1 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 June 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
2 FORM 10-Q QUARTERLY REPORT Quarter Ended June 30, 1997 TABLE OF CONTENTS <TABLE> <CAPTION> Item No. Page - -------- ---- <S> <C> <C> 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 </TABLE>
3 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE QUARTERS AND SIX MONTHS ENDED JUNE 30, 1997 and 1996 <TABLE> <CAPTION> SECOND QUARTER SIX MONTHS ------------------------ ------------------------ 1997 1996 1997 1996 -------- -------- -------- -------- ($000 Omitted) ($000 Omitted) <S> <C> <C> <C> <C> Revenues Title premiums, fees and other revenues 87,561 85,465 160,802 160,101 Investment income 3,861 3,523 7,588 6,969 Investment gains - net 25 (124) 181 250 Other income - net 596 855 226 403 -------- -------- -------- -------- 92,043 89,719 168,797 167,723 Expenses Employee costs 44,219 42,977 87,513 83,724 Other operating expenses 27,849 26,219 51,356 49,133 Title losses and related claims 7,544 8,100 14,103 16,060 Depreciation and amortization 2,843 2,714 5,619 5,179 Interest 313 292 566 576 Minority interests 643 507 910 743 -------- -------- -------- -------- 83,411 80,809 160,067 155,415 -------- -------- -------- -------- Earnings before taxes 8,632 8,910 8,730 12,308 Income taxes 3,104 3,208 3,138 4,431 -------- -------- -------- -------- Net earnings 5,528 5,702 5,592 7,877 ======== ======== ======== ======== Average number of shares outstanding (000) 6,805 6,693 6,796 6,680 Earnings per share 0.81 0.85 0.82 1.18 ======== ======== ======== ======== </TABLE> -1-
4 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 1997 AND DECEMBER 31, 1996 <TABLE> <CAPTION> JUNE 30 DEC 31 1997 1996 ------- ------- ($000 Omitted) <S> <C> <C> Assets Cash and cash equivalents 25,520 18,484 Short-term investments 27,000 31,946 Investments - statutory reserve funds 130,014 127,057 Investments - other 69,039 73,456 Receivables 33,904 31,616 Property and equipment 29,389 28,185 Title plants 21,719 21,096 Goodwill 16,759 16,535 Deferred income taxes 16,744 14,615 Other 21,225 20,382 ------- ------- 391,313 383,372 ======= ======= Liabilities Notes payable 14,990 12,324 Accounts payable and accrued liabilities 23,562 25,452 Estimated title losses 152,492 150,331 Minority interests 4,056 4,275 Contingent liabilities and commitments Stockholders' equity Common and Class B Common Stock and additional paid-in capital 58,704 57,574 Net unrealized investment gains 1,176 1,920 Retained earnings 136,333 131,496 ------- ------- Total stockholders' equity ($28.77 per share at June 30, 1997) 196,213 190,990 ------- ------- 391,313 383,372 ======= ======= </TABLE> -2-
5 STEWART INFORMATION SERVICES CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1997 AND 1996 <TABLE> <CAPTION> 1997 1996 ------- ------- ($000 Omitted) <S> <C> <C> Cash provided by operating activities (Note) 7,711 19,888 Investing activities: Purchases of property and equipment and title plants - net (5,988) (6,150) Proceeds from investments matured and sold 24,390 47,421 Purchases of investments (18,949) (56,864) Increases in notes receivable (1,743) (386) Collections on notes receivable 435 1,840 Proceeds from issuance of stock 96 60 Cash (paid) received for the acquisition of subsidiaries - net (942) 276 ------- ------- Cash used by investing activities (2,701) (13,803) Financing activities: Dividends paid (755) (742) Proceeds of notes payable 4,868 1,408 Payments on notes payable (2,087) (2,183) ------- ------- Cash provided (used) by financing activities 2,026 (1,517) ------- ------- Increase in cash and cash equivalents 7,036 4,568 ======= ======= NOTE: Reconciliation of net earnings to the above amounts - Net earnings 5,592 7,877 Add (deduct): Depreciation and amortization 5,619 5,179 Provision for title losses in excess of payments 2,161 5,802 Provision for uncollectible amounts - net 199 204 Increase in accounts receivable - net (3,261) (1,142) (Decrease) increase in accounts payable and accrued liabilities - net (1,804) 3,210 Minority interest expense 910 743 Equity in net earnings of investees (334) (392) Realized investment gains - net (181) (250) Other - net (1,190) (1,343) ------- ------- Cash provided by operating activities 7,711 19,888 ======= ======= </TABLE> -3-
6 STEWART INFORMATION SERVICES CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Interim Financial Statements The financial information contained in this report for the six month periods ended June 30, 1997 and 1996, and as at June 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-
