a6018957.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
[X]    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Quarterly Period Ended June 30, 2009
 
OR
 
[  ]    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 of Incorporation)
 
(I.R.S. Employer Identification No.)
 
 
121 North Columbia Street, Chapel Hill, North Carolina 27514
(Address of Principal Executive Offices)  (Zip Code)

 
(919) 968-2200
(Registrant's Telephone Number Including Area Code)
 
 
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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ___ No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one): Large accelerated filer ___
Accelerated filer  _X_
Non-accelerated filer ___
Smaller reporting company ___
 
   
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ___ No _X_

As of July 24, 2009, there were 2,297,132 common shares of the registrant outstanding.
 

 
 
INVESTORS TITLE COMPANY
AND SUBSIDIARIES

INDEX

PART I.
FINANCIAL INFORMATION
 
     
 
     
 
1
     
  2
     
  3
     
  4
     
 
5
     
18
     
29
     
29
     
     
PART II.
OTHER INFORMATION
 
     
30
     
31
     
32
     
32
     
     
 
33
 

 
Item 1.    Financial Statements
 
   
Investors Title Company and Subsidiaries
 
 
As of June 30, 2009 and December 31, 2008
 
(Unaudited)
 
             
   
June 30, 2009
   
December 31, 2008
 
             
Assets
           
  Investments in securities:
           
     Fixed maturities:
           
       Held-to-maturity, at amortized cost (fair value: 2009: $457,635; 2008: $462,580)
  $ 446,907     $ 451,681  
       Available-for-sale, at fair value (amortized cost: 2009: $83,291,395; 2008: $85,923,583)
    85,803,489       87,708,500  
     Equity securities, available-for-sale, at fair value (cost: 2009: $9,034,924; 2008: $9,158,785)
    10,392,874       9,965,297  
     Short-term investments
    15,127,184       15,725,513  
     Other investments
    2,400,932       2,040,962  
        Total investments
    114,171,386       115,891,953  
                 
  Cash and cash equivalents
    8,120,607       5,155,046  
  Premiums and fees receivable, less allowance for doubtful accounts of  
               
     $1,540,000 and $1,297,000 for 2009 and 2008, respectively
    7,956,609       4,933,797  
  Accrued interest and dividends
    1,151,634       1,225,070  
  Prepaid expenses and other assets
    1,521,707       1,215,146  
  Property acquired in settlement of claims
    378,884       395,734  
  Property, net
    4,051,221       4,422,318  
  Current income taxes receivable
    2,073,410       2,777,829  
  Deferred income taxes, net
    2,261,779       3,841,295  
                 
Total Assets
  $ 141,687,237     $ 139,858,188  
                 
Liabilities and Stockholders' Equity
               
Liabilities:
               
  Reserves for claims
  $ 39,583,000     $ 39,238,000  
  Accounts payable and accrued liabilities
    7,800,818       10,762,300  
      Total liabilities
    47,383,818       50,000,300  
                 
Commitments and Contingencies
               
                 
Stockholders' Equity:
               
  Class A Junior Participating preferred stock (shares authorized 100,000; no shares issued)
    -       -  
  Common stock-no par value (shares authorized 10,000,000;
               
    2,297,207 and 2,293,268 shares issued and outstanding 2009 and 2008,
               
    respectively, excluding 291,676 shares for 2009 and 2008
               
    of common stock held by the Company's subsidiary)
    1       1  
  Retained earnings
    91,859,793       88,248,452  
  Accumulated other comprehensive income
    2,443,625       1,609,435  
      Total stockholders' equity
    94,303,419       89,857,888  
                 
Total Liabilities and Stockholders' Equity
  $ 141,687,237     $ 139,858,188  
                 
See notes to Consolidated Financial Statements.
               
