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: March 31, 1999 ------------------- 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) 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 April 30, 1999: Common Stock, no par value 2,779,451 - -------------------------------------------------------------------- Class Shares Outstanding 1 INVESTORS TITLE COMPANY AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998....3 Consolidated Statements of Income: Three Months Ended March 31, 1999 and 1998 ............................4 Consolidated Statements of Cash Flows: Three Months Ended March 31, 1999 and 1998 ............................5 Notes to Condensed Consolidated Financial Statements .....................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................7 PART II. OTHER INFORMATION...................................................11 Item 6. Exhibits and Reports on Form 8-K....................................11 SIGNATURES...................................................................12 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements Investors Title Company and Subsidiaries Consolidated Balance Sheets As of March 31, 1999 and December 31, 1998 (Unaudited) March 31, 1999 December 31, 1998 -------------- ----------------- Assets Cash and Cash Equivalents $ 10,250,583 $8,141,354 Investments in securities: Fixed maturities: Held-to-maturity, at amortized cost 4,974,558 5,287,458 Available-for-sale, at fair value 22,998,439 23,235,754 Equity securities, at fair value 4,749,709 5,275,912 -------------- ------------- Total investments 32,722,706 33,799,124 Premiums ( less allowance for doubtful accounts: 1999: $775,000; 1998: $775,000) 4,499,386 5,357,000 Accrued interest and dividends 425,835 481,741 Prepaid expenses and other assets 746,956 410,778 Property acquired in settlement of claims 191,617 108,500 Property, net 3,812,450 3,299,315 Deferred income tax asset, net 143,395 - -------------- ------------- Total Assets $ 52,792,928 $51,597,812 ============== ============= Liabilities and Stockholders' Equity Liabilities: Reserves for claims (Note 2) $ 14,187,665 $13,362,665 Accounts payable and accrued liabilities 1,030,810 1,258,802 Commissions and reinsurance payables 153,767 84,598 Premium taxes payable 91,304 277,887 Current income taxes payable 453,990 207,350 Deferred income taxes, net - 77,845 -------------- ------------- Total liabilities 15,917,536 15,269,147 -------------- ------------- Stockholders' Equity: Common stock-no par value (shares authorized 6,000,000; 2,855,744 and 2,855,744 shares issued; and 2,801,104 and 2,809,123 shares outstanding 1999 and 1998, respectively) 356,281 732,453 Retained earnings 34,141,154 33,050,508 Accumulated other comprehensive income (net unrealized gain on investments) (net of deferred taxes: 1999: $1,225,580; 1998: $1,311,995) (Note 3) 2,377,957 2,545,704 --------------- -------------- Total stockholders' equity 36,875,392 36,328,665 --------------- -------------- Total Liabilities and Stockholders' Equity $ 52,792,928 $51,597,812 =============== ============== See notes to consolidated financial statements. 3 Investors Title Company and Subsidiaries Consolidated Statements of Income March 31, 1999 and 1998 (Unaudited) For The Three Months Ended March 31 ------------------------------------ 1999 1998 ------------- ------------- Revenues: Underwriting income: Premiums written $ 10,771,628 $ 9,516,951 Less-premiums for reinsurance ceded 77,391 75,103 ------------- ------------- Net premiums written 10,694,237 9,441,848 Investment income-interest and dividends 470,127 420,286 Net realized gain on sales of investments 191,405 70,175 Other 160,547 150,011 ------------- ------------- Total 11,516,316 10,082,320 ------------- ------------- Operating Expenses: Commissions to agents 3,991,288 3,531,840 Provision for claims (Note 2) 1,580,868 1,564,370 Salaries 1,792,777 1,226,059 Employee benefits and payroll taxes 749,975 811,034 Office occupancy and operations 888,333 659,734 Business development 274,910 307,775 Taxes, other than payroll and income 42,408 45,614 Premium and retaliatory taxes 261,910 196,826 Professional fees 166,158 89,136 Other 47,869 123,814 ------------- ------------- Total 9,796,496 8,556,202 ------------- ------------- Income Before Income Taxes 1,719,820 1,526,118 Provision For Income Taxes 543,502 458,497 ------------- ------------- Net Income $ 1,176,318 $ 1,067,621 ============= ============= Basic Earnings per Common Share (Note 4) $ 0.42 $ 0.38 ============= ============= Weighted Average Shares Outstanding-Basic (Note 4) 2,805,423 2,803,028 ============= ============= Diluted Earnings per Common Share (Note 4) $ 0.42 $ 0.38 ============= ============= Weighted Average Shares Outstanding-Diluted (Note 4) 2,821,888 2,846,113 ============= ============= Dividends Paid $ 85,672 $ 85,672 ============= ============= Dividends per Share $ 0.03 $ 0.03 ============= ============= See notes to consolidated financial statements. 