<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, 1998
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 of (I.R.S. Employer
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
----
Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
--------------------------------
(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, 1998,
were $3.9 million.
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 $12.2 on December 21,
1998.
1,335,725 of the registrant's common shares were issued and outstanding
on December 15, 1998.
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, 1998.
Part III of Form 10-KSB - Portions of the Proxy Statement for 1999 Annual
Meeting of Shareholders.
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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
Saving 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
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been originated 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,
---------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
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 $29,225 89.1% $24,669 93.1% $20,404 92.8%
Multifamily 1,507 4.6 573 2.2 407 1.9
Nonresidential 1,879 5.7 811 3.0 1,168 5.3
Construction 150 .5 527 2.0 - -
------- ----- ------- ----- ------- -----
Total real estate loans 32,761 99.9 26,580 100.3 21,979 100.0
Consumer loans:
Loans on deposits 106 .3 134 .5 96 0.4
------- ----- ------- ----- ------- -----
Total loans 32,867 100.2 26,714 100.8 22,075 100.4
Less:
Undisbursed portion of loans
in process - - 156 .6 - -
Unearned and deferred income (1) - 4 - 27 0.2
Allowance for losses on loans 52 .2 52 .2 52 0.2
------- ----- ------- ----- ------- -----
Net loans $32,816 100.0% $26,502 100.0% $21,996 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at September 30, 1998, 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 $413 $651 $ 96 $ 198 $ 28 $ -- $ 1,386
Fixed-rate 63 200 324 2,940 14,221 13,576 31,324
Consumer and other 16 80 10 -- -- -- 106
---- ---- ---- ------ ------- ------- -------
Total loans $492 $931 $430 $3,138 $14,249 $13,576 $32,816
==== ==== ==== ====== ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of loans maturing
after one year from September 30, 1998, 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 $29,382 $ 973
Nonresidential real estate 1,879 -
Consumer and other - 90
------- ------
Total loans $31,261 $1,063
======= ======
</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, 1998, Market's
one- to four-family residential loans totaled approximately $29.2 million, or
89.1% 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,
1998, 99.8% 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 $29.2 million of one- to four-family residential loans, approximately
$146,000 were closed-end home equity loans.
At September 30, 1998, Market had nonperforming loans totaling $171,000
in its one- to four-family portfolio. Residential real estate loans (including
one- to four-family and multifamily lending) constituted $11.0 million, or
88.2%, of the $12.5 million of loans originated in fiscal 1998.
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,
1998, loans secured by multifamily residences totaled approximately $1.5
million, or 4.6% of total loans. At September 30, 1998, the largest single loan
secured by a multifamily residence was $296,000 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, 1998, 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. 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, 1998, approximately $1.9 million, or 5.7%, 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, 1998, Market had no nonperforming loans in its
nonresidential real estate portfolio. Nonresidential real estate loans
constituted $1.1 million, or 8.9%, of the $12.5 million of loans originated in
fiscal 1998.
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, 1998, Market had construction loans of approximately $150,000, or .5% of
total loans outstanding, with the undisbursed portion of such loans totaling
approximately $50.
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, 1998.
None of Market's construction loans were nonperforming at September 30,
1998.
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, 1998,
Market had approximately $106,000 or .3% 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,
1998, 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
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the Board of Directors. Upon the completion of the appraisal and the receipt of
information on the credit history of the borrower, the 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,
---------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Residential (1) $11,023 $6,978 $ 2,515
Nonresidential 1,107 70 38
Construction 324 527 -
Consumer 40 157 30
------- ------ -------
Total loans originated 12,494 7,732 2,583
Principal repayments (6,183) (3,229) (3,621)
Increase in other items, net (2) 3 3 16
------- ------ -------
Net increase (decrease) $ 6,314 $4,506 $(1,022)
======= ====== =======
</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 $2.1
million to one borrower at September 30, 1998. The largest amount Market had
outstanding to one borrower, who is a director of Market, at September 30, 1998,
was $494,000, consisting of three loans, the largest of which had an outstanding
balance of $294,000, 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,
---------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
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 7 $125 0.4% 5 $ 64 0.3% 14 $337 1.6%
60 - 89 days 5 85 0.3 13 244 0.9 3 380 1.7
90 days and over 11 171 0.5 13 191 0.7 6 139 .6
-- ---- --- -- ---- --- -- ---- ---
Total delinquent
loans 23 $381 1.2% 31 $499 1.9% 23 $856 3.9%
== ==== === == ==== === == ==== ===
</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,
---------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent more
than 90 days (1) $ 171 $ 191 $ 139
Loans accounted for on a
nonaccrual basis:
Real estate
One- to four-family - - -
Multifamily - - -
Nonresidential - - -
Consumer - - -
----- ----- -----
Total nonaccrual loans - - -
----- ----- -----
Total nonperforming loans 171 191 139
Real estate acquired through
foreclosure - - -
----- ----- -----
Total nonperforming assets $ 171 $ 191 $ 139
===== ===== =====
Allowance for loan losses $ 52 $ 52 $ 52
===== ===== =====
Nonperforming assets as a
percent of total assets 0.3% 0.3% 0.3%
Nonperforming loans as a
percent of total loans 0.5% 0.7% 0.6%
Allowance for loan losses
as a percent of
nonperforming loans 30.4% 27.2% 37.4%
</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,
1998.
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,
------------------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Substandard $60 $17 $51
Doubtful 23 9 -
Loss 2 2 2
--- --- ---
Total classified assets $85 $28 $53
=== === ===
</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 .3% 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,
-----------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Balance at beginning of period $52 $52 $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 $52
=== === ===
Ratio of net charge-offs to average
loans - - -
=== === ===
Ratio of allowance for loan losses
to total loans .16% .20% .24%
=== === ===
</TABLE>
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The allowance for loan losses is based on estimates and is, therefore,
monitored monthly and adjusted as necessary to provide an adequate allowance.
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,
----------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
Carrying Percent Carrying Percent Carrying 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) $ 8,556 43.4% $ 8,388 31.0% $10,610 51.1%
U.S. Government agency obligations (2) 9,300 47.2 17,257 63.8 9,062 43.7
FHLMC stock (3) 1,448 7.3 1,029 3.8 712 3.4
FHLB stock 419 2.1 390 1.4 364 1.8
------- ----- ------- ----- ------- -----
Total $19,723 100.0% $27,064 100.0% $20,748 100.0%
======= ===== ======= ===== ======= =====
</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, 1998, 1997
and 1996.
(3) Classified as available for sale at September 30, 1998, 1997 and 1996.
-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, 1998 At September 30, 1997
-------------------------------------------------------------------------------------------------
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 $859 $43 $ -- $902 $1,268 $70 $ -- $1,338
==== === ===== ==== ====== === ===== ======
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1996
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains loss value
---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C>
GNMA participation
certificates $1,549 $63 $ - $1,612
====== === === ======
</TABLE>
-11-
<PAGE> 12
The maturities of Market's investment securities at September 30, 1998,
are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 1998
--------------------------------------------------------------------------------------------
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 $3,500 6.29% $ 290 5.98% $ - -% $3,790 $3,790 6.27%
institutions
U.S. Government agency
obligations (1) 4,300 6.28 3,500 6.48 1,500 6.07 9,300 9,394 6.32
</TABLE>
- --------------------
(1) Consists primarily of investments in U.S. Treasury Notes and Bills and
FHLB bonds, which are classified as held to maturity at September 30,
1998.
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 interest-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, 1998, Market's certificates of deposit totaled
approximately $26.0 million, or 68.9% of total deposits. Of such amount,
approximately $20.0 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 $8.4 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,
-------------------------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
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) $ 9,510 25.2% $10,094 28.6% $11,027 29.6%
Club accounts (2) 51 .1 52 .2 51 .1
Money market accounts (3) 2,178 5.8 2,374 6.7 3,380 9.1
------- ----- ------- ----- ------- -----
Total transaction accounts 11,739 31.1 12,520 35.5 14,458 38.8
Certificates of deposit (4) 26,006 68.9 22,783 64.5 22,824 61.2
------- ----- ------- ----- ------- -----
Total deposits $37,745 100.0% $35,303 100.0% $37,282 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
- --------------------
(Footnotes on next page)
-12-
<PAGE> 13
(1) The weighted average interest rates on passbook accounts were 2.83% at
September 30, 1998, 1997 and 1996.
(2) The weighted average interest rates on club accounts were 5.07%, 5.07%
and 5.08% at September 30, 1998, 1997 and 1996, respectively.
(3) The weighted average interest rates on money market accounts were 2.83%
at September 30, 1998 and 1997 and 3.09% at September 30, 1996.
(4) The weighted average rates on all certificates of deposit were 5.89%,
5.97% and 5.74% at September 30, 1998, 1997 and 1996, respectively.
The following table shows rate and maturity information for Market's
certificates of deposit at September 30, 1998:
<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% $19,751 $3,621 $ 792 $24,164
6.00 - 6.99% 268 556 1,018 1,842
------- ------ ------- -------
Total certificates
of deposit $20,019 $4,177 $ 1,810 $26,006
======= ====== ======= =======
</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, 1998:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
December 31, 1998 $ -
March 31, 1999 840
June 30, 1999 400
September 30, 1999 850
After September 30, 1999 1,078
------
Total $3,168
======
</TABLE>
The following table sets forth Market's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $35,303 $37,282 $38,056
Deposits 14,656 40,650 13,155
Withdrawals (13,580) (43,940) (15,249)
Interest credited 1,366 1,311 1,320
------- ------- -------
Ending balance $37,745 $35,303 $37,282
======= ======= =======
Net increase (decrease) $ 2,442 $(1,979) $ (774)
======= ======= =======
Percent increase (decrease) 6.9% (5.3)% (2.0)%
=== ==== ====
</TABLE>
-13-
<PAGE> 14
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, 1998, Market was
not utilizing FHLB advances.
Other borrowed money totaled $725,000 at September 30, 1998, and
consisted of a one-year, unsecured note from another financial institution.
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.
YEAR 2000 COMPLIANCE MATTERS
As with most providers of financial services, Market's operations are
heavily dependent on information technology systems. Market is addressing the
potential problems associated with the possibility that the computers that
control or operate Market's information technology system and infrastructure may
not be programmed to read four-digit date codes and, upon arrival of the year
2000, may recognize the two-digit code "00" as the year 1900, causing systems to
fail to function or to generate erroneous data.
Market has appointed a Year 2000 Coordinator who, with support and
oversight from management and the Boards of Directors of both Market and MFC,
shall analyze the risk of potential problems that might arise from the failures
of computers and microprocessors to recognize the Year 2000, and to develop a
plan to mitigate such risks. The Year 2000 Coordinator submits monthly and
quarterly progress reports to the Boards of Directors. The impact upon MFC's
results of operations, liquidity and capital resources will be immaterial;
however, approximately $16,000 has been budgeted to ensure Year 2000 compliance.
Through December 1998, Year 2000 expenditures have totaled approximately $3,200.
The Year 2000 Coordinator has determined that the greatest potential
impact upon Market and MFC is the risk related to vendors used by Market,
particularly its data processing service bureau. The service bureau has advised
Market that it has changed to a fully Year 2000 compliant processing system that
will be fully tested by January 1, 1999.
Management and the Boards of Directors of Market and MFC have reviewed
the reports regarding Year 2000 testing results to date and are in the process
of developing appropriate remedial measures without material cost. No assurance
can be given, however, that significant expense will not be incurred in future
periods. In the unlikely event that Market is ultimately required to purchase
replacement computer systems, programs and equipment, or incurs substantial
expense to make its current systems, programs and equipment year 2000 compliant,
Market's net earnings and financial condition could be adversely affected.
The Year 2000 Coordinator has written a contingency plan to provide
options for the Boards of Directors and management in order to ensure that
Market's core business functions can continue to operate in the event of a Year
2000 problem.
In addition to possible expense related to its own systems, Market
could incur losses if loan payments are delayed due to year 2000 problems
affecting any major borrowers in Market's primary market area. Because Market's
loan portfolio is highly diversified with regard to individual borrowers and
types of businesses and Market's primary market area is not
-14-
<PAGE> 15
significantly dependent upon one employer or industry, Market does not expect
any significant or prolonged difficulties that will affect net earnings or cash
flow.
In addition, financial institutions may experience increases in problem
loans and credit losses in the event that borrowers fail to prepare properly for
Year 2000, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. MFC could also be materially adversely
affected if other third parties, such as governmental agencies, clearing houses,
telephone companies, utilities and other service providers fail to prepare
properly. Market is therefore attempting to assess these risks and take action
to minimize their effect.
EMPLOYEES
At September 30, 1998, Market had seven full-time employees and two
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 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.
-15-
<PAGE> 16
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 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
-16-
<PAGE> 17
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, 1998.
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, 1998, 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
-17-
<PAGE> 18
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, 1998,
was approximately $15.2 million, or 41.72%, and exceeded the then applicable
5.0% liquidity requirement by approximately $13.7 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, 1998, Market met
the QTL test.
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, 1998, 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, 1998.
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
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<PAGE> 19
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, 1998.
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.
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 1998.
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
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<PAGE> 20
meet the QTL test, then such unitary holding company would become subject to the
activities restrictions applicable to multiple holding companies. At September
30, 1998, 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.
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.
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<PAGE> 21
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, 1998, were permissible for a federal
association.
FRB RESERVE REQUIREMENTS
Effective December 1, 1998, FRB regulations require savings
associations to maintain reserves of 3% of net transaction accounts (primarily
NOW accounts) up to $46.5 million (subject to an exemption of up to $4.9
million), and of 10% of net transaction accounts in excess of $46.5 million. At
September 30, 1998, 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 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 $419,000 at September 30, 1998.
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, 1998, Market's
maximum limit on advances was approximately $8.4 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
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<PAGE> 22
"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
December 31, 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 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
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"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, 1998, 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,
1998, 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 1994. 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.
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.
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<PAGE> 24
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
1998, 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 $67,000 $33,223
Mt. Healthy, Ohio 45231
125-127 Miami Avenue Owned 1994 1,753 6,000 4,522
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, 1998 (the
"Annual Report") under the caption "Market Price of MFC Common Shares and
Related Shareholder Matters" is incorporated herein by reference.
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 December 4, 1998, 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.
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<PAGE> 25
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.
ITEM 13. EXHIBITS AND REPORTS ON FROM 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
10.3 Market Financial Corporation 1998 Stock Option and
Incentive Plan
10.4 Market Financial Corporation Recognition and Retention
Plan and Trust Agreement
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 1999 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, 1998.
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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 15, 1998
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 15, 1998 Date: December 15, 1998
/s/ Edgar H. May /s/ Rae Skirvin Larimer.
