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, 2001 ------------------- 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 March 31, 2001: Common Stock, no par value 2,564,094 - ------------------------------ -------------------------------------- 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, 2001 and December 31, 2000.....3 Consolidated Statements of Income: Three Months Ended March 31, 2001 and 2000..............................4 Consolidated Statements of Cash Flows: Three Months Ended March 31, 2001 and 2000..............................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............10 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K......................................10 SIGNATURES....................................................................11 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Investors Title Company and Subsidiaries Consolidated Balance Sheets As of March 31, 2001 and December 31, 2000 (Unaudited) <TABLE> <CAPTION> March 31, 2001 December 31, 2000 ---------------------- ------------------------- <S> <C> <C> Assets Cash and cash equivalents $ 7,167,875 $ 7,850,991 Investments in securities: Fixed maturities: Held-to-maturity, at amortized cost 4,965,586 4,375,127 Available-for-sale, at fair value 33,630,405 31,710,705 Equity securities, at fair value 4,533,222 4,970,069 ---------------------- ------------------------- Total investments 43,129,213 41,055,901 Premiums receivable (less allowance for doubtful accounts: 2001 and 2000: $725,000) 4,005,044 3,023,304 Accrued interest and dividends 566,971 616,652 Prepaid expenses and other assets 649,953 1,091,416 Property acquired in settlement of claims 294,510 204,117 Property, net 5,220,494 5,496,626 Deferred income taxes, net 241,805 - ---------------------- ------------------------- Total Assets $ 61,275,865 $ 59,339,007 ====================== ========================= Liabilities and Stockholders' Equity Liabilities: Reserves for claims (Note 2) $ 18,619,665 $ 17,944,665 Accounts payable and accrued liabilities 1,955,671 1,918,034 Commissions and reinsurance payables 223,669 222,748 Premium taxes payable 71,283 - Current income taxes payable 478,721 24,069 Deferred income taxes, net - 39,842 ---------------------- ------------------------- Total liabilities 21,349,009 20,149,358 ---------------------- ------------------------- Stockholders' Equity: Common stock-no par value (shares authorized 6,000,000; 2,855,744 and 2,855,744 shares issued; and 2,564,094 and 2,566,859 shares outstanding 2001 and 2000, respectively) 1 1 Retained earnings 37,727,661 37,021,270 Accumulated other comprehensive income (net unrealized gain on investments) (net of deferred taxes: 2001: $1,133,489; 2000: $1,117,615) (Note 3) 2,199,194 2,168,378 ---------------------- ------------------------- Total stockholders' equity 39,926,856 39,189,649 ---------------------- ------------------------- Total Liabilities and Stockholders' Equity $ 61,275,865 $ 59,339,007 ====================== ========================= See notes to consolidated financial statements. </TABLE> 3
Investors Title Company and Subsidiaries Consolidated Statements of Income March 31, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> For The Three Months Ended March 31 ------------------------------------------------- 2001 2000 ---- ---- <S> <C> <C> Revenues: Underwriting income: Premiums written $ 11,501,245 $ 8,443,307 Less-premiums for reinsurance ceded 63,520 73,169 ------------------------ ---------------------- Net premiums written 11,437,725 8,370,138 Investment income-interest and dividends 685,877 591,791 Net realized gain on sales of investments 2,205 62,867 Other 463,445 301,437 ------------------------ ---------------------- Total 12,589,252 9,326,233 ------------------------ ---------------------- Operating Expenses: Commissions to agents 5,320,218 3,377,871 Provision for claims (Note 2) 1,410,645 1,244,804 Salaries and employee benefits 2,462,829 2,488,329 Office occupancy and operations 1,217,194 908,464 Business development 331,273 262,556 Taxes, other than payroll and income 60,844 53,461 Premium and retaliatory taxes 286,177 211,624 Professional fees 222,379 171,691 Other 99,569 28,226 ------------------------ ---------------------- Total 11,411,128 8,747,026 ------------------------ ---------------------- Income Before Income Taxes 1,178,124 579,207 ------------------------ ---------------------- Provision For Income Taxes 338,000 57,600 ------------------------ ---------------------- Net Income $ 840,124 $ 521,607 ======================== ====================== Basic Earnings per Common Share $ 0.33 $ 0.20 ======================== ====================== Weighted Average Shares Outstanding-Basic 2,566,921 2,643,241 ======================== ====================== Diluted Earnings per Common Share $ 0.32 $ 0.20 ======================== ====================== Weighted Average Shares Outstanding-Diluted 2,609,470 2,646,215 ======================== ====================== Dividends Paid $ 85,672 $ 85,672 ======================== ====================== Dividends per Share $ 0.03 $ 0.03 ======================== ====================== </TABLE> See notes to consolidated financial statements. 4
