FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JUNE 30, 2003
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Commission file number 0-22629
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UNIFIED FINANCIAL SERVICES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 35-1797759
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or
organization)
2424 HARRODSBURG ROAD
LEXINGTON, KENTUCKY 40503
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(Address of principal executive offices)
(Zip Code)
(859) 296-2016
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(Registrant's telephone number, including area code)
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. |X| Yes |_| No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). |_| Yes |X| No
Number of shares
Title of class outstanding as of August 4, 2003
- -------------------------------------- ------------------------------------
Common stock, $0.01 par value 2,829,117
UNIFIED FINANCIAL SERVICES, INC.
FORM 10-Q
INDEX
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition - June 30, 2003
(Unaudited) and December 31, 2002.................................1
Consolidated Statements of Operations (Unaudited) - Six and Three
Months Ended June 30, 2003 and 2002...............................3
Consolidated Statements of Comprehensive Income (Unaudited) - Six
and Three Months Ended June 30, 2003 and 2002.....................4
Consolidated Statements of Cash Flow (Unaudited) - Six Months
Ended June 30, 2003 and 2002......................................5
Notes to Consolidated Financial Statements........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................16
Cautionary Statement Regarding Forward-Looking Statements........16
General..........................................................16
Comparison of Results for the Six Months Ended June 30, 2003
and 2002.........................................................17
Comparison of Results for the Three Months Ended June 30, 2003
and 2002.........................................................19
Liquidity and Capital Resources..................................23
Item 3. Quantitative and Qualitative Disclosure About Market Risk........24
Item 4. Controls and Procedures..........................................28
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.................................29
SIGNATURES....................................................................30
CERTIFICATION.................................................................31
EXHIBIT INDEX.................................................................35
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
ASSETS
------
JUNE 30, DECEMBER 31,
2003 2002
-------------- ----------------
Current Assets
Cash and cash equivalents (see note 12)........................... $ 5,598,217 $ 4,564,949
Due from banks.................................................... 1,734,835 1,656,549
Federal funds sold................................................ 5,977,000 1,479,000
Bond investments (see note 12).................................... 10,239,945 15,685,987
Investment in securities and non-affiliated mutual funds.......... 727,250 709,687
Note receivable................................................... -- 800,000
Loans (net of allowance for loan losses of $622,864
for 2003 and $550,216 for 2002)................................. 55,790,324 57,579,002
Accounts receivable (net of allowance for doubtful accounts
of $72,781 for 2003 and $68,715 for 2002)....................... 2,388,984 2,607,547
Receivables from premium financings............................... 3,499,011 2,960,344
Prepaid and deposits.............................................. 366,057 830,512
Deferred income tax benefit....................................... 338,350 --
-------------- --------------
Total current assets.......................................... 86,659,973 88,873,577
-------------- --------------
Fixed Assets, at cost
Equipment and furniture (net of accumulated depreciation
of $2,564,723 for 2003 and $2,308,646 for 2002)................. 1,809,822 2,028,716
-------------- --------------
Total fixed assets............................................ 1,809,822 2,028,716
-------------- --------------
Non-Current Assets
Investment in affiliate (see note 10)............................. 1,010 1,010
Goodwill (net of accumulated amortization of
$347,734 for 2003 and 2002) .................................... 1,006,061 1,006,061
Other non-current assets.......................................... 112,060 120,534
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Total non-current assets...................................... 1,119,131 1,127,605
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TOTAL ASSETS............................................. $ 89,588,926 $ 92,029,898
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(Continued on next page)
See accompanying notes.
-1-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
JUNE 30, DECEMBER 31,
2003 2002
---------------- ----------------
Current Liabilities:
Borrowed funds..................................................... $ 3,872,233 $ 4,742,783
Deposits (see note 12)............................................. 67,309,323 67,277,222
Accounts payable and accrued expenses.............................. 1,343,387 1,766,741
Accrued compensation and benefits.................................. 406,526 491,334
Payable to broker-dealers.......................................... 42,727 79,962
Income taxes payable............................................... 88,924 144,204
Other liabilities.................................................. 1,438,551 1,975,261
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Total current liabilities...................................... 74,501,671 76,477,507
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Long-Term Liabilities
Other long-term liabilities........................................ 70,501 57,570
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Total long-term liabilities.................................... 70,501 57,570
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Total liabilities......................................... 74,572,172 76,535,077
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Commitments and Contingencies........................................... -- --
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Stockholders' Equity
Common stock, par value $.01 per share (authorized shares - 20,000,000;
issued and outstanding shares - 2,829,117 for
2003 and 2,844,246 for 2002)..................................... 32,791 32,943
Additional paid-in capital......................................... 15,703,815 16,004,747
Retained earnings.................................................. (1,107,327) (1,114,514)
Accumulated other comprehensive income............................. 387,475 571,645
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Total stockholders' equity................................ 15,016,754 15,494,821
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.............................. $ 89,588,926 $ 92,029,898
============= =============
See accompanying notes.
-2-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2003 2002 2003 2002
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REVENUE:
Gross revenue (see note 9)............... $ 7,036,025 $ 7,755,145 $ 3,399,274 $ 3,882,241
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Total gross revenue.................... 7,036,025 7,755,145 3,399,274 3,882,241
------------- ------------- ------------- --------------
COST OF SALES:
Cost of sales (see note 9)............... 1,073,163 1,805,741 479,961 982,068
------------- ------------- ------------- --------------
Total cost of sales.................... 1,073,163 1,805,741 479,961 982,068
------------- ------------- ------------- --------------
GROSS PROFIT (see note 9)................... 5,962,862 5,949,404 2,919,313 2,900,173
------------- ------------- ------------- --------------
EXPENSES:
Employee compensation.................... 3,392,909 3,887,554 1,720,139 1,892,514
Employee insurance and benefits.......... 588,808 651,200 291,246 295,696
Data processing.......................... 404,007 286,284 214,532 156,917
Mail and courier......................... 52,301 65,124 27,038 35,200
Telephone................................ 88,027 127,425 43,872 61,552
Equipment rental and maintenance......... 186,041 211,258 103,522 82,203
Occupancy................................ 416,708 402,194 216,601 209,783
Provision for depreciation and
amortization (see note 2).............. 182,648 144,454 88,511 97,290
Professional fees........................ 256,572 282,846 193,725 245,822
Travel and entertainment................. 83,587 78,431 18,664 77,045
Interest................................. 1,396 (7,697) 698 522
Errors expense........................... (75,466) (137,245) (100,823) 31,768
Provision for bad debt................... 113,385 31,407 68,045 3,198
Business development costs............... -- 11,250 (12,000) (25,400)
Insurance................................ 194,984 101,916 81,197 57,240
Other operating expenses (see note 10)... 275,525 150,840 161,699 92,507
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Total expenses......................... 6,161,432 6,287,241 3,116,666 3,313,857
------------- ------------- ------------- --------------
Loss from continuing operations.......... (198,570) (337,837) (197,353) (413,684)
Other income (loss)...................... 5,991 (24,202) 10,519 (18,107)
Income tax benefit (expense)............. 43,930 3,177 53,930 (1,935)
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Net loss from continuing operations......... (148,649) (358,862) (132,904) (433,726)
Gain on sale of operations (net of income
taxes of $63,930, $0, $63,930 and
$0, respectively)........................ 93,534 -- 93,534 --
Income (loss) from discontinued operations
(net of income taxes of $0, $8,177,
$0 and $(1,935), respectively)........... 62,301 (512,101) 36,905 (430,189)
------------- ------------- ------------- --------------
Net income (loss)........................... $ 7,186 $ (870,963) $ (2,465) $ (863,915)
============= ============= ============= ==============
Per share income (loss)
Basic common shares outstanding.......... 2,829,117 2,858,972 2,829,117 2,858,972
Net income (loss) - basic................ $ -- $ (0.30) $ -- $ (0.30)
Fully diluted common shares outstanding
(see note 11)......................... 2,829,117 2,858,972 2,829,117 2,858,972
Net income (loss) - fully diluted........ $ -- $ (0.30) $ -- $ (0.30)
See accompanying notes.
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UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
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2003 2002 2003 2002
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Net income (loss)........................... $ 7,186 $ (870,963) $ (2,465) $ (863,915)
Other comprehensive income (loss), net of tax
Unrealized loss on securities, net of
reclassification adjustment............ (184,170) 151,134 (111,832) 210,252
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Comprehensive loss.......................... $ (176,984) $ (719,829) $ (114,297) $ (653,663)
============= ============= ============= ==============
See accompanying notes.
