U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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 small business issuer as specified in its charter)
Kentucky 61-1187135
(State of Incorporation) (I.R.S. Employer Identification No.)
12910Shelbyville Road, Louisville, Kentucky, 40243
(Address of principal executive offices)
(502) 244-2420
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to filing requirements for the past 90 days. Yes X No
APPLICABLE ONLY TO CORPORATE ISSURERS
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date: Class A Stock 1,802,615 as of
November 12, 1998.
Transitional Small Business Disclosure Format (Check one):Yes No X
This Report consists of 13 consecutively numbered pages. An index to the
Exhibits to this Report appears on page 12. The date of this Report is November
13, 1998.
Part I - FINANCIAL INFORMATION; Item 1 - Financial Statements
- --------------------------------------------------------------
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30 1998 1997
- ----------------------------------------------- -------------------- -----------
Revenues:
Premiums and other considerations $14,332,477 $14,144,081
Premiums ceded (740,462) (819,487)
- ------------------------------------------- -------------------- ---------------
Net premiums earned 13,592,015 13,324,594
Net investment income 3,634,871 2,866,450
Net realized investment gains, net of expenses
2,532,217 1,058,247
Other income 21,397 8,240
- ------------------------------------------- -------------------- ---------------
Total Revenues 19,780,500 17,257,531
Policy Benefits and Expenses:
Policyholder benefits 10,113,702 8,649,689
Policyholder benefits ceded (835,182) (646,827)
- ------------------------------------------- -------------------- ---------------
Net benefits 9,278,520 8,002,862
Increase in net benefit reserves 485,239 604,827
Interest credited on policyholder deposits 637,091 675,204
Commissions 2,829,055 2,800,671
General expenses 3,460,646 3,181,723
Interest expense 335,933 260,956
Policy acquisition costs deferred (725,246) (830,096)
Amortization of deferred policy acquisition
costs and 944,779 1,038,242
value of insurance acquired
- -------------------------------------------- -------------------- --------------
Total Benefits and Expenses 17,246,017 15,734,389
- ----------------------------------------- -------------------- -----------------
Income before Federal Income Tax 2,534,483 1,523,142
Federal Income Tax Expense 494,000 263,000
- ------------------------------------------ -------------------- ----------------
Net Income 2,040,483 1,260,142
Dividends on Redeemable Convertible
Preferred Stock 279,650 305,250
- ------------------------------------- -------------------- ---------------------
Net Income Applicable to Common Stock $1,760,833 $ 954,892
- -------------------------------------------- -------------------- --------------
Net Income Per Common Share:
Basic $1.54 $ 0.89
Diluted $1.12 $ 0.69
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30 1998 1997
- -------------------------------------------- -------------------- --------------
Revenues:
Premiums and other considerations $ 5,020,409 $ 4,597,637
Premiums ceded (287,876) (265,749)
- ---------------------------------------------- -------------------- ------------
Net premiums earned 4,732,533 4,331,888
Net investment income 1,354,127 884,224
Net realized investment gains, net of expenses 463,188 810,890
Other income 13,143 945
- ------------------------------------------------ -------------------- ----------
Total Revenues 6,562,991 6,027,947
Policy Benefits and Expenses:
Policyholder benefits 3,697,136 2,821,895
Policyholder benefits ceded (260,387) (129,295)
- ----------------------------------------------- -------------------- -----------
Net benefits 3,436,749 2,692,600
Increase in net benefit reserves 159,178 142,724
Interest credited on policyholder deposits 194,061 222,167
Commissions 922,467 917,639
General expenses 1,091,746 1,032,760
Interest expense 143,866 82,005
Policy acquisition costs deferred (180,375) (200,488)
Amortization of deferred policy acquisition costs 420,702 310,132
and value of insurance acquired
- ------------------------------------------------ -------------------- ----------
Total Benefits and Expenses 6,188,394 5,199,539
- ----------------------------------------------- -------------------- -----------
Income before Federal Income Tax 374,597 828,408
