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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, 2002
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 ~~~~~
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 - 1,716,815 as of
August 12, 2002.
The date of this Report is August 14, 2002.
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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 2002 2001
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $18,434,777 $ 14,801,729
Premiums ceded (645,273) (571,395)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 17,789,504 14,230,334
Net investment income 2,896,643 3,341,497
Net realized investment losses (1,796,551) (3,298,100)
Other income 108,830 119,270
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 18,998,426 14,393,001
Policy Benefits and Expenses:
Policyholder benefits 9,797,107 9,211,451
Policyholder benefits ceded (849,674) (551,088)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 8,947,433 8,660,363
Increase in net benefit reserves 5,699,527 2,774,434
Interest credited on policyholder deposits 403,041 413,409
Commissions 3,537,980 3,413,978
General expenses 3,275,113 3,331,683
Interest expense 159,404 314,701
Policy acquisition costs deferred (1,283,785) (2,030,361)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 919,654 897,789
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 21,658,367 17,775,996
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax and cumulative effect (2,659,941) (3,382,995)
of a change in accounting principle
Income Tax Benefit (415,000) (886,000)
------------------------------------------------------------------------ -------------------- --------------------
Loss before cumulative effect of a (2,244,941) (2,496,995)
change in accounting principle
Cumulative effect from prior years (since January 1, 1999) of
accounting for embedded options (311,211)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (2,244,941) $ (2,808,206)
------------------------------------------------------------------------ -------------------- --------------------
Per Share Amounts:
Loss before cumulative effect of a
change in accounting principle $ (1.31) $ (1.43)
Cumulative effect from prior years (since January 1, 1999) of
accounting for embedded options --- (0.18)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (1.31) $ (1.61)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended June 30 2002 2001
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $9,838,801 $7,469,404
Premiums ceded (306,539) (259,863)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 9,532,262 7,209,541
Net investment income 1,428,820 1,656,564
Net realized investment losses (1,468,150) (3,469,996)
Other income 57,007 69,325
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 9,549,939 5,465,434
Policy Benefits and Expenses:
Policyholder benefits 5,021,002 4,510,476
Policyholder benefits ceded (358,546) (267,248)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 4,662,456 4,243,228
Increase in net benefit reserves 3,413,033 1,771,424
Interest credited on policyholder deposits 215,719 217,863
Commissions 1,843,347 1,655,635
General expenses 1,774,230 1,707,876
Interest expense 78,176 143,050
Policy acquisition costs deferred (712,890) (971,548)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 468,866 410,047
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 11,742,937 9,177,575
------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax and cumulative effect (2,192,998) (3,712,141)
of a change in accounting principle
Income Tax Benefit (345,000) (972,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (1,847,998) $ (2,740,141)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss Per Common Share $ (1.08) $ (1.57)
------------------------------------------------------------------------ -------------------- --------------------
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,
2002 2001
------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $80,651,162
and $75,872,277 in 2002 and 2001 respectively) $81,964,555 $ 77,534,516
Equity securities (cost of $5,817,578 and
$7,055,402 in 2002 and 2001, respectively) 6,568,127 8,116,958
Investment real estate 3,386,956 3,438,345
Mortgage loans on real estate 156,000 156,000
Policy loans 4,131,522 4,136,649
Short-term investments 652,192 652,192
------------------------------------------------------------------------ -------------------- --------------------
Total Investments 96,859,352 94,034,660
Cash and cash equivalents 18,940,265 18,433,626
Accrued investment income 1,431,897 1,390,550
Reinsurance recoverable 2,746,217 2,755,680
Premiums receivable 423,645 215,520
Property and equipment 2,789,996 2,862,727
Deferred policy acquisition costs 9,339,467 8,579,423
Value of insurance acquired 3,901,389 4,177,907
Goodwill 755,782 755,782
Federal income tax receivable 1,782,501 2,854,933
Other assets 259,669 536,275
------------------------------------------------------------------------ -------------------- --------------------
Total Assets $139,230,180 $ 136,597,083
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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,
2002 2001
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LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $95,062,043 $ 89,337,560
