a6086640.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 September 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 __
(Do not check if a smaller reporting company)
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 October 15, 2009, there were 2,287,122 common shares of the registrant outstanding.
 

 
INVESTORS TITLE COMPANY
AND SUBSIDIARIES

INDEX

 
 
       
 
       
  Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008
1
       
  Consolidated Statements of Income  
      For the Three and Nine Months Ended September 30, 2009 and 2008
2
       
  Consolidated Statements of Stockholders’ Equity  
      For the Nine Months Ended September 30, 2009 and 2008
3
       
  Consolidated Statements of Cash Flows  
      For the Nine Months Ended September 30, 2009 and 2008
4
       
  Notes to Consolidated Financial Statements
5
       
Management's Discussion and Analysis of Financial Condition and Results of Operations
18
       
       
Quantitative and Qualitative Disclosures About Market Risk
30
       
Controls and Procedures
30
       
       
 
       
Risk Factors
32
       
Unregistered Sales of Equity Securities and Use of Proceeds
33
       
Exhibits
34
       
       
35
 
 

 
 
           
             
Investors Title Company and Subsidiaries
 
 
As of September 30, 2009 and December 31, 2008
 
(Unaudited)
 
             
             
   
September 30, 2009
   
December 31, 2008
 
             
Assets
           
Investments in securities:
           
Fixed maturities:
           
Held-to-maturity, at amortized cost (fair value: 2009: $202,580; 2008: $462,580)
  $ 197,509     $ 451,681  
Available-for-sale, at fair value (amortized cost: 2009: $84,215,496; 2008: $85,923,583)
    89,334,159       87,708,500  
Equity securities, available-for-sale, at fair value (cost: 2009: $8,878,349; 2008: $9,158,785)
    11,672,102       9,965,297  
Short-term investments
    17,391,875       15,725,513  
Other investments
    2,221,506       2,040,962  
Total investments
    120,817,151       115,891,953  
                 
Cash and cash equivalents
    8,817,941       5,155,046  
Premiums and fees receivable, less allowance for doubtful accounts of  
               
$1,382,000 and $1,297,000 for 2009 and 2008, respectively
    5,970,676       4,933,797  
Accrued interest and dividends
    958,506       1,225,070  
Prepaid expenses and other assets
    1,713,632       1,215,146  
Property acquired in settlement of claims
    285,376       395,734  
Property, net
    4,018,601       4,422,318  
Current income taxes receivable
    2,518,078       2,777,829  
Deferred income taxes, net
    348,367       3,841,295  
                 
Total Assets
  $ 145,448,328     $ 139,858,188  
                 
Liabilities and Stockholders' Equity
               
Liabilities:
               
Reserves for claims
  $ 39,426,000     $ 39,238,000  
Accounts payable and accrued liabilities
    8,551,682       10,762,300  
Total liabilities
    47,977,682       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;
               
2,286,222 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
    92,372,351       88,248,452  
Accumulated other comprehensive income
    5,098,294       1,609,435  
Total stockholders' equity
    97,470,646       89,857,888  
                 
Total Liabilities and Stockholders' Equity
  $ 145,448,328     $ 139,858,188  
                 
See notes to Consolidated Financial Statements.
               
 
 
1

 
Investors Title Company and Subsidiaries
 
 
For the Three and Nine Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
                         
                         
    Three Months Ended     Nine Months Ended  
    September 30    
September 30
 
   
2009
   
2008
   
2009
   
2008
 
Revenues:
                       
Underwriting income:
                       
Premiums written
  $ 14,306,677     $ 15,410,424     $ 49,662,835     $ 51,493,078  
Less-premiums for reinsurance ceded
    24,062       78,604       58,012       219,916  
Net premiums written
    14,282,615       15,331,820       49,604,823       51,273,162  
Investment income - interest and dividends
    911,982       1,079,760       2,862,071       3,471,800  
Net realized loss on investments
    (110,818 )     (545,883 )     (400,760 )     (669,586 )
Exchange services revenue
    175,608       542,528       800,335       1,013,940  
Other
    1,103,230       1,188,338       3,799,116       3,720,966  
Total Revenues
    16,362,617       17,596,563       56,665,585       58,810,282  
                                 
Operating Expenses:
                               
