<PAGE>
Exhibit 99.3
MARKET
FINANCIAL
CORPORATION
2000
ANNUAL
REPORT
TO
SHAREHOLDERS
<PAGE>
Dear Shareholder,
On behalf of the directors, officers and employees of Market Financial
Corporation ("Market") and its wholly-owned subsidiary, Market Bank, I am
pleased to present our Annual Report to Shareholders for the fiscal year ended
September 30, 2000.
Market's net earnings for fiscal 2000 totaled $311,000, a $387,000, or
55.4%, decrease from the $698,000 reported for fiscal 1999. The decrease in
earnings was primarily attributable to the absence of a $306,000 after-tax gain
on sale of investments recorded in fiscal 1999.
We continued to consider growth in the loan and deposit portfolios to
be among our critical operating objectives. We are pleased to report that our
loan portfolio increased by $2.7 million, or 7.6%, during fiscal 2000, while our
deposits grew by $353,000, or .9%. During fiscal 2000, we opened our main office
addition in Mount Healthy, which included an ATM and a drive-thru facility. We
also opened an ATM in our North Bend branch office.
On September 19, 2000, Market announced that it had entered into a
definitive agreement with Peoples Community Bancorp, Inc. ("Peoples"), under
which Market would merge with and into Peoples, for cash and stock consideration
amounting to $13 per share. The merger is expected to be completed in the first
quarter of 2001, pending approval by Peoples' and Market's shareholders,
regulatory approval and other customary conditions of closing.
I would like to thank you, our shareholders, for the support you placed
in us through your investment in Market Financial Corporation.
Very truly yours,
Market Financial Corporation
John T. Larimer
<PAGE>
BUSINESS OF MARKET FINANCIAL CORPORATION
================================================================================
Market Financial Corporation ("MFC"), a unitary savings and loan holding company
incorporated under the laws of the State of Ohio, owns all of the issued and
outstanding common stock of Market Bank ("Market"), a savings and loan
association incorporated under the laws of the State of Ohio. In March 1997, MFC
acquired all of the common stock issued by Market upon its conversion from a
mutual savings association to a stock savings association (the "Conversion").
Since its formation, MFC's activities have been limited primarily to holding the
common shares of Market.
Market is a stock savings and loan association principally engaged in the
business of making permanent first mortgage loans secured by one- to four-family
residential real estate located in Market's primary market area of Hamilton
County, Ohio, and portions of the contiguous counties. Market also originates a
limited number of loans for the construction of residential real estate and
loans secured by multifamily real estate (over four units) and nonresidential
real estate. In addition to real estate lending, Market originates a limited
number of loans secured by deposits at Market. For liquidity and interest rate
risk management purposes, Market invests in U.S. Government and agency
obligations, interest-bearing deposits in other financial institutions and
mortgage-backed securities. Funds for lending and investment activities are
obtained primarily from deposits, which are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC"), and loan repayments. Market
conducts business from its main office located at 7522 Hamilton Avenue,
Cincinnati, Ohio, and its full-service branch office at 125 Miami Avenue, North
Bend, Ohio.
As a savings and loan holding company, MFC is subject to regulation, supervision
and examination by the Office of Thrift Supervision of the United States
Department of the Treasury (the "OTS"). As a savings and loan association
incorporated under the laws of the State of Ohio, Market is subject to
regulation, supervision and examination by the OTS and the Ohio Division of
Financial Institutions (the "Division"). Market is also a member of the Federal
Home Loan Bank (the "FHLB") of Cincinnati.
MARKET PRICE OF MFC'S
COMMON SHARES AND RELATED SHAREHOLDER MATTERS
================================================================================
There were 1,259,439 common shares of MFC outstanding on December 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 MFC's
common shares is quoted on the Nasdaq SmallCap System ("Nasdaq") under the
symbol "MRKF." The table below sets forth the high ask and low bid prices for
the common shares of MFC, 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.
