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, 2003
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 Identification No.)
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
----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes No X
----- ------
As of October 31, 2003, there were 2,855,744 outstanding shares of
common stock of Investors Title Company, including 351,674 shares held by
Investors Title Insurance Company, a wholly owned subsidiary of Investors Title
Company.
INVESTORS TITLE COMPANY
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002..........................1
Consolidated Statements of Income for the Three and Nine Months Ended
September 30, 2003 and 2002....................................................................2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002....................................................................3
Notes to Consolidated Financial Statements .........................................................4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations......................................................................................8
Item 3. Quantitative and Qualitative Disclosures About Market Risk ........................................12
Item 4. Controls and Procedures............................................................................12
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.........................................................13
Item 6. Exhibits and Reports on Form 8-K..................................................................13
SIGNATURES.......................................................................................................14
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Investors Title Company and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2003 and December 31, 2002
September 30, 2003 December 31, 2002
-------------------------------------------
(Unaudited) (Audited)
Assets
Cash and cash equivalents $ 6,165,725 $ 3,781,961
Investments in securities:
Fixed maturities:
Held-to-maturity, at amortized cost 3,774,541 4,395,081
Available-for-sale, at fair value 60,262,938 52,491,648
Equity securities, at fair value 7,265,944 7,884,928
Other investments 1,095,842 564,782
-------------------- --------------------
Total investments 72,399,265 65,336,439
Premiums receivable (less allowance for doubtful accounts of
$2,585,000 and $1,800,000 for 2003 and 2002, respectively) 9,857,935 7,949,904
Accrued interest and dividends 633,096 720,902
Prepaid expenses and other assets 1,049,657 1,095,230
Property acquired in settlement of claims 794,524 749,562
Property, net 4,139,257 4,109,885
Deferred income taxes, net 937,811 893,263
-------------------- --------------------
Total Assets $ 95,977,270 $ 84,637,146
==================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Reserves for claims (Note 2) $ 29,331,000 $ 25,630,000
Accounts payable and accrued liabilities 4,128,418 4,780,865
Commissions and reinsurance payables 579,389 401,040
Premium taxes payable 485,855 268,972
Current income taxes payable 435,838 888,085
-------------------- --------------------
Total liabilities 34,960,500 31,968,962
-------------------- --------------------
Commitments and Contingencies (Note 6)
Stockholders' Equity:
Class A Junior Participating preferred stock (shares authorized 100,000;
no shares issued) - -
Common stock-no par value (shares authorized 10,000,000;
2,504,070 and 2,515,804 shares issued and outstanding 2003 and 2002,
respectively, excluding 351,674 and 339,940 shares 2003 and 2002,
respectively, of common stock held by the Company's subsidiary) 1 1
Retained earnings 57,570,575 49,613,044
Accumulated other comprehensive income, net of deferred taxes of
$1,775,883 and $1,574,431 for 2003 and 2002, respectively (Note 3) 3,446,194 3,055,139
-------------------- --------------------
Total stockholders' equity 61,016,770 52,668,184
-------------------- --------------------
Total Liabilities and Stockholders' Equity $ 95,977,270 $ 84,637,146
==================== ====================
See notes to consolidated financial statements.