Policyholder deposits 15,887,304 15,917,731
Policy and contract claims 1,684,577 1,442,356
Unearned premiums 252,904 252,730
Other 212,236 289,400
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 113,099,064 107,239,777
Notes payable 6,437,501 7,095,834
Accrued expenses and other liabilities 2,151,873 1,748,753
Deferred federal income tax 193,174 510,236
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 121,881,612 116,594,600
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,716,815 shares issued and outstanding
in 2002 and 2001, respectively 1,716,815 1,716,815
Additional paid-in capital 7,285,938 7,285,938
Accumulated other comprehensive income 1,348,131 1,757,105
Retained earnings 6,997,684 9,242,625
------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 17,348,568 20,002,483
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $139,230,180 $ 136,597,083
------------------------------------------------------------------------ -------------------- --------------------
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 2002 2001
------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net loss $ (2,244,941) $ (2,808,206)
Adjustments to reconcile net loss to cash from operations:
Increase in benefit reserves 5,721,141 2,814,138
Increase (decrease) in claim liabilities 242,221 (168,783)
(Increase) in reinsurance recoverable 9,463 175,201
Interest credited on policyholder deposits 403,041 413,409
Provision for amortization and depreciation, net of deferrals (210,285) (953,450)
Amortization of premium and accretion of discount on
securities purchased, net 47,549 (42,285)
Net realized investment losses 1,796,551 3,298,100
(Increase) decrease in accrued investment income (41,347) (23,438)
Change in other assets and liabilities 214,254 (124,023)
Decrease in deferred federal income tax liability (106,379) (236,000)
Decrease in federal income taxes receivable 1,072,432 594,743
Cumulative effect of a change in accounting principle --- 311,211
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by Operations 6,903,700 3,250,617
Cash Flows from Investment Activities:
Cost of securities acquired (20,820,724) (9,002,909)
Investments sold or matured 15,584,807 13,108,753
Investment management fees (44,743) (170,395)
Additions to property and equipment, net (29,727) (157,092)
Other investing activities, net 5,127 76,833
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by (used in) Investment Activities (5,305,260) 3,855,190
Cash Flows from Financing Activities:
Policyholder deposits 423,324 511,638
Policyholder withdrawals (856,792) (985,671)
Payments on notes payable - bank (658,333) (400,000)
Repurchase of common stock --- (246,225)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (1,091,801) (1,120,258)
------------------------------------------------------------------------ -------------------- --------------------
Net Increase in Cash and Cash Equivalents 506,639 5,985,549
Cash and Cash Equivalents at Beginning of Period 18,433,626 20,093,774
------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $ 18,940,265 $ 26,079,323
------------------------------------------------------------------------ -------------------- --------------------
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, 2001 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, net of related tax, for the three months
and six months ended June 30, 2002 and 2001 are as follows:
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Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
COMPREHENSIVE INCOME: 2002 2001 2002 2001
------------------------------------------------- --------------- --------------- --------------- ---------------
Net Loss $(1,847,998) $(2,740,141) $(2,244,941) $(2,808,206)
Net unrealized gains (losses) on securities 328,811 2,308,564 (408,974) 2,371,618
------------------------------------------------- --------------- --------------- --------------- ---------------
Comprehensive Loss $(1,519,187) $ (431,577) $(2,653,915) $ (436,588)
------------------------------------------------- --------------- --------------- --------------- ---------------
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Effective January 1, 2001, the Company adopted Financial Accounting Standards
Board Statement (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended by SFAS Nos. 137 and 138. This statement
requires that all derivatives be recognized as either assets or liabilities in
the balance sheet at their fair value, and sets forth the manner in which gains
or losses thereon are to be recorded. The treatment of such gains and losses is
dependent upon the type of exposure, if any, for which the derivative is
designed as a hedge. Currently, the Company has not designated any derivatives
as hedges. In accordance with SFAS 133, as of January 1, 2001, the Company
recorded a $311,211 transition adjustment loss. This adjustment represents the
cumulative market value change (since January 1, 1999) of options embedded
within convertible bonds, along with a recalculation of discount accretion for
the related host bonds and corresponding income tax impacts. The net transition
adjustment includes a $539,090 gross market value decline, $67,558 of discount
accretion, and a $160,321 income tax benefit.
