INVESTORS TITLE CO - Quarter Report: 2005 June (Form 10-Q)

INVESTORS TITLE COMPANY

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2005

o	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 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 o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

As of July 21, 2005, there were 2,855,744 outstanding shares of common stock of Investors Title Company, including 292,609 shares held by Investors Title Insurance Company, a wholly owned subsidiary of Investors Title Company.

INVESTORS TITLE COMPANY

AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements:

	Consolidated Balance Sheets as of June 30, 2005 and December 31, 2004	1

	Consolidated Statements of Income For the Three and Six Months Ended June 30, 2005 and 2004	2

	Consolidated Statements of Stockholders’ Equity For the Six Months Ended June 30, 2005 and 2004	3

	Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2005 and 2004	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19


PART II.	OTHER INFORMATION

Item 2.	Unregistered Sales of Equity and Use of Proceeds	20

Item 4.	Submission of Matters to a Vote of Security Holders	21

Item 6.	Exhibits	21

SIGNATURE		22

INDEX

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Investors Title Company and Subsidiaries
Consolidated Balance Sheets
*As of June 30, 2005 and December 31, 2004*
*(Unaudited)*

	June 30, 2005		December 31, 2004

Assets
Cash and cash equivalents	$	5,660,399	$	4,726,443

Investments in securities:
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 2005: $1,858,580; 2004: $2,330,129)		1,755,475		2,202,635
Available-for-sale, at fair value		64,777,760		72,471,766
Equity securities, available-for-sale, at fair value		7,569,599		7,240,306
Short-term investments		19,668,548		10,134,321
Other investments		1,453,477		1,211,517
Total investments		95,224,859		93,260,545

Premiums receivable, less allowance for doubtful accounts of $2,361,000 and $2,240,000 for 2005 and 2004, respectively		8,236,391		6,679,994
Accrued interest and dividends		865,290		753,638
Prepaid expenses and other assets		1,845,425		1,410,584
Property acquired in settlement of claims		261,317		322,517
Property, net		4,388,426		4,592,784
Deferred income taxes, net		1,307,177		1,440,247

Total Assets	$	117,789,284	$	113,186,752

Liabilities and Stockholders' Equity
Liabilities:
Reserves for claims (Note 2)	$	33,149,000	$	31,842,000
Accounts payable and accrued liabilities		5,976,355		7,919,651
Commissions and reinsurance payables		476,833		551,662
Current income taxes payable		356,030		366,168
Total liabilities		39,958,218		40,679,481

Commitments and Contingencies (Note 7)

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;
2,564,458 and 2,481,024 shares issued and outstanding 2005 and 2004,
respectively, excluding 291,286 and 374,720 shares 2005 and 2004,
respectively, of common stock held by the Company's subsidiary)		1		1
Retained earnings		74,644,650		69,272,092
Accumulated other comprehensive income, net of deferred taxes of
$1,641,517 and $1,663,447 for 2005 and 2004, respectively (Note 3)		3,186,415		3,235,178
Total stockholders' equity		77,831,066		72,507,271

Total Liabilities and Stockholders' Equity	$	117,789,284	$	113,186,752

See notes to Consolidated Financial Statements.

INDEX

Investors Title Company and Subsidiaries
Consolidated Statements of Income
*For the Three and Six Months Ended June 30, 2005 and 2004*
*(Unaudited)*



	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004
Revenues:
Underwriting income:
Premiums written	$	20,052,131	$	19,763,410	$	37,298,168	$	36,827,576
Less - premiums for reinsurance ceded		45,736		93,782		184,815		163,308
Net premiums written		20,006,395		19,669,628		37,113,353		36,664,268
Investment income - interest and dividends		808,559		662,556		1,561,324		1,318,931
Net realized gain on sales of investments		30,801		16,956		19,907		20,387
Exchange services revenue (Note 5)		1,239,793		542,304		2,049,432		1,022,198
Other		768,514		590,043		1,439,625		1,072,272
Total		22,854,062		21,481,487		42,183,641		40,098,056

Operating Expenses:
Commissions to agents		7,848,781		7,913,200		14,840,530		14,911,795
Provision for claims (Note 2)		2,172,108		2,185,024		4,071,113		4,029,403
Salaries, employee benefits and payroll taxes (Note 6)		4,413,567		4,328,260		9,780,879		8,176,165
Office occupancy and operations		1,520,794		1,322,957		3,032,884		2,526,755
Business development		464,388		523,523		891,861		876,937
Taxes, other than payroll and income		209,230		97,940		319,984		299,054
Premium and retaliatory taxes		393,770		389,391		793,315		722,395
Professional fees		372,327		397,311		647,373		807,986
Other		66,099		16,693		111,210		54,567
Total		17,461,064		17,174,299		34,489,149		32,405,057

Income Before Income Taxes		5,392,998		4,307,188		7,694,492		7,692,999

Provision For Income Taxes		1,531,000		1,426,793		2,252,000		2,591,000

Net Income	$	3,861,998	$	2,880,395	$	5,442,492	$	5,101,999

Basic Earnings Per Common Share (Note 4)	$	1.51	$	1.15	$	2.12	$	2.04

Weighted Average Shares Outstanding - Basic (Note 4)		2,563,094		2,502,807		2,563,793		2,504,088

Diluted Earnings Per Common Share (Note 4)	$	1.48	$	1.10	$	2.08	$	1.94

Weighted Average Shares Outstanding - Diluted (Note 4)		2,607,611		2,618,477		2,616,418		2,628,431

See notes to Consolidated Financial Statements.

