Page 14 of 14 Pages
FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 333-10347
MARKET FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
31-1462464
Ohio (I.R.S. Employer
(State or other jurisdiction of Identification Number)
incorporation of organization)
7522 Hamilton Avenue
Mt. Healthy, OH 45231
(Address of principal executive (Zip Code)
office)
Registrant's telephone number, including area code: (513) 521-9772
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No_____
As of August 12, 1997, the latest practicable date, 1,335,725 common shares of
the registrant, no par value, were issued and outstanding.
Page 1 of 14 Pages
INDEX
MARKET FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition ................ 3
Consolidated Statements of Earnings ........................... 4
Consolidated Statements of Cash Flows ......................... 5
Notes to Consolidated Financial Statements .................... 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations ......................... 10
PART II - OTHER INFORMATION ............................................... 13
SIGNATURES ................................................................ 14
Page 2 of 14 Pages
Market Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
June 30, September 30,
1997 1996
ASSETS (In thousands)
Cash and due from banks ................................................... $ 513 $ 512
Federal funds sold ........................................................ 3,472 2,627
Interest-bearing deposits in other financial institutions ................. 494 943
--------- -----------
Cash and cash equivalents ....................................... 4,479 4,082
Certificates of deposit in other financial institutions ................... 6,990 7,040
Investment securities - at amortized cost, approximate market
value of $15,971 and $9,071 at June 30, 1997, and September 30, 1996
........................................................................... 15,956 9,062
Investment securities designated as available for sale - at market ........ 1,021 712
Mortgage-backed securities - at cost, approximate
market value of $1,349 and $1,612 at June 30, 1997
and September 30, 1996 ................................................. 1,284 1,549
Loans receivable - net .................................................... 25,860 21,996
Office premises and equipment - at depreciated cost ....................... 149 168
Federal Home Loan Bank stock - at cost .................................... 383 364
Accrued interest receivable ............................................... 395 339
Prepaid expenses and other assets ......................................... 61 196
Prepaid federal income taxes .............................................. - 39
------------- -----------
Total assets .................................................... $56,578 $45,547
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits .................................................................. $35,918 $37,282
Advances by borrowers for taxes and insurance ............................. 11 50
Accrued interest payable .................................................. 136 117
Other liabilities ......................................................... 165 273
Deferred federal income taxes ............................................. 527 311
Accrued federal income taxes .............................................. 17 -
----------- ------------
Total liabilities ............................................... 36,774 38,033
Shareholders' equity
Preferred stock - 1,000,000 shares without par value authorized; no
shares issued ......................................................... - -
Common stock - 4,000,000 shares without par value authorized;
1,335,725 shares issued and outstanding at June 30, 1997 .............. - -
Additional paid-in capital ............................................. 12,832 -
Shares acquired by Employee Stock Ownership Plan (ESOP) ................ (1,069) -
Retained earnings - substantially restricted ........................... 7,386 7,063
Unrealized gains on securities designated as available for sale,
net of related tax effects ............................................ 655 451
---------- ----------
Total shareholders' equity ...................................... 19,804 7,514
-------- ---------
Total liabilities and shareholders' equity ...................... $56,578 $45,547
======= =======
Page 3 of 14 Pages
Market Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
Nine months ended June 30, Three months ended June 30,
1997 1996 1997 1996
(In thousands, except per share data)
Interest income
Loans ...................................... $1,477 $1,414 $516 $453
Mortgage-backed securities ................. 96 133 29 46
Investment securities ...................... 429 436 180 166
Interest-bearing deposits and other ........ 563 486 239 168
-------- ------- ----- -----
Total interest income ................... 2,565 2,469 964 833
Interest expense
Deposits ................................... 1,281 1,336 427 433
------- ------- ----- -----
Net interest income ..................... 1,284 1,133 537 400
Provision for losses on loans ................ - 13 - -
---------- -------- ------- -------
Net interest income after provision for
losses on loans ....................... 1,284 1,120 537 400
Other operating income ....................... 4 6 1 2
General, administrative and other expense
Employee compensation and benefits ........ 483 328 192 97
Occupancy and equipment ................... 82 85 30 28
Federal deposit insurance premiums ........ 29 60 6 22
