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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2003
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 0-20148
CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1187135
(State of Incorporation) (I.R.S. Employer Identification No.)
12910 Shelbyville Road, Louisville, Kentucky 40243
(Address of principal executive offices)
(502) 244-2420
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ~~X~~ No ~~~~~
Indicate by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ~~~~~ No
~~X~~
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Class A Stock - 1,685,228 as of
November 12, 2003.
The date of this Report is November 14, 2003.
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Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30 2003 2002
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $27,088,830 $ 29,503,837
Premiums ceded (826,587) (964,938)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 26,262,243 28,538,899
Net investment income 4,332,680 4,308,775
Net realized investment gains (losses) 760,829 (2,497,769)
Other income 158,832 374,937
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 31,514,584 30,724,842
Policy Benefits and Expenses:
Policyholder benefits 15,965,187 14,394,220
Policyholder benefits ceded (766,275) (1,039,057)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 15,198,912 13,355,163
Increase in net benefit reserves 5,979,186 9,796,081
Interest credited on policyholder deposits 522,627 572,568
Commissions 4,999,926 5,577,016
General expenses 5,217,787 5,017,477
Interest expense 279,677 234,053
Policy acquisition costs deferred (1,623,450) (2,080,972)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 1,461,102 1,598,876
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 32,035,767 34,070,262
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax (521,183) (3,345,420)
Income Tax Benefit (121,000) (628,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (400,183) $ (2,717,420)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss Per Common Share $ (0.24) $ (1.58)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30 2003 2002
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $ 8,765,717 $ 11,069,060
Premiums ceded (293,985) (319,665)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 8,471,732 10,749,395
Net investment income 1,580,841 1,412,132
Net realized investment gains (losses) 925,557 (701,218)
Other income 46,756 266,107
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 11,024,886 11,726,416
Policy Benefits and Expenses:
Policyholder benefits 5,283,059 4,597,113
Policyholder benefits ceded (210,423) (189,383)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 5,072,636 4,407,730
Increase in net benefit reserves 2,022,373 4,096,554
Interest credited on policyholder deposits 177,055 169,527
Commissions 1,611,689 2,039,036
General expenses 1,792,592 1,742,364
Interest expense 90,068 74,649
Policy acquisition costs deferred (486,134) (797,187)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 471,732 679,222
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 10,752,011 12,411,895
------------------------------------------------------------------------ -------------------- --------------------
Income (Loss) before income tax 272,875 (685,479)
Income Tax Expense (Benefit) 20,000 (213,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Income (Loss) $ 252,875 $ (472,479)
------------------------------------------------------------------------ -------------------- --------------------
Net Income (Loss) Per Common Share $ 0.15 $ (0.27)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2003 2002
------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $102,252,796
and $101,161,174 in 2003 and 2002, respectively) $ 106,902,419 $ 103,953,815
Equity securities (cost of $12,553,529 and
$7,108,735 in 2003 and 2002, respectively) 14,946,354 7,761,892
Investment real estate 3,189,618 3,252,424
Policy loans 4,347,610 4,239,128
Short-term investments 632,381 632,381
------------------------------------------------------------------------ -------------------- --------------------
Total Investments 130,018,382 119,836,640
Cash and cash equivalents 4,007,597 6,699,171
Accrued investment income 1,427,560 1,330,036
Reinsurance recoverable 2,605,526 2,886,256
Premiums receivable 262,057 215,759
Property and equipment 2,639,783 2,767,763
Deferred policy acquisition costs 10,366,836 9,915,288
Value of insurance acquired 3,230,070 3,617,602
Goodwill 755,782 755,782
Federal income tax receivable 310,158 250,158
Other assets 24,102 164,077
------------------------------------------------------------------------ -------------------- --------------------
Total Assets $ 155,647,853 $ 148,441,532
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2003 2002
