As filed with the Securities and Exchange Commission on July 26, 1996
Registration No. 33-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
-----------------------
MARATHON FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
Virginia 6712 54-1560968
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification No.)
4095 Valley Pike
Winchester, Virginia 22602
(Address, Including Zip Code, and Telephone Number,
Including Area Code, of Registrant's Principal Executive Offices)
---------------------
DONALD L. UNGER
President and Chief Executive Officer
MARATHON FINANCIAL CORPORATION
4095 Valley Pike
Winchester, Virginia 22602
(540) 869-6600
(Names, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
-------------------------
With Copies to:
JODY M. WAGNER, ESQ.
Kaufman & Canoles
P.O. Box 3037
Norfolk, Virginia 23514-3037
(804) 624-3294
Approximate date of commencement of proposed sale to the public: As
soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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Proposed Maximum Proposed Maximum Amount of
Title of Each Class of Amount to be Offering Price Aggregate Registration
Securities to be Registered Registered Per Unit(1) Offering Price(1) Fee
======================================================================================================================
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Common Stock, par value $1.00 per share 575,000 shares $5.75 $3,306,250.00 $1,140.09
======================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) and (e)
----------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the Securities and Exchange Commission,
acting pursuant to Section 8(a), may determine.
<PAGE>
MARATHON FINANCIAL CORPORATION
Cross Reference Sheet
(Pursuant to Rule 404(a) of the Securities Act of 1933,
as amended, and Item 501 of Regulation S-K)
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<CAPTION>
Item No. and Caption in Form S-1 Location or Caption in Prospectus
<S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus............................... Facing Page of Registration Statement; Cross Reference
Sheet; Outside Front Cover Page of Prospectus.
2. Inside Front and Outside Back Cover Pages of
Prospectus................................................... Inside Front and Outside Back Cover Pages of
Prospectus.
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges.................................... Prospectus Summary; Investment Considerations.
4. Use of Proceeds.............................................. Use of Proceeds.
5. Determination of Offering Price.............................. Outside Front Cover Page of Prospectus; Investment
Considerations; Underwriting.
6. Dilution..................................................... Not Applicable.
7. Selling Security Holders..................................... Not Applicable.
8. Plan of Distribution......................................... Outside Front Cover Page of Prospectus; Prospectus
Summary; Offering to Stockholders; Underwriting.
9. Description of Securities to be Registered................... Description of Capital Stock.
10. Interests of Named Experts and Counsel....................... Legal Matters; Experts.
11. Information with Respect to the Registrant................... Outside Front Cover Page of Prospectus; Prospectus
Summary; Investment Considerations; Use of
Proceeds; The Corporation; Capitalization;
Selected Consolidated Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Marathon Financial
Corporation; Business; Management;
Description of Capital Stock;
Consolidated Financial Statements.
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities............... Not Applicable.
</TABLE>
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PRELIMINARY PROSPECTUS DATED ______ __, 1996, SUBJECT TO COMPLETION
500,000 Shares
MARATHON FINANCIAL CORPORATION
Common Stock
Prior to this offering, there has been no public market for the Common
Stock of Marathon Financial Corporation, a Virginia corporation (the
"Corporation"). See "Market Price and Dividend Data." The Corporation has
applied to have its Common Stock approved for listing on the NASDAQ SmallCap
Market under the symbol "MFCV." It is currently anticipated that the public
offering price will be between $4.75 and $5.75 per share. See "Underwriting" for
information regarding the factors considered in determining the offering price.
Of the 500,000 shares of Common Stock described herein (the "Shares"),
100,000 Shares will be offered first to the Corporation's stockholders of record
on June 24, 1996 at $5.00 per Share, on the basis of one Share for each 12
shares of Common Stock owned on such date (the "Subscription Offering"). See
"Offering to Stockholders." All Shares not subscribed for in the Subscription
Offering, together with 400,000 additional Shares, will be offered to the public
("Public Offering"). The Corporation reserves the right to increase the total
number of Shares offered in the Public Offering by not more than 75,000 Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY
THE SECURITIES AND EXCHANGE COMMISSION, THE FEDERAL
RESERVE BANK, THE VIRGINIA STATE CORPORATION COMMISSION
OR ANY OTHER STATE OR FEDERAL AGENCY, NOR HAS ANY STATE
OR FEDERAL AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER STATE OR FEDERAL AGENCY.
---------------
Public Broker/Dealer Proceeds to
Offering Price Commission (1) Corporation (2)
-------------- -------------- ---------------
Per Share............ $ $ $
Total (3)............ $ $ $
(1) Payable to McKinnon & Company, Inc. (the "Underwriter"), as selling
agent for the Corporation. The Corporation has agreed to indemnify the
Underwriter against certain civil liabilities, including liabilities
under the Securities Act of 1933.
(2) Before deducting expenses payable by the Corporation estimated at
approximately $ .
(3) Assumes the sale of the entire Shares offered hereby. In the
Corporation's prior Subscription Offering, it sold Shares at $5.00
per share for a total of $ , paid a financial advisory/standby
fee of $ to the Underwriter, and incurred expenses of approximately $
, ultimately yielding net proceeds of $ .
The Shares are offered by the Underwriter, as selling agent for the
Corporation, subject to prior sale, on a best efforts basis, and subject to
certain other conditions, including the right to reject any order in whole or in
part. This offering will close on or about , 1996, and is not subject to the
sale of any minimum number of Shares. Funds received by the Underwriter will be
deposited at, and held by, Crestar Bank (the "Escrow Agent") in a noninterest
bearing escrow account in Richmond, Virginia. It is expected that delivery of
the Shares will be made on or about , 1996.
McKinnon & Company, Inc.
The date of this Prospectus is ______ , 1996.
<PAGE>
[MAP of Northern Virginia with branch locations indicated]
<PAGE>
AVAILABLE INFORMATION
The Corporation has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement") under
the Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
agreement or other document referred to herein are not necessarily complete, and
reference is made to the copy of such agreement or other document filed as an
exhibit or schedule to the Registration Statement and each such statement shall
be deemed qualified in its entirety by such reference. For further information,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith, which are available for inspection without charge at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of the material containing
this information may be obtained from the Commission upon payment of the
prescribed fees.
The Corporation is subject to the periodic reporting and other
information requirements of the Securities Exchange Act of 1934, as amended.
Such reports may be inspected at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material may be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
REPORTS TO STOCKHOLDERS
The Corporation will furnish annual reports to its stockholders
containing audited financials of the Corporation and any subsidiaries on a
consolidated basis, as well as quarterly reports containing unaudited financial
information.
3
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PROSPECTUS SUMMARY
The following summary does not purport to be complete and is
qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, included elsewhere in this Prospectus.
Marathon Financial Corporation
Marathon Financial Corporation (the "Corporation") is a bank
holding company headquartered in Frederick County, Virginia. Its banking
subsidiary, The Marathon Bank (the "Bank"), began operations in December 1988 in
Frederick County, and opened additional branches in Front Royal, Virginia, in
1993 and in Winchester, Virginia in 1995. At June 30, 1996, the Corporation had
$41.611 million in assets, $31.596 million in net loans, $37.866 million in
deposits, $2.963 million in stockholders' equity, and an operating tax loss
carryforward of $3.226 million. During the year ended December 31, 1995, the
Corporation's net income grew 32.39% to $421 thousand from $318 thousand in
1994. For the six months ended June 30, 1996, the Corporation's net income
increased 71.75% to $304 thousand from $177 thousand for the comparable period
in 1995, while total assets increased 28.96% to $41.611 million at June 30, 1996
over the June 30, 1995 level. The annualized return on average assets and
average equity for the six months ended June 30, 1996 were 1.61% and 21.55%,
respectively. Improvements in the Bank's earnings and size have been consistent
since the employment by the Corporation of the current chief executive officer
in 1992.
The Corporation experienced significant losses in its first four
years of the Bank's operation, including net losses of $529 thousand in 1989,
$381 thousand in 1990, $2.748 million in 1991, and $474 thousand in 1992. In
late 1991, two significant loans with overdrafts and unusual extensions of
credit aggregating approximately $2.1 million were written off, without any
subsequent recovery. At December 31, 1991 the Corporation had a negative net
worth of $828 thousand, total assets of $15.883 million and a ratio of
non-performing assets and past due loans to total loans of 5.85%, which ratio
peaked at 10.39% at June 30, 1992. The Corporation was placed under a Memorandum
of Understanding by regulatory authorities in 1992 and the Board of Directors of
the Corporation accepted the resignations of the president, the chief lending
officer and the treasurer of the Corporation in February, April and May 1992,
respectively.
In April 1992, the Corporation's Board of Directors recruited
Donald L. Unger, a local, well respected banker, to take over as chief executive
officer of the Bank. Mr. Unger, with over 25 years of senior banking experience
in the Winchester and surrounding markets, had served as chief executive officer
and a director of The Peoples Bank of Front Royal, Front Royal, Virginia ("The
Peoples Bank"). Under Mr. Unger's leadership, the net income of The Peoples Bank
steadily increased from approximately $75 thousand in 1980 to $801 thousand in
1991 while, during the same period, assets increased from approximately $10
million to $60 million. Over the 1981-1991 period, the average annual return on
equity and average annual return on assets of The Peoples Bank were 17.40% and
1.59%, respectively. This period included the recession years of 1988-1991, when
the average annual return on equity and average annual return on assets were
15.72% and 1.40%, respectively. The Peoples Bank was sold to a large statewide
bank holding company in 1992.
Prior to hiring Mr. Unger, the Corporation's primary focus was on
commercial lending, which was largely unsecured. Under new management, the
Corporation's loan portfolio, deposit base and general operations were
diversified with the goal of reducing the volatility of assets and liabilities,
collateralizing the loan portfolio, and transforming the institution into a full
service community bank. From December 31, 1991 to June 30, 1996 consumer
installment loans increased 882.70% and loans secured by real estate increased
134.44%. The Corporation's loan portfolio stabilized, and at June 30, 1996 the
loan mix consisted of 52.24% consumer installment and real property loans and
47.76% commercial loans, a significant portion of which commercial loans were
secured by real estate, deposits and marketable securities. The Corporation also
began to originate and sell loans in the secondary mortgage market in September
1993, and production and sale has steadily increased from $2.237 million in
1994, to $3.502 million in 1995, and $2.389 million during the first six months
of 1996. The Bank emphasized diversifying its deposit base by increasing
consumer and commercial deposits and eliminating brokered deposits, which prior
to 1991 exceeded the Corporation's non-interest bearing deposits. Average
non-interest bearing deposits increased from $909 thousand, representing 6.14%
of the Corporation's total deposits at December 31, 1991, to $5.203 million,
representing 15.21% of the Corporation's total deposits, at June 30, 1996. This
shift substantially impacted the Corporation's cost of funds. As a result of
this successful turnaround, the Memorandum of Understanding was terminated on
November 23, 1994.
In the first three full years under Mr. Unger's leadership, the
Corporation's net income steadily increased to $80 thousand in 1993, $318
thousand in 1994 and $421 thousand in 1995. For the first six months of 1996,
net income was $304 thousand. These figures include expenses associated with the
opening of two additional branches -
4
<PAGE>
August 1993 in Front Royal and February 1995 in Winchester. Total assets
increased from $15.883 million at December 31, 1991 to $41.611 million at June
30, 1996. Non-performing assets to period end loans and other real estate owned
declined from 2.94% at December 31, 1991 to 0.93% at June 30, 1996.
Additionally, the Corporation has signed a contract to sell its largest piece of
other real estate owned to an unrelated purchaser for cash, which is anticipated
to close in late August 1996. If the transaction is consummated, the Corporation
will reduce its portfolio of other real estate owned by more than 90%. The net
interest margin increased from 3.67% in 1991 to 6.04% in 1994, was 5.81% in
1995, and for the first six months of 1996 on an annualized basis was 6.14%.
Over the same period, the return on average equity increased from negative
175.2% at December 31, 1991 to positive 21.55% on an annualized basis in the
first six months of 1996. The return on average assets increased from negative
16.40% to positive 1.61%; the ratio of nonperforming assets to period end loans
and other real estate owned decreased from 2.94% to .93%; while net chargeoffs
to average loans declined from 16.91% to .01%. The Corporation has significantly
more interest rate sensitive assets than liabilities adjustable within 90 days,
and, therefore, the net interest margin would be expected to benefit from an
increase in interest rates during this 90-day period.
As part of the recapitalization of the Corporation in 1992, the
Corporation, in private placements, issued two rounds of Common Stock at $5.00
per share, Convertible Preferred Stock convertible into Common Stock at $5.00
per share (which was mandatorily converted in July 1995) and warrants to
purchase Common Stock at $5.00 per share. At June 30, 1996, 200,688 of such
warrants were outstanding and exercisable through June 30, 1997.
The Corporation is the only independent community bank
headquartered in the City of Winchester or Frederick County, Virginia. The
Corporation's primary market is the Northern Shenandoah Valley, which includes
Frederick County, where, based on total financial institution deposits at June
30, 1995, it was the fourth largest financial institution with approximately 11%
of the market, Warren County, including the Town of Front Royal, where, based on
total financial institution deposits at June 30, 1995, it was the ninth largest
financial institution with approximately 4% of the market, and the City of
Winchester, the largest market in the four county area of Frederick, Warren,
Shenandoah and Clarke Counties. Winchester and Front Royal are located at or
near the intersections of I-81 and I-66 on the western fringe of the greater
Washington-Baltimore Metropolitan Statistical Area, the fourth largest market in
the United States.
Seventeen Fortune 500 companies have major manufacturing facilities
in the Northern Shenandoah Valley. In addition, Warren County is becoming a
significant center, in the Mid-Atlantic region, for manufacturing and
distribution due to its proximity to the Virginia Inland Port, a state sponsored
facility to expedite truck and rail shipments to the Hampton Roads Port. Pen-Tab
Inc. opened a manufacturing and distribution center in the first quarter of 1996
which employs over 270 persons. Toray, Inc. recently broke ground on a $120
million full service manufacturing plant which anticipates employing 120 persons
in 1997 and over 500 persons by the year 2000. Major employers in the four
county area include Valley Health Systems, Inc., National Fruit Products, Inc.,
Crown Cork and Seal, Automotive Industries Inc., Rubbermaid Commercial Products,
General Electric, AT&T Communications, duPont, Inc. and O'Sullivan Corporation.
The Offering
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<S> <C>
Shares offered........................ A total of 500,000 Shares, of which 100,000 (the "Subscription Shares")
will be initially offered in a subscription offering (the "Subscription
Offering") to the Corporation's stockholders of record on June 24, 1996 on
the basis of one Share for each 12 shares of Common Stock then
beneficially owned. The Shares not subscribed for in the Subscription
Offering, together with 400,000 additional Shares (collectively, the "Public
Offering Shares"; the Subscription Shares and the Public Offering Shares
are sometimes collectively referred to herein as the "Shares"), will be
offered in a public offering on a best efforts basis by the Underwriter as
selling agent for the Corporation, at a price currently anticipated to be
between $4.75 and $5.75 per Share. The Corporation reserves the right to
increase the total number of Shares offered in the Public Offering by not
more than 75,000 Shares. See "Offering to Stockholders" and
"Underwriting."
</TABLE>
5
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<TABLE>
<S> <C>
Common Stock outstanding............. 1,306,303 shares at June 30, 1996;
1,806,303 after completion of the
Offerings, assuming the sale of all 500,000
Shares and excluding the 75,000 additional
Shares that may be offered at the
election of the Corporation.
Use of proceeds....................... To support future growth of the Corporation's assets, including the potential
opening of new branches, and for general corporate purposes. See "Use of
Proceeds."
Market area........................... The Corporation's three banking offices, located in Frederick County, the
Town of Front Royal and the City of Winchester, operate along the western
fringe of Washington-Baltimore Metropolitan Statistical Area, the fourth
largest market in the United States.
Proposed NASDAQ symbol................ The Corporation has applied to
have its Common Stock approved for listing on the
NASDAQ SmallCap Market under the symbol "MFCV."
Dividends............................. The Corporation has never declared or paid cash dividends and does not
anticipate doing so in the foreseeable future. See "Market Price and
Dividend Data," "Business - Supervision and Regulation," and "Description
of Capital Stock."
Risk Factors.......................... Prospective investors should carefully consider certain factors before
purchasing any of the Shares offered in the Offerings. See "Investment
Considerations."
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL DATA
The year-end income statement data, the year-end per share data, and
the year-end balance sheet data regarding net income contained in the following
summary financial data for the five years ended December 31, 1995 are derived
from the audited historical consolidated financial statements of the
Corporation. The financial data for the six months ended June 30, 1996 and 1995
are derived from unaudited consolidated financial statements. The summary
financial data should be read in conjunction with the historical consolidated
financial statements and the notes thereto of the Corporation included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Income Statement Data:
Net interest income................... $ 1,038 $ 777 $ 1,688 $ 1,402 $ 908 $ 593 $ 566
Provision for loan losses............. 73 16 113 151 12 (88) 2,458
Noninterest income.................... 194 101 281 242 93 111 180
Noninterest expense................... 855 685 1,435 1,175 909 1,266 1,036
Income tax expense.................... 103 59 143 101 - - -
Benefit of net operating loss(1)...... (103) (59) (143) (101) - - -
Net income (loss)..................... $ 304 $ 177 $ 421 $ 318 $ 80 $ (474) $ (2,748)
========= ======== ======== ======== ======== ========= =========
Per Share Data:
Net income (loss)..................... $ .23 $ .16 $ .35 $ .30 $ .08 $ (.40) $ (4.51)
Cash dividends........................ -- -- -- -- -- -- --
Book value at period end.............. 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Tangible book value at period end..... 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Balance Sheet Data:
Total assets.......................... $ 41,611 $ 32,266 $ 36,070 $ 27,682 $ 22,379 $ 16,111 $ 15,883
Loans, net............................ 31,596 26,606 28,774 22,618 18,149 10,828 11,545
Securities............................ 1,691 1,506 1,699 1,490 1,517 2,168 2,572
Deposits.............................. 37,866 29,045 32,622 24,604 19,606 13,678 16,391
Stockholders' equity (deficit)........ 2,963 2,434 2,678 2,244 1,934 1,497 (828)
Average shares outstanding(2)......... 1,306 1,091 1,192 1,083 1,055 743 615
Performance Ratios(3):
Return on average assets.............. 1.61% 1.18% 1.31% 1.23% .42% (3.10)% (16.40)%
Return on average equity.............. 21.55 15.13 16.96 15.28 4.51 (90.00) (175.20)
Net interest margin(4)................ 6.14 6.21 5.81 6.04 5.38 4.31 3.67
Efficiency(5)......................... 69.40 78.02 72.88 71.47 90.81 179.83 138.87
Asset Quality Ratios:
Allowance for loan losses to period
end loans........................... 1.45% 1.15% 1.35% 1.31% 1.22% 1.78% 3.85%
Allowance for loan losses to
nonaccrual loans..................... 725.00 107.27 873.33 111.11 1,184.21 0.00 130.51
Nonperforming assets to period end
loans and other real estate owned(6) 0.93(7) 1.07 0.96 1.18 0.10 0.00 2.94
Net charge-offs (recoveries) to
average loans....................... .01 .04 .07 .37 (0.12) 1.63 16.91
Capital and Liquidity Ratios:
Leverage.............................. 7.88% 8.10% 8.32% 8.69% 9.99% 9.38% (5.21)%
Risk based:
Tier I capital...................... 9.20 9.19 9.40 10.04 10.67 11.71 (5.45)
Total capital....................... 10.45 10.37 10.60 11.29 11.92 13.30 (3.33)
Average loans to average deposits..... 90.33% 92.07% 91.57% 91.79% 87.79% 77.70% 84.80%
</TABLE>
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(1) At June 30, 1996, the Corporation had available approximately $3.226
million of an operating tax loss carryforward which could be offset
against future income.
(2) All periods have been restated to reflect the stock dividend declared in
1995.
(3) Annualized for the six months ended June 30, 1996 and 1995.
(4) Net interest margin is calculated as net interest income divided by average
earning assets and represents the Corporation's net yield on its earning
assets.
(5) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, net of securities gains or losses.
(6) Nonperforming assets consist of nonaccrual loans and foreclosed properties.
(7) The Corporation signed a contract to sell its largest piece of other real
estate owned to an unrelated purchaser for cash, which is anticipated to
close in late August 1996. If the transaction is consummated, the
Corporation will reduce its portfolio of other real estate owned by more
than 90%.
7
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THE CORPORATION
Marathon Financial Corporation (the "Corporation") is a bank holding
company headquartered in Frederick County, Virginia. Its banking subsidiary, The
Marathon Bank (the "Bank"), began operations in December 1988 in Frederick
County, and opened additional branches in Front Royal, Virginia, in 1993 and in
Winchester, Virginia in 1995. At June 30, 1996, the Corporation had $41.611
million in assets, $31.596 million in net loans, $37.866 million in deposits,
$2.963 million in stockholders' equity, and an operating tax loss carryforward
of $3.226 million. During the year ended December 31, 1995, the Corporation's
net income grew 32.39% to $421 thousand from $318 thousand in 1994. For the six
months ended June 30, 1996, the Corporation's net income increased 71.75% to
$304 thousand from $177 thousand for the comparable period in 1995, while total
assets increased 28.96% to $41.611 million at June 30, 1996 over the June 30,
1995 level. The annualized return on average assets and average equity for the
six months ended June 30, 1996 were 1.61% and 21.55%, respectively. Improvements
in the Bank's earnings and size have been consistent since the employment by the
Corporation of the current chief executive officer in 1992.
The Corporation experienced significant losses in its first four years
of the Bank's operation, including net losses of $529 thousand in 1989, $381
thousand in 1990, $2.748 million in 1991, and $474 thousand in 1992. In late
1991, two significant loans with overdrafts and unusual extensions of credit
aggregating approximately $2.1 million were written off, without any subsequent
recovery. At December 31, 1991 the Corporation had a negative net worth of $828
thousand, total assets of $15.883 million and a ratio of non-performing assets
and past due loans to total loans of 5.85%, which ratio peaked at 10.39% at June
30, 1992. The Corporation was placed under a Memorandum of Understanding by
regulatory authorities in 1992 and the Board of Directors of the Corporation
accepted the resignations of the president, the chief lending officer and the
treasurer of the Corporation in February, April and May 1992, respectively.
In April 1992, the Corporation's Board of Directors recruited Donald L.
Unger, a local, well respected banker, to take over as chief executive officer
of the Bank. Mr. Unger, with over 25 years of senior banking experience in the
Winchester and surrounding markets, had served as chief executive officer and a
director of The Peoples Bank of Front Royal, Front Royal, Virginia ("The Peoples
Bank"). Under Mr. Unger's leadership, the net income of The Peoples Bank
steadily increased from approximately $75 thousand in 1980 to $801 thousand in
1991 while, during the same period, assets increased from approximately $10
million to $60 million. Over the 1981-1991 period, the average annual return on
equity and average annual return on assets of The Peoples Bank were 17.40% and
1.59%, respectively. This period included the recession years of 1988-1991, when
the average annual return on equity and average annual return on assets were
15.72% and 1.40%, respectively. The Peoples Bank was sold to a large statewide
bank holding company in 1992.
Prior to hiring Mr. Unger, the Corporation's primary focus was on
commercial lending, which was largely unsecured. Under new management, the
Corporation's loan portfolio, deposit base and general operations were
diversified with the goal of reducing the volatility of assets and liabilities,
collateralizing the loan portfolio, and transforming the institution into a full
service community bank. From December 31, 1991 to June 30, 1996 consumer
installment loans increased 882.70% and loans secured by real estate increased
134.44%. The Corporation's loan portfolio stabilized, and at June 30, 1996 the
loan mix consisted of 52.24% consumer installment and real property loans and
47.76% commercial loans, a significant portion of which commercial loans were
secured by real estate, deposits and marketable securities. The Corporation also
began to originate and sell loans in the secondary mortgage market in September
1993, and production and sale has steadily increased from $2.237 million in
1994, to $3.502 million in 1995, and $2.389 million during the first six months
of 1996. The Bank emphasized diversifying its deposit base by increasing
consumer and commercial deposits and eliminating brokered deposits, which prior
to 1991 exceeded the Corporation's non-interest bearing deposits. Average
non-interest bearing deposits increased from $909 thousand, representing 6.14%
of the Corporation's total deposits at December 31, 1991, to $5.203 million,
representing 15.21% of the Corporation's total deposits, at June 30, 1996. This
shift substantially impacted the Corporation's cost of funds. As a result of
this successful turnaround, the Memorandum of Understanding was terminated on
November 23, 1994.
8
<PAGE>
In the first three full years under Mr. Unger's leadership, the
Corporation's net income steadily increased to $80 thousand in 1993, $318
thousand in 1994 and $421 thousand in 1995. For the first six months of 1996,
net income was $304 thousand. These figures include expenses associated with the
opening of two additional branches - August 1993 in Front Royal and February
1995 in Winchester. Total assets increased from $15.883 million at December 31,
1991 to $41.611 million at June 30, 1996. Non-performing assets to period end
loans and other real estate owned declined from 2.94% at December 31, 1991 to
0.93% at June 30, 1996. Additionally, the Corporation has signed a contract to
sell its largest piece of other real estate owned to an unrelated purchaser for
cash, which is anticipated to close in late August 1996. If the transaction is
consummated, the Corporation will reduce its portfolio of other real estate
owned by more than 90%. The net interest margin increased from 3.67% in 1991 to
6.04% in 1994, was 5.81% in 1995, and for the first six months of 1996 on an
annualized basis was 6.14%. Over the same period, the return on average equity
increased from negative 175.2% at December 31, 1991 to positive 21.55% on an
annualized basis in the first six months of 1996. The return on average assets
increased from negative 16.40% to positive 1.61%; the ratio of nonperforming
assets to period end loans and other real estate owned decreased from 2.94% to
.93%; while net chargeoffs to average loans declined from 16.91% to .01%. The
Corporation has significantly more interest rate sensitive assets than
liabilities adjustable within 90 days, and, therefore, the net interest margin
would be expected to benefit from an increase in interest rates during this
90-day period.
As part of the recapitalization of the Corporation in 1992, the
Corporation, in private placements, issued two rounds of Common Stock at $5.00
per share, Convertible Preferred Stock convertible into Common Stock at $5.00
per share (which was mandatorily converted in July 1995) and warrants to
purchase Common Stock at $5.00 per share. At June 30, 1996, 200,688 of such
warrants were outstanding and exercisable through June 30, 1997.
The Corporation is the only independent community bank headquartered in
the City of Winchester or Frederick County, Virginia. The Corporation's primary
market is the Northern Shenandoah Valley, which includes Frederick County,
where, based on total financial institution deposits at June 30, 1995, it was
the fourth largest financial institution with approximately 11% of the market,
Warren County, including the Town of Front Royal, where, based on total
financial institution deposits at June 30, 1995, it was the ninth largest
financial institution with approximately 4% of the market, and the City of
Winchester, the largest market in the four county area of Frederick, Warren,
Shenandoah and Clarke Counties. Winchester and Front Royal are located at or
near the intersections of I-81 and I-66 on the western fringe of the greater
Washington-Baltimore Metropolitan Statistical Area, the fourth largest market in
the United States.
Seventeen Fortune 500 companies have major manufacturing facilities in
the Northern Shenandoah Valley. In addition, Warren County is becoming a
significant center, in the Mid-Atlantic region, for manufacturing and
distribution due to its proximity to the Virginia Inland Port, a state sponsored
facility to expedite truck and rail shipments to the Hampton Roads Port. Pen-Tab
Inc. opened a manufacturing and distribution center in the first quarter of 1996
which employs over 270 persons. Toray, Inc. recently broke ground on a $120
million full service manufacturing plant which anticipates employing 120 persons
in 1997 and over 500 persons by the year 2000. Major employers in the four
county area include Valley Health Systems, Inc., National Fruit Products, Inc.,
Crown Cork and Seal, Automotive Industries Inc., Rubbermaid Commercial Products,
General Electric, AT&T Communications, duPont, Inc. and O'Sullivan Corporation.
The directors of the Corporation have agreed with the Underwriter to a
standard requirement not to sell or otherwise dispose of any shares of Common
Stock for a period of 120 days after the commencement of the Offerings without
the prior written consent of the Underwriter. It is anticipated that the
Underwriter will not give its consent to any sales or dispositions during this
period that, in its opinion, may have an adverse effect on the market price of
the Common Stock. After the expiration of the 120 day period, sales of Common
Stock by these individuals may have an adverse effect on the market price.
