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
For the fiscal Year Ended September 30, 2000
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
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(Name of small business issuer in its charter)
Ohio 34-0462464
-------------------------------- ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
7522 Hamilton Avenue, Mt. Healthy, Ohio 45231
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number:
(513) 521-9772
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Securities registered under Section 12(b) of the Exchange Act:
None
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Securities registered under Section 12(g) of the Exchange Act:
Common Shares, without par value
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this Form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
The issuer's revenues for the fiscal year ended September 30, 2000, were
$3.8 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 SmallCap Market, was $11.8 million on December
22, 2000.
1,259,439 of the registrant's common shares were issued and outstanding on
December 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part I of Form 10-KSB - Safe Harbor Under the Private Securities Litigation
Reform Act of 1995.
<PAGE>
PART I
Item 1. Description of Business
General
Market Financial Corporation, an Ohio corporation ("Market Financial"),
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
Bank").
Market Bank 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. Market Financial 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, Market
Financial 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 Bank's primary source of
income. Market Bank's principal expense is interest paid on deposit accounts.
Operating results are dependent to a significant degree on the net interest
income of Market Bank, 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 Bank's interest income and
interest expense are significantly affected by general economic conditions and
by the policies of various regulatory authorities.
Market Bank conducts business from its main office in Mt. Healthy,
Ohio, and from its full-service branch office located in North Bend, Ohio.
Market Bank'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, Market Financial 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 Bank is
subject to regulations, supervision and examination by the OTS, the FDIC and the
Ohio Division of Financial Institutions (the "Division"). Market Bank is also a
member of the Federal Home Loan Bank (the "FHLB") of Cincinnati.
Forward-Looking Statements
When used in this Annual Report on 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 Bank's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in Market Bank'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 Market
Financial's financial performance and could cause Market Financial'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.
Market Financial 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 Bank's principal lending activity is the origination of
conventional real estate loans secured by one- to four-family residences located
in Market Bank's primary market area. A limited number of loans secured by
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multifamily properties containing five units or more and by nonresidential real
estate and loans for the construction of residences have been originated by
Market Bank. Market Bank 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 Bank 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 Bank's loan portfolio at the
dates indicated:
<TABLE>
<CAPTION>
At September 30,
2000 1999 1998
------ ------ ----
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 $32,876 86.8% $30,959 87.9% $29,225 89.1%
Multifamily 2,828 7.5 2,049 5.8 1,507 4.6
Nonresidential 1,647 4.3 1,737 4.9 1,879 5.7
Construction 1,000 2.6 346 1.0 150 .5
Land 136 .4 138 .4 - -
------ ----- ------ ----- ------ -----
Total real estate loans 38,487 101.6 35,229 100.0 32,761 99.9
Consumer loans:
Loans on deposits 13 - 26 .1 106 .3
------ ----- ------ ----- ------ -----
Total loans 38,500 101.6 35,255 100.1 32,867 100.2
Less:
Undisbursed portion of loans
in process 608 1.6 17 - - -
Unearned and deferred income
(costs) (39) (.1) (33) (.1) (1) -
Allowance for loan losses 52 .1 52 .2 52 .2
------ ----- ------ ----- ------ -----
Net loans $37,879 100.0% $35,219 100.0% $32,816 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
Loan Maturity Schedule. The following table sets forth certain
information at September 30, 2000, regarding the dollar amount of loans maturing
in Market Bank'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 $1,599 $222 $168 $ 318 $ - $ - $ 2,307
Fixed-rate 33 276 266 3,602 12,909 16,298 33,384
Nonresidential real
estate and land loans 392 - 40 295 725 723 2,175
Consumer and other loans 5 8 - - - - 13
----- --- --- ----- ------ ------ -------
Total loans $2,029 $506 $474 $4,215 $13,634 $17,021 $37,879 (1)
===== === === ===== ====== ====== ======
</TABLE>
---------------
(1) Net of undisbursed portion of loans in process, unearned and deferred
income (costs) and allowance for loan losses.
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The following table sets forth the dollar amount of loans maturing
after one year from September 30, 2000, which have pre-determined interest rates
or floating or adjustable interest rates.
<TABLE>
<CAPTION>
Predetermined Floating or
rates Adjustable rates
------------- ----------------
(In thousands)
<S> <C> <C>
Residential real estate $33,351 $708
Nonresidential real estate 1,783 -
Consumer and other - 8
------ ---
Total loans $35,134 $716
====== ===
</TABLE>
One- to Four-Family Real Estate Loans. The principal lending activity
of Market Bank is the origination of conventional loans secured by first
mortgages on one- to four-family residences, primarily single-family residences
located within Market Bank's primary market area. At September 30, 2000, Market
Bank's one- to four-family residential loans totaled approximately $32.9
million, or 86.8% of total loans.
OTS regulations and Ohio law limit the amount which Market Bank 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 Bank makes fixed-rate loans on one- to
four-family residences for up to 95% of the value of the real estate and
improvements thereon, although most of Market Bank's one- to four-family loans
have an LTV of 80% or less. Market Bank 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 Bank, currently for terms of up
to 30 years, though most loans are originated with terms of 20 years or less.
Market Bank also offers adjustable-rate mortgage loans ("ARMs") for terms of up
to 30 years with various alternative features in an effort to decrease Market
Bank'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 Bank 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 Bank 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 Bank's
underwriting of any such loans with a one-year adjustment period. Of the total
mortgage loans originated by Market Bank during the fiscal year ended September
30, 2000, 67.7% were fixed-rate.
Market Bank also makes closed-end home equity loans 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. Market Bank's home equity loans
are made in a fixed amount disbursed at closing, rather than being lines of
credit. Home equity loans are secured by real estate and are made only to
borrowers as to whom Market Bank holds the first mortgage. Of the $32.9 million
of one- to four-family residential loans, approximately $251,000 were home
equity loans.
At September 30, 2000, Market Bank had nonperforming loans totaling
$272,000 in its one- to four-family portfolio. Residential real estate loans
(including one- to four-family and multifamily lending) constituted $6.3
million, or 93.8%, of the $6.8 million of loans originated in fiscal 2000.
Multifamily Real Estate Loans. In addition to loans on one- to
four-family properties, Market Bank originates a limited number of loans secured
by multifamily properties, which contain more than four units. At September 30,
2000, loans secured by multifamily residences totaled approximately $2.8
million, or 7.5% of total loans. At September 30, 2000, the largest single loan
secured by a multifamily residence was $659,000 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
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<PAGE>
the borrower. Market Bank 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 Bank requires borrowers to agree
to submit financial statements annually to enable Market Bank to monitor the
loan and requires the assignment of rents.
At September 30, 2000, Market Bank had no nonperforming loans in its
multifamily residential real estate portfolio.
Nonresidential Real Estate Loans. Market Bank also originates loans for
the purchase of nonresidential real estate located within close proximity to
Market Bank's offices. Among the properties securing the nonresidential real
estate loans originated by Market Bank are office buildings, retail properties
and a veterinary clinic, all located within the immediate vicinity of Market
Bank's offices. At September 30, 2000, approximately $1.6 million, or 4.3%, of
Market Bank's total loans were secured by mortgages on nonresidential real
estate. Market Bank'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 Bank 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 Bank also requires
personal guarantees.
At September 30, 2000, Market Bank had no nonperforming loans in its
nonresidential real estate portfolio. With the exception of the construction
loan discussed below, Market Bank did not originate any nonresidential real
estate loans in fiscal 2000.
Construction Loans. In the past, Market Bank has made 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 Bank are usually made to
owner-occupants for the construction of single-family homes by a general
contractor. At September 30, 2000, however, Market Bank had a construction loan
of approximately $1.0 million, or 2.6% of total loans outstanding, for a church,
with the undisbursed portion of such loan totaling approximately $608,000.
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 Bank 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 Bank's construction loans are secured by properties in Hamilton
County, with the exception of a construction loan on a church in Butler County.
None of Market Bank's construction loans were nonperforming at
September 30, 2000.
Commercial Loans. Market Bank 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 Bank makes loans at adjustable rates of interest
to depositors on the security of their deposit accounts. At September 30, 2000,
Market Bank had approximately $13,000, or less than .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,
2000, Market Bank 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 Bank's lending
staff and walk-in customers.
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Loan applications for permanent real estate loans are taken by loan
personnel. Market Bank typically obtains a credit report, verification of
employment and other documentation concerning the creditworthiness of the
borrower. An appraisal of the fair market value of the real estate which will be
given as security for the loan is prepared by an appraiser approved by the Board
of Directors. Upon the completion of the appraisal and the receipt of
information on the credit history of the borrower, the application for a loan is
submitted for review in accordance with Market Bank's underwriting guidelines.
The Managing Officer of Market Bank 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 Bank.
Until October 1995, if a mortgage loan application was approved, Market
Bank typically obtained an attorney's opinion of title. Presently, Market Bank
obtains title insurance on loans secured by real estate unless the borrower is
seeking to refinance a loan Market Bank originated. Borrowers are required to
carry satisfactory fire and casualty insurance and flood insurance, if
applicable, and to name Market Bank 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
Bank 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 Bank 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 Bank originated
only fixed-rate mortgage loans. Market Bank does not service loans for other
financial institutions.
The following table presents Market Bank's loan origination activity
for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Loans originated:
Residential (1) $6,335 $11,038 $11,023
Nonresidential - 98 1,107
Construction 409 446 324
Consumer 11 - 40
----- ------ ------
Total loans originated 6,755 11,582 12,494
Principal repayments (4,089) (9,182) (6,183)
Increase in other items, net (2) (6) 3 3
----- ------ ------
Net increase $2,660 $ 2,403 $ 6,314
===== ====== ======
</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 Bank was able to lend approximately $2.0 million to one borrower at
September 30, 2000. The largest amount Market Bank had outstanding to one
borrower at September 30, 2000, was $659,000, consisting of one loan, which was
secured by a multi-family real estate and which was performing in accordance
with its terms.
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Delinquent Loans, Nonperforming Assets and Classified Assets. Payments
on loans made by Market Bank 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 Bank 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 Bank is unable to make contact with the borrower
by mail or telephone, a representative from Market Bank 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 Bank and the above steps are repeated
and a letter is sent to the borrower by Market Bank 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 Bank, to be sold as soon as possible by Market Bank
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,
2000 1999 1998
----- ------ -----
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 3 $333 0.9% 1 $ 2 -% 7 $125 0.4%
60 - 89 days - - - 4 250 0.7 5 85 0.3
90 days and over 12 272 0.7 8 119 0.4 11 171 0.5
-- ----- --- --- ----- --- -- ----- ---
Total delinquent
loans 15 $605 1.6% 13 $371 1.1% 23 $381 1.2%
== ==== === == ==== === == ==== ===
</TABLE>
The following table sets forth information with respect to the accrual
and nonaccrual status of Market Bank's loans and other nonperforming assets at
the dates indicated:
<TABLE>
<CAPTION>
At September 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Accruing loans delinquent more
than 90 days (1) $272 $119 $171
Real estate acquired through
foreclosure - - -
--- --- ---
Total nonperforming assets $272 $119 $171
=== === ===
Allowance for loan losses $ 52 $ 52 $ 52
=== === ===
Nonperforming assets as a
percent of total assets 0.5% 0.2% 0.3%
Nonperforming loans as a
percent of total loans 0.7% 0.3% 0.5%
Allowance for loan losses
as a percent of
nonperforming loans 19.1% 43.7% 30.4%
</TABLE>
-----------------------------
(1) Consists entirely of one- to four-family residential loans for all dates
presented.
