FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
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 000-20148
Citizens Financial Corporation
(Exact name of registrant as specified in its charter)
Kentucky 61-1187135
(State or other jurisdiction of (I.R.S. Employer
organization) Identification No.)
The Marketplace, Suite 300
12910 Shelbyville Road
Louisville, Kentucky 40243
(Address of principal offices)
(Zip Code)
(502) 244-2420
(Registrant's telephone number, including area code)
_____________________________
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. Class A Stock --
1,075,615 as of November 14, 1996
This report consists of 15 consecutively numbered pages. An Exhibit Index
appears on page 11.
Part I. - Financial Information
Item 1. - Financial Statements
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Unaudited)
ASSETS September 30, December 31,
1996 1995
Investments:
Securities available for sale, at fair value:
Fixed maturities (amortized cost of
$51,674,868 and $45,369,804 in 1996
and 1995, respectively) $51,360,824 $46,917,198
Equity securities (cost of $9,091,297
and $4,263,273 in 1996 and 1995,
respectively) 10,730,982 5,742,914
Investment real estate 4,012,168 4,095,094
Mortgage loans on real estate 179,170 183,935
Policy loans 2,922,466 2,720,396
Short-term investments 842,111 821,271
70,047,721 60,480,808
Cash and cash equivalents 1,282,130 9,776,964
Accrued investment income 702,761 636,758
Reinsurance recoverable:
Paid benefits and losses 104,636 91,773
Unpaid benefits, losses and IBNR 1,693,024 1,468,413
Premiums receivable 502,160 485,585
Property and equipment 1,194,251 1,133,315
Deferred policy acquisition costs 3,709,136 3,477,377
Goodwill 131,016 146,738
Value of insurance acquired 5,190,219 6,059,095
Other assets 428,908 498,435
Deferred income taxes 92,875 ---
$85,078,837 $84,255,261
Item 1. (Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
September 30, December 31,
1996 1995
Policy and contract reserves:
Future policy benefits $41,355,132 $41,429,165
Unearned premiums 172,956 201,772
Policyholder deposits 15,915,227 15,925,201
Policy and contract claims 1,247,103 1,139,777
Other 163,003 163,100
58,853,421 58,859,015
Notes payable 9,113,028 9,306,982
Accrued expenses and other liabilities 1,928,994 2,745,673
Deferred income taxes --- 333,466
69,895,443 71,245,136
Redeemable convertible preferred stock:
370 and 157 shares issued and outstanding
as of September 30, 1996 and December 31, 1995,
respectively 4,043,907 1,700,907
Shareholders' Equity:
Common stock, 6,000,000 shares authorized;
1,275,724 shares issued and outstanding 1,275,724 1,275,724
Paid-in capital 5,198,250 5,198,250
Unrealized appreciation of investments 838,062 1,871,652
Retained earnings 4,389,753 3,525,894
11,701,789 11,871,520
Less 200,109 shares of common stock owned
by wholly-owned subsidiary (562,302) (562,302)
TOTAL SHAREHOLDERS' EQUITY 11,139,487 11,309,218
$85,078,837 $84,255,261
See accompanying notes.
Item 1. (Continued)
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the nine months ended September 30,
(Unaudited)
1996 1995
REVENUES
Premiums and other considerations $14,189,043 $ 7,956,944
Premiums ceded (705,519) (612,982)
13,483,524 7,343,962
Investment income, net of expenses 3,113,762 1,571,450
Net realized gain on investment securities 908,297 1,257,006
Other income 19,067 7,600
17,524,650 10,180,018
BENEFITS AND EXPENSES
Policyholder benefits 8,590,135 5,040,475
Policyholder benefits ceded (433,401) (572,911)
8,156,734 4,467,564
Interest credited on policyholder deposits 724,615 683,591
Increase in benefit reserves 475,834 134,011
Commissions 2,933,679 1,231,518
Other general expenses 2,808,974 2,324,093
Interest expense 760,449 211,105
Policy acquisition costs deferred (531,114) (496,898)
Amortization of deferred policy acquisition
costs and value of insurance acquired 919,140 584,543
16,248,311 9,139,527
INCOME FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES 1,276,339 1,040,491
Federal income taxes 213,766 268,308
NET INCOME $1,062,573 $ 772,183
Dividends on redeemable convertible
preferred stock 292,893 ---
NET INCOME APPLICABLE TO COMMON STOCK $ 769,680 $ 772,183
NET INCOME PER SHARE OF COMMON STOCK:
Primary $ .72 $ .72
Fully diluted $ .60 $ .72
Weighted average number of shares of common
stock outstanding during the period:
Primary 1,075,615 1,075,615
Fully diluted 1,785,659 1,075,615
See accompanying notes.
