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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-11774
INVESTORS TITLE COMPANY
(Exact name of registrant as specified in its charter)
NORTH CAROLINA 56-1110199
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
121 NORTH COLUMBIA STREET, CHAPEL HILL, NORTH CAROLINA 27514
(Address of principal executive offices)
Registrant's telephone number, including area code: (919) 968-2200
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, NO PAR VALUE NONE
(Title of each class) (Name of the exchange on which registered)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. X
On February 15, 1997, the aggregate market value of the voting stock held by
those other than executive officers and directors of the registrant was
$33,780,013.
On February 15, 1997, the number of common shares outstanding was 2,767,629.
DOCUMENTS INCORPORATED BY REFERENCE
Documents Form 10-K Reference
- ---------- -------------------
Portions of Annual Report to Shareholders Part I, Items 1 and 2
for fiscal year ended December 31, 1996 Part II, Items 5 - 8
Part IV, Item 14
Portions of Proxy Statement (in connection
with Annual Meeting to be held on May 13, 1997) Part III, Items 10 - 13
Location of Exhibit Index: The Index to Exhibits
is contained in Part IV herein on page 14.
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PART I
ITEM 1. BUSINESS
General
Investors Title Company ("the Company") is a holding company which was
incorporated in the State of North Carolina on February 13, 1973. The Company
became operational June 24, 1976 when it acquired as a wholly owned subsidiary
Investors Title Insurance Company, a North Carolina corporation ("ITIC"), under
a plan of exchange of shares of common stock. On September 30, 1983, the Company
acquired as a wholly owned subsidiary Investors Title Insurance Company of South
Carolina, a South Carolina corporation, under a plan of exchange of shares of
common stock. On June 12, 1985, its name was changed from Investors Title
Insurance Company of South Carolina to Northeast Investors Title Insurance
Company ("NE-ITIC"). The Company's executive offices are at 121 North Columbia
Street, Chapel Hill, North Carolina 27514. The Company's telephone number
is (919) 968-2200.
Through its two wholly owned title insurance subsidiaries, ITIC and
NE-ITIC, the Company underwrites land title insurance for owners and mortgagees
as a primary insurer and as a reinsurer for other title insurance companies.
ITIC was incorporated in the State of North Carolina on January 28,
1972, and became licensed to write title insurance in the State of North
Carolina on February 1, 1972. Since that date it has primarily written land
title insurance as a primary insurer and as a reinsurer in the States of North
Carolina and South Carolina. In addition, the Company currently writes title
insurance through issuing agents or branch offices in the States of Arkansas,
Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota,
Mississippi, Nebraska, Pennsylvania, Tennessee and Virginia. Agents issue
policies for ITIC and may also perform other services such as acting as escrow
agents.
ITIC is also licensed to write title insurance in the District of
Columbia and the States of Alabama, Colorado, Connecticut, Delaware, Idaho,
Kansas, Louisiana, Massachusetts, Missouri, Montana, Nevada, New Jersey, North
Dakota, Oklahoma, Texas and West Virginia.
NE-ITIC was incorporated in the State of South Carolina on February 23,
1973, and became licensed to write title insurance in that State on November 1,
1973. It also currently writes title insurance as a primary insurer and as a
reinsurer in the State of New York.
Title insurance guarantees owners, mortgagees, and others with a lawful
interest in real property against loss by reason of encumbrances and defective
title to such property. The commitments and policies issued are the standard
American Land Title Association approved forms. Title insurance policies do not
insure against future risks. Most other types of insurance protect against
losses and events in the future.
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In the State of North Carolina, title insurance commitments and
policies are issued by the home office and branch offices. ITIC has 29 branch
offices. In 1996, four offices were opened in North Carolina.
In the ordinary course of business, ITIC and NE-ITIC reinsure certain
risks with other title insurers for the purpose of limiting their exposure and
also assume reinsurance for certain risks of other title insurers for which they
receive additional income. Reinsurance activities account for less than 1% of
total premium volume.
ITIC currently assumes primary risks up to $500,000, reinsures the next
$250,000 of risk with NE-ITIC, and all risks above $750,000 are then reinsured
with a non-related reinsurer in the industry.
NE-ITIC currently assumes primary risks up to $250,000, reinsures the
next $500,000 of risk with ITIC, and reinsures all amounts above $750,000 with a
non-related reinsurer in the industry.
Each insurance subsidiaries' risk retention limits are self-imposed and
more conservative than state insurance regulations.
In 1984, ITIC became the leading title insurer of North Carolina
property and has held this position in the marketplace since that time. ITIC's
financial stability was recognized by a Fannie Mae and Freddie Mac approved
actuarial firm with a rating of "A Double Prime - unsurpassed financial
stability".
NE-ITIC's financial stability was recognized by a Fannie Mae and
Freddie Mac approved actuarial firm with a rating of "A - exceptional financial
stability".
In 1988, the Company established Investors Title Exchange Corporation,
a wholly owned subsidiary ("ITEC"), to provide services in connection with
tax-free exchanges of like-kind property. ITEC acts as an intermediary in
tax-free exchanges of property held for productive use in a trade or business or
for investments, and its income is derived from fees for handling exchange
transactions.
South Carolina Document Preparation Company, a wholly owned subsidiary
("SCDP"), purchased the net assets of a former agency to provide services and
assistance to licensed members of the South Carolina Bar in the closing of real
estate transactions. SCDP was unprofitable and ceased these operations in 1995.
SCDP currently provides services in connection with tax-free exchanges of
like-kind property.
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Operations of Subsidiaries
ITIC offers primary title insurance coverage to owners and mortgagees
of real estate and reinsurance of title insurance risks to other title insurance
companies. Title insurance premiums written are for a one-time initial payment,
with no recurring premiums. Schedule A summarizes the insurance premiums written
during the years 1994 through 1996 by this subsidiary.
NE-ITIC offers primary title insurance coverage to owners and
mortgagees of real estate and reinsurance of title insurance risks to other
title insurance companies. Title insurance premiums written are for a one-time
initial payment with no recurring premiums. Schedule A summarizes the insurance
premiums written during the years 1994 through 1996 by this subsidiary.
ITEC offers services in connection with tax-free exchanges. Schedule A
summarizes the fees earned during the years 1994 through 1996.
SCDP had revenues of $3,712, $40,926 and $97,924 in 1996, 1995 and
1994, respectively.
For a description of Premiums Written geographically, see Management's
Discussion and Analysis of Results of Operations and Financial Condition in the
1996 Annual Report to Shareholders incorporated by reference in this Form 10-K
Annual Report.
Seasonality
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 had the least real estate activity, while the remaining quarters have been
more active. Fluctuations in mortgage interest rates can cause shifts in real
estate activity outside the normal seasonal pattern.
Marketing
ITIC's current and future marketing plan is to provide fast and
efficient service in the delivery of title insurance coverage through a home
office, branch offices, and issuing agents. In North Carolina, ITIC operates
through a home office and 27 branch offices. In South Carolina, ITIC operates
through a branch office and issuing agents located conveniently to customers
throughout the State. ITIC also operates through issuing agents located in
Arkansas, Florida, Georgia, Illinois, Indiana, Kentucky, Maryland, Michigan,
Minnesota, Mississippi, Nebraska, Pennsylvania, Tennessee and
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SCHEDULE A
INVESTORS TITLE INSURANCE COMPANY
PREMIUMS WRITTEN
For The Years Ended December 31
1996 1995 1994
$20,696,625 $15,547,967 $15,151,448
=========== =========== ===========
NORTHEAST INVESTORS TITLE INSURANCE COMPANY
PREMIUMS WRITTEN
For The Years Ended December 31
1996 1995 1994
$535,623 $384,856 $496,301
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INVESTORS TITLE EXCHANGE CORPORATION
FEES EARNED
For The Years Ended December 31
1996 1995 1994
$272,998 $241,281 $153,144
======== ======== =======
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Virginia. ITIC intends to establish branch and/or agency offices in the other
states in which it is licensed. A time frame has not been determined for any
additional expansion.
NE-ITIC currently operates through two agency offices in the State of
New York.
ITIC and NE-ITIC strive to provide superior service to their customers
and consider this an important factor in attracting and retaining customers.
Branch and corporate personnel strive to develop new business relationships to
increase market share. The Company's marketing efforts are also enhanced through
advertising.
Customers
The Company is not dependent upon any single customer, the loss of
which could have a material effect on the Company.
Reserves
The reserves for possible claims for financial reporting purposes are
established based on criteria discussed in Notes 1 and 5 to Consolidated
Financial Statements of the 1996 Annual Report to Shareholders incorporated by
reference in this Form 10-K Annual Report.
Regulations
The Company's two insurance subsidiaries are subject to examination at
any time by the licensing states. Title insurance companies are extensively
regulated under applicable state laws. The regulatory authorities possess broad
powers with respect to the licensing of title insurers and agents, rates,
investments, policy forms, financial reporting, reserve requirements, dividend
restrictions as well as examinations and audits of title insurers.
ITIC is domiciled in North Carolina and subject to North Carolina state
insurance regulations. Examinations are scheduled every three years by the North
Carolina Department of Insurance. ITIC was last examined by the North Carolina
Department of Insurance commencing on May 15, 1995 for the period January 1,
1992 through December 31, 1994 with no material deficiencies noted.
NE-ITIC is domiciled in South Carolina and subject to South Carolina
state insurance regulations. NE-ITIC was last examined by the South Carolina
Department of Insurance on November 14, 1994 for the period December 31, 1991
through December 31, 1993 with no material deficiencies noted. Examinations are
scheduled periodically by the South Carolina Department of Insurance.
In accordance with the insurance laws and regulations applicable to
title insurance in the State of North Carolina, ITIC has established and
maintains a statutory premium reserve for the protection of policyholders.
ITIC reserves an amount equal to 10% of current year premiums written. This
amount is then reduced annually by 5% and the net amount is accumulated in a
statutory premium reserve.
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NE-ITIC has established and maintains a statutory premium reserve as
required by the insurance laws and regulations of the State of New York. A $1.50
for each risk assumed under a policy or commitment plus one-eightieth of one
percent of the face amount of each commitment or policy, reduced by that portion
of the reserve established 15 years earlier are accumulated in a statutory
premium reserve for years up to 1985. In subsequent years the addition to the
reserve is calculated in the same manner but is reduced annually by 5%.
These statutory premium reserve additions are not charged to operations
for financial reporting purposes and changes in the statutory premium reserve
have no effect on net income of the companies for financial reporting purposes.
The Company is an insurance holding company, and is also subject to
regulation in the states in which its insurance subsidiaries do business. These
regulations, among other things, require insurance holding companies to register
and file certain reports and require prior regulatory approval of intercorporate
transfers including, in some instances, the payment of shareholders' dividends
by the insurance subsidiary. All states set requirements for admission to do
business, including minimum levels of capital and surplus. State insurance
departments have broad administrative powers and monitor the stability and
service of insurance companies.
In addition to the financial statements which are required to be filed
as part of this report and are prepared on the basis of generally accepted
accounting principles, the Company's insurance subsidiaries also prepare
financial statements in accordance with statutory accounting principles
prescribed or permitted by state regulations. Based upon the latter principles,
as of December 31, 1996, ITIC reported $14,286,267 of capital and surplus, and
net income of $2,957,206; and NE-ITIC reported $1,957,088 of capital and
surplus, and net income of $160,882.
ITIC and NE-ITIC both meet the minimum capital and surplus requirements
of the states in which they are licensed.
Competition
ITIC currently operates primarily in the State of North Carolina. There
are 19 title insurance companies operating in the State of North Carolina. In
1996 Investors Title had approximately 26% of the title insurance market in the
State, and ranked first in the amount of premiums written among companies doing
business in the State.
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ITIC's major competitors in North Carolina are Chicago Title Insurance
Company, Commonwealth Land Title Insurance Company, Fidelity National Title
Insurance Company of Pennsylvania, First American Title Insurance Company,
Lawyers Title Insurance Corporation, Old Republic National Title Insurance
Company and Stewart Title Guaranty Company. ITIC and NE-ITIC have a number of
competitors in each state where they operate. The title insurance industry is
highly competitive. Key elements which affect competition are price, expertise,
service, financial strength and size of the insurer.
Investments
The Company and its subsidiaries derive a substantial portion of their
income from investments in bonds (municipal and corporate), certificates of
deposit, and equity securities. The investment policy is designed to maintain a
high quality portfolio and maximize income. Some state laws impose certain
restrictions upon the types and amounts of investments that can be made by the
Company's insurance subsidiaries.
