Investors Title (ITIC) 10-Q 2004 Q2 Quarterly report

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, 2004

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 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 is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |_|     No |X|

          As of June 30, 2004, there were 2,855,744 outstanding shares of common stock of Investors Title Company, including 354,380 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, 2004 and December 31, 2003	1
	Consolidated Statements of Income For the Three and Six Months Ended June 30, 2004 and 2003	2
	Consolidated Statements of Stockholders’ Equity  For the Six Months Ended June 30, 2004 and 2003	3
	Consolidated Statements of Cash Flows For the Six Months Ended June 30, 2004 and 2003	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
PART II.	OTHER INFORMATION
Item 2.	Changes in Securities, Use of Proceeds & Issuer Purchases of Equity Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 6.	Exhibits and Reports on Form 8-K	20
SIGNATURE		21

PART I.  FINANCIAL INFORMATION

Item 1.    Financial Statements

Investors Title Company and Subsidiaries
Consolidated Balance Sheets
As of June 30, 2004 and December 31, 2003

				June 30, 2004		December 31, 2003
				(Unaudited)		(Audited)
Assets
	Cash and cash equivalents			$	5,013,645	$	5,125,356
	Investments in securities:
		Fixed maturities:
			Held-to-maturity, at amortized cost		3,341,240		3,526,030
			Available-for-sale, at fair value		71,188,047		60,803,807
		Equity securities, at fair value			6,628,712		14,556,785
		Other investments			1,280,494		955,561
			Total investments		82,438,493		79,842,183
	Premiums receivable, less allowance for doubtful accounts of $2,360,000 and $2,474,000 for 2004 and 2003, respectively				7,995,639		8,031,803
	Accrued interest and dividends				679,458		667,147
	Prepaid expenses and other assets				1,488,550		934,345
	Property acquired in settlement of claims				286,517		286,517
	Property, net				4,143,845		4,099,243
	Deferred income taxes, net				1,172,598		1,485,217
Total Assets				$	103,218,745	$	100,471,811
Liabilities and Stockholders’ Equity
Liabilities:
	Reserves for claims (Note 2)			$	30,476,000	$	30,031,000
	Accounts payable and accrued liabilities				4,653,737		5,782,470
	Commissions and reinsurance payables				489,598		726,191
	Premium taxes payable				—		461,436
	Current income taxes payable				356,278		281,968
		Total liabilities			35,975,613		37,283,065
Commitments and Contingencies (Note 6)
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; 2,501,364 and 2,503,923 shares issued and outstanding 2004 and 2003, respectively, excluding 354,380 and 351,821 shares 2004 and 2003, respectively, of common stock held by the Company’s subsidiary)				1		1
	Retained earnings				64,435,785		59,756,927
	Accumulated other comprehensive income, net of deferred taxes of $1,447,096 and $1,768,477 for 2004 and 2003, respectively (Note 3)				2,807,346		3,431,818
		Total stockholders’ equity			67,243,132		63,188,746
Total Liabilities and Stockholders’ Equity				$	103,218,745	$	100,471,811

See notes to consolidated financial statements.

1

Investors Title Company and Subsidiaries
Consolidated Statements of Income
For the Three and Six Months Ended June 30, 2004 and 2003
(Unaudited)