-4-
UNIFIED FINANCIAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW (UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
-----------------------------------
2003 2002
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CASH FLOW FROM OPERATING ACTIVITIES
Net income (loss).............................................. $ 7,186 $ (870,963)
Adjustments to reconcile net income (loss) to cash
provided by (used in) operating activities:
Income tax payable, net of deferred tax..................... (298,755) 4,671
Provision for depreciation and amortization (see note 2).... 256,829 221,523
Provision for loan losses................................... 72,000 544,403
Provision for bad debt...................................... 112,385 33,352
Bond accretion.............................................. (14,044) (13,315)
Unrealized (gain)/loss on securities........................ (6,102) 10,603
Loss on disposal of fixed assets............................ 111 13,599
(Increase) decrease in operating assets:
Receivables.............................................. 106,180 (340,949)
Receivables from premium financings...................... (538,667) (647,618)
Loan receivables, net of repayments...................... 1,716,678 (13,834,058)
Prepaid and sundry assets................................ 485,859 172,523
Notes receivable......................................... 800,000 --
Increase (decrease) in operating liabilities:
Deposits................................................. 32,101 10,074,008
Accounts payable and accrued expenses.................... (460,589) (1,192,327)
Accrued compensation and benefits........................ (84,808) (216,760)
Other liabilities........................................ (536,708) (305,440)
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Net cash provide by (used in) operating activities... 1,649,656 (6,346,748)
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CASH FLOW FROM INVESTING ACTIVITIES
Purchase of equipment.......................................... (38,047) (132,233)
Due from banks................................................. (78,287) (62,442)
Bond investments............................................... 5,181,041 (4,438,789)
Federal funds sold/(purchased)................................. (4,498,000) 3,592,000
Securities sold/purchased under agreement to repurchase........ -- 163,500
Borrowed funds................................................. (870,550) 4,888,763
Proceeds from sale of securities............................... -- 234,556
Investment in securities and mutual funds...................... (11,461) (303,910)
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Net cash provided by (used in) investing activities.. (315,304) 3,941,445
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CASH FLOW FROM FINANCING ACTIVITIES
Retirement of common stock..................................... (301,084) (7,920)
Borrowings on line of credit................................... -- 795,220
Repayment of borrowings........................................ -- (443,154)
Repayment of capital lease obligations......................... -- (285)
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Net cash provided by (used in) financing activities.. (301,084) 343,861
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Net increase (decrease) in cash and cash equivalents............... 1,033,268 (2,061,442)
Cash and cash equivalents - beginning of year...................... 4,564,949 8,844,482
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Cash and cash equivalents - end of period.......................... $ 5,598,217 $ 6,783,040
============= =============
See accompanying notes.
-5-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 1 - NATURE OF OPERATIONS
Unified Financial Services, Inc., a Delaware holding company for
various financial services companies, was organized on December 7,
1989. We distribute our services via the traditional industry
channels of our subsidiaries and via the Internet. Through our
subsidiaries, all of which are wholly owned, we provide services
primarily in three lines of business: trust and retirement
services; mutual fund administration services; and investment
advisory services.
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
---------------------
The consolidated financial statements include the accounts of
Unified Financial Services, Inc. and our subsidiaries after
elimination of all material intercompany accounts and
transactions.
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. Operating
results for the six- and three-month periods ended June 30, 2003
are not necessarily indicative of the results that may be expected
for the year ending December 31, 2003.
The balance sheet at December 31, 2002 has been derived from the
audited financial statements at that date but does not include all
of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
For further information refer to the consolidated financial
statements and footnotes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2002.
Financial Statement Presentation
--------------------------------
Certain amounts in the 2002 financial statements have been
reclassified to conform to the 2003 presentation. For segment
report purposes, Unified Financial Securities (our brokerage
subsidiary) has been included in mutual fund administration
services based upon management's decision to exit the clearing,
discount and full services brokerage operations and concentrate on
mutual fund distribution. Commonwealth Premium Finance Corporation
has been included in the corporate segment due to Unified Banking
Company being reflected as a discontinued operation based upon the
Company's agreement to sell Unified Banking Company.
-6-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
The provision for depreciation and amortization expense on our
Consolidated Statements of Cash Flow includes depreciation and
amortization from continuing and discontinued operations for the
six months ended June 30, 2003 and 2002. On our Consolidated
Statements of Operations for the six and three months ended June
30, 2003 and 2002, the provision for amortization and depreciation
is for our continuing operations, and does not include a provision
for discontinued operations.
Use of Estimates
----------------
During 2002, we experienced operational issues with respect to our
mutual fund administrative services affiliate, which issues
primarily are related to problems associated with our
reconciliation of various accounts. In connection therewith, we
established an $854,000 reserve, $454,000 of which is related to
possible reconciliation losses and $400,000 of which is related to
estimated costs to ascertain the extent and nature of such losses
and to design control procedures and system enhancements to ensure
that such reconciliation issues do not recur. During the six and
three months ended June 30, 2003, we expended $251,179 and
$206,618, respectively, of the $400,000 reserve.
Note 3 - DISCONTINUED OPERATIONS
Sale of Unified Banking Company
-------------------------------
On June 9, 2003, we entered into a Stock Purchase Agreement with
Blue River Bancshares, Inc., an Indiana corporation. Pursuant to
such agreement, Blue River Bancshares would acquire all of the
outstanding shares of capital stock of our wholly owned banking
subsidiary, Unified Banking Company, for $8.2 million in cash. The
consummation of the transaction is contingent upon various
contingencies and conditions, including approval of the Stock
Purchase Agreement by our stockholders, regulatory approvals and
completion by Blue River Bancshares of certain financing
arrangements for the transaction. The transaction is expected to
close in the fourth quarter of 2003.
Unified Banking Company commenced operations on November 1, 1999.
Included in our consolidated financial statements at June 30, 2003
and 2002 were the bank's total assets of $79,118,270 and
$81,861,987 respectively, and total liabilities of $73,465,742 and
$76,410,959, respectively. As of such dates, certain components of
Unified Banking Company's unconsolidated assets and liabilities
were as follows:
-7-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 3 - DISCONTINUED OPERATIONS (continued)
JUNE 30,
---------------------------
2003 2002
---------- -----------
Due from banks.............................................. $1,734,835 $ 1,419,925
Federal funds sold.......................................... 5,977,000 441,000
Investments in securities:
US agency securities (includes $1,854,461 for 2003 and
$4,943,491 for 2002, see note 12)...................... 12,094,406 20,999,118
FHLB stock................................................ 518,900 497,300
Loans:
Real estate loans......................................... 34,927,666 36,883,451
Commercial loans (includes a $1,900,000 loan to our premium
finance company, see note 12).......................... 18,680,106 12,990,171
Installment loans......................................... 4,697,303 7,962,549
Other loans............................................... 8,113 104,061
Allowance for loan losses................................. 622,864 490,000
Bank deposits:
Demand deposits (includes $1,854,461 for 2003 and
$4,943,491 for 2002, see note 12)...................... 7,350,303 11,104,796
Official checks........................................... 368,365 93,126
NOW accounts.............................................. 3,826,619 3,697,056
Money market accounts..................................... 10,192,859 11,030,744
Savings accounts.......................................... 92,101 71,438
Time deposits............................................. 41,408,329 39,753,253
Other interest-bearing deposits........................... 5,925,208 5,172,627
Federal and borrowed funds.................................. 3,872,233 5,052,263
Sale of Insurance Operations
----------------------------
On December 17, 2001, we sold substantially all of the assets and
assigned substantially all of the liabilities of our insurance
subsidiaries, Equity Insurance Managers, Inc., Equity Insurance
Administrators, Inc. and 21st Century Claims Service, Inc., to
Arthur J. Gallagher & Co. In connection with the sale, $800,000 in
cash was deposited into an escrow account and was subject to
possible indemnification claims of Arthur J. Gallagher & Co.
pursuant to the sale agreement. As of December 31, 2001, we
established a liability of $800,000 related to the escrow. As of
June 30, 2003, we believed there was a current potential for
approximately $250,000 in claims against the escrow, which amount
is $170,000 less than our December 31, 2002 estimate. Based
thereupon, we recorded $175,000 of the escrow as gain on sale of
operations during the quarter ended June 30, 2002 (such amount is
in addition to the $280,000 we recorded as income related to the
sale during the year ended December 31, 2002). As of June 30,
2003, we had recorded to income $455,000 of the $800,000, with
$345,000 remaining for claims against the escrow ($250,000
reserved for submitted claims and $95,000 reserved for possible
future claims).
-8-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 4 - OPTIONS
Under the terms of our stock incentive plan, employees, directors,
advisers and consultants of our company and its subsidiaries are
eligible to receive the following: (a) incentive stock options;
(b) nonqualified stock options; (c) stock appreciation rights; (d)
restricted stock; (e) restricted stock units; and (f) performance
awards.
Options granted under our plan may be nonqualified or incentive
stock options and typically are granted at a price equal to the
quoted market price (or valuation made by independent valuation
experts) on our common stock on the trading day immediately prior
to the date of grant. Generally, options granted will have a term
of ten years from the date of the grant, and will vest in
increments of 33% per year over a three-year period or be 100%
vested on the date of grant.