The Company, ITIC, NE-ITIC, ITEC and SCDP had investment income as set
out in the following table for the years 1992 through 1996:
FOR THE YEARS ENDED DECEMBER 31
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
Company $ 67,162 $16,238 $12,225 $10,529 $ 11,755
ITIC 1,161,795 1,007,255 926,976 842,367 733,676
NE-ITIC 121,007 111,939 103,600 100,576 99,691
ITEC 2,708 3,457 3,911 968 357
SCDP 260 1,747 0 0 0
TOTAL $1,352,932 $1,140,636 $1046,712 $954,440 $845,479
========== ========== ========= ======== ========
See Note 3 in the 1996 Annual Report to Shareholders incorporated
herein by reference for the major categories of investments, earnings by
investment categories, scheduled maturities, amortized cost, and market values
of investment securities.
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Employees
The Company, ITEC, NE-ITIC and SCDP have no paid employees. Officers of
the Company are full-time paid employees of ITIC, which had 132 full-time
employees and 17 part-time employees as of December 31, 1996.
Trademark
The Company's subsidiary, ITIC, registered its logo with the U.S.
Patent- Trademark Office in February, 1987. The loss of said registration, in
the Company's opinion, would not materially affect its business.
ITEM 2. PROPERTIES
The Company owns property located at 135-137 East Rosemary Street,
Chapel Hill, North Carolina. This property currently serves as a parking
facility for employees and guests of the Company.
The Company owns the office building and property located on the corner
of North Columbia and West Rosemary Streets in Chapel Hill, North Carolina which
serves as the Company's corporate headquarters. The building contains
approximately 23,000 square feet. The Company's principal subsidiary, ITIC,
leases office space in 30 locations throughout North Carolina, South Carolina,
Michigan and Virginia.
See Note 8 in the 1996 Annual Report to Shareholders incorporated
herein by reference for the amounts of future minimum lease payments. Each of
the office facilities occupied by the Company and its subsidiaries are in good
condition and adequate for present operations.
ITEM 3. LEGAL PROCEEDINGS
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 are expected to have a material adverse effect on the
Company's consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
No matters were submitted to a vote of security holders during the
fourth quarter of the fiscal year ended December 31, 1996.
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ITEM 4A. EXECUTIVE OFFICERS OF THE COMPANY
Identification of Executive Officers
The following table sets forth the executive officers of the Company as
of December 31, 1996. Each officer is appointed at the annual meeting of the
Board of Directors to serve until the next annual meeting of the board or until
his respective successor has been elected.
Position with Officer Term to
Name Age Registrant Since Expire
J. Allen Fine 62 President 1973 1997
and
Director
Elizabeth P. Bryan 36 Vice President 1987 1997
and Assistant Secretary
James A. Fine, Jr. 34 Vice President 1987 1997
W. Morris Fine 30 Vice President and 1992 1997
Treasurer
L. Dawn Martin 31 Vice President 1993 1997
and Assistant Secretary
Carl E. Wallace, Jr. 52 Vice President 1977 1997
and Secretary
J. Allen Fine, President and Chairman of the Board of Directors, is the
father of James A. Fine, Jr., Vice President of the Company, and W. Morris Fine,
also a Vice President and Treasurer of the Company.
The business experience of the Executive Officers of the Company is set
forth below:
J. Allen Fine was the principal organizer of ITIC and has been Chairman of the
Board of that Company, the Registrant, and NE-ITIC since their incorporation.
Mr. Fine served as President of ITIC until February, 1997 when he was named
Chief Executive Officer. Additionally, Mr. Fine serves as President of the
Company and President and Chief Executive Officer of NE-ITIC. Mr. Fine also
serves as Chairman of the Board
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of ITEC and SCDP. Mr. Fine is the father of James A. Fine, Jr., Vice President
of the Company, and W. Morris Fine, Vice President and Treasurer of the Company.
Elizabeth P. Bryan joined the Company in 1985 as Controller of the Company, ITIC
and NE-ITIC. In 1987 she was named Vice President of the Company, Vice
President- Accounting of ITIC and Vice President of NE-ITIC. In 1988, Ms. Bryan
was named Vice President, Treasurer and Director of ITEC. In 1996, she was named
Treasurer of NE-ITIC, and Vice President and Treasurer of SCDP. In 1997, Ms.
Bryan was named Assistant Secretary of the Company.
James A. Fine, Jr. joined the Company in 1986 as Investment Manager of ITIC and
NE- ITIC. In 1987 he was named Vice President of the Company and Vice
President-Finance of ITIC and Vice President of NE-ITIC. In 1988, he was named
President and Director of ITEC. In 1990, he was appointed Director of ITIC and
in 1991 was appointed Director of NE-ITIC. In 1994, Mr. Fine was named Vice
President and Director of SCDP. In 1996, he was named Executive Vice President
and Chief Financial Officer of NE-ITIC and President of SCDP. In 1997, Mr. Fine
was named Executive Vice President and Chief Financial Officer of ITIC. James A.
Fine, Jr. is the son of J. Allen Fine, President and Chairman of the Board of
the Company, and brother of W. Morris Fine, Vice President and Treasurer of the
Company.
W. Morris Fine joined the Company in July, 1992, and was subsequently named Vice
President of the Company, Vice President-Marketing of ITIC, and Vice President
of ITEC. In 1993, Mr. Fine was named Treasurer of the Company and ITIC; Vice
President and Director of NE-ITIC; and Director of ITIC and ITEC. In 1994, Mr.
Fine was named Treasurer and Director of SCDP. In 1995, he was named Treasurer
of NE- ITIC. In 1996, he was named Executive Vice President and Chief Operating
Officer of NE-ITIC. In 1997, Mr. Fine was named President and Chief Operating
Officer of ITIC. Mr. Fine graduated from the University of North Carolina at
Chapel Hill in 1988 and, upon graduation, was employed by Ernst & Young as a
Senior Auditor prior to joining Investors Title. W. Morris Fine is the son of J.
Allen Fine, President and Chairman of the Board of the Company, and brother of
James A. Fine, Jr., Vice President of the Company.
L. Dawn Martin joined the Company in February, 1991, and was subsequently named
Vice President, Assistant Secretary and Director of ITEC. In 1993, Ms. Martin
was named Vice President of the Company and Vice President-Human Resources of
ITIC. In 1994, Ms. Martin was named Assistant Secretary for both the Company and
ITIC, and Secretary of ITEC and SCDP. In 1995, she was appointed as Director of
ITIC and SCDP, and named Assistant Secretary of NE-ITIC. Ms. Martin was
previously employed by Elite Personnel, Inc., as a Personnel Coordinator and by
Judith Fox Temporaries, Inc., as a Senior Personnel Coordinator.
Carl E. Wallace, Jr. is Vice President and Secretary of the Company. Since 1974,
he has
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also held the positions of Vice President and Secretary of NE-ITIC, as well as
Vice President-Business Development, Secretary and Title Attorney for ITIC. In
1990, he was appointed Director of ITIC. In 1994, Mr. Wallace was named Vice
President and Director of SCDP.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The high and low sales prices for the common stock on NASDAQ and the
dividends paid per common share for each quarter in the last two fiscal years
are indicated under "Operations Summaries" in the 1996 Annual Report to
Shareholders and are incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for the five years ended December 31, 1996
is in the 1996 Annual Report to Shareholders under the caption "Financial
Highlights" and is incorporated herein by reference. The information should be
read in conjunction with the Financial Statements and Notes and the Management's
Discussion and Analysis of Results of Operations and Financial Condition which
are in the 1996 Annual Report to Shareholders and are incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Management's Discussion and Analysis of Results of Operations and
Financial Condition in the 1996 Annual Report to Shareholders is incorporated
herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data in the 1996 Annual
Report to Shareholders are incorporated herein by reference.
The financial statement schedules meeting the requirements of
Regulation S-X are shown as Schedules I, II, III, IV and V included on pages 19
through 26.
The supplementary data (Selected Quarterly Operating Results) in the
1996 Annual Report to Shareholders is incorporated herein by reference.
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in, nor disagreements with accountants on
accounting and financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
Information pertaining to Directors of the Company under the heading
"Election of Directors" in the Company's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated herein
by reference. Other information with respect to executive officers is contained
in Part I - Item 4(a) under the caption "Executive Officers of the Company".
ITEM 11. EXECUTIVE COMPENSATION
Information pertaining to executive compensation under the heading
"Executive Compensation" in the Company's definitive Proxy Statement relating to
the Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information pertaining to securities ownership of certain beneficial
owners and management under the heading "Ownership of Stock by Executive
Officers and Certain Beneficial Owners" in the Company's definitive Proxy
Statement relating to the Annual Meeting of Shareholders to be held on May 13,
1997 is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information pertaining to certain relationships and related
transactions under the heading "Compensation Committee Interlocks and Insider
Participation" in the Company's definitive Proxy Statement relating to the
Annual Meeting of Shareholders to be held on May 13, 1997 is incorporated herein
by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements in the 1996 Annual Report to
Shareholders are hereby incorporated by reference in Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1996 & 1995
Consolidated Statements of Income for the Years Ended December 31,
1996, 1995 & 1994
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1996, 1995, & 1994
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1995 & 1994
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following is a list of financial statement schedules and the Auditors'
Report on such schedules filed as part of this report on Form 10-K:
Investors Title Company and Subsidiaries:
Independent Auditors' Report on Financial Statement Schedules
Schedule Number Description
I Summary of Investments- Other Than Investments
in Related Parties
II Condensed Financial Information of Registrant
III Supplementary Insurance Information
IV Reinsurance
V Valuation and Qualifying Accounts
All other schedules are omitted, as the required information is not applicable
or required, or the information is presented in the consolidated financial
statements or the notes thereto.
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3. Exhibits
Page Number or
Exhibit Incorporation by
Number Description Reference to
(3)(i) Articles of Incorporation Exhibit 1 to Form 10,
dated June 12, 1984
(3)(ii) By-Laws Exhibit 2 to Form 10,
dated June 12, 1984
(3)(iii) Amendment to Bylaws adopted Page 27 of this report.
March 10, 1997
Management contract of compensatory plan or arrangement
(Exhibits (10)(i) - (10)(viii))
(10)(i) 1988 Incentive Stock Option Plan Exhibit 10 to Form
10-K, page 31, dated
December 31, 1989
(10)(ii) 1993 Incentive Stock Option Plan Exhibit 10 to Form
10-K, page 32, dated
December 31, 1993
(10)(iii) 1993 Incentive Stock Option Plan- Exhibit 10 to Form
W. Morris Fine 10-K, page 33, dated
December 31, 1993
(10)(iv) Employment Agreement dated Exhibit 10 to Form
February 9, 1984 with 10-K, page 14, dated
J. Allen Fine, President December 31, 1985
(10)(v) Form of Incentive Stock Option Exhibit 10(v) to Form
Agreement under 1993 Incentive 10-K, page 29, dated
Stock Option Plans December 31, 1994
(10)(vi) Form of Amendment dated Exhibit 10(vi) to Form
November 8, 1994 to Stock Option 10-Q, page 11, dated
Agreement dated as of November 13, March 31, 1995
1989
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(10)(vii) Form of Stock Option Agreement Exhibit 10(vii) to Form
dated November 13, 1989 10-Q, page 13, dated
March 31, 1995
(10)(viii) 1997 Stock Option and Restricted Page 29 of this report.
Stock Plan
(13) Portions of 1996 Annual Included herewith
Report to Shareholders
incorporated by reference
in this report as set forth
in Part II hereof.
(21) Subsidiaries of Registrant Exhibit 21 to Form
10-K, page 55, dated
December 31, 1994
(27) Financial Data Schedule Included herewith
(B) Reports on Form 8-K
No reports were filed on Form 8-K for the fourth quarter.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
INVESTORS TITLE COMPANY
By:/s/J. Allen Fine
J. Allen Fine
President, Chairman
Date March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities on the 26th day of March, 1997.
/s/J. Allen Fine /s/William J. Kennedy III
J. Allen Fine, President, Chairman William J. Kennedy III, Director
/s/Elizabeth P. Bryan /s/H. Joe King, Jr.
Elizabeth P. Bryan, Vice President H. Joe King, Jr., Director
(Principal Accounting Officer)
/s/William Morris Fine
William Morris Fine, Vice President Richard W. McEnally, Director
and Treasurer (Principal Financial Officer)
/s/Lillard H. Mount /s/James R. Morton
Lillard H. Mount, Director and James R. Morton, Director
General Counsel
/s/David L. Francis /s/A. Scott Parker, Jr.
David L. Francis, Director A. Scott Parker, Jr., Director
Loren B. Harrell, Jr., Director
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(Deloitte & Touche LLP
Letterhead appears here)
INDEPENDENT AUDITORS' REPORT
Investors Title Company:
We have audited the consolidated financial statements of Investors Title Company
(the "Company") and its subsidiaries as of December 31, 1996 and 1995, and for
each of the three years in the period ended December 31, 1996, and have issued
our report thereon dated January 29, 1997; such consolidated financial
statements and report are included in your 1996 Annual Report to Shareholders
and are incorporated herein by reference. Our audits also included the
consolidated financial statement schedules of the Company, listed in Item 14.