Item 1. (Continued)
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
for the three months ended September 30,
(Unaudited)
1996 1995
REVENUES
Premiums and other considerations $4,743,022 $3,177,409
Premiums ceded (232,092) (213,367)
4,510,930 2,964,042
Investment income, net of expenses 1,021,625 546,671
Net realized gain (loss) on investment securities (29,047) 1,047,804
Other income, net 1,013 (450)
5,504,521 4,558,067
BENEFITS AND EXPENSES
Policyholder benefits 3,016,968 1,883,687
Policyholder benefits ceded (154,305) (237,066)
2,862,663 1,646,621
Interest credited on policyholder deposits 224,507 238,897
Increase in benefit reserves 159,391 40,954
Commissions 925,644 538,982
Other general expenses 951,934 855,505
Interest expense 245,871 39,387
Policy acquisition costs deferred (181,033) (189,846)
Amortization of deferred policy acquisition
costs and value of insurance acquired 206,266 235,255
5,395,243 3,405,755
INCOME FROM OPERATIONS BEFORE FEDERAL
INCOME TAXES 109,278 1,152,312
Federal income taxes 14,766 198,461
NET INCOME $ 94,512 $ 953,851
Dividends on redeemable convertible preferred stock 101,750 ---
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK $ (7,238) $ 953,851
NET INCOME (LOSS) PER SHARE OF COMMON STOCK:
Primary $ (.01) $ .89
Fully diluted $ .05 $ .89
Weighted average number of shares of common
stock outstanding during the period:
Primary 1,075,615 1,075,615
Fully diluted 1,815,615 1,075,615
See accompanying notes.
Item 1. (Continued)
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30
(Unaudited)
OPERATING ACTIVITIES 1996 1995
Net Income $1,062,573 $ 772,183
Adjustments to reconcile net income to net cash
provided by operating activities:
Increase in benefit reserves 633,693 218,412
Increase (decrease) in claims liabilities 107,326 (49,315)
(Increase) decrease in reinsurance receivable:
Paid benefits (12,863) 71,911
Unpaid benefits (224,611) (21,013)
Provision for amortization and depreciation,
net of deferrals 314,821 324,157
Amortization of premium and accretion of
discount on securities purchased, net (7,117) (19,692)
Net realized (gain) on investment securities (940,468) (1,257,006)
(Increase) decrease in accrued investment income (66,003) 188,509
Change in other assets and other liabilities (1,054,426) 445,316
Deferred federal income taxes 144,000 102,000
Federal income taxes payable (recoverable) (12,000) 114,308
Interest credited on policyholder deposits 724,615 683,591
NET CASH PROVIDED BY OPERATING ACTIVITIES 669,540 1,573,361
INVESTING ACTIVITIES
Cost of securities and mortgage loans acquired (34,089,532) (13,079,549)
Investments sold or matured 23,908,911 14,663,588
Additions to property and equipment, net (137,146) (128,356)
Short-term investments sold (acquired), net (20,840) 1,639,944
Purchase price of Integrity National Life
Insurance Company in excess of cash and
cash equivalents acquired --- (3,501,341)
Other investing activities, net (202,263) 496,591
NET CASH PROVIDED BY (USED IN)
INVESTING ACTIVITIES (10,540,870) 90,877
FINANCING ACTIVITIES
Issuance of redeemable convertible preferred
stock 2,343,000 ---
Policyholder deposits 610,037 697,179
Policyholder withdrawals (1,344,752) (1,711,071)
Proceeds from bank borrowings ---- 6,400,000
Payments on note payable (207,925) (52,609)
Dividends on redeemable convertible preferred
stock (198,714) ---
Other 174,850 (44,431)
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,376,496 5,289,068
Net increase (decrease) in cash and cash
equivalents (8,494,834) 6,953,306
Cash and cash equivalents at beginning of period 9,776,964 921,285
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 1,282,130 $ 7,874,591
See accompanying notes.
Item 1. (Continued)
CITIZENS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q 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, 1995
consolidated financial statements and footnotes included in the Company's
annual report on Form 10-K.
2. On September 22, 1995, the Company acquired 98.85% of the common stock of
Integrity National Life Insurance Company ("Integrity National") from
Southwestern Life Corporation ("Southwestern"), a Dallas-based insurance
holding company (the "Acquisition"). The Acquisition was accounted for as
a purchase with the results of Integrity National's operations being
included in the consolidated statements since the date of acquisition. The
Company acquired the remaining 1.15% of the common stock of Integrity
National in conjunction with the merger of Integrity National into a
Company subsidiary as of December 31, 1995.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
FINANCIAL POSITION
Fixed maturities increased $6,305,064, based on amortized cost, during the
first nine months of 1996. Equity securities increased $4,828,024 and
$4,988,068 on a cost and market value basis, respectively, during the same
period. Gross unrealized appreciation for available-for-sale fixed maturities
and equity securities decreased $1,701,394 during the nine months ended
September 30, 1996.