Note 4 - NET REALIZED INVESTMENT GAINS, NET OF EXPENSES
The Company recorded pretax reductions to the carrying value of available for
sale securities totaling $1,932,000 and $2,715,000 for the six months ended June
30, 2002 and 2001, respectively, relating to declines in value which were
considered by management to be other than temporary. These amounts are reported
as additions to net realized investment losses. The Company also includes
certain direct, incremental investment management fees with net realized
investment losses presented in the Condensed Consolidated Statements of Income.
Such costs are based directly on or, are primarily associated with, realized
capital gains and losses. Costs included with realized investment losses totaled
$6,000 and $23,000 for the six months ended June 30, 2002 and 2001,
respectively.
Part I; Item 1 (continued)
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.
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, 2002 and 2001, and for the
periods then ended is as follows:
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
REVENUE: 2002 2001 2002 2001
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 2,313,622 $ 2,344,220 $ 4,629,906 $ 4,682,981
Broker Life 1,492,992 1,602,379 3,046,215 3,393,677
Preneed Life 4,825,708 2,530,092 8,352,974 4,667,413
Dental 2,030,442 2,073,328 4,043,340 4,172,980
Other Health 355,325 385,411 722,542 774,050
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals 11,018,089 8,935,430 20,794,977 17,691,101
Net realized investment losses (1,468,150) (3,469,996) (1,796,551) (3,298,100)
------------------------------------------------- --------------- --------------- --------------- ---------------
Total Revenue $ 9,549,939 $ 5,465,434 $18,998,426 $14,393,001
------------------------------------------------- --------------- --------------- --------------- ---------------
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: 2002 2001 2002 2001
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 456,245 $ 549,316 $ 933,076 $1,112,364
Broker Life 554,808 685,730 1,142,345 1,398,252
Preneed Life 389,733 387,505 765,293 762,276
Dental 7,286 9,822 14,308 19,787
Other Health 20,748 24,191 41,621 48,818
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals $1,428,820 $1,656,564 $2,896,643 $3,341,497
------------------------------------------------- --------------- --------------- --------------- ---------------
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 and losses are
generated from investments in equity securities. The equities portfolio averaged
(on a cost basis) approximately $7,149,000 and $12,739,000 during the six months
ended June 30, 2002 and 2001, respectively.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
SEGMENT PROFIT (LOSS): 2002 2001 2002 2001
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ (144,248) $ 3,820 $ (147,852) $ 173,488
Broker Life (181,591) (202,945) (142,998) 11,502
Preneed Life (133,245) 104,739 (349,298) (69,496)
Dental (51,539) (10,800) 105,218 84,698
Other Health (136,049) 6,091 (169,056) 29,614
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals (646,672) (99,095) (703,986) 229,806
Net realized investment losses (1,468,150) (3,469,996) (1,796,551) (3,298,100)
Interest expense 78,176 143,050 159,404 314,701
------------------------------------------------- --------------- --------------- --------------- ---------------
Loss before Federal Income Tax $(2,192,998) $(3,712,141) $(2,659,941) $(3,382,995)
------------------------------------------------- --------------- --------------- --------------- ---------------
Depreciation and amortization amounts below consist of depreciation expense
along with amortization of the value of insurance acquired and deferred policy
acquisition costs. Goodwill amortization of approximately $29,000 and $51,000 is
also included for the three months and six months, respectively, ended June 30,
2001. As further described in Note 8, beginning in 2002, goodwill amortization
is no longer permitted.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
DEPRECIATION AND AMORTIZATION: 2002 2001 2002 2001
------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 121,640 $ 115,131 $ 280,910 $ 292,766
Broker Life 115,246 171,747 275,952 330,427
Preneed Life 283,588 178,919 464,538 385,299
Dental 14,848 18,006 29,692 36,006
Other Health 10,480 15,818 22,410 32,412
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals $ 545,802 $ 499,621 $1,073,502 $1,076,910
------------------------------------------------- --------------- --------------- --------------- ---------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
----------------- ----------------
June 30, December 31,