Commissions to agents
    6,838,090       6,707,688       23,202,041       21,976,896  
Provision for claims
    1,934,459       1,982,822       6,733,399       8,329,832  
Salaries, employee benefits and payroll taxes
    4,195,751       5,253,705       13,862,993       16,063,267  
Office occupancy and operations
    985,769       1,143,219       3,292,491       3,840,407  
Business development
    336,481       569,404       928,309       1,622,736  
Filing fees and taxes, other than payroll and income
    204,819       92,608       547,074       424,112  
Premium and retaliatory taxes
    270,352       210,233       1,013,124       1,029,298  
Professional and contract labor fees
    330,960       383,156       982,948       1,431,826  
Other
    173,893       248,695       363,727       762,429  
Total Operating Expenses
    15,270,574       16,591,530       50,926,106       55,480,803  
                                 
Income Before Income Taxes
    1,092,043       1,005,033       5,739,479       3,329,479  
                                 
Provision For Income Taxes
    123,000       88,000       1,220,000       562,000  
                                 
Net Income
  $ 969,043     $ 917,033     $ 4,519,479     $ 2,767,479  
                                 
Basic Earnings Per Common Share
  $ 0.42     $ 0.39     $ 1.97     $ 1.16  
                                 
Weighted Average Shares Outstanding - Basic
    2,290,666       2,342,643       2,293,754       2,388,115  
                                 
Diluted Earnings Per Common Share
  $ 0.42     $ 0.39     $ 1.96     $ 1.15  
                                 
Weighted Average Shares Outstanding - Diluted
    2,295,757       2,360,533       2,300,686       2,409,747  
                                 
Cash Dividends Paid Per Common Share
  $ 0.07     $ 0.07     $ 0.21     $ 0.21  
                                 
See notes to Consolidated Financial Statements.
                               
 
 
2

 
Investors Title Company and Subsidiaries
 
 
For the Nine Months Ended September 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
                    2,767,479               2,767,479  
Dividends ($.21 per share)
                    (501,333 )             (501,333 )
Shares of common stock repurchased and retired
    (124,092 )             (5,759,881 )             (5,759,881 )
Issuance of common stock in payment of
                                       
bonuses and fees
    40               1,946               1,946  
Stock options exercised
    11,280               216,403               216,403  
Share-based compensation expense
                    69,889               69,889  
Amortization related to postretirement health benefits, net of tax
              10,092       10,092  
Net unrealized loss on investments, net of tax
                            (2,857,991 )     (2,857,991 )
                                         
Balance, September 30, 2008
    2,298,546     $ 1     $ 92,534,330     $ 688,113     $ 93,222,444  
                                         
Balance, December 31, 2008
    2,293,268     $ 1     $ 88,248,452     $ 1,609,435     $ 89,857,888  
Net income
                    4,519,479               4,519,479  
Dividends ($.21 per share)
                    (481,591 )             (481,591 )
Shares of common stock repurchased and retired
    (11,771 )             (367,014 )             (367,014 )
Stock options exercised
    4,725               80,011               80,011  
Share-based compensation expense
                    373,014               373,014  
Amortization related to postretirement health benefits, net of tax
              11,088       11,088  
Net unrealized gain on investments, net of tax
                            3,477,771       3,477,771  
                                         
Balance, September 30, 2009
    2,286,222     $ 1     $ 92,372,351     $ 5,098,294     $ 97,470,646  
                                         
                                         
See notes to Consolidated Financial Statements.
                                       
 
 
3

 
 
             
Investors Title Company and Subsidiaries
 
 
For the Nine Months Ended September 30, 2009 and 2008
 
(Unaudited)
 
             
   
2009
   
2008
 
Operating Activities:
           
Net income
  $ 4,519,479     $ 2,767,479  
Adjustments to reconcile net income to net cash
               
provided by operating activities:
               
Depreciation
    546,423       770,901  
Amortization on investments, net
    214,511       237,374  
Amortization of prior service cost
    16,799       15,291  
Issuance of common stock in payment of bonuses and fees
    -       1,946  
Share-based compensation expense related to stock options
    373,014       69,889  
Allowance (benefit) for doubtful accounts on premiums receivable
    85,000       (837,000 )
Net loss on disposals of property
    15,207       10,684  
Net realized loss on investments
    400,760       669,586  
Net earnings from other investments
    (979,528 )     (667,377 )
Provision for claims
    6,733,399       8,329,832  
Provision for deferred income taxes
    1,644,000       962,000  
Changes in assets and liabilities:
               
(Increase) decrease in receivables and other assets
    (1,243,443 )     1,169,113  
Decrease in current income taxes receivable
    259,751       -  
Decrease in accounts payable and accrued liabilities
    (2,210,618 )     (594,738 )
Decrease in current income taxes payable
    -       (1,747,877 )
Payments of claims, net of recoveries
    (6,545,399 )     (8,014,832 )
Net cash provided by operating activities
    3,829,355       3,142,271  
                 
