a50463633.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, 2012

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   X    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 ___ Non-accelerated filer ___  Smaller reporting company     X
    (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 October 24, 2012, there were 2,062,854 common shares of the registrant outstanding.
 
 
 

 
 
INVESTORS TITLE COMPANY
AND SUBSIDIARIES

INDEX

PART I.
FINANCIAL INFORMATION
 
 
 
 
 
1
 
   
 
2
 
   
 
3
 
   
 
4
 
   
 
5
 
 
7
 
 
 
24
 
39
 
 
PART II.
OTHER INFORMATION
 
 
40
 
41
 
 
42
 
 
 

 

Item 1.  Financial Statements

Investors Title Company and Subsidiaries
Consolidated Balance Sheets
As of September 30, 2012 and December 31, 2011
(Unaudited)

   
September 30,
2012
   
December 31,
2011
 
Assets:
           
Investments in securities:
           
Fixed maturities, available-for-sale, at fair value (amortized cost: 2012: $78,228,525; 2011: $78,783,968)
  $ 85,167,066     $ 85,407,365  
    Equity securities, available-for-sale, at fair value (cost: 2012: $20,179,479; 2011: $17,652,745)
    28,081,485       22,549,975  
    Short-term investments
    11,231,113       14,112,262  
    Other investments
    5,925,020       3,631,714  
            Total investments
    130,404,684       125,701,316  
                 
Cash and cash equivalents
    19,982,759       18,042,258  
Premium and fees receivable (less allowance for doubtful accounts: 2012: $1,712,000; 2011: $1,218,000)
    10,208,947       6,810,000  
Accrued interest and dividends
    919,443       1,108,156  
Prepaid expenses and other assets
    4,938,693       2,743,517  
Property, net
    3,555,510       3,553,216  
Total Assets
  $ 170,010,036     $ 157,958,463  
                 
Liabilities and Stockholders’ Equity
               
Liabilities:
               
Reserves for claims
  $ 39,006,000     $ 37,996,000  
Accounts payable and accrued liabilities
    13,869,604       12,330,383  
Current income taxes payable
    283,595       640,533  
Deferred income taxes, net
    2,701,940       479,363  
Total liabilities
    55,861,139       51,446,279  
                 
Commitments and Contingencies
           
                 
Redeemable Noncontrolling Interest
    550,193        
                 
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; 2,062,604 and 2,107,681
               
shares issued and outstanding 2012 and 2011, respectively, excluding 291,676 shares
               
for 2012 and 2011 of common stock held by the Company’s subsidiary)
    1       1  
Retained earnings
    103,908,636       99,003,018  
Accumulated other comprehensive income
    9,690,067       7,509,165  
Total stockholders’ equity
    113,598,704       106,512,184  
Total Liabilities and Stockholders’ Equity
  $ 170,010,036     $ 157,958,463  

See notes to the Consolidated Financial Statements.
 
 
1

 
 
Investors Title Company and Subsidiaries
Consolidated Statements of Income
For the Three and Nine Months Ended September 30, 2012 and 2011
(Unaudited)

   
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Revenues:
                       
  Net premiums written
  $ 29,018,123     $ 23,986,592     $ 71,927,113     $ 63,303,202  
  Investment income - interest and dividends
    962,573       887,055       2,949,752       2,665,245  
  Net realized gain (loss) on investments
    99,790       (200,087 )     357,819       (79,172 )
  Other
    2,196,922       1,443,310       5,537,323       3,968,828  
     Total Revenues
    32,277,408       26,116,870       80,772,007       69,858,103  
                                 
Operating Expenses:
                               
  Commissions to agents
    16,840,421       15,161,823       40,683,365       39,335,237  
  Provision for claims
    2,432,057       349,672       4,424,523       2,301,259  
  Salaries, employee benefits and payroll taxes
    5,597,634       4,778,542       16,077,373       14,110,213  
  Office occupancy and operations
    954,876       919,681       2,919,749       2,836,068  
  Business development
    488,401       363,731       1,286,566       1,123,517  
  Filing fees, franchise and local taxes
    140,740       79,638       673,992       411,897  
  Premium and retaliatory taxes
    423,626       459,711       1,312,906       1,368,168  
  Professional and contract labor fees
    548,052       412,227       1,655,279       1,132,308  
  Other
    133,686       130,380       455,499       392,959  
     Total Operating Expenses
    27,559,493       22,655,405       69,489,252       63,011,626  
                                 
Income before Income Taxes
    4,717,915       3,461,465       11,282,755       6,846,477  
                                 
Provision for Income Taxes
    1,479,000       1,021,000       3,239,000       1,792,000  
                                 
Net Income
    3,238,915       2,440,465       8,043,755       5,054,477  
                                 
Less: Net Income Attributable to Redeemable Noncontrolling Interests
    80,730             103,943        
                                 
Net Income Attributable to the Company
  $ 3,158,185     $ 2,440,465     $ 7,939,812     $ 5,054,477  
                                 
Basic Earnings per Common Share
  $ 1.52     $ 1.15     $ 3.80     $ 2.34  
                                 
Weighted Average Shares Outstanding – Basic
    2,071,605       2,124,078       2,090,369       2,164,240  
                                 
Diluted Earnings per Common Share
  $ 1.50     $ 1.14     $ 3.74     $ 2.32  
                                 
Weighted Average Shares Outstanding – Diluted
    2,108,526       2,143,327       2,124,122       2,180,455  
                                 
Cash Dividends Paid per Common Share
  $ 0.07     $ 0.07     $ 0.21     $ 0.21  

See notes to the Consolidated Financial Statements.
 