As of June 30, 2003 and 2002, options to acquire 104,986 and
126,621 shares, respectively, of our common stock were outstanding
and issued to certain of our employees, directors and advisers
pursuant to our stock incentive plan. In addition, as of such
dates, our board had granted options to acquire 50,000 and 54,545
shares, respectively, of our common stock outside of such plan
(see note 10).
A summary of our outstanding stock options as of June 30, 2003 and
2002 is as follows:
JUNE 30,
------------------------------------------------
2003 2002
--------------------- ----------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------ ----- ------ -----
Options outstanding at beginning of year...... 161,986 $38.24 149,396 $41.94
Granted....................................... -- -- 38,050 16.50
Option to acquire 60,000 shares at $50.00 per
share converted to option to acquire 54,545
shares at $55.00 per share.................. -- -- (5,455) n/a
Option to acquire 54,545 shares at $55.00 per
share converted to option to acquire 50,000
shares at $60.00 per share.................. (4,545) n/a -- --
Forfeitures................................... (2,455) 17.02 (825) 37.37
Options outstanding at end of period.......... 154,986 39.69 181,166 37.88
Options exercisable at end of period.......... 154,653 39.69 166,301 37.82
Options available for future grants........... 145,014 n/a 123,379 n/a
As of June 30, 2003, 82,681 of such options were intended to
qualify as incentive stock options pursuant to Section 422 of the
Internal Revenue Code of 1986, as amended.
We apply Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," in accounting for stock-based
employee compensation arrangements whereby compensation costs
related to stock options generally are not recognized in
determining net income. Had we computed compensation costs for our
stock options pursuant to Financial Accounting Standard Board
Statement of Financial Accounting Standards No. 123,
-9-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 4 - OPTIONS (continued)
"Accounting for Stock-Based Compensation," the effect would have
been immaterial for the three and six months ended June 30, 2003
and 2002 (based upon the Black-Scholes option pricing model).
Note 5 - RENTAL AND LEASE INFORMATION
We lease certain office facilities and equipment. Continuing
operations' rental expense for the six months ended June 30, 2003
and 2002 was $416,708 and $402,194, respectively. Our discontinued
operation's rental expense for the six months ended June 30, 2003
and 2002 was $67,428 and $67,428, respectively.
At June 30, 2003, we were committed to minimal rental payments
under certain noncancellable operating leases. As of June 30,
2003, the minimum future rental commitments for each of the
succeeding five years subsequent to June 30, 2003 were as follows:
2004..................................... $ 654,964
2005..................................... 644,977
2006..................................... 626,984
2007..................................... 613,241
2008..................................... 378,895
Thereafter............................... 484,950
------------
Total............................... $ 3,404,011
============
Note 6 - COMMITMENTS AND CONTINGENCIES
We are a party to various lawsuits, claims and other legal actions
arising in the ordinary course of business. In the opinion of
management, after consultation with legal counsel, all such
matters are without merit or are of such kind, or involve such
amounts, that unfavorable disposition would not have a material
adverse effect on our consolidated financial position or results
of operations.
Note 7 - REGULATORY REQUIREMENTS
Unified Financial Securities is subject to the Securities and
Exchange Commission's Uniform Net Capital Rule, which requires the
maintenance of minimum net capital, as defined, of the greater of
(i) 6-2/3% of aggregate indebtedness or (ii) $50,000, and a ratio
of aggregate indebtedness to net capital of not more than 15 to 1.
At June 30, 2003, the net capital and ratio of aggregate
indebtedness for Unified Financial Securities were $143,085 and
0.5 to 1, respectively.
Unified Financial Securities is a fully disclosed broker-dealer.
As a result, pursuant to Rule 15c3-3 as promulgated by the
Securities and Exchange Commission, Unified Financial Securities
is not required to segregate cash and/or securities for the
benefit of its customers.
Under the Office of Thrift Supervision's regulatory capital
requirements, savings associations must maintain "tangible"
capital equal to 1.5% of adjusted total assets, "core" capital
equal to at least 4.0% of adjusted total assets and "total"
capital (a combination of "core" and "supplementary" capital)
equal to 8.0% of risk-weighted assets. In addition, the Office of
-10-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 7 - REGULATORY REQUIREMENTS (continued)
Thrift Supervision has adopted regulations that impose certain
restrictions on savings associations that have a total risk-based
capital ratio that is less than 8.0%, a ratio of Tier 1 capital to
risk-weighted assets of less than 4.0% or a ratio of Tier 1
capital to adjusted total assets of less than 4.0%. As of June 30,
2003, Unified Banking Company had a total risk-based capital ratio
of 11.1%, a ratio of Tier 1 capital to risk-weighted assets of
10.1% and a ratio of Tier 1 capital to adjusted total assets of
8.3%.
Unified Trust Company, National Association, a limited purpose
national trust company, is chartered, regulated and examined by
the Office of the Comptroller of the Currency. Unified Trust
Company, NA also is a member of the Federal Reserve System. As a
national trust company, the activities of Unified Trust Company,
NA must comply with various statutory and regulatory requirements,
including, among other things, the maintenance of adequate capital
and the exercise of fiduciary powers. Currently, Unified Trust
Company, NA is required to maintain a minimum of $2.0 million in
capital, and may be required to maintain additional minimum
capital as assets under management at the trust company increase.
As of June 30, 2003, Unified Trust Company, NA had $2,245,007 in
capital.
Note 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated
fair value of our financial instruments at June 30, 2003 and 2002.
Financial Accounting Standards Board Statement No. 107,
"Disclosures About Fair Value of Financial Instruments," defines
the fair value of a financial instrument as the amount at which
the instrument could be exchanged in a current transaction between
willing parties.
JUNE 30,
-------------------------------------------------------
2003 2002
-------------------------- ------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
(IN THOUSANDS)
Financial assets:
Cash and cash equivalents............ $ 5,598 $ 5,598 $ 6,783 $ 6,783
Due from banks....................... 1,735 1,735 1,420 1,420
Federal funds sold...................... 5,977 5,977 441 441
Bond investments..................... 10,240 10,240 16,056 16,056
Securities and mutual funds.......... 727 727 600 600
Notes receivable..................... -- -- 800 800
Loans, net of allowance.............. 55,790 55,790 56,995 56,995
Receivable from premium financings... 3,499 3,499 2,864 2,864
Receivables (trade), net of allowance 2,389 2,389 3,571 3,571
Prepaid and deposits................. 366 366 253 253
Financial liabilities:
Current liabilities.................. 74,502 74,502 76,472 76,472
-11-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 9 - DISCLOSURES ABOUT REPORTING SEGMENTS
We have three reportable operating segments: trust and retirement
services; mutual fund administration services; and investment
advisory services. In addition, we also report corporate as a
separate segment, which includes our premium finance company.
The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. We
evaluate performance based on profit or loss from operations
before income taxes, not including non-recurring gains and losses.
Our reportable segments are strategic business units that offer
different products and services. They are managed separately
because each business requires different technology and marketing
strategies. Most of the businesses were acquired as a unit and the
management at the time of the acquisition was retained. Reportable
segment revenue, gross profit, total assets, depreciation and
amortization and capital expenditures were as follows as of or for
the three or six months ended June 30, 2003 and 2002:
-12-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 9 - DISCLOSURES ABOUT REPORTING SEGMENTS (continued)
AS AND FOR THE FOR THE
SIX MONTHS ENDED THREE MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------- ------------------------------
2003 2002 2003 2002
-------------- ------------- ------------- -------------
Revenue:
- --------
Trust and retirement..................... $ 2,484,204 $ 2,665,403 $ 1,229,770 $ 1,336,981
Mutual fund administration............... 3,447,970 3,994,863 1,641,558 2,002,972
Investment advisory...................... 708,205 803,630 337,079 387,700
Corporate................................ 395,646 291,249 190,867 154,588
------------- ------------- ------------- --------------
Total............................... $ 7,036,025 $ 7,755,145 $ 3,399,274 $ 3,882,241
============= ============= ============= ==============
Gross profit:
- -------------
Trust and retirement..................... $ 2,054,022 $ 2,171,023 $ 1,017,085 $ 1,064,446
Mutual fund administration............... 2,920,763 2,814,314 1,423,481 1,360,754
Investment advisory...................... 592,431 672,818 287,880 320,385
Corporate................................ 395,646 291,249 190,867 154,588
------------- ------------- --------------- --------------
Total............................... $ 5,962,862 $ 5,949,404 $ 2,919,313 $ 2,900,173
============= ============= =============== ==============
Total assets:
- -------------
Trust and retirement..................... $ 2,567,274 $ 2,926,323
Mutual fund administration............... 2,460,476 2,490,872
Investment advisory...................... 1,328,400 1,512,745
Corporate................................ 4,114,506 4,409,374
Unified Banking Company.................. 79,118,270 81,861,987
------------- -------------
Total............................... $ 89,588,926 $ 93,201,301
============= =============
Depreciation and amortization:
- ------------------------------
Trust and retirement..................... $ 65,406 $ 59,285
Mutual fund administration............... 89,710 64,691
Investment advisory...................... 4,833 9,988
Corporate................................ 22,699 10,490
------------- -------------
Total............................... $ 182,648 $ 144,454
============= =============
Capital expenditures:
- ---------------------
Trust and retirement..................... $ -- $ 28,995
Mutual fund administration............... 24,810 87,990
Investment advisory...................... -- 1,204
Corporate................................ 3,240 8,244
Unified Banking Company.................. 9,997 5,800
------------- -------------
Total............................... $ 38,047 $ 132,233
============= =============
-13-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 10 - INVESTMENT IN AFFILIATE
On May 23, 2000, we subscribed for 10 shares of VSX Holdings, LLC,
a Delaware limited liability company, in exchange for $10 and
certain intangible property rights. We currently own approximately
0.5% of the outstanding shares of VSX Holdings, but have the right
to purchase up to an additional 1,990 (19.9%) shares at a price of
$1 per share, upon the occurrence of certain specified events. Our
investment in VSX Holdings is accounted for on the cost method of
accounting.
