FORM -10QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 000-22255
MARKET FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0462464
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
7522 Hamilton Avenue
Mt. Healthy, OH 45231
(Address of principal executive (Zip Code)
office)
Registrant's telephone number, including area code: (513) 521-9772
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
As of May 11, 1998, the latest practicable date, 1,335,725 common shares of the
registrant, no par value, were issued and outstanding.
Page 1 of 15
<PAGE>
INDEX
MARKET FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION 14
SIGNATURES 15
Page 2 of 15
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, September 30,
1998 1997
ASSETS
<S> <C> <C>
Cash and due from banks $ 716 $ 550
Federal funds sold 3,588 1,494
Interest-bearing deposits in other financial institutions 188 204
------- -------
Cash and cash equivalents 4,492 2,248
Certificates of deposit in other financial institutions 5,040 6,690
Investment securities - at amortized cost, approximate market
value of $14,264 and $17,316 at March 31, 1998 and September 30, 1997 14,199 17,257
Investment securities designated as available for sale - at market 1,384 1,029
Mortgage-backed securities - at cost, approximate market value of $1,297
and $1,338 at March 31, 1998 and September 30, 1997 1,223 1,268
Loans receivable - net 30,261 26,502
Office premises and equipment - at depreciated cost 139 147
Federal Home Loan Bank stock - at cost 404 390
Accrued interest receivable 451 520
Prepaid expenses and other assets 163 70
------- -------
Total assets $57,756 $56,121
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $36,387 $35,303
Advances by borrowers for taxes and insurance 57 49
Accrued interest payable 117 99
Other liabilities 77 137
Accrued federal income taxes 44 48
Deferred federal income taxes 705 590
------- -------
Total liabilities 37,387 36,226
Shareholders' equity
Preferred stock - 1,000,000 shares without par value authorized; no
shares issued - -
Common stock - 4,000,000 shares without par value authorized;
1,335,725 shares issued and outstanding at March 31, 1998 and
September 30, 1997 - -
Additional paid-in capital 12,832 12,832
Retained earnings - substantially restricted 7,613 7,472
Shares acquired by Employee Stock Ownership Plan (ESOP) (971) (1,069)
Unrealized gain on securities designated as available for sale,
net of related tax effects 895 660
------- -------
Total shareholders' equity 20,369 19,895
------- -------
Total liabilities and shareholders' equity $57,756 $56,121
======= =======
</TABLE>
Page 3 of 15
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Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended March 31, Three months ended March 31,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $1,146 $ 961 $ 590 $501
Mortgage-backed securities 56 67 27 33
Investment securities 521 249 252 102
Interest-bearing deposits and other 258 324 126 167
------- ------ ------- -----
Total interest income 1,981 1,601 995 803
Interest expense
Deposits 844 854 417 428
------- ------ ------- -----
Net interest income 1,137 747 578 375
Other operating income 4 3 2 1
General, administrative and other expense
Employee compensation and benefits 412 291 195 149
Occupancy and equipment 64 52 33 26
Federal deposit insurance premiums 13 23 7 1
Franchise taxes 87 54 66 30
Other operating 120 86 57 38
------- ------ ------- ------
Total general, administrative and
other expense 696 506 358 244
------- ----- ------ -----
Earnings before income taxes 445 244 222 132
Federal income taxes
Current 156 3 34 32
Deferred (5) 80 41 13
------- ------ ------- ------
Total federal income taxes 151 83 75 45
------- ------ ------- ------
Net Earnings $ 294 $ 161 $ 147 $ 87
====== ===== ===== =====
Earnings per share
Basic $ .24 N/A $ .12 N/A
======= ======
Diluted $ .24 N/A $ .12 N/A
======= ======
</TABLE>
Page 4 of 15
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Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended March 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 294 $ 161
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 (2) (28)
Depreciation and amortization 17 15
Amortization of deferred loan origination fees (4) (12)
Amortization of expense related to stock benefit plans 132 -
Federal Home Loan Bank stock dividends (14) (12)
Increase (decrease) in cash due to changes in:
Accrued interest receivable 69 24
Accrued interest payable 18 12
Prepaid expenses and other assets (93) 117
Other liabilities (60) (140)
Federal income taxes
Current (4) 3
Deferred (5) 80
------- --------
Net cash provided by operating activities 348 220
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 45 67
Proceeds from maturity of investment securities 5,660 2,400
Loan disbursements (6,603) (4,612)
Principal repayments on loans 2,848 1,211
Purchase of investment securities designated as held to maturity (2,600) (1,000)
Purchase of office equipment (9) (2)
Decrease in certificates of deposits in other financial
institutions - net 1,650 400
------- ---------
Net cash provided by (used in) investing activities 991 (1,536)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 1,084 (1,168)
Advances by borrowers for taxes and insurance 8 5
Disbursement of loan to ESOP - (1,069)
Net proceeds from issuance of common shares - 12,832
Dividends paid on common stock (187) -
-------- --------
Net cash provided by financing activities 905 10,600
-------- --------
Net increase in cash and cash equivalents (balance carried
