FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 (Mark One) [ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1997 [ ] 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 1-12688 STEWART INFORMATION SERVICES CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 74-1677330 - ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 1980 Post Oak Blvd., Houston TX 77056 ------------------------------------------------------------ (Address of principal executive offices, including zip code) (713) 625-8100 ---------------------------------------------------- (Registrant's telephone number, including area code) - -------------------------------------------------------------------------------- (Former name,former address and former fiscal year,if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Common 6,295,539 Class B Common 525,006
FORM 10-Q QUARTERLY REPORT Quarter Ended September 30, 1997 TABLE OF CONTENTS Item No. Page - -------- ---- Part I 1. Financial Statements 1 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 5 Part II 1. Legal Proceedings 8 6. Exhibits and Reports on Form 8-K 7 Signature 9
STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE QUARTERS AND NINE MONTHS ENDED SEPTEMBER 30, 1997 and 1996 <TABLE> <CAPTION> THIRD QUARTER NINE MONTHS --------------------- -------------------- 1997 1996 1997 1996 ---------- --------- -------- -------- ($000 Omitted) ($000 Omitted) <S> <C> <C> <C> <C> Revenues Title premiums, fees and other revenues 93,134 84,133 253,936 244,234 Investment income 3,962 3,710 11,550 10,679 Investment gains - net 124 (149) 305 101 Other income - net 902 352 1,128 755 -------- -------- -------- ------- 98,122 88,046 266,919 255,769 Expenses Employee costs 48,236 43,590 135,749 127,314 Other operating expenses 29,580 25,693 80,936 74,826 Title losses and related claims 8,035 8,484 22,138 24,544 Depreciation and amortization 3,110 2,724 8,729 7,903 Interest 400 277 966 853 Minority interests 561 314 1,471 1,057 -------- -------- -------- ------- 89,922 81,082 249,989 236,497 -------- -------- -------- ------- Earnings before taxes 8,200 6,964 16,930 19,272 Income taxes 2,713 2,507 5,851 6,938 -------- -------- -------- ------- Net earnings 5,487 4,457 11,079 12,334 ======== ======== ======== ======= Average number of shares outstanding (000) 6,821 6,727 6,805 6,696 Earnings per share 0.80 0.66 1.63 1.84 ======== ========= ======== ======= </TABLE> -1-
STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 <TABLE> <CAPTION> SEPT 30 DEC 31 1997 1996 ---------- ---------- ($000 Omitted) <S> <C> <C> Assets Cash and cash equivalents 22,092 18,484 Short-term investments 33,850 31,946 Investments - statutory reserve funds 135,150 127,057 Investments - other 69,277 73,456 Receivables 33,547 31,616 Property and equipment 30,215 28,185 Title plants 22,142 21,096 Goodwill 18,189 16,535 Deferred income taxes 17,275 14,615 Other 21,346 20,382 ---------- ---------- 403,083 383,372 ========== ========== Liabilities Notes payable 17,763 12,324 Accounts payable and accrued liabilities 22,660 25,452 Estimated title losses 155,381 150,331 Minority interests 3,987 4,275 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 58,705 57,574 Net unrealized investment gains 3,208 1,920 Retained earnings 141,379 131,496 ---------- ---------- Total stockholders' equity ($29.81 per share at September 30, 1997) 203,292 190,990 ---------- ---------- 403,083 383,372 ========== =========== </TABLE> -2-
STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 <TABLE> <CAPTION> 1997 1996 -------- -------- ($000 Omitted) <S> <C> <C> Cash provided by operating activities (Note) 15,533 27,692 Investing activities: Purchases of property and equipment and title plants - net (9,612) (8,272) Proceeds from investments matured and sold 33,020 62,426 Purchases of investments (36,552) (77,592) Increases in notes receivable (1,756) (886) Collections on notes receivable 594 2,472 Proceeds from issuance of stock 96 71 Cash (paid) received for the acquisition of subsidiaries - net (2,608) 276 ---------- --------- Cash used by investing activities (16,818) (21,505) Financing activities: Dividends paid (1,196) (1,115) Proceeds of notes payable 8,803 3,054 Payments on notes payable (2,714) (3,988) ---------- --------- Cash provided (used) by financing activities 4,893 (2,049) ---------- --------- Increase in cash and cash equivalents 3,608 4,138 ========== ========== </TABLE> NOTE: Reconciliation of net earnings to the above amounts - <TABLE> <S> <C> <C> Net earnings 11,079 12,334 Add (deduct): Depreciation and amortization 8,729 7,903 Provision for title losses in excess of payments 5,050 8,385 Provision for uncollectible amounts - net 403 18 Increase in accounts receivable - net (4,477) (1,448) (Decrease) increase in accounts payable and accrued liabilities - net (2,715) 3,711 Minority interest expense 1,471 1,057 Equity in net earnings of investees (922) (733) Realized investment gains - net (305) (101) Other - net (2,780) (3,434) ---------- --------- Cash provided by operating activities 15,533 27,692 ========== ========= </TABLE> -3-
