U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
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.)
12910 Shelbyville 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 - 1,796,915 as of
May 12, 1999.
Transitional Small Business Disclosure Format (Check one): Yes
No X
The date of this Report is May 14, 1999.
=============================================================================
1
<PAGE>
Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended March 31 1999 1998
- ------------------------------------------------------------------------------
Revenues:
Premiums and other considerations $ 5,129,687 $ 4,578,850
Premiums ceded (183,451) (224,182)
- ------------------------------------------------------------------------------
Net premiums earned 4,946,236 4,354,668
Net investment income 1,509,895 923,005
Net realized investment gains, net of expenses 1,541,836 1,027,515
Other income 11,908 678
- ------------------------------------------------------------------------------
Total Revenues 8,009,875 6,305,866
Policy Benefits and Expenses:
Policyholder benefits 4,047,434 2,732,386
Policyholder benefits ceded (212,540) (106,225)
- ------------------------------------------------------------------------------
Net benefits 3,834,894 2,626,161
Increase (decrease) in net benefit reserves (125,725) 264,846
Interest credited on policyholder deposits 247,351 213,967
Commissions 994,625 967,818
General expenses 1,234,580 1,106,726
Interest expense 127,099 78,069
Policy acquisition costs deferred (308,068) (280,654)
Amortization of deferred policy acquisition
costs and value of insurance acquired 417,563 228,854
- ------------------------------------------------------------------------------
Total Policy Benefits and Expenses 6,422,319 5,205,787
- ------------------------------------------------------------------------------
Income before Federal Income Tax 1,587,556 1,100,079
Federal Income Tax Expense 425,000 240,000
- ------------------------------------------------------------------------------
Net Income 1,162,556 860,079
Dividends on Redeemable Convertible Preferred
Stock --- 101,750
- ------------------------------------------------------------------------------
Net Income Applicable to Common Stock $ 1,162,556 $ 758,329
- ------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $0.65 $0.71
Diluted $0.65 $0.47
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------
ASSETS
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $72,914,756
and $75,235,199 in 1999 and 1998,respectively) $75,489,713 $ 77,582,742
Equity securities (cost of $20,664,746 and
$14,733,876 in 1999 and 1998, respectively) 24,162,956 17,208,338
Investment real estate 3,593,048 3,618,698
Mortgage loans on real estate 163,210 164,757
Policy loans 4,018,354 4,034,152
Short-term investments 594,805 594,805
- ------------------------------------------------------------------------------
Total Investments 108,022,086 103,203,492
Cash and cash equivalents 7,335,118 8,301,999
Accrued investment income 1,291,507 1,263,898
Reinsurance recoverable:
Paid benefits and losses 175,423 85,299
Unpaid benefits, losses and IBNR 3,317,982 3,379,063
Premiums receivable 355,771 407,571
Property and equipment 1,829,610 1,846,768
Deferred policy acquisition costs 4,157,172 4,120,215
Value of insurance acquired 5,848,440 6,135,132
Goodwill 502,530 513,325
Other assets 297,857 242,361
- ------------------------------------------------------------------------------
Total Assets $133,133,496 $ 129,499,123
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
(Unaudited)
March 31, December 31,
1999 1998
- ------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDER' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $ 77,463,206 $ 77,665,183
Policyholder deposits 16,279,011 16,323,652
Policy and contract claims 1,342,975 1,259,459
Unearned premiums 222,818 208,524
Other 249,616 187,779
- ------------------------------------------------------------------------------
Total Policy Liabilities 95,557,626 95,644,597
Notes payable 6,382,500 6,510,000
Accrued expenses and other liabilities 5,073,752 3,627,214
Federal income tax payable 843,123 667,013
Deferred federal income tax 1,632,723 1,305,018
- ------------------------------------------------------------------------------
Total Liabilities 109,489,724 107,753,842
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,800,315 and 1,802,615 shares issued and
outstanding in 1999 and 1998, respectively 1,800,315 1,802,615
Additional paid-in capital 8,073,425 8,091,825
Accumulated other comprehensive income 3,836,251 3,079,616
Retained earnings 9,933,781 8,771,225
- ------------------------------------------------------------------------------
Total Shareholders' Equity 23,643,772 21,745,281
- ------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $133,133,496 $129,499,123
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended March 31 1999 1998
- ------------------------------------------------------------------------------
Cash Flows from Operations:
Net income $ 1,162,556 $ 860,079
Adjustments to reconcile net income to cash
from operations:
Increase (decrease) in benefit reserves (115,734) 235,596
Increase (decrease) in claim liabilities 83,516 (321,898)
(Increase) decrease in reinsurance recoverable (29,043) 8,143
Interest credited on policyholder deposits 247,351 213,967
Provision for amortization and depreciation,