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Management evaluates each loan individually to determine whether Market
Bank should cease accruing interest on the loan, depending on whether management
deems collection of the loan to be likely. Market Bank had no nonaccruing loans
during the year ended September 30, 2000
Market Bank 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 Bank 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 Bank 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 Bank's classified assets at the dates
indicated were as follows:
<TABLE>
<CAPTION>
At September 30,
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Classified assets:
Special mention $89 $46 $60
Substandard 9 7 23
Doubtful - - -
Loss - - 2
-- -- --
Total classified assets $98 $53 $85
== == ==
</TABLE>
Market Bank 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 Bank 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 Bank charges off the portion of any real
estate loan deemed to be uncollectible.
Market Bank 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 Bank 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 Bank's loan portfolio consists
of one- to four-family residential real estate loans. Substantially all of these
loans are secured by property in Market Bank's lending area of Hamilton County,
Ohio, which has a fairly stable economy. Market Bank'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 Bank makes home equity, multifamily residential real estate,
nonresidential real estate and construction loans. These real estate loans are
also secured by property in Market Bank's lending area. During the fiscal years
ended September 30, 2000, 1999 and 1998, Market Bank has not experienced any
charge-offs or recoveries from these other real estate loan categories in recent
years. Less than .1% of Market Bank's total loans are comprised of consumer
loans, which carry a higher degree of risk than the real estate loans.
Market Bank's allowance for loan losses was $52,000 for the fiscal
years ended September 30, 2000, 1999 and 1998, which represented .13%, .15% and
.16%, 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.
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Investment Activities
Federal regulation and Ohio law permit Market Bank 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 Bank 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 Bank'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 Market Financial's investment portfolio,
excluding mortgage-backed securities, at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
2000 1999 1998
------- ----- ----
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) $ 539 4.0% $ 1,937 11.9% $ 8,556 43.4%
U.S. Government agency
obligations (2) 11,400 83.9 12,800 78.5 9,300 47.2
FHLMC stock (3) 1,160 8.5 1,116 6.8 1,448 7.3
FHLB stock 482 3.6 449 2.8 419 2.1
------ ----- ------ ----- ------ -----
Total $13,581 100.0% $16,302 100.0% $19,723 100.0%
====== ===== ====== ===== ====== =====
</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, Federal Farm Credit Bureau and 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, 2000, 1999 and 1998.
(3) Classified as available for sale at September 30, 2000, 1999 and 1998.
-9-
<PAGE>
Market Bank maintains a portfolio of mortgage-backed securities in the
form of fixed-rate participation interests issued by the Government National
Mortgage Association ("GNMA") and FHLMC. Mortgage-backed securities generally
entitle Market Bank 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 Bank, management believes they are a
prudent alternative for investing excess cash flow when available funds exceed
local loan demand and as part of Market Bank's interest rate risk management.
The following table sets forth certain information regarding Market Bank's
investments in mortgage-backed securities at the dates indicated, all of which
are classified as held to maturity:
<TABLE>
<CAPTION>
At September 30, 2000 At September 30, 1999
------------------------------------------ ----------------------------------------------
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 $ 499 $17 $ - $ 516 $ 592 $29 $ - $ 621
FHLMC participation
certificates 1,331 - 18 1,313 1,455 - 9 1,446
----- -- -- ----- ----- --- -- -------
Total $1,830 $17 $18 $1,829 $2,047 $29 $ 9 $2,067
===== == == ===== ===== === == ======
At September 30, 1998
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains loss value
------ ------ ------ ------
(In thousands)
<S> <C> <C> <C> <C>
GNMA participation
certificates $859 $ 43 $ - $902
FHLMC participation
certificates - - - -
--- --- -- ---
Total $859 $ 43 $ - $902
=== === == ===
</TABLE>
-10-
<PAGE>
The maturities of Market Bank's investment securities at September 30,
2000, are indicated in the following table:
<TABLE>
<CAPTION>
At September 30, 2000
---------------------------------------------------------------------------------------------
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 $200 6.38% $ 100 6.45% $ - -% $ 300 $ 300 6.40%
institutions
U.S. Government agency
obligations (1) - - 11,400 6.21 - - 11,400 11,143 6.21
</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, 2000.
Deposits and Borrowings
General. Deposits have traditionally been the primary source of Market
Bank's funds for use in lending and other investment activities. In addition to
deposits, Market Bank 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 Bank'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 Bank. Market Bank does not use brokers to attract deposits.
The amount of deposits from outside Market Bank's market area is not
significant.
At September 30, 2000 Market Bank's certificates of deposit totaled
approximately $28.9 million, or 71.9% of total deposits. Of such amount,
approximately $22.5 million in certificates of deposit mature within one year.
Based on past experience and Market Bank's prevailing pricing strategies,
management believes that a substantial percentage of such certificates will be
renewed with Market Bank at maturity. If, however, Market Bank is unable to
renew the maturing certificates for any reason, borrowings of up to $26.1
million are available from the FHLB of Cincinnati.
-11-
<PAGE>
The following table sets forth the dollar amount of deposits in the
various types of accounts offered by Market Bank at the dates indicated:
<TABLE>
<CAPTION>
At September 30,
2000 1999 1998
------ ----- -----
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:
NOW accounts (1) $ 198 0.5% $ - -% $ - -%
Statement savings
accounts (2) 14 - - - - -
Passbook accounts (3) 9,731 24.2 10,453 26.2 9,510 25.2
Club accounts (4) 57 .1 58 .1 51 .1
Money market accounts (5) 1,331 3.3 1,829 4.6 2,178 5.8
------ ----- ------ ----- ------ -----
Total transaction accounts 11,331 28.1 12,340 30.9 11,739 31.1
Certificates of deposit (6) 28,929 71.9 27,567 69.1 26,006 68.9
------ ----- ------ ----- ------ -----
Total deposits $40,260 100.0% $39,907 100.0% $37,745 100.0%
====== ===== ======= ===== ====== =====
</TABLE>
----------------------------
(1) The weighted average interest rate on NOW accounts was 0.76% at September
30, 2000.
(2) The weighted average interest rate on statement savings accounts was 2.67%
at September 30, 2000.
(3) The weighted average interest rates on passbook accounts were 2.67% at
September 30, 2000.
(4) The weighted average interest rates on club accounts were 5.08% at
September 30, 2000.
(5) The weighted average interest rates on money market accounts were 2.67% at
September 30, 2000.
(6) The weighted average rates on all certificates of deposit were 6.25% at
September 30, 2000.
The following table shows rate and maturity information for Market
Bank's certificates of deposit at September 30, 2000:
<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% $ 189 $ 40 $ - $ 229
5.00 - 5.99% 11,713 1,306 34 13,053
6.00 - 6.99% 9,876 2,658 1,275 13,809
7.00 - 7.99% 722 1,068 48 1,838
------ ----- ----- ------
Total certificates
of deposit $22,500 $5,072 $1,357 $28,929
====== ===== ===== ======
</TABLE>
-12-
<PAGE>
The following table presents the amount of Market Bank's certificates
of deposit of $100,000 or more by the time remaining until maturity at September
30, 2000:
<TABLE>
<CAPTION>
Maturity Amount
-------- ------
(In thousands)
<S> <C>
December 31, 2000 $ 665
March 31, 2001 794
June 30, 2001 941
September 30, 2001 803
After September 30, 2001 810
-----
Total $4,013
=====
</TABLE>
The following table sets forth Market Bank's deposit account balance
activity for the periods indicated:
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999 1998
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Beginning balance $39,907 $37,745 $35,303
Deposits 16,439 14,282 14,656
Withdrawals (17,517) (13,468) (13,580)
Interest credited 1,431 1,348 1,366
------ ------ ------
Ending balance $40,260 $39,907 $37,745
====== ====== ======
Net increase $ 353 $ 2,162 $ 2,442
====== ====== ======
Percent increase 0.1% 5.7% 6.9%
=== === ===
</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 Bank 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, 2000,
Market Bank was not utilizing FHLB advances.
Competition
Market Bank 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 Bank
competes with other savings associations, savings and loan associations,
commercial banks, mortgage brokers, consumer finance companies, credit unions,
leasing companies and other lenders. Market Bank 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 that are not readily predictable. Market Bank does not
offer all of the products and services offered by some of its competitors,
particularly commercial banks.
Employees
At September 30, 2000, Market Bank had nine full-time employees and one
part-time employee. Market Bank believes that relations with its employees are
excellent. Market Bank offers health, life and disability benefits to all
full-time employees. Market Bank 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 Bank are represented by a collective
bargaining unit.
-13-
<PAGE>
REGULATION
General
Market Financial is a savings and loan holding company within the
meaning of the Home Owners Loan Act, as amended (the "HOLA"). Consequently,
Market Financial 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,
Market Financial is subject to provisions of the Ohio Revised Code applicable to
corporations generally.
As an Ohio savings and loan association, Market Bank is subject to
regulation, examination and oversight by the Superintendent of the Division (the
"Ohio Superintendent"). Because Market Bank's deposits are insured by the FDIC,
Market Bank also is subject to regulatory oversight by the FDIC. Market Bank
must file periodic reports with the OTS concerning its activities and financial
condition. Examinations are conducted periodically by federal and state
regulators to determine whether Market Bank is in compliance with various
regulatory requirements and is operating in a safe and sound manner. Market Bank
is a member of the FHLB and is subject to certain regulations promulgated by the
Board of Governors of the Federal Reserve System (the "FRB").
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws that had generally prevented
banks from affiliating with securities and insurance firms and made other
significant changes in financial services in which various types of financial
institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad powers
for unitary thrift holding companies in existence on May 4, 1999, including
Market Financial. Any thrift holding company formed after May 4, 1999, however,
will be subject to the same restrictions as multiple thrift holding companies,
which generally are limited to activities that are considered incidental to
banking. The GLB Act authorizes a new "financial holding company," which can own
banks and thrifts and which is also permitted to engage in a variety of
financial activities, including insurance and securities underwriting and agency
activities, as long as the depository institutions it owns are well capitalized,
well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities
in which the Market Financial and Market Bank 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.
Office of Thrift Supervision
Regulatory Capital Requirements. Market Bank is required by OTS
regulations to meet certain minimum capital requirements. The tangible capital
requirement requires savings associations to maintain "tangible capital" of not
less than 1.5% of their adjusted total assets. Tangible capital is defined in
OTS regulations as core capital minus any intangible assets.
"Core capital" is comprised of common stockholders' equity (including
retained earnings), noncumulative preferred stock and related surplus, minority
interests in consolidated subsidiaries, certain nonwithdrawable accounts and
pledged deposits of mutual associations. OTS regulations require savings
associations to maintain core capital of at least 4% of their adjusted total
assets, except for associations with the highest examination rating and
acceptable levels of risk.
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 Bank includes a general loan loss allowance of
$52,000 at September 30, 2000. The OTS 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
-14-
<PAGE>
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. Market Bank's capital at September 30, 2000, met
the standards for the highest category, a "well-capitalized" institution.
Liquidity. OTS regulations require that a savings association maintain
a minimum daily balance of liquid assets (such as cash, certain time deposits,
bankers' acceptances and specified United States government, state or federal
agency obligations) of not less than 4% of its net withdrawable savings deposits
plus borrowings payable in one year or less computed as of the end of the prior
quarter or based on the average daily balance during the prior quarter. Monetary
penalties may be imposed upon associations failing to meet these liquidity
requirements. The eligible liquidity of Market Bank at September 30, 2000, was
approximately $12.5 million, or 30.6%, and exceeded the applicable 4.0%
percentage liquidity requirement by approximately $10.9 million.