4 Investors Title Company and Subsidiaries Consolidated Statements of Cash Flows For the Three Months Ended March 31, 1999 and 1998 (Unaudited) 1999 1998 ------------- ------------- Operating Activities: Net income $ 1,176,318 $ 1,067,621 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 100,966 79,184 Net (accretion) discount amortization 12,642 (2,294) Provision for losses on premiums receivable - 75,000 Net loss on disposals of property 1,791 83 Net realized gain on sales of investments (191,405) (70,175) Benefit for deferred income taxes (134,825) (64,553) Provision for claims 1,580,868 1,564,370 Payments of claims, net of recoveries (755,868) (687,745) Changes in assets and liabilities: Increase in receivables and other assets 494,225 (542,082) Decrease in accounts payable and accrued liabilities (227,992) (253,100) Increase (decrease) in commissions and reinsurance payables 69,169 (7,031) Decrease in premium taxes payable (186,583) (22,239) Increase in current income taxes payable 246,640 503,182 ------------- ------------- Net cash provided by operating activities 2,185,946 1,640,221 ------------- ------------- Investing Activities: Purchases of available-for-sale securities (100,000) (996,730) Purchases of held-to-maturity securities - (584,035) Proceeds from sales of available-for-sale securities 793,519 762,044 Proceeds from sales of held-to-maturity securities 307,500 130,000 Purchases of property (620,742) (135,725) Proceeds from sales of property 4,850 - ------------- ------------- Net cash provided by (used in) investing activities 385,127 (824,446) ------------- ------------- Financing Activities: Distributions (repurchases) of common stock (376,172) 99,390 Dividends paid (85,672) (85,672) ------------- ------------ Net cash provided by (used in) investing activities (461,844) 13,718 ------------- ------------ Net Increase in Cash and Cash Equivalents 2,109,229 829,493 Cash and Cash Equivalents, Beginning of Year 8,141,354 2,823,177 ------------- ------------- Cash and Cash Equivalents, End of Period $10,250,583 $ 3,652,670 ============= ============ Supplemental Disclosures: Cash Paid During the Year for: Income Taxes $ 430,487 $ 20,062 ============= ============= See notes to consolidated financial statements. 5 INVESTORS TITLE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements March 31, 1999 (Unaudited) Note 1 - Basis of Presentation - ------------------------------ The consolidated financial statements include Investors Title Company and its subsidiaries, and have been prepared in conformity with generally accepted accounting principles. 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. 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, 1998 for a description of accounting policies. Note 2 - Reserves for Claims - ---------------------------- Transactions in the reserves for claims for the three months ended March 31, 1999 were as follows: Balance, beginning of year $ 13,362,665 Provision, charged to operations 1,580,868 Recoveries 133,377 Payments of claims (889,245) ------------- Balance, March 31, 1999 $ 14,187,665 ============= 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 March 31, 1999 and 1998 was $1,008,571 and $1,257,092, 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. The total increase in the weighted average shares outstanding related to these equivalent shares was 16,465 and 43,085 for the three months ending March 31, 1999 and 1998, respectively. Options to purchase 50,416 and 2,600 shares of common stock were outstanding at March 31, 1999 and 1998, respectively, but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares. Subsequent to March 31, 1999, the Company repurchased 22,318 common shares at an average purchase price of $21.59 per share under a stock repurchase program. 6 Item 2. Management's Discussion and Analysis of Financial Condition ----------------------------------------------------------------- and Results of Operations ------------------------- The 1998 Form 10-K and the 1998 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. Results of Operations: ---------------------- For the quarter ended March 31, 1999, net premiums written increased 13% to $10,694,237, investment income increased 12% to $470,127, revenues increased 14% to $11,516,316 and net income increased 10% to $1,176,318 all compared with the same quarter in 1998. Net income per basic and diluted common share, increased 11% to $.42 and 11% to $.38, respectively, as compared with the year ago period. Growth in revenues has resulted from a combination of continued marketing efforts and a strong economy. The strong economic conditions experienced during 1998 carried over into the first quarter of 1999, despite a small uptide in interest rates by the end of the quarter. Housing starts generally remained strong during the first quarter of 1999. According to the Mortgage Bankers Association of America, the monthly average 30-year fixed mortgage interest rates declined to 6.88% for the three months ended March 31, 1999 compared with 7.04% for the three