				For The Three Months Ended June 30				For The Six Months Ended June 30
				2004		2003		2004		2003
Revenues:
	Underwriting income:
		Premiums written		$	19,743,434	$	23,415,757	$	36,794,716	$	43,180,931
		Less - premiums for reinsurance ceded			93,782		93,128		163,308		190,317
			Net premiums written		19,649,652		23,322,629		36,631,408		42,990,614
	Investment income - interest and dividends				691,996		679,857		1,365,322		1,354,435
	Net realized gain on sales of investments				16,956		41,867		20,387		64,914
	Exchange services revenue (Note 5)				542,304		389,812		1,022,198		490,901
	Other				580,579		745,478		1,058,741		1,307,222
			Total		21,481,487		25,179,643		40,098,056		46,208,086
Operating Expenses:
	Commissions to agents				7,913,200		11,462,988		14,911,795		20,855,778
	Provision for claims (Note 2)				2,185,024		2,687,693		4,029,403		4,770,731
	Salaries, employee benefits and payroll taxes (Note 6)				4,328,260		3,708,942		8,176,165		7,255,999
	Office occupancy and operations				1,322,957		1,365,677		2,533,255		2,462,793
	Business development				523,523		402,204		876,937		783,156
	Taxes, other than payroll and income				97,940		121,159		299,054		175,282
	Premium and retaliatory taxes				389,391		462,819		722,395		884,105
	Professional fees				408,871		250,795		819,546		458,139
	Other				5,133		147,914		36,507		199,845
			Total		17,174,299		20,610,191		32,405,057		37,845,828
Income Before Income Taxes					4,307,188		4,569,452		7,692,999		8,362,258
Provision For Income Taxes					1,426,793		1,482,000		2,591,000		2,666,245
Net Income				$	2,880,395	$	3,087,452	$	5,101,999	$	5,696,013
Basic Earnings Per Common Share (Note 4)				$	1.15	$	1.24	$	2.04	$	2.27
Weighted Average Shares Outstanding - Basic (Note 4)					2,502,807		2,494,036		2,504,088		2,503,773
Diluted Earnings Per Common Share (Note 4)				$	1.10	$	1.18	$	1.94	$	2.18
Weighted Average Shares Outstanding - Diluted (Note 4)					2,618,477		2,619,743		2,628,431		2,616,098
Dividends Paid				$	113,988	$	74,708	$	189,175	$	150,179
Dividends Per Share				$	0.04	$	0.03	$	0.07	$	0.06

See notes to consolidated financial statements.

2

Investors Title Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity
For the Six Months Ended June 30, 2004 and 2003
(Unaudited)

	Common Stock									Accumulated Other Comprehensive Income (Net				Total
							Retained			Unrealized Gain (Loss)				Stockholders’
	Shares			Amount			Earnings			on Investments)				Equity
Balance, December 31, 2002		2,515,804			$	1	$	49,613,044			$	3,055,139		$	52,668,184
Net income								5,696,013							5,696,013
Dividends ($.06 per share)								(150,179	)						(150,179	)
Shares of common stock repurchased		(36,128	)					(834,170	)						(834,170	)
Compensation expense related to stock options		1,443						31,009							31,009
Stock options exercised		17,820						272,246							272,246
Net unrealized gain (loss) on investments												570,099			570,099
Balance, June 30, 2003		2,498,939			$	1	$	54,627,963			$	3,625,238		$	58,253,202
Balance, December 31, 2003		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	)
Compensation expense related to stock options		525						17,292							17,292
Stock options exercised		10,495						163,510							163,510
Net unrealized gain (loss) on investments												(624,472	)		(624,472	)
Balance, June 30, 2004		2,501,364			$	1	$	64,435,785			$	2,807,346		$	67,243,132

See notes to consolidated financial statements.

3

Investors Title Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Six Months Ended June 30, 2004 and 2003
(Unaudited)

