10-Q 1 a4515157.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 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.
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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.
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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 --------------------------------------------------------------------------------------------------
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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. 11 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, 12 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. 13 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 14