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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1995
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 0-15458
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
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<S> <C>
Virginia 54-0292420
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
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4551 Cox Road, Glen Allen, Virginia 23060-3382
(Address of principal executive offices)
(Zip code)
(804) 747-0136
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or 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 / /
Number of shares of the registrant's common stock outstanding at April 21,
1995: 5,407,498
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Markel Corporation
Form 10-Q
Index
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Page Number
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PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets--
March 31, 1995 and December 31, 1994 3
Consolidated Statements of Income--
Three Months Ended March 31, 1995 and 1994 4
Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1995 and 1994 5
Notes to Consolidated Financial Statements--
March 31, 1995 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K 11
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
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March 31, December 31,
--------------------------------
1995 1994
- - --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
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ASSETS
Investments, available-for-sale, at estimated fair value
Fixed maturities (cost of $494,548 in 1995 and $441,983 in 1994) $ 489,236 $ 423,114
Equity securities (cost of $100,540 in 1995 and $98,117 in 1994) 116,511 107,315
Short-term investments (estimated fair value approximates cost) 83,741 81,258
- - --------------------------------------------------------------------------------------------------------------------
Total investments, available-for-sale 689,488 611,687
- - --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents 2,493 10,229
Receivables 100,116 130,562
Reinsurance recoverable on unpaid losses 188,067 180,934
Reinsurance recoverable on paid losses 39,289 45,163
Deferred policy acquisition costs 26,917 26,064
Prepaid reinsurance premiums 40,741 37,290
Property and equipment 42,343 43,288
Intangible assets 45,008 45,086
Deferred tax asset 4,392 14,912
Other assets 17,580 17,274
- - --------------------------------------------------------------------------------------------------------------------
Total assets $ 1,196,434 $ 1,162,489
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Unpaid losses and loss adjustment expenses $ 655,471 $ 652,930
Unearned premiums 154,000 146,553
Payables to insurance companies 88,328 79,758
Long-term debt (estimated fair value of $92,735 in 1995 and $87,489 in 1994) 100,699 100,686
Other liabilities 39,661 44,061
- - --------------------------------------------------------------------------------------------------------------------
Total liabilities 1,038,159 1,023,988
- - --------------------------------------------------------------------------------------------------------------------
Stockholders' equity
Common stock 22,948 22,929
Retained earnings 128,398 121,858
Net unrealized gains (losses) on fixed maturities and equity securities,
net of taxes 6,929 (6,286)
- - --------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 158,275 138,501
- - --------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 1,196,434 $ 1,162,489
====================================================================================================================
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See accompanying notes to consolidated financial statements.
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MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
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Three Months Ended
March 31,
----------------------------
1995 1994
- - --------------------------------------------------------------------------------------------------------------------
(dollars in thousands,
except per share data)
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Operating revenues
Earned premiums $65,784 $55,122
Net investment income 8,368 6,750
Net realized gains from investment sales 1,563 2,703
Other 810 893
- - --------------------------------------------------------------------------------------------------------------------
Total operating revenues 76,525 65,468
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Operating expenses
Losses and loss adjustment expenses 42,023 34,243
Underwriting, acquisition and insurance expenses 22,605 19,308
Other 417 1,097
Amortization of intangible assets 703 1,720
- - --------------------------------------------------------------------------------------------------------------------
Total operating expenses 65,748 56,368
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Operating income 10,777 9,100
Interest expense 1,939 1,864
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Income before income taxes 8,838 7,236
Income taxes 2,298 2,026
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Net income $ 6,540 $ 5,210
====================================================================================================================
Earnings per share
Primary $ 1.17 $ 0.93
- - --------------------------------------------------------------------------------------------------------------------
Fully diluted $ 1.17 $ 0.93
====================================================================================================================
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See accompanying notes to consolidated financial statements.
