<PAGE> 1
FORM 10-KSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee required]
For the fiscal Year Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 000-22255
MARKET FINANCIAL CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Ohio 34-0462464
-------------------------------- -----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
7522 Hamilton Avenue, Mt. Healthy, Ohio 45231
---------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(513) 521-9772
--------------------------
Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
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(Title of class)
Check whether the issuer (1) 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
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended September 30, 1997,
were $3,519,000.
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the average of the closing bid and
asked prices quoted by the Nasdaq Small Cap Market, was $3,593,361 on December
19, 1997.
1,335,725 of the registrant's common shares were issued and outstanding
on December 19, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part I of Form 10-KSB - Safe Harbor Under the Private Securities Litigation
Reform Act of 1995.
Part II of Form 10-KSB - Portions of the Annual Report to Shareholders for the
fiscal year ended September 30, 1997.
Part III of Form 10-KSB - Portions of the Proxy Statement for 1998 Annual
Meeting of Shareholders.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Market Financial Corporation ("MFC") is a unitary savings and loan
holding company which was organized under Ohio law in February 1997 and which
owns all of the issued and outstanding common shares of The Market Building and
Savings Company, a savings and loan association incorporated under Ohio law
("Market").
Market is principally engaged in the business of originating mortgage
loans secured by first mortgages on one- to four-family residential real estate
located in its primary market area of Hamilton County, Ohio, and portions of the
contiguous counties. MFC also originates a limited number of loans for the
construction of one- to four-family residential real estate, permanent mortgage
loans secured by multifamily real estate (over four units) and nonresidential
real estate in its primary market area, and secured consumer loans. For
liquidity and interest rate risk management purposes, MFC invests in
interest-bearing deposits in other financial institutions, U.S. Government and
agency obligations and mortgage-backed securities. Funds for lending and other
investment activities are obtained primarily from savings deposits, which are
insured up to applicable limits by the FDIC, and loan principal repayments.
Interest on loans and investments is Market's primary source of income.
Market's principal expense is interest paid on deposit accounts. Operating
results are dependent to a significant degree on the net interest income of
Market, which is the difference between interest income earned on loans,
mortgage-backed securities and other investments and interest paid on deposits.
Like most thrift institutions, Market's interest income and interest expense are
significantly affected by general economic conditions and by the policies of
various regulatory authorities.
Market conducts business from its main office in Mt. Healthy, Ohio, and
from its full-service branch office located in North Bend, Ohio. Market's
primary market area for lending and deposit activity is Hamilton County, Ohio,
which includes the City of Cincinnati within its boundaries.
As a savings and loan holding company, MFC is subject to regulations,
supervision and examination by the Office of Thrift Supervision of the United
States Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Market is subject to
regulations, supervision and examination by the OTS, the Federal Deposit
Insurance Corporation (the "FDIC") and the Ohio Division of Financial
Institutions (the "Division"). Market is also a member of the Federal Home Loan
Bank (the "FHLB") of Cincinnati.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-KSB, the words or phrases "will likely
result," "are expected to," "will continue," "anticipated," "estimated,"
"projected," or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in Market's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in Market's market area and competition that could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected. Factors listed above could affect MFC's financial performance and
could cause MFC's actual results for future periods to differ materially from
any statement expressed with respect to future periods. See Exhibit 99 hereto
"Safe Harbor Under the Private Securities Litigation Reform Act of 1995," which
is incorporated herein by reference.
MFC does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statement to reflect events or circumstances
after the date of such statements or to reflect the occurrence of anticipated or
unanticipated events.
LENDING ACTIVITIES
GENERAL. Market's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in Market's primary market area. A limited number of loans secured by
multifamily properties containing five units or more and by nonresidential real
estate and loans for the construction of residences have been originated
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by Market. Market does not originate first mortgage loans insured by the Federal
Housing Authority or guaranteed by the Veterans Administration. In addition to
real estate lending, Market originates a limited number of loans secured by
deposit accounts.
LOAN PORTFOLIO COMPOSITION. The following table presents certain
information in respect of the composition of Market's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------
1997 1996 1995
----------------- ------------------- -------------------
Percent Percent Percent
of total of total of total
Amount loans Amount loans Amount loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate loans:
One- to four-family $24,669 93.1% $20,404 92.8% $21,093 91.6%
Multifamily 573 2.2 407 1.9 465 2.0
Nonresidential 811 3.0 1,168 5.3 1,431 6.3
Construction 527 2.0 - - 146 0.6
------- ----- ------- ----- ------- -----
Total real estate loans 26,580 100.3 21,979 100.0 23,135 100.5
Consumer loans:
Loans on deposits 134 .5 96 0.4 118 0.5
------- ----- ------- ----- ------- -----
Total loans 26,714 100.8 22,075 100.4 23,253 101.0
Less:
Undisbursed portion of loans
in process 156 .6 - - 146 0.6
Unearned and deferred income 4 - 27 0.2 50 0.2
Allowance for losses on loans 52 .2 52 0.2 39 0.2
------- ----- ------- ----- ------- -----
Net loans $26,502 100.0% $21,996 100.0% $23,018 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at September 30, 1997, regarding the dollar amount of loans maturing
in Market's portfolio based on their contractual terms to maturity. Demand loans
and other loans having no stated schedule of repayments or no stated maturity
are reported as due in one year or less.
<TABLE>
<CAPTION>
Amounts Amounts Amounts Amounts Amounts
due within due in due in due in due in Amounts due
1 year 1 to 3 years 3 to 5 years 5 to 10 years 10 to 20 years after 20 years Total
------ ------------ ------------ ------------- -------------- -------------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans
Adjustable-rate $ 1,529 $ 629 $ - $ 158 $ - $ - $ 2,316
Fixed-rate 251 99 565 2,259 11,525 9,353 24,052
Consumer and other 22 90 22 - - - 134
------- ------- ------- ------- ------- ------- -------
Total loans $ 1,802 $ 818 $ 587 $ 2,417 $11,525 $ 9,353 $26,502
======= ======= ======= ======= ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of loans maturing
after one year from September 30, 1997, which have pre-determined interest rates
or floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined rates Floating or adjustable rates
------------------- ----------------------------
(In thousands)
<S> <C> <C>
Real estate mortgage loans $22,990 $787
Nonresidential real estate 811 -
Consumer and other - 112
---------- -----
Total loans $23,801 $899
======= ====
</TABLE>
LOANS SECURED BY ONE- TO FOUR-FAMILY RESIDENCES. The principal lending
activity of Market is the origination of conventional loans secured by first
mortgages on one- to four-family residences, primarily single-family residences
located within Market's primary market area. At September 30, 1997, Market's
one- to four-family residential loans totaled approximately $24.7 million, or
93.1% of total loans.
OTS regulations and Ohio law limit the amount which Market may lend in
relationship to the appraised value of the real estate and improvements which
will secure the loan (the "LTV") at the time of loan origination. In accordance
with such regulations, Market makes fixed-rate loans on one- to four-family
residences up to 95% of the value of the real estate and improvements thereon,
although most of Market's one- to four-family loans have an LTV of 80% or less.
Market requires private mortgage insurance for the amount of such loans in
excess of 89% of the value of the real estate securing such loans.
Fixed-rate loans are offered by Market, currently for terms of up to 30
years, though most loans are originated with terms of 20 years or less. Market
also offers adjustable-rate mortgage loans ("ARMs") for terms of up to 30 years
with various alternative features in an effort to decrease Market 's interest
rate risk. The interest rate adjustment periods on the ARMs are either one year
or a fixed rate for three or seven years followed by one-year adjustment
periods. The interest rate adjustments on ARMs presently originated by Market
are tied to the U.S. Treasury maturities index. Rate adjustments are computed by
adding a stated margin, typically 2.75%, to the index. The maximum allowable
adjustment at each adjustment date is usually 1% with a maximum adjustment of 5%
over the term of the loan.
The initial rate on ARMs originated by Market may be less than the sum
of the index at the time of origination plus the specified margin. Such loans
may be subject to greater risk of default as the interest rate adjusts to the
fully-indexed level, although such increase is considered in Market 's
underwriting of any such loans with a one-year adjustment period. Of the total
mortgage loans originated by Market during the fiscal year ended September 30,
1997, 69.4% were fixed-rate.
Market also makes closed-end home equity loans, which do not provide
the borrower with a line of credit at Market, in an amount which, when added to
the prior indebtedness secured by the real estate, does not exceed 80% of the
estimated value of the real estate. Home equity loans are secured by real estate
and are made only to borrowers as to whom Market holds the first mortgage. Of
the $24.7 million of one- to four-family residential loans, approximately
$130,000 were closed-end home equity loans.
At September 30, 1997, Market had nonperforming loans totaling $191,000
in its one- to four-family portfolio. Residential real estate loans (including
one- to four-family and multifamily lending) constituted $7.0 million, or 90.2%,
of the $7.7 million of loans originated in fiscal 1997.
LOANS SECURED BY MULTIFAMILY RESIDENCES. In addition to loans on one-
to four-family properties, Market originates a limited number of loans secured
by multifamily properties, which contain more than four units. At September 30,
1997, loans secured by multifamily residences totaled approximately $573,000, or
2.2% of total loans. At September 30, 1997, the largest single loan secured by a
multifamily residence was $186,000 and was performing in accordance with its
terms. Multifamily loans are offered with fixed or adjustable rates for terms of
up to 30 years and have LTVs of up to 80%.
Multifamily lending is generally considered to involve a higher degree
of risk than one- to four-family residential lending because the borrower
typically depends upon income generated by the project to cover operating
expenses and debt service. The profitability of a project can be affected by
economic conditions, government policies and other factors beyond the control of
the borrower. Market attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees on loans made to
corporations and partnerships. Market requires borrowers to agree to submit
financial statements annually to enable Market to monitor the loan and requires
the assignment of rents.
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At September 30, 1997, Market had no nonperforming loans in its
multifamily residential real estate portfolio.
LOANS SECURED BY NONRESIDENTIAL REAL ESTATE. Market also originates
loans for the purchase of nonresidential real estate located within close
proximity to Market 's offices, though it has not originated such a loan in the
last three years. Among the properties securing the nonresidential real estate
loans originated by Market are office buildings, retail properties and a
veterinary clinic, all located within the immediate vicinity of MFC's offices.
At September 30, 1997, approximately $811,000, or 3.0%, of MFC's total loans
were secured by mortgages on nonresidential real estate. Market's nonresidential
real estate loans have fixed rates, terms of up to 20 years and LTVs of up to
75%.
Although loans secured by nonresidential real estate have higher
interest rates than one- to four-family residential real estate loans,
nonresidential real estate lending is generally considered to involve a higher
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. Market has endeavored to reduce such
risk by evaluating the credit history of the borrower, the location of the real
estate, the financial condition of the borrower, the quality and characteristics
of the income stream generated by the property and the appraisals supporting the
property's valuation. Market also requires personal guarantees.
At September 30, 1997, Market had no nonperforming loans in its
nonresidential real estate portfolio. Nonresidential real estate loans
constituted $70,000, or less than 1%, of the $7.7 million of loans originated in
fiscal 1997.
CONSTRUCTION LOANS. Market has made in the past a limited number of
loans for the construction of residential real estate. Such loans are structured
as permanent loans with fixed rates of interest and terms of up to 30 years.
During the first six months while the residence is being constructed, the
borrower is required to pay interest only. Such loans have an LTV of 80% or
less, with the value of the land counting as part of the down payment if already
owned. Construction loans originated by Market are made to owner-occupants for
the construction of single-family homes by a general contractor. At September
30, 1997, Market had construction loans of approximately $527,000, or 2.0% of
total loans outstanding, with the undisbursed portion of such loans totaling
approximately $156,000.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. In addition,
such loans are more difficult to evaluate and monitor. Loan funds are advanced
upon the security of the project under construction, which is more difficult to
value before the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate the LTV's and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, Market would have to take control of the project and attempt either to
arrange for construction or dispose of the unfinished project. Almost all of
Market's construction loans are secured by properties in Hamilton County. The
economy of such lending area has been relatively stable over the three years
ended September 30, 1997.
None of Market's construction loans were nonperforming at September 30,
1997.
COMMERCIAL LOANS. Market does not issue any letters of credit or
originate or purchase any loans for commercial, business or agricultural
purposes, other than loans secured by real estate.
CONSUMER LOANS. Market makes loans at adjustable rates of interest to
depositors on the security of their deposit accounts. At September 30, 1997,
Market had approximately $134,000, or .5% of total loans, invested in such
consumer loans.
Consumer loans may entail greater risk than do residential real estate
loans. The risk of default on consumer loans increases during periods of
recession, high unemployment and other adverse conditions. At September 30,
1997, Market had no nonperforming loans in its consumer loan portfolio.
LOAN SOLICITATION AND PROCESSING. Loan originations are developed from
a number of sources, including continuing business with depositors, other
borrowers and real estate developers, solicitations by Market's lending staff
and walk-in customers.
Loan applications for permanent real estate loans are taken by loan
personnel. Market typically obtains a credit report, verification of employment
and other documentation concerning the creditworthiness of the borrower. An
appraisal of the fair market value of the real estate which will be given as
security for the loan is prepared by an appraiser approved by the Board of
Directors. Upon the completion of the appraisal and the receipt of information
on the credit history of the borrower, the
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application for a loan is submitted for review in accordance with Market's
underwriting guidelines. The Managing Officer of Market has authority to approve
loans of $100,000 or less. Loans for amounts ranging from $100,001 to $200,000
must be approved by a directors' committee, and loans of greater than $200,000
must be approved by the full Board of Directors of Market.
Until October 1995, if a mortgage loan application was approved, Market
typically obtained an attorney's opinion of title. Presently, Market obtains
title insurance on loans secured by real estate unless the borrower is seeking
to refinance a loan Market originated. Borrowers are required to carry
satisfactory fire and casualty insurance and flood insurance, if applicable, and
to name Market as an insured mortgagee.
The procedure for approval of construction loans is the same as for
permanent real estate loans, except that an appraiser evaluates the building
plans, construction specifications and estimates of construction costs. Market
also evaluates the feasibility of the proposed construction project and the
experience and record of the builder. Once approved, the construction loan is
disbursed in portions based upon periodic inspections of construction progress.
LOAN ORIGINATIONS AND PARTICIPATION. Currently, Market is offering both
fixed-rate and adjustable-rate loans, with no intention of selling such loans in
the secondary market. Prior to September 1996, Market originated only fixed-rate
mortgage loans. Market does not service loans for other financial institutions.
The following table presents Market's loan origination activity for the
periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Residential (1) $6,978 $2,515 $2,115
Nonresidential 70 38 -
Construction 527 - 146
Consumer 157 30 97
------ ------- ------
Total loans originated 7,732 2,583 2,358
Principal repayments (3,229) (3,621) (3,018)
Increase in other items, net (2) 3 16 20
------ ------- ------
Net increase (decrease) $4,506 $(1,022) $ (640)
====== ======= ======
</TABLE>
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(1) Includes one- to four-family and multifamily loans.
(2) Other items consist of loans in process, deferred loan origination fees
and allowance for loan losses.
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital for risk-based purposes plus any loan reserves not
already included in total capital (collectively, "Lending Limit Capital"). A
savings association may lend to one borrower an additional amount not to exceed
10% of the association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In applying this limit, the
regulations require that loans to certain related or affiliated borrowers be
aggregated. An exception to this limit permits loans of any type to one borrower
of up to $500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the lending limit on a case-by-case basis.
Based on such limits, Market was able to lend approximately $1.9 to one
borrower at September 30, 1997. The largest amount Market had outstanding to one
borrower, who is a director of Market, at September 30, 1997, was $518,000,
consisting of three loans, the largest of which had an outstanding balance of
$301,000, which was secured by one- to four-family real estate and which was
performing in accordance with its terms. The other two loans were secured by
nonresidential real estate and were performing in accordance with their terms.
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DELINQUENT LOANS, NONPERFORMING ASSETS AND CLASSIFIED ASSETS. Payments
on loans made by Market are due on the first day of the month with the interest
portion of the payment applicable to interest accrued during the prior month.
When a loan payment has not been made by the thirtieth of the month, a late
notice is sent. In addition, if the loan is on the borrower's primary residence,
Market will send a notice of available counseling for delinquent borrowers. If
payment is not received by the sixtieth day, a second notice is sent. Telephone
calls are made to the borrower in connection with both the 30- and 60-day
notices. If Market is unable to make contact with the borrower by mail or
telephone, a representative from Market will make a personal visit to the
property in an attempt to speak with the borrower.
When a loan secured by real estate becomes more than 90 days delinquent
it is considered nonperforming by Market and the above steps are repeated and a
letter is sent to the borrower by Market to inform the borrower that foreclosure
proceedings will begin if the loan is not brought current promptly. The borrower
is also counseled to make every effort to sell the property before it is lost in
a sheriff's sale. If the customer fails to take any action, a request is made to
the Board of Directors to authorize foreclosure proceedings.
If a foreclosure occurs, the real estate is sold at public sale and may
be purchased by Market, to be sold as soon as possible by Market without the use
of a real estate agent.
The following table reflects the amount of loans in a delinquent status
as of the dates indicated:
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Percent Percent Percent
of total of total of total
Number Amount loans Number Amount loans Number Amount loans
------ ------ ----- ------ ------ ----- ------ ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loans delinquent for:
30 - 59 days 5 $ 64 0.3 14 $337 1.6% 17 $902 3.9%
60 - 89 days 13 244 0.9 3 380 1.7 2 20 0.1
90 days and over 13 191 0.7 6 139 .6 - - -
-- ----- --- --- ---- --- -- ---- ---
Total delinquent loans 31 $499 1.9% 23 $856 3.9% 19 $922 4.0%
== ==== === == ==== === == ==== ===
</TABLE>
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The following table sets forth information with respect to the accrual
and nonaccrual status of Market's loans and other nonperforming assets at the
dates indicated:
<TABLE>
<CAPTION>
At September 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent more
than 90 days (1) $191 $139 $ -
Loans accounted for on a
nonaccrual basis:
Real estate
One- to four-family - - -
Multifamily - - -
Nonresidential - - -
Consumer - - -
----- ----- ---
Total nonaccrual loans - - -
----- ----- ---
Total nonperforming loans 191 139 -
Real estate acquired through
foreclosure - - -
----- ----- ---
Total nonperforming assets $191 $139 $ -
==== ==== =====
Allowance for loan losses $ 52 $ 52 $ 39
===== ===== =====
Nonperforming assets as a
percent of total assets 0.3% 0.3% N/A
Nonperforming loans as a
percent of total loans 0.7% 0.6% N/A
Allowance for loan losses
as a percent of
nonperforming loans 27.2% 37.4% N/A
</TABLE>
- -----------------------------
(1) Consists entirely of one- to four-family residential loans for all
dates presented.
Market had no nonaccruing loans during the year ended September 30,
1997.
Market classifies its own assets on a regular basis in accordance with
federal regulations. Problem assets are classified as "substandard," "doubtful"
or "loss." "Substandard" assets have one or more defined weaknesses and are
characterized by the distinct possibility that Market will sustain some loss if
the deficiencies are not corrected. "Doubtful" assets have the same weaknesses
as "substandard" assets, with the additional characteristics that (i) the
weaknesses make collection or liquidation in full, on the basis of currently
existing facts, conditions and values, questionable and (ii) there is a high
possibility of loss. An asset classified "loss" is considered uncollectible and
of such little value that its continuance as an asset of Market is not
warranted. The regulations also contain a "special mention" category, consisting
of assets which do not currently expose an institution to a different degree of
risk to warrant classification but which possess credit deficiencies or
potential weaknesses deserving management's close attention.
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The aggregate amounts of Market's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------
1997 1996 1995
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $17 $51 $15
Doubtful 9 - -
Loss 2 2 2
--- --- ---
Total classified assets $28 $53 $17
=== === ===
</TABLE>
Market establishes general allowances for loan losses for any loan
classified as substandard or doubtful. If an asset, or portion thereof, is
classified as loss, Market establishes specific allowances for losses in the
amount of 100% of the portion of the asset classified loss. See "Allowance for
Loan Losses." Generally, Market charges off the portion of any real estate loan
deemed to be uncollectible.
Market analyzes each classified asset on a monthly basis to determine
whether changes in the classifications are appropriate under the circumstances.
Such analysis focuses on a variety of factors, including the amount of any
delinquency and the reasons for the delinquency, if any, the use of the real
estate securing the loan, the status of the borrower and the appraised value of
the real estate. As such factors change, the classification of the asset will
change accordingly.
ALLOWANCE FOR LOAN LOSSES. Market maintains an allowance for loan
losses based upon a number of relevant factors, including, but not limited to,
growth and changes in the composition of the loan portfolio, trends in the level
of delinquent and problem loans, current and anticipated economic conditions in
the primary lending area, past loss experience and possible losses arising from
specific problem assets.
The single largest component of Market's loan portfolio consists of
one- to four-family residential real estate loans. Substantially all of these
loans are secured by property in Market's lending area of Hamilton County, Ohio,
which has a fairly stable economy. Market's practice of making loans primarily
in its local market area has contributed to a low historical charge-off rate. In
addition to one- to four-family residential real estate loans, Market makes home
equity, multifamily residential real estate, nonresidential real estate and
construction loans. These real estate loans are also secured by property in
Market's lending area. Market has not experienced any significant charge-offs
from these other real estate loan categories in recent years. Only .5% of
Market's total loans are comprised of consumer loans, which carry a higher
degree of risk than the real estate loans.
