EX-13 3 dex13.txt PORTIONS OF 2001 ANNUAL REPORT 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