1
Investors Title Company and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2003 and 2002
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30 September 30
--------------------------------- --------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenues:
Underwriting income:
Premiums written $ 23,583,938 $ 18,035,156 $ 66,764,869 $ 47,816,019
Less - premiums for reinsurance ceded 114,348 93,735 304,665 322,676
-------------- ------------- ------------- -------------
Net premiums written 23,469,590 17,941,421 66,460,204 47,493,343
Investment income - interest and dividends 666,399 680,991 2,020,834 2,042,810
Net realized gain on sales of investments 1,130 9,882 66,044 300,732
Other 1,186,120 556,775 2,984,243 1,513,844
-------------- ------------- ------------- -------------
Total 25,323,239 19,189,069 71,531,325 51,350,729
-------------- ------------- ------------- -------------
Operating Expenses:
Commissions to agents 11,029,831 8,615,016 31,885,609 22,391,778
Provision for claims (Note 2) 2,699,432 1,949,054 7,470,163 5,332,105
Salaries, employee benefits and payroll taxes 4,139,980 3,106,076 11,395,979 8,773,836
Office occupancy and operations 1,321,753 1,067,244 3,784,546 3,538,436
Business development 692,124 721,341 1,475,280 1,558,221
Taxes, other than payroll and income 101,178 72,707 276,460 264,301
Premium and retaliatory taxes 463,437 353,588 1,347,542 987,446
Professional fees 324,925 166,974 783,064 567,480
Other 87,780 27,644 287,625 132,924
-------------- ------------- ------------- -------------
Total 20,860,440 16,079,644 58,706,268 43,546,527
-------------- ------------- ------------- -------------
Income Before Income Taxes 4,462,799 3,109,425 12,825,057 7,804,202
-------------- ------------- ------------- -------------
Provision For Income Taxes 1,499,000 963,400 4,165,245 2,410,000
-------------- ------------- ------------- -------------
Net Income $ 2,963,799 $ 2,146,025 $ 8,659,812 $ 5,394,202
============== ============= ============= =============
Basic Earnings Per Common Share $ 1.18 $ 0.85 $ 3.46 $ 2.14
============== ============= ============= =============
Weighted Average Shares Outstanding - Basic (Note 4) 2,503,405 2,517,762 2,503,650 2,517,351
============== ============= ============= =============
Diluted Earnings Per Common Share (Note 4) $ 1.13 $ 0.83 $ 3.30 $ 2.08
============== ============= ============= =============
Weighted Average Shares Outstanding - Diluted (Note 4) 2,629,026 2,594,915 2,621,504 2,593,984
============== ============= ============= =============
Dividends Paid $ 75,098 $ 73,955 $ 225,277 $ 225,029
============== ============= ============= =============
Dividends Per Share $ 0.03 $ 0.03 $ 0.09 $ 0.09
============== ============= ============= =============
See notes to consolidated financial statements.
2
Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2003 and 2002
(Unaudited)
2003 2002
------------------ ------------------
Operating Activities:
Net income $ 8,659,812 $ 5,394,202
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 615,045 707,490
Amortization, net 20,297 20,060
Issuance of common stock in payment of bonuses and fees 46,215 51,752
Provision for losses on premiums receivable 785,000 100,000
Net gain on disposals of property (5,972) (12,435)
Net realized gain on sales of investments (66,044) (300,732)
Benefit for deferred income taxes (246,000) (326,000)
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets (2,604,614) 341,943
Decrease in accounts payable and accrued liabilities (652,447) (1,131,734)
Increase in commissions and reinsurance payables 178,349 230,191
Increase (decrease) in premium taxes payable 216,883 (124,177)
Increase (decrease) in current income taxes payable (452,247) 136,239
Provision for claims 7,470,163 5,332,105
Payments of claims, net of recoveries (3,769,163) (2,253,605)
------------------ ------------------
Net cash provided by operating activities 10,195,277 8,165,299
------------------ ------------------
Investing Activities:
Purchases of available-for-sale securities (12,068,891) (12,571,661)
Purchases of held-to-maturity securities (7,522) (362,470)
Purchases of other securities (554,921) (558,408)
Proceeds from sales of available-for-sale securities 5,536,005 7,638,598
Proceeds from sales of held-to-maturity securities 642,000 773,750
Proceeds from other securities 28,757 -
Purchases of property (655,318) (546,272)
Proceeds from sales of property 16,873 49,633
------------------ ------------------
Net cash used in investing activities (7,063,017) (5,576,830)
------------------ ------------------
Financing Activities:
Repurchases of common stock (860,316) (91,505)
Exercise of options 337,097 14,171
Dividends paid (225,277) (225,029)
------------------ ------------------
Net cash used in financing activities (748,496) (302,363)
------------------ ------------------
Net Increase in Cash and Cash Equivalents 2,383,764 2,286,106
Cash and Cash Equivalents, Beginning of Year 3,781,961 3,069,929
------------------ ------------------
Cash and Cash Equivalents, End of Period $ 6,165,725 $ 5,356,035
================== ==================
Supplemental Disclosures:
Cash Paid During the Year for:
Income Taxes, net of refunds $ 4,881,000 $ 2,601,000
================== ==================
See notes to consolidated financial statements.
