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: September 30, 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 September 30, 2001: Common Stock, no par value 2,555,991 -------------------------- --------- Class Shares Outstanding 1
INVESTORS TITLE COMPANY AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of September 30, 2001 and December 31, 2000...3 Consolidated Statements of Income: Three and Nine Months Ended September 30, 2001 and 2000....................4 Consolidated Statements of Cash Flows: Three and Nine Months Ended September 30, 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 ..........11 PART II. OTHER INFORMATION 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 September 30, 2001 and December 31, 2000 (Unaudited) <TABLE> <CAPTION> September 30, 2001 December 31, 2000 --------------------- --------------------- <S> <C> <C> Assets Cash and cash equivalents $ 5,778,079 $ 7,850,991 Investments in securities: Fixed maturities: Held-to-maturity, at amortized cost 4,966,224 4,375,127 Available-for-sale, at fair value 38,226,166 31,710,705 Equity securities, at fair value 4,517,413 4,970,069 -------------------- ------------------- Total investments 47,709,803 41,055,901 Premiums receivable (less allowance for doubtful accounts: 2001: $850,000 and 2000: $725,000) 5,964,170 3,023,304 Accrued interest and dividends 688,341 616,652 Prepaid expenses and other assets 736,083 1,091,416 Property acquired in settlement of claims 294,510 204,117 Property, net 4,650,735 5,496,626 Deferred income taxes, net 471,565 - -------------------- ------------------- Total Assets $ 66,293,286 $ 59,339,007 ==================== =================== Liabilities and Stockholders' Equity Liabilities: Reserves for claims (Note 2) $ 20,764,665 $ 17,944,665 Accounts payable and accrued liabilities 1,629,955 1,918,034 Commissions and reinsurance payables 296,428 222,748 Premium taxes payable 305,034 - Current income taxes payable 341,221 24,069 Deferred income taxes, net - 39,842 -------------------- ------------------- Total liabilities 23,337,303 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 2,555,991 and 2,566,859 shares outstanding 2001 and 2000, respectively) 1 1 Retained earnings 40,480,482 37,021,270 Accumulated other comprehensive income (net unrealized gain on investments) (net of deferred taxes: 2001: $1,275,830; 2000: $1,117,615) (Note 3) 2,475,500 2,168,378 -------------------- ------------------- Total stockholders' equity 42,955,983 39,189,649 -------------------- ------------------- Total Liabilities and Stockholders' Equity $ 66,293,286 $ 59,339,007 ==================== =================== </TABLE> See notes to consolidated financial statements. 3
Investors Title Company and Subsidiaries Consolidated Statements of Income September 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> For The Three For The Nine Months Ended Months Ended September 30 September 30 -------------------------------- -------------------------------- 2001 2000 2001 2000 ------------- ------------- -------------- ------------- <S> <C> <C> <C> <C> Revenues: Underwriting income: Premiums written $ 14,849,202 $ 10,168,696 $ 41,296,179 $ 28,785,819 Less-premiums for reinsurance ceded 119,168 65,878 261,143 247,831 ------------- ------------- -------------- ------------- Net premiums written 14,730,034 10,102,818 41,035,036 28,537,988 Investment income-interest and dividends 661,803 624,205 2,019,734 1,792,313 Net realized gain (loss) on sales of investments - (7,456) 2,053 77,310 Other 529,310 587,274 1,429,083 1,262,944 ------------- ------------- -------------- ------------- Total 15,921,147 11,306,841 44,485,906 31,670,555 ------------- ------------- -------------- ------------- Operating Expenses: Commissions to agents 6,762,756 4,169,207 18,842,967 11,579,542 Provision for claims (Note 2) 1,765,253 1,488,111 5,117,088 4,555,237 Salaries and employee benefits 2,920,136 2,332,667 8,022,825 7,205,747 Office occupancy and operations 1,048,337 864,881 3,641,988 2,645,794 Business development 404,131 354,653 1,277,590 1,016,869 Taxes, other than payroll and income 31,386 89,206 184,258 271,142 Premium and retaliatory taxes 285,708 176,244 858,385 579,981 Professional fees 158,078 163,845 598,424 594,938 Other 162,818 62,316 316,367 98,722 ------------- ------------- -------------- ------------- Total 13,538,603 9,701,130 38,859,892 28,547,972 ------------- ------------- -------------- ------------- Income Before Income Taxes 2,382,544 1,605,711 5,626,014 3,122,583 Provision For Income Taxes 778,100 460,227 