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, 1999
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. 000-22255
MARKET FINANCIAL CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 31-1462464
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(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
7522 Hamilton Avenue
Mt. Healthy, OH 45231
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(Address of principal executive office) (Zip Code)
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 February 11, 2000, the latest practicable date, 1,259,439 common
shares of the registrant, no par value, were issued and outstanding.
INDEX
MARKET FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Other Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
PART II - OTHER INFORMATION 11
SIGNATURES 12
Market Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31, September 30,
1999 1999
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(In thousands, except share data)
ASSETS
Cash and due from banks $ 675 $ 644
Federal funds sold 1,747 1,392
Interest-bearing deposits in other financial institutions 224 255
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Cash and cash equivalents 2,646 2,291
Certificates of deposit in other financial institutions 495 290
Investment securities - at amortized cost, approximate
market value of $11,126 and $12,529 at December 31, 1999
and September 30, 1999 11,500 12,800
Investment securities designated as available for
sale - at market 1,010 1,116
Mortgage-backed securities - at cost, approximate market
value of $1,966 and $2,067 at December 31, 1999 and
September 30, 1999 1,975 2,047
Loans receivable - net 35,860 35,219
Office premises and equipment - at depreciated cost 1,038 819
Federal Home Loan Bank stock - at cost 457 449
Accrued interest receivable 329 320
Prepaid expenses and other assets 182 100
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Total assets $55,492 $55,451
=======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $40,021 $39,907
Advances by borrowers for taxes and insurance 108 59
Accrued interest payable 100 98
Other liabilities 98 160
Accrued federal income taxes 29 45
Deferred federal income taxes 551 607
-----------------------
Total liabilities 40,907 40,876
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 - -
Additional paid-in capital 8,187 8,187
Retained earnings - substantially restricted 7,966 7,984
Shares acquired by stock benefit plans (1,383) (1,480)
Treasury stock - 76,286 shares at cost (838) (838)
Accumulated comprehensive income, unrealized gain on
securities designated as available for sale, net of
related tax effects 653 722
-----------------------
Total shareholders' equity 14,585 14,575
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Total liabilities and shareholders' equity $55,492 $55,451
=======================
Market Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
Three months ended December 31,
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1999 1998
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(In thousands, except per share data)
Interest income
Loans $674 $642
Mortgage-backed securities 38 19
Investment securities 206 164
Interest-bearing deposits and other 29 119
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Total interest income 947 944
Interest expense
Deposits 454 460
Borrowings - 16
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Total interest expense 454 476
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Net interest income 493 468
Other operating income 3 3
General, administrative and other expense
Employee compensation and benefits 221 189
Occupancy and equipment 26 27
Federal deposit insurance premiums 6 5
Franchise taxes 46 55
Other operating 71 74
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Total general, administrative and
other expense 370 350
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Earnings before income taxes 126 121
Federal income taxes
Current 62 75
Deferred (19) (34)
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Total federal income taxes 43 41
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Net Earnings $ 83 $ 80
================
Earnings per share
Basic $.07 $.06
================
Diluted $.07 $.06
================
Market Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months
ended December 31,
--------------------
1999 1998
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(In thousands)
Net earnings $ 83 $ 80
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on securities during the period (69) 285
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Comprehensive income $ 14 $ 365
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Accumulated comprehensive income $653 $1,222
==================
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended December 31,
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1999 1998
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(In thousands)
Cash flows from operating activities:
Net earnings for the period $ 83 $ 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 1 1
Depreciation and amortization 9 8
Amortization of deferred loan origination fees - (2)
Amortization of expense related to stock benefit plans 97 105
Federal Home Loan Bank stock dividends (8) (7)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (9) (10)
Accrued interest payable 2 14
Prepaid expenses and other assets (82) (43)
Other liabilities (62) (91)
Federal income taxes
Current (16) 18
Deferred (19) (34)
---------------------
Net cash provided by (used in) operating activities (4) 39
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 71 55
Proceeds from maturity of investment securities 1,500 2,500
Loan disbursements (1,721) (2,770)
Principal repayments on loans 1,080 2,635
Purchase of investment securities designated as held to
maturity (200) (3,000)
Purchase of office equipment and building improvements (228) (404)
Increase in certificates of deposits in other financial
institutions - net (205) -
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Net cash provided by (used in) investing activities 297 (984)
Cash flows provided by (used in) financing activities:
Net increase in deposits 114 926
Advances by borrowers for taxes and insurance 49 39
Proceeds from other borrowed money - 97
Purchase of treasury stock - (97)
Dividends paid on common stock (101) (94)
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Net cash provided by financing activities 62 871
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Net increase (decrease) in cash and cash equivalents
(balance carried forward) 355 (74)
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Cash and cash equivalents at beginning of period 2,291 5,381
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Cash and cash equivalents at end of period $ 2,646 $ 5,307
=====================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 79 $ 60
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Interest on deposits and borrowings $ 452 $ 462
=====================
Supplemental disclosure of noncash investing activities:
Unrealized gain (loss) on securities designated as
available for sale, net of related tax effects $ (69) $ 285
=====================
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended
December 31, 1999 and 1998
1. Basis of Presentation
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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
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 consolidated financial
statements and notes thereto of Market Financial Corporation ("MFC") for the
year ended September 30, 1999. 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 periods
ended December 31, 1999, are not necessarily indicative of the results which
may be expected for an entire fiscal year.
