Investors Title (ITIC) 10-Q 2005 Q3 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 September 30, 2005

OR

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

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

As of October 27, 2005, there were 2,557,841 outstanding shares of common stock of Investors Title Company, not including 297,903 shares held by Investors Title Insurance Company, a wholly owned subsidiary of Investors Title Company.

INVESTOR TITLE COMPANY

AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004	1
	Consolidated Statements of Income	2
	For the Three and Nine Months Ended September 30, 2005 and 2004
	Consolidated Statements of Stockholders’ Equity	3
	For the Nine Months Ended September 30, 2005 and 2004
	Consolidated Statements of Cash Flows	4
	For the Nine Months Ended September 30, 2005 and 2004
	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	18
Item 4.	Controls and Procedures	18
PART II	OTHER INFORMATION	19
Item 6.	Exhibits	20
SIGNATURE		21

PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements

Investors Title Company and Subsidiaries

Consolidated Balance Sheets

As of September 30, 2005 and December 31, 2004

(Unaudited)

	September 30, 2005		December 31, 2004
Assets
Cash and cash equivalents	$	6,165,400	$	4,726,443
Investments in securities:
Fixed maturities:
Held-to-maturity, at amortized cost (fair value: 2005: $1,787,304; 2004: $2,330,129)		1,703,724		2,202,635
Available-for-sale, at fair value		62,511,297		72,471,766
Equity securities, available-for-sale, at fair value		7,962,143		7,240,306
Short-term investments		25,825,270		10,134,321
Other investments		1,346,311		1,211,517
Total investments		99,348,745		93,260,545
Premiums receivable, less allowance for doubtful accounts of  $2,600,000 and $2,240,000 for 2005 and 2004, respectively		8,958,003		6,679,994
Accrued interest and dividends		750,600		753,638
Prepaid expenses and other assets		2,005,707		1,410,584
Property acquired in settlement of claims		355,008		322,517
Property, net		4,417,201		4,592,784
Deferred income taxes, net		1,431,563		1,440,247
Total Assets	$	123,432,227	$	113,186,752
Liabilities and Stockholders' Equity
Liabilities:
Reserves for claims (Note 2)	$	34,308,000	$	31,842,000
Accounts payable and accrued liabilities		7,130,514		7,919,651
Commissions and reinsurance payables		547,394		551,662
Current income taxes payable		193,410		366,168
Total liabilities		42,179,318		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;
2,557,711 and 2,481,024 shares issued and outstanding 2005 and 2004,
respectively, excluding 298,033 and 374,720 shares 2005 and 2004,
respectively, of common stock held by the Company's subsidiary)		1		1
Retained earnings		78,369,004		69,272,092
Accumulated other comprehensive income, net of deferred taxes of
$1,484,131 and $1,663,447 for 2005 and 2004, respectively (Note 3)		2,883,904		3,235,178
Total stockholders' equity		81,252,909		72,507,271
Total Liabilities and Stockholders' Equity	$	123,432,227	$	113,186,752

 See notes to Consolidated Financial Statements. 

1

Investors Title Company and Subsidiaries

Consolidated Statements of Income

For the Three and Nine Months Ended September 30, 2005 and 2004

(Unaudited)

