We conduct our title insurance business operations primarily in leased office space. We currently lease branch offices in approximately 140 locations. Our branch office leases generally provide for initial terms ranging from three to five years, and our current leases have remaining terms ranging generally from one to 84 months. We believe that the use of short-term office leases enhances our operating flexibility, which is particularly important because of the cyclical nature of the real estate industry.
We believe that the estimates and assumptions that are important to the portrayal of our financial condition and results of operations require us to make difficult, subjective and complex judgments, which form the basis for our critical accounting policies. Our most critical accounting policies relate to reserves for title insurance and escrow losses, related contingencies and litigation surrounding title and escrow losses and impairment of intangible assets.
The decrease in opened and closed orders during the year ended December 31, 2004 was the result of a decline in residential mortgage refinancings during 2004 compared to the prior year. The increase in average revenue per closed order reflects the increase in business mix in favor of residential resale transactions, which typically garner higher revenue per order, as well as an increase in property values, which is a main driver of the revenue we charge for a transaction.
Provision for title insurance and escrow losses decreased as a percentage of revenue for the year ended December 31, 2004 to 2.1% from 3.5% for the prior year. This decrease was primarily due to favorable claim experience in both our traditional title and escrow agency operations and insurance underwriting operation.
First California Title Company (“First California”), a California corporation that commenced operations in 1964 and was acquired by Nations in 1997, is an independent title agency serving the real estate industry with escrow and title services in the northern California Counties of Alameda, Contra Costa and San Francisco.
Certain reclassifications, including the reclassification of delivery fee income previously netted with expenses to other income, have been made in the 2003 and 2004 consolidated financial statements to conform to the presentation used in 2005.
Pro forma information regarding net income and earnings per share has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 4.4% for 2005, 3.4% for 2004, 3.0% for 2003; dividend yields of 1.3% for 2005 and 1.5% for 2004 and 1.6% for 2003; volatility factors of the expected market price of the Company’s common stock was 40% for 2005, 40% for 2004 and 48% for 2003; and a weighted-average expected life at the date of grant of options of four years for 2005, 2004 and 2003.
Basic earnings per share (“EPS”) is computed by dividing earnings available to stockholders by the weighted-average number of shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or contracts to issue common stock were exercised or converted to stock or resulted in the issuance of stock that then shared in the earnings of the Company.