INDEX

Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders' Equity
*For the Six Months Ended June 30, 2005 and 2004*
*(Unaudited)*

									Accumulated Other			Total
	Common Stock					Retained			Comprehensive			Stockholders'
	Shares			Amount		Earnings			Income			Equity

Balance, January 1, 2004		2,503,923		$	1	$	59,756,927		$	3,431,818		$	63,188,746
Net income							5,101,999						5,101,999
Dividends ($.07 per share)							(189,175	)					(189,175	)
Shares of common stock repurchased		(13,579	)				(414,768	)					(414,768	)
Issuance of common stock in payment of
bonuses and fees		525					17,292						17,292
Stock options exercised		10,495					163,510						163,510
Net unrealized loss on investments										(624,472	)		(624,472	)

Balance, June 30, 2004		2,501,364		$	1	$	64,435,785		$	2,807,346		$	67,243,132


Balance, January 1, 2005		2,481,024		$	1	$	69,272,092		$	3,235,178		$	72,507,271
Net income							5,442,492						5,442,492
Dividends ($.08 per share)							(205,294	)					(205,294	)
Shares of common stock repurchased		(68,730	)				(2,111,772	)					(2,111,772	)
Issuance of common stock in payment of
bonuses and fees		169					6,595						6,595
Stock options exercised		151,995					2,240,537						2,240,537
Net unrealized loss on investments										(48,763	)		(48,763	)

Balance, June 30, 2005		2,564,458		$	1	$	74,644,650		$	3,186,415		$	77,831,066

See notes to Consolidated Financial Statements.

INDEX

Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
*For the Six Months Ended June 30, 2005 and 2004*
*(Unaudited)*

	2005			2004
Operating Activities:
Net income	$	5,442,492		$	5,101,999
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		519,052			450,825
Amortization, net		36,125			19,625
Issuance of common stock in payment of bonuses and fees		6,595			17,292
Provision (benefit) for losses on premiums receivable		121,000			(114,000	)
Net gain on disposals of property		(25,849	)		(5,011	)
Net realized gain on sales of investments		(19,907	)		(20,387	)
Provision for claims		4,071,113			4,029,403
Provision for deferred income taxes		155,000			634,000
Changes in assets and liabilities:
Increase in receivables and other assets		(2,162,690	)		(328,482	)
Decrease in accounts payable and accrued liabilities		(15,148	)		(982,393	)
Decrease in commissions and reinsurance payables		(74,829	)		(236,593	)
Increase (decrease) in current income taxes payable		(10,138	)		74,310
Payments of claims, net of recoveries		(2,764,113	)		(3,584,403	)
Net cash provided by operating activities		5,278,703			5,056,185

Investing Activities:
Purchases of available-for-sale securities		(21,568,875	)		(29,626,332	)
Purchases of held-to-maturity securities		-			(3,897	)
Purchases of short-term securities		(10,473,089	)		(2,103,785	)
Purchases of and net (earnings) loss from other investments		(318,421	)		(324,933	)
Proceeds from sales and maturities of available-for-sale securities		28,841,837			24,637,670
Proceeds from sales of held-to-maturity securities		452,000			192,608
Proceeds from sales and maturities of short-term securities		938,862			3,687,268
Proceeds from sales and distributions from other investments		76,461			-
Purchases of property		(320,452	)		(522,582	)
Proceeds from sales of property		31,607			32,166
Net change in pending trades		(1,928,148	)		(695,646	)
Net cash used in investing activities		(4,268,218	)		(4,727,463	)

Financing Activities:
Repurchases of common stock, net		(2,111,772	)		(414,768	)
Exercise of options		2,240,537			163,510
Dividends paid		(205,294	)		(189,175	)
Net cash used in financing activities		(76,529	)		(440,433	)

Net Increase (Decrease) in Cash and Cash Equivalents		933,956			(111,711	)
Cash and Cash Equivalents, Beginning of Year		4,726,443			5,125,356
Cash and Cash Equivalents, End of Period	$	5,660,399		$	5,013,645

Supplemental Disclosures:
Cash Paid During the Year for:
Income taxes, net of refunds	$	2,113,987		$	1,891,000

See notes to consolidated financial statements.

INDEX

INVESTORS TITLE COMPANY

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

June 30, 2005

(Unaudited)

Note 1 - Basis of Presentation

Reference should be made to the "Notes to Consolidated Financial Statements" of Investors Title Company’s (the “Company”) Annual Report to Shareholders for the year ended December 31, 2004 for a complete description of the Company's significant accounting policies. There were no material changes in the significant accounting policies during the six months ended June 30, 2005.

Principles of Consolidation - The accompanying unaudited consolidated financial statements include the accounts and operations of Investors Title Company and its subsidiaries (Investors Title Insurance Company, Northeast Investors Title Insurance Company, Investors Title Exchange Corporation, Investors Title Accommodation Corporation, Investors Title Management Services, Inc., Investors Title Commercial Agency, LLC, Investors Capital Management Company and Investors Trust Company), and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. All intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation of the financial position, results of operations and cash flows in the accompanying unaudited consolidated financial states have been included. All such adjustments are of a normal recurring nature. Operating results for the quarter and the six months ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005.