Officers of the Bank who are not directors have not entered into any agreements
restricting sales of their Common Stock in the Bank. See "Underwriting."
The Bank is chartered under the laws of the Commonwealth of Virginia
and is a member of the Federal Reserve System. The Bank's deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC"), and the
9
<PAGE>
Bank is subject to the supervision, examination, and regulation of the Board of
Governors of the Federal Reserve System (the "Federal Reserve") and the Virginia
Bureau of Financial Institutions.
The Corporation's headquarters is located at 4095 Valley Pike,
Winchester, Virginia 22602 and its telephone number is (540) 869-6600.
INVESTMENT CONSIDERATIONS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors before purchasing
shares of Common Stock offered hereby.
Dependence on Key Personnel. The Corporation is substantially
dependent upon the services of Donald L. Unger, its President and Chief
Executive Officer. The loss of the services of Mr. Unger could have a material
adverse effect upon the future prospects of the Corporation. The Corporation
has entered into an employment agreement with Mr. Unger and maintains a "key"
man insurance policy insuring his life in the amount of $1 million. See
"Management - Chief Executive Officer Employment Agreement and Incentive Bonus
Plan."
Competition. The banking business in the area served by the Corporation
(the Counties of Frederick, Clarke, Shenandoah, and Warren (including the Town
of Front Royal), Virginia and the City of Winchester) is highly competitive with
respect to both loans and deposits. In the Corporation's primary service area,
there are approximately eleven commercial banks and savings and loans (including
seven large, Virginia-wide banks with multiple offices) offering services
ranging from deposits and real estate loans to full service banking. The Bank is
the newest and smallest commercial bank in its service area, in addition, there
can be no assurance that other financial institutions, with substantially
greater resources than the Corporation, will not establish operations in the
Corporation's service area.
Governmental Regulation. The Corporation is subject to extensive
governmental supervision, regulation, and control, and future legislation and
governmental policy could adversely affect the banking industry and the
operations of the Bank. Regulations affecting the banking industry may be
changed at any time, and the interpretation of those regulations by examining
authorities of the banking industry is also subject to change. There can be no
assurance that future changes in legislation and administrative regulations or
government policies will not adversely affect the banking industry and the
business of the Bank. See "Business - Supervision and Regulation."
No Assurance of Established Public Trading Market. The Corporation has
applied to have its Common Stock approved for listing on the NASDAQ SmallCap
Market; however, there can be no assurance that an active trading market for the
Corporation's Common Stock will develop after the Offerings, or if developed,
that such a market will be sustained. The market price of the Common Stock may
fluctuate substantially and may be adversely affected by factors that may or may
not be related to the Corporation's performance. Such factors may include
interest rates and conditions in the banking industry, the stock market, and the
economy in general.
Geographic Concentration of Loans. The vast majority of the Bank's
loans are made to borrowers within Winchester, Front Royal and Frederick County,
Virginia, and adjacent areas. Accordingly, a major downturn in the local economy
could adversely affect the Corporation's loan portfolio.
Uncertainties Regarding Growth. The Corporation has experienced
substantial growth in the last few years. Although the Corporation plans to
continue growing at a significant rate in the future, there can be no guarantee
that the recent rate can be maintained. If such anticipated growth does occur,
management will have to continue administering the Corporation's operations in
an efficient and productive manner consistent with its recent past practices.
10
<PAGE>
Payment of Cash Dividends. The Corporation has never paid any cash
dividends. The ability of the Corporation to pay cash dividends is subject to
both federal and state banking regulations. The Bank will not be able to and
does not intend to pay any dividends in the foreseeable future. See "Market
Price and Dividend Data" and "Business - Supervision and Regulation - Limits on
Dividends and Other Payments."
Determination of Offering Price. The offering price of the Shares has
been determined in large part by negotiation between the Corporation and the
Underwriter based upon certain factors, including an evaluation of assets,
earnings, and other established criteria of value, as well as the comparisons of
the relationships between market prices and book values of other banking
institutions of a similar size and asset quality. There can be no assurance
that the Shares can be resold at the offering price. See "Market Price and
Dividend Data" and "Underwriting."
No Minimum Offering. The Underwriter is selling the Shares on a best
efforts basis, which means that it may sell all, none or only some of the
Shares. As there is no minimum number of Shares that must be sold, a closing of
the Offerings could occur even if only a small number of Shares is sold.
No Independent Counsel. The Corporation and the Underwriter are both
represented by Kaufman & Canoles, and, accordingly, neither the Corporation nor
the Underwriter has the benefit of independent representation. In the event the
interests of the Corporation and the Underwriter diverge, each of them will be
required to obtain other legal counsel. See "Legal Matters."
OFFERING TO STOCKHOLDERS
The Bank is offering 100,000 Shares in the Subscription Offering until
September __, 1996, to the holders of its Common Stock of record on June 24,
1996 (the "Record Date") at the price of $5.00 per Share. Stockholders of record
at the close of business on the Record Date may purchase Shares on the basis of
one Share for each 12 shares of Common Stock beneficially owned by them on such
date. Fractional Shares will not be sold, but stockholders may round any such
fraction up to a full Share, and stockholders may oversubscribe. Stockholders
also may subscribe for less than the maximum number of Shares allocated to them.
USE OF PROCEEDS
The net proceeds to be received by the Corporation from the offering,
after deduction of underwriting fees and commissions and estimated expenses,
will be used to support future asset growth, including the potential opening of
new branches, and for general corporate purposes.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Corporation at
June 30, 1996. The table should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Prospectus.
June 30, 1996
(Dollars in
thousands)
Stockholders' equity:
Preferred stock, Series A, 5% noncumulative, no par $ -
value; 1,000,000 shares authorized; no shares
issued and outstanding(1)
Common Stock, $1.00 par value, 20,000,000
shares authorized, 1,306,303 shares issued and outstanding(2)..... 1,306
Capital surplus................................................... 5,110
Retained Earnings (Deficit)....................................... (3,443)
Unrealized gain (loss) on securities available for sale........... (10)
--------
Total stockholders' equity.................................. $ 2,963
========
(1) In July 1995, all of the Corporation's then outstanding convertible
preferred stock was mandatorily converted into Common Stock.
(2) In addition, there are outstanding warrants to purchase 200,688 shares
of the Corporation's Common Stock at $5.00 per share exercisable
through June 30, 1997.
12
<PAGE>
MARKET PRICE AND DIVIDEND DATA
The Corporation has applied to have the Common Stock approved for
listing on the NASDAQ SmallCap Market under the symbol "MFCV" effective upon the
closing of the Offerings; however, there can be no assurance that an active
trading market for the Corporation's Common Stock will develop after the
Offerings, or if developed, that such a market will be sustained. There is no
recognized market for the Corporation's common stock. There are occasional
transactions in the stock and the Corporation's management has assisted in
matching persons interested in buying and selling common stock. In July 1995,
all of the Corporation's convertible preferred stock was mandatorily converted
to Common Stock at the conversion price of $5.00 per share. The sporadic trades
in the Common Stock during the past year and a half have been at or about $5.00
per share. At June 30, 1996 the Corporation had approximately 792 stockholders
of record.
The book value of the Corporation's Common Stock at June 30, 1996 was
$2.27 per share. At June 30, 1996, Corporation's operating tax loss carryforward
was $3.226 million.
The Corporation has paid no cash dividends to date. Holders of the
Corporation's Common Stock will be entitled to dividends at such rate as may be
determined from time to time by the Board of Directors of the Corporation. The
Virginia Stock Corporation Act provides that a corporation may pay a cash
dividend to its shareholders so long as, after giving effect to such dividend,
the corporation will be able to pay its debts as they become due and the value
of the Corporation's assets exceeds its liabilities (plus the amount, if any,
necessary to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those shareholders receiving the
dividend). The Corporation's future dividends will depend on its earnings and
those of the Bank, general economic conditions, and other factors affecting
dividend policy.
Under state law, without the consent of the Bureau of Financial
Institutions, the Bank may not pay dividends until it has restored any deficit
in its capital funds as originally paid in. Further, a regulation promulgated by
the Board of Governors of the Federal Reserve System requires approval of
two-thirds of the holders of the Corporation's shares prior to payment of a
dividend until any deficit in the Bank's capital account has been restored.
While the Corporation has not been permitted to pay cash dividends, it
did issue one stock dividend. On December 19, 1995, the Corporation declared a
stock dividend for holders of Common Stock for year-end 1995. The stock dividend
declared was 15% of 1995 profits, which was $.04873 per share. The dividend was
paid in the first quarter of 1996. The stock dividend assumed a value of $5.00
per share. The Corporation obtained approval from the regulators prior to
issuing said shares in compliance with Virginia Code Section 6.1-56, which
requires prior approval because of impaired capital.
13
<PAGE>
SELECTED FINANCIAL DATA
The year-end income statement data, the year-end per share
data, and the year-end balance sheet data regarding net income contained in the
following selected financial data for the five years ended December 31, 1995 are
derived from the audited historical consolidated financial statements of the
Corporation. The financial data for the six months ended June 30, 1996 and 1995
are derived from unaudited consolidated financial statements. The selected
financial data should be read in conjunction with the consolidated financial
statements of the Corporation included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Income Statement Data:
Interest income....................... $ 1,778 $ 1,343 $ 2,940 $ 2,251 $ 1,625 $ 1,361 $ 1,580
Interest expense...................... 740 566 1,252 849 717 768 1,014
-------- -------- ------ -------- -------- -------- --------
Net interest income................... 1,038 777 1,688 1,402 908 593 566
Provision for loan losses............. 73 16 113 151 12 (88) 2,458
-------- -------- ------ -------- -------- -------- --------
Net interest income after provision
for loan losses..................... 965 761 1,575 1,251 896 681 (1,892)
Noninterest income.................... 194 101 281 242 93 111 180
Noninterest expense................... 855 685 1,435 1,175 909 1,266 1,036
-------- -------- ------ -------- -------- -------- --------
Income (loss) before income taxes..... 304 177 421 318 80 (474) (2,748)
Income tax expense.................... 103 59 143 101 -- -- --
Benefit of net operating loss(1)...... (103) (59) (143) (101) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $ 304 $ 177 $ 421 $ 318 $ 80 $ (474) $ (2,748)
======== ======== ========= ========= ======== ======== ========
Per Share Data:
Net income (loss)..................... $ .23 $ .16 $ .35 $ .30 $ .08 $ (.40) $ (4.51)
Cash dividends........................ -- -- -- -- -- -- --
Book value at period end.............. 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Tangible book value at period end..... 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Balance Sheet Data:
Total assets.......................... $ 41,611 $ 32,266 $ 36,070 $ 27,682 $ 22,379 $ 16,111 $ 15,883
Loans, net............................ 31,596 26,606 28,774 22,618 18,149 10,828 11,545
Securities............................ 1,691 1,506 1,699 1,490 1,517 2,168 2,572
Deposits.............................. 37,866 29,045 32,622 24,604 19,606 13,678 16,391
Stockholders' equity (deficit)........ 2,983 2,434 2,678 2,244 1,934 1,497 (828)
Average shares outstanding(2)......... 1,306 1,091 1,192 1,083 1,055 743 615
Performance Ratios(3):
Return on average assets.............. 1.61% 1.18% 1.31% 1.23% .42% (3.10)% (16.40)%
Return on average equity.............. 21.55 15.13 16.96 15.28 4.51 (90.00) (175.20)
Net interest margin(4)................ 6.14 6.21 5.81 6.04 5.38 4.31 3.67
Efficiency(5)......................... 69.40 78.02 72.88 71.47 90.81 179.83 138.87
Asset Quality Ratios:
Allowance for loan losses to period
end loans........................... 1.45% 1.15% 1.35% 1.31% 1.22% 1.78% 3.85%
Allowance for loan losses to
nonaccrual loans..................... 725.00 107.27 873.33 111.11 1,184.21 0.00 130.51
Nonperforming assets to period end
loans and other real estate owned(6) 0.93(7) 1.07 0.96 1.18 0.10 0.00 2.94
Net charge-offs (recoveries) to
average loans....................... .01 .04 .07 .37 (0.12) 1.63 16.91
Capital and Liquidity Ratios:
Leverage.............................. 7.88% 8.10% 8.32% 8.69% 9.99% 9.38% (5.21)%
Risk based:
Tier I capital...................... 9.20 9.19 9.40 10.04 10.67 11.71 (5.45)
Total capital....................... 10.45 10.37 10.60 11.29 11.92 13.30 (3.33)
Average loans to average deposits..... 90.33% 92.07% 91.57% 91.79% 87.79% 77.70% 84.80%
</TABLE>
- ------------------
(1) At June 30, 1996, the Corporation had available approximately $3.226
million of an operating tax loss carryforward which could be offset against
future income.
(2) All periods have been restated to reflect the stock dividend declared in
1995.
(3) Annualized for the six months ended June 30, 1996 and 1995.
(4) Net interest margin is calculated as net interest income divided by average
earning assets and represents the Corporation's net yield on its earning
assets.
(5) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, net of securities gains or losses.
(6) Nonperforming assets consist of nonaccrual loans and foreclosed properties.
(7) The Corporation signed a contract to sell its largest piece of other real
estate owned to an unrelated purchaser for cash, which is anticipated to
close in late August 1996. If the transaction is consummated, the
Corporation will reduce its portfolio of other real estate owned by more
than 90%.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MARATHON FINANCIAL CORPORATION
The following discussion is intended to assist readers in understanding
and evaluating the financial condition and results of operations of the
Corporation. This review should be read in conjunction with the Corporation's
financial statements and accompanying notes included elsewhere herein. This
analysis provides an overview of the significant changes that occurred during
the periods presented.
Overview
The Corporation's performance for the first six months of 1996 showed
an improvement over the same period a year ago. Net income increased 71.75% in
the first half of 1996 to $304 thousand compared to $177 thousand during the
same period of 1995. This increase in earnings was primarily due to higher net
interest income resulting from increased loan growth.
Return on average equity on an annualized basis during the first six
months of 1996 increased to 21.55%, up from 15.13% for the same period in 1995.
Return on average assets on an annualized basis was 1.61% during this period
compared to 1.18% for the first six months of 1995. These performance figures
had been at extremely low levels in 1991 and 1992 due to a provision for loan
losses of $2.1 million related primarily to two unsecured loans in 1991, and
increases in nonperforming assets in the first half of 1992, as a result of
prior management's lending practices, before beginning to improve in the second
half of 1992 under a new management team. Return on average assets was negative
16.40% and negative 3.10% in 1991 and 1992, respectively, and increased steadily
thereafter to positive 0.42% in 1993, to 1.23% in 1994, and to 1.31% in 1995.
Return on average equity, likewise, was negative 175.20% and negative 90.0% in
1991 and 1992, respectively, before increasing steadily to 4.51% in 1993, 15.28%
in 1994 and 16.96% in 1995.
The Corporation experienced limited loan growth from 1990 through 1992
until, under a new chief executive officer and management team, improvement
began in 1993. In 1991, average total assets increased 18.15% to $16.723 million
from $14.154 million in 1990, and declined in 1992 to $15.439 million, a 7.68%
decrease from the prior year. Average total assets increased to $19.184 million
in 1993, up 24.26%, and continued to increase in 1994 to $25.869 million, up
34.85% from the prior year, and in 1995 to $32.090 million, up 24.05% from the
prior year, and, for the first six months of 1996 to $37.739 million, up 26.03%
over the comparable period of 1995. This increase in average assets subsequent
to 1992 was, under the new chief executive officer, the result of new branches
opened in 1993 and 1995 in Front Royal and Winchester, Virginia, respectively,
and an emphasis on consumer and secured commercial loan growth. Average loans
were also relatively flat in the 1990-1992 period, with an increase of 26.33% in
1991 to $12.454 million from $9.858 million in 1990 and a subsequent decline to
$10.948 million in 1992, down 12.09% from the prior year. Average total earning
assets increased 22.83% in 1993 to $16.890 million from the prior year, and to
$23.225 million in 1994, up 37.51% over 1993, and to $29.040 million in 1995, up
25.04% over 1994, and, for the first six months of 1996 to $33.776 million, up
34.98% over the comparable period of 1995. Average installment loans increased
steadily from $1.403 million at December 31, 1993 to $6.902 million at June 30,
1996, an increase of 391.95%. Both commercial and real estate loans also
escalated over the same period. Average commercial loans increased to $13.940
million for the six months ended June 30, 1996, a rise of 68.99% over the
average amount of commercial loans in 1993. Similarly, average real estate loans
grew to $10.055 million for the six months ended June 30, 1996, an increase of
106.72% over the average amount of real estate loans in 1993.
Non-performing assets and past due loans to total loans peaked at
10.39% at June 30, 1992, and net charge-offs peaked in 1991 at $2.106 million,
primarily from the charge-off of two loans. Non-performing assets at June 30,
1996, were $300 thousand, or 0.93% of period end loans and other real estate
owned, and the allowance for loan losses was $464 thousand. The allowance for
loan losses to period end loans at June 30, 1996 was 1.45% and net charge-offs
to average loans in the first six months of 1996, annualized, was 0.01%. The
provision for loan losses in the first six months of 1996 was $73 thousand, up
356.25% from $16 thousand in the comparable period
15
<PAGE>
of 1995, while net charge-offs were $2 thousand versus $5 thousand in the first
half of 1995. In November 1994, the Corporation was released from the Written
Agreement that it entered into in 1992 with the Federal Reserve and the Virginia
Bureau of Financial Institutions.
On an annualized basis, the Corporation's net interest margin declined
slightly to 6.14% in the first half of 1996, from 6.21% during the same period
of 1995. Net interest margin had increased to 6.04% in 1994 from 5.38% in 1993
and 4.31% in 1992. In a period of declining market interest rates, as a result
of the Corporation's increased loan demand, a decline in its average cost of
interest bearing liabilities, an increase in its non-interest bearing deposits
and a shift from securities into higher yielding loans, the Corporation's net
interest margin increased in 1994 over the 1993 level. In 1995 the net interest
margin declined slightly to 5.81% from 6.04% in 1994 under rising interest
rates, as the cost of interest bearing liabilities rose more than the increase
in yields on interest earning assets. In the first six months of 1996 an
increase in average loan volume was partially offset by an increase in the
average cost of funds required to support this growth and a decline in the
average yield in earning assets.
Recent Developments
The Corporation signed a contract to sell its largest piece of other
real estate owned to an unrelated purchaser for cash, which is anticipated to
close in late August 1996. If the transaction is consummated, the Corporation
will reduce its portfolio of other real estate owned by more than 90%.
Net Interest Income
Net interest income is the major component of the Corporation's
earnings and is equal to the amount by which interest income exceeds interest
expense. Earning assets are composed primarily of loans and securities, while
deposits and short-term borrowings represent the major portion of
interest-bearing liabilities. Changes in volume and mix in assets and
liabilities, as well as changes in the yields and rates paid, determine changes
in net interest income. Net interest margin is calculated by dividing net
interest income by average earning assets and represents the Corporation's net
yield on earning assets.
Net interest income was $1.037 million in the first half of 1996,
33.59% greater than the $777 thousand reported during the comparable period of
1995. The improvement in net interest income was primarily due to volume
increases in the loan portfolio, as the loan demand, continued to increase. The
average balance of the loan portfolio was $30.897 million for the first six
months ended June 30, 1996, up $6.391 million, or 26.08%, over the same period
in 1995. The average balances of installment and commercial loans were $6.902
million and $13.940 million, respectively, for the six months ended June 30,
1996, up 60.51% and 13.98% respectively, over the same period of 1995. The
average balance of the securities portfolio was $1.627 million for the six
months ended June 30, 1996, up 7.68% over the comparable 1995 period. Despite
lower interest rates in the first half of 1996 than in the comparable period of
1995, the average yield on loans increased 50 basis points from 10.48% in 1995
to 10.98% in 1996 with an increase of 107 basis points on real estate loan
yields and an increase of 48 basis points in the average yields on commercial
loans offsetting a decline of 48 basis points in the average yields on
installment loans. However, an increase in average federal funds sold of 142.17%
to $1.252 million coupled with a decline in average yields on federal funds sold
of 108 basis points to 5.11% produced a slight decline of 20 basis points in the
average yield on total interest earning assets to 10.53% from 10.73% in 1995.
The average level of interest earning assets increased 34.98% to $33.776
million. Despite the decline of interest rates the average cost of funds to
support the growth in interest increased. Total interest bearing liabilities
increased 27.20% to $29.637 million led by a 35.28% increase in certificates of
deposit under $100,000 to $15.162 million and a 29.47% increase in money market
savings to $3.185 million and a 33.96% increase in interest checking accounts to
$2.154 million. The average costs of interest bearing liabilities increased 14
basis points to 5.00% from 4.86%. This increase was led by a 6 basis point rise
in the average cost of certificates of deposit under $100,000 and a 49 basis
point increase in the average cost of money market certificates to 3.58%. A
28.34% increase in non interest bearing deposits to $5.203 million partially
mitigated the rise in the costs of interest bearing deposits but the net
interest margin declined from 6.21% in 1995's first half to 6.14% in 1996's
comparable period. The increase in the average costs of interest bearing
16
<PAGE>
deposits and the decline in the yield on interest earning assets offset the
volume gains in loans, particularly commercial and installment loans.
Net interest income was $1.688 million in 1995, 20.40% greater than the
$1.402 million reported in 1994. The improvement in net interest income was
primarily due to volume and interest rate increases in the loan portfolio,
particularly installment and real estate loans. The average balance of loans
increased 25.56%, led by a 74.69% increase in installment loans and a 36.68%
increase in real estate loans. The average balance of the securities portfolio
declined 1.19%. Average balances of interest earning assets increased 25.04% to
$29.040 million. The average yields on interest earning assets increased 43
basis points from 9.69% in 1994 to 10.12% in 1995 led by a 46 basis point
increase in the average yield on loans to 10.57% which offset a 92 basis point
decline in the average yield on securities. Commercial, real estate and
installment loan yields increased 36, 79 and 43 basis points, respectively.
Total interest bearing liabilities increased 26.53% to $25.411 million while the
average rates paid on interest bearing liabilities increased 70 basis points to
4.93%, with the cost of interest bearing deposits increasing 73 basis points.
The greater increase in the rates paid for interest bearing deposits than in the
yields earned on interest earning assets produced a decline in the net interest
margin from 6.04% in 1994 to 5.81% in 1995.
Net interest income in 1994 compared to 1993 increased $494 thousand,
or 54.41%, to $1.402 million. This increase in net interest income was due
primarily to volume increases in the loan portfolio. The average balance of
loans increased 44.65% to $20.997 million, with commercial loans up 42.81%, real
estate loans up 30.53% and installment loans up 104.42%. The average balance of
the securities portfolio declined 12.68% to $1.515 million. The average yield
earned on interest earning assets increased 7 basis points to 10.11% despite
generally declining interest rates. The yield on loans increased 2 basis points
to 9.69% led by a 21 basis point increase in the yields on real estate loans
while yields on commercial and installment loans declined. The average yield on
the securities portfolio declined 145 basis points which was somewhat offset by
an increase of 68 basis points in the yields earned on federal funds sold. Total
interest bearing liabilities increased 32.39% to $20.083 million while the
average rates paid on interest earning assets declined 50 basis points to 4.23%.
The decline in the rates paid on interest earning assets coupled with the actual
increase in the average rate earned on interest earning assets and the higher
relative growth in interest earning assets over the increase in interest bearing
liabilities produced an increase in the net interest margin from 5.38% in 1993
to 6.04% in 1994.
17
<PAGE>
The following table illustrates average balances of total interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the distribution of assets, liabilities, stockholder's equity, and the
related income, expense, and corresponding weighted average yields and costs.
The average balances used for the purpose of these tables and other statistical
disclosures were calculated by using the daily average balances. Due to the net
operating loss carryforwards available, the Corporation currently does not pay
income taxes; therefore, income and yields are not reflected on a tax equivalent
basis.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
<TABLE>
<CAPTION>
Six months Ended
June 30, Years Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate balance expense rate
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Assets:
Interest bearing assets:
Securities.................... $ 1,627 $ 50 6.15% $ 1,497 $ 87 5.81% $ 1,515 $ 102 6.73%
Loans(1):
Commercial.................. 13,940 772 11.08 12,676 1,386 10.93 11,780 1,245 10.57
Real estate................. 10,055 544 10.82 8,678 872 10.05 6,349 588 9.26
Installment................. 6,902 380 11.01 5,010 528 10.54 2,868 290 10.11
------ ------ ------ ----- ------ -----
Total Loans............... 30,897 1,696 10.98 26,364 2,786 10.57 20,997 2,123 10.11
Federal funds sold............ 1,252 32 5.11 1,179 67 5.68 713 26 3.65
------ ------ ------ ------ ------ -----
Total earning assets...... 33,776 1,778 10.53 29,040 2,940 10.12 23,225 2,251 9.69
Less: Allowance for loan losses (423) (324) (260)
Total noninterest earning assets 4,386 3,374 2,904
------ ------ ------
Total Assets.................... $37,739 $32,090 $25,869
======= ======= =======
Liabilities and stockholders equity:
Interest bearing liabilities:
Interest bearing deposits:
Interest checking........... $ 2,154 $ 30 2.79% $ 1,756 $ 48 2.73% $ 1,375 $ 39 2.84%
Regular savings............. 4,823 80 3.32 5,009 158 3.15 6,543 212 3.24
Money market savings........ 3,185 57 3.58 2,661 93 3.49 2,356 86 3.65
Certificates of deposit:
$100,000 and over......... 3,679 105 5.71 2,843 166 5.84 1,277 46 3.60
Under $100,000............ 15,162 446 5.88 12,488 738 5.91 7,870 419 5.32
------ ----- ------ ----- ------ ------
Total interest bearing
deposits................ 29,003 718 4.95 24,757 1,203 4.86 19,421 802 4.13
Short-term borrowings......... 28 1 7.14 25 1 4.00 83 4 4.82
Mortgage payable.............. 502 18 7.17 519 39 7.51 539 40 7.42
Capital lease payable......... 104 4 7.69 110 9 8.18 40 3 7.50
------ ------ ------ ------ ------- ------
Total interest bearing
liabilities................. 29,637 741 5.00 25,411 1,252 4.93 20,083 849 4.23
Non interest bearing liabilities:
Demand deposits............. 5,203 4,034 3,455
Other liabilities........... 78 165 250
------ ------ ------
Total noninterest
liabilities............. 5,281 4,199 3,705
Total liabilities............. 34,918 29,610 23,788
Stockholders' equity.......... 2,821 2,480 2,081
------ ------ ------
Total Liabilities and
Stockholders' equity........ $37,739 $32,090 $25,869
======= ======= =======
Net interest income........... $1,037 $1,688 $1,402
====== ====== ======
Interest rate spread (2)...... 5.53% 5.19% 5.46%
Interest expense as a percent of
average earning assets...... 4.39% 4.31% 3.66%
Net interest margin (3)....... 6.14% 5.81% 6.04%
</TABLE>
1993
---------------------------------------
Interest Average
Average income/ yield/
balances expense rate
---------------------------------------
Assets:
Interest bearing assets:
Securities.................... $ 1,735 $ 142 8.18%
Loans(1):
Commercial.................. 8,249 877 10.63
Real estate................. 4,864 440 9.05
Installment................. 1,403 147 10.48
------ -----
Total Loans............... 14,516 1,464 10.09
Federal funds sold............ 639 19 2.97
------ -----
Total earning assets...... 16,890 1,625 9.62
Less: Allowance for loan losses (212)
Total noninterest earning assets 2,506
------
Total Assets.................... $19,184
=======
Liabilities and stockholders equity:
Interest bearing liabilities:
Interest bearing deposits:
Interest checking........... $ 814 $ 24 2.95%
Regular savings............. 4,721 193 4.09
Money market savings........ 2,471 81 3.28
Certificates of deposit:
$100,000 and over......... 773 43 5.56
Under $100,000............ 5,846 321 5.49
------ -----
Total interest bearing
deposits................ 14,625 662 4.53
Short-term borrowings......... - - 0.00
Mortgage payable.............. 545 55 10.09
Capital lease payable......... - - 0.00
------- ------
Total interest bearing
liabilities................. 15,170 717 4.73
Non interest bearing liabilities:
Demand deposits............. 1,909
Other liabilities........... 333
------
Total noninterest
liabilities............. 2,242
Total liabilities............. 17,412
Stockholders' equity.......... 1,772
------
Total Liabilities and
Stockholders' equity........ $19,184
=======
Net interest income........... $ 908
======
Interest rate spread (2)...... 4.89%
Interest expense as a percent of
average earning assets...... 4.25%
Net interest margin (3)....... 5.38%
- ------------------
(1) Nonaccruing loans are included in average loans outstanding.