Federal Income Tax Expense 16,000 143,000
- ------------------------------------------------ -------------------- ----------
Net Income 358,597 685,408
Dividends on Redeemable Convertible Preferred Stock 76,700 101,750
- ------------------------------------------------ -------------------- ----------
Net Income Applicable to Common Stock $ 281,897 $ 583,658
- ----------------------------------------------- -------------------- -----------
Net Income Per Common Share:
Basic $0.22 $0.54
Diluted $0.20 $0.38
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)
September 30, December 31,
1998 1997
- ----------------------------------------- -------------------- -----------------
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $75,851,430 $78,020,618 $ 43,029,609
and $41,840,652 in 1998 and 1997 respectively)
Equity securities (cost of $14,090,935 and 14,898,760 14,942,792
$12,014,105 in 1998 and 1997, respectively)
Investment real estate 3,646,033 3,890,961
Mortgage loans on real estate 166,261 170,536
Policy loans 4,086,321 2,943,148
Short-term investments 572,492 572,492
- ------------------------------------------- -------------------- ---------------
Total Investments 101,390,485 65,549,538
Cash and cash equivalents 6,896,312 6,180,576
Accrued investment income 1,252,066 710,673
Reinsurance recoverable
Paid benefits and losses 129,449 82,702
Unpaid benefits, losses and IBNR 2,925,532 1,537,270
Premiums receivable 415,130 442,846
Property and equipment 1,490,213 1,295,917
Deferred policy acquisition costs 4,061,708 3,819,678
Value of insurance acquired 6,343,007 4,496,872
Goodwill 519,814 104,814
Other assets 381,786 528,956
- ------------------------------------------- -------------------- ---------------
Total Assets $ 125,805,502 $ 84,749,842
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)
September 30, December 31,
1998 1997
- ---------------------------------------- -------------------- ------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $77,571,850 $42,229,519
Policyholder deposits 16,299,125 15,538,891
Policy and contract claims 1,167,024 1,220,023
Unearned premiums 205,635 160,107
Other 186,452 190,243
- -------------------------------------------- -------------------- --------------
Total Policy Liabilities 95,430,086 59,338,783
Notes payable 6,610,000 3,510,000
Accrued expenses and other liabilities 3,294,498 2,763,849
Federal income tax payable 750,480 263,500
Deferred federal income tax 420,497 508,918
- -------------------------------------------- -------------------- --------------
Total Liabilities 106,505,561 66,385,050
Commitments and Contingencies
Redeemable Convertible Preferred Stock; --- 4,043,907
370 shares outstanding in 1997
Shareholders' Equity
Commons stock, 6,000,000 shares authorized; 1,802,615 1,075,615
1,802,615 and 1,075,615 shares issued and
outstanding in 1998 and 1997, respectively
Additional paid-in capital 8,091,825 4,836,057
Unrealized appreciation of investments 1,893,453 2,594,998
Retained earnings 7,512,048 5,814,215
- -------------------------------------------- -------------------- --------------
Total Shareholders' Equity 19,299,941 14,320,885
- -------------------------------------------- -------------------- --------------
Total Liabilities and Shareholders' Equity $125,805,502 $84,749,842
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30 1998 1997
- ------------------------------------------- -------------------- ---------------
Cash Flows from Operations:
Net income $ 2,040,483 $ 1,260,142
Adjustments to reconcile net income to cash from operations:
Increase in benefit reserves 503,910 474,590
Decrease in claim liabilities (195,683) (187,467)
(Increase) decrease in reinsurance recoverable (45,293) 277,462
Interest credited on policyholder deposits 637,091 675,204
Provision for amortization and
depreciation, net of deferrals 425,798 399,996
Amortization of premium and accretion of discount 72,600 (15,490)
on Securities purchased, net
Net realized investment gains (2,532,217) (1,058,247)
Decrease in accrued investment income 64,858 101,612
Change in other assets and liabilities (178,658) 195,929
Increase (decrease) in deferred Federal
income tax liability (287,979) 16,000
Increase (decrease) in Federal income
taxes payable 486,980 (268,000)
- --------------------------------------------- -------------------- -------------
Net Cash provided by Operations 991,890 1,871,731
Cash Flows from Investment Activities:
Cost of securities acquired (28,546,723) (19,285,137)
Investments sold or matured 30,870,497 17,280,983
Purchase price paid for United Liberty Life (3,787,613) ---
Insurance Company in excess of cash acquired
Investment management fees and margin interest (396,369) (364,504)
Short-term investments sold, net --- 342,219
Additions to property and equipment, net (132,611) (223,008)
Other investing activities, net 37,249 47,591
- -------------------------------------------- -------------------- --------------
Net Cash used in Investment Activities (1,955,570) (2,201,856)
Cash Flows from Financing Activities:
Policyholder deposits 543,575 573,347
Policyholder withdrawals (1,415,916) (1,524,182)
Net brokerage account loan proceeds (repayments) (144,454) 1,796,110
Notes payable and interest - guarantor --- (220,869)
Proceeds from note payable - bank 3,400,000 ---
Payments on notes payable - bank (300,000) (290,000)
Common stock issuance 45,000 ---
Preferred stock redemption (169,139) ---
Dividends on redeemable convertible preferred stock (279,650) (305,250)
- --------------------------------------------- -------------------- -------------
Net Cash provided by Financing Activities 1,679,416 29,156
- --------------------------------------------- -------------------- -------------
Net Increase (Decrease) in Cash and Cash Equivalents 715,736 (300,969)
Cash and Cash Equivalents at Beginning of Period 6,180,576 2,805,717
- ------------------------------------------------- -------------------- ---------
Cash and Cash Equivalents at End of Period $ 6,896,312 $ 2,504,748
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-QSB in conformity with
generally accepted accounting principles. 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, 1997 consolidated financial statements
and footnotes included in the Company's annual report on Form 10-KSB.
2. Comprehensive Income
As of January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or total shareholder's
equity. SFAS 130 requires unrealized gains or losses on the Company's available
for sale securities to be included in comprehensive income.
The components of comprehensive income, net of related tax, for the nine months
ended September 30, 1998 and 1997 are as follows:
Nine months ended September 30 1998 1997
- ---------------------------------------------- -------------------- ------------
Net income $2,040,483 $1,260,142
Net unrealized gains on available for sale (701,545) 2,054,587
securities
- -------------------------------------------- -------------------- --------------
Comprehensive income $1,338,938 $3,314,729
3.Reclassifications
During 1997, the Company adopted the practice of netting certain direct,
incremental investment management fees and margin loan interest costs 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 generated in the equities portfolio. Previously
reported amounts have also been reclassified for consistency. Costs netted
against realized investment gains total $93,018 and $364,504 for the nine months
ended September 30, 1998 and 1997 respectively.
4. Purchase of United Liberty Life Insurance Company and Proforma Information
Effective May 12, 1998 the Company's Citizens Security Life Insurance Company
subsidiary (Citizens Security) completed the acquisition of United Liberty Life
Insurance Company (United Liberty) from Chaswil United Corporation, a
privately-held Cincinnati insurance holding company. The acquisition price was
$6.3 million, along with approximately $800 thousand of additional related
costs. In conjunction with the acquisition, Chaswil retained approximately $2.1
million of United Liberty's real estate related and other assets, which were
replaced with cash by Citizens Security.
The following proforma consolidated results of operations for the nine months
ended September 30, 1998 and 1997 give effect to the United Liberty acquisition
as though it had occurred at the beginning of each period presented. The primary
proforma effects relate to amortization of the acquired value of insurance
inforce, foregone investment income relating to Company funds used in the
purchase, and additional interest expense associated with incremental bank
borrowings. Goodwill of approximately $440,000 was recorded relating to the
acquisition. The proforma results are not necessarily indicative of the
consolidated results that would have occurred or which will be obtained in the
future.