VSX Holdings is involved in the development of an alternative
trading system to be known as VSX.com, which, upon and subject to
organization and regulatory approval, will serve as a virtual,
real-time private financial market place. In connection with the
organization of VSX Holdings, a third-party investor made a $3.0
million loan to VSX Holdings, which loan is evidenced by a
debenture issued by VSX Holdings to such investor. The debenture
is secured by 85,000 shares of our common stock pledged by certain
executive officers of our company. In addition, concurrent with
the issuance of such debenture, we issued an option to the
third-party investor to acquire shares of our common stock, which
option has a five-year term. The investor may elect to foreclose
on the pledged collateral or exercise the option. Pursuant to such
option, the holder of the option and the debenture is entitled to
surrender the debenture to us in payment of the exercise price of
the option. During the years ending May 23, 2004 and 2005, the
exercise price per share of our common stock subject to the option
will be $60 and $65, respectively. Should the investor foreclose
on the pledged collateral, the executive officers would succeed to
the option and/or the claim against VSX Holdings. Should the
option be exercised prior to May 23, 2004 by the holder of the
note (whether the investor, the executive officers or any other
holder): (a) we would issue 50,000 shares of stock (46,153 after
May 23, 2004) to the investor, the executive officers or any other
holder, as the case may be, and (b) we would succeed to the $3.0
million claim against VSX Holdings.
We also have entered into a management arrangement with VSX
Holdings whereby we provide consulting and development services to
VSX Holdings. For the six months ended June 30, 2003 and 2002, and
the three months ended June 30, 2003 and 2002, we received
payments totaling $55,621 and $219,455, respectively, and $29,771
and $99,889, respectively, from VSX Holdings for such consulting
and development services, which amounts are recorded as a
reduction of "Other operating expenses" on our Consolidated
Statements of Operations.
-14-
UNIFIED FINANCIAL SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2003 AND 2002
----------------------
Note 11 - INCOME (LOSS) PER SHARE OF STOCK
Income (loss) per share of stock is computed using the number of
common shares outstanding during the applicable period. Diluted
income (loss) per share of stock is computed using the number of
common shares outstanding and dilutive potential common shares
(outstanding stock options).
Dilutive potential common shares included in the diluted income
(loss) per share calculation were determined using the treasury
stock method. Under the treasury stock method, outstanding stock
options are dilutive when the average "market price" of our common
stock exceeds the option price during a period. In addition,
proceeds from the assumed exercise of dilutive options along with
the related tax benefit are assumed to be used to repurchase
common shares at the average market price of such stock during the
period. For the six and three months ended June 30, 2003 and 2002,
all potential common shares were considered to be anti-dilutive
and were excluded from the calculation of diluted earnings/loss
per share.
Note 12 - RELATED PARTY TRANSACTION
As of June 30, 2003, December 31, 2002 and June 30, 2002,
$1,854,461, $1,799,220 and $4,943,491, respectively, were
eliminated from both bond investments and deposits on our
Consolidated Statements of Financial Condition, which amounts
represented cash on deposit at our bank from various subsidiaries
of our company. We also have eliminated in consolidation
$1,900,000 outstanding as of June 30, 2003 under a line of credit
from Unified Banking Company to Commonwealth Premium Finance
Corporation.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Quarterly Report on Form 10-Q are
or may constitute forward-looking statements (as such term is defined in the
Private Securities Litigation Reform Act of 1995). Such forward-looking
statements are based on current expectations, estimates and projections about
Unified Financial Services' industries, management's beliefs and assumptions
made by management. For example, a downturn in economic conditions generally and
in particular those affecting bond and securities markets could lead to an exit
of investors from mutual funds. Similarly, an increase in Federal and state
regulations of the mutual fund, securities or banking industries or the
imposition of regulatory penalties could have an effect on our operating
results. In addition, by accepting deposits at fixed rates, at different times
and for different terms, and lending funds at fixed rates for fixed periods, a
bank accepts the risk that the cost of funds may rise and interest on loans and
investment securities may be at a fixed rate. Similarly, the cost of funds may
fall, but a bank may have committed by virtue of the term of a deposit to pay
what becomes an above-market rate. Investments may decline in value in a rising
interest rate environment. Loans have the risk that the borrower will not repay
all funds due in a timely manner as well as the risk of total loss. Collateral
may or may not have the value attributed to it. Although we believe our
allowance for loan losses and our allowance for doubtful accounts are adequate,
they may prove inadequate if one or more large borrowers or clients, or numerous
smaller borrowers or clients, or a combination of both, experience financial
difficulty for individual, national or international reasons. Because the
financial services industry is highly regulated, decisions of governmental
authorities can have a major effect on operating results. These uncertainties,
as well as others, are present in the financial services industry and we caution
stockholders that management's view of the future on which we price and
distribute our products and estimate costs of operations and regulations may
prove to be other than as anticipated. In addition, our current expectations
with respect to our three business lines, our ability to enhance stockholder
value and aggressively and profitably grow assets under management and under
service, our ability to provide a high level of service satisfaction and manage
costs, our ability to expand profit margins, our ability to achieve future
growth and the development of VSX Holdings as an alternative trading system may
prove to be other than expected. Words such as "anticipates," "expects,"
"intends," "plans," "believes," "seeks," "estimates," variations of such words
and similar expressions are intended to identify such forward-looking
statements. These statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict; therefore, actual results and outcomes may differ materially from what
is expressed or forecasted in any such forward-looking statements. Such risks
and uncertainties include those listed under "Risk Factors" in our Annual Report
on Form 10-K for the year ended December 31, 2002. Unless required by law, we
undertake no obligation to update publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
GENERAL
Unified Financial Services, Inc., a Delaware holding company that was
organized on December 7, 1989, provides financial products and services,
principally through three principal businesses:
o The provision of complete back-office and shareholder services for the
assets of third-party mutual fund families, as well as our affiliated
series funds;
o Management and administration of 401(k) and other ERISA-directed
assets; and
o Management of wealth for individuals through a suite of family-office
services.
-16-
Our fundamental objective is to enhance stockholder value by
aggressively and profitably growing assets under management and under service.
Our ability to provide a high level of service satisfaction, with an emphasis on
managing costs, combined with a dedication to maintaining a highly trained and
motivated workforce should lead to expanding profit margins.
Our principal executive offices are located at 2424 Harrodsburg Road,
Lexington, Kentucky 40503, telephone number (859) 296-2016. We and our
subsidiaries also maintain offices at 431 North Pennsylvania Street,
Indianapolis, Indiana, telephone number (317) 917-7001; 2353 Alexandria Drive,
Lexington, Kentucky 40504, telephone number (859) 296-4407; 1400 Civic Place,
Southlake, Texas 76092, telephone number (817) 431-2197; 36 West 44th Street,
The Bar Association Building, Suite 1310, New York, New York 10036, telephone
number (212) 852-8852; and One US Bank Plaza, Suite 2100, St. Louis, Missouri
63101, telephone number (314) 552-6440.
The following presents management's discussion and analysis of our
consolidated financial condition and results of operations as of the dates and
for the periods indicated. This discussion should be read in conjunction with
the other information set forth in this Quarterly Report on Form 10-Q, including
our consolidated financial statements and the accompanying notes thereto.
COMPARISON OF RESULTS FOR THE SIX MONTHS ENDED JUNE 30, 2003 AND 2002
Revenue for the six months ended June 30, 2003 compared to the same
period of 2002 declined $719,120, or 9.3%, from $7,755,145 to $7,036,025. For
such periods, gross profit increased by $13,458, or 0.2%, from $5,949,404 to
$5,962,862.