OPERATIONS
An analysis of results for the nine and three months ended September 30, 1996
and 1995, before federal income taxes, by segment is shown below.
Nine months ended September 30,
Net income (loss) before
Net Income realized investment gains
1996 1995 1996 1995
Life and Annuity $ 851,632 $ 777,409 $ (29,416) $ (415,037)
Accident and Health 424,707 263,082 397,458 198,522
$1,276,339 $1,040,491 $ 368,042 $ (216,515)
Three months ended September 30,
Net income (loss) before
Net Income (loss) realized investment gains
1996 1995 1996 1995
Life and Annuity $ (41,880) $ 979,177 $ (13,704) $ (14,739)
Accident and Health 151,158 173,135 152,029 119,247
$109,278 $1,152,312 $ 138,325 $ 104,508
The improvement in Life and Annuity segment results (before realized
investment gains) is principally attributable to additional margins generated by
the September 1995 acquisition of "Integrity National". These additional
margins, including expense savings from the "Acquisition", have offset increased
interest expense associated with the "Acquisition" financing. The improvement
in the Accident and Health segment is attributable to a decrease in cancer
claims partially offset by an increase in dental claims. In addition, a larger
portion of overhead has been allocated to the Life and Annuity segment due to
the increased premium volume associated with the "Acquisition".
Total premiums and other considerations increased 84% during the first nine
months of 1996 compared to the same period in 1995. The increase is primarily
attributable to growth in the Life and Annuity segment, where traditional life
product premiums increased 250% during the first nine months of 1996 compared
to 1995. The September 1995 "Acquisition" acquisition accounted for
approximately 95% of the life premium increase with the remaining increase being
attributable to sales of the Company's graded death benefit product. The
Company's Accident and Health premiums increased 36.6% due to increased sales of
the Company's dental products.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations (Continued)
CASH FLOW AND LIQUIDITY
Cash flow from operations decreased $903,821 for the nine months ended
September 30, 1996 compared to the same period in the prior year. This decrease
was principally attributable to the payment during the first quarter of 1996 of
integration costs, bonuses, agent awards, and other expenses associated with the
"Acquisition" which were accrued as of September 30, 1995.
The $10,540,870 of cash used in investing activities resulted from the
Company's investment of cash balances into fixed maturities and stocks.
The change in cash provided by financing activities during the first nine
months of 1996 compared to the same period in 1995 is attributable to the
issuance of an additional 213 shares of redeemable convertible preferred stock
in 1996 offset by a nonrecurring bank borrowing in 1995.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a. Exhibit 10.8A First Amendment to Guarantor's Compensation Agreement
dated September 21, 1996 between The Company and Darrell R. Wells
Exhibit 11. Statement re computation of per share earnings
Exhibit 27. Financial Data Schedule
b. None
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
Registrant has duly 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: November 12, 1996
EXHIBIT INDEX
Exhibit No. Description Page No.
10.8A First Amedment to Guarantor's Compensation Agreement 12
dated September 21, 1996 between the Company and
Darrell R. Wells
11 Statement re computation of per share earnings 15
27 Financial Data Schedule 16
(SEC filing
only)
FIRST AMENDMENT TO
GUARANTOR'S COMPENSATION AGREEMENT
THIS FIRST AMENDMENT ("Amendment") is made as of September 21, 1996 by and
between CITIZENS FINANCIAL CORPORATION, a Kentucky corporation ("CFC"), and
DARRELL R. WELLS, a Kentucky resident ("Mr. Wells"), TO the GUARANTOR'S
COMPENSATION AGREEMENT dated as of September 22, 1995 by and between them (the
"Original Agreement", defined terms in which shall have the same meanings when
used herein unless otherwise defined herein).
CFC and Mr. Wells desire to amend the Original Agreement in certain
particulars set forth herein and no further.