These financial statement schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
(Deloitte & Touche LLP signature appears here)
January 29, 1997
(Deloitte Touche
Footer appears here)
18
<PAGE>
SCHEDULE I
INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
As of December 31, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Amount at
which shown
in the
Type of Investment Cost(1) Market Value Balance Sheet
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed Maturities:
Bonds:
States, municipalities and political
subdivisions $15,595,059 $16,047,790 $15,892,518
Foreign governments 145,922 138,274 138,274
Public utilities 497,933 505,000 505,000
Convertibles and bonds with warrants
attached 10,000 11,300 11,300
All other corporate bonds 1,367,998 1,384,000 1,384,000
Certificates of deposit 169,004 169,004 169,004
------------------ -------------------- --------------------
Total fixed maturities 17,785,916 18,255,368 18,100,096
------------------ -------------------- --------------------
Equity Securities:
Common Stocks:
Public utilities 279,864 447,988 447,988
Banks, trust and insurance companies 555,147 1,144,692 1,144,692
Industrial, miscellaneous and all other 2,018,799 3,232,749 3,232,749
Nonredeemable preferred stocks 631,117 648,138 648,138
------------------ -------------------- --------------------
Total equity securities 3,484,927 5,473,567 5,473,567
------------------ -------------------- --------------------
Total investments per the consolidated balance sheet 21,270,843 23,573,663
------------------ --------------------
Short-term investments 3,833,153 3,833,153
------------------ --------------------
Total investments $25,103,996 $27,406,816
================== ====================
</TABLE>
(1) Fixed maturities are shown at amortized cost and equity securities are shown
at original cost.
19
<PAGE>
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Assets
Cash and Cash Equivalents $ 139,668 $ 41,370
----------- -----------
Equity Securities 90,000 --
----------- -----------
Investments in Affiliated Companies at Equity* 22,743,358 19,507,982
----------- -----------
Receivables:
Income taxes receivable 463,445 564,387
Other 45,232 58,839
----------- -----------
Total receivables 508,677 623,226
----------- -----------
Deferred Income Tax 25,688 18,572
----------- -----------
Prepaid Expenses and Other Assets 218,122 218,122
----------- -----------
Property-At Cost:
Land 782,582 782,582
Office buildings and improvements 1,293,726 1,293,726
Furniture, fixtures and equipment 82,138 139,158
----------- -----------
Total 2,158,446 2,215,466
Less accumulated depreciation 366,687 298,126
----------- -----------
Property, net 1,791,759 1,917,340
----------- -----------
Total Assets $25,517,272 $22,326,612
=========== ===========
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued liabilities $ 120,927 $ 140,507
Notes payable -- 362,000
----------- -----------
Total liabilities 120,927 502,507
----------- -----------
Stockholders' Equity:
Common stock-No par (shares authorized,
6,000,000; 2,855,744 and 2,855,744 shares issued and
2,767,830 and 2,790,633 shares outstanding 1996 and
1995, respectively) 1,650,350 1,650,350
Retained earnings 23,745,995 20,173,755
----------- -----------
Total stockholders' equity 25,396,345 21,824,105
----------- -----------
Total Liabilities and Stockholders' Equity $25,517,272 $22,326,612
=========== ===========
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
20
<PAGE>
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Investment income-interest and dividends $ 67,163 $ 19,430 $ 16,311
Rental income 350,331 304,931 321,057
Miscellaneous income 1,000 -- --
----------- ----------- -----------
Total 418,494 324,361 337,368
----------- ----------- -----------
OPERATING EXPENSES:
Office occupancy and operations 142,872 121,415 125,088
Business development 8,593 9,079 9,192
Taxes-other than payroll and income 49,579 47,032 39,632
Professional fees 33,684 18,251 8,864
Interest expense 7,692 43,191 76,633
Other expenses 36,231 92,769 33,324
----------- ----------- -----------
Total 278,651 331,737 292,733
----------- ----------- -----------
EQUITY IN NET INCOME OF AFFILIATED COS.* 3,745,375 3,138,446 3,103,224
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 3,885,218 3,131,070 3,147,859
----------- ----------- -----------
INCOME TAX EXPENSE (BENEFIT):
Current 48,797 (113,417) (108,656)
Deferred (7,116) (6,171) 129,656
----------- ----------- -----------
Total 41,681 (119,588) 21,000
----------- ----------- -----------
NET INCOME $ 3,843,537 $ 3,250,658 $ 3,126,859
=========== =========== ===========
EARNINGS PER COMMON SHARE $ 1.39 $ 1.16 $ 1.10
=========== =========== ===========
</TABLE>
* ELIMINATED IN CONSOLIDATION
SEE NOTES TO CONDENSED FINANCIAL STATEMENTS.
21
<PAGE>
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,843,537 $ 3,250,658 $ 3,126,859
Adjustments to reconcile net income to net cash provided
by operating activities:
Equity in net earnings of subsidiaries less dividends received of
$510,000, $856,828 and $772,774 in 1996, 1995 and 1994,
respectively (3,235,375) (2,281,618) (2,350,450)
Depreciation 68,560 67,793 58,821
Provision (benefit) for deferred income taxes (7,116) (6,171) 129,656
Decrease in receivables 13,607 1,216 68,987
(Increase) decrease in income taxes receivable-current 100,942 (311,222) 42,388
Decrease in prepaid expenses -- -- 860
Increase (decrease) in accounts payable and accrued liabilities (19,580) 39,861 (6,972)
----------- ----------- -----------
Net cash provided by operating activities 764,575 760,517 1,070,149
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of securities (30,000) -- --
Purchases of furniture and equipment (2,980) (69,605) (53,424)
----------- ----------- -----------
Net cash used in investing activities (32,980) (69,605) (53,424)
----------- ----------- -----------
FINANCING ACTIVITIES:
Payments on demand notes (362,000) (500,000) (1,000,000)
Dividends paid (271,297) (228,460) (228,460)
----------- ----------- -----------
Net cash used in financing activities (633,297) (728,460) (1,228,460)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 98,298 (37,548) (211,735)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 41,370 78,918 290,653
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 139,668 $ 41,370 $ 78,918
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
CASH PAID DURING THE YEAR FOR:
Interest $ 15,837 $ 35,046 $ 70,054
=========== =========== ===========
Income Taxes $ 371,193 $ 227,087 $ 149,372
=========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING ACTIVITIES:
Net unrealized gains (losses) on investments in common stocks were $0 in 1996,
1995 and 1994.
See notes to condensed financial statements.
During 1996, the Company exchanged assets with a value of $60,000 for an equity
investment.
</TABLE>
22
<PAGE>
SCHEDULE II
INVESTORS TITLE COMPANY (PARENT COMPANY)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. The accompanying condensed financial statements should be read in
conjunction with the consolidated financial statements and notes
thereto of Investors Title Company and Subsidiaries.
2. Cash dividends paid to Investors Title Company by its wholly owned
subsidiary, Investors Title Insurance Company, were $350,000, $836,828,
and $732,774 in 1996, 1995 and 1994, respectively. Cash dividends paid
to Investors Title Company by its wholly owned subsidiary, Investors
Title Exchange Corporation were $160,000, $20,000, and $40,000 in 1996,
1995 and 1994, respectively.
3. Notes payable consists of one note payable totaling $362,000 to
Investors Title Insurance Company. The note was paid off in March 1996.
4. Certain 1995 and 1994 amounts have been reclassified to conform with
1996 classifications.
23
<PAGE>
SCHEDULE III
INVESTORS TITLE COMPANY AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
FUTURE
POLICY OTHER
BENEFITS, POLICY
DEFERRED LOSSES, CLAIMS
POLICY CLAIMS AND NET
ACQUISITION AND LOSS UNEARNED BENEFITS PREMIUM INVESTMENT
SEGMENT COST EXPENSES PREMIUMS PAYABLE REVENUE INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1996
TITLE --- 5,086,065 --- 60,902 21,111,155 1,352,932
YEAR ENDED
DECEMBER 31, 1995
TITLE --- 3,836,065 --- 38,601 15,854,140 1,140,636
YEAR ENDED
DECEMBER 31, 1994
TITLE --- 3,635,850 --- 52,848 15,596,643 1,046,712
<CAPTION>
--------------------------------------------------------------------
BENEFITS AMORTIZATION
CLAIMS, OF DEFERRED
LOSSES AND POLICY OTHER
SETTLEMENT ACQUISITION OPERATING PREMIUMS
EXPENSES COSTS EXPENSES WRITTEN
--------------------------------------------------------------------
<S> <C> <C>
YEAR ENDED
DECEMBER 31, 1996
TITLE 2,939,741 --- 14,629,904 N/A
YEAR ENDED
DECEMBER 31, 1995
TITLE 1,429,660 --- 11,532,632 N/A
YEAR ENDED
DECEMBER 31, 1994
TITLE 1,446,068 --- 11,062,998 N/A
</TABLE>
24
<PAGE>
SCHEDULE IV
INVESTORS TITLE COMPANY AND SUBSIDIARIES
REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
CEDED TO ASSUMED FROM PERCENTAGE OF
GROSS OTHER OTHER NET AMOUNT
AMOUNT COMPANIES COMPANIES AMOUNT ASSUMED TO NET
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1996
TITLE INSURANCE PREMIUMS $21,187,689 $121,093 $44,559 $21,111,155 0.2%
YEAR ENDED
DECEMBER 31, 1995
TITLE INSURANCE PREMIUMS 15,903,006 78,683 29,817 15,854,140 0.2%
YEAR ENDED
DECEMBER 31, 1994
TITLE INSURANCE PREMIUMS 15,579,517 51,106 68,232 15,596,643 0.4%
</TABLE>
25
<PAGE>
SCHEDULE V
INVESTORS TITLE COMPANY AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995, AND 1994
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
BALANCE AT ADDITIONS ADDITIONS CHARGED
BEGINNING CHARGED TO TO OTHER DEDUCTIONS- BALANCE AT
DESCRIPTION OF PERIOD COSTS AND EXPENSES ACCOUNTS - DESCRIBE DESCRIBE END OF PERIOD
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996
PREMIUMS RECEIVABLE
VALUATION PROVISION $120,000 $80,000 $0 $0 $200,000
1995
PREMIUMS RECEIVABLE
VALUATION PROVISION 120,000 0 0 0 120,000
1994
PREMIUMS RECEIVABLE
VALUATION PROVISION 120,000 0 0 0 120,000
</TABLE>
26
<PAGE>
EXHIBIT 3(iii)
INVESTORS TITLE COMPANY
RESOLUTIONS TO BE CONSIDERED BY THE BOARD OF DIRECTORS
BYLAW AMENDMENTS
MARCH 10, 1997
WHEREAS, the Board of Directors of Investors Title Company (the
"Corporation") deems it to be in the best interest of the Corporation to amend
certain provisions of the Bylaws of the Corporation to conform such provisions
to, and to supply the Corporation with the flexibility afforded by, the North
Carolina Business Corporation Act; now then it is
RESOLVED, that the Bylaws of the Corporation be and hereby are amended
as follows:
A. Article I, Section 5 of the Bylaws is amended to delete said Section
5 in its entirety and to substitute in lieu thereof the following:
5. Notice of Meetings. Written or printed notice stating the time and
place of the meeting shall be delivered no fewer than 10 nor more than 60 days
before the date thereof, either personally or by mail, by or at the direction of
the President or the other person calling the meeting, to each shareholder of
record entitled to vote at such meeting and to each nonvoting shareholder
entitled to notice of the meeting. If the corporation is required by law to give
notice of proposed action to nonvoting shareholders and the action is to be
taken without a meeting pursuant to Section 9 of this Article, written notice of
such proposed action shall be delivered to such shareholders not less than 10
days before such action is taken.
If notice is mailed, such notice shall be effective when deposited in
the United States mail with postage thereon prepaid and correctly addressed to
the shareholder's address shown in the corporation's current record of
shareholders.
In the case of an annual or substitute annual meeting, the notice of
meeting need not specifically state the business to be transacted thereat unless
it is a matter with respect to which specific notice to the shareholders is
expressly required by the provisions of the North Carolina Business Corporation
Act. In the case of a special meeting, the notice of meeting shall specifically
state the purpose or purposes for which the meeting is called.
When a meeting is adjourned for more than 120 days after the date fixed
for the original meeting or if a new record date for the adjourned meeting is
fixed, notice of the
27
<PAGE>
adjourned meeting shall be given as in the case of an original meeting. When a
meeting is adjourned for 120 days or less and no new record date for the
adjourned meeting is fixed, it is not necessary to give notice of the adjourned
meeting other than by announcement at the meeting at which the adjournment is
taken.