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MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
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Three Months Ended
March 31,
-----------------------------
1995 1994
- - --------------------------------------------------------------------------------------------------------------------
(dollars in thousands)
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Operating Activities
Net income $ 6,540 $ 5,210
Adjustments to reconcile net income to net cash provided (used) by
operating activities 42,977 (8,834)
- - --------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 49,517 (3,624)
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Investing Activities
Proceeds from sales of fixed maturities and equity securities 103,668 95,210
Proceeds from maturities of fixed maturities 5,268 2,917
Cost of fixed maturities and equity securities purchased (162,711) (119,380)
Net change in short-term investments (2,484) (3,778)
Other (1,013) 2,461
- - --------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (57,272) (22,570)
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Financing Activities
Net proceeds from issuance of long-term debt -- 24,280
Repayment of long-term debt -- (1,500)
Other 19 (404)
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Net cash provided by financing activities 19 22,376
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Decrease in cash and cash equivalents (7,736) (3,818)
Cash and cash equivalents at beginning of period 10,229 12,386
- - --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 2,493 $ 8,568
====================================================================================================================
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See accompanying notes to consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--March 31, 1995
1. Principles of Consolidation
The consolidated balance sheet as of March 31, 1995 and the related
consolidated statements of income and cash flows for the three months ended
March 31, 1995 and 1994, are unaudited. In the opinion of management, all
adjustments necessary for a fair presentation of such consolidated financial
statements have been included. Such adjustments consist only of normal
recurring items. Interim results are not necessarily indicative of results of
operations for the full year.
The consolidated financial statements and notes are presented as permitted by
Form 10-Q, and do not contain certain information included in the Company's
annual consolidated financial statements and notes.
Certain reclassifications of prior year's amounts have been made to conform
with 1995 presentations.
2. Earnings per share
Earnings per share was determined by dividing net income, as adjusted below, by
the applicable shares outstanding (in thousands):
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Three Months Ended
March 31,
----------------------------
1995 1994
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Net income, as reported $ 6,540 $ 5,210
Dividends on redeemable preferred stock (4) (4)
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Primary and fully diluted income $ 6,536 $ 5,206
====================================================================================================================
Average common shares outstanding 5,388 5,420
Shares applicable to common stock equivalents 182 183
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Average primary shares outstanding 5,570 5,603
Additional dilution attributable to common
stock equivalents 16 1
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Average fully diluted shares outstanding 5,586 5,604
====================================================================================================================
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3. Reinsurance
The table below summarizes the effect of reinsurance on premiums written and
earned (dollars in thousands):
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Three Months Ended March 31,
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1995 1994
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Written Earned Written Earned
<S> <C> <C> <C> <C>
Direct $ 80,546 $ 78,176 $ 63,010 $ 66,184
Assumed 16,967 11,890 6,047 7,434
Ceded (27,734) (24,282) (14,833) (18,496)
- - --------------------------------------------------------------------------------------------------------------------
Net premiums $ 69,779 $ 65,784 $ 54,224 $ 55,122
====================================================================================================================
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Incurred losses and loss adjustment expenses are net of reinsurance recoveries
of $17.8 million and $15.1 million for the three months ended March 31, 1995
and 1994, respectively.
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Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS
Three Months ended March 31, 1995 compared to Three Months ended March 31, 1994
The Company underwrites specialty insurance products and programs to niche
markets. Significant areas of underwriting include professional and products
liability, excess and surplus lines, specialty programs and specialty personal
lines. Professional liability coverage is offered to physicians and health
professionals, insurance companies, directors and officers, attorneys and
architects and engineers. Products liability insurance is provided to
manufacturers and distributors. Property/casualty insurance for nonstandard and
hard-to-place risks is underwritten on an excess and surplus lines basis.
Specialty program insurance includes coverage for camps, youth and recreation,
health and fitness and agribusiness organizations, as well as accident and
health insurance for colleges. The Company also underwrites personal and
commercial property and liability coverages for watercraft, motorcycles, mobile
homes, dwellings and commercial freight companies, and maintains wholesale and
retail brokerage operations that produce business primarily for its insurance
subsidiaries.
Following is a comparison of gross premium volume and earned premiums by
significant underwriting area:
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Gross Premium Volume Earned Premiums
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Three Months Ended March 31, Three Months Ended March 31,
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1995 1994 (amounts in thousands) 1995 1994
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$ 32,295 $ 30,297 Professional/Products Liability $ 27,347 $ 25,404
26,299 18,144 Excess & Surplus Lines 16,657 13,656
23,671 18,716 Specialty Program Insurance 16,237 12,514
8,172 1,445 Specialty Personal Lines 5,084 2,200
4,650 4,090 Other 459 1,348
- - --------------------------------------------------------------------------------------------------------------------
$ 95,087 $ 72,692 Total $ 65,784 $ 55,122
====================================================================================================================
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Gross premium volume for the first quarter in 1995 increased 31% to $95.1
million from $72.7 million for the same period in the prior year.