For the first six months of 2003 compared to the same period of 2002,
trust and retirement services revenue and gross profit declined by $181,199, or
6.8%, and $117,001, or 5.4%, respectively, primarily due to a decline in the
average level of assets under management. For the six months ended June 30,
2003, our trust and retirement services operation experienced an increase in
assets under management, but such increase occurred in the later part of such
six-month period, which resulted in a decline in average assets during such
period. During the six months ended June 30, 2003, our trust and retirement
services operation added 54 new accounts, representing approximately $69.7
million in assets under management, but also lost 28 accounts representing
approximately $18.2 million in assets under management. As of June 30, 2003, our
trust and retirement services operation had approximately $582.0 million in
assets under management compared to $525.1 million as of June 30, 2002, an
increase of approximately 10.8%. While trust and retirement services assets
under management increased, the financial markets, in general, declined, as
was reflected by a 1.5% decline in the S&P 500 from June 30, 2002 to June 30,
2003.
For such periods, mutual fund administration services revenue, which
now includes Unified Financial Securities, our broker-dealer subsidiary,
declined $546,893, or 13.7%, and gross profit increased $106,449, or 3.8%, each
primarily due to the inclusion of Unified Financial Securities in the results of
our mutual fund administration services operation. As previously disclosed,
management made the decision to exit the retail and discount brokerage business
and focus the efforts of our brokerage subsidiary on the distribution of mutual
funds. For such periods, transfer agency revenue and gross profit increased
$437,562, or 46.3%, and $477,192, or 61.0%, respectively, due to the addition of
the Huntington Funds in June 2002, which added approximately $3.0 billion in
assets for the entire period of 2003. Fund accounting revenue and gross profit
decreased $43,389, or 5.4%, and $66,606, or 9.5%, respectively. Administration
revenue and gross profit decreased $114,214, or 15.7%, as more fund clients
discontinued operations due to continuing poor market conditions. Trail income
declined by $122,800, due to a decrease in basis points received from
one of our mutual fund providers. Investment management fee income and gross
-17-
profit declined $173,525 due to Unified Investment Advisers, Inc. ceasing to
serve as the investment advisor to the Liquid Green Money Market Fund. As of
June 30, 2003, we provided mutual fund administrative services to 29 mutual fund
families consisting of approximately 168 portfolios and approximately $11.5
billion in assets under service, compared to 30 mutual fund families consisting
of approximately 192 portfolios and approximately $8.9 billion in mutual fund
assets under service as of June 30, 2002. For the six months ended June 30, 2003
compared to the same period of 2002, Unified Financial Securities' gross revenue
declined $533,014, or 56.8%, and gross profit declined $9,995, or 4.7%. The
decline in revenue primarily was attributable to a decline of $337,548 in
clearing revenue due to our termination of most of our clearing relationships,
with the remainder anticipated to occur during the third quarter of 2003.
Commission revenue from our full service and CPA business, which ceased at June
30, 2003, decreased $44,858. Trail commission revenue declined $108,101, or
40.5%, as a result of lower asset levels attributable to the terminated
relationships discussed above and a reduction in the basis points received from
one of our mutual fund relationships.
For the six months ended June 30, 2003 compared to the same period of
2002, investment advisory revenue and gross profit declined $95,425, or 11.9%,
and $80,387, or 11.9%, respectively. Such declines primarily were due to the
lower market values of assets under management at such operation. Assets under
management at our investment advisory operation declined $54.4 million, or
18.9%, from $287.8 million at June 30, 2002 to $233.4 million at June 30, 2003.
Of such decline, approximately $37.9 million, or 13.2%, was attributable to the
transfer of assets in the Liquid Green Money Market Fund to the Huntington
Funds.
For such periods, corporate revenue and gross profit increased
$104,397, or 35.8%, from $291,249 to $395,646, primarily due to a $80,432, or
27.8%, increase in revenues at our premium finance company. Revenues at such
company increased primarily as the result of an increased volume of loans
outstanding and an increased interest spread due to a reduction in the cost of
borrowed funds.
Total expenses declined $125,809, or 2.0%, for the six months ended
June 30, 2003 compared to the same period of 2002. Employee compensation expense
declined by $494,645, or 12.7%. This decline primarily was attributable to
salary reductions taken by certain officers of our company during March and
April of 2002, which reductions ranged from 20% to 40% of such officers'
annualized salary, and a reduced employee workforce. Employee insurance and
benefits expense declined $62,392, or 9.6%, primarily due to reduced staffing,
partially offset by an increase in insurance premiums. Data processing expense
increased $117,723, or 41.1%, primarily due to a $104,000 increase at our trust
and retirement services operation due to its expanded usage of vendor products.
Telephone costs declined $39,398, or 30.9%, primarily due to the elimination of
our wide area network. Equipment rental and maintenance expense declined by
$25,217, or 11.9%. During the first half of 2002, our mutual fund administration
services operation and our trust and retirement services operation upgraded
various software products, without any corresponding expenses for the first half
of 2003. Also contributing to the decline was the termination of a clearing
relationship. For such periods, depreciation and amortization expense increased
$38,194, or 26.4%. The depreciation and amortization expense recorded for the
first half of 2003 is typical of our normal, recurring expense. The expense
recorded for the first half of 2002 included a reversal of an accrual made
during a previous year, which resulted in a reduction of amortization and
depreciation expense for the first half of 2002 compared to the same period of
2003. Insurance expense increased $93,068, or 91.3%, primarily due to our
purchase of expanded insurance coverage and due to increased insurance premiums
charged for coverage due to a hardening of the insurance markets. For such
-18-
periods, errors expense increased $61,779 to a credit of $75,466 for the first
half of 2003 from a credit of $137,245 for the same period of 2002, primarily
due to a $140,000 net recovery during 2002 from an insurance carrier with
respect to a previously recorded loss at our mutual fund administration services
operation versus a $100,000 recovery in 2003. Our provision for bad debt
increased $81,978, or 261.0%, due to management's assessment of the
collectibility of certain receivables at our mutual fund administration services
operation. For such periods, other operating expenses increased $124,685, or
82.7%, primarily due to a $163,834 net decrease in the benefit received from VSX
Holdings during the first half of 2003 compared to the same period of 2002.
Removing the effect of the VSX Holdings expense reimbursement, we experienced a
$39,149 decline in other operating expenses.
For the six months ended June 30, 2003, we recorded income of $175,000
from the escrow established for possible indemnification claims of Arthur J.
Gallagher & Co. pursuant to the sale agreement dated December 17, 2001. Expenses
related to the pending sale of Unified Banking Company were deducted from such
amount. For the six months ended June 30, 2003, we recorded a $93,534 gain on
sale of operations, net of income taxes, compared to $0 for the same period of
the prior year.
Income from discontinued operations for the first six months of 2003
was $62,301 compared to a loss of $512,101 for the same period of 2002. Income
for the six months ended June 30, 2003 at Unified Banking Company was $63,101
compared to a loss of $525,466 for the same period of 2002. During June 2002,
Unified Banking Company charged-off a $455,000 loan, which charge-off accounted
for most of the 2002 loss.
Net income increased $878,149 from a loss of $870,963 for the six
months ended June 30, 2002 to a profit of $7,186 for the same period of 2003.
Income from discontinued operations improved $574,402 with Unified Banking
Company accounting for $588,567 of the improvement (as previously discussed,
$455,000 of the $588,567 was related to one loan that was written off in 2002).
In addition, we recorded a net gain on the sale of operations of $93,534 without
a corresponding charge in the prior year. The loss from continuing operations
reflected an improvement of $139,267 from a loss of $337,837 in 2002 to a loss
of $198,570 for the six months ended June 30, 2003. Expenses declined $125,809
and gross profit increased $13,458. Also contributing to the improve was an
unrealized gain on securities of $5,991 for the six months ended June 30, 2003
compared to a loss of $24,202 for the same period of 2002, and continuing
operations received an income tax benefit of $43,930 during 2003 compared to a
$3,177 tax benefit recorded during 2002.
COMPARISON OF RESULTS FOR THE THREE MONTHS ENDED JUNE 30, 2003 AND 2002
Revenue for the quarter ended June 30, 2003 compared to the same
quarter of 2002 declined $482,967, or 12.4%, from $3,882,241 to $3,399,274. For
such quarters, gross profit increased by $19,140, or 0.7%.
For the quarter ended June 30, 2003 compared to the same quarter of
2002, trust and retirement services revenue declined $107,211, or 8.0%, and
gross profit declined $47,361, or 4.4%, primarily for the reasons previously
discussed.