7 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 six months of 1997 with the first six 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 $0.7 million, or 0.4%, 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. Because of lower rates real estate activity increased. Refinancing transactions, which had been at lower, more normal levels since mid 1996, also increased. The number of closings handled by the Company decreased 12.1%. Closings decreased in California, Florida, Texas and most other states. The average revenue per closing increased in the first six months of 1997 over the first six months of 1996. Fewer refinancings, with their lower premiums, resulted in higher revenues per closing in 1997. 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 8.9% in 1997 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Employee expenses increased $3.8 million, or 4.5%, in 1997 primarily because of a higher average number of employees during the first two 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, 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 $2.2 million, or 4.5%, primarily because of increased rent, travel, fees paid to attorneys for examination and closing services, bad debt provisions and premium taxes. Other operating expenses also include business promotion, supplies, policy forms, delivery costs, title plant expenses and telephone. Provisions for title losses and related claims were down $2.0 million, or 12.2% 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 six months of 1997 decreased to 8.8% versus 10.0% for the first six months of 1996. The provision for the year 1996 was 10.3 percent. The provision for income taxes represented a 36.0% effective tax rate in both 1997 and 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-
8 A comparison of the results of operations of the Company for the second quarter of 1997 with the second quarter 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 $2.1 million, or 2.5%, 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 decreased 9.0%. Closings decreased in California, Florida, Texas and most other states. The average revenue per closing increased 10.4% in 1997 over 1996. Fewer refinancings, with their lower premiums, resulted in higher revenues per closing in 1997. 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 9.6% in 1997 due to an increase in the average balances invested and the increased yield on the balances. EXPENSES Employee expenses increased $1.2 million, or 2.9%, in 1997 primarily because of increased average rates of compensation. The average number of employees was approximately the same in 1997 and 1996. 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, Florida and Texas in the second quarter of 1997 compared to the second 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 $1.6 million, or 6.2%, primarily because of increased travel, fees paid to attorneys for examination and closing services and rent. Other operating expenses also include business promotion, delivery costs, insurance and telephone. Provisions for title losses and related claims were down $0.6 million, or 6.9% 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 second quarter of 1997 decreased to 8.6% versus 9.5% in the second quarter of 1996. The provision for the year 1996 was 10.3 percent. The provision for income taxes represented a 36.0% effective tax rate in both 1997 and 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. -6-
9 PART II <TABLE> <CAPTION> Page ---- <S> <C> 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 June 30, 1997. </TABLE> -7-
10 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 is currently pending 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 certain plaintiffs the negotiated sum of $1.3 million in fees and expenses. The Court has awarded counsel for the remaining plaintiffs fees and expenses totaling $0.5 million. The Court has under advisement the motions of such plaintiff's counsel to amend and to reconsider that award. 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 is one of eight similar suits filed against various underwriters in Florida, including Guaranty. The alleged class would include all purchasers of title insurance of evidence of title in Florida since 1990. Plaintiffs allege that Guaranty's premium and cost sharing agreements with its Florida agents, which are governed by and set in accordance with rates promulgated by the Florida Department of Insurance, constitute violations of the Real Estate Settlement Procedures Act and Florida law, including fraudulent and negligent misrepresentation. Plaintiffs seek injunctive relief and treble damages of at least $60 million based upon the title insurance premiums paid by the purported class. Guaranty has filed a motion to dismiss the complaint on various grounds, including the filed rate doctrine. The Court has deferred any action on the plaintiff's motion to certify the proceedings as a class action pending disposition of Guaranty's motion to dismiss. Guaranty believes that the plaintiff's allegations are without merit and intends to vigorously defend 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-
11 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) August 12, 1997 - ---------------- Date /S/ MAX CRISP ----------------------------------------------- Max Crisp (Vice President-Finance, Secretary-Treasurer, Director and Principal Financial and Accounting Officer) -9-
12 INDEX TO EXHIBITS <TABLE> <CAPTION> EXHIBIT NUMBER DESCRIPTION - ------- ----------- <S> <C> 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 </TABLE>