Qualified Thrift Lender Test. Savings associations must meet one of two
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"). Generally, QTIs
are assets 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 the QTL 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, 2000, Market Bank qualified as a QTL.
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 Bank was in compliance with such
restrictions at September 30, 2000.
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. Market
Financial is an affiliate of Market Bank. 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 Bank was in
compliance with these requirements and restrictions at September 30, 2000.
Limitations on Capital Distributions. The OTS imposes various
restrictions or requirements on the ability of associations to make capital
distributions. Capital distributions include, without limitation, payments of
cash dividends, repurchases and certain other acquisitions by an association of
its shares and payments to stockholders of another association in an acquisition
of such other association.
An application must be submitted and approval from the OTS must be
obtained by a subsidiary of a savings and loan holding company (i) if the
proposed distribution would cause total distributions for the calendar year to
-15-
<PAGE>
exceed net income for that year to date plus the savings association's retained
net income for the preceding two years; (ii) if the savings association will not
be at least adequately capitalized following the capital distribution; (iii) if
the proposed distribution would violate a prohibition contained in any
applicable statute, regulation or agreement between the savings association and
the OTS (or the FDIC), or violate a condition imposed on the savings association
in an OTS-approved application or notice. If a savings association subsidiary of
a holding company is not required to file an application, it must file a 30-day
notice of the proposed capital distribution with the OTS.
Holding Company Regulation. As a savings and loan holding company
within the meaning of the HOLA, Market Financial 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 Market
Financial. 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 in existence on May 4,
1999, Market Financial generally has no restrictions on its activities. 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, however, 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 Market Financial 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 savings and loan holding company
would become subject to the activities restrictions applicable to multiple
holding companies. At September 30, 2000, Market Bank met the QTL test.
Federal Regulation of Acquisitions of Control of Market Financial and
Market Bank. In addition to the Ohio law limitations on the merger and
acquisition of Market Financial, 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 Bank or Market Financial 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.
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 Bank 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 Bank, 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.
State-Chartered Association Activities. The ability of state-chartered
associations to engage in any state-authorized activities or make any
-16-
<PAGE>
state-authorized investments is limited if such activity is conducted or
investment is made in a manner different than that permitted for, or subject to
different terms and conditions than those imposed on, federally chartered
savings associations. Engaging as a principal in any such activity or investment
not permissible for a federal association is subject to approval by the FDIC.
Such approval will not be granted unless certain capital requirements are met
and there is not a significant risk to the FDIC insurance fund. All of Market
Bank's activities and investments at September 30, 2000, were permissible for a
federal association.
FRB Reserve Requirements
Effective December 28, 2000, FRB regulations require savings
associations to maintain reserves of 3% of net transaction accounts (primarily
NOW accounts) up to $42.8 million (subject to an exemption of up to $5.5
million), and of 10% of net transaction accounts in excess of $42.8 million. At
September 30, 2000, Market Bank was in compliance with the present reserve
requirements and the requirements then in effect.
Federal Home Loan Banks
The FHLBs provide credit to their members in the form of advances.
Market Bank 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
Bank'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 Bank was in compliance with this requirement with an
investment in stock of the FHLB of Cincinnati of $482,000 at September 30, 2000.
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 specified categories.
The FHLB is required to establish standards of community investment or
service that its members must maintain for continued access to long-term
advances. The standards take into account a member's performance under the
Community Reinvestment Act and its record of lending to first-time home buyers.
All long-term advances by the FHLB must be made only to provide funds for
residential housing finance.
TAXATION
Federal Taxation
Market Financial and Market Bank are each subject to the federal tax
laws and regulations which apply to corporations generally. In addition to the
regular income tax, Market Financial and Market Bank 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. Market
Financial's average gross receipts for the three tax years ending on December
31, 1999, is $122,000, and, as a result, Market Financial does qualify as a
small corporation exempt from the alternative minimum tax. Market Bank's average
gross receipts for the three tax years ending on December 31, 1999, is $3.9
million, and, as a result, Market Bank 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
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<PAGE>
institutions, such as Market Bank, 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 Bank 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 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
and its reserve for losses on nonqualifying loans as of the close of its last
taxable year beginning before January 1, 1996, over (ii) the greater of the
balance of (a) its pre-1988 reserves or (b) what the thrift's reserves would
have been at the close of its last year beginning before January 1, 1996, had
the thrift always used the experience method.
For taxable years that begin after December 31, 1995, and before
January 1, 1998, if a thrift meets the residential loan requirement for a tax
year, the recapture of the applicable excess reserves otherwise required to be
taken into account as a Code Section 481(a) adjustment for the year will be
suspended. A thrift meets the residential loan requirement if, for the tax year,
the principal amount of residential loans made by the thrift during the year is
not less than its base amount. The "base amount" generally is the average of the
principal amounts of the residential loans made by the thrift during the six
most recent tax years beginning before January 1, 1996. A residential loan is a
loan as described in Section 7701(a)(19)(C)(v) (generally a loan secured by
residential or church property and certain mobile homes), but only to the extent
that the loan is made to the owner of the property.
The 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 Bank to Market Financial 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 Bank 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, 2000, the pre-1988 reserves of
Market Bank for tax purposes totaled approximately $1.3 million. Market Bank
believes it had approximately $6.0 million of accumulated earnings and profits
for tax purposes as of September 30, 2000, 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 Bank will
have current or accumulated earnings and profits in subsequent years.
-18-
<PAGE>
The tax returns of Market Bank have been audited or closed without
audit through 1996. 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 Bank.
Ohio Taxation
Market Financial is subject to the Ohio corporation franchise tax,
which, as applied to Market Financial, is a tax measured by both net earnings
and 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
Market Financial, 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 Bank 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 Bank determined in
accordance with generally accepted accounting principles. For tax year 1999, 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 rate is 1.3% of the taxable
book net worth. As a "financial institution," Market Bank is not subject to any
tax based upon net income or net profits imposed by the State of Ohio.
Item 2. Description of Property
The following table sets forth certain information at September
30, 2000, regarding the properties on which the main office and the branch
office of Market Bank are located:
<TABLE>
<CAPTION>
Approximate
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 5,000 $1,421 $36,101
Mt. Healthy, Ohio 45231
125-127 Miami Avenue Owned 1994 1,753 50 4,159
North Bend, Ohio 45052
</TABLE>
Item 3. Legal Proceedings
Market Bank is not presently involved in any material legal
proceedings. From time to time, Market Bank is a party to legal proceedings
incidental to its business to enforce its security interest in collateral
pledged to secure loans made by Market Bank.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
There were 1,259,439 common shares of Market Financial outstanding
on December 20, 2000, held of record by approximately 238 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 Market Financial's common shares is quoted on the
Nasdaq SmallCap System under the symbol "MRKF." The table below sets forth the
high ask and low bid prices for the common shares of Market Financial, together
with dividends declared per share, for each quarter of the 2000 and 1999 fiscal
years. Price quotations reflect inter-dealer prices, without retail mark-up,
mark-down or commission, and may not represent actual transactions.
-19-
<PAGE>
<TABLE>
<CAPTION>
Cash dividends
High Ask Low Bid declared per share
<S> <C> <C> <C>
Fiscal 2000
Quarter ended:
December 31, 1999 $11.25 $8.25 $.08
March 31, 2000 10.00 8.00 .08
June 30, 2000 8.13 7.06 .08
September 30, 2000 12.50 7.50 .08
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
</TABLE>
The earnings of Market Financial consist primarily of
dividends from Market Bank. 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 earnings for that year to date plus its
retained earnings 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 Bank currently meets the definition of a "well-capitalized"
institution and, unless the OTS determines that Market Bank is an institution
requiring more than normal supervision, may pay dividends in accordance with the
foregoing provisions of the OTS regulations.
Item 6. Management's Discussion and Analysis or Plan of Operation
General
The following discussion and analysis of the financial condition and
results of operations of Market Financial and Market Bank should be read in
conjunction with and with reference to the consolidated financial statements,
and the notes thereto, included in this Annual Report.
Market Financial was incorporated for the purpose of owning all of
Market Bank's outstanding stock upon conversion to stock form. As a result, the
discussion that follows focuses on Market Bank'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 Bank and Market
Financial'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 Market Financial'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 Bank as set forth
under "Asset and Liability Management;"
2. Management's discussion of the liquidity of Market Bank's assets and the
regulatory capital of Market Bank as set forth under "Liquidity and Capital
Resources;"
-20-
<PAGE>
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, 2000 and
1999;"
4. Management's estimate as to the effects of recent accounting pronouncements
as set forth under "Recent Accounting Pronouncements;" and
5. Management's determination of the effect of the Gramm-Leach-Bliley Act on
the business of Market Financial and Market Bank as set forth under
"Potential Impact Of Gramm-Leach- Bliley Act on Future Results of
Operation."
Changes in Financial Condition
Market Financial's assets at September 30, 2000, totaled approximately
$56.1 million, a $636,000, or 1.1%, increase over the $55.5 million total at
September 30, 1999. The increase was funded through growth in deposits and net
earnings for the year.
Liquid assets (cash and cash equivalents, certificates of deposit and
investment securities) totaled $13.6 million at September 30, 2000, a decrease
of $2.9 million from the total at September 30, 1999. Net proceeds from the
decline in liquid assets were primarily used to fund net loan originations of
$2.7 million.
Loans receivable totaled $37.9 million at September 30, 2000, an
increase of $2.7 million, or 7.6%, over September 30, 1999. This increase
resulted primarily from loan originations of $6.8 million, which exceeded
principal repayments of $4.1 million. Market Bank's allowance for loan losses
totaled $52,000 at September 30, 2000 and 1999. The allowance represented .13%
and .15% of total loans at September 30, 2000 and 1999, respectively.
Nonperforming loans totaled $272,000 and $119,000, or .71% and .34% of total
loans at September 30, 2000 and 1999, respectively.
Although management believes that its allowance for loan losses at
September 30, 2000, 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
Financial's results of operations.
Deposits totaled $40.3 million at September 30, 2000, an increase of
$353,000, or .9%, over the total at September 30, 1999. Demand accounts
decreased by approximately $1.0 million, and certificates of deposit increased
by $1.4 million during the year ended September 30, 2000. At September 30, 2000,
certificates of deposit that will mature within one year accounted for 55.9% of
Market Bank's deposit liabilities. Proceeds from the increase in deposits were
used to fund loan originations and the purchase of office premises and
equipment.
Shareholders' equity totaled $14.8 million at September 30, 2000, an
increase of $180,000, or 1.2%, over September 30, 1999. The increase was due
primarily to net earnings of $311,000 and a decrease in shares acquired by stock
benefit plans of $269,000, which were partially offset by dividends paid of
$403,000.
Market Bank is required to meet each of three minimum capital standards
promulgated by 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 generally equal to 4% of
adjusted total assets, while the risk-based capital requirement mandates
maintenance of core capital plus general loan loss allowances equal to 8% of
risk-weighted assets as defined by OTS regulations. As of September 30, 2000,
Market Bank's tangible and core capital totaled $13.0 million, or 23.7% of
adjusted total assets, which exceeded the minimum requirements of $820,000 and
$2.2 million, by $12.1 million and $10.8 million, respectively. As of September
30, 2000, Market Bank's risk-based capital was $13.5 million, or 46.0% of
risk-weighted assets, exceeding the minimum requirement by $11.2 million.