For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2004.

Use of Estimates and Assumptions - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

INDEX

Reclassification - Certain 2004 amounts have been reclassified to conform to 2005 classifications. These reclassifications had no effect on net income or stockholders’ equity as previously reported.

Stock-Based Compensation - The Company accounts for stock-based compensation based on the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB No. 25”), which states that, for fixed plans, no compensation expense is recorded for stock options or other stock-based awards to employees that are granted with an exercise price equal to or above the estimated fair value per share of the Company's common stock on the grant date. In the event that stock options are granted with an exercise price below the estimated fair value of the Company's common stock at the grant date, the difference between the fair value of the Company's common stock and the exercise price of the stock option is recorded as deferred compensation. Deferred compensation is amortized to compensation expense over the vesting period of the stock option. The Company has adopted the disclosure requirements of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation ("SFAS No. 123"), and Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure - an Amendment to FASB Statement No. 123, which together require compensation expense to be disclosed based on the fair value of the options granted at the date of the grant.

Had compensation cost for the Company's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method required by SFAS No. 123, the Company's net income and diluted net income per common share would have been the pro forma amounts indicated in the following table:

	Three Months Ended June 30,						Six Months Ended June 30,
	2005			2004			2005			2004
Net income as reported	$	3,861,998		$	2,880,395		$	5,442,492		$	5,101,999
Add back issuance of common stock in payment of bonuses and fees, net of tax		-			3,307			4,352			11,412
Deduct total stock-based employee compensation expense determined under fair value based method for all awards, net of tax		(36,564	)		(41,212	)		(77,197	)		(86,932	)
Pro forma net income	$	3,825,434		$	2,842,490		$	5,369,647		$	5,026,479
Net income per share:
Basic - as reported	$	1.51		$	1.15		$	2.12		$	2.04
Basic - pro forma	$	1.49		$	1.14		$	2.09		$	2.01

Diluted - as reported	$	1.48		$	1.10		$	2.08		$	1.94
Diluted - pro forma	$	1.47		$	1.09		$	2.05		$	1.91

INDEX

Recently Issued Accounting Standards - In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting SFAS No. 123(R), which revises SFAS No. 123 and supersedes APB 25. SFAS No. 123(R) eliminates an entity’s ability to account for share-based payments using APB 25 and requires all such transactions be accounted for using a fair value-based method. In April 2005, the Securities and Exchange Commission deferred the effective date of SFAS No. 123(R) from the first interim or annual period beginning after June 15, 2005 to the next fiscal year beginning after June 15, 2005. SFAS No. 123(R) is not expected to have a material impact on the Company’s consolidated statements of income or balance sheets. If the Company had included the cost of employee stock option compensation in its consolidated financial statements, its net income for the quarter and the first half ended June 30, 2005 would have been lower by $36,564 and $72,845, respectively, using a Black-Scholes model. Net income for the quarter and the six months ended June 30, 2004 would have been lower by $37,905 and $75,520, respectively, also using a Black-Scholes model.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154”). SFAS 154 replaces APB Opinion No. 20, “Accounting Changes,” (“APB No. 20”) and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” The statement requires a voluntary change in accounting principle to be applied retrospectively to all prior period financial statements so that those financial statements are presented as if the current accounting principle had always been applied. APB No. 20 previously required most voluntary changes in accounting principle to be recognized by including in net income of the period of change the cumulative effect of changing to the new accounting principle. In addition, SFAS No. 154 carries forward without change the guidance contained in APB No. 20 for reporting a correction of an error in previously issued financial statements and a change in accounting estimate. SFAS No. 154 is effective for accounting changes and correction of errors made after January 1, 2006, with early adoption permitted.

Note 2 - Reserves for Claims

Transactions in the reserves for claims for the six months ended June 30, 2005 and the year ended December 31, 2004 were as follows:

	June 30, 2005			December 31, 2004
Balance, beginning of year	$	31,842,000		$	30,031,000
Provision, charged to operations		4,071,113			7,984,339
Payments of claims, net of recoveries		(2,764,113	)		(6,173,339	)
Ending balance	$	33,149,000		$	31,842,000

The total reserve for all reported and unreported losses the Company incurred through June 30, 2005 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 written through June 30, 2005. 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.

INDEX

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

Total comprehensive income for the three months ended June 30, 2005 and 2004 was $4,326,094 and $2,177,908, respectively. Comprehensive income for the six months ended June 30, 2005 and 2004 was $5,393,729 and $4,477,527, respectively. Comprehensive income is comprised solely of unrealized gains or losses on the Company's available-for-sale securities.

Note 4 - Earnings Per Common Share

Employee stock options are considered outstanding for the diluted earnings per common share calculation and are computed using the treasury stock method. The total increase in the weighted average shares outstanding related to these equivalent shares was 44,517 and 115,670 for the three months ended June 30, 2005 and 2004, respectively, and 52,625 and 124,343 for the six months ended June 30, 2005 and 2004, respectively. Options to purchase 96,526 and 252,996 shares of common stock were outstanding as of June 30, 2005 and 2004, respectively. Of the total options outstanding, 3,000 and 1,200 options were not included in the computation of diluted earnings per share for the three months ended June 30, 2005 and 2004, respectively, and 3,000 options were not included in the computation of diluted earnings per share for the six months ended June 30, 2005 because the options' exercise prices were greater than the average market price of the common shares.