B. Article VII, Section 3 of the Bylaws is amended to delete said
Section 3 in its entirety and to substitute in lieu thereof the following:
3. Fixing Record Date. For the purpose of determining the shareholders
entitled to notice of a meeting of shareholders, to demand a special meeting, to
vote, to take any other action, or to receive a dividend with respect to their
shares, the Board of Directors may fix in advance a date as the record date for
any such determination of shareholders. Such record date fixed by the Board of
Directors under this Section shall not be more than 70 days before the meeting
or action requiring a determination of shareholders.
If no record date is fixed for the determination of shareholders
entitled to notice of or to vote at a meeting of shareholders, or shareholders
entitled to a dividend, the close of the business day before the first notice is
delivered to shareholders or the date on which the Board of Directors authorizes
the dividend, as the case may be, shall be the record date for such
determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this Section, such determination shall
apply to any adjournment thereof unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
28
<PAGE>
INVESTOR'S TITLE COMPANY EXHIBIT 10(viii)
1997 STOCK OPTION AND RESTRICTED STOCK PLAN
ARTICLE I
GENERAL PROVISIONS
1. Purpose. This 1997 Stock Option and Restricted Stock Plan (the
"Plan") of Investor's Title Company and its subsidiaries (the "Company") is
intended to induce those persons who are in a position to contribute materially
to the success of the Company to remain with the Company, to offer them rewards
in recognition of their contributions to the Company and to offer them
incentives to continue to promote the Company's best interests.
2. Elements of the Plan. The Plan provides for the grant of stock
options pursuant to Article II of the Plan ("Options") and restricted stock
awards pursuant to Article III of the Plan ("Restricted Stock Awards"). Each
Option granted pursuant to the Plan shall be designated as provided in Article
II as either an Incentive Stock Option or a Nonqualified Stock Option. Incentive
Stock Options granted under the Plan are intended to qualify as such under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), and
shall be construed and interpreted to comply with the requirements of that
section and any regulations promulgated thereunder.
3. Administration. The Plan shall be administered by an option
committee (the "Committee") appointed by the Board of Directors of the Company
(the "Board"). The Committee shall be comprised of at least two members of the
Board, none of whom shall be a current employee of the Company, a former
employee of the Company that receives compensation for prior services rendered
during the taxable year, an individual receiving direct or indirect remuneration
from the Company, within the meaning of Section 162(m) of the Code and any
regulations promulgated thereunder, in any capacity other than as a director, or
a former or current officer of the Company. The Board from time to time may
appoint members of the Committee in substitution for or in addition to members
previously appointed, and may fill vacancies in the Committee, however caused.
Any action by the Committee shall be taken by majority vote at a meeting thereof
called in accordance with procedures adopted thereby, or by unanimous written
consent of the Committee. No member of the Board or of the Committee shall be
liable for any action or determination made in good faith with respect to the
Plan or any Option or Restricted Stock Award granted thereunder. In addition,
directors or former directors of the Company, including members or former
members of the Committee, shall be entitled to indemnification by the Company to
the extent permitted by applicable law and by the Company's Articles of
Incorporation or Bylaws with respect to any liability or expense arising out of
such person's participation in the administration of this Plan.
29
<PAGE>
4. Authority of Committee.
(a) Subject to the other provisions of this Plan, the
Committee shall have sole authority in its absolute discretion: to grant Options
and Restricted Stock Awards under the Plan; to determine the number of shares
subject to any Option or Restricted Stock Award under the Plan; to fix the
option price and the duration of each Option; to establish corporate or
individual performance or other vesting standards for Options or Restricted
Stock Awards; to establish any other terms and conditions of Options and
Restricted Stock Awards; and to accelerate the time at which any outstanding
Option may be exercised or the time when restrictions and conditions on
Restricted Stock Awards will lapse.
(b) Subject to the other provisions of this Plan, and with a
view to effecting its purpose, the Committee shall have sole authority in its
absolute discretion: to construe and interpret the Plan; to prescribe, amend,
and rescind rules and regulations relating to the Plan; to make any other
determinations relating to the Plan; and to do everything necessary or advisable
to administer the Plan.
(c) All decisions, determinations, and interpretations made by
the Committee shall be binding and conclusive on all optionees and holders of
Restricted Stock and on their legal representatives, heirs and beneficiaries.
5. Shares Subject to the Plan; Reservation of Shares. The maximum
aggregate number of shares of common stock of the Company available pursuant to
the Plan for the grant of Options and for Restricted Stock Awards, subject to
adjustments as provided in Section 7 of this Article I, shall be 250,000 shares
of the Company's common stock, no par value (the "Common Stock"). The total
number of shares that may be issued to any one Optionee pursuant to options
granted under the Plan shall not exceed an aggregate of 50,000 shares of Common
Stock. If any Option granted pursuant to the Plan expires or terminates for any
reason before it has been exercised in full, the unpurchased shares subject to
that Option shall again be available for the purposes of the Plan. If any shares
issued pursuant to a Restricted Stock Award are forfeited, they shall again be
available for the purposes of the Plan. The Company shall at all times reserve
and keep available such number of shares of its Common Stock as shall be
sufficient to satisfy the requirements of the Plan.
6. Eligibility. Options and Restricted Stock Awards may be granted
under the Plan to such key employees (including statutory employees within the
meaning of Section 3121(d)(3) of the Code), officers or directors of the
Company, whether or not employees, as the Committee shall select from time to
time in its discretion. Incentive Stock Options, however, may be granted under
the Plan only to key employees of the Company who qualify for the grant of an
Incentive Stock Option under Section 422 of the Code.
7. Adjustments. If the shares of Common Stock of the Company are
increased, decreased, changed into or exchanged for a different number or kind
of shares or securities through merger, consolidation, combination, exchange of
shares, other reorganization,
30
<PAGE>
recapitalization, reclassification, stock dividend, stock split or reverse stock
split in which the Company is the surviving entity, an appropriate and
proportionate adjustment shall be made in the maximum number and kind of shares
as to which Options and Restricted Stock Awards may be granted under this Plan.
A corresponding adjustment changing the number or kind of shares allocated to
unexercised Options or unvested Restricted Stock Awards that shall have been
granted prior to any such change shall likewise be made. Any such adjustment in
outstanding Options shall be made without change in the aggregate purchase price
applicable to the unexercised portion of any such Option, but with a
corresponding adjustment in the price for each share covered by the Option, and
shall be made in a manner as not to constitute a modification, within the
meaning of Section 424(h) of the Code, of outstanding Incentive Stock Options.
In making any adjustment pursuant to this Section 7, any fractional shares shall
be disregarded.
In the event of a change in the Common Stock of the Company as
presently constituted, which is limited to a change of all of its authorized
shares with par value into the same number of shares with a different par value
or without par value, the shares resulting from any such change shall be deemed
to be Common Stock within the meaning of the Plan.
The grant of an Option or a Restricted Stock Award under the Plan shall
not affect in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes in its capital or business
structure.
ARTICLE II
STOCK OPTIONS
Options granted pursuant to the Plan that are intended to qualify as
"incentive stock options" under Section 422 of the Code shall be designated as
such at the time of their grant and are referred to herein as Incentive Stock
Options. Options not intended to qualify as Incentive Stock Options are referred
to herein as Nonqualified Stock Options and shall be designated as such in the
applicable option agreement. Options granted hereunder shall be subject to the
terms, conditions and limitations set forth in Article I above and to the
following:
1. Terms and Conditions of Options. Options granted under the Plan
shall be evidenced by written agreements ("option agreements") in such form as
the Committee may from time to time approve. The terms and conditions of Options
granted under the Plan, including the satisfaction of corporate or individual
performance or other vesting standards, may differ one from another as the
Committee shall in its discretion determine, as long as all Options granted
under the Plan satisfy the following terms and conditions:
(a) Number of Shares; Designation. Each Option shall state the
number of shares of Common Stock to which it pertains and that it is either an
Incentive Stock Option or a Nonqualified Stock Option.
31
<PAGE>
(b) Option Price. Each Option shall state the option price,
which shall not be less than the fair market value (as hereinafter defined) per
share of the Common Stock at the time the option is granted (except that for
Incentive Stock Options granted to any employee who owns more than 10% of the
combined voting power of all classes of stock of the Company, the option price
shall not be less than 110% of fair market value). For the purpose of the Plan,
the "fair market value" per share of Common Stock on any date of reference shall
be the Closing Price of the Common Stock referred to in clauses (i), (ii) or
(iii) below, whichever appropriate, on the business day immediately preceding
such date. For this purpose, the Closing Price of the Common Stock on any
business day shall be: (i) if the Common Stock is listed or admitted for trading
on any United States national securities exchange, or if actual transactions are
otherwise reported on the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") or other consolidated
transaction reporting system, the last reported sale price of Common Stock on
such exchange or reporting system on which the Common Stock is principally
traded, as reported in any newspaper of general circulation; (ii) if clause (i)
is not applicable and the Common Stock is otherwise quoted on NASDAQ, or any
similar system of automated dissemination of quotations of securities prices in
common use, the mean between the closing high bid and low asked quotations for
the Common Stock on such system for such day; or (iii) if neither clause (i) or
(ii) is applicable, the mean between the high bid and low asked quotations for
the Common Stock as reported by the National Quotation Bureau, Incorporated if
at least two securities dealers have inserted both bid and asked quotations for
Common Stock on at least five of the preceding ten days. If neither clause (i)
nor clauses (ii) or (iii) are applicable, "fair market value" per share of
Common Stock shall be such value as shall be determined by the Committee in its
sole discretion, unless the Committee shall identify a different method for
determining fair market value in a fair and uniform manner.
(c) Exercise of Options. Each Option shall be exercisable in
one or more installments during its term, as provided in the applicable Stock
Option agreement, and the right to exercise may be cumulative. No Option may be
exercised for a fraction of a share of Common Stock. Unless otherwise provided
in the option agreement, the purchase price of any shares purchased shall be
paid in full in cash or by certified or official bank check payable to the order
of the Company or, if permitted by the applicable option agreement, by shares of
Common Stock, or by a combination of cash, check, and (if permitted) shares of
Common Stock. If any portion of the purchase price is paid in shares of Common
Stock, those shares shall be valued at their fair market value as of the day of
delivery, as determined in accordance with Section 1(b) of this Article II. No
optionee, or optionee's executor, administrator, legatee, or distributee, shall
be deemed to be a holder of any shares subject to an option unless and until a
stock certificate or certificates for such are issued to such person(s) under
the terms of the Plan.
(d) Written Notice Required. An Option granted pursuant to the
terms of this Plan shall be exercised when written notice of that exercise,
stating the number of shares with respect to which the Option is being
exercised, has been given to the Company at its principal office, from the
person entitled to exercise the Option and full payment for the shares with
respect to which the Option is exercised has been received by the Company.
32
<PAGE>
(e) Options Not Transferable. Options granted pursuant to this
Plan may not be sold, pledged, assigned or transferred in any manner other than
by will or the laws of descent or distribution and may be exercised during the
lifetime of an optionee only by that optionee.
(f) Duration of Options. Each Option and all rights thereunder
granted pursuant to the terms of this Plan shall expire on the date specified in
the applicable option agreement, but in no event shall any Option expire later
than ten (10) years from the date on which the Option is granted; provided,
however, that any Option granted to an employee who owns more than 10% of the
combined voting power of all classes of stock of the Company may not be
exercisable after the date five (5) years from the date the Option is granted.
In addition, each Option shall be subject to early termination as provided in
this Plan or the applicable option agreement.
(g) Termination of Employment, Disability or Death.
(i) If an optionee ceases to be employed by the
Company, or any parent or subsidiary corporation, for any reason other than
death or disability, any Option granted to such optionee that is unexercised
shall be terminated and forfeited; provided, however, that the applicable option
agreement may allow such Option to be exercised within a period not to exceed
three months after the date of termination of employment.
(ii) If an optionee becomes disabled within the
meaning of Section 22(e)(3) of the Code while employed by the Company, or any
parent or subsidiary corporation, the Option may be exercised at any time within
three months after the date of termination of employment due to disability,
unless a longer or shorter period is provided in the applicable option
agreement.
(iii) If an optionee dies while employed by the
Company, its parent or any subsidiary corporation, his Option shall expire one
year after the date of death, unless a longer or shorter period of exercise is
provided in the applicable option agreement. During this period, the Option may
be exercised, except as otherwise provided in the applicable option agreement,
by the person or persons to whom the optionee's rights under the Option shall
pass by will or by the laws of descent and distribution, but in no event may the
Option be exercisable more than ten years from the date of grant.
