Investors Title Company - 10-Q quarterly report FY

June 30, 2007

(Unaudited)

Reference should be made to the "Notes to Consolidated Financial Statements" of Investors Title Company’s (“the Company”) Annual Report on Form 10-K for the year ended December 31, 2006 for a complete description of the Company’s significant accounting policies.

Reclassification - Certain 2006 amounts have been reclassified to conform to the 2007 classifications.  These reclassifications had no effect on net income or stockholders’ equity as previously reported.

 

Transactions in the reserves for claims for the six months ended June 2007 and the year ended December 31, 2006 are summarized as follows:

 

 

 

Consistent with SFAS No. 131,“Disclosures about Segments of an Enterprise and Related Information,” the Company has aggregated its operating segments into two reportable segments: 1) title insurance services; and 2) tax-deferred exchange services.

Operating revenues represent net premiums written and other revenues.

 

 

There are two basic types of title insurance policies - one for the mortgage lender and one for the real estate owner.  A lender often requires property owners to purchase title insurance to protect its position as a holder of a mortgage loan, but the lender's title insurance policy does not protect the property owner.  The property owner has to purchase a separate owner's title insurance policy to protect their investment.  When real property is conveyed from one party to another, occasionally there is an undisclosed defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property.  If a claim is made against real property, title insurance provides indemnification against insured defects.  The title insurer has the option to retain counsel and pay the legal expenses to eliminate or defend against any title defects, pay any third party claims arising from errors in title examination and recording or pay the insured’s actual losses, up to policy limits, arising from errors in title as defined in the policy.

The Company's overall level of premiums written in the land title insurance industry is affected by real estate activity.  In turn, real estate activity is affected by a number of factors, including the level of interest rates, the availability of mortgage funds, the level of real estate transactions and mortgage refinancing, the cost of real estate, employment levels, family income levels and general economic conditions.  Generally, real estate activity declines as a result of higher interest rates or an economic downturn, thus leading to a corresponding decline in title insurance premiums written and profitability of the Company.  The cyclical nature of the land title insurance industry has historically caused fluctuations in revenues and profitability and it is expected to continue to do so in the future.  This segment also experiences seasonality in addition to cyclicality.

 

 

 

 

Operating revenues:  Operating revenues include premiums written plus other fee income, exchange segment income as well as gains and losses on the disposal of fixed assets.  Investment income and realized gains and losses are not included in operating revenues and are discussed separately following operating revenues. 

Following is a breakdown of branch and agency premiums written for the three and six months ended June 30, 2007 and 2006:

 

 

On a consolidated basis, salaries, employee benefits and payroll taxes as a percentage of total revenues were 23.0% and 21.3% for the second quarter of 2007 and 2006, respectively.  For the first six months of the year, salaries, employee benefits and payroll taxes as a percentage of total revenues were 24.4% and 22.9% for 2007 and 2006, respectively.  Personnel costs increased compared with the first six months of last year due to increases in salaries and related compensation expenses. The title insurance segment’s total salaries, employee benefits and payroll taxes accounted for 86.3% and 85.1% of the consolidated total amount for the second quarter of 2007 and 2006, respectively and 85.4% and 86.2% for the six months ended June 30, 2007, and 2006, respectively.

Overall office occupancy and operations as a percentage of total revenues was 6.6% and 5.5% for the second quarter of 2007 and 2006, respectively and 6.8% and 6.3% for the first six months of 2007 and 2006, respectively.  The three and six month increases in office occupancy and operations expense were due to an increase in various items, including depreciation expense.

Title insurance companies are generally not subject to state income or franchise taxes.  However, in most states they are subject to premium and retaliatory taxes.  Premium and retaliatory taxes as a percentage of premiums written were 2.4% and 1.9% for the six months ended June 30, 2007 and 2006, respectively.

Other expenses primarily include miscellaneous operating expenses of the Trust division and other miscellaneous expenses of the title segment.

Income Taxes: The provision for income taxes was 10.9% and 23.5% of income before income taxes for the three months ended June 30, 2007 and 2006, respectively. For the six months ended June 30, 2007 and 2006, the provision for income taxes was 18.5% and 23.6%, respectively, of income before income taxes.  The declines in the effective tax rates for the quarter and the six months ended June 30, 2007 resulted primarily from a higher mix of tax-exempt investment income relative to taxable income. The reduction in taxable income primarily resulted from the increase in the provision for claims.

Net Income:   On a consolidated basis, the Company reported a decrease in net income of 51.7% for the six months ended June 30, 2006 compared with the prior year period.  Operating expenses increased compared with the 2006 period primarily due to the increase in provision for claims and commissions.

