FORM -10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 000-22255
MARKET FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
Ohio 31-0462464
(State or other jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)
7522 Hamilton Avenue
Mt. Healthy, OH 45231
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (513) 521-9772
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
As of May 11, 1999, the latest practicable date, 1,290,225 common shares of the
registrant, no par value, were issued and outstanding.
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INDEX
MARKET FINANCIAL CORPORATION
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Other Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
PART II - OTHER INFORMATION 14
SIGNATURES 15
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<TABLE>
Market Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
March 31, September 30,
1999 1998
<S> <C> <C>
ASSETS
Cash and due from banks $ 497 $ 615
Federal funds sold 4,121 4,493
Interest-bearing deposits in other financial institutions 765 273
------ ------
Cash and cash equivalents 5,383 5,381
Certificates of deposit in other financial institutions 1,790 3,790
Investment securities held to maturity - at amortized cost, approximate
market value of $11,276 and $9,394 at March 31, 1999 and September 30, 1998 11,300 9,300
Investment securities designated as available for sale - at market 1,230 1,448
Mortgage-backed securities - at cost, approximate market value of $794 and
$902 at March 31, 1999 and September 30, 1998 741 859
Loans receivable - net 33,364 32,816
Office premises and equipment - at depreciated cost 563 127
Federal Home Loan Bank stock - at cost 433 419
Accrued interest receivable 334 319
Prepaid expenses and other assets 114 149
------ ------
Total assets $55,252 $54,608
====== ======
Liabilities and SHAREHOLDERS' EQUITY
Deposits $39,354 $37,745
Other borrowed money - 725
Advances by borrowers for taxes and insurance 57 57
Accrued interest payable 111 95
Other liabilities 149 175
Accrued federal income taxes 207 18
Deferred federal income taxes 559 715
------ ------
Total liabilities 40,437 39,530
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 8,199 8,191
Retained earnings - substantially restricted 7,937 7,650
Shares acquired by Employee Stock Ownership Plan (ESOP) (1,603) (1,700)
Treasury stock - 45,500 shares at March 31, 1999 - at cost (516) -
Unrealized gain on securities designated as available for sale,
net of related tax effects 798 937
------ ------
Total shareholders' equity 14,815 15,078
------ ------
Total liabilities and shareholders' equity $55,252 $54,608
====== ======
</TABLE>
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<TABLE>
Market Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
March 31, March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest income
Loans $1,307 $1,146 $665 $590
Mortgage-backed securities 36 56 17 27
Investment securities 300 521 136 252
Interest-bearing deposits and other 211 258 92 126
----- ----- --- ---
Total interest income 1,854 1,981 910 995
Interest expense
Deposits 903 844 443 417
Borrowings 22 - 6 -
----- ----- --- ---
Total interest expense 925 844 449 417
----- ----- --- ---
Net interest income 929 1,137 461 578
Other income
Gain on sale of investments 463 - 463 -
Other operating income 6 4 3 2
----- ----- --- ---
Total other income 469 4 466 2
General, administrative and other expense
Employee compensation and benefits 379 412 190 195
Occupancy and equipment 61 64 34 33
Federal deposit insurance premiums 11 13 6 7
Franchise taxes 104 87 49 66
Other operating 126 120 52 57
----- ----- --- ---
Total general, administrative and
other expense 681 696 331 358
----- ----- --- ---
Earnings before income taxes 717 445 596 222
Federal income taxes
Current 321 156 246 34
Deferred (77) (5) (43) 41
----- ----- --- ---
Total federal income taxes 244 151 203 75
----- ----- --- ---
Net Earnings $ 473 $ 294 $393 $147
===== ===== === ===
Earnings per share
Basic $.39 $.24 $.33 $.12
=== === === ===
Diluted $.39 $.24 $.33 $.12
=== === === ===
</TABLE>
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<TABLE>
<CAPTION>
Market Financial Corporation
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
For the six months For the three months
ended March 31, ended March 31,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net earnings $473 $294 $393 $147
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities during the period 167 235 (118) 106
Reclassification adjustment for
realized gains included in earnings (306) - (306) -
--- --- --- ---
Comprehensive income (loss) $334 $529 $(31) $253
=== === === ===
</TABLE>
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<TABLE>