(2) Interest spread is the average yield earned on earning assets less the
average rate incurred on interest-bearing liabilities.
(3) Net interest margin is net interest income expressed as a percentage of
average earnings assets.
18
<PAGE>
The following table describes the impact on the interest income of the
Corporation resulting from changes in average balances and average rates for the
periods indicated. The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
Volume and Rate Analysis
<TABLE>
<CAPTION>
June 30, 1996 compared Years Ended December 31,
------------------------ --------------------------------------------------------
to June 30, 1995 1995 compared to 1994 1994 compared to 1993
----------------------------------------------------------------------- ----------------
Change Due To: Change Due To: Change Due To:
Increase Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in thousands)
<S> <C>
Assets:
Securities....................... $ 3 $ 4 $ 7 $ (1) $(14) $(15) $(17) $(23) $(40)
Loans:
Commercial....................... 94 30 124 97 44 141 373 (5) 368
Real estate...................... 109 46 155 230 54 284 138 10 148
Installment...................... 143 (10) 133 225 13 238 148 (5) 143
---- ----- ---- ---- ----- ---- ----- ----- -----
Total Loans.................... 346 66 412 552 111 663 659 - 659
Federal funds sold................. 18 (2) (16) 22 19 41 2 5 7
---- ----- --- ---- ----- ---- ----- ---- ----
Total earning assets............. 367 68 435 573 116 689 644 (18) 626
---- ---- --- ---- ---- --- ---- ---- ----
Liabilities and Stockholder's Equity:
Interest bearing deposits:
Interest Checking.............. 7 1 8 10 (1) 9 16 (1) 15
Regular savings................ (1) 2 1 (48) (6) (54) 41 (22) 19
Money market savings........... 12 7 19 11 (4) 7 (4) 9 5
Certificates of deposit:
$100,000 and over............ 39 (3) 36 80 40 120 7 (4) 3
Under $100,000............... 105 8 113 268 51 319 108 (10) 98
---- ---- ---- ---- ---- ---- ---- ----- ----
Total interest bearing deposits 162 15 177 321 80 401 168 (28) 140
Short-term borrowings.............. (3) 2 (1) (4) 1 (3) 4 - 4
Mortgage payable................... (1) (1) (2) (1) - (1) (1) (14) (15)
Capital lease payable.............. - 1 1 6 - 6 3 - 3
Total interest-bearing liabilities. 158 17 175 322 81 403 174 (42) 132
---- ----- ---- ---- ---- ---- ---- ---- ----
Change in net interest income...... $209 $ 51 $260 $251 $ 35 $286 $470 $ 24 $494
==== ===== ==== ==== ==== ==== ==== ==== ====
</TABLE>
19
<PAGE>
Interest Sensitivity
An important element of both earnings performance and liquidity is
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
in a specific time interval. The gap can be managed by repricing assets or
liabilities, by selling investments available-for-sale, by replacing an asset or
liability at maturity, or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and liabilities repricing in
the same time interval helps to hedge the risk and minimize the impact on net
interest income in periods of rising or falling interest rates.
The Corporation evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and pricing, funding sources and pricing,
and off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
The following table illustrates the interest sensitivity gap position
of the Corporation as of June 30, 1996. This table presents a position that
existed at one particular day, that changes continually, and that is not
necessarily indicative of the Corporation's position at any other time. The
Corporation has significantly more interest earning assets adjustable within 90
days than interest bearing liabilities adjustable within the same period. As
such, an increase in interest rates would increase the Corporation's net
interest margin, and conversely, a decrease in interest rates would decrease the
net interest margin.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
June 30, 1996 (1)
Maturing Or Repricing In:
----------------------------------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
------- ------ ------ ------- -----
(Dollars in thousands)
<S> <C>
Earning Assets:
Loans(2)..................................... $10,363 $ 5,507 $16,738 $ 385 $32,993
Investment securities, at amortized cost..... ___ 100 298 267 665
Securities available for sale, at fair value. ___ ___ 589 134 723
Federal funds sold........................... 3,148 3,148
------ ------- ------- ------- -----
Total Earning Assets....................... $13,511 $ 5,607 $17,625 $ 786 $37,529
======= ======= ======= ======= =======
Interest-Bearing Liabilities:
Interest checking(3)......................... $ ___ $ ___ $ 2,081 $ ___ $ 2,081
Regular savings(3)........................... ___ ___ 5,057 ___ 5,057
Money market savings......................... 3,141 ___ ___ ___ 3,141
Certificates of deposit:
$100,000 and over.......................... 1,219 1,966 1,164 ___ 4,349
Under $100,000............................. 1,429 8,717 6,825 16,971
------ ------ ------ ------ ------
Total Interest-Bearing Liabilities......... $ 5,789 $10,683 $15,127 $ - $31,599
======= ======= ======= ======== =======
Period gap................................... $ 7,722 $(5,076) $ 2,498 $ 786 $ 5,930
Cumulative gap............................... $ 7,722 $ 2,646 $ 5,144 $5,930
Ratio of cumulative gap to
total earning assets....................... 20.58% 7.05% 13.71% 15.80%
</TABLE>
- ------------------
(1) The repricing dates may differ from maturity dates for certain assets
due to prepayment assumptions.
(2) Excludes nonaccrual loans.
(3) The Corporation has determined that interest checking and savings
accounts are not sensitive to changes in related market rates and
therefore it has placed them in the 1 to 5 years column.
20
<PAGE>
Securities
Investment Securities. The carrying value of investment securities
amounted to $665 thousand at June 30, 1996, compared to $926 thousand at
December 31, 1995. The comparison of amortized cost to fair value is shown in
Note 2 of the notes to the consolidated financial statements. Note 2 also
provides an analysis of gross unrealized gains and losses of investment
securities. Investment securities consist of the following:
Portfolio of Investment Securities
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- ------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Book Value:
U.S. Treasury and other U.S.
government agencies and corporations....... $ 298 $ 650 $ 650 $ 649 $ 0
States of the U.S. and political
subdivisions............................... 251 150 150 150 0
Other securities........................... 116 134 126 147 0
----- ------ ------ ------ ---
Total Securities......................... $ 665 $ 934 $ 926 $ 946 $ 0
===== ====== ====== ====== ===
</TABLE>
Securities Available for Sale. Securities available for sale are used
as part of the Corporation's interest rate risk management strategy and may be
sold in response to changes in interest rates, changes in prepayment risk,
liquidity needs, the need to increase regulatory capital and other factors. The
fair value of securities available for sale totaled $1.026 million at June 30,
1996, compared to $773 thousand at December 31, 1995. The comparison of fair
market value to amortized cost is shown in Note 2 of the notes to the
consolidated financial statements. Note 2 also provides an analysis of gross
unrealized gains and losses of securities available for sale.
Securities Available for Sale
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- ---------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Fair Value:
U.S. Treasury and other U.S.
government agencies and corporations.............. $ 589 $ 293 $ 454 $ 281 $ 926
States of the U.S. and political
subdivisions...................................... 0 0 0 0 160
Other securities.................................. 437 279 319 263 472
----- ------ ------ ------ ------
Total Securities................................ $1,026 $ 572 $ 773 $ 544 $ 1,558
===== ====== ====== ====== ======
</TABLE>
The Corporation does not hold any derivative instruments.
21
<PAGE>
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio at June 30, 1996. The weighted
average yields are calculated on the basis of book value of the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount.
Maturities of Investments
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
--------------------- --------------------------
Held to Maturity Available for Sale
--------------------- --------------------------
(Dollars in thousands)
<S> <C>
U.S. Treasury and other
U.S. government agencies
and corporations
After one year to five years ... $298 $293 5.71% $596 $589 5.99%
--- ---- ---- ----
Total......................... 298 293 5.71 596 589 5.99
---- ---- ---- ----
Other Securities
After one year to five years.... 251 256 6.64 0 0 0.00
Other........................... 116 117 7.33 137 134 7.54
--- --- ---- ----
Total......................... 367 373 6.98 137 134 7.54
---- --- ---- ----
Total securities(1)(2)............ $665 $666 6.76% $733 $723 6.22%
==== === ==== ====
</TABLE>
- ------------------
(1) Excludes equity securities without readily determinable fair values, at
historical costs, as follows: Federal Reserve Bank - $139,550;
Virginia Bankers Bank - $50,000; FHLB stock - $108,300 and CDC Stock -
$5,000
(2) The equity securities have no stated maturity date.
Loan Portfolio
The Corporation's loan portfolio is comprised of commercial loans,
construction loans, real estate loans, and consumer installment loans. The
primary market in which the Corporation makes loans is the Northern Shenandoah
Valley, which includes Frederick, Shenandoah, Warren and Clarke Counties, and
the City of Winchester.
Net loans consist of total loans minus the allowance for loan losses,
and where applicable, unearned discounts. Net loans were $31.596 million at June
30, 1996, an 18.76% increase over June 30, 1995. Net loans were $28.774 million
at December 31, 1995, 27.22% greater than net loans of $22.618 million at
December 31, 1994. The average loans as a percentage of average earning assets
was 90.79%, 90.41%, and 85.94% for the years ended December 31, 1995, 1994, and
1993, respectively, and was 91.48% as of June 30, 1996. The Bank does not and
has not had any loans outstanding to foreign countries or for highly leveraged
transactions.
In the normal course of business, the Corporation makes various
commitments and incurs certain contingent liabilities which are disclosed but
not reflected in its financial statements. These commitments and contingent
liabilities include commitments to extend credit and financial standby letters
of credit. At June 30, 1996, commitments for financial standby letters of credit
totaled $78 thousand and commitments to extend credit were $4.685 million. At
December 31, 1995, commitments for financial standby letters of credit totaled
$77 thousand and commitments to extend credit totaled $3.699 million. At
December 31, 1994, commitments for financial standby letters of credit totaled
$55 thousand and commitments to extend credit totaled $2.969 million.
Interest income on installment, commercial, and real estate mortgage
loans is computed on the principal balance outstanding. Most variable rate loans
carry an interest rate tied to New York Prime, as published in the Wall Street
Journal.
22
<PAGE>
The following table summarizes the composition of the loan portfolio at
the dates indicated:
Loan Portfolio
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -----------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Commercial........................ $15,311 $13,315 $11,976 $ 7,566 $ 5,798 $ 7,132
Real estate construction.......... 4,015 3,638 2,488 1,788 945 1,289
Real estate mortgage.............. 5,747 6,133 4,924 5,807 2,508 2,875
Installment loans................. 6,987 6,081 3,529 3,213 1,773 711
------ ------ ------ ------ ------ ------
Total Loans..................... 32,060 29,167 22,917 18,374 11,024 12,007
Less:
Allowance for loan losses....... (464) (393) (299) (225) (196) (462)
------- ------- ------- ------- ------- -------
Net loans..................... $31,596 $28,774 $22,618 $18,149 $10,828 $11,545
====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the composition of the Corporation's
loan portfolio (by percentage) for the five years ended December 31, 1995, and
the six months ended June 30, 1996:
Loan Portfolio by Percentage
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Commercial........................ 47.76% 45.65% 52.26% 41.18% 52.59% 59.40%
Real estate construction.......... 12.52 12.47 10.86 9.73 8.57 10.74
Real estate mortgage.............. 17.93 21.03 21.48 31.60 22.76 23.94
Installment....................... 21.79 20.85 15.40 17.49 16.08 5.92
------ ------ ------ ------ ------ ------
Total Loans................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Real estate secured loans accounted for 30.45% of the loans outstanding
at June 30, 1996. These loans are primarily secured by residential property.
Commercial loans accounted for 47.76% of loans outstanding at June 30, 1996.
Commercial loans are made for business purposes and may be secured by commercial
real estate, demand deposits, stocks, and business equipment. Consumer
installment loans accounted for 21.79% of loans outstanding at June 30, 1996.
Consumer installment loans are normally loans to individuals for household,
automobiles, home improvements, family, and other personal expenditures.
Nonperforming loans as of June 30, 1996, totaled $64 thousand, or 0.20% of the
total loan portfolio.
23
<PAGE>
The following table presents the maturities or repricing periods of
selected loans outstanding at June 30, 1996:
Maturity Schedule of Loans
<TABLE>
<CAPTION>
(Dollars in thousands)
1 year or less 1-5 years After 5 years Total(1)
------------------- ------------------- ----------------- -----------------
Fixed Variable Fixed Variable Fixed Variable Fixed Variable
Rate Rate Rate Rate Rate Rate Rate Rate
<S> <C>
June 30, 1996 $9,627 $6,243 $16,738 -0- $385 -0- $26,750 $6,243
</TABLE>
- ------------------
(1) Excludes nonaccrual loans.
Asset Quality
The Corporation attempts to maintain the allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. Loan
losses are charged directly to the allowance when they occur, while recoveries
are credited to the allowance. The provision for loan losses is determined
periodically by senior management and lending officers based upon consideration
of several factors, including changes in the character and size of the loan
portfolio and related loan loss experience, a review and examination of overall
loan quality which includes the assessment of problem loans, and an analysis of
anticipated economic conditions in the market area. In addition, input from bank
regulatory agencies that regularly review the loan portfolio as part of their
examination process and advice from the Corporation's independent accountants
are considered in reviewing and assessing the adequacy of the allowance for loan
losses.
24
<PAGE>
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
SIX MONTHS
ENDED JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Average total loans................. $30,897 $24,506 $26,364 $20,997 $14,516 $10,948 $12,454
Balance, beginning of period........ $ 393 $ 299 $ 299 $ 225 $ 196 $ 462 $ 110
Less charge offs:
Commercial........................ _ _ 5 68 ___ 293 2,106
Real Estate....................... _ _ __ ___ ___ ___ ___
Installment....................... 6 7 26 22 4 15
------ ------ ----- ------ ------ ------ ------
Total Charge offs............... 6 7 31 90 4 308 2,106
------ ------ ----- ------ ------ ------ ------
Plus recoveries:
Commercial........................ 1 2 7 12 5 130 ___
Real Estate....................... __ _ _ __ ___ ___ ___
Installment....................... 3 _ 5 1 16 _ _
------ ------- ------ ------ ------ ------ ------
Total recoveries................ 4 2 12 13 21 130 0
------ ------- ------ ------ ------- ------ ------
Net (charge offs) recoveries........ (2) (5) (19) (77) 17 (178) (2,106)
Provision for loan losses........... 73 16 113 151 12 (88) 2,458
------ ------- ------- ------- ------- ------- -------
Balance, end of period.............. $ 464 $ 310 $ 393 $ 299 $ 225 $ 196 $ 462
====== ====== ====== ======= ======= ======= =======
Allowance for loan losses to
period end total loans............ 1.45% 1.15% 1.35% 1.31% 1.22% 1.78% 3.85%
Allowance for loan losses to
nonaccrual loans.................. 725.00% 107.27% 873.33% 111.11% 1,184.21% 0.00% 130.51%
Net charge-offs (recoveries) to average
loans ............................ .01% .04% .07% .37% (.12)% 1.63% 16.91%
</TABLE>
The allowance for loan losses is maintained at a level which in
management's judgment is adequate to absorb credit losses inherent in the loan
portfolio, although no assurance can be given in this regard due to competitive
and economic uncertainties. Management believes that the June 30, 1996 allowance
for loan losses was adequate at 1.45%. Management based such estimate on the
quality of assets held and the strong local economy because of: (i) high quality
and (ii) a strong local economy.
A breakdown of the allowance for loan losses is provided in the
following table. However, management of the Corporation does not believe that
the allowance for loan losses can be fragmented by category with any precision
that would be useful to investors. The breakdown of the allowance for loan
losses is based primarily upon those factors discussed above in computing the
allowance for loan losses as a whole. Because all of these factors are subject
to change, the breakdown is not necessarily indicative of the category of future
loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES IN DOLLARS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial $ 395 $264 $334 $278 $209 $182 $409
Real estate - construction 23 15 20 1 1 1 13
Real estate - mortgage 9 6 8 4 3 2 29
Installment 37 25 31 16 12 11 11
--- --- -- --- --- --- ---
Total allowance for loan
losses $464 $310 $393 $299 $225 $196 $462
=== === === === === === ===
</TABLE>
25
<PAGE>
NONPERFORMING ASSETS
The following table details information concerning nonaccrual and past
due loans, as well as foreclosed assets, for the dates indicated:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
JUNE 30, DECEMBER 31,
----------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C>
Nonaccrual loans $ 64 $ 289 $ 45 $ 269 $ 19 $ 0 $ 354
Other real estate owned(1) 236 - 236 - - - -
----- ------ ----- ------ ----- ----- ------
Total Nonperforming assets $ 300 $ 289 $ 281 $ 269 $ 19 $ 0 $ 354
===== ===== ===== ===== ===== ===== ======
Loans past due 90 or more
days accruing interest $ 219 $ 270 $ 215 $ 587 $ 16 $ 247 $ 349
Allowance for loan losses
to nonaccrual loans 725.00% 107.27% 873.33% 111.11% 1,184.21% 0.00% 130.51%
Nonperforming assets to
period end loans and
other real estate owned 0.93 1.07 0.96 1.18 0.10 0.00 2.94
</TABLE>
- ------------------
(1) The Corporation signed a contract to sell its largest piece of other
real estate owned to an unrelated purchaser for cash, which is
anticipated to close in late August 1996. If the transaction is
consummated, the Corporation will reduce its portfolio of other real
estate owned by more than 90%.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent 90 days or more. If
interest had been accrued on these loans for the six months of 1996, the
interest income would have been $3 thousand.
Noninterest Income
For the six month period ending June 30, 1996, noninterest income was
$194 thousand, an increase of $93 thousand, or 92.08% compared to noninterest
income of $101 thousand at June 30, 1995. For the twelve month period ended
December 31, 1995, noninterest income increased to $281 thousand from $242
thousand in 1994, or 16.12%. Such increase is a direct result of the
Corporation's increased volume of non-interest bearing deposits and the related
fees and service charges.
Noninterest Expense
Noninterest expense increased from $685 thousand for the six month
period ended June 30, 1995, to $851 thousand for the same period ended June 30,
1996. The category with the largest increase, salaries and benefits, increased
$84 thousand or 25.85%, as a result of salary adjustments due to changes in
positions. Noninterest expense for 1995 was $1.435 million, up 22.13% over the
comparable period of 1994. Noninterest expense for 1994 was $1.175 million, up
29.26%, over the comparable period for 1993.
Income Taxes
There was no income tax expense in 1995, 1994, and 1993 due to
utilization of a net operating loss carryforward. Under the Internal Revenue
Code, the Corporation has net operating loss carryforwards available totaling
$3.226 million at December 31, 1995. The carryforwards expire December 31, 2006.
The full realization of the tax benefits associated with the carryforwards
depends predominantly upon the recognition of ordinary income during the
carryforwards period. Effective January 1, 1993, the Corporation adopted
Statement of Financial
26
<PAGE>
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. See Note 8
to the Corporation's financial statements for related disclosures.
Deposits
The Corporation primarily uses deposits to fund its loans and
investment portfolio. For the six month period ended June 30, 1996, total
average deposits were $34.206 million, compared to $26.616 million for the
comparable period of 1995, a 28.52% increase. For the year ended December 31,
1995, total average deposits were $28.791 million, up 25.86% from $22.876
million for 1994. Average deposits for 1993 were $16.534 million. For the first
six months of 1996, average noninterest bearing demand deposits were $5.203
million, up 28.34% from $4.054 million for the comparable 1995 period. For the
year ended December 31, 1995, average noninterest bearing demand deposits were
$4.034 million, up 16.76% from $3.455 million during 1994 and up 80.98% from
$1.909 million during 1993. The largest category of interest bearing deposits is
certificates of deposit under $100,000. For the six month period ended June 30,
1996, this category increased $3.954 million, or 35.28%, to $15.162 million from
$11.208 million during the comparable period of 1995. Average certificates of
deposit under $100,000 were $15,162 million at June 30, 1996, $12.488 million,
$7.870 million and $5.846 million for the years 1995, 1994 and 1993,
respectively.
The Corporation offers individuals and small-to-medium sized businesses
a variety of deposit accounts. These accounts, including checking, savings,
money market, and certificates of deposit, are obtained primarily from the
community that the Corporation services. Accordingly, the Corporation enjoys a
stable core deposit base.
The following table details the average amount of, and the average rate
paid on, the following primary deposit categories, for the periods indicated:
Average Deposits and Average Rates Paid
<TABLE>
<CAPTION>
Six months
ended June 30, Years ended December 31,
1996 1995 1994 1993
-------------------- -------------------- ------------------- -------------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
(Dollars in thousands)
<S> <C>
Interest-bearing deposits:
Checking ............................. $ 2,154 2.79% $ 1,756 2.73% $ 1,375 2.84% $ 814 2.95%
Regular savings ...................... 4,823 3.32 5,009 3.15 6,543 3.24 4,721 4.09
Money market savings ................. 3,185 3.58 2,661 3.49 2,356 3.65 2,471 3.28
Certificates of deposit:
$100,000 and over .................. 3,679 5.71 2,843 5.84 1,277 3.60 773 5.56
Under $100,000 ..................... 15,162 5.88 12,488 5.91 7,870 5.32 5,846 5.49
------- ------ ------ ------
Total interest-bearing deposits.. 29,003 4.95% 24,757 4.86% 19,421 4.13% 14,625 4.53%
Noninterest-bearing .................... 5,203 4,034 3,455 1,909
------- ------ ------ ------
Total deposits ......................... $34,206 $28,791 $22,876 $16,534
======= ======= ======= =======
</TABLE>
27
<PAGE>
The following is a summary of the maturity distribution of certificates
of deposit in amounts of $100,000 or more as of June 30, 1996:
Maturities of CDs of $100,000 or More
June 30, 1996
------------------------------
Amount Percent
(Dollars in thousands)
Three months or less................... $1,219 28.03%
Over three months to one year.......... 1,966 45.21
Over one year to five years............ 1,164 26.76
----- ------
Total................................ $4,349 100.00%
===== ======
For the six month period ended June 30, 1996, average certificates of
deposit over $100,000 totaled $3.679 million. Average certificates of deposit in
amounts of $100,000 or more were $2.843 million, $1.277 million, and $773
thousand at December 31, 1995, 1994 and 1993, respectively. As of June 30, 1996,
and December 31, 1995, 1994, and 1993, average certificates over $100,000
represented 19.53%, 18.54%, 13.96%, and 1.68%, respectively, of the total
certificates of deposit held on the respective dates. The Corporation competes
with the major regional financial institutions for money market accounts and
certificates of deposit less than $100,000. The Corporation has a relatively
high level of rate sensitive assets and uses a system to adjust loan pricing to
reflect its cost of funds, loan and funding maturities and loan-to-deposit
ratio.
Short-Term Borrowings
The Corporation occasionally finds it necessary to purchase federal
funds on a short-term basis due to fluctuations in loan and deposit levels. The
Corporation had no short-term borrowings with an average balance outstanding of
more than 30% of stockholders' equity for the years ended December 31, 1995 and
1994.
Liquidity
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, investments, and loans maturing within one year. As a result of the
Corporation's management of liquid assets and the ability to generate liquidity
through
28
<PAGE>
liability funding, management believes that the Corporation maintains overall
liquidity sufficient to satisfy its depositors' requirements and meet its
customers' credit needs.
Summary of Liquid Assets
<TABLE>
<CAPTION>
June 30, December 31,
-------- --------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Cash and due from banks $ 3,110 $ 2,283 $ 1,789 $ 1,119
Federal funds sold 3,148 1,574 277 240
Investment securities(1) - 448 289 902
Available-for-sale securities 1,026 774 544 1,558
------ ------ ------ ------
Total liquid assets $ 7,284 $ 5,079 $ 2,899 $ 3,819
====== ====== ====== ======
Deposits and other liabilities $38,648 $33,392 $25,438 $20,445
Ratio of liquid assets to
deposits and other liabilities 18.85% 15.21% 11.40% 18.68%
</TABLE>
- ------------------
(1) Only investment securities with a maturity of one year or less are
considered liquid assets for this table.
As of June 30, 1996, the Corporation's liquidity position was tight,
although it had improved somewhat from its position at December 31, 1995, as
management continued its strategy to maximize earning assets in order to restore
previously impaired capital. Deposit growth continued to be invested almost
exclusively in loans and a minimal level of temporary investments. As of June
30, 1996, the Corporation had approximately $1.026 million in available-for-sale
securities at its disposal. Furthermore, the Corporation maintains a $600
thousand federal funds line with a correspondent bank, and can borrow up to 50%
of its capital on an unsecured basis from the Community Bankers' Bank. In
addition, should additional liquidity be required, management has the ability to
sell loans to other institutions to obtain additional capital as needed.
Liquidity is monitored by the institution on several levels. The
officers of the Corporation monitor liquidity on a monthly basis. In addition,
the loan committee, which consists of several directors and officers, monitors
the liquidity position on a biweekly basis. The results of both meetings are
reviewed by the full board at its monthly meeting. The loan-to-deposit ratio is
considered by management to be the key liquidity ratio. As of June 30, 1996,
such ratio was 84.67%. At June 30, 1996, the Corporation had long term debt of
$590 thousand and had no material commitments for capital expenditures.
29
<PAGE>
Return on Equity and Assets
The following table summarizes ratios considered to be significant
indicators of the Corporation's profitability and financial condition during the
periods indicated:
Return on Equity and Assets
<TABLE>
<CAPTION>
Six Months
ended
June 30, Years ended December 31,
1996(1) 1995 1994 1993
---- ---- ---- ----
<S> <C>
Return on average assets....................... 1.61% 1.31% 1.23% 0.42%
Return on average equity....................... 21.55 16.96 15.28 4.51
Average equity to average asset ratio.......... 7.48 7.73 8.04 9.24
</TABLE>
- ------------------
(1) Percentages for the six months ended June 30, 1996, have been annualized.
Impact of Inflation and Changing Prices and Seasonality
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such prices are affected by inflation.
The Corporation's loans and deposits are not typically seasonal or
cyclical.
Accounting Rule Changes
FASB No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, establishes standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Statement is effective for fiscal years beginning after December 15, 1995. The
Statement is not expected to have a material impact on the Corporation.
FASB No. 122, Accounting for Mortgage Servicing Rights, amends FASB No.
65, Accounting for Certain Mortgage Banking Activities, to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securities
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgage servicing
30
<PAGE>
rights and the mortgage loans (without the mortgage servicing rights), the
entire cost of purchasing or originating the loans should be allocated to the
mortgage loans (without the mortgage servicing rights) and no cost should be
allocated to the mortgage servicing rights. The Statement is effective for
transactions in fiscal years beginning after December 15, 1995. The Statement is
not expected to have a material impact on the Corporation.
FASB No. 123, Accounting for Stock-Based Compensation, establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which employees
receive shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock. Examples are stock purchase plans, stock options, restricted
stock, and stock appreciation rights. This Statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. Those transactions must be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
This Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The
fair value based method is preferable to the Opinion 25 method for purposes of
justifying a change in accounting principle under APB Opinion 20, Accounting
Changes. Entities electing to remain with the accounting in Opinion 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method of accounting defined in this Statement had been
applied.
The Statement is effective for fiscal years beginning after December
15, 1995. The disclosures must include the pro forma effects of other awards
granted in fiscal years beginning after December 31, 1994. The Statement is not
expected to have a material impact on the Corporation.
31
<PAGE>
BUSINESS
General
The Corporation is a bank holding corporation incorporated under the
laws of the Commonwealth of Virginia in June 1989. The Corporation owns all of
the outstanding stock of its subsidiary, The Marathon Bank ("Bank"), which was
incorporated in August 1987 and acquired by the Corporation in October 1990, in
accordance with the plan of exchange approved by the shareholders of the Bank in
June 1990. The Corporation is headquartered in Frederick County, Virginia. The
Corporation operates three offices. The original branch is located in Frederick
County. The second branch, which opened in August of 1993, is located in the
Town of Front Royal, Virginia. The third branch, which opened in February of
1995, is located in the City of Winchester, Virginia. Collectively, the three
branches service the Northern Shenandoah Valley, which is comprised of Frederick
County, Shenandoah County, Warren County, Clarke County, the City of Winchester,
and the Town of Front Royal.