	Three Months Ended September 30				Nine Months Ended September 30
	2005		2004		2005		2004
Revenues:
Underwriting income:
Premiums written	$	21,035,519	$	18,391,953	$	58,333,687	$	55,219,529
Less - premiums for reinsurance ceded		49,419		37,510		234,234		200,818
Net premiums written		20,986,100		18,354,443		58,099,453		55,018,711
Investment income - interest and dividends		812,659		603,584		2,373,983		1,922,515
Net realized gain on sales of investments		69,597		19,280		89,504		39,667
Exchange services revenue (Note 5)		1,222,602		931,446		3,272,034		1,953,644
Other		942,365		594,571		2,381,990		1,666,843
Total		24,033,323		20,503,324		66,216,964		60,601,380
Operating Expenses:
Commissions to agents		8,209,799		7,372,112		23,050,329		22,283,907
Provision for claims (Note 2)		2,283,372		2,110,152		6,354,485		6,139,555
Salaries, employee benefits and payroll taxes (Note 6)		4,540,061		4,042,857		14,320,940		12,219,022
Office occupancy and operations		1,320,550		1,294,766		4,353,434		3,821,520
Business development		591,506		447,159		1,483,367		1,324,096
Taxes, other than payroll and income		67,234		42,823		387,218		341,877
Premium and retaliatory taxes		411,084		357,244		1,204,399		1,079,639
Professional fees		183,310		336,919		830,683		1,144,906
Other		186,878		84,428		298,088		138,995
Total		17,793,794		16,088,460		52,282,943		48,493,517
Income Before Income Taxes		6,239,529		4,414,864		13,934,021		12,107,863
Provision For Income Taxes		1,910,000		1,487,000		4,162,000		4,078,000
Net Income	$	4,329,529	$	2,927,864	$	9,772,021	$	8,029,863
Basic Earnings Per Common Share (Note 4)	$	1.69	$	1.17	$	3.81	$	3.21
Weighted Average Shares Outstanding - Basic (Note 4)		2,559,154		2,493,786		2,562,247		2,500,654
Diluted Earnings Per Common Share (Note 4)	$	1.67	$	1.12	$	3.74	$	3.06
Weighted Average Shares Outstanding - Diluted (Note 4)		2,600,289		2,608,160		2,611,073		2,621,922

 See notes to Consolidated Financial Statements.

2

Investors Title Company and Subsidiaries

Consolidated Statements of  Stockholders' Equity

For the Nine Months Ended September 30, 2005 and 2004

(Unaudited)

	Common Stock								Accumulated Other Comprehensive Income (Net Unrealized			Total
	Shares			Amount		Retained Earnings			Gain (Loss) on Investments)			Stockholders' Equity
Balance, January 1, 2004	2,503,923		$	1	$	59,756,927		$	3,431,818		$	63,188,746
Net income						8,029,863						8,029,863
Dividends ($.11 per share)						(274,894	)					(274,894	)
Shares of common stock repurchased	(26,652	)				(807,771	)					(807,771	)
Issuance of common stock in payment of
bonuses and fees	724					23,207						23,207
Stock options exercised	10,735					167,860						167,860
Net unrealized loss on investments, net of tax of $165,612									(316,636	)		(316,636	)
Balance, September 30, 2004	2,488,730		$	1	$	66,895,192		$	3,115,182		$	70,010,375
Balance, January 1, 2005	2,481,024		$	1	$	69,272,092		$	3,235,178		$	72,507,271
Net income						9,772,021						9,772,021
Dividends ($.12 per share)						(307,911	)					(307,911	)
Shares of common stock repurchased	(87,043	)				(2,815,515	)					(2,815,515	)
Issuance of common stock in payment of
bonuses and fees	1,010					38,068						38,068
Stock options exercised	162,720					2,410,249						2,410,249
Net unrealized loss on investments, net of tax of $179,316									(351,274	)		(351,274	)
Balance, September 30, 2005	2,557,711		$	1	$	78,369,004		$	2,883,904		$	81,252,909

 See notes to Consolidated Financial Statements.