- ----------------------------- -------------------------------
Edgar H. May Rae Skirvin Larimer
Director and Vice President Director and Secretary
Date: December 15, 1998 Date: December 15, 1998
/s/ Robert Gandenberger /s/ R. C. Meyerenke
- ----------------------------- -------------------------------
Robert Gandenberger R. C. Meyerenke
Director Director
Date: December 15, 1998 Date: December 15, 1998
/s/ Wilbur H. Tisch /s/ Kathleen H. White
- ----------------------------- -------------------------------
Wilbur H. Tisch Kathleen H. White
Director Director
Date: December 15, 1998 Date: December 15, 1998
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<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
10.3 Market Financial Corporation 1998 Stock
Option and Incentive Plan
10.4 Market Financial Corporation Recognition
and Retention Plan and Trust Agreement
13 Market Financial Corporation 1998 Annual
Report to Shareholders
20 Proxy Statement for 1999 Annual Meeting of
Shareholders
21 Subsidiaries of Market Financial Incorporated by reference to the Form 10-KSB for the year
Corporation ended September 30, 1998, filed with the SEC on December 23,
1997, Exhibit 21
27 Financial Data Schedule
99 Safe Harbor Under the Private Securities
Litigation Reform Act of 1995
</TABLE>
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<PAGE> 1
Exhibit 10.3
MARKET FINANCIAL CORPORATION
1998 STOCK OPTION AND INCENTIVE PLAN
1. PURPOSE. The purpose of the Market Financial Corporation 1998 Stock
Option and Incentive Plan (this "Plan") is to promote and advance the interests
of Market Financial Corporation (the "Company") and its shareholders by enabling
the Company to attract, retain and reward directors, managerial and other key
employees of the Company and any Subsidiary (hereinafter defined), and to
strengthen the mutuality of interests between such directors and employees and
the Company's shareholders by providing such persons with a proprietary interest
in pursuing the long-term growth, profitability and financial success of the
Company.
2. DEFINITIONS. For purposes of this Plan, the following terms shall
have the meanings set forth below:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as
amended, or any successor thereto, together with rules, regulations and
interpretations promulgated thereunder.
(c) "Committee" means the Committee of the Board constituted
as provided in Section 3 of this Plan.
(d) "Common Shares" means the common shares, without par
value, of the Company or any security of the Company issued in
substitution, in exchange or in lieu thereof.
(e) "Company" means Market Financial Corporation, an Ohio
corporation, or any successor corporation.
(f) "Employment" means regular employment with the Company or
a Subsidiary and does not include service as a director only.
(g) "ERISA" means the Employment Retirement Income Security
Act, as amended, or any successor thereto, together with rules,
regulations and interpretations promulgated thereunder.
(h) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any successor statute.
(i) "Fair Market Value" shall be determined as follows:
(i) If the Common Shares are traded on a
national securities exchange at the time of grant of the Stock
Option, then the Fair Market Value shall be the average of the
highest and the lowest selling price on such exchange on the
date such Stock Option is granted or, if there were no sales
on such date, then on the next prior business day on which
there was a sale.
(ii) If the Common Shares are quoted on The
Nasdaq Stock Market at the time of the grant of the Stock
Option, then the Fair Market Value shall be the mean between
the closing high bid and low asked quotation with respect to a
Common Share on such date on The Nasdaq Stock Market.
(iii) If the Common Shares are not traded on
a national securities exchange or quoted on The Nasdaq Stock
Market, then the Fair Market Value shall be as determined by
the Committee.
<PAGE> 2
(j) "Incentive Stock Option" means any Stock Option granted
pursuant to the provisions of Section 6 of this Plan that is intended
to be and is specifically designated as an "incentive stock option"
within the meaning of Section 422 of the Code.
(k) "Non-Qualified Stock Option" means any Stock Option
granted pursuant to the provisions of Section 6 of this Plan that is
not an Incentive Stock Option.
(l) "OTS" means the Office of Thrift Supervision, Department
of the Treasury.
(m) "Participant" means an employee or director of the Company
or a Subsidiary who is granted a Stock Option under this Plan.
Notwithstanding the foregoing, for the purposes of the granting of any
Incentive Stock Option under this Plan, the term "Participant" shall
include only employees of the Company or a Subsidiary.
(n) "Plan" means the Market Financial Corporation 1998 Stock
Option and Incentive Plan, as set forth herein and as it may be
hereafter amended from time to time.
(o) "Stock Option" means an award to purchase Common Shares
granted pursuant to the provisions of Section 6 of this Plan.
(p) "Subsidiary" means any corporation or entity in which the
Company directly or indirectly controls 50% or more of the total voting
power of all classes of its stock having voting power and includes,
without limitation, The Market Building and Saving Company.
(q) "Terminated for Cause" means any removal of a director or
discharge of an employee for the personal dishonesty, incompetence,
willful misconduct, breach of fiduciary duty involving personal profit,
intentional failure to perform stated duties, willful violation of a
material provision of any law, rule or regulation (other than traffic
violations or similar offenses), a material violation of a final
cease-and-desist order or any other action of a director or employee
which results in a substantial financial loss to the Company or a
Subsidiary.
3. ADMINISTRATION.
(a) This Plan shall be administered by the Committee, which
shall be comprised of not fewer than three of the members of the Board
who are not employees of the Company. The members of the Committee
shall be appointed from time to time by the Board. Members of the
Committee shall serve at the pleasure of the Board, and the Board may
from time to time remove members from, or add members to, the
Committee. A majority of the members of the Committee shall constitute
a quorum for the transaction of business. An action approved in writing
by a majority of the members of the Committee then serving shall be
fully as effective as if the action had been taken by unanimous vote at
a meeting duly called and held.
(b) The Committee is authorized to construe and interpret this
Plan and to make all other determinations necessary or advisable for
the administration of this Plan. The Committee may designate persons
other than members of the Committee to carry out its responsibilities
under such conditions and limitations as it may prescribe. Any
determination, decision or action of the Committee in connection with
the construction, interpretation, administration, or application of
this Plan shall be final, conclusive and binding upon all persons
participating in this Plan and any person validly claiming under or
through persons participating in this Plan. The Company shall effect
the granting of Stock Options under this Plan in accordance with the
determinations made by the Committee, by execution of instruments in
writing in such form as approved by the Committee.
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<PAGE> 3
4. DURATION OF, AND COMMON SHARES SUBJECT TO, THIS PLAN.
(a) Term. This Plan shall terminate on the date which is ten
(10) years from the date on which this Plan is adopted by the Board,
except with respect to Stock Options then outstanding. Notwithstanding
the foregoing, no Incentive Stock Option may be granted under this Plan
after the date which is ten (10) years from the date on which this Plan
is adopted by the Board or the date on which this Plan is approved by
the shareholders of the Company, whichever is earlier.
(b) Common Shares Subject to Plan. The maximum number of
Common Shares in respect of which Stock Options may be granted under
this Plan, subject to adjustment as provided in Section 9 of this Plan,
shall be ten percent of the total Common Shares sold in connection with
the conversion of The Market Building and Saving Company from mutual to
stock form.
For the purpose of computing the total number of Common Shares
available for Stock Options under this Plan, there shall be counted against the
foregoing limitations the number of Common Shares subject to issuance upon
exercise or settlement of Stock Options as of the dates on which such Stock
Options are granted. If any Stock Options are forfeited, terminated or exchanged
for other Stock Options, or expire unexercised, the Common Shares which were
theretofore subject to such Stock Options shall again be available for Stock
Options under this Plan to the extent of such forfeiture, termination or
expiration of such Stock Options, to the extent permissible under Rule 16b-3
promulgated under the Exchange Act, or any successor rule or regulation thereto
as in effect from time to time.
Common Shares which may be issued under this Plan may be either
authorized and unissued shares or issued shares which have been reacquired by
the Company. No fractional shares shall be issued under this Plan.
5. ELIGIBILITY AND GRANTS. Persons eligible for Stock Options under
this Plan shall consist of directors and managerial and other employees of the
Company or a Subsidiary who hold positions with significant responsibilities or
whose performance or potential contribution, in the judgment of the Committee,
will benefit the future success of the Company or a Subsidiary. In selecting the
directors and employees to whom Stock Options will be awarded and the number of
shares subject to such Stock Options, the Committee shall consider the position,
duties and responsibilities of the eligible directors and employees, the value
of their services to the Company and the Subsidiaries and any other factors the
Committee may deem relevant.
6. STOCK OPTIONS. Stock Options granted under this Plan may be in the
form of Incentive Stock Options or Non-Qualified Stock Options, and such Stock
Options shall be subject to the following terms and conditions and in such form
as the Committee may from time to time approve and shall contain such additional
terms and conditions as the Committee shall deem desirable, not inconsistent
with the express provisions of the Plan:
(a) Grant. Stock Options may be granted under this Plan on
terms and conditions not inconsistent with the provisions of this Plan.
(b) Stock Option Price. The option exercise price per Common
Share purchasable under a Stock Option shall be determined by the
Committee at the time of grant; provided, however, that in no event
shall the exercise price of an Incentive Stock Option be less than 100%
of the Fair Market Value of the Common Shares on the date of the grant
of such Incentive Stock Option, and in the case of a Participant who
owns Common Shares representing more than 10% of the outstanding Common
Shares at the time an Incentive Stock Option is granted, the option
exercise price shall in no event be less than 110% of the Fair Market
Value of the Common Shares at the time the Incentive Stock Option is
granted to such Participant.
(c) Stock Option Terms. Subject to the right of the Company to
provide for earlier termination in the event of any merger, acquisition
or consolidation involving the Company, the term of each Stock Option
shall be fixed by the Committee; provided, however, that the term of
Incentive Stock Options will not exceed ten years after the date the
Incentive Stock Option is granted; provided further, however, that in
the case of a Participant who owns a number of Common Shares
representing more than
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<PAGE> 4
10% of the Common Shares outstanding at the time the Incentive Stock
Option is granted, the term of the Incentive Stock Option shall not
exceed five years.
(d) Exercisability. Except as set forth in Section 6(f) and
Section 7 of this Plan or as otherwise specified by the Committee,
Stock Options awarded under this Plan shall become exercisable on the
date of grant of the Stock Option and shall be subject to such other
terms and conditions as shall be determined by the Committee at the
date of grant.
(e) Method of Exercise. A Stock Option may be exercised, in
whole or in part, by giving written notice of exercise to the Company
specifying the number of Common Shares to be purchased. Such notice
shall be accompanied by payment in full of the purchase price in cash
or, if acceptable to the Committee in its sole discretion, in Common
Shares already owned by the Participant, or by surrendering outstanding
Stock Options. The Committee may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Stock Options
and sell Common Shares thereby acquired, pursuant to a brokerage or
similar arrangement, approved in advance by the Committee, and use the
proceeds from such sale as payment of the purchase price of such
shares.
(f) Special Rule for Incentive Stock Options. With respect to
Incentive Stock Options granted under this Plan, to the extent the
aggregate Fair Market Value (determined as of the date the Incentive
Stock Option is granted) of the number of shares with respect to which
Incentive Stock Options are exercisable under all plans of the Company
or a Subsidiary for the first time by a Participant during any calendar
year exceeds $100,000, or such other limit as may be required by the
Code, such Stock Options shall be Non-Qualified Stock Options to the
extent of such excess.
7. EFFECT OF TERMINATION OF EMPLOYMENT, DISABILITY, DEATH OR CHANGE IN
CONTROL.
(a) Except in the event of the death, disability or retirement
at or after age 65 of a Participant, or as otherwise permitted by the
Committee, upon the resignation, removal or retirement from the board
of directors of any Participant who is a director of the Company or a
Subsidiary or upon the termination of Employment of a Participant who
is not a director of the Company or a Subsidiary, any Stock Option
which has not yet become exercisable shall thereupon terminate and be
of no further force or effect, and, subject to extension by the
Committee, any Stock Option which has become exercisable shall
terminate if it is not exercised within twelve (12) months of such
resignation, removal or retirement.
(b) Unless the Committee shall specifically state otherwise at
the time a Stock Option is granted, all Stock Options granted under
this Plan shall become exercisable in full on the date of termination
of a Participant's employment or directorship with the Company or a
Subsidiary because of his death, disability or retirement at or after
age 65, and, subject to extension by the Committee, all Stock Options
shall terminate if not exercised within twelve (12) months of the
Participant's death, disability or retirement.
(c) In the event the Employment or the directorship of a
Participant is Terminated for Cause, any Stock Option which has not
been exercised shall terminate as of the date the Participant is
Terminated for Cause.
(d) All outstanding Incentive Stock Options shall become
immediately exercisable in the event of a change in control or imminent
change in control of the Company or The Market Building and Saving
Company, as determined by the Committee. For purposes of this Section
7, "change in control" shall mean: (i) the execution of an agreement
for the sale of all, or a material portion, of the assets of the
Company or The Market Building and Saving Company; (ii) the execution
of an agreement for a merger or recapitalization of the Company or The
Market Building and Saving Company or any merger or recapitalization
whereby the Company or The Market Building and Saving Company is not
the surviving entity; (iii) a change of control of the Company or The
Market Building and Saving Company, as defined or determined by the
OTS; or (iv) the acquisition, directly or indirectly, of the beneficial
ownership (within the meaning of the term "beneficial ownership" as
defined under Section 13(d) of the Exchange Act and the
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<PAGE> 5
rules promulgated thereunder) of twenty-five percent (25%) or more of
the outstanding voting securities of the Company or The Market Building
and Saving Company by any person, trust, entity or group. For purposes
of this Section 7, "imminent change in control" shall refer to any
offer or announcement, oral or written, by any person or any persons
acting as a group, to acquire control of the Company or The Market
Building and Saving Company as to which an application or notice has
been filed with the OTS and such application has been approved or such
notice has not been disapproved.
8. NON-TRANSFERABILITY OF STOCK OPTIONS. No Stock Option under this
Plan, and no rights or interests therein, shall be assignable or transferable by
a Participant except by will or the laws of descent and distribution. During the
lifetime of a Participant, Stock Options are exercisable only by, and payments
in settlement of Stock Options will be payable only to, the Participant or his
or her legal representative.
9. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
(a) The existence of this Plan and the Stock Options granted
hereunder shall not affect or restrict in any way the right or power of
the Board or the shareholders of the Company to make or authorize the
following: any adjustment, recapitalization, reorganization or other
change in the Company's capital structure or its business; any merger,
acquisition or consolidation of the Company; any issuance of bonds,
debentures, preferred or prior preference stocks ahead of or affecting
the Company's capital stock or the rights thereof; the dissolution or
liquidation of the Company or any sale or transfer of all or any part
of its assets or business; or any other corporate act or proceeding,
including any merger or acquisition which would result in the exchange
of cash, stock of another company or options to purchase the stock of
another company for any Stock Option outstanding at the time of such
corporate transaction or which would involve the termination of all
Stock Options outstanding at the time of such corporate transaction.