forward) 2,244 9,284
-------- --------
</TABLE>
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Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended March 31,
1998 1997
<S> <C> <C>
Net increase in cash and cash equivalents (balance brought
forward) $2,244 $ 9,284
Cash and cash equivalents at beginning of period 2,248 4,082
------ -------
Cash and cash equivalents at end of period $4,492 $13,366
====== =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 180 $ -
====== =======
Interest on deposits $ 826 $ 842
====== =======
Supplemental disclosure of noncash investing activities:
Unrealized gain on securities designated as available for sale,
net of related tax effects $ 235 $ 55
====== =======
</TABLE>
Page 6 of 15
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARKET FINANCIAL CORPORATION
For the six month periods ended
March 31, 1998 and 1997
On April 16, 1996, the Board of Directors of The Market Building and
Saving Company ("Market") unanimously adopted a Plan of Conversion to convert
Market 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 the
newly chartered holding company, Market Financial Corporation ("MFC"). The
conversion was accomplished through amendment of Market's Articles of
Incorporation and Constitution and the sale of MFC's common shares in an amount
equal to the pro forma market value of Market after giving effect to the
conversion. A subscription offering of the shares of MFC to Market's members and
to a 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 MFC 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.
Under OTS regulations, limitations have been imposed on all "capital
distributions", including cash dividends by savings institutions. The regulation
establishes a three-tiered system of restrictions, with the greatest flexibility
afforded to thrifts which are both well-capitalized and given favorable
qualitative examination ratings by the OTS.
The financial statements for periods prior to March 27, 1997, contained
herein, are those of Market prior to the completion of its conversion to stock
form.
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB, and, therefore, do not
include information or footnotes necessary for complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto of MFC for the year ended September 30, 1997.
However, in the opinion of management, all adjustments (consisting of only
normal recurring accruals) which are necessary for fair presentation of the
consolidated financial statements have been included. The results of operations
for the three month and six month periods ended March 31, 1998 and 1997 are not
necessarily indicative of the results which may be expected for an entire fiscal
year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of MFC and Market. All significant intercompany items have been eliminated.
3. Effects of Recent Accounting Pronouncements
In October 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting
for Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based compensation plans. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure the compensation cost of
all stock compensation plans based on the estimated fair value of the award at
the date it is granted. Companies are, however, allowed to continue to measure
compensation cost for those plans using the intrinsic value based method of
accounting, which generally does not result in compensation expense recognition
for most plans. Companies that elect to remain with the existing accounting are
required to disclose in a footnote to the financial statements pro forma net
earnings and, if presented, earnings per share, as if SFAS No. 123 had been
adopted. The accounting requirements of SFAS No. 123 are effective for
transactions entered into during fiscal years that begin after December 15,
1995; however, companies are required to disclose information for awards granted
in their first fiscal year beginning after December 15, 1994. Management has
determined that MFC will account for stock-based compensation pursuant to
Page 7 of 15
<PAGE>
Accounting Principles Board Opinion No. 25, and therefore, the disclosure
provisions of SFAS No. 123 will have no effect on its consolidated financial
condition or results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers
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 institution that undertakes an obligation to service financial
assets recognizes either a servicing asset or liability for the servicing
contract (unless related to a securitization of assets, and all the securitized
assets are retained and classified as held to maturity). A servicing asset or
liability that is purchased or assumed is initially recognized at its fair
value. Servicing assets and liabilities are amortized in proportion to and over
the period of estimated net servicing income or net servicing loss and are
subject to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of its
obligations for the liability or is legally released from being the primary
obligor. SFAS No. 125 supersedes SFAS No. 122 and is effective for transfers and
servicing of financial assets and extinguishment of liabilities occurring after
December 31, 1997, and is to be applied prospectively. Earlier or retroactive
application is not permitted. Management adopted SFAS No. 125 effective January
1, 1998, as required, without material effect on Market'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
is required. SFAS No. 130 is not expected to have a material adverse effect on
MFC's consolidated financial statements.
