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 notes in 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
that 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 ss.1031 like-kind exchanges of real or personal property. ITAC
serves as exchange accommodation titleholder in reverse exchanges.
The downward trend in interest rates that began in 2000 continued into
2002, thus helping to sustain strong real estate activity. During the latter
part of 2002, mortgage rates dropped to near forty-year lows. A new record for
refinance origination was set in the United States in 2002 as steadily declining
interest rates created a high demand for mortgage refinancing. According to data
published by Freddie Mac, the monthly average thirty-year fixed mortgage
interest rates were reported to be 6.54%, 6.97% and 8.05% in 2002, 2001 and
2000, respectively. According to statistics from the National Association of
Realtors(R), existing home sales reached a record high of 5.6 million. This
represents an increase of 5.1% from 2001 to 2002 and an increase of 2.8% from
2000 to 2001. New and existing home sales were 6.5 million, 6.2 million and 6
million in 2002, 2001 and 2000, respectively.
During 2002, the monthly average thirty-year fixed mortgage interest rates
began the year at 7.07% and ended the year at 6.05%, which was the lowest
monthly average for the year. Low interest rates also resulted in increased
affordability of new and existing homes, setting new annual transaction records.
Total refinancing volume for 2002 was approximately $1.4 trillion, which was
$270 billion more than the preceding year according to the Mortgage Bankers
Association of America. 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 also has been recognized by 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:
2002 2001 2000
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Title insurance $68,539,235 97.7% $59,815,041 96.9% $37,925,106 95.8%
Exchange services 947,426 1.3% 1,018,353 1.7% 1,046,178 2.6%
All other 674,570 1.0% 886,998 1.4% 626,130 1.6%
- ---------------------------------------------------------------------------------------------------------------------------------
$70,161,231 100% $61,720,392 100% $39,597,414 100%
Title Insurance
Net premiums written increased 13.8% in 2002 over 2001 and 57.8% in 2001
over 2000. The increase in premiums in 2002 and 2001 resulted primarily from
declining mortgage interest rates, which continued to fuel refinance activity.
The number of policies and commitments issued in 2002 was 325,918, an increase
of 11.5% compared with 292,328 in 2001. In 2001, the number of policies and
commitments issued increased by 48.5% compared with 196,836 in 2000.
Shown below is a schedule of net premiums written for 2002, 2001 and 2000
in all states where our two title insurance subsidiaries, Investors Title
Insurance Company and Northeast Investors Title Insurance Company, currently
underwrite insurance:
State 2002 2001 2000
- --------------------------------------------------------------------------------
Alabama $ 654,742 $ 90,369 $ --
Arkansas 58,455 -- --
District of Columbia 2,441 -- --
Florida 1,745 10,530 --
Georgia 100,887 318,284 209,300
Illinois 57,977 -- --
Indiana 292,575 14,096 400,488
Iowa -- 31,770 --
Kentucky 1,282,552 132,606 --
Maryland 1,434,872 1,023,093 525,177
Michigan 9,520,086 11,891,314 6,395,071
Minnesota 1,180,045 1,342,606 851,836
Mississippi 1,011,547 160,952 35,509
Nebraska 1,353,233 1,255,563 1,103,168
New Jersey 46,901 -- --
New York 3,894,757 3,384,451 770,082
North Carolina 24,418,013 21,767,115 15,825,323
Ohio 47,912 55,349 43,810
Pennsylvania 4,466,476 3,554,748 962,331
South Carolina 5,640,755 4,054,696 3,893,692
Tennessee 3,260,696 2,521,198 1,097,654
Virginia 7,633,405 6,847,586 4,772,838
West Virginia 1,650,424 1,314,747 1,127,715
Wisconsin 10,776 28,306 6,923
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Direct Premiums 68,021,272 59,799,379 38,020,917
Reinsurance Assumed 20,740 21,394 32,363
Reinsurance Ceded (348,395) (340,228) (362,528)
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Net Premiums Written $ 67,693,617 $ 59,480,545 $ 37,690,752
- --------------------------------------------------------------------------------
Branch net premiums written as a percentage of total net premiums written
were 36.3%, 36.7% and 42.2% in 2002, 2001 and 2000, respectively. Net premiums
written from branch operations increased 12.4% in 2002 compared with 2001 and
increased 37.3 % in 2001 compared with 2000.
Agency net premiums written as a percentage of total net premiums written
were 63.7%, 63.3% and 57.8% in 2002, 2001 and 2000, respectively. Net premiums
written from agency operations increased 14.6% compared with 2002 and increased
72.8 % in 2001 compared with 2000.
Exchange Services
Operating revenues from exchange transactions decreased 7% from 2001 to
2002 and decreased 2.7% from 2000 to 2001 due to lower interest rates. 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. Historically, the first quarter has the least
real estate activity because fewer real estate transactions occur, while the
remaining quarters are more active. Refinance activity is generally less
seasonal, but it is subject to interest rate volatility. Fluctuations in
mortgage interest rates can cause shifts in real estate activity outside of the
normal seasonal pattern.