net of deferrals 187,496 13,272
Amortization of premium and accretion of
discount on securities purchased, net 42,036 4,261
Net realized investment gains (1,541,836) (1,027,515)
Increase in accrued investment income (27,609) (684)
Change in other assets and liabilities 78,087 (300,008)
Increase (decrease) in deferred federal
income tax liability (62,077) 58,000
Increase in federal income taxes payable 176,110 182,000
- ------------------------------------------------------------------------------
Net Cash provided by (used in) Operations 200,853 (74,787)
Cash Flows from Investment Activities:
Cost of securities acquired (16,833,495) (11,702,558)
Investments sold or matured 14,999,895 8,607,527
Investment management fees and margin interest (207,081) (330,816)
Short-term investments sold, net --- 102,752
Additions to property and equipment, net (24,398) (5,717)
Other investing activities, net 19,154 (110,713)
- ------------------------------------------------------------------------------
Net Cash used in Investment Activities (2,045,925) (3,439,525)
Cash Flows from Financing Activities:
Policyholder deposits 157,734 178,603
Policyholder withdrawals (449,726) (446,345)
Net proceeds from brokerage account loans 1,318,383 294,947
Payments on notes payable - bank (127,500) (100,000)
Repurchase of common stock (20,700) ---
Dividends on redeemable convertible
preferred stock --- (101,750)
- ------------------------------------------------------------------------------
Net Cash provided by (used in) Financing
Activities 878,191 (174,545)
- ------------------------------------------------------------------------------
Net Decrease in Cash and Cash Equivalents (966,881) (3,688,857)
Cash and Cash Equivalents at Beginning of Period 8,301,999 6,180,576
- ------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Period $ 7,335,118 $ 2,491,719
- ------------------------------------------------------------------------------
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE>
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-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, 1998
consolidated financial statements and footnotes included in the Company's
annual report on Form 10-KSB.
Note 2- COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three
months ended March 31, 1999 and 1998 are as follows:
Three months ended March 31 1999 1998
-------------------------------------------------------------------
Net income $1,162,556 $ 860,079
Net unrealized gains on available 756,635 1,118,740
for sale securities
-------------------------------------------------------------------
Comprehensive income $1,919,191 $1,978,819
-------------------------------------------------------------------
Note 3 - 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
March 31, 1999 and 1998, and for the quarters then ended is as follows.
Three Months Ended March 31 1999 1998
- -------------------------------------------------------------
REVENUE:
Home Service Life $2,136,927 $2,107,312
Broker Life 1,554,150 1,124,132
Preneed Life 785,571 ---
Dental 1,676,297 1,692,000
Other Health 315,094 354,907
- -------------------------------------------------------------
Segment Totals 6,468,039 5,278,351
Net realized investment gains, 1,541,836 1,027,515
net of expenses
- -------------------------------------------------------------
Total Revenue $8,009,875 $6,305,866
- -------------------------------------------------------------
5
<PAGE>
Below are the net investment income amounts,which are
included in the revenue totals above.
Three Months Ended March 31 1999 1998
- -------------------------------------------------------------
NET INVESTMENT INCOME:
Home Service Life $506,969 $468,456
Broker Life 643,603 425,722
Preneed Life 330,007 ---
Dental 7,886 7,783
Other Health 21,430 21,044
- -------------------------------------------------------------
Segment Totals $1,509,895 $923,005
- -------------------------------------------------------------
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. The majority of the Company's realized investment gains are
generated from investment in equity securities. The equities portfolio has
averaged (on a cost basis) approximately $17,699,000 and $12,890,000 during
the three months ended March 31, 1999 and 1998, respectively. If these
funds had been invested in fixed-maturities yielding 6.5%, realized
investment gains would have declined and the segment profit totals below
would have increased by an additional $168,000 and $151,000 in 1999 and
1998, respectively.
6
<PAGE>
Part I; Item 1 (continued)
Three Months Ended March 31 1999 1998
- -------------------------------------------------------------
SEGMENT PROFIT (LOSS):
Home Service Life $ 36,711 $ 44,528
Broker Life 172,559 53,180
Preneed Life (179,192) ---
Dental 178,692 57,178
Other Health (35,951) (4,253)
- -------------------------------------------------------------
Segment Totals 172,819 150,633
Net realized investment gains, 1,541,836 1,027,515
net of expenses
Interest expense 127,099 78,069
- -------------------------------------------------------------
Income before Federal Income Tax $1,587,556 $1,100,079
- -------------------------------------------------------------
Depreciation and amortization amounts below consist of amortization
of the value of insurance acquired, deffered policy acquisition
costs and goodwill, along with depreciation expense.
