UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2002
----------------
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: 0-11774
-----------
INVESTORS TITLE COMPANY
------------------------
(Exact name of registrant as specified in its charter)
North Carolina 56-1110199
-------------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
121 North Columbia Street, Chapel Hill, North Carolina 27514
- -------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(919) 968-2200
--------------
(Registrant's Telephone Number Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 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
---
Shares outstanding of each of the issuer's classes of common stock as of
June 30, 2002:
Common Stock, no par value 2,519,031
-------------------------- ---------
Class Shares Outstanding
1
INVESTORS TITLE COMPANY AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001...3
Consolidated Statements of Income:
Three and Six Months Ended June 30, 2002 and 2001..................4
Consolidated Statements of Cash Flows:
Six Months Ended June 30, 2002 and 2001............................5
Notes to Consolidated Financial Statements..............................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................7
Item 3. Quantitative and Qualitative Disclosures About Market Risk .......11
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders...............11
Item 5. Other Information.................................................12
Item 6. Exhibits and Reports on Form 8-K................................. 12
SIGNATURES.................................................................13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
- ------------------------------
Investors Title Company and Subsidiaries
Consolidated Balance Sheets
As of June 30, 2002 and December 31, 2001
(Unaudited) (Audited)
June 30, 2002 December 31, 2001
----------------- -------------------
Assets
Cash and cash equivalents $ 5,807,181 $ 3,452,455
Investments in securities:
Fixed maturities:
Held-to-maturity, at amortized cost 4,501,005 4,907,066
Available-for-sale, at fair value 46,364,026 42,683,660
Equity securities, at fair value 4,933,086 5,433,557
Other investments 476,834 64,888
----------------- ----------------
Total investments 56,274,951 53,089,171
Premiums receivable (less allowance for doubtful accounts:
2002 and 2001: $1,405,000) 5,065,372 7,104,580
Accrued interest and dividends 711,353 725,757
Prepaid expenses and other assets 675,992 765,348
Property acquired in settlement of claims 197,617 294,510
Property, net 4,382,610 4,433,855
Deferred income taxes, net 390,798 354,024
----------------- -------------------
Total Assets (Note 5) $ 73,505,874 $ 70,219,700
================= ===================
Liabilities and Stockholders' Equity
Liabilities:
Reserves for claims (Note 2) $ 23,183,500 $ 21,460,000
Accounts payable and accrued liabilities 1,945,110 3,700,095
Commissions and reinsurance payables 307,957 281,961
Premium taxes payable - 367,055
Current income taxes payable 237,535 138,821
----------------- -------------------
Total liabilities 25,674,102 25,947,932
----------------- -------------------
Stockholders' Equity:
Common stock - no par value (shares authorized 10,000,000;
2,855,744 and 2,855,744 shares issued; and 2,519,031 and
2,516,298 shares outstanding 2002 and 2001, respectively) 1 1
Retained earnings 45,066,129 41,928,575
Accumulated other comprehensive income
(net unrealized gain on investments)
(net of deferred taxes: 2002: $1,425,295;
2001: $1,207,670) (Note 3) 2,765,642 2,343,192
----------------- -------------------
Total stockholders' equity 47,831,772 44,271,768
----------------- -------------------
Total Liabilities and Stockholders' Equity $ 73,505,874 $ 70,219,700
================= ===================
See notes to consolidated financial statements.