3
INVESTORS TITLE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2003
(Unaudited)
Note 1 - Basis of Presentation
- ------------------------------
Reference should be made to the "Notes to Consolidated Financial
Statements" of Investors Title Company's (the "Company") Annual Report to
Shareholders for the year ended December 31, 2002 for a complete description of
the Company's significant accounting policies. There were no changes in the
significant accounting policies during the nine months ended September 30, 2003.
Principles of Consolidation - The unaudited consolidated financial
statements include the accounts and operations of Investors Title Company and
its subsidiaries (Investors Title Insurance Company, Northeast Investors Title
Insurance Company, Investors Title Exchange Corporation, Investors Title
Accommodation Corporation, Investors Title Management Services, Inc. and
Investors Title Commercial Agency, LLC), and have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission. Accordingly,
certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted. All intercompany
balances and transactions have been eliminated in consolidation.
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.
Reclassification - Certain 2002 amounts have been reclassified to
conform to 2003 classifications.
Earnings Per Share - Basic net income per share information is computed
using the weighted average number of shares of common stock outstanding during
the period. Diluted net income per common share is computed using the weighted
average number of shares of common and dilutive potential common shares
outstanding during the period.
Recent Accounting Pronouncements - In June 2002, the Financial
Accounting Standards Board (the "FASB") issued Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated with Exit or Disposal
Activities ("SFAS No. 146"). SFAS No. 146 addresses accounting and reporting for
costs associated with exit or disposal activities and supercedes Emerging Issues
Task Force Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (Including Certain
Costs Incurred in a Restructuring). SFAS No. 146 requires that a liability for a
cost associated with an exit or disposal
4
activity be recognized and measured initially at fair value when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The adoption of this statement had no
material impact on the financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of FASB
Statement No. 123. SFAS No. 148 amends SFAS No. 123 to provide alternative
methods of transition for a voluntary change to the fair market value based
method of accounting for stock-based employee compensation. The disclosure
provisions of SFAS No. 148 were effective for years ending after December 15,
2002. Presently, the Company does not plan to change its method of accounting
for stock-based compensation.
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities. SFAS No. 149 is generally
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The effect of the adoption
of this statement was not material to the Company's operating results or
financial position.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity. This
SFAS is generally effective for financial instruments entered into or modified
after May 31, 2003 and otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The effect of the adoption of this
statement was not material to the Company's operating results or financial
position.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosures
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others, became effective on December 31, 2002. This Interpretation addresses the
disclosure requirements for guarantees and indemnification agreements entered
into by the entity and provides for recording the fair value of such guarantees.
The implementation of this pronouncement did not have any effect on the
Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, Consolidation
of Variable Interest Entities. FIN 46 requires that unconsolidated variable
interest entities must be consolidated by their primary beneficiaries. A primary
beneficiary is the party that absorbs a majority of the entity's expected losses
or residual benefits. FIN 46 applies immediately to variable interest entities
created after January 31, 2003 and in the periods beginning after December 15,
2003 for such entities created before February 1, 2003. The adoption of FIN 46
had no significant impact on our financial condition or results of operations.
Stock-Based Compensation - The Company accounts for stock-based
compensation based on the provisions of Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, which states that, for fixed
plans, no compensation expense is recorded for stock options or other
stock-based awards to employees that are granted with an exercise price equal to
or above the estimated fair value per share of the Company's common stock on the
grant date. In
5
the event that stock options are granted with an exercise price
below the estimated fair value of the Company's common stock at the grant date,
the difference between the fair value of the Company's common stock and the
exercise price of the stock option is recorded as deferred compensation.