Investing Activities:
               
Purchases of available-for-sale securities
    (6,953,840 )     (2,817,230 )
Purchases of short-term securities
    (7,747,949 )     (6,211,596 )
Purchases of other investments
    (315,804 )     (514,404 )
Proceeds from sales and maturities of available-for-sale securities
    8,595,251       13,433,644  
Proceeds from maturities of held-to-maturity securities
    260,000       505,000  
Proceeds from sales and maturities of short-term securities
    6,081,587       1,165,189  
Proceeds from sales and distributions of other investments
    840,802       768,013  
Purchases of property
    (166,729 )     (123,901 )
Proceeds from the sale of property
    8,816       -  
Net cash provided by investing activities
    602,134       6,204,715  
                 
Financing Activities:
               
Repurchases of common stock, net
    (367,014 )     (5,759,881 )
Exercise of options
    80,011       216,403  
Dividends paid
    (481,591 )     (501,333 )
Net cash used in financing activities
    (768,594 )     (6,044,811 )
                 
Net Increase in Cash and Cash Equivalents
    3,662,895       3,302,175  
Cash and Cash Equivalents, Beginning of Period
    5,155,046       3,000,762  
Cash and Cash Equivalents, End of Period
  $ 8,817,941     $ 6,302,937  
                 
Supplemental Disclosures:
               
Cash (Received) Paid During the Period for:
               
Income Taxes, (refunds) payments, net
  $ (683,000 )   $ 2,305,000  
                 
Non cash net unrealized (gain) loss on investments, net of deferred tax
         
(provision) benefit of ($1,843,217) and $1,478,492 for 2009 and 2008,
         
respectively
  $ (3,477,771 )   $ 2,857,991  
                 
See notes to Consolidated Financial Statements.
               
 
 
4

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


Note 1 - Basis of Presentation and Significant Accounting Policies
 
Reference should be made to the "Notes to Consolidated Financial Statements" appearing in the Annual Report on Form 10-K of Investors Title Company (“the Company”) 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, with the instructions to Form 10-Q and with 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 September 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 consolidated 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 consolidated 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 were no material subsequent events through October 30, 2009, which is the date of financial statement issuance, requiring adjustment to or disclosure in its consolidated financial statements.

Recently Issued Accounting Standards –  On September 30, 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2009-12 – Fair Value Measurements and Disclosures (Topic 820-10-65-6) to provide guidance on measuring the fair value of certain alternative investments that calculate net asset value per share.  The ASU is effective for the first reporting period (including interim periods) ending after December 15, 2009.  The Company does not expect this update to have an impact on its financial condition.

5

 
In June 2009, the FASB issued Accounting Standards Codification (“ASC”) Topic 105-10-05.  This ASC replaces 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 issuance was effective for financial statements issued for interim and annual periods ending after September 15, 2009.  The establishment of the Codification did not have an impact on the reporting of the Company’s results of operations.

In April 2009, the FASB issued 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”, which was incorporated into ASC Topic 820-10-65-4.  This ASC provides for additional guidance for estimating fair value in accordance with ASC Topic 820 when the volume and/or level of activity for the asset or liability have significantly decreased (from normal conditions for that asset).  This guidance was effective for interim and annual reporting periods ending after June 15, 2009 and must 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”, which was incorporated into ASC Topic 320-10-65-1  This guidance amends the other-than-temporary impairment guidance in GAAP for debt securities and changes the impairment model for such securities.  The guidance also improves the presentation and disclosure of other-than-temporary impairments of debt and equity securities in the financial statements.  (This guidance does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.) This guidance was effective for interim and annual reporting periods ending after June 15, 2009. Adopting this guidance did not have a significant impact on the Company’s consolidated financial statements.  The additional disclosures required by the guidance are set forth in Note 8.

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”, which was incorporated into ASC Topic 825-10-65-1.  This guidance requires disclosure in summarized financial information at interim reporting periods. This guidance was effective for interim reporting periods ending after June 15, 2009.
 