2. Principles of Consolidation
- ---------------------------------
The accompanying consolidated financial statements include the
accounts of MFC and its wholly owned subsidiary, the Market Bank ("Market").
All significant intercompany items have been eliminated.
3. Effects of Recent Accounting Pronouncements
- -------------------------------------------------
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which requires entities to
recognize all derivatives in their financial statements as either assets or
liabilities measured at fair value. SFAS No. 133 also specifies new methods
of accounting for hedging transactions, prescribes the items and
transactions that may be hedged, and specifies detailed criteria to be met
to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional
amount, such as an amount of currency, to determine the settlement
amount(s). It generally requires no significant initial investment and can
be settled net or by delivery of an asset that is readily convertible to
cash. SFAS No. 133 applies to derivatives embedded in other contracts,
unless the underlying of the embedded derivative is clearly and closely
related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to
transfer held-to-maturity debt securities to the available-for-sale or
trading category without calling into question their intent to hold other
debt securities to maturity in the future. SFAS No. 133 is not expected to
have a material impact on MFC's financial statements.
4. Earnings Per Share
- ------------------------
Basic 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 outstanding, which gives effect to 84,096 and 95,863 unallocated ESOP
shares, totaled 1,175,343 and 1,329,492 shares for the three month periods
ended December 31, 1999 and 1998. Diluted earnings per share is computed
taking into consideration common shares outstanding and dilutive potential
common shares to be issued under MFC's stock option plan. Weighted-average
shares outstanding for purposes of computing diluted earnings per share
totaled 1,175,343 and 1,329,492 for the three months ended December 31, 1999
and 1998. Options to purchase 125,558 and 113,526 shares of common stock
with a weighted-average exercise price of $9.6875 and $13.50 were outstanding
at December 31, 1999 and 1998, respectively, but were excluded from the
computation of common stock equivalents because their exercise price was
greater than the average market price of the common shares.
MARKET FINANCIAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
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, Market'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 and the effect of certain accounting pronouncements.
Discussion of Financial Condition Changes from
- ----------------------------------------------
September 30, 1999, to December 31, 1999
----------------------------------------
MFC's assets at December 31, 1999, totaled approximately $55.5
million, a $41,000, or .1%, increase over the total at September 30, 1999.
The increase was funded through growth in deposits and net earnings for the
quarter, which were partially offset by unrealized losses on securities
designated as available for sale.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $15.7 million at December 31, 1999, a
decrease of $846,000 from the total at September 30, 1999. This decrease
resulted primarily from the use of funds from the maturities or calls of
investment securities and deposit growth to fund loan originations and
purchase office equipment and building improvements during the quarter ended
December 31, 1999.
Loans receivable totaled $35.9 million at December 31, 1999, an
increase of $641,000, or 1.8%, over September 30, 1999. This increase
resulted primarily from loan originations of $1.7 million, which exceeded
principal repayments of $1.1 million. Market's allowance for loan losses
totaled $52,000 at both December 31, 1999, and September 30, 1999. The
allowance represented .15% of total loans at December 31, 1999, and
September 30, 1999. Nonperforming loans totaled $300,000 and $119,000, or
.84% and .34% of total loans, at December 31, 1999, and September 30, 1999,
respectively.
Although management believes that its allowance for loan losses at
December 31, 1999, 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
Market's results of operations.
During 1998 and 1999, Market purchased the adjoining properties to its
main office in Mt. Healthy, Ohio. These acquisitions will allow Market to
expand the facilities in Mt. Healthy and increase the services available to
its customers, including the installation of a drive-thru automated teller
window and an ATM. The construction of the addition to the main office is
expected to be completed in March 2000.
Deposits totaled $40.0 million at December 31, 1999, an increase of
$114,000, or .3%, over the total at September 30, 1999. Demand accounts
decreased by approximately $102,000, and certificates of deposit increased
by $216,000 during the quarter ended December 31, 1999. At December 31,
1999, certificates of deposit that will mature within one year accounted for
55.3% of Market's deposit liabilities.