(b) In the event of any change in capitalization affecting the
Common Shares of the Company, such as a stock dividend, stock split,
recapitalization, merger, consolidation, spin-off, split-up,
combination or exchange of shares or other form of reorganization, or
any other change affecting the Common Shares, such proportionate
adjustments, if any, as the Board in its discretion may deem
appropriate to reflect such change shall be made with respect to the
aggregate number of Common Shares for which Stock Options in respect
thereof may be granted under this Plan, the maximum number of Common
Shares which may be sold or awarded to any Participant, the number of
Common Shares covered by each outstanding Stock Option, and the
exercise price per share in respect of outstanding Stock Options.
10. AMENDMENT AND TERMINATION OF THIS PLAN. Without further approval of
the shareholders, the Board may at any time terminate this Plan, or may amend it
from time to time in such respects as the Board may deem advisable, except that
the Board may not, without approval of the shareholders, make any amendment
which would (a) increase the aggregate number of Common Shares which may be
issued under this Plan (except for adjustments pursuant to Section 9 of this
Plan), (b) materially modify the requirements as to eligibility for
participation in this Plan, or (c) materially increase the benefits accruing to
Participants under this Plan. The above notwithstanding, the Board may amend
this Plan to take into account changes in applicable securities, federal income
tax and other applicable laws.
11. MODIFICATION OF OPTIONS. The Board may authorize the Committee to
direct the execution of an instrument providing for the modification of any
outstanding Stock Option which the Board believes to be in the best interests of
the Company; provided, however, that no such modification, extension or renewal
shall confer on the holder of such Stock Option any right or benefit which could
not be conferred on him by the grant of a new Stock Option at such time and
shall not materially decrease the Participant's benefits under the Stock Option
without the consent of the holder of the Stock Option, except as otherwise
permitted under this Plan.
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<PAGE> 6
12. MISCELLANEOUS.
(a) Tax Withholding. The Company shall have the right to
deduct from any settlement made under this Plan, including the delivery
or vesting of Common Shares, any federal, state or local taxes of any
kind required by law to be withheld with respect to such payments or to
take such other action as may be necessary in the opinion of the
Company to satisfy all obligation for the payment of such taxes. If
Common Shares are used to satisfy tax withholding, such shares shall be
valued based on the Fair Market Value when the tax withholding is
required to be made.
(b) No Right to Employment. Neither the adoption of this Plan
nor the granting of any Stock Option shall confer upon any employee of
the Company or a Subsidiary any right to continued Employment with the
Company or a Subsidiary, as the case may be, nor shall it interfere in
any way with the right of the Company or a Subsidiary to terminate the
Employment of any of its employees at any time, with or without cause.
(c) Annulment of Stock Options. The grant of any Stock Option
under this Plan payable in cash is provisional until cash is paid in
settlement thereof. The grant of any Stock Option payable in Common
Shares is provisional until the Participant becomes entitled to the
certificate in settlement thereof. In the event the Employment or the
directorship of a Participant is Terminated for Cause, any Stock Option
which is provisional shall be annulled as of the date of such
termination.
(d) Other Company Benefit and Compensation Programs. Payments
and other benefits received by a Participant under a Stock Option made
pursuant to this Plan shall not be deemed a part of a Participant's
regular, recurring compensation for purposes of the termination
indemnity or severance pay law of any country and shall not be included
in, nor have any effect on, the determination of benefits under any
other employee benefit plan or similar arrangement provided by the
Company or a Subsidiary unless expressly so provided by such other plan
or arrangement, or except where the Committee expressly determines that
a Stock Option or portion of a Stock Option should be included to
accurately reflect competitive compensation practices or to recognize
that a Stock Option has been made in lieu of a portion of competitive
annual cash compensation. Stock Options under this Plan may be made in
combination with or in tandem with, or as alternatives to, grants,
stock options or payments under any other plans of the Company or a
Subsidiary. This Plan notwithstanding, the Company or any Subsidiary
may adopt such other compensation programs and additional compensation
arrangements as it deems necessary to attract, retain and reward
directors and employees for their service with the Company and its
Subsidiaries.
(e) Securities Law Restrictions. No Common Shares shall be
issued under this Plan unless counsel for the Company shall be
satisfied that such issuance will be in compliance with applicable
federal and state securities laws. Certificates for Common Shares
delivered under this Plan may be subject to such stop-transfer orders
and other restrictions as the Committee may deem advisable under the
rules, regulations and other requirements of the Securities and
Exchange Commission, any stock exchange upon which the Common Shares
are then listed, and any applicable federal or state securities law.
The Committee may cause a legend or legends to be put on any such
certificates to make appropriate reference to such restrictions.
(f) Stock Option Agreement. Each Participant receiving a Stock
Option under this Plan shall enter into an agreement with the Company
in a form specified by the Committee agreeing to the terms and
conditions of the Stock Option and such related matters as the
Committee shall, in its sole discretion, determine.
(g) Cost of Plan. The costs and expenses of administering this
Plan shall be borne by the Company.
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<PAGE> 7
(h) Governing Law. This Plan and all actions taken hereunder
shall be governed by and construed in accordance with the laws of the
State of Ohio, except to the extent that federal law shall be deemed
applicable.
(i) Effective Date. This Plan shall be effective upon the
later of adoption by the Board and approval by the Company's
shareholders. This Plan shall be submitted to the shareholders of the
Company for approval at an annual or special meeting of shareholders to
be held no sooner than six months after the effective date of the
Conversion.
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<PAGE> 1
Exhibit 10.4
MARKET FINANCIAL CORPORATION
RECOGNITION AND RETENTION PLAN
AND TRUST AGREEMENT
ARTICLE I
DEFINITIONS
The following words and phrases when used in this Agreement with an
initial capital letter shall have the meanings set forth below, unless the
context clearly indicates otherwise. Wherever appropriate, the masculine pronoun
shall include the feminine pronoun and the singular shall include the plural:
1.01 "Agreement" means the Market Financial Corporation Recognition and
Retention Plan and Trust Agreement.
1.02 "Association" means The Market Building and Saving Company, a
savings and loan association incorporated under the laws of the State of Ohio.
1.03 "Award" means a right granted to a Director or an Employee under
this Plan to receive Plan Shares.
1.04 "Beneficiary" means the person or persons designated by a
Recipient to receive any benefits payable under this Plan in the event of such
Recipient's death. Such person or persons shall be designated in writing on
forms provided for this purpose by the Committee and may be changed from time to
time by similar written notice to the Committee. In the absence of a written
designation, the Beneficiary shall be the Recipient's estate.
1.05 "Board" means the Board of Directors of the Corporation.
1.06 "Committee" means the Recognition and Retention Plan Committee
appointed by the Board pursuant to Article IV hereof.
1.07 "Common Shares" means common shares of the Corporation.
1.08 "Conversion" means the conversion of the Association from mutual
to stock form.
1.09 "Corporation" means Market Financial Corporation, a savings and
loan holding company incorporated under the laws of the State of Ohio for the
purpose of holding all of the common shares of the Association issued in
connection with the Conversion, or any successor thereto.
1.10 "Director" means any person who is a member of the Board of
Directors of the Corporation, the Association or a Subsidiary.
1.11 "Employee" means any person who is employed by the Corporation,
the Association or a Subsidiary.
1.12 "OTS" means the Office of Thrift Supervision, Department of the
Treasury.
1.13 "Person" means an individual, corporation, partnership, trust,
association, joint venture, pool, syndicate, sole proprietorship, unincorporated
organization or any other form of entity not specifically listed herein.
1.14 "Plan" means the Recognition and Retention Plan established by
this Agreement.
1.15 "Plan Shares" means the Common Shares held pursuant to the Trust
and which are awarded or issuable to a Recipient pursuant to the Plan.
<PAGE> 2
1.16 "Plan Share Reserve" means the Common Shares held by the Trustee
pursuant to Sections 5.02 and 5.03 of this Agreement.
1.17 "Recipient" means any Director or Employee who receives an Award
under the Plan.
1.18 "Subsidiaries" means subsidiaries of the Corporation or the
Association which, with the consent of the Board, agree to participate in the
Plan.
1.19 "Trust" means the trust established by this Agreement.
1.20 "Trustee(s)" means the person(s) or entity approved by the Board
pursuant to Sections 4.01 and 4.02 to hold legal title to the Plan assets for
the purposes set forth herein.
ARTICLE II
ESTABLISHMENT OF THE PLAN AND TRUST
2.01 The Corporation hereby establishes a Recognition and Retention
Plan and Trust upon the terms and subject to the conditions set forth in this
Agreement.
2.02 The Trustee hereby accepts the Trust and agrees to hold the Trust
assets existing on the date of this Agreement and all additions and accretions
thereto upon the terms and conditions of this Agreement.
ARTICLE III
PURPOSE OF THE PLAN
3.01 The purpose of the Plan is to reward and retain the Directors and
Employees of the Corporation, the Association and the Subsidiaries who are in
key positions of responsibility by providing such Directors and Employees with
an equity interest in the Corporation as reasonable compensation for their
contributions to the Corporation, the Association and the Subsidiaries.
ARTICLE IV
ADMINISTRATION OF THE PLAN
4.01 ROLE OF THE COMMITTEE. The Plan shall be administered and
interpreted by the Committee, which shall consist of not less than three members
of the Board who are not employees of the Corporation or the Association. The
Committee shall have all of the powers set forth in this Plan. The
interpretation and construction by the Committee of any provisions of this
Agreement or of any Award granted hereunder shall be final, conclusive and
binding. The Committee shall act by the vote, or the written consent, of a
majority of its members. The Committee shall report actions and decisions with
respect to the Plan to the Board upon request by the Board.
4.02 ROLE OF THE BOARD. The members of the Committee and the Trustee(s)
shall be appointed or approved by and will serve at the pleasure of the Board.
The Board may in its discretion from time to time remove members from or add
members to the Committee and may remove, replace or add Trustee(s). The Board,
in its absolute discretion, may take any action under or with respect to the
Plan which the Committee is authorized to take and may reverse or override any
action taken or decision made by the Committee under or with respect to the Plan
or take any other action reserved to the Board under this Agreement; provided,
however, that the Board may not revoke any Award already granted under this
Agreement. All decisions, determinations and interpretations of the Board shall
be final, conclusive and binding upon all parties having an interest in the
Plan.
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<PAGE> 3
4.03 LIMITATION ON LIABILITY. No member of the Board or the Committee,
nor any Trustee, shall be liable for any determination made in good faith with
respect to the Plan or any Plan Shares or Awards granted under the Plan. If a
member of the Board or of the Committee or any Trustee is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of anything done or not done by such member in such capacity under or
with respect to this Plan, the Corporation shall indemnify such member against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such member in connection with
such action, suit or proceeding if such member acted in good faith and in a
manner such member reasonably believed to be in or not opposed to the best
interests of the Corporation, the Association and the Subsidiaries and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
such member's conduct was unlawful.
ARTICLE V
CONTRIBUTIONS; PLAN SHARE RESERVE
5.01 AMOUNT AND TIMING OF CONTRIBUTIONS. The Board shall determine the
amounts (or the method of computing the amounts) to be contributed by the
Corporation to the Trust. Such amounts shall be paid to the Trustee at the time
of contribution. No contributions to the Trust by Directors or Employees shall
be permitted.
5.02 INVESTMENT OF TRUST ASSETS. Except as otherwise permitted by
Section 8.02 of this Agreement, the Trustee shall invest all of the Trust's
assets, after providing for any required withholding as needed for tax purposes,
exclusively in Common Shares; provided, however, that the Trust shall not
purchase a number of Common Shares equal to more than 3% of the number of Common
Shares issued in connection with the Conversion, except that if the
Association's tangible capital exceeds 10%, the Trust may purchase a number of
Common Shares equal to up to 4% of the Common Shares issued in connection with
the Conversion. After such investment, the Common Shares shall be held by the
Trustee in the Plan Share Reserve until such Common Shares are subject to one or
more Awards. Any funds held by the Trust before purchasing Common Shares shall
be invested by the Trustee in such interest-bearing account or accounts at the
Association as the Trustee shall determine to be appropriate.
5.03 EFFECT OF ALLOCATIONS, RETURNS AND FORFEITURES UPON PLAN SHARE
RESERVES. Upon the allocation of Awards under Section 6.02 of this Agreement, or
the decision of the Committee to return Plan Shares to the Corporation, the Plan
Share Reserve shall be reduced by the number of Plan Shares so allocated or
returned. Any Plan Shares subject to an Award which is subject to forfeiture by
the Recipient pursuant to Section 7.01 of this Agreement shall be retained in
the Plan Share Reserve.
ARTICLE VI
ELIGIBILITY; ALLOCATIONS
6.01 ELIGIBILITY. Directors and Employees are eligible to receive
Awards within the sole discretion of the Committee.
6.02 ALLOCATIONS. The Committee will determine which of the Directors
and Employees will be granted Awards and the number of Plan Shares covered by
each Award. In the event Plan Shares are forfeited for any reason or additional
Plan Shares are purchased by the Trustee, the Committee may, from time to time,
determine which of the Officers and Employees will be granted additional Awards
to be awarded from forfeited or additional Plan Shares.
In selecting the Directors and the Employees to whom Awards will be
granted and the number of shares covered by such Awards, the Committee shall
consider the position, duties and responsibilities of the eligible Directors and
Employees, the value of their services to the Corporation, the Association and
the Subsidiaries and any other factors the Committee may deem relevant. All
allocations by the Committee shall be subject to review and approval or
rejection by the Board.
3
<PAGE> 4
6.03 FORM OF ALLOCATION. As promptly as practicable after a
determination is made pursuant to Section 6.02 of this Agreement that an Award
is to be made, the Committee shall notify the Recipient in writing of the grant
of the Award, the number of Plan Shares covered by the Award and the terms upon
which the Plan Shares subject to the Award may be earned. The date on which the
Committee determines that an Award is to be made or a later date designated by
the Committee shall be considered the date of grant of the Awards. The Committee
shall maintain records as to all grants of Awards under the Plan.
6.04 ALLOCATIONS NOT REQUIRED. None of the Directors or Employees,
either individually or as a group, shall have any right or entitlement to
receive an Award under the Plan. The Committee may, with the approval of the
Board, and shall, if so directed by the Board, return all Common Shares and
other assets in the Plan Share Reserve to the Corporation at any time and
thereafter cease issuing Awards.
6.05 SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of the Corporation at an annual or special meeting to be held no
sooner than six months after the effective date of the Conversion.
Notwithstanding anything to the contrary in this Agreement, no Awards shall be
granted hereunder until the shareholders of the Corporation approve this
Agreement.
ARTICLE VII
EARNING AND DISTRIBUTION OF PLAN SHARES; VOTING RIGHTS
7.01 EARNING PLAN SHARES; FORFEITURES.
(a) GENERAL RULES. Unless the Committee shall specifically
state a longer period of time over which Awards shall be earned and
non-forfeitable at the time an Award is granted, Plan Shares shall be earned and
non-forfeitable by a Recipient over a period of five years at the rate of
one-fifth per year commencing on the date which is one year after the date of
the grant of such Award. As Plan Shares become earned and non-forfeitable, any
cash dividends, returned capital and earnings thereon shall also be earned and
non-forfeitable.
