10-Q 1 a4453559.txt INVESTORS TITLE COMPANY 10-Q 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, 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 August 1, 2003, there were 2,855,744 outstanding shares of common stock of Investors Title Company, including 352,517 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 June 30, 2003 and December 31, 2002...............1 Consolidated Statements of Income for the Three and Six Months Ended June 30, 2003 and 2002......................................................2 Consolidated Statements of Cash Flows for the Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders................................13 Item 5. Other Information..................................................................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 June 30, 2003 and December 31, 2002 June 30, 2003 December 31, 2002 -------------- ------------------ (Unaudited) (Audited) Assets Cash and cash equivalents $ 9,826,555 $ 3,781,961 Investments in securities: Fixed maturities: Held-to-maturity, at amortized cost 3,818,218 4,395,081 Available-for-sale, at fair value 50,588,858 52,491,648 Equity securities, at fair value 8,075,922 7,884,928 Other investments 1,106,990 564,782 -------------- ----------------- Total investments 63,589,988 65,336,439 Premiums receivable (less allowance for doubtful accounts of $2,475,000 and $1,800,000 for 2003 and 2002, respectively) 9,758,431 7,949,904 Accrued interest and dividends 674,478 720,902 Prepaid expenses and other assets 988,606 1,095,230 Property acquired in settlement of claims 771,687 749,562 Property, net 4,189,690 4,109,885 Deferred income taxes, net 633,577 893,263 -------------- ----------------- Total Assets $ 90,433,012 $ 84,637,146 ============== ================= Liabilities and Stockholders' Equity Liabilities: Reserves for claims (Note 2) $ 27,522,000 $ 25,630,000 Accounts payable and accrued liabilities 3,223,177 4,780,865 Commissions and reinsurance payables 390,747 401,040 Premium taxes payable 234,423 268,972 Current income taxes payable 809,463 888,085 -------------- ----------------- Total liabilities 32,179,810 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; 2,498,939 and 2,515,804 shares issued and outstanding 2003 and 2002, respectively, excluding 356,805 and 339,940 shares 2003 and 2002, respectively, of common stock held by the Company's subsidiary) 1 1 Retained earnings 54,627,963 49,613,044 Accumulated other comprehensive income, net of deferred taxes of $1,868,117 and $1,574,431 for 2003 and 2002, respectively (Note 3) 3,625,238 3,055,139 -------------- ----------------- Total stockholders' equity 58,253,202 52,668,184 -------------- ----------------- Total Liabilities and Stockholders' Equity $ 90,433,012 $ 84,637,146 ============== ================= See notes to consolidated financial statements.
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Investors Title Company and Subsidiaries Consolidated Statements of Income For the Three and Six Months Ended June 30, 2003 and 2002 (Unaudited) For The Three For The Six Months Ended Months Ended June 30 June 30 ----------------------- ----------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- Revenues: Underwriting income: Premiums written $23,415,757 $14,997,015 $43,180,931 $29,780,863 Less - premiums for reinsurance ceded 93,128 125,818 190,317 228,941 ----------- ----------- ----------- ----------- Net premiums written 23,322,629 14,871,197 42,990,614 29,551,922 Investment income - interest and dividends 679,857 692,781 1,354,435 1,361,819 Net realized gain on sales of investments 41,867 5,043 64,914 290,850 Other 1,135,290 523,066 1,798,123 957,069 ----------- ----------- ----------- ----------- Total 25,179,643 16,092,087 46,208,086 32,161,660 ----------- ----------- ----------- ----------- Operating Expenses: Commissions to agents 11,462,988 6,767,083 20,855,778 13,776,762 Provision for claims (Note 2) 2,687,693 1,703,640 4,770,731 3,383,051 Salaries, employee benefits and payroll taxes 3,708,942 2,729,169 7,255,999 5,667,760 Office occupancy and operations 1,365,677 1,270,795 2,462,793 2,471,192 Business development 402,204 448,759 783,156 836,880 Taxes, other than payroll and income 121,159 115,357 175,282 191,594 Premium and retaliatory taxes 462,819 304,092 884,105 633,858 Professional fees 250,795 190,251 458,139 400,506 Other 147,914 67,343 199,845 105,280 ----------- ----------- ----------- ----------- Total 20,610,191 13,596,489 37,845,828 27,466,883 ----------- ----------- ----------- ----------- Income Before Income Taxes 4,569,452 2,495,598 8,362,258 4,694,777 ----------- ----------- ----------- ----------- Provision For Income Taxes 1,482,000 794,600 2,666,245 1,446,600 ----------- ----------- ----------- ----------- Net Income $ 3,087,452 $ 1,700,998 $ 5,696,013 $ 3,248,177 =========== =========== =========== =========== Basic Earnings Per Common Share (Note 4) $ 1.24 $ 0.68 $ 2.27 $ 1.29 =========== =========== =========== =========== Weighted Average Shares Outstanding - Basic (Note 4) 2,494,036 2,517,739 2,503,773 2,517,148 =========== =========== =========== =========== Diluted Earnings Per Common Share (Note 4) $ 1.18 $ 0.65 $ 2.18 $ 1.25 =========== =========== =========== =========== Weighted Average Shares Outstanding - Diluted (Note 4) 2,619,743 2,600,191 2,616,098 2,593,565 =========== =========== =========== =========== Dividends Paid $ 74,708 $ 77,170 $ 150,179 $ 151,074 =========== =========== =========== =========== Dividends Per Share $ 0.03 $ 0.03 $ 0.06 $ 0.06 =========== =========== =========== =========== See notes to consolidated financial statements.