Premiums from professional/products liability insurance advanced 7% to $32.3
million from $30.3 million a year ago. The gain was attributed primarily to
growth in the medical malpractice and specified medical professions product
lines. Higher production from directors' and officers' professional liability
insurance also contributed to the increase.
Excess and surplus lines gross premium volume grew 45% to $26.3 million from
$18.1 million in 1994. Production from a specialty property insurance program
introduced in the second quarter of 1993 continued to show significant growth.
First quarter special property premiums amounted to $9.3 million compared to
$2.9 million for the same period in the prior year. The growth in excess and
surplus lines gross premium volume was also prompted by higher casualty
business.
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Gross premiums from specialty program insurance increased to $23.7 million from
$18.7 million. The Company reported higher production in the first quarter from
each of its product lines focused on specialty program insurance following
policy processing and other operating improvements.
Specialty personal lines premiums rose sharply to $8.2 million from $1.4
million in 1994. The increase reflected the first quarter 1995 acquisition of a
book of mobile home business and production from a commercial auto program
started in the second quarter of 1994.
Other gross premium totalled $4.7 million, compared to $4.1 million in 1994.
Other gross premium volume included production from the Company's brokerage
operations.
Total operating revenues rose 17% to $76.5 million from $65.5 million in the
prior year. First quarter earned premiums were $65.8 million compared to $55.1
million for the first quarter of 1994. The 19% advance resulted primarily from
higher gross premium volume and increasing retentions in prior years.
Net investment income increased 24% to $8.4 million from $6.8 million a year
ago. The increase reflected the impact of higher yields and significant growth
in the Company's investment portfolio. Realized gains were $1.6 million for the
first quarter in 1995 compared to $2.7 million last year.
Total operating expenses for the first quarter were $65.7 million compared to
$56.4 million in 1994. The 17% increase resulted primarily from higher variable
expenses associated with higher earned premiums.
Following is a comparison of selected data from the Company's operations (in
thousands):
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Three Months Ended
March 31,
-----------------------------
1995 1994
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Gross premium volume $ 95,087 $ 72,692
Net premiums written $ 69,779 $ 54,224
Net retention 73% 75%
Earned premiums $ 65,784 $ 55,122
Losses and loss adjustment expenses $ 42,023 $ 34,243
Underwriting, acquisition and insurance expenses $ 22,605 $ 19,308
GAAP ratios
Loss ratio 64% 62%
Expense ratio 34% 35%
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Combined ratio 98% 97%
====================================================================================================================
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The first quarter combined loss and expense ratio was 98% compared to 97% last
year. The loss ratio increased to 64% from 62% in 1994 due to the recognition
of lower redundancies in prior years' reserves. The expense ratio declined to
34% from 35% a year ago. Higher earned premiums and ongoing cost control
efforts accounted for the improvement in the expense ratio. Amortization
expense for the first quarter of 1995 was $0.7 million compared to $1.7 million
for the same period last year. Amortization expense decreased in accordance
with the expiration of noncompete agreements in December 1994.
In evaluating its operating performance, the Company focuses on core
underwriting and investing results before consideration of realized gains or
losses from the sales of investments and expenses related to the amortization
of intangible assets. Management believes this is a better indicator of the
Company's operating performance because it reduces the variability in results
associated with realized investment gains or losses and eliminates the impact
of accounting conventions which do not reflect current operating costs. For the
first quarter of 1995, income from core underwriting and investing operations
increased 28% to $8.0 million from $6.3 million in 1994. Higher net investment
income, growth in earned premiums and continued underwriting profitability
accounted for most of the growth.
The Company's effective tax rate for the first quarter was 26% of income before
income taxes compared to 28% of income before income taxes for the same period
last year.
First quarter 1995 net income was $6.5 million compared to $5.2 million in
1994. Relative to 1994, first quarter net income reflected higher net
investment income and higher earned premiums with continued underwriting
profitability.
FINANCIAL CONDITION AS OF MARCH 31, 1995
The Company's insurance operations collect premiums and pay current claims,
reinsurance costs and operating expenses. Premiums collected and positive cash
flows from the insurance operations are invested primarily in short-term
investments and long-term bonds. The Company's short-term investments provide
liquidity for projected claims, reinsurance costs and operating expenses.