In June 1997, the FASB issued SFAS No. 131," Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly changes
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about reportable segments in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
SFAS No. 131 uses a "management approach" to disclose financial and descriptive
information about the way that management organizes the segments within the
enterprise for making operating decisions and assessing information. For many
enterprises, the management approach will likely result in more segments being
reported. In addition, SFAS No. 131 requires significantly more information to
be disclosed for each reportable segment than is presently being reported in
annual financial statements and also requires that selected information be
reported in interim financial statements. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. The disclosure provisions of SFAS No.
131 are not expected to have a material adverse effect on MFC's consolidated
financial statements.
Page 8 of 15
<PAGE>
4. Pending Legislative Changes
Congress has enacted legislation that would merge the Savings
Association Insurance Fund (the "SAIF") and the Bank Insurance Fund (the "BIF")
on January 1, 2000. The legislation currently provides for the elimination of
the thrift charter or separate thrift regulation under federal law prior to the
merger of the deposit insurance funds. Market then might be regulated as a bank
under federal law and be subject to the more restrictive activity limits imposed
on national banks.
5. Earnings Per Share
Basic earnings per share is computed based upon the weighted average
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released. Weighted average common shares
outstanding, which give effect to 97,144 unallocated ESOP shares, totaled
1,238,581 shares for the three month and six month periods ended March 31, 1998.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares. Presently, MFC has no dilutive
potential common shares. Weighted-average shares outstanding for purposes of
computing diluted earnings per share totaled 1,238,581 for the three months and
six months ended March 31, 1998. The provisions of SFAS No. 128 "Earnings Per
Share," are not applicable to the three month and six month periods ended March
31, 1997, as the conversion from mutual to stock form was completed in March
1997.
Page 9 of 15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARKET FINANCIAL CORPORATION
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, Market's operations and actual results
could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and MFC's market area generally.
Some of the forward-looking statements included herein are the
statements regarding management's determination of the amount of allowance for
losses on loans, the adequacy of collateral on nonperforming loans, the effect
of the year 2000 on information technology systems, legislative changes with
respect to the federal thrift charter and the effect of certain accounting
pronouncements.
Discussion of Financial Condition Changes from September 30, 1997 to March 31,
1998
MFC's assets at March 31, 1998, totaled approximately $57.8 million, a
$1.6 million, or 2.9%, increase over the $56.1 million total at September 30,
1997. The increase was funded through growth in deposits, net earnings for the
period and unrealized gains on securities designated as available for sale.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $25.1 million at March 31, 1998, a decrease of
$2.1 million from the total at September 30, 1997. This decrease resulted
primarily from the use of proceeds from maturities of investment securities to
fund loan originations during the six months ended March 31, 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 $30.3 million at March 31, 1998, an increase
of $3.8 million, or 14.2%, over September 30, 1997. This increase resulted
primarily from loan originations of $6.6 million, which exceeded principal
repayments of $2.8 million. Market's allowance for loan losses totaled $52,000
at both March 31, 1998, and September 30, 1997. The allowance represented .17%
and .20% of total loans at March 31, 1998, and September 30, 1997. Nonperforming
loans totaled $192,000 and $191,000, or .63% and .72% of total loans, at March
31, 1998, and September 30, 1997, respectively.
Although management believes that its allowance for loan losses at
March 31, 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 Market's results of
operations.
Deposits totaled $36.4 million at March 31, 1998, an increase of $1.1
million, or 3.1% over the total at September 30, 1997. Demand accounts decreased
by approximately $106,000, while certificates of deposit increased by $1.2
million during the six months March 31, 1998. At March 31, 1998, certificates of
deposit that will mature within one year accounted for 52.6% of Market's deposit
liabilities.