(b) REVOCATION. Unless otherwise permitted by applicable
laws and regulations, any Plan Shares and any cash dividends, returned capital
and earnings thereon that have not been earned and are not non-forfeitable in
accordance with Section 7.01(a) of this Agreement shall be forfeited in the
event that (i) a Recipient who is a Director ceases to serve on the Board of
Directors of the Corporation or the Association or (ii) a Recipient who is not a
Director of the Corporation or the Association ceases to be an Employee of the
Corporation or the Association, except as otherwise provided in subsection (c)
or subsection (d) of this Section 7.01.
(c) EXCEPTION FOR TERMINATIONS DUE DEATH, DISABILITY OR
RETIREMENT. All Plan Shares and cash dividends, returned capital and earnings
thereon subject to an Award held by a Recipient whose service as a Director or
Employee of the Corporation, the Association or a Subsidiary terminates due to
(i) death, (ii) disability (as determined by the Committee), or (iii) retirement
at or after age 65 shall be deemed fully earned and non-forfeitable as of the
later of the Recipient's last day of service as a Director or as an Employee and
shall be distributed as soon as practicable thereafter.
(d) EXCEPTION FOR A CHANGE IN CONTROL. Notwithstanding any
other provision of this Agreement, all Plan Shares subject to an Award held by a
Recipient shall be deemed to be immediately 100% earned and non-forfeitable in
the event of a change in control or imminent change in control of the
Corporation or the Association and shall be distributed as soon as practicable
thereafter. For purposes of this Section 7.01(d), "change in control" shall
mean: (i) the execution of an agreement for the sale of all, or a material
portion, of the assets of the Corporation or the Association; (ii) the execution
of an agreement for a merger or recapitalization of the Corporation or the
Association or any merger or recapitalization whereby the Corporation or the
Association is not the surviving entity; (iii) a change of control of the
Corporation or the Association, as defined or determined by the OTS; or (iv) the
acquisition, directly or indirectly, of the beneficial ownership (within the
meaning of the terms "beneficial ownership" as defined under Section 13(d) of
the Securities Exchange Act of 1934 and the rules promulgated thereunder) of
twenty-five percent (25%) or more of the outstanding voting securities of the
Corporation or the
4
<PAGE> 5
Association by any person, trust, entity or group. For purposes of this Section
7.01(d), "imminent change in control" shall refer to any offer or announcement,
oral or written, by any person or any persons acting as a group, to acquire
control of the Corporation or the Association as to which an application or
notice has been filed with the OTS and such application has been approved or
such notice has not been disapproved.
7.02 DISTRIBUTION OF PLAN SHARES.
(a) TIMING OF DISTRIBUTIONS: GENERAL RULE. Except as
otherwise provided in this Agreement, Plan Shares shall be distributed to the
Recipient or his Beneficiary, as the case may be, as soon as practicable after
they have been earned, together with any cash dividends, returned capital and
earnings thereon with respect to Plan Shares that have been earned.
(b) FORM OF DISTRIBUTION. All distributions of Plan Shares,
together with any shares representing stock dividends, shall be distributed in
the form of Common Shares. No fractional shares shall be distributed. Payments
representing cash dividends, returned capital and earnings thereon shall be made
in cash.
(c) WITHHOLDING. The Trustee may withhold from any cash
payment made under this Plan sufficient amounts to cover any applicable
withholding and employment taxes and, if the amount of such cash payment is not
sufficient, the Trustee may require the Recipient or Beneficiary to pay to the
Trustee the amount required to be withheld as a condition of delivering the Plan
Shares. The Trustee shall pay over to the Corporation, the Association or the
Subsidiary which employs or employed such Recipient or which the Recipient
serves or served as a Director, any such amount withheld from or paid by the
Recipient or Beneficiary.
(d) REGULATORY EXCEPTIONS. Notwithstanding anything to the
contrary in this Agreement, no Plan Shares, upon becoming fully earned and
non-forfeitable, shall be distributed unless and until all of the requirements
of all applicable laws and regulations shall have been met.
7.03 VOTING OF PLAN SHARES. All Common Shares held by the Trustee in
the Plan Share Reserve which have not yet been earned by a Recipient pursuant to
Section 7.01 of this Agreement shall be voted by the Trustee. A Recipient shall
be entitled to direct the voting of Plan Shares which have been earned pursuant
to Section 7.01 of this Agreement but have not yet been distributed to him.
ARTICLE VIII
TRUST
8.01 TRUST. The Trustee shall receive, hold, administer, invest and
make distributions and disbursements from the Trust in accordance with the
provisions of the Plan and the Trust and the applicable directions, rules,
regulations, procedures and policies established by the Committee pursuant to
this Agreement.
8.02 MANAGEMENT OF TRUST. The Trustee shall have complete authority and
discretion with respect to the management, control and investment of the Trust,
and the Trustee shall invest all assets of the Trust, except those attributable
to cash dividends paid with respect to Plan Shares not held in the Plan Share
Reserve, in Common Shares to the fullest extent practicable, and except to the
extent that the Trustee determines that the holding of monies in cash or cash
equivalents is necessary to meet the obligations of the Trust. The Trustee shall
have the power to do all things and execute such instruments as may be deemed
necessary or proper, including the following powers:
(a) To invest up to 100% of all Trust assets in Common
Shares without regard to any law now or hereafter in force limiting
investments for Trustees or other fiduciaries. The investment
authorized herein may constitute the only investment of the Trust, and,
in making such investment, the Trustee is authorized to purchase Common
Shares from the Corporation or from any other source. Such Common
Shares so purchased may be outstanding, newly issued or treasury
shares;
5
<PAGE> 6
(b) To invest any Trust assets not otherwise invested in
accordance with Section 8.02(a) of this Agreement in such deposit
accounts and certificates of deposit (including those issued by the
Association), obligations of the United States government or its
agencies or such other investments as shall be considered the
equivalent of cash;
(c) To sell, exchange or otherwise dispose of any property
at any time held or acquired by the Trust;
(d) To cause stocks, bonds or other securities to be
registered in the name of a nominee, without the addition of words
indicating that such security is an asset of the Trust (but accurate
records shall be maintained showing that such security is an asset of
the Trust);
(e) To hold cash without interest in such amounts as may be
reasonable, in the opinion of the Trustee, for the proper operation of
the Plan and the Trust;
(f) To employ brokers, agents, custodians, consultants and
accountants;
(g) To hire counsel to render advice with respect to the
Trustee's rights, duties and obligations hereunder, and such other
legal services or representation as the Trustee may deem desirable; and
(h) To hold funds and securities representing the amounts to
be distributed to a Recipient or his Beneficiary as a consequence of a
dispute as to the disposition thereof, whether in a segregated account
or held in common with other assets of the Trust.
Notwithstanding anything herein contained to the contrary, the Trustee shall not
be required to make any inventory, appraisal or settlement or report to any
court, or to secure any order of court for the exercise of any power herein
contained, or to give bond.
8.03 RECORDS AND ACCOUNTS. The Trustee shall maintain accurate and
detailed records and accounts of all transactions of the Trust, which shall be
available at all reasonable times for inspection by any legally entitled person
or entity to the extent required by applicable law, or any other person
determined by the Committee.
8.04 EARNINGS. All earnings, gains and losses with respect to Trust
assets shall be allocated, in accordance with a reasonable procedure adopted by
the Committee, to bookkeeping accounts for Recipients or to the general account
of the Trust, depending on the nature and allocation of the assets generating
such earnings, gains and losses. Without limiting the generality of the
foregoing, any earnings on cash dividends or returned capital received with
respect to Common Shares shall be allocated (a) to accounts for Recipients, if
such shares are the subject of outstanding Awards, and shall become earned and
be distributed as specified in Article VII of this Agreement, or (b) otherwise
to the Plan Share Reserve if such Plan Shares are not the subject of outstanding
awards.
8.05 EXPENSES. All costs and expenses incurred in the operation and
administration of the Plan shall be paid by the Association.
ARTICLE IX
MISCELLANEOUS
9.01 ADJUSTMENTS FOR CAPITAL CHANGES. The aggregate number of Plan
Shares available for issuance pursuant to the Awards and the number of Plan
Shares to which any Award relates shall be proportionately adjusted for any
increase or decrease in the total number of outstanding Common Shares issued
subsequent to the effective date of the Plan if such increase or decrease
resulted from any split, subdivision or consolidation of shares or other capital
adjustment, or other increase or decrease in such shares effected without
receipt or payment of consideration by the Corporation.
6
<PAGE> 7
9.02 AMENDMENT AND TERMINATION OF PLAN. The Board may, by resolution,
at any time amend or terminate the Plan. The power to amend or terminate the
Plan shall include the power to direct the Trustee to return to the Corporation
all or any part of the assets of the Trust, including Common Shares held in the
Plan Share Reserve, as well as Common Shares and other assets subject to Awards
which have not yet been earned by the Directors or Employees to whom they are
allocated; provided, however, that the termination of the Trust shall not affect
a Recipient's right to earn Awards and to the distribution of Common Shares
relating thereto, including earnings thereon, in accordance with the terms of
this Agreement and the grant by the Committee or the Board.
9.03 NONTRANSFERABLE. Awards shall not be transferable by a Recipient.
During the lifetime of the Recipient, an Award may only be earned by and paid to
the Recipient who was notified in writing of the Award by the Committee pursuant
to Section 6.03 of this Agreement. No Recipient or Beneficiary shall have any
right in or claim to any assets of the Plan or the Trust, nor shall the
Corporation, the Association or any Subsidiary be subject to any claim for
benefits hereunder.
9.04 DIRECTORSHIP RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Director to continue to serve as a Director of the
Association or a Subsidiary.
9.05 EMPLOYMENT RIGHTS. Neither this Agreement nor any grant of an
Award hereunder nor any action taken by the Trustee, the Committee or the Board
in connection with the Plan shall create any right, either express or implied,
on the part of any Employee to continue in the employ of the Corporation, the
Association or a Subsidiary.
9.06 VOTING AND DIVIDEND RIGHTS. No Recipient shall have any voting or
dividend rights or other rights of a shareholder in respect of any Plan Shares
covered by an Award, except as expressly provided in Sections 7.01, 7.02 and
7.03 of this Agreement, prior to the time such Plan Shares are actually
distributed to such Recipient.
9.07 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Ohio, except to the extent that federal law shall
be deemed applicable.
9.08 EFFECTIVE DATE. Subject to Section 6.05 of this Agreement, this
Agreement shall be effective as of the 30th day of June, 1998.
9.09 TERM OF PLAN. The Plan shall remain in effect until the earlier of
(a) the termination of the Plan by the Board or (b) the distribution of all
assets from the Trust. The termination of the Plan shall not affect any Awards
previously granted and such Awards shall remain valid and in effect until they
have been earned and paid or by their terms expire or are forfeited.
9.10 TAX STATUS OF TRUST. It is intended that the trust established
hereby be treated as a grantor trust of the Association under the provisions of
Section 671, et seq., of the Internal Revenue Code of 1986, as amended (26
U.S.C. Section 671 et seq.).
7
<PAGE> 8
IN WITNESS WHEREOF, the following Trustees execute this Agreement,
accepting and binding themselves to undertake and perform the obligations and
duties of the Trustee hereunder and consenting to the foregoing Agreement
effective the 30th day of June, 1998.
By: ___________________________ (Trustee)
By: ___________________________ (Trustee)
IN WITNESS WHEREOF, the Corporation has caused this Agreement to be
executed by its duly authorized officer and duly attested, all as of the 30th
day of June, 1998.
MARKET FINANCIAL CORPORATION
By: ___________________________
John T. Larimer
its President
ATTEST:
_________________________
_________________________
its: ____________________
8
<PAGE> 1
Exhibit 13
MARKET
FINANCIAL
CORPORATION
1998
ANNUAL
REPORT
TO
SHAREHOLDERS
<PAGE> 2
Dear Shareholder,
On behalf of the directors, officers, and employees of Market Financial
Corporation ("Market") and its wholly-owned subsidiary, The Market Building and
Saving Company, I am pleased to present our second Annual Report to Shareholders
for the fiscal year ended September 30, 1998.
Market's net earnings for fiscal 1998 totaled a record $552,000,
representing a solid 10% increase over the $502,000 in net earnings reported for
fiscal 1997. Our fiscal 1998 operating performance was the product of both
internally and externally focused strategic initiatives.
From an internal perspective, we reduced our excess capital position
through the payment of $3.78 per share in cash distributions. These
distributions, all of which are presently deemed to be tax-free, should have a
future beneficial effect on Market's return on equity. In fiscal 1999, we
continued our commitment to a sound capital management strategy through the
announcement of a share repurchase program in November.
Externally, we considered growth in the loan and savings portfolios to
be a critical operating objective. To this end, we are pleased to report that
our loan portfolio increased by $6.3 million, or 23.8%, during fiscal 1998,
while our savings deposits grew by $2.4 million, or 6.9%. These two favorable
trends were integral factors in our $327,000, or 18%, increase in net interest
income during fiscal 1998. Growth will continue to be an operating priority for
your management in fiscal 1999.
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.
Very truly yours,
MARKET FINANCIAL CORPORATION
John T. Larimer
President
<PAGE> 3
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,
Cincinnati, 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 10, 1998, held
of record by approximately 670 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 1998 fiscal year and the 1997 fiscal year ending after March 27,
1997, the date of completion
1
<PAGE> 4
of the Conversion. Price quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission, and may not represent actual transactions.
<TABLE>
<CAPTION>
Cash dividends
High Ask Low Bid declared per share
-------- ------- ------------------
<S> <C> <C> <C>
FISCAL 1998
Quarter ended:
December 31, 1997 $16.80 $14.75 $ .07
March 31, 1998 17.75 15.38 .07
June 30, 1998 20.81 12.75 3.57
September 30, 1998 14.00 10.75 .07
FISCAL 1997
Quarter ended:
March 31, 1997 (1) $13.00 $12.50 $ --
June 30, 1997 13.00 12.50 --
September 30, 1997 14.75 14.00 .07
</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 monies 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
2
<PAGE> 5
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 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> 6
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: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $54,608 $56,121 $45,547 $45,734 $45,340
Cash and cash equivalents 5,381 2,248 4,082 4,013 6,380
Certificates of deposit in other financial
institutions 3,790 6,690 7,040 7,139 6,139
Investment securities - at cost 9,300 17,257 9,062 7,984 5,919
Investment securities designated as available
for sale - at market 1,448 1,029 712 504 --
Mortgage-backed securities - at cost 859 1,268 1,549 2,211 2,441
Loans receivable - net 32,816 26,502 21,996 23,018 23,658
Real estate acquired through foreclosure -- -- -- -- --
Deposits 37,745 35,303 37,282 38,056 38,674
Unrealized gains on securities designated as
available for sale - net (1) 937 660 451 314 --
Shareholders' equity-restricted (2) (3) 15,078 19,895 7,514 7,153 6,372
<CAPTION>
Year ended September 30,
------------------------------------------------------
SELECTED OPERATING DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $3,885 $3,513 $3,261 $3,182 $2,908
Interest expense 1,734 1,689 1,758 1,622 1,478
------ ------ ------ ------ ------
Net interest income 2,151 1,824 1,503 1,560 1,430
Provision for losses on loans -- -- 13 -- --
------ ------ ------ ------ ------
Net interest income after provision for losses on
loans 2,151 1,824 1,490 1,560 1,430
Other operating income 7 6 7 8 12
General, administrative and other expense 1,322 1,069 1,153 861 836
------ ------ ------ ------ ------
Earnings before income taxes 836 761 344 707 606
Federal income taxes 284 259 120 240 194
------ ------ ------ ------ ------
Net earnings $ 552 $ 502 $ 224 $ 467 $ 412
====== ====== ====== ====== ======
</TABLE>
- -------------------------
(1) 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.