Market Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended March 31,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 473 $ 294
Adjustments to reconcile net earnings to net cash provided by (used
in) operating activities
Amortization of premiums and discounts on investments and
mortgage-backed securities, net 1 (2)
Depreciation and amortization 16 17
Amortization of deferred loan origination fees (2) (4)
Amortization of expense related to stock benefit plans 105 132
Federal Home Loan Bank stock dividends (14) (14)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (15) 69
Accrued interest payable 16 18
Prepaid expenses and other assets 35 (93)
Other liabilities (26) (60)
Federal income taxes
Current 189 (4)
Deferred (77) (5)
----- -----
Net cash provided by operating activities 701 348
Cash flows provided by (used in) investing activities:
Principal repayments on mortgage-backed securities 117 45
Proceeds from maturity of investment securities 4,000 5,660
Loan disbursements (5,748) (6,603)
Principal repayments on loans 5,202 2,848
Purchase of investment securities designated as held to maturity (6,000) (2,600)
Purchase of office equipment (452) (9)
Decrease in certificates of deposits in other financial
institutions - net 2,000 1,650
----- -----
Net cash provided by (used in) investing activities (881) 991
Cash flows provided by (used in) financing activities:
Net increase in deposits 1,609 1,084
Advances by borrowers for taxes and insurance - 8
Proceeds from other borrowed money 180 -
Repayment of other borrowed money (905) -
Purchase of treasury stock (516) -
Dividends paid on common stock (186) (187)
----- -----
Net cash provided by financing activities 182 905
-----
Net increase in cash and cash equivalents (balance carried
forward) 2 2,244
----- -----
</TABLE>
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<TABLE>
Market Financial Corporation
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Six months ended March 31,
1999 1998
<S> <C> <C>
Net increase in cash and cash equivalents
(balance brought forward) $ 2 $2,244
Cash and cash equivalents at beginning of period 5,381 2,248
----- -----
Cash and cash equivalents at end of period $5,383 $4,492
===== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 153 $ 180
===== =====
Interest on deposits and borrowings $ 909 $ 826
===== =====
Supplemental disclosure of noncash investing activities:
Unrealized gain on securities designated as available for sale,
net of related tax effects $ 167 $ 235
===== =====
</TABLE>
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARKET FINANCIAL CORPORATION
For the six month periods ended
March 31, 1999 and 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB, and, therefore, do not
include information or footnotes necessary for complete presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. Accordingly, these financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto of Market Financial Corporation ("MFC") for the
year ended September 30, 1998. However, in the opinion of management, all
adjustments (consisting of only normal recurring accruals) which are necessary
for fair presentation of the consolidated financial statements have been
included. The results of operations for the three month and six month periods
ended March 31, 1999 and 1998 are not necessarily indicative of the results
which may be expected for an entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of MFC and the Market Bank ("Market"). All significant intercompany items have
been eliminated.
3. Effects 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 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.
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The definition of a derivative financial instrument is complex, but in
general it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally requires
no significant initial investment and can be settled net or by delivery of an
asset that is readily convertible to cash. SFAS No. 133 applies to derivatives
embedded in other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity debt
securities to the available-for-sale or trading category without calling into
question their intent to hold other debt securities to maturity in the future.
SFAS No. 133 is not expected to have a material impact on MFC's financial
statements.
4. Pending Legislative Changes
The deposit accounts of Market and other savings associations are
insured up to applicable limits by the FDIC in the SAIF. Legislation to
recapitalize the SAIF was enacted on September 30, 1996. Such legislation
provided that the SAIF will be merged into the Bank Insurance Fund if there are
no remaining federal savings associations. Such legislation also requires the
Department of Treasury to submit a report to Congress on the development of a
common charter for all financial institutions.