1,736,900 720,733 ------------- ------------- -------------- ------------- Net Income $ 1,604,444 $ 1,145,484 $ 3,889,114 $ 2,401,850 ============= ============= ============== ============= Basic Earnings per Common Share (Note 4) $ 0.63 $ 0.44 $ 1.52 $ 0.92 ============= ============= ============== ============= Weighted Average Shares Outstanding-Basic (Note 4) 2,555,778 2,580,062 2,561,721 2,603,458 ============= ============= ============== ============= Diluted Earnings per Common Share (Note 4) $ 0.61 $ 0.44 $ 1.49 $ 0.92 ============= ============= ============== ============= Weighted Average Shares Outstanding-Diluted (Note 4) 2,611,806 2,583,113 2,607,741 2,608,166 ============= ============= ============== ============= Dividends Paid $ 85,672 $ 85,672 $ 257,017 $ 257,017 ============= ============= ============== ============= Dividends per Share $ 0.03 $ 0.03 $ 0.09 $ 0.09 ============= ============= ============== ============= </TABLE> See notes to consolidated financial statements. 4
Investors Title Company and Subsidiaries Consolidated Statements of Cash Flows For the Nine Months Ended September 30, 2001 and 2000 (Unaudited) <TABLE> <CAPTION> 2001 2000 ------------- ------------ <S> <C> <C> Operating Activities: Net income $ 3,889,114 $ 2,401,850 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 1,148,316 580,783 Amortization (accretion), net 5,408 (1,421) Provision (benefit) for losses on premiums receivable 125,000 (50,000) Net gain on disposals of property (21,248) (4,355) Net realized gain on sales of investments (2,053) (77,310) Provision (benefit) for deferred income taxes (669,622) 94,800 Provision for claims 5,117,088 4,555,237 Payments of claims, net of recoveries (2,297,088) (3,150,237) Changes in assets and liabilities: (Increase) decrease in receivables and other assets (2,908,444) 356,637 Decrease in accounts payable and accrued liabilities (288,079) (344,651) Increase (decrease) in commissions and reinsurance payables 73,680 (15,605) Increase (decrease) in premium taxes payable 340,863 (185,624) Increase in current income taxes payable 317,152 1,131,789 ---------------- --------------- Net cash provided by operating activities 4,830,087 5,291,893 ---------------- --------------- Investing Activities: Purchases of available-for-sale securities (7,184,820) (2,827,132) Purchases of held-to-maturity securities (600,000) - Proceeds from sales of available-for-sale securities 1,582,900 2,834,038 Proceeds from sales of held-to-maturity securities 10,000 192,000 Purchases of property (339,280) (372,977) Proceeds from sales of property 58,103 24,429 ---------------- --------------- Net cash used in investing activities (6,473,097) (149,642) ---------------- --------------- Financing Activities: Repurchases of common stock, net (206,047) (1,995,005) Exercise of options 33,162 15,830 Dividends paid (257,017) (257,017) ---------------- -------------- Net cash used in investing activities (429,902) (2,236,192) ---------------- --------------- Net Increase (Decrease) in Cash and Cash Equivalents (2,072,912) 2,906,059 Cash and Cash Equivalents, Beginning of Year 7,850,991 7,554,297 --------------- --------------- Cash and Cash Equivalents, End of Period $ 5,778,079 $ 10,460,356 =============== =============== Supplemental Disclosures: Cash Paid During the Year for: Income Taxes, net of refunds $ 2,097,721 $ 571,756 ================ =============== </TABLE> Noncash Financing Activities: Bonuses and fees totaling $56,155 and $121,851 were paid for the nine months ended September 30, 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 September 30, 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 nine months ended September 30, 2001 were as follows: Balance, beginning of year $ 17,944,665 Provision, charged to operations 5,117,088 Recoveries 739,566 Payments of claims (3,036,654) ----------- Balance, September 30, 2001 $ 20,764,665 ============ 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 September 30, 2001 and 2000 was $1,898,034 and $1,505,391, respectively. Total comprehensive income for the nine months ended September 30, 2001 and 2000 was $4,196,236 and $3,054,959, 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 56,028 and 3,051 for the three months ended September 30, 2001 and 2000, respectively and 46,020 and 4,708 for the nine months ended September 30, 2001 and 2000, respectively. Options to purchase 55,626 and 207,110 shares of common stock were outstanding for the three months ended September 30, 2001 and 2000, respectively and 57,626 and 188,360 for the nine months ended September 30, 2001 and 2000, 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. 6