2 Investors Title Company and Subsidiaries Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2003 and 2002 (Unaudited) 2003 2002 -------------- --------------- Operating Activities: Net income $5,696,013 $3,248,177 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 399,390 497,858 Amortization, net 12,888 14,867 Issuance of common stock in payment of bonuses and fees 31,009 41,728 Provision for losses on premiums receivable 675,000 - Net gain on disposals of property (4,922) (7,108) Net realized gain on sales of investments (64,914) (290,850) Benefit for deferred income taxes (34,000) (254,400) Changes in assets and liabilities: (Increase) decrease in receivables and other assets (2,352,604) 2,245,828 Decrease in accounts payable and accrued liabilities (1,557,688) (1,754,985) Increase (decrease) in commissions and reinsurance payables (10,293) 25,996 Decrease in premium taxes payable (34,549) (373,022) Increase (decrease) in current income taxes payable (78,622) 98,714 Provision for claims 4,770,731 3,383,051 Payments of claims, net of recoveries (2,878,731) (1,659,551) -------------- --------------- Net cash provided by operating activities 4,568,708 5,216,303 -------------- --------------- Investing Activities: Purchases of available-for-sale securities (3,452,544) (5,237,709) Purchases of held-to-maturity securities (4,246) (362,470) Purchases of other securities (563,280) (411,946) Proceeds from sales of available-for-sale securities 6,064,365 3,293,836 Proceeds from sales of held-to-maturity securities 592,000 768,750 Proceeds from other securities 25,967 Purchases of property (483,508) (456,858) Proceeds from sales of property 9,235 17,353 -------------- --------------- Net cash provided by (used in) investing activities 2,187,989 (2,389,044) -------------- --------------- Financing Activities: Repurchases of common stock (834,170) (15,447) Exercise of options 272,246 14,171 Dividends paid (150,179) (151,074) -------------- --------------- Net cash used in financing activities (712,103) (152,350) -------------- --------------- Net Increase in Cash and Cash Equivalents 6,044,594 2,674,909 Cash and Cash Equivalents, Beginning of Year 3,781,961 3,069,929 -------------- --------------- Cash and Cash Equivalents, End of Period $9,826,555 $5,744,838 ============== =============== Supplemental Disclosures: Cash Paid During the Year for: Income Taxes, net of refunds $2,796,000 $1,603,601 ============== =============== See notes to consolidated financial statements. 3 INVESTORS TITLE COMPANY AND SUBSIDIARIES Notes to Consolidated Financial Statements ------------------------------------------ June 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 six months ended June 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 and Investors Title Management Services, Inc.), and have been prepared in conformity with accounting principles generally accepted in the United States of America. 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 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. 4 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 voluntarily change its method of accounting for stock-based compensation. In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 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 Company has not yet determined the effect, if any, of the adoption of this statement. 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. 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 in the periods beginning after June 15, 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 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. 5 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 For the Six Month Periods Ended June 30 Ended June 30 ---------------- ------------------ ----------------- ------------------- 2003 2002 2003 2002 ---------------- ------------------ ----------------- ------------------- Net income as reported $ 3,087,452 $ 1,700,998 $ 5,696,013 $ 3,248,177 Less: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects (32,534) (30,426) (70,447) (59,930) ---------------- ------------------ ------------------ ------------------- Pro forma net income $ 3,054,918 $ 1,670,572 $ 5,625,566 $ 3,188,247 ============ ============ ============ ============ Net income per share: Basic - as reported $ 1.24 $ 0.68 $ 2.27 $ 1.29 Basic - pro forma $ 1.22 $ 0.66 $ 2.25 $ 1.27 Diluted - as reported $ 1.18 $ 0.65 $ 2.18 $ 1.25 Diluted - pro forma $ 1.17 $ 0.64 $ 2.15 $ 1.23
Note 2 - Reserves for Claims Transactions in the reserves for claims for the six months ended June 30, 2003 and the year ended December 31, 2002 were as follows: June 30, 2003 December 31, 2002 ---------------- -------------------- Balance, beginning of year $ 25,630,000 $ 21,460,000 Provision, charged to operations 4,770,731 6,871,822 Payments of claims, net of recoveries (2,878,731) (2,701,822) ---------------- -------------------- Ending balance $ 27,522,000 $ 25,630,000 ================ ==================== 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. 