Franchise taxes ........................... 78 70 24 21
Other operating ........................... 127 121 41 34
------- ------- ------ ------
Total general, administrative and
other expense ......................... 799 664 293 202
------- ------- ----- -----
Earnings before income taxes ......... 489 462 245 200
Federal income taxes
Current ................................... 55 123 52 36
Deferred .................................. 111 37 31 31
------- -------- ------ ------
Total federal income taxes .............. 166 160 83 67
------- ------- ------ ------
Net Earnings ......................... $ 323 $ 302 $162 $133
====== ====== ==== ====
Earnings per share ........................... N/A N/A $ .13 N/A
=== === ===== ===
Page 4 of 14 Pages
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended June 30,
1997 1996
(In thousands)
Cash flows from operating activities:
Net earnings for the period ....................................... $ 323 $ 302
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Amortization of premiums and discounts
on investments and mortgage-backed
securities, net .............................................. (34) (35)
Depreciation and amortization ................................... 23 25
Amortization of deferred loan origination
fees ......................................................... (17) (25)
Provision for losses on loans ................................... - 13
Federal Home Loan Bank stock dividends .......................... (19) (18)
Increase (decrease) in cash due to changes in:
Accrued interest receivable ................................... (56) (2)
Accrued interest payable ...................................... 19 3
Prepaid expenses and other assets ............................. 135 (83)
Other liabilities ............................................. (108) (7)
Federal income taxes
Current .................................................... 56 (66)
Deferred ................................................... 111 37
-------- ---------
Net cash provided by operating
activities .................................................. 433 144
Cash flows provided by (used in) investing
activities:
Principal repayments on mortgage-backed
securities ..................................................... 263 426
Proceeds from maturity of investment
securities ..................................................... 3,800 2,900
Loan disbursements ................................................ (5,663) (2,049)
Principal repayments on loans ..................................... 1,816 2,695
Purchase of investment securities designated
as held to maturity ............................................ (10,658) (3,435)
Purchase of office equipment ...................................... (4) (29)
Decrease (increase) in certificates of deposits in other
financial institutions - net ................................... 50 (1)
----------- ----------
Net cash provided by (used in)
investing activities ..................................... (10,396) 507
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits .............................. (1,364) 134
Advances by borrowers for taxes and
insurance ..................................................... (39) (47)
Disbursement of loan to ESOP ..................................... (1,069) -
Net proceeds from issuance of common
shares ........................................................ 12,832 -
-------- -----------
Net cash provided by financing
activities .................................................. 10,360 87
-------- ---------
Net increase in cash and cash
equivalents (balance carried
forward) ................................................. 397 738
---------- --------
Page 5 of 14 Pages
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended June 30,
1997 1996
(In thousands)
Net increase in cash and cash
equivalents (balance brought
forward) ................................................. $ 397 $ 738
Cash and cash equivalents at beginning of
period .......................................................... 4,082 4,013
------- -------
Cash and cash equivalents at end of period .......................... $4,479 $4,751
====== ======
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Federal income taxes .......................................... $ - $ 161
========== =======
Interest on deposits .......................................... $1,262 $1,333
====== ======
Supplemental disclosure of noncash investing
activities:
Unrealized gains on securities designated as
available for sale, net of related tax
effects .................................................... $ 204 $ 78
======= ========
Page 6 of 14 Pages
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARKET FINANCIAL CORPORATION
For the three and nine month periods ended June 30, 1997 and 1996
On April 16, 1996, the Board of Directors of The Market Building and
Saving Company (the "Association") unanimously adopted a Plan of Conversion to
convert the Association from a mutual savings and loan association under Ohio
law to a stock savings and loan association under Ohio law with the concurrent
formation of the newly chartered holding company, Market Financial Corporation
("MFC"). The conversion was accomplished through amendment of the Association's
Articles of Incorporation and Constitution and the sale of MFC's common shares
in an amount equal to the pro forma market value of the Association after giving
effect to the conversion. A subscription offering of the shares of MFC to the
Association's members and to an employee stock benefit plan was conducted.