Note 5 - Segment Information

Consistent with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, the Company has aggregated its operating segments into two reportable segments: 1) title insurance services; and 2) tax-deferred exchange services:

INDEX

Three Months Ended June 30, 2005	Title Insurance		Exchange Services			All Other			Intersegment Eliminations			Total
Operating revenues	$	20,420,945	$	1,239,793		$	529,332		$	(175,368	)	$	22,014,702
Investment income		750,575		(809	)		70,446			(11,653	)		808,559
Net realized gain on sales of investments		30,801		-			-			-			30,801
Total revenues	$	21,202,321	$	1,238,984		$	599,778		$	(187,021	)	$	22,854,062
Operating expenses		16,826,461		178,954			631,018			(175,369	)		17,461,064
Income (loss) before income taxes	$	4,375,860	$	1,060,030		$	(31,240	)	$	(11,652	)	$	5,392,998
Assets, net	$	99,133,057	$	1,775,538		$	16,880,689		$	-		$	117,789,284


Three Months Ended June 30, 2004	Title Insurance		Exchange Services		All Other			Intersegment Eliminations			Total
Operating revenues	$	19,912,128	$	542,304	$	490,425		$	(142,882	)	$	20,801,975
Investment income		633,888		1,936		26,973			(241	)		662,556
Net realized gain on sales of investments		16,956		-		-			-			16,956
Total revenues	$	20,562,972	$	544,240	$	517,398		$	(143,123	)	$	21,481,487
Operating expenses		16,621,298		153,644		542,238			(142,881	)		17,174,299
Income (loss) before income taxes	$	3,941,674	$	390,596	$	(24,840	)	$	(242	)	$	4,307,188
Assets, net	$	90,493,978	$	1,063,816	$	11,660,951		$	-		$	103,218,745


Six Months Ended June 30, 2005	Title Insurance		Exchange Services		All Other			Intersegment Eliminations			Total
Operating revenues	$	37,826,893	$	2,049,432	$	1,063,514		$	(337,429	)	$	40,602,410
Investment income		1,448,981		2,643		132,866			(23,166	)		1,561,324
Net realized gain on sales of investments		19,907		-		-			-			19,907
Total revenues	$	39,295,781	$	2,052,075	$	1,196,380		$	(360,595	)	$	42,183,641
Operating expenses		33,227,868		369,343		1,229,367			(337,429	)		34,489,149
Income (loss) before income taxes	$	6,067,913	$	1,682,732	$	(32,987	)	$	(23,166	)	$	7,694,492
Assets, net	$	99,133,057	$	1,775,538	$	16,880,689		$	-		$	117,789,284


Six Months Ended June 30, 2004	Title Insurance		Exchange Services		All Other			Intersegment Eliminations			Total
Operating revenues	$	37,127,965	$	1,022,198	$	892,134		$	(283,559	)	$	38,758,738
Investment income		1,275,693		3,137		50,828			(10,727	)		1,318,931
Net realized gain on sales of investments		20,387		-		-			-			20,387
Total revenues	$	38,424,045	$	1,025,335	$	942,962		$	(294,286	)	$	40,098,056
Operating expenses		31,288,320		299,122		1,101,174			(283,559	)		32,405,057
Income (loss) before income taxes	$	7,135,725	$	726,213	$	(158,212	)	$	(10,727	)	$	7,692,999
Assets, net	$	90,493,978	$	1,063,816	$	11,660,951		$	-		$	103,218,745

INDEX

Operating revenues represent net premiums written and other revenues.

Note 6 - Retirement and Other Postretirement Benefit Plans

On November 17, 2003, 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 insurance, vision insurance and life insurance. The plan is unfunded. The following sets forth the net periodic benefits cost for the executive benefits for the periods three and six months ended June 30, 2005 and 2004:

	Three Months Ended June 30,				Six Months Ended June 30,
	2005		2004		2005		2004

Service cost	$	3,591	$	-	$	7,183	$	3,513
Interest cost		3,419		3,875		6,838		7,750
Amortization of Unrecognized Prior Service Cost		4,802		8,521		9,898		17,042
Amortization of Unrecognized Gains or Losses		-		-		-		-

Net Periodic Benefits Costs	$	11,812	$	12,396	$	23,919	$	28,305

Note 7 - Commitments and Contingencies

The Company and its subsidiaries are involved in various legal proceedings that are incidental to their business. In the Company’s opinion, based on the present status of these proceedings, any potential liability of the Company or its subsidiaries with respect to these legal proceedings will not, in the aggregate, be material to the Company’s consolidated financial condition, results of operations or liquidity.

INDEX

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company's 2004 Form 10-K and 2004 Annual Report to Shareholders should be read in conjunction with the following discussion since they contain important information for evaluating the Company's operating results and financial condition.

Overview

Title Insurance: Investors Title Company (the "Company") engages primarily in two segments of business. Its primary business activity is the issuance of title insurance through two subsidiaries, Investors Title Insurance Company ("ITIC") and Northeast Investors Title Insurance Company ("NE-ITIC") and settlement-related services. Through ITIC and NE-ITIC, the Company underwrites land title insurance for real estate owners and mortgagees principally as a primary insurer and, to a lesser extent, as a reinsurer for other title insurance companies. Title insurance protects against loss or damage resulting from defects that affect the title to real property. The commitment and policies issued are predominately the standard American Land Title Association approved forms.