Investors Title Company and Subsidiaries Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 ------------------ -------------- <S> <C> <C> Operating Activities: Net income $ 840,124 $ 521,607 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 368,668 185,185 Amortization, net 967 3,177 Net gain on disposals of property (8,538) (1,073) Net realized gain on sales of investments (2,205) (62,867) Provision (benefit) for deferred income taxes (297,522) 467,200 Provision for claims 1,410,645 1,244,804 Payments of claims, net of recoveries (735,645) (1,144,804) Changes in assets and liabilities: Increase in receivables and other assets (616,818) (32,573) Increase (decrease) in accounts payable and accrued liabilities 37,637 (552,408) Increase (decrease) in commissions and reinsurance payables 921 (17,103) Increase (decrease) in premium taxes payable 107,112 (15,606) Increase in current income taxes payable 454,652 - ----------------- -------------- Net cash provided by operating activities 1,559,998 595,539 ----------------- -------------- Investing Activities: Purchases of available-for-sale securities (1,987,090) (1,005,900) Purchases of held-to-maturity securities (600,000) - Proceeds from sales of available-for-sale securities 551,706 1,513,376 Proceeds from sales of held-to-maturity securities 10,000 15,000 Purchases of property (103,778) (127,637) Proceeds from sales of property 19,780 15,316 ----------------- -------------- Net cash (used in) provided by investing activities (2,109,382) 410,155 ----------------- -------------- Financing Activities: Repurchases of common stock, net (68,441) (1,844,223) Exercise of options 20,381 7,580 Dividends paid (85,672) (85,672) ----------------- -------------- Net cash used in investing activities (133,732) (1,922,315) ----------------- -------------- Net Decrease in Cash and Cash Equivalents (683,116) (916,621) Cash and Cash Equivalents, Beginning of Year 7,850,991 7,554,297 ----------------- -------------- Cash and Cash Equivalents, End of Period $ 7,167,875 $ 6,637,676 ================= ============== Supplemental Disclosures: Cash Paid During the Year for: Income Taxes $ 191,054 $ 4,298 ================= ============== </TABLE> Noncash Financing Activities: Accrued bonuses totaling $43,798 and $101,244 were paid for the three months ended March 31, 2001 and 2000 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 March 31, 2001 (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. 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, 2000 for a description of accounting policies. Note 2 - Reserves for Claims Transactions in the reserves for claims for the three months ended March 31, 2001 were as follows: Balance, beginning of year $ 17,944,665 Provision, charged to operations 1,410,645 Recoveries 279,064 Payments of claims (1,014,709) ----------- Balance, September 30, 2000 $ 18,619,665 ============ 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, 2001 and 2000 was $870,940 and $868,544, 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 42,549 and 2,974 for the three months ended March 31, 2001 and 2000, respectively. Options to purchase 279,080 and 93,610 shares of common stock were outstanding for the three months ended March 31, 2001 and 2000, respectively. Of the total options outstanding, 56,626 and 72,210 options were not included in the computation of diluted EPS for the three months ended March 31, 2001 and 2000, 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 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ March 31, 2001 - ------------------------------------------------------------------------------ Title Insurance $12,150,777 $ 978,625 $57,052,468 Exchange Services 260,946 172,955 325,461 All Other 177,529 26,544 3,897,936 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ $12,589,252 $ 1,178,124 $61,275,865 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ March 31, 2000 - ------------------------------------------------------------------------------ Title Insurance $ 9,069,673 $ 396,275 $50,215,229 Exchange Services 169,497 118,599 287,288 All Other 87,063 64,333 3,146,978 - ------------------------------------------------------------------------------ - ------------------------------------------------------------------------------ $ 9,326,233 $ 579,207 $53,649,495 - ------------------------------------------------------------------------------ Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations -------------------------------------------------------------- The 2000 Form 10-K and the 2000 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, 2001, net premiums written increased 37% to $11,437,725, investment income increased 16% to $685,877, revenues increased 35% to $12,589,252 and net income increased 61% to $840,124, all compared with the same quarter in 2000. Net income per basic and diluted common share increased 65% and 60%, respectively to $.33 and $.32, respectively as compared with the year ago