<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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number: 000-22255
MARKET FINANCIAL CORPORATION
----------------------------------------------
(Name of small business issuer in its charter)
Ohio 34-0462464
-------------------------------- ----------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or Identification Number)
organization)
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
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended September 30, 1999,
were $4.2 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 $8.3 million on December
27, 1999.
1,259,439 of the registrant's common shares were issued and outstanding
on December 27, 1999.
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, 1999.
Part III of Form 10-KSB - Portions of the Proxy Statement for 2000 Annual
Meeting of Shareholders.
<PAGE> 2
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Market Financial Corporation ("MFC") is a unitary savings and loan
holding company which was organized under Ohio law in April 1996 and which owns
all of the issued and outstanding common shares of Market Bank, 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 Federal Deposit Insurance Corporation
("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 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,
---------------------------------------------------------------------------
1999 1998 1997
------------------------- ---------------------- ----------------------
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 $30,959 87.9% $29,225 89.1% $24,669 93.1%
Multifamily 2,049 5.8 1,507 4.6 573 2.2
Nonresidential 1,737 4.9 1,879 5.7 811 3.0
Construction 346 1.0 150 .5 527 2.0
Land 138 .4 - - - -
--------- ------- ----------- ------- ----------- --------
Total real estate loans 35,229 100.0 32,761 99.9 26,580 100.3
Consumer loans:
Loans on deposits 26 .1 106 .3 134 .5
---------- ------- --------- ------------------ --------
Total loans 35,255 100.1 32,867 100.2 26,714 100.8
Less:
Undisbursed portion of loans
in process 17 - - - 156 .6
Unearned and deferred income
(costs) (33) (.1) (1) - 4 -
Allowance for losses on loans 52 .2 52 .2 52 .2
---------- ------- ---------- ------- ----------- --------
Net loans $35,219 100.0% $32,816 100.0% $26,502 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
LOAN MATURITY SCHEDULE. The following table sets forth certain
information at September 30, 1999, 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
------ ----------- ------------ ------------- -------------- -------------- -----
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Real estate mortgage loans
Adjustable-rate $705 $ 72 $236 $ - $ - $ - $ 1,013
Fixed-rate 37 335 356 3,810 15,127 14,515 34,180
Consumer and other 2 24 - - - - 26
------ ------ ------- ---------- ------------ ------------ ----------
Total loans $744 $431 $592 $3,810 $15,127 $14,515 $35,219
==== ==== ==== ====== ======= ======= =======
</TABLE>
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The following table sets forth the dollar amount of loans maturing
after one year from September 30, 1999, 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 $32,406 $308
Nonresidential real estate 1,737 -
Consumer and other - 24
------- ----
Total loans $34,143 $332
======= ====
</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, 1999, Market's
one- to four-family residential loans totaled approximately $31.0 million, or
87.9% 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,
1999, 98.8% 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 $31.0 million of one- to four-family residential loans, approximately
$192,000 were closed-end home equity loans.
At September 30, 1999, Market had nonperforming loans totaling $119,000
in its one- to four-family portfolio. Residential real estate loans (including
one- to four-family and multifamily lending) constituted $11.0 million, or
95.3%, of the $11.6 million of loans originated in fiscal 1999.
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,
1999, loans secured by multifamily residences totaled approximately $2.0
million, or 5.8% of total loans. At September 30, 1999, the largest single loan
secured by a multifamily residence was $289,000 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, 1999, 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, 1999, approximately $1.7 million, or 4.9%, 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, 1999, Market had no nonperforming loans in its
nonresidential real estate portfolio. Nonresidential real estate loans
constituted $98,000, or 0.8%, of the $11.6 million of loans originated in fiscal
1999.
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, 1999, Market had construction loans of approximately $346,000, or 1.0% of
total loans outstanding, with the undisbursed portion of such loans totaling
approximately $17,000.
Construction loans generally involve greater underwriting and default
risks than do loans secured by mortgages on existing properties. In addition,
such loans are more difficult to evaluate and monitor. Loan funds are advanced
upon the security of the project under construction, which is more difficult to
value before the completion of construction. Moreover, because of the
uncertainties inherent in estimating construction costs, it is relatively
difficult to evaluate the LTV's and the total loan funds required to complete a
project. In the event a default on a construction loan occurs and foreclosure
follows, Market would have to take control of the project and attempt either to
arrange for construction or dispose of the unfinished project. Almost all of
Market's construction loans are secured by properties in Hamilton County. The
economy of such lending area has been relatively stable over the three years
ended September 30, 1999.
None of Market's construction loans were nonperforming at September 30,
1999.
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, 1999,
Market had approximately $26,000 or 0.1% 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,
1999, 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,
------------------------------------------------
1999 1998 1997
------- -------- --------
(In thousands)
<S> <C> <C> <C>
Loans originated:
Residential (1) $11,038 $11,023 $6,978
Nonresidential 98 1,107 70
Construction 446 324 527
Consumer - 40 157
------- ------- ------
Total loans originated 11,582 12,494 7,732
Principal repayments (9,182) (6,183) (3,229)
Increase in other items, net (2) 3 3 3
------- ------- ------
Net increase $ 2,403 $ 6,314 $4,506
======= ======= ======
- -----------------------------
</TABLE>
(1) Includes one- to four-family and multifamily loans.
(2) Other items consist of loans in process, deferred loan origination fees
and costs and the allowance for loan losses.
OTS regulations generally limit the aggregate amount that a savings
association may lend to any one borrower to an amount equal to 15% of the
association's total capital for risk-based purposes plus any loan reserves not
already included in total capital (collectively, "Lending Limit Capital"). A
savings association may lend to one borrower an additional amount not to exceed
10% of the association's Lending Limit Capital if the additional amount is fully
secured by certain forms of "readily marketable collateral." Real estate is not
considered "readily marketable collateral." In applying this limit, the
regulations require that loans to certain related or affiliated borrowers be
aggregated. An exception to this limit permits loans of any type to one borrower
of up to $500,000. In addition, the OTS, under certain circumstances, may permit
exceptions to the lending limit on a case-by-case basis.
Based on such limits, Market was able to lend approximately $1.9
million to one borrower at September 30, 1999. The largest amount Market had
outstanding to one borrower, who is an appraiser of Market, at September 30,
1999, was $525,000, consisting of 3 loans, the largest of which had an
outstanding balance of $289,000, which was secured by a multi-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,
--------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------ ------------------------------ -----------------------------
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 1 $ 2 - % 7 $ 125 0.4% 5 $ 64 0.3%
60 - 89 days 4 250 0.7 5 85 0.3 13 244 0.9
90 days and over 8 119 0.4 11 171 0.5 13 191 0.7
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total delinquent loans 13 $ 371 1.1% 23 $ 381 1.2% 31 $ 499 1.9%
======== ======== ======== ======== ======== ======== ======== ======== ========
</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:
At September 30,
-----------------------------
1999 1998 1997
------- ------- -------
(Dollars in thousands)
Accruing loans delinquent more
than 90 days (1) $ 119 $ 171 $ 191
Real estate acquired through
foreclosure -- -- --
------- ------- -------
Total nonperforming assets $ 119 $ 171 $ 191
======= ======= =======
Allowance for loan losses $ 52 $ 52 $ 52
======= ======= =======
Nonperforming assets as a
percent of total assets 0.2% 0.3% 0.3%
Nonperforming loans as a
percent of total loans 0.3% 0.5% 0.7%
Allowance for loan losses
as a percent of
nonperforming loans 43.7% 30.4% 27.2%
- ------------------------------
(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,
1999.
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.
The aggregate amounts of Market's classified assets at the dates
indicated were as follows:
At September 30,
------------------------
1999 1998 1997
------ ------ ------
(In thousands)
Classified assets:
Special mention $ 46 $ 60 $ 60
Substandard 7 23 17
Doubtful -- -- 9
Loss -- 2 2
------ ------ ------
Total classified assets $ 53 $ 85 $ 88
====== ====== ======
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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 0.1% of
Market's total loans are comprised of consumer loans, which carry a higher
degree of risk than the real estate loans.
Market's allowance for loan losses was $52,000 for the fiscal years
ended September 30, 1999, 1998 and 1997, which represented .15%, .16% and .20%,
respectively, of total loans in those periods.
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,
------------------------------------------------------------------------
1999 1998 1997
--------------------- ---------------------- ----------------------
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) $ 1,937 11.9% $ 8,556 43.4% $ 8,388 31.0%
U.S. Government agency obligations (2) 12,800 78.5 9,300 47.2 17,257 63.8
FHLMC stock (3) 1,116 6.8 1,448 7.3 1,029 3.8
FHLB stock 449 2.8 419 2.1 390 1.4
-------- -------- -------- -------- -------- --------
Total $ 16,302 100.0% $ 19,723 100.0% $ 27,064 100.0%
======== ======== ======== ======== ======== ========
- ----------------------------------
</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, FNMA and the Federal Home Loan Mortgage Corporation
("FHLMC") Medium Term Notes and a Student Loan Marketing Association
("SLMA") bond, which are classified as held to maturity at September
30, 1999, 1998 and 1997.
(3) Classified as available for sale at September 30, 1999, 1998 and 1997.
-9-
<PAGE> 10
Market maintains a portfolio of mortgage-backed securities in the form
of fixed-rate participation interests issued by the Government National Mortgage
Association ("GNMA") and the FHLMC gold program. 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, 1999 At September 30, 1998
--------------------------------------------- ----------------------------------------------
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 $ 592 $ 29 $ -- $ 621 $ 859 $ 43 $ -- $ 902
FHLMC participation
certificates 1,455 -- 9 1,446 -- -- -- --
-------- -------- -------- -------- -------- -------- -------- --------
Total $ 2,047 $ 29 $ 9 $ 2,067 $ 859 $ 43 $ -- $ 902
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
At September 30, 1997
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains loss value
---- ----- ---- -----
<S> <C> <C> <C> <C>
GNMA participation
certificates $ 1,268 $ 70 $ -- $ 1,338
FHLMC participation
certificates -- -- -- --
-------- -------- -------- --------
Total $ 1,268 $ 70 $ -- $ 1,338
======== ======== ======== ========
</TABLE>
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<PAGE> 11
The maturities of Market's investment securities at September 30, 1999,
are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 1999
------------------------------------------------------------------------------------------
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 institutions $ 290 5.98% $ -- -- % $ -- -- % $ 290 $ 290 5.98%
U.S. Government agency
obligations (1) 1,800 6.99 8,500 6.05 2,500 6.62 12,800 12,529 6.29
- ------------------------------
</TABLE>
(1) Consists primarily of investments in U.S. Treasury Notes, FHLB bonds,
and FNMA and FHLMC medium term notes, which are classified as held to
maturity at September 30, 1999.
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, 1999, Market's certificates of deposit totaled
approximately $27.6 million, or 69.1% of total deposits. Of such amount,
approximately $21.7 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 $9.0 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,
-------------------------------------------------------------------------------------------
1999 1998 1997
------------------------ -------------------------------- ---------------------------
Percent Percent Percent
of total of total of total
Amount deposits Amount deposits Amount deposits
------ -------- ------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Transaction accounts:
Passbook accounts (1) $ 10,453 26.2% $ 9,510 25.2% $ 10,094 28.6%
Club accounts (2) 58 .1 51 .1 52 .2
Money market accounts (3) 1,829 4.6 2,178 5.8 2,374 6.7
-------- -------- -------- -------- -------- --------
Total transaction accounts 12,340 30.9 11,739 31.1 12,520 35.5
Certificates of deposit (4) 27,567 69.1 26,006 68.9 22,783 64.5
-------- -------- -------- -------- -------- --------
Total deposits $ 39,907 100.0% $ 37,745 100.0% $ 35,303 100.0%
======== ======== ======== ======== ======== ========
- -------------------
(Footnotes on next page)
</TABLE>
-11-
<PAGE> 12
(1) The weighted average interest rates on passbook accounts were 2.67%,
2.83% and 2.83% at September 30, 1999, 1998 and 1997, respectively.
(2) The weighted average interest rates on club accounts were 5.07%, 5.07%
and 5.07% at September 30, 1999, 1998 and 1997, respectively.
(3) The weighted average interest rates on money market accounts were 2.67%
at September 30, 1999 and 2.83% at September 30, 1998 and 1997,
respectively.
(4) The weighted average rates on all certificates of deposit were 5.40%,
5.89% and 5.97% at September 30, 1999, 1998 and 1997, respectively.
The following table shows rate and maturity information for Market's
certificates of deposit at September 30, 1999:
<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>
4.00 - 4.99% $ 8,850 $ 190 $ 40 $ 9,080
5.00 - 5.99% 12,293 3,644 817 16,754
6.00 - 6.99% 577 1,156 - 1,733
------- ------ ---- -------
Total certificates
of deposit $21,720 $4,990 $857 $27,567
======= ====== ==== =======
</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, 1999:
Maturity Amount
-------- ------
(In thousands)
December 31, 1999 $1,021
March 31, 2000 1,121
June 30, 2000 601
September 30, 2000 907
After September 30, 2000 867
--------
Total $4,517
========
-12-
<PAGE> 13
The following table sets forth Market's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $ 37,745 $ 35,303 $ 37,282
Deposits 14,282 14,656 40,650
Withdrawals (13,468) (13,580) (43,940)
Interest credited 1,348 1,366 1,311
-------- -------- --------
Ending balance $ 39,907 $ 37,745 $ 35,303
======== ======== ========
Net increase (decrease) $ 2,162 $ 2,442 $ (1,979)
======== ======== ========
Percent increase (decrease) 5.7% 6.9% (5.3)%
======== ======== ========
</TABLE>
BORROWINGS. The FHLB system functions as a central reserve bank
providing credit for its member institutions and certain other financial
institutions. See "REGULATION - Federal Home Loan Banks." As a member in good
standing of the FHLB of Cincinnati, Market is authorized to apply for advances
from the FHLB of Cincinnati, provided certain standards of creditworthiness have
been met. Under current regulations, an association must meet certain
qualifications to be eligible for FHLB advances. The extent to which an
association is eligible for such advances will depend upon whether it meets the
Qualified Thrift Lender (the "QTL") test. See "REGULATION - Office of Thrift
Supervision -- Qualified Thrift Lender Test." At September 30, 1999, Market was
not utilizing FHLB advances.