There are two basic types of title insurance policies - one for the mortgage lender and one for the real estate owner. A lender often requires property owners to purchase title insurance to protect its position as a holder of a mortgage loan, but the lender's title insurance policy does not protect the property owner. The property owner has to purchase a separate owner's title insurance policy to protect his investment. When real property is conveyed from one party to another, occasionally there is a latent defect in the title or a mistake or omission in a prior deed, will or mortgage that may give a third party a legal claim against such property. If a claim is made against real property, title insurance provides a corporate guarantee against insured defects, pays all legal expenses to eliminate any title defects, pays any claims arising from errors in title examination and recording, and pays any losses arising from hidden defects in title and defects that are not of record. Title insurance provides an assurance that the insurance holder's ownership and use of such property will be defended promptly against claims, at no cost, whether or not the claim is valid.

ITIC delivers title insurance coverage through a home office, branch offices and issuing agents. In North Carolina, ITIC issues policies primarily through a home office and 27 branch offices. The Company also has branch offices in South Carolina and Nebraska. Issuing agents are typically real estate attorneys or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company’s marketing strategy in a particular territory. NE-ITIC currently operates through agents in New York.

The Company's overall level of premiums written and profitability in the land title insurance industry is affected by a number of factors, including the level of interest rates, the availability of mortgage funds, the level of real estate transactions and mortgage refinance activity, the cost of real estate, employment levels, family income levels and general economic conditions.

INDEX

Generally, real estate activity declines as a result of higher interest rates or an economic downturn, thus leading to a corresponding decline in title insurance premiums written and the Company’s profitability. The cyclical nature of the land title insurance industry has historically caused fluctuations in revenues and profitability and it is expected to continue to do so in the future.

Volume is a key factor in the Company's profitability due to the existence of significant fixed costs such as personnel and occupancy expenses associated with the support of the issuance of title insurance policies and of general corporate operations. These expenses will be incurred by the Company regardless of the volume of premiums written. The resulting operating leverage has historically tended to amplify the impact of changes in volume on the Company’s profitability.

Operating results for the second quarter and for the six months ended June 20, 2005 continued to benefit from ongoing low interest rates. However, any substantial increases in interest rates will likely have a negative impact on mortgage originations. Operating results for the second quarter and the six months ended June 30, 2005, therefore, should not be viewed as indicative of the Company’s future operating results.

The Company continues to monitor and strives to manage operating expenses to offset the cyclical nature of the real estate market and with knowledge of the potential for declines in title insurance revenues if interest rates rise or the economy slows.

Exchange Services: The Company's second business segment provides customer services in connection with tax-deferred real property exchanges through its subsidiaries, Investors Title Exchange Corporation ("ITEC") and Investors Title Accommodation Corporation ("ITAC"). ITEC serves as a qualified intermediary in § 1031 like-kind exchanges of real or personal property. In its role as qualified intermediary, ITEC coordinates the exchange aspects of the real estate transaction with the closing agents. ITEC's duties include drafting standard exchange documents, holding the exchange funds between the sale of the old property and the purchase of the new property, and accepting the formal identification of the replacement property within the required identification period. ITAC serves as exchange accommodation titleholder in reverse exchanges. As exchange accommodation titleholder, ITAC offers a vehicle for accommodating a reverse exchange when the taxpayer must acquire replacement property before selling the relinquished property.

Factors that influence the title insurance industry will also generally affect the exchange services industry. In addition, the services provided by the Company’s exchange services are pursuant to provisions in the Internal Revenue Code. From time to time, these exchange provisions are subject to review and proposed changes. Any future change in the Code could potentially have a material negative impact on the exchange segment’s revenue and profitability.

All Other Services: All other services include those offered by Investors Trust Company ("INTC"), a wholly owned subsidiary of the Company, which was chartered on February 17, 2004 by the North Carolina Commissioner of Banks. INTC provides investment management and trust services to individuals, companies, banks and trusts.

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Critical Accounting Policies

During the six months ended June 30, 2005, the Company made no material changes in its critical accounting policies as previously disclosed in Management’s Discussion and Analysis in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.

Results of Operations

For the second quarter ended June 30, 2005, net premiums written increased 1.7% to $20,006,395, investment income increased 22% to $808,559, revenues increased 6.4% to $22,854,062 and net income increased 34.1% to $3,861,998, all compared with the second quarter of 2004. Net income per basic and diluted common share increased 31.3% and 34.5%, respectively, to $1.51 and $1.48 compared with the prior year quarter. For the second quarter of 2005, the title insurance segment's operating revenues increased 2.5% compared with the second quarter of 2004, while the exchange services segment's operating revenues increased 128.6% for the second quarter of 2005, compared with the same quarter in 2004.

For the six-month period ended June 30, 2005, net premiums written increased 1.2% to $37,113,353, investment income increased 18.4% to $1,561,324, revenues increased 5.2% to $42,183,641 and net income increased 6.7% to $5,442,492, all compared with the same six-month period in 2004. Net income per basic and diluted common share increased 3.9% and 7.2%, respectively, to $2.12 and $2.08 compared with the same six-month period ended June 30, 2004. For the six months ended June 30, 2005, the title insurance segment's operating revenues increased 1.8% compared with the same period in 2004, while the exchange services segment's operating revenues increased 100.5% for the six months ended June 30, 2005 compared with the same six-month period in 2004.