------------------------------------------------------------------------ -------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $ 108,487,159 $ 102,649,565
Policyholder deposits 15,505,662 15,743,293
Policy and contract claims 1,577,726 1,797,195
Unearned premiums 239,500 247,625
Other 229,340 277,955
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 126,039,387 120,715,633
Note payable - bank 4,462,502 5,779,168
Note payable - related party 2,000,000 2,000,000
Accrued expenses and other liabilities 2,075,534 1,851,467
Deferred federal income tax 1,408,030 337,632
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 135,985,453 130,683,900
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,685,228 and 1,686,828 shares issued and outstanding
in 2003 and 2002, respectively 1,685,228 1,686,828
Additional paid-in capital 7,170,321 7,176,480
Accumulated other comprehensive income 4,536,469 2,223,759
Retained earnings 6,270,382 6,670,565
------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 19,662,400 17,757,632
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $ 155,647,853 $ 148,441,532
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30 2003 2002
------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net loss $ (400,183) $ (2,717,420)
Adjustments to reconcile net loss to cash from operations:
Increase in benefit reserves 5,824,530 9,701,374
Increase (decrease) in claim liabilities (219,469) 159,674
Decrease in reinsurance recoverable 280,730 225,437
Interest credited on policyholder deposits 522,627 572,568
Provision for amortization and depreciation, net of deferrals 59,851 (250,520)
Amortization of premium and accretion of discount on
securities purchased, net 63,281 20,018
Net realized investment (gains) losses (760,829) 2,497,769
Increase in accrued investment income (97,524) 18,205
Change in other assets and liabilities 66,404 166,587
Decrease in deferred federal income tax liability (121,000) (314,034)
(Increase) decrease in federal income taxes receivable (60,000) 2,564,918
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by Operations 5,158,418 12,644,576
Cash Flows from Investment Activities:
Cost of securities acquired (61,311,997) (48,773,836)
Investments sold or matured 55,699,136 32,308,112
Investment management fees (12,552) (45,618)
Additions to real estate (26,529) (28,690)
Additions to property and equipment (12,195) (1,657)
Other investing activities, net (101,172) 9,353
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Investment Activities (5,765,309) (16,532,336)
Cash Flows from Financing Activities:
Policyholder deposits 417,888 588,023
Policyholder withdrawals (1,178,146) (1,310,077)
Payments on notes payable - bank (1,316,666) (987,500)
Repurchase of common stock (7,759) (67,696)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (2,084,683) (1,777,250)
------------------------------------------------------------------------ -------------------- --------------------
Net Increase (Decrease) in Cash and Cash Equivalents (2,691,574) (5,665,010)
Cash and Cash Equivalents at Beginning of Period 6,699,171 18,433,626
------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $ 4,007,597 $ 12,768,616
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1 - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q in conformity with
accounting principles generally accepted in the United States. The accompanying
unaudited condensed financial statements reflect all adjustments which are, in
the opinion of management, necessary to a fair presentation of the results for
the interim periods. All such adjustments are of a normal recurring nature. For
further information, refer to the December 31, 2002 consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K.
Note 2 - COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of related tax, for the three
and nine month periods ended September 30, 2003 and 2002 are as follows:
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
---------------- ----------------- ---------------- -----------------
COMPREHENSIVE INCOME: 2003 2002 2003 2002
------------------------------------------ ---------------- ----------------- ---------------- -----------------
Net Income (Loss) $ 252,875 $ (472,479) $ (400,183) $ (2,717,420)
Net Unrealized gains (losses) on
securities (526,373) 965,148 2,312,710 556,174
------------------------------------------ ---------------- ----------------- ---------------- -----------------
Comprehensive Income (Loss) $ (273,498) $ 492,669 $ 1,912,527 $ (2,161,246)
------------------------------------------ ---------------- ----------------- ---------------- -----------------
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's derivatives outstanding at September 30, 2003 include
approximately $195,000 of embedded options on convertible bonds and $134,000 of
other open option positions. Hedge accounting is not used for these securities
and changes in market value are reported currently as realized gains or losses.