ASSETS: 2002 2001
--------------------------------------------- ----------------- ----------------
Home Service Life $ 44,467,594 $ 44,818,038
Broker Life 53,622,142 54,954,194
Preneed Life 38,511,045 34,138,535
Dental 634,439 726,728
Other Health 1,994,960 1,959,588
--------------------------------------------- ----------------- ----------------
Segment Totals $ 139,230,180 $ 136,597,083
--------------------------------------------- ----------------- ----------------
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 whose policies
were issued in Ohio and 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 to which the plaintiffs have not yet responded. Although
United Liberty has requested mediation of the action, the plaintiffs would not
agree to the request for mediation until United Liberty made an offer to settle
the case. Consequently, United Liberty has 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 for policies with an increased premium and a
set dividend. 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 recorded claims liabilities are adequate to ensure
these other suits will be resolved without material financial impact to the
Company.
Note 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill will no longer be
amortized but will be subject to annual impairment tests in accordance with the
Statements. Other intangible assets will continue to be amortized over their
useful lives. The Company adopted the new rules on accounting for goodwill and
other intangible assets in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to increase net income
approximately $90,000 ($0.05 per share) per year. During 2002, the Company
completed the first step in evaluating the potential impairment of its goodwill.
Based on the results of this test, there was no impairment.
Below is a proforma illustration of earnings adjusted to exclude the goodwill
amortization recorded during 2001.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
2002 2001 2002 2001
------------------------------------------------- --------------- --------------- --------------- ---------------
Net Loss - excluding goodwill amortization $(1,847,998) $(2,717,638) $(2,244,941) $(2,757,200)
Goodwill amortization --- 22,503 --- 51,006
------------------------------------------------- --------------- --------------- --------------- ---------------
Net Loss - as reported $(1,847,998) $ (2,740,141) $(2,244,941) $(2,808,206)
Net Loss per Share:
Excluding goodwill amortization $ (1.08) $ (1.55) $ (1.31) $ (1.57)
As reported $ (1.08) $ (1.57) $ (1.31) $ (1.61)
Total goodwill outstanding at June 30, 2002 is approximately $756,000 with
$304,000 allocable to Broker Life, $270,000 to Home Service Life, and $182,000
to Preneed Life.
Part I; Item 1 (continued)
Note 9 - DEBT
The Company did not meet covenants relating to a ratio of outstanding bank debt
to adjusted earnings and a specified capital amount as of June 30, 2002. The
lender has waived these covenant violations with respect to that date and,
during the third quarter of 2002, the Company expects to evaluate strategic
alternatives necessary for returning to compliance.
Part I; Item 2 - Management's Discussion and Analysis
FINANCIAL POSITION. Shareholders' equity totaled approximately $17,349,000 and
$20,002,000 at June 30, 2002 and December 31, 2001, respectively. These balances
reflect a 7.6% and 13.3% decrease for the three months and six months ended June
30, 2002, respectively. As described above, comprehensive losses totaled
approximately $1,519,000 and $432,000 for the three months ended June 30, 2002
and 2001, respectively. For the six months ended June 30, 2002 and 2001
comprehensive losses totaled $2,654,000 and $437,000, respectively. A
significant portion of the 2002 comprehensive loss is attributable to changes in
the value of the Company's fixed maturity and equity portfolios. As of June 30,
2002 and December 31, 2001, equity securities comprised approximately 5% and 6%,
respectively of the Company's total assets, and 38% and 41%, respectively of
shareholders' equity. Accordingly, as also described below, the Company's
financial position can be significantly affected by movements in the equities
markets. Equity portfolio positions decreased $1,238,000 on a cost basis and
$1,549,000 on a market value basis, during the first six months of 2002. Fixed
maturity portfolio positions increased $4,779,000 on an amortized cost basis and
$4,430,000 on a market value basis during the same period. Cash and cash
equivalent positions also increased by approximately $507,000, to $18,940,000
during the six months ended June 30, 2002 and comprise approximately 13.5% of
total assets at June 30, 2002 and December 31, 2001.