The following table sets forth an analysis of Market's allowance for
loan losses for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $52 $39 $39
Loans charged-off: -
Residential real estate loans - - -
Nonresidential real estate loans - - -
Consumer loans - - -
--- --- ---
Total charge-offs - - -
Recoveries - - -
Provision for loan losses - 13 -
--- --- ---
Balance at end of period $52 $52 $39
=== === ===
Ratio of net charge-offs to average
loans - - -
=== === ===
Ratio of allowance for loan losses
to total loans .20% .24% .17%
=== === ===
</TABLE>
The allowance for loan losses is based on estimates and is, therefore,
monitored monthly and adjusted as necessary to provide an adequate allowance.
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INVESTMENT ACTIVITIES
Federal regulation and Ohio law permit Market to invest in various
types of investment securities, including interest-bearing deposits in other
financial institutions, U.S. Treasury and agency obligations, mortgage-backed
securities and certain other specified investments. The Board of Directors of
Market has adopted an investment policy which authorizes management to make
investments in U.S. Government and agency securities, deposits in the FHLB,
certificates of deposit in federally-insured financial institutions, and federal
funds at commercial banks. The Board of Directors has primary responsibility for
implementation of the investment policy. Market's investment policy is designed
primarily to provide and maintain liquidity within regulatory guidelines, to
maintain a balance of high quality investments to minimize risk and to maximize
return without sacrificing liquidity and safety. The following table sets forth
the composition of the Company's investment portfolio, excluding mortgage-backed
securities, at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
----------------------------------------------------------------
1997 1996 1995
------------------ ------------------ ------------------
Book Percent Book Percent Book Percent
value of total value of total value of total
----- -------- ----- -------- ----- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-bearing deposits
in other financial institutions (1) $ 8,388 31.0% $10,610 51.1% $10,483 54.3%
U.S. Government agency
obligations (2) 17,257 63.8 9,062 43.7 7,984 41.3
FHLMC stock (3) 1,029 3.8 712 3.4 504 2.6
FHLB stock 390 1.4 364 1.8 339 1.8
------- ----- ------- ----- ------- -----
Total $27,064 100.0% $20,748 100.0% $19,310 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- -----------------------------------
(1) Includes interest-bearing deposits, Federal Funds sold and certificates
of deposit.
(2) Consists primarily of investments in U.S. Treasury Notes and Bills,
FHLB bonds and a Student Loan Marketing Association ("SLMA") bond,
which are classified as held to maturity at September 30, 1997, 1996
and 1995.
(3) Classified as available for sale at September 30, 1997, 1996 and 1995.
-10-
<PAGE> 11
Market maintains a portfolio of mortgage-backed securities in the form
of fixed-rate participation interests issued by the Government National Mortgage
Association ("GNMA"). Mortgage-backed securities generally entitle Market to
receive a portion of the cash flows from an identified pool of mortgages and are
guaranteed by the issuing agency as to principal and interest. Although
mortgage-backed securities generally yield less than individual loans originated
by Market, management believes they are a prudent alternative for investing
excess cash flow when available funds exceed local loan demand and as part of
Market's interest rate risk management. The following table sets forth certain
information regarding Market's investments in mortgage-backed securities at the
dates indicated, all of which are classified as held to maturity:
<TABLE>
<CAPTION>
At September 30, 1997 At September 30, 1996
------------------------------------------- ---------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized unrealized unrealized fair Amortized unrealized unrealized fair
cost gains loss value cost gains loss value
---- ----- ---- ----- ---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GNMA participation
certificates $1,268 $70 $ - $1,338 $1,549 $63 $ - $1,612
====== === ==== ====== ====== === === ======
<CAPTION>
At September 30, 1995
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains loss value
---- ----- ---- -----
<S> <C> <C> <C> <C>
GNMA participation
certificates $2,211 $102 $ - $2,313
====== ==== === ======
</TABLE>
-11-
<PAGE> 12
The maturities of Market's investment securities at September 30, 1997,
are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 1997
-------------------------------------------------------------------------------------------
1-5 5-10 Total
Less than 1 year years years investment securities
---------------- ----------------- ---------------- ----------------------------
Book Book Book Book Market Average
value Yield value Yield value Yield value value yield
----- ----- ----- ----- ----- ----- ----- ----- -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Certificates of deposit in
other financial $3,190 5.83% $3,500 6.29% - - $ 6,690 $ 6,690 6.07%
institutions
U.S. Government agency
obligations (1) $6,399 6.10% $9,858 6.49% $1,000 6.99% $17,257 $17,316 6.37%
</TABLE>
- ------------------------------------
(1) Consists primarily of investments in U.S. Treasury Notes and Bills,
FHLB bonds and a SLMA bond, which are classified as held to maturity at
September 30, 1997.
DEPOSITS AND BORROWINGS
GENERAL. Deposits have traditionally been the primary source of
Market's funds for use in lending and other investment activities. In addition
to deposits, Market derives funds from interest payments and principal
repayments on loans and income on earning assets. Loan payments are a relatively
stable source of funds, while deposit inflows and outflows fluctuate in response
to general interest rates and money market conditions.
DEPOSITS. Deposits are attracted principally from within Market's
market area through the offering of a selection of deposit instruments,
including regular passbook savings accounts, term certificate accounts and
Individual Retirement Accounts ("IRAs"). Interest rates paid, maturity terms,
service fees and withdrawal penalties for the various types of accounts are
monitored weekly by the Managing Officer and reviewed monthly by the Board of
Directors of Market. Market does not use brokers to attract deposits. The amount
of deposits from outside Market's market area is not significant.
At September 30, 1997, Market's certificates of deposit totaled
approximately $22.8 million, or 64.5% of total deposits. Of such amount,
approximately $18.4 million in certificates of deposit mature within one year.
Based on past experience and Market's prevailing pricing strategies, management
believes that a substantial percentage of such certificates will be renewed with
Market at maturity. If, however, Market is unable to renew the maturing
certificates for any reason, borrowings of up to $7.8 million are available from
the FHLB of Cincinnati.
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Market at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------------------------------------
1997 1996 1995
-------------------- --------------------- ---------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts (1) $10,094 28.6% $11,027 29.6% $11,008 28.9%
Club accounts (2) 52 .2 51 .1 54 .1
Money market accounts (3) 2,374 6.7 3,380 9.1 3,857 10.2
--------- ------ -------- ------- --------- ------
Total transaction accounts 12,520 35.5 14,458 38.8 14,919 39.2
Certificates of deposit (4) 22,783 64.5 22,824 61.2 23,137 60.8
-------- ------ -------- ------ -------- ------
Total deposits $35,303 100.0% $37,282 100.0% $38,056 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- ---------------------------------
-12-
<PAGE> 13
(1) The weighted average interest rates on passbook accounts were 2.83% at
September 30, 1997 and 1996, and 3.09% at September 30, 1995.
(2) The weighted average interest rates on club accounts were 5.07%, 5.08%
and 5.07% at September 30, 1997, 1996 and 1995, respectively.
(3) The weighted average interest rates on money market accounts were 2.83%
at September 30, 1997 and 3.09% at September 30, 1996 and 1995.
(4) The weighted average rates on all certificates of deposit were 5.97%,
5.74% and 5.04% at September 30, 1997, 1996 and 1995, respectively.
The following table shows rate and maturity information for Market's
certificates of deposit at September 30, 1997:
<TABLE>
<CAPTION>
Amount Due
---------------------------------------------------------------
Over Over
Up to 1 year to 2 years to
Rate one year 2 years 3 years Total
- ---- -------- -------- --------- -------
(In thousands)
<S> <C> <C> <C> <C>
5.00 - 5.99% $17,194 $3,035 $559 $20,788
6.00 - 6.99% 1,068 264 518 1,850
7.00 - 7.99% 145 - - 145
------- ------ ------ -------
Total certificates
of deposit $18,407 $3,299 $1,077 $22,783
======= ====== ====== =======
</TABLE>
The following table presents the amount of Market's certificates of
deposit of $100,000 or more by the time remaining until maturity at September
30, 1997:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
December 31, 1997 $ 447
March 31, 1998 717
June 30, 1998 303
September 30, 1998 500
After September 30, 1998 420
-------
Total $ 2,387
=======
</TABLE>
-13-
<PAGE> 14
The following table sets forth Market's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------------------
1997 1996 1995
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 37,282 $ 38,056 $ 38,674
Deposits 40,650 13,155 19,344
Withdrawals (43,940) (15,249) (21,039)
Interest credited 1,311 1,320 1,077
-------- -------- --------
Ending balance $ 35,303 $ 37,282 $ 38,056
======== ======== ========
Net decrease $ (1,979) $ (774) $ (618)
======== ======== ========
Percent decrease (5.3)% (2.0)% (1.6)%
======== ======== ========
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, Market is authorized to apply for advances
from the FHLB of Cincinnati, provided certain standards of creditworthiness have
been met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which an
association is eligible for such advances will depend upon whether it meets the
Qualified Thrift Lender (the "QTL") test. See "REGULATION - Office of Thrift
Supervision -- Qualified Thrift Lender Test." At September 30, 1997, Market was
not utilizing FHLB advances.
COMPETITION
Market competes for deposits with other savings and loan associations,
savings banks, commercial banks and credit unions and with issuers of commercial
paper and other securities, including shares in money market mutual funds. The
primary factors in competition for deposits are customer service and convenience
of office location. In making loans, Market competes with other savings
associations, savings and loan associations, commercial banks, mortgage brokers,
consumer finance companies, credit unions, leasing companies and other lenders.
Market competes for loan originations primarily through the interest rates and
loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is intense and is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. Market does not offer all of the products and services offered by
some of its competitors, particularly commercial banks.
EMPLOYEES
At September 30, 1997, Market had eight full-time employees and three
part-time employees. Market believes that relations with its employees are
excellent. Market offers health, life and disability benefits to all full-time
employees and although it has had a defined benefit pension plan for its
full-time employees in the past, such plan has been terminated. Currently,
Market has an employee stock ownership plan for employees who are 21 or older
and who have completed at least one year of service. None of the employees of
Market are represented by a collective bargaining unit.
REGULATION
GENERAL
MFC is a savings and loan holding company within the meaning of the
Home Owners Loan Act, as amended (the "HOLA"). Consequently, MFC is subject to
regulation, examination and oversight by the OTS and must submit periodic
reports to the OTS concerning its activities and financial condition. In
addition, as a corporation organized under Ohio law, MFC is subject to
provisions of the Ohio Revised Code applicable to corporations generally.
As a savings and loan association chartered under the laws of Ohio,
Market is subject to regulation, examination and oversight by the Superintendent
of the Division (the "Ohio Superintendent"). Because Market's deposits are
insured by the FDIC, Market also is subject to regulatory oversight by the FDIC.
Market must file periodic reports with the OTS
-14-
<PAGE> 15
concerning its activities and financial condition. Examinations are conducted
periodically by federal and state regulators to determine whether Market is in
compliance with various regulatory requirements and is operating in a safe and
sound manner. Market is a member of the FHLB and is subject to certain
regulations promulgated by the Board of Governors of the Federal Reserve System
(the "FRB").
Congress is considering legislation to eliminate the federal savings
and loan charter and the separate federal regulation of savings and loan
associations. Pursuant to such legislation, Congress may eliminate the OTS and
Market may be regulated under federal law as a bank or be required to change its
charter. Such change in regulation or charter would likely change the range of
activities in which Market may engage and would probably subject Market to more
regulation by the FDIC. In addition, MFC might become subject to a different set
of holding company regulations limiting the activities in which MFC may engage
and subjecting MFC to additional regulatory requirements, including separate
capital requirements. At this time, MFC cannot predict when or whether Congress
may actually pass legislation regarding MFC's and Market's regulatory
requirements or charter. Although such legislation, if enacted, may change the
activities in which MFC or Market are authorized to engage, it is not
anticipated that the current activities of either MFC or Market will be
materially affected by those activity limits.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. Neither
MFC nor Market has opted out of the protection afforded by Chapter 1704.
CONTROL SHARE ACQUISITION. Section 1701.831 of the Ohio Revised Code
(the "Control Share Acquisition Statute") requires that, with certain
exceptions, acquisitions of voting securities which would result in the
acquiring shareholder owning 20%, 33-1/3% or 50% of the outstanding voting
securities of an Ohio corporation (a "Control Share Acquisition") must be
approved in advance by the holders of at least a majority of the outstanding
voting shares of such corporation represented at a meeting at which a quorum is
present and a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder, by certain other persons who acquire or transfer voting shares
after public announcement of the acquisition or by certain officers of the
corporation or directors of the corporation who are employees of the
corporation. The Control Share Acquisition Statute was intended, in part, to
protect shareholders of Ohio corporations from coercive tender offers.
TAKEOVER BID STATUTE. Ohio law provides that an offeror may not make
not make a tender offer or request or invitation for tenders that would result
in the offeror beneficially owning more than ten percent of any class of the
target company's equity securities unless such offeror files certain information
with the Ohio Division of Securities (the "Securities Division") and provides
such information to the target company and the offerees within Ohio. The
Securities Division may suspend the continuation of the control bid if the
Securities Division determines that the offeror's filed information does not
provide full disclosure to the offerees of all material information concerning
the control bid. The statue also provides that an offeror may not acquire any
equity security of a target company within two years of the offeror's previous
acquisition of any
-15-
<PAGE> 16
equity security of the same target company pursuant to a control bid unless the
Ohio offerees may sell such security to the offeror on substantially the same
terms as provided by the previous control bid. The statute does not apply to a
transaction if either the offeror or the target company is a savings and loan
holding company and the proposed transaction requires federal regulatory
approval.
OHIO SAVINGS AND LOAN REGULATION
The Ohio Superintendent is responsible for the regulation and
supervision of Ohio savings and loan associations in accordance with the laws of
the State of Ohio and imposes assessments on Ohio associations based on their
asset size to cover the costs of supervision and examination. Ohio law
prescribes the permissible investments and activities of Ohio savings and loan
associations, including the types of lending that such associations may engage
in and the investments in real estate, subsidiaries and corporate or government
securities that such associations may make. The ability of Ohio associations to
engage in these state-authorized investments and activities is subject to
oversight and approval by the FDIC, if such investments or activities are not
permissible for a federally-chartered savings association. The Ohio
Superintendent also has approval authority over any mergers involving, or
acquisitions of control of, Ohio savings and loan associations. The Ohio
Superintendent may initiate certain supervisory measures or formal enforcement
actions against Ohio associations. Ultimately, if the grounds provided by law
exist, the Superintendent may place an Ohio association in conservatorship or
receivership.
In addition to being governed by the laws of Ohio specifically
governing savings and loan associations, Market is also governed by Ohio
corporate law, to the extent such law does not conflict with the laws
specifically governing savings and loan associations.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the SAIF. The OTS issues regulations governing the
operation of savings associations, regularly examines such associations and
imposes assessments on savings associations based on their asset size to cover
the costs of general supervision and examination. The OTS also may initiate
enforcement actions against savings associations and certain persons affiliated
with them for violations of laws or regulations or for engaging in unsafe or
unsound practices. If the grounds provided by law exist, the OTS may appoint a
conservator or receiver for a savings association.
Savings associations are subject to regulatory oversight under various
consumer protection and fair lending laws. These laws govern, among other
things, truth-in-lending disclosures, equal credit opportunity, fair credit
reporting and community reinvestment. Failure to abide by federal laws and
regulations governing community reinvestment could limit the ability of an
association to open a new branch or engage in a merger. Community reinvestment
regulations evaluate how well and to what extent an institution lends and
invests in its designated service area, with particular emphasis on low- to
moderate-income communities and borrowers in that area.
REGULATORY CAPITAL REQUIREMENTS. Market is required by OTS regulations
to meet certain minimum capital requirements. The tangible capital requirement
requires savings associations to maintain "tangible capital" of not less than
1.5% of their adjusted total assets. Tangible capital is defined in OTS
regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 3% of their total assets. The
OTS has proposed to amend the core capital requirement so that those
associations that do not have the highest examination rating and exceed an
acceptable level of risk will be required to maintain core capital of from 4% to
5%, depending on the association's examination rating and overall risk. Market
does not anticipate that it will be adversely affected if the core capital
requirement regulation is amended as proposed.
OTS regulations require that savings associations maintain "risk-based
capital" in an amount not less than 8% of their risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Market includes a general loan loss allowance of $50,000 at
September 30, 1997.
-16-
<PAGE> 17
The OTS has adopted an interest rate risk component to the risk-based
capital requirement, though the implementation of that component has been
delayed. Pursuant to the interest rate risk component, a savings association
will have to measure the effect of an immediate 200 basis point change in
interest rates on the value of its portfolio as determined under the methodology
of the OTS. If the measured interest rate risk is above the level deemed normal
under the regulation, the association will be required to deduct one-half of
such excess exposure from its total capital when determining its risk-based
capital. In general, an association with less than $300 million in assets and a
risk-based capital ratio in excess of 12% will not be subject to the interest
rate risk component. Pending implementation of the interest rate risk component,
the OTS has the authority to impose a higher individualized capital requirement
on any savings association it deems to have excess interest rate risk. The OTS
also may adjust the risk-based capital requirement on an individualized basis to
take into account risks due to concentrations of credit and non-traditional
activities.
The OTS has adopted regulations governing prompt corrective action to
resolve the problems of capital deficient and otherwise troubled savings
associations. At each successively lower defined capital category, an
association is subject to more restrictive and more numerous mandatory or
discretionary regulatory actions or limits, and the OTS has less flexibility in
determining how to resolve the problems of the institution. In addition, the OTS
generally can downgrade an association's capital category, notwithstanding its
capital level, if, after notice and opportunity for hearing, the association is
deemed to be engaging in an unsafe or unsound practice because it has not
corrected deficiencies that resulted in it receiving a less than satisfactory
examination rating on matters other than capital or it is deemed to be in an
unsafe or unsound condition. All undercapitalized associations must submit a
capital restoration plan to the OTS within 45 days after becoming
undercapitalized. Such associations will be subject to increased monitoring and
asset growth restrictions and will be required to obtain prior approval for
acquisitions, branching and engaging in new lines of business. Furthermore,
critically undercapitalized institutions must be placed in conservatorship or
receivership within 90 days of reaching that capitalization level, except under
limited circumstances. Market's capital at September 30, 1997, met the standards
for the highest category, a "well-capitalized" institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
LIQUIDITY. OTS regulations require that a savings association maintain
an average daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations) equal to a monthly average of not less than 5% of its net
withdrawable savings deposits plus borrowings payable in one year or less.
Monetary penalties may be imposed upon associations failing to meet these
liquidity requirements. The eligible liquidity of Market at September 30, 1997,
was approximately $24.6 million, or 60.9%, and exceeded the then applicable 5.0%
liquidity requirement by approximately $22.6 million. Effective November 24,
1997, the liquidity requirement was reduced to 4%.
QUALIFIED THRIFT LENDER TEST. Savings associations are required to meet
the QTL test. Prior to September 30, 1996, the QTL test required savings
associations to maintain a specified level of investments in assets that are
designated as qualifying thrift investments ("QTI"), which are generally related
to domestic residential real estate and manufactured housing and include credit
card, student and small business loans and stock issued by any FHLB, the FHLMC
or the FNMA. Under such test, 65% of an institution's "portfolio assets" (total
assets less goodwill and other intangibles, property used to conduct business
and 20% of liquid assets) must consist of QTI on a monthly average basis in nine
out of every 12 months. Effective September 30, 1996, a savings association may
also qualify as a QTL by meeting the definition of "domestic building and loan
association" under the Internal Revenue Code of 1986, as amended (the "Code").
In order for an institution to meet the definition of a "domestic building and
loan association" under the Code, at least 60% of such institution's assets must
consist of specified types of property, including cash loans secured by
residential real estate or deposits, educational loans and certain governmental
obligations. The OTS may grant exceptions to the QTL test under certain
circumstances. If a savings association fails to meet the QTL test, the
association and its holding company become subject to certain operating and
regulatory restrictions. A savings association that fails to meet the QTL test
will not be eligible for new FHLB advances. At September 30, 1997, Market met
the QTL test.
-17-
<PAGE> 18
LENDING LIMIT. OTS regulations generally limit the aggregate amount
that a savings association can lend to one borrower to an amount equal to 15% of
the association's Lending Limit Capital. A savings association may lend to one
borrower an additional amount not to exceed 10% of the association's Lending
Limit Capital, if the additional amount is fully secured by certain forms of
"readily marketable collateral." Real estate is not considered "readily
marketable collateral." Certain types of loans are not subject to the lending
limit. A general exception to the 15% limit provides that an association may
lend to one borrower up to $500,000, for any purpose. In applying the limit on
loans to one borrower, the regulations require that loans to certain related
borrowers be aggregated. At September 30, 1997, Market was in compliance with
this lending limit.
TRANSACTIONS WITH INSIDERS AND AFFILIATES. Loans to executive officers,
directors and principal shareholders and their related interests must conform to
the lending limit on loans to one borrower, and the total of such loans to
executive officers, directors, principal shareholders and their related
interests cannot exceed the association's Lending Limit Capital (or 200% of
Lending Limit Capital for qualifying institutions with less than $100 million in
deposits). Most loans to directors, executive officers and principal
shareholders must be approved in advance by a majority of the "disinterested"
members of the board of directors of the association, with any "interested"
director not participating. All loans to directors, executive officers and
principal shareholders must be made on terms substantially the same as offered
in comparable transactions with the general public or as offered to all
employees in a company-wide benefit program, and loans to executive officers are
subject to additional limitations. Market was in compliance with such
restrictions at September 30, 1997.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. MFC is an
affiliate of Market. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchasing of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Market was in
compliance with these requirements and restrictions at September 30, 1997.