Comparison of Operating Results for the Years Ended September 30, 2000 and 1999
General. Net earnings totaled $311,000 for the year ended September 30, 2000, a
$387,000, or 55.4%, decrease from the $698,000 of net earnings recorded for the
year ended September 30, 1999. The decrease in earnings resulted primarily from
the absence in fiscal 2000 of a $463,000 gain on sale of investments recorded in
fiscal 1999, which was partially offset by a $200,000 decrease in the provision
for federal income taxes.
-21-
<PAGE>
Net Interest Income. Total interest income amounted to $3.8 million for the year
ended September 30, 2000, a $65,000, or 1.7%, increase over fiscal 1999. The
increase resulted primarily from an increase in the loan portfolio during fiscal
2000. Interest income on loans increased by $168,000, or 6.5%, primarily due to
a $2.8 million, or 8.5%, increase in the weighted-average balance outstanding
during fiscal 2000, which was partially offset by a 14 basis point (100 basis
points equals one percent) decrease in the weighted-average yield. Interest
income on mortgage-backed securities increased by $51,000, or 53.7%, compared to
fiscal 1999, as a result of a $701,000, or 57.3%, increase in the
weighted-average balance outstanding, which was partially offset by an 18 basis
point decrease in the weighted-average yield from 7.76% in fiscal 1999 to 7.58%
in fiscal 2000. Interest income on investment securities increased by $96,000,
or 13.6%, primarily due to an increase of $990,000, or 8.6%, in the
weighted-average balance outstanding during fiscal 2000, which was coupled with
a 29 basis point increase in the weighted-average yield. Interest income on
interest-bearing deposits totaled $93,000 in fiscal 2000, a decrease of
$250,000, or 72.9%, from fiscal 1999. The decrease resulted primarily from a
decrease of $4.5 million, or 77.1%, in the weighted-average balances
outstanding, which was partially offset by a 107 basis point increase in the
weighted-average yield, from 5.87% in fiscal 1999 to 6.94% in fiscal 2000.
Interest expense on deposits totaled $1.9 million for fiscal 2000, an increase
of $79,000, or 4.4%, over fiscal 1999. This increase was due primarily to an
increase of $805,000, or 2.1%, in the weighted average balance outstanding,
coupled with an 11 basis point increase in the average cost of deposits from
4.54% in fiscal 1999 to 4.65% in fiscal 2000. Interest expense on other
borrowings decreased by $21,000, or 100.0%, as a result of the $247,000 decrease
in the weighted average balance outstanding in fiscal 2000.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $7,000, or .4%, for fiscal 2000, compared to
fiscal 1999. The interest rate spread increased by five basis points, from 2.58%
in fiscal 1999 to 2.63% in fiscal 2000. The net interest margin increased by one
basis point, from 3.70% in fiscal 1999 to 3.71% in fiscal 2000.
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 Bank, the status of past due principal and interest
payments, general economic conditions, particularly as such conditions relate to
Market Bank's market area, and other factors related to the collectibility of
Market Bank'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, 2000. There can be no assurance, however, that the allowance for
loan losses of Market Bank will be adequate to cover losses on nonperforming
assets in the future.
Other Income. Other income declined by $463,000 due to the absence in fiscal
2000 of gains on sales of investments recorded in 1999. Other operating income,
primarily service fees on money orders and travelers' checks, totaled $11,000
for each of the years ended September 30, 2000 and 1999, respectively.
General, Administrative and Other Expense. General, administrative and other
expense increased by $131,000, or 9.7%, for the year ended September 30, 2000,
compared to fiscal 1999. The increase resulted primarily from a $100,000, or
12.4%, increase in employee compensation and benefits, an increase of $27,000,
or 22.3%, in occupancy and equipment and an increase of $34,000, or 16.6%, in
other operating expense, which were partially offset by an $11,000, or 47.8%,
decrease in federal deposit insurance premiums and a $19,000, or 9.9%, decrease
in franchise taxes. The increase in employee compensation and benefits was due
primarily to a $52,000 increase in stock benefit plan expense, coupled with an
increase in staffing levels and normal merit increases. The increase in
occupancy and equipment expense reflects increases in depreciation and other
costs related to the new office expansion completed during fiscal 2000. The
increase in other operating expense was due primarily to costs related to Market
Bank's start-up of automated teller machine ("ATM") services during fiscal 2000
and pro-rata increases in operating costs year to year. The decreases in federal
deposit insurance premiums and franchise taxes resulted from a decline in
premium rates and the rate of tax, respectively, during fiscal 2000.
Federal Income Taxes. The provision for federal income taxes totaled $160,000
for the year ended September 30, 2000, compared to $360,000 for fiscal 1999. The
$200,000, or 55.6%, decrease resulted from a $587,000, or 55.5%, decrease in
earnings before taxes. The effective tax rate was 34.0% for each of the years
ended September 30, 2000 and 1999.
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
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<PAGE>
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, or 13.5%, in the weighted
average balances outstanding during fiscal 1999, which was coupled with a 57
basis point 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 by
$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.
Provision for Losses on Loans. As a result of an analysis of historical
experience, the volume and type of lending conducted by Market Bank, the status
of past due principal and interest payments, general economic conditions,
particularly as such conditions relate to Market Bank's market area, and other
factors related to the collectibility of Market Bank's loan portfolio,
management decided no additional provision for losses on loans was necessary
during the year ended September 30, 1999.
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 an increase in 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.
Average Balance, Yield, Rate and Volume Data
The following table sets forth certain information relating to Market
Financial'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.
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<PAGE>
<TABLE>
<CAPTION>
Year ended September 30,
2000 1999 1998
-------------------------- ---------------------------- ----
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 $36,488 $2,758 7.56% $33,643 $2,590 7.70% $30,524 $2,411 7.90%
Mortgage-backed securities 1,925 146 7.58 1,224 95 7.76 1,147 101 8.81
Investment securities 12,446 801 6.44 11,456 705 6.15 13,249 890 6.72
Other interest-earning 1,340 93 6.94 5,845 343 5.87 7,954 483 6.07
------ ----- ---- ------ ----- ---- ------ ----- ----
assets
Total interest-earning 52,199 3,798 7.28 52,168 3,733 7.15 52,874 3,885 7.35
assets
Non-interest-earning assets 3,744 3,481 2,559
------ ------ ------
Total assets $55,943 $55,649 $55,433
====== ====== ======
Interest-bearing
liabilities:
NOW accounts $ 77 1 1.30 $ - - - $ - - -
-
Passbook and club accounts 10,302 273 2.65 10,136 277 2.73 9,875 279 2.83
Money market demand 1,561 42 2.69 2,039 55 2.70 2,254 64 2.84
accounts
Certificates of deposit 28,088 1,545 5.50 27,048 1,450 5.36 24,246 1,382 5.70
Borrowings - - - 247 21 8.50 121 9 7.44
------ ----- ---- ------ ----- ---- ------ ----- ----
Total interest-bearing
liabilities 40,028 1,861 4.65 39,470 1,803 4.57 36,496 1,734 4.75
----- ---- ----- ---- ----- ----
Non-interest-bearing 1,376 1,300 1,113
------ ------ ------
liabilities
Total liabilities 41,404 40,770 37,609
Shareholders' equity 14,539 14,879 17,824
------ ------ ------
Total liabilities and
shareholders' equity $55,943 $55,649 $55,433
====== ====== ======
Net interest income and
spread $1,937 2.63% $1,930 2.58% $2,151 2.60%
===== ==== ===== ==== ===== ====
Net interest margin (net
interest income as a
percent of average
interest-earning assets) 3.71% 3.70% 4.07%
==== ==== ====
Average interest-earning
assets to interest-bearing
liabilities 130.41% 132.17% 144.88%
====== ====== ======
</TABLE>
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<PAGE>
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 Bank'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,
2000 vs. 1999 1999 vs.1998
---------------------------- ----------------------------
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 $215 $ (47) $168 $ 240 $(61) $ 179
Mortgage-backed securities 53 (2) 51 6 (12) (6)
Investment securities 63 33 96 (109) (76) (185)
Interest-bearing deposits (313) 63 (250) (124) (16) (140)
--- --- --- ---- --- ----
Total interest income 18 47 65 13 (165) (152)
Interest expense attributable to:
Deposits 49 30 79 152 (95) 57
Borrowings (21) - (21) 11 1 12
--- --- --- ---- --- ----
Total interest expense 28 30 58 163 (94) 69
--- --- --- ---- --- ----
Increase (decrease) in net interest
income $(10) $ 17 $ 7 $(150) $(71) $(221)
=== === === ==== === ====
</TABLE>
Asset and Liability Management
Market Bank, 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 Bank uses the "net portfolio value" ("NPV")
methodology adopted by the OTS as part of its capital regulations. Although
Market Bank 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 Bank'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 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, 2000, 2% of the present value of Market Bank'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 $3.1 million at September 30, 2000, Market
Bank would have been required to deduct approximately $1.0 million (50% of the
$2.0 million difference) from its capital in determining whether Market Bank met
its risk-based capital requirement. Regardless of such restriction, however,
Market Bank's risk-based capital at September 30, 2000, would still have
exceeded the regulatory requirement by $10.2 million.
-25-
<PAGE>
Presented below, as of September 30, 2000, and September 30, 1999, is an
analysis of Market Bank'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 Bank has operated within
the policy limits set by the Board of Directors of Market Bank as the maximum
change in NPV that the Board of Directors deems advisable in the event of
various changes in interest rates.
<TABLE>
<CAPTION>
September 30, 2000
Change in interest rate $ change % change
(basis points) in NPV in NPV
----------------------- ------- --------
(Dollars in thousands)
<S> <C> <C>
+300 $(4,571) (32)%
+200 (3,101) (22)
+100 (1,553) (11)
0 - -
-100 1,206 8
-200 1,852 13
-300 2,469 17
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
</TABLE>
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 environment,
because Market Bank has a significant amount of fixed-rate loans in its loan
portfolio, the amount of interest Market Bank 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 Bank would pay on its deposits would
increase rapidly because Market Bank'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 Bank's net interest income could
be expected to be negatively affected. Moreover, rising interest rates could
negatively affect Market Bank's earnings due to diminished loan demand.
-26-
<PAGE>
Liquidity and Capital Resources
Liquidity refers to the ability of Market Bank 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 Bank'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, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Year ended September 30,
------------------------------------------
2000 1999 1998
---- ---- ----
(In thousands)
<S> <C> <C> <C>
Net cash from operating activities $ 254 $ 514 $ 798
Net cash from (used in) investing activities
(1,740) (3,841) 4,938
Net cash from (used in) financing activities
(39) 237 (2,603)
----- ----- -----
Net change in cash and cash equivalents
(1,525) (3,090) 3,133
Cash and cash equivalents at the beginning
of the year 2,291 5,381 2,248
----- ----- -----
Cash and cash equivalents at the end of the
year $ 766 $2,291 $5,381
===== ===== =====
</TABLE>
Market Bank's principal sources of funds are deposits, loan and mortgage-backed
securities repayments, maturities of securities and other funds provided by
operations. Market Bank 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 Bank 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 Bank's asset and liability management
program.
At September 30, 2000, Market Bank's certificates of deposit totaled
approximately $28.9 million, or 71.9% of total deposits. Of such amount,
approximately $22.5 million in certificates of deposit mature within one year.
