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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, 2004
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 0-20148
CITIZENS FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Kentucky 61-1187135
(State of Incorporation) (I.R.S. Employer Identification No.)
12910 Shelbyville Road, Louisville, Kentucky 40243
(Address of principal executive offices)
(502) 244-2420
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ~~X~~ No ~~~~~
Indicate by check mark whether the registrant is an accelerated filer (as
determined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes ~~~~~
No ~~X~~
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: Class A Stock - 1,677,628 as of
August 10, 2004.
The date of this Report is August 11, 2004.
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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 2004 2003
- ------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $ 14,900,716 $ 18,323,113
Premiums ceded (632,872) (532,602)
- ------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 14,267,844 17,790,511
Net investment income 3,339,977 2,751,839
Net realized investment gains (losses) 289,757 (164,728)
Other income 95,351 112,076
- ------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 17,992,929 20,489,698
Policy Benefits and Expenses:
Policyholder benefits 11,298,072 10,682,128
Policyholder benefits ceded (541,006) (555,852)
- ------------------------------------------------------------------------ -------------------- --------------------
Net benefits 10,757,066 10,126,276
Increase in net benefit reserves 1,237,438 3,956,813
Interest credited on policyholder deposits 338,432 345,572
Commissions 2,540,636 3,388,237
General expenses 3,764,740 3,425,195
Interest expense 177,826 189,609
Policy acquisition costs deferred (634,455) (1,137,316)
Amortization of deferred policy acquisition costs
and value of insurance acquired 806,132 989,370
- ------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 18,987,815 21,283,756
- ------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax (994,886) (794,058)
Income tax benefit (12,604) (141,000)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (982,282) $ (653,058)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Loss per Common Share, basic and diluted $ (0.58) $ (0.39)
- ------------------------------------------------------------------------ -------------------- --------------------
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 2004 2003
- ------------------------------------------------------------------------ -------------------- --------------------
Revenues:
Premiums and other considerations $ 7,506,098 $ 9,084,178
Premiums ceded (310,822) (271,307)
- ------------------------------------------------------------------------ -------------------- --------------------
Net premiums earned 7,195,276 8,812,871
Net investment income 1,716,296 1,377,850
Net realized investment gains 61,571 111,435
Other income 48,762 55,723
- ------------------------------------------------------------------------ -------------------- --------------------
Total Revenues 9,021,905 10,357,879
Policy Benefits and Expenses:
Policyholder benefits 5,746,093 5,424,917
Policyholder benefits ceded (273,574) (321,841)
- ------------------------------------------------------------------------ -------------------- --------------------
Net benefits 5,472,519 5,103,076
Increase in net benefit reserves 788,757 2,274,626
Interest credited on policyholder deposits 183,404 180,687
Commissions 1,217,065 1,694,569
General expenses 2,014,904 1,613,123
Interest expense 87,238 97,401
Policy acquisition costs deferred (285,687) (557,774)
Amortization of deferred policy acquisition costs
and value of insurance acquired 392,736 339,911
- ------------------------------------------------------------------------ -------------------- --------------------
Total Policy Benefits and Expenses 9,870,936 10,745,619
- ------------------------------------------------------------------------ -------------------- --------------------
Loss before income tax (849,031) (387,740)
Income tax (benefit) 23,644 (68,000)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Loss $ (872,675) $ (319,740)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Loss per Common Share, basic and diluted $ (0.52) $ (0.19)
- ------------------------------------------------------------------------ -------------------- --------------------
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,
2004 2003
- ------------------------------------------------------------------------ -------------------- --------------------
ASSETS (Unaudited)
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of $104,345,690
and $104,768,393 in 2004 and 2003, respectively) $ 104,147,222 $ 108,640,262
Equity securities (cost of $13,481,909 and
$8,061,783 in 2004 and 2003, respectively) 16,372,069 11,336,964
Investment real estate 3,067,389 3,162,223
Policy loans 4,454,320 4,409,301
Short-term investments 642,748 642,748
- ------------------------------------------------------------------------ -------------------- --------------------