The conversion was completed on March 27, 1997, and resulted in the
issuance of 1,335,725 common shares of MFC which, after consideration of
offering expenses totaling approximately $525,000 and shares purchased by the
ESOP of approximately $1.1 million, resulted in net proceeds of $11.8 million.
At the time of conversion, the Association established a liquidation
account in an amount equal to its regulatory capital as of September 30, 1996.
The liquidation account will be maintained for the benefit of eligible
depositors who continue to maintain their accounts at the Association after the
conversion. The liquidation account will be reduced annually to the extent
eligible depositors have reduced their qualifying deposits. Subsequent increases
will not restore an eligible account holder's interest in the liquidation
account. In the event of complete liquidation, and only in such event, each
eligible depositor will be entitled to receive a distribution from the
liquidation account in an amount proportionate to the current adjusted
qualifying balances for accounts then held. The Association may not pay
dividends that would reduce shareholders' equity below the required liquidation
account balance.
Under OTS regulations, limitations have been imposed on all "capital
distributions", including cash dividends by savings institutions. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS.
The consolidated financial statements for periods prior to March 27,
1997, contained herein, are those of the Association prior to the completion of
its conversion to stock form.
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB, and, therefore, do not
include information or footnotes necessary for complete presentation of
consolidated financial position, results of operations and cash flows in
conformity with generally accepted accounting principles. Accordingly, these
financial statements should be read in conjunction with the financial statements
and notes thereto of The Market Building and Saving Company for the year ended
September 30, 1996. However, in the opinion of management, all adjustments
(consisting of only normal recurring accruals) which are necessary for fair
presentation of the consolidated financial statements have been included. The
results of operations for the three month and nine month periods ended June 30,
1997 and 1996, are not necessarily indicative of the results which may be
expected for an entire fiscal year.
2. Principles of Consolidation
The accompanying financial statements include the accounts of MFC and
the Association. All significant intercompany items have been eliminated.
Page 7 of 14 Pages
3. Effects of Recent Accounting Pronouncements
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage
Servicing Rights," which requires that the Association recognize as separate
assets rights to service mortgage loans for others, regardless of how those
servicing rights are acquired. An institution that acquires mortgage servicing
rights through either the purchase or origination of mortgage loans and sells
those loans with servicing rights retained would allocate some of the cost of
the loans to the mortgage servicing rights. SFAS No. 122 requires that
securitizations of mortgage loans be accounted for as sales of mortgage loans
and acquisitions of mortgage-backed securities. Additionally, SFAS No. 122
requires that capitalized mortgage servicing rights and capitalized excess
servicing receivables be assessed for impairment. Impairment is measured based
on fair value. SFAS No. 122 was effective for fiscal years beginning after
December 15, 1995 (October 1, 1996, as to the Association), to transactions in
which an entity acquires mortgage servicing rights and to impairment evaluations
of all capitalized mortgage servicing rights and capitalized excess servicing
receivables whenever acquired. Retroactive application is prohibited, and
earlier adoption is encouraged. Management adopted SFAS No. 122 effective
October 1, 1996, as required, without material effect on the Association's
financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based compensation plans. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure the compensation cost of
all stock compensation plans based on the estimated fair value of the award at
the date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that MFC will continue to account for stock-based compensation
pursuant to Accounting Principles Board Opinion No. 25, and therefore, the
disclosure provisions of SFAS No. 123 will have no effect on its consolidated
financial condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
of Financial Assets, Servicing Rights and Extinguishment of Liabilities," that
provides accounting guidance on transfers of financial assets, servicing of
financial assets and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations, makes use of
special purpose entities in the transaction, or otherwise has continuing
involvement with the transferred assets. The new accounting method, the
financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements and transfers of receivables
with recourse.
An institution that undertakes an obligation to service financial
assets recognizes either a servicing asset or liability for the servicing
contract (unless related to a securitization of assets, and all the securitized
assets are retained and classified as held to maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligations for the liability or is legally released from being the primary
obligor. SFAS No. 125 supersedes SFAS No. 122 and is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1997, and is to be applied prospectively. Earlier or retroactive
application is not permitted. Management does not believe that the adoption of
SFAS No. 125 will have a material adverse effect on the Association's financial
position or results of operations.