			2004			2003
Operating Activities:
Net income			$	5,101,999		$	5,696,013
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation		450,825			399,390
		Amortization, net		19,625			12,888
		Issuance of common stock in payment of bonuses and fees		17,292			31,009
		Provision (benefit) for losses on premiums receivable		(114,000	)		675,000
		Net gain on disposals of property		(5,011	)		(4,922	)
		Net realized gain on sales of investments		(20,387	)		(64,914	)
		Provision (benefit) for deferred income taxes		634,000			(34,000	)
	Changes in assets and liabilities:
		Increase in receivables and other assets		(416,352	)		(2,352,604	)
		Decrease in accounts payable and accrued liabilities		(1,128,733	)		(1,557,688	)
		Decrease in commissions and reinsurance payables		(236,593	)		(10,293	)
		Decrease in premium taxes payable		(461,436	)		(34,549	)
		Increase (decrease) in current income taxes payable		74,310			(78,622	)
		Provision for claims		4,029,403			4,770,731
		Payments of claims, net of recoveries		(3,584,403	)		(2,878,731	)
	Net cash provided by operating activities			4,360,539			4,568,708
Investing Activities:
	Purchases of available-for-sale securities			(31,730,117	)		(3,452,544	)
	Purchases of held-to-maturity securities			(3,897	)		(4,246	)
	Purchases of other securities			(324,933	)		(563,280	)
	Proceeds from sales of available-for-sale securities			28,324,938			6,064,365
	Proceeds from sales of held-to-maturity securities			192,608			592,000
	Proceeds from sales of other securities			—			25,967
	Purchases of property			(522,582	)		(483,508	)
	Proceeds from sales of property			32,166			9,235
	Net cash provided by (used in) investing activities			(4,031,817	)		2,187,989
Financing Activities:
	Repurchases of common stock			(414,768	)		(834,170	)
	Exercise of options			163,510			272,246
	Dividends paid			(189,175	)		(150,179	)
	Net cash used in financing activities			(440,433	)		(712,103	)
Net Increase (Decrease) in Cash and Cash Equivalents				(111,711	)		6,044,594
Cash and Cash Equivalents, Beginning of Year				5,125,356			3,781,961
Cash and Cash Equivalents, End of Period			$	5,013,645		$	9,826,555
Supplemental Disclosures:
Cash Paid During the Year for:
	Income Taxes, net of refunds		$	1,891,000		$	2,796,000

See notes to consolidated financial statements.

4

INVESTORS TITLE COMPANY
AND SUBSIDIARIES

Notes to Consolidated Financial Statements
June 30, 2004
(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, 2003 for a complete description of the Company’s significant accounting policies. There were no changes in the significant accounting policies during the six months ended June 30, 2004.

          Principles of Consolidation –The 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 necessary adjustments have been reflected for a fair presentation of the financial position, results of operations and cash flows in the accompanying unaudited consolidated financial statements.  All such adjustments are of a normal recurring nature.

          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.             

          Earnings Per Share -Basic net income per share information is computed using the weighted average number of shares of common stock outstanding during the period.  Diluted net income per common share is computed using the weighted average number of shares of common and dilutive potential common shares outstanding during the period.

5

          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, 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:

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2004			2003			2004			2003
Net income as reported		$	2,880,395		$	3,087,452		$	5,101,999		$	5,696,013
Less:  Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects			(37,905	)		(32,534	)		(75,520	)		(70,447	)
Pro forma net income		$	2,842,490		$	3,054,918		$	5,026,479		$	5,625,566
Net income per share:
	Basic – as reported	$	1.15		$	1.24		$	2.04		$	2.27
	Basic – pro forma	$	1.14		$	1.22		$	2.01		$	2.25
	Diluted – as reported	$	1.10		$	1.18		$	1.94		$	2.18
	Diluted – pro forma	$	1.09		$	1.17		$	1.91		$	2.15

     Recent Accounting Pronouncements - FIN 46:In January 2003, the FASB issued Interpretation No. 46,Consolidation of Variable Interest Entities(“FIN 46”).  FIN 46 amended Accounting Research Bulletin 51,Consolidated Financial Statements,and established standards for determining circumstances under which a variable interest entity (“VIE”) should be consolidated by its primary beneficiary.  FIN 46 also requires disclosures about VIEs that the Company is not required to consolidate but in which it has a significant variable interest.  In December 2003, the FASB issued FIN 46-R, which not only included amendments to FIN 46, but also required application of the interpretation to all affected entities no later than March 31, 2004 for calendar-year reporting companies.  Prior to FIN 46-R, however, companies were required to apply the interpretation to special-purpose entities by December 31, 2003.  The adoption of FIN 46-R as it relates to special-purpose entities did not have any effect on the Company’s results of operations, financial position or liquidity.