Market 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 requirement
provides for the maintenance of tangible capital plus certain forms of
supervisory goodwill equal to at least 4% of adjusted total assets, except
for institutions with the highest examination rating and acceptable levels
of risk, 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, 1999, Market's
tangible and core capital totaled $12.6 million, or 23.2% of adjusted total
assets, which exceeded the minimum requirements of $815,000 and $1.6
million, by $11.8 million and $11.0 million, respectively. As of December
31, 1999, Market's risk-based capital was $12.7 million, or 45.77% of risk-
weighted assets, exceeding the minimum requirement by $10.4 million.
Comparison of Operating Results for the Three-Month
- ---------------------------------------------------
Periods Ended December 31, 1999 and 1998
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General
Net earnings totaled $83,000 for the three months ended December 31,
1999, a $3,000, or 3.8%, increase from the $80,000 of net earnings recorded
for the three months ended December 31, 1998. The increase in earnings
resulted primarily from a $25,000, or 5.3%, increase in net interest income,
partially offset by a $20,000, or 5.7%, increase in general, administrative
and other expense.
Net Interest Income
Interest income increased by $3,000, or .3%, for the three months
ended December 31, 1999, compared to the three months ended December 31,
1998. The increase resulted primarily from an increase in loans outstanding
and mortgage-backed securities portfolios, which were partially offset by a
decrease in the balance of interest-bearing deposits in other financial
institutions during the period. Interest expense on deposits decreased by
$6,000, or 1.3%, due primarily to a decrease in the cost of deposits, which
was partially offset by an increase in the deposit portfolio. Interest
expense on borrowings decreased $16,000 due to the repayment of advances
outstanding during the 1998 quarter. Net interest income increased by
$25,000, or 5.3%, for the three months ended December 31, 1999, compared to
the same quarter in 1998.
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 Market,
the status of past due principal and interest payments, general economic
conditions, particularly as such conditions relate to Market's market area,
and other factors related to the collectibility of Market'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, 1999.
There can be no assurance, however, that the allowance for loan losses of
Market will be adequate to cover losses on nonperforming assets in the
future.
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 or less than the outstanding balances of the consumer loans; and
(4) determinations by various regulatory agencies that Market 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 $3,000 for each of the three-month periods ended
December 31, 1999 and 1998, respectively.
General, Administrative and Other Expense
General, administrative and other expense increased by $20,000, or
5.7%, for the quarter ended December 31, 1999, compared to the same quarter
in 1998. The increase resulted primarily from a $32,000, or 16.9%, increase
in employee compensation and benefits due to an increased number of
employees, which was partially offset by a $9,000, or 16.4%, decrease in
franchise taxes and a $3,000, or 4.1%, decrease in other operating expenses.
Federal Income Tax
The provision for federal income taxes totaled $43,000 for the three
months ended December 31, 1999, compared to $41,000 for the same 1998
quarter. The $2,000, or 4.9%, increase resulted from a $5,000, or 4.1%,
increase in earnings before taxes. The effective tax rates were 34.1% and
33.9% for the three months ended December 31, 1999 and 1998, respectively.
Year 2000 Computer Matters
Market successfully addressed problems associated with the possibility
that computer systems would not recognize the year 2000 correctly. Market's
computers and those of its vendors continued to process transactions properly
into the new year. Market has not experienced increases in problem loans or
credit losses due to borrowers failing to respond properly to the year 2000
issue, and Market did not experience a significant increase in withdrawals of
deposits at the end of 1999.
PART II
MARKET FINANCIAL CORPORATION
Item 1. Legal Proceedings
-----------------
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
Not applicable.
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
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On January 25, 2000, MFC held its Annual Meeting of Shareholders. In
connection therewith, two matters were submitted to the shareholders for a
vote. First, shareholders elected three directors for terms expiring in
2002 by the following votes:
Robert G. Gandenberger
FOR: 941,976 WITHHELD: 81,076
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John T. Larimer
FOR: 942,476 WITHHELD: 80,576
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Edgar H. May
FOR: 941,976 WITHHELD: 81,076
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The shareholders also ratified the selection of Grant Thornton LLP as
the auditors of MFC for the current fiscal year, pursuant to the following
vote:
FOR: 1,014,952 AGAINST: 8,000 ABSTAIN: 100
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Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 27 - Financial Data Schedule.
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: 2/11/00 By: /s/ John T. Larimer
------------------------------------
John T. Larimer, President and
Managing Officer
Date 2/11/00 By: /s/ Julie M. Bertsch
------------------------------------
Julie M. Bertsch, Chief Financial
Officer