6 Note 3 - Comprehensive Income ----------------------------- Comprehensive income for the three months ended June 30, 2003 and 2002 was $3,679,441 and $2,369,666, respectively. Comprehensive income for the six months ended June 30, 2003 and 2002 was $6,266,112 and $3,670,627, 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 125,707 and 82,452 for the three months ended June 30, 2003 and 2002, respectively, and 112,325 and 76,417 for the six months ended June 30, 2003 and 2002, respectively. Options to purchase 282,246 and 301,316 shares of common stock were outstanding as of June 30, 2003 and 2002, respectively. Of the total options outstanding, 28,100 and 68,686 options were not included in the computation of diluted earnings per share for the three months ended June 30, 2003 and 2002, respectively; and 39,840 and 68,686 options were not included in the computation of diluted earnings per share for the six months ended June 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 -------------------------------------------------------------------------------------------------- June 30, 2003 -------------------------------------------------------------------------------------------------- Title Insurance $23,846,555 $ 4,225,350 $83,774,269 Exchange Services 389,811 277,381 408,640 All Other 221,553 66,721 6,250,103 -------------------------------------------------------------------------------------------------- $24,457,919 $ 4,569,452 $90,433,012 -------------------------------------------------------------------------------------------------- June 30, 2002 -------------------------------------------------------------------------------------------------- Title Insurance $15,021,352 $ 2,363,446 $69,338,805 Exchange Services 180,542 70,698 295,038 All Other 192,369 61,454 3,872,031 -------------------------------------------------------------------------------------------------- $15,394,263 $ 2,495,598 $73,505,874 --------------------------------------------------------------------------------------------------
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Income Six Months Operating Before Ended Revenues Income Taxes Assets -------------------------------------------------------------------------------------------------- June 30, 2003 -------------------------------------------------------------------------------------------------- Title Insurance $43,838,001 $ 7,959,007 $83,774,269 Exchange Services 490,901 242,500 408,640 All Other 459,835 160,751 6,250,103 -------------------------------------------------------------------------------------------------- $44,788,737 $ 8,362,258 $90,433,012 June 30, 2002 -------------------------------------------------------------------------------------------------- Title Insurance $29,845,072 $ 4,510,778 $69,338,805 Exchange Services 286,797 50,396 295,038 All Other 377,122 133,603 3,872,031 -------------------------------------------------------------------------------------------------- $30,508,991 $ 4,694,777 $73,505,874 --------------------------------------------------------------------------------------------------
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. Critical Accounting Policies: ----------------------------- During the six months ended June 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. 8 Results of Operations: ---------------------- For the quarter ended June 30, 2003, net premiums written increased 57% to $23,322,629, investment income decreased 2% to $679,857, revenues increased 56% to $25,179,643 and net income increased 82% to $3,087,452, all compared with the same quarter in 2002. Both net income per basic and diluted common share increased 82%, to $1.24 and $1.18, respectively, as compared with the same quarter ended June 30, 2002. For the quarter ended June 30, 2003, the title insurance segment's operating revenues increased 59% compared with the second quarter of 2002, while the exchange services segment's operating revenues increased 116% for the quarter ended June 30, 2003, compared with the same quarter in 2002. For the six months ended June 30, 2003, net premiums written increased 45% to $42,990,614, investment income decreased 1% to $1,354,435, revenues increased 44% to $46,208,086 and net income increased 75% to $5,696,013, all compared with the same period in 2002. Net income per basic and diluted common share increased 76% and 74%, respectively, to $2.27 and $2.18 as compared with the same six month period ended June 30, 2002. For the six months ended June 30, 2003, the title insurance segment's operating revenues increased 47% compared with the same period in 2002, while the exchange services segment's operating revenues increased 71% for the six months ended June 30, 2003 compared with the same period in 2002. Revenue and earnings continued to be driven by mortgage refinancing. Mortgage interest rates declined through the period as fears persisted over possible deflation. In response to lower rates, applications for mortgage refinancing surged to unprecedented levels. Nationally, refinancings represented over 75% of weekly mortgage applications at the end of the quarter. According to the Freddie Mac Weekly Mortgage Rate Survey, the monthly average 30-year fixed mortgage interest rates decreased to an average of 5.67% for the six months ended June 30, 2003, compared with 6.89% for the six months ended June 30, 2002. The volume of business remained strong in the second quarter of 2003 as the number of policies and commitments issued rose to 214,228, an increase of 49.2% compared with 143,583 in the same period in 2002. Branch net premiums