Exhibit 13.1
Investors Title Company
2001 Annual Report
Investors Title Company and Subsidiaries
FINANCIAL HIGHLIGHTS
For the Year 2001 2000 1999 1998 1997
- ------------ ---- ---- ---- ---- ----
Net premiums written $59,480,545 $37,690,752 $43,819,565 $45,379,696 $29,875,350
Revenues 64,472,445 42,229,768 47,366,559 48,476,263 32,390,516
Investment income 2,740,280 2,528,143 2,175,671 1,834,949 1,628,188
Net income 6,008,998 3,140,463 4,420,394 5,459,509 4,530,382
Per Share Data
- --------------
Basic earnings per common share $ 2.35 $ 1.21 $ 1.59 $ 1.95 $ 1.63
Weighted average shares
outstanding - Basic 2,554,204 2,594,891 2,776,878 2,806,267 2,782,449
Diluted earnings per common share $ 2.31 $ 1.21 $ 1.59 $ 1.92 $ 1.60
Weighted average shares
outstanding - Diluted 2,599,714 2,601,283 2,786,282 2,841,035 2,826,730
Cash dividends per share $ .12 $ .12 $ .12 $ .12 $ .12
At Year End
- -----------
Assets $70,219,700 $59,339,007 $55,156,564 $51,597,812 $41,293,007
Investments in securities 53,024,283 44,638,179 40,807,540 35,571,302 31,623,053
Stockholders' equity 44,271,768 39,189,649 37,501,740 36,328,665 31,128,908
Book value/share 17.59 15.27 13.70 12.93 11.12
Performance Ratios
- ------------------
Net income to:
Average stockholders' equity 14.40% 8.19% 11.97% 16.19% 15.86%
Total revenues (profit margin) 9.32% 7.44% 9.33% 11.26% 13.99%
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the
consolidated financial statements and the related footnotes on pages 12-22 of
this report.
OVERVIEW
Investors Title Company (the "Company") engages primarily in two segments
of business. The main business activity is the issuance of title insurance
through two title insurance subsidiaries, Investors Title Insurance Company
("ITIC") and Northeast Investors Title Insurance Company ("NE-ITIC"). Factors
which influence the land title business include mortgage interest rates, the
availability of mortgage funds, the level of real estate activity, the cost of
real estate, consumer confidence, the supply and demand of real estate,
inflation and general economic conditions.
The Company's second segment provides tax-free exchange services through
its two subsidiaries, Investors Title Exchange Corporation ("ITEC") and
Investors Title Accommodation Corporation ("ITAC"). ITEC serves as a qualified
intermediary in (S).1031 like-kind exchanges of real or personal property. ITAC
serves as exchange accommodation titleholder in reverse exchanges.
Although the economy in general suffered through a mild recession in 2001,
the real estate segment remained robust. The downward trend in interest rates
that began in 2000 continued last year and was the primary factor in the
relative strength in real estate activity. According to data published by
Freddie Mac, the monthly average 30-year fixed mortgage interest rates were
reported to be 6.97%, 8.05% and 7.44% in 2001, 2000 and 1999, respectively.
According to statistics from the National Association of Realtors, existing home
sales reached a record high of 5.3 million. This represents an increase of 3.5%
from 2000, and an increase of 1.7% over 1999. New and existing home sales were
6.2 million, 6 million and 6.1 million in 2001, 2000 and 1999, respectively.
During 2001, the monthly average 30-year fixed mortgage interest rates
began the year at 7.38%, declined to 6.62% in October and gradually increased to
end the year at 7.07%. The decline in rates contributed to improved housing
affordability, which helped home sales reach record levels. Lower interest rates
also fueled a surge in refinancing of existing mortgages. For 2001 in total,
refinancing volume was approximately $1.2 trillion, which was $1 trillion more
than the preceding year according to the Mortgage Bankers Association. The level
of mortgage refinancing and the number of existing home sales are primary
drivers of our premiums written.
Management cannot predict the future level of mortgage interest rates nor
the impact such rates will have on home sales, housing starts, mortgage lending
or other real estate activity. The Company strives to offset the cyclical nature
of the real estate market by increasing its market share. This effort includes
expanding into new markets primarily by continuing to develop agency
relationships, as well as improving market penetration with existing offices and
agents.
CREDIT RATING
ITIC has been recognized by two independent Fannie Mae approved actuarial
firms, Demotech, Inc. and Lace Financial Corporation, with rating categories of
"A Double Prime - unsurpassed financial stability" and "A - strong overall
financial condition."
NE-ITIC's financial stability has been recognized by two Fannie Mae
approved actuarial firms, Demotech, Inc. and Lace Financial Corporation, with
rating categories of "A Prime - unsurpassed financial stability" and "A - strong
overall financial condition."
RESULTS OF OPERATIONS
OPERATING REVENUES
A summary by segment of the Company's operating revenues is as follows:
2001 2000 1999
----------- ---- ----------- ---- ----------- ----
Title Insurance $59,815,041 96.9% $37,925,106 95.8% $43,942,374 98.2%
Exchange Services 1,018,353 1.7% 1,046,178 2.6% 723,854 1.6%
All Other 886,998 1.4% 626,130 1.6% 106,265 .2%
----------- ---- ----------- ---- ----------- ----
$61,720,392 100% $39,597,414 100% $44,772,493 100%
=========== =========== ===========
Title Insurance: Net premiums written increased 57.8% in 2001 and decreased 14%
and 3.4% in 2000 and 1999, respectively. The increase in sales in 2001 resulted
primarily from declining mortgage interest rates, which sparked a surge in
refinance activity. The number of policies and commitments issued in 2001 was
292,328, an increase of 48.5% compared with 196,836 in 2000. In 2000, the number
of policies and commitments issued decreased by 23.2% compared with 256,272 in
1999.
Shown below is a schedule of net premiums written for 2001, 2000 and 1999
in all states where our two insurance subsidiaries, Investors Title Insurance
Company and Northeast Investors Title Insurance Company, currently underwrite
insurance:
2001 2000 1999
------------ ------------ ------------
Alabama $ 90,369 $ - $ 1,003
Florida 10,530 - -
Georgia 318,284 209,300 499,194
Indiana 14,096 400,488 409,630
Iowa 31,770 - -
Kentucky 132,606 - 4,527
Maryland 1,023,093 525,177 597,470
Michigan 11,891,314 6,395,071 6,760,538
Minnesota 1,342,606 851,836 1,693,036
Mississippi 160,952 35,509 22,537
Nebraska 1,255,563 1,103,168 1,135,924
New York 3,384,451 770,082 542,497
North Carolina 21,767,115 15,825,323 19,713,637
Ohio 55,349 43,810 -
Pennsylvania 3,554,748 962,331 45,682
South Carolina 4,054,696 3,893,692 5,016,808
Tennessee 2,521,198 1,097,654 607,047
Virginia 6,847,586 4,772,838 6,143,420
West Virginia 1,314,747 1,127,715 895,745
Wisconsin 28,306 6,923 9,350
------------ ------------ ------------
Direct Premiums 59,799,379 38,020,917 44,098,045
Reinsurance Assumed 21,394 32,363 46,732
Reinsurance Ceded (340,228) (362,528) (325,212)
------------ ------------ ------------
Net Premiums Written $ 59,480,545 $ 37,690,752 $ 43,819,565
============ ============ ============
Branch net premiums written as a percentage of total net premiums written
were 36.7%, 42.2% and 45.2% in 2001, 2000 and 1999, respectively. Net premiums
written from branch operations increased 37.3% in 2001 compared with 2000 and
decreased 19.8% in 2000 compared with 1999.