 
2

 
 
Investors Title Company and Subsidiaries
Consolidated Statements of Comprehensive Income
For the Three and Nine Months Ended September 30, 2012 and 2011
(Unaudited)

   
Three Months Ended
September 30
   
Nine Months Ended
September 30
 
   
2012
   
2011
   
2012
   
2011
 
Net income
  $ 3,238,915     $ 2,440,465     $ 8,043,755     $ 5,054,477  
Other comprehensive income, before tax:
                               
  Amortization related to prior year service cost
    2,349       (415 )     7,047       9,779  
  Amortization of unrecognized loss (gain)
    171       (1,525 )     511       (239 )
  Unrealized gains (losses) on investments arising during the period
    2,142,925       (1,217,304 )     3,677,740       543,683  
  Reclassification adjustment for sale of securities included in net income
    (99,790 )     49,979       (434,358 )     (179,309 )
  Reclassification adjustment for write-down of securities included in net income
          150,109       76,539       258,481  
Other comprehensive income (loss), before tax
    2,045,655       (1,019,156 )     3,327,479       632,395  
Income tax expense (benefit) related to postretirement health benefits
    858       (661 )     2,571       3,244  
Income tax expense (benefit) related to unrealized gains (losses) on investments arising during the year
    737,122       (427,839 )     1,273,653       170,908  
Income tax (benefit) expense related to reclassification adjustment for sale of securities included in net income
    (34,576 )     17,377       (155,912 )     (61,842 )
Income tax expense related to reclassification adjustment for write-down of securities included in net income
          51,613       26,265       89,888  
Net income tax expense (benefit) on other comprehensive income
    703,404       (359,510 )     1,146,577       202,198  
Other comprehensive income (loss)
    1,342,251       (659,646 )     2,180,902       430,197  
Comprehensive income
    4,581,166       1,780,819       10,224,657       5,484,674  
Less:  Comprehensive income attributable to redeemable noncontrolling interest
    80,730             103,943        
Comprehensive income attributable to the Company
  $ 4,500,436     $ 1,780,819     $ 10,120,714     $ 5,484,674  

See notes to the Consolidated Financial Statements.
 
 
3

 
 
Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Nine Months Ended September 30, 2012 and 2011
(Unaudited)

                     
Accumulated
       
                      Other     Total  
   
Common Stock
   
Retained
   
 Comprehensive
   
 Stockholders’
 
   
Shares
   
Amount
   
Earnings
   
Income
   
Equity
 
Balance, January 1, 2011
    2,282,596     $ 1     $ 98,240,109     $ 5,688,705     $ 103,928,815  
Net income attributable to the Company
                    5,054,477               5,054,477  
Dividends ($0.21 per share)
                    (450,822 )             (450,822 )
Shares of common stock repurchased and retired
    (168,516 )             (5,426,478 )             (5,426,478 )
Stock options exercised
    7,550               152,526               152,526  
Share-based compensation expense
                    159,783               159,783  
Amortization related to postretirement health benefits
                            6,296       6,296  
Net unrealized gain on investments
                            423,901       423,901  
Balance, September 30, 2011
    2,121,630     $ 1     $ 97,729,595     $ 6,118,902     $ 103,848,498  
                                         
Balance, January 1, 2012
    2,107,681     $ 1     $ 99,003,018     $ 7,509,165     $ 106,512,184  
Net income attributable to the Company
                    7,939,812               7,939,812  
Dividends ($0.21 per share)
                    (438,431 )             (438,431 )
Shares of common stock repurchased and retired
    (51,207 )             (2,804,412 )             (2,804,412 )
Stock options exercised
    6,130               152,792               152,792  
Share-based compensation expense
                    55,857               55,857  
Amortization related to postretirement health benefits
                            4,987       4,987  
Net unrealized gain on investments
                            2,175,915       2,175,915  
Balance, September 30, 2012
    2,062,604     $ 1     $ 103,908,636     $ 9,690,067     $ 113,598,704  

See notes to the Consolidated Financial Statements
 
 
4

 
 
Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2012 and 2011
(Unaudited)

   
2012
   
2011
 
Operating Activities
           
Net income
  $ 8,043,755     $ 5,054,477  
Adjustments to reconcile net income to net cash provided by operating activities:
               
