UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
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OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ____________ to _______________
Commission File Number: 000-22255
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MARKET FINANCIAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
Ohio 31-1462464
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
7522 Hamilton Avenue, Mt. Healthy, Ohio 45231
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(Address of principal executive offices)
(513) 521-9772
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(Issuer's telephone number)
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(Former name, former address and former fiscal year, if changed since last
report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the issuer filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: May 11, 2000 - 1,259,439 common
shares
Transitional Small Business Disclosure Format (Check one): Yes [ ] No [X]
Page 1 of 13
INDEX
MARKET FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of 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 12
SIGNATURES 13
Page 2 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, September 30,
2000 1999
ASSETS (In thousands, except share data)
Cash and due from banks $ 647 $ 644
Federal funds sold 750 1,392
Interest-bearing deposits in other financial institutions 248 255
------ ------
Cash and cash equivalents 1,645 2,291
Certificates of deposit in other financial institutions 300 290
Investment securities - at amortized cost, approximate market
value of $11,681 and $12,529 at March 31, 2000 and September 30, 1999 12,090 12,800
Investment securities designated as available for sale - at market 948 1,116
Mortgage-backed securities - at cost, approximate market value of $1,899 and
$2,067 at March 31, 2000 and September 30, 1999 1,919 2,047
Loans receivable - net 36,072 35,219
Office premises and equipment - at depreciated cost 1,385 819
Federal Home Loan Bank stock - at cost 465 449
Accrued interest receivable 332 320
Prepaid expenses and other assets 95 100
Prepaid Federal income taxes 29 -
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Total assets $55,280 $55,451
====== ======
Liabilities and SHAREHOLDERS' EQUITY
Deposits $39,890 $39,907
Advances by borrowers for taxes and insurance 62 59
Accrued interest payable 108 98
Other liabilities 170 160
Accrued federal income taxes - 45
Deferred federal income taxes 527 607
------ ------
Total liabilities 40,757 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 7,945 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 612 722
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Total shareholders' equity 14,523 14,575
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Total liabilities and shareholders' equity $55,280 $55,451
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Page 3 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended March 31, Three months ended March 31,
2000 1999 2000 1999
Interest income
Loans $1,358 $1,307 $684 $665
Mortgage-backed securities 75 36 37 17
Investment securities 402 300 196 136
Interest-bearing deposits and other 58 211 29 92
----- ----- --- ---
Total interest income 1,893 1,854 946 910
Interest expense
Deposits 898 903 444 443
Borrowings - 22 - 6
----- ----- --- ---
Total interest expense 898 925 444 449
----- ----- --- ---
Net interest income 995 929 502 461
Other income
Gain on sale of investments - 463 - 463
Other operating income 6 6 3 3
----- ----- --- ---
Total other income 6 469 3 466
General, administrative and other expense
Employee compensation and benefits 445 379 224 190
Occupancy and equipment 68 61 42 34
Federal deposit insurance premiums 8 11 2 6
Franchise taxes 87 104 41 49
Other operating 146 126 75 52
----- ----- --- ---
Total general, administrative and
other expense 754 681 384 331
----- ----- --- ---
Earnings before income taxes 247 717 121 596
Federal income taxes
Current 106 321 44 246
Deferred (22) (77) (3) (43)
----- ----- --- ---
Total federal income taxes 84 244 41 203
----- ----- --- ---
Net Earnings $ 163 $ 473 $ 80 $393
===== ===== === ===
Earnings per share
Basic $.14 $.39 $.07 $.33
=== === === ===
Diluted $.14 $.39 $.07 $.33
=== === === ===
Page 4 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the six months For the three months
ended March 31, ended March 31,
2000 1999 2000 1999
Net earnings $163 $473 $ 80 $393
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities during the period, net of
tax of $(57), $86, $(21) and $(61)
during the respective periods (110) 167 (41) (118)
Reclassification adjustment for
realized gains included in earnings,
net of tax of $(157) in each of the
1999 periods - (306) - (306)
---- --- --- ---
Comprehensive income (loss) $ 53 $334 $ 39 $(31)
=== === === ===
Accumulated comprehensive income $612 $798 $612 $798
=== === === ===
Page 5 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended March 31,
2000 1999
Cash flows from operating activities:
Net earnings for the period $ 163 $ 473
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 13 16
Amortization of deferred loan origination fees (2) (2)
Amortization of expense related to stock benefit plans 97 105
Federal Home Loan Bank stock dividends (16) (14)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (12) (15)
Accrued interest payable 10 16
Prepaid expenses and other assets 5 35
Other liabilities 10 (26)
Federal income taxes
Current (74) 189
Deferred (22) (77)
----- -----
Net cash provided by operating activities 173 701
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 127 117
Proceeds from maturity of investment securities 1,500 4,000
Loan disbursements (2,986) (5,748)