 
6

 
Note 2 - Reserves for Claims
 
Transactions in the reserves for claims for the nine months ended September 30, 2009 and the year ended December 31, 2008 are summarized as follows:

     
September 30, 2009
   
December 31, 2008
 
 
Balance, beginning of period
  $ 39,238,000     $ 36,975,000  
 
Provision, charged to operations
    6,733,399       15,206,637  
 
Payments of claims, net of recoveries
    (6,545,399 )     (12,943,637 )
 
Ending balance
  $ 39,426,000     $ 39,238,000  
 
The total reserve for all reported and unreported losses the Company incurred through September 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 September 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.

A summary of the Company’s loss reserves, broken down into its components of known title claims and incurred but not reported claims (“IBNR”), follows:
 
   
September 30, 2009
   
%
   
December 31, 2008
   
%
 
Known title claims
  $ 6,763,212       17.2     $ 6,447,345       16.4  
IBNR
    32,662,788       82.8       32,790,655       83.6  
Total loss reserves
  $ 39,426,000       100.0     $ 39,238,000       100.0  
 
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 September 30, 2009 and 2008 was $3,623,712 and $(647,706), respectively.  Comprehensive income (loss) for the nine months ended September 30, 2009 and 2008 was $8,008,338 and $(80,420), 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.
 
 
7

 
Note 4 - Earnings 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 5,091 and 17,890 for the three months ended September 30, 2009 and 2008, respectively, and 6,932 and 21,632 for the nine months ended September 30, 2009 and 2008, respectively.

The following table sets forth the computation of basic and diluted earnings per share for the three and nine months ended September 30:
 
   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
Net income
  $ 969,043     $ 917,033     $ 4,519,479     $ 2,767,479  
Weighted average common shares outstanding - Basic
    2,290,666       2,342,643       2,293,754       2,388,115  
Incremental shares outstanding assuming the exercise of dilutive stock options and SARs (share settled)
    5,091       17,890       6,932       21,632  
Weighted average common shares outstanding - Diluted
    2,295,757       2,360,533       2,300,686       2,409,747  
Basic earnings per common share
  $ 0.42     $ 0.39     $ 1.97     $ 1.16  
Diluted earnings per common share
  $ 0.42     $ 0.39     $ 1.96     $ 1.15  
 
 
There were 10,500 and 8,000 shares for the quarters ended September 30, 2009 and 2008, respectively, and 17,200 and 5,500 shares for the nine months ended September 30, 2009 and 2008, respectively, excluded from the computation of diluted earnings per share 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:
 
   
Number
Of Shares
   
Weighted
Average
Exercise
Price
   
Average
Remaining
Contractual
Term (years)
   
Aggregate
Intrinsic
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
   
(4,725
)
   
16.93
                 
Options/SARs cancelled/forfeited/expired
   
(2,050
   
20.61
                 
Outstanding as of September 30, 2009
   
118,295
   
$
27.39
     
5.31
   
$
757,589
 
                                 
Exercisable as of September 30, 2009
   
73,717
   
$
27.36
     
4.87
   
$
521,018
 
                                 
Unvested as of September 30, 2009
   
44,578
   
$
27.44
     
6.03
   
$
236,571
 
 
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 $373,000 of compensation expense relating to SARs or options vesting on or before September 30, 2009 included in salaries, employee benefits and payroll taxes of the consolidated statements of income.  As of September 30, 2009, there was approximately $445,000 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 1.2 years.
 
9

 
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 FASB ASC 280-10-50 (formerly known as 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
September 30, 2009
 
Title
Insurance
   
Exchange
Services
   
All
Other
   
Intersegment
Eliminations
   
Total
 
 
Operating revenues
  $ 14,612,160     $ 175,608     $ 968,935     $ (195,250 )   $ 15,561,453  
Investment income
    768,514       27       213,858       (70,417 )     911,982  
Net realized loss
     on investments
    (20,071 )     -       (90,747 )     -       (110,818 )
Total revenues
  $ 15,360,603     $ 175,635     $ 1,092,046     $ (265,667 )   $ 16,362,617  
Operating expenses
    14,237,335       213,404       1,065,085       (245,250 )     15,270,574  
Income before
     income taxes
  $ 1,123,268     $ (37,769 )   $ 26,961     $ (20,417 )   $ 1,092,043  
Assets, net
  $ 107,882,412     $ 5,329,173     $ 32,236,743     $ -     $ 145,448,328  
 