6

SFAS 150: In May 2003, the FASB issued SFAS No. 150,Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.  SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  Many of these instruments were previously classified as equity.  SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability, or as an asset in some circumstances.  This Statement applies to three types of freestanding financial instruments, other than outstanding shares.  One type is mandatorily redeemable shares, which the issuer is obligated to buy back in exchange for cash or assets; a second type includes put options and forward purchase contracts that require or may require the issuer to buy back some of its shares in exchange for cash or other assets; the third type is obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or varies inversely with the value of the issuer’s shares.  SFAS No. 150 does not apply to features embedded in a financial instrument that is not a derivative in its entirety.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003.  The adoption of this Statement did not have a material impact on the Company’s financial statements.

Note 2 - Reserves for Claims

          Transactions in the reserves for claims for the six months ended June 30, 2004 and the year ended December 31, 2003 were as follows:

	June 30, 2004				December 31, 2003
Balance, beginning of year		$	30,031,000			$	25,630,000
Provision, charged to operations			4,029,403				9,292,739
Payments of claims, net of recoveries			(3,584,403	)			(4,891,739	)
Ending balance		$	30,476,000			$	30,031,000

          The total reserve for all reported and unreported losses the Company incurred through June 30, 2004 is represented by the reserve 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. 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.

7

          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 Company carries assets at the lower of cost or estimated realizable value, net of any indebtedness on the property.

Note 3 - Comprehensive Income

          Comprehensive income for the three months ended June 30, 2004 and 2003 was $2,177,908 and $3,679,441, respectively.  Comprehensive income for the six months ended June 30, 2004 and 2003 was $4,477,527 and $6,266,112, respectively.  Other 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 115,670 and 125,707 for the three months ended June 30, 2004 and 2003, respectively, and 124,343 and 112,325 for the six months ended June 30, 2004 and 2003, respectively.  Options to purchase 252,996 and 282,246 shares of common stock were outstanding as of June 30, 2004 and 2003, respectively.  Of the total options outstanding, 1,200 and 28,100 options were not included in the computation of diluted earnings per share for the three months ended June 30, 2004 and 2003, respectively; and –0- and 39,840 options were not included in the computation of diluted earnings per share for the six months ended June 30, 2004 and 2003, respectively, 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, the Company has aggregated its operating segments into two reportable segments:  1) title insurance services; and 2) tax-free exchange services.

Three Months Ended	Operating Revenues		Operating Expenses		Income (Loss) Before Income Taxes			Assets
June 30, 2004
Title Insurance	$	19,871,814	$	16,478,417	$	3,941,432		$	90,493,978
Exchange Services		542,304		153,644		390,595			1,063,816
All Other		358,417		542,238		(24,839	)		11,660,951
	$	20,772,535	$	17,174,299	$	4,307,188		$	103,218,745
June 30, 2003
Title Insurance	$	23,846,555	$	20,180,270	$	4,225,350		$	82,525,967
Exchange Services		389,812		113,220		277,381			408,640
All Other		221,552		316,701		66,721			7,498,405
	$	24,457,919	$	20,610,191	$	4,569,452		$	90,433,012

8

Six Months Ended	Operating Revenues		Operating Expenses		Income (Loss) Before Income Taxes			Assets
June 30, 2004
Title Insurance	$	37,058,377	$	31,004,760	$	7,124,998		$	90,493,978
Exchange Services		1,022,198		299,122		726,213			1,063,816
All Other		631,772		1,101,175		(158,212	)		11,660,951
	$	38,712,347	$	32,405,057	$	7,692,999		$	103,218,745
June 30, 2003
Title Insurance	$	43,838,001	$	36,999,372	$	7,959,007		$	82,525,967
Exchange Services		490,901		249,782		242,501			408,640
All Other		459,835		596,674		160,750			7,498,405
	$	44,788,737	$	37,845,828	$	8,362,258		$	90,433,012