(2) See Notes H, J, L and M of the Notes to Consolidated Financial Statements
regarding restrictions on equity.
(3) Consists solely of retained earnings at September 30, 1996, 1995 and 1994.
4
<PAGE> 7
<TABLE>
<CAPTION>
At or for the year ended September 30,
----------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets (1)(2)(3) 1.00% 0.99% 0.49% 1.03% 0.89%
Return on average equity (2)(3)(4) 3.16 3.66 3.05 6.91 6.68
Interest rate spread (5) 2.60 2.42 2.66 2.93 2.98
Net interest margin (6) 4.07 3.67 3.36 3.55 3.29
Operating expenses to average assets (2) (3) 2.39 2.10 2.53 1.89 1.81
Equity to assets (7) 27.61 35.45 16.50 15.64 14.05
Asset quality ratios:
Nonperforming assets to total assets 0.31 0.34 0.31 -- --
Nonperforming loans to total loans 0.52 0.72 0.63 -- --
Allowance for losses on loans to total loans 0.16 0.20 0.24 0.17 0.16
Allowance for losses on loans to
nonperforming loans 30.41 27.23 37.41 N/M(8) N/M(8)
Net charge-offs to average loans -- -- -- -- --
Average interest-earning assets to average
interest-bearing liabilities 144.88 136.77 117.78 116.62 109.04
Other data:
Number of full service offices 2 2 2 2 2
</TABLE>
- -------------------------
(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.
5
<PAGE> 8
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;"
3. Management's determination of the amount and adequacy of the allowance
for loan losses as set forth under "Changes in Financial Condition,"
"Comparison of Operating Results for the Years Ended September 30,
1998 and 1997," and "Comparison of Operating Results for the Years
Ended September 30, 1997 and 1996;"
4. Management's estimate as to the effects of recent accounting
pronouncements as set forth under "Recent Accounting Pronouncements;"
and
5. Management's determination of the effect of the year 2000 on MFC's
information technology systems as set forth under "Year 2000
Compliance Matters."
6
<PAGE> 9
CHANGES IN FINANCIAL CONDITION
- --------------------------------------------------------------------------------
MFC's assets at September 30, 1998, totaled approximately $54.6
million, a $1.5 million, or 2.7%, decrease from the $56.1 million total at
September 30, 1997. The decrease was primarily attributable to a special cash
distribution to shareholders of $4.7 million paid on April 30, 1998, to
shareholders of record on April 15, 1998, and quarterly cash dividends of
$374,000, which were partially offset by a $2.4 million growth in deposits, a
$725,000 increase in other borrowed money, net earnings for the year of $552,000
and a net increase in unrealized gains on securities designated as available for
sale of $277,000.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $19.9 million at September 30, 1998, a decrease
of $7.3 million, or 26.8%, from the total at September 30, 1997. This decrease
resulted primarily from the use of proceeds from maturities of investment
securities to fund the special cash distribution as well as loan portfolio
growth during the fiscal year ended September 30, 1998. Repayments from
mortgage-backed securities and an increase in deposits also provided funds for
the growth in loans during the period.
Loans receivable totaled $32.8 million at September 30, 1998, an
increase of $6.3 million, or 23.8%, over September 30, 1997. This increase
resulted primarily from loan originations of $12.5 million, which exceeded
principal repayments of $6.2 million. Loan origination volume during fiscal 1998
exceeded that of fiscal 1997 by $4.8 million, or 61.6%. Growth in the loan
portfolio consisted primarily of loans secured by one- to four-family
properties, which increased by $4.6 million, or 18.5%. Loans secured by
multifamily and nonresidential properties increased by $934,000, or 163.0% and
$1.1 million, or 202.7%, respectively.
MFC's allowance for loan losses totaled $52,000 at both September 30,
1998 and 1997. The allowance represented .16% and .20% of total loans at
September 30, 1998 and 1997. Nonperforming loans totaled $171,000 and $191,000,
or .52% and .72% of total loans, at September 30, 1998 and 1997, respectively.
Although management believes that its allowance for loan losses at September 30,
1998, 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 MFC's results of operations.
Deposits totaled $37.7 million at September 30, 1998, an increase of
$2.4 million, or 6.9%, over the total at September 30, 1997. Demand accounts
decreased by approximately $781,000, while certificates of deposit increased by
$3.2 million during the year ended September 30, 1998. At September 30, 1998,
certificates of deposit that will mature within one year accounted for 53.0% of
MFC's deposit liabilities.
Other borrowed money totaled $725,000 at September 30, 1998, and
consisted of a one-year, unsecured note from another financial institution.
7
<PAGE> 10
Shareholders' equity totaled $15.1 million at September 30, 1998, a
$4.8 million, or 24.2%, decrease from the September 30, 1997 amount. The
decrease was primarily attributable to the $4.7 million, or $3.50 per share,
special cash distribution paid to shareholders in April 1998, coupled with
regular quarterly dividends totaling $374,000, which were partially offset by
net earnings of $552,000.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 1998 AND 1997
- --------------------------------------------------------------------------------
GENERAL. Net earnings totaled $552,000 for the year ended September 30, 1998, a
$50,000, or 10.0%, increase over the $502,000 of net earnings recorded for the
year ended September 30, 1997. The increase in earnings resulted primarily from
a $327,000 increase in net interest income, which was partially offset by a
$253,000 increase in general, administrative and other expense and a $25,000
increase in the provision for federal income taxes.
NET INTEREST INCOME. Total interest income amounted to $3.9 million for the year
ended September 30, 1998, a $372,000, or 10.6% increase over the comparable 1997
period. The increase in total interest income was attributable to an increase of
$437,000, or 22.1%, in interest income on loans, due primarily to an increase of
$5.6 million, to $30.5 million, of weighted-average balances outstanding during
fiscal 1998, which was partially offset by a 2 basis point (100 basis points
equals one percent) decrease in the weighted-average yield. Interest income on
investment securities and interest-bearing deposits totaled $1.4 million in
fiscal 1998, a decrease of $41,000, or 2.9%, from fiscal 1997. The decrease
resulted primarily from a decrease of $2.2 million in weighted-average balances
outstanding, which was partially offset by a 44 basis point increase in the
weighted-average yield, from 6.04% in fiscal 1997 to 6.48%, in fiscal 1998.
Interest income on mortgage-backed securities decreased by $24,000, or 19.2%,
during fiscal 1998, as compared to 1997, as a result of a decline of $255,000 in
the weighted-average balance outstanding, coupled with a decrease of 11 basis
points in the weighted-average yield, from 8.92% in fiscal 1997 to 8.81% in
fiscal 1997.
Interest expense on deposits totaled $1.7 million for fiscal 1998, an increase
of $36,000, or 2.1%, from the comparable 1997 period. This increase was due
primarily to a 10 basis point increase in the average cost of deposits, from
4.64% in fiscal 1997 to 4.74% in fiscal 1998.
As a result of the foregoing changes in interest income and interest expense,
net interest income increased by $327,000, or 17.9%, for fiscal 1998, compared
to fiscal 1997. The interest rate spread increased by 18 basis points, from
2.42% in fiscal 1997 to 2.60% in fiscal 1998 and the net interest margin
increased by 40 basis points, from 3.67% in fiscal 1997 to 4.07% in fiscal 1998.
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance to a level considered appropriate by
management based on historical experience, the volume and type of lending
conducted by Market, the status of past due principal
8
<PAGE> 11
and interest payments, general economic conditions, particularly as such
conditions relate to Market's market area, and other factors related to the
collectibility of Market's loan portfolio. As a result of such analysis,
management decided no additional provision for losses on loans was necessary
during the year ended September 30, 1998. 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 $7,000 and $6,000 for the years ended
September 30, 1998 and 1997, respectively.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased by $253,000, or 23.7%, for the year ended September 30, 1998,
compared to fiscal 1997. The increase resulted primarily from a $119,000, or
18.1%, increase in employee compensation and benefits, due to normal merit
increases and expenses related to stock benefit plans, an $87,000, or 89.7%,
increase in franchise taxes due to an increase in shareholders' equity as a
result of the proceeds from the stock conversion in 1997, and a $43,000, or
25.7%, increase in other operating expenses primarily due to operating expenses
of MFC in the 1998 period.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $284,000
for the year ended September 30, 1998, compared to $259,000 for the 1997 fiscal
year. The $25,000, or 9.7%, increase resulted from a $75,000, or 9.9%, increase
in earnings before taxes. The effective tax rate was 34.0% for each of the years
ended September 30, 1998 and 1997.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 1997 AND 1996
- --------------------------------------------------------------------------------
GENERAL. MFC'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,
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 3 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
9
<PAGE> 12
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 withdrawal 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.
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.
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%, decline in occupancy and equipment expense and a $3,000, or 3.0%, decrease
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
10
<PAGE> 13
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.
11
<PAGE> 14
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,
---------------------------------------------------------------------------------------------------
1998 1997 1996
-------------------------------- ------------------------------ ---------------------------------
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 $30,524 $2,411 7.90% $24,921 $1,974 7.92% $22,648 $1,867 8.24%
Mortgage-backed securities 1,147 101 8.81 1,402 125 8.92 1,873 169 9.02
Investment securities 13,249 890 6.72 11,812 708 5.99 9,123 590 6.47
Other interest-earning
assets 7,954 483 6.07 11,598 706 6.09 11,070 635 5.74
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-earning
assets 52,874 3,885 7.35 49,733 3,513 7.06 44,714 3,261 7.29
Non-interest-earning assets 2,559 2,210 1,485
------- ------- -------
Total assets $55,433 $51,943 $46,199
======= ======= =======
Interest-bearing
liabilities:
Passbook and club accounts $9,875 279 2.83 $10,421 300 2.88 $11,159 324 2.90
Money market demand
accounts 2,254 64 2.84 2,872 81 2.82 3,621 104 2.87
Certificate of deposits 24,246 1,382 5.70 23,069 1,308 5.67 23,183 1,330 5.74
Borrowings 121 9 7.44 -- -- -- -- -- --
------- ------ ---- ------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 36,496 1,734 4.75 36,362 1,689 4.64 37,963 1,758 4.63
------ ---- ----- ---- ------ ----
Non-interest-bearing
liabilities 1,113 909 834
------- ------- -------
Total liabilities 37,609 37,271 38,797
Shareholders' equity (1) 17,824 14,672 7,402
------- ------ -------
Total liabilities and
shareholders' equity $55,433 $51,943 $46,199
======= ======= =======
Net interest income and
spread $2,151 2.60% $1,824 2.42% $1,503 2.66%
====== ==== ====== ==== ====== ====
Net interest margin (net
interest income as a
percent of average
interest-earning assets) 4.07% 3.67% 3.36%
==== ==== ====
Average interest-earning
assets to
interest-bearing
liabilities 144.88% 136.77% 117.78%
====== ====== ======
</TABLE>
- -------------------------------
(1) Consists solely of retained earnings for fiscal 1996.
12
<PAGE> 15
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,
-----------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
-------------------------- -----------------------------
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 $ 442 $ (5) $ 437 $ 182 $(75) $ 107
Mortgage-backed securities (22) (2) (24) (42) (2) (44)
Investment securities 96 86 182 164 (46) 118
Interest-bearing deposits (221) (2) (223) 31 40 71
----- ---- ----- ----- ---- -----
Total interest income 295 77 372 335 (83) 252
Interest expense attributable to:
Deposits 33 3 36 (74) 5 (69)
Borrowings 9 -- 9 -- -- --
----- ---- ----- ----- ---- -----
Total interest expense 42 3 45 (74) 5 (69)
----- ---- ----- ----- ---- -----
Increase in net interest income $ 253 $ 74 $ 327 $ 409 $(88) $ 321
===== ==== ===== ===== ==== =====
</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
13
<PAGE> 16
decrease in market interest rates are considered. If the NPV would decrease more
than 2% of the 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, 1998, 2% of the present value of Market's assets was
approximately $1.1 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 $2.1 million at September 30, 1998, Market
would have been required to deduct approximately $500,000 (50% of the $1.0
million 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, 1998, would still have exceeded the
regulatory requirement by $11.3 million.
Presented below, as of September 30, 1998, 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, 1998
-----------------------------
Change in interest rate Board limit $ change % change
(basis points) % change in NPV in NPV
- ----------------------- ----------- -------- ------
(Dollars in thousands)
<S> <C> <C> <C>
+400 (70)% $(4,681) (28)%
+300 (50) (3,439) (21)
+200 (35) (2,172) (13)
+100 (20) (993) (6)
0 - - -
-100 20 730 4
-200 35 1,488 9
-300 50 2,358 14
-400 70 3,249 20
</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> 17
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------
1998 1997 1996
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash from operating activities $ 798 $ 517 $ 153
Net cash from (used in) investing activities 4,938 (12,041) 697
Net cash from (used in) financing activities (2,603) 9,690 (781)
-------- -------- -------
Net change in cash and cash equivalents 3,133 (1,834) 69
Cash and cash equivalents at the beginning
of the year 2,248 4,082 4,013
-------- -------- -------
Cash and cash equivalents at the end of the
year $ 5,381 $ 2,248 $ 4,082
======== ======== =======
</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
15
<PAGE> 18
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. 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, 1998, Market's certificates of deposit totaled approximately
$26.0 million, or 68.9% of total deposits. Of such amount, approximately $20.0
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 $8.4 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 4% 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,
1998, Market's regulatory liquidity ratio was 41.72%. At such date, Market had
commitments to originate loans totaling $967,000 and undisbursed loans in
process of less than $1,000 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 I 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, 1998.
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% - 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
16
<PAGE> 19
plus certain additional items of capital, which in the case of Market includes a
general loan loss allowance of $50,000 at September 30, 1998.