LIMITATIONS ON CAPITAL DISTRIBUTIONS. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions, including dividend payments. An association which has converted
from mutual to stock form is prohibited from declaring or paying any dividends
or from repurchasing any of its stock if, as a result, the net worth of the
association would be reduced below the amount required to be maintained for the
liquidation account established in connection with its mutual to stock
conversion. OTS regulations also establish a three-tier system limiting capital
distributions according to ratings of associations based on their capital level
and supervisory condition.
Tier 1 consists of associations that, before and after the proposed
distribution, meet their fully phased-in capital requirements. Associations in
this category may make capital distributions during any calendar year up to the
greater of (i) 100% of net income, current year-to-date, plus 50% of the amount
by which the lesser of the association's tangible, core or risk-based capital
exceeds its fully phased-in capital requirement for such capital component, as
measured at the beginning of the calendar year, and (ii) the amount authorized
for a Tier 2 association. A Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association. Market meets the requirements for a Tier 1 association and has not
been notified of any need for more than normal supervision.
Tier 2 consists of associations that, before and after the proposed
distribution, meet their current minimum, but not fully phased-in, capital
requirements. Associations in this category may make capital distributions of up
to 75% of net income over the most recent four quarters. Tier 3 associations do
not meet current minimum capital requirements and must obtain OTS approval of
any capital distribution. Tier 2 associations that propose to make a capital
distribution in excess of the noted safe harbor level must also obtain OTS
approval. Tier 2 associations proposing to make a capital distribution within
the safe harbor provisions and Tier 1 associations proposing to make any capital
distribution need only submit written notice to the OTS 30 days prior to such
distribution.
-18-
<PAGE> 19
As a subsidiary of MFC, Market is required to give the OTS 30 days'
notice prior to declaring any dividend on its stock. The OTS may object to the
distribution during such 30-day period based on safety and soundness concerns.
Market paid no dividends to MFC during fiscal 1997.
HOLDING COMPANY REGULATION. MFC is a savings and loan holding company
within the meaning of the HOLA. As such, MFC has registered with the OTS and is
subject to OTS regulations, examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by MFC.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company, MFC generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit MFC's ability to engage in these activities. It cannot be
predicted whether and in what form these proposals might become law. However,
such limits would not impact MFC's current activities, which consist solely of
holding stock of Market. The broad latitude to engage in activities under
current law can be restricted. If the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of MFC and its
affiliates may be imposed on the savings association. Notwithstanding the
foregoing rules as to permissible business activities of a unitary savings and
loan holding company, if the savings association subsidiary of a holding company
fails to meet the QTL test, then such unitary holding company would become
subject to the activities restrictions applicable to multiple holding companies.
At September 30, 1997, Market met both those tests.
If MFC acquired control of another savings institution, other than
through a merger or other business combination with Market, MFC would become a
multiple savings and loan holding company. Unless the acquisition was an
emergency thrift acquisition and each subsidiary savings association met the QTL
test, the activities of MFC and any of its subsidiaries (other than Market or
other subsidiary savings associations) would thereafter be subject to activity
restrictions. The HOLA provides that, among other things, no multiple savings
and loan holding company or subsidiary thereof that is not a savings institution
shall commence or continue for a limited period of time after becoming a
multiple savings and loan holding company or subsidiary thereof, any business
activity other than (i) furnishing or performing management services for a
subsidiary savings institution, (ii) conducting an insurance agency or escrow
business, (iii) holding, managing or liquidating assets owned by or acquired
from a subsidiary savings institution, (iv) holding or managing properties used
or occupied by a subsidiary savings institution, (v) acting as trustee under
deeds of trust, (vi) those activities previously directly authorized by federal
regulation as of March 5, 1987, to be engaged in by multiple holding companies,
or (vii) those activities authorized by the FRB as permissible for bank holding
companies, unless the OTS by regulation prohibits or limits such activities for
savings and loan holding companies. Those activities described in (vii) above
must also be approved by the OTS prior to being engaged in by a multiple holding
company.
The OTS may approve acquisitions resulting in the formation of a
multiple savings and loan holding company that controls savings associations in
more than one state only if the multiple savings and loan holding company
involved controls a savings association that operated a home or branch office in
the state of the association to be acquired as of March 5, 1987, or if the laws
of the state in which the institution to be acquired is located specifically
permit institutions to be acquired by state-chartered institutions or savings
and loan holding companies located in the state where the acquiring entity is
located (or by a holding company that controls such state-chartered savings
institutions). As under prior law, the OTS may approve an acquisition resulting
in a multiple savings and loan holding company controlling savings associations
in more than one state in the case of certain emergency thrift acquisitions.
Bank holding companies have had more expansive authority to make interstate
acquisitions than savings and loan holding companies since August 1995.
-19-
<PAGE> 20
FEDERAL REGULATION OF ACQUISITIONS OF CONTROL OF MFC AND MARKET. In
addition to the Ohio law limitations on the merger and acquisition of Market and
MFC, federal limitations generally require regulatory approval of acquisitions
at specified levels. Under pertinent federal law and regulations, no person,
directly or indirectly, or acting in concert with others, may acquire control of
Market or MFC without 60 days' prior notice to the OTS. "Control" is generally
defined as having more than 25% ownership or voting power; however, ownership or
voting power of more than 10% may be deemed "control" if certain factors are in
place. If the acquisition of control is by a company, the acquiror must obtain
approval, rather than give notice, of the acquisition as a savings and loan
holding company.
In addition, any merger of Market must be approved by the OTS as well
as the Superintendent. Further, any merger of MFC in which MFC is not the
resulting company must also be approved by both the OTS and the Superintendent.
FEDERAL DEPOSIT INSURANCE CORPORATION
DEPOSIT INSURANCE AND ASSESSMENTS. The FDIC is an independent federal
agency that insures the deposits, up to prescribed statutory limits, of
federally insured banks and savings and loan associations and safeguards the
safety and soundness of the banking and savings and loan industries. The FDIC
administers two separate insurance funds, the Bank Insurance Fund ("BIF") for
commercial banks and state savings banks and the SAIF for savings associations.
Market is a member of the SAIF and its deposit accounts are insured by the FDIC
up to the prescribed limits. The FDIC has examination authority over all insured
depository institutions, including Market, and has authority to initiate
enforcement actions against federally-insured savings associations if the FDIC
does not believe the OTS has taken appropriate action to safeguard safety and
soundness and the deposit insurance fund.
The FDIC is required to maintain designated levels of reserves in the
SAIF and in the BIF. The FDIC may increase assessment rates for either fund if
necessary to restore the fund's ratio of reserves to insured deposits to its
target level within a reasonable time and may decrease such rates if such target
level has been met. The FDIC has established a risk-based assessment system for
both SAIF and BIF members. Under this system, assessments vary based on the risk
the institution poses to its deposit insurance fund. The risk level is
determined based on the institution's capital level and the FDIC's level of
supervisory concern about the institution.
Prior to September 1996, the SAIF's ratio of reserves to insured
deposits was significantly below the level required by law, while the BIF's
ratio was above the required level. As a result, institutions with SAIF-insured
deposits were paying higher deposit insurance assessments than institutions with
BIF-insured deposits. Federal legislation providing for the recapitalization of
the SAIF became effective in September 1996 and included a special assessment of
$.657 per $100 of SAIF-insured deposits held at March 31, 1995. Market had
approximately $37.6 million in deposits at March 31, 1995, and paid a special
assessment of $246,000.
STATE-CHARTERED ASSOCIATION ACTIVITIES. The ability of state-chartered
associations to engage in any state-authorized activities or make any
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of Market'
activities and investments at September 30, 1997, were permissible for a federal
association.
FRB RESERVE REQUIREMENTS
Effective December 16, 1997, FRB regulations require savings
associations to maintain reserves of 3% of net transaction accounts (primarily
NOW accounts) up to $47.8 million (subject to an exemption of up to $4.7
million), and of 10% of net transaction accounts in excess of $47.8 million. At
September 30, 1997, Market was in compliance with the reserve requirements then
in effect and also the new requirements.
FEDERAL HOME LOAN BANKS
The FHLBs provide credit to their members in the form of advances.
Market is a member of the FHLB of Cincinnati and must maintain an investment in
the capital stock of the FHLB of Cincinnati in an amount equal to the greater of
1.0% of the aggregate outstanding principal amount of Market's residential
mortgage loans, home purchase contracts and
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<PAGE> 21
similar obligations at the beginning of each year, or 5% of its advances from
the FHLB of Cincinnati. Market was in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $390,000 at September 30, 1997.
FHLB advances to member institutions who meet the QTL Test are
generally limited to the lower of (i) 25% of the member's assets or (ii) 20
times the member's investment in FHLB stock. At September 30, 1997, Market's
maximum limit on advances was approximately $7.8 million. The granting of
advances is also subject to the FHLB's collateral and credit underwriting
guidelines.
Upon the origination or renewal of a loan or advance, the FHLB is
required by law to obtain and maintain a security interest in collateral in one
or more of the following categories: fully-disbursed, whole first mortgage loans
on improved residential property or securities representing a whole interest in
such loans; securities issued, insured or guaranteed by the United States
Government or an agency thereof; deposits in any FHLB; or other real estate
related collateral (up to 30% of the member association's capital) acceptable to
the FHLB, if such collateral has a readily ascertainable value and the FHLB can
perfect its security interest in the collateral.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
TAXATION
FEDERAL TAXATION
MFC and Market are each subject to the federal tax laws and regulations
which apply to corporations generally. In addition to the regular income tax,
MFC and Market may be subject to the alternative minimum tax which is imposed at
a minimum tax rate of 20% on "alternative minimum taxable income" (which is the
sum of a corporation's regular taxable income, with certain adjustments, and tax
preference items), less any available exemption. Such tax preference items
include interest on certain tax-exempt bonds issued after August 7, 1986. In
addition, 75% of the amount by which a corporation's "adjusted current earnings"
exceeds its alternative minimum taxable income computed without regard to this
preference item and prior to reduction by net operating losses, is included in
alternative minimum taxable income. Net operating losses can offset no more than
90% of alternative minimum taxable income. The alternative minimum tax is
imposed to the extent it exceeds the corporation's regular income tax. Payments
of alternative minimum tax may be used as credits against regular tax
liabilities in future years. However, the Taxpayer Relief Act of 1997 repealed
the alternative minimum tax for certain "small corporations" for tax years
beginning after December 31, 1997. A corporation initially qualifies as a small
corporation if it had average gross receipts of $5,000,000 or less for the three
tax years ending with its first tax year beginning after December 31, 1996. Once
a corporation is recognized as a small corporation, it will continue to be
exempt from the alternative minimum tax for as long as its average gross
receipts for the prior three-year period does not exceed $7,500,000. In
determining if a corporation meets this requirement, the first year that it
achieved small corporation status is not taken into consideration.
Market's average gross receipts for the three tax years ending on
September 30, 1997, is $3.3 million and as a result, Market does qualify as a
small corporation exempt from the alternative minimum tax.
Prior to the enactment of the Small Business Jobs Protection Act (the
"Act"), which was signed into law on August 21, 1996, certain thrift
institutions, such as Market, were allowed deductions for bad debts under
methods more favorable than those granted to other taxpayers. Qualified thrift
institutions could compute deductions for bad debts using either the specific
charge-off method of Section 166 of the Code or one of two reserve methods of
Section 593 of the Code. The reserve methods under Section 593 of the Code
permitted a thrift institution annually to elect to deduct bad debts under
either (i) the "percentage of taxable income" method applicable only to thrift
institutions, or (ii) the "experience" method that also was available to small
banks. Under the "percentage of taxable income" method, a thrift institution
generally was allowed a deduction for an addition to its bad debt reserve equal
to 8% of its taxable income (determined without regard to this deduction and
with additional adjustments). Under the "experience" method, a thrift
institution was generally allowed a deduction for an addition to its bad debt
reserve equal to the greater of (i) an amount based on its actual average
experience for losses in the current and five preceding taxable years, or (ii)
an amount necessary to restore the reserve to its balance as of the close of the
base year. A thrift institution could elect annually to compute its allowable
addition to bad debt reserves for
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<PAGE> 22
qualifying loans either under the experience method or the percentage of taxable
income method. For tax years 1995, 1994 and 1993 Market used the percentage of
taxable income method and was subject to certain limitations based on aggregate
loans and savings account balances at the end of the calendar year.
The Act eliminated the percentage of taxable income method of
accounting for bad debts by thrift institutions, effective for taxable years
beginning after 1995. Thrift institutions that are treated as small banks are
allowed to utilize the experience method applicable to such institutions, while
thrift institutions that are treated as large banks are required to use only the
specific charge off method.
A thrift institution required to change its method of computing
reserves for bad debt will treat such change as a change in the method of
accounting, initiated by the taxpayer and having been made with the consent of
the Secretary of the Treasury. Section 481(a) of the Code requires certain
amounts to be recaptured with respect to such change. Generally, the amounts to
be recaptured will be determined solely with respect to the "applicable excess
reserves" of the taxpayer. The amount of the applicable excess reserves will be
taken into account ratably over a six-taxable year period, beginning with the
first taxable year beginning after 1995, subject to the residential loan
requirement described below. In the case of a thrift institution that is treated
as a large bank, the amount of the institution's applicable excess reserves
generally is the excess of (i) the balances of its reserve for losses on
qualifying real property loans (generally loans secured by improved real estate)
and its reserve for losses on nonqualifying loans (all other types of loans) as
of the close of its last taxable year beginning before January 1, 1996, over
(ii) the balances of such reserves as of the close of its last taxable year
beginning before January 1, 1988 (i.e., the "pre-1988 reserves"). In the case of
a thrift institution that is treated as a small bank, like Market, the amount of
the institution's applicable excess reserves generally is the excess of (i) the
balances of its reserve for losses on qualifying real property loans and its
reserve for losses on nonqualifying loans as of the close of its last taxable
year beginning before January 1, 1996, over (ii) the greater of the balance of
(a) its pre-1988 reserves or (b) what the thrift's reserves would have been at
the close of its last year beginning before January 1, 1996, had the thrift
always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property. The Company has provided
deferred taxes of approximately $22,000 and will be permitted to amortize the
recapture of the bad debt reserve over a six year period commencing in fiscal
1997.
The balance of the pre-1988 reserves is subject to the provisions of
Section 593(e), as modified by the Act, which require recapture in the case of
certain excessive distributions to shareholders. The pre-1988 reserves may not
be utilized for payment of cash dividends or other distributions to a
shareholder (including distributions in dissolution or liquidation) or for any
other purpose (except to absorb bad debt losses). Distribution of a cash
dividend by a thrift institution to a shareholder is treated as made: first, out
of the institution's post-1951 accumulated earnings and profits; second, out of
the pre-1988 reserves; and third, out of such other accounts as may be proper.
To the extent a distribution by Market to MFC is deemed paid out of its pre-1988
reserves under these rules, the pre-1988 reserves would be reduced and the gross
income of Market for tax purposes would be increased by the amount which, when
reduced by the income tax, if any, attributable to the inclusion of such amount
in its gross income, equals the amount deemed paid out of the pre-1988 reserves.
As of September 30, 1997, the pre-1988 reserves of Market for tax purposes
totaled approximately $1.3 million. Market believes it had approximately $6.2
million of accumulated earnings and profits for tax purposes as of September 30,
1997, which would be available for dividend distributions, provided regulatory
restrictions applicable to the payment of dividends are met. No representation
can be made as to whether Market will have current or accumulated earnings and
profits in subsequent years.
The tax returns of Market have been audited or closed without audit
through calendar year 1993. In the opinion of management, any examination of
open returns would not result in a deficiency which could have a material
adverse effect on the financial condition of Market.
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<PAGE> 23
OHIO TAXATION
MFC is subject to the Ohio corporation franchise tax, which, as applied
to MFC, is a tax measured by both net earnings and net worth. The rate of tax is
the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable income and
8.9% of computed Ohio taxable income in excess of $50,000 or (ii) 0.582% times
taxable net worth. For tax years beginning after December 31, 1998, the rate of
tax is the greater of (i) 5.1% on the first $50,000 of computed Ohio taxable
income and 8.5% of computed Ohio taxable income in excess of $50,000 or (ii)
.400% times taxable net worth.
In computing its tax under the net worth method, MFC may exclude 100%
of its investment in the capital stock of Market, as reflected on the balance
sheet of MFC in computing its taxable net worth as long as it owns at least 25%
of the issued and outstanding capital stock of Market. The calculation of the
exclusion from net worth is based on the ratio of the excludable investment (net
of any appreciation or goodwill included in such investment) to total assets
multiplied by the net value of the stock. As a holding company, MFC may be
entitled to various other deductions in computing taxable net worth that are not
generally available to operating companies.
A special litter tax is also applicable to all corporations, including
MFC, subject to the Ohio corporation franchise tax other than "financial
institutions." If the franchise tax is paid on the net income basis, the litter
tax is equal to .11% of the first $50,000 of computed Ohio taxable income and
.22% of computed Ohio taxable income in excess of $50,000. If the franchise tax
is paid on the net worth basis, the litter tax is equal to .014% times taxable
net worth.
Market is a "financial institution" for State of Ohio tax purposes. As
such, it is subject to the Ohio corporate franchise tax on "financial
institutions," which is imposed annually at a rate of 1.5% of the book net worth
of Market determined in accordance with generally accepted accounting
principles. For tax year 1999, however, the franchise tax on financial
institutions will be 1.4% of the book net worth and for tax year 2000 and years
thereafter the tax will be 1.3% of the book net worth. As a "financial
institution," Market is not subject to any tax based upon net income or net
profits imposed by the State of Ohio.
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
1997, regarding the properties on which the main office and the branch office of
Market are located:
<TABLE>
<CAPTION>
Owned or Date Square Net book
Location leased acquired footage value Deposits
- -------- ------ -------- ------- ----- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
7522 Hamilton Avenue Owned 1964 2,325 $65,000 $30,791
Mt. Healthy, Ohio 45231
125-127 Miami Avenue Owned 1994 1,753 8,000 4,512
North Bend, Ohio 45052
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
Market is not presently involved in any material legal proceedings.
From time to time, Market is a party to legal proceedings incidental to its
business to enforce its security interest in collateral pledged to secure loans
made by Market.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The information contained in the Market Financial Corporation
Annual Report to Shareholders for the fiscal year ended September 30, 1997 (the
"Annual Report") under the caption "Market Price of MFC Common Shares and
Related Shareholder Matters" is incorporated herein by reference.
-23-
<PAGE> 24
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information contained in the Annual Report under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements appearing in the Annual
Report and the report of Grant Thornton LLP dated November 19, 1997, are
incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information contained in the definitive Proxy Statement for
the 1998 Annual Meeting of Shareholders of MFC (the "Proxy Statement"), under
the caption "Board of Directors" is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The information contained in the Proxy Statement under the caption
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained in the Proxy Statement under the caption
"Voting Securities and Ownership of Certain Beneficial Owners and Management" is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Not Applicable.
-24-
<PAGE> 25
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
3 Articles of Incorporation and Code of Regulations
10.1 The Market Financial Corporation Employee Stock Ownership
Plan
10.2 Employment Agreement between John T. Larimer and Market,
dated April 1, 1997
13 Annual Report to Shareholders (the following parts of which
are incorporated herein by reference; "Market Price of
MFC's Common Shares and Related Shareholders' Matters,"
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Consolidated
Financial Statements)
20 Proxy Statement for 1998 Annual Meeting of Shareholders
21 Subsidiaries of Market Financial Corporation
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities Litigation Reform
Act of 1995
(B) REPORTS ON FORM 8-K
No reports on Form 8-K have been filed by MFC during the quarter ended
September 30, 1997.
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<PAGE> 26
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
MARKET FINANCIAL CORPORATION
By:/s/John T. Larimer
---------------------------------
John T. Larimer, President and
Chief Executive Officer
(Principal Executive Officer)
Date: December 17, 1997
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.
/s/ John T. Larimer /s/ Julie M. Bertsch
- ----------------------------- ------------------------------------
John T. Larimer, Julie M. Bertsch,
President and Director Chief Financial Officer
(Principal Financial Officer)
Date: December 17, 1997 Date: December 17, 1997
/s/ Edgar H. May /s/ Rae Skirvin Larimer.
- ----------------------------- ------------------------------------
Edgar H. May Rae Skirvin Larimer
Director and Vice President Director and Secretary
Date: December 17, 1997 Date: December 17, 1997
/s/ Robert Gandenberger /s/ R. C. Meyerenke
- ----------------------------- ------------------------------------
Robert Gandenberger R. C. Meyerenke
Director Director
Date: December 17, 1997 Date: December 17, 1997
/s/ Wilbur H. Tisch /s/ Kathleen H. White
- ----------------------------- ------------------------------------
Wilbur H. Tisch Kathleen H. White
Director Director
Date: December 17, 1997 Date: December 17, 1997
-26-
<PAGE> 27
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
3.1 Articles of Incorporation of MFC Financial Incorporated by reference to the Registration Statement on
Corporation Form S-1 filed by MFC on August 16, 1996 (the "S-1") with the
Securities and Exchange Commission (the "SEC"), Exhibit 3.1.
3.2 Certificate of Amendment to Articles of Incorporated by reference to Pre-Effective Amendment No. 1 to
Incorporation of MFC Financial Corporation the S-1, Exhibit 3.2.