3

Investors Title Company and Subsidiaries

Consolidated Statements of  Cash Flows

For the Nine Months Ended September 30, 2005 and 2004

(Unaudited)

	2005			2004
Operating Activities:
Net income	$	9,772,021		$	8,029,863
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		715,064			684,942
Amortization, net		57,234			30,518
Issuance of common stock in payment of bonuses and fees		38,068			23,207
Provision (benefit) for losses on premiums receivable		360,000			(114,000	)
Net gain on disposals of property		(24,684	)		(6,394	)
Net realized gain on sales of investments		(89,504	)		(39,667	)
Provision for claims		6,354,485			6,139,555
Provision for deferred income taxes		188,000			723,000
Changes in assets and liabilities:
Decrease (increase) in receivables and other assets		(3,262,585	)		691,367
Increase (decrease) in accounts payable and accrued liabilities		1,186,424			(376,567	)
Decrease in commissions and reinsurance payables		(4,268	)		(241,681	)
Increase (decrease) in current income taxes payable		(172,758	)		236,355
Payments of claims, net of recoveries		(3,888,485	)		(4,629,555	)
Net cash provided by operating activities		11,229,012			11,150,943
Investing Activities:
Purchases of available-for-sale securities		(25,569,390	)		(40,881,278	)
Purchases of short-term securities		(16,099,896	)		(4,412,111	)
Purchases of and net earnings (losses) from other investments		(432,014	)		(437,231	)
Proceeds from sales and maturities of available-for-sale securities		34,283,148			33,159,278
Proceeds from maturities of held-to-maturity securities		507,000			278,000
Proceeds from sales and maturities of short-term securities		408,948			3,134,267
Proceeds from sales and distributions of other investments		315,684			101,992
Purchases of property		(546,429	)		(1,127,490	)
Proceeds from sales of property		31,632			46,727
Net change in pending trades		(1,975,561	)		(725,564	)
Net cash used in investing activities		(9,076,878	)		(10,863,410	)
Financing Activities:
Repurchases of common stock, net		(2,815,515	)		(807,771	)
Exercise of options		2,410,249			167,860
Dividends paid		(307,911	)		(274,894	)
Net cash used in financing activities		(713,177	)		(914,805	)
Net Increase (Decrease) in Cash and Cash Equivalents		1,438,957			(627,272	)
Cash and Cash Equivalents, Beginning of Year		4,726,443			5,125,356
Cash and Cash Equivalents, End of Period	$	6,165,400		$	4,498,084
Supplemental Disclosures:
Cash Paid During the Year for:
Income taxes, net of refunds	$	4,154,000		$	3,181,000

See notes to Consolidated Financial Statements.

4

INVESTORS TITLE COMPANY

AND SUBSIDIARIES

Notes to Consolidated Financial Statements

September 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 nine months ended September 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 statements have been included. All such adjustments are of a normal recurring nature. Operating results for the quarter and the nine months ended September 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.

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.

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 (“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 September 30,						Nine Months Ended September 30,
		2005			2004			2005			2004
Net income as reported	$	4,329,529		$	2,927,864		$	9,772,021		$	8,029,863
Add back issuance of common stock in payment of bonuses and fees, net of tax		20,772			3,904			25,124			15,316
Deduct total stock-based employee compensation expense determined under fair
value based method for all awards, net of tax		(57,897	)		(42,546	)		(135,094	)		(129,478	)
Pro forma net income	$	4,292,404		$	2,889,222		$	9,662,051		$	7,915,701
Net income per share:
Basic - as reported	$	1.69		$	1.17		$	3.81		$	3.21
Basic - pro forma	$	1.68		$	1.16		$	3.77		$	3.17
Diluted - as reported	$	1.67		$	1.12		$	3.74		$	3.06
Diluted - pro forma	$	1.65		$	1.11		$	3.70		$	3.02

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 nine months ended September 30, 2005 would have been lower by $37,125 and $109,970, respectively, using a Black-Scholes model. Net income for the quarter and the nine months ended September 30, 2004 would have been lower by $38,642 and $114,162, respectively, also using a Black-Scholes model.

6

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS No. 154"). SFAS No. 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 in fiscal years beginning after December 15, 2005, with early adoption permitted.

Note 2 - Reserves for Claims

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

	Nine Months Ended September 30, 2005			Year Ended December 31, 2004
Balance, beginning of year	$	31,842,000		$	30,031,000
Provision, charged to operations		6,354,485			7,984,339
Payments of claims, net of recoveries		(3,888,485	)		(6,173,339	)
Ending balance	$	34,308,000		$	31,842,000

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

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.