1
<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 MFC consist primarily of dividends from Market. In addition to
certain federal income tax considerations, regulations issued by the OTS impose
limitations on the payment of dividends and other capital distributions by
savings associations. Under the regulations, a savings association that,
immediately prior to, and on a pro-forma basis after giving effect to a proposed
capital distribution, has total capital (as defined by OTS regulations) that is
equal to or greater than the amount of its "well-capitalized" capital
requirement, is generally permitted, without OTS approval (but subsequent to 30
days' prior notice of the planned dividend to the OTS) to make capital
distributions during a calendar year in an amount not to exceed its net 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 currently meets the
definition of a "well-capitalized" institution and, unless the OTS determines
that Market is an institution requiring more than normal supervision, may pay
dividends in accordance with the foregoing provisions of the OTS regulations.
2
<PAGE>
SELECTED CONSOLIDATED
FINANCIAL INFORMATION AND OTHER DATA
================================================================================
The following table sets forth certain information concerning the consolidated
financial condition, earnings and other data regarding MFC at the dates and for
the periods indicated.
<TABLE>
<CAPTION>
At September 30,
-------------------------------------------------------------
SELECTED FINANCIAL CONDITION: 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total amount of:
Assets $56,087 $55,451 $54,608 $56,121 $45,547
Cash and cash equivalents 766 2,291 5,381 2,248 4,082
Certificates of deposit in other financial
institutions 300 290 3,790 6,690 7,040
Investment securities held to maturity - at 11,400 12,800 9,300 17,257 9,062
cost
Investment securities designated as available
for sale - at market 1,160 1,116 1,448 1,029 712
Mortgage-backed securities held to maturity -
at cost 1,830 2,047 859 1,268 1,549
Loans receivable - net 37,879 35,219 32,816 26,502 21,996
Deposits 40,260 39,907 37,745 35,303 37,282
Unrealized gains on securities designated as
available for sale - net 752 722 937 660 451
Shareholders' equity - restricted (1) (2) 14,755 14,575 15,078 19,895 7,514
</TABLE>
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------
SELECTED OPERATING DATA: 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Interest income $3,798 $3,733 $3,885 $3,513 $3,261
Interest expense 1,861 1,803 1,734 1,689 1,758
---------- ---------- ---------- ----------- ---------
Net interest income 1,937 1,930 2,151 1,824 1,503
Provision for losses on loans - - - - 13
---------- ---------- ---------- ----------- ---------
Net interest income after provision for losses on
loans 1,937 1,930 2,151 1,824 1,490
Gain on sale of investments - 463 - - -
Other operating income 11 11 7 6 7
General, administrative and other expense 1,477 1,346 1,322 1,069 1,153
---------- ---------- ---------- ----------- ---------
Earnings before income taxes 471 1,058 836 761 344
Federal income taxes 160 360 284 259 120
---------- ---------- ---------- ----------- ---------
Net earnings $ 311 $ 698 $ 552 $ 502 $ 224
========== ========== ========== =========== =========
Earnings per share - Basic $.26 $.58 $.45 N/A N/A
========== ========== ========== =========== =========
- Diluted $.26 $.57 $.45 N/A N/A
========== ========== ========== =========== =========
</TABLE>
---------------------------
(1) See Notes G, I and K of the Notes to Consolidated Financial Statements
regarding restrictions on equity.
(2) Consists solely of retained earnings at September 30, 1996.