3.4 Code of Regulations of MFC Financial Incorporated by reference to the S-1, Exhibit 3.3.
Corporation
10.1 The Market Financial Corporation Employee Incorporated by reference to Pre-Effective Amendment No. 1 to
Stock Ownership Plan the S-1 filed with the SEC on January 22, 1997 ("Amendment
No. 1"), Exhibit 10.3.
10.2 Employment Agreement between Market and Incorporated by reference to Amendment No. 1, Exhibit 10.4.
John T. Larimer, dated April 1, 1997
13 Market Financial Corporation 1997 Annual
Report to Shareholders
20 Proxy Statement for 1998 Annual Meeting of
Shareholders
21 Subsidiaries of Market Financial
Corporation
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
</TABLE>
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<PAGE> 1
Exhibit 13
[LOGO-MFC]
MARKET FINANCIAL CORPORATION
7522 Hamilton Havenue
P.O. Box 31292
Phone (513) 521-9772 Cincinati, OH 45231-0292 Fax: (513) 521-0703
Dear Shareholder:
On behalf of the directors, officers and employees of Market Financial
Corporation and its wholly owned subsidiary, The Market Building and Saving
Company, I am pleased to present our first Annual Report to Shareholders for the
fiscal year ended September 30, 1997.
Market's net earnings totaled $502,000 in fiscal 1997 as compared to
$224,000 in fiscal 1996. The increase of $278,000, or 124%, in fiscal 1997 net
earnings was primarily attributable to the absence of the one-time $162,000
after-tax charge related to the recapitalization of the SAIF insurance fund as
well as an increase in net interest income of $321,000, or 21%, for the year
ended September 30, 1997. Return on average assets of .99% for the 1997 fiscal
year doubled the prior fiscal year's return of .49%. In August 1997, we paid our
first cash dividend of $.07 per share to shareholders of record on July 31,
1997.
Market Financial Corporation recorded increases in total assets of
$10.6 million, or 23%, investment securities of $8.5 million, or 87%, and
shareholders' equity of $12.4 million, or 165%, primarily as a result of the
proceeds from the sale of Market Financial Corporation common shares in March of
1997. In addition, our loan portfolio has increased $4.5 million, or 21%, since
September 30, 1996, due to increased lending volume. The increased loan
production coupled with the investment of funds from our common stock offering
into higher-yielding assets has had a positive impact on our earnings this year.
I would like to thank you, our shareholders, for the support you placed
in us through your investment in Market Financial Corporation. The directors,
officers and employees are committed to increasing the value of your investment
in the future.
Sincerely,
John T. Larimer
President and Managing Officer
<PAGE> 2
BUSINESS OF MARKET FINANCIAL CORPORATION
===============================================================================
Market Financial Corporation ("MFC"), a unitary savings and loan holding company
incorporated under the laws of the State of Ohio, owns all of the issued and
outstanding common stock of The Market Building and Saving Company ("Market"), a
savings and loan association incorporated under the laws of the State of Ohio.
In March 1997, MFC acquired all of the common stock issued by Market upon its
conversion from a mutual savings association to a stock savings association (the
"Conversion"). Since its formation, MFC's activities have been limited primarily
to holding the common shares of Market.
Market is a stock savings and loan association principally engaged in the
business of making permanent first mortgage loans secured by one- to four-family
residential real estate located in Market's primary market area of Hamilton
County, Ohio, and portions of the contiguous counties. Market also originates a
limited number of loans for the construction of residential real estate and
loans secured by multifamily real estate (over four units) and nonresidential
real estate. In addition to real estate lending, Market originates a limited
number of loans secured by deposits at Market. For liquidity and interest rate
risk management purposes, Market invests in U.S. Government and agency
obligations, interest-bearing deposits in other financial institutions and
mortgage-backed securities. Funds for lending and investment activities are
obtained primarily from deposits, which are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC"), and loan repayments. Market
conducts business from its main office located at 7522 Hamilton Avenue, Mt.
Healthy, Ohio, and its full-service branch office at 125 Miami Avenue, North
Bend, Ohio.
As a savings and loan holding company, MFC is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the United States
Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Market is subject to
regulation, supervision and examination by the OTS and the Ohio Division of
Financial Institutions (the "Division"). Market is also a member of the Federal
Home Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF MFC'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
===============================================================================
There were 1,335,725 common shares of MFC outstanding on December 18, 1997, held
of record by approximately 591 shareholders. The number of shareholders does not
reflect all of the persons or entities who may hold stock in nominee or "street"
name through brokerage firms or others. Price information with respect to MFC's
common shares is quoted on the Nasdaq Small-Cap Market ("Nasdaq") under the
symbol "MRKF." The table below sets forth the high and low bid prices for the
common shares of MFC, together with dividends declared per share, for each
quarter of the 1997 fiscal year ending after March 27, 1997, the date of
completion of the Conversion.
1
<PAGE> 3
Price quotations reflect inter-dealer prices, without retail mark-up, mark-down
or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
Cash dividends declared
High Bid Low Bid per share
-------- ------- ---------
<S> <C> <C> <C>
FISCAL 1997
Quarter ended:
March 31, 1997 (1) $12.50 $ -
June 30, 1997 $13.00 12.50 -
September 30, 1997 13.00 14.00 .07
14.75
</TABLE>
- ----------
(1) Reflects the period from March 27, 1997, the date the Conversion closed,
through March 31, 1997.
Dividends are subject to determination and declaration by the Board of Directors
of MFC which takes into account MFC's financial condition, results of
operations, tax considerations, industry standards, economic conditions,
regulatory restrictions and other factors which affect the payment of dividends.
The income of MFC consists of dividends which may periodically be declared and
paid by the Board of Directors of Market on the common shares of Market held by
MFC and earnings on the $6.4 million in net proceeds retained by MFC from the
sale of MFC's common shares in connection with the Conversion.
In addition to certain federal income tax considerations, OTS regulations impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under OTS regulations applicable to converted savings
associations, Market is not permitted to pay a cash dividend on its common
shares if the regulatory capital of Market would, as a result of the payment of
such dividend, be reduced below the amount required for the liquidation account
(which was established for the purpose of granting a limited priority claim on
the assets of Market in the event of a complete liquidation to those members of
Market before the Conversion who maintain a savings account at Market after the
Conversion) or applicable regulatory capital requirements prescribed by the OTS.
OTS regulations applicable to all savings associations provide that a savings
association which immediately prior to, and on a pro forma basis after giving
effect to, a proposed capital distribution (including a dividend) has total
capital (as defined by OTS regulations) that is equal to or greater than the
amount of its capital requirements is generally permitted without OTS approval
(but subsequent to 30 days' prior notice to the OTS) to make capital
distributions, including dividends, during a calendar year in an amount not to
exceed the greater of (1) 100% of its net earnings to date during the calendar
year, plus an amount equal to one-half the amount by which its total capital to
assets ratio exceeded its required capital to assets ratio at the beginning of
the calendar year, or (2) 75% of its net earnings for the most recent
four-quarter period. Savings associations with total capital in excess of the
capital requirements that have been notified by the OTS that they are in need of
more than normal supervision will be subject to restrictions on dividends. A
savings
2
<PAGE> 4
association that fails to meet current minimum capital requirements is
prohibited from making any capital distributions without the prior approval of
the OTS.
Market currently meets all of its regulatory capital requirements and, unless
the OTS determines that Market is an institution requiring more than normal
supervision, Market may pay dividends in accordance with the foregoing
provisions of the OTS regulations.
3
<PAGE> 5
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
===============================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding MFC at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
At September 30,
---------------------------------------------------------
SELECTED FINANCIAL CONDITION (1): 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $56,121 $45,547 $45,734 $45,340 $46,942
Cash and cash equivalents 2,248 4,082 4,013 6,380 18,289
Certificates of deposit in other financial
institutions 6,690 7,040 7,139 6,139 1,789
Investment securities - at cost 17,257 9,062 7,984 5,919 3,525
Investment securities designated as available
for sale - at market 1,029 712 504 - -
Mortgage-backed securities - at cost 1,268 1,549 2,211 2,441 3,661
Loans receivable - net 26,502 21,996 23,018 23,658 18,945
Real estate acquired through foreclosure - - - - 79
Deposits 35,303 37,282 38,056 38,674 40,703
Unrealized gains on securities designated as
available for sale - net (2) 660 451 314 - -
Shareholders' equity-restricted (3) 19,895 7,514 7,153 6,372 5,960
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------------------
SELECTED OPERATING DATA (1): 1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $3,513 $3,261 $3,182 $2,908 $3,095
Interest expense 1,689 1,758 1,622 1,478 1,706
------- ------- ------ ------ ------
Net interest income 1,824 1,503 1,560 1,430 1,389
Provision for losses on loans - 13 - - 10
----------- --------- --------- --------- --------
Net interest income after provision for losses on
loans 1,824 1,490 1,560 1,430 1,379
Other operating income 6 7 8 12 10
General, administrative and other expense 1,069 1,153 861 836 697
------- ------- ------ ------ ------
Earnings before income taxes 761 344 707 606 692
Federal income taxes 259 120 240 194 223
-------- -------- ------ ------ ------
Net earnings $ 502 $ 224 $ 467 $ 412 $ 469
======= ======= ====== ====== ======
<FN>
- ---------------------------
(1) The financial information as of and for the periods ended September 30,
1994 and 1993 presented above has been previously restated to reflect
the merger of The Cleves-North Bend Building and Loan Company into
Market and provides such information on a combined entity basis.
(2) Market adopted Statement of Financial Accounting Standards ("SFAS") No.
115, "Accounting for Certain Investments in Debt and Equity
Securities," on October 1, 1994. As of and subsequent to that date,
Market carries securities designated as available for sale at fair
value.
(3) See Notes G, I and K of the Notes to Consolidated Financial Statements
regarding restrictions on equity.
</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
At or for the Year ended September 30,
--------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 1997 1996 1995 1994 1993
---- ---- ---- ----- ----
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets (1)(2)(3) 0.99% 0.49% 1.03% 0.89% 0.99%
Return on average equity (2)(3)(4) 3.66 3.05 6.91 6.68 8.15
Interest rate spread (5) 2.42 2.66 2.93 2.98 2.58
Net interest margin (6) 3.67 3.36 3.55 3.29 3.03
Operating expenses to average assets (2) (3) 2.10 2.53 1.89 1.81 1.48
Equity to assets (7) 35.45 16.50 15.64 14.05 12.70
Asset quality ratios:
Nonperforming assets to total assets 0.34 0.31 - - 0.58
Nonperforming loans to total loans 0.72 0.63 - - 1.02
Allowance for losses on loans to total loans 0.20 0.24 0.17 0.16 0.21
Allowance for losses on loans to
nonperforming loans 27.23 37.41 N/M(8) N/M(8) 20.21
Net charge-offs to average loans - - - - 0.02
Average interest-earning assets to average
interest-bearing liabilities 136.77 117.78 116.62 109.04 112.38
Other data:
Number of full service offices 2 2 2 2 2
<FN>
- -------------------------
(1) Net earnings divided by average assets.
(2) Based on arithmetic average of beginning and ending balances.
(3) Excluding the effect of the one-time Savings Association Insurance Fund
(the "SAIF") recapitalization assessment, the return on average assets,
the return on average equity and the operating expenses to average
assets ratios would have been .85%, 5.21% and 1.99%, respectively, for
the fiscal year ended September 30, 1996.
(4) Net earnings divided by average equity capital.
(5) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) At the end of the respective periods.
(8) Not meaningful, as Market had no nonperforming loans at September 30, 1995 or 1994.
</TABLE>
5
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
===============================================================================
GENERAL
- -------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of MFC and Market should be read in conjunction with and with
reference to the consolidated financial statements, and the notes thereto,
included in this Annual Report.
MFC was incorporated for the purpose of owning all of Market's outstanding stock
upon conversion to stock form. As a result, the discussion that follows focuses
on Market's financial condition and results of operations.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Market and MFC's 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.
Without limiting the generality of the foregoing, some of the statements in the
following referenced sections of this discussion and analysis are forward
looking and are therefore subject to certain risks and uncertainties:
1. Management's analysis of the interest rate risk of Market as
set forth under "Asset and Liability Management;"
2. Management's discussion of the liquidity of Market's assets
and the regulatory capital of Market as set forth under
"Liquidity and Capital Resources;" and
3. Management's determination of the amount of the allowance for
loan losses as set forth under "Changes in Financial
Condition," "Comparison of Operating Results for the Years
Ended September 30, 1997 and 1996," and "Comparison of
Operating Results for the Years Ended September 30, 1996 and
1995."
CHANGES IN FINANCIAL CONDITION
- -------------------------------------------------------------------------------
MFC's assets at September 30, 1997, totaled approximately $56.1 million, a $10.6
million, or 23.2%, increase over the total at September 30, 1996. The increase
was funded primarily through the proceeds of the issuance of common shares of
MFC in March of 1997.
6
<PAGE> 8
Liquid assets (cash and cash equivalents and certificates of deposit) totaled
$8.9 million at September 30, 1997, a decrease of $2.2 million from the total at
September 30, 1996. The decline generally reflects management's decision to
redeploy excess liquid assets to fund growth in the loan portfolio.
Investment securities totaled $18.3 million at September 30, 1997, an increase
of $8.5 million, or 87.1%, over the total reported at September 30, 1996. The
increase was due primarily to purchases during fiscal 1997 of $11.3 million of
intermediate-term U.S. Government agency securities, with an overall yield of
6.63%. These purchases were funded primarily through proceeds from the
Conversion. Additionally, MFC purchased $2.8 million of U.S. Government treasury
securities yielding 6.13%. These purchases were partially offset by maturities
of investment securities totaling $5.9 million during fiscal 1997.
Loans receivable totaled $26.5 million at September 30, 1997, an increase of
$4.5 million, or 20.5%, over September 30, 1996. This increase resulted
primarily from loan originations of $7.7 million, which exceeded principal
repayments of $3.2 million. Loan origination volume during fiscal 1997 exceeded
that of fiscal 1996 by $5.1 million, or 199.3%. Growth in the loan portfolio was
comprised primarily of loans secured by one- to four-family residential real
estate, which increased by $4.3 million, or 20.9%, year to year. Market's
allowance for loan losses totaled $52,000 at both September 30, 1997 and 1996.
The allowance represented .20% and .24% of total loans at September 30, 1997 and
1996, respectively. Nonperforming loans totaled $191,000 and $139,000, or .72%
and .63% of total loans, at September 30, 1997 and 1996, respectively.
Although management believes that its allowance for loan losses at September 30,
1997, was adequate based upon the available facts and circumstances, there can
be no assurances that additions to such allowance will not be necessary in
future periods, which could adversely affect Market's results of operations.
Deposits totaled $35.3 million at September 30, 1997, a decrease of $2.0
million, or 5.3%, from the total at September 30, 1996, primarily as a result of
depositors withdrawing funds to purchase common shares in the Conversion.
Shareholders' equity totaled $19.9 million at September 30, 1997, an increase of
$12.4 million, or 164.8%, as a result of net conversion proceeds of $12.8
million, net earnings of $502,000 for the fiscal year ended September 30, 1997,
and a $209,000, or 46.3%, increase in unrealized gain on securities designated
as available for sale, which were partially offset by the use of Conversion
proceeds to purchase of MFC common shares totaling $1.1 million for the Market
Financial Corporation Employee Stock Ownership Plan (the "ESOP").
7
<PAGE> 9
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
- -------------------------------------------------------------------------------
GENERAL. Market's net earnings for fiscal 1997 totaled $502,000, an increase of
$278,000, or 124.1%, over the $224,000 in net earnings recorded for fiscal 1996.
The increase in earnings resulted primarily from a $321,000 increase in net
interest income, an $84,000 decrease in general, administrative and other
expense, due primarily to a one-time deposit insurance assessment during 1996
related to the recapitalization of the SAIF, and a $13,000 decrease in the
provision for losses on loans, which were partially offset by a $139,000
increase in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income amounted to $3.5 million for the year
ended September 30, 1997, a $252,000, or 7.7%, increase over the comparable 1996
period. The increase in total interest income was attributable to an increase of
$189,000, or 15.4%, in interest income on investment securities and
interest-bearing deposits, due primarily to an increase of $3.2 million to $23.4
million of weighted-average balances outstanding during fiscal 1997, which was
partially offset by a 13 basis point (100 basis points equals one percent)
decrease in the weighted-average yield. Interest income on loans totaled $2.0
million in 1997, an increase of $107,000, or 5.7%, from 1996. The increase
resulted primarily from an increase of $2.3 million in weighted-average balances
outstanding, which was partially offset by a 32 basis point decrease in the
weighted-average yield, from 8.24% in fiscal 1996 to 7.92% in fiscal 1997.
Interest income on mortgage-backed securities decreased by $44,000, or 26.0%,
during fiscal 1997, as compared to 1996, as a result of a decline of $471,000 in
the weighted-average balance outstanding, coupled with a decrease of 10 basis
points in the weighted-average yield, from 9.02% in fiscal 1996 to 8.92% in
fiscal 1997.
Interest expense on deposits totaled $1.7 million for fiscal 1997, a decrease of
$69,000, or 3.9%, from the comparable 1996 period. This decrease was due
primarily to a $1.6 million decrease in the weighted-average balances
outstanding, which can be primarily attributed to withdrawals by customers to
fund purchases of MFC common stock in the Conversion.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $321,000, or 21.4%, for fiscal 1997, compared
to fiscal 1996. The interest rate spread declined by 24 basis points, from 2.66%
in fiscal 1996 to 2.42% in fiscal 1997, while the net interest margin increased
by 31 basis points, from 3.36% in fiscal 1996 to 3.67% in fiscal 1997.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans decreased by
$13,000 for fiscal 1997, compared to fiscal 1996. During fiscal 1996, management
increased the allowance for losses on loans due to an increase in internally
classified assets of $36,000 and an increase of $139,000 in loans delinquent
more than 90 days. The $13,000 increase in the provision for losses on loans in
the prior year equaled approximately 10% of the increase in the amount of loans
delinquent more than 90 days, which were in the process of collection.
8
<PAGE> 10
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 fiscal 1997. 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 OPERATING INCOME. Other operating income, primarily service fees on money
orders and travelers' checks, totaled $6,000 for fiscal 1997, a decrease of
$1,000, or 14.3%, from the fiscal 1996 amount.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General administrative and other
expense totaled $1.1 million for fiscal 1997, a decrease of $84,000, or 7.3%,
from the 1996 fiscal year amount. The decrease resulted primarily from a
$292,000, or 89.3%, decrease in federal deposit insurance premiums, a $3,000, or
2.6%, decrease in occupancy and equipment expense and a $3,000, or 3.0%, decline
in franchise taxes, which were partially offset by a $197,000, or 42.6%,
increase in employee compensation and benefits, and a $17,000, or 11.3%,
increase in other operating expense. The decrease in federal deposit insurance
premiums was primarily attributable to the absence of the one-time SAIF
recapitalization assessment in fiscal 1996 of approximately $246,000, or 65.7
basis points of the deposit base at March 31, 1995. The increase in employee
compensation and benefits resulted primarily from the hiring of a chief
executive officer, a chief financial officer and a vice president of lending
during fiscal 1996, coupled with expenses related to the ESOP and normal merit
increases.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $259,000
for fiscal 1997, an increase of $139,000, or 115.8%, over the provision recorded
in fiscal 1996. The increase resulted primarily from a $417,000, or 121.2%,
increase in earnings before taxes. The effective tax rates were 34.0% and 34.9%
for fiscal 1997 and 1996, respectively.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 1996 AND 1995
- ------------------------------------------------------------------------------
GENERAL. Market's net earnings for fiscal 1996 were $224,000, a decline of
$243,000, or 52.0%, from the $467,000 in net earnings recorded for fiscal 1995.
The decline in earnings resulted primarily from a $292,000 increase in general,
administrative and other expenses, due primarily to a one-time deposit insurance
assessment, a $57,000 decrease in net interest income and a $13,000 increase in
the provision for losses on loans, which were partially offset by a $120,000
decrease in the provision for income taxes.
NET INTEREST INCOME. Total interest income was $3.3 million for fiscal 1996, a
$79,000, or 2.5%, increase over the comparable 1995 period. The increase in
total interest income was
9
<PAGE> 11
attributable to an increase of $199,000, or 19.4%, in interest income on
investment securities and interest-bearing deposits, due primarily to an
increase of $1.8 million in the weighted-average balances outstanding to $20.2
million at September 30, 1996, coupled with a 154 basis point increase in the
weighted-average yield. Interest income on loans totaled $1.9 million in fiscal
1996, a decrease of $93,000, or 4.7%, from fiscal 1995. The decrease resulted
primarily from the decline of $566,000 in weighted-average balances outstanding,
coupled with a 20 basis point decrease in the weighted-average yield, from 8.44%
in fiscal 1995 to 8.24% in fiscal 1996. Interest income on mortgage-backed
securities decreased by $27,000, or 13.8%, during fiscal 1996, as compared to
1995, as a result of a decline of $394,000 in the weighted-average balance
outstanding, which was partially offset by an increase of 37 basis points in the
weighted-average yield, from 8.65% in 1995 to 9.02% in 1996.
Interest expense on deposits totaled $1.8 million for fiscal 1996, an increase
of $136,000, or 8.4%, over the comparable 1995 period. This increase was due
primarily to a $299,000 increase in the weighted-average balances outstanding,
coupled with a 32 basis point increase in the weighted-average cost of deposits,
from 4.31% in the fiscal 1995 period to 4.63% in the fiscal 1996 period.