Note 5 - Segment Information - ----------------------------- Income Three Months Operating Before Ended Revenues Income Taxes Assets - ------------------------------------------------------------------------------- September 30, 2001 - ------------------------------------------------------------------------------- Title Insurance $15,469,347 $ 2,165,734 $61,865,185 Exchange Services 245,962 138,651 312,777 All Other 205,838 78,159 4,115,324 - ------------------------------------------------------------------------------- $15,921,147 $ 2,382,544 $66,293,286 - ------------------------------------------------------------------------------- September 30, 2000 - ------------------------------------------------------------------------------- Title Insurance $10,746,247 $ 1,242,599 $53,641,906 Exchange Services 266,175 210,908 389,804 All Other 294,419 152,204 3,394,098 - ------------------------------------------------------------------------------- $11,306,841 $ 1,605,711 $57,425,808 - ------------------------------------------------------------------------------- Income Nine Months Operating Before Ended Revenues Income Taxes Assets - ------------------------------------------------------------------------------- September 30, 2001 - ------------------------------------------------------------------------------- Title Insurance $43,179,400 $ 5,023,551 $61,865,185 Exchange Services 747,112 433,454 312,777 All Other 559,394 169,009 4,115,324 - ------------------------------------------------------------------------------- $44,485,906 $ 5,626,014 $66,293,286 - ------------------------------------------------------------------------------- September 30, 2000 - ------------------------------------------------------------------------------- Title Insurance $30,538,522 $ 2,445,162 $53,641,906 Exchange Services 659,414 496,155 389,804 All Other 472,619 181,266 3,394,098 - ------------------------------------------------------------------------------- $31,670,555 $ 3,122,583 $57,425,808 - ------------------------------------------------------------------------------- 7
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 September 30, 2001, net premiums written increased 46% to $14,730,034, investment income increased 6% to $661,803, revenues increased 41% to $15,921,147 and net income increased 40% to $1,604,444, all compared with the same quarter in 2000. Net income per basic and diluted common share increased 43% and 39% to $.63 and $.61, respectively, as compared with the year ago period. For the quarter ended September 30, 2001, the title insurance segment's revenues increased 44% versus the third quarter of 2000, while the exchange services segment's revenues decreased 8% for the three months ended September 30, 2001 compared with the prior year quarter. For the nine months ended September 30, 2001, net premiums written increased 44% to $41,035,036, investment income increased 13% to $2,019,734, revenues increased 40% to $44,485,906, net income increased 62% to $3,889,114, and net income per basic and diluted common share increased 65% and 62% to $1.52 and $1.49, respectively, as compared with the same period in 2000. For the nine months ended September 30, 2001, the title insurance segment's revenues increased 41% versus the same period in 2000, while the exchange services segment's revenues increased 13% for the nine months ended September 30, 2001 compared with the same period in 2000. Mortgage lending and sales of existing homes, which are primary drivers of title insurance premiums, remained strong despite weakness in the economy. Declining mortgage interest rates spurred higher levels of mortgage refinancing, which was also a significant driver of our revenue. According to the Freddie Mac Weekly Mortgage Rate Survey, the monthly average 30-year fixed mortgage interest rates decreased to 7.04% for the nine months ended September 30, 2001 compared with 8.20% for the nine months ended September 30, 2000. The volume of business increased in the third quarter of 2001 as the number of policies and commitments issued rose to 82,322, an increase of 59% compared with 51,861 in the same period in 2000. Policies and commitments issued for the nine months ended September 30, 2001 were 215,663 compared with 151,498 in 2000, an increase of 42%. Branch net premiums written as a percentage of total net premiums written were 38% and 41% for the three months ended September 30, 2001 and 2000, respectively, and 38% and 43% for the nine months ended September 30, 2001 and 2000, respectively. Net premiums written from branch operations increased 34% and decreased 17% for the three months ended September 30, 2001 and 2000, respectively, as compared with the same periods in the prior year. For the nine months ended September 30, 2001 and 2000, net premiums written from branch operations increased 29% and decreased 23%, respectively, as compared with the same prior year periods. 8