Page 8 of 14 Pages
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share,"
which requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early application is not permitted. The provisions of SFAS
No. 128 are not applicable to MFC's three month and nine month periods ended
June 30, 1996 and the nine month period ended June 30, 1997, as the conversion
was completed in March 1997. Basic and diluted earnings per share for the three
month period ended June 30, 1997, calculated in accordance with SFAS No. 128
would each be $.13 per share.
4. Pending Legislative Changes
Congress has enacted legislation that would merge the Savings
Association Insurance Fund (the "SAIF") and the Bank Insurance Fund (the "BIF")
on January 1, 1999. The legislation currently provides for the elimination of
the thrift charter or separate thrift regulation under federal law prior to the
merger of the deposit insurance funds. The Association then might be regulated
as a bank under federal law and subject to the more restrictive activity limits
imposed on national banks.
5. Earnings Per Share
Earnings per share is computed based upon the weighted average shares
outstanding during the period, less shares in the ESOP that are unallocated and
not committed to be released. Weighted average common shares deemed outstanding,
which give effect to 106,858 unallocated ESOP shares, totaled 1,228,867 shares
for the three month period ended June 30, 1997. The provisions of Accounting
Principles Board Opinion No. 15 "Earnings Per Share," are not applicable to the
nine and three month periods ended June 30, 1996 and the nine month period ended
June 30, 1997, as the conversion from mutual to stock form was completed in
March 1997.
Page 9 of 14 Pages
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARKET FINANCIAL CORPORATION
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, MFC's operations and actual results could
differ significantly from those discussed in the forward-looking statements.
Some of the factors that could cause or contribute to such differences are
discussed herein but also include changes in the economy and interest rates in
the nation and MFC's market area generally.
Some of the forward-looking statements included herein are the
statements regarding management's determination of the amount of allowance for
losses on loans, the adequacy of collateral on nonperforming loans, legislative
changes with respect to the federal thrift charter and the effect of certain
accounting pronouncements.
Discussion of Financial Condition Changes from September 30, 1996 to June 30,
1997
MFC's assets at June 30, 1997, totaled approximately $56.6 million, an
$11.0 million, or 24.2%, increase over the total at September 30, 1996. The
increase was funded primarily through the proceeds of the issuance of common
shares of MFC in March of 1997.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $28.4 million at June 30, 1997, an increase of
$7.6 million over the total at September 30, 1996. This increase resulted
primarily from the net proceeds from the offering of MFC common shares in March
1997, which was partially offset by the use of liquid assets to fund loan
originations during the nine months ended June 30, 1997. Repayments from
mortgage-backed securities also provided funds for the growth in loans during
the period.
Loans receivable totaled $25.9 million at June 30, 1997, an increase of
$3.9 million, or 17.6%, over September 30, 1996. This increase resulted
primarily from loan originations of $5.7 million, which exceeded principal
repayments of $1.8 million. The Association's allowance for loan losses totaled
$52,000 at both June 30, 1997 and September 30, 1996. The allowance represented
..20% and .24% of total loans at June 30, 1997, and September 30, 1996.
Nonperforming loans totaled $425,000 and $139,000, or 1.64% and .63% of total
loans, at June 30, 1997, and September 30, 1996, respectively. The increase of
$286,000 in nonperforming loans was primarily attributable to a nonresidential
real estate loan with an outstanding balance of $325,000. Such loan was paid in
full in July 1997.
Although management believes that its allowance for loan losses at June
30, 1997, was adequate based upon the available facts and circumstances, there
can be no assurances that additions to such allowance will not be necessary in
future periods, which could adversely affect the Association's results of
operations.
Deposits totaled $35.9 million at June 30, 1997, a decrease of $1.4
million, or 3.7%, from the total at September 30, 1996, primarily as a result of
depositors withdrawing funds to purchase common shares in the conversion. At
June 30, 1997, certificates of deposit that will mature within one year
accounted for 52.1% of the Association's deposit liabilities.