 
1

 
Investors Title Company and Subsidiaries
 
 
For the Three and Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
                         
   
Three Months Ended
   
Six Months Ended
 
   
June 30
   
June 30
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
Underwriting income:
                       
Premiums written
  $ 18,945,561     $ 18,178,892     $ 35,356,158     $ 36,082,654  
Less-premiums for reinsurance ceded
    33,173       50,910       33,950       141,312  
Net premiums written
    18,912,388       18,127,982       35,322,208       35,941,342  
Investment income - interest and dividends
    960,454       1,112,681       1,950,089       2,392,040  
Net realized gain (loss) on investments
    9,995       (242,272 )     (289,942 )     (123,703 )
Exchange services revenue
    300,963       66,714       624,727       471,412  
Other
    1,436,759       1,287,695       2,695,886       2,532,628  
Total Revenues
    21,620,559       20,352,800       40,302,968       41,213,719  
                                 
Operating Expenses:
                               
Commissions to agents
    8,831,742       7,949,938       16,363,951       15,269,208  
Provision for claims
    2,751,814       4,298,414       4,798,940       6,347,010  
Salaries, employee benefits and payroll taxes
    4,529,066       5,311,626       9,667,242       10,809,562  
Office occupancy and operations
    1,208,140       1,330,815       2,306,722       2,697,188  
Business development
    329,011       567,881       591,828       1,053,332  
Filing fees and taxes, other than payroll and income
    185,204       138,875       342,255       331,504  
Premium and retaliatory taxes
    375,510       451,728       742,772       819,065  
Professional and contract labor fees
    326,673       502,531       628,686       1,023,940  
Other
    214,926       301,926       213,136       538,464  
Total Operating Expenses
    18,752,086       20,853,734       35,655,532       38,889,273  
                                 
Income (Loss) Before Income Taxes
    2,868,473       (500,934 )     4,647,436       2,324,446  
                                 
Provision (Benefit) For Income Taxes
    753,000       (227,000 )     1,097,000       474,000  
                                 
Net Income (Loss)
  $ 2,115,473     $ (273,934 )   $ 3,550,436     $ 1,850,446  
                                 
Basic Earnings (Loss) Per Common Share
  $ 0.92     $ (0.11 )   $ 1.55     $ 0.77  
                                 
Weighted Average Shares Outstanding - Basic
    2,296,644       2,409,206       2,295,298       2,410,852  
                                 
Diluted Earnings (Loss) Per Common Share
  $ 0.92     $ (0.11 )   $ 1.54     $ 0.76  
                                 
Weighted Average Shares Outstanding - Diluted
    2,296,644       2,409,206       2,300,017       2,434,204  
                                 
Cash Dividends Paid Per Common Share
  $ 0.07     $ 0.07     $ 0.14     $ 0.14  
                                 
See notes to Consolidated Financial Statements.
                               
 
2

 
Investors Title Company and Subsidiaries
 
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
                               
                     
Accumulated
   
 
 
   
Common Stock
   
Retained
   
Other
Comprehensive
   
Total
Stockholders'
 
   
Shares
   
Amount
   
Earnings
   
Income
   
Equity
 
                               
Balance, December 31, 2007
    2,411,318     $ 1     $ 95,739,827     $ 3,536,012     $ 99,275,840  
Net income
                    1,850,446               1,850,446  
Dividends ($.14 per share)
                    (338,080 )             (338,080 )
Shares of common stock repurchased and retired
    (21,326 )             (1,002,423 )             (1,002,423 )
Issuance of common stock in payment of
                                       
     bonuses and fees
    40               1,946               1,946  
Stock options exercised
    10,450               204,012               204,012  
Share-based compensation expense
                    47,199               47,199  
Amortization related to FASB Statement No. 158
                      6,728       6,728  
Net unrealized loss on investments, net of tax
                      (1,289,888 )     (1,289,888 )
                                         
Balance, June 30, 2008
    2,400,482     $ 1     $ 96,502,927     $ 2,252,852     $ 98,755,780  
                                         
Balance, December 31, 2008
    2,293,268     $ 1     $ 88,248,452     $ 1,609,435     $ 89,857,888  
Net income
                    3,550,436               3,550,436  
Dividends ($.14 per share)
                    (321,385 )             (321,385 )
Shares of common stock repurchased and retired
    (286 )             (8,511 )             (8,511 )
Stock options exercised
    4,225               74,072               74,072  
Share-based compensation expense
                    316,729               316,729  
Amortization related to FASB Statement No. 158
                      7,392       7,392  
Net unrealized gain on investments, net of tax
                      826,798       826,798  
                                         
Balance, June 30, 2009
    2,297,207     $ 1     $ 91,859,793     $ 2,443,625     $ 94,303,419  
                                         
                                         
See notes to Consolidated Financial Statements.
                                 