Agency net premiums written as a percentage of total net premiums written
were 63.3%, 57.8% and 54.8% in 2001, 2000 and 1999, respectively. Net premiums
written from agency operations increased 72.8% compared with 2000 and decreased
9.2% in 2000 compared with 1999.
Exchange Services: Operating revenues from exchange transactions decreased 2.7%
in 2001 and increased 44.5% and 13.7% in 2000 and 1999, respectively. On
September 15, 2000, the Internal Revenue Service issued Revenue Procedure
2000-37, which provides a safe harbor for reverse exchanges. The original safe
harbors, which established procedures to follow for standard exchange
transactions, excluded the more complicated reverse transactions. The Company
has dedicated a separate subsidiary to assist clients in structuring this type
of exchange.
SEASONALITY
Title Insurance: Title insurance premiums are closely related to the level of
real estate activity and the average price of real estate sales. The
availability of funds to finance purchases directly affects real estate sales.
Other factors include consumer confidence, economic conditions, supply and
demand, mortgage interest rates and family income levels. Generally, the first
quarter has the least real estate activity, while the remaining quarters are
more active. Fluctuations in mortgage interest rates can cause shifts in real
estate activity outside of the normal seasonal pattern, especially as these
changes relate to refinance activity.
Exchange Services: Seasonal factors affecting the level of real estate activity
and the volume of title insurance premiums written will also affect the demand
for exchange services.
INVESTMENT INCOME
Investments are an integral part of the Company's business. In formulating
its investment strategy, the Company has emphasized after-tax income.
Investments in marketable securities have increased from funds retained in the
Company. The investments are primarily in debt securities, and to a lesser
extent, equity securities. The effective maturity of the majority of the
fixed-income investments is within 15 years.
As new funds become available, they are invested in accordance with the
Company's investment policy and corporate goals. Securities purchased may
include a combination of taxable fixed-income securities, tax-exempt securities
and equities. The Company strives to maintain a high quality investment
portfolio.
Investment income increased 8.4%, 16.2% and 18.6% in 2001, 2000 and 1999,
respectively. These increases were primarily attributable to increases in the
average investment portfolio balances.
EXPENSES
A summary by segment of the Company's operating expenses is as follows:
2001 2000 1999
----------- ----- ----------- ----- ------------ -----
Title Insurance $54,235,878 97.3% $36,925,644 97.3% $ 40,368,076 98.7%
Exchange Services 433,811 .8% 225,330 .6% 178,627 .4%
All Other 1,063,758 1.9% 818,331 2.1% 358,462 .9%
----------- ----- ----------- ----- ------------ -----
$55,733,447 100% $37,969,305 100% $ 40,905,165 100%
=========== =========== ============
On a combined basis, profit margins were 9.32%, 7.44% and 9.33% in 2001,
2000 and 1999, respectively. The increase of 57.8% in net premiums written
coupled with a smaller increase of only 46.8% in operating expenses contributed
to the increase in profit margin for 2001. Expenses increased due to the
increase in premium volume as well as an increase in costs associated with
entering and supporting new market areas.
Title Insurance: Profit margins for the title insurance segment were 8.69%,
6.02% and 8.39% in 2001, 2000 and 1999, respectively. The increase in premiums
written along with concerted efforts to contain costs contributed to
the improvement in the profit margin for 2001. In order to maintain and improve
margins, the Company strives to identify opportunities to refine operating
procedures and to implement programs designed to reduce expenses.
Commissions increased 81.5% in 2001 and decreased 9.2% and 2% in 2000 and
1999, respectively. Commission expense as a percentage of net premiums written
by agents was 74.6%, 71% and 71% for 2001, 2000 and 1999, respectively.
Commission rates vary geographically and may be influenced by state regulations.
The provision for claims as a percentage of net premiums written was 11.4%,
15.6% and 13.8% in 2001, 2000 and 1999, respectively. The provision reflects
actual payments of claims, net of recovery amounts, plus adjustments to the
specific and general claims reserves, the latter of which are actuarially
determined based on historical claims experience. Payments of claims, net of
recoveries, were $3,270,928, $3,785,355 and $3,524,064 in 2001, 2000 and 1999,
respectively.
The Company has continued to strengthen its reserves for claims. At
December 31, 2001, the total reserves for claims were $21,460,000. Of that
total, $3,788,091 was reserved for specific claims, and $17,671,909 was reserved
for claims for which the Company had no notice. Management relies on actuarial
techniques to estimate future claims by analyzing historical claim payment
patterns. Claims reserves are reviewed and certified as to their adequacy by
independent actuaries annually. There are no known claims which are expected to
have a materially adverse effect on the Company's financial position.
On a consolidated basis, salaries and employee benefits as a percentage of
net premiums written were 18.1%, 25.5% and 22.5% in 2001, 2000 and 1999,
respectively. Though salaries and employee benefits have risen in total, in 2001
the percentage to net premiums written decreased attesting to an improvement in
productivity. The title insurance segment's total salaries and employee benefits
accounted for 92.8%, 95.1% and 98.4% of total salaries for 2001, 2000 and 1999,
respectively. Overall office occupancy and operations as a percentage of net
premiums was 8.3%, 9.5% and 9.7% in 2001, 2000 and 1999, respectively. The title
insurance segment's total office occupancy and operations accounted for 95.2%,
93.5% and 94.9% in 2001, 2000 and 1999, respectively. In 2001, the improvement
in the percentage of overall office occupancy and operations to net premiums
reflects the increase in premium volume and the fixed cost nature of some of the
office occupancy and operations expenses.
Premium and retaliatory taxes increased 66.5% in 2001 and decreased 13% and
2.1% in 2000 and 1999, respectively, in direct proportion to the fluctuations in
premium volume.
Exchange Services: The exchange services segment's total operating expenses as a
percentage of the Company's total expenses were .8%, .6%, and .4% for 2001, 2000
and 1999, respectively. The increase in operating expenses was due to an
increase in staff.