As a result of the foregoing changes in interest income and interest expense,
net interest income declined by $57,000, or 3.7%, for fiscal 1996, compared to
fiscal 1995. The interest rate spread declined by 27 basis points, from 2.93% in
fiscal 1995 to 2.66% in fiscal 1996, while the net interest margin declined by
19 basis points, from 3.55% in fiscal 1995 to 3.36% in fiscal 1996.
PROVISION FOR LOSSES ON LOANS. The provision for losses on loans increased by
$13,000 for fiscal 1996, compared to fiscal 1995. During fiscal 1996, management
increased the allowance for losses on loans due to an increase in internally
classified assets of $36,000 and an increase of $139,000 in loans delinquent
more than 90 days. The $13,000 increase in the provision for losses on loans
equaled approximately 10% of the increase in the amount of loans delinquent more
than 90 days, which were in the process of collection.
OTHER OPERATING INCOME. Other operating income, primarily service fees on money
orders and travelers' checks, totaled $7,000 for fiscal 1996, a decrease of
$1,000, or 12.5%, from the fiscal 1995 amount.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense totaled $1.2 million for fiscal 1996, an increase of $292,000, or 33.9%,
over the 1995 fiscal year amount. The increase resulted primarily from a
$235,000, or 255.4%, increase in federal deposit insurance premiums and an
$86,000, or 22.9%, increase in employee compensation and benefits, which was
partially offset by a $20,000, or 11.8%, decrease in other operating expense, an
$8,000, or 6.6%, decrease in occupancy and equipment expense and a $1,000, or
1.0%, decrease in franchise taxes. The increase in federal deposit insurance
premiums was primarily attributable to the one-time SAIF recapitalization
assessment of approximately $246,000, or 65.7 basis points of the deposit base
at March 31, 1995. This increase was partially offset by the effect of a
decrease in the deposit portfolio during fiscal 1996. In addition to normal
merit increases, the
10
<PAGE> 12
increase in employee compensation and benefits resulted primarily from the
hiring of a chief executive officer, a chief financial officer and a vice
president of lending.
FEDERAL INCOME TAXES. The provision for federal income taxes was $120,000 for
fiscal 1996, a decrease of $120,000, or 50.0%, from the provision recorded in
fiscal 1995. The decrease resulted primarily from a $363,000, or 51.4%, decline
in earnings before taxes. The effective tax rates were 34.9% and 33.9% for
fiscal 1996 and 1995, respectively.
11
<PAGE> 13
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
- ------------------------------------------------------------------------------
The following table sets forth certain information relating to MFC's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances, which include nonaccruing loans in the loan
portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>
Year Ended September 30,
--------------------------------------------------------------------------------------------------
1997 1996 1995
------ ----- ----
Average Interest Average Average Interest Average Average Interest Average
outstanding earned/ yield/ outstanding earned/ yield/ outstanding earned/ yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ---- ------- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable $24,921 $1,974 7.92% $22,648 $1,867 8.24% $23,214 $1,960 8.44%
Mortgage-backed securities 1,402 125 8.92 1,873 169 9.02 2,267 196 8.65
Investment securities 11,812 708 5.99 9,123 590 6.47 7,288 309 4.24
Other interest-earning
assets 11,598 706 6.09 11,070 635 5.74 11,154 717 6.43
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning
assets 49,733 3,513 7.06 44,714 3,261 7.29 43,923 3,182 7.24
Non-interest-earning assets 2,210 1,485 1,240
------- -------- ---------
Total assets $51,943 $46,199 $45,163
====== ====== =======
Interest-bearing
liabilities:
Passbook and club accounts $10,421 300 2.88 $11,159 324 2.90 $11,386 343 3.01
Money market demand
accounts 2,872 81 2.82 3,621 104 2.87 4,728 119 2.52
Certificate of deposits 23,069 1,308 5.67 23,183 1,330 5.74 21,550 1,160 5.38
------ ----- ---- ------- ------ ------- -------- ----- --------
Total interest-bearing
liabilities 36,362 1,689 4.64 37,963 1,758 4.63 37,664 1,622 4.31
----- ---- ------ ------- ----- --------
Non-interest-bearing
liabilities 909 834 586
------- --------- ---------
Total liabilities 37,271 38,797 38,250
Shareholders' equity (1) 14,672 7,402 6,913
------ -------- --------
Total liabilities and
shareholders' equity $51,943 $46,199 $45,163
====== ====== ======
Net interest income and $1,824 2.42% $1,503 2.66% $1,560 2.93%
spread ====== ==== ====== ==== ====== ====
Net interest margin (net
interest income as a
percent of average
Interest-earning assets) 3.67% 3.36% 3.55%
==== ==== ====
Average interest-earning
assets to interest-bearing
liabilities 136.77% 117.78% 116.62%
====== ====== ======
<FN>
- -------------------------------
(1) Consists solely of retained earnings for fiscal 1996 and 1995.
</TABLE>
12
<PAGE> 14
The table below describes the extent to which changes in interest rates and
changes in volume of interest-earning assets and interest-bearing liabilities
have affected Market's interest income and expense during the years indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume
(changes in volume multiplied by prior year rate), (ii) changes in rate (changes
in rate multiplied by prior year volume) and (iii) total changes in rate and
volume. The combined effects of changes in both volume and rate, which cannot be
separately identified, have been allocated proportionately to the change due to
volume and the change due to rate.
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
--------------------------- ----------------------------
Increase Increase
(decrease) due to (decrease) due to
----------------- -----------------
Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $182 $(75) $107 $(48) $(45) $(93)
Mortgage-backed securities (42) (2) (44) (36) 9 (27)
Investment securities 164 (46) 118 92 189 281
Interest-bearing deposits 31 40 71 (5) (77) (82)
----- ----- ----- ----- ----- -----
Total interest income 335 (83) 252 3 76 79
Interest expense attributable to:
Deposits (74) 5 (69) 13 123 136
----- ------ ------ ----- ----- ----
Total interest expense (74) 5 (69) 13 123 136
----- ------ ------ ----- ----- ----
Increase (decrease) in net
interest income $409 $(88) $321 $(10) $(47) $(57)
==== ==== ==== ==== ==== ====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- -------------------------------------------------------------------------------
Market, like other financial institutions, is subject to interest rate risk to
the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Market uses the "net portfolio value" ("NPV") methodology
adopted by the OTS as part of its capital regulations. Although Market is not
currently subject to the NPV regulation because such regulation does not apply
to institutions with less than $300 million in assets and risk-based capital in
excess of 12%, the application of the NPV methodology illustrates certain
aspects of Market's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point change in market interest rates. Both
a 200 basis point increase in market interest rates and a 200 basis point
decrease in market interest rates are considered. If the NPV would decrease more
than 2% of the
13
<PAGE> 15
present value of the institution's assets with either an increase or a decrease
in market rates, the institution must deduct 50% of the amount of the decrease
in excess of such 2% in the calculation of the institution's risk-based capital.
See "Liquidity and Capital Resources."
At September 30, 1997, 2% of the present value of Market's assets was
approximately $1.2 million. Because the interest rate risk of a 200 basis point
increase in market interest rates (which was greater than the interest rate risk
of a 200 basis point decrease) was $1.8 million at September 30, 1997, Market
would have been required to deduct approximately $300,000 (50% of the $600,000
difference) from its capital in determining whether Market met its risk-based
capital requirement. Regardless of such restriction, however, Market's
risk-based capital at September 30, 1997, would still have exceeded the
regulatory requirement by $11.1 million.
Presented below, as of September 30, 1997, is an analysis of Market's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. The table also contains the
policy limits set by the Board of Directors of Market as the maximum change in
NPV that the Board of Directors deems advisable in the event of various changes
in interest rates. Such limits have been established with consideration of the
dollar impact of various rate changes and Market's strong capital position.
<TABLE>
<CAPTION>
September 30, 1997
-----------------------------
Change in interest rate Board limit $ change % change
(Basis Points) % Change In NPV In NPV
----------------------- ------------ --------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 (70.0)% $(3,843) (25)%
+300 (50.0) (2,858) (18)
+200 (35.0) (1,845) (12)
+100 (20.0) (848) (5)
0 - - -
-100 (20.0) 561 4
-200 (35.0) 1,050 7
-300 (50.0) 1,603 10
-400 (70.0) 2,291 15
</TABLE>
As illustrated in the table, NPV is more sensitive to rising rates than
declining rates. Such difference in sensitivity occurs principally because, as
rates rise, borrowers do not prepay fixed-rate loans as quickly as they do when
interest rates are declining. Thus, in a rising interest rate environment,
because Market has a significant amount of fixed-rate loans in its loan
portfolio, the amount of interest Market would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest Market would pay on its deposits would
increase rapidly because Market's deposits generally have shorter periods to
repricing. The assumptions used in calculating the amounts in this table are OTS
assumptions.
14
<PAGE> 16
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In a rising interest rate environment, Market's net interest income could be
expected to be negatively affected. Moreover, rising interest rates could
negatively affect Market's earnings due to diminished loan demand.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------------------------------------------------------
Liquidity refers to the ability of Market to generate sufficient cash to fund
current loan demand, meet deposit withdrawals and pay operating expenses.
Liquidity is influenced by financial market conditions, fluctuations in interest
rates, general economic conditions and regulatory requirements. Market's liquid
assets, primarily represented by cash and cash equivalents and interest-bearing
deposits in other financial institutions, are a result of its operating,
investing and financing activities. These activities are summarized in the
following table for the years ended September 30, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
1997 1996 1995
------- ------- ------
(In thousands)
<S> <C> <C> <C>
Net cash from operating activities $ 517 $ 153 $ 497
Net cash from investing activities (12,041) 697 (2,240)
Net cash from financing activities 9,690 (781) (624)
------- ------- --------
Net change in cash and cash equivalents
(1,834) 69 (2,367)
Cash and cash equivalents at the beginning
of the year 4,082 4,013 6,380
-------- ------- -------
Cash and cash equivalents at the end of the
year $ 2,248 $4,082 $ 4,013
======= ====== =======
</TABLE>
Market's principal sources of funds are deposits, loan and mortgage-backed
securities repayments, maturities of securities and other funds provided by
operations. Market also has the ability to borrow from the FHLB of Cincinnati.
While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and early loan and mortgage-backed security
prepayments are influenced to a greater degree by interest rates, general
economic conditions and competition.
15
<PAGE> 17
Market maintains investments in liquid assets based upon management's assessment
of (i) the need for funds, (ii) expected deposit flows, (iii) the yields
available on short-term liquid assets and (iv) the objectives of Market's asset
and liability management program.
At September 30, 1997, Market's certificates of deposit totaled approximately
$22.8 million, or 64.5% of total deposits. Of such amount, approximately $18.4
million in certificates of deposit mature within one year. Based on past
experience and Market's prevailing pricing strategies, management believes that
a substantial percentage of such certificates will be renewed with Market at
maturity. If Market is unable to renew the maturing certificates for any reason,
however, borrowings of up to $7.8 million are available from the FHLB of
Cincinnati.
OTS regulations presently require Market to maintain an average daily balance of
liquid assets, which may include, but are not limited to, investments in U.S.
Treasury and federal agency obligations and other investments having maturities
of five years or less, in an amount equal to 5% of the sum of Market's average
daily balance of net withdrawable deposit accounts and borrowings payable in one
year or less. The liquidity requirement, which may be changed from time to time
by the OTS to reflect changing economic conditions, is intended to provide a
source of relatively liquid funds upon which Market may rely if necessary to
fund deposit withdrawals or other short-term funding needs. At September 30,
1997, Market's regulatory liquidity ratio was 60.9%. At such date, Market had
commitments to originate loans totaling $873,000 and undisbursed loans in
process totaling $156,000 and no commitments to purchase or sell loans. Market
considers its liquidity and capital resources sufficient to meet its outstanding
short-term and long-term needs. See Note H to the Consolidated Financial
Statements.
Market is required by applicable law and regulations to meet certain minimum
capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement. Market exceeded all of its regulatory capital requirements
at September 30, 1997.
The tangible capital requirement requires a savings and loan association to
maintain "tangible capital" of not less than 1.5% of the association's adjusted
total assets. Tangible capital is defined in OTS regulations as core capital
minus any intangible assets.
"Core capital" is comprised of common shareholders' equity (including retained
earnings), noncumulative preferred stock and related surplus, minority interests
in consolidated subsidiaries, certain nonwithdrawable accounts, pledged deposits
of mutual associations and intangible assets, primarily consisting of certain
purchased mortgage servicing rights. OTS regulations require a savings and loan
association to maintain core capital of at least 3% of the association's total
assets. The OTS has proposed to increase such requirement to 4% and 5%, except
for those associations with the highest examination rating and acceptable levels
of risk.
OTS regulations require that a savings and loan association maintain "risk-based
capital" in an amount not less than 8% of its risk-weighted assets. Risk-based
capital is defined as core capital plus certain additional items of capital,
which in the case of Market includes a general loan loss allowance of $50,000 at
September 30, 1997.
16
<PAGE> 18
The following table summarizes Market's regulatory capital requirements and
actual capital at September 30, 1997:
<TABLE>
<CAPTION>
EXCESS OF ACTUAL
CURRENT CAPITAL OVER CURRENT APPLICABLE
ACTUAL CAPITAL REQUIREMENT REQUIREMENT ASSET TOTAL
------------------- --------------- -------------------- -------------
SEPTEMBER 30, 1997 AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
- ------------------ ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $12,885 23.4% $ 827 1.5% $12,058 21.9% $55,122
Core capital 12,885 23.4 1,654 3.0 11,231 20.4 55,122
Risk-based capital 12,935 68.2 1,518 8.0 11,417 60.2 18,980
</TABLE>
At September 30, 1997, Market had no material commitments for capital
expenditures.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- -------------------------------------------------------------------------------
In May 1995, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 122 "Accounting for Mortgage Servicing Rights," which requires that Market
recognize as separate assets rights to service mortgage loans for others,
regardless of how those servicing rights are acquired. An institution that
acquires mortgage servicing rights through either the purchase or origination of
mortgage loans and sells those loans with servicing rights retained would
allocate some of the cost of the loans to the mortgage servicing rights. SFAS
No. 122 requires that securitizations of mortgage loans be accounted for as
sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights
and capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value. SFAS No. 122 was effective for
fiscal years beginning after December 15, 1995 (October 1, 1996, as to Market),
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 Market's financial position or results of operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," establishing financial accounting and reporting standards for
stock-based compensation plans. SFAS No. 123 encourages all entities to adopt a
new method of accounting to measure the compensation cost of all stock
compensation plans based on the estimated fair value of the award at the date it
is granted. Companies are, however, allowed to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting, which
generally does not result in compensation expense recognition for most plans.
Companies that elect to remain
17
<PAGE> 19
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 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 Market's consolidated financial position
or results of operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities and
contingent stock
18
<PAGE> 20
agreements. SFAS No. 128 is effective for periods ending after December 15,
1997. Early application is not permitted. The provisions of SFAS No. 128 are not
applicable to MFC's fiscal years ended September 30, 1997 or 1996, as the
Conversion was completed in March 1997. The disclosure provisions of SFAS No.
128 are not expected to have a material effect on MFC's consolidated financial
statements.
In February 1997, the FASB issued SFAS No. 129, "Disclosures of Information
about Capital Structure." SFAS No. 129 consolidated existing accounting guidance
relating to disclosure about a company's capital structure. SFAS No. 129 is not
expected to have a material adverse effect on MFC's consolidated financial
statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenue, expenses, gains and losses) in a full set of
general-purpose financial statements. SFAS No. 130 requires that all items that
are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in the
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. SFAS No, 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
is required. SFAS No. 130 is not expected to have a material adverse effect on
MFC's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131," Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing information. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. The disclosure provisions of SFAS No. 131 are not expected to
have a material adverse effect on MFC's consolidated financial statements.
19
<PAGE> 21
IMPACT OF INFLATION AND CHANGING PRICES
- -------------------------------------------------------------------------------
The consolidated financial statements and notes thereto included herein have
been prepared in accordance with generally accepted accounting principles, which
require MFC to measure financial position and results of operations in terms of
historical dollars with the exception of investment and mortgage-backed
securities available-for-sale, which are carried at fair value. Changes in the
relative value of money due to inflation or recession are generally not
considered.
In management's opinion, changes in interest rates affect the financial
condition of a financial institution to a far greater degree than changes in the
rate of inflation. While interest rates are greatly influenced by changes in the
rate of inflation, they do not change at the same rate or in the same magnitude
as the rate of inflation. Rather interest rate volatility is based on changes in
the expected rate of inflation, as well as changes in monetary and fiscal
policies.
20
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 22
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 23
CONSOLIDATED STATEMENTS OF EARNINGS 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 25
CONSOLIDATED STATEMENTS OF CASH FLOWS 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 28
21
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Market Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Market Financial Corporation and Subsidiary as of September 30, 1997 and
1996, and the related consolidated statements of earnings, shareholders' equity,
and cash flows for the years ended September 30, 1997, 1996 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Market Financial
Corporation and Subsidiary as of September 30, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the years ended
September 30, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
/s/ Grant Thornton LLP
Grant Thornton LLP
Cincinnati, Ohio
November 19, 1997
22
<PAGE> 24
<TABLE>
<CAPTION>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 1997 1996
<S> <C> <C>
Cash and due from banks $ 550 $ 512
Federal funds sold 1,494 2,627
Interest-bearing deposits in other financial institutions 204 943
-------- --------
Cash and cash equivalents 2,248 4,082
Certificates of deposit in other financial institutions 6,690 7,040
Investment securities - at amortized cost, approximate market
value of $17,316 and $9,071 at September 30,
1997 and 1996 17,257 9,062
Investment securities designated as available for sale - at market 1,029 712
Mortgage-backed securities - at cost, approximate
market value of $1,338 and $1,612 at
September 30, 1997 and 1996 1,268 1,549
Loans receivable - net 26,502 21,996
Office premises and equipment - at depreciated cost 147 168
Federal Home Loan Bank stock - at cost 390 364
Accrued interest receivable 520 339
Prepaid expenses and other assets 70 196
Prepaid federal income taxes - 39
-------- --------
Total assets $ 56,121 $ 45,547
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 35,303 $ 37,282
Advances by borrowers for taxes and insurance 49 50
Accrued interest payable 99 117
Other liabilities 137 273
Accrued federal income taxes 48 -
Deferred federal income taxes 590 311
-------- --------
Total liabilities 36,226 38,033
Commitments - -
Shareholders' equity
Preferred stock - 1,000,000 shares without par value authorized;
no shares issued - -
Common stock - 4,000,000 shares without par value authorized;
1,335,725 shares issued and outstanding at September 30, 1997 - -
Additional paid-in capital 12,832 -
Retained earnings - substantially restricted 7,472 7,063
Shares acquired by Employee Stock Ownership Plan (ESOP) (1,069) -
Unrealized gains on securities designated as available for sale,
net of related tax effects 660 451
-------- --------
Total shareholders' equity 19,895 7,514
-------- --------
Total liabilities and shareholders' equity $ 56,121 $ 45,547
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 25
<TABLE>
<CAPTION>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income
Loans $ 1,974 $ 1,867 $ 1,960
Mortgage-backed securities 125 169 196
Investment securities 708 590 309
Interest-bearing deposits and other 706 635 717
------- ------- -------
Total interest income 3,513 3,261 3,182
Interest expense
Deposits 1,689 1,758 1,622
------- ------- -------
Net interest income 1,824 1,503 1,560
Provision for losses on loans - 13 -
------- ------- -------
Net interest income after provision for
losses on loans 1,824 1,490 1,560
Other operating income 6 7 8
General, administrative and other expense
Employee compensation and benefits 659 462 376
Occupancy and equipment 111 114 122
Federal deposit insurance premiums 35 327 92
Franchise taxes 97 100 101
Other operating 167 150 170
------- ------- -------
Total general, administrative and
other expense 1,069 1,153 861
------- ------- -------
Earnings before income taxes 761 344 707
Federal income taxes
Current 88 187 210
Deferred 171 (67) 30
------- ------- -------
Total federal income taxes 259 120 240
------- ------- -------
NET EARNINGS $ 502 $ 224 $ 467
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 26
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1997, 1996 and 1995
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED GAINS
ON SECURITIES
ADDITIONAL DESIGNATED AS SHARES
COMMON PAID-IN RETAINED AVAILABLE ACQUIRED
STOCK CAPITAL EARNINGS FOR SALE BY ESOP TOTAL
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1994 $ - $ - $ 6,372 $ - $ - $ 6,372
Cumulative effect of change in method of accounting
for securities designated as available for sale - net
of related tax effects - - - 238 - 238
Unrealized gains on securities designated as
available for sale, net of related tax effects - - - 76 - 76
Net earnings for the year ended September 30, 1995 - - 467 - - 467
---- -------- -------- -------- -------- --------
Balance at September 30, 1995 - - 6,839 314 - 7,153
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 137 - 137
Net earnings for the year ended September 30, 1996 - - 224 - - 224
---- -------- -------- -------- -------- --------
Balance at September 30, 1996 - - 7,063 451 - 7,514
Net proceeds from issuance of common shares - 12,832 - - - 12,832
Disbursement of loan to ESOP - - - - (1,069) (1,069)
Cash dividends of $.07 per share - - (93) - - (93)
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 209 - 209
Net earnings for the year ended September 30, 1997 - - 502 - - 502
---- -------- -------- -------- -------- --------
Balance at September 30, 1997 $ - $ 12,832 $ 7,472 $ 660 $ (1,069) $ 19,895
==== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 27
<TABLE>
<CAPTION>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 502 $ 224 $ 467
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 (36) (54) 2
Depreciation and amortization 31 31 25
Amortization of deferred loan origination fees (3) (29) (20)
Provision for losses on loans - 13 -
Federal Home Loan Bank stock dividends (26) (25) (21)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (181) 2 (106)
Accrued interest payable (18) (17) 31
Prepaid expenses and other assets 126 (132) 36
Other liabilities (136) 260 1
Federal income taxes
Current 87 (53) 52
Deferred 171 (67) 30
-------- -------- --------
Net cash provided by operating activities 517 153 497
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 279 660 221
Proceeds from maturity of investment securities 5,900 4,300 1,500
Loan disbursements (7,732) (2,583) (2,358)
Principal repayments on loans 3,229 3,621 3,018
Purchase of investment securities designated as held to maturity (14,057) (5,322) (3,587)
Purchase of office equipment (10) (78) (34)
(Increase) decrease in certificates of deposit in other
financial institutions - net 350 99 (1,000)
-------- -------- --------
Net cash provided by (used in) investing activities (12,041) 697 (2,240)
Cash flows provided by (used in) financing activities:
Net decrease in deposits (1,979) (774) (618)
Advances by borrowers for taxes and insurance (1) (7) (6)
Disbursement of loan to ESOP (1,069) - -
Proceeds from issuance of common shares 12,832 - -
Dividends paid on common stock (93) - -
-------- -------- --------
Net cash provided by (used in) financing activities 9,690 (781) (624)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents
(balance carried forward) (1,834) 69 (2,367)
-------- -------- --------
</TABLE>
26
<PAGE> 28
<TABLE>
<CAPTION>
MARKET FINANCIAL CORPORATION
CONSOLDIATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
1997 1996 1995
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (balance brought forward) $(1,834) $ 69 $(2,367)
Cash and cash equivalents at beginning of year 4,082 4,013 6,380
------- ------- -------
Cash and cash equivalents at end of year $ 2,248 $ 4,082 $ 4,013
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ - $ 159 $ 155
======= ======= =======
Interest on deposits $ 1,707 $ 1,775 $ 1,591
======= ======= =======
Supplemental disclosure of noncash investing activities:
Transfer of securities to an available for sale designation
upon adoption of SFAS No. 115 $ - $ - $ 29
======= ======= =======
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 209 $ 137 $ 314
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 29
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES
On April 16, 1996, the Board of Directors of The Market Building and Saving
Company (the "Company") unanimously adopted a Plan of Conversion to convert
the Company 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, Market Financial Corporation
(the "Corporation"). The conversion was accomplished through amendment of
the Association's Articles of Incorporation and the sale of the
Corporation's common shares in an amount equal to the pro forma market value
of the Company after giving effect to the conversion. A subscription
offering of the shares of the Corporation to the Company's members and to an
employee stock benefit plan was conducted.