  Depreciation
    348,334       360,820  
  Amortization, net
    320,666       250,728  
  Amortization related to postretirement benefits obligation
    7,558       9,540  
  Share-based compensation expense related to stock options
    55,857       159,783  
  Increase (decrease) in allowance for doubtful accounts on premiums receivable
    494,000       (115,000 )
  Net gain on disposals of property
    (23,076 )     (26,528 )
  Net realized (gain) loss on investments
    (357,819 )     79,172  
  Net earnings from other investments
    (1,211,188 )     (396,487 )
  Provision for claims
    4,424,523       2,301,259  
  Provision for deferred income taxes
    1,076,000       1,233,000  
Changes in assets and liabilities:
               
  (Increase) decrease in receivables
    (3,892,948 )     762,755  
  (Increase) decrease in other assets
    (524,563 )     73,731  
  Increase in current income taxes recoverable
          (506,717 )
  Increase in accounts payable and accrued liabilities
    847,971       2,840,359  
  Decrease in current income taxes payable
    (356,938 )     (1,056,356 )
  Payments of claims, net of recoveries
    (3,414,523 )     (2,951,959 )
     Net cash provided by operating activities
    5,837,609       8,072,577  
                 
Investing Activities
               
  Purchases of available-for-sale securities
    (14,000,215 )     (8,610,912 )
  Purchases of short-term securities
    (5,434,469 )     (4,592,762 )
  Purchases of other investments
    (2,460,907 )     (341,117 )
  Purchase of subsidiary
    (350,000 )      
  Proceeds from sales and maturities of available-for-sale securities
    11,860,920       7,503,245  
  Proceeds from sales and maturities of short-term securities
    8,315,618       10,072,820  
  Proceeds from sales and distributions of other investments
    1,379,198       492,975  
  Proceeds from sale of other assets
    204,750        
  Purchases of property
    (373,045 )     (328,138 )
  Proceeds from disposals of property
    51,093       31,157  
     Net cash (used in) provided by investing activities
    (807,057 )     4,227,268  
                 
Financing Activities
               
  Repurchases of common stock
    (2,804,412 )     (5,426,478 )
  Exercise of options
    152,792       152,526  
  Dividends paid
    (438,431 )     (450,822 )
     Net cash used in financing activities
    (3,090,051 )     (5,724,774 )
                 
Net Increase in Cash and Cash Equivalents
    1,940,501       6,575,071  
Cash and Cash Equivalents, Beginning of Period
    18,042,258       8,117,031  
Cash and Cash Equivalents, End of Period
  $ 19,982,759     $ 14,692,102  
 
 
5

 

Consolidated Statements of Cash Flows, continued
           
   
2012
   
2011
 
Supplemental Disclosures:
           
Cash Paid During the Year for:
           
   Income taxes, payments, net
  $ 2,523,000     $ 2,125,000  
                 
Non-Cash Disclosures
               
   Non-cash net unrealized gain on investments, net of deferred tax
    provision of $(1,144,006) and $(198,953) for 2012 and 2011,
    respectively
  $ (2,175,915 )   $  (423,901 )
                 
 Non-cash intangible assets acquired from purchase of subsidiary
  $ (1,481,900 )   $  
                 
 Non-cash contingent liability from purchase of subsidiary
  $ 691,250     $  

See notes to the Consolidated Financial Statements.
 
 
6

 
 
INVESTORS TITLE COMPANY
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
September 30, 2012
(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, 2011 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, 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.  Earnings attributable to the redeemable noncontrolling interest are recorded on the Consolidated Statement of Income for majority-owned subsidiaries. The redeemable noncontrolling interest representing the portion of equity not related to the Company’s ownership interest is recorded as redeemable equity in a separate section of the Consolidated Balance Sheets.  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, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

Use of Estimates and Assumptions. The preparation of the Company’s 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 financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates and assumptions used.

Subsequent Events. On November 12, 2002, the Company’s Board of Directors adopted a shareholders’ rights plan, pursuant to which the Board of Directors authorized and declared a dividend distribution of one stock purchase right for each outstanding share of common stock of the Company to stockholders of record at the close of business on December 2, 2002.  Subsequently issued shares of common stock also carry stock purchase rights.  Unless terminated or redeemed by the Board of Directors, the stock purchase rights become exercisable based upon certain limited conditions related to acquisitions of the Company’s common stock, tender offers and certain business combinations involving the Company.  On October 31, 2012, the shareholders’ rights plan was amended to, among other things, extend the expiration date of the plan from November 11, 2012 to October 31, 2022 and increase the exercise price of the stock purchase rights from $80 per unit to $220 per unit.  In connection with the amendments to the shareholders’ rights plan, the Board of Directors of the Company also amended the Company’s Articles of Incorporation to increase the number of shares designated under the rights plan as Series A Participating Preferred Stock from 100,000 shares to 200,000 shares.