NET INCOME
A summary by segment of the Company's net income is as follows:
2001 2000 1999
---- ----- ---- ----- ---- -----
Title Insurance $5,429,494 90.3% $2,434,088 77.5% $3,894,681 88.1%
Exchange Services 370,787 6.2% 514,921 16.4% 340,263 7.7%
All Other 208,717 3.5% 191,454 6.1% 185,450 4.2%
---------- --- ---------- --- ---------- ---
$6,008,998 100% $3,140,463 100% $4,420,394 100%
========== ========== ==========
On a consolidated basis, the Company reported an increase in net income of
91% in 2001 and a decrease in net income of 29% and 19% in 2000 and 1999,
respectively. The increase in 2001 was primarily attributable to increased
revenues and improved operating efficiencies resulting from expense control
procedures. The decreases in 2000 and 1999 were primarily due to decreases in
net premiums written of 14% and 3.4%, partially offset by increases in net
income of the exchange services segment and increases in investment income.
Title Insurance: Net income for the title insurance segment increased 123% in
2001 and decreased 37.5% and 22.1% in 2000 and 1999, respectively. The increase
in 2001 was primarily attributable to increased revenues and improved operating
efficiencies resulting from expense control procedures. Decreases in net
premiums written, coupled with the fixed nature of certain operating expenses
contributed to the decreases in net income for 2000 and 1999.
Exchange Services: The exchange services segment saw a net income decrease of
28% in 2001 and increases of 51.3% and 8.9% in 2000 and 1999, respectively. A
decrease in fee revenue coupled with an expansion of staff contributed to the
decrease in net income for the exchange services segment.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $8,723,704, $7,135,956 and
$7,738,524 in 2001, 2000 and 1999, respectively. The increase in 2001 is
primarily the result of the increase in net income compared with 2000.
As of December 31, 2001 and 2000, approximately $41,670,000 and $36,792,000
respectively, of the consolidated stockholders' equity represent net assets of
the Company's subsidiaries that cannot be transferred in the form of dividends,
loans or advances to the parent company under statutory regulations without
prior insurance department approval. The parent company's ability to pay
dividends and operating expenses is dependent upon funds received from the
insurance subsidiaries. The Company believes amounts available for transfer from
the insurance subsidiaries are adequate to meet the parent company's operating
needs.
On December 9, 1996, the Board of Directors approved the repurchase by the
Company of up to 150,000 shares of the Company's common stock from time to time
at prevailing market prices. A portion of the repurchases is to avoid dilution
to existing shareholders as a result of issuances of stock in connection with
stock options and stock bonuses. Pursuant to this approval, the Company
repurchased all 150,000 shares prior to 2001 at an average price of $19.37 per
share including 6,211 shares purchased at an average purchase price of $17.58
during 2000 and 99,645 shares at an average purchase price of $19.05 per share
during 1999.
On May 11, 1999, the Board of Directors approved the repurchase of an
additional 200,000 shares of the Company's common stock. Pursuant to this
approval, the Company repurchased all 200,000 shares at an average price of
$12.50 per share including 25,766 shares purchased at an average purchase price
of $14.73 during 2001 and 174,234 shares at an average purchase price of $12.18
per share during 2000.
On May 9, 2000, the Board of Directors approved the repurchase of an
additional 500,000 shares of the Company's common stock. Pursuant to this
approval, the Company repurchased 32,184 shares in the twelve months ended
December 31, 2001 at an average per share price of $14.75.
During the twelve months ended December 31, 2001, the Company repurchased
common stock for $854,138 and issued common stock totaling $95,134 in
satisfaction of stock option exercises, stock bonuses and other stock issuances.
In 2001, retained earnings had a net increase of $4,907,305, after repurchases
and issuances reduced retained earnings by $759,004.
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 its investment portfolio in the form of
short-term investments and other readily marketable securities.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary exposure to market risk relates to the impact of
adverse changes in interest rates and market prices of its investment portfolio.
Increases in interest rates diminish the value of fixed-income securities and
preferred stock and decreases in stock market values diminish the value of
common stocks held.
CORPORATE OVERSIGHT
The Company generates substantial investable funds from its two insurance
subsidiaries. In formulating and implementing policies for investing new and
existing funds, the Company has emphasized maximizing total after-tax return on
capital and earnings while ensuring the safety of funds under management and
adequate liquidity. The Company's Board of Directors oversees investment risk
management processes. The Company seeks to invest premiums and other income to
create future cash flows that will fund future claims, employee benefits and
expenses, and earn stable margins across a wide variety of interest rate and
economic scenarios. The Board has established specific investment policies that
define the overall framework for managing market and other investment risks,
including the accountabilities and controls over these activities. The Company
may use the following tools from time to time to manage its exposure to market
risk within defined tolerance ranges: 1) rebalance its existing asset portfolios
or 2) change the character of future investments.
INTEREST RATE RISK
Interest rate risk is the risk that the Company will incur economic losses
due to adverse changes in interest rates. This risk arises from the Company's
investments in interest-sensitive debt securities. These securities are
primarily fixed-rate municipal bonds and corporate bonds. The Company does not
purchase such securities for trading purposes. At December 31, 2001, the Company
had approximately $48 million in fixed-rate bonds. The Company manages the
interest rate risk inherent in its assets by monitoring its liquidity needs and
by targeting a specific range for the portfolio's duration or weighted average
maturity.
To determine the potential effect of interest rate risk on
interest-sensitive assets, the Company calculates the effect of a 10% change in
prevailing interest rates ("rate shock") on the fair market value of these
securities considering stated interest rates and time to maturity. Based upon
the information and assumptions the Company uses in its calculation, management
estimates that a 10% immediate, parallel increase in prevailing interest rates
would decrease the net fair market value of its debt securities by approximately
$5.5 million. The selection of a 10% immediate parallel increase in prevailing
interest rates should not be construed as a prediction by the Company's
management of future market events, but rather, to illustrate the potential
impact of such an event. To the extent that actual results differ from the
assumptions utilized, the Company's rate shock measures could be significantly
impacted. Additionally, the Company's calculation assumes that the current
relationship between short-term and long-term interest rates (the term structure
of interest rates) will remain constant over time. As a result, these
calculations may not fully capture the impact of nonparallel changes in the term
structure of interest rates and/or large changes in interest rates.
EQUITY PRICE RISK
Equity price risk is the risk that the Company will incur economic losses
due to adverse changes in a particular stock or stock index. At December 31,
2001, the Company had approximately $5.4 million in preferred and common stocks.
By statutory policy, the Company's maximum exposure to the equity market is
limited to 20% of the Company's statutorily admitted assets. Equity price risk
is addressed in part by varying the specific allocation of equity investments
over time pursuant to management's assessment of market and business conditions
and ongoing liquidity needs analysis. The Company's largest equity exposure is
declines in the S&P 500; its portfolio of equity instruments is similar to those
that comprise this index. Based upon the information and assumptions the Company
used in its calculation, management estimates that an immediate decrease in the
S&P 500 of 10% would decrease the net fair value of the Company's assets
identified above by approximately $540,000. The selection of a 10% immediate
decrease in the S&P 500 should not be construed as a prediction by the Company's
management of future market events, but rather, to illustrate the potential
impact of such an event. Since this calculation is based on historical
performance, projecting future price volatility using this method involves an
inherent assumption that historical volatility and correlation relationships
will remain stable. Therefore, the results noted above may not reflect the
Company's actual experience if future volatility and correlation relationships
differ from such historical relationships.