The conversion was completed on March 27, 1997, and resulted in the issuance
of 1,335,725 common shares of the Corporation which, after consideration of
offering expenses totaling approximately $525,000 and shares purchased by
the ESOP of approximately $1.1 million, resulted in net proceeds of $11.8
million.
The Corporation is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Company. Future references to
the Corporation or the Company are utilized herein as the context requires.
The Company conducts a general banking business in southwestern Ohio which
consists of attracting deposits from the general public and applying those
funds to the origination of loans for consumer and residential purposes. The
Company's profitability is significantly dependent on net interest income,
which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest
expense paid on interest-bearing liabilities (i.e. customer deposits and
borrowed funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or
received by the Company can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are
outside of management's control.
The consolidated financial information presented herein has been prepared in
accordance with generally accepted accounting principles ("GAAP") and
general accounting practices within the financial services industry. In
preparing financial statements in accordance with GAAP, management is
required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
The following is a summary of significant accounting policies which have
been consistently applied in the preparation of the accompanying
consolidated financial statements.
28
<PAGE> 30
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
1. Principles Of Consolidation
---------------------------
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, the Company. All significant
intercompany balances and transactions have been eliminated. The
consolidated financial statements for fiscal years prior to March 27, 1997,
contained herein, are those of the Company prior to the completion of its
conversion to stock form.
2. Investment Securities And Mortgage-Backed Securities
----------------------------------------------------
The Corporation accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No.
115 requires that investments be categorized as held-to-maturity, trading,
or available-for-sale. Securities classified as held-to-maturity are carried
at cost only if the Corporation has the positive intent and ability to hold
these securities to maturity. Trading securities and securities
available-for-sale are carried at fair value with resulting unrealized gains
or losses charged to operations or shareholders' equity, respectively.
The Corporation's shareholders' equity reflected unrealized gains on
securities designated as available for sale, net of applicable tax effects,
totaling approximately $660,000 and $451,000 at September 30, 1997 and 1996,
respectively.
Realized gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
3. Loans Receivable
----------------
Loans are stated at the principal amount outstanding, adjusted for deferred
loan origination fees and the allowance for loan losses. Interest is accrued
as earned unless the collectibility of the loan is in doubt. Uncollectible
interest on loans that are contractually past due is charged off, or an
allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status.
The Company accounts for loan origination fees in accordance with SFAS No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of
direct origination costs, are deferred and amortized to interest income
using the level yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to direct costs attributable to originating a loan, i.e.,
principally actual personnel costs.
29
<PAGE> 31
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. Allowance For Losses On Loans
-----------------------------
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, current trends in the level
of delinquent and specific problem loans, loan concentrations, changes in
the composition of the loan portfolio, adverse situations that may affect
the borrower's ability to repay, the estimated value of any underlying
collateral and current and anticipated economic conditions in the primary
lending areas. When the collection of a loan becomes doubtful, or otherwise
troubled, the Company records a charge-off equal to the difference between
the fair value of the property securing the loan and the loan's carrying
value. Major loans and major lending areas are reviewed periodically to
determine potential problems at an early date. The allowances are increased
by charges to earnings and decreased by charge-offs (net of recoveries).
In May 1993, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This
Statement, which was amended by SFAS No. 118 as to certain income
recognition provisions and financial statement disclosure requirements,
requires that impaired loans be measured based upon the present value of
expected future cash flows discounted at the loans' effective interest rate
or, as an alternative, at the loans' observable market price or fair value
of the collateral. SFAS No. 114 was effective for years beginning after
December 15, 1994 (October 1, 1995, as to the Company). The Company adopted
SFAS No. 114 effective October 1, 1995, without material financial statement
effect.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts due according to the contractual terms of the loan
agreement. In applying the provisions of SFAS No. 114, the Company considers
its investment in one- to four-family residential loans and consumer
installment loans to be homogeneous and therefore excluded from separate
identification for evaluation of impairment. With respect to the Company's
investment in nonresidential and multifamily residential real estate loans,
and its evaluation of impairment thereof, such loans are generally
collateral dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value. Collateral dependent loans which are
more than ninety days delinquent are considered to constitute more than a
minimum delay in repayment and are evaluated for impairment under SFAS No.
114 at that time.
At September 30, 1997 and 1996, the Company had no loans that would be
defined as impaired under SFAS No. 114.
30
<PAGE> 32
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
5. Office Premises And Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting,
depreciation is provided on the straight-line method over the useful service
lives of the assets, estimated to be thirty to forty years for the
buildings, thirty years for building improvements and five to ten years for
furniture and equipment. An accelerated depreciation method is used for tax
reporting purposes.
6. Real Estate Acquired Through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. A loan loss provision is recorded for
any write down in the loan's carrying value to fair value at the date of
acquisition. A real estate loss provision is recorded if the properties'
fair value subsequently declines below the value determined at the recording
date. In determining the lower of cost or fair value at acquisition, costs
relating to development and improvement of property are capitalized. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
7. Federal Income Taxes
--------------------
The Corporation accounts for federal income taxes in accordance with the
provisions of SFAS No. 109, "Accounting for Income Taxes". SFAS No. 109
established financial accounting and reporting standards for the effects of
income taxes that result from the Corporation's activities within the
current and previous years. Pursuant to the provisions of SFAS No. 109, a
deferred tax liability or deferred tax asset is computed by applying the
expected statutory tax rates to net taxable or deductible differences
between the tax basis of an asset or liability and its reported amount in
the financial statements that will result in taxable or deductible amounts
in future periods. Deferred tax assets are recorded only to the extent that
the amount of net deductible temporary differences or carryforward
attributes may be utilized against current period earnings, carried back
against prior years' earnings, offset against taxable temporary differences
reversing in future periods, or utilized to the extent of management's
estimate of future taxable income. A valuation allowance is provided for
deferred tax assets to the extent that the value of net deductible temporary
differences and carryforward attributes exceeds management's estimates of
taxes payable on future taxable income. Deferred tax liabilities are
provided on the total amount of net temporary differences taxable in the
future.
The Corporation's principal temporary differences between pretax financial
income and taxable income result primarily from the practice of preparing
tax returns on the cash basis of accounting, while the consolidated
financial statements are prepared on the accrual basis of accounting, and
from different methods of accounting for deferred loan origination fees,
Federal Home Loan Bank stock dividends and the Company's general loan loss
allowance. A temporary difference is also recognized for depreciation
utilizing accelerated methods for federal income tax purposes.
31
<PAGE> 33
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
8. Benefit Plans
-------------
The Corporation has established an Employee Stock Ownership Plan ("ESOP")
during fiscal 1997, which provides retirement benefits for substantially all
employees who are age 21 or older and who have completed one year of service
with the Corporation or its subsidiary. Expense of approximately $97,000 was
accrued by the Corporation relative to the ESOP for fiscal 1997.
The Company previously had a defined benefit pension plan which covered
substantially all employees who had completed one year of service. This plan
was terminated in fiscal 1997 upon receipt of all required regulatory
approvals. The pension plan was funded with an annuity policy using the
individual level premium method. It was the Company's policy to fund pension
costs accrued up through the date of termination. Annual pension expense for
the fiscal years ended September 30, 1997, 1996 and 1995, totaled
approximately $3,000, $38,000 and $24,000, respectively. The required
disclosure under SFAS No. 87, "Accounting for Pensions," has not been
provided herein based on materiality.
9. Cash And Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents includes
cash and due from banks, federal funds sold and interest-bearing deposits in
other financial institutions with original terms to maturity of less than
ninety days.
10. Advertising
-----------
Advertising costs are expensed when incurred.
11. Earnings Per Share
------------------
The provisions of Accounting Principles Board Opinion No. 15, "Earnings Per
Share," are not applicable to the years ended September 30, 1997, 1996 and
1995, as the conversion from mutual to stock form was completed in March
1997.
12. Fair Value Of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets
and liabilities whether or not recognized in the consolidated statement of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair
values are based on estimates using present value and other valuation
methods.
32
<PAGE> 34
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Fair Value Of Financial Instruments (continued)
-----------------------------------
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Because of the
judgment and subjective considerations required in determining appropriate
and reasonable assumptions, the derived fair value estimates cannot be
substantiated by comparison to independent markets. Further, the amounts
which could be realized in immediate settlement of the instruments could
vary significantly from the fair value estimate depending upon bulk versus
individual settlements or sales as well as other factors. SFAS No. 107
excludes certain financial instruments and all nonfinancial instruments from
its disclosure requirements. Accordingly, the aggregate net fair value
amounts presented do not represent the underlying value of the Company.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at September 30, 1997
and 1996:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
CERTIFICATES OF DEPOSIT IN OTHER FINANCIAL INSTITUTIONS: The
carrying amounts presented in the statements of financial
condition for certificates of deposit in other financial
institutions are deemed to approximate fair value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and
mortgage-backed securities, fair value is deemed to equal the
quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into
categories with similar characteristics, such as one- to
four-family residential, multi-family residential and
nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates
offered for loans with similar terms to borrowers of similar
credit quality. For loans on deposit accounts, and consumer
and other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in
the consolidated statements of financial condition is deemed
to approximate fair value since a quoted market price is not
available on Federal Home Loan Bank stock.
DEPOSITS: The fair value of passbook and club accounts, and
money market demand accounts are deemed to approximate the
amount payable on demand at September 30, 1997 and 1996,
respectively. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow
calculation using the interest rates currently offered for
deposits of similar remaining maturities.
33
<PAGE> 35
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and
adjustable-rate loan commitments, the fair value estimate
considers the difference between current levels of interest
rates and committed rates. The difference between the fair
value and notional amount of outstanding loan commitments at
September 30, 1997 and 1996 was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at September 30, are as follows:
<TABLE>
<CAPTION>
1997 1996
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,248 $ 2,248 $ 4,082 $ 4,082
Certificates of deposit in other financial institutions 6,690 6,690 7,040 7,040
Investment securities held to maturity 17,257 17,316 9,062 9,071
Investment securities designated as available for sale 1,029 1,029 712 712
Mortgage-backed securities 1,268 1,338 1,549 1,612
Loans receivable - net 26,502 27,281 21,996 21,844
Federal Home Loan Bank stock 390 390 364 364
------- ------- ------- -------
$55,384 $56,292 $44,805 $44,725
======= ======= ======= =======
Financial liabilities:
Deposits $35,303 $35,334 $37,282 $37,285
Advances by borrowers for taxes and insurance 49 49 50 50
------- ------- ------- -------
$35,352 $35,383 $37,332 $37,335
======= ======= ======= =======
</TABLE>
13. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal
1997 consolidated financial statement presentation.
34
<PAGE> 36
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and approximate market values of investment securities at
September 30 are summarized below. Certain securities with maturities of one
to ten years are subject to call provisions and, therefore, may not be held
to maturity.
<TABLE>
<CAPTION>
1997 1996
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency obligations
Due within:
One year $ 6,399 $ 6,413 $ 4,865 $ 4,881
One to three years 5,858 5,882 4,197 4,190
Three to five years 4,000 4,016 - -
Five to ten years 1,000 1,005 - -
------- ------- ------- -------
Total investment securities
held to maturity 17,257 17,316 9,062 9,071
AVAILABLE FOR SALE:
FHLMC stock 29 1,029 29 712
------- ------- ------- -------
Total investment securities $17,286 $18,345 $ 9,091 $ 9,783
======= ======= ======= =======
</TABLE>
At September 30, 1997, the market value appreciation of the Company's held
to maturity investment portfolio in excess of the cost carrying value
totaled $59,000, consisting of gross unrealized gains of $63,000 and gross
unrealized losses of $4,000.
At September 30, 1996, the market value appreciation of the Company's held
to maturity investment portfolio in excess of the cost carrying value
totaled $9,000, consisting of gross unrealized gains of $20,000 and gross
unrealized losses of $11,000.
Mortgage-backed securities at September 30, 1997 and 1996, were comprised
solely of Government National Mortgage Association participation
certificates. At September 30, 1997 and 1996, the market value appreciation
of the Company's mortgage-backed securities in excess of cost was
approximately $70,000 and $63,000, respectively, comprised solely of gross
unrealized gains. Maturities of mortgage-backed securities are due ratably
over the next fifteen fiscal years based on the contractual repayment terms
of the underlying loans.
35
<PAGE> 37
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Real estate mortgage loans
One- to four-family $24,669 $20,404
Multifamily 573 407
Nonresidential 811 1,168
Construction 527 -
Passbook loans 134 96
------- -------
26,714 22,075
Less:
Undisbursed portion of loans in process 156 -
Deferred loan origination fees 4 27
Allowance for loan losses 52 52
------- -------
$26,502 $21,996
======= =======
</TABLE>
As depicted above, the Company's lending efforts have historically focused
on residential real estate loans, which comprised approximately $25.6
million, or 96%, of the total loan portfolio at September 30, 1997 and $20.7
million, or 94%, of the total loan portfolio at September 30, 1996.
Generally, such loans have been underwritten on the basis of no more than an
80% loan-to-value ratio, which has historically provided the Company with
adequate collateral coverage in the event of default. Nevertheless, the
Company, as with any lending institution, is subject to the risk that
residential real estate values could deteriorate in its primary lending area
of southwestern Ohio, thereby impairing collateral values. However,
management is of the belief that real estate values in the Company's primary
lending area are presently stable.
The Company, in the ordinary course of business, has granted loans to some
of the directors, officers, employees and their related interests. Related
party loans are made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unrelated persons and do not involve more than normal risk
of collectibility. The aggregate dollar amount of these loans was
approximately $740,000 and $211,000 at September 30, 1997 and 1996,
respectively.
Additionally, the Company has paid a retainer of $20,000 to a related party
for legal services, principally related to the loan origination function,
during each of the fiscal years ended September 30, 1997 and 1996.
Management believes that the fees paid for such services are at, or below,
the comparable cost of such services from unrelated parties.
36
<PAGE> 38
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE D - ALLOWANCE FOR LOSSES ON LOANS
The activity in the allowance for losses on loans is summarized as follows
for the years ended September 30:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Beginning balance $52 $39 $39
Provision for loan losses - 13 -
--- --- ---
Ending balance $52 $52 $39
=== === ===
</TABLE>
At September 30, 1997, the Company's allowance for losses on loans was
comprised primarily of a general loan loss allowance, which is includible as
a component of regulatory risk-based capital.
Nonperforming loans totaled approximately $191,000 and $139,000 at
September 30, 1997 and 1996, respectively. There were no nonperforming
loans at September 30, 1995.
As of and for the year ended September 30, 1997, the Company had no loans
which would be defined as impaired under SFAS No. 114. As a result, there
was no interest income recognized or received on impaired loans for the year
ended September 30, 1997.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Land $ 34 $ 34
Buildings and improvements 161 161
Furniture and equipment 236 226
---- ----
431 421
Less accumulated
depreciation 284 253
---- ----
$147 $168
==== ====
</TABLE>
37
<PAGE> 39
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND
WEIGHTED-AVERAGE 1997 1996
INTEREST RATE AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook accounts -
2.83% in 1997 and 1996 $10,094 28.6 $11,027 29.6
Club accounts - 5.07% in 1997 and
5.08% in 1996 52 .2 51 .1
Money market demand accounts -
2.83% in 1997 and 3.09% in 1996 2,374 6.7 3,380 9.1
------- ----- ------- -----
Total demand accounts 12,520 35.5 14,458 38.8
Certificates of deposit -
5.97% in 1997 and 5.74% in 1996 22,783 64.5 22,824 61.2
------- ----- ------- -----
Total deposit accounts $35,303 100.0 $37,282 100.0
======= ===== ======= =====
</TABLE>
At September 30, 1997 and 1996, the Company had deposit accounts with
balances greater than $100,000 totaling $2.0 million and $2.4 million,
respectively.
Interest expense on deposits for the fiscal years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
(In thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 300 $ 324 $ 343
Money market accounts 81 104 119
Certificates of deposit 1,308 1,330 1,160
------ ------ ------
$1,689 $1,758 $1,622
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1997 1996
(In thousands)
<S> <C> <C>
Less than six months $ 8,000 $ 6,295
Six months to one year 10,407 11,281
One year to three years 4,376 5,248
------- -------
$22,783 $22,824
======= =======
</TABLE>
38
<PAGE> 40
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE G - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that
computed at the statutory corporate tax rate for the years ended September 30 as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
(Dollars in thousands)
<S> <C> <C> <C>
Federal income taxes computed
at the statutory rate $259 $117 $240
Increase in taxes resulting from:
Other - 3 -
---- ---- ----
Federal income tax provision per
consolidated financial statements $259 $120 $240
==== ==== ====
Effective tax rate 34.0% 34.9% 33.9%
==== ==== ====
</TABLE>
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
1997 1996
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT ESTIMATED CORPORATE TAX RATE: (In thousands)
<S> <C> <C>
Deferred tax assets:
Deferred loan origination fees $ - $ 6
General loan loss allowance 17 17
SAIF recapitalization assessment - 84
Other 1 5
----- -----
Total deferred tax assets 18 112
Deferred tax liabilities:
Unrealized gains on securities designated as
available for sale (340) (232)
Difference between cash and accrual basis of accounting (157) (94)
Federal Home Loan Bank stock dividends (69) (60)
Difference between book and tax depreciation (31) (29)
Percentage of earnings bad debt deduction (7) (8)
Deferred loan origination costs (4) -
----- -----
Total deferred tax liabilities (608) (423)
----- -----
Net deferred tax liability $(590) $(311)
===== =====
</TABLE>
39
<PAGE> 41
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE G - FEDERAL INCOME TAXES (continued)
The Company was allowed a special bad debt deduction based on a percentage
of earnings, generally limited to 8% of otherwise taxable income, or the
amount of qualifying and nonqualifying loans outstanding and subject to
certain limitations based on aggregate loans and savings account balances at
the end of the calendar year. The Company was subject to such limitations
during the fiscal years ended September 30, 1996 and 1995 and, therefore,
was precluded from utilizing the percentage of earnings bad debt deduction.
If the amounts that qualified as deductions for federal income tax purposes
are later used for purposes other than for bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. Retained
earnings at September 30, 1997 includes approximately $1.3 million for which
federal income taxes have not been provided. The amount of the unrecognized
deferred tax liability relating to the cumulative percentage of earnings bad
debt deduction totaled approximately $430,000 at September 30, 1997.
See Note L for additional information regarding the Company's future
percentage of earnings bad debt deductions.