          Operating revenues represent net premiums written and other revenues, excluding investment income and net realized gain on sales of investments.  Below is a schedule reconciling operating revenues to total revenues:

		For the Three Months Ended June 30, 2004		For the Three Months Ended June 30, 2003		For the Six Months Ended June 30, 2004		For the Six Months Ended June 30, 2003
Operating Revenues		$	20,772,535	$	24,457,919	$	38,712,347	$	44,788,737
Investment income – interest and dividends			691,996		679,857		1,365,322		1,354,435
Net realized gain on sales of investments			16,956		41,867		20,387		64,914
	Total Revenues	$	21,481,487	$	25,179,643	$	40,098,056	$	46,208,086

Note 6 – 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 or operations.

9

          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 quarter ended June 30, 2004:

	For the Three Months Ended June 30, 2004			For the Six Months Ended June 30, 2004
Service cost at beginning of period		$	15,909		$	3,513
Interest cost			3,875			7,750
Amortization of Unrecognized Prior Service Cost			8,521			17,042
Amortization of Unrecognized Gains or Losses			—			—
Net Periodic Benefits Costs		$	28,305		$	28,305

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

          The Company’s 2003 Form 10-K and 2003 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 main business activity is the issuance of title insurance through two subsidiaries, Investors Title Insurance Company (“ITIC”) and Northeast Investors Title Insurance Company (“NE-ITIC”). Through ITIC and NE-ITIC, the Company underwrites land title insurance for owners and mortgagees as a primary insurer and as a reinsurer for other title insurance companies. ITIC delivers title insurance coverage through a home office, branch offices, and issuing agents and NE-ITIC delivers title insurance through issuing agents. Title insurance protects against loss or damage resulting from defects that affect the title to real property.  The commitment and policies issued are 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 hidden defect in the title or a mistake 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.

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          The Company’s profitability in the land title insurance industry is affected by a number of factors, including the cost and availability of mortgage funds, the level of real estate and mortgage refinance activity, the cost of real estate, consumer confidence, employment levels, family income levels and general economic conditions.  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 revenues and profitability of the Company.  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 also a key factor in the Company’s profitability because the Company has certain significant fixed costs such as personnel and occupancy expenses associated with processing and issuing a title insurance policy.  These costs do not necessarily increase or decrease depending on the size and type of the policy issued.

          During 2004, premiums have declined principally due to the decline in refinancing activity, as a result of increased interest rates, which is expected to continue throughout the year.  Operating results for the six months ended June 30, 2004, therefore, should not be viewed as indicative of the Company’s future operating results.  As always, the Company has been monitoring and carefully managing operating expenses such as salaries, employees’ benefits and certain other operational expenses in light of the expected decline in title insurance revenues. 

          The Company strives to offset the cyclical nature of the real estate market by increasing its market share.  This effort includes expanding into new markets primarily by continuing to develop agency relationships, as well as improving market penetration with existing offices and agents.  In order to maintain and improve profits, the Company endeavors to identify opportunities to refine operating procedures and to implement programs designed to reduce expenses.

          Exchange Services: The Company’s second segment provides tax-free exchange services 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.

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          New Services: Investors Trust Company (“INTC”), wholly owned by the Company, was chartered on February 17, 2004 by the North Carolina Commissioner of Banks.   INTC will serve clients throughout North Carolina and neighboring states by providing professional portfolio management services along with trust services.  Activities of this company are not currently significant.

Critical Accounting Policies:

     During the six months ended June 30, 2004, the Company made no changes in its critical accounting policies as previously disclosed within the Company’s Annual Report on Form 10-K for the year ended December 31, 2003.

Results of Operations:

     For the quarter ended June 30, 2004, net premiums written decreased 16% to $19,649,652, investment income increased 2% to $691,996, total revenues decreased 15% to $21,481,487 and net income decreased 7% to $2,880,395, all compared with the same quarter in 2003.  Both net income per basic and diluted common share decreased 7%, to $1.15 and $1.10, respectively, as compared with the same quarter ended June 30, 2003.  For the quarter ended June 30, 2004, the title insurance segment’s operating revenues decreased 17% compared with the second quarter of 2003, while the exchange services segment’s operating revenues increased 39% for the quarter ended June 30, 2004, compared with the same quarter in 2003.