Total Investments 128,683,748 128,191,498
Cash and cash equivalents 3,741,831 8,588,896
Accrued investment income 1,752,425 1,685,776
Reinsurance recoverable 2,696,948 2,834,222
Premiums receivable 241,885 256,140
Property and equipment 1,538,537 2,640,579
Deferred policy acquisition costs 10,471,919 10,325,660
Value of insurance acquired 2,910,684 3,119,609
Goodwill 755,782 755,782
Federal income tax receivable --- 421,676
Other assets 232,118 60,494
- ------------------------------------------------------------------------ -------------------- --------------------
Total Assets $ 153,025,877 $ 158,880,332
- ------------------------------------------------------------------------ -------------------- --------------------
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,
2004 2003
- ------------------------------------------------------------------------ -------------------- --------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (Unaudited)
Liabilities:
Policy Liabilities:
Future policy benefits $ 110,507,549 $ 109,383,695
Policyholder deposits 15,338,670 15,530,824
Policy and contract claims 1,781,614 1,663,249
Unearned premiums 258,153 249,572
Other 228,149 310,464
- ------------------------------------------------------------------------ -------------------- --------------------
Total Policy Liabilities 128,114,135 127,137,804
Note payable - bank 3,475,002 4,133,335
Note payable - related party 3,000,000 3,000,000
Accrued expenses and other liabilities 1,356,512 1,805,934
Deferred federal income tax 48,651 1,969,850
- ------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities 135,994,300 138,046,923
Commitments and Contingencies
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,685,228 and 1,685,228 shares issued and outstanding
in 2004 and 2003, respectively 1,685,228 1,685,228
Additional paid-in capital 7,170,321 7,170,321
Accumulated other comprehensive income 1,775,939 4,595,473
Retained earnings 6,400,089 7,382,387
- ------------------------------------------------------------------------ -------------------- --------------------
Total Shareholders' Equity 17,031,577 20,833,409
- ------------------------------------------------------------------------ -------------------- --------------------
Total Liabilities and Shareholders' Equity $ 153,025,877 $ 158,880,332
- ------------------------------------------------------------------------ -------------------- --------------------
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 2004 2003
- ------------------------------------------------------------------------ -------------------- --------------------
Cash Flows from Operations:
Net loss $ (982,282) $ (653,058)
Adjustments to reconcile net loss to cash from operations:
Increase in benefit reserves 1,132,435 3,831,180
Increase (decrease) in claim liabilities 118,365 (85,452)
Decrease (increase) in reinsurance recoverable 137,274 (4,571)
Interest credited on policyholder deposits 315,996 345,572
Provision for amortization and depreciation, net of deferrals 297,977 188,922
Amortization of premium and accretion of discount on
securities purchased, net 14,044 60,313
Net realized investment (gains) losses (289,757) 164,728
Increase in accrued investment income (66,649) (136,771)
Change in other assets and liabilities (644,459) (20,630)
Decrease (increase) in deferred federal income tax liability 1,541 (141,000)
Increase in federal income taxes receivable (48,582) (60,000)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Cash provided by (used in) Operations (14,097) 3,489,233
Cash Flows from Investment Activities:
Cost of securities acquired (23,427,698) (33,376,076)
Investments sold or matured 19,016,146 31,113,919
Investment management fees (355,241) (4,597)
Additions to real estate -- (17,670)
(Additions) reductions to property and equipment, net 1,012,810 (5,071)
Other investing activities, net 87,497 (79,433)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Investment Activities (3,666,486) (2,368,928)
Cash Flows from Financing Activities:
Policyholder deposits 276,968 308,623
Policyholder withdrawals (785,117) (833,851)
Payments on notes payable - bank (658,333) (987,500)
Repurchase of common stock -- (7,759)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Cash used in Financing Activities (1,166,482) (1,520,487)
- ------------------------------------------------------------------------ -------------------- --------------------
Net Decrease in Cash and Cash Equivalents (4,847,065) (400,182)
Cash and Cash Equivalents at Beginning of Period 8,588,896 6,699,171
- ------------------------------------------------------------------------ -------------------- --------------------
- ------------------------------------------------------------------------ -------------------- --------------------
Cash and Cash Equivalents at End of Period $3,741,831 $ 6,298,989
- ------------------------------------------------------------------------ -------------------- --------------------
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 that 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, 2003 consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K.