NOTE H - COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve,
to varying degrees, elements of credit and interest-rate risk in excess of
the amount recognized in the statement of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Company's
involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At September 30, 1997 and 1996, the Company had outstanding commitments of
approximately $873,000 and $149,000 to originate fixed-rate residential real
estate loans at interest rates ranging from 7.25% to 8.00% and 7.88% to
8.38%, respectively. In the opinion of management, the loan commitments
equaled or exceeded prevalent market interest rates as of those dates, and
such commitments have been underwritten on the same basis as the existing
loan portfolio. Management believes that all commitments will be funded
through cash flow from operations and existing excess liquidity. Fees
received in connection with these commitments have not been recognized in
earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses and may require payment of a fee. Since many of the commitments may
expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Company evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Company upon extension
of credit, is based on management's credit evaluation of the counterparty.
Collateral on loans may vary but the preponderance of loans granted
generally include a mortgage interest in real estate as security.
40
<PAGE> 42
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE I - REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum
capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Company must meet specific capital guidelines that
involve quantitative measures of the Company's assets, liabilities, and
certain off-balance-sheet items as calculated under regulatory accounting
practices. The Company's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance
of regulatory capital sufficient to meet each of three tests, hereinafter
described as the tangible capital requirement, the core capital requirement
and the risk-based capital requirement. The tangible capital requirement
provides for minimum tangible capital (defined as shareholders' equity less
all intangible assets) equal to 1.5% of adjusted total assets. The core
capital requirement provides for minimum core capital (tangible capital plus
certain forms of supervisory goodwill and other qualifying intangible
assets) equal to 3.0% of adjusted total assets. An OTS proposal, if adopted
in present form, would increase the core capital requirement to a range of
4.0% - 5.0% of adjusted total assets for substantially all savings
associations. Management anticipates no material change to the Company's
excess regulatory capital position as a result of this proposed change in
the regulatory capital requirement. The risk-based capital requirement
currently provides for the maintenance of core capital plus general loss
allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted
assets, the Company multiplies the value of each asset on its statement of
financial condition by a defined risk-weighting factor, e.g., one- to
four-family residential loans carry a risk-weighted factor of 50%.
As of September 30, 1997, management believes that the Company met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
---------------- ----------------------------------------------------
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $12,885 23.4% Less than or equal $ 827 Less than or equal 1.5%
Core capital $12,885 23.4% Less than or equal $ 1,654 Less than or equal 3.0%
Risk-based capital $12,935 68.2% Less than or equal $ 1,518 Less than or equal 8.0%
<CAPTION>
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
------------------------------------------------------
AMOUNT RATIO
<S> <C> <C>
Tangible capital Less than or equal $2,756 Less than or equal 5.0%
Core capital Less than or equal $3,307 Less than or equal 6.0%
Risk-based capital Less than or equal $1,898 Less than or equal 10.0%
</TABLE>
41
<PAGE> 43
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE I - REGULATORY CAPITAL (continued)
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control
of the Company, such as increased interest rates or a downturn in the
economy in the Company's market area, could adversely affect future earnings
and, consequently, the ability to meet future minimum regulatory capital
requirements.
NOTE J - CORPORATE REORGANIZATION TO STOCK FORM
In April 1996, the Company's Board of Directors adopted an overall plan of
conversion and reorganization (the "Plan") whereby the Company would convert
to the stock form of ownership, followed by the issuance of all the
Company's outstanding stock to a newly formed holding company, Market
Financial Corporation. Pursuant to the Plan, as amended, the Company offered
for sale up to 1,335,725 common shares at $10.00 per share to its
depositors, members of the community, and a newly formed ESOP. The offering
was completed in March 1997, with the issuance of 1,335,725 common shares
which, after consideration of expenses totaling approximately $525,000,
resulted in net capital proceeds of $12.8 million.
At the completion of the conversion to stock form, the Company established a
liquidation account in the amount of retained earnings contained in the
final offering circular. The liquidation account will be maintained for the
benefit of eligible savings account holders who maintain deposit accounts in
the Company after conversion.
In the event of a complete liquidation (and only in such event), each
eligible member will be entitled to receive a liquidation distribution from
the liquidation account in the amount of the then current adjusted balance
of deposit accounts held, before any liquidation distribution may be made
with respect to common stock. Except for the repurchase of stock and payment
of dividends by the Company, the existence of the liquidation account will
not restrict the use or application of such retained earnings.
The Company may not declare, pay a cash dividend on, or repurchase any of
its common stock, if the effect thereof would cause retained earnings to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements for SAIF insured institutions.
42
<PAGE> 44
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE K - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Market Financial Corporation as of September 30, 1997, and the
results of its operations and its cash flows for the period ended September
30, 1997.
<TABLE>
<CAPTION>
MARKET FINANCIAL CORPORATION
STATEMENT OF FINANCIAL CONDITION
September 30, 1997
(In thousands)
ASSETS
<S> <C>
Interest-bearing deposits in The Market Building and Saving Co. $ 5,256
Interest-bearing deposits in other financial institutions 1
Loan receivable from ESOP 1,069
Investment in The Market Building and Saving Co. 13,546
Accrued interest receivable 38
--------
Total assets $ 19,910
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other liabilities $ 2
Accrued federal income taxes 13
--------
Total liabilities 15
Shareholders' equity
Common stock and additional paid-in capital 12,832
Retained earnings 7,472
Shares acquired by stock benefit plans (1,069)
Unrealized gains on securities designated as available for sale, net 660
--------
Total shareholders' equity 19,895
--------
Total liabilities and shareholders' equity $ 19,910
========
MARKET FINANCIAL CORPORATION
STATEMENT OF EARNINGS
Period ended September 30, 1997
(In thousands)
Revenue
Interest income $ 113
Equity in earnings of The Market Building and Saving Co. 314
--------
Total revenue 427
General and administrative expenses 74
--------
Earnings before income taxes 353
Federal income tax 13
--------
NET EARNINGS $ 340
========
</TABLE>
43
<PAGE> 45
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE K - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL
CORPORATION (continued)
MARKET FINANCIAL CORPORATION
STATEMENT OF CASH FLOWS
Period ended September 30, 1997
(In thousands)
<TABLE>
<CAPTION>
Cash provided by (used in) operating activities:
<S> <C>
Net earnings for the year $ 340
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (314)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (38)
Other liabilities 2
Federal income taxes - current 13
--------
Net cash provided by operating activities 3
Cash flows used in investing activities:
Investment in The Market Building and Saving Co. (6,416)
Cash flows provided by (used in) financing activities:
Disbursement of loan to ESOP (1,069)
Net proceeds from issuance of common shares 12,832
Payment of dividends on common stock (93)
--------
Net cash provided by financing activities 11,670
--------
Net increase in cash and cash equivalents 5,257
Cash and cash equivalents at beginning of period -
--------
Cash and cash equivalents at end of period $ 5,257
========
</TABLE>
As a condition to regulatory approval of the stock conversion and
reorganization to the holding company form of ownership, the Company agreed
to limit the amount of dividends payable to the Corporation. Regulations of
the Office of Thrift Supervision (OTS) impose limitations on the payment of
dividends and other capital distributions by savings associations. Under
such regulations, a savings association that, immediately prior to, and on a
pro forma basis after giving effect to, a proposed capital distribution, has
total capital (as defined by OTS regulation) that is equal to or greater
than the amount of its fully phased-in capital requirement is generally
permitted without OTS approval (but subsequent to 30 days prior notice to
the OTS of the planned dividend) to make capital distributions during a
calendar year in the amount of up to the greater of (i) 100% of its net
earnings to date during the year plus an amount equal to one-half of the
amount by which its total capital-to-assets ratio exceeded its fully
phased-in capital-to-assets ratio at the beginning of the year or (ii) 75%
of its net earnings for the most recent four quarters. Pursuant to such OTS
dividend regulations, the Company had the ability to pay dividends of
approximately $3.4 million to the Corporation at September 30, 1997.
44
<PAGE> 46
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1997, 1996 and 1995
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Company and of other savings associations are
insured by the Federal Deposit Insurance Corporation ("FDIC") through the
Savings Association Insurance Fund ("SAIF"). The reserves of the SAIF were
below the level required by law, because a significant portion of the
assessments paid into the fund were used to pay the cost of prior thrift
failures. The deposit accounts of commercial banks are insured by the FDIC
through the Bank Insurance Fund ("BIF"), except to the extent such banks
have acquired SAIF deposits. The reserves of the BIF met the level required
by law in May 1995. As a result of the respective reserve levels of the
funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per
$100 in deposits in 1995. In fiscal 1996 and 1997, no BIF assessments were
required for healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995,
in order to increase SAIF reserves to the level required by law. The Company
held $37.6 million in deposits at March 31, 1995, resulting in an assessment
of approximately $246,000, or $162,000 after-tax, which was charged to
operations in fiscal 1996.
A component of the recapitalization plan provided for the merger of the SAIF
and BIF on January 1, 1999. However, the SAIF recapitalization legislation
currently provides for an elimination of the thrift charter or of the
separate federal regulation of thrifts prior to the merger of the deposit
insurance funds. As a result, the Company would be regulated as a bank under
federal laws which would subject it to the more restrictive activity limits
imposed on national banks. In the opinion of management, such activity limit
restrictions would not have a material effect on the Corporation's financial
position or results of operations.
Under separate legislation related to the recapitalization plan, the Company
is required to recapture as taxable income approximately $22,000 of its tax
bad debt reserve, which represents the post-1987 additions to the reserve,
and will be unable to utilize the percentage of earnings method to compute
its bad debt deduction in the future. The Company has provided deferred
taxes for this amount and will be permitted to amortize the recapture of the
bad debt reserve in taxable income over a six year period commencing in
fiscal 1997.
45
<PAGE> 47
MARKET FINANCIAL CORPORATION
AND
THE MARKET BUILDING AND SAVING COMPANY
DIRECTORS AND OFFICERS
<TABLE>
<S> <C>
BOARD OF DIRECTORS OF BOARD OF DIRECTORS OF
MARKET FINANCIAL CORPORATION THE MARKET BUILDING AND SAVING COMPANY
Robert Gandenberger John T. Larimer
Supervisor - Retired President
Hamilton County of Ohio Recorder's Office Market Financial Corporation
The Market Building and Saving Company
John T. Larimer
President Edgar H. May
Market Financial Corporation Partner - Retired
The Market Building and Saving Company Ed May Realty Co.
Rae Skirvin Larimer R. C. Meyerenke
Attorney Managing Officer - Retired
The Market Building and Saving Company
Edgar H. May
Partner - Retired L. Craig Martin
Ed May Realty Co. President
Environmentrics, Inc.
R. C. Meyerenke
Managing Officer - Retired Una Schaeperklaus
The Market Building and Saving Company Secretary
The Market Building and Saving Company
Wilbur H. Tisch
President - Retired OFFICERS OF
General Metal Works THE MARKET BUILDING AND SAVING COMPANY
Kathleen A. White John T. Larimer
Real Estate Title Examiner President and Managing Officer
OFFICERS OF R. C. Meyerenke
MARKET FINANCIAL CORPORATION Treasurer
John T. Larimer Una Schaeperklaus
President Secretary
R.C. Meyerenke Julie M. Bertsch
Treasurer Chief Financial Officer
Rae Skirvin Larimer Thomas A. Gerdes
Secretary Vice President/Lending
Julie M. Bertsch
Chief Financial Officer
</TABLE>
46
<PAGE> 1
SHAREHOLDER SERVICES
================================================================================
The Fifth Third Bank serves as transfer agent and dividend distributing agent
for MFC's shares. Communications regarding change of address, transfer of
shares, lost certificates and dividends should be sent to:
The Fifth Third Bank
Stock Transfer Department
Mail Drop 1090F 5-3212
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
ANNUAL MEETING
===============================================================================
The 1998 Annual Meeting of Shareholders of Market Financial Corporation will be
held on January 30, 1998, at 10:00 a.m., Eastern Time, at Shuller's Wigwam
Restaurant, 6210 Hamilton Avenue, Mt. Healthy, Ohio 45224. Shareholders are
cordially invited to attend.
ANNUAL REPORT ON FORM 10-KSB
===============================================================================
A copy of MFC's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon request
to:
Market Financial Corporation
7522 Hamilton Avenue
Mt. Healthy, Ohio 45231
Attention: President
47
<PAGE> 2
MARKET FINANCIAL CORPORATION
7522 HAMILTON AVENUE
MT. HEALTHY, OHIO 45231
(513) 521-9772
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1998 Annual Meeting of Shareholders of
Market Financial Corporation ("MFC") will be held at Shuller's Wigwam
Restaurant, 6210 Hamilton Avenue, Cincinnati, Ohio 45224, on January 30, 1998,
at 10:00 a.m., Eastern Time (the "Annual Meeting"), for the following purposes,
all of which are more completely set forth in the accompanying Proxy Statement:
1. To reelect three directors of MFC for terms
expiring in 2000;
2. To ratify the selection of Grant Thornton LLP as
the auditors of MFC for the current fiscal year;
and
3. To transact such other business as may properly
come before the Annual Meeting or any
adjournments thereof.
Only shareholders of MFC of record at the close of business on December
19, 1997, will be entitled to receive notice of and to vote at the Annual
Meeting and at any adjournments thereof. Whether or not you expect to attend the
Annual Meeting, we urge you to consider the accompanying Proxy Statement
carefully and to SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY SO THAT YOUR
SHARES MAY BE VOTED IN ACCORDANCE WITH YOUR WISHES AND THE PRESENCE OF A QUORUM
AT THE ANNUAL MEETING MAY BE ASSURED. The giving of a proxy does not affect your
right to vote in person in the event you attend the Annual Meeting.
By Order of the Board of Directors
John T. Larimer, President
Mt. Healthy, Ohio
December 29, 1997
<PAGE> 3
MARKET FINANCIAL CORPORATION
7522 HAMILTON AVENUE
MT. HEALTHY, OHIO 45231
(513) 521-9772
PROXY STATEMENT
PROXIES
The enclosed proxy is being solicited by the Board of Directors of
Market Financial Corporation, an Ohio corporation ("MFC"), for use at the 1998
Annual Meeting of Shareholders of MFC to be held at Shuller's Wigwam Restaurant,
6210 Hamilton Avenue, Cincinnati, Ohio 45224, on January 30, 1998, at 10:00
a.m., Eastern Time, and at any adjournments thereof (the "Annual Meeting").
Without affecting any vote previously taken, the proxy may be revoked by a
shareholder by execution of a later dated proxy which is received by MFC before
the proxy is exercised or by giving notice of revocation to MFC in writing or in
open meeting before the proxy is exercised. Attendance at the Annual Meeting
will not, of itself, revoke a proxy.
Each properly executed proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of Robert Gandenberger, John T. Larimer and Edgar
H. May as directors of MFC for terms expiring in 2000; and
FOR the ratification of the selection of Grant Thornton LLP ("Grant
Thornton") as the auditors of MFC for the current fiscal year.
Proxies may be solicited by the directors, officers and other employees
of MFC and The Market Building and Saving Company, a wholly-owned subsidiary of
MFC ("Market"), in person or by telephone, telecopy, telegraph or mail, only for
use at the Annual Meeting. Such proxies will not be used for any other meeting.
The cost of soliciting proxies will be borne by MFC.
Only shareholders of record as of the close of business on December 19,
1997 (the "Voting Record Date"), are entitled to vote at the Annual Meeting.
Each such shareholder will be entitled to cast one vote for each share owned.
MFC's records disclose that, as of the Voting Record Date, there were 1,335,725
votes entitled to be cast at the Annual Meeting.
This Proxy Statement is first being mailed to the shareholders of MFC
on or about December 29, 1997.
<PAGE> 4
VOTE REQUIRED
-------------
ELECTION OF DIRECTORS
Under Ohio law and MFC's Code of Regulations (the "Regulations"), the
three nominees receiving the greatest number of votes will be elected as
directors. Each shareholder will be entitled to cast one vote for each share
owned. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified in the enclosed Proxy. If the enclosed Proxy is signed and
dated by the shareholder but no vote is specified thereon, the shares held by
such shareholder will be voted FOR the re-election of the three nominees. No
shareholder may cumulate votes in the election of directors.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares of MFC
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of MFC for the current fiscal
year. Shares which are held by a nominee for a beneficial owner and which are
represented in person or by proxy at the Annual Meeting but not voted with
respect to such proposals ("Non-votes") will have the same effect as a vote
against the approval of such ratification, as will abstentions. If, however, a
shareholder has signed and dated a proxy in the form of the enclosed Proxy but
has not voted on the ratification of the selection of Grant Thornton by checking
an appropriate block on the Proxy, such person's shares will be voted FOR the
ratification of the selection of Grant Thornton and will not be considered
Non-votes.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
---------------------------------------------------------------------------
The following table sets forth certain information with respect to the
only person known to MFC to own beneficially more than five percent of the
outstanding common shares of MFC as of December 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Name And Address Beneficial Ownership Shares Outstanding
---------------- -------------------- -------------------
<S> <C> <C>
First Bankers Trust Company, N.A.
1201 Broadway 106,858 8.00%
Quincy, Illinois 62301
<FN>
----------------------------
(1) Consists of shares held by First Bankers Trust Company, N.A. (the
"Trustee"), as the Trustee for the Market Financial Corporation
Employee Stock Ownership Plan (the "ESOP"). The Trustee has voting
power over shares that have not been allocated to an ESOP participant
and shares that have been allocated to an ESOP participant but as to
which no voting instructions are given by the recipient. The Trustee
has limited shared investment power over all ESOP shares.
</TABLE>
2
<PAGE> 5
The following table sets forth certain information with respect to the
number of common shares of MFC beneficially owned by each director of MFC and
Market and by all directors and executive officers of MFC and Market as a group
as of December 1, 1997:
<TABLE>
<CAPTION>
Amount and Nature of
Beneficial Ownership
-------------------------------------
Sole Voting and Shared Voting and Percent of
Name And Address (1) Investment Power Investment Power Shares Outstanding
- -------------------- ---------------- ---------------- ------------------
<S> <C> <C> <C>
Robert Gandenberger - 2,500 0.19%
John T. Larimer 23,450 (2) - 1.76
Rae Skirvin Larimer 21,700 (3) - 1.62
Edgar H. May 5,000 - 0.37
L. Craig Martin (4) 28,228 22,200 (5) 3.78
R. C. Meyerenke - 2,500 0.19
Wilbur H. Tisch 5,000 - 0.37
Una E. Schaeperklaus (4) 8,500 - 0.64
Kathleen A. White - 1,000 0.07
All directors of and
executive officers
of MFC and Market as a group
(11 people) 95,378 28,200 9.25%
<FN>
- ----------------------------
(1) Each of the persons listed in this table may be contacted at the address of
MFC.
(2) Does not include 21,700 shares owned by Mr. Larimer's spouse, Rae Skirvin
Larimer.
(3) Does not include 23,450 shares owned by Ms. Larimer's spouse, John T.
Larimer.
(4) Mr. Martin and Ms. Schaeperklaus are directors of Market but are not
directors of MFC.
(5) Includes 20,200 shares owned by Mr. Martin's wife and 2,000 shares owned by
Mr. Martin's son.
</TABLE>
PROPOSAL ONE - ELECTION OF DIRECTORS
------------------------------------
ELECTION OF DIRECTORS
The Regulations provide for a Board of Directors consisting of seven
persons divided into two classes. In accordance with Section 2.02 of the
Regulations, nominees for election as directors may be proposed only by the
directors or by a shareholder entitled to vote for directors if such shareholder
has submitted a written nomination to the Secretary of MFC by the later of the
October 31st immediately preceding the annual meeting of shareholders or the
sixtieth day before the first anniversary of the most recent annual meeting of
shareholders held for the election of directors. Each such written nomination
must state the name, age, business or residence address of the nominee, the
principal occupation or employment of the nominee, the number of common shares
of MFC owned either beneficially or of record by each such nominee and the
length of time such shares have been so owned.
3
<PAGE> 6
The Board of Directors proposes the re-election of the following
persons to serve until the Annual Meeting of Shareholders in 2000 and until
their successors are duly elected and qualified or until their earlier
resignation, removal from office or death:
<TABLE>
<CAPTION>
Director Director
of MFC of Market
NAME AGE POSITION(S) HELD SINCE (2) SINCE
---- ---- ---------------- --------- -----
(1)
<S> <C> <C> <C> <C>
Robert Gandenberger 69 Director 1996 -
John T. Larimer 64 Director and President 1996 1975
Edgar H. May 73 Director and Vice President 1996 1992
<FN>
- -----------------------------
(1) As of December 15, 1997.
(2) Messrs. Gandenberger, Larimer and May became directors of MFC in
connection with the conversion of Market from mutual to stock form (the
"Conversion") and the formation of MFC as the holding company for
Market.
</TABLE>
If any nominee is unable to stand for election, any proxies granting
authority to vote for such nominee will be voted for such substitute as the
Board of Directors recommends.
The following directors will continue to serve as directors of MFC
after the Annual Meeting for the terms indicated:
<TABLE>
<CAPTION>
DIRECTOR OF DIRECTOR OF
NAME AGE (1) POSITIONS HELD MFC SINCE (2) TERM EXPIRES MARKET SINCE
- ---- ------- -------------- ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Rae Skirvin Larimer 61 Director and Secretary 1996 1999 -
R.C. Meyerenke 75 Director and Treasurer 1996 1999 1974
Wilbur H. Tisch 82 Director 1996 1999 -
Kathleen A. White 40 Director 1996 1999 -
<FN>
- -----------------------------
(1) As of December 15, 1997.