3
<PAGE>
<TABLE>
<CAPTION>
At or for the year ended September 30,
-----------------------------------------------------------
SELECTED FINANCIAL RATIOS AND OTHER DATA: 2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Performance ratios:
Return on average assets (1)(2)(3) 0.56% 1.27% 1.00% 0.99% 0.49%
Return on average equity (2)(3)(4) 2.12 4.71 3.16 3.66 3.05
Interest rate spread (5) 2.63 2.58 2.60 2.42 2.66
Net interest margin (6) 3.71 3.70 4.07 3.67 3.36
Operating expenses to average assets (2) (3) 2.65 2.45 2.39 2.10 2.53
Equity to assets (7) 26.31 26.28 27.61 35.45 16.50
Dividend payout ratio 123.08 48.28 8,400.00 N/A N/A
Asset quality ratios:
Nonperforming assets to total assets 0.48 0.21 0.31 0.34 0.31
Nonperforming loans to total loans 0.71 0.34 0.52 0.72 0.63
Allowance for losses on loans to total loans 0.13 0.15 0.16 0.20 0.24
Allowance for losses on loans to
nonperforming loans 19.12 43.70 30.41 27.23 37.41
Average interest-earning assets to average
interest-bearing liabilities 130.41 132.17 144.88 136.77 117.78
Other data:
Number of full service offices 2 2 2 2 2
</TABLE>
-------------------------
(1) Net earnings divided by average assets.
(2) Based on arithmetic average of beginning and ending balances.
(3) Excluding the effect of the one-time Savings Association Insurance Fund
(the "SAIF") recapitalization assessment, the return on average assets,
the return on average equity and the operating expenses to average
assets ratios would have been .85%, 5.21% and 1.99%, respectively, for
the fiscal year ended September 30, 1996.
(4) Net earnings divided by average equity capital.
(5) Average yield on interest-earning assets less average cost of
interest-bearing liabilities.
(6) Net interest income as a percentage of average interest-earning assets.
(7) At the end of the respective periods.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
================================================================================
GENERAL
--------------------------------------------------------------------------------
The following discussion and analysis of the financial condition and results of
operations of MFC and Market should be read in conjunction with and with
reference to the consolidated financial statements, and the notes thereto,
included in this Annual Report.
MFC was incorporated for the purpose of owning all of Market's outstanding stock
upon conversion to stock form. As a result, the discussion that follows focuses
on Market's financial condition and results of operations.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the operations of Market and MFC's actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and MFC's market area.
Without limiting the generality of the foregoing, some of the statements in the
following referenced sections of this discussion and analysis are forward
looking and are, therefore, subject to certain risks and uncertainties:
1. Management's analysis of the interest rate risk of Market as
set forth under "Asset and Liability Management;"
2. Management's discussion of the liquidity of Market's assets
and the regulatory capital of Market as set forth under
"Liquidity and Capital Resources;"
3. Management's determination of the amount and adequacy of the
allowance for loan losses as set forth under "Changes in
Financial Condition," and "Comparison of Operating Results for
the Years Ended September 30, 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 MFC and Market as
set forth under "Potential Impact Of Gramm-Leach- Bliley Act
on Future Results of Operation."
5
<PAGE>
CHANGES IN FINANCIAL CONDITION
--------------------------------------------------------------------------------
MFC'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'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 MFC'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'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 is required to meet each of three minimum capital standards
promulgated by the Office of Thrift Supervision (the "OTS"), hereinafter
described as the tangible capital requirement, the core capital requirement and
the risk-based capital requirement. The tangible capital requirement provides
for the maintenance of shareholders' equity less all intangible assets equal to
1.5% of adjusted total assets. The core capital requirement provides for the
maintenance of tangible capital plus certain forms of supervisory goodwill
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's tangible and core capital totaled $13.0 million,
or 23.7% of
6
<PAGE>
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'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.
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.
7
<PAGE>
PROVISION FOR LOSSES ON LOANS. A provision for losses on loans is charged to
earnings to bring the total allowance to a level considered appropriate by
management based on historical experience, the volume and type of lending
conducted by Market, the status of past due principal and interest payments,
general economic conditions, particularly as such conditions relate to Market's
market area, and other factors related to the collectibility of Market's loan
portfolio. As a result of such analysis, management decided no additional
provision for losses on loans was necessary during the year ended September 30,
2000. There can be no assurance, however, that the allowance for loan losses of
Market will be adequate to cover losses on nonperforming assets in the future.