Operating revenues: Operating revenues for the title insurance segment include premiums written and reinsurance assumed, net of reinsurance ceded (net premiums written) plus other income as well as gains and losses on the disposal of fixed assets. Investment income and realized gains and losses are not included in operating revenues.

According to the Freddie Mac Weekly Mortgage Rate Survey, the monthly average 30-year fixed mortgage interest rates decreased to an average of 5.74% for the six months ended June 30, 2005, compared with 5.87% for the six months ended June 30, 2004. Ongoing low interest rates continued to fuel high volumes of purchase transactions in residential and commercial property. Strength in the overall real estate market favorably impacted revenue growth, largely offsetting the decline in mortgage refinance lending, which typically has lower premiums per transaction compared with rates for purchases. The total number of policies and commitments issued declined in the second quarter of 2005 to 72,953, a decrease of 6.4% compared with 77,946 issued in the same period in 2004. The total number of policies and commitments issued declined in the six months ended June 30, 2005 to 134,950, a decrease of 9.9% compared with 149,842 policies and commitments issued in the first six months of 2004.

INDEX

Following is a schedule of premiums written for the three and six months ended June 30, 2005 and 2004 in all states in which the Company's two insurance subsidiaries, ITIC and NE-ITIC, currently underwrite insurance:

	Three Months Ended June 30,						Six Months Ended June 30,
State	2005			2004			2005			2004
Alabama	$	379,273		$	385,354		$	730,003		$	713,670
Florida		462,331			299,884			771,940			655,488
Illinois		278,550			285,394			491,330			549,122
Kentucky		545,873			469,178			984,840			869,208
Maryland		487,882			402,188			860,528			737,048
Michigan		1,273,971			1,357,627			2,385,378			2,580,427
Minnesota		259,992			271,224			528,792			517,584
Mississippi		298,242			266,542			561,593			512,817
Nebraska		180,377			236,882			385,695			455,806
New York		774,372			1,015,832			1,360,377			1,832,172
North Carolina		9,606,689			8,999,926			17,365,468			16,601,446
Pennsylvania		448,823			884,749			827,648			1,459,575
South Carolina		1,340,095			1,471,548			3,387,988			3,245,445
Tennessee		722,736			873,284			1,290,584			1,584,199
Virginia		2,211,161			1,872,162			3,954,013			3,320,600
West Virginia		582,511			488,153			1,012,065			863,081
Other		199,253			183,483			385,880			329,888
Direct Premiums		20,052,131			19,763,410			37,284,122			36,827,576
Reinsurance Assumed		-			-			14,046			-
Reinsurance Ceded		(45,736	)		(93,782	)		(184,815	)		(163,308	)
Net Premiums	$	20,006,395		$	19,669,628		$	37,113,353		$	36,664,268

Year to date premiums in North Carolina and Virginia were positively impacted by the continued strength in the real estate market. Partially offsetting the increases in these states, premiums written in Pennsylvania, New York and Tennessee were negatively impacted by declining business in individual agencies in those states.

Following is a breakdown of branch and agency premiums for the three and six months ended June 30, 2005 and 2004:

	Three Months Ended June 30,								Six Months Ended June 30,
	2005		%		2004		%		2005		%		2004		%
Branch	$	9,131,282		46	$	8,848,520		45	$	16,381,111		44	$	16,320,815		45
Agency		10,875,113		54		10,821,108		55		20,732,242		56		20,343,453		55
Total	$	20,006,395		100	$	19,669,628		100	$	37,113,353		100	$	36,664,268		100

INDEX

Net premiums written from branch operations increased 3.2% for the three months ended June 30, 2005 compared with the same period in the prior year. Net premiums written from branch operations increased 0.4% for the six months ended June 30, 2005, compared with the same period in the prior year. Of the Company’s 29 branch locations that underwrite title insurance policies, 27 are located in North Carolina and, as a result, branch net premiums written primarily represent North Carolina business.

Agency net premiums increased 0.5% for the quarter ended June 30, 2005 compared with the same period in the prior year. Agency net premiums increased 1.9% for the six months ended June 30, 2005 compared with the same period in the prior year.

Operating revenues from the Company’s two subsidiaries that provide tax-deferred exchange services (ITEC and ITAC) increased 128.6% compared with the second quarter of 2004. For the first six months ended June 30, 2005, operating revenues from ITEC and ITAC increased 100.5% compared with the first six months of 2004. The increase in 2005 was primarily due to an increased demand for qualified intermediary services and an increase in fee income. The Company has focused on increased marketing and education efforts.

Investment income increased 18.4% for the six months ended June 30, 2005 compared with the same period in 2004 and 22% for the three months ended June 30, 2005 compared with the same period in 2004. The increase was primarily attributable to the increase in the average investment portfolio balance.

Other revenues include management and closing fee income and investment management fee income. Other revenues increased 30.2% in the second quarter of 2005 compared with the second quarter of the prior year and 34.3% in the six months ended June 30, 2005 compared with the first six months of 2004, primarily due to increases in investment management fee income, closing fees and increased income related to the Company’s other equity method investments.