Market is required to meet minimum capital standards promulgated by the
Office of Thrift Supervision (the "OTS"), hereinafter described as the core
capital requirement and the risk-based capital requirement. The core capital
requirement provides for the maintenance of shareholder's equity less all
intangible assets plus certain forms of supervisory goodwill equal to 4% of
adjusted total assets, while the risk-based capital requirement mandates
maintenance of core capital plus general loan loss allowances equal to 8% of
risk-weighted assets as defined by OTS regulations. As of March 31, 1998,
Market's core capital totaled $13.3 million, or 23.6% of adjusted total assets,
which exceeded the minimum requirement of $2.2 million, by $11.1 million. As of
March 31, 1998, Market's risk-based capital was $13.4 million, or 61.6% of
risk-weighted assets, exceeding the minimum requirement by $11.6 million.
Page 10 of 15
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Comparison of Operating Results for the Three-Month Periods Ended March 31, 1998
and 1997
General
Net earnings totaled $147,000 for the three months ended March 31,
1998, a $60,000, or 69.0%, increase from the $87,000 of net earnings recorded
for the three months ended March 31, 1997. The increase in earnings resulted
primarily from a $203,000 increase in net interest income, which was partially
offset by a $114,000 increase in general, administrative and other expenses and
a $30,000 increase in the provision for federal income taxes.
Net Interest Income
Interest income increased by $192,000, or 23.9%, for the three months
ended March 31, 1998, compared to the three months ended March 31, 1997. The
increase resulted primarily from an increase in the weighted average balance of
loans and investment securities outstanding during the period. Interest expense
on deposits decreased by $11,000, or 2.6%, due primarily to a decrease in the
weighted average balance of deposits, resulting primarily from customers' use of
deposits to purchase common shares in the conversion in March 1997, coupled with
a decrease in the cost of deposits. Net interest income increased by $203,000,
or 54.1%, for the three months ended March 31, 1998, compared to the same
quarter in 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the
total allowance to a level considered appropriate by management based on
historical experience, the volume and type of lending conducted by Market, the
status of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to market area, and other factors related
to the collectibility of Market's loan portfolio. As a result of such analysis,
management decided no additional provision for losses on loans was necessary
during the quarter ended March 31, 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, primaril service fees on money orders and
travelers' checks, totaled $2,000 and $1,000 for the three-month periods ended
March 31, 1998 and 1997, respectively.
General, Administrative and Other Expense
General, administrative and other expenses increased by $114,000, or
46.7%, for the quarter ended March 31, 1998, compared to the same quarter in
1997. The increase resulted primarily from a $46,000, or 30.9%, increase in
employee compensation and benefits due to normal merit increases and expenses
related to the stock benefit plan, an increase of $36,000, or 120.0%, in
franchise taxes due to an increase in shareholders' equity as a result of the
proceeds from the stock conversion in 1997, and an increase of $19,000, or
50.0%, in other operating expenses primarily due to operating expenses of MFC in
the 1998 quarter.
Federal Income Tax
The provision for federal income taxes totaled $75,000 for the three
months ended March 31, 1998, compared to $45,000 for the 1997 quarter. The
$30,000, or 66.7%, increase resulted from a $90,000, or 68.2%, increase in
earnings before taxes. The effective tax rates were 33.8% and 34.1% for the
three months ended March 31, 1998 and 1997, respectively.
Comparison of Operating Results for the Six-Month Periods Ended March 31, 1998
and 1997
General
Net earnings totaled $294,000 for the six months ended March 31, 1998,
a $133,000, or 82.6%, increase over $161,000 of net earnings recorded for the
six months ended March 31, 1997. The increase in earnings resulted primarily
from a $390,000 increase in net interest income, which was partially offset by a
$190,000 increase in general, administrative and other expense and a $68,000
increase in the provision for federal income taxes.
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Net Interest Income
Interest income increased by $380,000, or 23.7%, for the six months
ended March 31, 1998, compared to the six months ended March 31, 1997. The
increase resulted primarily from an increase in the investment securities
portfolio and the balance of loans outstanding during the period. Interest
expense on deposits decreased by $10,000, or 1.2% due primarily to a decrease in
the deposit portfolio. Net interest income increased by $390,000, or 52.2%, for
the six months ended March 31, 1998, compared to the same period in 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the
total allowance to a level considered appropriate by management based on
historical experience, the volume and type of lending conducted by Market, the
status of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to Market's market area, and other
factors related to the collectibility of Market's loan portfolio. As a result of
such analysis, management decided no additional provision for losses on loans
was necessary during the six months ended March 31, 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.
