgage lenders, maintains secured warehouse lending facilities with

several banking institutions. At March 31, 2022, outstanding borrowings

under these facilities totaled $545 million.

• ServiceMac, LLC, a residential mortgage subservicer, maintains secured

warehouse lending facilities with several banking institutions. At March

31, 2022, outstanding borrowings under these facilities totaled $2

million.

• First American Trust, FSB (“FA Trust”), a federal savings bank, maintains

a secured line of credit with the Federal Home Loan Bank and federal funds

lines of credit with certain correspondent institutions. In addition, FA

Trust is a party to master repurchase agreements under which securities

may be loaned or sold. At March 31, 2022, no amounts were outstanding

under any of these facilities.

• First Canadian Title Company Limited, a Canadian title insurance and

services company, maintains credit facilities with certain Canadian

banking institutions. At March 31, 2022, no amounts were outstanding under

these facilities.

The Company’s debt to capitalization ratios were 29.1% and 27.4% at

March 31, 2022 and December 31, 2021, respectively. The Company’s adjusted debt

to capitalization ratios, excluding secured financings payable of $558 million

and $538 million at March 31, 2022 and December 31, 2021, were 23.4% and 22.2%,

respectively.

Investment Portfolio. The Company maintains a high quality, liquid investment

portfolio that is primarily held at its insurance and banking subsidiaries. As

of March 31, 2022, 94% of the Company’s investment portfolio consisted of debt

securities, of which 67% were either United States government-backed or rated

AAA and 97% were either rated or classified as investment grade. Percentages are

based on the estimated fair values of the securities. Credit ratings reflect

published ratings obtained from globally recognized securities rating

agencies. If a security was rated differently among the rating agencies, the

lowest rating was selected. For further information on the credit quality of the

Company’s debt securities portfolio at March 31, 2022, see Note 3 Debt

Securities to the condensed consolidated financial statements.

In addition to its debt and marketable equity securities portfolio, the Company

maintains investments in non-marketable equity securities and securities

accounted for under the equity method. For further information on the Company’s

equity securities, see Note 4 Equity Securities to the condensed consolidated

financial statements.

Off-balance sheet arrangements. 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

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.

35

——————————————————————————–

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.

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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

The Company’s primary exposure to market risk relates to interest rate risk

associated with certain financial instruments. Although the Company monitors its

risk associated with fluctuations in interest rates, it does not currently use

derivative financial instruments on any significant scale to hedge these risks.

There have been no material changes in the Company’s market risks since the

filing of its Annual Report on Form 10-K for the year ended December 31, 2021.

Item 4. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

The Company’s chief executive officer and chief financial officer have concluded

that, as of March 31, 2022, the end of the quarterly period covered by this

Quarterly Report on Form 10-Q, the Company’s disclosure controls and procedures,

as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended,

were effective, based on the evaluation of these controls and procedures

required by Rule 13a-15(b) thereunder.

Changes in Internal Control Over Financial Reporting

There was no change in the Company’s internal control over financial reporting

during the quarter ended March 31, 2022, that has materially affected, or is

reasonably likely to materially affect, the Company’s internal control over

financial reporting.

36

——————————————————————————–

PART II: OTHER INFORMATION