Note 4 - NET REALIZED INVESTMENT GAINS (LOSSES), NET OF EXPENSES
The Company recorded pretax reductions to the carrying value of available for
sale securities totaling $135,000 and $2,095,000 for the nine months ended
September 30, 2003 and 2002, respectively, relating to declines in value which
were considered by management to be other than temporary. These amounts are
included along with other net realized losses. The Company also nets certain
direct, incremental investment management fees against net realized investment
gains and losses presented in the Condensed Consolidated Statements of
Operations. Such costs are based directly on or, are primarily associated with
capital gains. Costs netted against realized investment gains and losses total
$236,000 and $23,000 for the nine months ended September 30, 2003 and 2002,
respectively.
Note 5 - INCOME TAXES
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
Part I; Item 1 (continued)
Note 6 - SEGMENT INFORMATION
The Company's operations are managed along five principal insurance product
lines: Home Service Life, Broker Life, Preneed Life, Dental, and Other Health.
Products in all five lines are sold through independent agency operations. Home
Service Life consists primarily of traditional life insurance coverage sold in
amounts of $10,000 and under to middle and lower income individuals. This
distribution channel is characterized by a significant amount of agent contact
with customers throughout the year. Broker Life product sales consist primarily
of simplified issue and graded-benefit policies in amounts of $10,000 and under.
Other products in this segment which are not aggressively marketed include:
group life, universal life, annuities and participating life coverages. Preneed
Life products are sold to individuals in connection with prearrangement of their
funeral and include single premium and multi-pay policies with coverages
generally in amounts of $10,000 and less. These policies are generally sold to
older individuals at increased premium rates. Dental products are term coverages
generally sold to small and intermediate size employer groups. Other Health
products include various accident and health coverages sold to individuals and
employer groups. Segment information as of September 30, 2003 and 2002, and for
the periods then ended is as follows:
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
---------------- ----------------- ---------------- -----------------
REVENUE: 2003 2002 2003 2002
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 2,267,969 $ 2,405,316 $ 6,815,681 $ 7,035,222
Broker Life 1,485,946 1,485,669 4,317,588 4,531,884
Preneed Life 3,953,455 6,092,054 12,288,540 14,445,028
Dental 2,052,254 2,077,379 6,290,470 6,120,719
Other Health 339,705 367,216 1,041,476 1,089,758
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals 10,099,329 12,427,634 30,753,755 33,222,611
Net realized investment gains (losses) 925,557 (701,218) 760,829 (2,497,769)
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Total Revenue $ 11,024,886 $ 11,726,416 $ 31,514,584 $ 30,724,842
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Below are the net investment income amounts which are included in the revenue
totals above.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
---------------- ----------------- ---------------- -----------------
NET INVESTMENT INCOME: 2003 2002 2003 2002
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 434,121 $ 435,698 $ 1,208,152 $ 1,368,774
Broker Life 580,429 527,574 1,633,080 1,669,919
Preneed Life 537,241 425,155 1,413,597 1,190,448
Dental 7,047 5,454 18,780 19,762
Other Health 22,002 18,251 59,070 59,872
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals $ 1,580,840 $ 1,412,132 $ 4,332,679 $ 4,308,775
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Part I; Item 1 (continued)
The Company evaluates performance based on several factors, of which the primary
financial measure is segment profit. Segment profit represents pretax earnings,
except net realized investment gains and interest expense are excluded. A
significant portion of the Company's realized investment gains are generated
from investments in equity securities. The equities portfolio averaged (on a
cost basis) approximately $9,941,000 and $7,179,000 during the nine months ended
September 30, 2003 and 2002, respectively.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
----------------- ---------------- ----------------- ----------------
SEGMENT PROFIT (LOSS): 2003 2002 2003 2002
---------------------------------------- ----------------- ---------------- ----------------- ----------------
Home Service Life $ (122,951) $ 145,625 $ (36,241) $ (2,227)
Broker Life (312,089) (49,071) (487,753) (192,069)