The Corporation is engaged in the business of offering banking services
to the general public. It offers checking accounts, savings and time deposits,
and commercial, real estate, personal, home improvement, automobile and other
installment and term loans. It also offers travelers checks, safe deposit,
collection, notary public, credit cards and other customary bank services. The
Corporation is also becoming increasingly involved in the origination and sale
of loans in the secondary mortgage market.
The Corporation is the only independent community bank headquartered in
the City of Winchester or Frederick County, Virginia. The Corporation's primary
market is the Northern Shenandoah Valley, which includes Frederick County,
where, based on total financial institution deposits at June 30, 1995, it was
the fourth largest financial institution with approximately 11% of the market,
Warren County, including the Town of Front Royal, where, based on total
financial institution deposits at June 30, 1995, it was the ninth largest
financial institution with approximately 4% of the market. The newest branch is
located in the City of Winchester, the largest market in the four county area of
Frederick, Warren, Shenandoah and Clarke Counties. Winchester and Front Royal
are located at or near the intersections of I-81 and I-66 on the western fringe
of the greater Washington-Baltimore Metropolitan Statistical Area, the fourth
largest market in the United States.
At June 30, 1996, the Corporation had $41.611 million in assets,
$31.596 million in net loans, $37.866 million in deposits, and $2.963 million in
stockholders' equity. It also had, at that date, a tax loss carryforward of
$3.226 million. During the year ended December 31, 1995, the Corporation's net
income grew 32.39% to $421 thousand from $318 thousand in 1994. In the six
months ended June 30, 1996, the Corporation's net income increased 71.75% to
$304 thousand from $177 thousand for the comparable period in 1995, while total
assets increased 28.96% to $41.611 million at June 30, 1996 over the June 30,
1995 level. The annualized return on average assets and equity for the six
months ended June 30, 1996 were 1.61% and 21.55%, respectively. Improvements in
the Bank's earnings and size have been consistent since the employment by the
Corporation of the current chief executive officer in 1992.
Credit Policies
The Corporation employs extensive written policies and procedures to
enhance management of credit risk. The loan portfolio is managed under a
specifically defined credit process. This process includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for on-going identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with the Corporation's policies. The largest unsecured
individual lending authority currently granted by the Corporation is $100,000.
Loan applications in excess of $50,000 are reviewed by the Loan Committee on a
weekly basis. The Loan Committee consists of the Chief Executive Officer and six
additional directors.
32
<PAGE>
A major element of credit risk management is the diversification of
risk. The Corporation's objective is to maintain a diverse loan portfolio to
minimize the impact of any single event or set of circumstances. Concentration
parameters are based upon individual risk factors, policy constraints, economic
conditions, collateral, and products. The Corporation, as a matter of policy,
generally does not extend credit to any single borrower or group of related
borrowers in excess of $400,000. The Corporation generally does not make loans
outside its market area, except for loan participations, unless the borrower has
an established relationship with the Corporation and lives and conducts his
principal business operations within the Corporation's market area.
Consequently, the Corporation and its borrowers are directly affected by the
economic conditions prevailing in its market area.
Lending Activities
The Corporation's primary market focus is on making loans to small
businesses and consumers in its local market area. Business and consumer
installment loans secured by real estate represent the largest segment of the
Corporation's loan portfolio. In addition, the Corporation also provides a wide
range of business and consumer installment loans that are not secured by real
property. The Corporation's lending activities are principally directed to its
defined market area in the Northern Shenandoah Valley.
Commercial Business Lending. The Corporation's commercial loans are
made primarily to local service and retail oriented businesses for a variety of
purposes, including revolving lines of credit, working capital loans, equipment
financing loans, letters of credit, construction loans, and "mini-permanent"
financing of commercial real estate. Pricing on commercial loans is generally
tied to the depository relationship and/or the perceived risk involved in the
credit.
The Corporation normally looks to the borrower's cash flow and/or
earnings as the principal source of repayment for commercial business loans, and
most of these loans are both secured and personally guaranteed by the principals
of such businesses.
Real Estate Construction Lending. At June 30, 1996, real estate
construction loans comprised $4.015 million, or 12.52%, of the Corporation's
total loan portfolio.
Mortgage Lending. The Corporation's real estate loan portfolio, a
significant portion of which consists of business related loans secured by the
owner's residence or commercial property, was approximately 30.45% of total
loans at June 30, 1996. The mortgage portfolio consists primarily of loans for
individual purposes with 15- to 25-year amortization schedules that mature with
a balloon payment on the third or fifth anniversary of the loan.
Consumer Installment Lending. The Corporation currently offers most
types of consumer time and installment loans, including automobile loans and
home equity lines of credit. The Corporation also extends other consumer credit
through its overdraft protection program. At June 30, 1996, the Corporation's
consumer installment loans, including home equity lines, were 21.79% of the
total loan portfolio. The performance of the consumer installment loan portfolio
is directly tied to and dependent upon the general economic conditions in the
Corporation's market area.
Credit Policies and Administration. The Corporation has adopted a
comprehensive lending policy which includes stringent underwriting standards for
all types of loans and pricing guidelines. In an effort to manage risk, all
credit decisions in excess of the officer's lending authority must be approved
prior to funding by the Loan Committee. Management believes that it employs
experienced lending officers, secures appropriate collateral, and carefully
monitors the financial conditions of its borrowers and the concentration of such
loans in the Corporation's portfolio.
33
<PAGE>
Market Area
The Corporation has three branches located in the Northern Shenandoah
Valley. The Shenandoah Valley is located on the I-81 corridor in Northwestern
Virginia, and borders on the Washington-Baltimore Metropolitan Statistical Area,
the fourth largest market in the United States. The Northern Shenandoah Valley
is the home of major manufacturing facilities of 17 Fortune 500 companies. In
addition, Warren County is becoming a significant center, in the Mid-Atlantic
region, for manufacturing and distribution due to its proximity to the Virginia
Inland Port. Pen-Tab Inc. opened a manufacturing and distribution center in the
first quarter of 1996 which employs over 270 persons. Toray, Inc. recently broke
ground on a $120 million full service manufacturing plant which will employ 120
persons in 1997 and over 500 persons by the year 2000. Major employers in the
four county area include Valley Health Systems, Inc., Crown Cork and Seal,
Automotive Industries Inc., National Fruit Products, Inc., Rubbermaid Commercial
Products, General Electric, AT&T Communications, duPont, Inc. and O'Sullivan
Corporation. The Corporation's headquarters and a branch office are located in
Frederick County. The population of the City of Winchester and Frederick County
is approximately 75,000. The local economy is driven by the manufacturing and
service industries, with over 30% of the area's workforce engaged in
manufacturing. The Corporation's third office is located in Front Royal,
Virginia in Warren County. The combined population of Front Royal and Warren
County is approximately 40,000. The principal employers are in the manufacturing
service industries as well as state and local government. The Corporation also
services Shenandoah and Clarke Counties. The approximate population of such
areas are 33,000 and 12,000, respectively.
Competition
The banking business in the Northern Shenandoah Valley (the counties of
Frederick, Clarke, Shenandoah, and Warren, Virginia and the City of Winchester),
the area served by the Corporation is highly competitive with respect to both
loans and deposits. In the Corporation's primary service area, there are
approximately eleven commercial banks and savings and loans (including six
large, Virginia-wide and national banks with multiple offices); offering
services ranging from deposits and real estate loans to full service banking.
The Corporation is the newest and smallest commercial bank in its service area,
in addition, there can be no assurance that other financial institutions, with
substantially greater resources than the Corporation, will not establish
operations in the service area.
Properties
The Corporation's office is located at 4095 Valley Pike, Winchester,
Virginia, in property owned by the Corporation.
In July 1996, the Bank's branch located in the Town of Front Royal
moved into a newly constructed building located in the Post Office Plaza at 300
Warren Avenue. The Corporation leased the property from a related party under a
20 year lease with no renewal options. See "Management - Indebtedness and Other
Transactions."
On February 13, 1995, the Corporation opened its Winchester Branch at
1041 Berryville Avenue in the City of Winchester, Virginia. The Corporation has
a five year lease, with two five year options.
Employees
At June 30, 1996, the Corporation had the equivalent of 29 full-time
employees. None of its employees is represented by any collective bargaining
unit. The Corporation considers relations with its employees to be good.
Legal Proceedings
In the course of its operations, the Corporation is party to various
legal proceedings. The Corporation does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse effect
on the Bank's business, financial position, or results of operations.
34
<PAGE>
Supervision and Regulation
The Bank is subject to state and federal banking laws and regulations
which impose specific requirements or restrictions and provide for general
regulatory oversight with respect to virtually all aspects of its operations.
The following is a brief summary of certain statutes and regulations affecting
the Bank. This summary is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below, and it is not
intended to be an exhaustive description of all laws applicable to the business
of the Bank. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Corporation.
State Chartered Banks. The Bank is a state-chartered bank, organized
under Virginia law. It is also a member of the Federal Reserve System and,
therefore, is supervised and examined by the Federal Reserve, its primary
federal regulator. The Federal Reserve and Bureau of Financial Institutions
("BFI") conduct regular examinations of the Bank, reviewing the adequacy of its
allowance for loan losses, quality of loans and investments, propriety of
management practices, compliance with laws and regulations and other aspects of
its operations. In addition to these regular examinations, the Bank must furnish
the Federal Reserve with quarterly reports containing detailed financial
statements and schedules. The Federal Deposit Insurance Corporation ("FDIC"),
which provides deposit insurance, also has authority to examine and regulate the
Bank.
Federal and state banking laws and regulations govern all areas of the
operations of the Bank, including maintenance of cash reserves, loans,
mortgages, maintenance of minimum capital, payment of dividends, and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate dividends paid by insured banks if such
payment is deemed to constitute an unsafe or unsound practice. The Federal
Reserve has authority to impose penalties, initiate civil administrative
actions, and take other steps to prevent the Bank Subsidiaries from engaging in
unsafe or unsound practices. In this regard, the Federal Reserve has adopted
capital adequacy requirements applicable to its member banks. See "Supervision
and Regulation of the Corporation - Capital Requirements" below.
Supervision and Regulation of the Corporation
General. As a bank holding company, the Corporation is subject to state
and federal banking and bank holding company laws and regulations which impose
specific requirements or restrictions and provide for general regulatory
oversight with respect to virtually all aspects of its operations. The following
is a brief summary of certain statutes and regulations affecting the
Corporation. This summary is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below, and is not
intended to be an exhaustive description of all laws applicable to the
Corporation's operations. Any change in applicable laws or regulations may have
a material effect on the business and prospects of the Corporation.
Bank Holding Companies. As a bank holding company registered under the
Bank Holding Company Act ("BHC Act"), the Corporation is subject to regulation
by the Federal Reserve. The Federal Reserve has jurisdiction under the BHC Act
to approve any bank or nonbank acquisition, merger or consolidation proposed by
a bank holding company. The BHC Act generally limits the activities of a bank
holding company and its subsidiaries to that of banking, managing or controlling
banks, or any other activity which is so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.
The BHC Act formerly prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries were principally conducted, unless such an acquisition was
specifically authorized by statute of the state in which the bank whose shares
were to be acquired was located. However, under recently enacted federal
legislation, the restriction on interstate acquisitions was abolished effective
September 29, 1995, and bank holding companies from any state may now acquire
banks and bank holding companies located in any other state. Banks also will be
able to branch across state lines effective June 1, 1997, provided certain
conditions are met, including
35
<PAGE>
that applicable state law must expressly permit such interstate branching. Under
Virginia law effective July 1, 1995, Virginia banks can branch across state
lines in those states with which Virginia has reciprocal agreements.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. In addition, the "cross-guarantee" provisions of federal law
require insured depository institutions under common control to reimburse the
FDIC for any loss suffered or reasonably anticipated by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a
result of the default of a commonly controlled insured depository institution or
for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The Federal Deposit Insurance Act also provides that amounts received
from the liquidation or other dissolution of any insured depository institution
by any receiver must be distributed (after payment of secured claims) to pay the
deposit liabilities of the institution prior to payment of any other general or
unsecured senior liability, subordinated liability, general creditor or
shareholder. This provision would give depositors a preference over general and
subordinated creditors and shareholders in the event a receiver is appointed to
distribute the assets of any of the Corporation's subsidiaries.
The Corporation is registered under the bank holding company laws of
Virginia. Accordingly, the Corporation and the Bank are also subject to
regulation and supervision by the BFI.
Capital Requirements. The Federal Reserve, the Office of the
Comptroller of the Currency and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies, the
Bank is required to maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%. At least half of the total capital is required to be
"Tier 1 capital," which consists principally of common and certain qualifying
preferred shareholders' equity, less certain intangibles and other adjustments.
The remainder, "Tier 2 capital," consists of a limited amount of subordinated
and other qualifying debt (including certain hybrid capital instruments) and a
limited amount of the general loan loss allowance. The Tier 1 and total capital
to risk-weighted asset ratios of the Corporation as of June 30, 1996 were 9.20%
and 10.45%, respectively, exceeding the minimums required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of the Bank as of June 30, 1996, was 7.88%. The guidelines also provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
36
<PAGE>
The following table sets forth in detail the various capital ratios of
the Bank at the dates indicated:
Analysis of Capital
<TABLE>
<CAPTION>
June 30, December 31,
---------- -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Tier 1 Capital:
Noncumulative preferred stock........ $ $ 1,003 $ - $ 1,003 $ 1,003
Common stock......................... 1,306 1,079 1,306 1,079 1,069
Capital surplus...................... 5,110 4,199 5,110 4,199 4,159
Retained earnings (deficit).......... (3,443) (3,852) (3,747) (4,029) (4,297)
Less: Intangibles.................. - - - (5) (18)
------- ------- ------- ------- -------
Total Tier 1 capital............... $ 2,973 $2,429 $ 2,669 $ 2,247 $ 1,916
Tier 2 Capital:
Allowance for loan losses(1)......... 404 310 $ 340 $ 280 $ 225
------- ------- ------- ------- -------
Total risk-based Capital........... $ 3,377 $2,739 $3,009 $ 2,527 $ 2,141
======= ======= ======= ======= =======
Risk-weighted assets................... $32,309 $26,419 $28,390 $22,380 $17,961
Capital Ratios:
Tier 1 risk-based capital ratio...... 9.20% 9.19% 9.40% 10.04% 10.67%
Total risk-based capital ratio....... 10.45 10.37 10.60 11.29 11.92
Tier 1 capital to average adjusted
total assets....................... 7.88 8.10 8.32 8.69 9.99
</TABLE>
- ------------------
(1) Limited to 1.25% of risk weighted assets.
Deposit Insurance. The deposits of the Bank are insured up to $100,000
per insured depositor (as defined by law and regulation) by the FDIC through the
BIF. The BIF are administered and managed by the FDIC. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by SAIF and
BIF-insured institutions. FIRREA also authorizes the FDIC to prohibit any SAIF
and BIF-insured institution from engaging in any activity that the FDIC
determines by regulation or order to pose a serious threat to the SAIF and BIF.
The FDIC also has the authority to initiate enforcement actions against savings
institutions, after first giving the OTS an opportunity to take such action.
From time to time, there are various proposals that involve increasing
the deposit insurance premiums paid by banks and/or savings institutions. The
Corporation is unable to predict whether or to what extent the rates that the
Bank pays for federal deposit insurance may increase in future periods as a
result of such proposals. Such increases would adversely affect its operations.
The FDIC may terminate the deposit insurance of any depository
institution, including the Bank's, if it determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed in writing by the
FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If deposit insurance is terminated, the deposits at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period from six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could result
in termination of the deposit insurance of the Bank.
37
<PAGE>
On December 15, 1994, the Federal Reserve Board, the Office of Thrift
Supervision, the Office of the Controller of the Currency ("OCC"), and the FDIC
(collectively the "agencies") issued a final rule entitled, Risk- Based Capital
Standards; Concentration of Credit Risk and Risks of Nontraditional Activities.
The final rule amends the risk-based capital standards by explicitly identifying
concentrations of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, as
important factors in assessing an institution's overall capital adequacy. While
no quantitative measure of such risk is included in the final rule, to the
extent appropriate, the agencies will issue examination guidelines on new
developments in nontraditional activities or concentrations of credit to ensure
that adequate account is taken of the risks of these activities. Moreover, the
agencies also believe that institutions identified through the examination
process as having significant exposure to concentration of credit risk or as not
adequately managing concentration risks should hold capital in excess of the
regulatory minimums. Therefore, due to the subjective nature of this final rule,
the Corporation is unable to determine what effect, if any, this rule may have
on regulatory capital requirements.
On August 2, 1995, the OCC, the Federal Reserve Board, and the FDIC
(collectively the "banking agencies") issued a final rule entitled, Risk-Based
Capital Standards; Interest Rate Risk. The final rule implements minimum capital
standards for interest rate risk exposures in a two-step process. The final rule
implements the first step of that process by revising the capital standards of
the banking agencies to explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor that
the banking agencies will consider in evaluating a bank's capital adequacy. The
banking agencies intend to implement this rule on a case-by-case basis during
the examination process. The second step of the banking agencies' process will
be to issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk, based on the level of the bank's measured
interest rate risk exposure. Due to the subjective nature of the first phase of
this final rule, the Corporation is unable to determine what effect, if any,
this rule may have on its regulatory capital requirements.
On November 16, 1995, the Federal Reserve Board issued guidelines
entitled, Federal Reserve Guidelines for Rating Risk Management at State Member
Banks and Bank Holding Companies (the "Guidelines"). The Guidelines specify that
principles of sound management should apply to the entire spectrum of risks
facing a banking institution including, but not limited to, credit, market,
liquidity, operational, legal, and reputational risk and that, for state member
banks, a single numerical rating for risk management should be provided as part
of the examination process. The Guidelines also specify that examination reports
should make reference to the types and nature of corrective actions that need to
be taken by institutions to address noted risk management and internal control
deficiencies. Where appropriate, institutions should also be advised that the
Federal Reserve Board will initiate supervisory actions if the failure to
separate critical operational duties creates the potential for serious losses or
if material deficiencies or situations that threaten the safe and sound conduct
of their activities are not adequately addressed in a timely manner. Due to the
subjective nature of the risk-management evaluation, the Corporation is not able
to determine what effect, if any, this rule may have on the operation of the
Corporation.
Community Reinvestment Act. The federal supervisory agencies share
authority to implement regulations under the Community Reinvestment Act of 1979,
as amended ("CRA"). The general purpose of the CRA is to encourage lenders,
while operating safely and soundly, to meet the credit needs of their
communities. The CRA specifically directs regulators, when examining a lender,
to assess the lender's record of helping to meet the credit needs of its entire
community, including low and moderate-income neighborhoods. For example, the
regulators will evaluate and take into account a lender's record of meeting its
community credit needs when evaluating a lender's application for creation of a
new branch. The Bank has always had a "Satisfactory" rating with respect to
their compliance with the CRA. The Corporation itself has not been examined or
received a CRA rating.
As a result of a Presidential initiative, each of the federal banking
agencies, including the FDIC, issued a notice of proposed rule making in October
of 1994 to replace the current CRA assessment system with a new evaluation
system that would rate institutions based on their actual performance (rather
than efforts) in meeting community credit needs. The final rule retains, to a
significant extent, the principles and structures underlying the
38
<PAGE>
1994 proposal and will be phased in over 1996 and 1997. The Corporation is
currently studying the new CRA regulations and determining whether the
regulations would require changes to the CRA action plans of the Bank.
Governmental Monetary Policies and Economic Controls. The Corporation
and the Bank are affected by monetary policies of regulatory authorities,
including the Federal Reserve, which regulates the national money supply in
order to mitigate recessionary and inflationary pressures. Among the techniques
available to the Federal Reserve are engaging in open market transactions in
United States Government securities, changing the discount rate on bank
borrowings, and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth of
bank loans, investments and deposits. Their use may also affect interest rates
charged on loans or paid on deposits. The effect of governmental policies on the
earnings of the Corporation cannot be predicted.
39
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions of the
Corporation's Directors and Executive Officers.
<TABLE>
<CAPTION> Director of the
Name Age Position Bank/Corporation Since
<S> <C>
Class I
Frank H. Brumback 71 Chairman of the Board 1987
Robert W. Claytor 48 Director 1987
Clifton L. Good 59 Director 1987
Donald L. Unger 54 Director, President and 1992
Chief Executive Officer
Class II
Joseph W. Hollis 42 Director 1987
Gerald H. Kidwell 74 Director 1987
Lewis W. Spangler 54 Director 1987
Thomas W. Grove 56 Director 1992
Class III
W. Houston Board, III 49 Director 1987
Ralph S. Gregory 57 Director 1987
George R. Irvin, Jr. 60 Director 1987
</TABLE>
Class I Directors
Frank H. Brumback is 71 years old and has served as a director of the
Corporation since 1989 and a director of the Bank since 1987. He is Chairman of
the Bank and the Corporation; Vice President of Woodbine Farms, Incorporated
(orchardist) in Winchester, Virginia, and President of BGW, Incorporated (real
estate) in Winchester, Virginia
Robert W. Claytor is 48 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is President and General
Manager of H. N. Funkhouser & Company (petroleum distributor) in Winchester,
Virginia.
Clifton L. Good is 59 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is retired and the former
President of Clifton L. Good Realty, Incorporated in Front Royal, Virginia.
Donald L. Unger is 54 years old and has served as a director of the
Corporation since 1992 and of the Bank since 1992. He has served as President
and Chief Executive Officer of The Marathon Bank and of the Corporation since
April 1992.
40
<PAGE>
Class II Directors
Joseph W. Hollis is 42 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is President of B. J.
Sager (beer distributor) in Winchester, Virginia.
Gerald H. Kidwell is 74 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is a farmer and former
budget analyst with the federal government in Washington, D.C.
Lewis W. Spangler is 54 years old and has served as a director of the
Corporation since 1989 ard of the Bank since 1987. He is Vice President of Jones
& Frank Corporation (petroleum equipment sales and distribution) in Winchester,
Virginia; and Vice President and Manager of Oil Equipment Properties (real
estate in Winchester, Virginia).
Thomas W. Grove is 56 years old and has served as a director of the
Corporation since 1992 and of the Bank since 1993. He is President of T. W.
Grove Construction, Inc. in Front Royal, Virginia.
Class III Directors
W. Houston Board, III is 49 years old and has served as a director of
the Corporation since 1989 and of the Bank since 1987. He is President and a
Director of B.T.B., Inc. (tire dealer) in Front Royal and Winchester, Virginia.
Ralph S. Gregory is 57 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is President of Gregory's
Incorporated (commercial contractor) in Stephens City, Virginia.
George R. Irvin, Jr. is 60 years old and has served as a director of
the Corporation since 1989 and of the Bank since 1987. He is retired and the
former chairman of Irvin, Incorporated (wholesale candy and tobacco distributor)
in Edinburg, Virginia.
Board Committees
The Corporation's Board of Directors meets monthly and also holds an
organizational meeting following the conclusion of the Annual Meeting of
Stockholders. Special meetings are held when necessary. The Board of Directors
met 12 times during the fiscal year ended December 31, 1995. Each incumbent
director attended at least 75% of the aggregate of the number of meetings of the
Board and the number of meetings held by all committees on which he served.
The Board of Directors of the Corporation has standing Audit, Loan and
Personnel Committees.
The Audit Committee is responsible for receiving the audit and
examination reports of the internal accounting staff, the independent public
accountants and the banking examiners. The Audit Committee held five meetings in
1995. The present members of the Audit Committee are Messrs. Hollis, Board, Good
and Kidwell.
The Loan Committee considers new loan applications which are in excess
of individual officer limits and monitors (with management) the Corporation's
loan portfolio. The Loan Committee held 36 meetings in 1995. The present members
of the Loan Committee are Messrs. Claytor, Good, Gregory, Brumback, Spangler,
Grove, Kidwell and Unger.
The Personnel Committee is responsible for supervising, hiring and
setting compensation levels for the Bank's personnel. The Personnel Committee
met two times in 1995. The present members of the Personnel Committee are
Messrs. Irvin, Claytor, Hollis, Spangler and Unger.
41
<PAGE>
Indebtedness and Other Transactions
Certain directors and executive officers of the Corporation, members of
their immediate families and corporations, partnerships and other entities with
which such persons are associated are customers of the Corporation. As such,
they had transactions in the ordinary course of business with the Corporation
during the fiscal year ended December 31, 1995, and will have additional
transactions with the Corporation in the future. All loans and commitments to
lend included in such transactions were made in the ordinary course of business
and upon substantially the same terms, including interest rates, collateral and
repayment terms, as those prevailing for comparable transactions with the
general public. In the opinion of management, none of the transactions involved
more than the normal risk of collectibility or presented other unfavorable
features. At June 30, 1996, loans from the Corporation to all executive officers
and directors, their immediate families and/or affiliated companies in which
they are principals amounted to approximately $1.460 million. This amount
represented approximately 49.27% of the stockholders' equity of the Corporation
as of June 30, 1996.
On July 1, 1996, the Corporation entered into a 20 year property lease
with Post Office Plaza, L.C. ("Related Party"), a limited liability corporation,
which is owned 25% by Donald L. Unger, President, Chief Executive Officer and a
director of the Corporation, and 25% by Thomas W. Grove, a director of the
Corporation. The lease provides for fixed annual payments in the amount of
$46,153 for the first five years of the term, after which payments increase
annually in conjunction with the consumer price index. Prior to the consummation
of such lease, the Corporation was permitted to finance and construct a branch
facility on such property with the understanding that upon completion of the
construction the Corporation would enter into a long term lease with the Related
Party and the Related Party would reimburse the Corporation for all direct costs
incurred with respect to the construction of the branch. As of June 30, 1996,
the project was substantially complete, the Corporation had invested $237,365 in
construction costs for which the Related Party had verbally committed to
reimburse the Corporation upon consummation of the lease.
Prior to the execution of the aforementioned Post Office Plaza lease,
the Corporation maintained a portable branch facility on property owned by the
Related Party. The Corporation paid $500 per month to the Related Party for such
use.
Directors' Compensation
The Corporation's Directors receive a fee of $250 per meeting for their
services. Committee members receive $35 per meeting as compensation for their
services.
Executive Compensation
The following table presents information concerning the annual and
long-term compensation of Donald L. Unger who was, at December 31, 1995, the
Corporation's chief executive officer. This table presents compensation for
services rendered in all capacities to the Corporation in 1995, 1994 and 1993.
42
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Annual Compensation Compensation(1)
--------------------------------------------- -----------------
Fiscal Other Annual
Name and Principal Year Salary Bonus Compensation(2)
<S> <C>
Donald L. Unger 1995 $100,000 $7,000 $14,600 $2,000
President and CEO 1994 100,000 7,000 14,600 2,000
1993 100,000 0 14,600 0
</TABLE>
(1) Reflects the Corporation's matching contribution under its 401(k)
retirement plan.
(2) Represents deferred compensation payable to Mr. Unger upon termination
of employment, payment of Mr. Unger's country club dues and the value
of the use of a company vehicle.
The following table presents, for the executive officer listed in the
Summary Compensation Table, information regarding (i) his exercise of stock
options in 1995 and (ii) the number and value of all his unexercised stock
options at December 31, 1995.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1995 and December 31, 1995 Option Values
---------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options at in-the-money Options at
Shares December 31, 1995(#) December 31, 1995($)
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) Upon Exercise ($) Unexercisable Unexercisable(1)
---- ------------ ----------------- -------------------- -----------------------
<S> <C>
Donald L. Unger 0 $0 500/0 $0
</TABLE>
(1) Based upon a market value of $5.00 per share.