7

Note 3 - Comprehensive Income

Total comprehensive income for the quarter ended September 30, 2005 and 2004 was $4,027,018 and $3,235,700, respectively. Comprehensive income for the nine months ended September 30, 2005 and 2004 was $9,420,747and $7,713,227, respectively. Accumulated 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 41,135 and 114,374 for the quarter ended September 30, 2005 and 2004, respectively, and 48,826 and 121,268 for the nine months ended September 30, 2005 and 2004, respectively. Options to purchase 82,701 and 250,506 shares of common stock were outstanding as of September 30, 2005 and 2004, respectively. Of the total options outstanding, 3,700 options were not included in the computation of diluted earnings per share for the quarter and nine months ended September 30, 2004, 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.

Three Months Ended September 30, 2005		Title Insurance		Exchange Services		All Other		Intersegment Eliminations			Total
Operating revenues	$	21,527,738	$	1,222,602	$	585,434	$	(184,707	)	$	23,151,067
Investment income		748,873		9,499		67,213		(12,926	)		812,659
Net realized gain on sales of investments		51,132		-		18,465		-			69,597
Total revenues	$	22,327,743	$	1,232,101	$	671,112	$	(197,633	)	$	24,033,323
Operating expenses		17,280,896		277,343		421,576		(186,021	)		17,793,794
Income (loss) before income taxes	$	5,046,847	$	954,758	$	249,536	$	(11,612	)	$	6,239,529
Assets, net	$	102,495,320	$	1,458,268	$	19,478,639	$	-		$	123,432,227

8

Three Months Ended September 30, 2004		Title Insurance		Exchange Services		All Other			Intersegment Eliminations			Total
Operating revenues	$	18,535,865	$	931,446	$	552,811		$	(139,662	)	$	19,880,460
Investment income		588,128		2,109		41,859			(28,512	)		603,584
Net realized gain (loss) on sales of investments		31,780		-		(12,500	)		-			19,280
Total revenues	$	19,155,773	$	933,555	$	582,170		$	(168,174	)	$	20,503,324
Operating expenses		15,585,674		176,976		465,472			(139,662	)		16,088,460
Income (loss) before income taxes	$	3,570,099	$	756,579	$	116,698		$	(28,512	)	$	4,414,864
Assets, net	$	91,342,012	$	1,188,218	$	15,165,751		$	-		$	107,695,981

Nine Months Ended September 30, 2005		Title Insurance		Exchange Services		All Other		Intersegment Eliminations			Total
Operating revenues	$	59,354,631	$	3,272,034	$	1,648,948	$	(522,136	)	$	63,753,477
Investment income		2,197,854		12,142		200,079		(36,092	)		2,373,983
Net realized gain on sales of investments		71,039		-		18,465		-			89,504
Total revenues	$	61,623,524	$	3,284,176	$	1,867,492	$	(558,228	)	$	66,216,964
Operating expenses		50,508,764		646,686		1,650,943		(523,450	)		52,282,943
Income (loss) before income taxes	$	11,114,760	$	2,637,490	$	216,549	$	(34,778	)	$	13,934,021
Assets, net	$	102,495,320	$	1,458,268	$	19,478,639	$	-		$	123,432,227

Nine Months Ended September 30, 2004		Title Insurance		Exchange Services		All Other			Intersegment Eliminations			Total
Operating revenues	$	55,663,829	$	1,953,644	$	1,444,946		$	(423,221	)	$	58,639,198
Investment income		1,863,820		5,246		92,687			(39,238	)		1,922,515
Net realized gain (loss) on sales of investments		52,167		-		(12,500	)		-			39,667
Total revenues	$	57,579,816	$	1,958,890	$	1,525,133		$	(462,459	)	$	60,601,380
Operating expenses		46,873,994		476,098		1,566,646			(423,221	)		48,493,517
Income (loss) before income taxes	$	10,705,822	$	1,482,792	$	(41,513	)	$	(39,238	)	$	12,107,863
Assets, net	$	91,342,012	$	1,188,218	$	15,165,751		$	-		$	107,695,981

Operating revenues represent net premiums written and other revenues.

