================================================================================
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 September 30, 2001
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 - 1,733,715 as of
November 2, 2001.
The date of this Report is November 7, 2001.
================================================================================
Part I - Financial Information; Item 1 - Financial Statements
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Nine Months Ended September 30 2001 2000
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $22,151,658 $18,154,881
Premiums ceded (868,582) (734,408)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 21,283,076 17,420,473
Net investment income 4,948,968 4,561,218
Net realized investment gains (losses), net of expenses (6,398,998) 4,660,783
Other income 196,669 181,250
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 20,029,715 26,823,724
Policy Benefits and Expenses:
Policyholder benefits 13,459,724 12,331,784
Policyholder benefits ceded (869,942) (813,517)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 12,589,782 11,518,267
Increase in net benefit reserves 4,567,024 2,024,241
Interest credited on policyholder deposits 643,148 653,598
Commissions 4,903,230 3,629,503
General expenses 4,922,102 4,750,193
Interest expense 442,205 575,742
Policy acquisition costs deferred (2,687,885) (1,201,812)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 1,606,003 1,048,561
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 26,985,609 22,998,293
------------------------------------------------------------------------ -------------------- --------------------
Income (Loss) before income tax and cumulative effect (6,955,894) 3,825,431
of a change in accounting principle
Income Tax Expense (Benefit) (1,643,000) 1,272,000
------------------------------------------------------------------------ -------------------- --------------------
Income (Loss) before cumulative effect of a (5,312,894) 2,553,431
change in accounting principle
Cumulative effect from prior years (since January 1, 1999) of
accounting for embedded options (311,211) ---
------------------------------------------------------------------------ -------------------- --------------------
Net Income (Loss) $(5,624,105) $ 2,553,431
------------------------------------------------------------------------ -------------------- --------------------
Per Share Amounts:
Income (Loss) before cumulative effect of a
change in accounting principle $(3.04) $1.45
Cumulative effect from prior years (since January 1, 1999) of
accounting for embedded options (0.18) ---
------------------------------------------------------------------------ -------------------- --------------------
Net Income (Loss) $(3.22) $1.45
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I, Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended September 30 2001 2000
------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $7,652,167 $6,386,687
Premiums ceded (297,187) (249,058)
------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 7,354,980 6,137,629
Net investment income 1,607,471 1,595,522
Net realized investment losses, net of expenses (3,100,898) (1,664,106)
Other income 77,399 69,813
------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 5,938,952 6,138,858
Policy Benefits and Expenses:
Policyholder benefits 4,248,273 4,340,600
Policyholder benefits ceded (318,854) (390,940)
------------------------------------------------------------------------ -------------------- --------------------
Net benefits 3,929,419 3,949,660
Increase in net benefit reserves 1,793,317 975,558
Interest credited on policyholder deposits 229,739 247,494
Commissions 1,489,252 1,245,928
General expenses 1,590,419 1,569,337
Interest expense 127,504 196,435
Policy acquisition costs deferred (657,524) (414,141)
Amortization of deferred policy acquisition costs,
value of insurance acquired, and goodwill 692,002 421,066
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 9,194,128 8,191,337
------------------------------------------------------------------------ -------------------- --------------------
Loss before Income Tax (3,255,176) (2,052,479)
Income Tax Benefit (786,000) (868,000)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss $(2,469,176) $ (1,184,479)
------------------------------------------------------------------------ -------------------- --------------------
Net Loss Per Common Share $(1.42) $(0.67)
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2001 2000
------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $73,878,918
and $72,516,172 in 2001 and 2000 respectively) $ 74,694,965 $ 71,403,674
Equity securities (cost of $5,808,613 and
$13,677,303 in 2001 and 2000, respectively) 5,829,761 12,577,874
Investment real estate 3,527,984 3,506,386
Mortgage loans on real estate 156,000 156,000
Policy loans 4,226,290 4,270,588
Short-term investments 610,379 610,379
------------------------------------------------------------------------ -------------------- --------------------
Total Investments 89,045,379 92,524,901
Cash and cash equivalents 22,672,850 20,093,774
Accrued investment income 1,366,930 1,328,491
Reinsurance recoverable 2,533,774 2,686,747
Premiums receivable 341,835 212,089
Property and equipment 2,851,619 2,959,744
Deferred policy acquisition costs 8,382,514 6,511,948
Value of insurance acquired 4,360,154 4,884,680
Goodwill 778,285 851,795
Federal income tax receivable 2,067,933 1,364,502
Deferred federal income tax 670,839 1,711,661
Other assets 555,434 407,674
------------------------------------------------------------------------ -------------------- --------------------
Total Assets $135,627,546 $135,538,006
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Financial Condition
September 30, December 31,
2001 2000
------------------------------------------------------------------------ -------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $ 88,334,132 $ 83,403,780
Policyholder deposits 16,153,350 16,381,247
Policy and contract claims 1,351,667 1,816,947
Unearned premiums 165,307 217,670
Other 307,283 203,600
------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 106,311,739 102,023,244
Notes payable 7,400,000 8,000,000
Accrued expenses and other liabilities 2,367,840 2,240,653
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 116,079,579 112,263,897
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,733,715 and 1,758,215 shares issued and outstanding
in 2001 and 2000, respectively 1,733,715 1,758,215
Additional paid-in capital 7,419,263 7,640,988
Accumulated other comprehensive income (loss) 570,894 (1,573,294)
Retained earnings 9,824,095 15,448,200
------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 19,547,967 23,274,109
------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $135,627,546 $135,538,006
------------------------------------------------------------------------ -------------------- --------------------
See Notes to Condensed Consolidated Financial Statements.