OTHER INCOME. Other income 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'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
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.
8
<PAGE>
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, the status of
past due principal and interest payments, general economic conditions,
particularly as such conditions relate to Market's market area, and other
factors related to the collectibility of Market's loan portfolio, management
decided no additional provision for losses on loans was necessary during the
year ended September 30, 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.
9
<PAGE>
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.
10
<PAGE>
AVERAGE BALANCE, YIELD, RATE AND VOLUME DATA
--------------------------------------------------------------------------------
The following table sets forth certain information relating to MFC's average
balance sheet information and reflects the average yield on interest-earning
assets and the average cost of interest-bearing liabilities for the periods
indicated. Such yields and costs are derived by dividing income or expense by
the average monthly balance of interest-earning assets or interest-bearing
liabilities, respectively, for the periods presented. Average balances are
derived from month-end balances, which include nonaccruing loans in the loan
portfolio, net of the allowance for loan losses.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------------------------------------------------------------
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
assets 1,340 93 6.94 5,845 343 5.87 7,954 483 6.07
----------- -------- ------- ----------- -------- ------- ----------- -------- -------
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
accounts 1,561 42 2.69 2,039 55 2.70 2,254 64 2.84
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
liabilities 1,376 1,300 1,113
----------- ---------- -----------
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 3.71% 3.70% 4.07%
interest-earning assets) ======= ======== =======
Average interest-earning
assets to interest-bearing
liabilities 130.41% 132.17% 144.88%
======= ======== ========
</TABLE>
11
<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'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, like other financial institutions, is subject to interest rate risk to
the extent that its interest-earning assets reprice differently than its
interest-bearing liabilities. As part of its effort to monitor and manage
interest rate risk, Market uses the "net portfolio value" ("NPV") methodology
adopted by the OTS as part of its capital regulations. Although Market is not
currently subject to the NPV regulation because such regulation does not apply
to institutions with less than $300 million in assets and risk-based capital in
excess of 12%, the application of the NPV methodology illustrates certain
aspects of Market's interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point change in market interest rates. Both
a 200 basis point increase in market interest rates and a 200 basis point
decrease in market interest rates are considered. If the NPV would decrease more
than 2% of the
12
<PAGE>
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'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
would have been required to deduct approximately $1.0 million (50% of the $2.0
million difference) from its capital in determining whether Market met its
risk-based capital requirement. Regardless of such restriction, however,
Market's risk-based capital at September 30, 2000, would still have exceeded the
regulatory requirement by $10.2 million.
Presented below, as of September 30, 2000, and September 30, 1999, is an
analysis of Market's interest rate risk as measured by changes in NPV for
instantaneous and sustained parallel shifts of 100 basis points in market
interest rates. During both of these periods, Market has operated within the
policy limits set by the Board of Directors of Market as the maximum change in
NPV that the Board of Directors deems advisable in the event of various changes
in interest rates.
<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
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------
Change in interest rate $ change % change
(basis points) in NPV in NPV
------------------------ -------- --------
(Dollars in thousands)
<S> <C> <C>
+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
13
<PAGE>
environment, because Market has a significant amount of fixed-rate loans in its
loan portfolio, the amount of interest Market would receive on its loans would
increase relatively slowly as loans are slowly prepaid and new loans are made at
higher rates. Moreover, the interest Market would pay on its deposits would
increase rapidly because Market's deposits generally have shorter periods to
repricing. The assumptions used in calculating the amounts in this table are OTS
assumptions.
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
In a rising interest rate environment, Market's net interest income could be
expected to be negatively affected. Moreover, rising interest rates could
negatively affect Market's earnings due to diminished loan demand.
14
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
--------------------------------------------------------------------------------
Liquidity refers to the ability of Market to generate sufficient cash to fund
current loan demand, meet deposit withdrawals and pay operating expenses.