Chief Executive Officer Employment Agreement and Incentive Bonus Plan
The Corporation and Donald L. Unger, President and Chief Executive
Officer, entered into a written employment agreement on April 13, 1992, to be
effective as of April 13, 1992 ("Unger Employment Agreement"). The Unger
Employment Agreement provides that Mr. Unger will serve on the Board of
Directors of the Corporation, subject to shareholder election, until his
employment ends. Under the terms of the Unger Employment Agreement, Mr. Unger
receives an annual salary of $100,000, together with certain other customary
benefits. In the event of a change of control of the Corporation (as defined in
the Unger Employment Agreement), Mr. Unger will receive a one time cash payment
equal to his annual salary at the date of change of control multiplied by the
percentage by which the Corporation's appraised value exceeds its book value.
Such payment is not to exceed 300% of Mr. Unger's annual salary at the date of
change in control.
Employee Benefit Plans
The Corporation has adopted a plan that is qualified under Section
401(k) of the Internal Revenue Code for the benefit of its eligible employees.
Employees are not required to contribute to the plan but may contribute, subject
to the statutory maximum, from their annual salary before taxes. Employees who
have attained age 21 and completed six months of service are eligible to
participate in the plan beginning on the January 1 or July 1 following their
six-month anniversary. The Corporation made a contribution to the plan for the
year ending December 31, 1995 in the amount of $9,601. No contributions were
made for the years ending December 31, 1994 and 1993.
43
<PAGE>
Security Ownership of Management
The following table sets forth for (i) each director and executive
officer of the Corporation, (ii) each beneficial owner of 5% or more of the
outstanding shares of the Corporation's Common Stock, and (iii) all directors
and executive officers of the Corporation as a group: (1) the number of shares
of the Corporation's Common Stock beneficially owned on June 30, 1996 and (2)
the percentage of ownership of outstanding shares of the Bank's Common Stock on
said date. All of the Corporation's directors and executive officers receive
mail at the Corporation's principal executive office at 4095 Valley Pike,
Winchester, Virginia 22602.
<TABLE>
<CAPTION>
Name of Number of Shares Percent of
Beneficial Owner Beneficially Owned(1) of Class
<S> <C>
W. Houston Board, III 19,660 2.09%
Frank H. Brumback 35,323(2) 2.70
Robert W. Claytor 44,679(3) 3.42
Clifton L. Good 49,363(4) 3.78
Ralph S. Gregory 69,547(5) 5.32
Thomas W. Grove 8,520 0.66
Joseph W. Hollis 57,951(6) 4.40
George R. Irvin, Jr. 54,012(7) 4.55
Gerald H. Kidwell 55,029(8) 4.21
Lewis W. Spangler 39,267(9) 3.01
Donald L. Unger 4,019(10) 0.31
Beneficial ownership of Common 450,014 34.45
Stock; by all directors and executive
officers as a group (11 persons)
</TABLE>
(1) In calculating the number of shares of Common Stock which are
beneficially owned (and thus the percentage of Common Stock
beneficially owned), a person is deemed to own Common Stock if that
person has the right to acquire beneficial ownership of Common Stock
within sixty (60) days through the exercise of any option, warrant or
right, or through the conversion of any security.
(2) Includes 16,802 shares held jointly.
(3) Includes 34,869 shares held by, or jointly with, spouses, children or
trusts.
(4) Includes 40,966 shares held by, or jointly with, spouses,
children or trusts or Clifton L. Good Realty, Incorporated.
(5) Includes 58,021 shares held by, or jointly with, spouses, children or
trusts.
(6) Includes 39,276 shares held by, or jointly with, spouses, children
or trusts.
(7) Includes 1,110 shares held by, or jointly with, spouses,
children or trusts.
(8) Includes 54,020 shares held by, or jointly with, spouses, children or
trusts.
(9) Includes 402 shares held by, or jointly with, spouses, children or
trusts.
(10) Includes 19 shares held by, or jointly with, spouses, children or
trusts.
Unless otherwise indicated in the footnotes above, the individuals named above
have sole voting and dispositive powers over the shares beneficially owned by
them.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The Corporation's Articles of Incorporation authorize 20,000,000 shares
of Common Stock, par value $1.00, of which 1,306,303 shares were issued and
outstanding on June 30, 1996. The Articles of Incorporation also authorize
1,000,000 shares of preferred stock, no par value, of which no shares were
issued and outstanding at June 30, 1996.
Characteristics of Common Stock
Certain characteristics of the Corporation's Common Stock are
summarized below:
Dividend Rights. The Corporation may pay dividends as declared from
time to time by the Board of Directors out of funds legally available therefor,
subject to certain restrictions imposed by federal and state laws. See "Business
- - Supervision and Regulation - Limits on Dividends and Other Payments." The
holders of Common Stock are entitled to receive and share equally in any
dividends as may be declared by the Board of Directors.
Voting Rights. In all elections of directors, each stockholder has the
right to cast one vote for each share of Common Stock owned by him and is
entitled to vote for as many persons as there are directors to be elected.
Stockholders of the Corporation do not have cumulative voting rights. On any
other question to be determined by a vote of shares at any meeting of
stockholders, each stockholder shall be entitled to one vote for each share of
Common Stock owned by him and entitled to vote.
Liquidation Rights. Upon liquidation, after payment of all creditors,
including without limitation the liquidation preference per share of preferred
stock, if any is outstanding, the remaining assets of the Corporation would be
distributed to the holders of the Common Stock on a pro rata basis.
Preemptive Rights. Holders of Common Stock have no preemptive rights
with respect to the issuance of additional shares of Common Stock.
Calls and Assessments. All Common Stock outstanding is fully paid and
nonassessable.
Reports to Stockholders. The Corporation furnishes its stockholders
with annual reports, including audited financial statements, as well as
quarterly reports containing unaudited financial information.
Transfer Agent. The Corporation acts as its own transfer agent.
Characteristics of Preferred Stock
The Board of Directors may determine the preferences, limitations, and
relative rights, to the extent permitted by the Virginia Stock Corporation Act,
of any class or series of shares of Preferred Stock before the issuance of any
shares of that class or series.
Warrants to Acquire Common Stock
As part of the recapitalization of the Corporation in 1992, the
Corporation, in private placements, issued two rounds of Common Stock at $5.00
per share, convertible Preferred Stock convertible into Common Stock at $5.00
per share (which has since been converted) and warrants to purchase Common Stock
at $5.00 per share. At
45
<PAGE>
June 30, 1996, there were warrants to purchase 200,688 shares of Common Stock
outstanding which are exercisable through June 30, 1997.
Limitations on Liability of Directors
Section 13.1-692.1 of the Virginia Stock Corporation Act ("Virginia
Act") authorizes a Virginia corporation to reduce or eliminate the damages that
can be assessed against an officer or director arising out of a single
transaction. The Corporation's bylaws provide that no member of the
Corporation's Board of Directors shall be liable for any amount in any
proceeding brought against him or her as a director. The Virginia Act provides
that the liability of a director may not be limited if the director engages in
willful misconduct or a knowing violation of the criminal law or of any federal
or state securities law, including any claim of unlawful insider trading or
manipulation of the market for any security.
Indemnification of Directors
Sections 13.1-697 and 13.1-698 of the Virginia Act set forth certain
provisions regarding the indemnification of directors. Generally, these
provisions of the Virginia Act allow a corporation to indemnify a director if:
(i) he conducted himself in good faith; (ii) he believed (a) in the case of
conduct in his official capacity, that his conduct was in the corporation's best
interests, and (b) in all other cases, that his conduct was at least not opposed
to its best interests; and (iii) in the case of any criminal proceeding, that he
had no reasonable cause to believe his conduct was unlawful. Under the Virginia
Act, a corporation may not indemnify a director (i) in connection with a
proceeding by or in the right of the corporation in which the director is
adjudged liable to the corporation; or (ii) in any other proceeding charging
improper personal benefit to him, in which he is adjudged liable on the basis
that personal benefit was improperly received by him. The Virginia Act also
prohibits indemnification of a director for willful misconduct or a knowing
violation of the criminal law.
The Corporation's Articles of Incorporation call for the
indemnification of (a) any person who was or is a party to any proceeding,
including a proceeding brought by a shareholder in the right of the Corporation
or brought by or on behalf of shareholders of the Corporation, by reason of the
fact that he is or was a Director or officer of the Corporation, or (b) any
Director or officer who is or was serving at the request of the Corporation as a
director, trustee, partner or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against any liability
incurred by him in connection with such proceeding unless he engaged in willful
misconduct or a knowing violation of criminal law.
Federal Law Restrictions on Acquisition of the Bank
Under the Bank Holding Company Act of 1956 ("BHCA") and regulations
promulgated thereunder by the Federal Reserve, no company may acquire "control"
of institutions that offer demand deposit accounts and make commercial loans
without the prior approval of the Federal Reserve. The ownership of, control,
holding with power to vote of, or holding proxies representing 25% or more of
any class of voting securities is presumed to be a "controlling" interest under
the BHCA, and, depending on the circumstances, control may be found to exist
below this level of ownership. Any company acquiring such control would become a
bank holding company, would be subject to certain limitations and prohibitions
on its operations, and would become subject to registration, examination and
supervision by the Federal Reserve. The Federal Reserve may withhold approval of
an application to become a bank holding company on certain specified grounds.
Articles of Incorporation
Limitation on Ownership in Excess of 9.99%. The Articles of
Incorporation restrict the transfer, sale, assignment, gift, pledge, or bequest
of a beneficial interest in common stock of the Corporation to an "interested
shareholder" without prior approval by a majority of the Corporation's Board of
Directors.
46
<PAGE>
An "interested shareholder" is any person, firm, corporation,
partnership, joint venture, or other entity whom either directly or indirectly,
through the use of an associate or affiliate, is or becomes a beneficial owner
of stock in excess of 9.99% of the total outstanding common shares of the
Corporation. Any shares acquired in excess of the 9.99% threshold will be
considered excess shares, and such transfer will be considered null and void.
Such restriction is marked conspicuously on the front and back of the
stock certificate in compliance with Section 13.1-648.B of the Virginia Code
requiring adequate notification of any such restriction.
The Corporation's Articles of Incorporation provide for a classified
Board of Directors which is divided into three classes, with each class serving
a three-year term and one class of directors being elected each year. In
addition to classifying the Board of Directors, the Articles of Incorporation
also provide, subject to the rights of holders of any outstanding preferred
stock, that directors can be removed during their terms of office for cause only
by the affirmative vote of the holders of more than two-thirds of the then
outstanding voting shares. Thus, holders of a majority (but less than
two-thirds) of the Corporation's outstanding shares might not be able to remove
a director, even for cause, for up to three years. The Articles of Incorporation
also would require the affirmative vote of more than two-thirds of the
outstanding voting shares to increase or decrease the number of directors by
more than 30% of the number of directors last elected by the stockholders.
The Corporation has not adopted many of the conventional anti-takeover
provisions such as a fair-price charter amendment, a super-majority vote charter
amendment, or an anti-greenmail charter amendment. The Articles of Incorporation
do, however, as permitted by Virginia law, in addition to staggering the terms
of the members of the Board of Directors, provide the Board of Directors with
flexibility to eliminate the right of stockholders to call a special meeting
and, as explained below, to fix the stockholder vote required for certain
corporate actions.
Virginia law provides that certain significant corporate actions must
be approved by a vote of more than two-thirds of the votes entitled to be cast
on the matter, unless the Articles of Incorporation provide otherwise. These
actions include amendments to a corporation's articles of incorporation, plans
of merger or exchange, sales of substantially all assets other than in the
ordinary course of business or plans of dissolution ("Fundamental Actions").
Virginia law also provides that a corporation's articles of incorporation may
either increase the vote required to approve Fundamental Actions or decrease the
required vote to not less than a majority of all the votes cast by each voting
group entitled to vote on the transaction at a meeting at which a quorum of
the voting group exists.
The Articles of Incorporation decrease the stockholder vote required to
approve amendments to the Articles of Incorporation to a majority of the shares
cast on such proposed amendments, unless the Board of Directors conditions its
submission of a proposed amendment on receipt of a greater vote. The Articles of
Incorporation also provide that, unless the Board of Directors conditions its
submission of a proposed Fundamental Action (other than an amendment to the
Articles of Incorporation) on receipt of a greater vote, any Fundamental Action
that requires stockholder approval must be approved by a vote of more than
two-thirds of the votes entitled to be cast on such Fundamental Action.
The effect of these provisions is to make stockholder approval of
Fundamental Actions less difficult to obtain in the case of Fundamental Actions
favored by the Board of directors. A lower required stockholder vote on
amendments to the Articles of Incorporation will benefit the Corporation in
terms of cost savings related to the solicitation efforts necessary to obtain a
more than two-thirds vote. If, however, the Board of directors conditions
approval of a Fundamental Action on receipt of a higher stockholder vote, this
provision will make approval of the Fundamental Action more difficult to obtain.
For this reason, these provisions of the Articles of Incorporation and Virginia
law have anti-takeover implications in that they permit the Board of Directors
to make a Fundamental Action not approved by it more difficult to adopt.
47
<PAGE>
UNDERWRITING
The Underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, has agreed, subject to the terms and conditions contained in an
underwriting agreement with the Corporation, to sell, as selling agent for the
Corporation on a best efforts basis, the Shares offered in the Subscription
Offering that are not purchased by stockholders, together with 400,000
additional Shares. The Underwriter is not obligated to purchase the Shares if
they are not sold to the public.
The Underwriter has informed the Corporation that it proposes to offer
the Shares as selling agent for the Corporation, subject to prior sale, when, as
and if issued by the Corporation, in part to the public at the Public Offering
price, and in part through certain selected dealers to customers of such
selected dealers at the Public Offering price, for which such selected dealers
will receive a commission of ___% of the Public Offering price of such Shares.
The Underwriter reserves the right to reject any order for the purchase of
Shares through it, in whole or in part. The Corporation will pay the Underwriter
a $10,000 financial advisory/standby fee in connection with the Subscription
Offering.
The Public Offering is not contingent upon the occurrence of any event
or the sale of a minimum or maximum number of Shares. Funds received by the
Underwriter from investors in the Public Offering will be deposited with and
held by the Escrow Agent in a noninterest-bearing escrow account until the
closing of the Public Offering.
The Corporation has applied to list its Common Stock on the NASDAQ
SmallCap Market under the symbol "MFCV"; however, there can be no assurance that
an active trading market for the Corporation's Common Stock will develop after
the Offerings, or if developed, that such a market will be sustained. The
Corporation believes that it meets all the criteria for inclusion on the NASDAQ
SmallCap Market and that its application for listing will be approved at the
closing of the Offerings, although no assurance can be given in this regard.
The Subscription Offering price was determined by the Corporation after
consultation with the Underwriter. The Public Offering price was determined by
negotiations between the Corporation and the Underwriter. Among the factors
considered in determining the price were the history and the prospects for the
Corporation, its past and present earnings and trend of such earnings, the
prospects for future earnings, the current performance and prospects of the
banking industry in which it competes, the general condition of the securities
market at the time of the Public Offering, and the prices of equity securities
of comparable companies.
The directors of the Corporation have agreed that they will not sell,
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for a
period of 120 days after the date of the commencement of the Offerings without
the prior written consent of the Underwriter. Officers of the Corporation who
are not directors have not entered into any agreements restricting sales of
their Common Stock in the Corporation. The Underwriter may from time to time be
a customer of, engage in transactions with, and perform services for the
Corporation in the ordinary course of business.
The Corporation has agreed to indemnify the Underwriter against certain
civil liabilities, including liability under the Securities Act of 1933, as
amended. The Corporation has agreed to pay the Underwriter's legal fees, which
will not exceed $10,000, and to reimburse the Underwriter for up to $1,000 for
costs of informational and due diligence meetings.
48
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Corporation by Kaufman & Canoles, P.C. of Norfolk, Virginia.
Certain legal matters are being passed upon for the Underwriter by Kaufman &
Canoles, P.C.
EXPERTS
The financial statements of the Bank at December 31, 1995 and 1994 and
for the three year period ended December 31, 1995 included in this Prospectus
have been audited by Yount, Hyde & Barbour, P.C., independent certified public
accountants, to the extent and for the periods indicated in their report
thereon, and are included in reliance upon the authority of Yount, Hyde &
Barbour, P.C., as experts in accounting and auditing.
49
<PAGE>
Part F/S
Index to Consolidated Financial Statements
Independent Auditor's Report.............................................. F- 2
Consolidated Balance Sheets at December 31, 1995 and 1994................. F- 3
Consolidated Statements of Income for the Three Years Ended
December 31, 1995, 1994 and 1993....................................... F- 4
Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1995, 1994 and 1993..................... F- 6
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1995, 1994 and 1993....................................... F- 7
Notes to Consolidated Financial Statements................................ F- 9
Consolidated Balance Sheet at June 30, 1996 (unaudited)................... F-29
Consolidated Statements of Income for the Six Months Ended June 30,
1996 and 1995 (unaudited).............................................. F-30
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 30, 1996 and 1995 (unaudited).................... F-32
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 (unaudited)..................................... F-33
Notes to Consolidated Financial Statements (unaudited).................... F-35
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Marathon Financial Corporation
Winchester, Virginia
We have audited the accompanying consolidated balance sheets of
Marathon Financial Corporation and Subsidiaries, as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1995, 1994
and 1993. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
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 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Marathon Financial Corporation and Subsidiaries, as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years ended
December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Corporation changed its method of
accounting for investments in debt and equity securities to adopt the provisions
of Statements of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" in 1994.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 31, 1996
F-2
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
-------------- ---------------
<S> <C>
Cash and due from banks $ 2 282 876 $ 1 788 496
Securities (fair value: 1995, $1,708,102 and
1994, $1,450,973) (Note 2) 1 699 472 1 489 791
Federal funds sold 1 574 000 277 000
Loans, net (Notes 3 and 4) 28 774 020 22 618 297
Bank premises and equipment, net (Notes 5 and 9) 1 288 463 1 242 102
Organization costs, at amortized cost (Note 6) - - 5 064
Accrued interest receivable 159 066 172 734
Other real estate 236 123 - -
Other assets 55 999 88 743
-------------- ---------------
$ 36 070 019 $ 27 682 227
============== ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing $ 5 261 411 $ 3 759 042
Interest bearing 27 360 753 20 845 174
-------------- ---------------
Total deposits (Note 7) $ 32 622 164 $ 24 604 216
Interest expense payable 60 151 134 969
Accounts payable and accrued expenses 93 220 54 984
Mortgage payable 507 134 529 368
Capital lease payable (Note 9) 109 600 114 721
Commitments and contingent liabilities (Notes 10 and 13) - - - -
-------------- ---------------
Total liabilities $ 33 392 269 $ 25 438 258
-------------- ---------------
Stockholders' Equity
Preferred stock, Series A, 5% noncumulative, no par value; 1,000,000 shares
authorized; 1995, no shares issued and outstanding; 1994, 200,688 shares
issued and outstanding $ - - $ 1 003 440
Common stock, $1 par value; 20,000,000 shares
authorized; 1995, 1,306,303 shares issued and
outstanding; 1994, 1,078,601 shares issued and
outstanding 1 306 303 1 078 601
Capital surplus 5 109 908 4 199 100
Retained earnings (deficit) (3 746 878) (4 029 140)
Unrealized gain (loss) on securities available for sale 8 417 (8 032)
-------------- ---------------
Total stockholders' equity $ 2 677 750 $ 2 243 969
-------------- ---------------
$ 36 070 019 $ 27 682 227
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
<S> <C>
Interest income:
Interest and fees on loans $ 2 786 074 $ 2 123 881 $ 1 463 942
Interest on investment securities:
Taxable 42 788 67 870 - -
Nontaxable 15 000 15 000 - -
Interest and dividends on securities available for sale:
Taxable 16 559 13 452 123 143
Nontaxable - - - - 15 000
Dividends 13 060 5 404 3 374
Interest on federal funds sold 66 829 25 641 19 683
--------------- ---------------- ----------------
Total interest income $ 2 940 310 $ 2 251 248 $ 1 625 142
--------------- ---------------- ----------------
Interest expense:
Interest on deposits (Note 7) $ 1 203 143 $ 801 614 $ 661 920
Interest on mortgage payable 38 949 40 550 54 742
Interest on capital lease obligation 8 610 2 816 - -
Interest on federal funds purchased 1 536 3 933 430
--------------- ---------------- ----------------
Total interest expense $ 1 252 238 $ 848 913 $ 717 092
--------------- ---------------- ----------------
Net interest income $ 1 688 072 $ 1 402 335 $ 908 050
Provision for loan losses (Note 4) 113 419 151 533 12 100
--------------- ---------------- ----------------
Net interest income after
provision for loan losses $ 1 574 653 $ 1 250 802 $ 895 950
--------------- ---------------- ----------------
Other income:
Service charges on deposit accounts $ 227 776 $ 112 899 $ 56 264
Commissions and fees 45 207 31 725 27 062
Gain on redemption of investment securities - - 19 125 - -
Settlement of legal disputes - - 58 847 - -
Other 8 346 19 393 10 098
---------------- ---------------- ----------------
Total other income $ 281 329 $ 241 989 $ 93 424
---------------- ---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
<S> <C>
Other expenses:
Salaries and employee benefits $ 675 948 $ 523 017 $ 385 230
Net occupancy expense of premises 110 478 91 624 75 701
Furniture and equipment 98 969 57 100 75 632
Other (Note 12) 550 046 502 574 372 292
---------------- ---------------- ----------------
Total other expenses $ 1 435 441 $ 1 174 315 $ 908 855
---------------- ---------------- ----------------
Income before income taxes $ 420 541 $ 318 476 $ 80 519
Provision for income taxes (Note 8) - - - - - -
---------------- ---------------- ----------------
Net income $ 420 541 $ 318 476 $ 80 519
================ ================ ================
Earnings per common and equivalent share (Note 1) $ .35 $ .30 $ .08
================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Retained Securities Total
Capital Stock Capital Earnings Available Stockholders'
Preferred Common Surplus (Deficit) for Sale Equity
-------------- ------------- ------------- ------------- ------------ ---------------
<S> <C>
Balance, December 31,
1992 $ 1 003 440 $ 992 335 $ 3 854 036 $ (4 352 800) $ - - $ 1 497 011
Net income - 1993 - - - - - - 80 519 - - 80 519
Sale of common stock
(71,199 shares) - - 71 199 284 796 - - - - 355 995
Issuance of common
stock (5,030 shares) - - 5 030 20 120 (25 150) - - - -
-------------- ------------- ------------- ------------- ------------ ---------------
Balance, December 31,
1993 $ 1 003 440 $ 1 068 564 $ 4 158 952 $ (4 297 431) $ - - $ 1 933 525
Net income - 1994 - - - - - - 318 476 - - 318 476
Issuance of common
stock (10,037 shares) - - 10 037 40 148 (50 185) - - - -
Unrealized gain
(loss) on securities
available for sale - - - - - - - - (8 032) (8 032)
-------------- ------------- ------------- ------------- ------------ ---------------
Balance, December 31,
1994 $ 1 003 440 $ 1 078 601 $ 4 199 100 $ (4 029 140) $ (8 032) $ 2 243 969
Net income - 1995 - - - - - - 420 541 - - 420 541
Issuance of common
stock (15,045 shares) - - 15 045 60 180 (75 225) - - - -
Issuance of common
stock - stock dividend
(11,969 shares) (Note 11) - - 11 969 47 876 (59 845) - - - -
Cash to be paid in lieu
of fractional shares - - - - - - (3 209) - - (3 209)
Unrealized gain
(loss) on securities
available for sale - - - - - - - - 16 449 16 449
Conversion of
preferred stock to
common stock
(200,688 shares) (1 003 440) 200 688 802 752 - - - - - -
-------------- ------------- ------------- ------------- ------------ ---------------
Balance, December 31,
1995 $ - - $ 1 306 303 $ 5 109 908 $ (3 746 878) $ 8 417 $ 2 677 750
============== ============= ============= ============= ============ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ---------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 420 541 $ 318 476 $ 80 519
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 16 194 34 670 41 428
Depreciation 103 366 73 710 88 118
Provision for loan losses 113 419 151 533 12 100
Writedown of other real estate 42 581 - - - -
Gain on redemption of investment securities - - (19 125) - -
Accretion of securities discounts, net (2 567) (2 210) (4 299)
Changes in assets and liabilities:
(Increase) decrease in other assets 21 614 (9 440) (6 496)
(Increase) decrease in accrued interest
receivable 13 668 (68 341) 26 444
Increase (decrease) in accounts payable
and accrued expenses 35 027 43 672 (112 626)
Increase (decrease) in interest expense payable (74 818) (143 266) 15 282
---------------- ---------------- ---------------
Net cash provided by operating activities $ 689 025 $ 379 679 $ 140 470
---------------- ---------------- ---------------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investments securities $ 21 240 $ 800 362 $ - -
Proceeds from maturities and principal
payments of securities available for sale 4 901 23 648 861 703
Purchase of investment securities - - (538 833) - -
Purchase of securities available for sale (216 806) (244 336) (207 000)
Net (increase) in loans (6 547 846) (4 620 745) (7 333 303)
Purchase of equipment (128 332) (56 076) (80 329)
---------------- ---------------- ---------------
Net cash (used in) investing activities $ (6 866 843) $ (4 635 980) $ (6 758 929)
---------------- ---------------- ---------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 2 383 106 $ 1 075 894 $ 4 742 518
Net increase in certificates of deposit 5 634 842 3 922 516 1 185 182
Net proceeds from issuance of common stock - - - - 355 995
Principal payments on capital lease obligations (26 516) (14 931) - -
Proceeds on refinance of mortgage payable - - - - 550 000
Principal payments on mortgage payable (22 234) (20 632) (548 648)
---------------- ---------------- ---------------
Net cash provided by financing activities $ 7 969 198 $ 4 962 847 $ 6 285 047
---------------- ---------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ---------------
<S> <C>
Increase (decrease) in cash
and cash equivalents $ 1 791 380 $ 706 546 $ (333 412)
Cash and Cash Equivalents
Beginning 2 065 496 1 358 950 1 692 362
---------------- ---------------- ---------------
Ending $ 3 856 876 $ 2 065 496 $ 1 358 950
================ ================ ===============
Supplemental Disclosures of Cash Flow
Information, cash payments for interest $ 1 327 056 $ 992 179 $ 701 810
================ ================ ===============
Supplemental Schedule of Noncash
Investing and Financing Activities:
Other real estate acquired in
settlement of loans $ 278 704 $ - - $ - -
================ ================ ===============
Issuance of common stock $ 138 279 $ 50 185 $ 25 150
================ ================ ===============
Equipment acquired under capital
lease obligations $ 21 395 $ 129 652 $ - -
================ ================ ===============
Conversion of preferred stock
to common stock $ 1 003 440 $ - - $ - -
================ ================ ===============
Unrealized gain (loss) on securities
available for sale $ 16 449 $ (8 032) $ - -
================ ================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
MARATHON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Banking Activities and Significant Accounting Policies
Marathon Financial Corporation and Subsidiary (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans
to customers in Virginia. The loans are expected to be repaid from
cash flow or proceeds from the sale of selected assets of the
borrowers.
On December 31, 1993, the Marathon Land Trust was merged into the
Marathon Bank. The Marathon Bank acquired all assets and assumed all
liabilities of the Trust. This transaction had no effect on the
consolidated financial statements presented.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Principles of Consolidation
The consolidated financial statements of the Marathon Financial
Corporation and its Subsidiaries, include the accounts of all
companies. All material intercompany balances and transactions
have been eliminated.
Securities
The Corporation adopted FASB No. 115, "Accounting for Certain
Investment in Debt and Equity Securities" effective beginning
January 1, 1994. This statement addresses the accounting and
reporting for investments in equity securities that have
readily determinable fair values and for all investments in
debt securities. Those investments are classified in three
categories and accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability
to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount,
computed by the interest method over their contractual
lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt
and equity securities that the Corporation intends to hold
for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors,
including significant movements in interest rates, changes
in the maturity mix of the Corporation's assets and
liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities
available for sale are carried at fair
F-9
<PAGE>
value. Unrealized gains or losses are reported as increases
or decreases in stockholders' equity. Realized gains or
losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short
term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading
account assets are included in interest income on trading
account securities. The Corporation had no trading
securities at December 31, 1995 and 1994.
Prior to 1994, the Corporation also classified its securities
into three investment categories: trading, available for sale,
and held to maturity. The accounting policies for these
categories were the same except for securities available for
sale, which were carried at the lower of cost or market.