Based on past experience and Market Bank's prevailing pricing strategies,
management believes that a substantial percentage of such certificates will be
renewed with Market Bank at maturity. If Market Bank is unable to renew the
maturing certificates for any reason, however, borrowings of up to $26.1 million
are available from the FHLB of Cincinnati.
OTS regulations presently require Market Bank 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 Bank's average daily balance of net
withdrawable deposit accounts and borrowings payable in one year or less. The
liquidity requirement, which may be changed from time to time by the OTS to
reflect changing economic conditions, is intended to provide a source of
relatively liquid funds upon which Market Bank may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At September 30, 2000,
Market Bank's regulatory liquidity ratio was 32.7%. At such date, Market Bank
had no commitments to originate loans, undisbursed loans in process of $608,000
and no commitments to purchase or sell loans. Market Bank considers its
liquidity and capital resources sufficient to meet its outstanding short-term
and long-term needs. See Note H to the Consolidated Financial Statements.
Market Bank 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 Bank exceeded all of its regulatory capital
requirements at September 30, 2000.
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
-27-
<PAGE>
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 4% - 5% of the association's total
assets, 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 Bank includes a general loan loss allowance of
$52,000 at September 30, 2000.
The following table summarizes Market Bank's regulatory capital requirements and
actual capital at September 30, 2000:
<TABLE>
<CAPTION>
Excess of
Current requirement actual capital
------------------- over current Applicable
Actual capital requirement asset total
-------------------- ------------------ ------------
September 30, 2000 Amount Percent Amount Percent Amount Percent
------------------ ------ ------- ------ ------- ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Tangible capital $12,958 23.7% $ 820 1.5% $12,138 22.2% $54,676
Core capital 12,958 23.7 2,187 4.0 10,771 19.7 54,676
Risk-based capital 13,523 46.0 2,353 8.0 11,170 38.0 29,413
</TABLE>
Potential Impact of Gramm-Leach-Bliley Act on Future Results of Operation
On November 12, 1999, the Gramm-Leach-Bliley Act (the "GLB Act") was
enacted into law. The GLB Act repealed prior laws that had generally prevented
banks from affiliating with securities and insurance firms and made other
significant changes in financial services in which various types of financial
institutions may engage.
Prior to the GLB Act, unitary savings and loan holding companies which
met certain requirements were the only financial institution holding companies
that were permitted to engage in any type of business activity, whether or not
the activity was a financial service. The GLB Act continues those broad powers
for unitary thrift holding companies in existence on May 4, 1994, including
Market Financial. Any thrift holding company formed after May 4, 1999, however,
will be subject to the same restrictions as multiple thrift holding companies,
which generally are limited to activities that are considered incidental to
banking. The GLB Act authorizes a new "financial holding company," which can own
banks and thrifts and which is also permitted to engage in a variety of
financial activities, including insurance and securities underwriting and agency
activities, as long as the depository institutions it owns are well capitalized,
well managed and meet certain other tests.
The GLB Act is not expected to have a material effect on the activities
in which the Market Financial and Market Bank 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 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. Management adopted SFAS No. 133 effective October 1,
2000, as required without material impact on Market Financial's financial
statements.
-28-
<PAGE>
In September 2000, the FASB issued SFAS No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
which revises the standards for accounting for securitizations and other
transfers of financial assets and collateral and requires certain disclosures,
but carries over most of the provisions of SFAS No. 125 without reconsideration.
SFAS No. 140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001, and is effective
for recognition and reclassification of collateral and for disclosures relating
to securitization transactions and collateral for fiscal years ending after
December 15, 2000. SFAS No. 140 is not expected to have a material effect on
Market Financial's financial position or results of operations.
-29-
<PAGE>
Item 7. Financial Statements
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, 2000 and 1999, and the
related consolidated statements of earnings, comprehensive income, shareholders'
equity, and cash flows for each of the three years in the period ended September
30, 2000. 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, 2000 and 1999, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended September 30, 2000, in conformity with generally accepted accounting
principles.
/s/Grant Thornton LLP
Cincinnati, Ohio
November 15, 2000
-30-
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
ASSETS 2000 1999
<S> <C> <C>
Cash and due from banks $ 527 $ 644
Federal funds sold 100 1,392
Interest-bearing deposits in other financial institutions 139 255
------ ------
Cash and cash equivalents 766 2,291
Certificates of deposit in other financial institutions 300 290
Investment securities held to maturity - at amortized cost, approximate market
value of $11,143 and $12,529 at September 30, 2000 and 1999 11,400 12,800
Investment securities designated as available for sale - at market 1,160 1,116
Mortgage-backed securities held to maturity - at cost, approximate market
value of $1,829 and $2,067 at September 30, 2000 and 1999 1,830 2,047
Loans receivable - net 37,879 35,219
Office premises and equipment - at depreciated cost 1,471 819
Federal Home Loan Bank stock - at cost 482 449
Accrued interest receivable 371 320
Prepaid expenses and other assets 265 100
Prepaid federal income taxes 163 -
------ ------
Total assets $56,087 $55,451
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits $40,260 $39,907
Advances by borrowers for taxes and insurance 70 59
Accrued interest payable 105 98
Other liabilities 272 160
Accrued federal income taxes - 45
Deferred federal income taxes 625 607
------ ------
Total liabilities 41,332 40,876
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 8,160 8,187
Retained earnings - substantially restricted 7,892 7,984
Shares acquired by stock benefit plans (1,211) (1,480)
Less 76,286 shares of treasury stock - at cost (838) (838)
Accumulated comprehensive income, unrealized gains on securities
designated as available for sale, net of related tax effects 752 722
------ ------
Total shareholders' equity 14,755 14,575
------ ------
Total liabilities and shareholders' equity $56,087 $55,451
====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
-31-
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except per share data)
2000 1999 1998
<S> <C> <C> <C>
Interest income
Loans $2,758 $2,590 $2,411
Mortgage-backed securities 146 95 101
Investment securities 801 705 890
Interest-bearing deposits and other 93 343 483
----- ----- -----
Total interest income 3,798 3,733 3,885
Interest expense
Deposits 1,861 1,782 1,725
Borrowings - 21 9
----- ----- -----
Total interest expense 1,861 1,803 1,734
----- ----- -----
Net interest income 1,937 1,930 2,151
Other income
Gain on sale of investments - 463 -
Other operating 11 11 7
----- ----- -----
Total other income 11 474 7
General, administrative and other expense
Employee compensation and benefits 906 806 778
Occupancy and equipment 148 121 122
Federal deposit insurance premiums 12 23 28
Franchise taxes 172 191 184
Other operating 239 205 210
----- ----- -----
Total general, administrative and
other expense 1,477 1,346 1,322
----- ----- -----
Earnings before income taxes 471 1,058 836
Federal income taxes
Current 156 359 301
Deferred 4 1 (17)
----- ----- -----
Total federal income taxes 160 360 284
----- ----- -----
NET EARNINGS $ 311 $ 698 $ 552
===== ===== =====
EARNINGS PER SHARE
Basic $.26 $.58 $.45
=== === ===
Diluted $.26 $.57 $.45
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
-32-
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Net earnings $311 $698 $552
Other comprehensive income, net of tax:
Unrealized holding gains on securities during
the period, net of tax of $15, $47 and $143
in 2000, 1999 and 1998, respectively 30 91 277
Reclassification adjustment for realized gains
included in earnings, net of tax of $157 in 1999 - (306) -
--- --- ---
Comprehensive income $341 $483 $829
=== === ===
Accumulated comprehensive income $752 $722 $937
=== === ===
</TABLE>
The accompanying notes are an integral part of these statements.
-33-
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
(In thousands, except share data)
Shares Unrealized gains
acquired on securities
Additional by stock designated as
Common paid-in Retained benefit Treasury available
stock capital earnings plans stock for sale Total
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at October 1, 1997 $ - $12,832 $7,472 $(1,069) $ - $660 $19,895
Purchase of shares for stock benefit plans - - - (729) - - (729)
Amortization of expense related to stock benefit plans - 34 - 98 - - 132
Capital distributions of $3.78 per share - (4,675) (374) - - - (5,049)
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - - 277 277
Net earnings for the year ended September 30, 1998 - - 552 - - - 552
-- ------ ----- ------ ---- --- ------
Balance at September 30, 1998 - 8,191 7,650 (1,700) - 937 15,078
Purchase of treasury stock - - - - (838) - (838)
Amortization of expense related to stock benefit plans - (4) - 220 - - 216
Cash dividends of $.28 per share - - (364) - - - (364)
Realized gains on securities designated as available for
sale, net of related tax effects - - - - - (306) (306)
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - - 91 91
Net earnings for the year ended September 30, 1999 - - 698 - - - 698
-- ------ ----- ------ ---- --- ------
Balance at September 30, 1999 - 8,187 7,984 (1,480) (838) 722 14,575
Amortization of expense related to stock benefit plans - (27) - 269 - - 242
Cash dividends of $.32 per share - - (403) - - - (403)
Unrealized gains on securities designated as available
for sale, net of related tax effects - - - - - 30 30
Net earnings for the year ended September 30, 2000 - - 311 - - - 311
-- ------ ----- ------ ---- --- ------
Balance at September 30, 2000 $ - $8,160 $7,892 $(1,211) $(838) $752 $14,755
== ===== ===== ====== ==== === ======
</TABLE>
The accompanying notes are an integral part of these statements.
-34-
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 311 $ 698 $ 552
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 1
Depreciation and amortization 40 30 36
Amortization of deferred loan origination (fees) costs 6 (3) (3)
Amortization of expense related to stock benefit plans 242 216 132
Gain on sale of investment securities designated as available
for sale - (463) -
Federal Home Loan Bank stock dividends (33) (30) (29)
Increase (decrease) in cash due to changes in:
Accrued interest receivable (51) (1) 201
Accrued interest payable 7 3 (4)
Prepaid expenses and other assets (165) 49 (79)
Other liabilities 112 (15) 38
Federal income taxes
Current (208) 27 (30)
Deferred 4 1 (17)
----- ------ ------
Net cash provided by operating activities 266 514 798
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as held to maturity (790) (11,000) (6,600)
Proceeds from maturity of investment securities 2,190 7,500 14,560
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 216 296 405
Loan disbursements (6,755) (11,582) (12,494)
Principal repayments on loans 4,089 9,182 6,183
Purchase of office premises and equipment (692) (722) (16)
(Increase) decrease in certificates of deposit in other
financial institutions - net (10) 3,500 2,900
----- ------ ------
Net cash provided by (used in) investing activities (1,752) (3,841) 4,938
Cash flows provided by (used in) financing activities:
Net increase in deposits 353 2,162 2,442
Proceeds from other borrowed money 500 180 725
Repayment of other borrowed money (500) (905) -
Advances by borrowers for taxes and insurance 11 2 8
Shares acquired for stock benefit plans - - (729)
Purchase of treasury stock - (838) -
Capital distributions and dividends paid on common stock (403) (364) (5,049)
----- ------ ------
Net cash provided by (used in) financing activities (39) 237 (2,603)
----- ------ ------
Net increase (decrease) in cash and cash equivalents
(balance carried forward) (1,525) (3,090) 3,133
----- ------ ------
</TABLE>
-35-
<PAGE>
Market Financial Corporation
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Net increase (decrease) in cash and cash
equivalents (balance brought forward) $(1,525) $(3,090) $3,133
Cash and cash equivalents at beginning of year 2,291 5,381 2,248
------ ------ -----
Cash and cash equivalents at end of year $ 766 $ 2,291 $5,381
====== ====== =====
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 391 $ 264 $ 340
====== ====== =====
Interest on deposits and borrowings $ 1,854 $ 1,800 $1,738
====== ====== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains on securities designated as available for sale,
net of related tax effects $ 30 $ 91 $ 277
====== ====== =====
</TABLE>
The accompanying notes are an integral part of these statements.