(iv) Unless otherwise provided in the applicable
option agreement, any Option that may be exercised for a period following
termination of the optionee's employment may be exercised only to the extent it
was exercisable immediately before such termination and in no event after the
Option would expire by its terms without regard to such termination.
(h) Reorganizations. If the Company shall be a party to any merger or
consolidation in which it is not the surviving entity or pursuant to which the
shareholders of the Company exchange their Common Stock, or if the Company shall
dissolve or liquidate or sell all or substantially all of its assets, all
Options outstanding under this Plan, unless otherwise provided in the applicable
option agreement, shall terminate on the effective date of such merger,
consolidation, dissolution, liquidation or sale; provided, however, that prior
to such
33
<PAGE>
effective date, the Committee may, in its discretion, make any or all
outstanding Options immediately exercisable, and may, with respect to Options
that are terminated as provided in this Section (h), (i) authorize a payment to
any optionee that approximates the economic benefit that he would realize if his
option were exercised immediately before such effective date, (ii) authorize a
payment in such other amount as it deems appropriate to compensate any optionee
for the termination of his Option, or (iii) arrange for the granting of a
substitute Option to any optionee.
2. Maximum Amount of Incentive Stock Options. The maximum aggregate
fair market value of Common Stock, determined as of the time the Incentive Stock
Option is granted, with respect to which Incentive Stock Options are exercisable
by an Optionee for the first time during any calendar year, under this Plan and
all other incentive stock option plans of the Company and any parent,
subsidiary, and predecessor corporations, shall not exceed $100,000.
ARTICLE III
RESTRICTED STOCK AWARDS
Restricted Stock Awards granted pursuant to this Article III shall be
subject to those terms, conditions and limitations set forth in Article I above
and to the following additional terms:
1. Grant of Restricted Shares. The Committee may cause the Company to
grant Restricted Stock Awards to eligible participants in such amounts as the
Committee, in its sole discretion, shall determine. Restricted Stock Awards may
be issued either alone or in addition to Options granted under the Plan.
2. Agreement. Each Restricted Stock Award shall be evidenced by a
written agreement in such form and containing such provisions not inconsistent
with the Plan as the Committee may from time to time approve. Each Restricted
Stock Award shall be effective as of the date so stated in the resolution of the
Committee making the award.
3. Restrictions and Conditions. Shares of Common Stock awarded under
this Article III shall be subject to such restrictions and conditions, if any,
as may be imposed by the Committee at the time of making the award. Such
restrictions and conditions may include, without limitation, the satisfaction of
specified performance criteria by the Company or by the grantee of the
Restricted Stock Award, or other vesting standards; provided, however, that no
award shall require any payment of cash consideration by the grantee.
Restrictions and conditions imposed on shares of Common Stock awarded under this
Article III may differ from one award to another as the Committee shall, in its
discretion, determine. Any restrictions and conditions shall lapse, in whole or
in part, as provided in the agreement evidencing the Restricted Stock Award, but
must lapse, if at all, not later than ten (10) years from the date of the award.
Shares with respect to which no restrictions or conditions are imposed
and shares with respect to which the restrictions and conditions imposed thereon
have lapsed are hereinafter
34
<PAGE>
referred to as "Unrestricted Shares." Shares with respect to which the
restrictions and conditions imposed thereon have not lapsed are hereinafter
referred to as "Restricted Shares."
4. Rights as a Shareholder. A holder of Unrestricted Shares shall have
all of the rights of a shareholder of the Company with respect thereto and shall
be entitled to receive a stock certificate evidencing such Unrestricted Shares.
Such certificate shall be issued without legend, except to the extent that a
legend may be necessary for compliance with applicable securities laws.
A holder of Restricted Shares shall be the record owner thereof and
shall, subject to the restrictions and conditions, have all of the rights of a
shareholder with respect thereto, including, but not limited to, the right to
receive all dividends paid on the Common Stock (ordinary or extraordinary,
whether in cash, securities or other property) and the right to vote the
Restricted Shares; provided, however, that each stock certificate evidencing
Restricted Shares shall bear a conspicuous legend stating that the shares
evidenced thereby are subject to restrictions as to transferability as provided
in Section 6 of this Article III and to such other restrictions and conditions
as have been imposed by the Committee, and each such certificate shall be
deposited by the Holder with the Company or its designee together with a stock
power endorsed in blank.
5. Forfeiture. Unless otherwise provided in the applicable Restricted
Stock Award agreement, upon termination of the grantee's employment with the
Company or any of its subsidiaries for any reason whatsoever (voluntarily or
involuntarily, with or without cause), all Restricted Shares then owned by him
shall automatically and without any action on his part be forfeited and
transferred to the Company.
6. Transferability. Restricted Shares held by a grantee shall not be
subject to alienation, sale, transfer, assignment, pledge, attachment or
encumbrances of any kind, and any attempt to alienate, sell, transfer, assign,
pledge or otherwise encumber any Restricted Shares shall be void. In addition,
the Company may impose such restrictions on the transfer of Unrestricted Shares
as it deems necessary or desirable to assure compliance with all applicable
federal and state securities laws.
7. Adjustments. If there is a change in the Common Stock of the Company
as described in Article I, Section 7 of this Plan, any stock or other securities
or other property issued with respect to Restricted Shares shall be subject to
the same restrictions and conditions as are applicable to such Restricted
Shares, and the certificates or other evidence of such stock, securities or
other property, together with an appropriate stock power or power of attorney,
shall be delivered to the Company or its designee and held until such time as
the restrictions and conditions applicable thereto lapse or until the stock,
securities or other property is forfeited in accordance with the provisions of
this Article III.
If the Company shall be a party to any merger or consolidation in which
it is not the surviving company or pursuant to which the shareholders of the
Company exchange their Common Stock, or if the Company shall dissolve or
liquidate or sell all or substantially all of its assets, the Committee may, in
its discretion, cause all Restricted Stock Awards that are still subject to any
restrictions and conditions to become immediately vested in full on the
effective
35
<PAGE>
date of any such transaction, unless otherwise provided in the applicable
agreement evidencing such Restricted Stock Award.
ARTICLE IV
MISCELLANEOUS PROVISIONS
1. Tax Reimbursement Payments or Loans. In view of the federal and
state income tax savings expected to be realized by the Company upon exercise of
a Nonqualified Stock Option or the lapse of restrictions and conditions imposed
upon Restricted Shares, the Committee may, in its discretion, provide that the
Company will make a cash payment or a loan or a combination thereof to the
grantee of a Nonqualified Stock Option or the recipient of a Restricted Stock
Award (or his personal representatives or heirs) for the purpose of assisting
such optionee or grantee in the payment of personal income taxes arising from
such exercise or lapse of restrictions and conditions. The basis for determining
the amount and conditions of such cash payment or loan or combination thereof
and the terms and conditions of any such loan shall be specified in the
agreement pursuant to which the grant or award is made or may be subsequently
determined by the Committee. The Committee, in its discretion, may from time to
time forgive any such loan in whole or in part.
2. Tax Withholding. No optionee shall be entitled to issuance of a
stock certificate representing shares purchased upon exercise of a Nonqualified
Stock Option, and no grantee of a Restricted Stock Award shall be entitled to
issuance of a stock certificate evidencing Unrestricted Shares, until such
optionee or grantee has paid, or made arrangements for payment, to the Company
of an amount equal to the income and other taxes that the Company is required to
withhold from such person as a result of his exercise of a Nonqualified Stock
Option or his receipt of Unrestricted Shares. In addition, such amounts as the
Company is required to withhold by reason of any tax reimbursement payments made
pursuant to Section 1 of this Article IV may be deducted from such payments.
3. Employment. Nothing in the Plan or in any Option or Restricted Stock
Award shall confer upon any eligible employee any right to continued employment
by the Company, or limit in any way the right of the Company at any time to
terminate or alter the terms of that employment.
4. Effective Date of Plan. This Plan shall be effective March 10, 1997,
the date of adoption of the Plan by the Board of Directors of the Company,
subject to approval of the Plan by the shareholders of the Company by the
majority of the votes cast at a meeting in which a majority of the
Company's Common Stock is present either in person or by proxy held
within 12 months of the date of adoption of the Plan by the Board.
5. Termination and Amendment of Plan. The Plan may be terminated at any
time by the Board of Directors. Unless sooner terminated, the Plan shall
terminate on March 9, 2007. No Option or Restricted Stock Award shall be granted
under the Plan after the Plan is terminated. Subject to the limitation contained
in Section 7 of this Article IV, the Board of Directors may at any time amend or
revise the terms of the Plan, provided, however, that no
36
<PAGE>
amendment or revision shall (a) increase the maximum aggregate number of shares
subject to this Plan, except as permitted under Section 7 of Article I; (b)
change the minimum purchase price for shares subject to Options granted under
the Plan; (c) extend the maximum duration established under the Plan for any
Option or for a Restricted Stock Award; or (d) permit the granting of an Option
or Restricted Stock Award to anyone other than those individuals described in
Section 6 of Article I hereof.
6. Prior Rights and Obligations. No amendment, suspension, or
termination of the Plan shall, without the consent of the person who has
received an Option or Restricted Stock Award, alter or impair any of that
person's rights or obligations under any Option or Restricted Stock Award
granted under the Plan prior to such amendment, suspension, or termination.
37
<PAGE>
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FOR THE YEAR 1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
Premiums written $21,232,248 $15,932,823 $15,647,749 $14,347,323 $13,321,104
Revenues 22,991,182 17,365,950 16,933,925 15,463,260 14,239,039
Investment income 1,352,932 1,140,636 1,046,712 954,440 845,479
Provision for possible claims 2,939,741 1,429,660 1,446,068 2,264,411 2,534,582
Income before extraordinary
charge and cumulative effect of
a change in accounting principle 3,843,537 3,250,658 3,126,859 2,313,014 1,511,859
Extraordinary charge related to
settlement of lawsuit (2,706,565)
Cumulative effect of a change
in method of accounting for
income taxes 141,125
Net income (loss) 3,843,537 3,250,658 3,126,859 2,313,014 (1,053,581)
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PER SHARE DATA
Income before extraordinary
charge and cumulative
effect of a change
in accounting principle $1.39 $1.16 $1.10 $.81 $.53
Extraordinary charge related
to settlement of lawsuit (.95)
Cumulative effect of a change
in method of accounting for
income taxes .05
Net income (loss) 1.39 1.16 1.10 .81 (.37)
Cash dividends $.095 $.08 $.08 $.055 $.04
Average number of common
shares outstanding 2,772,286 2,804,632 2,833,778 2,855,744 2,855,744
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
AT YEAR END
Assets $33,642,528 $28,224,276 $24,242,060 $22,589,386 $20,929,895
Liabilities 2,568,286 2,178,397 2,052,198 3,042,759 4,074,763
Investments in securities 23,573,663 19,742,639 16,362,082 14,914,140 14,468,853
Stockholders' equity 25,988,177 22,209,814 18,554,012 16,203,627 13,914,411
Book value/share 9.39 7.96 6.60 5.67 4.87
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
PERFORMANCE RATIOS
Net income (loss) to:
Average stockholders' equity 15.95% 15.95% 18.00% 15.36% (7.29%)
Total revenues (profit margin) 16.72% 18.72% 18.47% 14.96% (7.40%)
Provision for possible claims to
premiums written 13.85% 8.97% 9.24% 15.78% 19.03%
</TABLE>
1
<PAGE>
OPERATIONS SUMMARIES
STOCK PRICES AND DIVIDENDS
On November 12, 1986, the common
stock of Investors Title Company began
trading on the NASDAQ National Market
under the symbol ITIC. The Company has
approximately 1,200 shareholders of
record, including shareholders whose
shares are held in street names. The
following table shows the high and low
sales prices reported on the NASDAQ
National Market System and cash
dividends declared per share for the
indicated periods.
<TABLE>
<CAPTION>
PRICES CASH DIVIDENDS
(HIGH-LOW) DECLARED
<S> <C> <C>
1996
2(cents) -
First Quarter 12 1/4 - 10 3/1/96
2.5(cents) -
Second Quarter 13 - 11 1/4 6/1/96
2.5(cents) -
Third Quarter 14 - 11 1/4 9/1/96
2.5(cents) -
Fourth Quarter 16 3/4 - 12 3/4 12/12/96
1995
2(cents) -
First Quarter 8 1/2 - 6 1/16 3/1/95
2(cents) -
Second Quarter 9 1/4 - 7 6/1/95
2(cents) -
Third Quarter 9 1/2 - 8 1/4 9/1/95
2(cents) -
Fourth Quarter 11 - 8 3/4 12/1/95
</TABLE>
The following firms currently make a
market in Investors Title Company's
common stock: Davenport & Co. of
Virginia, Inc.; Ferris, Baker Watts,
Inc.; Herzog, Heine, Geduld, Inc.;
Interstate/Johnson Lane; and Scott &
Stringfellow, Inc.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following discussion should be read in conjunction with the consolidated
financial statements and the related footnotes on pages 12-21 of this report.