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 with 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 dependence of the Company
on key management personnel the loss of whom could have a material adverse
affect 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.
SELECTED QUARTERLY FINANCIAL DATA
2001 March 31 June 30 September 30 December 31
- ---- -------- ------- ------------ -----------
Net premiums written $11,437,725 $14,867,277 $14,730,034 $18,445,509
Investment income 685,877 672,054 661,803 720,546
Net income 840,124 1,444,546 1,604,444 2,119,884
Basic earnings per common share .33 .56 .63 .84
Diluted earnings per common share .32 .56 .61 .82
2000
- ----
Net premiums written $ 8,370,138 $10,065,032 $10,102,818 $ 9,152,764
Investment income 591,791 576,317 624,205 735,830
Net income 521,607 734,759 1,145,484 738,613
Basic earnings per common share .20 .28 .44 .29
Diluted earnings per common share .20 .28 .44 .29
Investors Title Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
As of December 31, 2001 and 2000
2001 2000
------------ ------------
Assets
Cash and cash equivalents $ 3,452,455 $ 4,268,713
Investments in securities (Notes 2 and 3):
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 2001: $7,255,507;
2000: $8,068,247) 7,152,336 7,957,405
Available-for-sale, at fair value (amortized cost: 2001: $39,118,999;
2000: $30,960,414) 40,438,390 31,710,705
Equity securities, at fair value (cost: 2001: $3,202,085; 2000: $2,434,367) 5,433,557 4,970,069
------------ ------------
Total investments 53,024,283 44,638,179
Premiums receivable (less allowance for doubtful accounts: 2001: $1,405,000;
2000: $725,000) 7,104,580 3,023,304
Accrued interest and dividends 725,757 616,652
Prepaid expenses and other assets 830,236 1,091,416
Property acquired in settlement of claims 294,510 204,117
Property, net (Note 4) 4,433,855 5,496,626
Deferred income taxes, net (Note 8) 354,024 -
------------ ------------
Total Assets (Note 13) $ 70,219,700 $ 59,339,007
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Reserves for claims (Note 6) $ 21,460,000 $ 17,944,665
Accounts payable and accrued liabilities 3,700,095 1,918,034
Commissions and reinsurance payables (Note 5) 281,961 222,748
Premium taxes payable 367,055 -
Current income taxes payable 138,821 24,069
Deferred income taxes, net (Note 8) - 39,842
------------ ------------
Total liabilities 25,947,932 20,149,358
------------ ------------
Commitments and Contingencies
(Notes 5, 9 and 11)
Stockholders' Equity (Notes 2, 3, 7 and 12):
Common stock-no par value (shares authorized 6,000,000; 2,855,744
and 2,855,744 shares issued; and 2,516,298 and 2,566,859 shares
outstanding 2001 and 2000, respectively) 1 1
Retained earnings 41,928,575 37,021,270
Accumulated other comprehensive income (net unrealized gain on investments)
(net of deferred taxes: 2001: $1,207,670; 2000: $1,117,615) (Note 8) 2,343,192 2,168,378
------------ ------------
Total stockholders' equity 44,271,768 39,189,649
------------ ------------
Total Liabilities and Stockholders' Equity $ 70,219,700 $ 59,339,007
============ ============
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Revenues:
Underwriting income:
Premiums written (Note 5) $59,820,773 $38,053,280 $44,144,777
Less-premiums for reinsurance ceded (Note 5) 340,228 362,528 325,212
- ----------- ----------- -----------
Net premiums written 59,480,545 37,690,752 43,819,565
Investment income - interest and dividends (Note 3) 2,740,280 2,528,143 2,175,671
Net realized gain on sales of investments (Note 3) 11,773 104,211 418,395
Other 2,239,847 1,906,662 952,928
----------- ----------- -----------
Total 64,472,445 42,229,768 47,366,559
----------- ----------- -----------
Operating Expenses:
Commissions to agents 28,074,489 15,470,852 17,045,552
Provision for claims (Note 6) 6,786,263 5,865,355 6,026,064
Salaries, employee benefits and payroll taxes (Notes 7 and 10) 10,747,424 9,602,572 9,842,328
Office occupancy and operations (Note 9) 4,911,912 3,568,760 4,238,753
Business development 1,859,039 1,515,428 1,662,485
Taxes, other than payroll and income 287,804 309,098 265,467
Premium and retaliatory taxes 1,250,177 750,697 862,414
Professional fees 910,586 749,047 782,331
Other 905,753 137,496 179,771
----------- ----------- -----------
Total 55,733,447 37,969,305 40,905,165
----------- ----------- -----------
Income Before Income Taxes (Note 13) 8,738,998 4,260,463 6,461,394
Provision For Income Taxes (Notes 8 and 13) 2,730,000 1,120,000 2,041,000
----------- ----------- -----------
Net Income (Notes 7 and 12) $ 6,008,998 $ 3,140,463 $ 4,420,394
=========== =========== ===========
Basic Earnings Per Common Share (Note 7) $ 2.35 $ 1.21 $ 1.59
=========== =========== ===========
Weighted Average Shares Outstanding - Basic 2,554,204 2,594,891 2,776,878
=========== =========== ===========
Diluted Earnings Per Common Share (Note 7) $ 2.31 $ 1.21 $ 1.59
=========== =========== ===========
Weighted Average Shares Outstanding - Diluted 2,599,714 2,601,283 2,786,282
=========== =========== ===========
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
Accumulated
Other
Comprehensive
Income (Net Total
Common Stock Retained Unrealized Gain Stockholders'
Shares Amount Earnings on Investments) Equity
--------- ------ -------- --------------- -------------
Balance,
January 1, 1999 2,809,123 $732,453 $ 33,050,508 $ 2,545,704 $36,328,665
Net income 4,420,394 4,420,394
Dividends ($.12 per share) (342,689) (342,689)
Purchases of 72,162 shares
of common stock (net of distributions) (72,162) (732,452) (816,600) (1,549,052)
Net unrealized gain on investments (1,355,578) (1,355,578)
--------- --------- ------------- ---------- -----------
Balance,
December 31, 1999 2,736,961 1 36,311,613 1,190,126 37,501,740
Net income 3,140,463 3,140,463
Dividends ($.12 per share) (342,689) (342,689)
Purchases of 170,102 shares
of common stock (net of distributions) (170,102) (2,088,117) (2,088,117)
Net unrealized gain on investments 978,252 978,252
---------- -------- ------------- --------- -----------
Balance,
December 31, 2000 2,566,859 1 37,021,270 2,168,378 39,189,649
Net income 6,008,998 6,008,998
Dividends ($.12 per share) (342,689) (342,689)
Purchases of 50,561 shares
of common stock (net of distributions) (50,561) (759,004) (759,004)
Net unrealized gain on investments 174,814 174,814
---------- -------- ------------ ---------- -----------
Balance,
December 31, 2001 2,516,298 $ 1 $ 41,928,575 $ 2,343,192 $44,271,768
========== ======== ============ =========== ===========
Investors Title Company and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Net income $ 6,008,998 $ 3,140,463 $ 4,420,394
----------- ----------- -----------
Other comprehensive income, before tax:
Unrealized gain (loss) on investments arising during the year 276,642 1,586,411 (1,635,511)
Less: reclassification adjustment for gains
realized in net income (11,773) (104,211) (418,395)
------------ ------------ ------------
Other comprehensive income (loss), before tax 264,869 1,482,200 (2,053,906)