 
 
3

 
Investors Title Company and Subsidiaries
 
 
For the Six Months Ended June 30, 2009 and 2008
 
(Unaudited)
 
             
   
2009
   
2008
 
Operating Activities:
           
Net income
  $ 3,550,436     $ 1,850,446  
  Adjustments to reconcile net income to net cash
               
     used in operating activities:
               
        Depreciation
    421,720       555,908  
        Amortization on investments, net
    140,438       156,259  
        Amortization of prior service cost
    11,200       10,194  
        Issuance of common stock in payment of bonuses and fees
    -       1,946  
        Share-based compensation expense related to stock options
    316,729       47,199  
        Allowance for doubtful accounts on premiums receivable
    243,000       (241,000 )
        Net loss on disposals of property
    13,136       1,999  
        Net realized loss on investments
    289,942       123,703  
        Net earnings from other investments
    (881,715 )     (499,924 )
        Provision for claims
    4,798,940       6,347,010  
        Provision for deferred income taxes
    1,117,000       592,000  
  Changes in assets and liabilities:
               
        Increase in receivables and other assets
    (3,482,087 )     (719,882 )
        Decrease in current income taxes receivable
    704,419       -  
        Decrease in accounts payable and accrued liabilities
    (2,961,482 )     (1,392,846 )
        Decrease in current income taxes payable
    -       (1,747,877 )
        Payments of claims, net of recoveries
    (4,453,940 )     (6,086,010 )
    Net cash used in operating activities
    (172,264 )     (1,000,875 )
                 
Investing Activities:
               
  Purchases of available-for-sale securities
    (2,910,021 )     (2,293,775 )
  Purchases of short-term securities
    (2,004,425 )     (8,906,105 )
  Purchases of other investments
    (176,759 )     (494,795 )
  Proceeds from sales and maturities of available-for-sale securities
    5,435,206       12,999,142  
  Proceeds from maturities of held-to-maturity securities
    5,000       505,000  
  Proceeds from sales and maturities of short-term securities
    2,602,754       160,984  
  Proceeds from sales and distributions of other investments
    505,653       390,001  
  Purchases of property
    (69,925 )     (87,155 )
  Proceeds from the sale of property
    6,166       -  
    Net cash provided by investing activities
    3,393,649       2,273,297  
                 
Financing Activities:
               
  Repurchases of common stock, net
    (8,511 )     (1,002,423 )
  Exercise of options
    74,072       204,012  
  Dividends paid
    (321,385 )     (338,080 )
    Net cash used in financing activities
    (255,824 )     (1,136,491 )
                 
Net Increase in Cash and Cash Equivalents
    2,965,561       135,931  
Cash and Cash Equivalents, Beginning of Period
    5,155,046       3,000,762  
Cash and Cash Equivalents, End of Period
  $ 8,120,607     $ 3,136,693  
                 
Supplemental Disclosures:
               
Cash (Received) Paid During the Period for:
               
  Income Taxes, (refunds) payments, net
  $ (724,000 )   $ 2,314,400  
                 
Non cash net unrealized (gain) loss on investments, net of deferred tax
         
(provision) benefit of  ($458,708) and $676,032 for 2009 and 2008,
               
respectively
  $ (826,798 )   $ 1,289,888  
                 
See notes to Consolidated Financial Statements.
               
 
4

 
INVESTORS TITLE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
June 30, 2009
(Unaudited)


Note 1 - Basis of Presentation and Significant Accounting Policies
 
Reference should be made to the "Notes to Consolidated Financial Statements" of Investors Title Company’s (“the Company”) Annual Report on Form 10-K for the year ended December 31, 2008 for a complete description of the Company’s significant accounting policies.

Principles of Consolidation – The accompanying unaudited consolidated financial statements include the accounts and operations of Investors Title Company and its subsidiaries (Investors Title Insurance Company, Northeast Investors Title Insurance Company, Investors Title Exchange Corporation, Investors Title Accommodation Corporation, Investors Title Management Services, Inc., Investors Title Commercial Agency, LLC, Investors Capital Management Company, and Investors Trust Company), and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted.  All intercompany balances and transactions have been eliminated in consolidation.