Proforma Consolidated Results of Operations
Nine months ended September 30 1998 1997
------------------------------------------- -------------------- ------------
Revenue $21,314,035 $22,740,953
Net Income $ 2,043,322 $ 1,321,538
Net Income Applicable to Common Stock $ 1,763,672 $ 1,016,288
Earnings per share:
-------------------------------------------- -------------------- -----------
Basic $1.55 $0.94
Diluted $1.13 $0.73
Part I - FINANCIAL INFORMATION; Item 2 - Management's Discussion and Analysis or
Plan of Operations
FINANCIAL POSITION
Fixed maturities increased $34,010,778 based on amortized cost, during the first
nine months of 1998. Equity securities increased $2,076,830 on a cost basis and
decreased $44,032 on market value basis, during the same period. Gross
unrealized appreciation for available-for-sale fixed maturities and equity
securities decreased approximately $1,141,000 during the nine months ended
September 30, 1998.
OPERATIONS
An analysis of segment results (before federal income taxes) for the nine months
and three months ended September 30, 1998 and 1997 is shown below.
Segment Income
------------------------------------------------------------------------------
Before Realized Investment Gains Total
--------------------------------------- ------------------------
Nine months ended September
30 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Life and Annuity $ (305,505) $ (66,146) $2,139,510 $ 952,818
Accident and Health 307,771 531,041 394,973 570,324
- --------------------------------------------------------------------------------
Total $ 2,266 $ 464,895 $2,534,483 $1,523,14
- --------------------------------------------------------------------------------
Three months ended
September 30 1998 1997 1998 1997
- --------------------------------------------------------------------------------
Life and Annuity $ (342,002) $ (159,068)$ 114,345 $ 621,965
Accident and Health 253,411 176,586 260,252 206,443
- --------------------------------------------------------------------------------
Total $(88,591) $17,518 $374,597 $828,408
The decline in Life and Annuity segment results (before realized investment
gains) for the nine months ended September 30, 1998 is principally attributable
to a return to historical mortality levels for broker-sold graded benefit life
insurance products, after realizing more favorable results in 1997. The
improvement in the Accident and Health segment for the current quarter is
primarily attributable to termination of an unprofitable group dental case
during the year, while the year-to-date decrease is primarily attributable to
this group dental case and increased individual Accident and Health claim
ratios.
Total premiums and other considerations increased approximately 2% during the
first nine months of 1998. This change is attributable to a 14% increase in Life
and Annuity premium along with an 11% decrease in Accident and Health premium.
Approximately 85% of the Life and Annuity increase resulted from acquisition of
United Liberty, while the remainder resulted primarily from improved home
service sales and persistency. The majority of the Accident and Health decrease
is attributable to termination of certain under-performing group Dental cases.
Part I; Item 2 (continued)
CASH FLOW AND LIQUIDITY
Cash flow from operations totaled $991,890 for the nine months ended September
30, 1998 compared to $1,871,731 for the same period in the prior year. This
decrease was principally attributable to an increase in certain reinsurance
receivables, increased life claims, and a reduction of certain outstanding
accrued expenses.
The $1,955,570 of cash used in investing activities resulted primarily from the
acquisition of United Liberty Life Insurance Company, partially offset by
liquidation of certain fixed maturity investments.
The cash provided by financing activities during the first nine months of 1998
is primarily attributable to an additional $3,400,000 bank loan used to finance
a portion of the United Liberty Life Insurance Company acquisition.
Part II - OTHER INFORMATION
Item 2. Changes in Securities
c. As disclosed in the Company's Forms 8-K filed August 14 and September 4,
1998, in late August and early September 1998, the Company issued 718,000 shares
of its Class A Stock (the "Common Stock") to 20 holders of record of its 1995
Convertible Class B Preferred Stock (the "Preferred Stock") in exchange for
their shares of Preferred Stock. The exchange was not underwritten. Pursuant to
the instruments governing the Preferred Stock, it was called by the Company for
redemption for cash or conversion into Common Stock on the ratio of 2,000 shares
of Common Stock for each share of Preferred Stock. The shares of Common Stock
were exempt from registration pursuant to Section 3(a)(9) of the Securities Act
by reason of their being securities exchanged by the issuer with its existing
security holders where no commission or other remuneration was paid or given
directly or indirectly for soliciting such exchange.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibit 11. Statement re computation of per share earnings.