For such quarters, mutual fund administration services revenue declined
$361,414, or 18.0%, and gross profit increased $62,727, or 4.6%, primarily due
to the inclusion of the results of Unified Financial Securities in mutual fund
administration services operation. Unified Fund Services' gross revenue for the
quarter ended June 30, 2003 declined $62,353, or 4.0%, and gross profit
increased $42,424, or 3.3%. For such quarters, transfer agency revenue and gross
profit increased $181,738, or 35.5%, and $221,852, or 54.8%, respectively, due
to the addition of the Huntington Funds in June 2002. Fund accounting revenue
and gross profit declined $42,176, and $42,330,
-19-
respectively. Administration revenue and gross profit declined $62,015, or
16.7%. Investment management income and gross profit declined $85,710, due to
Unified Investment Advisers ceasing to serve as the advisor to the Liquid Green
Money Market Fund. For the second quarter of 2003 gross revenue attributable to
our brokerage subsidiary declined $299,061, or 54.1%, and gross profit
increased $20,303, or 32.4%. The decline in revenue was, in large part,
attributable to a decline of $216,241 in clearing revenue due to our termination
of most of our clearing relationships. For such quarters, trail commission
revenue decreased $39,396 and gross profit increased $33,308. Commission revenue
from our full service and CPA business, which ceased at June 30, 2003, decreased
$32,818.
For the quarter ended June 30, 2003 compared to the same quarter of
2002, investment advisory revenue and gross profit declined $50,621, or 13.1%,
and $32,505, or 10.1%, respectively. Such declines primarily were due to the
lower market values of assets under management at such operation.
For such quarters, corporate revenue and gross profit increased
$36,279, or 23.5%, primarily due to a $37,808, or 24.7%, increase in revenues at
our premium finance company. Revenues increased primarily as the result of an
increased volume of loans outstanding and an increased interest spread due to a
reduction in the cost of borrowed funds.
Total expenses declined $197,191, or 6.0%, for the quarter ended June
30, 2003 compared to the same quarter of 2002. Employee compensation expense
declined by $172,375, or 9.1%. This decline primarily was attributable to a
reduced employee workforce. Data processing expense increased $57,615, or 36.7%,
primarily due to a $61,000 increase at our trust and retirement services
operation due to its expanded usage of vendor products. Telephone costs declined
$17,680, or 28.7%, primarily due to the elimination of our wide area network.
Equipment rental and maintenance expense for our mutual fund administrative
services operation increased by $21,319, or 25.9%, primarily due to an increase
in phone service maintenance in the second quarter and a maintenance agreement
on an imaging scanner. Also contributing to the increase was a $15,500 accrual
in June 2003 for a new cash management system for our mutual fund administrative
services operation. For such quarters, professional fees declined $52,097, or
21.2%, primarily due to a $30,000 reimbursement received from a third party with
respect to legal fees previously paid by our brokerage subsidiary. Travel and
entertainment costs decreased $58,381, or 75.8%, primarily due to the reversal
of a $35,720 accrual taken in the first quarter of 2002. Also contributing was
less travel at the corporate and mutual fund administration services segments.
Insurance expense increased $23,957, or 41.9%, primarily due to our purchase of
expanded insurance coverage and due to increased insurance premiums charged for
coverage due to a hardening of the insurance markets. For such quarters, errors
expense decreased $132,591, to a credit of $100,823 for the second quarter of
2003 from an expense of $31,768 for the same period of 2002, primarily due to a
$100,000 recovery in 2003. Our provision for bad debt increased $64,847 due to
management's assessment of the collectibility of certain receivables at our
mutual fund administrative services operation. For such quarters, other
operating expenses increased $69,192, or 74.8%, primarily due to a $70,118 net
decrease in the benefit received from VSX Holdings during the second quarter of
2003 compared to the same period of 2002.
Income from discontinued operations for the second quarter of 2003
increased $467,094 compared to the same quarter of 2002. For the quarter ended
June 30, 2003, Unified Banking Company recorded income of $37,406 compared to a
loss of $427,027 for the same quarter 2002. As previously discussed, the
increase from 2002 to 2003 primarily was attributable to the $455,000 loan that
Unified Banking Company charged-off in June 2002.
For such quarters, our net loss declined $861,450, from a loss of
$863,915 in the second quarter of 2002 to a loss of $2,465 for the same quarter
of 2003, primarily due to income from discontinued operations of $36,905 in 2003
compared to a loss from discontinued operations of $430,189 in 2002, and the
$93,534 income recorded (net of income taxes) during 2003, which principally was
-20-
related to the gain on sale of operations. Also, contributing to the improvement
was a decrease in the net loss from continuing operations of $300,822, primarily
due to a reduction in expenses of $197,191.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
GENERAL. Management's Discussion and Analysis of Financial Condition
and Results of Operations is based on the consolidated financial statements and
accompanying notes that have been prepared in accordance with accounting
principles generally accepted in the United States ("GAAP"). Our significant
accounting policies are described in note 2 to the consolidated financial
statements contained in this report and in note 2 to the audited, consolidated
financial statements contained in our Annual Report on Form 10-K for the year
ended December 31, 2002. The preparation of financial statements in accordance
with GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and disclosure
of contingent assets and liabilities. Actual results could differ from those
estimates. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carry values of assets and liabilities that are not readily apparent from
other sources. Certain policies inherently have a greater reliance on the use of
estimates, assumptions and judgments and as such, have a greater possibility of
producing results that could be materially different than originally reported.
However, we are not currently aware of any reasonable likely events or
circumstances that would result in materially different results. Senior
management has discussed the development, selection and disclosure of these
policies and estimates with our company's independent auditor and the members of
the audit, nominating and compensation committee of our board of directors.
Management believes the following critical accounting policies reflect its more
significant estimates and assumptions used in the preparation of the
consolidated financial statements. This discussion should be read in conjunction
with the audited, consolidated financial statements and the related notes
contained in our Annual Report on Form 10-K for the year ended December 31,
2002.
VALUATION OF LONG-LIVED ASSETS, INCLUDING GOODWILL. We review
intangible assets and our operating assets, including goodwill, for impairment
when events or changes in circumstances indicate the carrying value of an asset
may not be recoverable. Our asset impairment review assesses the fair value of
assets based on the future cash flows the assets are expected to generate. An
impairment loss is recognized when estimated discounted future cash flows
expected to result from the use of the asset plus net proceeds expected from
disposition of the asset (if any) are less than the carrying value of the asset.
This approach uses our estimates of future market growth, forecasted revenue and
costs, expected periods the assets will be utilized and the appropriate discount
methods. Such evaluations of impairment of long-lived assets, including
goodwill, are an integral part of, but not limited to, our strategic reviews of
our business and operations performed in conjunction with restructuring actions.
When an impairment is identified, the carrying value of the asset is reduced to
its estimated fair value. Deterioration of our business in a geographic region
or within a business segment in the future could also lead to impairment
adjustments as such issues are identified.
Critical estimates in valuing goodwill include, but are not limited to,
those discussed above. Management's estimates of fair value are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates.
Effective January 1, 2002, we adopted Financial Accounting Standard No. 142,
"Goodwill and Other Intangible Assets," at which time goodwill amortization
ceased. Goodwill was tested for impairment by comparing implied value to its
-21-
carry value. Based upon a third-party valuation as of December 31, 2002, we have
determined that our recorded goodwill was not impaired during the quarter ended
June 30, 2003. Impairment adjustments after adoption of the accounting rule, if
any, are required to be recognized as operating expense when determined.
ACCRUED LIABILITY FOR OPERATIONAL ISSUES. During 2002, we experienced
operational issues at our mutual fund administration services affiliate,
primarily relating to reconciliation issues. In connection therewith, we
established an $854,000 reserve, $454,000 of which is related to possible
reconciliation losses, which may or may not be recoverable, and $400,000 of
which is related to estimated costs for professional fees, related travel and
administration expenses to ascertain the nature and extent of such losses and to
redesign control procedures and make other system enhancements to ensure that
such reconciliation issues do not recur. Management's estimates are based upon
assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable and, as a result, actual results may differ from estimates. During
the six and three months ended June 30, 2003, we expended $251,179 and $206,618,
respectively, of the $400,000 reserve.
Management is acutely aware of opportunities for enhanced controls at
our mutual fund services administration operation. In fact, three initiatives
are underway that should have a dramatic positive impact on quality. They are
introduction of new systems, more front-end editing and personnel reorganization
at such operation that will allow for additional management oversight in all
operating areas.
REVENUE RECOGNITION. Our trust and retirement services operation's
revenue reflects a revenue sharing arrangement, as well as investment adviser
fees earned by third party advisers, which are recorded on the accrual basis.
The fees earned by the operation and paid to sub-advisers are based on
established fee schedules and contracts. Generally, fees paid to our trust and
retirement services operation by the various mutual funds in which client assets
are invested are used to offset the fees due from the client. In the event such
fees do not cover all fees due to our operation, the remainder is collected from
the client. In the event such fees exceed the fees due, a credit is given to the
client. Revenue is recorded as it is earned each month based upon assets under
management times a stated fee schedule. Historically, we have experienced very
low levels of deviation from recorded estimates, and we assume the estimates are
reasonable.