Pursuant to such legislation, Congress may eliminate the OTS, and
Market may be regulated under federal law as a bank or may 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, Market might become subject to a
different form of holding company regulation, which may limit the activities in
which MFC may engage, and subject MFC to other 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 may
change the activities in which either MFC or Market may engage, it is not
anticipated that the current activities of either MFC and Market will be
materially affected by those activity limits.
5. Earnings Per Share
Basic earnings per share is computed based upon the weighted average
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released. Weighted average common shares
outstanding, which gives effect to 95,863 and 84,096 unallocated ESOP shares,
totaled 1,214,681 and 1,227,223 shares for the three month and six month periods
ended March 31, 1999. Weighted average common shares outstanding, which gives
effect to 95,683 unallocated ESOP shares, totaled 1,239,862 shares for the three
month and six month periods ended March 31, 1998. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares to be issued under MFC's stock option plan.
Weighted-average shares outstanding for purposes of computing diluted earnings
per share totaled 1,214,681 and 1,227,223 for the three and six month periods
ended March 31, 1999, and 1,239,862 for each of the three and six month periods
ended March 31, 1998. Options to purchase 113,526 shares of common stock with a
weighted-average exercise price of $13.50 were outstanding at March 31, 1999,
but were excluded from the computation of common stock equivalents because their
exercise price was greater than the average market price of the common shares.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
MARKET FINANCIAL CORPORATION
Note Regarding Forward-Looking Statements
In addition to historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, Market's operations and actual results
could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and MFC's market area generally.
Some of the forward-looking statements included herein are the
statements regarding management's determination of the amount of allowance for
losses on loans, the adequacy of collateral on nonperforming loans, the effect
of the year 2000 on information technology systems, legislative changes with
respect to the federal thrift charter and the effect of certain accounting
pronouncements.
Discussion of Financial Condition Changes from September 30, 1998 to March 31,
1999
MFC's assets at March 31, 1999, totaled approximately $55.3 million, a
$644,000, or 1.2%, increase over the $54.6 million total at September 30, 1998.
The increase was funded through growth in deposits and net earnings for the
quarter, including gains on securities designated as available for sale.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $19.7 million at March 31, 1999, a decrease of
$216,000 from the total at September 30, 1998. Net proceeds from the decline in
liquid assets were used to fund loan originations.
Loans receivable totaled $33.4 million at March 31, 1999, an increase
of $548,000, or 1.7%, over September 30, 1998. This increase resulted primarily
from loan originations of $5.7 million, which exceeded principal repayments of
$5.2 million. Market's allowance for loan losses totaled $52,000 at both March
31, 1999 and September 30, 1998. The allowance represented .16% of total loans
at March 31, 1999 and September 30, 1998. Nonperforming loans totaled $144,000
and $171,000, or .43% and .52% of total loans, at March 31, 1999 and September
30, 1998, respectively.
Although management believes that its allowance for loan losses at
March 31, 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 $39.4 million at March 31, 1999, an increase of $1.6
million, or 4.3%, over the total at September 30, 1998. Demand accounts
increased by approximately $1.1 million, and certificates of deposit increased
by $505,000 during the period ended March 31, 1999. At March 31, 1999,
certificates of deposit that will mature within one year accounted for 54.2% 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 $14.8 million at March 31, 1999, a decrease
of $263,000, or 1.7%, from September 30, 1998. The decrease was due primarily to
a purchase of 45,500 treasury shares totaling $516,000, coupled with dividends
paid of $186,000, which were partially offset by net earnings of $473,000.
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 March 31, 1999,
Market's tangible and core capital totaled $13.9 million, or 25.1% of adjusted
total assets, which exceeded the minimum requirements of $829,000 and $1.7
million, by $13.1 million and $12.2 million, respectively. As of March 31, 1999,
Page 10 of 15
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Market's risk-based capital was $13.9 million, or 36.2% of risk-weighted assets,
exceeding the minimum requirement by $12.0 million.
Comparison of Operating Results for the Three-Month Periods Ended March 31, 1999
and 1998
General
Net earnings totaled $393,000 for the three months ended March 31,
1999, a $246,000, or 167.3%, increase from the $147,000 of net earnings recorded
for the three months ended March 31, 1998. The increase in earnings resulted
primarily from a $464,000 increase in other income primarily from a gain on sale
of investment securities, which was partially offset by a $117,000 decrease in
net interest income and a $128,000 increase in the provision for federal income
taxes.