3
Investors Title Company and Subsidiaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2002 and 2001
(Unaudited)
-------------------------------- --------------------------------
2002 2001 2002 2001
------------- ------------- -------------- -------------
Revenues:
Underwriting income:
Premiums written $ 14,997,015 $ 14,945,732 $ 29,780,863 $ 26,446,977
Less - premiums for reinsurance ceded 125,818 78,455 228,941 141,975
------------- ------------- -------------- -------------
Net premiums written 14,871,197 14,867,277 29,551,922 26,305,002
Investment income - interest and dividends 692,781 672,054 1,361,819 1,357,931
Net realized gain (loss) on sales of investments 5,043 (152) 290,850 2,053
Other 523,066 436,328 957,069 899,773
------------- ------------- -------------- -------------
Total 16,092,087 15,975,507 32,161,660 28,564,759
------------- ------------- -------------- -------------
Operating Expenses:
Commissions to agents 6,767,083 6,759,993 13,776,762 12,080,211
Provision for claims (Note 2) 1,703,640 1,941,190 3,383,051 3,351,835
Salaries, employee benefits and payroll taxes 2,729,169 2,639,860 5,667,760 5,102,689
Office occupancy and operations 1,270,795 1,376,457 2,471,192 2,593,651
Business development 430,484 542,186 808,305 873,459
Taxes, other than payroll and income 115,357 92,028 191,594 152,872
Premium and retaliatory taxes 304,092 286,500 633,858 572,677
Professional fees 190,251 217,967 400,506 440,346
Other 85,618 53,980 133,855 153,549
------------- ------------- -------------- -------------
Total 13,596,489 13,910,161 27,466,883 25,321,289
------------- ------------- -------------- -------------
Income Before Income Taxes (Note 5) 2,495,598 2,065,346 4,694,777 3,243,470
Provision For Income Taxes 794,600 620,800 1,446,600 958,800
------------- ------------- -------------- -------------
Net Income $ 1,700,998 $ 1,444,546 $ 3,248,177 $ 2,284,670
============= ============= ============== =============
Basic Earnings Per Common Share (Note 4) $ 0.68 $ 0.56 $ 1.29 $ 0.89
============= ============= ============== =============
Weighted Average Shares Outstanding - Basic (Note 4) 2,517,739 2,562,467 2,517,148 2,564,695
============= ============= ============== =============
Diluted Earnings Per Common Share (Note 4) $ 0.65 $ 0.56 $ 1.25 $ 0.88
============= ============= ============== =============
Weighted Average Shares Outstanding - Diluted (Note 4) 2,600,191 2,602,006 2,593,565 2,605,812
============= ============= ============== =============
Dividends Paid $ 77,170 $ 85,673 $ 151,074 $ 171,345
============= ============= ============== =============
Dividends Per Share $ 0.03 $ 0.03 $ 0.06 $ 0.06
============= ============= ============== =============
See notes to consolidated financial statements.
4
Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2002 and 2001
(Unaudited)
2002 2001
------------------ ------------------
Operating Activities:
Net income $ 3,248,177 $ 2,284,670
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 497,858 884,611
Amortization, net 14,867 1,743
Net gain on disposals of property (7,108) (9,872)
Net realized gain on sales of investments (290,850) (2,053)
Benefit for deferred income taxes (254,400) (483,721)
Provision for claims 3,383,051 3,351,835
Payments of claims, net of recoveries (1,659,551) (1,591,835)
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets 2,245,828 (2,522,275)
Increase (decrease) in accounts payable
and accrued liabilities (1,754,985) 759,629
Increase in commissions and reinsurance payables 25,996 30,649
Increase (decrease) in premium taxes payable (373,022) 126,742
Increase in current income taxes payable 98,714 292,952
------------------ ------------------
Net cash provided by operating activities 5,174,575 3,123,075
------------------ ------------------
Investing Activities:
Purchases of available-for-sale securities (5,557,892) (5,259,412)
Purchases of held-to-maturity securities (362,470) (600,000)
Purchases of held-at-cost securities (411,946) -
Proceeds from sales of available-for-sale securities 3,293,836 827,221
Proceeds from sales of held-to-maturity securities 768,750 963,689
Purchases of property (456,858) (219,499)
Proceeds from sales of property 17,353 40,720
------------------ ------------------
Net cash used in investing activities (2,709,227) (4,247,281)
------------------ ------------------
Financing Activities:
Distributions (repurchases) of common stock, net 26,281 (138,258)
Exercise of options 14,171 20,381
Dividends paid (151,074) (171,345)
------------------ ------------------
Net cash used in investing activities (110,622) (289,222)
------------------ ------------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,354,726 (1,413,428)
Cash and Cash Equivalents, Beginning of Year 3,452,455 4,268,712
------------------ ------------------
Cash and Cash Equivalents, End of Period $ 5,807,181 $ 2,855,284
================== ==================
Supplemental Disclosures:
Cash Paid During the Year for:
Income Taxes, net of refunds $ 1,603,601 $ 1,159,754
================== ==================
Noncash Financing Activities:
Bonuses and fees totaling $41,728 and $48,809 were paid for the six months ended
June 30, 2002 and 2001, respectively, by issuance of the Company's common stock.
See notes to consolidated financial statements.
5
INVESTORS TITLE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2002
(Unaudited)
Note 1 - Basis of Presentation
---------------------
The consolidated financial statements include Investors Title Company and
its subsidiaries, and have been prepared in conformity with accounting
principles generally accepted in the United States of America.
In the opinion of management all necessary adjustments have been reflected
for a fair presentation of the financial position, results of operations
and cash flows in the accompanying unaudited consolidated financial
statements. All such adjustments are of a normal recurring nature.
Certain 2001 amounts have been reclassified to conform with 2002
classifications.