          For the six months ended June 30, 2004, net premiums written decreased 15% to $36,631,408, investment income increased 1% to $1,365,322, total revenues decreased 13% to $40,098,056 and net income decreased 10% to $5,101,999, all compared with the same period in 2003.  Net income per basic and diluted common share decreased 10% and 11%, respectively, to $2.04 and $1.94 as compared with the same six-month period ended June 30, 2003.  For the six months ended June 30, 2004, the title insurance segment’s operating revenues decreased 15% compared with the same period in 2003, while the exchange services segment’s operating revenues increased 108% for the six months ended June 30, 2004 compared with the same period in 2003. 

          Operating revenues: Premiums written declined primarily due to significantly lower levels of mortgage refinancing compared with the prior year quarter, which was partially offset by a rate increase in North Carolina. According to the Freddie Mac Weekly Mortgage Rate Survey, the monthly average 30-year fixed mortgage interest rates increased to an average of 5.87% for the six months ended June 30, 2004, compared with 5.67% for the six months ended June 30, 2003.  The volume of business decreased in the first half of 2004, as the number of policies and commitments issued for the six months declined to 149,842, a decrease of 30.1% compared with 214,228 in the same period in 2003. 

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          Shown below is a schedule of premiums written for the three and six months ended June 30, 2004 and 2003 in all states in which the Company’s two insurance subsidiaries, Investors Title Insurance Company and Northeast Investors Title Insurance Company, currently underwrite insurance:

	For the Three Months Ended						For the Six Months Ended
State	2004			2003			2004			2003
Alabama	$	385,354		$	362,456		$	713,670		$	645,527
Florida		299,884			10,170			655,488			25,150
Illinois		285,394			444,000			549,122			756,449
Kentucky		469,178			511,292			869,208			941,646
Maryland		402,188			563,848			737,048			975,414
Michigan		1,357,627			2,499,942			2,580,427			4,394,450
Minnesota		271,224			486,750			517,584			1,093,748
Mississippi		266,542			327,540			512,817			565,025
Nebraska		236,882			665,620			455,806			1,163,552
New York		1,015,832			1,693,109			1,832,172			3,106,336
North Carolina		8,979,950			7,949,288			16,568,586			14,909,659
Pennsylvania		884,749			1,728,956			1,459,575			3,297,694
South Carolina		1,471,548			1,701,820			3,245,445			3,272,382
Tennessee		873,284			1,111,776			1,584,199			2,029,754
Virginia		1,872,162			2,565,849			3,320,600			4,608,819
West Virginia		488,153			593,811			863,081			1,034,122
Other States		183,483			196,884			329,888			354,973
Direct Premiums		19,743,434			23,413,111			36,794,716			43,174,700
Reinsurance Assumed		—			2,646			—			6,231
Reinsurance Ceded		(93,782	)		(93,128	)		(163,308	)		(190,317	)
Net Premiums	$	19,649,652		$	23,322,629		$	36,631,408		$	42,990,614

          The decline in total premiums written was primarily due to lower mortgage refinancing activity compared with the same period in 2003. Premiums written in Pennsylvania and Virginia were also impacted by declining business in individual agencies in those states. Year to date premiums in North Carolina, the Company’s largest market, were positively impacted by approximately $3.7 million related to the rate increase filed on October 1, 2003 for insured closing services.  The increase in Florida is due primarily to the increase in agent business.