Preneed Life (59,469) (163,181) (438,880) (512,479)
Dental (10,726) 131,685 195,170 236,903
Other Health (57,379) 25,330 (234,631) (143,726)
---------------------------------------- ----------------- ---------------- ----------------- ----------------
Segment Totals (562,614) 90,388 (1,002,335) (613,598)
Net realized investment gains
(losses) 925,557 (701,218) 760,829 (2,497,769)
Interest expense 90,068 74,649 279,677 234,053
---------------------------------------- ----------------- ---------------- ----------------- ----------------
Gain (Loss) before income tax $ 272,875 $ (685,479) $ (521,183) $ (3,345,420)
---------------------------------------- ----------------- ---------------- ----------------- ----------------
Depreciation and amortization amounts below consist of depreciation expense
along with amortization of the value of insurance acquired and deferred policy
acquisition costs.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
---------------- ----------------- ---------------- -----------------
DEPRECIATION AND AMORTIZATION: 2003 2002 2003 2002
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 196,679 $ 250,420 $ 548,657 $ 531,330
Broker Life 182,691 119,652 468,398 395,604
Preneed Life 147,511 363,395 597,884 827,933
Dental 15,759 13,946 44,284 43,638
Other Health 7,918 9,542 24,080 31,952
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals $ 550,558 $ 756,955 $ 1,683,303 $ 1,830,457
--------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
----------------- ----------------
September 30, December 31,
ASSETS: 2003 2002
--------------------------------------------- ----------------- ----------------
Home Service Life $ 40,533,336 $ 39,587,175
Broker Life 54,070,858 54,232,558
Preneed Life 58,511,130 51,991,206
Dental 586,657 658,963
Other Health 1,945,872 1,971,630
--------------------------------------------- ----------------- ----------------
Segment Totals $155,647,853 $148,441,532
--------------------------------------------- ----------------- ----------------
Part I; Item 1 (continued)
Note 7 - LITIGATION
United Liberty Life Insurance Company ("United Liberty"), which the Company
acquired in 1998, is defending an action in an Ohio state court brought by two
policyholders. The Complaint refers to a particular class of life insurance
policies that United Liberty issued over a period of years ending around 1971.
It alleges that United Liberty's dividend payments on these policies from 1993
through 1999 were less than the required amount. It does not specify the amount
of the alleged underpayment but implies a maximum of about $850,000. The
plaintiffs also allege that United Liberty is liable to pay punitive damages,
also in an unspecified amount, for breach of an implied covenant of good faith
and fair dealing to the plaintiffs in relation to the dividends. The action has
been certified as a class action on behalf of all policyholders who were Ohio
residents and whose policies were still in force in 1993. United Liberty has
denied the material allegations of the Complaint and is defending the action
vigorously. Pre-trial discovery is continuing. United Liberty has filed a motion
for summary judgment, which has been fully briefed and argued and awaits
decision by the Court. At United Liberty's request, an initial mediation session
has been completed and negotiations are continuing. As a pre-requisite for the
mediation, United Liberty offered to settle the matter for payments over time,
which would include attorneys' fees, and which would be contingent upon an
exchange or reformation of the insurance policies currently owned by the members
of the class. At this stage of the litigation, the Company is unable to
determine whether an unfavorable outcome of the action is likely to occur or,
alternatively, whether the chance of such an outcome is remote. Therefore, at
this time, management has no basis for estimating potential losses, if any. In
addition, the Company is party to other lawsuits in the normal course of
business. Management believes that recorded claims liabilities are adequate to
ensure that these other suits will be resolved without material financial impact
to the Company.
NOTE 8 - RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin (ARB) No. 51 which states certain
criteria for use in consolidating another entity. The provisions of
Interpretation No. 46 had no impact on the financial statements of the Company.
In May 2003, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity (FAS 150),
effective for interim reporting periods beginning after June 15, 2003. Under the
new rules, certain financial instruments classified as equity will be required
to be presented as liabilities. The provisions of FAS 150 had no impact on the
financial statements of the Company.