In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows in the accompanying unaudited consolidated financial statements have been included.  All such adjustments are of a normal recurring nature.  Operating results for the quarter ended June 30, 2009 are not necessarily indicative of the results that may be expected for the year ending December 31, 2009.

Use of Estimates and Assumptions – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and assumptions used.

Reclassification - Certain 2008 amounts have been reclassified to conform to the 2009 classifications.  These reclassifications had no effect on net income or stockholders’ equity as previously reported.

Subsequent Events – The Company has evaluated and concluded that there are no subsequent events through July 31, 2009, which is the date of financial statement issuance.

Recently Issued Accounting Standards –   In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.”  This Statement replaces Statement of Financial Accounting Standards (“SFAS”)  No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” and establishes the FASB Accounting Standards Codification (“Codification”) as the source of authoritative accounting principles recognized as applicable to nongovernmental entities in the preparation of financial statements in conformity with GAAP.  Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The Company is currently evaluating the effect of adopting this new Statement and anticipates that the Statement will not have a significant impact on the reporting of the Company’s results of operations.
 
5

 
In April 2009, the FASB issued its Staff Position (“FSP”) No. FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This FSP provides for additional guidance for estimating fair value in accordance with SFAS 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased.  This Position is effective for interim and annual reporting periods ending after June 15, 2009 and shall be applied prospectively.  Adopting this new Position did not have a significant impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” The objective of an other-than-temporary impairment analysis under U.S. GAAP is to determine whether the holder of an investment in a debt or equity security for which changes in fair value are not regularly recognized in earnings, such as securities classified as held-to-maturity or available-for-sale, should recognize a loss in earnings when the investment is impaired.  This FSP amends the other-than-temporary impairment guidance in U.S. GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements.  This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. This Position is effective for interim and annual reporting periods ending after June 15, 2009.  Adopting this new Position did not have a significant impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued FSP No. FAS 107-1 and Accounting Principles Board (“APB”) Opinion 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” This FSP also amends APB Opinion No. 28 to require disclosures in summarized financial information at interim reporting periods. This Position is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009.  Adopting this new Position did not have a significant impact on the Company’s consolidated financial statements.

 
Note 2 - Reserves for Claims
 
Transactions in the reserves for claims for the six months ended June 30, 2009 and the year ended December 31, 2008 are summarized as follows:
 
     
June 30, 2009
   
December 31, 2008
 
 
Balance, beginning of period
  $ 39,238,000     $ 36,975,000  
 
Provision, charged to operations
    4,798,940       15,206,637  
 
Payments of claims, net of recoveries
    (4,453,940 )     (12,943,637 )
 
Ending balance
  $ 39,583,000     $ 39,238,000  
 
 
6

 
The total reserve for all reported and unreported losses the Company incurred through June 30, 2009 is represented by the reserves for claims. The Company's reserves for unpaid losses and loss adjustment expenses are established using estimated amounts required to settle claims for which notice has been received (reported) and the amount estimated to be required to satisfy incurred claims of policyholders which may be reported in the future. Despite the variability of such estimates, management believes that the reserves are adequate to cover claim losses which might result from pending and future claims for policies issued through June 30, 2009.  The Company continually reviews and adjusts its reserve estimates to reflect its loss experience and any new information that becomes available.  Adjustments resulting from such reviews may be significant.

Claims and losses paid are charged to the reserves for claims. Although claims losses are typically paid in cash, occasionally claims are settled by purchasing the interest of the insured or the claimant in the real property. When this event occurs, the acquiring company carries assets at the lower of cost or estimated realizable value, net of any indebtedness on the property.

   
Note 3 - Comprehensive Income (Loss)
 
Total comprehensive income (loss) for the three months ended June 30, 2009 and 2008 was $2,732,732 and $(942,733), respectively.  Comprehensive income for the six months ended June 30, 2009 and 2008 was $4,384,626 and $567,286, respectively.  Other comprehensive income is comprised of unrealized gains or losses on the Company’s available-for-sale securities, net of tax and amortization of prior service cost and unrealized gains and losses in net periodic benefit costs related to postretirement liabilities, net of tax.