Part I; Item 1 (continued)
Citizens Financial Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30 2001 2000
------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net income (loss) $(5,624,105) $2,553,431
Adjustments to reconcile net income to cash from operations:
Increase in benefit reserves 4,891,473 2,068,882
Decrease in claim liabilities (465,280) (30,858)
Decrease in reinsurance recoverable 152,973 96,614
Interest credited on policyholder deposits 643,148 653,598
Provision for amortization and depreciation, net of deferrals (813,185) 74,174
Amortization of premium and accretion of discount on
securities purchased, net (129,103) 35,591
Net realized investment (gains) losses 6,398,998 (4,660,783)
Increase in accrued investment income (38,440) (65,420)
Change in other assets and liabilities (210,473) (397,447)
(Increase) decrease in deferred federal income tax asset 353,000 (1,688,000)
(Increase) decrease in federal income taxes receivable (703,431) 170,000
Cumulative effect of a change in accounting principle 311,211 ---
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by (used in) Operations 4,766,786 (1,190,218)
Cash Flows from Investment Activities:
Cost of securities acquired (20,797,466) (70,458,472)
Investments sold or matured 20,603,453 71,876,615
Net cash received on block of insurance business acquired --- 1,894,271
Investment management fees and margin interest (173,389) (679,254)
Additions to property and equipment, net (182,171) (210,058)
Other investing activities, net 79,122 (9,263)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by (used in) Investment Activities (470,451) 2,413,839
Cash Flows from Financing Activities:
Policyholder deposits 725,417 596,659
Policyholder withdrawals (1,596,451) (2,020,267)
Payments on notes payable - bank (600,000) (375,000)
Repurchase of common stock (246,225) (66,463)
Brokerage account advances, net --- (100,884)
------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (1,717,259) (1,965,955)
------------------------------------------------------------------------ -------------------- --------------------
Net Increase (Decrease) in Cash and Cash Equivalents 2,579,076 (742,334)
Cash and Cash Equivalents at Beginning of Period 20,093,774 18,696,401
------------------------------------------------------------------------ -------------------- --------------------
------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $22,672,850 $17,954,067
------------------------------------------------------------------------ -------------------- --------------------
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, 2000 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 nine months ended September 30, 2001 and 2000 are as follows:
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------- ----------------- ---------------- ----------------- ----------------
COMPREHENSIVE INCOME: 2001 2000 2001 2000
------------------------------------------- ----------------- ---------------- ----------------- ----------------
Net Income (Loss) $(2,469,176) $ (1,184,479) $(5,624,104) $ 2,553,431
Net unrealized gains (losses) on
securities (227,430) (2,000,020) 2,144,188 (2,865,000)
------------------------------------------- ----------------- ---------------- ----------------- ----------------
Comprehensive Loss $(2,696,606) $ (3,184,499) $(3,479,916) $ (311,569)
------------------------------------------- ----------------- ---------------- ----------------- ----------------
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 $2,634,000 and $5,063,000 for the nine months ended
September 30, 2001 and 2000, respectively, relating to declines in value which
were considered by management to be other than temporary. These amounts are
reported as additional realized investment losses. Changes in the fair value of
derivative instruments are also reported as realized gains (losses). The Company
also nets certain direct, incremental investment management fees against net
realized investment gains (losses) presented in the Condensed Consolidated
Statements of Operations. Such costs are based directly on or, are primarily
associated with, realized capital gains (losses). Costs netted against realized
investment gains (losses) total $54,000 and $211,000 for the nine months ended
September 30, 2001 and 2000, 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 September 30, 2001 and 2000, and for