------------ ------------ ------------
Income tax expense (benefit) related to unrealized
gain (loss) on investments arising during the year 94,058 539,380 (556,074)
Income tax expense related to reclassification
adjustment for net gain realized in net income (4,003) (35,432) (142,254)
----------- ------------ ------------
Net income tax expense (benefit) on other comprehensive
income 90,055 503,948 (698,328)
----------- ------------ ------------
Other comprehensive income (loss) 174,814 978,252 (1,355,578)
----------- ----------- -----------
Comprehensive income $ 6,183,812 $ 4,118,715 $ 3,064,816
=========== =========== ===========
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
---- ---- ----
Operating Activities:
Net income $ 6,008,998 $ 3,140,463 $ 4,420,394
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 1,412,023 794,689 470,843
Amortization (accretion), net 1,818 (1,312) 34,195
Provision (benefit) for losses on premiums receivable 680,000 (50,000) -
(Gain) loss on disposals of property (22,263) (4,523) 45,216
Net realized gain on sales of investments (11,773) (104,211) (418,395)
Provision (benefit) for deferred income taxes (483,921) 149,987 6,390
Provision for claims 6,786,263 5,865,355 6,026,064
Payments of claims, net of recoveries (3,270,928) (3,785,355) (3,524,064)
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets (4,699,594) 50,734 1,421,796
Increase in accounts payable and accrued liabilities 1,782,061 357,098 302,134
Increase in commissions and reinsurance payables 59,213 14,143 124,007
Increase (decrease) in premium taxes payable 367,055 (20,618) (257,269)
Increase (decrease) in current income taxes payable 114,752 729,506 (912,787)
------------- ------------- -------------
Net cash provided by operating activities 8,723,704 7,135,956 7,738,524
------------- ------------- -------------
Investing Activities:
Purchases of available-for-sale securities (11,473,160) (7,497,294) (6,036,921)
Purchases of held-to-maturity securities (600,000) - (3,626,300)
Proceeds from sales of available-for-sale securities 2,555,417 3,347,164 1,948,391
Proceeds from sales of held-to-maturity securities 1,406,463 1,907,214 808,886
Purchases of property (392,157) (484,151) (3,077,730)
Proceeds from disposals of property 65,168 33,825 24,520
------------ ------------- -------------
Net cash used in investing activities (8,438,269) (2,693,242) (9,959,154)
------------- ------------- -------------
Financing Activities:
Repurchases of common stock, net (792,666) (2,103,947) (1,706,271)
Exercise of options 33,662 15,830 157,219
Dividends paid (342,689) (342,689) (342,689)
------------- ------------- -------------
Net cash used in financing activities (1,101,693) (2,430,806) (1,891,741)
------------- ------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents (816,258) 2,011,908 (4,112,371)
Cash and Cash Equivalents, Beginning of Year 4,268,713 2,256,805 6,369,176
------------- ------------- -------------
Cash and Cash Equivalents, End of Year $ 3,452,455 $ 4,268,713 $ 2,256,805
============= ============= =============
Supplemental Disclosures:
Cash Paid During the Year for:
Income taxes (net of refunds) $ 3,101,000 $ 240,000 $ 2,947,000
============= ============= =============
Noncash Financing Activities:
Bonuses and fees totaling $61,472, $126,850 and $191,623 were paid for
the twelve months ended December 31, 2001, 2000 and 1999 respectively, by
issuance of the Company's common stock.
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation and Summary of Significant Accounting Policies
Description of Business - Investors Title Company's ("the Company") two
-----------------------
primary business segments are title insurance and exchange services. The
Company's title insurance segment, through its two subsidiaries, Investors Title
Insurance Company ("ITIC") and Northeast Investors Title Insurance Company
("NE-ITIC"), is licensed to insure titles to residential, institutional,
commercial and industrial properties. The Company issues title insurance
policies through approved attorneys from underwriting offices in North Carolina
and South Carolina, and through independent issuing agents in Alabama, Florida,
Georgia, Indiana, Iowa, Kentucky, Maryland, Michigan, Minnesota, Mississippi,
Nebraska, New York, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia,
West Virginia and Wisconsin. The majority of the Company's business is
concentrated in Michigan, New York, North Carolina, Pennsylvania, South Carolina
and Virginia. The Company's exchange segment, through its two subsidiaries,
Investors Title Exchange Corporation ("ITEC") and Investors Title Accommodation
Corporation ("ITAC"), acts as an intermediary in tax-free exchanges of property
held for productive use in a trade or business or for investments. ITEC's and
ITAC's income is derived from fees for handling exchange transactions.
Principles of Consolidation and Basis of Presentation - The accompanying
-----------------------------------------------------
consolidated financial statements include the accounts of the Company and its
wholly owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Significant Accounting Policies - The significant accounting policies of
-------------------------------
the Company are summarized below:
Cash and Cash Equivalents
For the purpose of presentation in the Company's statements of cash flows,
cash equivalents are highly liquid investments with original maturities of three
months or less.
Investments in Securities
Securities for which the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and reported at cost, adjusted for
amortization of premiums or accretion of discounts and other-than-temporary
declines in fair value. Securities held principally for resale in the near term
are classified as trading securities and recorded at fair values. Realized and
unrealized gains and losses on trading securities are included in other income.
Securities not classified as either trading or held-to-maturity are classified
as available-for-sale and reported at fair value, adjusted for
other-than-temporary declines in fair value, with unrealized gains and losses
reported as accumulated other comprehensive income. Fair values of all
investments are based on quoted market prices. Realized gains and losses are
determined on the specific identification method.
Property Acquired in Settlement of Claims
Property acquired in settlement of claims is carried at estimated
realizable value. Adjustments to reported estimated realizable values and
realized gains or losses on dispositions are recorded as increases or decreases
in claim costs.
Property and Equipment
Property and equipment are recorded at cost and are depreciated principally
under the straight-line method over the estimated useful lives (3 to 25 years)
of the respective assets. During 2001, the Company changed the estimated useful
lives of EDP equipment from 5 to 3 years. The change in estimated useful lives
is a change in accounting estimate and had an effect of decreasing net income
for the year by approximately $291,600.