Exchange Services
Seasonal factors affecting the level of real estate activity and the
volume of title 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 2.4% from 2001 to 2002 and increased 8.4% from
2000 to 2001. 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:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Title insurance $60,039,502 97.5% $54,235,878 97.3% $36,925,644 97.3%
Exchange services 441,386 .7% 433,811 .8% 225,330 .6%
All other 1,097,610 1.8% 1,063,758 1.9% 818,331 2.1%
- ------------------------------------------------------------------------------------------------------------------
$61,578,498 100% $55,733,447 100% $37,969,305 100%
----------- ----------- -----------
On a combined basis, profit margins were 11.07%, 9.32% and 7.44% in 2002,
2001 and 2000, respectively. The increase of 13.8% in net premiums written
coupled with a smaller increase of only 10.5% in operating expenses contributed
to the increase in profit margin for 2002. 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 10.78%, 8.69% and
6.02% in 2002, 2001 and 2000, respectively. The increase in premiums written,
along with concerted efforts to contain costs, contributed to the improvements
in the profit margin for 2002 and 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 14% from 2001 to 2002 and increased 81.5% from 2000
to 2001. Commission expense as a percentage of net premiums written by agents
was 74.2%, 74.6% and 71% for 2002, 2001 and 2000, respectively. Commission rates
vary geographically and may be influenced by state regulations.
The provision for claims as a percentage of net premiums written was
10.2%, 11.4% and 15.6% in 2002, 2001 and 2000, respectively. This is due in
large part to the fact that we have intensified our analysis of the nature and
source of claims and used this information to foster the development of
preventive measures. The provision reflects actual payments of claims, net of
recovery amounts, plus adjustments to the specific and incurred but not reported
claims reserves, the latter of which are actuarially determined based on
historical claims experience. Payments of claims, net of recoveries, were
$2,701,822, $3,270,928 and $3,785,355 in 2002, 2001 and 2000, respectively.
The Company has continued to strengthen its reserves for claims. At
December 31, 2002, the total reserves for claims were $25,630,000. Of that
total, $3,563,247 was reserved for specific claims, and $22,066,753 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 or
operating results.
On a consolidated basis, salaries and employee benefits as a percentage of
net premiums written were 18.6%, 18.1% and 25.5% in 2002, 2001 and 2000,
respectively. Although salaries and employee benefits have risen in total in
2002 and 2001 compared with 2000, the percentage to net premiums written
decreased due to improvements in productivity and increased revenue from agency
operations. The title insurance segment's total salaries and employee benefits
accounted for 93.5%, 92.8% and 95.1% of total salaries for 2002, 2001 and 2000,
respectively. Overall office occupancy and operations as a percentage of net
premiums was 7.1%, 8.3% and 9.5% in 2002, 2001 and 2000, respectively. The title
insurance segment's total office occupancy and operations accounted for 92.9%,
95.2% and 93.5% in 2002, 2001 and 2000, respectively. In 2002, 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 10.3% from 2001 to 2002 and
increased 66.5% from 2000 to 2001 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 .7%, .8%, and .6% for 2002, 2001 and 2000,
respectively, which remained at comparable levels for the reporting periods.
Net Income
A summary by segment of the Company's net income is as follows:
2002 2001 2000
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Title insurance $7,706,961 95.0% $5,429,494 90.3% $2,434,088 77.5%
Exchange services 317,154 3.9% 370,787 6.2% 514,921 16.4%
All other 84,727 1.1% 208,717 3.5% 191,454 6.1%
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$8,108,842 100% $6,008,998 100% $3,140,463 100%
---------- ---------- ----------
On a consolidated basis, the Company reported an increase in net income of
34.9% and 91.3% in 2002 and 2001, respectively. The increases in 2002 and 2001
were primarily attributable to increased revenue, improved operating
efficiencies resulting from expense control procedures and improved claims
experience.
Title Insurance
Net income for the title insurance segment increased 41.9% from 2001 to
2002 and increased 123.1% from 2000 to 2001. The increases in 2002 and 2001 were
primarily attributable to increased revenues and improved operating efficiencies
resulting from expense control procedures.
Exchange Services
The exchange services segment saw a net income decrease of 14.5% from 2001
to 2002 and a decrease of 28% from 2000 to 2001. Decreases in fee revenue,
coupled with increases in salaries and employee benefits, contributed to the
decreases in net income for the exchange services segment for 2002 and 2001.
Liquidity and Capital Resources
Cash flows provided by operating activities were $12,290,577, $8,723,704
and $7,135,956 in 2002, 2001 and 2000, respectively. The increase in 2002 is
primarily the result of the increase in net income compared with 2001.
As of December 31, 2002 and 2001, approximately $46,730,000 and
$41,670,000, respectively, of the consolidated stockholders' equity represented
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 on 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 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 purchased 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 19,134 shares in the twelve months ended
December 31, 2002 and 32,184 shares in the twelve months ended December 31, 2001
at an average per share price of $18.81 and $14.75, respectively.
During the twelve months ended December 31, 2002, the Company repurchased
common stock for $359,902 and issued common stock totaling $236,086 in
satisfaction of stock option exercises, stock bonuses and other stock issuances.
In 2002, retained earnings had a net increase of $7,684,469, after repurchases
and issuances reduced retained earnings by $123,816.
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 rebalance its existing asset portfolios or change the character of future
investments from time to time to manage its exposure to market risk within
defined tolerance ranges.
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, 2002, the Company
had approximately $57 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
$2.3 million. The selection of 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,
2002, the Company had approximately $7.9 million in preferred and common stocks.
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 $488,000. 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.
Critical Accounting Policies
The Company's management makes various estimates when applying policies
affecting the preparation of the consolidated financial statements. Actual
results could differ from those estimates. Significant accounting policies of
the Company are discussed in Note 1 to the accompanying consolidated financial
statements. Following are those accounting policies considered critical to the
Company:
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.
Reserves for Claims
The total reserve for all reported and unreported losses the Company
incurred through December 31, 2002, is represented by the reserve for claims.
The Company's reserves for unpaid losses and loss adjustment expenses are
established using estimated amounts required to settle claims for which notice
has been received (reported) and the amount estimated to be required to satisfy
incurred claims of policyholders which may be reported in the future. Despite
the variability of such estimates, management believes that the reserves are
adequate to cover claim losses which might result from pending and future
claims. The Company continually reviews and adjusts its reserve estimates to
reflect its loss experience and any new information that becomes available.