9

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 three and nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Service cost	$	3,592	$	-	$	10,775	$	3,513
Interest cost		3,418		3,875		10,256		11,625
Amortization of unrecognized prior service cost		4,949		8,521		14,847		25,563
Net Periodic Benefits Costs	$	11,959	$	12,396	$	35,878	$	40,701

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 or operations.

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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 the state of New York.

The Company's overall level of premiums written 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.

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.

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Volume is the principal 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 third quarter and for the nine months ended September 30, 2005 continued to benefit from ongoing low interest rates which continued to fuel strong demand for real estate. However, long-term interest rates have risen slightly in October 2005 and any substantial increases in interest rates will likely have a negative impact on mortgage originations. Operating results for the third quarter and the nine months ended September 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 declines in title insurance revenues if interest rates continue to 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, such as volume, 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 potential changes. Any future change in the Code could potentially have a material negative impact on the exchange segment’s operating results.

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.

Critical Accounting Policies

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

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Results of Operations

For the third quarter ended September 30, 2005, net premiums written increased 14.3% to $20,986,100, investment income increased 34.6% to $812,659, total revenues increased 17.2% to $24,033,323 and net income increased 47.9% to $4,329,529, all compared with the prior year quarter. Net income for the quarter per basic and diluted common share increased 44.4% and 49.1%, respectively, to $1.69 and $1.67 as compared with the third quarter last year. For the third quarter of 2005, the title insurance segment's operating revenues increased 16% compared with the third quarter of 2004, while the exchange services segment's operating revenues increased 31.3% for the third quarter of 2005, compared with the third quarter of 2004.

For the first nine months of 2005, net premiums written increased 5.6% to $58,099,453,  investment income increased 23.5% to $2,373,983, total revenues increased 9.3% to $66,216,964 and net income increased 21.7% to $9,772,021, all compared with the first nine months of 2004. Net income per basic and diluted common share increased 18.7% and 22.2%, respectively, to $3.81 and $3.74 compared with the first nine months of 2004. For the first nine months of 2005, the title insurance segment's operating revenues increased 6.6% compared with the first nine months of 2004, while the exchange services segment's operating revenues increased 67.5% for the first nine months of 2005 compared with the first nine months of 2004. The Company’s pretax profit margin increased in the first nine months of 2005 compared with the same first nine months in 2004 primarily due to continued growth in the exchange services segment, which generally has higher margins than the title insurance segment, principally due to lower overhead.

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 5.75% for the nine months ended September 30, 2005, compared with 5.87% for the nine months ended September 30, 2004. Strength in the real estate markets of the Company’s operating territories drove the increases in revenue for both the Company’s title insurance and § 1031 exchange operating segments. Although mortgage rates trended slightly higher as the quarter progressed, activity for the period remained strong. Although net premiums written increased, volume declined slightly due to the slowdown in refinance activity, which typically has lower premiums per transaction compared with other rates.