Reserves for Claims
The reserves for claims and the annual provision for claims are established
based on: (1) estimated amounts required to settle claims for which notice has
been received (reported) and (2) the amount estimated to be required to satisfy
incurred claims of policyholders which may be reported in the future. Claims and
losses paid are charged to the reserves for claims (see Note 6).
Deferred Income Taxes
The Company provides for deferred income taxes (benefits) on temporary
differences between the financial statements' carrying values and the tax bases
of assets and liabilities.
Premiums Written and Commissions to Agents
Premiums are recorded and policies or commitments are issued upon receipt
of final certificates or preliminary reports with respect to titles. Title
insurance commissions earned by the Company's agents are recognized as expense
concurrently with premium recognition.
Earnings Per Common Share
The employee stock options discussed in Note 7 are considered outstanding
for the diluted earnings per common share calculation.
Comprehensive Income
The Company's other comprehensive income is solely comprised of its
unrealized holding gains on available-for-sale securities.
Escrows and Trust Deposits
As a service to its customers, the Company, through ITIC, administers
escrow and trust deposits representing earnest money received under real estate
contracts, undisbursed amounts received for settlement of mortgage loans and
indemnities against specific title risks. In administering tax-free exchanges,
ITEC serves as a qualified intermediary for exchanges, holding the net sales
proceeds from relinquished property to be used for purchase of replacement
property. ITAC serves as exchange accommodation titleholder and holds property
for exchangers in reverse exchange transactions. Cash and other assets held by
the Company for these purposes were approximately $67,713,000 and $35,748,000 as
of December 31, 2001 and 2000, respectively. These amounts are not considered
assets of the Company, and therefore, are excluded from the accompanying
consolidated balance sheets.
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities as amended by SFAS 138, Accounting
for Certain Derivative Instruments and Certain Hedging Activities. This
statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company adopted SFAS
133 on January 1, 2001. Adoption of SFAS 133 did not have a material impact on
the Company's financial statements.
In July 2001, FASB issued SFAS No. 141, Business Combinations, and SFAS No.
142, Goodwill and Other Intangible Assets. SFAS No. 141 requires the use of the
purchase method of accounting for all business acquisitions initiated after June
30, 2001, and the use of the pooling-of-interest method is no longer allowed.
Under SFAS No. 142, goodwill and intangible assets deemed to have infinite lives
will no longer be amortized but will be subject to annual impairment tests in
accordance with the statement. Other intangible assets will continue to be
amortized over their useful lives and reviewed for impairment in accordance with
SFAS No. 121, Accounting for Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. SFAS No. 142 is effective for fiscal years beginning
after December 15, 2001, thus the Company will be required to adopt the standard
on January 1, 2002. The Company is currently in the process of evaluating the
impact that this pronouncement will have on its 2002 financial statements which
is not expected to be material.
In August 2001, FASB issued SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. This statement addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. SFAS No. 144 is effective for fiscal
years beginning after December 15, 2001, thus the Company will be required to
adopt the standard on January 1, 2002. The Company is currently in the process
of evaluating the impact that this pronouncement will have on its 2002 financial
statements which is not expected to be material.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassification
Certain 2000 and 1999 amounts have been reclassified to conform with 2001
classifications.
2. STATUTORY RESTRICTIONS ON CONSOLIDATED STOCKHOLDERS' EQUITY AND INVESTMENTS
The Company has designated approximately $21,948,000 and $18,942,000 of
retained earnings as of December 31, 2001 and 2000, respectively, as
appropriated to reflect the required statutory premium reserve. See Note 8 for
the tax treatment of the statutory premium reserve.
As of December 31, 2001 and 2000, approximately $41,670,000 and $36,792,000
respectively, of consolidated stockholders' equity represents net assets of the
Company's insurance subsidiaries that cannot be transferred in the form of
dividends, loans or advances to the parent company under statutory regulations
without prior insurance department approval.
Bonds and certificates of deposit totaling approximately $3,170,000 and
$3,120,000 at December 31, 2001 and 2000, respectively, are deposited with the
insurance departments of the states in which business is conducted. These
investments are restricted as to withdrawal as required by law.
3. INVESTMENTS IN SECURITIES
The aggregate fair value, gross unrealized holding gains, gross unrealized
holding losses and amortized cost for securities by major security type at
December 31 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -----
December 31, 2001
- -----------------
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit $ 2,915,396 $ - $ - $ 2,915,396
Obligations of states and political subdivisions 4,236,940 120,282 17,111 4,340,111
----------- ----------- ----------- -----------
Total $ 7,152,336 $ 120,282 $ 17,111 $ 7,255,507
=========== =========== =========== ===========
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions $24,302,114 $ 722,428 $ 46,938 $24,977,604
Corporate debt securities 14,816,885 669,510 25,609 15,460,786
----------- ----------- ----------- -----------
Total $39,118,999 $ 1,391,938 $ 72,547 $40,438,390
=========== =========== =========== ===========
Equity securities, at fair value
Common stocks and nonredeemable preferred stocks $ 3,202,085 $ 2,335,603 $ 104,131 $ 5,433,557
=========== =========== =========== ===========
December 31, 2000
- -----------------
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit $ 3,681,260 $ - $ - $ 3,681,260
Obligations of states and political subdivisions 4,276,145 120,759 9,917 4,386,987
----------- ----------- ----------- -----------
Total $ 7,957,405 $ 120,759 $ 9,917 $ 8,068,247
=========== =========== =========== ===========
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions $19,232,729 $ 661,030 $ 18,770 $19,874,989
Corporate debt securities 11,727,685 177,434 69,403 11,835,716
----------- ----------- ----------- -----------
Total $30,960,414 $ 838,464 $ 88,173 $31,710,705
=========== =========== =========== ===========
Equity securities, at fair value -
Common stocks and nonredeemable preferred stocks $ 2,434,367 $ 2,583,687 $ 47,985 $ 4,970,069
=========== =========== =========== ===========
The scheduled maturities of fixed maturities at December 31, 2001 are as
follows:
Available-for-Sale Held-to-Maturity
----------------------------- ----------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ---------- -----------
Due in one year or less $ 1,409,029 $ 1,418,334 $2,915,396 $2,915,396
Due after one year through five years 13,853,540 14,387,279 413,789 419,269
Due after five years through ten years 15,693,760 16,265,527 1,854,795 1,933,075
Due after ten years 8,162,670 8,367,250 1,968,356 1,987,767
