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, 2000
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
(Exact name of registrant as specified in its charter)
Ohio 31-0462464
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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
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As of February 9, 2001, the latest practicable date, 1,259,439 common shares of
the registrant, no par value, were issued and outstanding.
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 10
PART II - OTHER INFORMATION 12
SIGNATURES 13
Page 2 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, September 30,
2000 2000
ASSETS
Cash and due from banks $ 749 $ 527
Federal funds sold 250 100
Interest-bearing deposits in other financial institutions 187 139
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Cash and cash equivalents 1,186 766
Certificates of deposit in other financial institutions 300 300
Investment securities - at amortized cost, approximate market
value of $11,356 and $11,143 at December 31, 2000 and September 30, 2000
11,400 11,400
Investment securities designated as available for sale - at market 1,478 1,160
Mortgage-backed securities - at cost, approximate market value of $1,800 and
$1,829 at December 31, 2000 and September 30, 2000 1,787 1,830
Loans receivable - net 38,381 37,879
Office premises and equipment - at depreciated cost 1,457 1,471
Federal Home Loan Bank stock - at cost 491 482
Accrued interest receivable 368 371
Prepaid expenses and other assets 382 265
Prepaid federal income taxes 106 163
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Total assets $57,336 $56,087
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Liabilities and SHAREHOLDERS' EQUITY
Deposits $41,230 $40,260
Advances by borrowers for taxes and insurance 126 70
Accrued interest payable 109 105
Other liabilities 136 272
Deferred federal income taxes 707 625
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Total liabilities 42,308 41,332
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 8,176 8,160
Retained earnings - substantially restricted 7,843 7,892
Shares acquired by stock benefit plans (1,114) (1,211)
Treasury stock - 76,286 shares of treasury stock - at cost (838) (838)
Accumulated comprehensive income, unrealized gain on securities designated
as available for sale, net of related tax effects 961 752
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Total shareholders' equity 15,028 14,755
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Total liabilities and shareholders' equity $57,336 $56,087
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Page 3 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Three months ended December 31,
2000 1999
Interest income
Loans $727 $674
Mortgage-backed securities 35 38
Investment securities 208 206
Interest-bearing deposits and other 13 29
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Total interest income 983 947
Interest expense
Deposits 524 454
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Net interest income 459 493
Other operating income 6 3
General, administrative and other expense
Employee compensation and benefits 211 221
Occupancy and equipment 42 26
Federal deposit insurance premiums 6 6
Franchise taxes 47 46
Other operating 80 71
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Total general, administrative and
other expense 386 370
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Earnings before income taxes 79 126
Federal income taxes
Current 53 62
Deferred (26) (19)
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Total federal income taxes 27 43
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Net Earnings $ 52 $ 83
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Earnings per share
Basic $.04 $.07
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Diluted $.04 $.07
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Page 4 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the three months
ended December 31,
2000 1999
Net earnings $ 52 $ 83
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities net of taxes
(benefits) of $108 and $(36) during 2000 and 1999, respectively 209 (69)
--- ---
Comprehensive income $261 $ 14
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Accumulated comprehensive income $961 $653
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Page 5 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended December 31,
2000 1999
(In thousands)
Cash flows from operating activities:
Net earnings for the period $ 52 $ 83
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
Depreciation and amortization 14 9
Amortization of deferred loan origination costs 2 -
Amortization of expense related to stock benefit plans 113 97
Federal Home Loan Bank stock dividends (9) (8)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 3 (9)
Accrued interest payable 4 2
Prepaid expenses and other assets (117) (82)
Other liabilities (136) (62)
Federal income taxes
Current 57 (16)
Deferred (26) (19)
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Net cash used in operating activities (43) (4)
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 43 71
Proceeds from maturity of investment securities - 1,500
Loan disbursements (1,288) (1,721)
Principal repayments on loans 783 1,080
Purchase of investment securities designated as held to maturity - (200)
Purchase of office equipment and building improvements - (228)
Increase in certificates of deposits in other financial
institutions - net - (205)
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Net cash provided by (used in) investing activities (462) 297
Cash flows provided by (used in) financing activities:
Net increase in deposits 970 114
Advances by borrowers for taxes and insurance 56 49
Dividends paid on common stock (101) (101)
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Net cash provided by financing activities 925 62
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Net increase in cash and cash equivalents (balance carried
forward) 420 355
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Page 6 of 13
Market Financial Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended December 31,
2000 1999
(In thousands)
Net increase in cash and cash equivalents (balance brought
forward) $ 420 $ 355
Cash and cash equivalents at beginning of period 766 2,291
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Cash and cash equivalents at end of period $1,186 $2,646
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Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ - $ 79
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Interest on deposits and borrowings $ 520 $ 452
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Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 209 $ (69)
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Page 7 of 13
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended
December 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") included in
the Annual Report on Form 10-KSB for the year ended September 30, 2000. 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, 2000, are not necessarily
indicative of the results which may be expected for the 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. Management adopted SFAS No. 133 effective October 1,
2000, as required, without material impact on MFC's financial position or
results of operations.
In September 2000, the FASB issued SFAS No. 140 "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125 without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The Statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ending
after December 15, 2000. SFAS No. 140 is not expected to have a material effect
on MFC's financial position or results of operations.
Page 8 of 13
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 1,175,343 shares for the three month periods ended
December 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
1,211,869 and 1,175,343 for the three months ended December 31, 2000 and 1999,
respectively. Incremental shares related to the assumed exercise of stock
options totaled 25,244 for the three month period ended December 31, 2000.