Note 4 - Earnings (Loss) Per Common Share and Share Awards
 
Basic earnings per common share is computed by dividing net income by the weighted-average number of common shares outstanding during the reporting period.  Diluted earnings per common share is computed by dividing net income by the combination of dilutive potential common stock, comprised of shares issuable under the Company’s share-based compensation plans and the weighted-average number of common shares outstanding during the reporting period.  Dilutive common share equivalents includes the dilutive effect of in-the-money share-based awards, which are calculated based on the average share price for each period using the treasury stock method.  Under the treasury stock method, the exercise price of a share-based award, the amount of compensation cost, if any, for future service that the Company has not yet recognized, and the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, when the share-based awards are exercised are assumed to be used to repurchase shares in the current period.  The incremental dilutive potential common shares, calculated using the treasury stock method were 4,719 and 23,352 for the six months ended June 30, 2009 and 2008, respectively.
 
7

 
The following table sets forth the computation of basic and diluted earnings per share for the three and six months ended June 30:

   
Three months ended June 30,
   
Six months ended June 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income (loss)
  $ 2,115,473     $ (273,934 )   $ 3,550,436     $ 1,850,446  
Weighted average common shares outstanding - Basic
    2,296,644       2,409,206       2,295,298       2,410,852  
Incremental shares outstanding assuming
                               
    the exercise of dilutive stock options and SARs (share settled)
    -       -       4,719       23,352  
Weighted average common shares outstanding - Diluted
    2,296,644       2,409,206       2,300,017       2,434,204  
Basic earnings (loss) per common share
  $ 0.92     $ (0.11 )   $ 1.55     $ 0.77  
Diluted earnings (loss) per common share
  $ 0.92     $ (0.11 )   $ 1.54     $ 0.76  

There were 17,200 shares for the quarter ended June 30, 2009 and 17,200 and 6,000 shares excluded from the computation of diluted earnings per share for the six months ended June 30, 2009 and 2008, respectively, because these shares were anti-dilutive.

The Company has adopted employee stock award plans (the "Plans") under which restricted stock, and options or stock appreciation rights (“SARs”) to purchase shares (not to exceed 500,000 shares) of the Company's stock may be granted to key employees or directors of the Company at a price not less than the market value on the date of grant.  SARs and options (which have predominantly been incentive stock options) awarded under the Plans thus far are exercisable and vest immediately or within one year or at 10% to 20% per year beginning on the date of grant and generally expire in five to ten years.  All SARs issued to date have been share settled only.  There have not been any SARs exercised in 2009, 2008 or 2007.
 
 
8

 
A summary of share-based award transactions for all share-based award plans follows:

         
Weighted
   
Average
       
         
Average
   
Remaining
   
Aggregate
 
   
Number
   
Exercise
   
Contractual
   
Intrinsic
 
   
Of Shares
   
Price
   
Term (years)
   
Value
 
Outstanding as of January 1, 2007
   
74,051
   
$
21.82
     
4.34
   
$
2,338,246
 
SARs granted
   
3,000
     
49.04
                 
Options exercised
   
(15,390
)
   
23.74
                 
Options/SARs cancelled/forfeited/expired
   
(1,181
)
   
17.38
                 
Outstanding as of December 31, 2007
   
60,480
   
$
22.77
     
4.11
   
$
1,377,390
 
SARs granted
   
3,000
     
47.88
                 
Options exercised
   
(12,360
)
   
18.67
                 
Options/SARs cancelled/forfeited/expired
   
(4,050
)
   
29.96
                 
Outstanding as of December 31, 2008
   
47,070
   
$
24.83
     
3.67
   
$
666,079
 
SARs granted
   
78,000
     
28.13
                 
Options exercised
   
(4,225
)
   
