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 DECEMBER 31, 1996
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)
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 _____ No __X*__
As of March 20, 1997, the latest practicable date, 100 common shares of the
registrant, no par value, were issued and outstanding.
* The Registrant's Registration Statement on Form S-1 was declared effective on
February 11, 1997. The Registrant has conducted no business except the offering
of its shares and preparation to acquire The Market Building and Saving Company.
The financial information contained in this Form 10-QSB is, therefore, provided
for The Market Building and Saving Company.
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INDEX
THE MARKET BUILDING AND SAVING COMPANY
Page
PART I - FINANCIAL INFORMATION
Statements of Financial Condition 3
Statements of Earnings 4
Statements of Cash Flows 5
Notes to Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION 12
SIGNATURES 13
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The Market Building and Saving Company
STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
1996 1996
------------ -------------
ASSETS (In thousands)
Cash and due from banks $ 603 $ 512
Federal funds sold 2,508 2,627
Interest-bearing deposits in other financial institutions 600 943
------- -------
Cash and cash equivalents 3,711 4,082
Certificates of deposit in other financial institutions 6,540 7,040
Investment securities - at amortized cost, approximate market
value of $8,395 and $9,071 at December 31, 1996 and
September 30, 1996 8,379 9,062
Investment securities designated as available for sale - at market 805 712
Mortgage-backed securities - at cost, approximate
market value of $1,546 and $1,612 at December 31, 1996
and September 30, 1996 1,495 1,549
Loans receivable - net 23,639 21,996
Office premises and equipment - at depreciated cost 162 168
Federal Home Loan Bank stock - at cost 370 364
Accrued interest receivable 335 339
Prepaid expenses and other assets 225 196
Prepaid federal income taxes 68 39
------- -------
Total assets $45,729 $45,547
======= =======
LIABILITIES AND RETAINED EARNINGS
Deposits $37,425 $37,282
Advances by borrowers for taxes and insurance 95 50
Accrued interest payable 142 117
Other liabilities 8 273
Deferred federal income taxes 410 311
------- -------
Total liabilities 38,080 38,033
Commitments and contingencies -- --
Retained earnings - substantially restricted 7,137 7,063
Unrealized gain on securities designated as available for sale,
net of related tax effects 512 451
------- -------
Total retained earnings 7,649 7,514
------- -------
Total liabilities and retained earnings $45,729 $45,547
======= =======
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The Market Building and Saving Company
STATEMENTS OF EARNINGS
Three months ended December 31,
1996 1995
-------- --------
(In thousands)
Interest income
Loans $ 460 $ 487
Mortgage-backed securities 34 48
Investment securities 147 140
Interest-bearing deposits and other 157 160
----- -----
Total interest income 798 835
Interest expense
Deposits 426 452
----- -----
Net interest income 372 383
Provision for losses on loans -- 11
----- -----
Net interest income after provision for
losses on loans 372 372
Other operating income 2 2
General, administrative and other expense
Employee compensation and benefits 142 126
Occupancy and equipment 26 27
Federal deposit insurance premiums 22 22
Franchise taxes 24 27
Other operating 48 46
----- -----
Total general, administrative and
other expense 262 248
Earnings before income taxes 112 126
Federal income taxes
Current (29) 79
Deferred 67 (33)
----- -----
Total federal income taxes 38 46
----- -----
Net Earnings $ 74 $ 80
===== =====
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The Market Building and Saving Company
STATEMENTS OF CASH FLOWS
Three months ended December 31,
1996 1995
-------- --------
(In thousands)
Cash flows from operating activities:
Net earnings for the period $ 74 $ 80
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 (17) (6)
Depreciation and amortization 8 10
Amortization of deferred loan origination fees (6) (11)
Provision for losses on loans -- 11
Federal Home Loan Bank stock dividends (6) (6)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 4 (26)
Accrued interest payable 25 34
Prepaid expenses and other assets (29) 54
Other liabilities (265) 9
Federal income taxes
Current (29) 49
Deferred 67 (33)
------- -----
Net cash provided by (used in) operating activities (174) 165
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 54 163
Proceeds from maturity of investment securities 1,200 600
Loan disbursements (2,166) (722)
Principal repayments on loans 529 574