Derivative Financial Instruments
In October, 1994, FASB No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments"
was issued. It requires various disclosures for derivative
financial instruments which are futures, forward, swap, or
option contract, or other financial instruments with similar
characteristics. The Corporation does not have any derivative
financial instruments as defined under this statement.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses. Unearned
discount on installment loans is recognized as income over the
terms of the loans by the interest method. Interest on other
loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding. Loans are
charged off when management believes that the collectibility of
the principal is unlikely. Accrual of interest is discontinued
on a loan when management believes, after considering economic
and business conditions and collection efforts, that the
borrowers' financial condition is such that collection of
interest is doubtful.
On January 1, 1995, the Corporation adopted FASB No. 114,
"Accounting by Creditors for Impairment of a Loan." This
statement has been amended by FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the
impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that
is, if repayment of those loans is expected to be provided
solely by the underlying collateral) and for which management
has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of
the collateral. Statement 114, as amended, also requires
certain disclosures about investments in impaired loans and the
allowance for credit losses and
F-10
<PAGE>
interest income recognized on loans. The Corporation had no
loans subject to FASB 114 at December 31, 1995.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of
estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in
the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may
change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the
straight-line and declining-balance methods. Lease amortization
is included in depreciation expense.
Maintenance and repairs of property and equipment are charged
to operations and major improvements are capitalized. Upon
retirement, sale or other disposition of property and
equipment, the cost and accumulated depreciation are eliminated
from the accounts and gain or loss is included in operations.
Classifications of Amortization on Assets Acquired Under Capital
Leases
The amortization expense on assets acquired under capital
leases is included with the depreciation expense.
Earnings Per Share
Earnings per share of common stock are based on the weighted
average number of common shares outstanding during each year
after giving retroactive effect to the stock dividend declared
in 1995.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards, and tax credit
carry-forwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased and sold for
one-day periods.
Organization Costs
The Marathon Bank was organized under the laws of the State of
Virginia and commenced operations as a commercial bank on
December 15, 1988. Certain expenses incurred prior to this date
were deferred and were amortized using the straight-line method
over a 60-month period.
In addition, the Marathon Financial Corporation was organized
under the laws of the State of Virginia as a bank holding
company on October 2, 1990. Certain expenses incurred prior to
this date were deferred and were amortized using the
straight-line method over a 60-month period.
Loan Fees and Costs
Loan origination and commitment fees and direct loan
origination costs are being recognized as collected and
incurred. The use of this method of recognition does not
produce results that are materially different from results
which would have been produced if such costs and fees were
deferred and amortized as an adjustment of the loan yield over
the life of the related loan.
Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1995
<S> <C>
Obligations of U.S.
government corporations
and agencies $ 447 801 $ 6 636 $ - - $ 454 437
Mortgage-backed securities 38 639 1 781 - - 40 420
Other 278 650 - - - - 278 650
-------------- -------------- -------------- --------------
$ 765 090 $ 8 417 $ - - $ 773 507
============== ============== ============== ==============
<CAPTION>
1994
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 289 035 $ 8 $ (8 040) $ 281 003
Other 262 750 - - - - 262 750
-------------- -------------- ------------- --------------
$ 551 785 $ 8 $ (8 040) $ 543 753
============== ============== ============= ==============
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of the securities available for
sale as of December 31, 1995, by contractual maturity, are shown
below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due in one year or less $ 246 895 $ 252 500
Due after one year through five years 200 906 201 937
Mortgage-backed securities 38 639 40 420
Other 278 650 278 650
------------ ---------
$ 765 090 $ 773 507
============ =========
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1995
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 649 946 $ 54 $ (2 625) $ 647 375
Obligations of state and
political subdivisions 150 000 10 590 - - 160 590
Corporate securities 99 819 181 - - 100 000
Mortgage-backed securities 26 200 430 - - 26 630
-------------- ------------- ------------- ------------
$ 925 965 $ 11 255 $ (2 625) $ 934 595
============== ============== ============= ============
<CAPTION>
1994
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 649 290 $ - - $ (38 322) $ 610 968
Obligations of state and
political subdivisions 150 000 4 995 - - 154 995
Corporate securities 99 686 - - (2 686) 97 000
Mortgage-backed securities 47 062 229 (3 034) 44 257
-------------- -------------- ------------- --------------
$ 946 038 $ 5 224 $ (44 042) $ 907 220
============== ============== ============= ==============
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1995, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because the corporate securities and mortgages underlying the
mortgage-backed securities may be called or prepaid without any
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due in one year or less $ 199 946 $ 200 000
Due after one year through five years 450 000 447 375
Due after ten years 150 000 160 590
Corporate securities 99 819 100 000
Mortgage-backed securities 26 200 26 630
-------------- ----------
$ 925 965 $ 934 595
============== ==========
</TABLE>
Proceeds from maturities, calls and principal payments of securities
available for sale during 1995, 1994 and 1993 were $4,901, $23,648
and $861,703. There were no realized gains or realized losses
recognized on these transactions.
Proceeds from maturities, calls and principal payments of securities
being held to maturity during 1995 and 1994 were $21,240 and
$800,362. There were no realized gains or realized losses recognized
on these transactions.
Securities having a book value of $702,448 and $686,478 at December
31, 1995 and 1994 were pledged to secure public deposits and for
other purposes required by law.
Note 3. Loans and Related Party Transactions
The loan portfolio as of December 31, 1995 and 1994, is composed of
the following:
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C>
Commercial $ 13 315 029 $ 11 976 315
Real estate - mortgage 6 133 400 4 923 825
Real estate - construction 3 637 433 2 487 939
Installment loans to individuals 6 081 297 3 529 421
--------------- --------------
$ 29 167 159 $ 22 917 500
Less allowance for loan losses 393 139 299 203
--------------- --------------
$ 28 774 020 $ 22 618 297
=============== ==============
</TABLE>
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as
related parties), on the same terms, including interest rates and
collateral, as those prevailing at the time for
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
comparable transactions with others. These persons and firms
(exclusive of loans to any such person which in the aggregate did not
exceed $60,000) were indebted to the Bank for loans totaling
$1,174,885 and $1,294,697 at December 31, 1995 and 1994,
respectively. During 1995, total principal additions were $839,888
and total principal payments were $959,700.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
------------- ------------- -----------
<S> <C>
BALANCE, BEGINNING $ 299 203 $ 224 758 $ 196 476
Provision for loan losses 113 419 151 533 12 100
Recoveries 11 185 12 744 20 367
Loan losses charged to
the allowance (30 668) (89 832) (4 185)
------------- ------------- -----------
BALANCE, ENDING $ 393 139 $ 299 203 $ 224 758
============= ============= ===========
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $45,445 and $269,314 at December 31, 1995 and 1994,
respectively. If interest on these loans had been accrued, such
income would have approximated $3,679 and $4,770 for 1995 and 1994,
respectively.
NOTE 5. BANK PREMISES AND EQUIPMENT, NET
Bank premises and equipment as of December 31, 1995 and 1994 consists
of the following:
1995 1994
------------ ------------
Capital leases - computer $ 151 047 $ 129 652
Bank premises 1 314 922 1 268 464
Furniture and equipment 553 837 472 290
------------ ------------
$ 2 019 806 $ 1 870 406
Less accumulated depreciation 731 343 628 304
------------ ------------
$ 1 288 463 $ 1 242 102
============ ============
Depreciation included in operating expense for 1995, 1994, and
1993 was $103,366, $73,710, and $88,118, respectively.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. ORGANIZATION COSTS
Certain costs incurred by the Bank prior to commencing operations
on December 15, 1988, were capitalized and amortized over a
60-month life. These costs totaled $108,361.
Certain costs incurred by the Corporation prior to commencing
operations on October 2, 1990, were capitalized and amortized over
a 60-month life. These costs totaled $60,350.
NOTE 7. DEPOSITS
Deposits outstanding at December 31, 1995, 1994 and 1993 and the
related interest expense for the years then ended, are summarized
as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1995 December 31, 1994
Amount Expense Amount Expense
<S> <C>
Noninterest bearing $ 5 261 411 $ - - $ 3 759 042 $ - -
------------ ----------- ------------ -----------
Interest bearing:
Interest checking $ 1 941 150 $ 48 524 $ 1 731 740 $ 38 974
Money market accounts 3 307 328 92 892 2 366 898 86 388
Regular savings 4 980 952 157 793 5 250 054 211 531
Certificates of deposit:
Less than $100,000 13 870 161 738 106 9 496 559 418 561
$100,000 and more 3 261 162 165 828 1 999 923 46 160
------------ ----------- ------------ -----------
Total interest bearing $ 27 360 753 $ 1 203 143 $ 20 845 174 $ 801 614
------------ ----------- ------------ -----------
Total deposits $ 32 622 164 $ 1 203 143 $ 24 604 216 $ 801 614
============ =========== ============ ===========
</TABLE>
Year Ended
December 31, 1993
Expense Amount
Noninterest bearing $ 2 480 666 $ - -
----------- ---------
Interest bearing:
Interest checking $ 1 120 707 $ 23 864
Money market accounts 2 217 352 81 396
Regular savings 6 213 115 192 527
Certificates of deposit:
Less than $100,000 6 763 082 321 022
$100,000 and more 810 884 43 111
----------- ---------
Total interest bearing $17 125 140 $ 661 920
----------- ---------
Total deposits $19 605 806 $ 661 920
=========== =========
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
Effective January 1, 1993, the Corporation adopted FASB No. 109,
"Accounting for Income Taxes". The cumulative effect of the change in
accounting principle is deemed immaterial in determining net income
for the year ended December 31, 1993.
Net deferred tax assets consist of the following components as of
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 1 291 762 $ 1 469 716 $ 1 610 105
Writedown of other real estate 14 478 - - - -
Less valuation allowance (1 206 820) (1 349 715) (1 450 418)
------------ ------------ ------------
$ 99 420 $ 120 001 $ 159 687
------------ ------------ ------------
Deferred tax liabilities:
Allowance for loan losses $ 99 420 $ 120 001 $ 155 450
Deferred loan fees - - - - 4 237
------------ ------------ ------------
$ 99 420 $ 120 001 $ 159 687
------------ ------------ ------------
$ - - $ - - $ - -
============ ============ ============
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1995, 1994 and 1993, consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- --------
<S> <C>
Current tax effect $ - - $ - - $ - -
Deferred tax expense 142 895 100 703 - -
Benefit of net operating loss (142 895) (100 703) - -
------------ ----------- --------
$ - - $ - - $ - -
============ =========== ========
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1995, 1994 and 1993, due
to the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C>
Computed "expected" tax expense $ 142 984 $ 108 282 $ 29 401
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance (142 895) (100 703) (14 451)
Tax exempt interest income (3 173) (4 754) (3 200)
Reduced tax due to marginal tax rates - - (826) (11 750)
Other 3 084 (1 999) - -
----------- ----------- ----------
$ - - $ - - $ - -
=========== =========== ==========
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the provisions of the Internal Revenue Code, the Corporation
has available approximately $3,799,300 of net operating loss
carryforwards which can be offset against future taxable income.
The carryforwards expire December 31, 2006. The full realization
of the tax benefits associated with the carryforwards depends
predominately upon the recognition of ordinary income during the
carryforward period.
The loss carryforward at December 31, 1995, for financial
reporting purposes is approximately $3,529,874. The differences
between the loss carryforward for financial reporting and income
tax purposes results principally from timing differences in
recognizing start-up costs and the provision for loan losses. No
deferred taxes are recorded on these timing differences due to the
net operating loss carryforward position of the Corporation.
NOTE 9. LEASES
CAPITAL LEASE
During the year ended December 31, 1994, the Corporation entered
into a lease agreement on computer equipment and software.
Additional equipment and software was added to the lease during
1995 in the amount of $21,395. The balance of the liability under
capital leases at December 31, 1995 in the amount of $109,600
represents the present value of the balance due in future years
for lease rentals discounted at 7%. The liability is payable in
quarterly installments of $9,017 for principal and interest to
June 1, 1999. Since the term of the lease is approximately the
same as the estimated useful life of the assets, and the present
value of the future minimum lease payments at the beginning of the
lease approximated the fair value of the leased assets at that
date, the leases are considered to be capital leases and have been
so recorded. The lease also requires additional maintenance
payments of $4,853 per quarter.
The following is a schedule by years of the future minimum lease
payments under the capital leases together with the present value
of the net minimum lease payments as of December 31, 1995:
Years ending December 31:
1996 $ 55 480
1997 55 480
1998 55 480
1999 25 821
--------------
Total minimum lease payments $ 192 261
Less estimated executory costs
(such as maintenance) included in
the total minimum lease payments 67 942
--------------
Net minimum lease payments $ 124 319
Less the amount representing interest 14 719
-----------
Present value of net minimum
lease payments $ 109 600
=============
F-19
<PAGE>
LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
During the year ended December 31, 1994, the Corporation entered
into a five-year operating lease for the rental of a branch
location. The lease expires on September 30, 1999 and has two
five-year renewal options. The lease provides that the Corporation
pay all property taxes, insurance and maintenance plus an annual
rental of $12,000 for the initial lease period commencing on April
1, 1995. The total minimum lease commitment at December 31, 1995
under this lease is $51,000 which is due as follows:
1996 $ 12 000
1997 12 000
1998 12 000
1999 12 000
2000 3 000
--------------
$ 51 000
==============
There was $9,000 in rental expense resulting from this lease
included in the consolidated statements of income for the year
ended December 31, 1995.
FIXED EQUIPMENT ON LAND LEASED WITH RELATED PARTIES
Fixed equipment with a depreciated cost at December 31, 1995 of
$21,904 is located on land leased from a partnership of which the
Corporation's president is a partner. The lease expires on June
30, 1996, and includes an option to buy agreement; whereby the
Corporation can purchase the property for $150,000 at any time on
or before June 30, 1996. The total minimum lease commitment at
December 31, 1995, under this lease is $6,600 payable in 1996.
As of December 31, 1995 the Corporation has invested $36,614 in
the construction of a new building on this site. The total
estimated cost of the finished building is $225,000. The
Corporation has agreed to finance the construction of the building
with the understanding that the lessor will reimburse the
Corporation for all costs and will lease the building to the
Corporation for a rental expense to be determined based on the
total cost of the finished building and a land value of $150,000.
The estimated date of completion for the project is June 1, 1996
at which time the lease terms will be renegotiated.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in the
accompanying financial statements. See Note 13 with respect to
financial instruments with off-balance-sheet risk.
As members of the Federal Reserve System, the Corporation is required
to maintain certain average reserve balances. For the final weekly
reporting period in the year ended December 31, 1995 this requirement
was $65,000. For the final weekly reporting period in the year ended
December 31, 1994, there was no daily average required balance.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DIVIDEND RESTRICTIONS
Federal and state regulations limit the amount of dividends which the
Corporation can pay without obtaining prior approval and,
additionally, federal regulations require that the Corporation
maintain minimum capital requirements. As of December 31, 1995, the
Corporation was required to obtain prior approval on any dividend
declared.
The Corporation did obtain approval from the State Corporation
Commission to pay a stock dividend and on December 19, 1995, the
Board of Directors declared a stock dividend equal to 15% of net
income, payable February 8, 1996, to stockholders of record December
19, 1995. This dividend has been reflected in the accompanying
financial statements.
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of
December 31, 1995, no unrestricted funds could be transferred from
the banking subsidiary to the parent corporation, without prior
regulatory approval.
NOTE 12. OTHER EXPENSES
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- -----------
<S> <C>
FDIC assessment $ 33 798 $ 52 377 $ 39 513
Other real estate valuation 42 581 - - - -
Marketing 53 619 32 522 16 193
Stationery and supplies 48 225 30 486 16 976
Other (includes no items in excess
of 1% of total revenue) 371 823 387 189 299 610
-------------- -------------- --------------
$ 550 046 $ 502 574 $ 372 292
============== ============== ==============
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes
of financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of December 31, 1995 and 1994
is as follows:
1995 1994
---------- ---------
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $ 3 698 658 $ 2 969 252
Standby letters of credit 76 812 54 500
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 are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds no
collateral supporting those commitments.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at December 31, 1995 exceeded
the insurance limits of the Federal Deposit Insurance Corporation by
approximately $274,000.
NOTE 14. DEFINED CONTRIBUTION RETIREMENT PLAN
The Corporation has a defined contribution retirement plan under Code
Section 401(k) of the Internal Revenue Service covering employees who
have completed six months of service and who are at least 21 years of
age. Contributions made to the plan for the year ended December 31,
1995 was $9,601. No contributions were made for the years ended
December 31, 1994 and 1993.
NOTE 15. WRITTEN AGREEMENT
On January 28, 1992, a written agreement was entered into by the
Board of Directors of the Bank with the Federal Reserve Bank of
Richmond and the Bureau of Financial Institutions. The written
agreement was terminated effective November 23, 1994.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND SHORT-TERM INVESTMENTS
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value
is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining
maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar agreements,
taking into account the remaining terms of the agreements and
the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the
committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
At December 31, 1995, the carrying amounts and fair values of
loan commitments and stand-by letters of credit were
immaterial.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
1995
CARRYING FAIR
AMOUNT VALUE
(THOUSANDS)
Financial assets:
<S> <C>
Cash and short-term investments $ 3 857 $ 3 857
Securities 1 699 1 708
Loans 29 167 29 716
Less: allowance for loan losses 393 - -
------------ -----------
Total financial assets $ 34 330 $ 35 281
============ ===========
Financial liabilities:
Deposits $ 32 622 $ 33 136
Long-term debt 617 634
------------ -----------
Total financial liabilities $ 33 239 $ 33 770
============ ===========
</TABLE>
NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS
FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," establishes standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived
assets and certain identifiable intangibles to be disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Statement is effective
for fiscal years beginning after December 15, 1995. The Statement is
not expected to have a material impact on the Corporation.
FASB No. 122, "Accounting for Mortgage Servicing Rights," amends FASB
No. 65, "Accounting for Certain Mortgage Banking Activities," to
require that a mortgage banking enterprise recognize as separate assets
rights to service mortgage loans for others, however those servicing
rights are acquired. A mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing
rights retained should allocate the total cost of the mortgage loans to
the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to
estimate the fair values of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire cost
of purchasing or originating the loans should be allocated to the
mortgage loans (without the mortgage servicing rights) and no cost
should be allocated to the mortgage servicing rights. The Statement is
effective for transactions in fiscal years beginning after December 15,
1995. The Statement is not expected to have a material impact on the
Corporation.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FASB No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts
based on the price of the employer's stock. Examples are stock purchase
plans, stock options, restricted stock, and stock appreciation rights.
This Statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
This Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The fair value based method
is preferable to the Opinion 25 method for purposes of justifying a
change in accounting principle under APB Opinion 20, "Accounting
Changes." Entities electing to remain with the accounting in Opinion 25
must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied.
The Statement is effective for fiscal years beginning after December
15, 1995. The disclosures must include the pro forma effects of other
awards granted in fiscal years beginning after December 31, 1994. The
Statement is not expected to have a material impact on the Corporation.
NOTE 18. STOCK OPTIONS AND WARRANTS OUTSTANDING
On June 15, 1992 the Corporation issued one stock purchase warrant
("warrant") for each share of preferred stock purchased in a private
offering. A total of 200,688 warrants were issued. Warrants were
immediately transferable and entitle the holder to purchase one share
of common stock at a price of $5.00 per share until June 30, 1997. As
of December 31, 1995 all 200,688 warrants were outstanding.
On April 13, 1992 the Corporation granted 500 stock options to the
Corporation's chief executive officer pursuant to his employment
agreement with the Corporation. The stock options are exercisable at
$5.00 per share and expire on June 1, 1997. As of December 31, 1995 all
500 stock options were outstanding.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARATHON FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
BALANCE SHEETS
December 31, 1995 and 1994
1995 1994
-------------- --------------
ASSETS
<S> <C>
Cash $ 370 $ 370
Organization cost, at amortized costs - - 5 064
Prepaid expenses 578 213
Investment in capital stock of subsidiary 2 681 486 2 238 322
--------------- ---------------
Total assets $ 2 682 434 $ 2 243 969
============== ==============
LIABILITIES, accounts payable $ 4 684 $ - -
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock $ - - $ 1 003 440
Common stock 1 306 303 1 078 601
Capital surplus 5 109 908 4 199 100
Retained earnings (deficit) (3 746 878) (4 029 140)
Unrealized gain (loss) on securities
available for sale 8 417 (8 032)
-------------- --------------
Total stockholders' equity $ 2 677 750 $ 2 243 969
-------------- --------------
Total liabilities and stockholders'
equity $ 2 682 434 $ 2 243 969
============== ==============
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- ---------
<S> <C>
INCOME, miscellaneous $ - - $ - - $ 3 250
------------- -------------- -----------
EXPENSES:
Amortization $ 5 064 $ 12 072 $ 12 072
Other 1 110 849 776
------------- -------------- -----------
Total expenses $ 6 174 $ 12 921 $ 12 848
------------- -------------- -----------
(Loss) before undistributed
income of subsidiaries $ (6 174) $ (12 921) $ (9 598)
------------- -------------- ------------
Undistributed income of
subsidiary $ 426 715 $ 331 397 $ 90 117
------------- -------------- ------------
Net income $ 420 541 $ 318 476 $ 80 519
============= ============== ============
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income $ 420 541 $ 318 476 $ 80 519
Adjustments to reconcile net income to
net cash (used in) operating activities:
Amortization 5 064 12 071 12 072
Undistributed (income) of subsidiary (426 715) (331 397) (90 117)
(Increase) in prepaid expenses (365) - - (71)
Increase (decrease) in accounts payable,
subsidiary company 1 475 - - (3 250)
------------- ----------- -----------
Net cash (used in)
operating activities $ - - $ (850) $ (847)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock $ - - $ - - $ 355 995
Purchase of stock from subsidiary - - - - (355 998)
------------- ------------ -------------
Net cash (used in)
financing activities $ - - $ - - $ (3)
------------- ------------- -------------
(Decrease) in cash
and cash equivalents $ - - $ (850) $ (850)
CASH AND CASH EQUIVALENTS
Beginning 370 1 220 2 070
------------- -------------- ------------
Ending $ 370 $ 370 $ 1 220
=============== ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock $ 138 279 $ 50 185 $ 25 150
============= ============== =============
Unrealized gain (loss) on securities
available for sale $ 16 449 $ (8 032) $ - -
============= ============== =============
Conversion of preferred stock to
common stock $ 1 003 440 $ - - $ - -
=============== ============= =============
</TABLE>
F-28
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and due from banks $ 3 110 122
Securities (fair value: $1,692,099) (Note 2) 1 691 345
Federal funds sold 3 148 000
Loans, net (Notes 3 and 4) 31 596 179
Bank premises and equipment, net (Notes 5 and 9) 1 327 924
Accrued interest receivable 199 174
Other real estate 236 123
Other assets 301 870
------------
$ 41 610 737
============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing $ 6 267 152
Interest bearing 31 598 997
------------
Total deposits (Note 7) $ 37 866 149
Interest expense payable 73 100
Accounts payable and accrued expenses 117 873
Mortgage payable 495 377
Capital lease payable (Note 9) 95 278
Commitments and contingent liabilities (Notes 10 and 13) - -
------------
Total liabilities $ 38 647 777
------------
Stockholders' Equity
Preferred stock, Series A, 5% noncumulative, no par
value; 1,000,000 shares authorized; no shares
issued and outstanding $ - -
Common stock, $1 par value; 20,000,000 shares
authorized; 1,306,303 shares issued and
outstanding 1 306 303
Capital surplus 5 109 908
Retained earnings (deficit) (3 443 316)
Unrealized (loss) on securities available for sale (9 935)
------------
Total stockholders' equity $ 2 962 960
------------
$ 41 610 737
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-29
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C>
Interest income:
Interest and fees on loans $ 1 696 282 $ 1 283 690
Interest on investment securities:
Taxable 15 905 19 272
Nontaxable 8 337 7 500
Interest and dividends on securities available for sale:
Taxable 21 239 9 080
Dividends 4 187 6 833
Interest on federal funds sold 32 403 16 448
------------- -------------
Total interest income $ 1 778 353 $ 1 342 823
------------- -------------
Interest expense:
Interest on deposits (Note 7) $ 717 718 $ 541 037
Interest on mortgage payable 18 835 19 683
Interest on capital lease obligation 3 712 3 495
Interest on federal funds purchased 414 1 474
------------- -------------
Total interest expense $ 740 679 $ 565 689
------------- -------------
Net interest income $ 1 037 674 $ 777 134
Provision for loan losses (Note 4) 72 500 16 000
------------- -------------
Net interest income after
provision for loan losses $ 965 174 $ 761 134
------------- -------------
Other income:
Service charges on deposit accounts $ 149 003 $ 75 799
Commissions and fees 35 409 20 028
Other 9 450 4 951
------------- -------------
Total other income $ 193 862 $ 100 778
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
(Continued)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C>
Other expenses:
Salaries and employee benefits $ 408 531 $ 324 801
Net occupancy expense of premises 65 756 54 564
Furniture and equipment 56 186 39 053
Other (Note 12) 320 935 266 801
------------- -------------
Total other expenses $ 851 408 $ 685 219
------------- -------------
Income before income taxes $ 307 628 $ 176 693
Provision for income taxes (Note 8) 4 066 - -
------------- -------------
Net income $ 303 562 $ 176 693
============= =============
Earnings per common and equivalent share (Note 1) $ .23 $ .16
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-31
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Retained Securities Total
Capital Stock Capital Earnings Available Stockholders'
Preferred Common Surplus (Deficit) for Sale Equity
<S> <C>
Balance, December 31,
1994 $ 1 003 440 $ 1 078 601 $4 199 100 $(4 029 140) $ (8 032) $ 2 243 969
Net income - 1995 - - - - - - 176 693 - - 176 693
Unrealized gain (loss)
on securities avail-
able for sale - - - - - - - - 12 899 12 899
----------- ----------- ---------- ----------- ----------- -----------
Balance, June 30,
1995 $ 1 003 440 $ 1 078 601 $4 199 100 $(3 852 447) $ 4 867 $ 2 433 561
=========== =========== ========== =========== =========== ===========
Balance, December 31,
1995 $ - - $ 1 306 303 $5 109 908 $(3 746 878) $ 8 417 $ 2 677 750
Net income - 1996 - - - - - - 303 562 - - 303 562
Unrealized gain
(loss) on securities
available for sale - - - - - - - - (18 352) (18 352)
---------- ----------- ---------- ----------- ----------- -----------
Balance, June 30,
1996 $ - - $ 1 306 303 $5 109 908 $(3 443 316) $ (9 935) $ 2 962 960
=========== =========== ========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 303 562 $ 176 693
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 5 451 10 576
Depreciation 56 820 48 223
Provision for loan losses 72 500 16 000
Accretion of securities discounts, net (1 228) (1 071)
Changes in assets and liabilities:
(Increase) in other assets (251 322) (71 083)
(Increase) decrease in accrued interest
receivable (40 108) 2 167
Increase in accounts payable and
accrued expenses 27 862 47 758
Increase (decrease) in interest expense payable 12 949 (72 536)
------------ ------------
Net cash provided by operating activities $ 186 486 $ 156 727
------------ ------------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investments securities $ 559 340 $ 2 300
Proceeds from maturities and principal
payments of securities available for sale 204 087 11 004
Purchase of investment securities (299 221) - -
Purchase of securities available for sale (473 203) (15 900)
Net (increase) in loans (2 894 659) (4 003 977)
Purchase of equipment (96 281) (50 592)
------------ ------------
Net cash (used in) investing activities $ (2 999 937) $ (4 057 165)
------------ ------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 1 055 295 $ 589 354
Net increase in certificates of deposit 4 188 690 3 851 348
Cash paid in lieu of fractional shares (3 209) - -
Principal payments on capital lease obligations (14 322) (11 037)
Principal payments on mortgage payable (11 757) (10 909)
------------ ------------
Net cash provided by financing activities $ 5 214 697 $ 4 418 756
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C>
Increase in cash and
cash equivalents $ 2 401 246 $ 518 318
Cash and Cash Equivalents
Beginning 3 856 876 2 065 496
------------ ------------
Ending $ 6 258 122 $ 2 583 814
============ ============
Supplemental Disclosures of Cash Flow
Information, cash payments for interest $ 727 730 $ 638 225
============ ============
Supplemental Schedule of Noncash
Investing and Financing Activities
Equipment acquired under capital
lease obligations $ - - $ 21 395
============ ============
Unrealized gain (loss) on securities
available for sale $ (18 352) $ 12 899
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE>
MARATHON FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Nature of Banking Activities and Significant Accounting Policies
Marathon Financial Corporation and Subsidiary, The Marathon Bank,
(the Corporation) grant commercial, financial, agricultural,
residential and consumer loans to customers in Virginia. The loans
are expected to be repaid from cash flow or proceeds from the sale of
selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Principles of Consolidation
The consolidated financial statements of the Marathon Financial
Corporation and its Subsidiary, include the accounts of all
companies. All material intercompany balances and transactions
have been eliminated.