Payment of dividends:  The Company’s significant sources of funds are dividends and distributions from its subsidiaries, which are subject to regulation in the states in which they do business.  These regulations, among other things, require prior regulatory approval of the payment of dividends and other intercompany transfers.  The Company believes that amounts available for transfer from the insurance subsidiaries are adequate to meet the Company’s operating needs.

Liquidity: Due to the Company’s historical ability to generate positive cash flows from its operations, management believes that funds generated from operations will enable the Company to adequately meet its anticipated cash needs and is unaware of any trend or occurrence that is likely to result in adverse liquidity changes.  The Company’s cash requirements include operating expenses, taxes, capital expenditures and dividends on its common stock declared by the Board of Directors.

 

 

Capital expenditures:  During 2007, the Company has plans for various capital improvement projects, including software development projects. The Company anticipates capital expenditures of approximately $900,000 during the remainder of 2007 in connection with these projects.

Off-Balance Sheet Arrangements and Contractual Obligations:  It is not the general practice of the Company to enter into off-balance sheet arrangements, nor is it the policy of the Company to issue guarantees to third parties.  Off-balance sheet arrangements are generally limited to the future payments under noncancelable operating leases, payments due under various agreements with third-party service providers, and unaccrued obligations pursuant to certain executive employment agreements.

The total reserve for all reported and unreported losses the Company incurred through June 30, 2007 is represented by the reserves for claims. Information regarding the claims reserve can be found in Note 2 to the consolidated financial statements of this Form 10-Q.  Further information on contractual obligations related to the reserves for claims can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006 as filed with the Securities and Exchange Commission.

Equity Investments:  The Company’s equity investments are in public companies whose security prices are subject to volatility.  Should the fair value of these investments fall below the Company’s cost bases and the financial condition or prospects of these companies deteriorate, the Company may determine in a future period that this decline in fair value is other than temporary, requiring that an impairment loss be recognized.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).  SFAS 157 establishes a common definition for fair value to be applied to GAAP guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.  SFAS 157 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact of SFAS 157 on its consolidated financial position and results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  This statement, which is expected to expand fair value measurement, permits entities to choose to measure many financial instruments and certain other items at fair value.  SFAS 159 is effective for fiscal years beginning after November 15, 2007.  The Company is currently assessing the impact of SFAS 159 on its consolidated financial position and results of operations.

 

This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect management’s current outlook for future periods.  These statements may be identified by the use of words such as "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "should," "could" and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about the Company's strategy for growth, product and service development, market share position, claims, expenditures, financial results and cash requirements, are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties.

Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including, but not limited to, the following: varying demand for title insurance due to factors such as interest rate fluctuations, the availability of mortgage funds, the level of real estate transactions, mortgage refinance activity, the cost of real estate, consumer confidence, employment levels, family income levels and general economic conditions; changes to the insurance requirements of the participants in the secondary mortgage market; losses from claims may be greater than anticipated such that reserves for possible claims are inadequate; unanticipated adverse changes in securities markets including interest rates, resulting in material losses on the Company’s investments; the Company’s dependence on key management personnel, the loss of whom could have a material adverse affect on the Company’s business; the Company’s ability to develop and offer products and services that meet changing industry standards in a timely and cost-effective manner; significant changes to applicable government regulations; state statutes requiring the Company’s insurance subsidiaries to maintain minimum levels of capital, surplus and reserves and restricting the amount of dividends that the insurance subsidiaries may pay to the Company without prior regulatory approval; and the concentration of key accounting and information systems in a few locations. These and 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.  For more details on factors that could affect expectations, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.  The Company does not undertake to update forward-looking statements to reflect circumstances or events that occur after the date the forward-looking statements are made.

 

No material changes in the Company’s market risk or market strategy occurred during the current period.  A detailed discussion of market risk is provided in the Company’s 2006 Annual Report on Form 10-K for the year ended December 31, 2006.

The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the "Act") was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms.  Pursuant to Rule 13a-15(b) under the Act, an evaluation was performed under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures.  Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2007.  In reaching this conclusion, the Company's Chief Executive Officer and Chief Financial Officer determined that the Company's disclosure controls and procedures were effective in ensuring that such information was accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2007, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

 

For the quarter ended June 30, 2007, ITC purchased an aggregate of 5,842 shares of the Company’s common stock pursuant to the purchase plan (the “Plan”) that was publicly announced on June 5, 2000.  In 2000, 2004 and 2005, the Board of Directors of ITIC and ITC approved the purchase by ITC of up to an aggregate of 500,000 and 125,000 shares of the Company’s common stock pursuant to the Plan.  Unless terminated earlier by resolution of the Board of Directors, the Plan will expire when ITC has purchased all shares authorized for purchase thereunder.  ITC intends to make further purchases under this Plan.

 

 

 

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.