the periods then ended is as follows:
---------------------------------- -----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
REVENUE: 2001 2000 2001 2000
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Home Service Life $ 2,346,090 $ 2,252,559 $ 7,029,071 $ 6,797,357
Broker Life 1,684,895 1,609,712 4,776,334 4,575,552
Preneed Life 2,763,516 1,595,490 7,430,929 3,875,964
Dental 1,884,305 1,993,461 6,057,285 5,828,971
Other Health 361,044 351,742 1,135,094 1,085,097
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Segment Totals 9,039,850 7,802,964 26,428,713 22,162,941
--------------------------------------------
Realized investment gain (loss), net (3,100,898) (1,664,106) (6,398,998) 4,660,783
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Total Revenue $ 5,938,952 $ 6,138,858 $20,029,715 $26,823,724
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Below are the net investment income amounts which are included in the revenue totals above.
---------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------ ----------------- ---------------- ----------------- ----------------
INVESTMENT INCOME: 2001 2000 2001 2000
------------------------------------------ ----------------- ---------------- ----------------- ----------------
Home Service Life $ 526,394 $ 524,942 $1,638,758 $1,553,985
Broker Life 661,800 702,021 2,060,052 1,938,719
Preneed Life 388,358 336,452 1,150,634 974,073
Dental 7,907 8,996 27,694 27,697
Other Health 23,012 23,111 71,830 66,744
------------------------------------------ ----------------- ---------------- ----------------- ----------------
Segment Totals $1,607,471 $1,595,522 $4,948,968 $4,561,218
------------------------------------------ ----------------- ---------------- ----------------- ----------------
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 (losses) and interest
Part I; Item 1 (continued)
expense are excluded. The majority 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 $10,887,000 and $20,508,000
during the nine months ended September 30, 2001 and 2000, respectively. If these
funds had been invested in fixed-maturities yielding 7%, realized investment
gains (losses) would have changed and the nine month segment profit totals below
would have increased by approximately $365,000 and $763,000 in 2001 and 2000,
respectively.
---------------------------------- -----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
SEGMENT PROFIT (LOSS): 2001 2000 2001 2000
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Home Service Life $ 42,374 $ (17,494) $ 215,862 $ 77,454
Broker Life 181,013 63,395 192,515 259,408
Preneed Life (260,289) (274,706) (647,508) (829,929)
Dental 81,070 47,080 165,768 269,575
Other Health (70,942) (10,213) (41,328) (36,118)
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Segment Totals (26,774) (191,938) (114,691) (259,610)
Realized investment gain (loss), net (3,100,898) (1,664,106) (6,398,998) 4,660,783
Interest expense 127,504 196,435 442,205 575,742
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Income (Loss) before income tax and
cumulative effect of a change in
accounting principle $(3,255,176) $ (2,052,479) $(6,955,894) $3,825,431
-------------------------------------------- ----------------- ---------------- ----------------- -----------------
Depreciation and amortization amounts below consist of amortization of the value of insurance acquired, deferred policy acquisition
costs and goodwill, along with depreciation expense.
----------------------------------- ----------------------------------
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------------------------- ----------------- ----------------- ---------------- -----------------
DEPRECIATION AND AMORTIZATION: 2001 2000 2001 2000
---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Home Service Life $ 352,726 $ 233,834 $ 645,492 $ 538,399
Broker Life 158,360 160,873 488,787 436,980
Preneed Life 241,809 77,434 643,320 230,241
Dental 18,005 13,818 54,011 40,080
Other Health 10,677 13,257 43,089 30,287
---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Segment Totals $ 781,577 $ 499,216 $1,874,699 $1,275,987
---------------------------------------------- ----------------- ----------------- ---------------- -----------------
Segment asset totals are determined based on policy liabilities outstanding in each segment.