-36-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Market Financial Corporation (the "Corporation") is a savings and loan
holding company whose activities are primarily limited to holding the stock
of Market Bank (the "Bank"). Future references to the Corporation or the
Bank are utilized herein as the context requires. The Bank 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 Bank'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 Bank 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.
1. Principles of Consolidation
The consolidated financial statements include the accounts of the
Corporation and its wholly-owned subsidiary, the Bank. 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 recorded to operations or shareholders' equity, respectively.
-37-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
2. Investment Securities and Mortgage-Backed Securities (continued)
The Corporation's shareholders' equity reflected unrealized gains on
securities designated as available for sale, net of applicable tax effects,
totaling $752,000 and $722,000 at September 30, 2000 and 1999, 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.
4. Allowance for Loan Losses
It is the Bank'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 Bank 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 Bank 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.
-38-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
4. Allowance for Loan Losses (continued)
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 Bank 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 Bank'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, 2000 and 1999, the Bank had no loans that would be defined
as impaired under SFAS No. 114.
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.
-39-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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.
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 $108,000, $101,000 and
$139,000 for the fiscal years ended September 30, 2000, 1999 and 1998,
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 and awarded 53,429 shares of the Corporation's common stock,
which are earned ratably over a five-year period. Expense recognized under
the RRP totaled approximately $169,000, $124,000 and $36,000 for the fiscal
years ended September 30, 2000, 1999 and 1998, respectively.
-40-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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. The Corporation's advertising
expense totaled $10,000, $10,000 and $12,000 for the fiscal years ended
September 30, 2000, 1999 and 1998, respectively.
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 72,814, 84,096 and 95,863
unallocated ESOP shares, totaled 1,183,789, 1,208,530 and 1,239,862 for the
fiscal years ended September 30, 2000, 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 deemed
outstanding for purposes of computing diluted earnings per share totaled
1,183,789, 1,215,305 and 1,239,862 for the fiscal years ended September 30,
2000, 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 125,558 and 113,526 shares of common stock with a
weighted-average exercise price of $9.6875 and $13.50 were outstanding at
September 30, 2000 and 1998, respectively, but were excluded from the
computation of common stock equivalents because their exercise prices were
higher than the average market price of the common shares.
During fiscal 1998, the Corporation declared capital distributions 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.
-41-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
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 Corporation.
The following methods and assumptions were used by the Corporation in
estimating its fair value disclosures for financial instruments at September
30, 2000 and 1999:
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.
-42-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES (continued)
12. Fair Value of Financial Instruments (continued)
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, 2000 and 1999,
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.
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, 2000 and 1999 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>
2000 1999
Carrying Fair Carrying Fair
value value value value
(In thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 766 $ 766 $ 2,291 $ 2,291
Certificates of deposit in other financial institutions 300 300 290 290
Investment securities held to maturity 11,400 11,143 12,800 12,529
Investment securities designated as available for sale 1,160 1,160 1,116 1,116
Mortgage-backed securities 1,830 1,829 2,047 2,067
Loans receivable - net 37,879 36,074 35,219 33,824
Federal Home Loan Bank stock 482 482 449 449
------ ------ ------ ------
$53,817 $51,754 $54,212 $52,566
====== ====== ====== ======
Financial liabilities:
Deposits $40,260 $40,190 $39,907 $39,958
Advances by borrowers for taxes and insurance 70 70 59 59
------ ------ ------ ------
$40,330 $40,260 $39,966 $40,017
====== ====== ====== ======
</TABLE>
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the fiscal
2000 consolidated financial statement presentation.
-43-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
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>
2000 1999
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
Three to five years 11,400 11,143 8,500 8,269
Five to ten years - - 2,500 2,455
------ ------ ------ ------
Total investment securities
held to maturity 11,400 11,143 12,800 12,529
Available for sale:
FHLMC stock 21 1,160 21 1,116
------ ------ ------ ------
Total investment securities $11,421 $12,303 $12,821 $13,645
====== ====== ====== ======
</TABLE>
At September 30, 2000, the cost carrying value of the Company's
held-to-maturity investment portfolio exceeded the estimated fair value by
$257,000, consisting solely of gross unrealized losses.
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.
Mortgage-backed securities at September 30, 2000 and 1999, were comprised of
Government National Mortgage Association ("GNMA") and Federal Home Loan
Mortgage Corporation Gold program participation certificates. At September
30, 2000, the market value depreciation of the Company's mortgage-backed
securities below cost was approximately $1,000, comprised of gross
unrealized gains of $17,000 and gross unrealized losses of $18,000. 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. Maturities of mortgage-backed securities are due ratably over the
next twenty fiscal years based on the contractual repayment terms of the
underlying loans.
-44-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at September 30 is as follows:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Real estate mortgage loans
One- to four-family $32,876 $30,959
Multifamily 2,828 2,049
Nonresidential 1,647 1,737
Land 136 138
Construction 1,000 346
Passbook loans 13 26
Deferred loan origination costs 39 33
------ ------
38,539 35,288
Less:
Undisbursed portion of loans in process 608 17
Allowance for loan losses 52 52
------ ------
$37,879 $35,219
====== ======
</TABLE>
As depicted above, the Bank's lending efforts have historically focused on
residential real estate loans, which comprised approximately $35.7 million,
or 94%, of the total loan portfolio at September 30, 2000 and $33.3 million,
or 95%, of the total loan portfolio at September 30, 1999. Generally, such
loans have been underwritten on the basis of no more than an 80%
loan-to-value ratio, which has historically provided the Bank with adequate
collateral coverage in the event of default. Nevertheless, the Bank, 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 Bank's primary lending area are presently
stable.
The Bank, 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 $499,000 and $531,000 at September 30, 2000 and 1999,
respectively.
Additionally, the Bank 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, 2000, 1999 and 1998.
-45-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
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>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
Beginning balance $ 52 $ 52 $ 52
Provision for loan losses - - -
--- --- ---
Ending balance $ 52 $ 52 $ 52
=== === ===
</TABLE>
At September 30, 2000 and 1999, the Bank's allowance for loan losses was
comprised solely of a general loan loss allowance, which is includible as a
component of regulatory risk-based capital.
Nonperforming loans totaled approximately $272,000, $119,000 and $171,000 at
September 30, 2000, 1999 and 1998, respectively.
As of and for the years ended September 30, 2000 and 1999, the Bank had no
loans which would be defined as impaired under SFAS No. 114.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at September 30 are comprised of the
following:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Land $ 641 $ 607
Buildings and improvements 871 264
Furniture and equipment 350 299
----- -----
1,862 1,170
Less accumulated depreciation 391 351
----- -----
$1,471 $ 819
===== =====
</TABLE>
During fiscal 2000, the Bank completed construction of a building addition
to its main office facility at a total cost of $1.3 million.
-46-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE F - DEPOSITS
Deposits consist of the following major classifications at September 30:
<TABLE>
<CAPTION>
Deposit type and
weighted-average 2000 1999
interest rate Amount % Amount %
(Dollars in thousands)
<S> <C> <C> <C> <C>
NOW accounts - .76% in 2000 $ 198 .5% $ - - %
Statement savings accounts - 2.67% in 2000 14 - - -
Passbook accounts - 2.67% in 2000
and 1999 9,731 24.2 10,453 26.2
Club accounts - 5.08% in 2000 and
5.07% in 1999 57 .1 58 .1
Money market demand accounts -
2.67% in 2000 and 1999 1,331 3.3 1,829 4.6
------ ------ ------ -----
Total demand accounts 11,331 28.1 12,340 30.9
Certificates of deposit -
6.25% in 2000 and 5.40% in 1999 28,929 71.9 27,567 69.1
------ ----- ------ -----
Total deposits $40,260 100.0% $39,907 100.0%
====== ===== ====== =====
</TABLE>
At September 30, 2000 and 1999, the Bank had deposit accounts with balances
greater than $100,000 totaling $3.2 million and $3.3 million, respectively.
Interest expense on deposits for the fiscal years ended September 30 is
summarized as follows:
<TABLE>
<CAPTION>
2000 1999 1998
(In thousands)
<S> <C> <C> <C>
NOW accounts $ 1 $ - $ -
Passbook, statement savings and club accounts 273 277 279
Money market accounts 42 55 64
Certificates of deposit 1,545 1,450 1,382
----- ----- -----
$1,861 $1,782 $1,725
===== ===== =====
</TABLE>
Maturities of outstanding certificates of deposit are summarized as follows
at September 30:
<TABLE>
<CAPTION>
2000 1999
(In thousands)
<S> <C> <C>
Less than six months $ 9,835 $ 9,691
Six months to one year 12,665 12,029
One year to three years 6,429 5,847
------ ------
$28,929 $27,567
====== ======
</TABLE>
-47-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE G - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings for the years ended
September 30, 2000, 1999 and 1998, 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>
2000 1999
Taxes (payable) refundable on temporary
differences at estimated corporate tax rate: (In thousands)
<S> <C> <C>
Deferred tax assets:
General loan loss allowance $ 18 $ 18
Stock benefit plan 57 79
---- ----
Total deferred tax assets 75 97
Deferred tax liabilities:
Unrealized gains on securities designated as
available for sale (387) (373)
Difference between cash and accrual basis of accounting (145) (176)
Federal Home Loan Bank stock dividends (100) (89)
Difference between book and tax depreciation (31) (29)
Percentage of earnings bad debt deduction (2) (4)
Deferred loan origination costs (35) (33)
---- ----
Total deferred tax liabilities (700) (704)
---- ----
Net deferred tax liability $(625) $(607)
==== ====
</TABLE>
The Bank 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, 2000 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, 2000. The Bank is required to recapture as taxable income its
post-1987 additions to its tax bad debt reserve, and will be unable to
utilize the percentage of earnings method to compute its bad debt deduction
in the future. The Bank 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 in fiscal 1997.
-48-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE H - COMMITMENTS
The Bank 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
Bank's involvement in such financial instruments.
The Bank'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
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments.
At September 30, 2000, the Bank had no commitments to originate real estate
loans. At September 30, 1999, the Bank had outstanding commitments of
approximately $88,000 to originate fixed-rate residential real estate loans
at interest rates ranging from 7.00% to 8.25%. In the opinion of management,
loan commitments equaled or exceeded prevalent market interest rates as of
that date, 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 Bank evaluates each
customer's creditworthiness on a case-by-case basis. The amount of
collateral obtained, if it is deemed necessary by the Bank 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 I - REGULATORY CAPITAL
The Bank 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 Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities, and certain
off-balance-sheet items as calculated under regulatory accounting practices.
The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings,
and other factors.
-49-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE I - 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) generally equal to 4.0% of adjusted total assets. 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 Bank 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%.
During fiscal 2000, the Bank was notified from its regulator that it was
categorized as "well-capitalized" under the regulatory framework for prompt
corrective action. To be categorized as "well-capitalized" the Bank must
maintain minimum capital ratios as set forth in the following tables.