Equity markets continue to be highly volatile and have declined during 2002 to a
greater extent than previously anticipated. In addition, interest yields on
fixed maturity investments have also declined during 2002 to a greater extent
than previously anticipated. Accordingly, although the Company had maintained
significant cash and cash equivalent balances in anticipation of potentially
rising interest rates, the significant decline in short-term rates has and,
continues to adversely impact the Company's investment portfolio yield and
operating earnings. The Company's 2002 investment impairments include writedowns
of certain highly publicized companies such as Cablevision ($362,000),
MCI/Worldcom ($348,000) and Adelphia ($145,000). Due to continuing accounting
investigations at a wide range of companies and the generally adverse economic
environment, the Company cannot predict the potential of future investment
impairments. The 2002 environment described above has produced a higher level of
qualitative investment risk. However, the previously disclosed measures of
quantitative risk per unit of investment are not believed to have changed
significantly.
OPERATIONS. Net premiums and other considerations increased approximately
$2,323,000 or 32% during the three months ended June 30, 2002 compared to the
three months ended June 30, 2001 and increased $3,559,000, or 25% during the
first six months of 2002 compared to the first six months of 2001. For the first
six months of 2002, Preneed Life and Home Service Life premium increases were
approximately $3,680,000 and $131,000, respectively, while Broker Life and
Dental each experienced modest decreases. The Preneed Life segment growth is
attributable primarily to continued expansion into independently owned funeral
homes and a joint marketing agreement with a casket distributor. Preneed Life
growth also accounts for approximately eighty percent of the Increase in Net
Benefit Reserves for six months ended June 30, 2002. Broker Life and Dental
premium reductions are primarily attributable to increased competition in the
broker market, and the mid-2001 loss of certain dental groups which had above
average claim rates. The Other Health segment represents approximately 4% of
total premium.
Pretax earnings (loss) (before the cumulative effect of a new accounting
principle) improved approximately $723,000 to $(2,660,000) for the six months
ended June 30, 2002, primarily due to an approximate $1,502,000 decrease in
realized investment losses, partially offset by increased segment losses. Pretax
Segment Profit (Loss) (excluding realized investment gains and interest expense)
for the first six months of 2002 was approximately $(704,000), compared to
$230,000 for the first six months of 2001. The Pretax Segment Loss for the three
months ended June 30, 2002 and 2001 was $(647,000) and $(99,000), respectively.
These decreases resulted primarily from declines in investment yields, increased
mortality rates, and higher disability claim levels. Below are the approximate,
annualized pretax investment income and total return yields for the six months
ended June 30, 2002 and 2001.
Part I; Item 2 - Management's Discussion and Analysis (continued)
----------------- -----------------
Six Months Ended June 30 2002 2001
-------------------------------------------- ----------------- -----------------
Investment Income $ 2,896,643 $3,341,497
Realized and Unrealized Losses (2,456,404) (325,428)
-------------------------------------------- ----------------- -----------------
Total Return $ 440,239 $3,016,069
-------------------------------------------- ----------------- -----------------
Average Cash and Investments $113,549,504 $113,452,219
Investment Income Yield - Annualized 5.10% 5.89%
Total Return - Annualized 0.78% 5.32%
The change in the Company's effective income tax rate is due to the lack of tax
loss carryback potential for a portion of the Company's operations.