Options to purchase 125,558 shares of common stock with a weighted-average
exercise price of $9.6875 were outstanding at December 31, 1999, but were
excluded from the computation of common stock equivalents for the three month
period ended December 31, 1999, because their exercise price was greater than
the average market price of the common shares.
5. Pending Merger
On September 19, 2000, MFC entered into an Agreement and Plan of
Reorganization (the "Agreement") whereby MFC would be merged into Peoples
Community Bancorp, Inc. ("Peoples") for total consideration of approximately
$16.4 million in either cash or common stock. Under the terms of the Agreement,
each common share of MFC will be exchanged for either cash of $13.00 per share
or Peoples common shares with an equivalent value, based on the average closing
prices of Peoples stock over a 20 trading day period ending the day before the
effective date of the merger.
Page 9 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 and adequacy of
the allowance for loan losses and the effect of certain accounting
pronouncements.
Discussion of Financial Condition Changes from September 30, 2000, to December
31, 2000
MFC's assets at December 31, 2000, totaled approximately $57.3 million,
a $1.2 million, or 2.2%, increase over the total at September 30, 2000. The
increase was funded through growth in deposits and unrealized gains on
securities designated as available for sale.
Liquid assets (cash and cash equivalents and certificates of deposit)
totaled $1.5 million at December 31, 2000, an increase of $420,000, or 39.4%,
over the total at September 30, 2000. Investment securities totaled $12.9
million at December 31, 2000, an increase of $318,000, or 2.5%, over the balance
at September 30, 2000. The increase was due to an increase in the unrealized
gain on available for sale securities.
Loans receivable totaled $38.4 million at December 31, 2000, an
increase of $502,000, or 1.3%, over September 30, 2000. This increase resulted
primarily from loan originations of $1.3 million, which exceeded principal
repayments of $783,000. Market's allowance for loan losses totaled $52,000 at
both December 31, 2000 and September 30, 2000. The allowance represented .14% of
total loans at both December 31, 2000 and September 30, 2000. Nonperforming
loans totaled $126,000 and $272,000, or .33% and .71% of total loans, at
December 31, 2000 and September 30, 2000, respectively.
Although management believes that its allowance for loan losses at
December 31, 2000, was adequate based upon the available facts and
circumstances, there can be no assurance that additions to such allowance will
not be necessary in future periods, which could adversely affect Market's
results of operations.
Deposits totaled $41.2 million at December 31, 2000, an increase of
$970,000, or 2.4%, over the total at September 30, 2000. Demand accounts
increased by approximately $310,000, and certificates of deposit increased by
$660,000 during the quarter ended December 31, 2000. At December 31, 2000,
certificates of deposit that will mature within one year accounted for 56.8% 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 4.0% 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, 2000, Market's tangible and core capital totaled $12.6 million,
or 22.8% of adjusted total assets, which exceeded the minimum requirements of
$832,000 and $2.2 million, by $11.8 million and $10.4 million, respectively. As
of December 31, 2000, Market's risk-based capital was $13.3 million, or 43.8% of
risk-weighted assets, exceeding the minimum requirement by $10.9 million.
Page 10 of 13
Comparison of Operating Results for the Three-Month Periods Ended December 31,
2000 and 1999
General
Net earnings totaled $52,000 for the three months ended December 31,
2000, a $31,000, or 37.3%, decrease from the $83,000 of net earnings recorded
for the three months ended December 31, 1999. The decrease in earnings resulted
primarily from a $34,000, or 6.9%, decrease in net interest income and a
$16,000, or 4.3%, increase in general, administrative and other expense, which
were partially offset by a $16,000 decrease in the provision for federal income
taxes.
Net Interest Income
Interest income increased by $36,000, or 3.8%, for the three months
ended December 31, 2000, compared to the three months ended December 31, 1999.
The increase resulted primarily from an increase in loans outstanding, which was
partially offset by a decrease in the balance of interest-bearing deposits in
other financial institutions during the period. Interest expense on deposits
increased by $70,000, or 15.4%, due primarily to an increase in the cost of
deposits, coupled with an increase in the deposit portfolio. Net interest income
decreased by $34,000, or 6.9%, for the three months ended December 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'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, 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 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 $6,000 and $3,000 for the three-month periods ended
December 31, 2000 and 1999, respectively.
General, Administrative and Other Expense
General, administrative and other expense increased by $16,000, or
4.3%, for the quarter ended December 31, 2000, compared to the same quarter in
1999. The increase resulted primarily from a $16,000, or 61.5%, increase in
occupancy and equipment and a $9,000, or 12.7%, increase in other operating
expense, which were partially offset by a $10,000, or 4.5%, decrease in employee
compensation and benefits. The increase in occupancy and equipment was due
primarily to depreciation and other costs related to the remodeling additions to
the main office. The decline in employee compensation and benefits was due
primarily to a reduction in staffing levels year to year.
Federal Income Tax
The provision for federal income taxes totaled $27,000 for the three
months ended December 31, 2000, compared to $43,000 for the same 1999 quarter.
The $16,000, or 37.2%, decrease resulted from a $47,000, or 37.3%, decrease in
earnings before taxes. The effective tax rates were 34.2% and 34.1% for the
three months ended December 31, 2000 and 1999, respectively.
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
No applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibits: None
Reports on Form 8-K: None
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: 2/14/01 By: /s/John T. Larimer
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John T. Larimer, President and
Managing Officer
Date 2/14/01 By: /s/Julie M. Bertsch
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Julie M. Bertsch, Chief Financial Officer
Page 13 of 13