Part I; Item 2 - Management's Discussion and Analysis
FINANCIAL POSITION. Shareholders' equity totaled approximately $19,662,000 and
$17,758,000 at September 30, 2003 and December 31, 2002, respectively. These
balances reflect an approximate 11% increase for the nine months ended September
30, 2003. As described above, comprehensive income (loss) totaled approximately
$1,913,000 and $(2,161,000) for the nine months ended September 30, 2003 and
2002, respectively. A significant portion of comprehensive income (loss) is
attributable to changes in the value of the Company's fixed maturity and equity
portfolios. Fixed maturity portfolio positions increased $1,092,000 on an
amortized cost basis and increased $2,949,000 on a market value basis during the
first nine months of 2003. This gross appreciation of $1,857,000 resulted
primarily from increasing bond prices during the period. Equity securities
comprised approximately 9.6% and 5.2% of the Company's total assets as of
September 30, 2003 and December 31, 2002, respectively. Equity portfolio
positions increased $5,445,000 on a cost basis and $7,184,000 on a market value
basis, during the first nine months of 2003, resulting in gross appreciation of
$1,739,000. Cash and cash equivalent positions also decreased approximately
$2,692,000 during the nine months ended September 30, 2003 primarily due to
increased fixed maturity and equity security investments.
Equity markets continue to be volatile but were much more favorable during 2003
than results experienced during the prior three years. Late in the second
quarter of 2003, interest yields on fixed maturity investments finally began to
rise. Although this adversely impacts the market value of the Company's bond
portfolio, the opportunity to invest new money at higher yields would have a
positive impact on the Company's operating earnings. Additionally, improving
economic activity and equity valuations have resulted in a lower level of
securities impairment writedowns during 2003. The 2003 environment as described
continues to generate a relatively high level of qualitative investment risk.
However, measures of quantitative investment risk are not believed to have
changed significantly from those previously disclosed in the Company's 2002 Form
10-K.
OPERATIONS. Net premiums and other considerations decreased approximately
$2,278,000, or 21% during the three months ended September 30, 2003 compared to
the three months ended September 30, 2002 and decreased $2,277,000, or 8% for
the first nine months of 2003 compared to the first nine months of 2002. Below
is a summary of net premiums earned by segment, for the three and nine month
periods ended September 30, 2003, along with the change from the prior year.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------- ----------------------------------
---------------- ----------------- ---------------- -----------------
NET PREMIUMS EARNED Total Change Total Change
------------------------------------- ---------------- ----------------- ---------------- -----------------
Home Service Life $ 1,821,080 (64,488) $ 5,563,237 $ 15,895
Broker Life 888,522 32,821 2,624,641 (92,011)
Preneed Life 3,400,085 (2,191,979) 10,823,122 (2,327,869)
Dental 2,044,997 (25,746) 6,271,002 171,764
Other Health 317,048 (28,271) 980,241 (44,435)
------------------------------------- ---------------- ----------------- ---------------- -----------------
Segment Totals $ 8,471,732 $ (2,277,663) $ 26,262,243 $ (2,276,656)
------------------------------------- ---------------- ----------------- ---------------- -----------------
The Home Service Life growth for the year is attributable to a continuing focus
on providing quality service to existing agents and customers along with a
moderate level of new agent recruiting, although some agents have expressed
concern about a recent premium rate increase. The Broker Life decline for the
year is primarily attributable to competition from other carriers in the final
expense marketplace. Preneed life premiums are lower, due in part to the
Company's decision to emphasize the lower annual premium "multi-pay" policies
rather than "single-pay" policies and some loss of volume attributable to
reducing commission levels and the rate of annual growth credited to policies.
During 2003, Dental premiums were favorably impacted by additional broker
relationships and normal inflationary premium increases. The Other Health
segment products are not being actively marketed.