Claims and losses paid are charged to the reserves for claims. Although
claims losses are typically paid in cash, occasionally claims are settled by
purchasing the interest of the insured or the claimant in the real property.
When this event occurs, the acquiring company carries assets at the lower of
cost or estimated realizable value, net of any indebtedness on the property.
Investments in Securities
Securities for which the Company has the intent and ability to hold to
maturity are classified as held-to-maturity and are 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. Other investments consist
primarily of investments in affiliates, which are accounted for under the equity
or cost method of accounting.
Recent and Pending Accounting Pronouncements
SFAS 141/142: In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Standards ("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 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. The Company
adopted SFAS No. 142 on January 1, 2002. Adoption of SFAS No. 142 did not have
any impact on the Company's financial statements.
SFAS 144: In August 2001, the 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 supercedes
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. The Company adopted SFAS No. 144 on January
1, 2002. Adoption of SFAS No. 144 did not have any impact on the Company's
financial statements.
SFAS 146: In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 addresses accounting
and reporting for costs associated with exit or disposal activities. SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized and measured initially at fair value when the liability
is incurred. SFAS No. 146 is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect the adoption of
this Statement to have a material effect on its financial statements.
SFAS 148: In December 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an Amendment of FASB
Statement No. 123. This Statement amends SFAS No. 123, Accounting for
Stock-Based Compensation, to provide alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for stock-based
employee compensation and the effect of the method used on reported results.
This Statement requires that companies having a fiscal year end after December
15, 2002, follow the prescribed format and provide the additional disclosures in
their annual reports. Adoption of SFAS 148 did not have a material impact on the
Company's financial statements.
FIN 45: FASB Interpretation No. 45, Guarantor's Accounting and Disclosures
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others became effective on December 31, 2002. This Interpretation addresses the
disclosure requirements for guarantees and indemnification agreements entered
into by the entity. The implementation of this pronouncement did not have any
effect on the Company's financial statements.
Selected Quarterly Financial Data
2002 March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------
Net premiums written $14,680,725 $14,871,197 $18,041,421 $20,100,274
Investment income 669,038 692,781 680,991 763,998
Net income 1,547,179 1,700,998 2,146,025 2,714,640
Basic earnings per common share .61 .68 .85 1.08
Diluted earnings per common share .60 .65 .83 1.04
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
Investors Title Company and Subsidiaries
Consolidated Balance Sheets
as of December 31, 2002 2001
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Assets
Cash and cash equivalents $ 3,781,961 $ 3,069,929
Investments in securities (Notes 2 and 3):
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 2002: $4,577,069; 2001: $5,010,237) 4,395,081 4,907,066
Available-for-sale, at fair value (amortized cost: 2002: $49,353,717; 2001: $41,746,795) 52,491,648 43,066,186
Equity securities, at fair value (cost: 2002: $6,393,289; 2001: $3,202,085) 7,884,928 5,433,557
Other investments 564,782 64,888
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Total investments 65,336,439 53,471,697
Premiums receivable (less allowance for doubtful accounts: 2002: $1,800,000; 2001: $1,405,000) 7,949,904 7,104,580
Accrued interest and dividends 720,902 725,757
Prepaid expenses and other assets 1,095,230 765,348
Property acquired in settlement of claims 749,562 294,510
Property, net (Note 4) 4,109,885 4,433,855
Deferred income taxes, net (Note 8) 893,263 354,024
- ---------------------------------------------------------------------------------------------------------------------------------
Total Assets $84,637,146 $70,219,700
=================================================================================================================================
Liabilities and Stockholders' Equity
Liabilities
Reserves for claims (Note 6) $25,630,000 $21,460,000
Accounts payable and accrued liabilities 4,780,865 3,700,095
Commissions and reinsurance payables (Note 5) 401,040 281,961
Premium taxes payable 268,972 367,055
Current income taxes payable 888,085 138,821
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Total liabilities 31,968,962 25,947,932
=================================================================================================================================
Commitments and Contingencies (Notes 5, 9 and 11)
Stockholders' Equity (Notes 2, 3, 7 and 12)
Class A Junior Participating preferred stock - no par value
(shares authorized 100,000; no shares issued) -- --
Common stock-no par value (shares authorized 10,000,000; 2,855,744 and
2,855,744 shares issued; and 2,515,804 and 2,516,298 shares outstanding
2002 and 2001, respectively) 1 1
Retained earnings 49,613,044 41,928,575
Accumulated other comprehensive income (net unrealized gain on investments)
(net of deferred taxes: 2002: $1,574,431; 2001: $1,207,670) (Note 8) 3,055,139 2,343,192
- ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 52,668,184 44,271,768
- ---------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $84,637,146 $70,219,700
=================================================================================================================================
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
Consolidated Statements of Income
for the Years Ended December 31, 2002 2001 2000
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Revenues
Underwriting income:
Premiums written (Note 5) $68,042,012 $59,820,773 $38,053,280
Less--premiums for reinsurance ceded (Note 5) 348,395 340,228 362,528
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Net premiums written 67,693,617 59,480,545 37,690,752
Investment income-interest and dividends (Note 3) 2,806,808 2,740,280 2,528,143
Net realized gain on sales of investments (Note 3) 279,301 11,773 104,211
Other 2,467,614 2,239,847 1,906,662
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Total 73,247,340 64,472,445 42,229,768
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Operating Expenses
Commissions to agents 32,006,188 28,074,489 15,470,852
Provision for claims (Note 6) 6,871,822 6,786,263 5,865,355
Salaries, employee benefits and payroll taxes (Notes 7 and 10) 12,591,736 10,747,424 9,602,572
Office occupancy and operations (Note 9) 4,810,283 4,911,912 3,568,760
Business development 2,161,928 1,879,224 1,521,120
Taxes, other than payroll and income 387,594 287,804 309,098
Premium and retaliatory taxes 1,378,880 1,250,177 750,697
Professional fees 772,096 910,586 749,047
- ------------------------------------------------------------------------------------------------------------------------------------
Other 597,971 885,568 131,804
- ------------------------------------------------------------------------------------------------------------------------------------
Total 61,578,498 55,733,447 37,969,305
- ------------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes 11,668,842 8,738,998 4,260,463