Note 2 - COMPREHENSIVE INCOME
The components of comprehensive income (loss), net of related tax, for the three
and six month periods ended June 30, 2004 and 2003 are as follows:
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
COMPREHENSIVE INCOME: 2004 2003 2004 2003
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Net Loss $ (872,675) $ (319,740) $ (982,282) $ (653,058)
Net unrealized gains (losses) on securities (4,191,038) 2,420,849 (2,819,534) 2,839,083
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Comprehensive Income (Loss) $ (5,063,713) $ 2,101,109 $ (3,801,816) $ 2,186,025
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Note 3 - DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company's derivatives outstanding at June 30, 2004 include approximately
$227,000 of embedded options on convertible bonds and $(90,000) of other open
option positions. Hedge accounting is not used for these securities and changes
in market value are reported currently as realized gains or losses.
Note 4 - NET REALIZED INVESTMENT GAINS (LOSSES), NET OF EXPENSES
The Company recorded pretax reductions to the carrying value of available for
sale securities totaling $101,000 and $135,000 for the six months ended June 30,
2004 and 2003, respectively, relating to declines in value which were considered
by management to be other than temporary. These amounts are included along with
other net realized gains (losses). Until the Company terminated its investment
management agreements on January 31, 2004, the Company also netted certain
direct, incremental investment management fees against net realized investment
gains and losses presented in the Condensed Consolidated Statements of
Operations. Such costs are based directly on or, are primarily associated with
capital gains. Costs netted against realized investment gains and losses total
$46,000 and $225,000 for the six months ended June 30, 2004 and 2003,
respectively.
Note 5 - INCOME TAXES
Current taxes are provided based on estimates of the projected effective annual
tax rate. Deferred taxes reflect the net effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Income before federal
income taxes differs from taxable income principally due to the small life
insurance company tax deduction and dividends-received tax deductions.
Part I; Item 1 (continued)
Note 6 - SEGMENT INFORMATION
The Company's operations are managed along five principal insurance product
lines: Home Service Life, Broker Life, Preneed Life, Dental, and Other Health.
Products in all five lines are sold through independent agency operations. Home
Service Life consists primarily of traditional life insurance coverage sold in
amounts of $10,000 and under to middle and lower income individuals. This
distribution channel is characterized by a significant amount of agent contact
with customers throughout the year. Broker Life product sales consist primarily
of simplified issue and graded-benefit policies in amounts of $10,000 and under.
Other products in this segment, which are not aggressively marketed, include:
group life, universal life, annuities and participating life coverages. Preneed
Life products are sold to individuals in connection with prearrangement of their
funeral and include single premium and multi-pay policies with coverages
generally in amounts of $10,000 and less. These policies are generally sold to
older individuals at increased premium rates. Dental products are term coverages
generally sold to small and intermediate size employer groups. Other Health
products include various accident and health coverages sold to individuals and
employer groups. Segment information as of June 30, 2004 and 2003, and for the
periods then ended is as follows:
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
REVENUE: 2004 2003 2004 2003
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 2,345,217 $ 2,259,771 $ 4,586,813 $ 4,547,712
Broker Life 3,388,451 1,367,436 2,992,999 2,831,642
Preneed Life 635,017 4,193,478 5,017,029 8,335,085
Dental 2,318,403 2,090,956 4,507,041 4,238,216
Other Health 273,246 334,803 599,290 701,771
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals 8,960,334 10,246,444 17,703,172 20,654,426
Net realized investment gains (losses) 61,571 111,435 289,757 (164,728)
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Total Revenue $9,021,905 $ 10,357,879 $ 17,992,929 $ 20,489,698
- ------------------------------------------------- --------------- --------------- --------------- ---------------
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: 2004 2003 2004 2003
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 466,654 $ 377,689 $ 894,163 $ 774,031
Broker Life 643,110 511,544 1,206,983 1,052,651
Preneed Life 576,522 466,522 1,180,701 876,356
Dental 9,354 5,096 17,698 11,733
Other Health 20,656 16,999 40,432 37,068
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals $ 1,716,296 $1,377,850 $ 3,339,977 $2,751,839
- ------------------------------------------------- --------------- --------------- --------------- ---------------
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 (losses) and interest expense are excluded.
