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
<PAGE>
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
<PAGE>
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)
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
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
=============== ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Statements of Income
March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
For The Three
Months Ended
March 31
------------------------------------
1999 1998
------------- -------------
<S> <C> <C>
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
============= =============
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
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
============= =============
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
*Not disclosed on a quarterly basis.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 22,998,439
<DEBT-CARRYING-VALUE> 4,954,558
<DEBT-MARKET-VALUE> 0*
<EQUITIES> 4,749,709
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 32,722,706
<CASH> 10,250,583
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 52,792,928
<POLICY-LOSSES> 14,187,665
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 153,767
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 356,281
<OTHER-SE> 36,519,111
<TOTAL-LIABILITY-AND-EQUITY> 52,792,928
10,694,237
<INVESTMENT-INCOME> 470,127
<INVESTMENT-GAINS> 191,405
<OTHER-INCOME> 160,547
<BENEFITS> 1,580,868
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 8,215,628
<INCOME-PRETAX> 1,719,820
<INCOME-TAX> 543,502
<INCOME-CONTINUING> 1,176,318
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,176,318
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
