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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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
August 11, 2003.
The date of this Report is August 13, 2003.
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Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Six Months Ended June 30 2003 2002
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $18,323,113 $18,434,777
Premiums ceded (532,602) (645,273)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 17,790,511 17,789,504
Net investment income 2,751,839 2,896,643
Net realized investment losses (164,728) (1,796,551)
Other income 112,076 108,830
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 20,489,698 18,998,426
Policy Benefits and Expenses:
Policyholder benefits 10,682,128 9,797,107
Policyholder benefits ceded (555,852) (849,674)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 10,126,276 8,947,433
Increase in net benefit reserves 3,956,813 5,699,527
Interest credited on policyholder deposits 345,572 403,041
Commissions 3,388,237 3,537,980
General expenses 3,425,195 3,275,113
Interest expense 189,609 159,404
Policy acquisition costs deferred (1,137,316) (1,283,785)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 989,370 919,654
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 21,283,756 21,658,367
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax (794,058) (2,659,941)
Income Tax Benefit (141,000) (415,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (653,058) $(2,244,941)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss Per Common Share $ (0.39) $ (1.31)
------------------------------------------------------------------------ -------------------- --------------------
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 June 30 2003 2002
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $9,084,178 $ 9,838,801
Premiums ceded (271,307) (306,539)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 8,812,871 9,532,262
Net investment income 1,377,850 1,428,820
Net realized investment gains (losses) 111,435 (1,468,150)
Other income 55,723 57,007
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 10,357,879 9,549,939
Policy Benefits and Expenses:
Policyholder benefits 5,424,917 5,021,002
Policyholder benefits ceded (321,841) (358,546)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 5,103,076 4,662,456
Increase in net benefit reserves 2,274,626 3,413,033
Interest credited on policyholder deposits 180,687 215,719
Commissions 1,694,569 1,843,347
General expenses 1,613,123 1,774,230
Interest expense 97,401 78,176
Policy acquisition costs deferred (557,774) (712,890)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 339,911 468,866
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 10,745,619 11,742,937
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax (387,740) (2,192,998)
Income Tax Benefit (68,000) (345,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (319,740) $(1,847,998)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss Per Common Share $ (0.19) $ (1.08)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
June 30, December 31,
2003 2002
------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $100,059,180
and $101,161,174 in 2003 and 2002, respectively) $ 105,844,331 $ 103,953,815
Equity securities (cost of $10,312,336 and
$7,108,735 in 2003 and 2002, respectively) 12,413,783 7,761,892
Investment real estate 3,210,542 3,252,424
Policy loans 4,318,561 4,239,128
Short-term investments 632,381 632,381
------------------------------------------------------------------------ -------------------- --------------------
Total Investments 126,419,598 119,836,640
Cash and cash equivalents 6,298,989 6,699,171
Accrued investment income 1,466,807 1,330,036
Reinsurance recoverable 2,697,334 2,886,256
Premiums receivable 288,170 215,759
Property and equipment 2,686,731 2,767,763
Deferred policy acquisition costs 10,182,816 9,915,288
Value of insurance acquired 3,366,665 3,617,602
Goodwill 755,782 755,782
Federal income tax receivable 310,158 250,158
Other assets 49,566 164,077
------------------------------------------------------------------------ -------------------- --------------------
Total Assets $ 154,522,616 $ 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
June 30, December 31,
2003 2002
------------------------------------------------------------------------ -------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $ 106,492,701 $ 102,649,565
Policyholder deposits 15,563,637 15,743,293
Policy and contract claims 1,711,743 1,797,195
Unearned premiums 239,500 247,625
Other 218,892 277,955
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 124,226,473 120,715,633
Note payable - bank 4,791,668 5,779,168
Note payable - related party 2,000,000 2,000,000
Accrued expenses and other liabilities 1,909,386 1,851,467
Deferred federal income tax 1,659,191 337,632
