Housing Woes Drive 40 Percent Drop in Net Income at First American

The First American Corporation (NYSE:FAF), America’s largest provider of business information, said yesterday that net income declined 40 percent during 2006, falling to $287.7 million versus $480.4 million during 2005, in spite of a 5 percent boost in company revenues. Fourth quarter revenues were down 2 percent, the company said, and profits for the quarter fell 11 percent to $104.0 million. First American had reported net income of $116.6 million in the fourth quarter of 2005. “This year was marked by a number of challenges for our company, including a general decline in real estate activity, home price depreciation and increased industry regulation,” said Parker S. Kennedy, chairman and chief executive officer of The First American Corporation. “We achieved reasonable top-line growth with a 5 percent increase in revenues to a record level. However, we feel our margins fell short of where they can and will be. This coming year will be one in which we focus on integration, organic growth, building scale in selected businesses and expense management. Our approach to acquisitions will be very selective and focused on businesses and markets with high expected growth rates.”

Kennedy said the company’s title operations experienced a 44 percent decline in income before taxes and minority interest, primarily due to what he characterized as “a significant increase in regulatory and litigation expenses.” The company recently agreed to a $10 million dollar settlement with the California Department of Insurance over allegedly engaging in numerous illegal marketing activities. “2007 will be a transitional year for our title company,” Kennedy said. “In our quest to improve margins and returns on allocated capital, we may not experience the same level of revenue growth that we have seen historically. In addition, our goal of being an industry leader in terms of compliance may put pressure on profitability in the short term.” Kennedy said the company’s title operations will be restructured during the year in an effort to reduce operating costs, although he did not provide specific information regarding potential layoffs. Outside of its core title operations, First American said the declining real estate market was the primary cause of an 11 percent decline in the company’s mortgage information segment, which includes its default servicing outsourcing businesses. Revenues fell to $126.4 million in the fourth quarter of 2006, compared with 2005, although the company said it expects to see strong revenue growth in this area of the business during 2007, as rising delinquencies and defaults drive up demand for the company’s services in this sector. For more information, visit http://www.firstam.com.

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