----------- ----------- ----------- -----------
Total $39,118,999 $40,438,390 $7,152,336 $7,255,507
=========== =========== =========== ===========
Earnings on investments and net realized gains for the years ended December
31 are as follows:
2001 2000 1999
----------- ----------- -----------
Fixed maturities $2,235,401 $1,838,463 $1,571,121
Equity securities 160,493 174,757 191,741
Invested cash and other short-term investments 293,729 497,653 401,060
Miscellaneous interest 50,657 17,270 11,749
Net realized gain 11,773 104,211 418,395
----------- ----------- -----------
Investment income $2,752,053 $2,632,354 $2,594,066
=========== =========== ===========
Gross realized gains and losses on sales of available-for-sale securities
for the years ended December 31 are summarized as follows:
2001 2000 1999
Gross realized gains: ----------- ----------- -----------
Obligations of states and political subdivisions $ 323 $ 280 $ 8,509
Common stocks and nonredeemable preferred stocks 79,766 501,942 520,429
----------- ----------- -----------
Total 80,089 502,222 528,938
Gross realized losses: ----------- ----------- -----------
Obligations of states and political subdivisions (155) (147,659) (563)
Common stocks and nonredeemable preferred stocks (68,161) (250,352) (109,980)
----------- ----------- -----------
Total (68,316) (398,011) (110,543)
----------- ----------- -----------
Net realized gain $ 11,773 $ 104,211 $ 418,395
=========== =========== ===========
4. PROPERTY
Property and equipment and estimated useful lives at December 31 are summarized
as follows:
2001 2000
------------ ------------
Land $ 1,107,582 $ 1,107,582
Office buildings and improvements (25 years) 1,617,387 1,609,305
Furniture, fixtures and equipment (3 to 10 years) 4,860,555 4,652,915
Automobiles (3 years) 468,201 447,651
------------ ------------
Total 8,053,725 7,817,453
Less accumulated depreciation (3,619,870) (2,320,827)
------------ ------------
Property and equipment, net $ 4,433,855 $ 5,496,626
============ ============
5. REINSURANCE
The Company assumes and cedes reinsurance with other insurance companies in
the normal course of business. Premiums assumed and ceded were approximately
$21,000 and $ 340,000, respectively for 2001, $32,000 and $363,000, respectively
for 2000, and $47,000 and $325,000, respectively for 1999. Ceded reinsurance is
comprised of excess of loss treaties, which protects against losses over certain
amounts. In the event that the assuming insurance companies are unable to meet
their obligations under these contracts, the Company is contingently liable.
6. RESERVES FOR CLAIMS
Changes in the reserves for claims for the years ended December 31 are
summarized as follows based on the year in which the policies were written:
2001 2000 1999
----------- ----------- -----------
Balance, beginning of year $17,944,665 $15,864,665 $13,362,665
Provision related to:
Current year 7,056,008 5,832,040 6,651,832
Prior years (269,745) 33,315 (625,768)
----------- ----------- -----------
Total provision charged to operations 6,786,263 5,865,355 6,026,064
----------- ----------- -----------
Claims paid, net of recoveries, related to:
Current year (241,263) (413,129) (1,142,117)
Prior years (3,029,665) (3,372,226) (2,381,947)
----------- ----------- -----------
Total claims paid, net of recoveries (3,270,928) (3,785,355) (3,524,064)
----------- ----------- -----------
Balance, end of year $21,460,000 $17,944,665 $15,864,665
=========== =========== ===========
In management's opinion, the reserves are adequate to cover claim losses which
might result from pending and possible claims.
7. COMMON STOCK AND STOCK OPTIONS
The Company has adopted Employee Stock Option Purchase Plans (the "Plans")
under which options to purchase shares (not to exceed 650,000 shares) of the
Company's stock may be granted to key employees of the Company at a price not
less than the market value on the date of grant. All options are exercisable at
10 to 20% per year beginning on the date of grant or one year from the date of
grant and generally expire in five to ten years. The Company applies Accounting
Principles Board Opinion No. 25 and related Interpretations in accounting for
its plans and, accordingly, no compensation cost has been recognized. Had
compensation cost for the Plans been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of Financial
Accounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation, the Company's net income and earnings per share would have been
reduced to the pro forma amounts indicated below:
2001 2000 1999
---------- ---------- -----------
Net income:
As reported $6,008,998 $3,140,463 $4,420,394
Pro forma 5,881,756 3,041,875 4,414,260
Basic earnings per common share:
As reported $ 2.35 $ 1.21 $ 1.59
Pro forma 2.30 1.17 1.59
Diluted earnings per common share:
As reported $ 2.31 $ 1.21 $ 1.59
Pro forma 2.26 1.17 1.58
The estimated weighted average grant-date fair value of options granted for the
years ended December 31 are as follows:
2001 2000 1999
---- ---- ----
Exercise price equal to market price on date of grant:
Weighted average exercise price $14.91 $12.07 $20.30
Weighted average grant-date fair value 7.19 5.85 9.55
Exercise price greater than market price on date of grant:
Weighted average exercise price $ - $ - $ -
Weighted average grant-date fair value - - -
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999, respectively: dividend yield
of .8%, .6% and .6%; expected volatility of 33%, 34% and 26%; risk-free interest
rates of approximately 5%, 5.5% and 6%; and expected lives of 5 to 10 years. A
summary of the status of the Company's plans as of December 31 and changes
during the years ended on those dates is presented below:
2001 2000 1999
------------------- -------------------- ---------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- --------- -------- ---------- -------- ---------
Outstanding at beginning of year 279,080 $15.05 82,320 $22.74 96,524 $19.93
Granted 31,300 14.91 212,500 12.07 9,700 20.30
Exercised (3,150) 10.53 (2,060) 7.60 (17,774) 8.44
Terminated (15,395) 15.27 (13,680) 16.29 (6,130) 16.16
------- -------- -------
Outstanding at end of year 291,835 $15.08 279,080 $15.05 82,320 $22.74
======= ======== =======
Options exercisable at year-end 126,145 $14.81 108,744 $14.89 27,890 $18.14
======= ======== =======
The following table summarizes information about fixed stock options outstanding
at December 31, 2001:
Options Outstanding at Year-End Options Exercisable at Year-End
-------------------------------------------- -------------------------------
Weighted- Weighted- Weighted-
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Contractual Life Price Exercisable Price
------------------------ ----------- ---------------- -------- ----------- --------
$10.00 - $12.00 99,550 6 $11.11 35,830 $11.08
13.06 - 14.80 121,359 4 13.24 67,459 13.11
15.00 - 17.50 18,390 9 15.36 2,520 15.47
20.00 - 22.78 10,696 7 20.99 3,626 21.12
25.50 - 29.15 41,840 6 28.21 16,710 28.21
-------- --------
$10.00 - $29.15 291,835 6 $15.08 126,145 $14.81
======== ========
The employee stock options are considered outstanding for the diluted
earnings per common share calculation. The total increase in the weighted
average shares outstanding related to these equivalent shares was 45,510, 6,392
and 9,404 for 2001, 2000 and 1999, respectively.
Options to purchase 57,626, 174,880 and 58,456 shares of common stock were
outstanding during 2001, 2000 and 1999, respectively, but were not included in
the computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares.