Provision for Income Taxes (Note 8) 3,560,000 2,730,000 1,120,000
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 8,108,842 $ 6,008,998 $ 3,140,463
====================================================================================================================================
Basic Earnings per Common Share (Note 7) $ 3.22 $ 2.35 $ 1.21
====================================================================================================================================
Weighted Average Shares Outstanding--Basic 2,517,328 2,554,204 2,594,891
====================================================================================================================================
Diluted Earnings per Common Share (Note 7) $ 3.12 $ 2.31 $ 1.21
====================================================================================================================================
Weighted Average Shares Outstanding--Diluted 2,597,979 2,599,714 2,601,283
====================================================================================================================================
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
Accumulated
Other Comprehensive
Common Stock Income (Net Total
-------------------- Retained Unrealized Gain Stockholders'
for the Years Ended December 31, 2002, 2001 and 2000 Shares Amount Earnings on Investments) Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
January 1, 2000 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 ($.12 per share) (342,689) (342,689)
Purchases of 50,561 shares of common
stock (net of distributions) (50,561) (759,004) (759,004)
Net unrealized gain on investments 174,814 174,814
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2001 2,516,298 1 41,928,575 2,343,192 44,271,768
Net income 8,108,842 8,108,842
Dividends ($.12 per share) (300,557) (300,557)
Purchases of 494 shares of common
stock (net of distributions) (494) (123,816) (123,816)
Net unrealized gain on investments 711,947 711,947
- ------------------------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 2002 2,515,804 $1 $49,613,044 $3,055,139 $52,668,184
====================================================================================================================================
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
Consolidated Statements of Comprehensive Income
for the Years Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 8,108,842 $ 6,008,998 $ 3,140,463
Other comprehensive income, before tax:
Unrealized gains on investments arising during the year 1,358,009 276,642 1,586,411
Less: reclassification adjustment for gains realized in net income (279,301) (11,773) (104,211)
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income, before tax 1,078,708 264,869 1,482,200
Income tax expense related to unrealized gains on investments arising during the year 461,723 94,058 539,380
Income tax expense related to reclassification adjustment for
gains realized in net income (94,962) (4,003) (35,432)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income tax expense on other comprehensive income 366,761 90,055 503,948
- ------------------------------------------------------------------------------------------------------------------------------------
Other comprehensive income 711,947 174,814 978,252
- ------------------------------------------------------------------------------------------------------------------------------------
Comprehensive income $ 8,820,789 $ 6,183,812 $ 4,118,715
====================================================================================================================================
See notes to consolidated financial statements.
Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
for the Years Ended December 31, 2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income $ 8,108,842 $ 6,008,998 $ 3,140,463
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 961,872 1,412,023 794,689
Amortization (accretion), net 25,022 1,818 (1,312)
Provision (benefit) for losses on premiums receivable 395,000 680,000 (50,000)
Net gain on disposals of property (15,485) (22,263) (4,523)
Net realized gain on sales of investments (279,301) (11,773) (104,211)
Provision (benefit) for deferred income taxes (906,000) (483,921) 149,987
Provision for claims 6,871,822 6,786,263 5,865,355
Payments of claims, net of recoveries (2,701,822) (3,270,928) (3,785,355)
Changes in assets and liabilities:
(Increase) decrease in receivables and other assets (2,020,403) (4,699,594) 50,734
Increase in accounts payable and accrued liabilities 1,080,770 1,782,061 357,098
Increase in commissions and reinsurance payables 119,079 59,213 14,143
Increase (decrease) in premium taxes payable (98,083) 367,055 (20,618)
Increase in current income taxes payable 749,264 114,752 729,506
- ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 12,290,577 8,723,704 7,135,956
- ------------------------------------------------------------------------------------------------------------------------------
Investing Activities
Purchases of available-for-sale securities (18,534,327) (11,194,289) (7,899,367)
Purchases of held-to-maturity securities (365,796) (600,000) --
Purchases of other securities (499,894) -- --
Proceeds from sales of available-for-sale securities 7,987,511 2,555,417 3,347,164
Proceeds from sales of held-to-maturity securities 880,751 1,406,463 1,907,214
Purchases of property (691,968) (392,157) (484,151)
Proceeds from disposals of property 69,551 65,168 33,825
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,154,172) (8,159,398) (3,095,315)
- ------------------------------------------------------------------------------------------------------------------------------
Financing Activities
Repurchases of common stock, net (303,146) (792,666) (2,103,947)
Exercise of options 179,330 33,662 15,830
Dividends paid (300,557) (342,689) (342,689)
- ------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (424,373) (1,101,693) (2,430,806)
- ------------------------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 712,032 (537,387) 1,609,835
Cash and Cash Equivalents, Beginning of Year 3,069,929 3,607,316 1,997,481
- ------------------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents, End of Year $ 3,781,961 $ 3,069,929 $ 3,607,316
==============================================================================================================================
Supplemental Disclosures
Cash Paid During the Year for
Income Taxes (net of refunds) $ 3,718,000 $ 3,101,000 $ 240,000
==============================================================================================================================
Noncash Financing Activities
Bonuses and fees totaling $56,757, $61,472 and $126,850 were paid for the twelve
months ended December 31, 2002, 2001 and 2000, 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 primarily through independent issuing agents in the
District of Columbia, Alabama, Arkansas, Florida, Georgia, Illinois, Indiana,
Kentucky, Maryland, Michigan, Minnesota, Mississippi, Nebraska, New Jersey, New
York, North Carolina, 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, Tennessee and Virginia. Investors Title Exchange Corporation ("ITEC")
acts as an intermediary in tax-free exchanges of property held for productive
use in a trade or business or for investments, while Investors Title
Accommodation Corporation ("ITAC") serves as an exchange accommodation
titleholder, offering a vehicle for accomplishing a reverse exchange when a
taxpayer must acquire replacement property before selling the relinquished
property. 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. The carrying amount of cash and cash equivalents is a reasonable
estimate of fair value due to the short-term maturity of these investments.