17.53
                 
Options/SARs cancelled/forfeited/expired
   
(2,050
   
20.61
                 
Outstanding as of June 30, 2009
   
118,795
   
$
27.33
     
5.54
   
$
245,718
 
                                 
Exercisable as of June 30, 2009
   
68,025
   
$
27.38
     
5.04
   
$
200,631
 
                                 
Unvested as of June 30, 2009
   
50,770
   
$
27.26
     
6.22
   
$
45,087
 


During the second quarter of 2009, the Company issued 3,000 share settled SARs to the directors of the Company.  SARs give the holder the right to receive stock equal to the appreciation in the value of shares of stock from the grant date for a specified period of time, and as a result, are accounted for as equity instruments.  As such, these were valued using the Black-Scholes option valuation model.  The fair value of each award is estimated on the date of grant using the Black-Scholes option valuation model with the weighted-average assumptions noted in the following table. Expected volatilities are based on both the implied and historical volatility of the Company’s stock. The Company uses historical data to estimate SAR exercise and employee termination within the valuation model. The expected term of awards represents the period of time that SARs granted are expected to be outstanding. The interest rate for periods during the expected life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant.  The weighted-average fair value for the SARs issued was $10.81 and was estimated using the following weighted-average assumptions:

 
2009
Expected Life in Years
5.0
Volatility
38.76%
Interest Rate
2.05%
Yield Rate
0.93%
   
 
 
9

 
The following table provides the Black-Scholes weighted-average components for all grants during the respective years:
 
 
2009
2008
2007
Expected Life in Years
5.0
5.0
5.0
Volatility
34%
24%
25%
Interest Rate
1.9%
3.1%
4.6%
Yield Rate
0.9%
0.6%
0.5%
 
There was approximately $317,000 of compensation expense relating to SARs or options vesting on or before June 30, 2009 included in salaries, employee benefits and payroll taxes of the consolidated statements of income.  As of June 30, 2009, there was approximately $501,000 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the Company’s stock award plans. That cost is expected to be recognized over a weighted-average period of 1.3 years.

There have been no stock options or SARs granted where the exercise price was less than the market price on the date of grant.


Note 5 – Segment Information

Consistent with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information ,” the Company has aggregated its operating segments into two reportable segments: 1) title insurance services; and 2) tax-deferred exchange services.  The remaining immaterial segments have been combined into a group called All Other.

The title insurance segment primarily issues title insurance policies through approved attorneys from underwriting offices and through independent issuing agents.  Title insurance policies insure titles to residential, institutional, commercial and industrial properties.

The tax-deferred exchange services segment acts as an intermediary in tax-deferred exchanges of property held for productive use in a trade or business or for investing and serves as the exchange accommodation titleholder, holding property for exchangers in reverse exchange transactions.  Revenues are derived from fees for handling exchange transactions.
   
Provided below is selected financial information about the Company’s operations by segment: 

Three Months Ended
June 30, 2009
 
Title
Insurance
   
Exchange
Services
   
All
Other
   
Intersegment
Eliminations
   
Total
 
 
Operating revenues
  $ 19,685,359     $ 304,627     $ 853,507     $ (193,383 )   $ 20,650,110  
Investment income
    800,799       50       180,023       (20,418 )     960,454  
Net realized gain (loss)
     on investments
    35,806       -       (25,811 )     -       9,995  
Total revenues
  $ 20,521,964     $ 304,677     $ 1,007,719     $ (213,801 )   $ 21,620,559  
Operating expenses
    17,786,954       193,720       964,795       (193,383 )     18,752,086  
Income before
     income taxes
  $ 2,735,010     $ 110,957     $ 42,924     $ (20,418 )   $ 2,868,473  
Assets, net
  $ 104,029,922     $ 465,690     $ 37,191,625     $ -     $ 141,687,237  
 
 
10

 
Three Months Ended
 
Title
Insurance
   
Exchange
Services
   
All
Other
   
Intersegment
Eliminations
   
Total
 
June 30, 2008
                             
Operating revenues
  $ 18,712,575     $ 66,714     $ 901,621     $ (198,519 )   $ 19,482,391  
Investment income
    902,757       27,369       202,973       (20,418 )     1,112,681  
Net realized loss on
     investments
    (233,618 )     (99 )     (8,555 )     -       (242,272 )
Total revenues
  $ 19,381,714     $ 93,984     $ 1,096,039     $ (218,937 )   $ 20,352,800  
Operating expenses
    19,634,063       365,876       1,052,314       (198,519 )     20,853,734  
Income (loss) before
     income taxes
  $ (252,349 )   $ (271,892 )   $ 43,725     $ (20,418 )   $ (500,934 )
Assets, net
  $ 108,834,556     $ 161,240     $ 37,246,841     $ -     $ 146,242,637  
 