CASH FLOW AND LIQUIDITY. Cash flow from operations totaled $6,904,000 for the
six months ended June 30, 2002 compared to $3,251,000 for the same period in the
prior year. This increase is primarily attributable to growth in Preneed Life
business. The $5,305,000 of cash used by investing activities for the six months
ended June 30, 2002 resulted primarily from investing the proceeds of Preneed
Life sales in fixed maturity securities. The $1,092,000 of cash used in
financing activities during the first quarter of 2002 is primarily attributable
to bank loan principal repayments along with annuity and Universal Life account
withdrawals. Due to continued investment losses and earnings pressure from lower
yields on investments and cash equivalents, and in consideration of bank loan
covenants, the Company will be evaluating options for strengthening its overall
financial position, including reassessing the strategic value of its business
segments. Continuation of existing earnings trends could also prompt state
insurance department regulatory action and/or rating agency reevaluations.
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 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 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
The primary changes in quantitative market risks during the six months ended
June 30, 2002 are discussed in Part I, Item 2 above.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The 2002 annual meeting of shareholders of the Company was held on
May 23, 2002. 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. 1,167,467
Lane A. Hersman 1,052,179
Frank T. Kiley 1,165,967
Earle V. Powell 1,167,392
Thomas G. Ward 1,167,467
Darrell R. Wells 1,088,279
Margaret A. Wells 1,088,279
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibits: See Exhibit Index enclosed.
b). Reports on Form 8-K: None.
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
/s/ Darrell R. Wells
By:
-----------------------------------------------------
Darrell R. Wells
President and Chief Executive Officer
/s/ Brent L. Nemec
By:
-----------------------------------------------------
Brent L. Nemec
Treasurer and Principal Accounting Officer
Date: August 14, 2002
EXHIBIT INDEX
--------------------- ----------------------------------------------------------
Exhibit No. Description
--------------------- ----------------------------------------------------------
11 Statement re: computation of per share earnings
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
EXHIBIT 11
Citizens Financial Corporation and Subsidiaries
Computation of Per Share Earnings
(Unaudited)
Six Months Ended June 30 2002 2001
--------------------------------------------------------------------------- ----------------- ----------------
Numerator(s):
Loss before cumulative effect of a
change in accounting principle $(2,244,941) $(2,496,995)
Cumulative effect of a change in accounting principle --- (311,211)
--------------------------------------------------------------------------- ----------------- ----------------
Net Loss $(2,244,941) $ (2,808,206)
Denominator:
Weighted average common shares 1,716,815 1,753,884
Earnings Per Share:
Loss before cumulative effect of a
change in accounting principle $ (1.31) $ (1.43)
Cumulative effect of a change in accounting principle --- (0.18)
--------------------------------------------------------------------------- ----------------- ----------------
Net Loss $ (1.31) $ (1.61)
Three Months Ended June 30 2002 2001
--------------------------------------------------------------------------- ----------------- ----------------
Numerator:
Net Loss $(1,847,998) $(2,740,141)
Denominator:
Weighted average common shares 1,716,815 1,749,600
Earnings Per Share:
Net Loss $ (1.08) $ (1.57)
EXHIBIT 99.1
Citizens Financial Corporation and Subsidiaries
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q of Citizens
Financial Corporation (the "Company") for the quarterly period ended
June 30, 2002, as filed with the Securities and Exchange Commission on the date
hereof (the "Report") I, Darrell R. Wells, Chief Executive Officer of the
Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss.906
of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
By: /s/ Darrel R. Wells
-----------------------------------------------------
Darrell R. Wells
Chief Executive Officer
Date: August 14, 2002
EXHIBIT 99.2
Citizens Financial Corporation and Subsidiaries
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350
In connection with the Quarterly Report on Form 10-Q of Citizens
Financial Corporation (the "Company") for the quarterly period ended
June 30, 2002, as filed with the Securities and Exchange Commission on the
date hereof (the "Report") I, Brent L. Nemec, Vice President and Chief Financial
Officer of the Company, certify pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that, to the best of my
knowledge:
1. The Report fully complies with the requirements of section 13(a) or 15(d)
of the Securities Exchange Act of 1934; and
2. The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Company.
By: /s/ Brent L. Nemec
-----------------------------------------------------
Brent L. Nemec
Chief Financial Officer
Date: August 14, 2002