Reference should be made to the "Notes to Consolidated Financial
Statements" of the Registrant's Annual Report to Shareholders for the year
ended December 31, 2001 for a description of accounting policies.
Note 2 - Reserves for Claims
-------------------
Transactions in the reserves for claims for the six months ended
June 30, 2002 were as follows:
Balance, beginning of year $ 21,460,000
Provision, charged to operations 3,383,051
Recoveries 323,985
Payments of claims (1,983,536)
---------------
Balance, June 30, 2002 $ 23,183,500
===============
In management's opinion, the reserves are adequate to cover claim losses
which might result from pending and possible claims.
Note 3 - Comprehensive Income
--------------------
Total comprehensive income for the three months ended June 30, 2002 and
2001 was $2,369,666 and $1,427,262, respectively. Total comprehensive
income for the six months ended June 30, 2002 and 2001 was $3,670,627 and
$2,298,202, respectively. Other comprehensive income is comprised solely
of unrealized gains or losses on the Company's available-for-sale
securities.
Note 4 - Earnings Per Common Share
-------------------------
Employee stock options are considered outstanding for the diluted earnings
per common share calculation and are computed using the treasury stock
method. The total increase in the weighted average shares outstanding
related to these equivalent shares was 82,452 and 39,539 for the three
months ended June 30, 2002 and 2001, respectively, and 76,417 and 41,117
for the six months ended June 30, 2002 and 2001, respectively. Of the
total options outstanding, 68,686 and 82,821 options were not included in
the computation of diluted EPS for the three months ended June 30, 2002
and 2001, respectively; and 68,686 and 57,626 options were not included in
the computation of diluted EPS for the six months ended June 30, 2002 and
2001, respectively, because the options' exercise prices were greater than
the average market price of the common shares.
6
Note 5 - Segment Information
---------------------
Income
Three Months Operating Before
Ended Revenues Income Taxes Assets
- ---------------------------------------------------------------------------------------
June 30, 2002
- ---------------------------------------------------------------------------------------
Title Insurance $15,021,352 $ 2,363,446 $69,338,805
Exchange Services 180,542 70,698 295,038
All Other 192,369 61,454 3,872,031
- ---------------------------------------------------------------------------------------
$15,394,263 $ 2,495,598 $73,505,874
- ---------------------------------------------------------------------------------------
June 30, 2001
- ---------------------------------------------------------------------------------------
Title Insurance $14,905,837 $ 1,879,192 $59,967,759
Exchange Services 236,889 121,848 501,273
All Other 160,879 64,306 3,809,085
- ---------------------------------------------------------------------------------------
$15,303,605 $ 2,065,346 $64,278,117
- ---------------------------------------------------------------------------------------
Income
Six Months Operating Before
Ended Revenues Income Taxes Assets
- ---------------------------------------------------------------------------------------
June 30, 2002
- ---------------------------------------------------------------------------------------
Title Insurance $29,845,072 $ 4,510,778 $69,338,805
Exchange Services 286,797 50,396 295,038
All Other 377,122 133,603 3,872,031
- ---------------------------------------------------------------------------------------
$30,508,991 $ 4,694,777 $73,505,874
- ---------------------------------------------------------------------------------------
June 30, 2001
- ---------------------------------------------------------------------------------------
Title Insurance $26,387,316 $ 2,857,817 $59,967,759
Exchange Services 490,199 294,803 501,273
All Other 327,260 90,850 3,809,085
- ---------------------------------------------------------------------------------------
$27,204,775 $ 3,243,470 $64,278,117
- ---------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
--------------------------------------------------------------
The 2001 Form 10-K and the 2001 Annual Report should be read in
conjunction with the following discussion since they contain
important information for evaluating the Company's operating results
and financial condition.
7
Results of Operations:
----------------------
For the quarter ended June 30, 2002, net premiums written increased
to $14,871,197 from $14,867,277, investment income increased 3% to
$692,781, revenues increased 1% to $16,092,087 and net income
increased 18% to $1,700,998, all compared with the same quarter in
2001. Net income per basic and diluted common share increased 21% and
16%, respectively, to $.68 and $.65, respectively, as compared with
the prior year period. For the quarter ended June 30, 2002, the title
insurance segment's operating revenues increased 1% versus the second
quarter of 2001, while the exchange services segment's operating
revenues decreased 24% for the three months ended June 30, 2002
compared with the prior year quarter. See Note 5 to the consolidated
financial statements contained in this report.