Three Months Ended March 31 1999 1998
- -------------------------------------------------------------
DEPRECIATION and AMORTIZATION:
Home Service Life $213,303 $174,093
Broker Life 139,209 97,503
Preneed Life 120,071 ---
Dental 13,590 13,802
Other Health 9,391 8,528
- -------------------------------------------------------------
Segment Totals $495,564 $293,926
- -------------------------------------------------------------
Segment asset totals are determined based on policy liabilities
outstanding in each segment.
7
<PAGE>
March 31 1999 1998
- -------------------------------------------------------------
ASSETS:
Home Service Life $44,883,632 $44,212,074
Broker Life 56,808,957 40,040,698
Preneed Life 28,888,581 ---
Dental 697,008 748,632
Other Health 1,855,318 1,975,419
- -------------------------------------------------------------
Total Assets $133,133,496 $86,976,823
- -------------------------------------------------------------
Note 4 - NET REALIZED CAPITAL GAINS, NET OF EXPENSE
The Company nets certain direct,incremental investment management fees and
margin loan interest cost against net realized investment gains and losses
presented in the Condensed Consolidated Statements of Income. Such costs
are based directly on or, are primarily associated with, realized capital
gains. Costs netted against realized investment gains total $144,230 and
$261,442 for the three months ended March 31 1999 and 1998 respectively.
Note 5 - INCOM 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 amoounts used for income tax purposes.
8
<PAGE>
Part I; Item 2 - Management's Discussion and Analysis or Plan of Operations
FINANCIAL POSITION
Fixed maturities decreased $2,320,000 based on amortized cost, during the
first three months of 1999. Equity securities increased $5,931,000 on a
cost basis and increased $6,955,000 on market value basis, during the same
period. Gross unrealized appreciation for available-for-sale fixed
maturities and equity securities increased approximately $1,251,000 during
the three months ended March 31, 1999.
OPERATIONS
Net premiums and other considerations increased approximately 14% during
the first three months of 1999 compared to the first three months of 1998.
This increase is primarily attributable to the acquisition of United
Liberty Life Insurance Company (United Liberty) during May 1998, and growth
in the Company's existing Broker Life business. Preneed Life premium
associated with the United Liberty acquisition generated growth of
approximately 10% compared to the prior year, while the remaining premium
growth is from the Broker Life segment. The 64% increase in investment
income compared to the first three months of the prior year is also
primarily attributable to the United Liberty acquisition.
Total pretax earnings increased approximately 44% to $1,588,000 for the
three months ended March 31, 1999, primarily due to an approximate $514,000
increase in realized investment gains, net of expenses. Pretax Segment
Profit (excluding realized investment gains and interest expense) for the
first three months of 1999 increased approximately 15% to $173,000,
primarily due to improvement in the Broker Life and Dental segments. The
Broker Life improvement includes earnings from business obtained in the
United Liberty acquisition and mortality improvement in the Company's
existing graded-benefit life business. The improvement in Dental earnings
resulted from a number of continuing profitability initiatives, including
selective non-renewal of groups with excessive claim ratios. Preneed Life
earnings were impacted by adverse mortality in the month of March 1999.
However, claim levels in April have returned to normal levels.
The Company's increased earnings has also resulted in a higher effective
income tax rate due to a phasing-out of available small-life insurance
company deductions and full utilization of previously available non-life
insurance net operating loss carryforwards.
CASH FLOW AND LIQUIDITY
Cash flow from operations totaled $201,000 for the three months ended March
31, 1999 compared to ($75,000) used in operations for the same period in
the prior year. This improvement was principally attributable to an
increase in certain outstanding tax accruals and other liabilities.
The $2,046,000 of cash used in investing activities resulted primarily from
net additions to the Company's equity investment portfolio.
The $878,000 of cash provided by financing activities during the first
three months of 1999 is primarily attributable to an increase in the
Company's investment margin account advances, which total $2,826,000 at
March 31, 1999.
9
<PAGE>
Part I; Item 2 (continued)
YEAR 2000 ISSUE
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those
computer programs could fail to properly distinguish between dates in the
1900's and 2000's. This could cause system failures or miscalculations,
creating disruption of operations, including, among other things, a
temporary inability to process insurance transactions, conduct-banking
activities, or engage in other normal business activities. Also, some
systems and equipment that are not typically thought of as
"computer-related" ("non-IT")contain imbedded hardwareor software that may
not perform properly after 1999.
The Company has completed an internal assessment of the year 2000 issue and
implemented a program to install updated releases or modify its software so
that its computer systems will function properly with respect to dates in
the year 2000 and thereafter. The Company's two primary insurance
administrative systems (Individual and Group) are vendor supplied programs,
which have been, or are being, modified as part of the ongoing vendor
maintenance process. Modification of the Individual insurance system is
complete. Vendor modification to the Group insurance system have been
installed and are being tested by the Company. Most of the peripheral,
internally developed programs associated with these systems have also been
modified, and those remaining are scheduled to be completed by June 30,
1999. The Company's investment accounting and general ledger systems are
also vendor-supplied programs, which have been properly updated. The
Company's primary non-IT systems involve building equipment control modules
at its home office. The Company has verified these systems are year 2000
compliant.