OVERVIEW
The Company's primary business activity is the issuance of title insurance.
Factors which influence the land title business include mortgage interest rates,
availability of mortgage funds, level of real estate activity, cost of real
estate, consumer confidence, supply and demand of real estate, inflation and
general economic conditions.
During the past three years, the Company's operating results improved
significantly. These improvements are attributable to the Company's efforts to
increase market share and to improve the efficiency of operations along with a
strong real estate market. Monthly average 30-year fixed rate mortgages were
7.81% in 1996, 7.96% in 1995 and 8.36% in 1994. Housing starts were 1.48 million
in 1996, 1.35 million in 1995, and 1.46 million in 1994. New and existing home
sales were 4.84 million in 1996, 4.47 million in 1995, and 4.61 million in 1994.
Beginning in 1994, the Federal Reserve Board began increasing short-term
interest rates and thereafter tightened several additional times. This
tightening significantly impacted mortgage rates and resulted in a decline in
refinancing activity and residential home sales. Although real estate activity
was fairly brisk at the beginning of the year, the pace of transactions declined
steadily as mortgage rates rose.
During 1995, fixed mortgage interest rates began to drop, declining to 7.2%
by year-end for 30-year fixed rate mortgages. These lower rates contributed to
an improved real estate market. The Company's operating results began to be
positively impacted by a general increase in real estate activity in the second
quarter of 1995. The improved real estate environment along with increases in
market share combined to provide record quarterly earnings in the third and
fourth quarters of 1995.
During 1996, interest rates rose more than one percentage point through
September, then began to decline, falling to 7.6% by year-end for 30-year fixed
rate mortgages. Despite the increase in rates, the pace of real estate
transactions increased. The strength in the real estate market since the latter
part of 1995 and expansion into new operating territories contributed to record
operating results in the second, third and fourth quarters of 1996.
Management believes that the current low level of interest bodes well for
activity in the real estate market. However, future trends in interest rates are
extremely difficult to predict because of the variety of potential influences
including U.S. monetary policy and inflationary pressures. The Company strives
to offset the cyclical nature of the real estate market by increasing its market
share. These efforts include developing
new agent relationships and increasing the number of underwriting offices as
well as improving market penetration with existing offices and agents.
CREDIT RATING
Investors Title Insurance Company's financial strength was recognized with a
rating of "A Double Prime" (unsurpassed financial stability) by a Fannie Mae
approved actuarial
firm. Northeast Investors Title Insurance Company received a rating of "A"
(exceptional financial stability) from the same firm.
RESULTS OF OPERATIONS
OPERATING REVENUES
Total premiums written increased 33.3% in 1996 compared to 1995. Premiums
written in 1995 increased 1.8% compared to
1994. Growth in sales has resulted from a combination of continued
marketing efforts and a strong real estate market, despite a slight rise in
mortgage interest rates since December 1995. The volume of business continued to
increase in 1996 as the number of policies and commitments issued rose to
142,009, an increase of 29.1% compared to 110,036 in 1995.
In addition to the improved real estate market and increases in the number
of branch offices and issuing agents, management believes that other factors
contributing to sales growth were (1) improved service provided through
additions to the Company's legal department to provide technical support to
branch offices, agents and customers, (2) establishment of a commercial
department to provide services in connection with commercial transactions, and
(3) establishments of employee incentives given as a motivating tool to achieve
revenue targets.
Shown below is a schedule of title premiums written for 1996, 1995 and 1994
in all states where our two insurance subsidiaries, Investors Title Insurance
Company and Northeast Investors Title Insurance Company, currently underwrite
insurance:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Florida $ 73,529 $ 128,124 $ 82,146
Georgia 192,731 31,812 --
Illinois -- -- 5,964
Indiana 91,417 47,342 77,795
Kentucky 239 -- 1,720
Maryland 69,346 6,499 --
Michigan 458,198 -- --
Nebraska 531,688 323,290 86,913
New York 535,952 385,258 494,697
North Carolina 12,492,684 10,254,900 10,375,988
Pennsylvania 2,321 25,276 1,433
South Carolina 2,906,361 1,974,607 2,467,470
Tennessee 109,679 37,992 267,225
Virginia 3,723,544 2,687,906 1,718,166
Direct Premiums 21,187,689 15,903,006 15,579,517
Reinsurance Assumed 44,559 29,817 68,232
Total Premiums
Written $21,232,248 $15,932,823 $15,647,749
</TABLE>
8
<PAGE>
Shown below is a breakdown of branch and agency premiums:
<TABLE>
<CAPTION>
1996 % 1995 % 1994 %
<S> <C> <C> <C> <C> <C> <C>
Branch $12,670,101 59.8 $10,453,167 65.7 $10,551,332 67.7
Agency 8,517,588 40.2 5,449,839 34.3 5,028,185 32.3
Total $21,187,689 100.0 $15,903,006 100.0 $15,579,517 100.0
</TABLE>
Premiums written from branch operations increased 21.2% in 1996 compared to
1995 and decreased 1% in 1995 compared to 1994.
Agency premiums increased 56.3% in 1996 compared to 1995 and increased 8.4%
in 1995 compared to 1994. In certain geographic areas, the primary distribution
of our product is through an agency network. Our ability to increase this
network with reputable and qualified agents directly affects our ability to grow
our market share.
SEASONALITY
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 the
normal seasonal pattern.
INVESTMENT INCOME
Investments are an integral part of the Company's business.
In formulating its investment strategy, the Company has
emphasized after-tax income on its investments. 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 maturity schedule of investments has primarily remained within
15 years.
In 1997, the Company intends to seek growth in investment income by
increasing the average size of the investment portfolio. As new funds become
available, they will be invested in accordance with the Company's strategy of
emphasizing after-tax return, which 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 18.6% in 1996 compared
to 1995 and increased 9% in 1995 compared to 1994. These
increases were primarily attributable to an increase in the average
investment portfolio balance.
EXPENSES
Profit margins were 16.72% in 1996, 18.72% in 1995, and 18.47% in 1994.
These profit margins were largely the result of steps taken to refine operating
procedures to better support our branch offices and agents, tight monitoring of
expenses, and
higher operating leverage resulting from an increase in premiums
written.
In the fourth quarter of 1993, the Company began implementation of an
automation system that computerized the underwriting process. Resulting benefits
include a more streamlined and consistent underwriting process and greater
efficiency per underwriter. Computer automation has favorably impacted our labor
costs.
Another step taken to streamline operations was the development of a
training center for underwriters that standardizes our underwriting practices.
As part of this effort, the Company developed a new underwriting manual to be
used by both branch and agency underwriting personnel.
In 1996, salaries as a percentage of our branch premiums written declined to
29.8% compared to 33.6% and 33.2% in 1995 and 1994, respectively. The number of
branch offices increased from 25 in 1994 to 29 in 1996. Office occupancy and
operations as a percentage of branch premiums improved over the three year
period (17% in 1996, 17.5% in 1995, and 18% in 1994). Continued expense
monitoring and increased automation have enabled the Company to improve margins.
Commissions increased 57.5% in 1996 compared to 1995 and increased 11.8% in
1995 compared to 1994 due to increased business from agent sources. The overall
commission rate has increased due to higher commission rates in certain new
operating territories. Commission rates vary geographically and may be
influenced by state regulators.
In 1996, the provision for possible claims as a percentage of premiums
written increased to 13.85% compared to 8.97% in 1995 and 9.24% in 1994. The
increase in the 1996 claims provision is primarily due to increases in claims
payments and the reserves for claims. Payments of claims, net of recoveries,
were $1,689,741, $1,229,445 and $1,153,218 in 1996, 1995 and 1994, respectively.
The Company has continued to strengthen its reserves for claims. At December
31, 1996, the total reserves for claims were $5,086,065. Of that total,
$1,297,178 was reserved for specific claims and $3,788,887 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. There are no known claims which are expected to have a material effect
on the Company's financial position.
Taxes consist primarily of personal and real property taxes
and premium taxes. Premium taxes as a percentage of premiums
written remained constant at 2% from 1994 to 1996.
INCOME TAXES
Income tax expense as a percentage of income before income taxes was 29.1%,
26.2%, and 29.3% in 1996, 1995 and 1994, respectively. The decrease in the
percentage in 1995 was primarily due to a refund of taxes paid in prior years
totaling $119,994.
The deferred income tax liability and net unrealized gain on investments
increased primarily due to an appreciation in investment securities.
NET INCOME
The Company reported an 18.2% increase in net income in 1996 compared to
1995 and a 4% increase in 1995 compared to 1994. These increases were primarily
attributable to increased revenues and improved operating efficiencies resulting
from expense control procedures.
LIQUIDITY AND CAPITAL RESOURCES
Cash flows provided by operating activities were $5,397,301, $3,257,858 and
$4,533,402 in 1996, 1995 and 1994, respectively. The increase in 1996 compared
to 1995 is primarily attributable to the increase in net income and a number of
other factors, including increases in the provision for
9
<PAGE>
possible claims (net of payments) and the provision for losses on premiums
receivable, a smaller increase in receivables, a decrease in property acquired
in settlement of claims, partially offset by a decrease in the provision for
deferred income taxes and a larger gain on sales of investments in 1996.
Net cash used in investing activities was $3,092,349 in 1996. Net cash used
in financing activities was $587,390 in 1996.
The insurance subsidiaries are restricted by state regulations in their
ability to pay dividends and to make distributions. A significant source of the
Company's funds are dividends received from the insurance company subsidiaries.
In 1997, the amount of dividends that can be paid without prior approval from
the insurance commissioner is approximately $1,624,000.
These funds should be adequate to cover the Company's operating
needs.
On December 9, 1996, the Board of Directors approved
the repurchase by the Company of shares of the Company's
common stock from time to time at prevailing market prices.
The purpose 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 has
repurchased 7,218 shares at an average price of $15.03 per share in 1997 as of
March 7, 1997. During 1996, the Company also repurchased an additional 40,936
shares at an average purchase price of $11.85 per share under another plan
approved by the Board of Directors. The Board has authorized management to
repurchase up to an additional 142,782 shares.
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 the investment portfolio in the form of
short-term investments and other readily marketable securities.
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: (i) 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; (ii) the risk that losses from claims are greater than anticipated
such that reserves for possible claims are inadequate; (iii) the risk that
unanticipated adverse changes in securities markets could result in material
losses on investments made by the Company; and (iv) 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 OPERATING RESULTS
<TABLE>
<CAPTION>
1996 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
<S> <C> <C> <C> <C>
Premiums written $4,452,889 $5,505,691 $5,604,538 $5,669,130
Investment income 294,791 314,286 329,113 414,742
Net income 747,719 978,782 1,072,350 1,044,686
Net income per share .27 .35 .39 .38
1995
Premiums written $3,121,311 $3,773,439 $4,443,282 $4,594,791
Investment income 266,947 268,484 284,699 320,506
Net income 607,174 756,406 913,731 973,347
Net income per share .22 .27 .32 .35
</TABLE>
10
<PAGE>
INDEPENDENT AUDITORS' REPORT
Investors Title Company and Subsidiaries:
We have audited the accompanying
consolidated balance sheets of Investors Title
Company and its subsidiaries as of December 31,
1996 and 1995, and the related statements of
consolidated income, stockholders' equity and
cash flows for each of the three years in the
period ended December 31, 1996. 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
generally accepted auditing standards. 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 the Company
and its subsidiaries at December 31, 1996 and
1995, and the results of their operations and
their cash flows for each of the three years in
the period ended December 31, 1996 in conformity
with generally accepted accounting principles.
(Signature of Deloitte & Touche LLP)
Raleigh, North Carolina
January 29, 1997
11
<PAGE>
INVESTORS TITLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS................................................................... $ 4,244,570 $ 2,527,008
INVESTMENTS IN SECURITIES (NOTES 2, 3 AND 7):
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 1996: $5,422,644; 1995: $5,372,464)... 5,267,372 5,147,479
Available-for-sale, at fair value (amortized cost: 1996: $12,518,544; 1995:
$9,901,772)........................................................................... 12,832,724 10,310,737
Equity securities, at fair value (cost: 1996: $3,484,927; 1995: $3,181,613)............... 5,473,567 4,284,423
Total investments...................................................................... 23,573,663 19,742,639
RECEIVABLES:
Premiums (less allowance for doubtful accounts: 1996: $200,000; 1995: $120,000)
(Note 7)............................................................................... 2,016,122 1,703,395
Accrued interest and dividends............................................................ 321,634 299,159
Recoveries of claims previously paid...................................................... 69,334 426,056
Other..................................................................................... 35,663 34,159
Total receivables...................................................................... 2,442,753 2,462,769
PREPAID EXPENSES AND OTHER ASSETS........................................................... 451,972 378,191
PROPERTY ACQUIRED IN SETTLEMENT OF CLAIMS................................................... 165,500 250,500
PROPERTY-AT COST (NOTES 7 AND 8):
Land...................................................................................... 782,582 782,582
Office buildings and improvements......................................................... 1,293,726 1,293,726
Furniture, fixtures and equipment......................................................... 1,843,636 1,694,657
Automobiles............................................................................... 169,423 151,374
Total.................................................................................. 4,089,367 3,922,339
Less accumulated depreciation............................................................. 1,325,297 1,059,170
Property, net.......................................................................... 2,764,070 2,863,169
TOTAL ASSETS................................................................................ $33,642,528 $28,224,276
</TABLE>
See notes to consolidated financial statements.