As of September 30, 2000 and 1999, management believes that the Bank met all
capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
As of September 30, 2000
Required
to be "well-
Required capitalized" under
for capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $12,958 23.7% =>$ 820 =>1.5% =>$2,734 => 5.0%
Core capital $12,958 23.7% =>$2,187 =>4.0% =>$3,281 => 6.0%
Risk-based capital $13,523 46.0% =>$2,353 =>8.0% =>$2,941 =>10.0%
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
Required
to be "well-
Required capitalized" under
for capital prompt corrective
Actual adequacy purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Tangible capital $12,379 22.8% =>$ 815 =>1.5% =>$2,718 => 5.0%
Core capital $12,379 22.8% =>$2,173 =>4.0% =>$3,261 => 6.0%
Risk-based capital $12,431 45.4% =>$2,190 =>8.0% =>$2,738 =>10.0%
</TABLE>
-50-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE I - REGULATORY CAPITAL (continued)
Management believes that, under the current regulatory capital regulations,
the Bank will continue to meet its minimum capital requirements in the
foreseeable future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in the Bank's market
area, could adversely affect future earnings and, consequently, the ability
to meet future minimum regulatory capital requirements.
NOTE J - 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 authorized, but unissued, common shares 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 options to purchase 125,668 shares at the fair value for the
Corporation's shares of $9.69 per share.
The Corporation accounts for the Plan in accordance with 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 the Plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the 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 recorded
as the pro forma amounts indicated below:
<TABLE>
<CAPTION>
2000 1999 1998
<S> <C> <C> <C> <C>
Net earnings (In thousands) As reported $311 $698 $552
=== === ===
Pro-forma $311 $463 $321
=== === ===
Earnings per share
Basic As reported $.26 $.58 $.45
=== === ===
Pro-forma $.26 $.38 $.26
=== === ===
Diluted As reported $.26 $.57 $.45
=== === ===
Pro-forma $.26 $.38 $.26
=== === ===
</TABLE>
-51-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE J - 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 Plan as of and for the fiscal
years ended September 30, 2000, 1999 and 1998, are presented below:
<TABLE>
<CAPTION>
2000 1999 1998
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 125,558 $9.6875 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 125,558 $ 9.6875 113,526 $13.50
======= ====== ======= ======= ======= =====
Options exercisable at year-end 125,558 $9.6875 125,558 $ 9.6875 113,526 $13.50
======= ====== ======= ======= ======= =====
Weighted-average fair value of
options granted during the year N/A $2.83 $3.08
=== ==== ====
</TABLE>
The following information applies to options outstanding at September 30,
2000:
Number outstanding 125,558
Range of exercise prices $9.6875
Weighted-average exercise price $9.6875
Weighted-average remaining contractual life 7.75 years
-52-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE K - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
The following condensed financial statements summarize the financial
position of Market Financial Corporation as of September 30, 2000 and 1999,
and the results of its operations and its cash flows for the years ended
September 30, 2000, 1999 and 1998.
Market Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
ASSETS 2000 1999
<S> <C> <C>
Interest-bearing deposits in Market Bank $ 72 $ 512
Interest-bearing deposits in other financial institutions 1 1
Loan receivable from ESOP 777 874
Investment in Market Bank 13,710 13,101
Accrued interest receivable 41 46
Prepaid expenses and other assets 157 1
Prepaid federal income taxes 115 82
Deferred federal income taxes 27 -
------ ------
Total assets $14,900 $14,617
====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Accrued expenses and other liabilities $ 145 $ 39
Deferred federal income taxes - 3
------ ------
Total liabilities 145 42
Shareholders' equity
Common stock and additional paid-in capital 8,160 8,187
Retained earnings 7,892 7,984
Shares acquired by stock benefit plans (1,211) (1,480)
Less 76,286 shares of treasury stock - at cost (838) (838)
Unrealized gains on securities designated as available for sale, net 752 722
------ ------
Total shareholders' equity 14,755 14,575
------ ------
Total liabilities and shareholders' equity $14,900 $14,617
====== ======
</TABLE>
-53-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE K - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
Market Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Revenue
Interest income $ 65 $ 68 $157
Equity in earnings of Market Bank 482 855 600
--- --- ---
Total revenue 547 923 757
Interest expense - 22 9
General and administrative expenses 324 284 221
--- --- ---
Earnings before income tax credits 223 617 527
Federal income tax credits (88) (81) (25)
--- --- ---
NET EARNINGS $311 $698 $552
=== === ===
</TABLE>
-54-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE K - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
Market Financial Corporation
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
2000 1999 1998
<S> <C> <C> <C>
Cash provided by (used in) operating activities:
Net earnings for the year $311 $ 698 $ 552
Adjustments to reconcile net earnings to net
cash provided by (used in) operating activities
Undistributed earnings of consolidated subsidiary (482) (855) (600)
Dividend received from subsidiary - 2,200 -
Amortization of expense related to stock benefit plans 145 111 -
Increase (decrease) in cash due to changes in:
Accrued interest receivable 5 5 (13)
Prepaid expenses and other assets (156) 28 (30)
Other liabilities 106 (1) 38
Prepaid federal income taxes (33) (48) (47)
Deferred federal income taxes (30) (9) 12
--- ----- -----
Net cash provided by (used in) operating activities (134) 2,129 (88)
Cash flows provided by investing activities:
Repayment of loan to ESOP 97 97 98
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)
Purchase of treasury stock - (838) -
Capital distributions and dividends paid on common stock (403) (364) (5,049)
Net cash used in financing activities (403) (1,927) (5,053)
--- ------ -----
Net increase (decrease) in cash and cash equivalents (440) 299 (5,043)
Cash and cash equivalents at beginning of year 513 214 5,257
--- ----- -----
Cash and cash equivalents at end of year $ 73 $ 513 $ 214
=== ===== =====
</TABLE>
-55-
<PAGE>
Market Financial Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
September 30, 2000, 1999 and 1998
NOTE K - CONDENSED FINANCIAL STATEMENTS OF MARKET FINANCIAL CORPORATION
(continued)
The Bank is subject to regulations imposed by the OTS regarding the amount
of capital distributions payable by the Bank to the Corporation. Generally,
the Bank's payment of dividends is limited, without prior OTS approval, to
net earnings 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
Bank received OTS approval to make up to $2.2 million in capital
distributions during fiscal 2000. Subsequent to September 30, 2000, the Bank
received OTS approval to make up to $500,000 in capital distributions during
fiscal 2001.
NOTE L - PENDING MERGER
On September 19, 2000, the Corporation entered into an Agreement and Plan of
Reorganization (the "Agreement") whereby the Corporation would be merged
into Peoples Community Bancorp, Inc. ("Peoples") for total consideration of
approximately $16.4 million in either cash or common stock. Under the terms
of the Agreement, each common share of the Corporation will be exchanged for
either cash of $13.00 per share or Peoples common shares with an equivalent
value, based on the average closing prices of Peoples stock over a 20
trading day period ending the day before the effective date of the merger.
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 following table sets forth certain information regarding the
directors and executive officers of Market Financial:
<TABLE>
<CAPTION>
Director of Director of Term
Name Age (1) Position(s) Held Market Financial Since (2) Market Bank Since Expires
---- ------- ---------------- -------------------------- ----------------- -------
<S> <C> <C> <C> <C> <C>
Rae Skirvin Larimer 64 Director and 1996 - 2001
Secretary
L. Craig Martin 54 Director 2000 1996 2001
Wilbur H. Tisch 84 Director 1996 - 2001
Kathleen A. White 43 Director 1996 - 2001
Robert Gandenberger 72 Director and 1996 2000 2002
Treasurer
John T. Larimer 67 Director and 1996 1975 2002
President
Edgar H. May 83 Director and Vice 1996 1992 2002
President
Julie M. Bertsch 39 Chief Financial - - -
Officer
</TABLE>
--------------------------
(1) As of December 15, 2000.
(Footnotes continue on next page)
-56-
<PAGE>
(2) Except for Mr. Martin, each person became a director of Market Financial in
connection with the conversion of Market Bank from mutual to stock form and
the formation of Market Financial as the holding company for Market Bank.
Mr. Martin was appointed in January 2000, to fill the vacancy created by
the death of R.C. Meyerenke.
Robert Gandenberger. Mr. Gandenberger retired as Supervisor of the Hamilton
County Recorder's Office in 1994. From 1991 to 1994, Mr. Gandenberger served as
a director of The Cleves-North Bend Building and Loan Company, which merged into
Market Bank in 1994.
John T. Larimer. Mr. Larimer, an attorney, has been a director of Market
Bank since 1975, President of Market Bank since 1993, Managing Officer of Market
Bank since November 1995, and President of Market Financial since April 1996.
Mr. Larimer is Rae Skirvin Larimer's spouse and is a brother-in-law of Una
Schaeperklaus.
Rae Skirvin Larimer. Ms. Larimer has been legal counsel for Market Bank
since 1975. From 1979 to 1994, Ms. Larimer served as a director of The
Cleves-North Bend Building and Loan Company. Ms. Larimer is John T. Larimer's
spouse and the sister of Una Schaeperklaus, a director of Market Bank.
L. Craig Martin. In January 2000, Mr. Martin was appointed to fill the
vacancy created by the death of R.C. Meyerenke. For over 20 years, Mr. Martin
has served as President of Environmetrics, Inc., an architectural firm and
commercial and residential construction company he founded.
Edgar H. May. Mr. May has served as a director of Market Bank since 1992
and as Vice President of Market Bank and Market Financial 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.
Wilbur H. Tisch. Mr. Tisch retired as owner and President of General Metal
Works in 1983. Mr. Tisch served as a director of The Cleves-North Bend Building
and Loan Company 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.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires
Market Financial's officers and directors and persons who own 10% or more of the
common shares of Market Financial to file reports of ownership and changes in
ownership on Forms 3, 4 and 5 with the Commission. Officers, directors and 10%
or greater shareholders are required by the Commission's regulations to furnish
Market Financial with copies of all Forms 3, 4 and 5 they file.
Based on Market Financial's review of the copies of such forms it
has received, Market Financial believes that all of its officers, directors and
10% or greater shareholders complied with all Section 16 filing requirements
applicable to them with respect to transactions during 2000.
-57-
<PAGE>
Item 10. Executive Compensation
The following table presents certain information regarding the
cash compensation received by the President and Chief Executive Officer of
Market Financial and Market Bank. No other executive officer of Market Financial
or Market Bank received compensation in excess of $100,000 during the fiscal
years ended September 30, 2000, 1999 and 1998:
<TABLE>
<CAPTION>
Summary compensation table
-------------------------------------------------------------------------------------------
Annual Compensation Long-term compensation
----------------------
------------------------------
Name and principal Year Salary Bonus ($) Awards
position ($)(1)
------------------------------
Securities
Restricted underlying All Other
stock awards options/SARs (#) Compensation
($)
--------------------------- -------- ------------ ---------- -------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
John T. Larimer, President 2000 $104,775 $13,238 - - $42,221 (2)
and Chief Executive 1999 99,800 13,238 $ 7,619 (3) 34,729 (4) 34,624 (5)
Officer
1998 97,007 11,135 180,320 (3) 33,393 (6) 34,688 (7)
</TABLE>
------------------------------
(1) Does not include amounts attributable to other miscellaneous benefits
received by executive officers. The cost to Market Financial or Market Bank
of providing such benefits to Mr. Larimer was less than 10% of his cash
compensation.
(2) Consists of the September 30, 2000, $42,221 fair market value of Market
Financial's contribution to Mr. Larimer's account in the Market Financial
Corporation Employee Stock Ownership Plan (the "ESOP").