 
7

 
 
Recently Issued Accounting Standards. In June 2011, the Financial Accounting Standards Board (“the FASB”) updated requirements relating to the presentation of comprehensive income.  The objectives of this accounting update are to facilitate convergence of GAAP and International Financial Reporting Standards (“IFRS”), to improve the comparability, consistency, and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income.  The main provisions of the guidance require that all nonowner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  For public entities, this update became effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.  The Company complied with this update, and it did not have an impact on the Company’s financial condition or results of operations.

In May 2011, the FASB updated requirements for measuring and disclosing fair value information, resulting in common principles and requirements in accordance with GAAP and IFRS.  For public entities, this guidance became effective during interim and annual periods beginning after December 15, 2011.  The Company complied with this update, and it did not have an impact on the Company’s financial condition or results of operations.

Pending Accounting Standards. In June 2011, the FASB updated requirements relating to the presentation of comprehensive income.  In December 2011, the FASB issued a subsequent update to defer those changes in the June 2011 update that relate to the presentation of reclassification adjustments.  All other requirements of the June 2011 update are not affected by the December 2011 update.  The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented.

Note 2 - Reserves for Claims

Transactions in the reserves for claims for the nine months ended September 30, 2012 and the year ended December 31, 2011 are summarized as follows:

   
September 30, 2012
   
December 31, 2011
 
Balance, beginning of period
  $ 37,996,000     $ 38,198,700  
Provision, charged to operations
    4,424,523       3,342,427  
Payments of claims, net of recoveries
    (3,414,523 )     (3,545,127 )
Ending balance
  $ 39,006,000     $ 37,996,000  

The total reserve for all reported and unreported losses the Company incurred through September 30, 2012 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 under policies issued through September 30, 2012.  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.

 
8

 
 
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, 2012
   
%
 
December 31, 2011
   
%
Known title claims
  $ 5,925,874       15.2     $ 6,233,501       16.4  
IBNR
    33,080,126       84.8       31,762,499       83.6  
Total loss reserves
  $ 39,006,000       100.0     $ 37,996,000       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 - Earnings Per Common Share and Share Awards

Basic earnings per common share are 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 include 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, when share-based awards are exercised, (a) the exercise price of a share-based award; (b), the amount of compensation cost, if any, for future service that the Company has not yet recognized; and (c) the amount of estimated tax benefits that would be recorded in additional paid-in capital, if any, are assumed to be used to repurchase shares in the current period.  The number of incremental dilutive potential common shares, calculated using the treasury stock method, was 36,921 and 19,249 for the three months ended September 30, 2012, and 2011, respectively, and 33,753 and 16,215 for the nine months ended September 30, 2012, and 2011, respectively.

 
9

 
 
The following table sets forth the computation of basic and diluted earnings per share for the three and nine month periods ended September 30:

   
Three months ended
September 30,
   
Nine months ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
                                 
Net income attributable to the Company
  $ 3,158,185     $ 2,440,465     $ 7,939,812     $ 5,054,477  
Weighted average common shares
      outstanding – Basic
    2,071,605       2,124,078       2,090,369       2,164,240  
Incremental shares outstanding assuming
      the exercise of dilutive stock options
      and SARs (share settled)
    36,921       19,249       33,753       16,215  
Weighted average common shares
      outstanding - Diluted
    2,108,526       2,143,327       2,124,122       2,180,455  
                                 
Basic earnings per common share
  $ 1.52     $ 1.15     $ 3.80     $ 2.34  
                                 
Diluted earnings per common share
  $ 1.50     $ 1.14     $ 3.74     $ 2.32  

There were 11,500 potential shares excluded from the computation of diluted earnings per share for both the three and nine month periods ended September 30, 2011, because these shares were anti-dilutive.  These potential shares were anti-dilutive because the underlying share awards were out-of-the-money.  There were no potential shares excluded from the computation of diluted earnings per share for either the three or nine month periods ended September 30, 2012.
 
The Company has adopted stock award plans under which restricted stock, and options or stock appreciation rights (“SARs”) to acquire 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 2012 or 2011.

 
10

 
 
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, 2011
    110,800     $ 28.77       4.51     $ 353,955  
SARs granted
    3,000       41.50                  
Options exercised
    (7,700 )     20.15                  
Options/SARs cancelled/forfeited/expired
    (4,500 )     28.61                  
Outstanding as of December 31, 2011
    101,600     $ 29.81       3.91     $ 697,780  
SARs granted
    3,000       50.50                  
Options exercised
    (6,130 )     24.93                  
Options/SARs cancelled/forfeited/expired
    (70 )     31.00                  
Outstanding as of September 30, 2012
    98,400     $ 30.74       3.42     $ 3,394,561  
                                 
Exercisable as of September 30, 2012
    96,600     $ 30.43       3.38     $ 3,362,208  
                                 
Unvested as of September 30, 2012
    1,800     $ 47.27       5.82     $ 32,353  
 
During both the second quarters of 2012 and 2011, 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 table shown below. Expected volatilities are based on both the implied and historical volatility of the Company’s stock. The Company uses historical data to project SAR exercises and pre-exercise forfeitures 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 values for the SARs issued during 2012 and 2011 were $18.84 and $15.55, respectively, and were estimated using the weighted-average assumptions shown in the table below.