For the six months ended June 30, 2002, net premiums written
increased 12% to $29,551,922, investment income was virtually flat at
$1,361,819, revenues increased 13% to $32,161,660 and net income
increased 42% to $3,248,177, all compared with the same period in
2001. Net income per basic and diluted common share increased 45% and
42%, respectively, to $1.29 and $1.25, respectively, as compared with
the prior year period. For the six months ended June 30, 2002, the
title insurance segment's operating revenues increased 13% versus the
same period in 2001, while the exchange services segment's operating
revenues decreased 41% for the six months ended June 30, 2002
compared with the same period in 2001. The exchange services
segment's operating revenues decreased primarily due to a decline in
fee income tied to interest rates paid by depositories. These
interest rates have declined in the past year.
Notwithstanding uncertainty in the financial markets, the pace of
mortgage lending has remained strong. Home sales have tracked the
previous year's record levels and low interest rates continue to
stimulate a healthy demand for mortgage refinancing. According to the
Freddie Mac Weekly Mortgage Rate Survey, the monthly average 30-year
fixed mortgage interest rates decreased to 6.89% for the six months
ended June 30, 2002 compared with 7.07% for the six months ended June
30, 2001. The volume of business remained strong in the second
quarter of 2002 as the number of policies and commitments issued
totaled 70,501 compared with 74,859 in the same period in 2001.
Policies and commitments issued for the six months ended June 30,
2002 were 143,583 compared with 133,655 in 2001, an increase of 7.4%.
Branch net premiums written as a percentage of total net premiums
written were 38% and 39% for the three months ended June 30, 2002 and
2001, respectively, and 37% and 38% for the six months ended June 30,
2002 and 2001, respectively. Net premiums written from branch
operations decreased 3% and increased 33% for the three months ended
June 30, 2002 and 2001, respectively, as compared with the same
periods in the prior year. For the six months ended June 30, 2002 and
2001, net premiums written from branch operations increased 8% and
27%, respectively, as compared with the same prior year periods.
Though refinancing activity remained strong in the first half of
2002, the accelerated pace experienced in 2001 began to slow down in
2002.
8
Agency net premiums written as a percentage of total net premiums
written were 62% and 61% for the three months ended June 30, 2002 and
2001, respectively, and 63% and 62% for the six months ended June 30,
2002 and 2001, respectively. Agency net premiums increased 2% and 59%
for the three months ended June 30, 2002 and 2001, respectively, as
compared with the same periods in the prior year. For the six months
ended June 30, 2002 and 2001, net premiums written from agency
operations increased 15% and 55%, respectively, as compared with the
same prior year periods.
Shown below is a schedule of premiums written for the six months
ended June 30, 2002 and 2001 in all states where the Company's two
insurance subsidiaries, Investors Title Insurance Company and
Northeast Investors Title Insurance Company, currently underwrite
insurance:
2002 2001
---- ----
Alabama $ 275,440 $ -
Arkansas 7,638 -
Georgia 1,836 94,171
Indiana 5,114 1,446
Kentucky 503,741 -
Maryland 636,148 400,203
Michigan 4,419,751 5,166,760
Minnesota 652,130 726,983
Mississippi 413,665 12,607
Nebraska 387,291 458,816
New Jersey 11,943 -
New York 1,527,021 1,514,598
North Carolina 10,817,167 10,020,400
Ohio 11,673 16,631
Pennsylvania 1,551,870 1,549,390
South Carolina 2,616,019 1,747,074
Tennessee 1,521,794 1,101,852
Virginia 3,625,674 3,033,952
West Virginia 772,049 583,387
Wisconsin 7,234 14,997
------------------ ------------------
Direct Premiums 29,765,198 26,443,267
Reinsurance Assumed 15,665 3,710
Reinsurance Ceded (228,941) (141,975)
------------------ ------------------
Net Premiums $29,551,922 $26,305,002
================== ==================
Total operating expenses decreased 2% and increased 8% for the three
and six-month periods ended June 30, 2002, compared with the same
periods in 2001. Part of the decrease in operating expenses for the
second quarter was due to the decrease in depreciation expense. The
depreciable life of a large majority of the Company's electronic data
processing equipment ended in the first quarter of 2002, which
resulted in less depreciation for the second quarter of 2002 as
compared to the second quarter 2001.
9
The provision for claims as a percentage of net premiums written was
11% for the three and six months ended June 30, 2002 versus 13% for
the same periods in 2001.
The provision for income taxes was 32% of income before income taxes
for the three months ended June 30, 2002 versus 30% for the same
period in 2001. For the six months ended June 30, 2002 and 2001, the
provision for income taxes was 31% and 30% of income before income
taxes, respectively. The slight change in the tax provision
percentage was primarily due to a change in the mix of tax-exempt
investment income to taxable income.