 
Six Months Ended
June 30, 2009
 
 
   
 
   
 
   
 
   
 
 
Operating revenues
  $ 36,747,997     $ 628,391     $ 1,651,645     $ (385,212 )   $ 38,642,821  
Investment income
    1,609,318       148       381,458       (40,835 )     1,950,089  
Net realized loss on
     investments
    (90,489 )     -       (199,453 )     -       (289,942 )
Total revenues
  $ 38,266,826     $ 628,539     $ 1,833,650     $ (426,047 )   $ 40,302,968  
Operating expenses
    33,964,253       244,679       1,831,812       (385,212 )     35,655,532  
Income before
     income taxes
  $ 4,302,573     $ 383,860     $ 1,838     $ (40,835 )   $ 4,647,436  
Assets, net
  $ 104,029,922     $ 465,690     $ 37,191,625     $ -     $ 141,687,237  
 
 
Six Months Ended
                             
June 30, 2008
                             
Operating revenues
  $ 37,082,541     $ 471,412     $ 1,781,959     $ (390,530 )   $ 38,945,382  
Investment income
    1,852,216       35,378       545,281       (40,835 )     2,392,040  
Net realized loss on
     investments
    (115,236 )     -       (8,467 )     -       (123,703 )
Total revenues
  $ 38,819,521     $ 506,790     $ 2,318,773     $ (431,365 )   $ 41,213,719  
Operating expenses
    36,465,168       678,964       2,135,671       (390,530 )     38,889,273  
Income (loss) before
     income taxes
  $ 2,354,353     $ (172,174 )   $ 183,102     $ (40,835 )   $ 2,324,446  
Assets, net
  $ 108,834,556     $ 161,240     $ 37,246,841     $ -     $ 146,242,637  


Operating revenues represent net premiums written and other revenues.

 
 Note 6 – Retirement and Other Postretirement Benefit Plans

On November 17, 2003, the Company’s subsidiary, Investors Title Insurance Company, entered into employment agreements with key executives that provide for the continuation of certain employee benefits upon retirement.  The executive employee benefits include health insurance, dental, vision and life insurance. The benefits are unfunded.  The following sets forth the net periodic benefits cost for the executive benefits for the three and six months ended June 30, 2009 and 2008:
 
11

 
   
For the Three
Months Ended
June 30,
   
For the Six
Months Ended
June 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service cost – benefits earned during the year
  $ 5,958     $ 4,334     $ 11,916     $ 8,668  
Interest cost on the projected benefit obligation
    6,743       4,761       13,486       9,522  
Amortization of unrecognized prior service cost
    5,098       5,097       10,195       10,194  
Amortization of unrecognized gains
    503       -       1,005       -  
Net periodic benefits costs
  $ 18,302     $ 14,192     $ 36,602     $ 28,384  

 
Note 7 - Fair Value Measurement
 
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which was effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This Statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements.  Relative to SFAS 157, the FASB recently issued FASB Staff Positions (“FSP”) 157-1, 157-2 and 157-3.  FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis.  FSP 157-3 clarifies the principles in SFAS 157 on the fair value measurement of liabilities.  The Company adopted SFAS 157 as of January 1, 2008.
 
Valuation Hierarchy. SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.  Level 1 inputs to the valuation methodology are quoted prices (unadjusted) in active markets for identical assets or liabilities.  Level 2 inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.  Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
 
The following table presents, by level, the financial assets carried at fair value measured on a recurring basis as of June 30, 2009.  The table does not include cash on hand and also does not include assets which are measured at historical cost or any basis other than fair value.
 