12
<PAGE>
INVESTORS TITLE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued liabilities.................................................. $ 997,759 $ 997,823
Commissions and reinsurance payables (Note 4)............................................. 60,902 38,601
Premium taxes payable..................................................................... 101,766 35,840
Income taxes payable:
Current................................................................................ 175,143 119,500
Deferred (Note 7):..................................................................... 1,232,716 986,633
Total liabilities...................................................................... 2,568,286 2,178,397
RESERVES FOR POSSIBLE CLAIMS (NOTES 5 AND 7)................................................ 5,086,065 3,836,065
COMMITMENTS AND CONTINGENCIES
(NOTES 4, 8 AND 10)
STOCKHOLDERS' EQUITY (NOTES 2, 3, 6, 7 AND 11):
Common stock-no par value (shares authorized 6,000,000; 2,855,744 and 2,855,744 shares
issued; and 2,767,830 and 2,790,633 shares outstanding 1996 and 1995, respectively).... 722,321 1,038,414
Retained earnings......................................................................... 23,745,995 20,173,755
Net unrealized gain on investments
(net of deferred taxes: 1996: $782,959; 1995: $514,130)................................ 1,519,861 997,645
Total stockholders' equity............................................................. 25,988,177 22,209,814
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................................. $33,642,528 $28,224,276
</TABLE>
See notes to consolidated financial statements.
13
<PAGE>
INVESTORS TITLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES:
Underwriting income:
Premiums written (Note 4)............................................ $21,232,248 $15,932,823 $15,647,749
Less-premiums for reinsurance ceded (Note 4)......................... 121,093 78,683 51,106
Underwriting income................................................ 21,111,155 15,854,140 15,596,643
Investment income-interest and dividends (Note 3)....................... 1,352,932 1,140,636 1,046,712
Gain on sales of investments, net (Note 3).............................. 178,238 45,242 41,029
Other................................................................... 348,857 325,932 249,541
Total.............................................................. 22,991,182 17,365,950 16,933,925
OPERATING EXPENSES:
Salaries................................................................ 3,773,550 3,515,480 3,498,794
Commissions to agents................................................... 5,780,048 3,669,995 3,283,210
Provision for possible claims (Note 5).................................. 2,939,741 1,429,660 1,446,068
Employee benefits and payroll taxes (Notes 6 and 9)..................... 1,224,659 1,107,465 1,099,148
Office occupancy and operations (Note 8)................................ 2,159,175 1,831,074 1,901,827
Business development.................................................... 665,705 573,874 541,953
Taxes, other than payroll and income.................................... 150,617 142,811 112,574
Premium taxes (Note 7).................................................. 420,963 328,791 318,153
Professional fees....................................................... 160,929 212,279 152,605
Other................................................................... 294,258 150,863 154,734
Total.............................................................. 17,569,645 12,962,292 12,509,066
INCOME BEFORE INCOME TAXES................................................ 5,421,537 4,403,658 4,424,859
PROVISION FOR INCOME TAXES (NOTE 7):
Current:
Federal.............................................................. 1,586,940 1,062,346 1,008,463
State................................................................ 14,000 16,000 8,000
Total.............................................................. 1,600,940 1,078,346 1,016,463
Deferred Federal........................................................ (22,940) 74,654 281,537
Total.............................................................. 1,578,000 1,153,000 1,298,000
NET INCOME................................................................ $ 3,843,537 $ 3,250,658 $ 3,126,859
EARNINGS PER COMMON SHARE................................................. $ 1.39 $ 1.16 $ 1.10
AVERAGE NUMBER OF COMMON SHARES OUTSTANDING............................... 2,772,286 2,804,632 2,833,778
</TABLE>
See notes to consolidated financial statements.
14
<PAGE>
INVESTORS TITLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN TOTAL
COMMON STOCK RETAINED (LOSS) ON STOCKHOLDERS'
SHARES AMOUNT EARNINGS INVESTMENTS EQUITY
<S> <C> <C> <C> <C> <C>
BALANCE,
JANUARY 1, 1994.......................... 2,855,744 $1,650,350 $14,253,158 $ 300,119 $16,203,627
Net income............................... 3,126,859 3,126,859
Dividends ($.08 per share)............... (228,460) (228,460)
Purchase of 43,682 shares of
common stock (net).................... (43,682) (387,032) (387,032)
Net unrealized loss on investments (net
of deferred taxes of ($81,730))....... (160,982) (160,982)
BALANCE,
DECEMBER 31, 1994........................ 2,812,062 1,263,318 17,151,557 139,137 18,554,012
Net income............................... 3,250,658 3,250,658
Dividends ($.08 per share)............... (228,460) (228,460)
Purchase of 21,429 shares of
common stock (net).................... (21,429) (224,904) (224,904)
Net unrealized gain on investments (net
of deferred taxes of $441,254)........ 858,508 858,508
BALANCE,
DECEMBER 31, 1995........................ 2,790,633 1,038,414 20,173,755 997,645 22,209,814
Net income............................... 3,843,537 3,843,537
Dividends ($.095 per share).............. (271,297) (271,297)
Purchase of 22,803 shares of common stock
(net)................................. (22,803) (316,093) (316,093)
Net unrealized gain on investments (net
of deferred taxes of $268,829)........ 522,216 522,216
BALANCE,
DECEMBER 31, 1996........................ 2,767,830 $ 722,321 $23,745,995 $1,519,861 $25,988,177
</TABLE>
See notes to consolidated financial statements.
15
<PAGE>
INVESTORS TITLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................... $ 3,843,537 $ 3,250,658 $ 3,126,859
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation........................................................ 328,682 307,649 315,436
Amortization, net of accretion...................................... 11,114 50,369 45,990
Provision for losses on premiums receivable......................... 80,000 -- --
(Gain) loss on disposals of property................................ (9,895) 11,028 7,998
Gain on sales of investments........................................ (178,238) (45,242) (41,029)
Provision (benefit) for deferred income taxes....................... (22,940) 74,654 281,537
Provision for possible claims....................................... 2,939,741 1,429,660 1,446,068
Payments of claims, net of recoveries............................... (1,689,741) (1,229,445) (1,153,218)
Changes in assets and liabilities:
(Increase) decrease in receivables.................................. (59,984) (495,063) 664,167
(Increase) decrease in prepaid expenses and other assets............ (73,781) (7,301) 110,462
(Increase) decrease in property acquired in settlement of claims.... 85,000 (79,900) (80,500)
Decrease in accounts payable and accrued liabilities................ (64) (2,036) (90,534)
Increase (decrease) in commissions and reinsurance payables......... 22,301 (14,247) (71,828)
Increase (decrease) in premium taxes payable........................ 65,926 7,074 (28,006)
Increase in income taxes payable.................................... 55,643 -- --
Net cash provided by operating activities........................... 5,397,301 3,257,858 4,533,402
INVESTING ACTIVITIES:
Purchases of available-for-sale securities............................. (4,370,919) (4,419,434) (862,994)
Purchases of held-to-maturity securities............................... (997,220) (415,000) (2,573,655)
Proceeds from sales of available-for-sale securities................... 1,437,173 1,688,312 413,631
Proceeds from sales of held-to-maturity securities..................... 1,118,305 1,060,200 1,327,403
Purchases of property.................................................. (303,417) (315,763) (340,412)
Proceeds from sales of property........................................ 23,729 34,128 6,402
Net cash used in investing activities............................... (3,092,349) (2,367,557) (2,029,625)
FINANCING ACTIVITIES:
Repayment of notes payable............................................. -- (500,000) (1,000,000)
Repurchase of common stock............................................. (316,093) (224,904) (387,032)
Dividends paid......................................................... (271,297) (228,460) (228,460)
Net cash used in financing activities............................... (587,390) (953,364) (1,615,492)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................... 1,717,562 (63,063) 888,285
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............................. 2,527,008 2,590,071 1,701,786
CASH AND CASH EQUIVALENTS, END OF YEAR................................... $ 4,244,570 $ 2,527,008 $ 2,590,071
SUPPLEMENTAL DISCLOSURES:
CASH PAID DURING THE YEAR FOR:
Interest............................................................ $ 33 $ 14,962 $ 54,854
Income taxes........................................................ $ 1,418,000 $ 897,000 $ 1,051,900
</TABLE>
The change in unrealized gain (loss) on investments in securities (which is
included in stockholders' equity, net of deferred income taxes) was $791,045,
$1,299,762, and ($242,712), in 1996, 1995 and 1994, respectively. The change in
the deferred income taxes (benefit) on the net unrealized gain and loss was
$268,829, $441,254, and ($81,730) in 1996, 1995 and 1994, respectively.
During 1996, the Company exchanged assets with a value of $60,000 for an
equity investment.
See notes to consolidated financial statements.
16
<PAGE>
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 (the "Company"), through
its wholly owned 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 Arkansas, Florida, Georgia,
Illinois, Indiana, Kentucky, Maryland, Michigan, Minnesota, Mississippi,
Nebraska, New York, Pennsylvania, South Carolina, Tennessee,
and Virginia. The majority of the Company's business is concentrated in North
Carolina, South Carolina, and Virginia. Investors Title Exchange Corporation
("ITEC"), a wholly owned subsidiary, acts as an intermediary in tax-free
exchanges of property held for productive use in a trade or business or for
investments. ITEC'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 all
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
excluded from income and reported as a separate component of stockholders'
equity. 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 is recorded at cost and is depreciated principally
under the straight-line method over the estimated useful lives (3 to 25 years)
of the respective assets.
RESERVES FOR POSSIBLE CLAIMS
The reserves for possible claims and the annual provision for possible
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 reserve for possible
claims (see Note 5).
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 from approved
attorneys who have examined such titles. Title insurance commissions earned by
the Company's agents are recognized as expense concurrently with premium
recognition.
EARNINGS PER COMMON SHARE
Earnings per common share is computed based on the weighted average number
of common shares outstanding. The effect of stock options is not material to the
computation of earnings per share.
ESCROWS AND TRUST DEPOSITS
As a service to its customers, the Company administers escrow and trust
deposits representing undisbursed amounts received for settlements of mortgage
loans and indemnities against specific title risks. These funds are not
considered assets of the Company and, therefore, are excluded from the
accompanying consolidated balance sheets.
In administering exchanges, ITEC holds properties to be exchanged and cash
received for such exchanges which are not considered assets and liabilities of
the Company and, therefore, are excluded from the accompanying consolidated
balance sheets. Cash held by ITEC for the purchase of exchange properties was
approximately $14,016,000 and $12,267,000 as of December 31, 1996 and 1995,
respectively.
EFFECTS OF INFLATION
The effect of inflation on the Company has not been material in recent
years.
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
17
<PAGE>
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 1995 and 1994 amounts have been reclassified to conform with 1996
classifications.
2. STATUTORY RESTRICTIONS ON CONSOLIDATED STOCKHOLDERS' EQUITY AND INVESTMENTS
The Company has designated approximately $10,909,000 and $9,476,000 of
retained earnings as of December 31, 1996 and 1995, respectively, as
appropriated to reflect the required statutory reserve for unearned premiums.
See Note 7 for the tax treatment of the statutory unearned premium reserve.