The foregoing statement is a "forward-looking" statement within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Factors that could
affect the adequacy of the loan loss allowance include, but are not limited to,
the following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which may
cause the value of real estate and other properties that secure outstanding
loans to decline; (2) unforeseen adverse changes in circumstances with respect
to uncertain large loan borrowers; (3) decreases in the value of collateral
securing consumer loans to amounts equal to or less than the outstanding
balances of the consumer loans; and (4) determinations by various regulatory
agencies that Market must recognize additions to its loan loss allowance based
on such regulators' judgment of information available to them at the time of
their examinations.
Other Operating Income
Other operating income, primarily service fees on money orders and
travelers' checks, totaled $4,000 and $3,000 for the six-month periods ended
March 31, 1998 and 1997, respectively.
General, Administrative and Other Expense
General, administrative and other expense increased by $190,000, or
37.5%, for the six months ended March 31, 1998, compared to the same period in
1997. The increase resulted primarily from a $121,000, or 41.6%, increase in
employee compensation and benefits due to normal merit increases and expenses
related to the stock benefit plan.
Federal Income Tax
The provision for federal income taxes totaled $151,000 for the six
months ended March 31, 1998, compared to $83,000 for the same 1997 period. The
$68,000, or 81.9%, increase resulted from a $201,000, or 82.4%, increase in
earnings before taxes. The effective tax rates were 33.9% and 34.0% for the six
months ended March 31, 1998 and 1997, respectively.
Other Matters
Market's operations, like those of most financial institutions, depend
almost entirely on computer systems. Market is addressing the potential problems
associated with the possibility that the computers which control or operate
Market's operating systems, facilities 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 is working with the companies that supply or
service its computer-operated or -dependent systems to identify and remedy any
year-2000 related problems.
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At this time, no specific material expenses have been identified which
are reasonably likely to be incurred by Market in connection with year-2000
issues and Market does not expect to incur significant expense to implement
corrective measures. No assurance can be given at this time, however, that
significant expense will not be incurred in future periods. In the event that
Market is ultimately required to purchase replacement computer systems, programs
and equipment, or that substantial expense must be incurred to make Market's
current systems, programs and equipment year-2000 compliant, MFC's net earnings
and financial condition could be adversely affected. While Market is endeavoring
to ensure that its computer-dependent operations are year-2000 compliant, no
assurance can be given that some year-2000 problems will not occur.
In addition to possible expense related to its own systems, MFC could
incur losses if year-2000 issues adversely affect Market's depositors or
borrowers. Such problems could include delayed loan payments due to year-2000
problems affecting any of Market's significant borrowers or impairing the
payroll systems of large employers 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 year-2000 related difficulties that will affect net
earnings or cash flow.
Page 13 of 15
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PART II
MARKET FINANCIAL CORPORATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule.
Page 14 of 15
<PAGE>
SIGNATURES
MARKET FINANCIAL CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1998 By: /s/ John T. Larimer
-------------------
John T. Larimer, President and
Managing Officer
Date: May 14, 1998 By: /s/ Julie M. Bertsch
--------------------
Julie M. Bertsch, Chief Financial Officer
Page 15 of 15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 716
<INT-BEARING-DEPOSITS> 188
<FED-FUNDS-SOLD> 3,588
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,384
<INVESTMENTS-CARRYING> 20,462
<INVESTMENTS-MARKET> 20,601
<LOANS> 30,261
<ALLOWANCE> 52
<TOTAL-ASSETS> 57,756
<DEPOSITS> 36,387
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,000
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 20,369
<TOTAL-LIABILITIES-AND-EQUITY> 57,756
<INTEREST-LOAN> 1,146
<INTEREST-INVEST> 577
<INTEREST-OTHER> 258
<INTEREST-TOTAL> 1,981
<INTEREST-DEPOSIT> 844
<INTEREST-EXPENSE> 844
<INTEREST-INCOME-NET> 1,137
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 696
<INCOME-PRETAX> 445
<INCOME-PRE-EXTRAORDINARY> 294
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 4.09
<LOANS-NON> 0
<LOANS-PAST> 192
<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
</TABLE>