Securities
Securities are classified in three categories and accounted for
as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed
by the interest method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt
and equity securities that the Corporation intends to hold
for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors,
including significant movements in interest rates, changes in
the maturity mix of the Corporation's assets and liabilities,
liquidity needs, regulatory capital considerations, and other
similar factors. Securities available for sale are carried at
fair value. Unrealized gains or losses are reported as
increases or decreases in stockholders' equity. Realized
gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
F-35
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
c. Trading Securities
Trading securities, which are generally held for the short
term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading
account assets are included in interest income on trading
account securities. The Corporation had no trading securities
at June 30, 1996 and 1995.
Derivative Financial Instruments
FASB No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" requires various
disclosures for derivative financial instruments which are
futures, forwards, swaps, or option contracts, or other
financial instruments with similar characteristics. The
Corporation does not have any derivative financial instruments
as defined under this statement.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses. Unearned
discount on installment loans is recognized as income over the
terms of the loans by the interest method. Interest on other
loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loans are charged
off when management believes that the collectibility of the
principal is unlikely. Accrual of interest is discontinued on a
loan when management believes, after considering economic and
business conditions and collection efforts, that the borrowers'
financial condition is such that collection of interest is
doubtful.
On January 1, 1995, the Corporation adopted FASB No. 114,
"Accounting by Creditors for Impairment of a Loan." This
statement has been amended by FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the
impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided solely by
the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of
those loans is to be based on the fair value of the collateral.
Statement 114, as amended, also requires certain disclosures
about investments in impaired loans and the allowance for credit
losses and interest income recognized on loans. The Corporation
had no loans subject to FASB 114 at June 30, 1996 and 1995.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received.
F-36
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows.
The allowance is increased by a provision for loan losses, which
is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans
are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan
portfolio and the related allowance may change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the
straight-line and declining-balance methods. Lease amortization
is included in depreciation expense.
Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon
retirement, sale or other disposition of property and equipment,
the cost and accumulated depreciation are eliminated from the
accounts and gain or loss is included in operations.
Classifications of Amortization on Assets Acquired Under Capital
Leases
The amortization expense on assets acquired under capital leases
is included with the depreciation expense.
Earnings Per Share
Earnings per share of common stock are based on the weighted
average number of common shares outstanding during each year
after giving retroactive effect to the stock dividend declared
in 1995.
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards, and tax credit
carry-forwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
F-37
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased and sold for
one-day periods.
Organization Costs
The Marathon Financial Corporation was organized under the laws
of the State of Virginia as a bank holding company on October 2,
1990. Certain expenses incurred prior to this date were deferred
and were amortized using the straight-line method over a
60-month period.
Loan Fees and Costs
Loan origination and commitment fees and direct loan origination
costs are being recognized as collected and incurred. The use of
this method of recognition does not produce results that are
materially different from results which would have been produced
if such costs and fees were deferred and amortized as an
adjustment of the loan yield over the life of the related loan.
Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-38
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of June 30, 1996, is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1996
<S> <C>
Obligations of U.S.
government corporations
and agencies $ 595 744 $ 1 862 $ (8 545) $ 589 061
Mortgage-backed securities 137 134 1 558 (4 810) 133 882
Other 302 850 - - - - 302 850
----------- ----------- ---------- ------------
$ 1 035 728 $ 3 420 $ (13 355) $ 1 025 793
=========== =========== ========== ============
</TABLE>
The amortized cost and fair value of the securities available for
sale as of June 30, 1996, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
mortgages underlying the mortgage-backed securities may be called or
prepaid without any penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due after one year through five years $ 595 744 $ 589 061
Mortgage-backed securities 137 134 133 882
Other 302 850 302 850
------------ ------------
$ 1 035 728 $ 1 025 793
============ ============
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1996
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 297 980 $ - - $ (4 713) $ 293 267
Obligations of state and
political subdivisions 251 324 6 330 (1 154) 256 500
Corporate securities 99 885 115 - - 100 000
Mortgage-backed securities 16 363 176 - - 16 539
----------- ----------- ---------- ------------
$ 665 552 $ 6 621 $ (5 867) $ 666 306
=========== =========== ========== ============
</TABLE>
F-39
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
The amortized cost and fair value of the securities being held to
maturity as of June 30, 1996, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because the corporate securities and mortgages underlying the
mortgage-backed securities may be called or prepaid without any
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due after one year through five years $ 297 980 $ 293 267
Due after five years through ten years 251 324 256 500
Corporate securities 99 885 100 000
Mortgage-backed securities 16 363 16 539
--------- ----------
$ 665 552 $ 666 306
========= ==========
</TABLE>
Proceeds from maturities, calls and principal payments of securities
available for sale during 1996 and 1995 were $204,087 and $11,004.
There were no realized gains or realized losses recognized on these
transactions.
Proceeds from maturities, calls and principal payments of securities
being held to maturity during 1996 and 1995 were $559,340 and $2,300.
There were no realized gains or realized losses recognized on these
transactions.
Securities having a book value of $547,589 and $695,655 at June 30,
1996 and 1995 were pledged to secure public deposits and for other
purposes required by law.
Note 3. Loans and Related Party Transactions
The loan portfolio as of June 30, 1996, is composed of the following:
Commercial $ 15 310 722
Real estate - mortgage 5 747 258
Real estate - construction 4 015 021
Installment loans to individuals 6 986 771
------------
$ 32 059 772
Less allowance for loan losses 463 593
------------
$ 31 596 179
============
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as
related parties), on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with others. These persons and firms (exclusive of loans
to any such person which in the aggregate did not exceed $60,000)
were indebted to the Bank for loans totaling $1,459,760 at June 30,
1996. During 1996, total principal additions were $528,117 and total
principal payments were $243,242.
F-40
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
June 30,
1996 1995
----------- ------------
Balance, beginning $ 393 139 $ 299 203
Provision for loan losses 72 500 16 000
Recoveries 4 265 2 050
Loan losses charged to
the allowance (6 311) (7 411)
------------- ------------
Balance, ending $ 463 593 $ 309 842
============= ============
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $63,819 at June 30, 1996. If interest on these loans
had been accrued, such income would have approximated $2,518 for
1996.
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment as of June 30, 1996 consists of the
following:
Capital leases - computer $ 151 047
Bank premises 1 222 881
Furniture and equipment 742 159
------------
$ 2 116 087
Less accumulated depreciation 788 163
------------
$ 1 327 924
============
Depreciation included in operating expense for 1996 and 1995 was
$56,820 and $48,223, respectively.
Note 6. Organization Costs
Certain costs incurred by the Corporation prior to commencing
operations on October 2, 1990, were capitalized and amortized over a
60-month life. These costs totaled $60,350.
F-41
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 7. Deposits
Deposits outstanding at June 30, 1996 and 1995 and the related
interest expense for the years then ended, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------
Amount Expense Amount Expense
<S> <C>
Noninterest bearing $ 6 267 152 $ - - $ 4 348 396 $ - -
----------- ----------- ----------- ------------
Interest bearing:
Interest checkin $ 2 080 895 $ 30 098 $ 1 855 975 $ 21 523
Money market accounts 3 140 621 56 858 2 536 310 38 187
Regular savings 5 057 468 79 657 4 844 164 79 153
Certificates of deposit:
Less than $100,000 16 971 439 445 950 12 457 447 333 088
$100,000 and more 4 348 574 105 155 3 002 626 69 086
----------- ----------- ----------- ------------
Total interest bearing $31 598 997 $ 717 718 $24 696 522 $ 541 037
----------- ----------- ----------- ------------
Total deposits $37 866 149 $ 717 718 $29 044 918 $ 541 037
=========== =========== =========== ============
</TABLE>
Note 8. Income Taxes
Net deferred tax assets consist of the following components as of
June 30, 1996:
Deferred tax assets:
Net operating loss carryforward $1 163 263
Writedown of other real estate 14 478
Less valuation allowance (1 103 668)
----------
$ 74 073
----------
Deferred tax liabilities:
Allowance for loan losses $ 74 073
----------
$ - -
==========
The provision for income taxes charged to operations for the years
ended June 30, 1996 and 1995, consists of the following:
1996 1995
---------- ----------
Current tax expense $ 4 066 $ - -
Deferred tax expense 103 152 59 425
Benefit of net operating loss (103 152) (59 425)
---------- ----------
$ 4 066 $ - -
========== ==========
F-42
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
The current tax expense incurred in 1996 is related to the
alternative minimum tax calculated for the Corporation.
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the six months ended June 30, 1996 and 1995, due to the
following:
1996 1995
---------- ----------
Computed "expected" tax expense $ 104 594 $ 60 076
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance (103 152) (59 425)
Tax exempt interest income (1 157) (1 611)
Other 3 781 960
---------- ----------
$ 4 066 $ - -
========== ==========
Under the provisions of the Internal Revenue Code, the Corporation
has available approximately $3,421,362 of net operating loss
carryforwards which can be offset against future taxable income.
The carryforwards expire December 31, 2006. The full realization
of the tax benefits associated with the carryforwards depends
predominately upon the recognition of ordinary income during the
carryforward period.
The loss carryforward at June 30, 1996, for financial reporting
purposes is approximately $3,225,670. The differences between the
loss carryforward for financial reporting and income tax purposes
results principally from timing differences in recognizing
start-up costs and the provision for loan losses. No deferred
taxes are recorded on these timing differences due to the net
operating loss carryforward position of the Corporation.
Note 9. Leases
Capital Lease
During the year ended December 31, 1994, the Corporation entered
into a lease agreement on computer equipment and software.
Additional equipment and software was added to the lease during
1995 in the amount of $21,395. The balance of the liability under
capital leases at June 30, 1996 in the amount of $95,278
represents the present value of the balance due in future years
for lease rentals discounted at 7%. The liability is payable in
quarterly installments of $9,017 for principal and interest to
June 1, 1999. Since the term of the lease is approximately the
same as the estimated useful life of the assets, and the present
value of the future minimum lease payments at the beginning of the
lease approximated the fair value of the leased assets at that
date, the leases are considered to be capital leases and have been
so recorded. The lease also requires additional maintenance
payments of $4,853 per quarter.
The following is a schedule by years of the future minimum lease
payments under the capital leases together with the present value
of the net minimum lease payments as of June 30, 1996:
F-43
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
For the Year Ended December 31:
1996 $ 27 740
1997 55 480
1998 55 480
1999 25 821
-----------
Total minimum lease payments $ 164 521
Less estimated executory costs
(such as maintenance) included in
the total minimum lease payments 58 236
-----------
Net minimum lease payments $ 106 285
Less the amount representing interest 11 007
-----------
Present value of net minimum
lease payments $ 95 278
===========
Lease Commitments and Total Rental Expense
During the year ended December 31, 1994, the Corporation entered
into a five-year operating lease for the rental of a branch
location. The lease expires on September 30, 1999 and has two
five-year renewal options. The lease provides that the Corporation
pay all property taxes, insurance and maintenance plus an annual
rental of $12,000 for the initial lease period commencing on April
1, 1995. The total minimum lease commitment at June 30, 1996 under
this lease is $45,000 which is due as follows:
For the Year Ended December 31:
1996 $ 6 000
1997 12 000
1998 12 000
1999 12 000
2000 3 000
-----------
$ 45 000
===========
There was $6,000 in rental expense resulting from this lease
included in the consolidated statements of income for the six
months ended June 30, 1996.
F-44
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Fixed Equipment on Land Leased with Related Parties
As of June 30, 1996 the Corporation has invested $237,365 in the
construction of a new building on this site. The Corporation has
agreed to finance the construction of the building with the
understanding that the lessor will reimburse the Corporation for
all costs and will lease the building to the Corporation for a
rental expense to be determined based on the total cost of the
finished building and a land value of $150,000. The project was
completed on June 30, 1996.
Note 10. Commitments and Contingent Liabilities
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in the
accompanying financial statements. See Note 13 with respect to
financial instruments with off-balance-sheet risk.
As members of the Federal Reserve System, the Corporation is required
to maintain certain average reserve balances. For the final weekly
reporting period in the year ended June 30, 1996 this requirement was
$72,000.
Note 11. Dividend Restrictions
Federal and state regulations limit the amount of dividends which the
Corporation can pay without obtaining prior approval and,
additionally, federal regulations require that the Corporation
maintain minimum capital requirements. As of June 30, 1996, the
Corporation was required to obtain prior approval on any dividend
declared.
The Corporation did obtain approval from the State Corporation
Commission to pay a stock dividend and on December 19, 1995, the
Board of Directors declared a stock dividend equal to 15% of net
income, payable February 8, 1996, to stockholders of record December
19, 1995. This dividend has been reflected in the accompanying
financial statements.
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of June
30, 1996, no unrestricted funds could be transferred from the banking
subsidiary to the parent corporation, without prior regulatory
approval.
F-45
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 12. Other Expenses
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
1996 1995
----------- -----------
FDIC assessment $ 1 500 $ 27 490
Marketing 32 531 32 100
Stationery and supplies 23 894 24 377
Professional fees 25 069 26 258
Postage 24 924 12 640
Other (includes no items in excess
of 1% of total revenue) 213 017 143 936
----------- -----------
$ 320 935 $ 266 801
=========== ===========
Note 13. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes
of financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of June 30, 1996 is as follows:
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 4 684 904
Standby letters of credit 78 000
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 are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing
commercial properties.
F-46
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds no
collateral supporting those commitments.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at June 30, 1996 exceeded the
insurance limits of the Federal Deposit Insurance Corporation by
approximately $797,183.
Note 14. Defined Contribution Retirement Plan
The Corporation has a defined contribution retirement plan under Code
Section 401(k) of the Internal Revenue Service covering employees who
have completed six months of service and who are at least 21 years of
age. No contributions were made to the plan for the six months ended
June 30, 1996 and 1995.
Note 15. Stock Options and Warrants Outstanding
On June 15, 1992 the Corporation issued one stock purchase warrant
("warrant") for each share of preferred stock purchased in a private
offering. A total of 200,688 warrants were issued. Warrants were
immediately transferable and entitle the holder to purchase one share
of common stock at a price of $5.00 per share until June 30, 1997. As
of June 30, 1996 all 200,688 warrants were outstanding.
On April 13, 1992 the Corporation granted 500 stock options to the
Corporation's chief executive officer pursuant to his employment
agreement with the Corporation. The stock options are exercisable at
$5.00 per share and expire on June 1, 1997. As of June 30, 1996 all
500 stock options were outstanding.
F-47
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 16. Parent Corporation Only Financial Statements
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheet
(Unaudited)
June 30, 1996
Assets
Cash $ 732
Prepaid expenses 690
Investment in capital stock of subsidiary 2 961 538
------------
Total assets $ 2 962 960
============
Liabilities, accounts payable $ - -
------------
Stockholders' Equity
Preferred stock $ - -
Common stock 1 306 303
Capital surplus 5 109 908
Retained earnings (deficit) (3 443 316)
Unrealized (loss) on securities
available for sale (9 935)
------------
Total stockholders' equity $ 2 962 960
------------
Total liabilities and stockholders'
equity $ 2 962 960
============
F-48
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C>
Income, dividends from subsidiary $ 6 000 $ - -
------------- ----------
Expenses:
Amortization $ - - $ 5 064
Other 841 425
------------- ----------
Total expenses $ 841 $ 5 489
------------- ----------
Income (loss) before undistributed
income of subsidiaries $ 5 159 $ (5 489)
Undistributed income of
subsidiary 298 403 182 182
------------- ----------
Net income $ 303 562 $ 176 693
============= ==========
</TABLE>
F-49
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C>
Cash Flows from Operating Activities
Net income $ 303 562 $ 176 693
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization - - 5 064
Undistributed (income) of subsidiary (298 403) (182 182)
(Increase) decrease in prepaid expenses (113) 425
(Decrease) in accounts payable, subsidiary
company (1 475) - -
------------ ----------
Net cash provided by
operating activities $ 3 571 $ - -
------------ ----------
Cash Flows from Financing Activities,
cash paid in lieu of financial shares $ (3 209) $ - -
------------ ----------
Increase in cash and
cash equivalents $ 362 $ - -
Cash and Cash Equivalents
Beginning 370 370
------------ ----------
Ending $ 732 $ 370
============ ==========
</TABLE>
F-50
<PAGE>
No person has been authorized in connection with this offering to give
any information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Corporation or the Underwriter. This
Prospectus does not constitute an offer of any securities other than the Common
Stock to which it relates or an offer to sell, or a solicitation of an offer to
buy, in any jurisdiction to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Corporation
since the date hereof or that the information contained or incorporated by
reference herein is correct as of any time subsequent to its date.
--------------------
TABLE OF CONTENTS
Page
Available Information............... 3
Reports to Stockholders............. 3
Prospectus Summary.................. 4
Summary Financial Data.............. 7
The Corporation..................... 8
Investment Considerations........... 10
Offering to Stockholders............ 11
Use of Proceeds..................... 11
Capitalization...................... 12
Market Price and Dividend Data...... 13
Selected Financial Data............. 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................ 15
Business............................ 32
Management.......................... 40
Description of Capital Stock........ 45
Underwriting........................ 48
Legal Matters....................... 49
Experts............................. 49
Index to Financial Statements....... F1
[LOGO]
500,000 Shares
Common Stock
-----------------
PROSPECTUS
-----------------
McKinnon & Company, Inc.
, 1996
<PAGE>
PROSPECTUS
100,000 Shares
MARATHON FINANCIAL CORPORATION
Common Stock
Marathon Financial Corporation, a Virginia corporation (the
"Corporation") is offering 100,000 shares of its Common Stock (the "Subscription
Shares") to its stockholders in a subscription offering (the "Subscription
Offering"). There is no established public trading market for the Corporation's
Common Stock, which is not actively traded.
The Subscription Shares will be offered initially to the Corporation's
stockholders of record at the close of business on June 24, 1996 at $5.00 per
share on the basis of one Subscription Share for each 12 shares of Common Stock
then beneficially owned. See "Offering to Stockholders" and "Underwriting" for
information regarding the factors considered in determining the offering price.
To the extent that Subscription Shares are available, stockholders will be
permitted to oversubscribe. See "Offering to Stockholders." Subscriptions must
be received by the Corporation by 5:00 p.m. Virginia time on _______ __, 1996.
Any unsubscribed Subscription Shares, plus an additional 400,000 shares
of the Corporation's Common Stock (collectively the "Public Offering Shares")
(the Subscription Shares and the Public Offering Shares collectively the
"Shares"), will be offered in a public offering (the "Public Offering"; the
Subscription Offering and the Public Offering collectively the "Offerings") on a
best efforts basis by McKinnon & Company, Inc. as selling agent for the
Corporation (the "Underwriter"), at a price currently anticipated to be between
$4.75 and $5.75 per Public Offering Share. If the Public Offering price exceeds
$5.00 per Share, persons who subscribed for Subscription Shares will pay no more
than $5.00 per Share. If the Public Offering price is less than $5.00 per
Share, subscribers in the Subscription Offering will receive a rebate without
interest immediately following the closing of the Offerings for the difference
between $5.00 and the Public Offering price. The Corporation reserves the right
to increase the total number of Shares offered in the Public Offering by not
more than 75,000 Shares.
--------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, THE FEDERAL RESERVE BANK, THE VIRGINIA STATE
CORPORATION COMMISSION OR ANY OTHER STATE OR FEDERAL AGENCY, NOR
HAS ANY STATE OR FEDERAL AGENCY PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES OFFERED HEREBY ARE NOT SAVINGS ACCOUNTS OR SAVINGS
DEPOSITS, AND THEY ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION OR BY ANY OTHER STATE OR FEDERAL AGENCY.
---------------
Subscription Proceeds to
Offering Price(1) Corporation (2)(3)
Per Share................... $5.00 $5.00
Total (3)................... $500,000 $500,000
(1) The Corporation has agreed to indemnify the Underwriter against certain
civil liabilities, including liabilities under the Securities Act of
1933.
(2) Before deducting expenses payable by the Corporation estimated at
approximately $______, including $10,000 paid to the Underwriter as a
financial advisory/standby fee.
(3) Assumes the sale of all 100,000 Subscription Shares offered to the
stockholders at $5.00 per Share.
Subscribers' funds will be held by the Corporation in a noninterest
bearing escrow account until the closing of the Offerings, which are not subject
to the sale of any minimum number of Shares. It is anticipated that delivery of
the Subscription Shares will be made on or about ________ ___, 1996.
The date of this Prospectus is _______ __, 1996.
<PAGE>
[MAP of Northern Virginia with branch locations indicated]
<PAGE>
AVAILABLE INFORMATION
The Corporation has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (the "Registration Statement") under
the Securities Act of 1933, as amended, with respect to the Common Stock offered
hereby. This Prospectus, which constitutes a part of the Registration Statement,
does not contain all of the information set forth in the Registration Statement,
certain items of which are omitted as permitted by the rules and regulations of
the Commission. Statements made in this Prospectus as to the contents of any
agreement or other document referred to herein are not necessarily complete, and
reference is made to the copy of such agreement or other document filed as an
exhibit or schedule to the Registration Statement and each such statement shall
be deemed qualified in its entirety by such reference. For further information,
reference is made to the Registration Statement and to the exhibits and
schedules filed therewith, which are available for inspection without charge at
the public reference facilities maintained by the Commission at Room 1024, 450
Fifth Street, N.W., Washington, D.C. 20549. Copies of the material containing
this information may be obtained from the Commission upon payment of the
prescribed fees.
The Corporation is subject to the periodic reporting and other
information requirements of the Securities Exchange Act of 1934, as amended.
Such reports may be inspected at the public reference facilities maintained by
the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and
at the Commission's regional offices located at 500 West Madison Street, Suite
1400, Chicago, Illinois 60661, and 7 World Trade Center, 13th Floor, New York,
New York 10048. Copies of such material may be obtained by mail from the Public
Reference Branch of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
REPORTS TO STOCKHOLDERS
The Corporation will furnish annual reports to its stockholders
containing audited financials of the Corporation and any subsidiaries on a
consolidated basis, as well as quarterly reports containing unaudited financial
information.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary does not purport to be complete and is
qualified in its entirety by the more detailed information and financial
statements, including the notes thereto, included elsewhere in this Prospectus.
Marathon Financial Corporation
Marathon Financial Corporation (the "Corporation") is a bank
holding company headquartered in Frederick County, Virginia. Its banking
subsidiary, The Marathon Bank (the "Bank"), began operations in December 1988 in
Frederick County, and opened additional branches in Front Royal, Virginia, in
1993 and in Winchester, Virginia in 1995. At June 30, 1996, the Corporation had
$41.611 million in assets, $31.596 million in net loans, $37.866 million in
deposits, $2.963 million in stockholders' equity, and an operating tax loss
carryforward of $3.226 million. During the year ended December 31, 1995, the
Corporation's net income grew 32.39% to $421 thousand from $318 thousand in
1994. For the six months ended June 30, 1996, the Corporation's net income
increased 71.75% to $304 thousand from $177 thousand for the comparable period
in 1995, while total assets increased 28.96% to $41.611 million at June 30, 1996
over the June 30, 1995 level. The annualized return on average assets and
average equity for the six months ended June 30, 1996 were 1.61% and 21.55%,
respectively. Improvements in the Bank's earnings and size have been consistent
since the employment by the Corporation of the current chief executive officer
in 1992.
The Corporation experienced significant losses in its first four
years of the Bank's operation, including net losses of $529 thousand in 1989,
$381 thousand in 1990, $2.748 million in 1991, and $474 thousand in 1992. In
late 1991, two significant loans with overdrafts and unusual extensions of
credit aggregating approximately $2.1 million were written off, without any
subsequent recovery. At December 31, 1991 the Corporation had a negative net
worth of $828 thousand, total assets of $15.883 million and a ratio of
non-performing assets and past due loans to total loans of 5.85%, which ratio
peaked at 10.39% at June 30, 1992. The Corporation was placed under a Memorandum
of Understanding by regulatory authorities in 1992 and the Board of Directors of
the Corporation accepted the resignations of the president, the chief lending
officer and the treasurer of the Corporation in February, April and May 1992,
respectively.
In April 1992, the Corporation's Board of Directors recruited
Donald L. Unger, a local, well respected banker, to take over as chief executive
officer of the Bank. Mr. Unger, with over 25 years of senior banking experience
in the Winchester and surrounding markets, had served as chief executive officer
and a director of The Peoples Bank of Front Royal, Front Royal, Virginia ("The
Peoples Bank"). Under Mr. Unger's leadership, the net income of The Peoples Bank
steadily increased from approximately $75 thousand in 1980 to $801 thousand in
1991 while, during the same period, assets increased from approximately $10
million to $60 million. Over the 1981-1991 period, the average annual return on
equity and average annual return on assets of The Peoples Bank were 17.40% and
1.59%, respectively. This period included the recession years of 1988-1991, when
the average annual return on equity and average annual return on assets were
15.72% and 1.40%, respectively. The Peoples Bank was sold to a large statewide
bank holding company in 1992.
Prior to hiring Mr. Unger, the Corporation's primary focus was on
commercial lending, which was largely unsecured. Under new management, the
Corporation's loan portfolio, deposit base and general operations were
diversified with the goal of reducing the volatility of assets and liabilities,
collateralizing the loan portfolio, and transforming the institution into a full
service community bank. From December 31, 1991 to June 30, 1996 consumer
installment loans increased 882.70% and loans secured by real estate increased
134.44%. The Corporation's loan portfolio stabilized, and at June 30, 1996 the
loan mix consisted of 52.24% consumer installment and real property loans and
47.76% commercial loans, a significant portion of which commercial loans were
secured by real estate, deposits and marketable securities. The Corporation also
began to originate and sell loans in the secondary mortgage market in September
1993, and production and sale has steadily increased from $2.237 million in
1994, to $3.502 million in 1995, and $2.389 million during the first six months
of 1996. The Bank emphasized diversifying its deposit base by increasing
consumer and commercial deposits and eliminating brokered deposits, which prior
to 1991 exceeded the Corporation's non-interest bearing deposits. Average
non-interest bearing deposits increased from $909 thousand, representing 6.14%
of the Corporation's total deposits at December 31, 1991, to $5.203 million,
representing 15.21% of the Corporation's total deposits, at June 30, 1996. This
shift substantially impacted the Corporation's cost of funds. As a result of
this successful turnaround, the Memorandum of Understanding was terminated on
November 23, 1994.
In the first three full years under Mr. Unger's leadership, the
Corporation's net income steadily increased to $80 thousand in 1993, $318
thousand in 1994 and $421 thousand in 1995. For the first six months of 1996,
net income was $304 thousand. These figures include expenses associated with the
opening of two additional branches -
4
<PAGE>
August 1993 in Front Royal and February 1995 in Winchester. Total assets
increased from $15.883 million at December 31, 1991 to $41.611 million at June
30, 1996. Non-performing assets to period end loans and other real estate owned
declined from 2.94% at December 31, 1991 to 0.93% at June 30, 1996.
Additionally, the Corporation has signed a contract to sell its largest piece of
other real estate owned to an unrelated purchaser for cash, which is anticipated
to close in late August 1996. If the transaction is consummated, the Corporation
will reduce its portfolio of other real estate owned by more than 90%. The net
interest margin increased from 3.67% in 1991 to 6.04% in 1994, was 5.81% in
1995, and for the first six months of 1996 on an annualized basis was 6.14%.
Over the same period, the return on average equity increased from negative
175.2% at December 31, 1991 to positive 21.55% on an annualized basis in the
first six months of 1996. The return on average assets increased from negative
16.40% to positive 1.61%; the ratio of nonperforming assets to period end loans
and other real estate owned decreased from 2.94% to .93%; while net chargeoffs
to average loans declined from 16.91% to .01%. The Corporation has significantly
more interest rate sensitive assets than liabilities adjustable within 90 days,
and, therefore, the net interest margin would be expected to benefit from an
increase in interest rates during this 90-day period.