----------------- ----------------
----------------------------------------------- September 30, December 31,
ASSETS: 2001 2000
----------------------------------------------- ----------------- ----------------
Home Service Life $ 44,498,472 $ 45,577,255
Broker Life 55,107,256 57,721,008
Preneed Life 33,462,095 29,421,677
Dental 643,914 799,496
Other Health 1,915,809 2,018,570
----------------------------------------------- ----------------- ----------------
Segment Totals $135,627,546 $135,538,006
----------------------------------------------- ----------------- ----------------
Part I; Item 1 (continued)
Note 7 - LITIGATION
United Liberty Life Insurance Company ("United"), 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 issued over a period of years ending around 1971. It
alleges that United'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 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 residing in Ohio
whose policies were still in force in 1993. United has denied the material
allegations of the Complaint and is defending the action vigorously. Pre-trial
discovery is continuing and will be followed by motions to dismiss or narrow the
plaintiffs' claims. At this early 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.
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 will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Application of the
nonamortization provisions of the Statement is expected to result in an increase
in net income of $90,000 ($0.05 per share) per year. During 2002, the Company
will perform the first of the required impairment tests of goodwill as of
January 1, 2002 and has not yet determined what the effect of these tests will
be on the earnings and financial position of the Company.
Part I; Item 2 - Management's Discussion and Analysis
FINANCIAL POSITION. Shareholders' equity totaled approximately $19,548,000 and
$23,274,000 at September 30, 2001 and December 31, 2000, respectively. These
balances reflect a decrease of approximately 16% for the nine months ended
September 30, 2001. As described above, the comprehensive loss totaled
approximately $3,480,000 for the nine months ended September 30, 2001. A
significant portion of the comprehensive loss is attributable to securities
trading and changes in the value of the Company's equity portfolios. Equity
portfolio positions decreased $7,869,000 (57%) on a cost basis and $6,748,000
(54%) on a market value basis, during the first nine months of 2001.
Accordingly, equity securities comprised approximately 4% and 9% of the
Company's total assets as of September 30, 2001 and December 31, 2000,
respectively. Fixed maturity portfolio positions increased $1,363,000 on an
amortized cost basis and $3,291,000 on a market value basis during the same
period. However, as described in Note 3 above, $497,000 of the change between
cost and market values during 2001 is attributable to the SFAS 133 transition
adjustment recorded at January 1, 2001. Cash and cash equivalent positions also
increased approximately $2,579,000 during the nine months ended September 30,
2001.
The reduced equity positions described above have significantly decreased the
Company's gross quantitative equity market risk. However, with the accompanying
reductions in shareholders' equity, there is a somewhat lesser decline in
relative equity market risk. As a result of this activity, A. M. Best Company
recently revised the rating for the Company's principal insurance subsidiary,
Citizens Security Life Insurance Company ("CSLIC"), from B to B-. In addition
CSLIC reached agreement with its principal state insurance regulator concerning
the carrying value of its subsidiaries. For statutory reporting purposes, CSLIC
is now permitted to carry its inactive property and casualty insurance
subsidiary at its full statutory value, provided CSLIC complies with additional
planning and reporting requests.
OPERATIONS. Net premiums and other considerations increased approximately
$3,863,000, or 22% during the first nine months of 2001 compared to the first
nine months of 2000. Preneed Life, Dental, Home Service Life and Broker Life
premium increases were approximately $3,876,000, $228,000, $144,000 and $75,000,
respectively. The Preneed Life segment growth is attributable primarily to
competitive marketing agreements signed with certain independent agency groups
during late 2000 and continued expansion into independently owned funeral homes.
Dental premium growth is also primarily attributable to a key additional
independent marketing arrangement signed during 2000 and inflationary growth,
net of cancellations. The Other Health segment represents less that 6% of total
premium. Net premiums and other considerations for the three months ended
September 30, 2001 increased approximately $1,217,000 or 20% compared to the
three months ended September 30, 2000. Preneed Life, Dental, Home Service Life
and Broker Life premium increases (decreases) were approximately $1,112,000,
$(108,000), $90,000 and $114,000 respectively
Pretax earnings (loss) [before the cumulative effect of a new accounting
principle] totaled approximately $(6,956,000) for the nine months ended
September 30, 2001, compared to $3,825,000 for the nine months ended September
30, 2000. Pretax (loss) for the three months ending September 30, 2001 totaled
approximately $(3,255,000) compared to $(2,052,000) for three months ended
September 30, 2000. The majority of these changes resulted from realized
investment losses. Pretax Segment (Loss) (excluding realized investment gains
and losses and interest expense) for the first nine months of 2001 was
approximately $(115,000), compared to $(260,000) for the first nine months of
2000. This change resulted primarily from improving sales volume and mortality
for Preneed Life and Home Service Life, partially offset by higher Broker Life
and Dental claims. The Pretax Segment (Loss) for the three months ended
September 30, 2001 was $(27,000) compared to $(192,000) for the three months
ended September 30, 2000.