For the three month period ended March 31, 1995, the Company reported net cash
provided by operating activities of $49.5 million, compared to net cash used by
operating activities of $3.6 million for the same period in 1994. During the
first quarter of 1995, the Company collected $28 million following the
amendment of an indemnification agreement with one of the sellers of the
Company's Shand/Evanston subsidiary. In the prior year, operating cash flow was
adversely affected by the payment of certain large claims related primarily to
pre-1987 environmental impairment liability (EIL) business. The timing of the
claim payments was such that a substantial portion of the related reinsurance
had not been collected at the end of the first quarter in 1994.
For the three month period ended March 31, 1995, the Company reported net cash
used by investing activities of $57.3 million. The Company's invested assets
increased to $689.5 million at March 31, 1995 from $611.7 million at December
31, 1994. At March 31, 1995 the Company's fixed maturity and equity investments
comprised approximately 71% and 17% of total investments, respectively.
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The Company expects variability in its realized and unrealized investment gains
due to interest rate volatility as well as other economic conditions. The
market value of the Company's investment portfolio increased by $20.3 million
during the first quarter. As of March 31, 1995, the cost of the Company's fixed
maturity investments exceeded fair market value by $5.3 million, while the fair
market value of its equity investments exceeded cost by $16.0 million.
Stockholders' equity at March 31, 1995 was $158.3 million compared to $138.5
million at December 31, 1994. During the quarter, net unrealized investment
gains increased by $13.2 million. There were no other material changes in the
Company's financial condition from that reported as of December 31, 1994.
OTHER ITEMS
During the first quarter, the Company entered into an agreement to purchase
Lincoln Insurance Company (LIC) of Wilmington, Delaware from an operating
subsidiary of The Thomson Corporation. LIC is an excess and surplus lines
insurer with approximately $28 million of premium volume in 1994 and pro forma
assets of $80 million at December 31, 1994. Markel expects to significantly
reorganize LIC and renew certain portions of its business in Essex Insurance
Company, an existing Markel subsidiary. The terms of the transaction provide
for the acquisition of the stock of LIC for total consideration of
approximately $24 million. Additionally, the Company will obtain
indemnification against adverse development of loss and loss adjustment
expenses and uncollectible reinsurance, if any, in an amount up to the purchase
price.
The Company will fund the transaction with available cash on hand and
borrowings up to $18 million under existing lines of credit. The transaction
is expected to be completed during the second quarter of 1995, subject to
certain regulatory approvals.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The Exhibits to this Report are listed in the Exhibit Index.
(b) No reports on Form 8-K were filed during the quarter ended March 31, 1995.
11
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized, this 28th day of April, 1995.
Markel Corporation
By Alan I. Kirshner
-------------------------------------
Alan I. Kirshner
Chief Executive Officer
(Principal Executive Officer)
By Anthony F. Markel
-------------------------------------
Anthony F. Markel
President
(Principal Operating Officer)
By Steven A. Markel
-------------------------------------
Steven A. Markel
Vice Chairman
By Darrell D. Martin
-------------------------------------
Darrell D. Martin
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
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Exhibit Index
Number Description
27 Financial Data Schedule *
* Filed electronically with the Commission's operational EDGAR system.
13
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<LEGEND>
This schedule contains summary financial information extracted from the
financial statements contained in the Form 10-Q for the quarterly period ended
March 31, 1995 for Markel Corporation and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 489,236
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 116,511
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 689,488
<CASH> 2,493
<RECOVER-REINSURE> 39,289
<DEFERRED-ACQUISITION> 26,917
<TOTAL-ASSETS> 1,196,434
<POLICY-LOSSES> 655,471
<UNEARNED-PREMIUMS> 154,000
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 100,699
<COMMON> 22,948
0
0
<OTHER-SE> 135,327
<TOTAL-LIABILITY-AND-EQUITY> 1,196,434
65,784
<INVESTMENT-INCOME> 8,368
<INVESTMENT-GAINS> 1,563
<OTHER-INCOME> 810
<BENEFITS> 42,023
<UNDERWRITING-AMORTIZATION> 15,733
<UNDERWRITING-OTHER> 6,872
<INCOME-PRETAX> 8,838
<INCOME-TAX> 2,298
<INCOME-CONTINUING> 6,540
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,540
<EPS-PRIMARY> 1.17
<EPS-DILUTED> 1.17
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