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. Other investments consist
primarily of investments in affiliates, which are accounted for under the equity
or cost method of accounting.
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 life of EDP equipment from 5 to 3 years. This accounting
estimate change had an effect of decreasing net income for the year by
approximately $291,600. Maintenance and repairs are charged to operating
expenses and improvements are capitalized.
Reserves for Claims
The total reserve for all reported and unreported losses the Company
incurred through December 31, 2002, is represented by the reserve for claims.
The Company's reserves for unpaid losses and loss adjustment expenses are
established using estimated amounts required to settle claims for which notice
has been received (reported) and the amount estimated to be required to satisfy
incurred claims of policyholders which may be reported in the future. Despite
the variability of such estimates, management believes that the reserves are
adequate to cover claim losses which might result from pending and future
claims. The Company continually reviews and adjusts its reserve estimates to
reflect its loss experience and any new information that becomes available.
Claims and losses paid are charged to the reserves for claims. Although
claims losses are typically paid in cash, occasionally claims are settled by
purchasing the interest of the insured or the claimant in the real property.
When this event occurs, the acquiring company carries assets at the lower of
cost or estimated realizable value, net of any indebtedness on the property.
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.
Stock Option Disclosure
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 the
intrinsic value method of Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, and related Interpretations in accounting for its
employee stock option 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:
2002 2001 2000
- -------------------------------------------------------------------------------------------
Net income:
As reported $8,108,842 $6,008,998 $3,140,463
Pro forma 7,983,301 5,881,756 3,041,875
Basic earnings per common share:
As reported $ 3.22 $ 2.35 $ 1.21
Pro forma 3.17 2.30 1.17
Diluted earnings per common share:
As reported $ 3.12 $ 2.31 $ 1.21
Pro forma 3.07 2.26 1.17
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 $63,642,000 and $67,713,000 as
of December 31, 2002 and 2001, respectively. These amounts are not considered
assets of the Company and, therefore, are excluded from the accompanying
consolidated balance sheets.
Recently Issued and Pending Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial 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 any impact on the Company's financial statements.
In July 2001, the 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. The Company adopted SFAS No. 142 on
January 1, 2002. Adoption of SFAS No. 142 did not have any impact on the
Company's financial statements.
In August 2001, the 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 supercedes 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. The Company
adopted SFAS No. 144 on January 1, 2002. Adoption of SFAS No. 144 did not have
any impact on the Company's financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS
No. 146 addresses accounting and reporting for costs associated with exit or
disposal activities. SFAS No. 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized and measured
initially at fair value when the liability is incurred. SFAS No. 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. The Company does not expect the adoption of this statement to have a
material effect on its financial statements.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based
Compensation--Transition and Disclosure--an Amendment of FASB Statement No. 123.
This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. This Statement requires that
companies having a year end after December 15, 2002, follow the prescribed
format and provide the additional disclosures in their annual reports. Adoption
of SFAS No. 148 did not have a material impact on the Company's financial
statements.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosures
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others became effective on December 31, 2002. This Interpretation addresses the
disclosure requirements for guarantees and indemnification agreements entered
into by the entity. The implementation of this pronouncement did not have any
effect on the Company's financial statements.
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 2001 and 2000 amounts have been reclassified to conform with 2002
classifications.
2. Statutory Restrictions on Consolidated Stockholders' Equity and Investments
The Company has designated approximately $25,467,000 and $21,948,000 of
retained earnings as of December 31, 2002 and 2001, 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, 2002 and 2001, approximately $46,730,000 and
$41,670,000, respectively, of consolidated stockholders' equity represents 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.
Bonds and certificates of deposit totaling approximately $3,420,000 and
$3,170,000 at December 31, 2002 and 2001, 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.
The National Association of Insurance Commissioners has established new
statutory accounting practices, which became effective January 1, 2001, subject
to adoption by the various state insurance departments. Adoption of the new
practices, as amended by state insurance departments, resulted in an adjustment
that increased surplus $1,000,000 as of January 1, 2001. The increase in surplus
related to deferred tax assets.