Purchase of investment securities designated as held to maturity (500) (968)
Purchase of office equipment (2) (14)
Decrease in certificates of deposits in other financial
institutions - net 500 300
------- -----
Net cash used in investing activities (385) (67)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 143 (114)
Advances by borrowers for taxes and insurance 45 48
------- -----
Net cash provided by (used in) financing activities 188 (66)
------- -----
Net increase (decrease) in cash and cash equivalents
(balance carried forward) (371) 32
------- -----
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The Market Building and Saving Company
STATEMENTS OF CASH FLOWS
Three months ended December 31,
1996 1995
-------- --------
(In thousands)
Net increase (decrease) in cash and cash equivalents
(balance brought forward) $ (371) $ 32
Cash and cash equivalents at beginning of period 4,082 4,013
------- ------
Cash and cash equivalents at end of period $ 3,711 $4,045
======= ======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ 39
======= ======
Interest on deposits $ 401 $ 418
======= ======
Supplemental disclosure of noncash investing activities:
Unrealized gain on securities designated as available
for sale, net of related tax effects $ 61 $ 134
======= ======
The accompanying notes are an integral part of these statements.
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NOTES TO FINANCIAL STATEMENTS
THE MARKET BUILDING AND SAVING COMPANY
For the three-month periods ended
December 31, 1996 and 1995
1. Basis of Presentation
The accompanying unaudited 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 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 financial statements
have been included. The results of operations for the three month periods ended
December 31, 1996 and 1995 are not necessarily indicative of the results which
may be expected for an entire fiscal year.
The accompanying financial statements include the accounts of The Market
Building and Saving Company (the "Association"). The Association is in the
process of converting to a stock association. Upon completion of the conversion,
the Association will become a wholly-owned subsidiary of Market Financial
Corporation ("MFC").
2. 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 acquisition 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.
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NOTES TO FINANCIAL STATEMENTS
THE MARKET BUILDING AND SAVING COMPANY
For the three-month periods ended
December 31, 1996 and 1995
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based employee compensation plans. SFAS No. 123 encourages all entities to
adopt a new method of accounting to measure the compensation cost of all
employee 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.
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NOTES TO FINANCIAL STATEMENTS
THE MARKET BUILDING AND SAVING COMPANY
For the three-month periods ended
December 31, 1996 and 1995
3. Consummation of the Conversion to a Stock Savings and Loan Association
On April 16, 1996, the Board of Directors of 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 a newly chartered holding
company, MFC. The conversion will be 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's to the Association's members and to an employee stock
benefit plan is being conducted.
At the time of conversion, the Association will establish 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.
Conversion costs are being deferred and will be deducted from the proceeds
of the shares sold in the conversion. If the conversion is not completed, all
costs will be charged to expense. As of December 31, 1996, $199,000 of
conversion costs had been deferred.
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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE MARKET BUILDING AND SAVING COMPANY
Discussion of Financial Condition Changes from September 30, 1996 to
December 31, 1996
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Association'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 the Association'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.
The Association's assets at December 31, 1996, totaled approximately $45.7
million, a $182,000, or .40%, increase over the $45.5 million total at September
30, 1996. The increase was funded through growth in deposits.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $19.4 million at December 31, 1996, a decrease of
$1.5 million from the total at September 30, 1996. This decrease resulted
primarily from the use of liquid assets to fund loan originations during the
quarter ended December 31, 1996. Repayments from mortgage-backed securities and
an increase in deposits also provided funds for the growth in loans during the
year.