Deferred compensation is amortized to compensation expense over the vesting
period of the stock option. The Company has adopted the disclosure requirements
of Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"), and Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an Amendment to FASB Statement No. 123, which together require
compensation expense to be disclosed based on the fair value of the options
granted at the date of the grant.
Had compensation cost for the Company's stock option plan been
determined based on the fair value at the grant dates for awards under the plan
consistent with the method required by SFAS No. 123, the Company's net income
and diluted net income per common share would have been the pro forma amounts
indicated in the following table:
For the Three Month Periods Ended For the Nine Month Periods Ended
September 30 September 30
----------------- ------------------ ----------------- -------------------
2003 2002 2003 2002
----------------- ------------------ ----------------- -------------------
Net income as reported $ 2,963,799 $ 2,146,025 $ 8,659,812 $ 5,394,202
Less: Total stock-based employee
compensation expense determined under
fair value-based method for all
awards, net of related tax effects (37,349) (32,296) (107,796) (92,226)
----------------- ------------------ ----------------- -------------------
Pro forma net income $ 2,926,450 $ 2,113,729 $ 8,552,016 $ 5,301,976
================ ================= ================ ==================
Net income per share:
Basic - as reported $ 1.18 $ 0.85 $ 3.46 $ 2.14
Basic - pro forma $ 1.17 $ 0.84 $ 3.42 $ 2.11
Diluted - as reported $ 1.13 $ 0.83 $ 3.30 $ 2.08
Diluted - pro forma $ 1.11 $ 0.81 $ 3.26 $ 2.04
Note 2 - Reserves for Claims
- ----------------------------
Transactions in the reserves for claims for the nine months ended
September 30, 2003 and the year ended December 31, 2002 were as follows:
September 30, 2003 December 31, 2002
--------------------------- ---------------------------
Balance, beginning of year $ 25,630,000 $ 21,460,000
Provision, charged to operations 7,470,163 6,871,822
Payments of claims, net of recoveries (3,769,163) (2,701,822)
--------------- ------------
Ending balance $ 29,331,000 $ 25,630,000
============= ============
6
In management's opinion, the reserves are adequate to cover claim
losses which might result from pending and possible claims. The Company's
reserves for unpaid losses and loss adjustment expenses are established using
estimated amounts required to settle claims for which notice has been received
(reported) and the amount estimated to be required to satisfy incurred claims of
policyholders which may be reported in the future. Despite the variability of
such estimates, management believes that the reserves are adequate to cover
claim losses which might result from pending and future claims. The Company
continually reviews and adjusts its reserve estimates to reflect its loss
experience and any new information that becomes available.
Note 3 - Comprehensive Income
- -----------------------------
Comprehensive income for the three months ended September 30, 2003 and
2002 was $2,784,755 and $2,469,708, respectively. Comprehensive income for the
nine months ended September 30, 2003 and 2002 was $9,050,867 and $6,140,335,
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 125,621 and 77,153 for the three months ended
September 30, 2003 and 2002, respectively, and 117,854 and 76,633 for the nine
months ended September 30, 2003 and 2002, respectively. Options to purchase
274,241 and 311,316 shares of common stock were outstanding as of September 30,
2003 and 2002, respectively. Of the total options outstanding, 0 and 73,686
options were not included in the computation of diluted earnings per share for
the three months ended September 30, 2003 and 2002, respectively; and 36,350 and
73,686 options were not included in the computation of diluted earnings per
share for the nine months ended September 30, 2003 and 2002, respectively,
because the options' exercise prices were greater than the average market price
of the common shares.