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 Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ------------------------------------------------------------------------------------------------------------------------------------
December 31, 2002
Fixed maturities--
Held-to-maturity, at amortized cost:
Certificates of deposit $ 1,035,924 $ -- $ -- $ 1,035,924
Obligations of states and political subdivisions 3,359,157 184,417 2,429 3,541,145
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,395,081 $ 184,417 $ 2,429 $ 4,577,069
====================================================================================================================================
Fixed maturities--
Available-for-sale, at fair value:
Obligations of states and political subdivisions $25,895,959 $1,879,795 $ -- $27,775,754
Corporate debt securities 13,975,517 1,258,136 -- 15,233,653
Other 9,482,241 -- -- 9,482,241
- ------------------------------------------------------------------------------------------------------------------------------------
Total $49,353,717 $3,137,931 $ -- $52,491,648
====================================================================================================================================
Equity securities, at fair value--
Common stocks and nonredeemable preferred stocks $ 6,393,289 $1,665,624 $173,985 $ 7,884,928
====================================================================================================================================
December 31, 2001
Fixed maturities--
Held-to-maturity, at amortized cost:
Certificates of deposit $ 670,126 $ -- $ -- $ 670,126
Obligations of states and political subdivisions 4,236,940 120,282 17,111 4,340,111
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 4,907,066 $ 120,282 $ 17,111 $ 5,010,237
====================================================================================================================================
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
Other 2,627,796 -- -- 2,627,796
- ------------------------------------------------------------------------------------------------------------------------------------
Total $41,746,795 $1,391,938 $ 72,547 $43,066,186
====================================================================================================================================
Equity securities, at fair value--
Common stocks and nonredeemable preferred stocks $ 3,202,085 $2,335,603 $104,131 $ 5,433,557
====================================================================================================================================
The scheduled maturities of fixed maturities at December 31, 2002 are as
follows:
Available-for-Sale Held-to-Maturity
- --------------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------
Due in one year or less $11,090,185 $11,121,498 $1,095,764 $1,096,778
Due after one year through five years 12,403,845 13,317,270 348,664 349,274
Due after five years through ten years 17,597,015 19,232,314 1,080,938 1,146,005
Due after ten years 8,262,672 8,820,566 1,869,715 1,985,012
- --------------------------------------------------------------------------------------------------------------------
Total $49,353,717 $52,491,648 $4,395,081 $4,577,069
====================================================================================================================
Earnings on investments and net realized gains for the years ended
December 31 are as follows:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Fixed maturities $ 2,397,307 $ 2,235,401 $ 1,838,463
Equity securities 225,913 160,493 174,757
Invested cash and other short-term investments 166,298 293,729 497,653
Miscellaneous interest 17,290 50,657 17,270
Net realized gain 279,301 11,773 104,211
- ---------------------------------------------------------------------------------------------------------------------
Investment income $ 3,086,109 $ 2,752,053 $ 2,632,354
=====================================================================================================================
Gross realized gains and losses on sales of available-for-sale securities
for the years ended December 31 are summarized as follows:
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Gross realized gains:
Obligations of states and political subdivisions $ 5,909 $ 323 $ 280
Debt securities of domestic corporations 6,820 -- --
Common stocks and nonredeemable preferred stocks 405,449 79,766 501,942
- ---------------------------------------------------------------------------------------------------------------------
Total 418,178 80,089 502,222
- ---------------------------------------------------------------------------------------------------------------------
Gross realized losses:
Obligations of states and political subdivisions (7,672) (155) (147,659)
Common stocks and nonredeemable preferred stocks (131,205) (68,161) (250,352)
- ---------------------------------------------------------------------------------------------------------------------
Total (138,877) (68,316) (398,011)
- ---------------------------------------------------------------------------------------------------------------------
Net realized gain $ 279,301 $ 11,773 $ 104,211
=====================================================================================================================
4. Property and Equipment
Property and equipment and estimated useful lives at December 31 are
summarized as follows:
2002 2001
- -----------------------------------------------------------------------------------------------------
Land $ 1,107,582 $ 1,107,582
Title plant 200,000 --
Office buildings and improvements (25 years) 1,625,544 1,617,387
Furniture, fixtures and equipment (3 to 10 years) 5,205,145 4,860,555
Automobiles (3 years) 399,169 468,201
- -----------------------------------------------------------------------------------------------------
Total 8,537,440 8,053,725
Less accumulated depreciation (4,427,555) (3,619,870)
- -----------------------------------------------------------------------------------------------------
Property and equipment, net $ 4,109,885 $ 4,433,855
=====================================================================================================
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 $348,000, respectively, for 2002, $21,000 and $340,000,
respectively, for 2001, and $32,000 and $363,000, respectively, for 2000. Ceded
reinsurance is comprised of excess of loss treaties, which protects against
losses over certain amounts. The Company remains liable to the insured for
claims under ceded insurance policies in the event that the assuming insurance
companies are unable to meet their obligations under these contracts.
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:
2002 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Balance, beginning of year $21,460,000 $17,944,665 $15,864,665
Provision related to:
Current year 9,714,121 7,056,008 5,832,040
Prior years (2,842,299) (269,745) 33,315
- -------------------------------------------------------------------------------------------------------------------
Total provision charged to operations 6,871,822 6,786,263 5,865,355
- -------------------------------------------------------------------------------------------------------------------
Claims paid, net of recoveries, related to:
Current year (395,688) (241,263) (413,129)
Prior years (2,306,134) (3,029,665) (3,372,226)
- -------------------------------------------------------------------------------------------------------------------
Total claims paid, net of recoveries (2,701,822) (3,270,928) (3,785,355)
- -------------------------------------------------------------------------------------------------------------------
Balance, end of year $25,630,000 $21,460,000 $17,944,665
===================================================================================================================
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:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------------
Net income:
As reported $8,108,842 $6,008,998 $3,140,463
Pro forma 7,983,301 5,881,756 3,041,875
Basic earnings per common share:
As reported $ 3.22 $ 2.35 $ 1.21
Pro forma 3.17 2.30 1.17
Diluted earnings per common share:
As reported $ 3.12 $ 2.31 $ 1.21
Pro forma 3.07 2.26 1.17
The estimated weighted average grant-date fair value of options granted
for the years ended December 31 are as follows:
2002 2001 2000
- ------------------------------------------------------------------------------------------------------------------
Exercise price equal to market price on date of grant:
Weighted average exercise price $19.40 $14.91 $12.07
Weighted average grant-date fair value 8.83 7.19 5.85
There are no stock options granted where the exercise price is greater
than the market price on the date of grant.
