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: June 30, 1997 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 June 30, 1997: Common Stock, no par value 2,774,850 Class Shares Outstanding 1
INVESTORS TITLE COMPANY AND SUBSIDIARIES Index PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996 . . . . . . . . . . . . . . . . . . 3 Consolidated Statements of Income: Three and Six Months Ended June 30, 1997 and 1996. 4 Consolidated Statements of Cash Flows: Six Months Ended June 30, 1997 and 1996 . . . . . 5 Notes to Consolidated Financial Statements . . . . . 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations . 8 PART II. OTHER INFORMATION . . . . . . . . . . . . . . . . . .11 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . .11 Item 6. Exhibits and Reports on Form 8-K. . . . . . . .11 SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . .12 2
PART I. FINANCIAL INFORMATION Item 1. Financial Statements Investors Title Company and Subsidiaries Consolidated Balance Sheets As of June 30, 1997 and December 31, 1996 (Unaudited) <TABLE> <S> <C> <C> 6/30/97 12/31/96 Assets Cash and Cash Equivalents $ 5,626,284 $ 4,244,570 Investments: Held-to-maturity: Certificates of deposit 169,004 169,004 Bonds - at amortized cost 4,637,317 5,098,368 Available-for-sale - at market: Bonds 14,567,157 12,832,724 Common and nonredeemable preferred stocks 5,137,853 5,473,567 Total investments 24,511,331 23,573,663 Receivables: Premiums, net 2,435,733 2,016,122 Accrued interest and dividends 319,283 321,634 Recoveries of claims previously paid 37,700 69,334 Other 57,418 35,663 Total receivables 2,850,134 2,442,753 Prepaid Expenses and Other Assets 376,285 451,972 Property Acquired in Settlement of Claims 198,500 165,500 Property-At Cost: Land 782,582 782,582 Office buildings and improvements 1,293,726 1,293,726 Furniture, fixtures and equipment 1,927,765 1,843,636 Automobiles 173,627 169,423 Total 4,177,700 4,089,367 Less accumulated depreciation 1,480,717 1,325,297 Property, net 2,696,983 2,764,070 Total Assets $ 36,259,517 $ 33,642,528 Liabilities and Stockholders' Equity Liabilities: Accounts payable and accrued liabilities $ 815,793 $ 997,759 Commissions and reinsurance payables 67,744 60,902 Premium taxes payable 13,643 101,766 Income taxes payable: Current 208,154 175,143 Deferred 1,121,573 1,232,716 Total liabilities 2,226,907 2,568,286 Reserves for Claims 6,078,330 5,086,065 Stockholders' Equity: Common stock-No par value (shares authorized 6,000,000; 2,855,744 and 2,855,744 shares issued; and 2,774,850 and 2,767,830 shares outstanding 1997 and 1996, respectively) 805,069 722,321 Retained earnings 25,581,178 23,745,995 Net unrealized gain on investments (net of deferred taxes: 1997: $807,773 ; 1996: $782,959) 1,568,033 1,519,861 Total stockholders' equity 27,954,280 25,988,177 Total Liabilities and Stockholders' Equity $ 36,259,517 $ 33,642,528 </TABLE> 3
Investors Title Company and Subsidiaries Consolidated Statements of Income June 30, 1997 and 1996 (Unaudited) <TABLE> <S> <C> <C> <C> <C> For The Three For The Six Months Ended Months Ended June 30 June 30 1997 1996 1997 1996 Revenues: Underwriting income: Premiums written $ 7,703,332 $ 5,505,691 $ 13,190,962 $ 9,958,580 Less-premiums for reinsurance ceded 41,643 24,199 110,485 42,289 Net premiums written 7,661,689 5,481,492 13,080,477 9,916,291 Investment income-interest and dividends 385,606 314,286 783,719 609,077 Net Gain (loss) on sales of investments (32) 48,656 107,049 8,604 Other 144,536 72,196 266,065 141,906 Total 8,191,799 5,916,630 14,237,310 10,675,878 Operating Expenses: Salaries 1,087,793 919,272 2,079,269 1,781,158 Commissions to agents 2,588,253 1,362,102 4,260,341 2,449,054 Provision for claims 1,003,167 830,812 1,817,988 1,512,145 Employee benefits and payroll taxes 486,780 448,131 950,252 730,381 Office occupancy and operations 623,376 558,384 1,170,316 987,357 Business development 324,805 167,026 470,752 296,191 Taxes, other than payroll and income 173,702 147,528 346,546 259,080 Professional fees 64,121 38,920 99,257 71,171 Other 241,537 93,066 263,400 191,249 Total 6,593,534 4,565,241 11,458,121 8,277,786 Income Before Income Taxes 1,598,265 1,351,389 2,779,189 2,398,092 Provision For Income Taxes: Current 551,221 454,377 908,618 701,622 Deferred (98,430) (81,770) (135,957) (30,031) Total 452,791 372,607 772,661 671,591 Net Income $ 1,145,474 $ 978,782 $ 2,006,528 $ 1,726,501 Average number of shares outstanding $ 2,773,582 $ 2,773,362 $ 2,771,264 $ 2,778,105 Net Income Per Share $ 0.41 $ 0.35 $ 0.72 $ 0.62 Dividends Paid $ 85,673 $ 71,394 $ 171,345 $ 128,508 Dividends Per Share $ 0.03 $ 0.025 $ 0.06 $ 0.045 </TABLE> 4