INVESTMENT SECURITIES AVAILABLE-FOR-SALE AT UNIFIED BANKING COMPANY.
Securities expected to be held for an indefinite period of time are classified
as available-for-sale and carried at fair value. Unrealized gains and losses are
reported as a separate component of stockholders' equity, net of estimated
income taxes. Substantially all of our securities have readily determinable
market prices that are derived from third party pricing services. Decisions to
purchase or sell these securities are based on economic conditions, including
changes in interest rates, liquidity and asset/liability management strategies.
At June 30, 2003, we reported accumulative other comprehensive income of
$387,475. The net change during the six months ended June 30, 2003 from December
31, 2002 was a decline of $184,170.
ALLOWANCES FOR DOUBTFUL ACCOUNTS AND LOAN LOSSES. We evaluate the
collectibility of our trade and financing receivables based on a combination of
factors. We regularly analyze our customer accounts and, in the event we become
aware of a specific customer's inability to meet its financial obligations to us
(such as in the case of bankruptcy filings or deterioration in the client's
financial position or operating results), we record a reserve for bad debt or
loan loss to reduce the related receivable to an amount we reasonably believe is
collectible. We also record reserves for loan losses for clients based on
requirements of the Office of Trust Supervision, which requires an allowance
based upon a specific percentage of loans outstanding. If circumstances related
to specific customers change, our estimates of the recoverability of receivables
could be further adjusted.
-22-
TAXES ON EARNINGS. Our effective tax rate is low because of our federal
income tax net operating loss carryforwards. We record the tax benefit of the
net operating loss when realized.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY. Our primary sources of liquidity historically have been and
continue to be cash flow from operating activities, as well as cash generated
through our private placements in 1998 and 1999. We also received $800,000 and
$8.4 million in cash for the six months ended June 30, 2003 and the year ended
December 31, 2001, respectively, in connection with the sale of the assets of
our insurance subsidiaries in 2001.
The net increase in cash and cash equivalents at June 30, 2003 from
December 31, 2002 was $1,033,268. Of the inflow, we received $800,000 in cash
from the note receivable recorded in connection with the sale of the assets of
our insurance subsidiaries in 2001. Operating assets such as loans to customers,
premium financing loans, trade receivables, due from banks, federal funds sold
and bond investments accounted for $2,363,343 in sources of cash, and operating
liabilities such as accounts payable and other liabilities accounted for
$2,219,309 in uses of cash. Cash provided from operating activities, including
depreciation and amortization, provisions for loan loss and bad debt, generated
cash in the amount of $428,365. Additionally, retirement of common stock
resulted in a usage of cash of $301,084, as did capital expenditures of $38,047.
We also received $55,621 from VSX Holdings, LLC during the six-month period
ended June 30, 2003 in connection with services we provided relating to the
construction and development of the VSX marketplace and its corresponding
products.
Short-term liquidity needs arise from continuous fluctuations in the
flow of funds on both sides of the balance sheet resulting from growth and
seasonal and cyclical customer demands. The securities portfolio provides stable
long-term earnings as well as serving as a primary source of liquidity. The
designation of securities as available-for-sale or held-to-maturity does not
impact the portfolio as a source of liquidity due to the ability to enter into
repurchase agreements using those securities. We anticipate continued loan
demand in our market area. We have utilized, and expect to continue to utilize,
Federal Home Loan Bank borrowings to fund a portion of future loan growth. We
continue to emphasize growth in stable core deposits while utilizing the Federal
Home Loan Bank and Federal funds purchased as necessary to balance liquidity and
cost effectiveness. We closely monitor our level of liquidity to meet expected
future needs.
In February 2002, Unified Banking Company borrowed approximately $5.0
million in ten- to 15-year fixed rate amortizing advances from the Federal Home
Loan Bank, which proceeds were invested in 15- to 20-year FNMA mortgage backed
securities. The interest spread between these assets and liabilities is
approximately 1.25%.
CAPITAL RESOURCES. Total stockholders' equity was $15,016,754 at June
30, 2003 compared to $15,494,821 at December 31, 2002. The decline in total
equity was due to the retirement of common stock and our comprehensive loss,
partially offset by our net income. We had no material commitments for capital
expenditures as of June 30, 2003.
-23-
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The business activities of our company expose it to a variety of risks.
Management of these risks is necessary for the long-term profitability of our
company. We manage these risks through the establishment of numerous policies,
procedures and controls. The most significant risks that affect us are market
risk and credit risk. We also are subject to regulatory risk.
Market risk is the risk of loss to us resulting from changes in
interest rates, equity prices or both. We are exposed to market risk since we,
through our subsidiaries, maintain positions in fixed-income and equity
securities. We primarily manage our risk through the establishment of trading
policies and guidelines and through the implementation of control and review
procedures.
Our asset/liability strategy is to minimize the sensitivity of earnings
to changes in interest rates while maintaining an acceptable net interest
margin. Unified Banking Company's asset/liability committee monitors the
interest rate sensitivity of the bank's balance sheet on a quarterly basis. The
committee reviews asset and liability repricing in the context of current and
future interest rate scenarios affecting the economic climate in our market
areas.
Our pricing policy is that all earning assets and interest bearing
liabilities be either based on floating rates or have a fixed rate not exceeding
five years. Real estate mortgage loans held by us, while having long final
maturities, are comprised of one-, two- or three-year adjustable rate loans. The
adjustable basis of these loans significantly reduces interest rate risk.
-24-
The following table illustrates Unified Banking Company's estimated
static gap with prepayments calculated as of June 30, 2003:
TIME TO MATURITY OR REPRICING
0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 51 >51
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE ASSETS
Federal Funds sold......... $ 5,977 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ 5,977
Securities.................
U.S. agencies............ - 629 596 556 1,444 1,145 900 5,143 270 824 11,507
FHLB stock............... 519 - - - - - - - - - 519
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total securities....... 519 629 596 556 1,444 1,145 900 5,143 270 824 12,206
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Loans
Commercial
Fixed.................. - 86 56 67 221 173 183 3,157 164 41 4,148
Variable............... 14,532 - - - - - - - - - 14,532
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total commercial..... 14,532 86 56 67 221 173 183 3,157 164 41 18,680
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Real Estate
Commercial
Fixed................ - 418 41 42 1,131 578 363 4,977 - - 7,550
Variable............. 3,063 - - - - - - - - - 3,063
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total commercial... 3,063 418 41 42 1,131 578 363 4,977 - - 10,613
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Residential
Fixed................ - 510 99 98 287 727 383 4,684 495 217 7,500
Variable............. 3,976 - - - - - - - - - 3,976
Other................ - 6 6 6 478 18 18 682 11 30 1,255
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total residential.. 3,976 516 105 104 765 745 401 5,366 506 247 12,731
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total real estate 7,039 934 146 146 1,896 1,323 764 10,343 506 247 23,344
------- ------ ----- ------ ------- ------- -------- -------- ------- ------- --------
Construction
Fixed.................. - 1 1 1 3 3 97 38 7 178 328
Variable............... 2,199 - - - - - - - - - 2,199
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total construction... 2,199 1 1 1 3 3 97 38 7 178 2,527
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Personal
Home equity loans...... 9,098 - - - - - - - - - 9,098
Installment loans...... - 876 337 303 296 148 519 1,009 19 9 3,517
Cash reserve loan...... 2 - - - - - - - - - 2
Personal open end
letters of credit.... 1,148 - - - - - - - - - 1,148
Loans secured by
deposits............. - 10 - - 1 14 2 4 - - 33
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total personal....... 10,248 886 338 304 297 162 521 1,103 19 9 13,798
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
Total loans................ 34,018 1,907 540 517 2,417 1,661 1,565 14,551 696 475 58,349
-------- ------- ------ ----- ------ ------- ------- -------- ------ ------- --------
TOTAL RATE
SENSITIVE ASSETS....... $ 40,514 $ 2,535 $1,137 $1,073 $3,861 $ 2,807 $ 2,465 $ 19,694 $ 966 $ 1,299 $ 76,352
======== ======= ====== ====== ====== ======= ======= ======== ====== ======= ========
-25-
TIME TO MATURITY OR REPRICING
0 TO 1 1 TO 2 2 TO 3 3 TO 6 6 TO 9 9 TO 12 12 TO 48 48 TO 51 >51
(DOLLARS IN THOUSANDS) IMMEDIATE MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS MONTHS TOTALS
--------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
RATE SENSITIVE LIABILITIES
Interest bearing deposits
NOW accounts............. $ 3,830 $ - $ - $ - $ - $ - $ - $ - $ - $ - $3,830