A significant portion of the Company's realized investment gains (losses) are
generated from investments in equity securities. The equities portfolio averaged
(on a cost basis) approximately $11,964,000 and $9,066,000 during the six months
ended June 30, 2004 and 2003, respectively.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
SEGMENT PROFIT (LOSS): 2004 2003 2004 2003
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 55,612 $ (35,157) $ (61,497) $ 86,710
Broker Life (321,048) (240,873) (466,630) (175,664)
Preneed Life (213,085) (257,999) (290,225) (379,411)
Dental (246,349) 63,984 (172,393) 205,896
Other Health (98,494) 68,271 (116,072) (177,252)
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals (823,364) (401,774) (1,106,817) (439,721)
Net realized investment gains (losses) 61,571 111,435 289,757 (164,728)
Interest expense 87,238 97,401 177,826 189,609
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Loss before Federal Income Tax $ (849,031) $ (387,740) $ (994,886) $ (794,058)
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Depreciation and amortization amounts below consist of depreciation expense
along with amortization of the value of insurance acquired and deferred policy
acquisition costs.
------------------------------- -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
--------------- --------------- --------------- ---------------
DEPRECIATION AND AMORTIZATION: 2004 2003 2004 2003
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Home Service Life $ 100,117 $ 175,994 $ 234,077 $ 351,978
Broker Life 114,977 86,170 198,182 285,707
Preneed Life 196,953 131,698 426,358 450,373
Dental 11,817 14,231 27,970 28,525
Other Health 24,147 3,506 47,107 16,162
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Segment Totals $ 448,011 $ 411,599 $ 933,694 $1,132,745
- ------------------------------------------------- --------------- --------------- --------------- ---------------
Segment asset totals are determined based on policy liabilities outstanding in
each segment.
----------------- ----------------
June 30, December 31,
ASSETS: 2004 2003
- --------------------------------------------- ----------------- ----------------
Home Service Life $ 40,146,974 $41,312,914
Broker Life 53,129,025 54,585,019
Preneed Life 57,200,594 60,100,723
Dental 816,325 930,279
Other Health 1,732,959 1,951,397
- --------------------------------------------- ----------------- ----------------
Segment Totals $153,025,877 $158,880,332
- --------------------------------------------- ----------------- ----------------
Part I; Item 1 (continued)
Note 7 - LITIGATION
United Liberty, which the Company acquired in 1998, is defending an action in an
Ohio state court brought by two policyholders in 2000. The Complaint refers to a
particular class of life insurance policies that United Liberty issued over a
period of years ending around 1971. It alleges that United Liberty's dividend
payments on these policies from 1993 through 1999 were less than the required
amount. It does not specify the amount of the alleged underpayment but implies a
maximum of about $850,000. The plaintiffs also allege that United Liberty is
liable to pay punitive damages, also in an unspecified amount, for breach of an
implied covenant of good faith and fair dealing to the plaintiffs in relation to
the dividends. The action has been certified as a class action on behalf of all
policyholders who were Ohio residents and whose policies were still in force in
1993. United Liberty has denied the material allegations of the Complaint and is
defending the action vigorously. United Liberty has filed a motion for summary
judgment, which has been fully briefed and argued and awaits decision by the
Court. Efforts to settle the action, including mediation, have not been
successful. The Company expects that the Court will decide pending motions in
the third quarter, which may dispose of all issues in the case or set the stage
for trial. At this stage, the Company remains unable to determine whether an
unfavorable outcome of this action is likely to occur or whether the chance of
such an outcome is remote and therefore does not have a basis for estimating the
potential loss, if any, that may ultimately result.
Since 2001, Citizens Security has been defending an action in an Alabama state
court brought by an alleged policyholder in which a former independent agent is
also a defendant. The action was described in Note 7 to Part I, Item 1, of the
Company's Form 10-Q for the quarterly period ended March 31, 2004. The parties
settled this action in early August 2004. For strategic reasons related to other
potential claims, the Company has not disclosed the specific amount paid in
settlement. It is included under "Policyholder benefits" in the Condensed
Consolidated Statements of Operations for the three and six months ended June
30, 2004 in "Policy and contract claims" in the Condensed Consolidated Statement
of Financial Condition.
In addition, the Company is party to other legal, actions in the normal course
of business. Management believes that recorded claims liabilities are adequate
to ensure that these other actions will be resolved without material financial
impact on the Company.