   
2012
 
2011
Expected Life in Years
    5.0       5.0  
Volatility
    44.6 %     43.6 %
Interest Rate
    0.8 %     1.9 %
Yield Rate
    0.6 %     0.8 %

There was approximately $56,000 and $160,000 of compensation expense relating to SARs or options vesting on or before September 30, 2012 and 2011, respectively, included in salaries, employee benefits and payroll taxes in the Consolidated Statements of Income for the nine months ended September 30, 2012 and 2011, respectively.  As of September 30, 2012, there was approximately $43,000 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 approximately 5 months.

 
11

 
 
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 4 – Segment Information

The Company has one reportable segment, title insurance 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 real estate.

The following table shows selected financial information about the Company's operations by segment for the periods ended September 30, 2012 and 2011:

Three Months Ended
September 30, 2012
 
Title
Insurance
   
All
Other
   
Intersegment
Eliminations
   
Total
 
Operating revenues
  $ 30,429,446     $ 1,356,733     $ (571,134 )   $ 31,215,045  
Investment income
    832,241       150,749       (20,417 )     962,573  
Net realized gain on investments
    85,560       14,230             99,790  
Total revenues
  $ 31,347,247     $ 1,521,712     $ (591,551 )   $ 32,277,408  
Operating expenses
    27,086,970       1,026,236       (553,713 )     27,559,493  
Income before income taxes
  $ 4,260,277     $ 495,476     $ (37,838 )   $ 4,717,915  
Total assets
  $ 132,713,703     $ 37,296,333     $     $ 170,010,036  
                                 
Three Months Ended
September 30, 2011
 
Title
Insurance
   
All
Other
   
Intersegment
Eliminations
   
Total
 
Operating revenues
  $ 24,501,862     $ 1,128,526     $ (200,486 )   $ 25,429,902  
Investment income
    783,495       123,977       (20,417 )     887,055  
Net realized loss on investments
    (179,016 )     (21,071 )           (200,087 )
Total revenues
  $ 25,106,341     $ 1,231,432     $ (220,903 )   $ 26,116,870  
Operating expenses
    21,620,657       1,235,234       (200,486 )     22,655,405  
Income (loss) before income taxes
  $ 3,485,684     $ (3,802 )   $ (20,417 )   $ 3,461,465  
Total assets
  $ 118,905,284     $ 36,591,725     $     $ 155,497,009  

Nine Months Ended
September 30, 2012
 
Title
Insurance
   
All
Other
   
Intersegment
Eliminations
   
Total
 
Operating revenues
  $ 74,967,470     $ 3,635,577     $ (1,138,611 )   $ 77,464,436  
Investment income
    2,566,875       444,129       (61,252 )     2,949,752  
Net realized gain on investments
    182,249       175,570             357,819  
Total revenues
  $ 77,716,594     $ 4,255,276     $ (1,199,863 )   $ 80,772,007  
Operating expenses
    66,772,534       3,820,487       (1,103,769 )     69,489,252  
Income before income taxes
  $ 10,944,060     $ 434,789     $ (96,094 )   $ 11,282,755  
Total assets
  $ 132,713,703     $ 37,296,333     $     $ 170,010,036  
 
 
12

 
 
Nine Months Ended
September 30, 2011
 
Title
Insurance
   
All
Other
   
Intersegment
Eliminations
   
Total
 
Operating revenues
  $ 64,498,303     $ 3,383,112     $ (609,385 )   $ 67,272,030  
Investment income
    2,348,441       378,056       (61,252 )     2,665,245  
Net realized loss on investments
    (54,407 )     (24,765 )           (79,172 )
Total revenues
  $ 66,792,337     $ 3,736,403     $ (670,637 )   $ 69,858,103  
Operating expenses
    59,758,416       3,862,595       (609,385 )     63,011,626  
Income (loss) before income taxes
  $ 7,033,921     $ (126,192 )   $ (61,252 )   $ 6,846,477  
Total assets
  $ 118,905,284     $ 36,591,725     $     $ 155,497,009  

Note 5 – Retirement Agreements and Other Postretirement Benefits

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 and other payments due under the agreements upon retirement totaling $6,163,000 and $5,740,000 as of September 30, 2012 and December 31, 2011, respectively.  The executive employee benefits include health insurance, dental, vision and life insurance and are unfunded.  These amounts are classified as accounts payable and accrued liabilities in the Consolidated Balance Sheets.  The following table sets forth the net periodic benefits cost for the executive benefits for the periods ended September 30, 2012 and 2011:
 
   
For the Three
Months Ended
September 30,
   
For the Nine
Months Ended
September 30,
 
   
2012
   
2011
   
2012
   
2011
 
Service cost – benefits earned during the year
  $ 3,155     $ 1,778     $ 9,463     $ 14,627  
Interest cost on the projected benefit obligation
    6,966       3,077       20,900       18,455  
Amortization of unrecognized prior service cost
    2,349       (415 )     7,047       9,779  
Amortization of unrecognized losses (gains)
    171       (1,525 )     511       (239 )
Net periodic benefits costs
  $ 12,641     $ 2,915     $ 37,921     $ 42,622  

Note 6 - Fair Value Measurement

Valuation of Financial Assets and Liabilities
 
The FASB has established a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value of financial assets and liabilities, such as securities. This hierarchy categorizes 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.