The following table summarizes Market's regulatory capital requirements and
actual capital at September 30, 1998:
<TABLE>
<CAPTION>
Excess of actual
Current capital over current Applicable
Actual capital requirement requirement asset total
-------------------- ----------- -------------------- -----------
September 30, 1998 Amount Percent Amount Percent Amount Percent
- ------------------ ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $13,619 25.6% $ 797 1.5% $12,822 24.1% $53,160
Core capital 13,619 25.6 1,595 3.0 12,024 22.6 53,160
Risk-based capital 13,669 59.6 1,835 8.0 11,834 51.6 22,942
</TABLE>
At September 30, 1998, Market had entered into a commitment to purchase
properties adjacent to the main office for approximately $325,000.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1996, the Financial Accounting Standards Board (the "FASB") issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments 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 entity 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.
17
<PAGE> 20
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 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 adopted SFAS No. 125 during fiscal 1998, as required, without
material effect on MFC's consolidated financial position or results of
operations.
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
provided for comparative purposes 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. SFAS No. 131 is not expected to have a material adverse
effect on MFC's consolidated financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial statements
18
<PAGE> 21
as either assets or liabilities measured at fair value. SFAS No. 133 also
specifies new methods of accounting for hedging transactions, prescribes the
items and transactions that may be hedged, and specifies detailed criteria to be
met to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in general,
it is an instrument with one or more underlyings, such as an interest rate or
foreign exchange rate, that is applied to a notional amount, such as an amount
of currency, to determine the settlement amount(s). It generally requires no
significant initial investment and can be settled net or by delivery of an asset
that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. On
adoption, entities are permitted to transfer held-to-maturity debt securities to
the available-for-sale or trading category without calling into question their
intent to hold other debt securities to maturity in the future. SFAS No. 133 is
not expected to have a material impact on MFC's financial statements.
YEAR 2000 COMPLIANCE MATTERS
- --------------------------------------------------------------------------------
As with most providers of financial services, Market's operations are heavily
dependent on information technology systems. Market is addressing the potential
problems associated with the possibility that the computers that control or
operate Market's information technology system and infrastructure may not be
programmed to read four-digit date codes and, upon arrival of the year 2000, may
recognize the two-digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data.
Market has appointed a Year 2000 Coordinator who, with support and oversight
from management and the Boards of Directors of both Market and MFC, shall
analyze the risk of potential problems that might arise from the failures of
computers and microprocessors to recognize the Year 2000, and to develop a plan
to mitigate such risks. The Year 2000 Coordinator submits monthly and quarterly
progress reports to the Board of Directors. The impact upon MFC's results of
operations, liquidity and capital resources will be immaterial; however,
approximately $16,000 has been budgeted to ensure Year 2000 compliance. Through
December 1998, Year 2000 expenditures have totaled approximately $3,200.
The Year 2000 Coordinator has determined that the greatest potential impact upon
Market and MFC is the risk related to vendors used by Market, particularly its
data processing service bureau. The service bureau has advised Market that it
has changed to a fully Year 2000 compliant processing system that will be fully
tested by January 1, 1999.
Management and the Board of Directors of Market and MFC have reviewed the
reports regarding Year 2000 testing results to date and are in the process of
the appropriate remedial measures without material cost. No assurance can be
given, however, that significant expense will not be
19
<PAGE> 22
incurred in future periods. In the unlikely event that Market is ultimately
required to purchase replacement computer systems, programs and equipment, or
incur substantial expense to make Market's current systems, programs and
equipment year 2000 compliant, MFC's net earnings and financial condition could
be adversely affected.
The Year 2000 Coordinator has written a contingency plan to provide options for
the Boards of Directors and management in order to ensure that Market's core
business functions can continue to operate in the event of a Year 2000 problem.
In addition to possible expense related to its own systems, Market could incur
losses if loan payments are delayed due to year 2000 problems affecting any
major borrowers in Market's primary market area. Because Market's loan portfolio
is highly diversified with regard to individual borrowers and types of
businesses and Market's primary market area is not significantly dependent upon
one employer or industry, Market does not expect any significant or prolonged
difficulties that will affect net earnings or cash flow.
In addition, financial institutions may experience increases in problem loans
and credit losses in the event that borrowers fail to prepare properly for Year
2000, and higher funding costs could result if consumers react to publicity
about the issue by withdrawing deposits. MFC could also be materially adversely
affected if other third parties, such as governmental agencies, clearing houses,
telephone companies, utilities and other service providers fail to prepare
properly. Market is therefore attempting to assess these risks and take action
to minimize their effect.
20
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
PAGE
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 22
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> 24
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 as of September 30, 1998 and 1997, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the years ended September 30, 1998, 1997 and 1996. 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 as of September 30, 1998 and 1997, and the consolidated results of
its operations and its cash flows for each of the years ended September 30,
1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
Cincinnati, Ohio
December 4, 1998
<PAGE> 25
<TABLE>
<CAPTION>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
1998 1997
<S> <C> <C>
ASSETS
Cash and due from banks $ 615 $ 550
Federal funds sold 4,493 1,494
Interest-bearing deposits in other financial institutions 273 204
-------- --------
Cash and cash equivalents 5,381 2,248
Certificates of deposit in other financial institutions 3,790 6,690
Investment securities - at amortized cost, approximate market
value of $9,394 and $17,316 at September 30,
1998 and 1997 9,300 17,257
Investment securities designated as available for sale - at market 1,448 1,029
Mortgage-backed securities - at cost, approximate
market value of $902 and $1,338 at
September 30, 1998 and 1997 859 1,268
Loans receivable - net 32,816 26,502
Office premises and equipment - at depreciated cost 127 147
Federal Home Loan Bank stock - at cost 419 390
Accrued interest receivable 319 520
Prepaid expenses and other assets 149 70
-------- --------
Total assets $ 54,608 $ 56,121
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $ 37,745 $ 35,303
Other borrowed money 725 --
Advances by borrowers for taxes and insurance 57 49
Accrued interest payable 95 99
Other liabilities 175 137
Accrued federal income taxes 18 48
Deferred federal income taxes 715 590
-------- --------
Total liabilities 39,530 36,226
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 -- --
Additional paid-in capital 8,191 12,832
Retained earnings - substantially restricted 7,650 7,472
Shares acquired by stock benefit plans (1,700) (1,069)
Unrealized gains on securities designated as available for sale,
net of related tax effects 937 660
-------- --------
Total shareholders' equity 15,078 19,895
-------- --------
Total liabilities and shareholders' equity $ 54,608 $ 56,121
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 26
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest income
Loans $ 2,411 $1,974 $ 1,867
Mortgage-backed securities 101 125 169
Investment securities 890 708 590
Interest-bearing deposits and other 483 706 635
------- ------ -------
Total interest income 3,885 3,513 3,261
Interest expense
Deposits 1,725 1,689 1,758
Borrowings 9 -- --
------- ------ -------
Total interest expense 1,734 1,689 1,758
------- ------ -------
Net interest income 2,151 1,824 1,503
Provision for losses on loans -- -- 13
------- ------ -------
Net interest income after provision for
losses on loans 2,151 1,824 1,490
Other operating income 7 6 7
General, administrative and other expense
Employee compensation and benefits 778 659 462
Occupancy and equipment 122 111 114
Federal deposit insurance premiums 28 35 327
Franchise taxes 184 97 100
Other operating 210 167 150
------- ------ -------
Total general, administrative and
other expense 1,322 1,069 1,153
------- ------ -------
Earnings before income taxes 836 761 344
Federal income taxes
Current 301 88 187
Deferred (17) 171 (67)
------- ------ -------
Total federal income taxes 284 259 120
------- ------ -------
NET EARNINGS $ 552 $ 502 $ 224
======= ====== =======
EARNINGS PER SHARE
Basic $ .45 N/A N/A
======= ====== =======
Diluted $ .45 N/A N/A
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 27
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1998, 1997 and 1996
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED GAINS SHARES
ON SECURITIES ACQUIRED
ADDITIONAL DESIGNATED AS BY STOCK
COMMON PAID-IN RETAINED AVAILABLE BENEFIT
STOCK CAPITAL EARNINGS FOR SALE PLANS TOTAL
<S> <C> <C> <C> <C> <C> <C>
Balance at October 1, 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
Purchase of shares for stock benefit plans -- -- -- -- (729) (729)
Amortization of expense related to stock benefit plans -- 34 -- -- 98 132
Cash distributions of $3.78 per share -- (4,675) (374) -- -- (5,049)
Unrealized gains on securities designated as available
for sale, net of related tax effects -- -- -- 277 -- 277
Net earnings for the year ended September 30, 1998 -- -- 552 -- -- 552
---- -------- ------- ---- ------- --------
Balance at September 30, 1998 $ -- $ 8,191 $ 7,650 $937 $(1,700) $ 15,078
==== ======== ======= ==== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 28
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 552 $ 502 $ 224
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of premiums and discounts on
investments and mortgage-backed securities, net 1 (36) (54)
Depreciation and amortization 36 31 31
Amortization of deferred loan origination fees (3) (3) (29)
Amortization of expense related to stock benefit plans 132 -- --
Provision for losses on loans -- -- 13
Federal Home Loan Bank stock dividends (29) (26) (25)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 201 (181) 2
Accrued interest payable (4) (18) (17)
Prepaid expenses and other assets (79) 126 (132)
Other liabilities 38 (136) 260
Federal income taxes
Current (30) 87 (53)
Deferred (17) 171 (67)
-------- -------- -------
Net cash provided by operating activities 798 517 153
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as held to maturity (6,600) (14,057) (5,322)
Proceeds from maturity of investment securities 14,560 5,900 4,300
Principal repayments on mortgage-backed securities 405 279 660
Loan disbursements (12,494) (7,732) (2,583)
Principal repayments on loans 6,183 3,229 3,621
Purchase of office premises and equipment (16) (10) (78)
Decrease in certificates of deposit in other
financial institutions - net 2,900 350 99
-------- -------- -------
Net cash provided by (used in) investing activities 4,938 (12,041) 697
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 2,442 (1,979) (774)
Advances by borrowers for taxes and insurance 8 (1) (7)
Disbursement of loan to ESOP -- (1,069) --
Shares acquired by stock benefit plans (729) -- --
Proceeds from other borrowed money 725 -- --
Net proceeds from issuance of common shares -- 12,832 --
Capital distributions and dividends paid on common stock (5,049) (93) --
-------- -------- -------
Net cash provided by (used in) financing activities (2,603) 9,690 (781)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents
(balance carried forward) 3,133 (1,834) 69
-------- -------- -------
</TABLE>
<PAGE> 29
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (balance brought forward) $3,133 $(1,834) $ 69
Cash and cash equivalents at beginning of year 2,248 4,082 4,013
------ ------- ------
Cash and cash equivalents at end of year $5,381 $ 2,248 $4,082
====== ======= ======
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 340 $ -- $ 159
====== ======= ======
Interest on deposits and borrowings $1,738 $ 1,707 $1,775
====== ======= ======
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 277 $ 209 $ 137
====== ======= ======
</TABLE>
The accompanying notes are an integral part of these statements.
<PAGE> 30
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998, 1997 and 1996
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 Company'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.
<PAGE> 31
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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 $937,000 and $660,000 at September 30, 1998 and 1997,
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.
<PAGE> 32
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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).
The Company accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan," which 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.
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, 1998 and 1997, the Company had no loans that would be
defined as impaired under SFAS No. 114.
<PAGE> 33
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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". 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.
<PAGE> 34
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
8. Benefit Plans
The Corporation has an Employee Stock Ownership Plan ("ESOP") which provides
retirement benefits for substantially all employees who have completed one
year of service and have attained the age of 21. The Corporation accounts
for the ESOP in accordance with Statement of Position ("SOP") 93-6,
"Employers' Accounting for Employee Stock Ownership Plans". SOP 93-6
requires that compensation expense recorded by employers equal the fair
value of ESOP shares allocated to participants during a given fiscal year.
Expense related to the ESOP totaled approximately $85,000 and $97,000 for
the years ended September 30, 1998 and 1997, respectively.
During fiscal 1998, the Corporation established a Recognition and Retention
Plan ("RRP") which provides for the issuance of shares to members of the
board of directors, management and employees. Upon shareholder approval, the
RRP purchased 53,429 shares of the Corporation's common stock in the open
market. At September 30, 1998, 45,415 shares had been awarded. Common stock
awarded under the RRP vests ratably over a five year period, commencing with
the date of the award. Expense recognized under the RRP totaled
approximately $36,000 for the fiscal year ended September 30, 1998.
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 and 1996, totaled approximately
$3,000 and $38,000, 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.
<PAGE> 35
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
11. Earnings Per Share and Dividends Per Share
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the Corporation's ESOP that
are unallocated and not committed to be released. Weighted-average common
shares outstanding, which gives effect to 95,863 unallocated ESOP shares,
totaled 1,239,862 for the fiscal year ended September 30, 1998.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued under
the Corporation's stock option plan. Options to purchase 113,526 shares of
common stock with a weighted-average exercise price of $13.50 were
outstanding at September 30, 1998, but were excluded from the computation of
common stock equivalents because their exercise price was greater than the
average market price of the common shares. Weighted-average common shares
deemed outstanding for purposes of computing diluted earnings per share
totaled 1,239,862 for the fiscal year ended September 30, 1998.
The provisions of SFAS No. 128, "Earnings Per Share," are not applicable to
the years ended September 30, 1997 and 1996, as the conversion from mutual
to stock form was completed in March 1997.
During fiscal 1998, the Corporation declared dividends of $3.78 per common
share. Of this amount, $3.50 per share was paid in April 1998 from funds
retained by the Corporation in the conversion to stock form and was deemed
by management to constitute a return of excess capital. Accordingly, the
Corporation charged the return of capital distribution to additional
paid-in-capital. Management estimates that all of the 1998 fiscal year
distributions constitute a tax-free return of capital.
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.
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.
<PAGE> 36
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at September 30, 1998
and 1997:
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, 1998 and 1997,
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.
Other Borrowed Money: The fair value of variable rate
borrowings is deemed to approximate the carrying value at
September 30, 1998.
<PAGE> 37
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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, 1998 and 1997 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>
1998 1997
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 5,381 $ 5,381 $ 2,248 $ 2,248
Certificates of deposit in other financial institutions 3,790 3,790 6,690 6,690
Investment securities held to maturity 9,300 9,394 17,257 17,316
Investment securities designated as available for sale 1,448 1,448 1,029 1,029
Mortgage-backed securities 859 902 1,268 1,338
Loans receivable - net 32,816 33,843 26,502 27,281
Federal Home Loan Bank stock 419 419 390 390
------- ------- ------- -------
$54,013 $55,177 $55,384 $56,292
======= ======= ======= =======
Financial liabilities:
Deposits $37,745 $37,873 $35,303 $35,334
Other borrowed money 725 725 -- --
Advances by borrowers for taxes and insurance 57 57 49 49
------- ------- ------- -------
$38,527 $38,655 $35,352 $35,383
======= ======= ======= =======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal
1998 consolidated financial statement presentation.