(3) On June 30, 1998 and June 30, 1999, Mr. Larimer was awarded 13,357 and 802
common shares, respectively, pursuant to the Market Financial Corporation
Recognition and Retention Plan and Trust Agreement (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, Market Financial. The market price of Market Financial'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 Market
Financial's shares on the Nasdaq SmallCap Market on each date, was $13.50
and $9.50 per share, respectively. As of September 29, 2000, the 14,159
shares had an aggregate market value of approximately $171,678, based on
the $12.125 per share fair market value for the Market Financial shares on
such date, as quoted by Nasdaq. Dividends and other distributions paid on
such shares and earnings on such dividends and distributions will be
distributed to Mr. Larimer when the shares are distributed.
(4) Represents the number of common shares of Market Financial underlying
options granted to Mr. Larimer pursuant to the Stock Option Plan (the
"Stock Option Plan") during the fiscal year ended September 30, 1999.
(5) Consists of the September 30, 1999, $34,624 fair market value of Market
Financial's contribution to Mr. Larimer's ESOP account.
(6) Represents the number of common shares of Market Financial underlying
options granted to Mr. Larimer pursuant to the Market Financial Stock
Option Plan during the fiscal year ended September 30, 1998. These options
were cancelled on May 3, 1999.
(7) Consists of the September 30, 1998, $34,688 fair market value of Market
Financial's contribution to Mr. Larimer's ESOP account.
-58-
<PAGE>
Market Financial Stock Option Plan
The Stock Option Plan is administered by the Stock Option Committee,
which is composed of three directors of Market Financial who are not employees
of Market Financial. The Stock Option Committee may grant options under the
Market Financial Stock Option Plan at such times as they deem most beneficial to
Market Bank and Market Financial on the basis of the individual participant's
position and duties and the value of the individual's services and
responsibilities to Market Bank and Market Financial. Options to purchase
113,526 common shares were granted pursuant to the Stock Option Plan during the
fiscal year ended September 30, 1998. These options were cancelled on May 3,
1999, and options to purchase 125,558 common shares were granted on May 4, 1999.
No options were granted during the fiscal year ended September 30, 2000.
The following table sets forth information regarding the number and
value of unexercised options held by Mr. Larimer at September 30, 2000:
<TABLE>
<CAPTION>
Aggregated Option/SAR Exercises in Last Fiscal Year and 9/30/2000 Option/SAR Values
Number of Securities Underlying Value of Unexercised
Unexercised Options/SARs at In The Money Options/
Shares Acquired Value 9/30/2000(#) SARs at 9/30/2000($)(1)
Name on Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C>
John T. Larimer -0- N/A 34,729/-0- $84,652/-0-
</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
Market Financial's common shares, which was $12.125 on September 29, 2000,
based on the last sale of Market Financial shares reported by Nasdaq.
Recognition and Retention Plan and Trust
The shareholders of Market Financial adopted the RRP on June 30, 1998.
The RRP purchased 53,429 common shares of Market Financial, all of which were
awarded to directors, executive officers and employees of Market Financial and
Market Bank in June 1998 and June 1999. The awards become 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, Market Financial, subject to provisions for earlier vesting upon a
change in control of Market Financial.
Director Compensation
Each director of Market Financial who is not a director of Market Bank
receives an annual fee of $10,000, payable quarterly. Each director of Market
Bank currently receives a fee of $19,500 per year, payable quarterly. Mr.
Larimer does not receive director's fees from Market Financial or Market Bank.
Employment Agreements
On April 1, 2000, Market Bank entered into an employment agreement with
Mr. Larimer. The employment agreement provides for a term of three years, a
salary of not less than $109,750 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 Bank at any time. In
the event of termination by Market Bank 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 Bank 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.
-59-
<PAGE>
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 that Mr. Larimer may receive under such provisions, however, is limited
to an amount that will not result in the imposition of a penalty tax pursuant to
Section 280G(b)(3) of the Internal Revenue Code of 1986, as amended (the
"Code"), and an amount that will not violate applicable restrictions of the
Office of Thrift Supervision (the "OTS"). A "change of control," as defined in
the employment agreement, generally refers to the acquisition by any person or
entity of the ownership or power to vote 25% or more of the voting stock of
Market Bank or Market Financial, the control of the election of a majority of
the directors of Market Bank or Market Financial or the exercise of a
controlling influence over the management or policies of Market Bank or Market
Financial.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information with respect to the
only persons known to Market Financial to own beneficially more than five
percent of the outstanding common shares of Market Financial as of December 22,
2000:
<TABLE>
<CAPTION>
Amount and Nature of Percent of
Beneficial Ownership Shares Outstanding
<S> <C> <C>
Name and Address
First Bankers Trust Company, N.A. 104,924(1) 8.3%
Market Financial Corporation
Employee Stock Ownership Plan
1201 Broadway
Quincy, Illinois 62301
John T. Larimer 78,458(2) 6.1
4315 Redstar Court
Cincinnati, Ohio 45238
L. Craig Martin 68,336(3) 5.4
8340 Indian Hill Road
Cincinnati, Ohio 45243
</TABLE>
----------------------------
(1) Includes 72,814 unallocated shares with respect to which First Bankers
Trust Company, N.A. as the trustee for the Market ESOP has sole voting
power. The trustee has limited shared investment power over all Market ESOP
shares.
(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, 9,974 shares held in Mr. Larimer's ESOP account,
with respect to which Mr. Larimer has voting control only, and 4,800 shares
owned jointly with Mr. Larimer's spouse. It does not include 29,008 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 Market Financial Stock Option Plan.
-60-
<PAGE>
The following table sets forth certain information with respect to the
number of common shares of Market Financial beneficially owned by each director
of Market Financial and Market Bank and by all directors and executive officers
of Market Financial and Market Bank as a group as of December 22, 2000:
<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) 35,265(3) 3.3%
John T. Larimer 73,658(4) 4,800 6.1
Rae Skirvin Larimer 29,008(2) (5) 4,800 2.7
Edgar H. May 12,308(2) - 1.0
L. Craig Martin 45,536(2) 22,800 5.4
Wilbur H. Tisch 12,308(2) - 1.0
Una E. Schaeperklaus (6) 15,808(2) - 1.2
Kathleen A. White 7,308(2) 33,802(3) 3.2
All directors of and executive officers of
Market Financial and Market Bank as a
group (9 people) 221,177(7) 70,664(8) 21.6%
</TABLE>
(1) Each of the persons listed in this table may be contacted at the address of
Market Financial.
(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 31,802 shares held by the Market Financial Corporation
Recognition and Retention Plan Trust with regard to which Mr. Gandenberger
and Ms. White have voting power as trustees.
(4) This number includes 34,729 shares that may be acquired upon the exercise
of options awarded pursuant to the Stock Option Plan and 9,974 shares held
in Mr. Larimer's ESOP account, with respect to which Mr. Larimer has voting
control only, but does not include 29,008 shares owned by Mr. Larimer's
spouse, Rae Skirvin Larimer.
(5) This number does not include 73,658 shares owned by Ms. Larimer's spouse,
John T. Larimer.
(6) Ms. Schaeperklaus is a director of Market Bank but not a director of Market
Financial.
(7) This number includes 92,501 shares that may be acquired upon the exercise
of options awarded pursuant to the Market Financial Stock Option Plan and
15,515 shares held in the ESOP accounts of officers, with respect to which
such officers have voting control only.
(8) The 4,800 shares held jointly by Mr. and Mrs. Larimer and the 31,802 shares
held by the Recognition and Retention Plan Trust are only included once in
this total.
On September 19, 2000, Peoples Community Bancorp, Inc. ("Peoples"), a
Delaware corporation headquartered in Lebanon, Ohio, Peoples Community Bank
("Peoples Bank"), a federal savings bank and wholly-owned subsidiary of Peoples,
Market Financial and Market Bank entered into an Agreement and Plan of
Reorganization (the "Agreement") (including an Agreement of Merger) which sets
forth the terms and conditions under which Market Financial will merge with and
into Peoples (the "Merger"). Following consummation of the Merger, Peoples shall
cause Market Bank to merge with and into Peoples Bank.
The Agreement provides that upon consummation of the Merger, and
subject to certain further terms, conditions, limitations and procedures set
forth in the Agreement, each share of common stock of Market Financial ("Market
Financial Common Shares") outstanding immediately prior to the effective time of
the Merger shall be cancelled and extinguished. Each of such shares (other than
(i) shares as to which dissenters' rights have been asserted in accordance with
-61-
<PAGE>
Ohio law and (ii) any shares held by Market Financial (including treasury
shares) or Peoples or any of their respective wholly-owned subsidiaries) shall,
by virtue of the Merger, and without any further action by the holder thereof,
be converted into and represent the right to receive, at the election of the
holder thereof:
(i) the number of shares of common stock of Peoples ("Peoples Common
Stock") which is equal to the quotient, rounded to four decimal places
(the "Exchange Ratio") determined by dividing $13.00 by the daily
average of the closing price per share of Peoples Common Stock, as
reported on the Nasdaq Stock Market's National Market (as reported by
an authoritative source), as of the close of trading for each of the 20
trading days ending at the close of business on the business day
immediately preceding the effective time of the Merger, or
(ii) a cash amount equal to $13.00 per share of Market F inancial
Common Shares,
subject to an overall requirement that 50% of the total outstanding Market
Common Shares be exchanged for cash and 50% of the total outstanding Market
Common Shares be exchanged for Peoples Common Stock.
Consummation of the Merger is subject to the approval of the
shareholders of Market Financial and Peoples and the receipt of all required
regulatory approvals, as well as other customary conditions.
Item 12. Certain Relationships and Related Transactions
Not applicable.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
2 Agreement and Plan of Reorganization
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
Bank, dated April 1, 2000
10.3 Market Financial Corporation 1998 Stock Option and
Incentive Plan
10.4 Market Financial Corporation Recognition and Retention
Plan and Trust Agreement
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
On September 25, 2000, Market Financial filed a Current Report on Form
8-K reporting under Item 5 that Market Financial and Market Bank had entered
into an Agreement and Plan of Reorganization with Peoples Community Bancorp,
Inc. and its wholly-owned subsidiary, Peoples Community Bank, effective
September 19, 2000. Pursuant to the Reorganization Agreement, Market Financial
will merge into Peoples Community Bancorp, Inc. and Market Bank will merge into
Peoples Community Bank.
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<PAGE>
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 22, 2000
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 22, 2000 Date: December 22, 2000
/s/ Edgar H. May /s/ Rae Skirvin Larimer.
---------------------------- -----------------------------
Edgar H. May Rae Skirvin Larimer
Director and Vice President Director and Secretary
Date: December 22, 2000 Date: December 22, 2000
/s/ Robert Gandenberger /s/ L. Craig Martin
---------------------------- -----------------------------
Robert Gandenberger L. Craig Martin
Director and Treasurer Director
Date: December 22, 2000 Date: December 22, 2000
/s/ Wilbur H. Tisch /s/ Kathleen H. White
---------------------------- -----------------------------
Wilbur H. Tisch Kathleen H. White
Director Director
Date: December 22, 2000 Date: December 22, 2000
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<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE NUMBER
------ ----------- -----------
<S> <C> <C>
2 Agreement and Plan of Reorganization Incorporated by reference to Current Report on Form 8-K filed
by Market Financial on September 25, 2000, Exhibit 2.
3.1 Articles of Incorporation of Market Incorporated by reference to the Registration Statement on
Financial Corporation Form S-1 filed by Market Financial 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 Market Financial the S-1, Exhibit 3.2.
Corporation
3.4 Code of Regulations of Market 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 Bank
and John T. Larimer, dated April 1, 2000
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
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>
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