Operating Expenses: Total operating expenses increased 1.7% and 6.4% for the three and six months ended June 30, 2005, respectively, compared with the same periods in 2004. These increases were due primarily to an increase in salaries, employee benefits and payroll taxes and an increase in office occupancy and operations. A summary by segment of the Company’s operating expenses is as follows for the quarter and the six months ended June 30:

	Three Months Ended June 30,								Six Months Ended June 30,
	2005		%		2004		%		2005		%		2004		%
Title insurance	$	16,661,084		95	$	16,478,417		96	$	32,908,728		95	$	31,004,760		96
Exchange services		169,980		1		153,644		1		353,085		1		299,122		1
All other		630,000		4		542,238		3		1,227,336		4		1,101,175		3
Total	$	17,461,064		100	$	17,174,299		100	$	34,489,149		100	$	32,405,057		100

Commissions as a percentage of agency premiums remained relatively stable in the second quarter of 2005 when compared with the second quarter of last year.

INDEX

The Company reviews its claims experience quarterly, and in conjunction with its outside actuary, evaluates the adequacy of its claims reserves. The Company records its provision for future claims payments at the time premiums are recognized as revenue in accordance with paragraph of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” At June 30, 2005, the total reserves for claims were $33,149,000. Of that total, $4,500,903 was reserved for specific claims, and $28,648,097 was reserved for claims for which the Company had no notice. The provision for claims as a percentage of net premiums written was 10.9% for the second quarter of 2005, versus 11.1% for the same period in 2004. For the first six months of 2005 and 2004, the provision for claims as a percentage of net premiums written was 11.0%.

On a consolidated basis, salaries, employee benefits and payroll taxes as a percentage of total revenues were 19.3% and 20.1% for the second quarter of 2005 and 2004, respectively. For the first six months of the year, salaries, employee benefits and payroll taxes as a percentage of total revenues were 23.2% and 20.4% for 2005 and 2004, respectively. The increase in salaries, employee benefits and payroll taxes in the first six months of 2005 was partially attributed to compensation expense totaling $598,484 resulting from shares purchased by ITIC pursuant to the exercise of nonqualified stock options by three related parties. In addition, salaries and employee benefits increased compared with the first six months of last year due to increases in expenses associated with executive contracts, merit increases, the addition of staff and increases in health insurance costs.

The title insurance segment’s total salaries, employee benefits and payroll taxes accounted for 88.8% and 89.6% of the consolidated total amount for the second quarter of 2005 and 2004, respectively and 89.7% and 89.3% for the six months ended June 30, 2005, and 2004, respectively.

Overall office occupancy and operations as a percentage of total revenues was 6.7% and 6.2% for the second quarter of 2005 and 2004, respectively and 7.2% and 6.3% for the first six months of 2005 and 2004, respectively. The increase in office occupancy and operations expense was due to an increase in various items, including contract labor, printing, office rent, depreciation expense and telecommunications.

Professional fees decreased for the six months ended June 30, 2005 compared with the same period in 2004 primarily due to a decline in various legal and professional fees.

Income Taxes: The provision for income taxes was 28.4% and 33.1% of income before income taxes for the three months ended June 30, 2005 and 2004, respectively. For the six months ended June 30, 2005 and 2004, the provision for income taxes was 29.3% and 33.7%, respectively, of income before income taxes. The decrease in the effective rates was primarily due to an increase in tax-exempt investment income.

Liquidity and Capital Resources

Cash flows: Net cash provided by operating activities for the six months ended June 30, 2005, amounted to $5,278,703 compared with $5,056,185 for the six months ended June, 30, 2004. The net increase is primarily the result of the deceleration of accounts payable and accrued liabilities, decreased payments of claims and the increase in net income, partially offset by the increase in receivables and other assets and the decrease in the provision for deferred income taxes compared with the first six months of last year.

INDEX

Payment of dividends: The Company’s ability to pay dividends and operating expenses is dependent among other things on funds received from the insurance subsidiaries, which are subject to regulation in the states in which they do business. These regulations, among other things, require prior regulatory approval of the payment of dividends and other intercompany transfers. The Company believes, however, that amounts available for transfer from the insurance subsidiaries are adequate to meet the Company’s operating needs.

Liquidity: Management believes that funds generated from operations will enable the Company to adequately meet its cash needs and is unaware of any trend or occurrence that is likely to result in adverse liquidity changes. In addition to operational liquidity, the Company maintains a high degree of liquidity within its investment portfolio in the form of short-term investments and other readily marketable securities.

Capital Expenditures: During 2005, the Company has plans for various capital improvement projects, including several software development projects. The Company anticipates additional capital expenditures of approximately $600,000 during the remainder of 2005 in connection with these capital improvement projects.

Off-Balance Sheet Arrangements and Contractual Obligations: It is not the general practice of the Company to enter into off-balance sheet arrangements nor is it the policy of the Company to issue guarantees to third parties. Off-balance sheet arrangements are generally limited to the future payments under noncancelable operating leases, payments due under various agreements with third-party service providers, and obligations pursuant to certain executive employment agreements.