Note 5 - Segment Information
Income
Three Months Operating Before
Ended Revenues Income Taxes Assets
- --------------------------------------------------------------------------------------------------
September 30, 2003
- --------------------------------------------------------------------------------------------------
Title Insurance $23,978,898 $ 4,180,662 $84,901,946
Exchange Services 383,094 252,262 620,958
All Other 293,718 29,875 10,454,366
- --------------------------------------------------------------------------------------------------
$24,655,710 $ 4,462,799 $95,977,270
- --------------------------------------------------------------------------------------------------
7
Income
Three Months Operating Before
Ended Revenues Income Taxes Assets
- --------------------------------------------------------------------------------------------------
September 30, 2002
- --------------------------------------------------------------------------------------------------
Title Insurance $18,160,367 $ 2,970,073 $71,019,015
Exchange Services 282,083 172,386 449,687
All Other 55,746 (33,034) 6,829,741
- --------------------------------------------------------------------------------------------------
$18,498,196 $ 3,109,425 $78,298,443
- --------------------------------------------------------------------------------------------------
Income
Nine Months Operating Before
Ended Revenues Income Taxes Assets
- --------------------------------------------------------------------------------------------------
September 30, 2003
- --------------------------------------------------------------------------------------------------
Title Insurance $67,816,899 $ 12,139,669 $84,901,946
Exchange Services 873,995 494,762 620,958
All Other 753,553 190,626 10,454,366
- --------------------------------------------------------------------------------------------------
$69,444,447 $ 12,825,057 $95,977,270
- --------------------------------------------------------------------------------------------------
September 30, 2002
- --------------------------------------------------------------------------------------------------
Title Insurance $48,005,439 $ 7,480,851 $71,019,015
Exchange Services 568,880 222,782 449,687
All Other 432,868 100,569 6,829,741
- --------------------------------------------------------------------------------------------------
$49,007,187 $ 7,804,202 $78,298,443
- --------------------------------------------------------------------------------------------------
Operating revenues represent net premiums written and other revenues,
excluding investment income and net realized gain on sales of investments.
Note 6 - Commitments and Contingencies
- -------------------------------------
The Company and its subsidiaries are involved in various routine
legal proceedings that are incidental to their business. All of these
proceedings arose in the ordinary course of business and, in the Company's
opinion, any potential liability of the Company or its subsidiaries with respect
to these legal proceedings will not, in the aggregate, be material to the
Company's consolidated financial condition or operations.
Item 2. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations
-------------------------
The Company's 2002 Form 10-K and 2002 Annual Report to Shareholders
should be read in conjunction with the following discussion since they contain
important information for evaluating the Company's operating results and
financial condition.
8
Critical Accounting Policies:
- ------------------------------
During the nine months ended September 30, 2003, the Company made no
changes in its critical accounting policies as previously disclosed within the
Company's Annual Report on Form 10-K for the year ended December 31, 2002.
Results of Operations:
- -----------------------
For the quarter ended September 30, 2003, net premiums written increased
31% to $23,469,590, investment income decreased 2% to $666,399, revenues
increased 32% to $25,323,239 and net income increased 38% to $2,963,799, all
compared with the same quarter in 2002. Net income per basic and diluted common
share increased 39% and 36%, to $1.18 and $1.13, respectively, as compared with
the same quarter in 2002. For the quarter ended September 30, 2003, the title
insurance segment's operating revenues increased 32% compared with the third
quarter of 2002, while the exchange services segment's operating revenues
increased 36% for the quarter ended September 30, 2003, compared with the same
quarter in 2002.
For the nine months ended September 30, 2003, net premiums written
increased 40% to $66,460,204, investment income decreased 1% to $2,020,834,
revenues increased 39% to $71,531,325 and net income increased 61% to
$8,659,812, all compared with the same period in 2002. Net income per basic and
diluted common share increased 62% and 59%, respectively, to $3.46 and $3.30 as
compared with the same nine-month period ended September 30, 2002. For the nine
months ended September 30, 2003, the title insurance segment's operating
revenues increased 41% compared with the same period in 2002, while the exchange
services segment's operating revenues increased 54% for the nine months ended
September 30, 2003 compared with the same period in 2002.