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          Shown below is a breakdown of branch and agency premiums for the three and six months ended June 30:

	For The Three Months Ended						For The Six Months Ended
	2004		%	2003		%	2004		%	2003		%
Branch	$	8,828,544	45	$	7,996,257	34	$	16,287,955	44	$	14,997,950	35
Agency		10,821,108	55		15,326,372	66		20,343,453	56		27,992,664	65
Total	$	19,649,652	100	$	23,322,629	100	$	36,631,408	100	$	42,990,614	100

          Net premiums written from branch operations increased 10% for the three months ended June 30, 2004 as compared with the same period in the prior year due to the above mentioned North Carolina rate increase.  For the six months ended June 30, 2004 and 2003, net premiums written from branch operations increased 9%. 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 decreased 29% for the three months ended June 30, 2004 as compared with the same period in the prior year. For the six months ended June 30, 2004, agency net premiums decreased 27% as compared with the same prior year period. The majority of the decrease in agency net premiums written in the second quarter 2004 can be attributed to the general decline in business due to the slowdown in refinancing activity.

          The increase in exchange services revenue was due to both an increase in the volume of transactions, resulting in a revenue increase of approximately $170,000, as well as an increase in fees. The Company believes that this line of business will continue to grow, although not necessarily at the same rate.

          Operating Expenses: Total operating expenses decreased 17% and 14% for the three and six month periods ended June 30, 2004, respectively, compared with the same periods in 2003.  This was due primarily to a decrease in commission expense as a result of decreased business from agent sources. A summary by segment of the Company’s operating expenses is as follows for the three and six months ended June 30:

	For The Three Months Ended						For The Six Months Ended
	2004		%	2003		%	2004		%	2003		%
Title insurance	$	16,478,417	96	$	20,180,270	98	$	31,004,760	96	$	36,999,372	98
Exchange services		153,644	1		113,220	—		299,122	1		249,782	1
All other		542,238	3		316,701	2		1,101,175	3		596,674	1
Total	$	17,174,299	100	$	20,610,191	100	$	32,405,057	100	$	37,845,828	100

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          Commissions to agents decreased 31% for the three months ended June 30, 2004 when compared with the same quarter in 2003. Commissions to agents decreased 29% for the six months ended June 30, 2004 when compared with the same period in 2003.  This decrease is in proportion to the decline in agency premiums written.

          The provision for claims as a percentage of net premiums written was 11.0% for the six months ended June 30, 2004, versus 11.1% for the same period in 2003.

          Total salaries, employee benefits and payroll taxes as a percentage of total revenues were 20% and 16% for the six months ended June 30, 2004 and 2003, respectively. The increase in these costs was attributed to several factors, including $333,000 for certain employee benefits associated with key executive employment agreements entered into in late 2003, personnel costs of approximately $243,000 related to staff hired by the newly formed Investors Trust Company and the regulated investment advisory, and various staff additions and salary adjustments made during the first six months of 2004.  The title insurance segment’s total salaries, employee benefits and payroll taxes accounted for 89% and 93% of the total consolidated amount for the six months ended June 30, 2004 and 2003, respectively. 

          Professional fees for the six months ended June 30, 2004 increased primarily due to the costs associated with compliance with Section 404 of the Sarbanes-Oxley Act of 2002, along with an increase in other professional fees.

          Provision for Income Taxes:The provision for income taxes was 33% and 32% of income before income taxes for the three months ended June 30, 2004 and 2003, respectively. For the six months ended June 30, 2004 and 2003, the provision for income taxes was 34% and 32%, respectively, of income before income taxes. 

Liquidity and Capital Resources:

          Cash flows: Net cash provided by operating activities for the six months ended June 30, 2004, amounted to $4,360,539 compared with $4,568,708 for the same six month period of 2003. The decrease is primarily the result of a decrease in net income, a decrease in provision for claims, and increased net claim payments, offset by an increase in receivables and other assets.  The principal non-operating use of cash and cash equivalents for the six months ended June 30, 2004 was additions to the investment portfolio.

          Payment of dividends: The Company’s ability to pay dividends to its shareholders and operating expenses is dependent 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.