Shareholders' equity increased $12.3 million, or 163.6%, as a result of
net conversion proceeds of $12.8 million, net earnings of $323,000 for the nine
months ended June 30, 1997 and a $204,000 or 45.2% increase in unrealized gain
on securities designated as available for sale, which were partially offset by
the Market Financial Corporation Employee Stock Ownership Plan (the "ESOP")
purchase of MFC common shares totaling $1.1 million.
The Association is required to meet each of three minimum capital
standards promulgated by the Office of Thrift Supervision (the "OTS"),
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. The tangible capital
requirement provides for the maintenance of shareholders' equity less all
intangible assets equal to 1.5% of adjusted total assets. The core capital
Page 10 of 14 Pages
requirement provides for the maintenance of tangible capital plus certain forms
of supervisory goodwill equal to 3% of adjusted total assets, while the
risk-based capital requirement mandates maintenance of core capital plus general
loan loss allowances equal to 8% of risk-weighted assets as defined by OTS
regulations. As of June 30, 1997, the Association's tangible and core capital
totaled $12.7 million, or 22.9%, of adjusted total assets, which exceeded the
minimum requirements of $834,000 and $1.7 million by $11.9 million and $11.0
million, respectively. As of June 30, 1997, the Association's risk-based capital
was $12.8 million, or 68.3% of risk-weighted assets, exceeding the minimum
requirement by $11.3 million.
Comparison of Operating Results for the Three-Month Periods Ended June 30, 1997
and 1996
General. Net earnings totaled $162,000 for the three months ended June
30, 1997, a $29,000, or 21.8%, increase over the $133,000 of net earnings
recorded for the three months ended June 30, 1996. The increase in earnings
resulted primarily from a $137,000 increase in net interest income, which was
partially offset by a $91,000 increase in general, administrative and other
expense and a $16,000 increase in the provision for federal income taxes.
Net Interest Income. Interest income increased by $131,000, or 15.7%,
for the three months ended June 30, 1997, compared to the three months ended
June 30, 1996. The increase resulted primarily from an increase in the weighted
average balance of loans outstanding during the period. Interest expense on
deposits decreased by $6,000, or 1.4%, due primarily to a decrease in the
deposit portfolio, resulting primarily from customers' use of deposits to
purchase common shares in the conversion in March 1997, coupled with a decrease
in the cost of deposits. Net interest income increased by $137,000, or 34.3%,
for the three months ended June 30, 1997, compared to the same quarter in 1996.
Provision for Losses on Loans. A provision for losses on loans is
charged to earnings to bring the total allowance to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Association, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Association's market area, and other factors related to the
collectibility of the Association's loan portfolio. As a result of such
analysis, management decided no additional provision for losses on loans was
necessary during the quarter ended June 30, 1997. There can be no assurance,
however, that the allowance for loan losses of the Association will be adequate
to cover losses on nonperforming assets in the future.
The foregoing statement is a "forward-looking" statement within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Factors that could
affect the adequacy of the loan loss allowance include, but are not limited to,
the following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which may
cause the value of real estate and other properties that secure outstanding
loans to decline; (2) unforeseen adverse changes in circumstances with respect
to uncertain large loan borrowers; (3) decreases in the value of collateral
securing consumer loans to amounts equal to less than the outstanding balances
of the consumer loans; and (4) determinations by various regulatory agencies
that the Association must recognize additions to its loan loss allowance based
on such regulators' judgment of information available to them at the time of
their examinations.
Other Operating Income. Other operating income, primarily service fees
on money orders and travelers' checks, totaled $1,000 and $2,000 for the
three-month periods ended June 30, 1997 and 1996, respectively.
General, Administrative and Other Expense. General, administrative and
other expense increased by $91,000, or 45.0%, for the quarter ended June 30,
1997, compared to the same quarter in 1996. The increase resulted primarily from
a $95,000, or 97.9%, increase in employee compensation and benefits due to
increased staffing, normal merit increases and the expenses related to the stock
benefit plan, which were partially offset by a $16,000, or 72.7%, decrease in
federal deposit insurance premiums due to a decline in premium rates following
the SAIF recapitalization assessment.
Federal Income Tax. The provision for federal income taxes totaled
$83,000 for the three months ended June 30, 1997, compared to $67,000 for the
1996 quarter. The $16,000, or 23.9%, increase resulted from a $45,000, or 22.5%,
increase in earnings before taxes. The effective tax rates were 33.9% and 33.5%
for the three months ended June 30, 1997 and 1996, respectively.