Exhibit 27. Financial Data Schedule.
b. Form 8-KA's dated July 28 and 29, 1998 were filed relating to
Item 7 Financial Statements. These forms disclosed audited,
interim, and proforma financial information for United Liberty
Life Insurance Company, which was acquired during May 1998.
Form 8-K's dated August 14 and September 4, 1998 were filed
relating to Item 5 Other Events. These forms disclosed the
Company's program for redeeming the Preferred Stock and the
conversion or repurchase of all such stock by the established
deadline of September 3, 1998. The conversion program resulted
in issuance of 718,000 additional shares of Common Stock.
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 13, 1998
EXHIBIT INDEX
- -------------------- ---------------------------------- -----------------------
Exhibit No. Description Page No.
- -------------------- ---------------------------------- -----------------------
11 Statement re computation of per share earnings 13
27 Financial Data Schedule electronic filing only
EXHIBIT 11
Citizens Financial Corporation and Subsidiaries
Computation of Per Share Earnings
(Unaudited)
Nine Months Ended September 30 1998 1997
- ---------------------------------------------- -------------------- ------------
Numerator:
Diluted: Net income $2,040,483 $ 1,260,142
Less: Preferred stock dividends (279,650) (305,250)
- --------------------------------------------- -------------------- -------------
Basic: Net income applicable to common stock $1,760,833 $ 954,892
- --------------------------------------------- -------------------- -------------
Denominator:
Basic: Weighted average common shares 1,139,838 1,075,615
Plus: Assumed conversion of preferred stock 675,495 740,000
- ---------------------------------------------- -------------------- ------------
Diluted: Weighted average shares assumin
preferred conversion 1,815,333 1,815,615
- ---------------------------------------------- -------------------- ------------
Basic Earnings Per Share $1.54 $0.89
Diluted Earnings Per Share $1.12 $0.69
Three Months Ended September 30 1998 1997
- ------------------------------------------- -------------------- ---------------
Numerator:
Diluted: Net income $358,597 $685,408
Less: Preferred stock dividends (76,700) (101,750)
- ------------------------------------------- -------------------- ---------------
Basic: Net income applicable to common stock $281,897 $583,658
- ------------------------------------------- -------------------- ---------------
Denominator:
Basic: Weighted average common shares 1,264,115 1,075,615
Plus: Assumed conversion of preferred stock 549,848 740,000
- -------------------------------------------- -------------------- --------------
Diluted: Weighted average shares assuming preferred conversion
1,813,963 1,815,615
- -------------------------------------------- -------------------- --------------
Basic Earnings Per Share $0.22 $0.54
Diluted Earnings Per Share $0.20 $0.38
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 78,021
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,899
<MORTGAGE> 166
<REAL-ESTATE> 3,646
<TOTAL-INVEST> 101,390
<CASH> 6,896
<RECOVER-REINSURE> 129
<DEFERRED-ACQUISITION> 4,062
<TOTAL-ASSETS> 125,806
<POLICY-LOSSES> 77,572
<UNEARNED-PREMIUMS> 206
<POLICY-OTHER> 1,167
<POLICY-HOLDER-FUNDS> 16,299
<NOTES-PAYABLE> 6,610
0
0
<COMMON> 1,803
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<TOTAL-LIABILITY-AND-EQUITY> 125,806
13,592
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<UNDERWRITING-AMORTIZATION> 945
<UNDERWRITING-OTHER> 2,829
<INCOME-PRETAX> 3,461
<INCOME-TAX> 494
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