Revenue was driven by a flurry of mortgage originations during the
first part of the quarter. Mortgage rates increased during the period but real
estate activity stayed relatively strong as interest rates remained at
historically low levels. The rate increase primarily reduced the demand for
mortgage refinancing, which resulted in correspondingly lower premiums written
as the quarter progressed. According to the Freddie Mac Weekly Mortgage Rate
Survey, the monthly average 30-year fixed mortgage interest rates decreased to
an average of 5.79% for the nine months ended September 30, 2003, compared with
6.69% for the nine months ended September 30, 2002. The volume of business
remained strong in the third quarter of 2003 as the number of policies and
commitments issued rose to 110,189, an increase of 27.3% compared with 86,589 in
the same period in 2002. Policies and commitments issued for the nine months
ended September 30, 2003 were 324,417 compared with 230,172 in the same
nine-month period in 2002. Mortgage rate increases may continue to reduce the
demand for mortgage refinancing, resulting in lower premiums written in the
future.
Branch net premiums written as a percentage of total net premiums
written were 37% and 35% for the three months ended September 30, 2003 and 2002,
respectively, and 35% and 36%
9
for the nine months ended September 30, 2003 and 2002, respectively. Net
premiums written from branch operations increased 37% and 16% for the three
months ended September 30, 2003 and 2002, respectively, as compared with the
same periods in the prior year. For the nine months ended September 30, 2003 and
2002, net premiums written from branch operations increased 38% and 11%,
respectively, as compared with the same prior year periods.
Agency net premiums written as a percentage of total net premiums written
were 63% and 65% for the three months ended September 30, 2003 and 2002,
respectively, and 65% and 64% for the nine months ended September 30, 2003 and
2002, respectively. Agency net premiums increased 27% for the three months ended
September 30, 2003 and 2002, as compared with the same periods in the prior
year. For the nine months ended September 30, 2003 and 2002, net premiums
written from agency operations increased 41% and 19%, respectively, as compared
with the same prior year periods.
Shown below is a schedule of premiums written for the nine months ended
September 30, 2003 and 2002 in all states in which the Company's two insurance
subsidiaries, Investors Title Insurance Company and Northeast Investors Title
Insurance Company, currently underwrite insurance:
State 2003 2002
---------- ------------ -----------
Alabama $ 1,014,151 $ 445,786
Arkansas 22,113 39,550
District of Columbia 9,300 250
Florida 107,147 1,745
Georgia 97,318 70,834
Illinois 1,048,229 6,816
Indiana 258,646 110,288
Kentucky 1,418,543 823,642
Louisiana 1,676 -
Maryland 1,363,584 1,026,002
Michigan 6,339,491 7,464,819
Minnesota 1,625,270 873,252
Mississippi 927,208 695,700
Missouri 79,704 -
Nebraska 1,606,527 843,657
New Jersey 57,310 23,130
New York 4,796,813 2,379,541
North Carolina 23,508,790 17,073,173
Ohio 94,883 26,562
Pennsylvania 5,134,214 2,681,654
South Carolina 5,287,003 4,110,279
Tennessee 3,014,397 2,360,796
Virginia 7,305,163 5,558,913
West Virginia 1,641,651 1,172,927
Wisconsin (493) 10,776
---------------------- --------------------
Direct Premiums 66,758,638 47,800,092
Reinsurance Assumed 6,231 15,927
Reinsurance Ceded (304,665) (322,676)
---------------------- --------------------
Net Premiums $66,460,204 $47,493,343
====================== ==================
10
The increase in premiums written in 2003 compared to 2002 is primarily
the result of the continuing strong demand for home sales and mortgage
refinancing. The interest rate increase in the third quarter of 2003 weakened
the demand for mortgage refinancing, which resulted in correspondingly lower
premiums written as the quarter progressed. Ongoing improvements and increased
efforts in marketing to existing and new agents were also factors in the
increase in premium volume.
During the quarter, the North Carolina Rating Bureau filed a rate with
the Department of Insurance for member title insurance underwriters to charge
for insured closing services beginning on October 1, 2003. Investors Title
Insurance Company is a member of the Bureau. The premium is equal to $.50 per
thousand of policy coverage of $100,000 or less, and $.10 per thousand of policy
coverage from $100,001 to $500,000. The charge will be applicable on
transactions where insured closing services are provided. This rate increase is
expected to increase revenue from premiums written in North Carolina.