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 2002, 2001 and 2000, respectively: dividend yield
of .6%, .8% and .6%; expected volatility of 32%, 33% and 34%; risk-free interest
rates of approximately 3.9%, 5% and 5.5%; 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:
2002 2001 2000
-----------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 291,835 $15.08 279,080 $15.05 82,320 $22.74
Granted 28,650 19.40 31,300 14.91 212,500 12.07
Exercised (15,604) 11.49 (3,150) 10.53 (2,060) 7.60
Terminated (6,140) 15.04 (15,395) 15.27 (13,680) 16.29
- -------------------------------------------------------------------------------------------------------------------------
Outstanding at end of year 298,741 $15.68 291,835 $15.08 279,080 $15.05
======= ======= =======
Options exercisable at year-end 145,156 $15.22 126,145 $14.81 108,744 $14.89
======= ======= =======
The following table summarizes information about fixed stock options
outstanding at December 31, 2002:
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 87,965 5 $11.13 35,960 $11.12
13.06- 15.58 126,800 4 13.40 80,160 13.18
16.25- 19.35 17,740 9 18.35 2,215 18.07
20.00- 22.75 24,396 8 20.52 5,926 20.91
25.50- 29.15 41,840 5 28.21 20,895 28.21
------- -------
$10.00-$29.15 298,741 5 $15.68 145,156 $15.22
======= =======
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 80,651, 45,510
and 6,392 for 2002, 2001 and 2000, respectively.
Options to purchase 69,386, 57,626 and 174,880 shares of common stock were
outstanding during 2002, 2001 and 2000, 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
The components of income tax expense for the years ended December 31 are
summarized as follows:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------
Current:
Federal $4,425,000 $2,993,500 $ 889,038
State 41,000 61,500 79,037
- -----------------------------------------------------------------------------------------------------
Total 4,466,000 3,055,000 968,075
Deferred expense (benefit) (906,000) (325,000) 151,925
- -----------------------------------------------------------------------------------------------------
Total $3,560,000 $2,730,000 $1,120,000
=====================================================================================================
For state income tax purposes, ITIC and NE-ITIC must pay only a gross
premium tax.
At December 31, the approximate effect on each component of deferred
income taxes and liabilities is summarized as follows:
2002 2001
- ----------------------------------------------------------------------------------------------------
Deferred income tax assets:
Recorded reserves for claims net of statutory premium reserves $1,622,992 $1,027,881
Accrued vacation 246,911 203,181
Reinsurance and commissions payable 64,497 23,681
Bad debt reserve 612,000 477,700
Other 134,338 8,000
- ----------------------------------------------------------------------------------------------------
Total 2,680,738 1,740,443
- ----------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Net unrealized gain on investments 1,574,431 1,207,670
Excess of tax over book depreciation 152,739 142,089
Discount accretion on tax-exempt obligations 33,849 35,661
Other 26,456 999
- ----------------------------------------------------------------------------------------------------
Total 1,787,475 1,386,419
- ----------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 893,263 $ 354,024
====================================================================================================
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:
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Anticipated income tax expense $3,967,406 $2,971,259 $1,448,557
Increase (reduction) related to:
State income taxes, net of the federal income tax benefit 25,740 47,413 48,408
Tax exempt interest income (net of amortization) (461,300) (466,408) (466,041)
Other, net 28,154 177,736 89,076
- -----------------------------------------------------------------------------------------------------------------
Provision for income taxes $3,560,000 $2,730,000 $1,120,000
=================================================================================================================
9. Leases
The Company leases certain office facilities and equipment under operating
leases. Rent expense totaled approximately $643,000, $575,000 and $584,000 in
2002, 2001 and 2000, 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, 2002 are summarized as follows:
Year End:
2003 $464,328
2004 261,285
2005 123,383
- --------------------------------------------------------------------------------
Total $848,996
================================================================================
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 $40,000 annually per employee. All contributions
are deposited in Individual Retirement Accounts for participants. Contributions
under the plan were approximately $475,000, $416,000 and $393,000 for 2002, 2001
and 2000, respectively.
11. Commitments and Contingencies
The Company and its subsidiaries are involved in various routine legal
proceedings that are incidental to their business. All of these proceedings
arose in the ordinary course of business and, in the Company's opinion, any
potential liability of the Company or its subsidiaries with respect to these
legal proceedings will not, in the aggregate, be material to the Company's
consolidated financial condition or operations.
12. Statutory Accounting
The consolidated financial statements have been prepared in conformity
with generally accepted accounting principles 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 $44,597,876 and $36,750,825
as of December 31, 2002 and 2001, respectively. Net income on a statutory basis
was $8,466,841, $5,348,071 and $3,911,764 for the twelve months ended December
31, 2002, 2001 and 2000, respectively. The Company's subsidiaries complied with
all applicable state insurance department requirements at December 31, 2002.