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Following is a schedule of premiums written for the third quarter and the nine months ended September 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 September 30,						Nine Months Ended September 30,
State	2005			2004			2005			2004
Alabama	$	304,229		$	297,717		$	1,034,232		$	1,011,387
Florida		410,075			243,128			1,182,015			898,616
Illinois		244,111			193,245			735,441			742,367
Kentucky		616,986			449,086			1,601,826			1,318,294
Maryland		471,464			414,501			1,331,992			1,151,549
Michigan		1,229,606			1,208,766			3,614,984			3,789,193
Minnesota		227,850			312,912			756,642			830,496
Mississippi		249,728			245,857			811,321			758,674
Nebraska		212,204			153,045			597,899			608,851
New York		998,587			869,203			2,358,964			2,701,375
North Carolina		10,111,914			8,439,442			27,477,382			25,040,888
Pennsylvania		460,000			615,729			1,287,648			2,075,304
South Carolina		1,748,951			1,625,811			5,136,939			4,871,256
Tennessee		775,812			750,156			2,066,396			2,334,355
Virginia		2,078,630			1,860,509			6,032,643			5,181,109
West Virginia		728,273			530,463			1,740,338			1,393,544
Other States		167,099			182,383			552,979			512,271
Direct Premiums		21,035,519			18,391,953			58,319,641			55,219,529
Reinsurance Assumed		-			-			14,046			-
Reinsurance Ceded		(49,419	)		(37,510	)		(234,234	)		(200,818	)
Net Premiums	$	20,986,100		$	18,354,443		$	58,099,453		$	55,018,711

In most states where the Company does business, year to date premiums were positively impacted by the continued strength in the real estate market. Partially offsetting the increases in those states, premiums written for the nine months ended September 30, 2005 in Pennsylvania and New York were negatively impacted by declines in business received from agencies in these states.

Following is a breakdown of branch and agency premiums for the quarter and the nine months ended September 30, 2005 and 2004:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2005		%		2004		%		2005		%		2004		%
Branch	$	9,636,878		46	$	8,163,258		44	$	26,017,989		45	$	24,484,073		45
Agency		11,349,222		54		10,191,185		56		32,081,464		55		30,534,638		55
Total	$	20,986,100		100	$	18,354,443		100	$	58,099,453		100	$	55,018,711		100

Net premiums written from branch operations increased 18.1% for the third quarter ended September 30, 2005, as compared with the same period in the prior year. Net premiums written from branch operations increased 6.3% for the nine months ended September 30, 2005, as 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.

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Agency net premiums increased 11.4% for the quarter ended September 30, 2005, compared with the same period in the prior year. Agency net premiums increased 5.1% for the nine months ended September 30, 2005, as 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 31.3% compared with the third quarter of 2004. For the first nine months of 2005, operating revenues from ITEC and ITAC increased 67.5% compared with the first nine months of 2004. The increase in 2005 was primarily due to increased interest income earned on deposits held by the Company and an increased demand for qualified intermediary services.

For the nine months ended September 30, 2005, total revenues were also favorably impacted by a 23.5% increase in investment income, resulting primarily from higher investment balances and higher rates of interest earned on short-term investments. Short-term investments have increased as a hedge against rising interest rates.

Other revenues include management and closing fee income, investment management fee income and income related to the Company’s other equity method investments. Other revenues increased 58.5% in the third quarter of 2005 compared with the third quarter of the prior year and increased 42.9% in the nine months ended September 30, 2005 compared with the nine months in the prior year, primarily due to increased income related to the Company’s other equity method investments and increases in closing fees.

Operating Expenses:Total operating expenses increased 10.6% and 7.8% for the third quarter and the first nine months of 2005, respectively, compared with the same periods in 2004. This increase was due primarily to increases in salaries, employee benefits and payroll taxes, commissions to agents and office occupancy and operations. A summary by segment of the Company’s operating expenses is as follows for the quarter and the nine months ended September 30:

	Three Months Ended September 30,								Nine Months Ended September 30,
	2005		%		2004		%		2005		%		2004		%
Title insurance	$	17,108,943		96	$	15,446,012		96	$	50,017,671		96	$	46,450,773		96
Exchange services		264,527		2		176,976		1		617,612		1		476,098		1
All other		420,324		2		465,472		3		1,647,660		3		1,566,646		3
Total	$	17,793,794		100	$	16,088,460		100	$	52,282,943		100	$	48,493,517		100

Commissions as a percentage of agency premiums remained relatively stable in the third quarter of 2005 when compared with the third quarter of last year and in the nine months ended September 30, 2005 compared with the same period in the previous year.