The Company's Pretax Income (Loss) improved approximately $958,000 to $273,000
for the three months ended September 30, 2003, and improved $2,824,000
to $(521,000) for the nine months ended September 30, 2003, compared
to the corresponding periods in 2002. Most of this improvement is
attributable to improving realized investment gains (losses). Net realized
investment gains totaled $926,000 and $761,000 respectively, for the three
Part I; Item 2 - Management's Discussion and Analysis, continued
and nine month periods ending September 30, 2003, compared to realized losses of
$701,000 and $2,498,000 respectively, for the three and nine month periods
ending September 30, 2002. Both the equity and fixed income investment markets
improved significantly during the first nine months of 2003. Segment Profit
(Loss), which excludes net realized investment gains (losses) and interest
expense declined approximately $653,000 to $(563,000) for the three months ended
September 30, 2003, and declined $389,000 to $(1,002,000) for the nine months
ended September 30, 2003, compared to the corresponding periods in 2002. A
significant portion of the adverse impact for the three and nine month periods
ended September 30, 2003 relates to the approximate 54 basis point decline in
investment yields as shown below. However, investment yields for the three
months ended September 30, 2003 were approximately 46 basis points higher than
yields during the first six months of 2003. Additionally, for the three months
ended September 30, 2003, mortality was unfavorable in the Home Service and
Broker Life lines and Dental claim rates were higher, compared to the three
months ended September 30, 2002. For the nine months ended September 30, 2003,
Preneed Life results were somewhat favorably impacted by a variety of pricing
and agent compensation actions taken, while mortality and morbidity results in
the other business segment were relatively stable.
Below are pretax investment income and total return, along with approximate
annualized yields for the nine months ended September 30, 2003 and 2002.
----------------- -----------------
Nine Months Ended September 30 2003 2002
-------------------------------------------- ----------------- -----------------
Investment Income $ 4,332,680 $ 4,308,775
Realized and Unrealized Gains (Losses) 4,357,479 (1,654,740)
-------------------------------------------- ----------------- -----------------
Total Return $ 8,690,159 $ 2,654,035
-------------------------------------------- ----------------- -----------------
Average Cash and Investments $ 130,248,047 $ 115,261,875
Investment Income Yield - Annualized 4.44% 4.98%
Total Return - Annualized 8.90% 3.07%
The Company's effective income tax rate differs from the statutory federal rate
primarily due to the effect of the small life insurance company deduction which
allows certain companies to reduce their taxable income by up to 60% before
computing provisions for regular and alternative minimum tax.
CASH FLOW AND LIQUIDITY. Cash flow from operations totaled $5,158,000 for the
nine months ended September 30, 2003 compared to $12,645,000 for the same period
in the prior year. This positive cash flow for both periods is primarily
attributable to growth in Preneed Life business, although the 2002 total also
includes an approximate $2,565,000 net recovery of federal income tax. The
$5,765,000 of cash used by investing activities for the nine months ended
September 30, 2003 resulted primarily from investing the proceeds of Preneed
Life sales. The $2,085,000 of cash used in financing activities during the first
nine months of 2003 is primarily attributable to bank loan principal repayments
along with annuity and Universal Life account withdrawals. The quarterly bank
loan payment due on October 1, 2003 was paid by September 30, 2003, accordingly,
the outstanding bank loan balance decreased by four quarterly installments
during 2003. Due to continued earnings pressure from lower yields on investments
and other competitive impacts on product margins, the Company is completing a
strategic review of its products and operations. A key element of this
initiative is improving profitability of the Preneed, Home Service, and Broker
Life segments by increasing premiums, strengthening underwriting practices,
modifying commissions, and where possible, lowering interest crediting or policy
growth rates. Regarding the currently scheduled debt repayments, the Company
believes its available funds will be adequate to service 2003 debt obligations
and, with other available assets, will probably be adequate to service debt
obligations through 2004. In addition, the Company's Chairman has expressed
potential willingness to loan the Company an additional $3,000,000 if necessary,
which could service debt obligations through the majority of 2006. For the
quarter ended September 30, 2003, the Company did not meet one of its bank debt
covenants (debt to earnings ratio), however the lender has waived this
violation. In return for the waiver and recognizing the Company may not meet
this covenant as of December 31, 2003, the Company's Chairman agreed to
personally guarantee the outstanding bank debt. During the fourth quarter of
2003, the Company expects to negotiate an appropriate fee for this personal
guarantee will attempt to renegotiate the debt to earnings ratio covenant.