12

 
Available-for-sale securities
 
Carrying Balance
   
Level 1
   
Level 2
   
Level 3
 
Obligations of states and political subdivisions
  $ 71,964,228     $ -     $ 64,181,573     $ 7,782,655  
Corporate debt securities
    13,839,261       -       13,839,261       -  
Equity
    10,392,874       10,392,874       -       -  
Total
  $ 96,196,363     $ 10,392,874     $ 78,020,834     $ 7,782,655  
 
The following table presents the changes in the Company’s assets measured at fair value using significant unobservable inputs (Level 3) as defined in SFAS 157 at June 30, 2009:

Changes in fair value during the period ended June 30, 2009:
 
Level 3
 
Beginning balance at January 1, 2009
  $ 7,596,920  
Unrealized gains - included in other comprehensive income
    185,735  
Ending balance at June 30, 2009
  $ 7,782,655  
 
Valuation Techniques.  A financial instrument’s classification within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
 
Publicly traded equity securities are measured at fair value using quoted active market prices and are classified within Level 1 of the valuation hierarchy.
 
 The Level 2 category generally includes corporate bonds, U.S. government corporations and agency bonds and municipal bonds.  The fair value of fixed maturity investments included in the Level 2 category was based on the market values obtained from pricing services.  If the inputs used to measure fair value fall in different levels of the fair value hierarchy, a financial security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement.  A number of the Company’s investment grade corporate bonds are frequently traded in active markets and traded market prices for these securities existed at June 30, 2009.  However, these securities were classified as Level 2 at June 30, 2009, because the third party pricing services from which the Company has obtained fair values for such instruments also use valuation models, which use observable market inputs, in addition to traded prices.  Substantially all of these assumptions are observable in the marketplace or can be derived or supported by observable market data.
 
The Company’s investments in student loan auction rate securities (“ARS”) are its only Level 3 assets, and were transferred from Level 2 in 2008 because quoted prices from broker-dealers were unavailable due to the failure of auctions.  Valuations using discounted cash flow models were used to determine the estimated fair value of these investments as of June 30, 2009. Some of the inputs to this model are unobservable in the market and are significant.
 
ARS were structured to provide purchase and sale liquidity through a Dutch auction process.  Due to the increasingly stressed and liquidity-constrained environment in money markets, the auction process for ARS began failing in February 2008 as broker-dealers ceased supporting auctions with their own capital.  The credit quality of the ARS the Company holds is high, as all are rated investment grade and are comprised entirely of student loan ARS, substantially guaranteed by government-sponsored enterprises, and the Company continues to receive interest income.
 
13

 
Note 8 – Investments in Securities

The aggregate estimated fair value, gross unrealized holding gains, gross unrealized holding losses, and cost or amortized cost for securities by major security type are as follows:

   
Gross
Gross
Estimated
 
Amortized
Unrealized
Unrealized
Fair
June 30, 2009
Cost
Gains
Losses
Value
Fixed Maturities-
       
  Held-to-maturity, at amortized cost-
       
     Obligations of states and political subdivisions
$         446,907
$        10,728
$                 -
$        457,635
     Total
$         446,907
$        10,728
$                 -
$        457,635
Fixed Maturities-
       
  Available-for-sale, at fair value:
       
     Obligations of states and political subdivisions
$    83,291,395
$   3,365,516
$     853,422
$   85,803,489
     Total
$    83,291,395
$   3,365,516
$     853,422
$   85,803,489
Equity Securities, available-for-sale at fair value-
       
  Common stocks and nonredeemable preferred stocks
$      9,034,924
$   1,948,986
$     591,036
$   10,392,874
     Total
$      9,034,924
$   1,948,986
$     591,036
$   10,392,874
Short-term investments-
       
  Certificates of deposit and other
$    15,127,184
$                  -
$                -
$   15,127,184
     Total
$    15,127,184
$                  -
$                -
$   15,127,184
         
   
Gross
Gross
Estimated
 
Amortized
Unrealized
Unrealized
Fair
December 31, 2008
Cost
Gains
Losses
Value
Fixed Maturities-
       
  Held-to-maturity, at amortized cost-
       
     Obligations of states and political subdivisions
$         451,681
$        10,899
$                 -
$        462,580
     Total
$         451,681
$        10,899
$                 -
$        462,580
Fixed Maturities-
       
  Available-for-sale, at fair value:
       
     Obligations of states and political subdivisions
$    72,818,413
$   2,178,686
$     986,503
$   74,010,596
     Corporate debt securities
13,105,170
606,001
13,267
13,697,904
     Total
$    85,923,583
$   2,784,687
$     999,770
$   87,708,500