Note 8 - RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2004, the Company adopted Statement of Position 03-1,
"Accounting and Reporting by Insurance Enterprises for certain Nontraditional
Long-Duration Contracts and for Separate Accounts (SOP 03-1)." The provisions of
SOP 03-1 did not have a material impact on the Company's financial statements.
Part I; Item 2 - Management's Discussion and Analysis
EXECUTIVE SUMMARY
The Company's management continuously monitors the performance and outlook of
the Company by analyzing several indicators that they judge to be critical.
Some, but not necessarily all, of the indicators of particular interest to
management are:
o The general economic environment
o Trend of premium volume
o Lapse rates
o Mortality and morbidity rates
o Trend of general expense levels
o Asset and Shareholders' Equity growth
o General interest rate movements
o Investment yields
o Diversity (e.g. by industry) and mix (e.g. between fixed income
securities and equity securities) of our portfolios
o Segment performance and trends
OPERATIONS. Net premiums and other considerations decreased approximately
$1,618,000, or 18.4% during the three months ended June 30, 2004 compared to the
three months ended June 30, 2003 and decreased approximately $3,523,000 for the
first six months of 2004 compared to the first six months of 2003. Below is a
summary of net premiums earned by segment, for the three and six month periods
ended June 30, 2004, along with the change from the same periods of 2003.
------------------------------ -------------------------------
Three Months Ended June 30, Six Months Ended June 30,
-------------- --------------- --------------- ---------------
NET PREMIUMS EARNED Total Change Total Change
- ------------------------------------- -------------- --------------- --------------- ---------------
Home Service Life $ 1,865,307 $ (1,507) $ 3,667,124 $ (75,033)
Broker Life 730,065 (105,148) 1,778,591 42,472
Preneed Life 2,039,119 (1,668,954) 3,775,586 (3,647,451)
Dental 2,308,784 223,130 4,488,839 262,834
Other Health 252,001 (65,116) 557,704 (105,489)
- ------------------------------------- -------------- --------------- --------------- ---------------
Segment Totals $ 7,195,276 $ (1,617,595) $14,267,844 $(3,522,667)
- ------------------------------------- -------------- --------------- --------------- ---------------
Preneed Life premiums declined $3,647,000 or 49% during the first half of 2004
compared to the same period in 2003 as the result of the Company lowering
crediting rates related to face amount growth, lowering commission rates and
changing the focus of our marketing efforts in the second half of 2003. The
Company is in the process of redirecting the focus of our marketing efforts to
the Home Service, Broker and Dental segments in an effort to improve
profitability in those segments. During 2004, Dental premiums were favorably
impacted by additional broker relationships, increasing participation of certain
groups and normal inflationary premium increases. The Other Health segment
products are not being actively marketed. All other segments experienced only
modest changes in premium from the first half of 2003.
The increase in net benefit reserves decreased $2,700,000 or 69% during the
first half of 2004 compared to the same period in 2003 primarily due to the
decrease in Preneed policies issued and in force during the period. The decrease
in net benefit reserves in the second quarter was $1,486,000 or 65% compared to
the second quarter of 2003.
Pretax loss increased approximately $201,000 to $995,000 for the six months
ended June 30, 2004, primarily due to unfavorable mortality and Dental morbidity
rates, settlement of a lawsuit and increased general expenses, partially offset
by an increase in realized investment gains of $454,000 and an increase in net
investment income of $588,000. Net investment income increased 21% for the first
half of 2004 compared to the same period of 2003, in spite of a decline in
invested assets, due to a decrease in cash and cash equivalents and an increased
yield on the Company's fixed maturities portfolio resulting from investing in
longer term fixed maturity securities. Net realized investment gains increased
to $290,000 for the first six months of 2004 from net investment losses of
$165,000 for the same period in 2003, as the Company took advantage of the
stronger equities markes of the past twelve months. Net benefits increased
$631,000 or 6% during the first six months of 2004 from the same period in 2003
due primarily to adverse mortality rates in Broker and the Preneed segments
along with adverse morbidity in the Dental segment. Commissions decreased
$848,000 or 25% for the six months ended June 30, 2004 compared to the same
period in 2003 due to a lowering in commission rates in the second half of 2003
on the Preneed premium and the decrease in that premium. General expenses
increased $340,000, or 9.9% for the first half of 2004 due to the Company
continuing to incur costs associated with outside consultants who were employed
to review profitability of the Company's life products in the current interest
rate environment and perform other actuarial calculations and analysis, the cost
of a severance agreement settlement and the costs of a market conduct
examination conducted by the Office of Insurance of the Company's domiciliary
state. Policy acquisition costs deferred decreased $503,000 or 44% for the six
months ended June 30, 2004 compared to the same period in 2003 principally due
to the substantial decline in first year Preneed premiums during the same
period. Pretax Segment loss (excluding realized investment gains (losses) and
interest expense) for the first six months of 2004 was approximately $1,107,000
compared to $440,000 for the first six months of 2003. This is primarily
attributable to the factors described above relative to revenue changes,
mortality and morbidity rates, increased general expenses and the settlement of
one of the lawsuits discussed in Note 7 to the Condensed Consolidated Financial
Statements. Below are the approximate, annualized pretax investment income and
total return yields for the six months ended June 30, 2004 and 2003.