Net Interest Income
Interest income decreased by $85,000, or 8.5%, for the three months
ended March 31, 1999, compared to the three months ended March 31, 1998. The
decrease resulted primarily from a decrease in the weighted average balance of
investment securities outstanding following the payment of the $4.7 million
distribution to shareholders in April 1998. Interest expense on deposits
increased by $26,000, or 6.2%, due primarily to an increase in the weighted
average balance of deposits, which was slightly offset with a decrease in the
cost of deposits. Net interest income decreased by $117,000, or 20.2%, for the
three months ended March 31, 1999, compared to the same quarter in 1998.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the
total allowance to a level considered appropriate by management based on
historical experience, the volume and type of lending conducted by Market, the
status of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to market area, and other factors related
to the collectibility of Market's loan portfolio. As a result of such analysis,
management decided no additional provision for losses on loans was necessary
during the quarter ended March 31, 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.
The foregoing statement is a "forward-looking" statement within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Factors that could
affect the adequacy of the loan loss allowance include, but are not limited to,
the following: (1) changes in the national and local economy which may
negatively impact the ability of borrowers to repay their loans and which may
cause the value of real estate and other properties that secure outstanding
loans to decline; (2) unforeseen adverse changes in circumstances with respect
to uncertain large loan borrowers; (3) decreases in the value of collateral
securing consumer loans to amounts equal to or less than the outstanding
balances of the consumer loans; and (4) determinations by various regulatory
agencies that Market must recognize additions to its loan loss allowance based
on such regulators' judgment of information available to them at the time of
their examinations.
Other Income
Other income increased to $466,000 for the quarter ended March 31, 1999, as
compared to $2,000 for the 1998 quarter primarily due to a $463,000 gain on sale
of investment securities designated as available for sale.
Other operating income, primarily service fees on money orders and
travelers' checks, totaled $3,000 and $2,000 for the three-month periods ended
March 31, 1999 and 1998, respectively.
General, Administrative and Other Expense
General, administrative and other expenses decreased by $27,000, or
7.5%, for the quarter ended March 31, 1999, compared to the same quarter in
1998. The decrease resulted primarily from a $17,000, or 25.8%, decrease in
franchise taxes due to a decrease in shareholders' equity from a special cash
distribution to shareholders of $4.7 million paid in April 1998.
Page 11 of 15
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Federal Income Tax
The provision for federal income taxes totaled $203,000 for the three
months ended March 31, 1999, compared to $75,000 for the 1998 quarter. The
$128,000 or 170.7%, increase resulted from a $374,000, or 168.5%, increase in
earnings before taxes. The effective tax rates were 34.1% and 33.8% for the
three months ended March 31, 1999 and 1998, respectively.
Comparison of Operating Results for the Six-Month Periods Ended March 31, 1999
and 1998
General
Net earnings totaled $473,000 for the six months ended March 31, 1999,
a $179,000, or 60.9%, increase over the $294,000 of net earnings recorded for
the six months ended March 31, 1998. The increase in earnings resulted primarily
from a $465,000 increase in other income, which was partially offset by a
$208,000 decrease in net interest income and a $93,000 increase in the provision
for federal income taxes.
Net Interest Income
Interest income decreased by $127,000, or 6.4%, for the six months
ended March 31, 1999, compared to the six months ended March 31, 1998. 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 expense on deposits increased by $59,000, or 7.0% due
primarily to an increase in the deposit portfolio. Net interest income decreased
by $208,000, or 18.3%, for the six months ended March 31, 1999, compared to the
same period in 1998.
Provision for Losses on Loans
As a result of 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 six months ended March 31, 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 income increased to $469,000 for the six months ended March 31, 1999,
as compared to $4,000 for the 1998 period primarily due to a $463,000 gain on
sale of investment securities designated as available for sale.