(2) Each director became a director of MFC in connection with the Conversion.
</TABLE>
ROBERT GANDENBERGER. Mr. Gandenberger retired as Supervisor of the
Hamilton County Recorder's Office in 1994. From 1991 to 1994, Mr. Gandenberger
served as a director of The Cleves-North Bend Building and Loan Company, an Ohio
savings and loan association which merged into Market in December 1995
("Cleves-North Bend").
JOHN T. LARIMER. Mr. Larimer, an attorney, has been a director of
Market since 1975, President of Market since 1993, Managing Officer of Market
since November 1995, and President of MFC since March 1996. Mr. Larimer is Rae
Skirvin Larimer's spouse and is a brother-in-law of Una Schaeperklaus, a
director of Market.
RAE SKIRVIN LARIMER. Ms. Larimer has been legal counsel for Market
since 1975. From 1979 to 1994, Ms. Larimer served as a director of Cleves-North
Bend. Ms. Larimer is John T. Larimer's spouse and the sister of Una
Schaeperklaus.
EDGAR H. MAY. Mr. May has served as a director of Market since 1992 and
as Vice President of Market and MFC since January 14, 1997. From 1960 until his
retirement in 1994, Mr. May was a broker and partner in Ed May Realty Co.,
located in Deer Park, Ohio.
R.C. MEYERENKE. Mr. Meyerenke has served Market as a director since
1974 and as the Secretary and the Treasurer since 1972. From 1974 until his
retirement in 1991, Mr. Meyerenke was the Managing Officer of Market.
4
<PAGE> 7
WILBUR H. TISCH. Mr. Tisch retired as owner and President of General
Metal Works in 1983. Mr. Tisch served as a director of Cleves-North Bend from
1975 to 1994 and as President from 1986 to 1994.
KATHLEEN A. WHITE. Ms. White has been employed as a real estate title
examiner since 1980.
MEETINGS OF DIRECTORS
MFC was incorporated in April 1996. The Board of Directors of MFC met
seven times for regularly scheduled and special meetings during the fiscal year
ended September 30, 1997. Each director attended at least 75% of the aggregate
of such meetings. No MFC Board of Directors' committee meetings were held during
fiscal year 1997.
The Board of Directors of Market met 14 times for regularly scheduled
and special meetings during the fiscal year ended September 30, 1997. Each
director attended at least 75% of the aggregate of such meetings.
COMMITTEES OF DIRECTORS
The Board of Directors of MFC does not have a nominating committee or a
compensation committee. Nominees for election to the Board of Directors are
selected by the entire Board of Directors.
The Board of Directors of Market has an Audit Committee, a Compensation
Committee and an Executive Committee.
The Audit Committee is responsible for reviewing and reporting to the
full Board of Directors on the independent audit of MFC and reviewing Market's
loan files for regulatory compliance and adherence to Market's lending policies.
The Audit Committee recommends audit firms to the full Board of Directors and
reviews and approves the annual independent audit report. The members of the
Audit Committee are Mr. Meyerenke and Ms. Schaeperklaus. The Audit Committee did
not meet separately from the full Board of Directors during the fiscal year
ended September 30, 1997.
Market's Compensation Committee is comprised of Messrs. May and
Meyerenke and Ms. Schaeperklaus. The function of the Compensation Committee is
to make recommendations to the Board of Directors regarding the compensation of
Market's executive officers and employees. The Compensation Committee did not
meet separately from the full Board of Directors during the fiscal year ended
September 30, 1997.
The members of the Executive Committee are Ms. Schaeperklaus and
Messrs. Larimer, Meyerenke and May. The Executive Committee is authorized to act
on behalf of the Board of Directors between regular meetings of the Board of
Meetings. The Executive Committee met once during the fiscal year ended
September 30, 1997.
EXECUTIVE OFFICERS
------------------
The following table sets forth certain information with respect to the
current executive officers of MFC:
<TABLE>
<CAPTION>
Name Age(1) Position(s) Held
- ---- ------- ---------------------
<S> <C> <C>
John T. Larimer 64 President and Director
Rae Skirvin Larimer 61 Secretary and Director
Edgar H. May 73 Vice President and Director
Julie M. Bertsch 36 Chief Financial Officer
<FN>
- -----------------------------
(1) As of December 15, 1997.
</TABLE>
JULIE M. BERTSCH, a Certified Public Accountant, was hired as Chief
Financial Officer of MFC and Market in June 1996. Prior to joining MFC, Ms.
Bertsch was employed from August 1987 until June 1996 with Grant Thornton,
independent certified public accountants.
5
<PAGE> 8
For biographical information regarding John T. Larimer, Rae Skirvin
Larimer and Edgar H. May, see "PROPOSAL ONE - ELECTION OF DIRECTORS."
COMPENSATION OF EXECUTIVE OFFICERS AND DIRECTORS
------------------------------------------------
EXECUTIVE COMPENSATION
The following table presents certain information regarding the cash
compensation received by the President and Chief Executive Officer of MFC and
Market. No other executive officer of MFC or Market received compensation in
excess of $100,000 during the fiscal years ended September 30, 1997 and 1996:
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
- ------------------------- ----------- ---------------------------------
Annual Compensation
---------------------------------
Name and Year Salary ($) Bonus ($)
Principal
Position
- ------------------------- ----------- ----------------- ---------------
<S> <C> <C> <C> <C>
John T. Larimer 1997 $94,500 (1) $4,835
President and Chief 1996 70,703 (2)
Executive Officer
- ------------------------- ----------- ----------------- ---------------
<FN>
- -----------------------------
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to MFC or Market of providing
such benefits to Mr. Larimer was less than 10% of his cash
compensation.
(2) Includes salary of $56,078 and directors' fees of $14,625. Does not
include amounts attributable to other miscellaneous benefits received
by executive officers. The cost to Market of providing such benefits to
Mr. Larimer was less than 10% of his cash compensation.
</TABLE>
DIRECTOR COMPENSATION
Each director of MFC who is not a director of Market receives an annual
fee of $10,000. Each director of Market currently receives a fee of $19,500 per
year. Mr. Larimer does not receive director's fees from MFC or Market.
EMPLOYMENT AGREEMENTS
On April 1, 1997, Market entered into an employment agreement with Mr.
Larimer (the "Employment Agreement").
The Employment Agreement provides for a term of three years, a salary
of not less than $94,500 and a performance review by the Board of Directors not
less often than annually. The Employment Agreement also provides for the
inclusion of Mr. Larimer in any formally established employee benefit, bonus,
pension and profit-sharing plans for which senior management personnel are
eligible.
The Employment Agreement is terminable by Market at any time. In the
event of termination by Market for "just cause," as defined in the Employment
Agreement, Mr. Larimer will have no right to receive any compensation or other
benefits for any period after such termination. In the event of termination by
Market before the end of the term of the Employment Agreement other than for
just cause, or in connection with a "change of control," as defined in the
Employment Agreement, Mr. Larimer will be entitled to a continuation of salary
payments for a period of time equal to the term of the Employment Agreement and
a continuation of benefits substantially equal to those being provided at the
date of termination of employment until the earliest to occur of the end of the
term of the Employment Agreement or the date on which Mr. Larimer becomes
employed full-time by another employer.
6
<PAGE> 9
The Employment Agreement also contains provisions with respect to the
occurrence of the following within one year of a "change of control": (1) the
termination of employment of Mr. Larimer for any reason other than just cause,
retirement or termination at the end of the term of the Employment Agreement;
(2) a material change in the capacity or circumstances in which Mr. Larimer is
employed; or (3) a material reduction in his responsibilities, authority,
compensation or other benefits provided under the Employment Agreement. In the
event of any such occurrence, Mr. Larimer will be entitled to receive an amount
equal to three times his average annual compensation for the three taxable years
immediately preceding the termination of employment. In addition, Mr. Larimer
will be entitled to continued coverage under all benefit plans until the
earliest of the end of the term of the Employment Agreement or the date on which
he is included in another employer's benefit plans as a full-time employee. The
maximum which Mr. Larimer may receive under such provisions, however, is limited
to an amount that will not result in the imposition of a penalty tax pursuant to
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code"), and an amount that will not violate applicable restrictions of the
Office of Thrift Supervision (the "OTS"). A "change of control," as defined in
the Employment Agreement, generally refers to the acquisition by any person or
entity of the ownership or power to vote 25% or more of the voting stock of
Market or MFC, the control of the election of a majority of the directors of
Market or MFC or the exercise of a controlling influence over the management or
policies of Market or MFC.
CERTAIN TRANSACTIONS
In accordance with OTS regulations, Market makes loans to executive
officers and directors of Market and MFC in the ordinary course of business and
on the same terms and conditions, including interest rates and collateral, as
those of comparable loans to other persons. All outstanding loans to executive
officers and directors during the last two fiscal years were made pursuant to
such policy, do not involve more than the normal risk of collectibility or
present other unfavorable features and are current in their payments.
Rae Skirvin Larimer, the spouse of John T. Larimer and director of MFC,
serves as general counsel to Market. During the fiscal year ended September 30,
1997, Market paid $20,000 in legal fees to Ms. Larimer for her services. Ms.
Larimer does not serve as legal counsel to MFC.
PROPOSAL TWO - SELECTION OF AUDITORS
------------------------------------
The Board of Directors has selected Grant Thornton as the auditors of
MFC and Market for the current fiscal year and recommends that the shareholders
ratify such selection. Management expects that a representative of Grant
Thornton will be present at the Annual Meeting, will have the opportunity to
make a statement if he or she so desires and will be available to respond to
appropriate questions.
PROPOSALS OF SHAREHOLDERS AND OTHER MATTERS
-------------------------------------------
Any proposals of shareholders intended to be included in the proxy
statement for the 1999 Annual Meeting of Shareholders of MFC should be sent to
MFC by certified mail and must be received by MFC not later than August 31,
1998.
Management knows of no other business which may be brought before the
Annual Meeting. It is the intention of the persons named in the enclosed Proxy
to vote such Proxy in accordance with their best judgment on any other matters
which may be brought before the Annual Meeting.
7
<PAGE> 10
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. WHETHER OR NOT YOU
EXPECT TO ATTEND THE MEETING IN PERSON, YOU ARE URGED TO FILL IN, SIGN AND
RETURN THE PROXY IN THE ENCLOSED SELF-ADDRESSED ENVELOPE.
By Order of the Board of Directors
John T. Larimer, President
Mt. Healthy, Ohio
December 29, 1997
8
<PAGE> 11
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
MARKET FINANCIAL CORPORATION
MARKET FINANCIAL CORPORATION 1998 ANNUAL MEETING OF SHAREHOLDERS
JANUARY 30, 1998
The undersigned shareholder of Market Financial Corporation ("MFC")
hereby constitutes and appoints Julie M. Bertsch and Kathleen A. White, or
either of them, as the Proxy or Proxies of the undersigned with full power of
substitution and resubstitution, to vote at the Annual Meeting of Shareholders
of MFC to be held at Shuller's Wigwam Restaurant, 6210 Hamilton Avenue,
Cincinnati, Ohio 45224, on January 30, 1998, at 10:00 a.m. local time (the
"Annual Meeting"), all of the shares of MFC which the undersigned is entitled to
vote at the Annual Meeting, or at any adjournment thereof, on each of the
following proposals, all of which are described in the accompanying Proxy
Statement:
1. The election of three directors:
FOR all nominees WITHHOLD authority to
listed below vote for all nominees
[ ] (except as marked to the [ ] listed below:
contrary below):
Robert Gandenberger
John T. Larimer
Edgar H. May
(INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided below).
- ------------------------------------------------------------------------------
2. The ratification of the selection of Grant Thornton LLP, certified
public accountants, as the auditors of MFC for the current fiscal year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, upon such other business as may properly come
before the Annual Meeting or any adjournments thereof.
The Board of Directors recommends a vote "FOR" the nominees and the
proposals listed above.
IMPORTANT: PLEASE SIGN AND DATE THIS PROXY ON THE REVERSE SIDE.
<PAGE> 12
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. Unless otherwise specified, the
shares will be voted FOR proposals 1 and 2.
All Proxies previously given by the undersigned are hereby revoked.
Receipt of the Notice of the 1998 Annual Meeting of Shareholders of MFC and of
the accompanying Proxy Statement is hereby acknowledged.
Please sign exactly as your name appears on your Stock Certificate(s).
Executors, Administrators, Trustees, Guardians, Attorneys and Agents should give
their full titles.
- ---------------------------- ------------------------------
Signature Signature
- ---------------------------- ------------------------------
Print or Type Name Print or Type Name
Dated: _____________________ Dated: _______________________
PLEASE DATE, SIGN AND RETURN THIS PROXY PROMPTLY IN THE ENCLOSED ENVELOPE. NO
POSTAGE IS REQUIRED FOR MAILING IN THE U.S.A.
2
<PAGE> 1
Exhibit 21
SUBSIDIARIES
Jurisdiction of
Name Incorporation
---- -------------
The Market Building and Saving Company Ohio
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 550
<INT-BEARING-DEPOSITS> 204
<FED-FUNDS-SOLD> 1,494
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,029
<INVESTMENTS-CARRYING> 25,215<F1>
<INVESTMENTS-MARKET> 25,344
<LOANS> 26,502
<ALLOWANCE> 52
<TOTAL-ASSETS> 56,121
<DEPOSITS> 35,303
<SHORT-TERM> 0
<LIABILITIES-OTHER> 923
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 19,895<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 56,121<F3>
<INTEREST-LOAN> 1,974
<INTEREST-INVEST> 833
<INTEREST-OTHER> 706
<INTEREST-TOTAL> 3,513
<INTEREST-DEPOSIT> 1,689
<INTEREST-EXPENSE> 1,689
<INTEREST-INCOME-NET> 1,824
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,069
<INCOME-PRETAX> 761
<INCOME-PRE-EXTRAORDINARY> 502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 502
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 3.67
<LOANS-NON> 0
<LOANS-PAST> 191
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 52
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 52
<ALLOWANCE-DOMESTIC> 2
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50
<FN>
<F1>Includes certificates of deposit.
<F2>Incudes net-unrealized gains on securities, additional paid-in-capital
and shares acquired by ESOP.
<F3>Includes interest from mortgage-backed securities.
</FN>
</TABLE>
<PAGE> 1
Exhibit 99
SAFE HARBOR UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Private Securities Litigation Reform Act of 1995 (the "Act") provides a
"safe harbor" for forward-looking statements to encourage companies to provide
prospective information about their companies, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary
statements identifying important factors that could because actual results to
differ material from those discussed in the statement. Market Financial
Corporation desires to take advantage of the "safe harbor" provisions of the
Act. Certain information, particularly information regarding future economic
performance and finances and plans and objectives of management, contained or
incorporated by reference in Market Financial Corporation's Annual Report on
Form 10-KSB for fiscal year 1997 is forward-looking. In some cases, information
regarding certain important factors that could cause actual results of
operations or outcomes of other events to differ materially from any such
forward-looking statement appear together with such statement. In addition,
forward-looking statement s are subject to other risks and uncertainties
affecting the financial institutions industry, including, but not limited to,
the following:
INTEREST RATE RISK
Market Financial Corporation's operating results are dependent to a significant
degree on its net interest income, which is the difference between interest
income from loans and investments and interest expense on deposits and
borrowings. The interest income and interest expense of Market Financial
Corporation change as the interest rates on mortgages, securities and other
assets and on deposits and other liabilities change. Interest rates may change
because of general economic conditions, the policies of various regulatory
authorities and other factors beyond Market Financial Corporation's control. The
interest rates on specific assets and liabilities of Market Financial
Corporation will change or "reprice" in accordance with the contractual terms of
the asset or liability instrument and in accordance with customer reaction to
general economic trends. In a rising interest rate environment, loans tend to
prepay slowly and new loans at higher rates increase slowly, while interest paid
on deposits increases rapidly because the terms to maturity of deposits tend to
be shorter than the terms to maturity or prepayment of loans. Such differences
in the adjustment of interest rates on assets and liabilities may negatively
affect Market Financial Corporation income. Moreover, rising interest rates tend
to decrease loan demand in general, negatively affecting Market Financial
Corporation income.
POSSIBLE INADEQUACY OF THE ALLOWANCE FOR LOAN LOSSES
The Market Building and Saving Company maintains an allowance for loan losses
based upon a number of relevant factors, including, but not limited to, trends
in the level of nonperforming assets and classified loans, current and
anticipated economic conditions in the primary lending area, past loss
experience, possible losses arising from specific problem assets and changes in
the composition of the loan portfolio. While the Board of Directors of The
Market Building and Saving Company believes that it uses the best information
available to determine the allowance for loan losses, unforeseen market
conditions could result in material adjustments, and net
<PAGE> 2
earnings could be significantly adversely affected if circumstances differ
substantially from the assumptions used in making the final determination.
Loans not secured by one- to four-family residential real estate are generally
considered to involve greater risk of loss than loans secured by one- to
four-family residential real estate due, in part, to the effects of general
economic conditions. The prepayment of multifamily residential and
nonresidential real estate loans generally depends upon the cash flow from the
operation of the property, which may be negatively affected by national and
local economic conditions that cause leases not to be renewed or that negatively
affect the operations of a commercial borrower. Construction loans may also be
negatively affected by such economic conditions, particularly loans made to
developers who do not have a buyer for a property before the loan is made. The
risk of default on consumer loans increases during periods of recession, higher
unemployment and other adverse economic conditions. When consumers have trouble
paying their bills, they are more likely to pay mortgage loans than consumer
loans, and the collateral securing such loans, if any, may decrease in value
more rapidly than the outstanding balance of the loan.
COMPETITION
The Market Building and Saving Company competes for deposits with other savings
associations, commercial banks and credit unions and issuers of commercial paper
and other securities, such as shares in money market mutual funds. The primary
factors in competing for deposits are interest rates and convenience of office
location. In making loans, The Market Building and Saving Company competes with
other savings associations, commercial banks, consumer finance companies, credit
unions, leasing companies, mortgage companies and other lenders. Competition is
affected by, among other things, the general availability of lendable funds,
general and local economic conditions, current interest rate levels and other
factors which are not readily predictable. The size of financial institutions
competing with The Market Building and Saving Company is likely to increase as a
result of changes in statutes and regulations eliminating various restrictions
on interstate and inter-industry branching and acquisitions. Such increased
competition may have an adverse effect upon Market Financial Corporation.
LEGISLATION AND REGULATION THAT MAY ADVERSELY AFFECT THE MARKET BUILDING AND
SAVING COMPANY 'S EARNINGS
The Market Building and Saving Company is subject to extensive regulation by the
Office of Thrift Supervision (the "OTS") and the Federal Deposit Insurance
Corporation (the "FDIC") and is periodically examined by such regulatory
agencies to test compliance with various regulatory requirements. As a savings
and loan holding company, Market Financial Corporation is also subject to
regulation and examination by the OTS. Such supervision and regulation of The
Market Building and Saving Company and Market Financial Corporation are intended
primarily for the protection of depositors and not for the maximization of
shareholder value and may affect the ability of the company to engage in various
business activities. The assessments, filing fees and other costs associated
with reports, examinations and other regulatory matters are significant and may
have an adverse effect on Market Financial Corporation's net earnings.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance of members of the Bank Insurance fund (the "BIF") and the Savings
Association Insurance Fund (the "SAIF") . The FDIC may increase assessment rates
for either fund if necessary to restore the fund's ratio of reserves to insured
deposits to the target level within a reasonable time and may decrease such
rates if such target level has been met. The FDIC has established a risk-based
assessment system for both SAIF and BIF members. Under such system, assessments
may vary
<PAGE> 3
depending on the risk the institution poses to its deposit insurance fund. Such
risk level is determined by reference to the institution's capital level and the
FDIC's level of supervisory concern about the institution.
Congress recently enacted a plan to recapitalize the SAIF. The recapitalization
plan also provides for the merger of the SAIF and BIF effective January l, 1999,
assuming there are no savings associations under federal law. Congress is
considering legislation to eliminate the federal thrift charter and the separate
federal regulation of savings and loan associations, and the Department of the
Treasury is preparing a report for Congress on the development of a common
charter for all financial institutions. As a result, The Market Building and
Saving Company may have to convert to a different financial institution charter
or might be regulated under federal law as a bank. If The Market Building and
Saving Company becomes a bank or is regulated as a bank, it would become subject
to the more restrictive activity limitations imposed on national banks.
Moreover, Market Financial Corporation might become subject to more restrictive
holding company requirements, including activity limits and capital requirements
similar to those imposed on The Market Building and Saving Company. Market
Financial Corporation cannot predict the impact of the conversion of The Market
Building and Saving Company to, or regulation of The Market Building and Saving
Company as, a bank until any legislation requiring such change is enacted.
SPECIFIC REFERENCES
In addition to the foregoing, some of the matters, which are addressed in the
Form 10-KSB and Forms 10-QSB's filed by Market Financial Corporation and contain
forward-looking statements, include the following.
1. Pending legislation or proposals regarding changes in charter or regulation.
2. Management's determination of the amount of the allowance for loan losses
and expectations regarding its adequacy.
3. Management's efforts to reduce the higher degree of risk in second mortgage,
multifamily residential real estate, developed building lot, nonresidential
real estate and construction loans.
4. Management's expectation that secondary market activities will continue to
increase if interest rates decline.
5. Management's efforts to manage delinquencies.
6. Management's efforts to manage interest rate risk.
7. Management's characterization of its competition.
8. Pending regulatory proposals.
9. Levels of deposit insurance assessments.