As of December 31, 1996 and 1995, approximately $22,550,000 and $19,085,000,
respectively, of the 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 $2,290,000 and
$2,495,000 at December 31, 1996 and 1995, 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, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
COST GAINS LOSSES
<S> <C> <C> <C>
DECEMBER 31, 1996:
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit............................. $ 169,004 $ -- $ --
Obligations of states and political subdivisions.... 5,098,368 157,719 2,447
Total................................................. $ 5,267,372 $ 157,719 $ 2,447
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions.... $10,496,691 $ 329,912 $ 32,453
Corporate debt securities........................... 1,875,931 25,062 693
Debt securities issued by foreign governments....... 145,922 2,036 9,684
Total................................................. $12,518,544 $ 357,010 $ 42,830
Equity securities, at fair value -
Common stocks and nonredeemable preferred
stocks.............................................. $ 3,484,927 $2,095,430 $106,790
DECEMBER 31, 1995:
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit............................. $ 399,203 $ -- $ --
Obligations of states and political subdivisions.... 4,748,276 225,545 560
Total................................................. $ 5,147,479 $ 225,545 $ 560
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions.... $ 8,125,216 $ 378,218 $ 23,834
Corporate debt securities........................... 1,631,447 68,053 --
Debt securities issued by foreign governments....... 145,109 2,299 15,771
Total................................................. $ 9,901,772 $ 448,570 $ 39,605
Equity securities, at fair value -
Common stocks and nonredeemable preferred
stocks.............................................. $ 3,181,613 $1,184,673 $ 81,863
<CAPTION>
FAIR
VALUE
<S> <C>
DECEMBER 31, 1996:
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit............................. $ 169,004
Obligations of states and political subdivisions.... 5,253,640
Total................................................. $ 5,422,644
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions.... $10,794,150
Corporate debt securities........................... 1,900,300
Debt securities issued by foreign governments....... 138,274
Total................................................. $12,832,724
Equity securities, at fair value -
Common stocks and nonredeemable preferred
stocks.............................................. $ 5,473,567
DECEMBER 31, 1995:
Fixed maturities -
Held-to-maturity, at amortized cost:
Certificates of deposit............................. $ 399,203
Obligations of states and political subdivisions.... 4,973,261
Total................................................. $ 5,372,464
Fixed maturities -
Available-for-sale, at fair value:
Obligations of states and political subdivisions.... $ 8,479,600
Corporate debt securities........................... 1,699,500
Debt securities issued by foreign governments....... 131,637
Total................................................. $10,310,737
Equity securities, at fair value -
Common stocks and nonredeemable preferred
stocks.............................................. $ 4,284,423
</TABLE>
The scheduled maturities of fixed maturities at December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Due in one year or less............................... $ 446,615 $ 438,274 $ 499,880 $ 504,004
Due after one year through five years................. 3,558,172 3,637,850 1,140,430 1,191,350
Due after five years through ten years................ 2,599,679 2,691,600 764,665 798,500
Due after ten years................................... 5,914,078 6,065,000 2,862,397 2,928,790
Total............................................. $12,518,544 $12,832,724 $5,267,372 $5,422,644
</TABLE>
18
<PAGE>
Earnings on investments and net realized gains for the three years ended
December 31 follow:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Fixed maturities.......................................................... $1,026,010 $ 853,705 $ 823,493
Equity securities......................................................... 137,065 142,899 121,956
Invested cash and other short-term investments............................ 156,885 138,768 97,351
Miscellaneous interest.................................................... 32,972 5,264 3,912
Net realized gains........................................................ 178,238 45,242 41,029
Investment income......................................................... $1,531,170 $1,185,878 $1,087,741
</TABLE>
Gross realized gains and losses on sales of available-for-sale securities
were:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Gross realized gains:
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies........................... $ -- $ 3,937 $ --
Redeemable preferred stocks........................................... 11,274 -- 475
Obligations of states and political subdivisions...................... -- 727 2,000
Common stocks and nonredeemable preferred stocks...................... 233,129 67,590 78,210
Total............................................................... 244,403 72,254 80,685
Gross realized losses:
Obligations of states and political subdivisions...................... (3,838) (500) --
Debt securities issued by foreign governments......................... -- (800) --
Common stocks and nonredeemable preferred stocks...................... (62,327) (25,712) (39,656)
Total............................................................... (66,165) (27,012) (39,656)
Net realized gain..................................................... $ 178,238 $ 45,242 $ 41,029
</TABLE>
Concurrent with the adoption of the implementation guidance in Financial
Accounting Standards Board Special Report "A Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company reassessed the appropriateness of the classifications
of all securities held at that time and transferred held-to-maturity investments
with amortized cost of $8,433,685 and fair value of $8,800,000 to
available-for-sale effective December 31, 1995. The unrealized gain of $241,768,
net of deferred taxes of $124,547, has been included in stockholders' equity.
4. REINSURANCE
The Company assumes and cedes reinsurance with other insurance companies in
the normal course of business. Premiums assumed and ceded were approximately
$45,000 and $121,000, respectively for 1996, $30,000 and $79,000, respectively
for 1995, and $68,000 and $51,000, respectively for 1994. 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.
5. RESERVES FOR POSSIBLE CLAIMS
Changes in the reserves for possible claims for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Balance, beginning of year.................. $ 3,836,065 $ 3,635,850 $ 3,343,000
Provision related to:
Current year.............................. 1,143,070 1,050,005 1,036,848
Prior years............................... 1,796,671 379,655 409,220
Total provision charged to operations....... 2,939,741 1,429,660 1,446,068
Claims paid, net of recoveries, related to:
Current year.............................. (64,582) (81,148) (95,503)
Prior years............................... (1,625,159) (1,148,297) (1,057,715)
Total claims paid, net of recoveries........ (1,689,741) (1,229,445) (1,153,218)
Balance, end of year........................ $ 5,086,065 $ 3,836,065 $ 3,635,850
</TABLE>
In management's opinion, the reserve is adequate to cover claim losses which
might result from pending and possible claims.
6. 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 193,300 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
20% per year one year from the date of grant and generally expire after five
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:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income:
As reported................................................ $3,843,537 $3,250,658
Pro forma.................................................. 3,767,770 3,217,552
Earnings per share:
As reported................................................ $1.39 $1.16
Pro forma.................................................. 1.36 1.15
</TABLE>
19
<PAGE>
The estimated weighted average grant-date fair values of options granted in
1996 and 1995 were $4.35 and $2.28 per share, respectively. 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 1996 and 1995, respectively: dividend yield of 0.7% and 0.8%; expected
volatility of 22% and 21%; risk-free interest rates of 6% and 5%; and expected
lives of 5 years for both years.
A summary of the status of the Company's Plans as of December 31, 1996, 1995
and 1994 and changes during the years ended on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year..................... 107,860 $ 7.79 99,400 $7.76 58,825 $6.31
Granted....................... 17,400 14.60 14,500 8.30 68,600 8.49
Exercised..................... (8,150) 7.41 (40) 8.50 (9,785) 6.50
Terminated.................... (3,100) 8.50 (6,000) 8.47 (18,240) 6.50
Outstanding at end of year.... 114,010 $ 8.84 107,860 $7.79 99,400 $7.76
Options exercisable at year
end......................... 37,830 $ 7.48 25,640 $7.04 7,000 $6.00
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE AT
OPTIONS OUTSTANDING AT YEAR-END YEAR-END
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
NUMBER REMAINING EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
<S> <C> <C> <C> <C> <C>
$ 4.25-$ 5.50............... 13,525 2 $ 4.71 8,525 $ 4.84
6.75- 9.75............... 83,085 3 8.30 29,305 8.25
10.00- 15.50............... 17,400 5 14.60 -- --
$ 4.25-$15.50............... 114,010 3 $ 8.84 37,830 $ 7.48
</TABLE>
7. INCOME TAXES
At December 31, 1996 and 1995, the approximate effect on each component of
deferred income taxes and liabilities is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Deferred income tax assets:
Accrued vacation............................................... $ 82,426 $ 99,014
Reinsurance payable............................................ 14,875 15,584
Bad debt reserve............................................... 68,000 40,800
Net state operating loss carryforward.......................... 310,857 317,618
Total........................................................ 476,158 473,016
Less valuation allowance....................................... 310,857 317,618
Total........................................................ 165,301 155,398
Deferred income tax liabilities:
Statutory unearned premiums reserve net of recorded
reserve for possible claims.................................. 486,521 512,264
Unrealized net gain on investments............................. 782,959 514,130
Excess of tax over book depreciation........................... 109,314 103,614
Discount accretion on tax-exempt obligations................... 19,223 12,023
Total........................................................ 1,398,017 1,142,031
Net deferred income tax liabilities.............................. $1,232,716 $ 986,633
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized.
20
<PAGE>
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:
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Anticipated income tax expense................................... $1,843,323 $1,497,244 $1,504,452
Increase (reduction) related to:
State income taxes, net of the federal income tax benefit...... 9,240 10,560 5,280
Tax exempt interest income (net of amortization)............... (276,678) (227,206) (210,788)
Dividends received (nontaxable portion)........................ (31,132) (28,426) (24,288)
Refund of taxes paid in prior years............................ -- (119,994) --
Other, net..................................................... 33,247 20,822 23,344
Provision for income taxes....................................... $1,578,000 $1,153,000 $1,298,000
</TABLE>
For state income tax purposes, ITIC and NE-ITIC must pay only a gross
premium tax.
At December 31, 1996 and 1995, the Company has available state net operating
loss carryforwards of approximately $3,900,000 and $4,100,000, respectively,
that originated in 1992 and will expire in 1997.
8. LEASES
Rent expense totaled $400,000, $373,000 and $335,000 in 1996, 1995 and 1994,
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,
1996 are summarized as follows:
<TABLE>
<S> <C>
Year End:
1997 $170,221
1998 130,635
1999 56,974
2000 34,587
2001 11,528
Total $403,945
</TABLE>
9. 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 $22,500 per employee. All contributions are
deposited in Individual Retirement Accounts for participants. Contributions
under the plan were approximately $216,000, $193,000, and $177,000 for 1996,
1995 and 1994, respectively.
10. 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.
11. STATUTORY ACCOUNTING
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles 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 $18,985,205 and $15,237,402 as
of December 31, 1996 and 1995, respectively. Net income on a statutory basis was
$3,322,356 $3,377,015 and $2,406,575 for the twelve months ended December 31,
1996, 1995 and 1994, respectively.
21
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-START> JAN-01-1996 JAN-01-1996 JAN-01-1996 JAN-01-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996
<DEBT-HELD-FOR-SALE> 11,122,024 10,247,774 11,239,947 12,832,724
<DEBT-CARRYING-VALUE> 4,773,802 5,385,784 5,579,075 5,118,367
<DEBT-MARKET-VALUE> 0<F1> 0<F1> 0<F1> 5,273,639
<EQUITIES> 3,923,286 4,908,399 5,275,938 5,473,567
<MORTGAGE> 0 0 0 0
<REAL-ESTATE> 0 0 0 0
<TOTAL-INVEST> 19,943,423 20,675,968 22,240,439 23,573,663
<CASH> 3,111,968 3,029,399 3,577,290 4,244,570
<RECOVER-REINSURE> 0 0 0 0
<DEFERRED-ACQUISITION> 0 0 0 0
<TOTAL-ASSETS> 29,028,800 30,141,064 31,846,199 33,642,528
<POLICY-LOSSES> 4,186,065 4,486,065 4,786,065 5,086,065
<UNEARNED-PREMIUMS> 0 0 0 0
<POLICY-OTHER> 30,682 36,063 44,115 60,902
<POLICY-HOLDER-FUNDS> 0 0 0 0
<NOTES-PAYABLE> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 910,970 783,200 746,424 722,321
<OTHER-SE> 21,882,473 22,853,262 24,071,109 25,265,856
<TOTAL-LIABILITY-AND-EQUITY> 29,028,800 30,141,064 31,846,199 33,642,528
4,434,799 9,916,291 15,490,534 21,111,155
<INVESTMENT-INCOME> 294,791 609,077 938,190 1,352,932
<INVESTMENT-GAINS> (40,052) 8,604 46,810 178,238
<OTHER-INCOME> 69,710 141,906 224,896 348,857
<BENEFITS> 681,333 1,512,145 2,226,658 2,939,741
<UNDERWRITING-AMORTIZATION> 0 0 0 0
<UNDERWRITING-OTHER> 3,031,212 6,765,641 10,597,816 14,629,904
<INCOME-PRETAX> 1,046,703 2,398,092 3,875,956 5,421,537
<INCOME-TAX> 298,984 671,591 1,077,105 1,578,000
<INCOME-CONTINUING> 747,719 1,726,501 2,798,851 3,843,537
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> 747,719 1,726,501 2,798,851 3,843,537
<EPS-PRIMARY> .27 .62 1.01 1.39
<EPS-DILUTED> .27 .62 1.01 1.39
<RESERVE-OPEN> 0 0 0 0
<PROVISION-CURRENT> 0 0 0 0
<PROVISION-PRIOR> 0 0 0 0
<PAYMENTS-CURRENT> 0 0 0 0
<PAYMENTS-PRIOR> 0 0 0 0
<RESERVE-CLOSE> 0 0 0 0
<CUMULATIVE-DEFICIENCY> 0 0 0 0
<FN>
<F1>Not disclosed on a quarterly basis.
</FN>
</TABLE>