Investors Title Company and Subsidiaries Consolidated Statements of Cash Flows For the Six Months Ended June 30, 1997 and 1996 (Unaudited) <TABLE> <S> <C> <C> 1997 1996 Operating Activities: Net income $2,006,528 $1,726,501 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 166,434 158,208 Amortization, net of accretion 2,132 6,942 Net (gain) loss on disposals of property 422 (11,910) Net gain on sales of investments (107,049) (8,604) Benefit for deferred income taxes (135,957) (30,031) Provision for possible claims 1,817,988 1,512,145 Payments of claims, net of recoveries (825,723) (862,145) Increase in receivables (407,381) (606,848) (Increase) decrease in prepaid expenses and other assets 75,687 (16,417) (Increase) decrease in assets acquired in settlement of claims (33,000) 85,000 Decrease in accounts payable and accrued liabilities (181,966) (197,642) Increase (decrease) in commissions and reinsurance payables 6,842 (2,538) Decrease in premium taxes payable (88,123) (22,839) Increase in income taxes payable - current 33,011 68,014 Net cash provided by operating activities 2,329,845 1,797,836 Investing Activities: Purchases of investments held-to-maturity 0 (897,846) Purchases of investments available-for-sale (2,525,212) (1,010,755) Proceeds from investments held-to-maturity 460,000 491,019 Proceeds from investments available-for-sale 1,305,447 594,960 Purchases of property (120,849) (171,080) Proceeds from sales of property 21,080 81,979 Net cash used in investing activities (859,534) (911,723) Financing Activities: Dividends paid (171,345) (128,508) Repurchases of common stock, net 82,748 (255,214) Net cash used in financing activities (88,597) (383,722) Net Increase in Cash and Cash Equivalents 1,381,714 502,391 Cash and Cash Equivalents, Beginning of Year 4,244,570 2,527,008 Cash and Cash Equivalents, End of Period $5,626,284 $3,029,399 Supplemental Disclosures of Cash Flow Information: Cash Paid During the Year for: Interest $0 $0 Income Taxes $875,765 $784,006 </TABLE> 5
INVESTORS TITLE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements June 30, 1997 (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. Certain 1996 amounts have been reclassified to conform to the 1997 presentation. 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, 1996 for a description of accounting policies. Note 2 - Reserves for Claims Transactions in the reserve for claims for the six months ended June 30, 1997 were as follows: Balance, beginning of year $5,086,065 Provision, charged to operations 1,817,988 Recoveries 65,703 Payments of claims (891,426) Balance, June 30, 1997 $6,078,330 In management's opinion, the reserve is adequate to cover claim losses which might result from pending and possible claims. Note 3 - New Accounting Pronouncements In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128 "Earnings per Share" ("SFAS 128") which specifies a new methodology for computing earnings per share. SFAS 128 replaces the presentation of primary and fully diluted earnings per share pursuant to Accounting Principles Board Opinion No. 15 - "Earnings per Share" ("APB 15") with the presentation of basic and diluted earnings per share. Basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted 6
earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. SFAS 128 must be adopted for financial statements issued after December 15, 1997. Restatement of prior-period earnings per share data is required. Earnings per share will be computed under APB 15 until that time. The Company does not believe that implementation of SFAS 128 will materially affect its financial results. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130 "Reporting Comprehensive Income" ("SFAS 130"). This Statement establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. The Company is required to adopt SFAS 130 for the year ended December 31, 1998. Management has not determined the impact of this Statement. 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The 1996 Form 10-K and the 1996 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 June 30, 1997, premiums written increased 40% to $7,703,332, investment income increased 23% to $385,606, revenues increased 38% to $8,191,799, net income increased 17% to $1,145,474 and net income per share increased 17% to $.41 all compared to the same quarter in 1996. For the six months ended June 30, 1997, premiums written increased 32% to $13,190,962, investment income increased 29% to $783,719, revenues increased 33% to $14,237,310, net income increased 16% to $2,006,528 and net income per share increased 16% to $.72 all compared to the same period in 1996. Sales growth in 1997 has resulted from a combination of continued marketing efforts and a healthy real estate market. The volume of business continued to increase in the second quarter of 1997 as the number of policies and commitments issued rose to 46,946, an increase of 27% compared to 37,027 in the same period in 1996. The average premium per policy has risen primarily due to increased business in operating areas with higher premium rates. Policies and commitments issued for the six months ended June 30, 1997 were 81,803 compared to 69,242 in 1996. Shown below is a breakdown of branch and agency premiums: <TABLE> <S> <C> <C> <C> <C> <C> <C> <C> <C> Three Months Ended Six Months Ended June 30 June 30 1997 % 1996 % 1997 % 1996 % Branch $4,006,363 52 $3,493,143 63 $ 7,113,776 54 $6,331,032 64 Agency $3,696,969 48 $2,012,548 37 $ 6,077,186 46 $3,627,548 36 Total $7,703,332 100 $5,505,691 100 $13,190,962 100 $9,958,580 100 </TABLE> Premiums written from branch operations increased 12% in 1997 compared to 1996. Agency premiums increased 68% in 1997 compared to 1996. The following table shows title premiums written for the three and six months ended June 30, 1997 and 1996 in all states where our two insurance subsidiaries, Investors Title Insurance Company and Northeast Investors Title Insurance Company, currently underwrite insurance: 8