----------------- -----------------
Six Months Ended June 30 2004 2003
- -------------------------------------------- ----------------- -----------------
Investment Income $ 3,339,977 $ 2,751,831
Realized and Unrealized Gains (Losses) (4,165,601) 4,276,072
- -------------------------------------------- ----------------- -----------------
Total Return $( 825,624) $ 7,027,911
- -------------------------------------------- ----------------- -----------------
Average Cash and Investments $136,572,241 $128,685,929
Investment Income Yield - Annualized 4.89% 4.28%
Total Return - Annualized (1.21)% 10.92%
The income tax benefit of $13,000 is at a lower effective rate on the pretax
operating loss, excluding net realized investment gains, (1.0%) than the full
year rate for 2003 of 5.2% due to the Company not having any ability to carry
back any additional net operating losses for tax purposes and management's
judgment that it is not likely the full tax benefit will be realized in the
foreseeable future.
FINANCIAL POSITION. Shareholders' equity totaled approximately $17,032,000 and
$20,833,000 at June 30, 2004 and December 31, 2003, respectively. These balances
reflect an approximate 18.2% decrease for the six months ended June 30, 2004. As
described above, the comprehensive income (loss) totaled approximately
$(3,802,000) and $2,186,000 for the six months ended June 30, 2004 and 2003,
respectively. A significant portion of the comprehensive income (loss) is
attributable to changes in the value of the Company's fixed maturity and equity
portfolios. Equity securities comprised approximately 10.7% and 7.1% of the
Company's total assets as of June 30, 2004 and December 31, 2003, respectively.
Accordingly, as also described below, the Company's financial position can be
significantly affected by movements in the equities markets. Equity portfolio
positions increased $5,420,000 on a cost basis and $5,035,000 on a market value
basis, during the first six months of 2004. Fixed maturity portfolio positions
decreased $423,000 on an amortized cost basis and $4,493,000 on a market value
basis during the same period. This difference resulted primarily from a
significant decrease in bond prices during the period. Cash and cash equivalent
positions decreased approximately $1,559,000 during the quarter ended June 30,
2004.
Equity markets continue to be highly volatile and were unfavorable in the second
quarter of 2004. Interest yields on fixed maturity investments held in our
portfolio are continuing to slowly increase. The significant decline in
short-term rates continues to adversely impact the Company's investment
portfolio yield and operating earnings. The 2004 environment described continues
to generate a relatively high level of qualitative investment risk. However,
measures of quantitative risk per unit of investment are not believed to have
changed significantly from those previously disclosed in the Company's 2003 Form
10-K.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not participate in any off-balance sheet arrangements.