NOW, in consideration for their respective agreements set forth herein and
other valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, CFC and Wells are agreed and intending to be bound do hereby
agree, as follows:
1. Guaranty. Mr. Wells affirms that he continues to be bound by the Guaranty.
2. Interim Compensation to Mr. Wells. Solely with respect to the period
beginning September 22, 1996 (that is, the first anniversary of the date CFC
issued the Bank Note to the Bank) and ending September 22, 1997 (the "Interim
Period"), Mr. Wells waives and relinquishes his right to the Annual Guaranty Fee
provided by the Original Agreement. In consideration therefor, CFC agrees to
pay to SMC Advisors, Inc., a Kentucky corporation with which Mr. Wells is
affiliated and that serves as an investment adviser for CFC and its affiliates
("SMC"), a supplemental portfolio management fee with respect to its services
under the Investment Management Agreement dated as of July 1, 1994 between CFC
and SMC (the "Management Agreement"), determined as follows (the "Supplemental
Fee"), which shall be in addition to (and not in lieu of) the consideration
otherwise payable to SMC pursuant to the Management Agreement:
A. The Supplemental Fee shall be payable solely with respect to the
period beginning October 1, 1996 and ending September 30, 1997 (the "Applicable
Period").
B. Subject to the provisions of 2C and 2D next following, the
Supplemental Fee shall be equal to 15% of the sum of the "Net Unrealized Capital
Gains" or "Net Unrealized Capital Losses" plus the "Net Realized Capital Gains"
or "Net Realized Capital Losses" in the "Stocks and Bonds Portfolio" (as the
terms in quotations are defined in the Management Agreement) over the Applicable
Period. All provisions (other than the applicable percentage) of and
definitions in the Management Agreement applicable to calculating compensation
under 5B thereof shall be applicable to calculating the Supplemental Fee
hereunder.
C. In the event CFC pays all or any portion of the principal of the Bank
Note during the Interim Period, the Supplemental Fee shall be reduced to an
amount that bears the same proportion to the Supplemental Fee calculated
according to B next preceding as the daily average outstanding principal
balance of the Bank Note during the Interim Period bears to $2,000,000.
D. In the event the Management Agreement is terminated at any time during
the Interim Period, the Supplemental Fee calculated according to B and C next
preceding shall be prorated to the date of such termination.
E. In the event the Management Agreement is terminated at any time during
the Interim Period, CFC shall pay to Mr. Wells an amount equal to 133-1/3% of
the difference between the Supplemental Fee calculated according to B and C
preceding and the amount paid to SMC pursuant to D preceding.
3. Payment. As soon as practicable after September 30, 1997, CFC shall
calculate the Supplemental Fee, if any, payable to SMC pursuant to B, C and
D of 2 and, if applicable, the amount, if any, payable to Mr. Wells pursuant
to E of 2. Subject to receipt of any necessary approval from the Bank, CFC
shall pay to SMC and, if applicable, Mr. Wells in cash the amount or amounts, if
any, calculated pursuant to the preceding sentence as soon as possible after
they are calculated but in any event prior to November 15, 1997; provided,
however, that if the Bank shall not give any necessary consent, CFC shall pay
such amount or amounts in the form of a Guaranty Note or Guaranty Notes as
provided in and subject to the applicable terms and conditions of the Original
Agreement.
4. Reaffirmation of Original Agreement. Except as provided herein with
respect to the Interim Period, the Original Agreement remains in full force and
effect in accordance with its terms. Except as the parties may otherwise agree,
CFC's obligation to pay the Guaranty Fee shall resume effective September 22,
1997 according to the schedule set forth in the Original Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
CITIZENS FINANCIAL CORPORATION
by:________________________________
Lane A. Hersman
Executive Vice President
__________________________________
DARRELL R. WELLS
Exhibit 11 - COMPUTATION OF PER SHARE EARNINGS
Nine Months Ended
September 30,
1996 1995
(In thousands, except share
and per share data)
Primary earnings per common share:
Net income $ 1,062,573 $ 772,183
Redeemable convertible preferred stock dividends 292,893 ---
Income applicable to common stock $ 769,680 $ 772,183
Average common shares outstanding 1,075,615 1,075,615
Primary earnings per common share $ 0.72 $ .72
Fully diluted earnings per common share:
Net income $ 1,062,573 $ 772,183
Average number of shares for computation
of fully diluted earnings per common share 1,785,659 1,075,615
Fully diluted earnings per common share $ 0.60 $ .72
Three Months Ended
September 30,
1996 1995
(In thousands, except share
and per share data)
Primary earnings per common share:
Net income $ 94,512 $ 953,851
Redeemable convertible preferred
stock dividends 101,750 ---
Income (loss) applicable to common stock $ (7,238) $ 953,851
Average common shares outstanding 1,075,615 1,075,615
Primary earnings (loss) per common share $ (.01) $ .89
Fully diluted earnings per common share:
Net income $ 94,512 $ 953,851
Average number of shares for computation
of fully diluted earnings per common share 1,815,615 1,075,615
Fully diluted earnings per common share $ 0.05 $ .89