 
Three Months Ended
                             
September 30, 2008
                             
 
Operating revenues
  $ 15,764,122     $ 542,528     $ 952,770     $ (196,734 )   $ 17,062,686  
Investment income
    850,925       769       248,483       (20,417 )     1,079,760  
Net realized loss on
     investments
    (542,392 )     -       (3,491 )     -       (545,883 )
Total revenues
  $ 16,072,655     $ 543,297     $ 1,197,762     $ (217,151 )   $ 17,596,563  
Operating expenses
    15,523,544       310,452       954,268       (196,734 )     16,591,530  
Income before
     income taxes
  $ 549,111     $ 232,845     $ 243,494     $ (20,417 )   $ 1,005,033  
Assets, net
  $ 108,574,776     $ 219,132     $ 32,767,501     $ -     $ 141,561,409  
                                         
 
 
10

 
Nine Months Ended
September 30, 2009
 
Title
Insurance
   
Exchange
Services
   
All
Other
   
Intersegment
Eliminations
   
Total
 
 
Operating revenues
  $ 51,360,157     $ 803,999     $ 2,620,580     $ (580,462 )   $ 54,204,274  
Investment income
    2,377,832       175       595,316       (111,252 )     2,862,071  
Net realized loss on
     investments
    (110,560 )     -       (290,200 )     -       (400,760 )
Total revenues
  $ 53,627,429     $ 804,174     $ 2,925,696     $ (691,714 )   $ 56,665,585  
Operating expenses
    48,201,588       458,083       2,896,897       (630,462 )     50,926,106  
Income before
     income taxes
  $ 5,425,841     $ 346,091     $ 28,799     $ (61,252 )   $ 5,739,479  
Assets, net
  $ 107,882,412     $ 5,329,173     $ 32,236,743     $ -     $ 145,448,328  
 
 
Nine Months Ended
                             
September 30, 2008
                             
 
Operating revenues
  $ 52,846,663     $ 1,013,940     $ 2,734,729     $ (587,264 )   $ 56,008,068  
Investment income
    2,703,141       36,147       793,764       (61,252 )     3,471,800  
Net realized loss on
     investments
    (657,628 )     -       (11,958 )     -       (669,586 )
Total revenues
  $ 54,892,176     $ 1,050,087     $ 3,516,535     $ (648,516 )   $ 58,810,282  
Operating expenses
    51,988,712       989,416       3,089,939       (587,264 )     55,480,803  
Income before
     income taxes
  $ 2,903,464     $ 60,671     $ 426,596     $ (61,252 )   $ 3,329,479  
Assets, net
  $ 108,574,776     $ 219,132     $ 32,767,501     $ -     $ 141,561,409  
 
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 nine months ended September 30, 2009 and 2008:
 
   
For the Three
Months Ended
September 30,
   
For the Nine
Months Ended
September 30,
 
   
2009
   
2008
   
2009
   
2008
 
                         
Service cost – benefits earned during the year
  $ 5,959     $ 4,334     $ 17,875     $ 13,002  
Interest cost on the projected benefit obligation
    6,743       4,761       20,229       14,283  
Amortization of unrecognized prior service cost
    5,097       5,097       15,292       15,291  
Amortization of unrecognized gains
    502       -       1,507       -  
Net periodic benefits costs
  $ 18,301     $ 14,192     $ 54,903     $ 42,576  
 
 
11

 
Note 7 - Fair Value Measurement
 
The Company accounts for fair value in accordance with ASC 820, “Fair Value Measurements and Disclosures.”
 
Valuation Hierarchy. A valuation hierarchy was established 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 September 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.
 
Available-for-sale securities
 
Carrying Balance
   
Level 1
   
Level 2
   
Level 3
 
Obligations of states and political subdivisions
  $ 73,387,734     $ -     $ 65,830,029     $ 7,557,705  
Corporate debt securities
    15,946,425       -       13,159,875       2,786,550  
Equity
    11,672,102       11,672,102       -       -  
Short-term investments
    17,333,264       17,333,264       -       -  
Total
  $ 118,339,525     $ 29,005,366     $ 78,989,904     $ 10,344,255  
 
The following table presents the changes in the Company’s assets measured at fair value using significant unobservable inputs (Level 3) at September 30, 2009:
 
Changes in fair value during the period ended September 30, 2009:
 
Level 3
 
Beginning balance at January 1, 2009
  $ 7,596,920  
Additions in 2009
    3,708,280  
Redemptions in 2009
    (1,200,000 )
Unrealized gains - included in other comprehensive income
    239,055  
Ending balance at September 30, 2009
  $ 10,344,255  
 
 
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- consequently, if there are multiple significant valuation inputs that are categorized in different levels of the hierarchy, the instrument’s hierarchy level is the lowest level within which any significant input falls.
 