CASH FLOW AND LIQUIDITY. Cash flow from operations totaled $(14,000) for the six
months ended June 30, 2004 compared to $3,489,000 for the same period in the
prior year. The decrease in the positive cash flow is primarily attributable to
the decline in Preneed Life business which was growing during the second quarter
of 2003 and adverse mortality and morbidity rates. The $3,666,000 of cash used
in investing activities for the six months ended June 30, 2004 resulted
primarily from investing a large portion of cash held at the beginning of the
year, partially offset by proceeds from the sale of the Company's interest in an
aircraft. The $1,166,000 of cash used in financing activities during the first
six months of 2004 is primarily attributable to bank loan principal repayments
along with annuity and Universal Life account withdrawals. Due to continued
earnings pressure from low yields on investments and cash equivalents and the
declining Preneed premiums, the Company is completing a strategic review of its
products and operations. A key element of this initiative is improving
profitability of the Preneed, Home Service, and Broker Life segments by
increasing premiums in the Home Service and Broker segments, strengthening
underwriting practices, modifying commissions, and where possible, lowering
interest crediting or policy growth rates. Regarding the currently scheduled
debt repayments, the Company believes its available funds will be adequate to
service 2004 debt obligations and, with other available assets, management
believes it will be adequate to service debt obligations through 2005. The
Company sold its interest in an aircraft to SMC Advisors Inc., a related entity,
in April 2004, generating $971,000 in additional cash. In addition, the
Company's Chairman has expressed potential willingness to loan the Company an
additional $2,000,000 if necessary, which could service debt obligations through
the majority of 2007. For the quarter ended June 30, 2004, the Company did not
meet one of its bank debt covenants (debt to earnings ratio), however the lender
has waived this violation for the quarter and for several previous quarters. In
return for the waiver the Company's Chairman has personally guaranteed the
outstanding bank debt.
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 that 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
Quantitative and Qualitative Risk. The primary changes in quantitative market
risks during the six months ended June 30, 2004 are discussed in Part I, Item 2
above.
Part I; Item 4 - Controls and Procedures
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within the past 90 days, the
Company conducted an evaluation of its disclosure controls and procedures, with
the supervision and participation of its Chief Executive Officer and Principal
Financial Officer. The Company does not expect that its disclosure controls and
procedures will prevent all error and fraud. Such a control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must balance the constraint of prudent resource expenditure
with a judgmental evaluation of risks and benefits. Based on this evaluation of
disclosure controls and procedures, the Company's Chief Executive Officer and
Principal Financial Officer have concluded that such controls and procedures
provide reasonable assurance that material information required to be included
in the Company's periodic SEC reports is made known on a timely basis to the
Company's principal executive and financial officers.
CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the
Company's internal controls or changes in other factors that could significantly
affect these controls subsequent to their evaluation, nor has the Company
implemented any corrective actions regarding significant deficiencies or
material weaknesses in internal controls.
Part II - Other Information
Item 4. Submission of Matters to a Vote of Security Holders.
The 2004 annual meeting of shareholders of the Company was held on
June 30, 2004. At the meeting, five incumbent directors were
re-elected and one new director was elected to serve until the 2005
annual meeting of shareholders. The names of the directors and shares
of the Company's Class A Stock voted for each were as follows:
Candidate Votes
- ------------------------------------- -----------------
John H. Harralson, Jr. 1,365,211
Frank T. Kiley 1,358,826
George A. Turk * 1,354,973
Thomas G. Ward 1,368,211
Darrell R. Wells 1,365,711
Margaret A. Wells 1,365,511
* new director
Item 6. Exhibits and Reports on Form 8-K.
a). Exhibit 10.16 Form of Indemnification Agreement
between the Company and its Directors,
Executive Officers and Certain Other
Officers
Exhibit 10.17 Aircraft Interest Purchase Agreement
Exhibit 11 Statement re: computation of per share
earnings.
Exhibit 31.1 Rule 13a-14(a)/15d-14(a) Certification
--Principal Executive Officer
Exhibit 31.2 Rule 13a-14(a)/15d-14(a) Certification
--Principal Financial Officer
Exhibit 32.1 Section 1350 Certification --Principal
Executive Officer
Exhibit 32.2 Section 1350 Certification --Principal
Financial Officer
b). Reports on Form 8-K: On May 17, 2004 the Company filed a Form
8-K to furnish, pursuant to Item 12, a
press release disclosing the Company's
earnings for the first quarter of 2004.
On July 1, 2004 the Company filed a Form
8-K to furnish, pursuant to Item 12,
remarks by the Company's Chief Executive
Officer at the Company's 2004 Annual
Meeting.
SIGNATURES
In accordance with the requirements of the Securities and Exchange Act of 1934,
the registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
CITIZENS FINANCIAL CORPORATION
BY: /s/ Darrell R. Wells
-----------------------------------------
Darrell R. Wells
President and Chief Executive Officer
BY: /s/ Len E. Schweitzer
-----------------------------------------
Len E. Schweitzer
Treasurer and Principal Financial Officer
Date: August 11, 2004