Other operating income, primarily service fees on money orders and
travelers' checks, totaled $6,000 and $4,000 for the six-month periods ended
March 31, 1999 and 1998, respectively.
General, Administrative and Other Expense
General, administrative and other expense decreased by $15,000, or
2.2%, for the six months ended March 31, 1999, compared to the same period in
1998. The decrease resulted primarily from a $33,000, or 8.0%, decrease in
employee compensation and benefits due to employee turnover, which was partially
offset by normal merit increases and expenses related to the stock benefit
plans, which was partially offset by a $17,000, or 19.5%, increase in franchise
taxes.
Federal Income Tax
The provision for federal income taxes totaled $244,000 for the six
months ended March 31, 1999, compared to $151,000 for the same 1998 period. The
$93,000, or 61.6%, increase resulted from a $272,000, or 61.1%, increase in
earnings before taxes. The effective tax rates were 34.0% and 33.9% for the six
months ended March 31, 1999 and 1998, respectively.
Page 12 of 15
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Year 2000 Compliance Matters
As with most providers of financial services, Market's operations are
heavily dependent on information technology systems. Market is addressing the
potential problems associated with the possibility that the computers that
control or operate Market's information technology and infrastructure may not be
programmed to read four-digit date codes and, upon arrival of the year 2000, may
recognize the two-digit code "00" as the year 1900, causing systems to fail to
function or to generate erroneous data.
Market has appointed a Year 2000 Coordinator who, with support and
oversight from management and the Boards of Directors of both Market and MFC,
shall analyze the risk of potential problems that might arise from the failures
of computers and microprocessors to recognize the Year 2000, and to develop a
plan to mitigate such risks. The Year 2000 Coordinator submits monthly and
quarterly progress reports to the Boards of Directors. The impact upon MFC's
results of operation, liquidity and capital resources will be immaterial;
however, approximately $16,000 has been budgeted to ensure Year 2000 compliance.
Through March 1999, Year 2000 expenditures have totaled approximately $4,000.
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 are in the process
of taking 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 costs could result if consumers react to publicity
about the issue by withdrawing deposits. MFC could also be materially adversely
affected if other third parties, such as governmental agencies, clearing houses,
telephone companies, utilities and other service providers fail to prepare
properly. Market is therefore attempting to assess these risks and take action
to minimize their effect.
Page 13 of 15
<PAGE>
PART II
MARKET FINANCIAL CORPORATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities and Use of Proceeds
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
Exhibit 27 - Financial Data Schedule.
Page 14 of 15
<PAGE>
SIGNATURES
MARKET FINANCIAL CORPORATION
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 1999 By: /s/ John T. Larimer
-------------------------- ----------------------------
John T. Larimer
President and
Managing Officer
Date: May 14, 1999 By: /s/ Julie M. Bertsch
------------------------- ----------------------------
Julie M. Bertsch
Chief Financial Officer
Page 15 of 15
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> OCT-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 497
<INT-BEARING-DEPOSITS> 765
<FED-FUNDS-SOLD> 4,121
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,230
<INVESTMENTS-CARRYING> 13,831
<INVESTMENTS-MARKET> 13,860
<LOANS> 33,364
<ALLOWANCE> 52
<TOTAL-ASSETS> 55,252
<DEPOSITS> 39,354
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,083
<LONG-TERM> 0
0
0
<COMMON> 0
<OTHER-SE> 14,815
<TOTAL-LIABILITIES-AND-EQUITY> 55,252
<INTEREST-LOAN> 1,307
<INTEREST-INVEST> 336
<INTEREST-OTHER> 211
<INTEREST-TOTAL> 1,854
<INTEREST-DEPOSIT> 903
<INTEREST-EXPENSE> 925
<INTEREST-INCOME-NET> 929
<LOAN-LOSSES> 0
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<EXPENSE-OTHER> 681
<INCOME-PRETAX> 717
<INCOME-PRE-EXTRAORDINARY> 473
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 473
<EPS-PRIMARY> .39
<EPS-DILUTED> .39
<YIELD-ACTUAL> 3.48
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<ALLOWANCE-DOMESTIC> 2
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 50
</TABLE>