<PAGE> 38
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair 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>
1998 1997
ESTIMATED ESTIMATED
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
(In thousands)
<S> <C> <C> <C> <C>
HELD TO MATURITY:
U.S. Government agency obligations
Due within:
One year $4,000 $ 4,026 $ 6,399 $ 6,413
One to three years 1,800 1,832 5,858 5,882
Three to five years 1,500 1,525 4,000 4,016
Five to ten years 2,000 2,011 1,000 1,005
------ ------- ------- -------
Total investment securities
held to maturity 9,300 9,394 17,257 17,316
AVAILABLE FOR SALE:
FHLMC stock 29 1,448 29 1,029
------ ------- ------- -------
Total investment securities $9,329 $10,842 $17,286 $18,345
====== ======= ======= =======
</TABLE>
At September 30, 1998, the market value appreciation of the Company's held
to maturity investment portfolio in excess of the cost carrying value
totaled $94,000, consisting solely of gross unrealized gains.
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.
Mortgage-backed securities at September 30, 1998 and 1997, were comprised
solely of Government National Mortgage Association participation
certificates. At September 30, 1998 and 1997, the market value appreciation
of the Company's mortgage-backed securities in excess of cost was
approximately $43,000 and $70,000, 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.
<PAGE> 39
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Real estate mortgage loans
One- to four-family $ 29,225 $24,669
Multifamily 1,507 573
Nonresidential 1,879 811
Construction 150 527
Passbook loans 106 134
-------- -------
32,867 26,714
Less:
Undisbursed portion of loans in process -- 156
Deferred loan origination fees (costs) (1) 4
Allowance for loan losses 52 52
-------- -------
$ 32,816 $26,502
======== =======
</TABLE>
As depicted above, the Company's lending efforts have historically focused
on residential real estate loans, which comprised approximately $30.9
million, or 94%, of the total loan portfolio at September 30, 1998 and $25.6
million, or 97%, of the total loan portfolio at September 30, 1997.
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 its 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 $705,000 and $740,000 at September 30, 1998 and 1997,
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, 1998 and 1997.
Management believes that the fees paid for such services are at, or below,
the comparable cost of such services from unrelated parties.
<PAGE> 40
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
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>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Beginning balance $52 $52 $39
Provision for loan losses -- -- 13
--- --- ---
Ending balance $52 $52 $52
=== === ===
</TABLE>
At September 30, 1998 and 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 $171,000 and $191,000 and $139,000
at September 30, 1998, 1997 and 1996, respectively.
As of and for the year ended September 30, 1998, 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, 1998.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Land $ 40 $ 34
Buildings and improvements 161 161
Furniture and equipment 246 236
---- ----
447 431
Less accumulated
depreciation 320 284
---- ----
$127 $147
==== ====
</TABLE>
At September 30, 1998, the Company had entered into a commitment to purchase
properties adjacent to its main office for approximately $325,000.
<PAGE> 41
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND
WEIGHTED-AVERAGE 1998 1997
INTEREST RATE AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook accounts -
2.83% in 1998 and 1997 $ 9,510 25.2% $10,094 28.6%
Club accounts - 5.07% in 1998 and 1997 51 .1 52 .2
Money market demand accounts -
2.83% in 1998 and 1997 2,178 5.8 2,374 6.7
------- ----- ------- -----
Total demand accounts 11,739 31.1 12,520 35.5
Certificates of deposit -
5.89% in 1998 and 5.97% in 1997 26,006 68.9 22,783 64.5
------- ----- ------- -----
Total deposits $37,745 100.0% $35,303 100.0%
======= ===== ======= =====
</TABLE>
At September 30, 1998 and 1997, the Company had deposit accounts with
balances greater than $100,000 totaling $2.7 million and $2.0 million,
respectively.
Interest expense on deposits for the fiscal years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
(In thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 279 $ 300 $ 324
Money market accounts 64 81 104
Certificates of deposit 1,382 1,308 1,330
------ ------ ------
$1,725 $1,689 $1,758
====== ====== ======
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1998 1997
(In thousands)
<S> <C> <C>
Less than six months $ 8,655 $ 8,000
Six months to one year 11,364 10,407
One year to three years 5,987 4,376
------- -------
$26,006 $22,783
======= =======
</TABLE>
<PAGE> 42
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE G - OTHER BORROWED MONEY
Other borrowed money at September 30, 1998 consists of a one year, unsecured
note from another financial institution bearing interest at the prime rate,
or 8.50%, at September 30, 1998. The note matures in July 1999.
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings for the years ended
September 30, 1998, 1997 and 1996, does not differ materially from that
computed at the statutory corporate tax rate.
The composition of the Corporation's net deferred tax liability at September
30 is as follows:
<TABLE>
<CAPTION>
1998 1997
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT ESTIMATED CORPORATE TAX RATE: (In thousands)
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 17 $ 17
Other -- 1
----- -----
Total deferred tax assets 17 18
Deferred tax liabilities:
Unrealized gains on securities designated as
available for sale (482) (340)
Difference between cash and accrual basis of accounting (116) (157)
Federal Home Loan Bank stock dividends (78) (69)
Difference between book and tax depreciation (33) (31)
Percentage of earnings bad debt deduction (5) (7)
Deferred loan origination costs (18) (4)
----- -----
Total deferred tax liabilities (732) (608)
----- -----
Net deferred tax liability $(715) $(590)
===== =====
</TABLE>
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. 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, 1998 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, 1998. See Note N for additional information regarding the
Company's future percentage of earnings bad debt deductions.
<PAGE> 43
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE I - 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 consolidated 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, 1998 and 1997, the Company had outstanding commitments of
approximately $967,000 and $873,000 to originate fixed-rate residential real
estate loans at interest rates ranging from 7.00% to 8.25% and 7.25% to
8.00%, 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.
NOTE J - 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.
<PAGE> 44
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE J - REGULATORY CAPITAL (continued)
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, 1998 and 1997, management believes that the Company met
all capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $13,619 25.6% >$ 797 >1.5% >$2,658 > 5.0%
Core capital $13,619 25.6% >$1,595 >3.0% >$3,190 > 6.0%
Risk-based capital $13,669 59.6% >$1,835 >8.0% >$2,294 >10.0%
<CAPTION>
AS OF SEPTEMBER 30, 1997
TO BE "WELL-
CAPITALIZED" UNDER
FOR CAPITAL PROMPT CORRECTIVE
ACTUAL ADEQUACY PURPOSES ACTION PROVISIONS
------ ----------------- -----------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
Tangible capital $12,885 23.4% >$ 827 >1.5% >$2,756 > 5.0%
Core capital $12,885 23.4% >$1,654 >3.0% >$3,307 > 6.0%
Risk-based capital $12,935 68.2% >$1,518 >8.0% >$1,898 >10.0%
</TABLE>
<PAGE> 45
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE J - 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 K - STOCK OPTION PLAN
During fiscal 1998 the Board of Directors adopted the Market Financial
Corporation 1998 Stock Option and Incentive Plan (the "Plan") that provided
for the issuance of 133,572 shares of authorized, but unissued shares of
common stock at fair value at the date of grant. In June 1998, the
Corporation granted options to purchase 113,526 shares at the fair value of
$13.50 per share, all of which were fully exercisable at the grant date,
with an expiration term of ten years.
In 1998, the Corporation adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," which contains a fair value-based method for valuing
stock-based compensation that entities may use, which measures compensation
cost at the grant date based on the fair value of the award. Compensation is
then recognized over the service period, which is usually the vesting
period. Alternatively, SFAS No. 123 permits entities to continue to account
for stock options and similar equity instruments under Accounting Principles
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities that continue to account for stock options using APB Opinion No. 25
are required to make pro forma disclosures of net earnings and earnings per
share, as if the fair value-based method of accounting defined in SFAS No.
123 had been applied.
The Corporation applies APB Opinion No. 25 and related Interpretations in
accounting for its stock option plan. Accordingly, no compensation cost has
been recognized for the Plan. Had compensation cost for the Corporation's
stock option plan been determined based on the fair value at the grant dates
for awards under the Plan consistent with the accounting method utilized in
SFAS No. 123, the Corporation's net earnings and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998
<S> <C> <C>
Net earnings (In thousands) As reported $552
Pro-forma $321
Earnings per share
Basic As reported $.45
Pro-forma $.26
Diluted As reported $.45
Pro-forma $.26
</TABLE>
<PAGE> 46
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE K - STOCK OPTION PLAN (continued)
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1998: dividend yield
of 4.0%, expected volatility of 20.0%, a risk-free interest rate of 6.5% and
expected lives of ten years.
A summary of the status of the Corporation's stock option plan as of and for
the fiscal year ended September 30, 1998, is presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
<S> <C> <C>
Outstanding at beginning of year -- $ --
Granted 113,526 13.50
Exercised -- --
Forfeited -- --
------- --------
Outstanding at end of year 113,526 $ 13.50
======= ========
Options exercisable at year-end 113,526 $ 13.50
======= ========
Weighted-average fair value of
options granted during the year $ 3.08
========
The following information applies to options outstanding at
September 30, 1998:
Number outstanding 113,526
Range of exercise prices $ 13.50
Weighted-average exercise price $ 13.50
Weighted-average remaining contractual life 9.75 years
</TABLE>
<PAGE> 47
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE L - 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.
<PAGE> 48
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Market Financial Corporation as of September 30, 1998 and 1997,
and the results of its operations and its cash flows for the periods ended
September 30, 1998 and 1997.
MARKET FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Interest-bearing deposits in The Market Building and Saving Co. $ 213 $ 5,256
Interest-bearing deposits in other financial institutions 1 1
Loan receivable from ESOP 971 1,069
Investment in The Market Building and Saving Co. 14,556 13,546
Accrued interest receivable 51 38
Prepaid expenses and other assets 29 --
Prepaid federal income taxes 34 --
-------- --------
Total assets $ 15,855 $ 19,910
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed money $ 725 $ --
Other liabilities 40 2
Accrued federal income taxes -- 13
Deferred federal income taxes 12 --
-------- --------
Total liabilities 777 15
Shareholders' equity
Common stock and additional paid-in capital 8,191 12,832
Retained earnings 7,650 7,472
Shares acquired by stock benefit plans (1,700) (1,069)
Unrealized gains on securities designated as available for sale, net 937 660
-------- --------
Total shareholders' equity 15,078 19,895
-------- --------
Total liabilities and shareholders' equity $ 15,855 $ 19,910
======== ========
</TABLE>
<PAGE> 49
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
MARKET FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Period ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997
Revenue
<S> <C> <C>
Interest income $ 157 $113
Equity in earnings of The Market Building and Saving Co. 600 314
----- ----
Total revenue 757 427
Interest expense 9 --
General and administrative expenses 221 74
----- ----
Earnings before income taxes (credits) 527 353
Federal income taxes (credits) (25) 13
----- ----
NET EARNINGS $ 552 $340
===== ====
</TABLE>
<PAGE> 50
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
MARKET FINANCIAL CORPORATION
STATEMENTS OF CASH FLOWS
Period ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 552 $ 340
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (600) (314)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (13) (38)
Prepaid expenses and other assets (30) --
Other liabilities 38 2
Federal income taxes - current (47) 13
Federal income taxes - deferred 12 --
------- --------
Net cash provided by (used in) operating activities (88) 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)
Repayment of loan to ESOP 98 --
Shares acquired by stock benefit plans (729) --
Proceeds from other borrowed money 725 --
Net proceeds from issuance of common shares -- 12,832
Capital distributions and dividends paid on common stock (5,049) (93)
------- --------
Net cash provided by (used in) financing activities (4,955) 11,670
------- --------
Net increase (decrease) in cash and cash equivalents (5,043) 5,257
Cash and cash equivalents at beginning of period 5,257 --
------- --------
Cash and cash equivalents at end of period $ 214 $ 5,257
======= ========
</TABLE>
<PAGE> 51
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE M - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
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 $6.3 million to the Corporation at September 30, 1998.
NOTE N - 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.
<PAGE> 52
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1998, 1997 and 1996
NOTE N - LEGISLATIVE DEVELOPMENTS (continued)
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 is permitted to amortize the recapture of the bad
debt reserve in taxable income over a six year period commencing in fiscal
1997.
<PAGE> 53
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 L. Craig Martin
Market Financial Corporation President
The Market Building and Saving Company Environmentrics, Inc.
Rae Skirvin Larimer Edgar H. May
Attorney Partner - Retired
Ed May Realty Co.
Edgar H. May
Partner - Retired R. C. Meyerenke
Ed May Realty Co. Managing Officer - Retired
The Market Building and Saving Company
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
General Metal Works OFFICERS OF
THE MARKET BUILDING AND SAVING COMPANY
Kathleen A. White
Real Estate Title Examiner John T. Larimer
President and Managing Officer
OFFICERS OF
MARKET FINANCIAL CORPORATION R. C. Meyerenke
Treasurer
John T. Larimer
President Una Schaeperklaus
Secretary
R.C. Meyerenke
Treasurer Julie M. Bertsch
Chief Financial Officer
Rae Skirvin Larimer
Secretary
Julie M. Bertsch
Chief Financial Officer
</TABLE>
51
<PAGE> 54
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 10AT66
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
ANNUAL MEETING
================================================================================
The 1999 Annual Meeting of Shareholders of Market Financial Corporation will be
held on January 26, 1999, at 10:00 a.m., Eastern Time, at Shuller's Wigwam
Restaurant, 6210 Hamilton Avenue, Cincinnati, 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
Cincinnati, Ohio 45231
Attention: President
52
<PAGE> 1
Exhibit 20
MARKET FINANCIAL CORPORATION
7522 Hamilton Avenue
Cincinnati, Ohio 45231
(513) 521-9772
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Notice is hereby given that the 1999 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 26, 1999,
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 four directors of MFC for terms expiring in 2001;
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
10, 1998, 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
Cincinnati, Ohio John T. Larimer, President
December 29, 1998
<PAGE> 2
Market Financial Corporation
7522 Hamilton Avenue
Cincinnati, 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 1999
Annual Meeting of Shareholders of MFC to be held at Shuller's Wigwam Restaurant,
6210 Hamilton Avenue, Cincinnati, Ohio 45224, on January 26, 1999, 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 Rae Skirvin Larimer, R.C. Meyerenke, Wilbur
H. Tisch and Kathleen A. White as directors of MFC for terms
expiring in 2001; 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 10,
1998 (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, 1998.
<PAGE> 3
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and MFC's Code of Regulations (the "Regulations"), the
four 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 four 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 15, 1998:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Beneficial Ownership Shares Outstanding
-------------------- ------------------
Name and Address
- ----------------
<S> <C> <C>
Market Financial Corporation
Employee Stock Ownership Plan
1201 Broadway
Quincy, Illinois 62301 104,924 (1) 7.9%
- ----------------------------
</TABLE>
(1) Includes 95,863 unallocated shares with respect to which First Bankers
Trust Company, N.A. (the "Trustee"), as the Trustee for the Market
Financial Corporation Employee Stock Ownership Plan (the "ESOP") has sole
voting power. The Trustee has limited shared investment power over all ESOP
shares.