Principal repayments on loans 2,135 5,202
Purchase of investment securities designated as held to maturity (790) (6,000)
Purchase of office equipment (579) (452)
(Increase) decrease in certificates of deposits in other financial
institutions - net (10) 2,000
----- -----
Net cash used in investing activities (603) (881)
Cash flows provided by (used in) financing activities:
Net (decrease) increase in deposits (17) 1,609
Advances by borrowers for taxes and insurance 3 -
Proceeds from other borrowed money - 180
Repayment of other borrowed money - (905)
Purchase of treasury stock - (516)
Dividends paid on common stock (202) (186)
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Net cash provided by (used in) financing activities (216) 182
----- -----
Net increase (decrease) in cash and cash equivalents
(balance carried forward) (646) 2
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Page 6 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended March 31,
2000 1999
Net increase (decrease) in cash and cash equivalents
(balance brought forward) $ (646) $ 2
Cash and cash equivalents at beginning of period 2,291 5,381
----- -----
Cash and cash equivalents at end of period $1,645 $5,383
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 181 $ 153
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Interest on deposits and borrowings $ 888 $ 909
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Supplemental disclosure of noncash investing activities:
Unrealized gain (loss) on securities designated as available for
sale, net of related tax effects $ (110) $ 167
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Page 7 of 13
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six month periods ended
March 31, 2000 and 1999
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
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 and six month periods
ended March 31, 2000, 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 72,814 and 84,096 unallocated ESOP shares,
totaled 1,186,625 and 1,214,681 shares for the three month periods ended March
31, 2000 and 1999, respectively, and 1,180,953 and 1,227,223 for the six month
periods ended March 31, 2000 and 1999, respectively. 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 1,186,625 and 1,214,681 for the three months ended March 31,
2000 and 1999, respectively, and 1,180,953 and 1,227,233 for the six month
periods ended March 31, 2000 and 1999, respectively. 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 March 31, 2000 and 1999, 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.
Page 8 of 13
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 March 31,
2000
MFC's assets at March 31, 2000, totaled approximately $55.3 million, a
$171,000, or .3%, decrease from the total at September 30, 1999. The decrease
was primarily attributable to a reduction of unrealized gains on securities
designated as available for sale.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $15.0 million at March 31, 2000, a decrease of
$1.5 million from the total at September 30, 1999. This decrease resulted
primarily from the use of funds from cash and cash equivalents and the
maturities or calls of investment securities to fund loan originations and
purchase office equipment and building improvements during the six months ended
March 31, 2000.
Loans receivable totaled $36.1 million at March 31, 2000, an increase
of $853,000, or 2.4%, over September 30, 1999. This increase resulted primarily
from loan originations of $3.0 million, which exceeded principal repayments of
$2.1 million. Market's allowance for loan losses totaled $52,000 at both March
31, 2000, and September 30, 1999. The allowance represented .14% and .15% of
total loans at March 31, 2000, and September 30, 1999, respectively.
Nonperforming loans totaled $322,000 and $119,000, or .89% and .34% of total
loans, at March 31, 2000, and September 30, 1999, respectively.
Although management believes that its allowance for loan losses at
March 31, 2000, 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 have allowed Market to
expand the facilities in Mt. Healthy and increase the services available to its
customers, including the installation of a drive-thru teller window and an ATM.
The construction of the addition to the main office was substantially completed
in March 2000.
Deposits totaled $39.9 million at March 31, 2000, a decrease of
$17,000, or less than .1%, from the total at September 30, 1999. Demand accounts
decreased by approximately $131,000, and certificates of deposit increased by
$114,000 during the period ended March 31, 2000. At March 31, 2000, certificates
of deposit that will mature within one year accounted for 57.0% 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 March 31, 2000, Market's tangible and core capital totaled $12.7 million, or
23.5% of adjusted total assets, which exceeded the minimum requirements of
$815,000 and $2.1 million, by $11.9 million and $10.6 million, respectively. As
of March 31, 2000, Market's risk-based capital was $13.2 million, or 47.7% of
risk-weighted assets, exceeding the minimum requirement by $11.0 million.
Page 9 of 13
Comparison of Operating Results for the Three-Month Periods Ended March 31, 2000
and 1999
General
Net earnings totaled $80,000 for the three months ended March 31, 2000,
a $313,000, or 79.6%, decrease from the $393,000 of net earnings recorded for
the three months ended March 31, 1999. The decrease in earnings resulted
primarily from a $463,000 decrease in other income primarily from a gain on sale
of investment securities in the prior quarter, which was partially offset by a
$41,000 increase in net interest income and a $162,000 decrease in the provision
for federal income taxes.