Part I; Item 2 - Management's Discussion and Analysis, continued
FORWARD-LOOKING INFORMATION.
All statements, trend analyses and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things:
|X| the market value of the Company's investments, including stock market
performance and prevailing interest rate levels;
|X| customer and agent response to new products, distribution channels
and marketing initiatives, including exposure to unrecoverable advanced
commissions;
|X| mortality, morbidity, lapse rates, and other factors which may affect
the profitability of the Company's insurance products;
|X| regulatory changes or actions, including those relating to regulation
of insurance products and insurance companies;
|X| ratings assigned to the Company and its subsidiaries by independent
rating organizations which the Company believes are important to the
sale of its products;
|X| general economic conditions and increasing competition which may affect
the Company's ability to sell its products;
|X| the Company's ability to achieve anticipated levels of operating
efficiencies and meet cash requirements based upon projected liquidity
sources;
|X| unanticipated adverse litigation outcomes; and
|X| changes in the Federal income tax laws and regulations which may affect
the relative tax advantages of some of the Company's products.
There can be no assurance that other factors not currently anticipated by
management will not also materially and adversely affect the Company's results
of operations.
Part I; Item 3 - Quantitative and Qualitative Disclosures about Market Risk
QUANTITATIVE AND QUALITATIVE RISK. Changes in quantitative and qualitative
market risks during the nine months ended September 30, 2003 are discussed in
Part I, Item 2 above.
Part I; Item 4 - Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Management of the Company
conducted an evaluation of its disclosure controls and procedures, with the
supervision and participation of its Chief Executive Officer and Chief Financial
Officer, as of the end of the period covered by this quarterly report. The
Company does not expect that its disclosure controls and procedures will prevent
all error and fraud. Such a control system, no matter how well conceived and
operated, can provide only reasonable, not absolute, assurance that the
objectives of the control system are met. Further, the design of a control
system must balance the constraint of prudent resource expenditure with a
judgmental evaluation of risks and benefits. Based on this evaluation of
disclosure controls and procedures, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that such controls and procedures provide
reasonable assurance that material information required to be included in the
Company's periodic SEC reports is made known on a timely basis to the Company's
principal executive and financial officers.
CHANGES IN INTERNAL CONTROLS. There has been no change in the Company's internal
control over financial reporting identified in connection with the evaluation,
that occurred during the fiscal quarter ended September 30, 2003 that materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibit 11: Statement re: computation of per share earnings.
Exhibit 31.1: Certification of Chief Executive Officer
Exhibit 31.2: Certification of Chief Financial Officer
Exhibit 32.1: Certification of Chief Executive Officer
Exhibit 32.2: Certification of Chief Financial Officer
b). Reports on Form 8-K: On August 15, 2003 the Company filed a Form 8-K
to furnish, pursuant to Item 12, a press release
disclosing the Company's earnings for the second
quarter of 2003.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CITIZENS FINANCIAL CORPORATION
BY: /s/ Darrell R. Wells
---------------------------------------------
Darrell R. Wells
President and Chief Executive Officer
BY: /s/ Brent L. Nemec
---------------------------------------------
Brent L. Nemec
Treasurer and Principal Accounting Officer
Date: November 14, 2003
EXHIBIT INDEX
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Exhibit No. Description
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11 Statement re: computation of per share earnings
31.1 Certification of Chief Executive Officer
31.2 Certification of Chief Financial Officer
32.1 Certification of Chief Executive Officer
32.2 Certification of Chief Financial Officer