2
<PAGE> 4
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 15, 1998:
<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 5,008(2) 55,929(3) 4.5%
John T. Larimer 59,826.89(4) 4,800 4.7
Rae Skirvin Larimer 26,708(5) 4,800 2.4
Edgar H. May 10,008(2) - 0.7
L. Craig Martin (6) 63,036(2) 3,000 4.9
R. C. Meyerenke 5,008(2) 2,500 0.6
Wilbur H. Tisch 10,008(2) - 0.7
Una E. Schaeperklaus (6) 13,508(2) - 1.0
Kathleen A. White 5,008(2) 55,429(3) 4.5
All directors of and executive officers of
MFC and Market as a group
(10 people) 204,081.095(7) 76,529(8) 19.7%
- ----------------------------
</TABLE>
(1) Each of the persons listed in this table may be contacted at the address of
MFC.
(2) This number includes 5,008 that may be acquired upon the exercise of
options awarded pursuant to the Market Financial Corporation 1998 Stock
Option and Incentive Plan (the "Stock Option Plan").
(3) This number includes 53,429 shares held by the Recognition and Retention
Plan (the "RRP") Trust with regard to which Mr. Gandenberger and Ms. White
have voting power as Trustees of the RRP Trust.
(4) This number includes 33,393 shares that may be acquired upon the exercise
of options awarded pursuant to the Stock Option Plan, but does not include
21,700 shares owned by Mr. Larimer's spouse, Rae Skirvin Larimer.
(5) This number does not include 23,450 shares owned by Ms. Larimer's spouse,
John T. Larimer.
(6) Mr. Martin and Ms. Schaeperklaus are directors of Market but are not
directors of MFC.
(7) This number includes 86,814 shares that may be acquired upon the exercise
of options awarded pursuant to the Stock Option Plan.
(8) The 53,429 shares held by the RRP Trust are reflected in each Trustees'
amount but counted only once in the amount beneficially owned by all
directors and executive officers of MFC as a group.
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> 5
The Board of Directors proposes the re-election of the following
persons to serve until the Annual Meeting of Shareholders in 2001 and until
their successors are duly elected and qualified or until their earlier
resignation, removal from office or death:
<TABLE>
<CAPTION>
Director of Director of
Name Age (1) Positions Held MFC Since (2) Market Since
- ---- ------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Rae Skirvin Larimer 62 Director and Secretary 1996 -
R.C. Meyerenke 76 Director and Treasurer 1996 1974
Wilbur H. Tisch 82 Director 1996 -
Kathleen A. White 41 Director 1996 -
- -----------------------------
</TABLE>
(1) As of December 15, 1998.
(2) Each person became a director 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.
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 Director
of MFC of Market
Name Age (1) Position(s) Held Since (2) Term Expires Since
- ---- ------- ---------------- --------- ------------ -----
<S> <C> <C> <C> <C> <C>
Robert Gandenberger 70 Director 1996 2000 -
John T. Larimer 65 Director and President 1996 2000 1975
Edgar H. May 74 Director and Vice President 1996 2000 1992
- -----------------------------
</TABLE>
(1) As of December 15, 1998.
(2) Each person became a director of MFC in connection with the Conversion.
RAE SKIRVIN LARIMER. Ms. Larimer has been legal counsel for Market
since 1975. From 1979 to 1994, Ms. Larimer 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 1994 ("Cleves-North Bend"). Ms.
Larimer is John T. Larimer's spouse and the sister of Una Schaeperklaus, a
director of Market.
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.
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.
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 Cleves-North Bend.
4
<PAGE> 6
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 April 1996. Mr. Larimer is Rae
Skirvin Larimer's spouse and is a brother-in-law 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.
MEETINGS OF DIRECTORS
MFC was incorporated in April 1996. The Board of Directors of MFC met
eight times for regularly scheduled and special meetings during the fiscal year
ended September 30, 1998.
The Board of Directors of Market met 12 times for regularly scheduled
meetings during the fiscal year ended September 30, 1998.
COMMITTEES OF DIRECTORS
The Board of Directors of MFC does not have a nominating committee or a
compensation committee. The Board of Directors of MFC has a Stock Option
Committee and an RRP Committee. Nominees for election to the Board of Directors
are selected by the entire Board of Directors.
The Stock Option Committee is responsible for administering the Stock
Option Plan, including interpreting the Stock Option Plan and awarding options
pursuant to its terms. The members of the Stock Option Committee are Messrs.
Gandenberger and May and Ms. White and the committee took action by unanimous
written consent once during the fiscal year ended September 30, 1998.
The RRP Committee administers the RRP. Such committee consists of
Messrs. Gandenberger, Martin and Tisch. The RRP Committee took action by
unanimous written consent once during the 1998 fiscal year.
The Board of Directors of Market has an Audit Committee, a Compensation
Committee and an Executive Committee.
The Audit Committee of Market 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 Messrs. Martin, Meyerenke and Ms.
Schaeperklaus. The Audit Committee met once during the fiscal year ended
September 30, 1998.
Market's Compensation Committee is comprised of Messrs. Martin, May and
Meyerenke. 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 met twice during the fiscal
year ended September 30, 1998.
The members of the Executive Committee of Market are Ms. Schaeperklaus
and Messrs. Larimer, May and Meyerenke. The Executive Committee is authorized to
act on behalf of the Board of Directors between regular meetings of the Board of
Directors. The Executive Committee met twice during the fiscal year ended
September 30, 1998.
5
<PAGE> 7
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 65 President and Director
Rae Skirvin Larimer 62 Secretary and Director
Edgar H. May 74 Vice President and Director
Julie M. Bertsch 37 Chief Financial Officer
- -----------------------------
</TABLE>
(1) As of December 15, 1998.
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.
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 $100,000 during the fiscal years ended September 30, 1998, 1997 and
1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Annual Compensation Long term compensation
-------------------------------------------------------------------------------
Name and principal position Year Salary ($)(1) Bonus ($) Awards
-----------------------------------------
Securities
Restricted stock underlying
awards ($) options/SARs (#)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John T. Larimer, President 1998 $97,007 $11,135 $180,320 (2) 33,393 (3)
and Chief Executive Officer 1997 94,500 4,835 -- --
1996 70,703 (4) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
- -----------------------------
</TABLE>
(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) On June 30, 1998, Mr. Larimer was awarded 13.357 common shares pursuant to
the RRP. Mr. Larimer paid no consideration for such shares. Such shares
are earned and non-forfeitable at the rate of one-fifth per year on the
anniversary of the date of award, beginning on June 30, 1999, assuming
continued employment with, or service on the Board of Directors of, MFC.
The market price of MFC's shares on June 30, 1998, determined by reference
to the mean between the closing high bid and low asked quotation for MFC's
shares on the Nasdaq Small Cap Market ("Nasdaq") on such date, was $13.50
per share. The aggregate market value of the shares awarded to Mr. Larimer
under the RRP as of June 30, 1998, was approximately $180,320. As of
September 30, 1998, the 13,357 shares had an aggregate market value of
approximately $155,725, based on the $11.625 fair market value for the MFC
shares on such date. In addition, dividends and other distributions paid
on such shares and earnings on such dividends and distributions will be
distributed to Mr. Larimer according to the vesting schedule of the award.
6
<PAGE> 8
(3) Represents the number of commons shares of MFC underlying options granted
to Mr. Larimer pursuant to the Stock Option Plan during the fiscal year
ended September 30, 1998.
(4) Includes salary of $56,078 and directors' fees of $14,625.
STOCK OPTION PLAN.
On June 30, 1998, the shareholders of MFC adopted the Stock Option
Plan. Pursuant to the Stock Option Plan, 133,572 common shares were reserved for
issuance by MFC upon the exercise of options to be granted to certain directors,
officers and employees of MFC and Market from time to time under the Stock
Option Plan. Options to purchase 113,526 common shares were granted pursuant to
the Stock Option Plan during the fiscal year ended September 30, 1998.
The Stock Option Plan is administered by the Stock Option Committee
which is composed of at least three directors of MFC who are not employees of
MFC. The Stock Option Committee may grant options under the Stock Option Plan at
such times as they deem most beneficial to Market and MFC on the basis of the
individual participant's position and duties and the value of the individual's
services and responsibilities to Market and MFC.
Options granted to the officers and employees under the Stock Option
Plan may be "incentive stock options" ("ISOs") within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code"), or may be options
which do not qualify under Section 422 of the Code ("Non-Qualified Stock
Options"). Options granted under the Stock Option Plan to directors who are not
employees of MFC or Market will be Non-Qualified Stock Options.
MFC will receive no monetary consideration for the granting of options
under the Stock Option Plan. Upon the exercise of options, MFC will receive
payment of cash or, if acceptable to the Stock Option Committee, common shares
of MFC or outstanding awarded stock options.
The following table sets forth information regarding all grants of
options to purchase common shares of MFC made to Mr. Larimer during the fiscal
year ended September 30, 1998:
<TABLE>
<CAPTION>
Options/SAR Grants In Last Fiscal Year
------------------------------------------------------------------------------------------------
Number of Securities % of Total Options/SARs
Underlying Options/ Granted to Employees in Exercise or Base
Name SARs Granted (#) 1998 Fiscal Year Price ($/Share) Expiration Date
- ---- --------------------- ----------------------- ------------------ ---------------
<S> <C> <C> <C> <C>
John T. Larimer 33,393 45.46% $13.50 June 30, 2008
- --------------------
</TABLE>
(1) The options were granted on June 30, 1998.
7
<PAGE> 9
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Larimer at September 30, 1998:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 9/30/98 Option/SAR Values
-------------------------------------------------------------------------------------------------
Number of Securities Underlying
Unexercised Options/SARs at Value of Unexercisable
Shares Acquired Value 9/30/98(#) "In The Money" Options/
Name on Exercise(#) Realized($) Exercisable/Unexercisable SARs at 9/30/98(#)(1)
- ---- -------------- ----------- ------------------------- ---------------------
<S> <C> <C> <C> <C>
John T. Larimer -0- N/A 33,393/-0- N/A
- ----------------------
</TABLE>
(1) An option is "in the money" if the exercise price is less than the current
fair market value of the common shares. At September 30, 1998, the
exercise price of Mr. Larimer's options was greater than the fair market
value of the underlying MFC shares.
RECOGNITION AND RETENTION PLAN AND TRUST
The shareholders of MFC adopted the RRP on June 30, 1998. The RRP
purchased 53,429 common shares of MFC, 45,409 of which were awarded to
directors, executive officers and employees of MFC and Market in June 1998.
The RRP is administered by the RRP Committee which is composed of three
directors of MFC who are not employees of Market or MFC. The RRP Committee
determines which directors and employees of MFC and Market will be awarded
shares under the RRP and the number of shares awarded.
Unless the RRP Committee specifies a longer period of time, one-fifth
of the number of shares awarded to an individual will become earned and
non-forfeitable on each of the first five anniversaries of the date of such
award. Compensation expense in the amount of the fair market value of the RRP
shares will be recognized as the shares are earned. Until shares awarded are
earned by the participant, such shares will be forfeited in the event that the
participant ceases to be either a director of MFC or Market or an employee of
Market or MFC, except that in the event of the death, disability or retirement
at or after age 65 of a participant or of a change in control of MFC or Market,
the participant's shares will be deemed to be earned and non-forfeitable.
The RRP shares, together with any cash dividends or distributions paid
thereon, will be distributed as soon as practicable after they are earned. A
participant may direct the voting of all shares awarded to him or her which have
been earned but have not yet been distributed to him or her. Shares that have
been awarded but not earned will be voted in the discretion of the RRP Trustee
to be appointed by the RRP Committee. Shares that have been awarded but not
earned may not be transferred.
DIRECTOR COMPENSATION
Each director of MFC who is not a director of Market receives an annual
fee of $10,000, payable quarterly. Each director of Market currently receives a
fee of $19,500 per year, payable quarterly. Mr. Larimer does not receive
director's fees from MFC or Market.
EMPLOYMENT AGREEMENTS
On April 1, 1998, 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 $99,800 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
8
<PAGE> 10
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.
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,
1998, Market paid $20,455 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 qualified shareholders intended to be included in the
proxy statement for the 2000 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, 1999. In addition, if a shareholder intends to present a proposal at the
2000 Annual Meeting without including the proposal in the proxy materials
related to that meeting, and if the proposal is not received by November 15,
1999, then the proxies designated by the Board of Directors of MFC for the 2000
Annual Meeting of Shareholders of MFC may vote in their discretion on any such
proposal any shares for which they have been appointed proxies without mention
of such matter in the proxy statement or on the proxy card for such meeting.
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.
9
<PAGE> 11
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
Cincinnati, Ohio John T. Larimer, President
December 29, 1998
10
<PAGE> 12
REVOCABLE PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF
MARKET FINANCIAL CORPORATION
MARKET FINANCIAL CORPORATION 1999 ANNUAL MEETING Of SHAREHOLDERS
JANUARY 26, 1999
The undersigned shareholder of Market Financial Corporation ("MFC")
hereby constitutes and appoints Julie M. Bertsch and Robert Gandenberger, 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 26, 1999, 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 four directors:
FOR all nominees WITHHOLD authority to
[ ] listed below [ ] vote for all nominees
(except as marked to the listed below:
contrary below):
Rae Skirvin Larimer
R. C. Meyerenke
Wilbur H. Tisch
Kathleen A. White
(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> 13
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 1999 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 USA
2
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 615
<INT-BEARING-DEPOSITS> 273
<FED-FUNDS-SOLD> 4,493
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,448
<INVESTMENTS-CARRYING> 13,949<F1>
<INVESTMENTS-MARKET> 14,086
<LOANS> 32,816
<ALLOWANCE> 52
<TOTAL-ASSETS> 54,608
<DEPOSITS> 37,745
<SHORT-TERM> 725
<LIABILITIES-OTHER> 1,060
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 15,078<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 54,608
<INTEREST-LOAN> 2,411
<INTEREST-INVEST> 991<F3>
<INTEREST-OTHER> 483
<INTEREST-TOTAL> 3,885
<INTEREST-DEPOSIT> 1,725
<INTEREST-EXPENSE> 1,734
<INTEREST-INCOME-NET> 2,151
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,322
<INCOME-PRETAX> 836
<INCOME-PRE-EXTRAORDINARY> 552
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 552
<EPS-PRIMARY> .45
<EPS-DILUTED> .45
<YIELD-ACTUAL> 4.07
<LOANS-NON> 0
<LOANS-PAST> 171
<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>INCLUDES 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 1998 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.
<PAGE> 3
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 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 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.
Pending legislation or proposals regarding changes in charter or regulation.
Management's determination of the amount of the allowance for loan losses and
expectations regarding its adequacy.
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.
Management's expectation that secondary market activities will continue to
increase if interest rates decline.
Management's efforts to manage delinquencies.
Management's efforts to manage interest rate risk.
<PAGE> 4
Management's characterization of its competition.
Pending regulatory proposals.
Levels of deposit insurance assessments.