COMPETITION
Market competes for deposits with other savings and loan associations,
savings banks, commercial banks and credit unions and with issuers of commercial
paper and other securities, including shares in money market mutual funds. The
primary factors in competition for deposits are customer service and convenience
of office location. In making loans, Market competes with other savings
associations, savings and loan associations, commercial banks, mortgage brokers,
consumer finance companies, credit unions, leasing companies and other lenders.
Market competes for loan originations primarily through the interest rates and
loan fees it charges and through the efficiency and quality of services it
provides to borrowers. Competition is intense and is affected by, among other
things, the general availability of lendable funds, general and local economic
conditions, current interest rate levels and other factors which are not readily
predictable. Market does not offer all of the products and services offered by
some of its competitors, particularly commercial banks.
EMPLOYEES
At September 30, 1999, Market had 10 full-time employees and 2
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 association organized under the laws of the United States,
Market is subject to regulatory oversight by the OTS. Because Market's deposits
are insured by the FDIC, Market is also subject to examination and regulation by
the
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<PAGE> 14
FDIC. Market must file periodic reports with the OTS concerning its activities
and financial condition. Examinations are conducted periodically by the OTS 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 of
Cincinnati.
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.
NEW FEDERAL LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including MFC, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999, will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence on May 4,
1999, may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities in
which the MFC and Market currently engage, except to the extent that competition
with other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act.
OHIO CORPORATION LAW
MERGER MORATORIUM STATUTE. Chapter 1704 of the Ohio Revised Code
regulates certain takeover bids affecting certain public corporations which have
significant ties to Ohio. This statute prohibits, with some exceptions, any
merger, combination or consolidation and any of certain other sales, leases,
distributions, dividends, exchanges, mortgages or transfers between an Ohio
corporation and any person who has the right to exercise, alone or with others,
10% or more of the voting power of such corporation (an "Interested
Shareholder"), for three years following the date on which such person first
becomes an Interested Shareholder. Such a business combination is permitted only
if, prior to the time such person first becomes an Interested Shareholder, the
Board of Directors of the issuing corporation has approved the purchase of
shares which resulted in such person first becoming an Interested Shareholder.
After the initial three-year moratorium, such a business combination
may not occur unless (1) one of the specified exceptions applies, (2) the
holders of at least two-thirds of the voting shares, and of at least a majority
of the voting shares not beneficially owned by the Interested Shareholder,
approve the business combination at a meeting called for such purpose, or (3)
the business combination meets certain statutory criteria designed to ensure
that the issuing public corporation's remaining shareholders receive fair
consideration for their shares.
An Ohio corporation may, under certain circumstances, "opt out" of the
statute by specifically providing in its articles of incorporation that the
statute does not apply to any business combination of such corporation. However,
the statute still prohibits for twelve months any business combination that
would have been prohibited but for the adoption of such an opt-out amendment.
The statute also provides that it will continue to apply to any business
combination between a person who became an Interested Shareholder prior to the
adoption of such an amendment as if the amendment had not been adopted. MFC has
not opted out of the protection afforded by Chapter 1704.
-14-
<PAGE> 15
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 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 statute 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.
OFFICE OF THRIFT SUPERVISION
GENERAL. The OTS is an office of the Department of the Treasury and is
responsible for the regulation and supervision of all federally-chartered
savings associations and all other savings associations the deposits of which
are insured by the FDIC in the Savings Association Insurance Fund ("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. Effective April 1, 1999, OTS
regulations require savings associations with the highest examination rating to
maintain core capital of at least 3% of their total assets. 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 at least 4%. Depending on
the association's examination rating and overall risk, OTS may require a higher
core capital ratio.
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 $52,000 at
September 30, 1999.
-15-
<PAGE> 16
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, 1999, met the standards
for the highest category, a "well-capitalized" institution.
Federal law prohibits a savings association from making a capital
distribution to anyone or paying management fees to any person having control of
the association if, after such distribution or payment, the association would be
undercapitalized. In addition, each company controlling an undercapitalized
association must guarantee that the association will comply with its capital
plan until the association has been adequately capitalized on an average during
each of four preceding calendar quarters and must provide adequate assurances of
performance. The aggregate liability pursuant to such guarantee is limited to
the lesser of (a) an amount equal to 5% of the association's total assets at the
time the institution became undercapitalized and (b) the amount that is
necessary to bring the association into compliance with all capital standards
applicable to such association at the time the association fails to comply with
its capital restoration plan.
LIQUIDITY. OTS regulations require that a savings association maintain
a minimum daily balance of liquid assets (cash, certain time deposits, bankers'
acceptances and specified United States government, state or federal agency
obligations). During fiscal 1999, certain maturity requirements were removed,
which, in Market's case, resulted in a greater eligible liquidity amount and
percentage at September 30, 1999, than at prior year ends. At December 31, 1998,
such minimum requirement was an amount equal to a monthly average of not less
than 4% of its net withdrawable savings deposits plus borrowings payable in one
year or less. Monetary penalties may be imposed upon associations failing to
meet the liquidity requirement. The eligible liquidity of Market at September
30, 1999, was approximately $15.1 million, or 39.7%.
QUALIFIED THRIFT LENDER TEST. Savings associations must meet one of two
possible tests in order to be a qualified thrift lender ("QTL"). The first test
requires a savings association to maintain a specified level of investments in
assets that are designated as qualifying thrift investments ("QTIs"), 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 this 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. The second test permits a
savings association to 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 tests
under certain circumstances. If a savings association fails to meet one of the
QTL tests, the association and its holding company become subject to certain
operating and regulatory restrictions. A savings association that fails to meet
one of the QTL tests will not be eligible for new FHLB advances. At September
30, 1999, Market qualified as a QTL.
-16-
<PAGE> 17
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, 1999, 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, 1999.
All transactions between savings associations and their affiliates must
comply with Sections 23A and 23B of the Federal Reserve Act (the "FRA"). An
affiliate of a savings association is any company or entity that controls, is
controlled by or is under common control with the savings association. MFC is an
affiliate of Market. Generally, Sections 23A and 23B of the FRA (i) limit the
extent to which a savings association or its subsidiaries may engage in "covered
transactions" with any one affiliate to an amount equal to 10% of such
institution's capital stock and surplus, (ii) limit the aggregate of all such
transactions with all affiliates to an amount equal to 20% of such capital stock
and surplus, and (iii) require that all such transactions be on terms
substantially the same, or at least as favorable to the association, as those
provided in transactions with a non-affiliate. The term "covered transaction"
includes the making of loans, purchasing of assets, issuance of a guarantee and
other similar types of transactions. In addition to the limits in Sections 23A
and 23B, a savings association may not make any loan or other extension of
credit to an affiliate unless the affiliate is engaged only in activities
permissible for a bank holding company and may not purchase or invest in
securities of any affiliate except shares of a subsidiary. Market was in
compliance with these requirements and restrictions at September 30, 1999.
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.
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<PAGE> 18
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 dividends to MFC totaling $2.2 million during fiscal 1999.
HOLDING COMPANY REGULATION. MFC is a savings and loan holding company
within the meaning of the HOLA. As such, MFC has registered with the OTS and is
subject to OTS regulations, examination, supervision and reporting requirements.
The HOLA generally prohibits a savings and loan holding company from
controlling any other savings association or savings and loan holding company,
without prior approval of the OTS, or from acquiring or retaining more than 5%
of the voting shares of a savings association or holding company thereof, which
is not a subsidiary. Under certain circumstances, a savings and loan holding
company is permitted to acquire, with the approval of the OTS, up to 15% of the
previously unissued voting shares of an undercapitalized savings association for
cash without such savings association being deemed to be controlled by MFC.
Except with the prior approval of the OTS, no director or officer of a savings
and loan holding company or person owning or controlling by proxy or otherwise
more than 25% of such holding company's stock may also acquire control of any
savings institution, other than a subsidiary institution, or any other savings
and loan holding company.
As a unitary savings and loan holding company, MFC generally has no
restrictions on its activities. Such companies are the only financial
institution holding companies which may engage in any commercial, securities and
insurance activities without restriction. Congress is considering legislation
which may limit MFC's ability to engage in these activities. It cannot be
predicted whether and in what form these proposals might become law. However,
such limits would not impact MFC's current activities, which consist solely of
holding stock of Market. The broad latitude to engage in activities under
current law can be restricted. If the OTS determines that there is reasonable
cause to believe that the continuation by a savings and loan holding company of
an activity constitutes a serious risk to the financial safety, soundness or
stability of its subsidiary savings association, the OTS may impose such
restrictions as deemed necessary to address such risk, including limiting (i)
payment of dividends by the savings association, (ii) transactions between the
savings association and its affiliates, and (iii) any activities of the savings
association that might create a serious risk that the liabilities of MFC and its
affiliates may be imposed on the savings association. Notwithstanding the
foregoing rules as to permissible business activities of a unitary savings and
loan holding company, if the savings association subsidiary of a holding company
fails to meet the QTL test, then such unitary holding company would become
subject to the activities restrictions applicable to multiple holding companies.
At September 30, 1999, 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 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 with, and acquisition of,
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.
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<PAGE> 19
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.
FEDERAL RESERVE REQUIREMENTS
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, 1999, Market was in
compliance with the reserve requirements.
FEDERAL HOME LOAN BANKS
The Federal Home Loan Banks 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 $449,000 at September 30, 1999.
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, 1999, Market's
maximum limit on advances was approximately $9.0 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.
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<PAGE> 20
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 an alternative minimum tax. An alternative
minimum tax is imposed at a minimum tax rate of 20% on "alternative minimum
taxable income" (which is the sum of a corporation's regular taxable income,
with certain adjustments, and tax preference items), less any available
exemption. Such tax preference items include interest on certain tax-exempt
bonds issued after August 7, 1986. In addition, 75% of the amount by which a
corporation's "adjusted current earnings" exceeds its alternative minimum
taxable income computed without regard to this preference item and prior to
reduction by net operating losses, is included in alternative minimum taxable
income. Net operating losses can offset no more than 90% of alternative minimum
taxable income. The alternative minimum tax is imposed to the extent it exceeds
the corporation's regular income tax. Payments of alternative minimum tax may be
used as credits against regular tax liabilities in future years. However, the
Taxpayer Relief Act of 1997 repealed the alternative minimum tax for certain
"small corporations" for tax years beginning after December 31, 1997. A
corporation initially qualifies as a small corporation if it had average gross
receipts of $5,000,000 or less for the three tax years ending with its first tax
year beginning after December 31, 1996. Once a corporation is recognized as a
small corporation, it will continue to be exempt from the alternative minimum
tax for as long as its average gross receipts for the prior three-year period
does not exceed $7,500,000. In determining if a corporation meets this
requirement, the first year that it achieved small corporation status is not
taken into consideration. MFC's average gross receipts for the three tax years
ending on December 31, 1998, is $146,000, and, as a result, MFC does qualify as
a small corporation exempt from the alternative minimum tax. Market's average
gross receipts for the three tax years ending on December 31, 1998, is $3.6
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 prior to 1996,
Market used the percentage of taxable income method, if available.
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
-20-
<PAGE> 21
beginning before January 1, 1996, over (ii) the greater of the balance of (a)
its pre-1988 reserves or (b) what the thrift's reserves would have been at the
close of its last year beginning before January 1, 1996, had the thrift always
used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The 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, 1999, the pre-1988 reserves of Market for tax purposes
totaled approximately $1.3 million. Market believes it had approximately $5.5
million of accumulated earnings and profits for tax purposes as of September 30,
1999, 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 1995. 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.
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 for years prior to 1999 was imposed annually at a rate of
1.5% of the taxable book net worth of Market determined in accordance with
generally accepted accounting principles. For tax year 1999, however, the
franchise tax on financial institutions was 1.4% of the taxable book net worth
and for tax year 2000 and years thereafter the tax will be 1.3% of the taxable
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> 22
ITEM 2. DESCRIPTION OF PROPERTY
The following table sets forth certain information at September 30,
1999, 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 $770,000 $35,320
Mt. Healthy, Ohio 45231
125-127 Miami Avenue Owned 1994 1,753 49,000 4,587
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, 1999 (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 November 22, 1999, 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 2000 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> 23
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, 1999
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 2000 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, 1999.
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<PAGE> 24
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 14, 1999
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 14, 1999 Date: December 14, 1999
/s/ Edgar H. May /s/ Rae Skirvin Larimer.
- ------------------------------------ --------------------------------------
Edgar H. May Rae Skirvin Larimer
Director and Vice President Director and Secretary
Date: December 14, 1999 Date: December 14, 1999
/s/ Robert Gandenberger /s/ R. C. Meyerenke
- ------------------------------------ --------------------------------------
Robert Gandenberger R. C. Meyerenke
Director Director
Date: December 14, 1999 Date: December 14, 1999
/s/ Wilbur H. Tisch /s/ Kathleen H. White
- ------------------------------------ --------------------------------------
Wilbur H. Tisch Kathleen H. White
Director Director
Date: December 14, 1999 Date: December 14, 1999
-24-
<PAGE> 25
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
John T. Larimer, dated April 1, 1999
10.3 Market Financial Corporation 1998 Stock Incorporated by reference to the Annual Report on Form 10-KSB
Option and Incentive Plan for the fiscal year ended September 30, 1998, filed with the
SEC on December 23, 1998 (the "1998 10-KSB"), Exhibit 10.3
10.4 Market Financial Corporation Recognition Incorporated by reference to the 1998 10-KSB, Exhibit 10.4
and Retention Plan and Trust Agreement
13 Market Financial Corporation 1999 Annual
Report to Shareholders
20 Proxy Statement for 2000 Annual Meeting of
Shareholders
21 Subsidiaries of Market Financial Incorporated by reference to the Form 10-KSB for the year
Corporation ended September 30, 1997, 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>
-25-
<PAGE> 1
Exhibit 10.2
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (hereinafter referred to as this
"AGREEMENT"), is entered into this 1st day of April, 1999, by and between Market
Bank, a savings and loan association incorporated under Ohio law (hereinafter
referred to as the "EMPLOYER"), and John T. Larimer, an individual (hereinafter
referred to as the "EMPLOYEE");
WITNESSETH:
WHEREAS, the EMPLOYEE is currently employed as the President and
Managing Officer of the EMPLOYER;
WHEREAS, as a result of the skill, knowledge and experience of the
EMPLOYEE, the Board of Directors of the EMPLOYER desire to retain the services
of the EMPLOYEE as the President and Managing Officer of the EMPLOYER;
WHEREAS, the EMPLOYEE desires to continue to serve as the President and
Managing Officer of the EMPLOYER; and
WHEREAS, the EMPLOYEE and the EMPLOYER desire to enter into this
AGREEMENT to set forth the terms and conditions of the employment relationship
between the EMPLOYER and the EMPLOYEE.
NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained, the EMPLOYER and the EMPLOYEE hereby agree as follows:
1. EMPLOYMENT AND TERM. Upon the terms and subject to the conditions of this
AGREEMENT, the EMPLOYER hereby employs the EMPLOYEE, and the EMPLOYEE hereby
accepts employment, as the President and Managing Officer of the EMPLOYER. The
term of this AGREEMENT shall commence on the date hereof, and shall end on March
31, 2002 (hereinafter referred to as the "TERM"). In March of each year, the
Board of Directors of the EMPLOYER shall review the EMPLOYEE's performance and
record the results of such review in the minutes of the Board of Directors. This
AGREEMENT shall not be renewed or extended without a taking of affirmative
action by the Board of Directors of the EMPLOYER to cause such renewal or
extension. Any such extension shall be subject to the written consent of the
EMPLOYEE.
2. DUTIES OF EMPLOYEE.
(a) GENERAL DUTIES AND RESPONSIBILITIES. The EMPLOYEE shall serve as
the President and Managing Officer of the EMPLOYER. Subject to the direction of
the Board of Directors of the EMPLOYER, the EMPLOYEE shall have responsibility
for the general management and control of the business and affairs of the
EMPLOYER and shall perform all duties and shall have all powers which are
commonly incident to the office of President and
<PAGE> 2
Managing Officer or which, consistent therewith, are delegated to him by the
Board of Directors. Such duties shall include, but not be limited to, (1)
managing the day-to-day operations of the EMPLOYER, (2) managing the efforts of
the EMPLOYER to comply with applicable laws and regulations, (3) marketing of
the EMPLOYER and its services, (4) supervising other employees of the EMPLOYER,
(5) providing prompt and accurate reports to the Board of Directors of the
EMPLOYER regarding the affairs and conditions of the EMPLOYER, and (6) making
recommendations to the Board of Directors of the EMPLOYER concerning the
strategies, capital structure, tactics, and general operations of the EMPLOYER.
(b) DEVOTION OF ENTIRE TIME TO THE BUSINESS OF THE EMPLOYER. The
EMPLOYEE shall devote his entire productive time, ability and attention during
normal business hours throughout the TERM to the faithful performance of his
duties under this AGREEMENT. The EMPLOYEE shall not directly or indirectly
render any services of a business, commercial or professional nature to any
person or organization other than the EMPLOYER and Market Financial Corporation
without the prior written consent of the Board of Directors of the EMPLOYER;
provided, however, that the EMPLOYEE shall not be precluded from (i) vacations
and other leave time in accordance with Section 3(d) hereof; (ii) reasonable
participation in community, civic, charitable or similar organizations; or (iii)
the pursuit of personal investments which do not interfere or conflict with the
performance of the EMPLOYEE's duties to the EMPLOYER. Nothing in this section
shall limit the EMPLOYEE's right to invest in securities of any business that
does not provide services or products of the type or competing with those
provided by the EMPLOYER or its subsidiaries or affiliates.
3. COMPENSATION, BENEFITS AND REIMBURSEMENTS.
(a) SALARY. The EMPLOYEE shall receive during the TERM an annual salary
payable in equal installments not less often than monthly. The amount of such
annual salary shall be $99,800 until changed by the Board of Directors of the
EMPLOYER in accordance with Section 3(b) of this AGREEMENT.
(b) ANNUAL SALARY REVIEW. In March of each year throughout the TERM,
the annual salary of the EMPLOYEE shall be reviewed by the Board of Directors of
the EMPLOYER and shall be set at an amount not less than $99,800 based upon the
EMPLOYEE's individual performance and the overall profitability and financial
condition of the EMPLOYER (hereinafter referred to as the "ANNUAL REVIEW"). The
results of the ANNUAL REVIEW shall be reflected in the minutes of the Board of
Directors of the EMPLOYER.
(c) EMPLOYEE BENEFIT PROGRAM. During the TERM, the EMPLOYEE shall be
entitled to participate in all formally established employee benefit, bonus,
pension and profit-sharing plans and similar programs that are maintained by the
EMPLOYER from time to time, and all employee benefit plans or programs hereafter
adopted in writing by the Board of Directors of the EMPLOYER, for which senior
management personnel are eligible including any employee stock ownership plan,
stock option plan or other stock benefit plan (hereinafter collectively referred
to as the "BENEFIT PLANS"). Notwithstanding any statement to the contrary
contained elsewhere in this Agreement, the EMPLOYER may discontinue or terminate
at any time any such
2
<PAGE> 3
BENEFIT PLANS, now existing or hereafter adopted, to the extent permitted by the
terms of such plans and shall not be required to compensate the EMPLOYEE for
such discontinuance or termination.
(d) VACATION AND SICK LEAVE. The EMPLOYEE shall be entitled, without
loss of pay, to be absent voluntarily from the performance of his duties under
this AGREEMENT, in accordance with the policies periodically established by the
Board of Directors of the EMPLOYER for senior management officials of the
EMPLOYER. The EMPLOYEE shall not be entitled to receive any additional
compensation from the EMPLOYER in the event of his failure to take the full
allotment of vacation time in any calendar year. In the event that any sick
leave time shall not have been used during any calendar year, such leave shall
accrue to subsequent calendar years, only to the extent authorized by the Board
of Directors of the EMPLOYER. Upon termination of employment, the EMPLOYEE shall
not be entitled to receive any additional compensation from the EMPLOYER for
unused sick leave.
4. TERMINATION OF EMPLOYMENT.
(a) GENERAL. In addition to the termination of the employment of the
EMPLOYEE upon the expiration of the TERM, the employment of the EMPLOYEE shall
terminate at any other time during the TERM upon the delivery by the EMPLOYER of
written notice of employment termination to the EMPLOYEE. Without limiting the
generality of the foregoing sentence, the following subparagraphs (i), (ii) and
(iii) of this Section 4(a) shall govern the obligations of the EMPLOYER to the
EMPLOYEE upon the occurrence of the events described in such subparagraphs:
(i) TERMINATION FOR JUST CAUSE. In the event that the EMPLOYER
terminates the employment of the EMPLOYEE during the TERM because of the
EMPLOYEE's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure or refusal to
perform the duties and responsibilities assigned in this AGREEMENT, willful
violation of any law, rule, regulation or final cease-and-desist order (other
than traffic violations or similar offenses), conviction of a felony or for
fraud or embezzlement, or material breach of any provision of this AGREEMENT
(hereinafter collectively referred to as "JUST CAUSE"), the EMPLOYEE shall not
receive, and shall have no right to receive, any compensation or other benefits
for any period after such termination.
(ii) TERMINATION AFTER CHANGE OF CONTROL. In the event that,
before the expiration of the TERM and in connection with or within one year
after a CHANGE OF CONTROL (as defined hereinafter) of the EMPLOYER or Market
Financial Corporation, (A) the employment of the EMPLOYEE is terminated for any
reason other than JUST CAUSE before the expiration of the TERM, (B) the present
capacity or circumstances in which the EMPLOYEE is employed are materially
changed before the expiration of the TERM, or (C) the EMPLOYEE's
responsibilities, authority, compensation or other benefits provided under this
AGREEMENT are materially reduced, then the following shall occur:
3
<PAGE> 4
(I) The EMPLOYER shall promptly pay to the EMPLOYEE or to his
beneficiaries, dependents or estate an amount equal to the sum of (1) the amount
of compensation to which the EMPLOYEE would be entitled for the remainder of the
TERM under this AGREEMENT, plus (2) the difference between (x) the product of
three, multiplied by the greater of the annual salary set forth in Section 3(a)
of this AGREEMENT or the annual salary payable to the EMPLOYEE as a result of
any ANNUAL REVIEW, less (xx) the amount paid to the EMPLOYEE pursuant to clause
(1) of this subparagraph (I);
(II) The EMPLOYEE, his dependents, beneficiaries and estate shall
continue to be covered under all BENEFIT PLANS of the EMPLOYER at the EMPLOYER's
expense as if the EMPLOYEE were still employed under this AGREEMENT until the
earliest of the expiration of the TERM or the date on which the EMPLOYEE is
included in another employer's benefit plans as a full-time employee; and
(III) The EMPLOYEE shall not be required to mitigate the amount of any
payment provided for in this AGREEMENT by seeking other employment or otherwise,
nor shall any amounts received from other employment or otherwise by the
EMPLOYEE offset in any manner the obligations of the EMPLOYER hereunder, except
as specifically stated in subparagraph (II).
In the event that payments pursuant to this subsection (ii) would result in
the imposition of a penalty tax pursuant to Section 280G(b)(3) of the Internal
Revenue Code of 1986, as amended, and the regulations promulgated thereunder
(hereinafter collectively referred to as "SECTION 280G"), such payments shall be
reduced to the maximum amount which may be paid under SECTION 280G without
exceeding such limits. Payments pursuant to this subsection also may not exceed
the limit set forth in Regulatory Bulletin 27a of the Office of Thrift
Supervision.
(iii) TERMINATION WITHOUT CHANGE OF CONTROL. In the event that the
employment of the EMPLOYEE is terminated before the expiration of the TERM other
than (A) for JUST CAUSE or (B) in connection with or within one year after a
CHANGE OF CONTROL, the EMPLOYER shall be obligated to continue (1) to pay on a
monthly basis to the EMPLOYEE, his designated beneficiaries or his estate, his
annual salary provided pursuant to Section 3(a) or (b) of this AGREEMENT until
the expiration of the TERM and (2) to provide to the EMPLOYEE, at the EMPLOYER's
expense, health, life, disability, and other benefits substantially equal to
those being provided to the EMPLOYEE at the date of termination of his
employment until the earliest to occur of the expiration of the TERM or the date
the EMPLOYEE becomes employed full-time by another employer. In the event that
payments pursuant to this subsection (iii) would result in the imposition of a
penalty tax pursuant to SECTION 280G, such payments shall be reduced to the
maximum amount which may be paid under SECTION 280G without exceeding those
limits. Payments pursuant to this subsection also may not exceed the limit set
forth in Regulatory Bulletin 27a of the Office of Thrift Supervision.
4
<PAGE> 5
(b) DEATH OF THE EMPLOYEE. The TERM automatically terminates upon the
death of the EMPLOYEE. In the event of such death, the EMPLOYEE's estate shall
be entitled to receive the compensation due the EMPLOYEE through the last day of
the calendar month in which the death occurred, except as otherwise specified
herein.
(c) "GOLDEN PARACHUTE" PROVISION. Any payments made to the EMPLOYEE
pursuant to this AGREEMENT or otherwise are subject to and conditioned upon
their compliance with 12 U.S.C. Section 1828(k) and any regulations promulgated
thereunder.
(d) DEFINITION OF "CHANGE OF CONTROL". A "CHANGE OF CONTROL" shall mean
any one of the following events; (i) the acquisition of ownership or power to
vote more than 25% of the voting stock of the EMPLOYER or Market Financial
Corporation; (ii) the acquisition of the ability to control the election of a
majority of the directors of the EMPLOYER or Market Financial Corporation; (iii)
during any period of two consecutive years, individuals who at the beginning of
such period constitute the Board of Directors of the EMPLOYER or Market
Financial Corporation cease for any reason to constitute at least two-thirds
thereof; provided, however, that any individual whose election or nomination for
election as a member of the Board of Directors of the EMPLOYER or Market
Financial Corporation was approved by a vote of at least two-thirds of the
directors then in office shall be considered to have continued to be a member of
the Board of Directors of the EMPLOYER or Market Financial Corporation; or (iv)
the acquisition by any person or entity of "conclusive control" of the EMPLOYER
within the meaning of 12 C.F.R. Section 574.4(a), or the acquisition by any
person or entity of "rebuttable control" within the meaning of 12 C.F.R. Section
574.4(b) that has not been rebutted in accordance with 12 C.F.R. Section
574.4(c). For purposes of this paragraph, the term "person" refers to an
individual or corporation, partnership, trust, association, or other
organization, but does not include the EMPLOYEE and any person or persons with
whom the EMPLOYEE is "acting in concert" within the meaning of 12 C.F.R. Part
574.
5. SPECIAL REGULATORY EVENTS. Notwithstanding Section 4 of this AGREEMENT, the
obligations of the EMPLOYER to the EMPLOYEE shall be as follows in the event of
the following circumstances:
(a) If the EMPLOYEE is suspended and/or temporarily prohibited from
participating in the conduct of the EMPLOYER's affairs by a notice served under
section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act (hereinafter
referred to as the "FDIA"), the EMPLOYER's obligations under this AGREEMENT
shall be suspended as of the date of service of such notice, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
EMPLOYER may, in its discretion, pay the EMPLOYEE all or part of the
compensation withheld while the obligations in this AGREEMENT were suspended and
reinstate, in whole or in part, any of the obligations that were suspended;
(b) If the EMPLOYEE is removed and/or permanently prohibited from
participating in the conduct of the EMPLOYER's affairs by an order issued under
Section 8(e)(4) or (g)(1) of the FDIA, all obligations of the EMPLOYER under
this AGREEMENT shall terminate as of the
5
<PAGE> 6
effective date of such order; provided, however, that vested rights of the
EMPLOYEE shall not be affected by such termination;
(c) If the EMPLOYER is in default, as defined in section 3(x)(1) of the
FDIA, all obligations under this AGREEMENT shall terminate as of the date of
default; provided, however, that vested rights of the EMPLOYEE shall not be
affected;
(d) All obligations under this AGREEMENT shall be terminated, except to
the extent of a determination that the continuation of this AGREEMENT is
necessary for the continued operation of the EMPLOYER, (i) by the Director of
the Office of Thrift Supervision (hereinafter referred to as the "OTS"), or his
or her designee at the time that the Federal Deposit Insurance Corporation
enters into an agreement to provide assistance to or on behalf of the EMPLOYER
under the authority contained in Section 13(c) of the FDIA or (ii) by the
Director of the OTS, or his or her designee, at any time the Director of the OTS
approves a supervisory merger to resolve problems related to the operation of
the EMPLOYER or when the EMPLOYER is determined by the Director of the OTS to be
in an unsafe or unsound condition. No vested rights of the EMPLOYEE shall not be
affected by any such action; and
(e) The provisions of this Section 5 are governed by the requirements
of 12 C.F.R. Section 563.39(b) and in the event that any statements in this
Section 5 are inconsistent with 12 C.F.R. Section 563.39(b), the provisions of
12 C.F.R. Section 563.39(b) shall be controlling.
6. CONSOLIDATION, MERGER OR SALE OF ASSETS. Nothing in this AGREEMENT shall
preclude the EMPLOYER or Market Financial Corporation from consolidating with,
merging into, or transferring all, or substantially all, of their assets to
another corporation that assumes all of their obligations and undertakings
hereunder. Upon such a consolidation, merger or transfer of assets, the term
"EMPLOYER" as used herein, shall mean such other corporation or entity, and this
AGREEMENT shall continue in full force and effect.