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          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 2004, the Company has plans for various capital improvement projects, including an upgrade of certain electronic data processing systems. For the six months ended June 30, 2004, the Company purchased electronic data processing equipment in excess of  $400,000. Other property additions were approximately $100,000.  The Company anticipates additional capital expenditures of approximately $500,000 during the remainder of 2004 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 made from claims reserves, payments due under various agreements with third-party service providers, and obligations pursuant to certain executive employment agreements.

          The following table summarizes the Company’s future estimated cash payments under existing contractual obligations, 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
Long-term Debt Obligations	$	—	$	—	$	—	$	—	$	—
Capital Lease Obligations		—		—		—		—		—
Operating Lease Obligations		1,347,995		344,097		877,494		126,404		—
Telecommunications Contractual Obligations		410,400		116,400		294,000		—		—
Other Obligations		204,399		168,899		35,500		—		—
Executive Employment Agreements Obligations		785,000		—		—		—		785,000
Total	$	2,747,794	$	629,396	$	1,206,994	$	126,404	$	785,000

          The total reserve for all reported and unreported losses the Company incurred through June 30, 2004 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, 2003 as filed with the Securities and Exchange Commission.

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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 and financial results, 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 the cost and availability of mortgage funds, the level of real estate and 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 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; (6) the costs of producing title evidence are relatively high, whereas premium revenues are subject to regulatory and competitive restraints; and (7) state statutes require the Company’s insurance subsidiaries to maintain minimum levels of capital and surplus and restrict the amount of dividends that the insurance subsidiaries may pay to the Company without prior regulatory approval. 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. 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

          No material changes in the Company’s market risk or market strategy occurred since December 31, 2003.  A detailed discussion of market risk is provided in the Company’s 2003 Annual Report on Form 10-K for the period ended December 31, 2003.

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, 2004.  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.

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          During the quarter ended June 30, 2004, there was no change in the Company’s internal control over financial reporting identified in connection with the above-referenced evaluation that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.   OTHER INFORMATION

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

(a)	None
(b)	None
(c)	None
(d)	None
(e)	The following table provides information about purchases by the Company (and all affiliated purchasers) during the quarter ended June 30, 2004 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									401,684
04/01/04 – 04/30/04		120		$	31.00		120		401,564
05/01/04 – 05/31/04		7,591		$	28.02		7,591		393,973
06/01/04 – 06/30/04		45		$	27.34		45		393,928
Total:		7,756		$	28.06		7,756		393,928

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(1)	For the quarter ended June 30, 2004, ITIC purchased an aggregate of 7,756 shares of the Company’s common stock pursuant to the purchase plan (the “Plan”) that was publicly announced on June 5, 2000.
(2)	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.  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.

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

(a)	Investors Title Company’s Annual Meeting of Shareholders was held on May 19, 2004.
(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:

	For	Against	Abstentions	Withheld	Broker Non-votes
J. Allen Fine	2,107,814	N/A	N/A	141,248	N/A
David L. Francis	2,244,608	N/A	N/A	4,454	N/A
A. Scott Parker	2,247,896	N/A	N/A	1,166	N/A

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Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
	10(x)	Amended and Restated Employment Agreement dated June 1, 2004 with J. Allen Fine
	10(xi)	Form of Amended and Restated Employment Agreement dated June 1, 2004 with each of James A. Fine, Jr. and W. Morris Fine
	10(xii)	Nonqualified Deferred Compensation Plan dated June 1, 2004
	10(xiii)	Nonqualified Supplemental Retirement Benefit Plan dated November 17, 2003
	10(xiv)	Death Benefit Plan Agreement dated April 1, 2004 with J. Allen Fine
	10(xv)	Death Benefit Plan Agreement dated May 19, 2004 with James A. Fine, Jr.
	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
(b)	Reports on Form 8-K
	On April 28, 2004, the Company furnished a report on Form 8-K that reported under Item 12 that, on April 27, 2004, the Company released earnings for the quarter ended March 31, 2004.

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

Dated: August 13, 2004

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