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 134,586,718 130,683,900
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 5,062,842 2,223,759
Retained earnings 6,017,507 6,670,565
------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 19,935,898 17,757,632
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $ 154,522,616 $ 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)
Six Months Ended June 30 2003 2002
------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net loss $ (653,058) $ (2,244,941)
Adjustments to reconcile net loss to cash from operations:
Increase in benefit reserves 3,831,180 5,721,141
Increase (decrease) in claim liabilities (85,452) 242,221
(Increase) decrease in reinsurance recoverable (4,571) 9,463
Interest credited on policyholder deposits 345,572 403,041
Provision for amortization and depreciation, net of deferrals 188,922 (210,285)
Amortization of premium and accretion of discount on
securities purchased, net 60,313 47,549
Net realized investment losses 164,728 1,796,551
Increase in accrued investment income (136,771) (41,347)
Change in other assets and liabilities (20,630) 214,254
Decrease in deferred federal income tax liability (141,000) (106,379)
(Increase) decrease in federal income taxes receivable (60,000) 1,072,432
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by Operations 3,489,233 6,903,700
Cash Flows from Investment Activities:
Cost of securities acquired (33,376,076) (20,820,724)
Investments sold or matured 31,113,919 15,584,807
Investment management fees (4,597) (44,743)
Additions to real estate (17,670) (5,568)
Additions to property and equipment (5,071) (24,159)
Other investing activities, net (79,433) 5,127
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Investment Activities (2,368,928) (5,305,260)
Cash Flows from Financing Activities:
Policyholder deposits 308,623 423,324
Policyholder withdrawals (833,851) (856,792)
Payments on notes payable - bank (987,500) (658,333)
Repurchase of common stock (7,759) ---
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (1,520,487) (1,091,801)
------------------------------------------------------------------------ -------------------- --------------------
Net Increase (Decrease) in Cash and Cash Equivalents (400,182) 506,639
Cash and Cash Equivalents at Beginning of Period 6,699,171 18,433,626
------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $ 6,298,989 $ 18,940,265
------------------------------------------------------------------------ -------------------- --------------------
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 six month periods ended June 30, 2003 and 2002 are as follows:
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
COMPREHENSIVE INCOME: 2003 2002 2003 2002
------------------------------------------------- --------------- --------------- --------------- ---------------
Net Loss $ (319,740) $(1,847,998) $ (653,058) $(2,244,941)
Net unrealized gains (losses) on securities 2,420,849 328,811 2,839,083 (408,974)
------------------------------------------------- --------------- --------------- --------------- ---------------
Comprehensive Income (Loss) $2,101,109 $(1,519,187) $2,186,025 $(2,653,915)
------------------------------------------------- --------------- --------------- --------------- ---------------
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's derivatives outstanding at June 30, 2003 include approximately
$200,000 of embedded options on convertible bonds and $2,000 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 $1,932,000 for the six months ended June
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 $225,000 and
$6,000 for the six months ended June 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 June 30, 2003 and 2002, and for the
periods then ended is as follows:
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
REVENUE: 2003 2002 2003 2002
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 2,259,771 $ 2,313,622 $ 4,547,712 $ 4,629,906
Broker Life 1,367,436 1,492,992 2,831,642 3,046,215
Preneed Life 4,193,478 4,825,708 8,335,085 8,352,974
Dental 2,090,956 2,030,442 4,238,216 4,043,340
Other Health 334,803 355,325 701,771 722,542
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals 10,246,444 11,018,089 20,654,426 20,794,977
Net realized investment gains (losses) 111,435 (1,468,150) (164,728) (1,796,551)
------------------------------------------------- --------------- --------------- --------------- ---------------
Total Revenue $10,357,879 $ 9,549,939 $20,489,698 $18,998,426
------------------------------------------------- --------------- --------------- --------------- ---------------
Below are the net investment income amounts which are included in the revenue
totals above.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
NET INVESTMENT INCOME: 2003 2002 2003 2002
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 377,689 $ 456,245 $ 774,031 $ 933,076