Net Interest Income
Interest income increased by $36,000, or 4.0%, for the three months
ended March 31, 2000, compared to the three months ended March 31, 1999. The
increase resulted primarily from increases in the weighted average balance of
the loans, mortgage-backed and investment securities portfolios, which were
partially offset by a decrease in the weighted average balance of
interest-bearing deposits in other financial institutions. Interest expense on
deposits increased by $1,000, or .2%, due primarily to an increase in the
weighted average balance of deposits, which was partially offset by a decrease
in the cost of deposits. Net interest income increased by $41,000, or 8.9%, for
the three months ended March 31, 2000, compared to the same quarter in 1999.
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 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 March 31, 2000. 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 certain 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 Income
Other income decreased to $3,000 for the quarter ended March 31, 2000,
compared to $466,000 for the 1999 quarter primarily due to a $463,000 gain on
sale of investment securities designated as available for sale during the 1999
quarter.
Other operating income, primarily service fees on money orders and
travelers' checks, totaled $3,000 for each of the three-month periods ended
March 31, 2000 and 1999.
General, Administrative and Other Expense
General, administrative and other expenses increased by $53,000, or
16.0%, for the quarter ended March 31, 2000, compared to the same quarter in
1999. The increase resulted primarily from a $34,000, or 17.9%, increase in
employee compensation and benefits due primarily to increased staffing levels,
expenses related to the stock benefit plans, and normal merit increases. Other
operating expense increased $23,000, or 44.2%, due primarily to increased legal
fees and transfer agent fees at the holding company level.
Federal Income Tax
The provision for federal income taxes totaled $41,000 for the three
months ended March 31, 2000, compared to $203,000 for the 1999 quarter. The
$162,000 or 79.8%, decrease resulted from a $475,000, or 79.7%, decrease in
earnings before taxes. The effective tax rates were 33.9% and 34.1% for the
three months ended March 31, 2000 and 1999, respectively.
Page 10 of 13
Comparison of Operating Results for the Six-Month Periods Ended March 31, 2000
and 1999
General
Net earnings totaled $163,000 for the six months ended March 31, 2000,
a $310,000, or 65.5%, decrease from the $473,000 of net earnings recorded for
the six months ended March 31, 1999. The decrease in earnings resulted primarily
from a $463,000 decrease in other income, which was partially offset by a
$66,000 increase in net interest income and a $160,000 decrease in the provision
for federal income taxes.
Net Interest Income
Interest income increased by $39,000, or 2.1%, for the six months ended
March 31, 2000, compared to the six months ended March 31, 1999. The increase
resulted primarily from increases in the weighted average balances of the loans,
mortgage-backed and investment securities portfolios, which were partially
offset by a decrease in the weighted average balance of interest-bearing
deposits in other financial institutions. Interest expense on deposits decreased
by $5,000, or .6% due primarily to an a decrease in the cost of deposits, which
was partially offset by an increase in the weighted average balance of deposits.
Net interest income increased by $66,000, or 7.1%, for the six months ended
March 31, 2000, compared to the same period in 1999.
Provision for Losses on Loans
As a result of an analysis of 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, management decided no additional provision for
losses on loans was necessary during the six months ended March 31, 2000. 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.
Other Income
Other income decreased to $6,000 for the six months ended March 31,
2000, compared to $469,000 for the 1999 period primarily due to the absence of a
$463,000 gain on sale of investment securities designated as available for sale.
Other operating income, primarily service fees on money orders and
travelers' checks, totaled $6,000 for each of the six-month periods ended March
31, 2000 and 1999.
General, Administrative and Other Expense
General, administrative and other expense increased by $73,000, or
10.7%, for the six months ended March 31, 2000, compared to the same period in
1999. The increase resulted primarily from a $66,000, or 17.4%, increase in
employee compensation and benefits due to hiring employees, normal merit
increases and expenses related to the stock benefit plans. Other operating
expense increased $20,000, or 15.9%, due primarily to increased legal fees and
transfer agent fees at the holding company level.
Federal Income Tax
The provision for federal income taxes totaled $84,000 for the six
months ended March 31, 2000, compared to $244,000 for the same 1999 period. The
$160,000, or 65.5%, decrease resulted from a $470,000, or 65.6%, reduction in
earnings before taxes. The effective tax rates were 34.0% for each of the six
months ended March 31, 2000 and 1999.
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.
Page 11 of 13
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
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule.
Page 12 of 13
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: 5/12/2000 By: /s/ John T. Larimer
-------------------
John T. Larimer, President and
Managing Officer
Date 5/14/2000 By: /s/ Julie M. Bertsch
--------------------
Julie M. Bertsch, Chief Financial Officer