Money market accounts
Market rate accounts... 4,131 - - - - - - - - - 4,131
Business market rate
accounts............. 350 - - - - - - - - - 350
Special personal
MMDA................. 1,069 - - - - - - - - - 1,069
Special business
MMDA................. 4,643 - - - - - - - - - 4,643
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total money market
accounts........... 10,193 - - - - - - - - - 10,193
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Savings accounts......... 92 - - - - - - - - - 92
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Time deposits
CD's > 100K............ - 1,302 502 404 2,421 2,853 3,755 5,561 - 115 16,915
CD's < 100K............ - 1,049 735 564 3,397 5,106 3,030 10,456 52 105 24,493
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total time deposits.. - 2,351 1,237 968 5,818 7,959 6,785 16,017 52 220 41,408
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Individual retirement
accounts............. - - 132 68 96 281 271 5,015 4 58 5,925
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total interest
bearing deposits... 14,115 2,351 1,369 1,036 5,914 8,240 7,056 21,032 56 278 61,448
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Borrowed funds
Repurchase agreements.. - 9 - - - - - - - - 9
FHLB borrowings........ - 27 25 25 75 594 66 1,667 90 1,294 3,863
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
Total borrowed funds. - 36 25 25 75 594 66 1,667 90 1,294 3,872
-------- -------- ------- -------- -------- -------- -------- ------- ------- -------- --------
TOTAL RATE
SENSITIVE LIABILITIES.. $ 14,115 $ 2,387 $ 1,394 $ 1,062 $ 5,989 $ 8,834 $ 7,123 $22,699 $ 145 $ 1,573 $ 65,320
======== ======== ======= ======== ======== ======== ======== ======= ======= ======== ========
INCREMENTAL GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $ 40,514 $ 2,535 $ 1,137 $ 1,073 $ 3,861 $ 2,807 $ 2,465 $19,694 $ 966 $ 1,299
Total rate sensitive
liabilities.............. 14,115 2,387 1,394 1,062 5,989 8,834 7,123 22,699 145 1,573
Gap........................ 26,399 148 (257) 11 (2,128) (6,027) (4,658) (3,005) 821 (274)
RSA/RSL.................... 2.87x 1.06x 0.82x 1.01x 0.64x 0.32x 0.35x 0.87x 6.66x 0.83x
RSA/assets................. 0.51 0.03 0.01 0.01 0.05 0.04 0.03 0.25 0.01 0.02
RSL/assets................. 0.18 0.03 0.02 0.01 0.08 0.11 0.09 0.29 0.00 0.02
Gap/assets................. 33.37% 0.19% -0.32% 0.01% -2.69% -7.62% -5.89% -3.80% 1.04% -0.35%
Gap/RSA.................... 65.16 5.84 -22.60 1.03 -55.12 -214.71 -188.97 -15.26 84.99 -21.09
CUMULATIVE GAP REPORT
SUMMARY INFORMATION
Total rate sensitive assets $ 40,514 $ 43,049 $44,186 $45,259 $ 49,120 $ 51,927 $ 54,392 $74,086 $ 75,052 $ 76,351
Total rate sensitive
liabilities............. 14,115 16,502 17,896 18,958 24,947 33,781 40,904 63,603 63,748 65,321
Gap........................ 26,399 26,547 26,290 26,301 24,173 18,146 13,488 10,483 11,304 11,030
RSA/RSL.................... 2.87x 2.61x 2.47x 2.39x 1.97x 1.54x 1.33x 1.16x 1.18x 1.17x
RSA/assets................. 0.51 0.54 0.56 0.57 0.62 0.66 0.69 0.94 0.95 0.97
RSL/assets................. 0.18 0.21 0.23 0.24 0.32 0.43 0.52 0.80 0.81 0.83
Gap/assets................. 33.37% 33.55% 33.23% 33.24% 30.55% 22.94% 17.05% 13.25% 14.29% 13.94%
Gap/RSA.................... 65.16 61.67 59.50 58.11 49.21 34.95 24.80 14.15 15.06 14.45
We measure the impact of interest rate changes on our income statement
through the use of gap analysis. The gap represents the net position of assets
and liabilities subject to repricing in specified time periods. During any given
time period, if the amount of rate-sensitive liabilities exceeds the amount of
rate-sensitive assets, a company would generally be considered negatively gapped
and would benefit from falling rates over that period of time. Conversely, a
positively gapped company would generally benefit from rising rates.
-26-
Interest rate changes do not affect all categories of assets and
liabilities equally or simultaneously. There are other factors that are
difficult to measure and predict that would influence the effect of interest
rate fluctuations on our income statement. For example, a rapid drop in interest
rates might cause our borrowers to repay their loans at a more rapid pace and
certain mortgage-related investments to be prepaid more quickly than projected.
This could mitigate some of the benefits of falling rates as are expected when
negatively gapped. Conversely, a rapid rise in rates could give us an
opportunity to increase our margins and stifle the rate of repayment on our
mortgage-related loans, which would increase our returns.
The following table shows the "rate shock" results of a simulation
model that attempts to measure the effect of rising and falling interest rates
over a two-year horizon in a rapidly changing rate environment.
PERCENTAGE CHANGE IN
BASIS POINT --------------------------------------------------------------
CHANGE IN NET INTEREST INCOME MARKET VALUE OF PORTFOLIO EQUITY
INTEREST RATES PROJECTED CHANGE PROJECTED CHANGE
-------------- --------------------------------------------------------------
-200 -14.96 -10.28
-100 -7.43 -6.55
0 0.00 0.00
100 7.18 3.36
200 14.36 4.23
We use a sensitivity model that simulated these interest rate changes
on our earning assets and interest-bearing liabilities. This process allows us
to explore the complex relationships among the financial instruments in various
interest rate environments.
The preceding sensitivity analysis is based on numerous assumptions
including: the nature and timing of interest rate levels, including the shape of
the yield curve; prepayments on loans and securities; changes in deposit levels;
pricing decisions on loans and deposits; reinvestment/replacement of asset and
liability cash flows; and others. While assumptions are developed based upon
current economic and local market conditions, we cannot make any assurances as
to the predictive nature of these assumptions including how client preferences
or competitor influences might change.
Interest rate exposure is measured by the potential impact on our
income statement of changes in interest rates. We use information from our gap
analysis and rate shock calculations as input to help manage our exposure to
changing interest rates. We use our rate shock information to tell us how much
exposure we have to rapidly changing rates.
-27-
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of our company's
and our subsidiaries' management, including our company's president and chief
executive officer along with our chief financial officer, of the effectiveness
of the design and operation of our disclosure controls and procedures pursuant
to Exchange Act Rule 13a-14. This evaluation included a review of revised
procedures put in place at our mutual fund services administration operation
following the discovery in the fourth quarter of 2002 of potential
reconciliation losses at such operation. Based upon that evaluation, our
president and chief executive officer along with our chief financial officer
concluded that our disclosure controls and procedures are effective in timely
alerting them to material information relating to our company (including our
consolidated subsidiaries) required to be included in our periodic SEC filings.
There have been no significant changes in our internal controls or in
other factors that could significantly affect internal controls subsequent to
the date we carried out this evaluation.
-28-
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See Exhibit Index attached hereto.
(b) Reports on Form 8-K.
On June 10, 2003, we filed a Current Report on Form 8-K, dated
June 9, 2003, to report under Item 5 our execution of a Stock
Purchase Agreement, dated June 9, 2003, whereby we will sell
our wholly owned banking subsidiary, Unified Banking Company,
to Blue River Bancshares, Inc.
-29-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIFIED FINANCIAL SERVICES, INC.
(Registrant)
Dated: August 4, 2003 By: /s/ John S. Penn
-----------------------------------------
John S. Penn, President and
Chief Executive Officer
Dated: August 4, 2003 By: /s/ Thomas G. Napurano
-----------------------------------------
Thomas G. Napurano, Executive Vice President
and Chief Financial Officer
-30-
CERTIFICATION
I, John S. Penn, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Unified
Financial Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
-31- role in the registrant's internal controls; and
-31-
(6) The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
August 4, 2003 /s/ John S. Penn
--------------------------------------------
John S. Penn
President and Chief Executive Officer
-32-
CERTIFICATION
I, Thomas G. Napurano, certify that:
(1) I have reviewed this quarterly report on Form 10-Q of Unified
Financial Services, Inc.;
(2) Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
(3) Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this
quarterly report;
(4) The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant, including its consolidated subsidiaries,
is made known to us by others within those entities,
particularly during the period for which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the
Evaluation Date;
(5) The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or
operation of internal controls which could adversely
affect the registrant's ability to record, process,
summarize and report financial data and have
identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves
management or other employees who have a significant
role in the registrant's internal controls; and
-33-
(6) The registrant's other certifying officers and I have
indicated in this quarterly report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
August 4, 2003 /s/ Thomas G. Napurano
-----------------------------------------------
Thomas G. Napurano
Chief Financial Officer
-34-
EXHIBIT INDEX
Ex. No. Description
------- -----------
99.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, is filed herewith.
99.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, is filed herewith
-35-