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 (with Level 3 being the lowest level) within which any significant input falls.
 
 
13

 
 
Debt and Equity Securities

The Level 1 category includes equity securities that are measured at fair value using quoted active market prices and money market mutual funds valued at transacted amounts.

The Level 2 category includes fixed maturity investments such as corporate bonds, U.S. government and agency bonds and municipal bonds.  Their fair value is principally based on market values obtained from a third party pricing service.  Factors that are used in determining their fair market value include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data.  The Company receives one quote per security from the pricing service, although as discussed below, the Company does consult other pricing resources when confirming that the prices it obtains reflect the fair values of the instruments in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures.  Generally, quotes obtained from the pricing service for instruments classified as Level 2 are not adjusted and are not binding.  As of September 30, 2012 and December 31, 2011, the Company did not adjust any Level 2 fair values.

A number of the Company’s investment grade corporate bonds are frequently traded in active markets, and trading prices are consequently available for these securities.  However, these securities were classified as Level 2 because the third party pricing service from which the Company has obtained fair values for these instruments uses valuation models which use observable market inputs in addition to traded prices.  Substantially all of the input assumptions used in the service’s model are observable in the marketplace or can be derived or supported by observable market data.

The Level 3 category only includes the Company’s investments in student loan auction rate securities (“ARS”) because quoted prices were unavailable due to the failure of auctions.  Some of the inputs to this model are unobservable in the market and are significant—therefore, the Company utilizes another third party pricing service to assist in the determination of the fair market value of these securities on a quarterly basis.  That service uses a proprietary valuation model that considers factors such as: the financial standing of the issuer; reported prices and the extent of public trading in similar financial instruments of the issuer or comparable companies; the ability of the issuer to obtain required financing; changes in the economic conditions affecting the issuer; pricing by other dealers in similar securities; time to maturity; and interest rates.  The following table summarizes some key assumptions the service used to determine fair value as of September 30, 2012 and December 31, 2011:

   
2012
   
2011
 
Cumulative probability of earning maximum rate until maturity
    0.0 %     0.0-0.1 %
Cumulative probability of principal returned prior to maturity
    95.9-96.0 %     95.4-98.7 %
Cumulative probability of default at some future point
    4.0-4.1 %     1.3-4.6 %
Liquidity risk premium
    4.5 %     4.5-5.0 %

Significant increases or decreases in any of the inputs in isolation would result in significant changes to the fair value measurement.  Generally, increases in default probabilities and liquidity risk premiums lower the fair market value while increases in the principal being returned and interest rates increase fair market values.

 
14

 
 
Based upon these inputs and assumptions, the pricing service provides a range of values to the Company for its ARS.  The Company records the fair value based on the midpoint of the range. The Company believes that the midpoint valuation is the most reasonable estimate of fair value.  On a quarterly basis, the Company reviews the valuation for significant changes in quarter over quarter values compared with changes to the current market and economic environments.  In 2012 and 2011, the difference in the low and high values of the ranges was between approximately three and four percent of the carrying value of the Company’s ARS.

The Company’s ARS portfolio is comprised entirely of investment grade student loan ARS. The par value of these securities was $3,000,000 and $5,000,000 as of September 30, 2012 and December 31, 2011, respectively, with approximately 97.0% and 79.6% as of September 30, 2012 and December 31, 2011, respectively, guaranteed by the U.S. Department of Education.

The following table presents, by level, investments carried at fair value measured on a recurring basis as of September 30, 2012 and December 31, 2011.  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.

As of September 30, 2012
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Short-term investments
  $ 11,231,113     $     $     $ 11,231,113  
Equity securities
                               
    Common stock and nonredeemable preferred stock
    28,081,485                   28,081,485  
Fixed maturities
                               
    Obligations of states and political subdivisions*
          63,463,568             63,463,568  
    Corporate debt securities*
          18,931,598       2,771,900       21,703,498  
Total
  $ 39,312,598     $ 82,395,166     $ 2,771,900     $ 124,479,664  

As of December 31, 2011
 
Level 1
   
Level 2
   
Level 3
   
Total
 
Short-term investments
  $ 14,112,262     $     $     $ 14,112,262  
Equity securities
                               
    Common stock and nonredeemable preferred stock
    22,549,975                   22,549,975  
Fixed maturities
                               
    Obligations of states and political subdivisions*
          67,612,793       1,834,700       69,447,493  
    Corporate debt securities*
          13,242,172       2,717,700       15,959,872  
Total
  $ 36,662,237     $ 80,854,965     $ 4,552,400     $ 122,069,602  
 
*Denotes fair market value obtained from pricing services.
 