STEWART INFORMATION SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Interim Financial Statements The financial information contained in this report for the nine month periods ended September 30, 1997 and 1996, and as at September 30, 1997, is unaudited. In the opinion of management, all adjustments necessary for a fair presentation of this information for all unaudited periods, consisting only of normal recurring accruals, have been made. The results of operations for the interim periods are not necessarily indicative of results for a full year. -4-
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations A comparison of the results of operations of the Company for the first nine months of 1997 with the first nine months of 1996 follows: GENERAL The Company's dominant segment of operations is the land title business. In general, the principal factors which contribute to increases in title revenues include declining mortgage interest rates (which usually increase home sales), increases in refinancing transactions, rising home prices, higher premium rates, increased market share, additional revenues from new offices and increased revenue from non-residential, commercial transactions. Although relatively few in number, large commercial transactions usually yield higher premiums. REVENUES Revenues from title premiums and fees increased $9.7 million, or 4.0%, from a year ago. Mortgage interest rates were higher in the early part of 1997 than in the same period a year ago but then rates began to decline in the second quarter, causing increased real estate activity. Refinancing transactions, which had been at lower, more normal levels since mid 1996, also increased. The number of closings handled by the Company decreased 5.0%. Closings decreased in California, Florida, and Texas. The average revenue per closing increased in the first nine months of 1997 over the first nine months of 1996. Industry sources report an increase of 4-5% in home prices, which has the effect of raising title premiums and fees. Increases in commercial transactions and revenues from agents also contributed to higher revenues in 1997. Investment income increased 8.2% in 1997 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Employee expenses increased $8.4 million, or 6.6%, in 1997 primarily because of a higher average number of employees during the first three quarters of 1997 compared to a year ago and increased average rates of compensation. The Company continued to maintain higher staff levels in comparison with a year ago. Increases were in areas of automating services rendered to customers and improving its own processes, real estate information services that are being developed and sold to customers and the expansion of its national marketing efforts. The Company believes the development and sale of new products and services is important to its future. Through automated operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. Other operating expenses increased by $6.1 million, or 8.2%, primarily because of increased rent, premium taxes, travel, business promotion and fees paid to attorneys for examination and closing services. Other operating expenses also include supplies, policy forms, delivery costs, title plant expenses and telephone. Provisions for title losses and related claims were down $2.4 million, or 9.8% in 1997. The Company's experience in claims continues to improve significantly. As a percentage of title premiums, fees and related revenues, the provisions for the first nine months of 1997 decreased to 8.7% versus 10.0% for the first nine months of 1996. The provision for income taxes represented a 34.6% effective tax rate in 1997 and 36.0% in 1996. LIQUIDITY AND CAPITAL RESOURCES Operating margins represent the primary source of financing for the Company, but this may be supplemented by bank borrowings. The capital resources of the Company, and the present debt-to-equity relationship, are considered satisfactory. -5-
A comparison of the results of operations of the Company for the third quarter of 1997 with the third quarter of 1996 follows: REVENUES Revenues from title premiums and fees increased $9.0 million, or 10.7%, from a year ago. Mortgage interest rates were higher in the early part of the second quarter of 1997 than the same time in 1996 but then rates began to decline. Mortgage interest rates are now lower than one year ago. Because of lower rates, real estate activity increased. Refinancing transactions, which had been at lower, more normal levels since mid 1996, also began to increase. The number of closings handled by the Company increased 10.3%. Closings increased in California, Arizona, Texas and most other states. The average revenue per closing increased slightly in 1997 from 1996. Industry sources report an increase of 4-5% in home prices, which has the effect of raising title premiums and fees. Increases in commercial