Page 11 of 14 Pages
Comparison of Operating Results for the Nine-Month Periods Ended June 30, 1997
and 1996
General. Net earnings totaled $323,000 for the nine months ended June
30, 1997, a $21,000, or 7.0%, increase over the $302,000 of net earnings
recorded for the nine months ended June 30, 1996. The increase in earnings
resulted primarily from a $151,000 increase in net interest income and a $13,000
decrease in the provision for losses on loans, which were partially offset by a
$135,000 increase in general, administrative and other expenses and a $6,000
increase in the provision for federal income taxes.
Net Interest Income. Interest income increased by $96,000, or 3.9%, for
the nine months ended June 30, 1997, compared to the nine months ended June 30,
1996. The increase resulted primarily from an increase in the weighted average
balance of loans outstanding during the period, which was partially offset by a
decrease in the weighted average balances of mortgage-backed securities during
the period. Interest expense on deposits decreased by $55,000, or 4.1%, due
primarily to a decrease in the deposit portfolio, due to customers' use of
deposits to purchase common shares in the conversion in March 1997, coupled with
a decrease in the cost of deposits. Net interest income increased by $151,000,
or 13.3%, for the nine months ended June 30, 1997, compared to the same period
in 1996.
Provision for Losses on Loans. A provision for losses on loans is
charged to earnings to bring the total allowance to a level considered
appropriate by management based on historical experience, the volume and type of
lending conducted by the Association, the status of past due principal and
interest payments, general economic conditions, particularly as such conditions
relate to the Association's market area, and other factors related to the
collectibility of the Association's loan portfolio. As a result of such
analysis, management decided no additional provision for losses on loans was
necessary during the nine months ended June 30, 1997. There can be no assurance,
however, that the allowance for loan losses of the Association will be adequate
to cover losses on nonperforming assets in the future.
The foregoing statement is a "forward-looking" statement within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Factors that could
affect the adequacy of the loan loss allowance include, but are not limited to,
the following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which may
cause the value of real estate and other properties that secure outstanding
loans to decline; (2) unforeseen adverse changes in circumstances with respect
to uncertain large loan borrowers; (3) decreases in the value of collateral
securing consumer loans to amounts equal to less than the outstanding balances
of the consumer loans; and (4) determinations by various regulatory agencies
that the Association must recognize additions to its loan loss allowance based
on such regulators' judgment of information available to them at the time of
their examinations.
Other Operating Income. Other operating income, primarily service fees
on money orders and travelers' checks, totaled $4,000 and $6,000 for the
nine-month periods ended June 30, 1997 and 1996, respectively.
General, Administrative and Other Expense. General, administrative and
other expense increased by $135,000, or 20.3%, for the nine months ended June
30, 1997, compared to the same period in 1996. The increase resulted primarily
from a $155,000, or 47.3%, increase in employee compensation and benefits, due
to increased staffing, normal merit increases and the expenses related to the
stock benefit plan, which were partially offset by a $31,000, or 51.7%, decrease
in federal deposit insurance premiums due to a decline in premium rates
following the SAIF recapitalization assessment.
Federal Income Tax. The provision for federal income taxes totaled
$166,000 for the nine months ended June 30, 1997, compared to $160,000 for the
1996 period. The $6,000, or 3.8%, increase resulted from a $27,000, or 5.8%,
increase in earnings before taxes. The effective tax rates were 33.9% and 34.6%
of the nine months ended June 30, 1997 and 1996, respectively.
Page 12 of 14 Pages
PART II
MARKET FINANCIAL CORPORATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Materially Important Events
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule.
Page 13 of 14 Pages
SIGNATURES
MARKET FINANCIAL CORPORATION
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.
Date: August 12, 1997 By:/s/ John T. Larimer
-------------------
John T. Larimer, President and
Chief Executive Officer
Date: August 12, 1997 By:/s/ Julie M. Bertsch
--------------------
Julie M. Bertsch, Chief Financial Officer
Page 14 of 14 Pages