There were no transfers into or out of Levels 1 and 2 during the period.

To help ensure that fair value determinations are consistent with ASC 820 fair value measurements, prices from our pricing services go through multiple review processes to ensure appropriate pricing.  Pricing procedures and inputs used to price each security include, but are not limited to, the following: unadjusted quoted market prices for identical securities such as stock market closing prices; non-binding quoted prices for identical securities in markets that are not active; interest rates; yield curves observable at commonly quoted intervals; volatility; prepayment speeds; loss severity; credit risks and default rates.  The Company reviews the procedures and inputs used by its pricing services and verifies a sample of the services’ quotes by comparing them to values obtained from other pricing resources.  In the event the Company disagrees with a price provided by its pricing services, the service reevaluates the price to corroborate the market information and then reviews inputs to the evaluation in light of  potentially new market data.  The Company believes that these processes and inputs result in appropriate classifications and fair values consistent with ASC 820.

 
15

 
 
Other Financial Instruments

The Company uses various financial instruments in the normal course of its business. In the measurement of the fair value of certain financial instruments, other valuation techniques were utilized if quoted market prices were not available. These derived fair value estimates are significantly affected by the assumptions used. Additionally, ASC 820 excludes from its scope certain financial instruments including those related to insurance contracts, pension and other postretirement benefits, and equity method investments.
 
In estimating the fair value of the financial instruments presented, the Company used the following methods and assumptions:
 
Cash and cash equivalents
 
The carrying amount for cash and cash equivalents is a reasonable estimate of fair value due to the short-term maturity of these investments.
 
Cost-basis investments
 
The estimated fair value of cost basis investments is calculated from the book value of the underlying entities.
 
Accrued dividends and interest
 
The carrying amount for accrued dividends and interest is a reasonable estimate of fair value due to the short-term maturity of these assets.
 
Contingent consideration
 
The fair value of the contingent consideration was estimated based on the discounted value of the future cash flows.  Contingent consideration consists of additional monies the Company may become obligated to pay based on the future performance of a business the Company acquired, as discussed in Note 10.
 
The carrying amounts and fair values of these financial instruments (please note investments are disclosed in a previous table) as of September 30, 2012 and December 31, 2011 are presented in the following table:

As of September 30, 2012:
                             
Financial Assets
 
Carrying Value
   
Estimated Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
  Cash
  $ 19,982,759     $ 19,982,759     $ 19,982,759     $     $  
  Cost-basis investments
    1,894,899       2,224,253                   2,224,253  
  Accrued dividends and interest
    919,443       919,443       919,443              
Total
  $ 22,797,101     $ 23,126,455     $ 20,902,202     $     $ 2,224,253  
                                         
Financial Liabilities
                                       
   Contingent consideration
  $ 691,250     $ 691,250     $     $     $ 691,250  
Total
  $ 691,250     $ 691,250     $     $     $ 691,250  
 
 
16

 
 
As of December 31, 2011:
                             
 
Financial Assets
 
Carrying Value
   
Estimated Fair
Value
   
Level 1
   
Level 2
   
Level 3
 
  Cash
  $ 18,042,258     $ 18,042,258     $ 18,042,258     $     $  
  Cost-basis investments
    1,303,887       1,688,262                   1,688,262  
  Accrued dividends and interest
    1,108,156       1,108,156       1,108,156              
Total
  $ 20,454,301     $ 20,838,676     $ 19,150,414     $     $ 1,688,262  

The following table presents a reconciliation of the Company’s assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3), which are all ARS securities, for the nine months ended September 30, 2012 and the year ended December 31, 2011:
 
Changes in fair value during the period ended:
 
2012
   
2011
 
Beginning balance at January 1
  $ 4,552,400     $ 5,472,244  
Redemptions and sales
    (2,000,000 )     (900,000 )
Realized gain - included in net realized gain (loss) on investments
    118,336       43,199  
Realized loss - included in net realized gain (loss) on investments
          (101,861 )
Unrealized gain - included in other comprehensive income
    101,164       38,818  
Ending balance, net
  $ 2,771,900     $ 4,552,400  

The following table presents a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3), consisting solely of contingent consideration, for the nine months ended September 30, 2012 and the year ended December 31, 2011:
 
Changes in fair value during the period ended:
 
2012
   
2011
 
Beginning balance at January 1
  $     $  
Addition of contingent consideration
    691,250        
Ending balance, net
  $ 691,250     $  
 
Certain cost method investments are measured at estimated fair value on a non-recurring basis, such as investments that are impaired during the period and recorded at estimated fair value in the Consolidated Financial Statements as of September 30, 2012 and December 31, 2011.  There were no assets valued at fair market value on a non-recurring basis as of September 30, 2012.
 