The most significant third parties potentially impacting the Company are
banks, investment brokers, and suppliers of utility and telecommunication
services. Their critical functions include safekeeping and managing
investment portfolios, processing the Company's operating bank accounts,
and supplying utilities. Assurances of year 2000 compliance have been
received from the Company's primary banking service provider and many other
key providers. Efforts are ongoing to obtain additional assurances.
The total year 2000 project cost is estimated at approximately $100,000,
which is primarily internal salary cost for testing and modifying
peripheral programs associated with the Individual and Group insurance
systems. Approximately half of this total has been incurred and expensed
with the remaining half to be incurred and expensed over the next two
quarters. The direct cost of modifying the Individual and Group system
vendor programs is included in annual maintenance fees, which total
approximately $25,000.
The Company has investments in publicly and privately placed securities and
loans. The Company may be exposed to credit risk to the extent that
related borrowers are materially adversely impacted by the year 2000
issue. Portfolio diversification reduces the overall risk. Although the
Company expects its critical systems to be compliant by September 30, 1999,
there is no guarantee that these results will be achieved. Specifically,
from year 2000 problems, the Company could experience an interruption in
its ability to collect and process premiums, process claim payments,
safeguard and manage its invested assets and operating cash accounts,
accurately maintain policyholder information, accurately maintain
accounting records, issue new policies and/or perform adequate customer
service. While the Company believes the occurrence of such a situation is
unlikely, a possible worst case scenario might include one or more of the
Company's significant insurance systems being non-compliant. Such an event
could result in a material disruption to the Company's operations. Should
the worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and liquidity and
ultimately on its financial position.
With respect to contingency plans for the Group insurance system, if
unforeseen delays are encountered during the next few months, the Company
will develop supplemental manual processing procedures to assist with group
claims adjudication. This is not expected to be a significant issue, as
most group insurance processing is not dependent on date sensitive data.
Regarding third-party systems, the Company is continuing to assess their
compliance and will continue to reassess the need for formal contingency
plans, based on progress of year 2000 efforts by the Company and third
parties.
Part II - Other Information
10
<PAGE>
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. 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
BY:
-------------------------------------
Darrell R. Wells
President and Chief Executive
Officer
BY:
-------------------------------------
Brent L. Nemec
Treasurer and Principal Accounting
Officer
Date: May 14, 1999
11
<PAGE>
EXHIBIT INDEX
- ----------------------------------------------------------------
Exhibit No. Description
- ----------------------------------------------------------------
11 Statement re: computation of per share earnings
27 Financial Data Schedule (electronic filing only)
12
<PAGE>
EXHIBIT 11
Citizens Financial Corporation and Subsidiaries
Computation of Per Share Earnings
(Unaudited)
Three Months Ended March 31 1999 1998
- ------------------------------------------------------------------------------
Numerator:
Diluted: Net income $1,162,556 $860,079
Less: Preferred stock dividends --- (101,750)
- ------------------------------------------------------------------------------
Basic: Net income applicable to common stock $1,162,556 $758,329
- ------------------------------------------------------------------------------
Denominator:
Basic: Weighted average common shares 1,800,443 1,075,615
Plus: Assumed conversion of preferred
stock --- 740,000
- ------------------------------------------------------------------------------
Diluted: Weighted average shares assuming
preferred conversion 1,800,443 1,815,615
- ------------------------------------------------------------------------------
Basic Earnings Per Share $0.65 $0.71
Diluted Earnings Per Share $0.65 $0.47
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 75,490
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 24,163
<MORTGAGE> 163
<REAL-ESTATE> 3,593
<TOTAL-INVEST> 108,022
<CASH> 7,335
<RECOVER-REINSURE> 175
<DEFERRED-ACQUISITION> 4,157
<TOTAL-ASSETS> 133,133
<POLICY-LOSSES> 77,463
<UNEARNED-PREMIUMS> 250
<POLICY-OTHER> 1,343
<POLICY-HOLDER-FUNDS> 16,279
<NOTES-PAYABLE> 6,383
0
0
<COMMON> 1,800
<OTHER-SE> 21,844
<TOTAL-LIABILITY-AND-EQUITY> 133,133
4,946
<INVESTMENT-INCOME> 1,510
<INVESTMENT-GAINS> 1,542
<OTHER-INCOME> 12
<BENEFITS> 3,835
<UNDERWRITING-AMORTIZATION> 418
<UNDERWRITING-OTHER> 2,229
<INCOME-PRETAX> 1,588
<INCOME-TAX> 425
<INCOME-CONTINUING> 1,163
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,163
<EPS-PRIMARY> 0.65
<EPS-DILUTED> 0.65
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