months ended March 31, 1998. The volume of business continued to increase in the first quarter of 1999 as the number of policies and commitments issued rose to 68,191, an increase of 9% compared with 62,363 in the same period in 1998. Branch net premiums written as a percentage of total net premiums written were 48% and 49% for the three months ended March 31, 1999 and 1998, respectively. Net premiums written from branch operations increased 12% and 50% for the three months ended March 31, 1999 and 1998, respectively. Agency net premiums written as a percentage of total net premiums written were 52% and 51% for the three months ended March 31, 1999 and 1998, respectively. Due to the Company's efforts to increase the distribution of its products through an agency network, agency net premiums increased 14% and 105% for the three months ending March 31, 1999 and 1998, respectively. 7 Shown below is a schedule of title premiums written for the three months ended March 31, 1999 and 1998 in all states where the Company's two insurance subsidiaries, Investors Title Insurance Company and Northeast Investors Title Insurance Company, currently underwrite insurance: 1999 1998 ------- -------- Florida $ - $ 8,224 Georgia 159,712 141,944 Indiana 35,803 31,812 Kentucky 93 102 Maryland 103,760 37,036 Michigan 1,779,066 2,076,358 Minnesota 412,657 225,206 Mississippi 5,430 10,973 Nebraska 138,680 177,171 New York 144,443 101,765 North Carolina 5,128,234 4,574,551 Pennsylvania - 250 South Carolina 930,487 593,595 Tennessee 102,322 35,951 Virginia 1,593,505 1,474,921 West Virginia 224,975 - ------------ ------------ Direct Premiums 10,759,167 9,489,859 Reinsurance, net (64,930) (48,011) ------------ ------------ Net Premiums $ 10,694,237 $ 9,441,848 ============= ============ Total operating expenses increased 14% for the three months ended March 31, 1999. The increase in commissions is the result of the Company's expansion into new markets primarily by continuing to develop agency relationships. Salaries increased primarily due to an increase in the number of employees for the three months ended March 31, 1999 as compared with the same period in 1998. Office occupancy and operations and premium and retaliatory taxes rose primarily due to the increase in premium volume. Professional fees increased primarily as a result of payment of employee recruitment fees during the three months ended March 31, 1999 as well as an increase in consulting fees during the first quarter 1999 as compared with the same period in 1998. The provision for claims as a percentage of net premiums written was 15% for the three months ended March 31, 1999, versus 17% for the same period in 1998. The decrease in the percentage of provision for claims to net premiums written is the result of management's current assessment of the Company's claims experience. 8 Liquidity and Capital Resources: -------------------------------- Net cash provided by operating activities for the three months ended March 31, 1999, amounted to $2,185,946 compared with $1,640,221 for the same three-month period during 1998. This increase is primarily the result of an increase in premiums as compared with the prior period, partially offset by an increase in commissions expense. On December 9, 1996, the Board of Directors approved the repurchase by the Company of shares of the Company's common stock from time to time at prevailing market prices. The purpose of the repurchases is to avoid dilution to existing shareholders as a result of issuances of stock in connection with stock options and stock bonuses. Pursuant to this approval, the Company has repurchased 95,574 shares at an average price of $22.13 per share as of April 30, 1999, including 29,112 shares purchased at an average purchase price of $22.01 during the quarter ended March 31, 1999. The Board has authorized management to repurchase up to an additional 54,426 shares. Management believes that funds generated from operations (primarily underwriting and investment income) will enable the Company to adequately meet its operating needs. In addition to operational liquidity, the Company maintains a high degree of liquidity within the investment portfolio in the form of short-term investments and other readily marketable securities. Other Matters ------------- Year 2000 Issues ---------------- The Company's Year 2000 Project Committee (the "Committee") is comprised of department heads and high-level managers representing each of the Company's departments. Under the leadership of the Vice President of Information Systems, the Committee has continued its efforts to ensure that all aspects of the Company's business and operations are adequately addressed in the Company's Year 2000 readiness efforts. The Committee adopted a three-phase approach with estimated completion dates as follows: awareness (fourth quarter 1998), assessment (first quarter 1999) and implementation (third quarter 1999). In the awareness phase, the Committee and the Company as a whole became educated about the nature of