The following table summarizes the corresponding estimated fair value hierarchy of such investments at December 31, 2011 and the related impairments recognized.

 
 
December 31, 2011
Valuation
Method
Impaired
 
Level 1
   
Level 2
   
Level 3
   
Total at
Estimated
Fair Value
   
Impairment
Losses
 
Cost method investments
Fair Value
Yes
  $     $     $ 58,281     $ 58,281     $ (28,904 )     
Other assets Fair Value Yes                 17,000       17,000       (15,500
Total cost method
     investments and other
     assets
      $       $       $  75,281     $  75,281     $ (44,404 )
 
 
17

 
 
Note 7 – 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, 2012
 
Cost
   
Gains
   
Losses
   
Value
 
Fixed maturities, available-for-sale, at fair value-
                       
  Obligations of states and political subdivisions
  $ 57,914,850     $ 5,561,688     $ 12,970     $ 63,463,568  
  Corporate debt securities
    17,590,282       1,344,750       3,434       18,931,598  
  Auction rate securities
    2,723,393       48,507             2,771,900  
     Total
  $ 78,228,525     $ 6,954,945     $ 16,404     $ 85,167,066  
Equity securities, available-for-sale at fair value-
                               
  Common stocks and nonredeemable preferred stocks
  $ 20,179,479     $ 7,942,885     $ 40,879     $ 28,081,485  
     Total
  $ 20,179,479     $ 7,942,885     $ 40,879     $ 28,081,485  
Short-term investments-
                               
  Money market mutual funds and certificates of deposit
  $ 11,231,113     $     $     $ 11,231,113  
     Total
  $ 11,231,113     $     $     $ 11,231,113  

         
Gross
   
Gross
   
Estimated
 
   
Amortized
   
Unrealized
   
Unrealized
   
Fair
 
December 31, 2011
 
Cost
   
Gains
   
Losses
   
Value
 
Fixed maturities, available-for-sale, at fair value-
                       
 Obligations of states and political subdivisions
  $ 62,042,929     $ 5,583,733     $ 13,869     $ 67,612,793  
 Corporate debt securities
    12,188,639       1,202,149       148,616       13,242,172  
 Auction rate securities
    4,552,400                   4,552,400  
     Total
  $ 78,783,968     $ 6,785,882     $ 162,485     $ 85,407,365  
Equity securities, available-for-sale at fair value-
                               
  Common stocks and nonredeemable preferred stocks
  $ 17,652,745     $ 4,939,053     $ 41,823     $ 22,549,975  
     Total
  $ 17,652,745     $ 4,939,053     $ 41,823     $ 22,549,975  
Short-term investments-
                               
  Money market mutual funds and certificates of deposit
  $ 14,112,262     $     $     $ 14,112,262  
     Total
  $ 14,112,262     $     $     $ 14,112,262  
 
The scheduled maturities of fixed maturity securities at September 30, 2012 were as follows:
   
Available-for-Sale
 
   
Amortized
   
Fair
 
   
Cost
   
Value
 
Due in one year or less
  $ 7,089,663     $ 7,195,711  
Due after one year through five years
    48,492,618       52,604,090  
Due five years through ten years
    17,886,881       20,044,188  
Due after ten years
    4,759,363       5,323,077  
     Total
  $ 78,228,525     $ 85,167,066  
 
 
18

 
 
Gross realized gains and losses on securities for the nine months ended September 30 are summarized as follows:

     
2012
     
2011
 
Gross realized gains:                
  Obligations of states and political subdivisions
  $ 2,862     $ 20,845  
  Common stocks and nonredeemable preferred stocks
    199,977       279,899  
  Auction rate securities
    118,336       43,200  
     Total
  $ 321,175     $ 343,944  
Gross realized losses:
  Common stocks and nonredeemable preferred stocks
  $ (91,975 )   $ (141,609 )
  Other than temporary impairment of securities
    (76,539 )     (214,077 )
     Total
    (168,514 )     (355,686 )
Net realized gain (loss)
  $ 152,661     $ (11,742 )

Realized gains and losses are determined on the specific identification method.  Also included in net realized gain (loss) on investments in the Consolidated Statements of Income are impairments of other investments and gain (loss) on sales of other assets and property acquired in the settlement of claims totaling $205,158 and $(67,430) for the nine months ended September 30, 2012 and 2011, respectively.

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 loss position at September 30, 2012 and December 31, 2011.

   
Less than 12 Months
   
12 Months or Longer
   
Total
 
   
Fair
   
Unrealized
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
September 30, 2012
 
Value
   
Losses
   
Value
   
Losses
   
Value
   
Losses
 
Obligations of states and  political subdivisions
$  2,367,365     $ (12,970 )   $       $       $  2,367,365     $ (12,970 )
Corporate debt securities     -       -       1,013,480       (3,434     1,013,480       (3,434
Total fixed income securities
  $ 2,367,365     $ (12,970 )   $ 1,013,480     $ (3,434 )   $ 3,380,845     $ (16,404 )
Equity securities