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 SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” At September 30, 2005, the total reserves for claims were $34,308,000. Of that total, $5,089,611 was reserved for specific claims, and $29,218,389 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 third quarter of 2005, versus 11.5% for the same period in 2004. For the first nine months of this year, the provision for claims as a percentage of net premiums written was 10.9% versus 11.2% for the first nine months of last year.

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On a consolidated basis, salaries, employee benefits and payroll taxes as a percentage of revenues were 18.9% and 19.7% for the third quarter of 2005 and 2004, respectively. For the first nine months, salaries, employee benefits and payroll taxes as a percentage of revenues were 21.6% and 20.2% for 2005 and 2004, respectively. The increase in salaries, employee benefits and payroll taxes in the first nine months was partially attributed to compensation expense totaling $598,484 resulting from shares purchased by ITIC as a result of the exercise of nonqualified stock options by three related parties. In addition, salaries and employee benefits increased compared with the first nine months of last year primarily due to increases in expenses associated with executive contracts, merit increases and the addition of staff and increases in health insurance costs.

The title insurance segment’s total salaries, employee benefits and payroll taxes accounted for 91.1% and 89.5% of the consolidated total amount for the third quarter of 2005 and 2004, respectively.

Overall office occupancy and operations as a percentage of total revenues was 6.6% and 6.3% for the nine months ended September 30, 2005 and 2004, respectively. The increase in office occupancy and operations expense was due to an increase in various items, including contract labor, telecommunications, office rent, depreciation expense and office supplies.

Professional fees decreased for the nine months ended September 30, 2005 compared with the same period in 2004 primarily due to a decline in various legal and professional fees. From time to time, the Company retains external legal and professional resources. Fluctuations in expenditures result from changes in demand for these as needed services.

Income Taxes:The provision for income taxes was approximately 31% and 34% of income before income taxes for the third quarters of 2005 and 2004, respectively. For the nine months ended September 30, 2005 and 2004, the provision for income taxes was approximately 30% and 34%, 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:Total cash and cash equivalents increased $1,438,957 for the nine months ended September 30, 2005 and decreased $627,272 for the nine months ended September 30, 2004. Net cash provided by operating activities was $11,229,012 and $11,150,943 for the first nine months of 2005 and 2004, respectively. The net increase is primarily the result of the increase in net income, the

timing of payments of accounts payable and accrued liabilities, and payments of claims compared with the first nine months of last year, offset by an increase in receivables and other assets compared with the first nine months of 2004.

Payment of dividends: The Company’s ability to pay dividends 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 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, including $90,040,291 of short-term and fixed maturity 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 $1,450,000 during the remainder of 2005.

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.

The following table summarizes the Company’s future estimated cash payments under existing contractual obligations at September 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	$	1,833,029	$	788,403	$	761,947	$	243,241	$	39,438
Other Obligations		501,414		414,789		64,125		22,500		-
Executive Employment Agreements Obligations		2,084,000		-		-		-		2,084,000
Total	$	4,418,443	$	1,203,192	$	826,072	$	265,741	$	2,123,438

The total reserve for all reported and unreported losses the Company incurred through September 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.

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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 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. 

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 September 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.

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During the quarter ended September 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.

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 September 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					426,142
07/01/05 - 07/31/05	5,600	$	35.89	5,600	420,542
08/01/05 - 08/31/05	4,886	$	39.37	4,886	415,656
09/01/05 - 09/30/05	7,827	$	39.65	7,827	407,829
Total:	18,313	$	38.44	18,313	407,829

(1)   For the quarter ended September 30, 2005, ITIC purchased an aggregate of 18,313 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 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
Date: November 10, 2005	By:	/s/ James A. Fine, Jr.
		James A. Fine, Jr.
		President, Principal Financial Officer and Principal Accounting Officer

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