The Company's lower effective income tax (benefit) rate for the nine months
ended September 30, 2001 is due to the effect of the small life insurance
company deduction on taxes paid in prior years, for which loss carrybacks are
available.
Part I; Item 2 - Management's Discussion and Analysis (continued)
CASH FLOW AND LIQUIDITY. Cash flow from operations totaled $4,767,000 for the
nine months ended September 30, 2001 compared to $(1,190,000) for the same
period in the prior year. This increase is primarily attributable to growth in
the Preneed Life business. The $1,717,000 of cash used in financing activities
during the first nine months of 2001 is primarily attributable to annuity and
Universal Life account withdrawals and bank loan principal repayments.
FORWARD-LOOKING INFORMATION.
All statements, trend analyses and other information contained in this report
relative to markets for the Company's products and trends in the Company's
operations or financial results, as well as other statements including words
such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and
other similar expressions, constitute forward-looking statements under the
Private Securities Litigation Reform Act of 1995. These forward-looking
statements are subject to known and unknown risks, uncertainties and other
factors which may cause actual results to be materially different from those
contemplated by the forward-looking statements. Such factors include, among
other things:
|X| the market value of the Company's investments, including stock market
performance and prevailing interest rate levels;
|X| customer and agent response to new products, distribution channels
and marketing initiatives, including exposure to unrecoverable advanced
commissions;
|X| mortality, morbidity, lapse rates, and other factors which may affect
the profitability of the Company's insurance products;
|X| regulatory changes or actions, including those relating to regulation
of insurance products and insurance companies;
|X| ratings assigned to the Company and its subsidiaries by independent
rating organizations which the Company believes are important to the
sale of its products;
|X| general economic conditions and increasing competition which may affect
the Company's ability to sell its products;
|X| the Company's ability to achieve anticipated levels of operating
efficiencies and meet cash requirements based upon projected liquidity
sources;
|X| unanticipated adverse litigation outcomes; and
|X| changes in the Federal income tax laws and regulations which may affect
the relative tax advantages of some of the Company's products.
There can be no assurance that other factors not currently anticipated by
management will not also materially and adversely affect the Company's results
of operations.
Part I; Item 3 - Quantitative and Qualitative Disclosures about Market Risk
The primary changes in quantitative market risks during the nine months ended
September 30, 2001 are discussed in Part I, Item 2 above.
Part II - Other Information
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibit 11. Statement re: computation of per share earnings.
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: /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 7, 2001
EXHIBIT INDEX
----------------- --------------------------------------------------------------
Exhibit No. Description
----------------- --------------------------------------------------------------
11 Statement re: computation of per share earnings
EXHIBIT 11
Citizens Financial Corporation and Subsidiaries
Computation of Per Share Earnings
(Unaudited)
Nine Months Ended September 30 2001 2000
--------------------------------------------------------------------------- ----------------- ----------------
Numerator(s):
Income (Loss) before cumulative effect of a
change in accounting principle $(5,312,894) $2,553,431
Cumulative effect of a change in accounting principle (311,211) ---
--------------------------------------------------------------------------- ----------------- ----------------
Net Income (Loss) $ (5,624,105) $2,553,431
Denominator:
Weighted average common shares 1,747,087 1,762,430
Earnings Per Share:
Income (Loss) before cumulative effect of a
change in accounting principle $ (3.04) $ 1.45
Cumulative effect of a change in accounting principle (0.18) ---
--------------------------------------------------------------------------- ----------------- ----------------
Net Income (Loss) $ (3.22) $ 1.45
Three Months Ended September 30 2001 2000
--------------------------------------------------------------------------- ----------------- ----------------
Numerator:
Net Income (Loss) $(2,469,176) $(1,184,479)
Denominator:
Weighted average common shares 1,733,715 1,761,415
Earnings Per Share:
Net Income (Loss) $ (1.42) $ (0.67)