Publicly traded equity securities are measured at fair value using quoted active market prices and are classified within Level 1 of the valuation hierarchy.
 
12

 
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.  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 September 30, 2009.  However, these securities were classified as Level 2 at September 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 September 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.

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
 
September 30, 2009
 
Cost
   
Gains
   
Losses
   
Value
 
Fixed Maturities-
                       
Held-to-maturity, at amortized cost-
                       
Obligations of states and political subdivisions
  $ 197,509     $ 5,071     $ -     $ 202,580  
Total
  $ 197,509     $ 5,071     $ -     $ 202,580  
Fixed Maturities-
                               
Available-for-sale, at fair value:
                               
Obligations of states and political subdivisions
  $ 69,443,464     $ 4,558,295     $ 614,025     $ 73,387,734  
Corporate debt securities
    14,772,032       1,174,393       -       15,946,425  
Total
  $ 84,215,496     $ 5,732,688     $ 614,025     $ 89,334,159  
Equity Securities, available-for-sale at fair value-
                               
Common stocks and nonredeemable preferred stocks
  $ 8,878,349     $ 2,939,635     $ 145,882     $ 11,672,102  
Total
  $ 8,878,349     $ 2,939,635     $ 145,882     $ 11,672,102  
Short-term investments-
                               
Certificates of deposit and other
  $ 17,391,875     $ -     $ -     $ 17,391,875  
Total
  $ 17,391,875     $ -     $ -     $ 17,391,875  
 
 
13

 
         
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  
Equity Securities, available-for-sale at fair value-
                               
Common stocks and nonredeemable preferred stocks
  $ 9,158,785     $ 1,446,389     $ 639,877     $ 9,965,297  
Total
  $ 9,158,785     $ 1,446,389     $ 639,877     $ 9,965,297  
Short-term investments-
                               
Certificates of deposit and other
  $ 15,725,513     $ -     $ -     $ 15,725,513  
Total
  $ 15,725,513     $ -     $ -     $ 15,725,513  
 
 
The fair value of debt and equity securities was determined primarily using estimated market prices obtained from independent third party pricing services and quoted market prices.
 
The scheduled maturities of fixed maturity securities at September 30, 2009 were as follows:
 
                         
   
Available-for-Sale
   
Held-to-Maturity
 
   
Amortized
   
Fair
   
Amortized
   
Fair
 
   
Cost
   
Value
   
Cost
   
Value
 
Due in one year or less
  $ 7,022,271     $ 7,209,212     $ 2,000     $ 2,048  
Due after one year through five years
    25,914,170       27,726,617       -       -  
Due five years through ten years
    34,114,729       36,934,529       195,509       200,532  
Due after ten years
    17,164,326       17,463,801       -       -  
Total
  $ 84,215,496     $ 89,334,159     $ 197,509     $ 202,580  
 
Proceeds and gross realized gains and losses on securities for the nine months ended September 30 are summarized as follows:
 
     
2009
   
2008
 
 
Proceeds
  $ 15,777,640     $ 15,871,846  
                   
 
Gross realized gains:
               
 
Obligations of states and political subdivisions
  $ 5,496     $ 24,726  
 
Common stocks and nonredeemable preferred stocks
    387,556       261,195  
 
Total
    393,052       285,921  
 
Gross realized losses:
               
 
Obligations of states and political subdivisions
  -     (352,093 )
 
Common stocks and nonredeemable preferred stocks
    (519,826 )     (609,014 )
 
Total
    (519,826 )     (961,107 )
 
Net realized loss
  $ (126,774 )   $ (675,186 )
 
 
14

 
Realized gains and losses are determined on the specific identification method.  Also included in net realized loss on sales of investments in the consolidated statements of income for the nine months ended September 30, 2009 and 2008 is $(273,986) and $5,600 of (losses) and gains from the sale of other investments.

The following table presents the gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2009 and December 31, 2008.
 
   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
September 30, 2009
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
                                     
Auction rate securities
  $ -     $ -     $ 6,635,975     $ (614,025 )   $ 6,635,975     $ ( 614,025 )
Obligations of states and  political subdivisions
      -         -         -         -         -         -  
Total Fixed Income Securities
     -       -        6,635,975       (614,025 )     6,635,975       (614,025 )
Equity Securities
    757,608       (52,045 )     905,448       (93,837 )     1,663,056       (145,882 )
Total temporarily impaired securities
  $ 757,608     $ (52,045 )   $ 7,541,423     $ (707,862 )   $ 8,299,031     $ (759,907 )
 
&