Total operating expenses increased 30% and 35% for the three and
nine-month periods ended September 30, 2003, respectively, compared with the
same periods in 2002. This was due primarily to an increase in commission
expense as a result of increased business from agent sources. The increase in
volume of premiums and costs associated with entering and supporting new markets
also contributed to the increase in operating expenses.
The provision for claims as a percentage of net premiums written was
approximately 11% for each of the three and nine month periods ended September
30, 2003 and 2002.
The provision for income taxes was 34% and 31% of income before income
taxes for the three months ended September 30, 2003 and 2002, respectively. For
the nine months ended September 30, 2003 and 2002, the provision for income
taxes was 32% and 31% of income before income taxes, respectively. The slight
increase in the tax provision percentage was primarily due to a change in the
ratio of tax-exempt investment income to taxable income.
Liquidity and Capital Resources:
- -------------------------------
Net cash provided by operating activities for the nine months ended
September 30, 2003, amounted to $10,195,277 compared with $8,165,299 for the
same nine-month period in 2002. The increase is primarily the result of an
increase in net income and an increase in the provision for claims net of claims
paid, offset by an increase in receivables and a decrease in liabilities.
On June 5, 2000, the Board of Directors of Investors Title Insurance
Company approved Investors Title Insurance Company's purchase of 500,000 shares
of the Company's common stock. Pursuant to this approval, Investors Title
Insurance Company purchased 88,333 shares at an average price of $19.19 per
share through September 30, 2003. For the nine months ended September 30, 2003
and 2002, a total of 37,015 shares and 17,914 shares at an average price of
$23.24 per share and $14.66 per share, respectively, were repurchased.
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On May 16, 2001, the Board of Directors approved the 2001 Stock Option
and Restricted Stock Plan. Pursuant to the Plan, 250,000 shares of common stock
are available. For the nine months ended September 30, 2003, options for 46,000
shares had been granted. As of October 31, 2003, options for 1,300 shares had
been exercised under this plan.
During the nine months ended September 30, 2003, Investors Title
Insurance Company purchased common stock for $860,316 and issued common stock
totaling $383,312 in satisfaction of stock option exercises, stock bonuses and
other stock issuances.
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 due to 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 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 Company's dependence 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 2002 Annual Report on Form 10-K.
Item 4. Controls and Procedures
-----------------------
Based on their evaluation of the effectiveness of the Company's
disclosure controls and procedures, the Chief Executive Officer and the Chief
Financial Officer of the Company concluded that, as of September 30, 2003, the
Company's disclosure controls and procedures were effective to ensure that
information required to be disclosed by the Company in the reports that it files
or submits under the Securities and Exchange Act of 1934, as amended,
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was recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission's rules and forms. 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 to allow timely decisions regarding
required disclosure.
There was no change in the Company's internal control over financial
reporting identified in connection with the above-referenced evaluation that has
materially affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(c) On various dates between February 7, 2003 and July 1, 2003, the Company
issued an aggregate of 1,300 shares of its common stock to four employees upon
the exercise of stock options granted to them under the Investors Title Company
2001 Stock Option and Restricted Stock Plan. The Company relied upon Section
4(2) of the Securities Act in issuing the shares. On February 7, 2003, the
Company repurchased 100 of these shares and, on September 30, 2003, the Company
registered the remaining 1,200 of these shares on its registration statement on
Form S-8, file no. 333-109279, which included a reoffer prospectus prepared in
accordance with the requirements of Part I of Form S-3.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
31(i) Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31(ii) Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On July 24, 2003, the Company furnished a report on Form 8-K that
reported under Item 9 that, on July 24, 2003, the Company released earnings
for the quarter ended June 30, 2003.
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SIGNATURES
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.
INVESTORS TITLE COMPANY
By: /s/ James A. Fine, Jr.
-----------------------
James A. Fine, Jr.
President, Chief Financial Officer and
Chief Accounting Officer
Dated: November 13, 2003
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