Liquidity is influenced by financial market conditions, fluctuations in interest
rates, general economic conditions and regulatory requirements. Market's liquid
assets, primarily represented by cash and cash equivalents and interest-bearing
deposits in other financial institutions, are a result of its operating,
investing and financing activities. These activities are summarized in the
following table for the years ended September 30, 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's principal sources of funds are deposits, loan and mortgage-backed
securities repayments, maturities of securities and other funds provided by
operations. Market also has the ability to borrow from the FHLB of Cincinnati.
While scheduled loan repayments and maturing investments are relatively
predictable, deposit flows and early loan and mortgage-backed security
prepayments are influenced to a greater degree by interest rates, general
economic conditions and competition. Market maintains investments in liquid
assets based upon management's assessment of (i) the need for funds, (ii)
expected deposit flows, (iii) the yields available on short-term liquid assets
and (iv) the objectives of Market's asset and liability management program.
At September 30, 2000, Market'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's prevailing pricing strategies, management believes that
a substantial percentage of such certificates will be renewed with Market at
maturity. If Market is unable to renew the maturing certificates for any reason,
however, borrowings of up to $26.1 million are available from the FHLB of
Cincinnati.
OTS regulations presently require Market to maintain an average daily balance of
liquid assets, which may include, but are not limited to, investments in U.S.
Treasury and federal agency obligations and other investments in an amount equal
to 4% of the sum of Market's average daily
15
<PAGE>
balance of net withdrawable deposit accounts and borrowings payable in one year
or less. The liquidity requirement, which may be changed from time to time by
the OTS to reflect changing economic conditions, is intended to provide a source
of relatively liquid funds upon which Market may rely if necessary to fund
deposit withdrawals or other short-term funding needs. At September 30, 2000,
Market's regulatory liquidity ratio was 32.7%. At such date, Market had no
commitments to originate loans, undisbursed loans in process of $608,000 and no
commitments to purchase or sell loans. Market considers its liquidity and
capital resources sufficient to meet its outstanding short-term and long-term
needs. See Note H to the Consolidated Financial Statements.
Market is required by applicable law and regulations to meet certain minimum
capital standards. Such capital standards include a tangible capital
requirement, a core capital requirement or leverage ratio and a risk-based
capital requirement. Market exceeded all of its regulatory capital requirements
at September 30, 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
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 includes a general loan loss allowance of $52,000 at
September 30, 2000.
The following table summarizes Market's regulatory capital requirements and
actual capital at September 30, 2000:
<TABLE>
<CAPTION>
Excess of actual
capital over current Applicable
Actual capital Current requirement 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>
16
<PAGE>
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 MFC.
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 MFC and Market currently engage, except to the extent that
competition with other types of financial institutions may increase as they
engage in activities not permitted prior to enactment of the GLB Act.
EFFECT OF RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------------------------------------------------------
In June 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
17
<PAGE>
debt securities to maturity in the future. Management adopted SFAS No. 133
effective October 1, 2000, as required without material impact on MFC's
financial statements.
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
MFC's financial position or results of operations.
18
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS AND
CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
PAGE
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 20
FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION 21
CONSOLIDATED STATEMENTS OF EARNINGS 22
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 23
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 24
CONSOLIDATED STATEMENTS OF CASH FLOWS 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27
</TABLE>
19
<PAGE>
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.
Grant Thornton LLP
Cincinnati, Ohio
November 15, 2000
20
<PAGE>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands, except share data)
<TABLE>
<CAPTION>
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.
21
<PAGE>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands, except per share data)
<TABLE>
<CAPTION>
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.
22
<PAGE>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
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.
23
<PAGE>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended September 30, 2000, 1999 and 1998
(In thousands, except share data)
<TABLE>
<CAPTION>
UNREALIZED
SHARES GAINS ON
ACQUIRED SECURITIES
ADDITIONAL BY STOCK DESIGNATED
COMMON PAID-IN RETAINED BENEFIT TREASURY AS 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.