7. CONFIDENTIAL INFORMATION. The EMPLOYEE acknowledges that during his
employment he will learn and have access to confidential information regarding
the EMPLOYER and its customers and businesses. The EMPLOYEE agrees and covenants
not to disclose or use for his own benefit, or the benefit of any other person
or entity, any confidential information, unless or until the EMPLOYER consents
to such disclosure or use or such information is otherwise legally in the public
domain. The EMPLOYEE shall not knowingly disclose or reveal to any unauthorized
person any confidential information relating to the EMPLOYER, its subsidiaries,
or affiliates, or to any of the businesses operated by them, and the EMPLOYEE
confirms that such information constitutes the exclusive property of the
EMPLOYER. The EMPLOYEE shall not otherwise knowingly act or conduct himself (a)
to the material detriment of the EMPLOYER, its subsidiaries, or affiliates, or
(b) in a manner which is inimical or contrary to the interests of the EMPLOYER.
8. NON-ASSIGNABILITY. Neither this AGREEMENT nor any right or interest hereunder
shall be assignable by the EMPLOYEE, his beneficiaries or legal representatives
without the EMPLOYER's prior written consent; provided, however, that nothing in
this Section 8 shall
6
<PAGE> 7
preclude (a) the EMPLOYEE from designating a beneficiary to receive any benefits
payable hereunder upon his death, or (b) the executors, administrators, or other
legal representatives of the EMPLOYEE or his estate from assigning any rights
hereunder to the person or persons entitled thereto.
9. NO ATTACHMENT. Except as required by law, no right to receive payment under
this AGREEMENT shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge or hypothecation or to execution,
attachment, levy, or similar process of assignment by operation of law, and any
attempt, voluntary or involuntary, to effect any such action shall be null, void
and of no effect.
10. BINDING AGREEMENT. This AGREEMENT shall be binding upon, and inure to the
benefit of, the EMPLOYEE and the EMPLOYER and its respective permitted
successors and assigns.
11. AMENDMENT OF AGREEMENT. This AGREEMENT may not be modified or amended,
except by an instrument in writing signed by the parties hereto.
12. WAIVER. No term or condition of this AGREEMENT shall be deemed to have been
waived, nor shall there be an estoppel against the enforcement of any provision
of this AGREEMENT, except by written instrument of the party charged with such
waiver or estoppel. No such written waiver shall be deemed a continuing waiver,
unless specifically stated therein, and each waiver shall operate only as to the
specific term or condition waived and shall not constitute a waiver of such term
or condition for the future or as to any act other than the act specifically
waived.
13. SEVERABILITY. If, for any reason, any provision of this AGREEMENT is held
invalid, such invalidity shall not affect the other provisions of this AGREEMENT
not held so invalid, and each such other provision shall, to the full extent
consistent with applicable law, continue in full force and effect. If this
AGREEMENT is held invalid or cannot be enforced, then any prior AGREEMENT
between the EMPLOYER (or any predecessor thereof) and the EMPLOYEE shall be
deemed reinstated to the full extent permitted by law, as if this AGREEMENT had
not been executed.
14. HEADINGS. The headings of the paragraphs herein are included solely for
convenience of reference and shall not control the meaning or interpretation of
any of the provisions of this AGREEMENT.
15. GOVERNING LAW. This AGREEMENT has been executed and delivered in the State
of Ohio and its validity, interpretation, performance, and enforcement shall be
governed by the laws of this State of Ohio, except to the extent that federal
law is governing.
16. EFFECT OF PRIOR AGREEMENTS. This AGREEMENT contains the entire understanding
between the parties hereto and supercedes any prior employment agreement between
the EMPLOYER or any predecessor of the EMPLOYER and the EMPLOYEE.
7
<PAGE> 8
17. NOTICES. Any notice or other communication required or permitted pursuant to
this AGREEMENT shall be deemed delivered if such notice or communication is in
writing and is delivered personally or by facsimile transmission or is deposited
in the United States mail, postage prepaid, addressed as follows:
If to the EMPLOYER:
Market Bank
7522 Hamilton Avenue
Mt. Healthy, Ohio 45231
Attn: Secretary
If to the EMPLOYEE:
Mr. John T. Larimer
4315 Redstar Court
Cincinnati, Ohio 45238
with copies to:
John C. Vorys, Esq.
Vorys, Sater, Seymour and Pease LLP
Atrium Tow, Suite 2100
221 East Fourth Street
Cincinnati, Ohio 45202
8
<PAGE> 9
IN WITNESS WHEREOF, the EMPLOYER has caused this AGREEMENT to be
executed by its duly authorized officer, and the EMPLOYEE has signed this
AGREEMENT, each as of the day and year first above written.
Attest: Market Bank
Wilbur H. Tisch Market Bank
- ------------------------------ -------------------------------------
By:/s/ Una Schaeperslaus
----------------------------------
Its Secretary
---------
Attest:
Wilbur H. Tisch John T. Larimer
- ------------------------------ ---------------
John T. Larimer
9
<PAGE> 1
Exhibit 13
MARKET
FINANCIAL
CORPORATION
1999
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, Market Bank, I
am pleased to present our third Annual Report to Shareholders for the fiscal
year ended September 30, 1999.
Market's net earnings for fiscal 1999 totaled a record
$698,000, representing a 26% increase over the $552,000 in net earnings for
fiscal 1998. The $146,000 increase in net earnings for the year ended September
30, 1999 was primarily attributable to an after-tax gain on sale of investments
of approximately $306,000, which was partially offset by a decrease in net
interest income of $221,000, or 10.3%. Market's decreased net interest income
level was primarily the result of a $4.7 million decrease in interest-earning
assets following the $3.50 per share cash distribution on April 30, 1998.
In fiscal 1999, we reduced our excess capital position through
a share repurchase program, completing the first 5% stock repurchase of 66,786
shares and purchasing 9,500 shares of the second 5% repurchase, for a total of
76,286 shares. The repurchase of shares, totaling $838,000, should have a future
beneficial effect on Market's return on equity.
We continue to consider growth in the loan and savings
portfolios to be a critical operating objective. We are pleased to report that
our loan portfolio increased by $2.4 million, or 7.3%, during fiscal 1999, while
our savings deposits grew by $2.2 million, or 5.7%. We are looking forward to
the opening of our main office addition in Mount Healthy, which includes an ATM
and a drive-thru facility to be opened in early calendar year 2000. We are also
opening an ATM in our North Bend branch office. Both additions should enhance
the growth of our deposit portfolio and increase our ability to serve our
customers.
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
<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 Market Bank ("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 1,259,439 common shares of MFC outstanding on December 10, 1999, held
of record by approximately 525 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 1999 and 1998 fiscal years. Price quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission, and may not represent
actual transactions.
1
<PAGE> 4
<TABLE>
<CAPTION>
Cash dividends DECLARED
High Ask Low Bid Per Share
-------- ------- ---------
<S> <C> <C> <C>
FISCAL 1999
Quarter ended:
December 31, 1998 $12.63 $10.00 $ .07
March 31, 1999 12.38 8.38 .07
June 30, 1999 10.38 8.25 .07
September 30, 1999 13.75 9.00 .07
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
</TABLE>
The earnings of MFC consist primarily of dividends from Market. In
addition to certain federal income tax considerations, regulations issued
by the OTS impose limitations on the payment of dividends and other
capital distributions by savings associations. Under the 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 regulations) that is equal to or greater than the
amount of its "well-capitalized" capital requirement, is generally
permitted, without OTS approval (but subsequent to 30 days' prior notice
of the planned dividend to the OTS) to make capital distributions during a
calendar year in an amount not to exceed its net income for that year to
date plus its retained income for the preceding two years. Savings
associations which have total capital in excess of the "well-capitalized"
capital requirement, and which have been notified by the OTS that they are
in need of more than normal supervision will be subject to greater
restrictions on dividends. In addition, 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 the definition of a "well-capitalized" institution and,
unless the OTS determines that Market is an institution requiring more
than normal supervision, may pay dividends in accordance with the
foregoing provisions of the OTS regulations.
2
<PAGE> 5
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding MFC at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
At September 30,
------------------------------------------------------------
SELECTED FINANCIAL CONDITION: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $55,451 $54,608 $56,121 $45,547 $45,734
Cash and cash equivalents 2,291 5,381 2,248 4,082 4,013
Certificates of deposit in other financial
institutions 290 3,790 6,690 7,040 7,139
Investment securities held to maturity - at 12,800 9,300 17,257 9,062 7,984
cost
Investment securities designated as available
for sale - at market 1,116 1,448 1,029 712 504
Mortgage-backed securities held to maturity -
at cost 2,047 859 1,268 1,549 2,211
Loans receivable - net 35,219 32,816 26,502 21,996 23,018
Deposits 39,907 37,745 35,303 37,282 38,056
Unrealized gains on securities designated as
available for sale - net (1) 722 937 660 451 314
Shareholders' equity-restricted (2) (3) 14,575 15,078 19,895 7,514 7,153
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------------
SELECTED OPERATING DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $3,733 $ 3,885 $ 3,513 $ 3,261 $ 3,182
Interest expense 1,803 1,734 1,689 1,758 1,622
------ ------- ------- ------- -------
Net interest income 1,930 2,151 1,824 1,503 1,560
Provision for losses on loans - - - 13 -
------ ------- ------- ------- -------
Net interest income after provision for losses on
loans 1,930 2,151 1,824 1,490 1,560
Gain on sale of investments 463 - - - -
Other operating income 11 7 6 7 8
General, administrative and other expense 1,346 1,322 1,069 1,153 861
----- ------- ------- ------- ------
Earnings before income taxes 1,058 836 761 344 707
Federal income taxes 360 284 259 120 240
------ ------- ------- ------- -------
Net earnings $ 698 $ 552 $ 502 $ 224 $ 467
====== ======= ======= ======= =======
- ---------------------------
</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 and 1995.
3
<PAGE> 6
<TABLE>
<CAPTION>
At or for the Year Ended September 30,
-----------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets (1)(2)(3) 1.27% 1.00% 0.99% 0.49% 1.03%
Return on average equity (2)(3)(4) 4.71 3.16 3.66 3.05 6.91
Interest rate spread (5) 2.58 2.60 2.42 2.66 2.93
Net interest margin (6) 3.70 4.07 3.67 3.36 3.55
Operating expenses to average assets (2) (3) 2.45 2.39 2.10 2.53 1.89
Equity to assets (7) 26.28 27.61 35.45 16.50 15.64
Asset quality ratios:
Nonperforming assets to total assets 0.21 0.31 0.34 0.31 -
Nonperforming loans to total loans 0.34 0.52 0.72 0.63 -
Allowance for losses on loans to total loans 0.15 0.16 0.20 0.24 0.17
Allowance for losses on loans to
nonperforming loans 43.70 30.41 27.23 37.41 N/M(8)
Average interest-earning assets to average
interest-bearing liabilities 132.17 144.88 136.77 117.78 116.62
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.
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
- --------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of MFC and Market should be read in conjunction with and with
reference to the consolidated financial statements, and the notes thereto,
included in this Annual Report.
MFC was incorporated for the purpose of owning all of Market's outstanding stock
upon conversion to stock form. As a result, the discussion that follows focuses
on Market's financial condition and results of operations.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Market and MFC's actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and MFC's market area.
Without limiting the generality of the foregoing, some of the statements in the
following referenced sections of this discussion and analysis are forward
looking and are, therefore, subject to certain risks and uncertainties:
1. Management's analysis of the interest rate risk of Market as
set forth under "Asset and Liability Management;"
2. Management's discussion of the liquidity of Market's assets
and the regulatory capital of Market as set forth under
"Liquidity and Capital Resources;"
3. Management's determination of the amount and adequacy of the
allowance for loan losses as set forth under "Changes in
Financial Condition," and "Comparison of Operating Results for
the Years Ended September 30, 1999 and 1998;"
4. Management's estimate as to the effects of recent accounting
pronouncements as set forth under "Recent Accounting
Pronouncements;"
5. Management's determination of the effect of the
Gramm-Leach-Bliley Act on the business of MFC and Market as
set forth under "Potential Impact Of Current Legislation on
Future Results of Operation;" and
6. Management's determination of the effect of the year 2000 on
MFC's information technology systems as set forth under "Year
2000 Compliance Matters."
5
<PAGE> 8
CHANGES IN FINANCIAL CONDITION
- --------------------------------------------------------------------------------
MFC's assets at September 30, 1999, totaled approximately $55.5
million, an $843,000, or 1.5%, increase over the $54.6 million total at
September 30, 1998. The increase was funded through growth in deposits and net
earnings for the year including gains on sale of securities designated as
available for sale.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $16.5 million at September 30, 1999, a decrease
of $3.4 million from the total at September 30, 1998. Net proceeds from the
decline in liquid assets were primarily used to fund net loan originations of
$2.4 million and purchase mortgage-backed securities of $1.5 million.
Loans receivable totaled $35.2 million at September 30, 1999, an
increase of $2.4 million, or 7.3%, over September 30, 1998. This increase
resulted primarily from loan originations of $11.6 million, which exceeded
principal repayments of $9.2 million. Market's allowance for loan losses totaled
$52,000 at September 30, 1999 and 1998. The allowance represented .15% and .16%
of total loans at September 30, 1999 and 1998, respectively. Nonperforming loans
totaled $119,000 and $171,000, or .34% and .52% of total loans at September 30,
1999 and 1998, respectively.
Although management believes that its allowance for loan losses at
September 30, 1999, 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 $39.9 million at September 30, 1999, an increase of
$2.2 million, or 5.7%, over the total at September 30, 1998. Demand accounts
increased by approximately $601,000, and certificates of deposit increased by
$1.6 million during the year ended September 30, 1999. At September 30, 1999,
certificates of deposit that will mature within one year accounted for 54.4% of
Market's deposit liabilities. Proceeds from the increase in deposits were used
to fund loan originations, purchase office premises and repay other borrowed
money.