written as a percentage of total net premiums written were 34% and 38% for the three months ended June 30, 2003 and 2002, respectively, and 35% and 37% for the six months ended June 30, 2003 and 2002, respectively. Net premiums written from branch operations increased 43% and decreased 3% for the three months ended June 30, 2003 and 2002, respectively, as compared with the same periods in the prior year. For the six months ended June 30, 2003 and 2002, net premiums written from branch operations increased 38% and 8%, respectively, as compared with the same prior year periods. Agency net premiums written as a percentage of total net premiums written were 66% and 62% for the three months ended June 30, 2003 and 2002, respectively, and 65% and 63% for the six months ended June 30, 2003 and 2002, respectively. Agency net premiums increased 65% and 2% for the three months ended June 30, 2003 and 2002, respectively, as compared with the same periods in the prior year. For the six months ended June 30, 2003 and 2002, net premiums written from agency operations increased 50% and 15%, respectively, as compared with the same prior year periods. 9 Shown below is a schedule of premiums written for the six months ended June 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 $ 645,527 $ 275,440 Arkansas 18,170 7,638 District of Columbia 6,274 - Florida 25,150 - Georgia 27,639 1,836 Illinois 756,449 - Indiana 175,701 5,114 Kentucky 941,646 503,741 Louisiana 1,676 - Maryland 975,414 636,148 Michigan 4,394,450 4,419,751 Minnesota 1,093,748 652,130 Mississippi 565,025 413,665 Missouri 19,218 - Nebraska 1,163,552 387,291 New Jersey 41,266 11,943 New York 3,106,336 1,527,021 North Carolina 14,909,659 10,817,167 Ohio 65,129 11,673 Pennsylvania 3,297,694 1,551,870 South Carolina 3,272,382 2,616,019 Tennessee 2,029,754 1,521,794 Virginia 4,608,819 3,625,674 West Virginia 1,034,122 772,049 Wisconsin (100) 7,234 ----------------- --------------------- Direct Premiums 43,174,700 29,765,198 Reinsurance Assumed 6,231 15,665 Reinsurance Ceded (190,317) (228,941) ----------------- --------------------- Net Premiums $42,990,614 $29,551,922 ================= ===================== The increase in premiums is primarily the result of lower mortgage interest rates that continue to stimulate a healthy demand for home sales and mortgage refinancing. The continued effort to increase our market share with existing and new agents also contributed to the increase in premium volume. 10 Total operating expenses increased 52% and 38% for the three and six month periods ended June 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 the three and six months ended June 30, 2003 and 2002. The provision for income taxes was 32% of income before income taxes for the three months ended June 30, 2003 and 2002. For the six months ended June 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 six months ended June 30, 2003, amounted to $4,568,708 compared with $5,216,303 for the same six month period of 2002. The decrease is primarily the result of an increase in receivables, an increase in payments of claims, net of recoveries, and a decrease in accounts payable, offset by an increase in net income. 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 87,446 shares at an average price of $19.09 per share. For the six months ended June 30, 2003 and 2002, a total of 36,128 shares and 829 shares at an average price of $23.09 per share and $18.63 per share, respectively, were repurchased. 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 six months ended June 30, 2003, options for a total of 43,500 shares had been granted. As of August 1, 2003, options for 1,300 shares had been exercised under this plan. During the six months ended June 30, 2003, Investors Title Insurance Company purchased common stock for $834,170 and issued common stock totaling $303,255 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. 11 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 June 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, 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. 12 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 on May 21, 2003. The voting results for the proposal to elect three Directors to the Company's Board of Directors, each for a three-year term, are as follows:
Broker For Against Abstentions Withheld Non-votes --- ------- ----------- -------- --------- James A. Fine, Jr. 2,260,594 N/A N/A 64,695 N/A H. Joe King, Jr. 2,322,833 N/A N/A 2,456 N/A James R. Morton 2,287,685 N/A N/A 37,604 N/A
Item 5. Other Information ----------------- On April 17, 2003, the Audit Committee of the Company's Board of Directors voted to engage Deloitte and Touche, LLP to perform audit and tax services for the Company for the year ending December 31, 2003. Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits 3(ii) Amended and Restated By-Laws 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 April 24, 2003, the Company furnished a report on Form 8-K that reported under Item 9 that, on April 24, 2003, the Company released earnings for the quarter ended March 31, 2003. 13 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 By: /s/ James A. Fine, Jr. ---------------------- James A. Fine, Jr. President, Principal Financial Officer and Principal Accounting Officer Dated: August 13, 2003 14