24
<PAGE>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
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>
25
<PAGE>
MARKET FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
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.
26
<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.
27
<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.
28
<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.
29
<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.
30
<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.
31
<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.
32
<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.
33
<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.
34
<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.
35
<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)
<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.
36
<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>
37
<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.
38
<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.
39
<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.
40
<PAGE>
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% greater than greater than greater than greater than
or equal to $820 or equal to 1.5% or equal to $2,734 or equal to 5.0%
Core capital $12,958 23.7% greater than greater than greater than greater than
or equal to $2,187 or equal to 4.0% or equal to $3,281 or equal to 6.0%
Risk-based capital $13,523 46.0% greater than greater than greater than greater than
or equal to $2,353 or equal to 8.0% or equal to $2,941 or equal to 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% greater than greater than greater than greater than
or equal to $815 or equal to 1.5% or equal to $2,718 or equal to 5.0%
Core capital $12,379 22.8% greater than greater than greater than greater than
or equal to $2,173 or equal to 4.0% or equal to $3,261 or equal to 6.0%
Risk-based capital $12,431 45.4% greater than greater than greater than greater than
or equal to $2,190 or equal to 8.0% or equal to $2,738 or equal to 10.0%
</TABLE>
41
<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>
42
<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
====== ======== =====
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
</TABLE>
43
<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
STATEMENTS OF FINANCIAL CONDITION
September 30,
(In thousands)
<TABLE>
<CAPTION>
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>
44
<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
STATEMENTS OF EARNINGS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
2000 1999 1998
<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>
45
<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
STATEMENTS OF CASH FLOWS
Year ended September 30,
(In thousands)
<TABLE>
<CAPTION>
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>
46
<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.
47
<PAGE>
MARKET FINANCIAL CORPORATION
AND
MARKET BANK
DIRECTORS AND OFFICERS
================================================================================
BOARD OF DIRECTORS OF
MARKET FINANCIAL CORPORATION
Robert Gandenberger
Supervisor - Retired
Hamilton County of Ohio Recorder's Office
John T. Larimer
President
Market Financial Corporation
Market Bank
Rae Skirvin Larimer
Attorney
Edgar H. May
Partner - Retired
Ed May Realty Co.
L. Craig Martin
President
Environmentrics, Inc.
Wilbur H. Tisch
President - Retired
General Metal Works
Kathleen A. White
Real Estate Title Examiner
OFFICERS OF
MARKET FINANCIAL CORPORATION
John T. Larimer
President
Rae Skirvin Larimer
Secretary
Julie M. Bertsch
Chief Financial Officer
BOARD OF DIRECTORS OF
MARKET BANK
Robert Gandenberger
Supervisor - Retired
Hamilton County of Ohio Recorder's Office
John T. Larimer
President
Market Financial Corporation
Market Bank
L. Craig Martin
President
Environmentrics, Inc.
Edgar H. May
Partner - Retired
Ed May Realty Co.
Una Schaeperklaus
Secretary
Market Bank
OFFICERS OF
MARKET BANK
John T. Larimer
President and Managing Officer
Una Schaeperklaus
Secretary
Julie M. Bertsch
Chief Financial Officer
48
<PAGE>
SHAREHOLDER SERVICES
================================================================================
The Fifth Third Bank serves as transfer agent and dividend distributing agent
for MFC's shares. Communications regarding change of address, transfer of
shares, lost certificates and dividends should be sent to:
The Fifth Third Bank
Stock Transfer Department
Mail Drop 10AT66
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(513) 579-5320
(800) 837-2755
ANNUAL REPORT ON FORM 10-KSB
================================================================================
A copy of MFC's Annual Report on Form 10-KSB, as filed with the Securities and
Exchange Commission, will be available at no charge to shareholders upon request
to:
Market Financial Corporation
7522 Hamilton Avenue
Cincinnati, Ohio 45231
Attention: President
49