Shareholders' equity totaled $14.6 million at September 30, 1999, a
decrease of $503,000, or 3.3%, from September 30, 1998. The decrease was due
primarily to a purchase of 76,286 treasury shares totaling $838,000, coupled
with dividends paid of $364,000, which were partially offset by net earnings of
$698,000.
Market is required to meet each of three minimum capital standards
promulgated by the Office of Thrift Supervision (the "OTS"), hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for the maintenance of shareholders' equity less all intangible assets equal to
1.5% of adjusted total assets. The core capital requirement provides for the
maintenance of tangible capital plus certain forms of supervisory goodwill equal
to 3% 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 September 30,
1999, Market's tangible and core capital totaled $12.4 million, or 22.8% of
6
<PAGE> 9
adjusted total assets, which exceeded the minimum requirements of $815,000 and
$1.6 million, by $11.6 million and $10.7 million, respectively. As of September
30, 1999, Market's risk-based capital was $12.4 million, or 45.4% of
risk-weighted assets, exceeding the minimum requirement by $10.2 million.
COMPARISON OF OPERATING RESULTS
FOR THE YEARS ENDED SEPTEMBER 30, 1999 AND 1998
- --------------------------------------------------------------------------------
GENERAL. Net earnings totaled $698,000 for the year ended September 30, 1999, a
$146,000, or 26.4%, increase over the $552,000 of net earnings recorded for the
year ended September 30, 1998. The increase in earnings resulted primarily from
a $467,000 increase in other income, which was partially offset by a $221,000
decrease in net interest income and a $76,000 increase in the provision for
federal income taxes.
NET INTEREST INCOME. Total interest income amounted to $3.7 million for the year
ended September 30, 1999, a $152,000, or 3.9%, decrease from the comparable 1998
period. The decrease resulted primarily from a decrease in the investment
securities portfolio due to a $4.7 million special cash distribution to
shareholders paid in April 1998. Interest income on investment securities
decreased due primarily to a decrease of $1.8 million, to $11.5 million, of
weighted average balances outstanding during fiscal 1999, which was coupled with
a 57 basis point (100 basis points equals one percent) decrease in the
weighted-average yield. Interest income on interest-bearing deposits totaled
$343,000 in fiscal 1999, a decrease of $140,000, or 29.0%, from fiscal 1998. The
decrease resulted primarily from a decrease of $2.1 million in weighted-average
balances outstanding, coupled with a 20 basis point decrease in the
weighted-average yield, from 6.07% in fiscal 1998 to 5.87% in fiscal 1999.
Interest income on mortgage-backed securities decreased by $6,000, or 5.9%,
during fiscal 1999, compared to 1998, as a result of a decline of 105 basis
points in the weighted-average yield, from 8.81% in fiscal 1998 to 7.76% in
fiscal 1999. Interest income on loans increased $179,000, or 7.4%, primarily due
to a $3.1 million increase in weighted average balances outstanding during
fiscal 1999, which was partially offset by a decline of 20 basis points in the
weighted-average yield, from 7.90% in fiscal 1998 to 7.70% in fiscal 1999.
Interest expense on deposits totaled $1.8 million for fiscal 1999, an increase
of $57,000, or 3.3%, over the comparable 1998 period. This increase was due
primarily to an increase of $2.8 million in the weighted average balance
outstanding, which was partially offset by a 20 basis point decrease in the
average cost of deposits from 4.74% in fiscal 1998 to 4.54% in fiscal 1999.
Interest expense on other borrowings increased by $12,000, or 133.3%, primarily
due to the increase in the weighted average balance outstanding of $126,000,
coupled with a 106 basis point increase in the weighted average cost, from 7.44%
in fiscal 1998 to 8.50% in fiscal 1999.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $221,000, or 10.3%, for fiscal 1999, compared
to fiscal 1998. The interest rate spread decreased by two basis points, from
2.60% in fiscal 1998 to 2.58% in fiscal 1999 and the net interest margin
decreased by 37 basis points, from 4.07% in fiscal 1998 to 3.70% in fiscal 1999.
7
<PAGE> 10
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 year ended September 30,
1999. There can be no assurance, however, that the allowance for loan losses of
Market will be adequate to cover losses on nonperforming assets in the future.
OTHER INCOME. Other operating income, primarily service fees on money orders and
travelers' checks, totaled $11,000 and $7,000 for the years ended September 30,
1999 and 1998, respectively. Gains on sale of securities during fiscal 1999
reflected a $463,000 increase over fiscal 1998. The sale of investment
securities during fiscal 1999 reflected management's decision to redeploy price
appreciation on securities to higher yielding earning assets.
GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other
expense increased by $24,000, or 1.8%, for the year ended September 30, 1999,
compared to fiscal 1998. The increase resulted primarily from a $28,000, or
3.6%, increase in employee compensation and benefits, due to normal merit
increases and expenses related to stock benefit plans.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled $360,000
for the year ended September 30, 1999, compared to $284,000 for the 1998 fiscal
year. The $76,000, or 26.8%, increase resulted from a $222,000, or 26.6%,
increase in earnings before taxes. The effective tax rate was 34.0% for each of
the years ended September 30, 1999 and 1998.
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
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-
8
<PAGE> 11
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 balances 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 1998.
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. Based on an analysis of historical experience,
the volume and type of lending conducted by Market, the status of past due
principal and interest payments, general economic conditions, particularly as
such conditions relate to Market's market area, and other factors related to the
collectibility of Market's loan portfolio, management decided no additional
provision for losses on loans was necessary during the year ended September 30,
1998.
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.
9
<PAGE> 12
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,
----------------------------------------------------------------------------------------------------
1999 1998 1997
------------------------------- --------------------------------- ----------------------------------
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 $33,643 $2,590 7.70% $30,524 $2,411 7.90% $24,921 $1,974 7.92%
Mortgage-backed securities 1,224 95 7.76 1,147 101 8.81 1,402 125 8.92
Investment securities 11,456 705 6.15 13,249 890 6.72 11,812 708 5.99
Other interest-earning 5,845 343 5.87 7,954 483 6.07 11,598 706 6.09
assets ------- ------ ---- ------- ------ ---- ------ ------ ----
Total interest-earning 52,168 3,733 7.15 52,874 3,885 7.35 49,733 3,513 7.06
assets
Non-interest-earning assets 3,481 2,559 2,210
------- ------- -------
Total assets $55,649 $55,433 $51,943
======= ======= =======
Interest-bearing
liabilities:
Passbook and club accounts $10,136 277 2.73 $9,875 279 2.83 $10,421 300 2.88
Money market demand 2,039 55 2.70 2,254 64 2.84 2,872 81 2.82
accounts
Certificates of deposit 27,048 1,450 5.36 24,246 1,382 5.70 23,069 1,308 5.67
Borrowings 247 21 8.50 121 9 7.44 - - -
-------- -------- ---- -------- ------ ---- ------- ------ ----
Total interest-bearing
liabilities 39,470 1,803 4.57 36,496 1,734 4.75 36,362 1,689 4.64
----- ---- ------ ---- ------ ----
Non-interest-bearing 1,300 1,113 909
liabilities ------- ------- -------
Total liabilities 40,770 37,609 37,271
Shareholders' equity 14,879 17,824 14,672
------- ------- ------
Total liabilities and
shareholders' equity $55,649 $55,433 $51,943
======= ======= =======
Net interest income and
spread $1,930 2.58% $2,151 2.60% $1,824 2.42%
====== ==== ====== ==== ====== ====
Net interest margin (net
interest income as a
percent of average
interest-earning assets) 3.70% 4.07% 3.67%
==== ==== ====
Average interest-earning
assets to
interest-bearing liabilities 132.17% 144.88% 136.77%
====== ====== ======
</TABLE>
10
<PAGE> 13
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,
--------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------ --------------------------------
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 $ 240 $(61) $ 179 $ 442 $ (5) $ 437
Mortgage-backed securities 6 (12) (6) (22) (2) (24)
Investment securities (109) (76) (185) 96 86 182
Interest-bearing deposits (124) (16) (140) (221) (2) (223)
------ ----- ------- ------- ----- -----
Total interest income 13 (165) (152) 295 77 372
Interest expense attributable to:
Deposits 152 (95) 57 33 3 36
Borrowings 11 1 12 9 - 9
------ ----- ------- ------- ----- -----
Total interest expense 163 (94) 69 42 3 45
------ ----- ------- ------- ----- -----
Increase (decrease) in net interest
income $(150) $(71) $(221) $ 253 $74 $ 327
===== ==== ====== ===== === =====
</TABLE>
ASSET AND LIABILITY MANAGEMENT
- --------------------------------------------------------------------------------
Market, like other financial institutions, is subject to interest rate risk to
the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Market uses the "net portfolio value" ("NPV") methodology
adopted by the OTS as part of its capital regulations. Although Market is not
currently subject to the NPV regulation because such regulation does not apply
to institutions with less than $300 million in assets and risk-based capital in
excess of 12%, the application of the NPV methodology illustrates certain
aspects of Market's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point change in market interest rates. Both
a 200 basis point increase in market interest rates and a 200 basis point
decrease in market interest rates are considered. If the NPV would decrease more
than 2% of the
11
<PAGE> 14
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, 1999, 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 $3.0 million at September 30, 1999, Market
would have been required to deduct approximately $950,000 (50% of the $1.9
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, 1999, would still have exceeded the
regulatory requirement by $9.3 million.
Presented below, as of September 30, 1999, and 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. During both of these periods, Market has operated within 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.
September 30, 1999
---------------------------------
Change in interest rate $ change % change
(Basis Points) in NPV in NPV
------------------------ ----------- ------------
(Dollars in thousands)
+300 $(4,478) (33)%
+200 (2,959) (22)
+100 (1,417) (10)
0 - -
-100 1,026 7
-200 1,736 13
-300 2,405 18
September 30, 1999
---------------------------------
Change in interest rate $ change % change
(Basis Points) in NPV in NPV
------------------------ ----------- ------------
(Dollars in thousands)
+300 (3,439) (21)
+200 (2,172) (13)
+100 (993) (6)
0 - -
-100 730 4
-200 1,488 9
-300 2,358 14
As illustrated in the tables, 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
12
<PAGE> 15
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.
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.
13
<PAGE> 16
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, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
Year ended September 30,
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash from operating activities $ 514 $ 798 $ 517
Net cash from (used in) investing activities (3,841) 4,938 (12,041)
Net cash from (used in) financing activities 237 (2,603) 9,690
------ ------ -------
Net change in cash and cash equivalents (3,090) 3,133 (1,834)
Cash and cash equivalents at the beginning 5,381 2,248 4,082
of the year ------ ------ -------
Cash and cash equivalents at the end of the $2,291 $5,381 $ 2,248
year ====== ====== =======
</TABLE>
Market's principal sources of funds are deposits, loan and mortgage-backed
securities repayments, maturities of securities and other funds provided by
operations. Market also has the ability to borrow from the FHLB of Cincinnati.
While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and early loan and mortgage-backed security
prepayments are influenced to a greater degree by interest rates, general
economic conditions and competition. 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, 1999, Market's certificates of deposit totaled approximately
$27.6 million, or 69.1% of total deposits. Of such amount, approximately $21.7
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 $9.0 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 in an amount equal
to 4% of the sum of Market's average daily
14
<PAGE> 17
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, 1999,
Market's regulatory liquidity ratio was 39.7%. At such date, Market had
commitments to originate loans totaling $88,000 and undisbursed loans in process
of $17,000 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, 1999.
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 plus certain additional items of capital,
which in the case of Market includes a general loan loss allowance of $52,000 at
September 30, 1999.
The following table summarizes Market's regulatory capital requirements and
actual capital at September 30, 1999:
<TABLE>
<CAPTION>
Current Excess of actual
------- capital over current Applicable
Actual capital requirement requirement asset total
-------------- ----------- ----------- -----------
September 30, 1999 Amount Percent Amount Percent Amount Percent
- ------------------ ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $12,379 22.8% $ 815 1.5% $11,564 21.3% $54,357
Core capital 12,379 22.8 1,631 3.0 10,748 19.8 54,357
Risk-based capital 12,431 45.4 2,190 8.0 10,241 37.4 27,381
</TABLE>
15
<PAGE> 18
At September 30, 1999, Market had entered into a commitment to make improvements
to its main office and to construct a building addition on the properties
adjacent to the main office for approximately $566,000.
POTENTIAL IMPACT OF CURRENT LEGISLATION ON FUTURE RESULTS OF OPERATION
- --------------------------------------------------------------------------------
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act makes sweeping changes in the financial services
in which various types of financial institutions may engage. The Glass-Steagall
Act, which had generally prevented banks from affiliating with securities and
insurance firms, was repealed. A new "financial holding company," which owns
only well capitalized and well managed depository institutions, will be
permitted to engage in a variety of financial activities, including insurance
and securities underwriting and agency activities.
The GLB Act permits unitary savings and loan holding companies in
existence on May 4, 1999, including MFC, to continue to engage in all activities
that they were permitted to engage in prior to the enactment of the Act. Such
activities are essentially unlimited, provided that the thrift subsidiary
remains a qualified thrift lender. Any thrift holding company formed after May
4, 1999, will be subject to the same restrictions as a multiple thrift holding
company. In addition, a unitary thrift holding company in existence on May 4,
1999, may be sold only to a financial holding company engaged in activities
permissible for multiple savings and loan holding companies.
The GLB Act is not expected to have a material effect on the activities in
which the MFC and Market currently engage, except to the extent that competition
with other types of financial institutions may increase as they engage in
activities not permitted prior to enactment of the GLB Act.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------------------------------------------------------
In June 1996, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 established 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
16
<PAGE> 19
comprehensive income separately from retained earnings and additional paid-in
capital. SFAS No. 130 is effective for fiscal years beginning after December 15,
1997. Reclassification of financial statements for earlier periods is required.
Management adopted SFAS No. 130 effective October 1, 1998, as required, without
material 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. Management adopted SFAS No. 131
effective October 1, 1998, as required, without material 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 as either assets or liabilities
measured at fair value. SFAS No. 133 also specifies new methods of accounting
for hedging transactions, prescribes the items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting.
The definition of a derivative financial instrument is complex, but in
general it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133, as amended by SFAS No. 137, is effective for fiscal years
beginning after June 15, 2000. On adoption, entities are permitted to transfer
held-to-maturity debt securities to the available-for-sale or trading category
without calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material impact
on MFC's financial statements.