Agency net premiums written as a percentage of total net premiums written were 62% and 59% for the three months ended September 30, 2001 and 2000, respectively, and 62% and 57% for the nine months ended September 30, 2001 and 2000, respectively. Agency net premiums increased 54% and decreased 5% for the three months ended September 30, 2001 and 2000, respectively, as compared with the same periods in the prior year. For the nine months ended September 30, 2001 and 2000, net premiums written from agency operations increased 54% and decreased 11%, respectively, as compared with the same prior year periods. Shown below is a schedule of premiums written for the nine months ended September 30, 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 ---- ---- Alabama $ 632 $ - Georgia 218,410 175,662 Indiana 1,452 369,691 Iowa 3,788 - Maryland 680,890 396,796 Michigan 7,812,916 4,937,780 Minnesota 1,069,902 605,537 Mississippi 20,103 30,609 Nebraska 710,497 856,611 New York 2,411,705 407,239 North Carolina 15,644,222 12,077,523 Ohio 30,736 1,513 Pennsylvania 2,309,698 667,236 South Carolina 2,940,957 2,916,553 Tennessee 1,699,465 814,941 Virginia 4,820,625 3,589,110 West Virginia 886,986 908,323 Wisconsin 22,783 5,638 --------------- -------------- Direct Premiums 41,285,767 28,760,762 Reinsurance Assumed 10,412 25,057 Reinsurance Ceded (261,143) (247,831) --------------- -------------- Net Premiums $41,035,036 $28,537,988 =============== ============== Total operating expenses increased 40% and 36% for the three and nine-month periods ended September 30, 2001 compared with the same periods in 2000. This increase was due primarily to the increase in premium volume. 9
The provision for claims as a percentage of net premiums written was 12% for the three and nine months ended September 30, 2001, versus 15% and 16% for the same periods 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 33% of income before income taxes for the three months ended September 30, 2001 versus 29% for the same period in 2000. For the nine months ended September 30, 2001 and 2000, the provision for income taxes was 31% and 23% of income before income taxes, respectively. The increase in the tax provision was primarily due to a lower mix of tax-exempt investment income to total income before taxes in 2001 compared with 2000. Liquidity and Capital Resources: -------------------------------- Net cash provided by operating activities for the nine months ended September 30, 2001, amounted to $4,830,087 compared with $5,291,893 for the same nine-month period during 2000. The decrease is primarily the result of an increase in receivables and other assets, offset by an increase in net income, a net increase in liabilities and a net increase in noncash adjustments to reconcile net income to net cash. 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 192,148 shares at an average price of $12.41 per share as of September 30, 2001, including 17,914 shares purchased at an average price of $14.66 in the nine months ended September 30, 2001. On May 9, 2000, the Board of Directors approved the repurchase of an additional 500,000 shares of the Company's common stock. As of October 24, 2001, no shares have been repurchased pursuant to this approval. On May 16, 2001, the Board of Directors approved the 2001 Stock Option and Restricted Stock Plan. As of October 24, 2001, no options or shares have been issued under this plan. Management believes that funds generated from operations (primarily underwriting and investment income) will enable the Company to adequately meet its operating needs and is unaware of any trend likely to result in adverse liquidity changes. In addition to operational liquidity, the Company maintains a high degree of liquidity within 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 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, rendering reserves for possible claims 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. 10
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) Exhibits -------- None. (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: November 9, 2001 12