Loans receivable totaled $23.6 million at December 31, 1996, an increase of
$1.6 million, or 7.5%, from September 30, 1996. This increase resulted primarily
from loan originations of $2.2 million, which exceeded principal repayments of
$529,000. The Association's allowance for loan losses totaled $52,000 at
December 31, 1996, and September 30, 1996. The allowance represented .22% and
.24% of total loans at December 31, 1996, and September 30, 1996. Nonperforming
loans totaled $451,000 and $139,000, or 1.91% and .63% of total loans, at
December 31, 1996, and September 30, 1996, respectively. The increase of
$312,000 in nonperforming loans was primarily attributable to a nonresidential
real estate loan with an outstanding balance of $325,000. Management believes,
however, that the collateral on such property is adequate and anticipates no
losses on the property.
Although management believes that its allowance for loan losses at December
31, 1996, 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 $37.4 million at December 31, 1996, an increase of
$143,000, or .4%, from the total at September 30, 1996. Demand accounts
decreased by approximately $471,000 while certificates of deposit increased by
$614,000 during the quarter ended December 31, 1996. At December 31, 1996,
certificates of deposit that will mature within one year accounted for 41.3% of
the Association's deposit liabilities.
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 retained earnings less all intangible assets equal to
1.5% of adjusted total assets. The core capital 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 December 31,
1996, the Association's tangible and core capital totaled $7.1 million, or 15.9%
of adjusted total assets, which exceeded the minimum requirements of $674,000
and $1.3 million by $6.5 million and $5.8 million, respectively. As of December
31, 1996, the Association's risk-based capital was $7.2 million, or 45.9% of
risk-weighted assets, exceeding the minimum requirement by $5.9 million.
Comparison of Operating Results for the Three-Month Periods Ended
December 31, 1996 and 1995
General
Net earnings totaled $74,000 for the three months ended December 31, 1996,
a $6,000, or 7.5%, decrease from the $80,000 of net earnings recorded for the
three months ended December 31, 1995. The decrease in earnings resulted
primarily from a $14,000 increase in general, administrative and other expense
and an $11,000 decrease in net interest income, which were partially offset by
an $11,000 decrease in the provision for losses on loans and an $8,000 decrease
in the provision for federal income taxes.
Net Interest Income
Interest income decreased by $37,000, or 4.4%, for the three months ended
December 31, 1996, compared to the three months ended December 31, 1995. The
decrease resulted primarily from a decrease in the weighted average balances of
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loans outstanding during the period. Interest expense on deposits decreased by
$26,000, or 5.8%, due primarily to a decrease in the deposit portfolio, as the
preponderance of loan growth in 1996 occurred during the third month of the
quarter coupled with a decrease in the cost of deposits. Net interest income
decreased by $11,000, or 2.9%, for the three months ended December 31, 1996,
compared to the same quarter in 1995.
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 December 31, 1996. 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.
Other Operating Income
Other operating income, primarily service fees on money orders and
travelers' checks, totaled $2,000 for each of the three-month periods ended
December 31, 1996 and 1995.
General, Administrative and Other Expense
General, administrative and other expense increased by $14,000, or 5.6%,
for the quarter ended December 31, 1996, compared to the same quarter in 1995.
The increase resulted primarily from a $16,000, or 12.7%, increase in employee
compensation and benefits due to increased staffing and normal merit increases.
Federal Income Tax
The provision for federal income taxes totaled $38,000 for the three months
ended December 31, 1996, compared to $46,000 for the same 1995 quarter. The
$8,000, or 17.4%, reduction resulted from a $14,000, or 11%, decline in earnings
before taxes. The effective tax rates were 33.9% and 36.5% for the three months
ended December 31, 1996 and 1995, respectively.
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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 Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Not applicable.
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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: March 27, 1997 By: /s/ John T. Larimer
__________________________________________
John T. Larimer, President and
Chief Executive Officer
Date: March 27, 1997 By: /s/ Julie M. Bertsch
__________________________________________
Julie M. Bertsch, Chief Financial Officer