8. INCOME TAXES
At December 31, the approximate effect on each component of deferred income
taxes and liabilities is summarized as follows:
2001 2000
Deferred income tax assets:
----------- -----------
Recorded reserves for claims net of statutory premium reserves $ 1,027,881 $ 983,404
Accrued vacation 203,181 163,462
Reinsurance payable 23,681 75,012
Bad debt reserve 477,700 245,465
Other 8,000 65,627
----------- -----------
Total 1,740,443 1,532,970
----------- -----------
Deferred income tax liabilities:
Net unrealized gain on investments 1,207,670 1,117,615
Excess of tax over book depreciation 142,089 343,227
Discount accretion on tax-exempt obligations 35,661 49,426
Other 999 62,544
----------- -----------
Total 1,386,419 1,572,812
----------- -----------
Net deferred income tax assets (liabilities) $ 354,024 $ (39,842)
=========== ===========
A reconciliation of income tax as computed for the years ended December 31 at
the U.S. federal statutory income tax rate (34%) to income tax expense follows:
2001 2000 1999
----------- ----------- -----------
Anticipated income tax expense $ 2,971,259 $ 1,448,557 $ 2,196,874
Increase (reduction) related to:
State income taxes, net of the federal income tax benefit 47,413 48,408 35,483
Tax-exempt interest income (net of amortization) (466,408) (466,041) (477,926)
Other, net 177,736 89,076 286,569
----------- ----------- -----------
Provision for income taxes $ 2,730,000 $ 1,120,000 $ 2,041,000
=========== =========== ===========
The components of income tax expense for the years ended December 31 are
summarized as follows:
2001 2000 1999
Current:
----------- ----------- -----------
Federal $ 2,993,500 $ 889,038 $ 1,994,169
State 61,500 79,037 40,441
----------- ----------- -----------
Total 3,055,000 968,075 2,034,610
Deferred expense (benefit) (325,000) 151,925 6,390
----------- ----------- -----------
Total $ 2,730,000 $ 1,120,000 $ 2,041,000
=========== =========== ===========
For state income tax purposes, ITIC and NE-ITIC must pay only a gross premium
tax.
9. LEASES
Rent expense totaled approximately $545,000, $550,000, and $509,000 in
2001, 2000 and 1999, respectively. The future minimum lease payments under
operating leases that have initial or remaining noncancelable lease terms in
excess of one year as of December 31, 2001 are summarized as follows:
Year End:
2002 $428,056
2003 208,329
2004 107,561
2005 52,968
Thereafter -
--------
Total $796,914
========
10. EMPLOYEE BENEFIT PLAN
After three years of service, employees are eligible to participate in a
Simplified Employee Pension Plan. Contributions, which are made at the
discretion of the Company, are based on the employee's salary, but in no case
will such contribution exceed $25,500 per employee. All contributions are
deposited in Individual Retirement Accounts for participants. Contributions
under the plan were approximately $416,000, $393,000 and $337,000 for 2001, 2000
and 1999, respectively.
11. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries are involved in litigation on a number of
claims which arise in the normal course of business, none of which, in the
opinion of management, is expected to have a material adverse effect on the
Company's consolidated financial position.
12. STATUTORY ACCOUNTING
The consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
differ in some respects from statutory accounting practices prescribed or
permitted in the preparation of financial statements for submission to insurance
regulatory authorities.
Stockholders' equity on a statutory basis was $36,750,825 and $32,504,251
as of December 31, 2001 and 2000, respectively. Net income on a statutory basis
was $5,348,071, $3,911,764 and $5,129,055 for the twelve months ended December
31, 2001, 2000 and 1999, respectively.
13. SEGMENT INFORMATION
The Company's operations include two reportable segments: title insurance
services and tax-free exchange services.
The title insurance segment issues title insurance policies through
approved attorneys from underwriting offices and through independent issuing
agents. Title insurance policies insure titles to residential, institutional,
commercial and industrial properties.
The tax-free exchange segment acts as an intermediary in tax-free exchanges
of property held for productive use in a trade or business or for investments.
Revenues are derived from fees for handling exchange transactions.
Provided below is selected financial information about the Company's
operations by segment for the three years ended December 31, 2001, 2000 and
1999:
Income Provision
Operating Before For
Revenues Income Taxes Income Taxes Assets
------------ ------------ ------------ ------------
2001
- ----
Title Insurance $ 59,815,041 $ 7,779,494 $ 2,350,000 $ 64,928,091
Exchange Services 1,018,353 600,787 230,000 367,848
All Other 886,998 358,717 150,000 4,923,761
------------ ----------- ----------- ------------
Consolidated Total $ 61,720,392 $ 8,738,998 $ 2,730,000 $ 70,219,700
============ =========== =========== ============
2000
- ----
Title Insurance $ 37,925,106 $ 3,115,950 $681,862 $ 55,299,670
Exchange Services 1,046,178 838,326 323,405 724,020
All Other 626,130 306,187 114,733 3,315,317
------------ ----------- ----------- ------------
Consolidated Total $ 39,597,414 $ 4,260,463 $ 1,120,000 $ 59,339,007
============ =========== =========== ============
1999
- ----
Title Insurance $ 43,942,374 $ 5,641,471 $ 1,746,790 $ 51,102,222
Exchange Services 723,854 556,189 215,926 270,436
All Other 106,265 263,734 78,284 3,783,906
------------ ----------- ----------- ------------
Consolidated Total $ 44,772,493 $ 6,461,394 $ 2,041,000 $ 55,156,564
============ =========== =========== ============
Investors Title Company and Subsidiaries
REPORT OF INDEPENDENT AUDITORS
We have audited the accompanying consolidated balance sheets of Investors
Title Company (the "Company") and its subsidiaries as of December 31, 2001 and
2000, and the related consolidated statements of income, comprehensive income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Investors Title Company and its
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Raleigh, North Carolina
February 14, 2002
SHAREHOLDER INFORMATION
Common Stock Data
The common stock of the Company is traded under the symbol "ITIC" in the
over-the-counter market and is quoted on the National Market System of the
National Association of Securities Dealers Automated Quotation System
("NASDAQ"). The Company has approximately 1,500 shareholders of record,
including shareholders whose shares are held in street name. The following table
shows the 2001 and 2000 high and low sales prices reported on the NASDAQ
National Market System.
2001 2000
--------------- -----------------
High Low High Low
---- --- ---- ---
First Quarter $15.00 $15.00 $18.125 $10.25
Second Quarter $15.50 $14.80 $13.25 $ 9.813
Third Quarter $15.25 $14.97 $13.00 $10.125
Fourth Quarter $15.85 $15.42 $17.00 $10.016
The Company paid cash dividends of $.03 per share in each of the four quarters
during 2001 and 2000.
Market Makers
BB&T Investment Securities Knight Securities L.P. Sherwood Securities Corp.
Davenport & Co. of Virginia Spear, Leeds & Kellog