17
<PAGE> 20
YEAR 2000 COMPLIANCE MATTERS
- --------------------------------------------------------------------------------
As with most providers of financial services, Market's operations are
heavily dependent on information technology systems. Market has addressed the
potential problems associated with the possibility that the computers that
control or operate Market's information technology 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,
has analyzed the risk of potential problems that might arise from the failures
of computers and microprocessors to recognize the Year 2000, and developed 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 operation, liquidity and capital resources will be immaterial;
however, approximately $16,000 has been budgeted to ensure Year 2000 compliance.
Through September 1999, Year 2000 expenditures have totaled approximately
$5,000.
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. STARCOM is the system used by
the service bureau (NCR) to process account data and generate necessary reports.
NCR has stated in its October 31, 1998 Quarterly Update Letter (a "Year 2000
Readiness Disclosure") that the STARCOM system is Year 2000 qualified per their
Year 2000 Qualification Requirements Definition document.
Management and the Boards of Directors of Market and MFC have reviewed
the reports regarding Year 2000 testing results to date and have taken
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 incur substantial expense to make
Market's 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 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
18
<PAGE> 21
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.
19
<PAGE> 22
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 21
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 22
CONSOLIDATED STATEMENTS OF EARNINGS 23
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 25
CONSOLIDATED STATEMENTS OF CASH FLOWS 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
</TABLE>
20
<PAGE> 23
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
Market Financial Corporation
We have audited the accompanying consolidated statements of financial condition
of Market Financial Corporation as of September 30, 1999 and 1998, and the
related consolidated statements of earnings, comprehensive income, shareholders'
equity, and cash flows for each of the years ended September 30, 1999, 1998 and
1997. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
consolidated 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, 1999 and 1998, and the consolidated results of
its operations and its cash flows for each of the years ended September 30,
1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
November 22, 1999
21
<PAGE> 24
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Cash and due from banks $ 644 $ 615
Federal funds sold 1,392 4,493
Interest-bearing deposits in other financial institutions 255 273
------ ------
Cash and cash equivalents 2,291 5,381
Certificates of deposit in other financial institutions 290 3,790
Investment securities held to maturity - at amortized cost, approximate market
value of $12,529 and $9,394 at September 30, 1999 and 1998 12,800 9,300
Investment securities designated as available for sale - at market 1,116 1,448
Mortgage-backed securities held to maturity - at cost, approximate market
value of $2,067 and $902 at September 30, 1999 and 1998 2,047 859
Loans receivable - net 35,219 32,816
Office premises and equipment - at depreciated cost 819 127
Federal Home Loan Bank stock - at cost 449 419
Accrued interest receivable 320 319
Prepaid expenses and other assets 100 149
------ ------
Total assets $55,451 $54,608
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $39,907 $37,745
Other borrowed money - 725
Advances by borrowers for taxes and insurance 59 57
Accrued interest payable 98 95
Other liabilities 160 175
Accrued federal income taxes 45 18
Deferred federal income taxes 607 715
------ ------
Total liabilities 40,876 39,530
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 - -
Additional paid-in capital 8,187 8,191
Retained earnings - substantially restricted 7,984 7,650
Shares acquired by stock benefit plans (1,480) (1,700)
Less 76,286 shares of treasury stock - at cost (838) -
Accumulated comprehensive income, unrealized gains on securities
designated as available for sale, net of related tax effects 722 937
------ ------
Total shareholders' equity 14,575 15,078
------ ------
Total liabilities and shareholders' equity $55,451 $54,608
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 25
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Interest income
Loans $ 2,590 $ 2,411 $ 1,974
Mortgage-backed securities 95 101 125
Investment securities 705 890 708
Interest-bearing deposits and other 343 483 706
-------- -------- --------
Total interest income 3,733 3,885 3,513
Interest expense
Deposits 1,782 1,725 1,689
Borrowings 21 9 --
-------- -------- --------
Total interest expense 1,803 1,734 1,689
-------- -------- --------
Net interest income 1,930 2,151 1,824
Other income
Gain on sale of investments 463 -- --
Other operating 11 7 6
-------- -------- --------
Total other income 474 7 6
General, administrative and other expense
Employee compensation and benefits 806 778 659
Occupancy and equipment 121 122 111
Federal deposit insurance premiums 23 28 35
Franchise taxes 191 184 97
Other operating 205 210 167
-------- -------- --------
Total general, administrative and
other expense 1,346 1,322 1,069
-------- -------- --------
Earnings before income taxes 1,058 836 761
Federal income taxes
Current 359 301 88
Deferred 1 (17) 171
-------- -------- --------
Total federal income taxes 360 284 259
-------- -------- --------
NET EARNINGS $ 698 $ 552 $ 502
======== ======== ========
EARNINGS PER SHARE
Basic $ .58 $ .45 N/A
======== ======== ========
Diluted $ .57 $ .45 N/A
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 26
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net earnings $ 698 $ 552 $ 502
Other comprehensive income, net of tax:
Unrealized holding gains on securities during
the period, net of tax of $47, $143 and
$108 in 1999, 1998 and 1997, respectively 91 277 209
Reclassification adjustment for realized gains
included in earnings, net of tax of $157 in 1999 (306) -- --
------ ------ ------
Comprehensive income $ 483 $ 829 $ 711
====== ====== ======
Accumulated comprehensive income $ 722 $ 937 $ 660
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 27
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 1999, 1998 and 1997
(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
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1996 $ - $ - $7,063 $451 $ -
Net proceeds from issuance of common shares - 12,832 - - -
Disbursement of loan to ESOP - - - - (1,069)
Cash dividends of $.07 per share - - (93) - -
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 209 -
Net earnings for the year ended September 30, 1997 - - 502 - -
--- ------- ------ -- ------
Balance at September 30, 1997 - 12,832 7,472 660 (1,069)
Purchase of shares for stock benefit plans - - - - (729)
Amortization of expense related to stock benefit plans - 34 - - 98
Cash distributions of $3.78 per share - (4,675) (374) - -
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 277 -
Net earnings for the year ended September 30, 1998 - - 552 - -
--- ------- ------ -- ------
Balance at September 30, 1998 - 8,191 7,650 937 (1,700)
Purchase of treasury stock - - - - -
Amortization of expense related to stock benefit plans - (4) - - 220
Cash dividends of $.28 per share - - (364) - -
Realized gains on securities designated as available for
sale, net of related tax effects - - - (306) -
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - 91 -
Net earnings for the year ended September 30, 1999 - - 698 - -
--- ------- ------ -- ------
Balance at September 30, 1999 $ - $ 8,187 $7,984 $722 $(1,480)
=== ======= ===== === ======
</TABLE>
<TABLE>
<CAPTION>
TREASURY
STOCK TOTAL
<S> <C> <C>
Balance at October 1, 1996 $ - $ 7,514
Net proceeds from issuance of common shares - 12,832
Disbursement of loan to ESOP - (1,069)
Cash dividends of $.07 per share - (93)
Unrealized gains on securities designated as available
for sale, net of related tax effects - 209
Net earnings for the year ended September 30, 1997 - 502
--- --------
Balance at September 30, 1997 - 19,895
Purchase of shares for stock benefit plans - (729)
Amortization of expense related to stock benefit plans - 132
Cash distributions of $3.78 per share - (5,049)
Unrealized gains on securities designated as available
for sale, net of related tax effects - 277
Net earnings for the year ended September 30, 1998 - 552
--- --------
Balance at September 30, 1998 - 15,078
Purchase of treasury stock (838) (838)
Amortization of expense related to stock benefit plans - 216
Cash dividends of $.28 per share - (364)
Realized gains on securities designated as available for
sale, net of related tax effects - (306)
Unrealized gains on securities designated as available
for sale, net of related tax effects - 91
Net earnings for the year ended September 30, 1999 - 698
--- --------
Balance at September 30, 1999 $(838) $ 14,575
==== =======
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE> 28
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 698 $ 552 $ 502
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 1 (36)
Depreciation and amortization 30 36 31
Amortization of deferred loan origination fees (3) (3) (3)
Amortization of expense related to stock benefit plans 216 132 --
Gain on sale of investment securities designated as available
for sale (463) -- --
Federal Home Loan Bank stock dividends (30) (29) (26)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (1) 201 (181)
Accrued interest payable 3 (4) (18)
Prepaid expenses and other assets 49 (79) 126
Other liabilities (15) 38 (136)
Federal income taxes
Current 27 (30) 87
Deferred 1 (17) 171
-------- -------- --------
Net cash provided by operating activities 514 798 517
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as held to maturity (11,000) (6,600) (14,057)
Proceeds from maturity of investment securities 7,500 14,560 5,900
Proceeds from sale of investment securities designated as
available for sale 471 -- --
Purchase of mortgage-backed securities designated as held to maturity (1,486) -- --
Principal repayments on mortgage-backed securities 296 405 279
Loan disbursements (11,582) (12,494) (7,732)
Principal repayments on loans 9,182 6,183 3,229
Purchase of office premises and equipment (722) (16) (10)
Decrease in certificates of deposit in other
financial institutions - net 3,500 2,900 350
-------- -------- --------
Net cash provided by (used in) investing activities (3,841) 4,938 (12,041)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 2,162 2,442 (1,979)
Proceeds from other borrowed money 180 725 --
Repayment of other borrowed money (905) -- --
Advances by borrowers for taxes and insurance 2 8 (1)
Shares acquired for stock benefit plans -- (729) --
Purchase of treasury stock (838) -- --
Net proceeds from issuance of common shares -- -- 12,832
Disbursement of loan to ESOP -- -- (1,069)
Capital distributions and dividends paid on common stock (364) (5,049) (93)
-------- -------- --------
Net cash provided by (used in) financing activities 237 (2,603) 9,690
-------- -------- --------
Net increase (decrease) in cash and cash equivalents
(balance carried forward) (3,090) 3,133 (1,834)
-------- -------- --------
</TABLE>
26
<PAGE> 29
MARKET FINANCIAL CORPORATION
CONSOLDIATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (balance brought forward) $ (3,090) $ 3,133 $ (1,834)
Cash and cash equivalents at beginning of year 5,381 2,248 4,082
-------- -------- --------
Cash and cash equivalents at end of year $ 2,291 $ 5,381 $ 2,248
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 264 $ 340 $ --
======== ======== ========
Interest on deposits and borrowings $ 1,800 $ 1,738 $ 1,707
======== ======== ========
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 91 $ 277 $ 209
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE> 30
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
On April 16, 1996, the Board of Directors of Market Bank, formerly known as
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.
28
<PAGE> 31
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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.
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 $722,000 and $937,000 at September 30, 1999 and 1998,
respectively.
Realized gains and losses on the sale of investment and mortgage-backed
securities are recognized using the specific identification method.
3. LOANS RECEIVABLE
Loans are stated at the principal amount outstanding, adjusted for deferred
loan origination fees and the allowance for loan losses. Interest is accrued
as earned unless the collectibility of the loan is in doubt. Uncollectible
interest on loans that are contractually past due is charged off, or an
allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all
interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status.
The Company accounts for loan origination fees in accordance with SFAS No.
91, "Accounting for Nonrefundable Fees and Costs Associated with Originating
or Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the
provisions of SFAS No. 91, origination fees received from loans, net of
direct origination costs, are deferred and amortized to interest income
using the level yield method, giving effect to actual loan prepayments.
Additionally, SFAS No. 91 generally limits the definition of loan
origination costs to direct costs attributable to originating a loan, i.e.,
principally actual personnel costs.
29
<PAGE> 32
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. ALLOWANCE FOR LOAN LOSSES
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, 1999 and 1998, the Company had no loans that would be
defined as impaired under SFAS No. 114.
30
<PAGE> 33
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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.
31
<PAGE> 34
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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 $101,000, $139,000 and
$97,000 for the fiscal years ended September 30, 1999, 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, 1999, 53,429 shares had been awarded and 9,088
shares were vested. 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 $124,000 and $36,000 for the fiscal
years ended September 30, 1999 and 1998, respectively.
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 year ended September 30, 1997, totaled approximately $3,000. 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.
32
<PAGE> 35
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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 84,096 and 95,863 unallocated ESOP
shares, totaled 1,208,530 and 1,239,862 for the fiscal years ended September
30, 1999 and 1998, respectively.
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. Weighted-average common shares at
deemed outstanding for purposes of computing diluted earnings per share
totaled 1,215,305 and 1,239,862 for the fiscal years ended September 30,
1999 and 1998, respectively. Incremental shares related to the assumed
exercise of stock options included in the calculation of diluted earnings
per share totaled 6,775 for the fiscal year ended September 30, 1999.
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 higher than the average market price of the common
shares.
The provisions of SFAS No. 128, "Earnings Per Share," are not applicable to
the year ended September 30, 1997, 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. All of the 1998 fiscal year distributions constituted 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.
33
<PAGE> 36
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999
and 1998:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in
the consolidated 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 consolidated 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, 1999 and 1998,
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.
34
<PAGE> 37
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999 and 1998 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>
1999 1998
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 2,291 $ 2,291 $ 5,381 $ 5,381
Certificates of deposit in other financial institutions 290 290 3,790 3,790
Investment securities held to maturity 12,800 12,529 9,300 9,394
Investment securities designated as available for sale 1,116 1,116 1,448 1,448
Mortgage-backed securities 2,047 2,067 859 902
Loans receivable - net 35,219 33,824 32,816 33,843
Federal Home Loan Bank stock 449 449 419 419
------ ------ ------ ------
$54,212 $52,566 $54,013 $55,177
====== ====== ====== ======
Financial liabilities:
Deposits $39,907 39,958 $37,745 $37,873
Other borrowed money - - 725 725
Advances by borrowers for taxes and insurance 59 59 57 57
------ ------ ------ ------
$39,966 $40,017 $38,527 $38,655
====== ====== ====== ======
</TABLE>
13. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the fiscal 1999
consolidated financial statement presentation.
35
<PAGE> 38
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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>
1999 1998
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 $ 1,800 $ 1,805 $4,000 $ 4,026
One to three years - - 1,800 1,832
Three to five years 8,500 8,269 1,500 1,525
Five to ten years 2,500 2,455 2,000 2,011
------- ------- ----- -------
Total investment securities
held to maturity 12,800 12,529 9,300 9,394
AVAILABLE FOR SALE:
FHLMC stock 21 1,116 29 1,448
--------- ------- ------- -------
Total investment securities $12,821 $13,645 $9,329 $10,842
====== ====== ===== ======
</TABLE>
At September 30, 1999, the cost carrying value of the Company's held to
maturity investment portfolio exceeded the estimated fair value by $271,000,
consisting of gross unrealized losses totaling $279,000 and gross unrealized
gains of $8,000.