transactions and revenues from agents also contributed to higher revenues in 1997. Investment income increased 6.8% in 1997 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Employee expenses increased $4.6 million, or 10.7%, in 1997 primarily because of increased average rates of compensation. The average number of employees was approximately 3% higher in 1997. In comparison with a year ago, the Company continued to maintain higher staff levels in areas of automating services rendered to customers and improving its own processes, real estate information services that are being developed and sold to customers and the expansion of its national marketing efforts. The number of employees in title operations was lower in California and Florida in the third quarter of 1997 compared to the third quarter of 1996. The Company believes the development and sale of new products and services is important to its future. Through automated operating processes, the Company expects to add customer revenues and reduce operating expenses and title losses in the future. Other operating expenses increased by $3.9 million, or 15.1%, primarily because of increased rent, business promotion and premium taxes. Other operating expenses also include travel, supplies, title plant expenses, telephone, delivery costs and insurance. Provisions for title losses and related claims were down $0.4 million, or 5.3% in 1997. The Company's experience in claims continues to improve significantly. As a percentage of title premiums, fees and related revenues, the provision in the third quarter of 1997 decreased to 8.6% versus 10.1% in the third quarter of 1996. The provision for income taxes represented a 33.1% effective tax rate in 1997 and 36.0% in 1996. The effective tax rate for the quarter ended September 30, 1997 is lower than the same quarter of last year because of refunds received in the current quarter for a federal net operating loss carryforward and a change in the filing method for a certain state. -6-
PART II Page ---------- Item 1. Legal Proceedings 8 Item 6. Exhibits and Reports on Form 8-K (a) Index to exhibits (b) There were no reports on Form 8-K filed during the quarter ended September 30, 1997. -7-
ITEM 1. LEGAL PROCEEDINGS Guaranty and 18 other title insurers are defendants in a consolidated class action proceeding originating from complaints first filed in April 1990. The suit was consolidated in the United States District Court for the District of Arizona. The plaintiffs allege that the defendants violated federal antitrust law by participating in title insurance rating bureaus in Arizona and Wisconsin in the early 1980s through which they allegedly agreed upon the prices and other terms and conditions of sale for title search and examination services. The plaintiffs request treble damages in an unspecified amount, costs and attorneys' fees. The Court has certified the proceeding as a class action and approved a settlement pursuant to which members of the class would receive cash (not to exceed approximately $4.1 million from all defendants) and additional coverage under, and discounts on, title insurance policies. In addition, the Court has awarded counsel for plaintiffs the negotiated sum of $1.9 million in fees and expenses. The settlement has become final. James C. O'Brien and Ingrid K. O'Brien vs. Stewart Title Guaranty Company, filed September 25, 1996, in the United States District Court, Southern District of Florida. This purported class action was one of eight similar suits filed against various underwriters in Florida, including Guaranty. On April 14, 1997, the United States District Court, Southern District of Florida, entered its Omnibus Order dismissing the plaintiffs' complaints against the underwriters, including the O'Briens' claims against Guaranty. Subsequent to the entry of the Omnibus Order, Guaranty and the other underwriters entered into a final resolution of all claims between the underwriters and the purported plaintiffs' class representatives. Dismissal of the claims against Guaranty are final and there are no pending claims against Guaranty relating to this suit. The Registrant is a party to routine lawsuits incidental to its business, most of which involve disputed policy claims. In many of these suits, the plaintiff seeks exemplary or treble damages in excess of policy limits based on the alleged malfeasance of an issuing agent of the Registrant. -8-
SIGNATURE 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. Stewart Information Services Corporation ---------------------------------------- (Registrant) September 11, 1997 - ---------------- Date /S/ MAX CRISP ----------------------------------------------- Max Crisp (Vice President-Finance, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -9-
INDEX TO EXHIBITS EXHIBIT NUMBER DESCRIPTION - ------- ----------- 4. - Rights of Common and Class B Common Stockholders 27.0 - Financial data schedule 28.2 - Details of investments as reported in the Quarterly Report to Shareholders