Liquidity and Capital Resources:
--------------------------------
Net cash provided by operating activities for the six months ended
June 30, 2002, amounted to $5,174,575, compared with $3,123,075 for
the same six-month period during 2001. The increase is primarily the
result of an increase in net income, a decrease in receivables and
other assets, partially offset by a decrease in premium taxes payable
and accounts payable and accrued liabilities compared with the prior
year.
On May 11, 1999, the Board of Directors approved the repurchase of
200,000 shares of the Company's common stock. Pursuant to this
approval, the Company repurchased 200,000 shares prior to 2002 at an
average price of $12.50 per share including 12,804 shares purchased
at an average price of $14.61 during the six months ended June 30,
2001.
On May 9, 2000, the Board of Directors approved the repurchase of an
additional 500,000 shares of the Company's common stock. Pursuant to
this approval, the Company repurchased a total of 33,013 shares at an
average price of $14.85, of which 829 shares were purchased at an
average purchase price of $18.63 in the six months ended June 30,
2002.
On May 16, 2001, the Board of Directors approved the 2001 Stock
Option and Restricted Stock Plan. Pursuant to the Plan, 250,000
shares of common stock are available. As of July 31, 2002, no options
or shares have been issued under this plan.
Management believes that funds generated from operations (primarily
underwriting and investment income) will enable the Company to
adequately meet its operating needs and is unaware of any trend
likely to result in adverse liquidity changes. In addition to
operational liquidity, the Company maintains a high degree of
liquidity within its investment portfolio in the form of short-term
investments and other readily marketable securities.
10
Safe Harbor Statement
---------------------
Except for the historical information presented, the matters
disclosed in the foregoing discussion and analysis and other parts of
this report include forward-looking statements. These statements
represent the Company's current judgment on the future and are
subject to risks and uncertainties that could cause actual results to
differ materially. Such factors include, without limitation: (1) that
the demand for title insurance will vary with factors beyond the
control of the Company, such as changes in mortgage interest rates,
availability of mortgage funds, level of real estate activity, cost
of real estate, consumer confidence, supply and demand for real
estate, inflation and general economic conditions; (2) that losses
from claims may be greater than anticipated, such that reserves for
possible claims are inadequate; (3) that unanticipated adverse
changes in securities markets could result in material losses on
investments made by the Company; and (4) the dependence of the
Company on key management personnel the loss of whom could have a
material adverse effect on the Company's business. Other risks and
uncertainties may be described from time to time in the Company's
other reports and filings with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
The Company's market risk exposure has not changed materially from
the exposure as disclosed in the Company's 2001 Annual Report on Form
10-K.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
(a) Investors Title Company's Annual Meeting of Shareholders was held
May 15, 2002.
(b) No response is required.
(c) The proposals voted upon and the results of the voting were as follows:
1. Election of four Directors for a three-year term.
Broker
For Against Abstentions Withheld Non-votes
W. Morris Fine 2,270,453 N/A N/A 23,566 N/A
Loren B. Harrell 2,116,975 N/A N/A 177,044 N/A
H. Joe King, Jr. 2,282,961 N/A N/A 11,058 N/A
William J. Kennedy III 2,287,469 N/A N/A 6,550 N/A
2. Approval to amend the Articles of Incorporation to Limit Director
Liability
Broker
For Against Abstentions Withheld Non-votes
2,246,857 42,123 5,839 N/A N/A
11
3. Approval to amend the Articles of Incorporation to Increase Authorized
Capital Stock
Broker
For Against Abstentions Withheld Non-votes
1,497,990 316,776 6,153 N/A N/A
Item 5. Other Information
-----------------
On August 9, 2002, the Company's Audit Committee approved Deloitte and
Touche, LLP to perform the following services for the year ending
December 31, 2002:
(a) Insurance services for Investors Title Insurance Company
and Northeast Investors Title Insurance Company, two wholly owned
subsidiaries of the Company;
(b) Audit services for the Company and its wholly owned
subsidiaries.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
(3)(iii) Articles of Amendment of Investors Title Company
filed May 28, 2002
(99)(i) Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (Subsections (a) and (b) of Section 1350,
Chapter 63 of Title 18, United States Code)
(b) Reports on Form 8-K
-------------------
There were no reports filed on Form 8-K for this quarter.
12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this Report to be signed in its behalf by the
undersigned hereunto duly authorized.
INVESTORS TITLE COMPANY
(Registrant)
By: /s/ James A. Fine, Jr.
----------------------
James A. Fine, Jr.
President
(Chief Financial Officer and
Chief Accounting Officer)
Dated: August 14, 2002
13