Broker Life 511,544 554,808 1,052,651 1,142,345
Preneed Life 466,522 389,733 876,356 765,293
Dental 5,096 7,286 11,733 14,308
Other Health 16,999 20,748 37,068 41,621
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals $1,377,850 $1,428,820 $2,751,839 $2,896,643
------------------------------------------------- --------------- --------------- --------------- ---------------
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 $9,066,000 and $7,149,000 during the six months ended
June 30, 2003 and 2002, respectively.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
SEGMENT PROFIT (LOSS): 2003 2002 2003 2002
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ (35,157) $ (144,248) $ 86,710 $ (147,852)
Broker Life (240,873) (181,591) (175,664) (142,998)
Preneed Life (257,999) (133,245) (379,411) (349,298)
Dental 63,984 (51,539) 205,896 105,218
Other Health 68,271 (136,049) (177,252) (169,056)
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals (401,774) (646,672) (439,721) (703,986)
Net realized investment gains (losses) 111,435 (1,468,150) (164,728) (1,796,551)
Interest expense 97,401 78,176 189,609 159,404
------------------------------------------------- --------------- --------------- --------------- ---------------
Loss before Federal Income Tax $ (387,740) $(2,192,998) $ (794,058) $(2,659,941)
------------------------------------------------- --------------- --------------- --------------- ---------------
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 June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
DEPRECIATION AND AMORTIZATION: 2003 2002 2003 2002
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 175,994 $ 121,640 $ 351,978 $ 280,910
Broker Life 86,170 115,246 285,707 275,952
Preneed Life 131,698 283,588 450,373 464,538
Dental 14,231 14,848 28,525 29,692
Other Health 3,506 10,480 16,162 22,410
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals 411,599 $ 545,802 $1,132,745 $1,073,502
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
----------------- ----------------
June 30, December 31,
ASSETS: 2003 2002
--------------------------------------------- ----------------- ----------------
Home Service Life $40,489,156 $39,587,175
Broker Life 54,665,495 54,232,558
Preneed Life 56,950,744 51,991,206
Dental 554,483 658,963
Other Health 1,862,738 1,971,630
--------------------------------------------- ----------------- ----------------
Segment Totals $154,522,616 $148,441,532
--------------------------------------------- ----------------- ----------------
Part I; Item 1 (continued)
Note 7 - LITIGATION
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 Company has evaluated
Interpretation No. 46 and does not believe it will have a material impact on the
financial statements.
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 Company has evaluated FAS 150 and does not
believe it will have a material impact on the financial statements.
Part I; Item 2 - Management's Discussion and Analysis
FINANCIAL POSITION. Shareholders' equity totaled approximately $19,936,000 and
$17,758,000 at June 30, 2003 and December 31, 2002, respectively. These balances
reflect an approximate 12% increase for the six months ended June 30, 2003. As
described above, comprehensive income (loss) totaled approximately $2,186,000
and $(2,654,000) for the six months ended June 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 decreased $1,102,000 on an amortized cost basis and
increased $1,891,000 on a market value basis during the first six months of
2003. This gross appreciation of $2,993,000 resulted primarily from increasing
bond prices during the period. However, during July 2003, bond values declined
and a significant portion of this appreciation was reversed. Equity securities
comprised approximately 8.0% and 5.2% of the Company's total assets as of June
30, 2003 and December 31, 2002, respectively. Equity portfolio positions
increased $3,204,000 on a cost basis and $4,652,000 on a market value basis,
during the first six months of 2003, resulting in gross appreciation of
$1,448,000. Cash and cash equivalent positions also decreased approximately
$400,000 during the six months ended June 30, 2003.
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 produces an adverse impact on the value of the Company's
bond portfolio, the opportunity to invest new money at higher yields is expected
to 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 risk per unit of investment
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
$719,000, or 7% during the three months ended June 30, 2003 compared to the
three months ended June 30, 2002 but increased $1,000 for the first six months
of 2003 compared to the first six months of 2002. Below is a summary of net
premiums earned by segment, for the three and six month periods ended June 30,
2003, along with the change from the prior year.