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.
Mortgage-backed securities at September 30, 1999, were comprised of
Government National Mortgage Association ("GNMA") and Federal Home Loan
Mortgage Corporation Gold program participation certificates.
Mortgage-backed securities at September 30, 1998, were comprised solely of
GNMA participation certificates. At September 30, 1999, the market value
appreciation of the Company's mortgage-backed securities in excess of cost
was approximately $20,000, comprised of gross unrealized gains of $29,000
and gross unrealized losses of $9,000. At September 30, 1998, the market
value appreciation of the Company's mortgage-backed securities in excess of
cost was approximately $43,000, comprised of gross unrealized gains.
Maturities of mortgage-backed securities are due ratably over the next
twenty fiscal years based on the contractual repayment terms of the
underlying loans.
36
<PAGE> 39
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Real estate mortgage loans
One- to four-family $30,959 $29,225
Multifamily 2,049 1,507
Nonresidential 1,737 1,879
Land 138 -
Construction 346 150
Passbook loans 26 106
Deferred loan origination costs 33 1
------ ------
35,288 32,868
Less:
Undisbursed portion of loans in process 17 -
Allowance for loan losses 52 52
------ ------
$35,219 $32,816
====== ======
</TABLE>
As depicted above, the Company's lending efforts have historically focused
on residential real estate loans, which comprised approximately $33.3
million, or 95%, of the total loan portfolio at September 30, 1999 and $30.9
million, or 94%, of the total loan portfolio at September 30, 1998.
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 $531,000 and $705,000 at September 30, 1999 and 1998,
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, 1999 and 1998.
Management believes that the fees paid for such services are at, or below,
the comparable cost of such services from unrelated parties.
37
<PAGE> 40
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended September 30:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 52 $ 52 $ 52
Provision for loan losses - - -
-- -- --
Ending balance $ 52 $ 52 $ 52
==== ==== ====
</TABLE>
At September 30, 1999 and 1998, 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 $119,000, $171,000 and $191,000 at
September 30, 1999, 1998 and 1997, respectively.
As of and for the year ended September 30, 1999, 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, 1999.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Land $ 607 $ 40
Buildings and improvements 264 161
Furniture and equipment 299 246
------ ---
1,170 447
Less accumulated depreciation 351 320
------ ---
$ 819 $127
====== ===
</TABLE>
At September 30, 1999, the Company had entered into a commitment to make
improvements to its main office and to construct a building addition on the
properties adjacent to its main office for approximately $566,000.
38
<PAGE> 41
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
DEPOSIT TYPE AND
WEIGHTED-AVERAGE 1999 1998
INTEREST RATE AMOUNT % AMOUNT %
(Dollars in thousands)
<S> <C> <C> <C> <C>
Passbook accounts - 2.67% in 1999
and 2.83% in 1998 $ 10,453 26.2% $ 9,510 25.2%
Club accounts - 5.07% in 1999 and 1998 58 .1 51 .1
Money market demand accounts -
2.67% in 1999 and 2.83% in 1998 1,829 4.6 2,178 5.8
-------- -------- -------- --------
Total demand accounts 12,340 30.9 11,739 31.1
Certificates of deposit -
5.40% in 1999 and 5.89% in 1998 27,567 69.1 26,006 68.9
-------- -------- -------- --------
Total deposits $ 39,907 100.0% $ 37,745 100.0%
======== ======== ======== ========
</TABLE>
At September 30, 1999 and 1998, the Company had deposit accounts with
balances greater than $100,000 totaling $3.3 million and $2.7 million,
respectively.
Interest expense on deposits for the fiscal years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
(In thousands)
<S> <C> <C> <C>
Passbook and club accounts $ 277 $ 279 $ 300
Money market accounts 55 64 81
Certificates of deposit 1,450 1,382 1,308
----- ----- -----
$1,782 $1,725 $1,689
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
1999 1998
(In thousands)
<S> <C> <C>
Less than six months $ 9,691 $ 8,655
Six months to one year 12,029 11,364
One year to three years 5,847 5,987
------- -------
$27,567 $26,006
====== ======
</TABLE>
39
<PAGE> 42
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE G - OTHER BORROWED MONEY
Other borrowed money at September 30, 1998 consisted 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 matured in July 1999.
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings for the years ended
September 30, 1999, 1998 and 1997, 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>
1999 1998
TAXES (PAYABLE) REFUNDABLE ON TEMPORARY
DIFFERENCES AT ESTIMATED CORPORATE TAX RATE: (In thousands)
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 18 $ 17
Deferred tax liabilities:
Unrealized gains on securities designated as
available for sale (373) (482)
Difference between cash and accrual basis of accounting (97) (116)
Federal Home Loan Bank stock dividends (89) (78)
Difference between book and tax depreciation (29) (33)
Percentage of earnings bad debt deduction (4) (5)
Deferred loan origination costs (33) (18)
--- ---
Total deferred tax liabilities (625) (732)
--- ---
Net deferred tax liability $(607) $(715)
==== ====
</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, 1999 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, 1999. 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 began to
amortize the recapture of the bad debt reserve into taxable income over a
six year period, commencing in fiscal 1997.
40
<PAGE> 43
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999 and 1998, the Company had outstanding commitments of
approximately $88,000 and $967,000 to originate fixed-rate residential real
estate loans at interest rates ranging from 7.00% to 8.25%. 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.
41
<PAGE> 44
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999 and 1998, management believes that the Company met
all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $12,379 22.8% greater than or equal to $ 815 greater than or equal to 1.5%
Core capital $12,379 22.8% greater than or equal to $1,631 greater than or equal to 3.0%
Risk-based capital $12,431 45.4% greater than or equal to $2,190 greater than or equal to 8.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C>
Tangible capital greater than or equal to $2,718 greater than or equal to 5.0%
Core capital greater than or equal to $3,261 greater than or equal to 6.0%
Risk-based capital greater than or equal to $2,738 greater than or equal to 10.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
FOR CAPITAL
ACTUAL ADEQUACY PURPOSES
AMOUNT RATIO AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $13,619 25.6% greater than or equal to $ 797 greater than or equal to 1.5%
Core capital $13,619 25.6% greater than or equal to $1,595 greater than or equal to 3.0%
Risk-based capital $13,669 59.6% greater than or equal to $1,835 greater than or equal to 8.0%
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
TO BE "WELL-
CAPITALIZED" UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
AMOUNT RATIO
(Dollars in thousands)
<S> <C> <C>
Tangible capital greater than or equal to $2,658 greater than or equal to 5.0%
Core capital greater than or equal to $3,190 greater than or equal to 6.0%
Risk-based capital greater than or equal to $2,294 greater than or equal to 10.0%
</TABLE>
42
<PAGE> 45
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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. During fiscal 1999, the Corporation
cancelled these options and granted 125,668 shares at the stock's fair value
of $9.69 per share. The issuance of new options was effected to reflect the
Company's $3.50 cash distribution in fiscal 1998 and essentially placed the
optionees in equivalent economic position after the distribution.
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>
1999 1998
<S> <C> <C>
Net earnings (In thousands) As reported $698 $552
=== ===
Pro-forma $463 $321
=== ===
Earnings per share
Basic As reported $.58 $.45
=== ===
Pro-forma $.38 $.26
=== ===
Diluted As reported $.57 $.45
=== ===
Pro-forma $.38 $.26
=== ===
</TABLE>
43
<PAGE> 46
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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 1999 and 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 years ended September 30, 1999 and 1998, are presented below:
<TABLE>
<CAPTION>
1999 1998
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
<S> <C> <C> <C> <C>
Outstanding at beginning of year 113,526 $13.5000 - $ -
Granted 125,558 9.6875 113,526 13.50
Exercised - - - -
Cancelled 113,526 13.5000 - -
------- ------- ------- -----
Outstanding at end of year 125,558 $ 9.6875 113,526 $13.50
======= ======= ======= =====
Options exercisable at year-end 125,558 $ 9.6875 113,526 $13.50
======= ======= ======= =====
Weighted-average fair value of options
granted during the year $ 2.8300 $ 3.08
======= =====
</TABLE>
The following information applies to options outstanding at September 30,
1999:
<TABLE>
<S> <C>
Number outstanding 125,558
Range of exercise prices $9.6875
Weighted-average exercise price $9.6875
Weighted-average remaining contractual life 8.75 years
</TABLE>
44
<PAGE> 47
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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.
45
<PAGE> 48
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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, 1999 and 1998,
and the results of its operations and its cash flows for the periods ended
September 30, 1999, 1998 and 1997.
MARKET FINANCIAL CORPORATION
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
ASSETS 1999 1998
<S> <C> <C>
Interest-bearing deposits in Market Bank $ 512 $ 213
Interest-bearing deposits in other financial institutions 1 1
Loan receivable from ESOP 874 971
Investment in Market Bank 13,101 14,556
Accrued interest receivable 46 51
Prepaid expenses and other assets 1 29
Prepaid federal income taxes 82 34
------ ------
Total assets $14,617 $15,855
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Other borrowed money $ - $ 725
Other liabilities 39 40
Deferred federal income taxes 3 12
------ ------
Total liabilities 42 777
Shareholders' equity
Common stock and additional paid-in capital 8,187 8,191
Retained earnings 7,984 7,650
Shares acquired by stock benefit plans (1,480) (1,700)
Less 76,286 shares of treasury stock - at cost (838) -
Unrealized gains on securities designated as available for sale, net 722 937
------ ------
Total shareholders' equity 14,575 15,078
------ ------
Total liabilities and shareholders' equity $14,617 $15,855
====== ======
</TABLE>
46
<PAGE> 49
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
MARKET FINANCIAL CORPORATION
STATEMENTS OF EARNINGS
Period ended September 30,
(In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Revenue
Interest income $ 68 $157 $113
Equity in earnings of Market Bank 855 600 314
--- --- ---
Total revenue 923 757 427
Interest expense 22 9 -
General and administrative expenses 284 221 74
--- --- ----
Earnings before income taxes (credits) 617 527 353
Federal income taxes (credits) (81) (25) 13
---- ---- ----
NET EARNINGS $698 $552 $340
=== === ===
</TABLE>
47
<PAGE> 50
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
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>
1999 1998 1997
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $ 698 $ 552 $ 340
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (855) (600) (314)
Dividend received from subsidiary 2,200 -- --
Amortization of expense related to stock benefit plans 111 -- --
Increase (decrease) in cash due to changes in:
Accrued interest receivable 5 (13) (38)
Prepaid expenses and other assets 28 (30) --
Other liabilities (1) 38 2
Prepaid federal income taxes (48) (47) 13
Deferred federal income taxes (9) 12 --
-------- -------- --------
Net cash provided by (used in) operating activities 2,129 (88) 3
Cash flows provided by (used in) investing activities:
Investment in Market Bank -- -- (6,416)
Disbursement of loan to ESOP -- -- (1,069)
Repayment of loan to ESOP 97 98 --
-------- -------- --------
Net cash provided by (used in) investing activities 97 98 (7,485)
Cash flows provided by (used in) financing activities:
Proceeds from other borrowed money 180 725 --
Repayment of other borrowed money (905) -- --
Shares acquired for stock benefit plans -- (729) --
Net proceeds from issuance of common shares -- -- 12,832
Purchase of treasury stock (838) -- --
Capital distributions and dividends paid on common stock (364) (5,049) (93)
-------- -------- --------
Net cash provided by (used in) financing activities (1,927) (5,053) 12,739
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 299 (5,043) 5,257
Cash and cash equivalents at beginning of period 214 5,257 --
-------- -------- --------
Cash and cash equivalents at end of period $ 513 $ 214 $ 5,257
======== ======== ========
</TABLE>
48
<PAGE> 51
MARKET FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 1999, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
The Company is subject to regulations imposed by the OTS regarding the
amount of capital distributions payable by the Company to the Corporation.
Generally, the Company's payment of dividends is limited, without prior OTS
approval, to net income for the current calendar year plus the two preceding
calendar years, less capital distributions paid over the comparable time
period. Insured institutions are required to file an application with the
OTS for capital distributions in excess of this limitation. During fiscal
1999, the Company received OTS approval to make up to $2.2 million in
capital distributions during fiscal 2000.
49
<PAGE> 52
MARKET FINANCIAL CORPORATION
AND
MARKET BANK
DIRECTORS AND OFFICERS
================================================================================
BOARD OF DIRECTORS OF
MARKET FINANCIAL CORPORATION
Robert Gandenberger
Supervisor - Retired
Hamilton County of Ohio Recorder's Office
John T. Larimer
President
Market Financial Corporation
Market Bank
Rae Skirvin Larimer
Attorney
Edgar H. May
Partner - Retired
Ed May Realty Co.
R. C. Meyerenke
Managing Officer - Retired
Market Bank
Wilbur H. Tisch
President - Retired
General Metal Works
Kathleen A. White
Real Estate Title Examiner
OFFICERS OF
MARKET FINANCIAL CORPORATION
John T. Larimer
President
R.C. Meyerenke
Treasurer
Rae Skirvin Larimer
Secretary
Julie M. Bertsch
Chief Financial Officer
BOARD OF DIRECTORS OF
MARKET BANK
John T. Larimer
President
Market Financial Corporation
Market Bank
L. Craig Martin
President
Environmentrics, Inc.
Edgar H. May
Partner - Retired
Ed May Realty Co.
R. C. Meyerenke
Managing Officer - Retired
Market Bank
Una Schaeperklaus
Secretary
Market Bank
OFFICERS OF
MARKET BANK
John T. Larimer
President and Managing Officer
R. C. Meyerenke
Treasurer
Una Schaeperklaus
Secretary
Julie M. Bertsch
Chief Financial Officer
50
<PAGE> 53
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 2000 Annual Meeting of Shareholders of Market Financial Corporation will be
held on January 25, 2000, 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
51
<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 2000 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 25, 2000,
at 10:00 a.m., Eastern Time (the "Annual Meeting"), for the following purposes,
all of which are more completely set forth in the accompanying Proxy Statement:
1. To reelect three directors of MFC for terms expiring in 2002;
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, 1999, 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 22, 1999
<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 2000
Annual Meeting of Shareholders of MFC to be held at Shuller's Wigwam Restaurant,
6210 Hamilton Avenue, Cincinnati, Ohio 45224, on January 25, 2000, at 10:00
a.m., Eastern Time, and at any adjournments thereof (the "Annual Meeting").