the Year 2000 problem, particularly as applied to the Company's business circumstances. During the assessment phase the Committee identified potential points of failure and evaluated Year 2000 compliance status of such functions. The implementation phase will focus on modifying non-compliant systems that serve critical business needs. Less critical systems will be addressed once the primary systems have been remediated. The Company has inventoried all hardware and software for date-sensitive function. As part of a regular technology refresh cycle, the Company is currently replacing most existing PC workstations and servers. Desktop operating systems, network operating systems and commercial off-the-shelf application suites are also being standardized and upgraded to Year 2000 compliant versions. This replacement strategy will have the added benefit of obtaining vendor representations that all hardware and operating system software being purchased, are Year 2000 compliant. The Company previously budgeted for these technology upgrades; therefore, additional costs specifically allocated to Year 2000 compliance efforts are expected to be minimal. The Company currently estimates that costs directly attributable solely to its Year 2000 compliance program will be less than $175,000. These funds will be used for potential replacement of non computer-related equipment and other Year 2000 needs as they are identified. The Company has lowered its original cost estimate as stated in the third quarter 1998 as a result of preliminary evaluation of the assessment phase (see discussion below). The Company has incurred no material costs directly related to its Year 2000 compliance program as of March 31, 1999. 9 The Company has completed a preliminary evaluation of the assessment phase and observed a common operating environment exists throughout the Company. The existence of a common operating environment has reduced the amount of product research and potential remediation that may be required. The Company is beginning to formalize testing procedures and remediation efforts. The Company is in contact with its third-party business partners and vendors to insure they are addressing, or have addressed, any Year 2000 problems that might affect the Company's systems or business processes. The Company will assess and attempt to mitigate risks with respect to the failure of any mission critical third-party business partners and vendors to be Year 2000 ready. The Company's preparation of contingency plans for Year 2000-related occurrences is ongoing and will continue throughout 1999. The elements of the contingency plan will depend upon the continued analysis of the Company's assessment phase as well as internal Company meetings to ensure that each operational aspect of the Company is addressed appropriately. The Company's current assessment of the most likely Year 2000-related worst case scenario is that it may experience a decline in its volume of business or a delay in its ability to write title insurance as a result of failures in various functions and services in the real estate transaction business. Although the Company believes it will have completed all the remaining phases of its Year 2000 initiative in sufficient time to identify and remedy any non-compliant programs and systems and avoid any material adverse impact on its business, failure of third-party business partners and governmental services to be Year 2000 compliant, as well as a possible downturn in the economy due to Year 2000-related failures, could have a material adverse effect on the Company's operations. 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: (i) 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; (ii) that losses from claims may be greater than anticipated such that reserves for possible claims are inadequate; (iii) that unanticipated adverse changes in securities markets could result in material losses on investments made by the Company; and (iv) the dependence of the Company on key management personnel the loss of whom could have a material adverse affect on the Company's business. The Company's discussion of Year 2000 issues under the heading "Other Matters" contains forward-looking statements that are subject to risks and uncertainties that could cause the actual results to differ from those projected. These include the risks associated with unforeseen technological issues associated with the Company's own Year 2000 compliance efforts and the compliance efforts of third parties on whose systems the Company relies. 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 1998 Annual Report on Form 10-K. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- (27) Financial Data Schedule included herewith. (b) Reports on Form 8-K ------------------- There were no reports filed on Form 8-K for this quarter. 11 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 By: /s/ Elizabeth P. Bryan ----------------------- Elizabeth P. Bryan Vice President (Principal Accounting Officer) Dated: May 13, 1999 12