period. For the quarter ended March 31, 2001, the title insurance segment's revenues increased 34% versus the first three months of 2000, while the exchange services segment's revenues increased 54% for the three months ended March 31, 2001 compared with the same quarter in 2000. Stimulated by the decline in mortgage interest rates at the end of last year, mortgage refinancing picked up significantly in the first quarter of 2001. This contributed substantially to the increase in our premiums written. We also experienced continued growth in revenue from premiums generated in new operating territories. According to the Freddie Mac Weekly Mortgage Rate Survey, the monthly average 30-year fixed mortgage interest rates decreased to 7.01 % for the quarter ended March 31, 2001 compared with 8.26% for the quarter ended March 31, 2000. The volume of business increased in the first quarter of 2001 as the number of policies and commitments issued rose to 58,796, an increase of 24.5% compared with 47,228 in the same period in 2000. Branch net premiums written as a percentage of total net premiums written were 38% and 43% for the three months ended March 31, 2001 and 2000, respectively. Net premiums written from branch operations 7
increased 20% and decreased 30% for the three months ended March 31, 2001 and 2000, respectively, as compared with the same period in the prior year. Agency net premiums written as a percentage of total net premiums written were 62% and 57% for the three months ended March 31, 2001 and 2000, respectively. Agency net premiums increased 49% and decreased 14% for the three months ended March 31, 2001 and 2000, respectively, as compared with the same period in the prior year. Shown below is a schedule of premiums written for the three months ended March 31, 2001 and 2000 in all states where the Company's two insurance subsidiaries, Investors Title Insurance Company and Northeast Investors Title Insurance Company, currently underwrite insurance: 2001 2000 ---- ---- Georgia $ 44,237 $ 68,917 Indiana 1,553 112,184 Maryland 186,572 139,672 Michigan 2,182,765 1,452,644 Minnesota 444,314 141,783 Mississippi 5,778 5,541 Nebraska 267,112 316,913 New York 649,551 72,621 North Carolina 4,301,891 3,576,796 Ohio 4,470 - Pennsylvania 627,132 131,750 South Carolina 807,680 770,103 Tennessee 447,704 244,553 Virginia 1,287,536 1,132,474 West Virginia 241,468 262,846 Wisconsin 921 3,942 ----------- ---------- Direct Premiums 11,500,684 8,432,739 Reinsurance Assumed 561 10,568 Reinsurance Ceded (63,520) (73,169) ----------- ---------- Net Premiums $11,437,725 $8,370,138 =========== ========== Total operating expenses increased 30% for the three-month period ended March 31, 2001 compared with the same period in 2000. This increase was due primarily to an increase in commission expense as a result of increased business from agent sources. Certain operating expenses increased due to continued ongoing investments in technology and costs associated with entering and supporting new markets. The provision for claims as a percentage of net premiums written was 12% for the three months ended March 31, 2001 versus 15% for the same 8
period in 2000. The decrease in the percentage of the provision for claims to net premiums written is primarily the result of a decrease in claims payments (net of recoveries) in 2001 compared with 2000. The provision for income taxes was 29% of income before income taxes for the three months ended March 31, 2001 versus 10% for the same period in 2000. The increase in the tax provision was primarily due to a lower mix of tax-exempt investment income to taxable income in 2001 compared with 2000. Liquidity and Capital Resources: ------------------------------- Net cash provided by operating activities for the three months ended March 31, 2001, amounted to $1,559,998 compared with $595,539 for the same three-month period during 2000. The increase is primarily the result of an increase in net income, an increase in accounts payable and accrued liabilities, a decrease in payments of claims (net of recoveries), an increase in current income taxes payable, partially offset by an increase in receivables and other assets. 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 has repurchased 181,965 shares at an average price of $12.28 per share as of March 31, 2001 including 7,731 shares purchased at an average price of $14.52 during the quarter ended March 31, 2001. On May 9, 2000, the Board of Directors approved the repurchase of an additional 500,000 shares of the Company's common stock. As of May 11, 2001, no shares have been repurchased pursuant to this approval. 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 the investment portfolio in the form of short-term investments and other readily marketable securities. 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 9
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 2000 Annual Report on Form 10-K. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K There were no reports filed on Form 8-K for this quarter. 10
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 11, 2001 11