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 and serves as exchange accommodation titleholder, holding property
for exchangers in reverse exchange transactions. 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, 2002, 2001 and
2000:
Income Provision
Operating Before for
Revenues Income Taxes Income Taxes Assets
- -------------------------------------------------------------------------------------------------------------
2002
Title insurance $68,539,235 $11,035,961 $3,329,000 $77,427,725
Exchange services 947,426 512,154 195,000 386,419
All other 674,570 120,727 36,000 6,823,002
- -------------------------------------------------------------------------------------------------------------
Consolidated total $70,161,231 $11,668,842 $3,560,000 $84,637,146
=============================================================================================================
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
=============================================================================================================
14. Stockholders' Equity
On November 12, 2002, the Company's Board of Directors amended the
Company's Articles of Incorporation, creating a series of Class A Junior
Participating Preferred Stock (the "Class A Preferred Stock"). The number of
shares constituting the Class A Preferred Stock is 100,000. The Class A
Preferred Stock is senior to common stock in dividends or distributions of
assets upon liquidations, dissolutions or winding up of the Company. Dividends
on the Class A Preferred Stock are cumulative and accrue from the quarterly
dividend payment date. Each share of Class A Preferred Stock entitles the holder
thereof to 100 votes on all matters submitted to a vote of shareholders of the
Company. These shares were reserved for issuance under the Shareholder Rights
Plan (the "Plan"), which was adopted on November 21, 2002, by the Company's
Board of Directors. Under the terms of the Plan, the Company's common stock
acquired by a person or a group buying 15% or more of the Company's common stock
would be diluted, except in transactions approved by the Board of Directors.
In connection with the Plan, the Company's Board of Directors declared a
dividend distribution of one right (a "Right") for each outstanding share of the
Company's common stock paid on December 16, 2002, to shareholders of record at
the close of business on December 2, 2002. Each Right entitles the registered
holder to purchase from the Company a unit (a "Unit") consisting of one
one-hundredth of a share of Class A Preferred Stock at a purchase price of $80
per Unit. Under the Plan, the Rights detach and become exercisable upon the
earlier of (1) 10 days following public announcement that a person or group of
affiliated or associated persons has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of the Company's
common stock, or (2) 10 business days following the commencement of, or first
public announcement of the intent of a person or group to commence, a tender
offer or exchange offer that would result in a person or group beneficially
owing 15% or more of such outstanding shares of the Company's common stock. The
exercise price, the kind and the number of shares covered by each right are
subject to adjustment upon the occurrence of certain events described in the
Plan.
If the Company is acquired in a merger or consolidation in which the
Company is not the surviving corporation, or the Company engages in a merger or
consolidation in which the Company is the surviving corporation and the
Company's common stock is changed or exchanged, or more than 50% of the
Company's assets or earning power is sold or transferred, the Rights entitle a
holder (other than the acquiring person or group) to buy, at the exercise price,
stock of the acquiring company having a market value equal to twice the exercise
price. Following an acquisition by such person or group of 50% or more of the
outstanding common stock, the Company's Board of Directors may exchange the
Rights (other than the Rights owned by such person or group), in whole or in
part, at an exchange ratio of one share of the Company's common stock, or one
one-hundredth of a share of Preferred Stock, per Right.
The Rights expire on November 11, 2012 and are redeemable upon action by
the Board of Directors at a price of $0.01 per right at any time before they
become exercisable. Until the Rights become exercisable, they are evidenced only
by the common stock certificates and are transferred with and only with such
certificates.
Report of Independent Auditors
Investors Title Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Investors
Title Company (the "Company") and its subsidiaries as of December 31, 2002 and
2001, 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, 2002. 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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002 in conformity with accounting principles generally accepted in the
United States of America.
/s/ DELOITTE & TOUCHE LLP
Raleigh, North Carolina
March 11, 2003
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 high and low sales prices reported on the NASDAQ National Market
System.
2002 2001
- ---------------------------------------------------------------------------
High Low High Low
First Quarter $19.92 $15.24 $17.00 $13.75
Second Quarter $20.90 $18.30 $16.00 $14.49
Third Quarter $20.20 $17.60 $17.44 $12.01
Fourth Quarter $22.96 $17.67 $17.00 $14.00
The Company paid cash dividends of $.03 per share in each of the four quarters
during 2002 and 2001.
Market Makers
Davenport & Co. of Virginia Knight Securities L.P.
Goldman, Sachs & Co.
Financial Highlights
For the Year 2002 2001 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums written $67,693,617 $59,480,545 $37,690,752 $43,819,565 $45,379,696
Revenues 73,247,340 64,472,445 42,229,768 47,366,559 48,476,263
Investment income 2,806,808 2,740,280 2,528,143 2,175,671 1,834,949
Net income 8,108,842 6,008,998 3,140,463 4,420,394 5,459,509
Per Share Data
- -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per
common share $ 3.22 $ 2.35 $ 1.21 $ 1.59 $ 1.95
Weighted average shares
outstanding--Basic 2,517,328 2,554,204 2,594,891 2,776,878 2,806,267
Diluted earnings per
common share $ 3.12 $ 2.31 $ 1.21 $ 1.59 $ 1.92
Weighted average shares
outstanding--Diluted 2,597,979 2,599,714 2,601,283 2,786,282 2,841,035
Cash dividends per share $ .12 $ .12 $ .12 $ .12 $ .12
At Year End
- -----------------------------------------------------------------------------------------------------------------------------------
Assets $84,637,146 $70,219,700 $59,339,007 $55,156,564 $51,597,812
Investments in securities 65,336,439 53,471,697 45,299,576 41,066,864 35,726,837
Stockholders' equity 52,668,184 44,271,768 39,189,649 37,501,740 36,328,665
Book value/share 20.93 17.59 15.27 13.70 12.93
Performance Ratios
- -----------------------------------------------------------------------------------------------------------------------------------
Net income to:
Average stockholders' equity 16.73% 14.40% 8.19% 11.97% 16.19%
Total revenues (profit margin) 11.07% 9.32% 7.44% 9.33% 11.26%