------------------------------ -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------- --------------- --------------- ---------------
NET PREMIUMS EARNED Total Change Total Change
------------------------------------- -------------- --------------- --------------- ---------------
Home Service Life $ 1,866,814 $ 27,658 $ 3,742,157 $ 80,383
Broker Life 835,213 (80,795) 1,736,119 (124,832)
Preneed Life 3,708,073 (712,408) 7,423,037 (135,890)
Dental 2,085,654 62,787 4,226,005 197,510
Other Health 317,117 (16,633) 663,193 (16,164)
------------------------------------- -------------- --------------- --------------- ---------------
Segment Totals $ 8,812,871 $ (719,391) $17,790,511 $ 1,007
------------------------------------- -------------- --------------- --------------- ---------------
The Home Service Life growth is attributable to a continuing focus on providing
quality service to existing agents and customers along with a moderate level of
new agent recruiting. The Broker Life declines are 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. Dental premium increases are attributable to
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 $1,805,000
to $(388,000) for the three months ended June 30, 2003, and improved
$1,866,000 to $(794,000) for the six months ended June 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 (losses) totaled $111,000 and $(164,728) for the three and six month
periods respectively, ending June 30, 2003. Both the equity and fixed
income investment markets improved significantly during the first six
months of 2003. Segment Profit (Loss), which excludes net realized investment
Part I; Item 2 - Management's Discussion and Analysis, continued
gains (losses) and interest expense improved approximately $245,000 to
$(402,000) for the three months ended June 30, 2003, and improved $265,000 for
the six months ended June 30, 2003, compared to the corresponding periods in
2002. Most of this improvement is attributable to favorable Home Service Life
mortality, a reduction in Other Health disability claim and reserve levels, and
improvement in Dental claim levels. These favorable impacts were partially
offset by net declines in the Company's investment portfolio yield and adverse
Broker Life and Preneed Life mortality.
Below are pretax investment income and total return, along with approximate
annualized yields for the six months ended June 30, 2003 and 2002.
----------------- -----------------
Six Months Ended June 30 2003 2002
-------------------------------------------- ----------------- -----------------
Investment Income $ 2,751,839 $ 2,896,643
Realized and Unrealized Gains (Losses) 4,276,072 (2,456,404)
-------------------------------------------- ----------------- -----------------
Total Return $ 7,027,911 $ 440,239
-------------------------------------------- ----------------- -----------------
Average Cash and Investments $128,685,929 $113,549,504
Investment Income Yield - Annualized 4.28% 5.10%
Total Return - Annualized 10.92% 0.78%
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 $3,489,000 for the
six months ended June 30, 2003 compared to $6,904,000 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 $1,072,000 net recovery of federal income tax. The $2,369,000 of
cash used by investing activities for the six months ended June 30, 2003
resulted primarily from investing the proceeds of Preneed Life sales. The
$1,520,000 of cash used in financing activities during the first six 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 July 1, 2003 was paid by June 30, 2003, accordingly, the outstanding bank
loan balance decreased by three quarterly installments. Due to continued
investment losses and earnings pressure from lower yields on investments and
cash equivalents, 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.
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:
Part I; Item 2 - Management's Discussion and Analysis, continued
|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
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. The primary changes in quantitative market
risks during the six months ended June 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 June 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 4. Submission of Matters to a Vote of Security Holders.
The 2003 annual meeting of shareholders of the Company was held on
May 22, 2003. At the meeting, eight incumbent directors were re-elected
to serve until the 2003 annual meeting of shareholders. The names of
the incumbent directors and shares of the Company's Class A Stock voted
for each were as follows:
Candidate Votes
------------------------------------- -----------------
John H. Harralson, Jr. 1,364,917
Lane A. Hersman 1,292,093
Frank T. Kiley 1,312,293
Earle V. Powell 1,364,817
Thomas G. Ward 1,364,917
Darrell R. Wells 1,312,293
Margaret A. Wells 1,312,293
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 May 22, 2003 the Company filed a Form
8-K to furnish, pursuant to Item 12, a
press release disclosing the Company's
earnings for the first quarter of 2003.
On May 23, 2003 the Company filed a Form
8-K to furnish, pursuant to Item 12,
remarks by the Company's Executive Vice
President and Chief Operating Officer at
the Company's 2003 Annual Meeting.
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: August 12, 2003
EXHIBIT INDEX
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Exhibit No. Description
--------------------- ----------------------------------------------------------
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