INDEX

The following table summarizes the Company’s future estimated cash payments under existing contractual obligations at June 30, 2005, including payments due by period:

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Operating Lease Obligations	$	1,145,113	$	674,906	$	460,457	$	9,750	$	-
Other Obligations		551,237		455,737		65,500		30,000		-
Executive Employment Agreements Obligations		1,872,000		-		-		-		1,872,000
Total	$	3,568,350	$	1,130,643	$	525,957	$	39,750	$	1,872,000

The total reserve for all reported and unreported losses the Company incurred through June 30, 2005 is represented by the reserve for claims. Information regarding the claims reserve can be found in Note 2 to the consolidated financial statements of this Form 10-Q. Further information on contractual obligations related to the reserves for claims can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004 as filed with the Securities and Exchange Commission.

Equity Investments: The Company’s equity investments are in public companies whose security prices are subject to volatility. Should the fair value of these investments fall below the Company’s cost bases and the financial condition or prospects of these companies deteriorate, the Company may determine in a future period that this decline in fair value is other than temporary, requiring that an impairment loss be recognized.

Safe Harbor Statement

This Quarterly Report on Form 10-Q, as well as information included in future filings by the Company with the Securities and Exchange Commission and information contained in written material, press releases and oral statements issued by or on behalf of the Company, contains, or may contain, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect management’s current outlook for future periods. These statements may be identified by the use of words such as "plan," "expect," "aim," "believe," "project," "anticipate," "intend," "estimate," "will," "should," "could" and other expressions that indicate future events and trends. All statements that address expectations or projections about the future, including statements about the Company's strategy for growth, product and service development, market position, claims, expenditures, financial results and cash requirements, are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those projected in any such forward-looking statements depending on a variety of factors, including, but not limited to, the following: (1) the demand for title insurance will vary due to factors such as interest rate fluctuations, the availability of mortgage funds, the level of real estate transactions, including mortgage refinance activity, the cost of real estate, consumer confidence, employment levels, family income levels and general economic conditions; (2) losses from claims may be greater than anticipated such that reserves for possible claims are inadequate; (3) unanticipated adverse changes in securities markets, including interest rates, could result in material losses on the Company's investments; (4) the Company's dependence on key management personnel, the loss of whom could have a material adverse effect on the Company's business; (5) the Company's ability to develop and offer products and services that meet changing industry standards in a timely and cost-effective manner and significant changes or additions to applicable government regulations; and (6) state statutes require the Company's insurance subsidiaries to maintain minimum levels of capital, surplus and reserves and restrict the amount of dividends that the insurance subsidiaries may pay to the Company without prior regulatory approval. These and other risks and uncertainties may be described from time to time in the Company's other reports and filings with the Securities and Exchange Commission.

INDEX

Item 3. Quantitative and Qualitative Disclosures About Market Risk

No material changes in the Company’s market risk or market strategy occurred during the current period. A detailed discussion of market risk is provided in the Company’s 2004 Annual Report on Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 (the "Act") was recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission's rules and forms. An evaluation was performed under the supervision and with the participation of the Company's management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-15(e) under the Act. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2005. In reaching this conclusion, the Company's Chief Executive Officer and Chief Financial Officer determined that the Company's disclosure controls and procedures were effective in ensuring that such information was accumulated and communicated to the Company's management as appropriate to allow timely decisions regarding required disclosure.

During the quarter ended June 30, 2005, there was no change in the Company's internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

INDEX

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity and Use of Proceeds

(a)

None

(b)

None

(c)	The following table provides information about purchases by the Company (and all affiliated purchasers) during the quarter ended June 30, 2005 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

Issuer Purchases of Equity Securities

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plan		Maximum Number of Shares that May Yet Be Purchased Under the Plan
Beginning of period								427,577
04/01/05 - 04/30/05		744	$	37.36		744		426,833
05/01/05 - 05/31/05		691	$	36.51		691		426,142
06/01/05 - 06/30/05		-	$	00.00		-		426,142
Total:		1,435	$	36.95		1,435		426,142

(1)	For the quarter ended June 30, 2005, ITIC purchased an aggregate of 1,435 shares of the Company’s common stock pursuant to the purchase plan (the “Plan”) that was publicly announced on June 5, 2000.

(2)

On June 5, 2000, the Board of Directors of ITIC approved the purchase by ITIC of up to an aggregate of 500,000 shares of the Company’s common stock pursuant to the Plan. Subsequently, the Board approved the purchase of an additional 125,000 shares of the Company’s common stock pursuant to the plan. Unless terminated earlier by resolution of the Board of Directors of ITIC, the Plan will expire when ITIC has purchased all shares authorized for purchase thereunder.

(3)	ITIC intends to make further purchases under this Plan.

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Item 4. Submission of Matters to a Vote of Security Holders

(a) Investors Title Company's Annual Meeting of Shareholders was held on May 18, 2005.

(c) The voting results for the proposal to elect three Directors to the Company's Board of Directors, each for a three-year term, are as follows:

Director

For

Against

Abstentions

Withheld

Broker

Non-votes

W. Morris Fine

2,085,671

N/A

7,738

N/A

Loren B. Harrell, Jr.

2,084,633

N/A

8,776

N/A

R. Horace Johnson

2,084,633

N/A

8,776

N/A

Item 6. Exhibits

(a)

Exhibits


31 (i)	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31(ii)	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32	Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURE

Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed in its behalf by the undersigned hereunto duly authorized.


	INVESTORS TITLE COMPANY

Dated: August 11, 2005	By:	/s/ James A. Fine, Jr.
		James A. Fine, Jr.
		President, Principal Financial Officer and Principal Accounting Officer