Without affecting any vote previously taken, the proxy may be revoked by a
shareholder by execution of a later dated proxy which is received by MFC before
the proxy is exercised or by giving notice of revocation to MFC in writing or in
open meeting before the proxy is exercised. Attendance at the Annual Meeting
will not, of itself, revoke a proxy.
Each properly executed proxy received prior to the Annual Meeting and
not revoked will be voted as specified thereon or, in the absence of specific
instructions to the contrary, will be voted:
FOR the reelection of Robert Gandenberger, John T. Larimer and
Edgar H. May as directors of MFC for terms expiring in 2002;
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 Market Bank, 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,
1999 (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 1,259,439
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 31, 1999.
<PAGE> 3
VOTE REQUIRED
ELECTION OF DIRECTORS
Under Ohio law and MFC's Code of Regulations (the "Regulations"), the
three nominees receiving the greatest number of votes will be elected as
directors. Each shareholder will be entitled to cast one vote for each share
owned. Shares as to which the authority to vote is withheld are not counted
toward the election of directors or toward the election of the individual
nominees specified in the enclosed Proxy. If the enclosed Proxy is signed and
dated by the shareholder but no vote is specified thereon, the shares held by
such shareholder will be voted FOR the re-election of the three nominees. No
shareholder may cumulate votes in the election of directors.
RATIFICATION OF SELECTION OF AUDITORS
The affirmative vote of the holders of a majority of the shares of MFC
represented in person or by proxy at the Annual Meeting is necessary to ratify
the selection of Grant Thornton as the auditors of MFC for the current fiscal
year. Shares which are held by a nominee for a beneficial owner and which are
represented in person or by proxy at the Annual Meeting but not voted with
respect to such proposals ("non-votes") will have the same effect as a vote
against the approval of such ratification, as will abstentions. If, however, a
shareholder has signed and dated a proxy in the form of the enclosed Proxy but
has not voted on the ratification of the selection of Grant Thornton by checking
an appropriate block on the Proxy, such person's shares will be voted FOR the
ratification of the selection of Grant Thornton and will not be considered
non-votes.
VOTING SECURITIES AND OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
only persons known to MFC to own beneficially more than five percent of the
outstanding common shares of MFC as of November 30, 1999:
<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) 8.3%
John T. Larimer
4315 Redstar Court
Cincinnati, Ohio 45238 72,141.117 (2) 5.6%
L. Craig Martin
8340 Indian Hill Road
Cincinnati, Ohio 45243 67,774 (3) 5.4%
----------------------------
</TABLE>
(1) Includes 84,096 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.
(Footnotes continued on next page)
2
<PAGE> 4
(2) This number includes 34,729 shares 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") and 4,800 shares owned jointly with Mr. Larimer's spouse. It
does not include 22,101 shares owned by Mr. Larimer's spouse
individually.
(3) This number includes 6,345 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan.
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 November 30, 1999:
<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 6,345 (2) 47,242 (3) 4.2%
John T. Larimer 67,341.117 (4) 4,800 5.6
Rae Skirvin Larimer 28,446 (2)(5) 4,800 2.6
Edgar H. May 11,746 (2) - 0.9
L. Craig Martin (6) 64,774 (2) 3,000 5.4
R. C. Meyerenke 6,746 (2) 2,500 0.7
Wilbur H. Tisch 11,746 (2) - 0.9
Una E. Schaeperklaus (6) 15,246 (2) - 1.2
Kathleen A. White 6,746 (2) 46,341 (3) 4.2
All directors of and executive officers of
MFC and Market as a group
(10 people) 235,976.729 (7) 64,111 (8) 22.1
</TABLE>
- ------------
(1) Each of the persons listed in this table may be contacted at the
address of MFC.
(2) This number includes 6,345 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan.
(3) This number includes 44,341 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 34,729 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan, but does
not include 22,101 shares owned by Mr. Larimer's spouse, Rae Skirvin
Larimer.
(5) This number does not include 32,612.117 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 98,846 shares that may be acquired upon the
exercise of options awarded pursuant to the Stock Option Plan.
(8) The 44,341 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.
3
<PAGE> 5
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.
The Board of Directors proposes the re-election of the following
persons to serve until the Annual Meeting of Shareholders in 2002 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>
Robert Gandenberger 71 Director 1996 -
John T. Larimer 66 Director and 1996 1975
President
Edgar H. May 75 Director and 1996 1992
Vice President
- -----------------------------
</TABLE>
(1) As of December 10, 1999.
(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>
Rae Skirvin Larimer 63 Director and Secretary 1996 2001 -
R.C. Meyerenke 77 Director and Treasurer 1996 2001 1974
Wilbur H. Tisch 83 Director 1996 2001 -
Kathleen A. White 42 Director 1996 2001 -
- -----------------------------
</TABLE>
(1) As of December 10, 1999.
(2) Each person became a director of MFC in connection with the Conversion.
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.
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.
MEETINGS OF DIRECTORS
The Board of Directors of MFC met eight times for regularly scheduled
and special meetings and took action by unanimous written consent nine times
during the fiscal year ended September 30, 1999.
The Board of Directors of Market met 12 times for regularly scheduled
meetings and took action by unanimous written consent once during the fiscal
year ended September 30, 1999.
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, an Audit 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. The Stock Option Committee met twice and
took action by unanimous written consent twice during the fiscal year ended
September 30, 1999.
The Audit Committee of MFC reviews and reports to the full Board of
Directors on the independent audit of MFC. The members of the Audit Committee
are Messrs. Gandenberger and Tisch and Ms. White. The Audit Committee met once
during the fiscal year ended September 30, 1999.
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 1999 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, 1999.
5
<PAGE> 7
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 once during the fiscal
year ended September 30, 1999.
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 did not meet during the fiscal year ended
September 30, 1999.
EXECUTIVE OFFICERS
The following table sets forth certain information with
respect to the current executive officers of MFC:
Name Age(1) Position(s) Held
- ---- ------ ----------------
John T. Larimer 66 President and Director
Rae Skirvin Larimer 63 Secretary and Director
Edgar H. May 75 Vice President and
Director
Julie M. Bertsch 38 Chief Financial Officer
- --------------------------
(1) As of December 15, 1999.
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, LLP,
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 $100,000 during the fiscal years ended September 30, 1999, 1998 and
1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
- --------------------------------- ------------ ------------------------------------- -----------------------------------------
Annual Compensation Long term compensation
------------------------------------- -----------------------------------------
Name and principal position Year Salary ($)(1) Bonus ($) Awards
-----------------------------------------
Securities
Restricted stock underlying
awards ($) options/SARs (#)
- --------------------------------- ------------ ------------------ ------------------ ------------------- ---------------------
<S> <C> <C> <C> <C> <C>
John T. Larimer, President 1999 $99,800 $13,238 $ 7,619 (2) 34,729 (3)
and Chief Executive Officer 1998 97,007 11,135 180,320 (2) 33,393 (4)
1997 94,500 4,835 -- --
- -----------------------------
</TABLE>
(Footnotes on next page)
6
<PAGE> 8
(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 and June 30, 1999, Mr. Larimer was awarded 13,357 and
802 common shares, respectively, 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, assuming continued employment with, or service on
the Board of Directors of, MFC. The market price of MFC's shares on
June 30, 1998 and June 30, 1999, 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 each date, was $13.50 and
$9.50 per share, respectively. The aggregate market value of the shares
awarded to Mr. Larimer under the RRP on June 30, 1998, was
approximately $180,320. The aggregate market value of the shares
awarded to Mr. Larimer under the RRP on June 30, 1999, was $7,619. As
of September 30, 1999, the 14,159 shares had an aggregate market value
of approximately $139,820, based on the $9.875 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.
(3) Represents the number of common shares of MFC underlying options
granted to Mr. Larimer pursuant to the Stock Option Plan during the
fiscal year ended September 30, 1999.
(4) 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. These options were cancelled on
May 3, 1999.
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, 1999. These
options were cancelled on May 3, 1999, and options to purchase 125,558 common
shares were granted on May 4, 1999.
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 under the Stock Option Plan do not qualify under
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
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, 1999:
<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 (#) 1999 Fiscal Year Price ($/Share) Expiration Date
- ---- ---------------------- ------------------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
John T. Larimer 34,729 27.7% $9.6875 May 4, 2009 (1)
- --------------------
</TABLE>
(1) The options were granted on May 4, 1999.
7
<PAGE> 9
The following table sets forth information regarding the cancellation
and regrant of an option to Mr. Larimer during the fiscal year ended September
30, 1999:
TEN-YEAR OPTION/SAR REPRICINGS
<TABLE>
<CAPTION>
- -------------------- --------------- ---------------- ------------------ -------------------- ------------ --------------------
Securities
Underlying Length of Original
Number of Market Price of Option Term
Options/SARs Stock at Time of Exercise Price at New Remaining at Date
Repriced or Repricing or Time of Repricing Exercise of Repricing or
Name Date Amended (#) Amendment ($) or Amendment ($) Price Amendment
---- ---- ------------- ------------- ---------------- --------- -----------
- -------------------- --------------- ---------------- ------------------ -------------------- ------------ --------------------
<S> <C> <C> <C> <C> <C> <C>
John T. Larimer May 4, 1999 33,393 $9.6875 $13.50 $9.6875 9 years
- -------------------- --------------- ---------------- ------------------ -------------------- ------------ --------------------
</TABLE>
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Larimer at September 30, 1999:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 9/30/99 Option/SAR Values
-------------------------------------------------------------------------------------------------
Number of Securities Underlying
Unexercised Options/SARs at Value of Unexercisable
Shares Acquired Value 9/30/99(#) "In The Money" Options/
Name on Exercise(#) Realized($) Exercisable/Unexercisable SARs at 9/30/99(#)(1)
- ---- -------------- ----------- ------------------------- ---------------------
<S> <C> <C> <C> <C>
John T. Larimer -0- N/A 34,729/-0- $6,512
- ----------------------
</TABLE>
(1) For purposes of this table, the value of the option was determined by
multiplying the number of shares subject to the unexercised option by
the difference between the $9.6875 exercise price and the fair market
value of MFC's common shares, which was $9.875 on September 30, 1999,
based on the last sale of MFC shares reported by the Nasdaq Small Cap
Market.
In June 1998, the Stock Option Committee determined to grant options to
purchase common shares of MFC to John T. Larimer, President of MFC and Market,
as well as to the other directors and executive officers of MFC and Market. The
exercise price for the June 1998 options was set at $13.50, the market price of
MFC shares on the date of grant. During 1998 and 1999, the stock price of MFC
common shares declined markedly, along with the share prices of other thrift
stocks generally. In fact, despite share repurchases by MFC, as of May 1999 the
market price of an MFC share had fallen below $10.00, the initial offering price
for the shares. Many other thrift stocks have experienced a similar decline in
their market value. The Board of Directors determined that with exercise prices
almost $4.00 above the current market price, the June 1998 options could not
serve their purpose of promoting a financial interest in MFC on the part of
directors, management and employees. The Board and the Stock Option Committee
therefore determined, with the consent of each option holder, to cancel the
outstanding June 1998 options and make new grants with an exercise price equal
to the current market value of MFC stock as of May 4, 1999.
Submitted by the MFC Board of Directors
Robert Gandenberger R.C. Meyerenke
John T. Larimer Wilbur H. Tisch
Rae Skirvin Larimer Kathleen A. White
Edgar H. May
8
<PAGE> 10
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 and 8,020 of which were awarded to
directors, executive officers and employees of MFC and Market in June 1998 and
June 1999, respectively.
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, 1999, 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
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,
9
<PAGE> 11
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,
1999, Market paid $20,310 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 2001 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, 2000. In addition, if a shareholder intends to present a proposal at the
2001 Annual Meeting without including the proposal in the proxy materials
related to that meeting, and if the proposal is not received by November 15,
2000, then the proxies designated by the Board of Directors of MFC for the 2001
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.
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 22, 1999
10
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> SEP-30-1999
<CASH> 644
<INT-BEARING-DEPOSITS> 255
<FED-FUNDS-SOLD> 1,392
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,116
<INVESTMENTS-CARRYING> 15,137<F1>
<INVESTMENTS-MARKET> 14,886
<LOANS> 35,219
<ALLOWANCE> 52
<TOTAL-ASSETS> 55,451
<DEPOSITS> 39,907
<SHORT-TERM> 0
<LIABILITIES-OTHER> 969
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 14,575<F2>
<TOTAL-LIABILITIES-AND-EQUITY> 55,451
<INTEREST-LOAN> 2,590
<INTEREST-INVEST> 800<F3>
<INTEREST-OTHER> 343
<INTEREST-TOTAL> 3,733
<INTEREST-DEPOSIT> 1,782
<INTEREST-EXPENSE> 1,803
<INTEREST-INCOME-NET> 1,930
<LOAN-LOSSES> 0
<SECURITIES-GAINS> 463
<EXPENSE-OTHER> 1,346
<INCOME-PRETAX> 1,058
<INCOME-PRE-EXTRAORDINARY> 698
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 698
<EPS-BASIC> .58
<EPS-DILUTED> .57
<YIELD-ACTUAL> 3.70
<LOANS-NON> 0
<LOANS-PAST> 119
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 52
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 52
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 52
<FN>
<F1>includes certificates of deposit.
<F2>includes net unrealized gains on securities, additional paid-in-capital and
shares acquired by stock benefits plans.
<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 1999 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 statements 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
Market Bank 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 Market Bank believes that it uses the
best information available to determine the allowance for loan losses,
unforeseen market conditions could result in
<PAGE> 2
material adjustments, and net 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
Market Bank 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, Market Bank 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 Market Bank 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 MARKET BANK'S EARNINGS
Market Bank 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 Market Bank and
Market Financial Corporation are intended primarily for the protection of
depositors and not for the maximization of shareholder value and may affect the
ability of the company to engage in various business activities. The
assessments, filing fees and other costs associated with reports, examinations
and other regulatory matters are significant and may have an adverse effect on
Market Financial Corporation's net earnings.
The FDIC is authorized to establish separate annual assessment rates for deposit
insurance of members of the Bank Insurance fund (the "BIF") and the Savings
Association Insurance Fund
<PAGE> 3
(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.
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.
The Effect of New Legislation on Market Bank's and Market Financial
Corporation's operations.
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.
Management's characterization of its competition.
Pending regulatory proposals.
Levels of deposit insurance assessments.