<TABLE> <S> <C> <C> <C> <C> Three Months Ended Six Months End June 30 June 30 1997 1996 1997 1996 Florida 17,062 22,194 $39,835 $41,221 Georgia 118,741 27,203 311,650 43,622 Indiana 30,279 27,411 49,218 49,002 Kentucky 0 0 0 84 Maryland 28,239 16,219 48,604 27,693 Michigan 1,249,142 24,365 1,917,432 24,365 Minnesota 7,719 0 7,719 0 Mississippi 4,982 0 15,770 0 Nebraska 171,739 134,659 330,609 273,229 New York 118,175 133,257 217,530 215,736 North Carolina 3,945,470 3,447,972 6,911,833 6,232,693 South Carolina 692,295 630,318 1,100,349 1,196,115 Tennessee 62,683 18,559 76,567 41,569 Virginia 1,241,178 1,013,997 2,125,971 1,790,945 Direct Premiums 7,687,704 5,496,154 13,153,087 9,936,274 Reinsurance 15,628 9,537 37,875 22,306 Total Premiums $7,703,332 $5,505,691 $13,190,962 $9,958,580 </TABLE> Operating expenses increased 44% and 38% for the three and six months ended June 30, 1997, respectively, when compared to the same periods in 1996. Salaries and employee benefits increased primarily due to additional staffing needed to process the rise in premium volume. Office occupancy and operations, business development, and premium taxes increased primarily due to the increase in premium volume. The increase in commissions is the result of the Company's expansion into new markets primarily through establishing new agency relationships. For the three months ended June 30, 1997, the provision for claims as a percentage of premiums written was 13.02% compared to 15.09% for same period in 1996. For the six months ended June 30, 1997, the provision for claims as percentage of premiums written was 13.78% compared to 15.18% for the same period in 1996. The lower provision in 1997 was primarily the result of an improvement in claims experience. The reserve for claims has increased $992,265 in 1997 compared to year-end based on management's assessment of the reserve. Income tax expense as percentage of income before income taxes was 27.8% and 28% for the six months ended June 30, 1997 and 1996, respectively. Liquidity and Capital Resources: Net cash provided by operating activities for the six months ended June 30, 1997, amounted to $2,329,845 compared to $1,797,836 for the same six month period during 1996. This increase is attributable to the increase in net income and a number of other factors, including a smaller increase in receivables, a decrease in prepaid expenses and other assets, and a higher provision for possible claims in 1997, partially offset by a 9
net gain on sales of investments, a larger benefit for deferred income taxes and an increase in assets acquired in settlement of claims in 1997. 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 8,250 shares at an average purchase price of $14.97 per share as of July 17, 1997. The Board has authorized management to repurchase up to an additional 141,750 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. 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) 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) the risk that losses from claims are greater than anticipated such that reserves for possible claims are inadequate; (iii) the risk 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. 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
PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders Investors Title Company's Annual Meeting of Shareholders was held May 13, 1997. The proposals voted upon and the results of the voting were as follows: 1. Election of three Directors for a three-year term. <TABLE> <S> <C> <C> <C> <C> <C> Broker For Against Abstentions Withheld Non-votes James A. Fine, Jr. 2,339,426 N/A N/A 20,811 N/A James R. Morton 2,346,726 N/A N/A 13,511 N/A Lillard H. Mount 2,342,564 N/A N/A 17,673 N/A </TABLE> 2. Approval of the 1997 Stock Option and Restricted Stock Plan. <TABLE> <S> <C> <C> <C> <C> Broker For Against Abstentions Withheld Non-votes 1,866,852 47,849 28,420 N/A N/A </TABLE> 3. Ratification of the selection of Deloitte & Touche LLP, Certified Public Accountants to audit the books and accounts of the Company for the calendar year ending December 31, 1997. <TABLE> <S> <C> <C> <C> <C> Broker For Against Abstentions Withheld Non-votes 2,350,459 8,898 880 N/A N/A </TABLE> Item 6. Exhibits and Reports on Form 8-K (a) Exhibits (10)(ix) Form of Nonqualified Stock Agreement to nonemployee directors dated May 13, 1997 included herewith. (27) Financial Data Schedule included herewith. (b) Reports on Form 8-K There were no reports filed on Form 8-K for this quarter. 11
SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this Report to be signed in its behalf by the undersigned hereunto duly authorized. INVESTORS TITLE COMPANY (Registrant) By: /s/James A. Fine, Jr. James A. Fine, Jr. President By: /s/Elizabeth P. Bryan Elizabeth P. Bryan Vice President (Principal Accounting Officer) Dated: August 11, 1997