As part of the recapitalization of the Corporation in 1992, the
Corporation, in private placements, issued two rounds of Common Stock at $5.00
per share, Convertible Preferred Stock convertible into Common Stock at $5.00
per share (which was mandatorily converted in July 1995) and warrants to
purchase Common Stock at $5.00 per share. At June 30, 1996, 200,688 of such
warrants were outstanding and exercisable through June 30, 1997.
The Corporation is the only independent community bank
headquartered in the City of Winchester or Frederick County, Virginia. The
Corporation's primary market is the Northern Shenandoah Valley, which includes
Frederick County, where, based on total financial institution deposits at June
30, 1995, it was the fourth largest financial institution with approximately 11%
of the market, Warren County, including the Town of Front Royal, where, based on
total financial institution deposits at June 30, 1995, it was the ninth largest
financial institution with approximately 4% of the market, and the City of
Winchester, the largest market in the four county area of Frederick, Warren,
Shenandoah and Clarke Counties. Winchester and Front Royal are located at or
near the intersections of I-81 and I-66 on the western fringe of the greater
Washington-Baltimore Metropolitan Statistical Area, the fourth largest market in
the United States.
Seventeen Fortune 500 companies have major manufacturing facilities
in the Northern Shenandoah Valley. In addition, Warren County is becoming a
significant center, in the Mid-Atlantic region, for manufacturing and
distribution due to its proximity to the Virginia Inland Port, a state sponsored
facility to expedite truck and rail shipments to the Hampton Roads Port. Pen-Tab
Inc. opened a manufacturing and distribution center in the first quarter of 1996
which employs over 270 persons. Toray, Inc. recently broke ground on a $120
million full service manufacturing plant which anticipates employing 120 persons
in 1997 and over 500 persons by the year 2000. Major employers in the four
county area include Valley Health Systems, Inc., National Fruit Products, Inc.,
Crown Cork and Seal, Automotive Industries Inc., Rubbermaid Commercial Products,
General Electric, AT&T Communications, duPont, Inc. and O'Sullivan Corporation.
The Offering
<TABLE>
<S> <C>
Shares offered........................ A total of 500,000 Shares, of which 100,000 (the "Subscription Shares")
will be initially offered in a subscription offering (the "Subscription
Offering") to the Corporation's stockholders of record on June 24, 1996 on
the basis of one Share for each 12 shares of Common Stock then
beneficially owned. The Shares not subscribed for in the Subscription
Offering, together with 400,000 additional Shares (collectively, the "Public
Offering Shares"; the Subscription Shares and the Public Offering Shares
are sometimes collectively referred to herein as the "Shares"), will be
offered in a public offering on a best efforts basis by the Underwriter as
selling agent for the Corporation, at a price currently anticipated to be
between $4.75 and $5.75 per Share. The Corporation reserves the right to
increase the total number of Shares offered in the Public Offering by not
more than 75,000 Shares. See "Offering to Stockholders" and
"Underwriting."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Common Stock outstanding............. 1,306,303 shares at June 30, 1996;
1,806,303 after completion of the
Offerings, assuming the sale of all 500,000
Shares and excluding the 75,000 additional
Shares that may be offered at the
election of the Corporation.
Use of proceeds....................... To support future growth of the Corporation's assets, including the potential
opening of new branches, and for general corporate purposes. See "Use of
Proceeds."
Market area........................... The Corporation's three banking offices, located in Frederick County, the
Town of Front Royal and the City of Winchester, operate along the western
fringe of Washington-Baltimore Metropolitan Statistical Area, the fourth
largest market in the United States.
Proposed NASDAQ symbol................ The Corporation has applied to
have its Common Stock approved for listing on the
NASDAQ SmallCap Market under the symbol "MFCV."
Dividends............................. The Corporation has never declared or paid cash dividends and does not
anticipate doing so in the foreseeable future. See "Market Price and
Dividend Data," "Business - Supervision and Regulation," and "Description
of Capital Stock."
Risk Factors.......................... Prospective investors should carefully consider certain factors before
purchasing any of the Shares offered in the Offerings. See "Investment
Considerations."
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL DATA
The year-end income statement data, the year-end per share data, and
the year-end balance sheet data regarding net income contained in the following
summary financial data for the five years ended December 31, 1995 are derived
from the audited historical consolidated financial statements of the
Corporation. The financial data for the six months ended June 30, 1996 and 1995
are derived from unaudited consolidated financial statements. The summary
financial data should be read in conjunction with the historical consolidated
financial statements and the notes thereto of the Corporation included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Income Statement Data:
Net interest income................... $ 1,038 $ 777 $ 1,688 $ 1,402 $ 908 $ 593 $ 566
Provision for loan losses............. 73 16 113 151 12 (88) 2,458
Noninterest income.................... 194 101 281 242 93 111 180
Noninterest expense................... 855 685 1,435 1,175 909 1,266 1,036
Income tax expense.................... 103 59 143 101 - - -
Benefit of net operating loss(1)...... (103) (59) (143) (101) - - -
Net income (loss)..................... $ 304 $ 177 $ 421 $ 318 $ 80 $ (474) $ (2,748)
========= ======== ======== ======== ======== ========= =========
Per Share Data:
Net income (loss)..................... $ .23 $ .16 $ .35 $ .30 $ .08 $ (.40) $ (4.51)
Cash dividends........................ -- -- -- -- -- -- --
Book value at period end.............. 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Tangible book value at period end..... 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Balance Sheet Data:
Total assets.......................... $ 41,611 $ 32,266 $ 36,070 $ 27,682 $ 22,379 $ 16,111 $ 15,883
Loans, net............................ 31,596 26,606 28,774 22,618 18,149 10,828 11,545
Securities............................ 1,691 1,506 1,699 1,490 1,517 2,168 2,572
Deposits.............................. 37,866 29,045 32,622 24,604 19,606 13,678 16,391
Stockholders' equity (deficit)........ 2,963 2,434 2,678 2,244 1,934 1,497 (828)
Average shares outstanding(2)......... 1,306 1,091 1,192 1,083 1,055 743 615
Performance Ratios(3):
Return on average assets.............. 1.61% 1.18% 1.31% 1.23% .42% (3.10)% (16.40)%
Return on average equity.............. 21.55 15.13 16.96 15.28 4.51 (90.00) (175.20)
Net interest margin(4)................ 6.14 6.21 5.81 6.04 5.38 4.31 3.67
Efficiency(5)......................... 69.40 78.02 72.88 71.47 90.81 179.83 138.87
Asset Quality Ratios:
Allowance for loan losses to period
end loans........................... 1.45% 1.15% 1.35% 1.31% 1.22% 1.78% 3.85%
Allowance for loan losses to
nonaccrual loans..................... 725.00 107.27 873.33 111.11 1,184.21 0.00 130.51
Nonperforming assets to period end
loans and other real estate owned(6) 0.93(7) 1.07 0.96 1.18 0.10 0.00 2.94
Net charge-offs (recoveries) to
average loans....................... .01 .04 .07 .37 (0.12) 1.63 16.91
Capital and Liquidity Ratios:
Leverage.............................. 7.88% 8.10% 8.32% 8.69% 9.99% 9.38% (5.21)%
Risk based:
Tier I capital...................... 9.20 9.19 9.40 10.04 10.67 11.71 (5.45)
Total capital....................... 10.45 10.37 10.60 11.29 11.92 13.30 (3.33)
Average loans to average deposits..... 90.33% 92.07% 91.57% 91.79% 87.79% 77.70% 84.80%
</TABLE>
- ------------------
(1) At June 30, 1996, the Corporation had available approximately $3.226
million of an operating tax loss carryforward which could be offset
against future income.
(2) All periods have been restated to reflect the stock dividend declared in
1995.
(3) Annualized for the six months ended June 30, 1996 and 1995.
(4) Net interest margin is calculated as net interest income divided by average
earning assets and represents the Corporation's net yield on its earning
assets.
(5) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, net of securities gains or losses.
(6) Nonperforming assets consist of nonaccrual loans and foreclosed properties.
(7) The Corporation signed a contract to sell its largest piece of other real
estate owned to an unrelated purchaser for cash, which is anticipated to
close in late August 1996. If the transaction is consummated, the
Corporation will reduce its portfolio of other real estate owned by more
than 90%.
7
<PAGE>
THE CORPORATION
Marathon Financial Corporation (the "Corporation") is a bank holding
company headquartered in Frederick County, Virginia. Its banking subsidiary, The
Marathon Bank (the "Bank"), began operations in December 1988 in Frederick
County, and opened additional branches in Front Royal, Virginia, in 1993 and in
Winchester, Virginia in 1995. At June 30, 1996, the Corporation had $41.611
million in assets, $31.596 million in net loans, $37.866 million in deposits,
$2.963 million in stockholders' equity, and an operating tax loss carryforward
of $3.226 million. During the year ended December 31, 1995, the Corporation's
net income grew 32.39% to $421 thousand from $318 thousand in 1994. For the six
months ended June 30, 1996, the Corporation's net income increased 71.75% to
$304 thousand from $177 thousand for the comparable period in 1995, while total
assets increased 28.96% to $41.611 million at June 30, 1996 over the June 30,
1995 level. The annualized return on average assets and average equity for the
six months ended June 30, 1996 were 1.61% and 21.55%, respectively. Improvements
in the Bank's earnings and size have been consistent since the employment by the
Corporation of the current chief executive officer in 1992.
The Corporation experienced significant losses in its first four years
of the Bank's operation, including net losses of $529 thousand in 1989, $381
thousand in 1990, $2.748 million in 1991, and $474 thousand in 1992. In late
1991, two significant loans with overdrafts and unusual extensions of credit
aggregating approximately $2.1 million were written off, without any subsequent
recovery. At December 31, 1991 the Corporation had a negative net worth of $828
thousand, total assets of $15.883 million and a ratio of non-performing assets
and past due loans to total loans of 5.85%, which ratio peaked at 10.39% at June
30, 1992. The Corporation was placed under a Memorandum of Understanding by
regulatory authorities in 1992 and the Board of Directors of the Corporation
accepted the resignations of the president, the chief lending officer and the
treasurer of the Corporation in February, April and May 1992, respectively.
In April 1992, the Corporation's Board of Directors recruited Donald L.
Unger, a local, well respected banker, to take over as chief executive officer
of the Bank. Mr. Unger, with over 25 years of senior banking experience in the
Winchester and surrounding markets, had served as chief executive officer and a
director of The Peoples Bank of Front Royal, Front Royal, Virginia ("The Peoples
Bank"). Under Mr. Unger's leadership, the net income of The Peoples Bank
steadily increased from approximately $75 thousand in 1980 to $801 thousand in
1991 while, during the same period, assets increased from approximately $10
million to $60 million. Over the 1981-1991 period, the average annual return on
equity and average annual return on assets of The Peoples Bank were 17.40% and
1.59%, respectively. This period included the recession years of 1988-1991, when
the average annual return on equity and average annual return on assets were
15.72% and 1.40%, respectively. The Peoples Bank was sold to a large statewide
bank holding company in 1992.
Prior to hiring Mr. Unger, the Corporation's primary focus was on
commercial lending, which was largely unsecured. Under new management, the
Corporation's loan portfolio, deposit base and general operations were
diversified with the goal of reducing the volatility of assets and liabilities,
collateralizing the loan portfolio, and transforming the institution into a full
service community bank. From December 31, 1991 to June 30, 1996 consumer
installment loans increased 882.70% and loans secured by real estate increased
134.44%. The Corporation's loan portfolio stabilized, and at June 30, 1996 the
loan mix consisted of 52.24% consumer installment and real property loans and
47.76% commercial loans, a significant portion of which commercial loans were
secured by real estate, deposits and marketable securities. The Corporation also
began to originate and sell loans in the secondary mortgage market in September
1993, and production and sale has steadily increased from $2.237 million in
1994, to $3.502 million in 1995, and $2.389 million during the first six months
of 1996. The Bank emphasized diversifying its deposit base by increasing
consumer and commercial deposits and eliminating brokered deposits, which prior
to 1991 exceeded the Corporation's non-interest bearing deposits. Average
non-interest bearing deposits increased from $909 thousand, representing 6.14%
of the Corporation's total deposits at December 31, 1991, to $5.203 million,
representing 15.21% of the Corporation's total deposits, at June 30, 1996. This
shift substantially impacted the Corporation's cost of funds. As a result of
this successful turnaround, the Memorandum of Understanding was terminated on
November 23, 1994.
8
<PAGE>
In the first three full years under Mr. Unger's leadership, the
Corporation's net income steadily increased to $80 thousand in 1993, $318
thousand in 1994 and $421 thousand in 1995. For the first six months of 1996,
net income was $304 thousand. These figures include expenses associated with the
opening of two additional branches - August 1993 in Front Royal and February
1995 in Winchester. Total assets increased from $15.883 million at December 31,
1991 to $41.611 million at June 30, 1996. Non-performing assets to period end
loans and other real estate owned declined from 2.94% at December 31, 1991 to
0.93% at June 30, 1996. Additionally, the Corporation has signed a contract to
sell its largest piece of other real estate owned to an unrelated purchaser for
cash, which is anticipated to close in late August 1996. If the transaction is
consummated, the Corporation will reduce its portfolio of other real estate
owned by more than 90%. The net interest margin increased from 3.67% in 1991 to
6.04% in 1994, was 5.81% in 1995, and for the first six months of 1996 on an
annualized basis was 6.14%. Over the same period, the return on average equity
increased from negative 175.2% at December 31, 1991 to positive 21.55% on an
annualized basis in the first six months of 1996. The return on average assets
increased from negative 16.40% to positive 1.61%; the ratio of nonperforming
assets to period end loans and other real estate owned decreased from 2.94% to
.93%; while net chargeoffs to average loans declined from 16.91% to .01%. The
Corporation has significantly more interest rate sensitive assets than
liabilities adjustable within 90 days, and, therefore, the net interest margin
would be expected to benefit from an increase in interest rates during this
90-day period.
As part of the recapitalization of the Corporation in 1992, the
Corporation, in private placements, issued two rounds of Common Stock at $5.00
per share, Convertible Preferred Stock convertible into Common Stock at $5.00
per share (which was mandatorily converted in July 1995) and warrants to
purchase Common Stock at $5.00 per share. At June 30, 1996, 200,688 of such
warrants were outstanding and exercisable through June 30, 1997.
The Corporation is the only independent community bank headquartered in
the City of Winchester or Frederick County, Virginia. The Corporation's primary
market is the Northern Shenandoah Valley, which includes Frederick County,
where, based on total financial institution deposits at June 30, 1995, it was
the fourth largest financial institution with approximately 11% of the market,
Warren County, including the Town of Front Royal, where, based on total
financial institution deposits at June 30, 1995, it was the ninth largest
financial institution with approximately 4% of the market, and the City of
Winchester, the largest market in the four county area of Frederick, Warren,
Shenandoah and Clarke Counties. Winchester and Front Royal are located at or
near the intersections of I-81 and I-66 on the western fringe of the greater
Washington-Baltimore Metropolitan Statistical Area, the fourth largest market in
the United States.
Seventeen Fortune 500 companies have major manufacturing facilities in
the Northern Shenandoah Valley. In addition, Warren County is becoming a
significant center, in the Mid-Atlantic region, for manufacturing and
distribution due to its proximity to the Virginia Inland Port, a state sponsored
facility to expedite truck and rail shipments to the Hampton Roads Port. Pen-Tab
Inc. opened a manufacturing and distribution center in the first quarter of 1996
which employs over 270 persons. Toray, Inc. recently broke ground on a $120
million full service manufacturing plant which anticipates employing 120 persons
in 1997 and over 500 persons by the year 2000. Major employers in the four
county area include Valley Health Systems, Inc., National Fruit Products, Inc.,
Crown Cork and Seal, Automotive Industries Inc., Rubbermaid Commercial Products,
General Electric, AT&T Communications, duPont, Inc. and O'Sullivan Corporation.
The directors of the Corporation have agreed with the Underwriter to a
standard requirement not to sell or otherwise dispose of any shares of Common
Stock for a period of 120 days after the commencement of the Offerings without
the prior written consent of the Underwriter. It is anticipated that the
Underwriter will not give its consent to any sales or dispositions during this
period that, in its opinion, may have an adverse effect on the market price of
the Common Stock. After the expiration of the 120 day period, sales of Common
Stock by these individuals may have an adverse effect on the market price.
Officers of the Bank who are not directors have not entered into any agreements
restricting sales of their Common Stock in the Bank. See "Underwriting."
The Bank is chartered under the laws of the Commonwealth of Virginia
and is a member of the Federal Reserve System. The Bank's deposits are insured
by the Federal Deposit Insurance Corporation ("FDIC"), and the
9
<PAGE>
Bank is subject to the supervision, examination, and regulation of the Board of
Governors of the Federal Reserve System (the "Federal Reserve") and the Virginia
Bureau of Financial Institutions.
The Corporation's headquarters is located at 4095 Valley Pike,
Winchester, Virginia 22602 and its telephone number is (540) 869-6600.
INVESTMENT CONSIDERATIONS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following factors before purchasing
shares of Common Stock offered hereby.
Dependence on Key Personnel. The Corporation is substantially
dependent upon the services of Donald L. Unger, its President and Chief
Executive Officer. The loss of the services of Mr. Unger could have a material
adverse effect upon the future prospects of the Corporation. The Corporation
has entered into an employment agreement with Mr. Unger and maintains a "key"
man insurance policy insuring his life in the amount of $1 million. See
"Management - Chief Executive Officer Employment Agreement and Incentive Bonus
Plan."
Competition. The banking business in the area served by the Corporation
(the Counties of Frederick, Clarke, Shenandoah, and Warren (including the Town
of Front Royal), Virginia and the City of Winchester) is highly competitive with
respect to both loans and deposits. In the Corporation's primary service area,
there are approximately eleven commercial banks and savings and loans (including
seven large, Virginia-wide banks with multiple offices) offering services
ranging from deposits and real estate loans to full service banking. The Bank is
the newest and smallest commercial bank in its service area, in addition, there
can be no assurance that other financial institutions, with substantially
greater resources than the Corporation, will not establish operations in the
Corporation's service area.
Governmental Regulation. The Corporation is subject to extensive
governmental supervision, regulation, and control, and future legislation and
governmental policy could adversely affect the banking industry and the
operations of the Bank. Regulations affecting the banking industry may be
changed at any time, and the interpretation of those regulations by examining
authorities of the banking industry is also subject to change. There can be no
assurance that future changes in legislation and administrative regulations or
government policies will not adversely affect the banking industry and the
business of the Bank. See "Business - Supervision and Regulation."
No Assurance of Established Public Trading Market. The Corporation has
applied to have its Common Stock approved for listing on the NASDAQ SmallCap
Market; however, there can be no assurance that an active trading market for the
Corporation's Common Stock will develop after the Offerings, or if developed,
that such a market will be sustained. The market price of the Common Stock may
fluctuate substantially and may be adversely affected by factors that may or may
not be related to the Corporation's performance. Such factors may include
interest rates and conditions in the banking industry, the stock market, and the
economy in general.
Geographic Concentration of Loans. The vast majority of the Bank's
loans are made to borrowers within Winchester, Front Royal and Frederick County,
Virginia, and adjacent areas. Accordingly, a major downturn in the local economy
could adversely affect the Corporation's loan portfolio.
Uncertainties Regarding Growth. The Corporation has experienced
substantial growth in the last few years. Although the Corporation plans to
continue growing at a significant rate in the future, there can be no guarantee
that the recent rate can be maintained. If such anticipated growth does occur,
management will have to continue administering the Corporation's operations in
an efficient and productive manner consistent with its recent past practices.
10
<PAGE>
Payment of Cash Dividends. The Corporation has never paid any cash
dividends. The ability of the Corporation to pay cash dividends is subject to
both federal and state banking regulations. The Bank will not be able to and
does not intend to pay any dividends in the foreseeable future. See "Market
Price and Dividend Data" and "Business - Supervision and Regulation - Limits on
Dividends and Other Payments."
Determination of Offering Price. The offering price of the Shares has
been determined in large part by negotiation between the Corporation and the
Underwriter based upon certain factors, including an evaluation of assets,
earnings, and other established criteria of value, as well as the comparisons of
the relationships between market prices and book values of other banking
institutions of a similar size and asset quality. There can be no assurance
that the Shares can be resold at the offering price. See "Market Price and
Dividend Data" and "Underwriting."
No Minimum Offering. The Underwriter is selling the Shares on a best
efforts basis, which means that it may sell all, none or only some of the
Shares. As there is no minimum number of Shares that must be sold, a closing of
the Offerings could occur even if only a small number of Shares is sold.
No Independent Counsel. The Corporation and the Underwriter are both
represented by Kaufman & Canoles, and, accordingly, neither the Corporation nor
the Underwriter has the benefit of independent representation. In the event the
interests of the Corporation and the Underwriter diverge, each of them will be
required to obtain other legal counsel. See "Legal Matters."
OFFERING TO STOCKHOLDERS
The Corporation is offering 100,000 Subscription Shares until
___________ __, 1996, for sale to the holders of its Common Stock of record on
June 24, 1996 (the "Record Date") residing in jurisdictions in which the
Corporation has registered the Subscription Shares under the jurisdiction's
securities laws, or in which issuance of the Subscription Shares is exempt from
such registration requirements. Stockholders of record at the close of business
on the Record Date may purchase Subscription Shares on the basis of one
Subscription Share for each 12 shares of Common Stock beneficially owned by them
on such date. Stockholders may oversubscribe for Subscription Shares. If
oversubscriptions exceed the available Subscription Shares, the available
Subscription Shares will be allocated among the oversubscribers based upon the
ratio that the number of shares of Common Stock owned by the oversubscriber on
the Record Date bears to the number of shares of Common Stock owned by all of
the oversubscribers on the Record Date. Fractional shares will not be sold, but
stockholders may round any such fraction up to a full share. Stockholders also
may subscribe for less than the maximum number of Subscription Shares allocated
to them.
The Subscription Offering to stockholders will terminate on ___________
__, 1996. Neither the Subscription Offering nor the Public Offering is
contingent upon the occurrence of any event, including consummation of the
Public Offering, or the sale of a minimum or maximum number of Shares. Funds
received by the Corporation from stockholders in the Subscription Offering will
be deposited with and held by the Corporation in a noninterest bearing escrow
account until the simultaneous closing of both the Subscription Offering and the
Public Offering. The Corporation does not intend to return the funds of
purchasers if fewer than all of the Shares offered are sold.
The Subscription Offering price was determined by the Corporation after
consultation with the Underwriter. Among the factors considered in determining
the price of the Subscription Shares were the history and the prospects for the
Corporation, its past and present earnings and trends of such earnings, the
prospects for future earnings, the current performance and prospects of the
segment of the banking industry in which the Corporation competes, the general
condition of the securities market at the time of the Subscription Offering, and
the price of equity securities of comparable companies.
All Subscription Shares unsubscribed for, plus an additional 400,000
Shares, will be offered for sale to the public in the Public Offering on a best
efforts basis by the Underwriter, as selling agent for the Corporation. There
can be no assurance that any of the Shares will be sold. See "Underwriting."
To subscribe for Subscription Shares, stockholders should execute the
Subscription Agreement accompanying this Prospectus and deliver it, together
with a check payable to the order of "Marathon Financial Corporation" for the
full purchase price, to:
Marathon Financial Corporation
4095 Valley Pike
Winchester, VA 22602
Attention: Donald L. Unger
Telephone: 540-869-6600
SUBSCRIPTION AGREEMENTS AND FULL PAYMENT FOR SUBSCRIPTION SHARES
SUBSCRIBED FOR BY STOCKHOLDERS MUST BE RECEIVED BY THE CORPORATION PRIOR TO 5:00
P.M. EASTERN STANDARD TIME ON ___________ __, 1996, OR SUBSCRIBING STOCKHOLDERS
WILL FORFEIT THEIR RIGHT TO PURCHASE SUBSCRIPTION SHARES IN THIS SUBSCRIPTION
OFFERING.
USE OF PROCEEDS
The net proceeds to be received by the Corporation from the offering,
after deduction of underwriting fees and commissions and estimated expenses,
will be used to support future asset growth, including the potential opening of
new branches, and for general corporate purposes.
11
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Corporation at
June 30, 1996. The table should be read in conjunction with the financial
statements and related notes thereto included elsewhere in this Prospectus.
June 30, 1996
(Dollars in
thousands)
Stockholders' equity:
Preferred stock, Series A, 5% noncumulative, no par $ -
value; 1,000,000 shares authorized; no shares
issued and outstanding(1)
Common Stock, $1.00 par value, 20,000,000
shares authorized, 1,306,303 shares issued and outstanding(2)..... 1,306
Capital surplus................................................... 5,110
Retained Earnings (Deficit)....................................... (3,443)
Unrealized gain (loss) on securities available for sale........... (10)
--------
Total stockholders' equity.................................. $ 2,963
========
(1) In July 1995, all of the Corporation's then outstanding convertible
preferred stock was mandatorily converted into Common Stock.
(2) In addition, there are outstanding warrants to purchase 200,688 shares
of the Corporation's Common Stock at $5.00 per share exercisable
through June 30, 1997.
12
<PAGE>
MARKET PRICE AND DIVIDEND DATA
The Corporation has applied to have the Common Stock approved for
listing on the NASDAQ SmallCap Market under the symbol "MFCV" effective upon the
closing of the Offerings; however, there can be no assurance that an active
trading market for the Corporation's Common Stock will develop after the
Offerings, or if developed, that such a market will be sustained. There is no
recognized market for the Corporation's common stock. There are occasional
transactions in the stock and the Corporation's management has assisted in
matching persons interested in buying and selling common stock. In July 1995,
all of the Corporation's convertible preferred stock was mandatorily converted
to Common Stock at the conversion price of $5.00 per share. The sporadic trades
in the Common Stock during the past year and a half have been at or about $5.00
per share. At June 30, 1996 the Corporation had approximately 792 stockholders
of record.
The book value of the Corporation's Common Stock at June 30, 1996 was
$2.27 per share. At June 30, 1996, Corporation's operating tax loss carryforward
was $3.226 million.
The Corporation has paid no cash dividends to date. Holders of the
Corporation's Common Stock will be entitled to dividends at such rate as may be
determined from time to time by the Board of Directors of the Corporation. The
Virginia Stock Corporation Act provides that a corporation may pay a cash
dividend to its shareholders so long as, after giving effect to such dividend,
the corporation will be able to pay its debts as they become due and the value
of the Corporation's assets exceeds its liabilities (plus the amount, if any,
necessary to satisfy the preferential rights upon dissolution of shareholders
whose preferential rights are superior to those shareholders receiving the
dividend). The Corporation's future dividends will depend on its earnings and
those of the Bank, general economic conditions, and other factors affecting
dividend policy.
Under state law, without the consent of the Bureau of Financial
Institutions, the Bank may not pay dividends until it has restored any deficit
in its capital funds as originally paid in. Further, a regulation promulgated by
the Board of Governors of the Federal Reserve System requires approval of
two-thirds of the holders of the Corporation's shares prior to payment of a
dividend until any deficit in the Bank's capital account has been restored.
While the Corporation has not been permitted to pay cash dividends, it
did issue one stock dividend. On December 19, 1995, the Corporation declared a
stock dividend for holders of Common Stock for year-end 1995. The stock dividend
declared was 15% of 1995 profits, which was $.04873 per share. The dividend was
paid in the first quarter of 1996. The stock dividend assumed a value of $5.00
per share. The Corporation obtained approval from the regulators prior to
issuing said shares in compliance with Virginia Code Section 6.1-56, which
requires prior approval because of impaired capital.
13
<PAGE>
SELECTED FINANCIAL DATA
The year-end income statement data, the year-end per share
data, and the year-end balance sheet data regarding net income contained in the
following selected financial data for the five years ended December 31, 1995 are
derived from the audited historical consolidated financial statements of the
Corporation. The financial data for the six months ended June 30, 1996 and 1995
are derived from unaudited consolidated financial statements. The selected
financial data should be read in conjunction with the consolidated financial
statements of the Corporation included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Six months ended
June 30, Years ended December 31,
------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands, except per share data)
<S> <C>
Income Statement Data:
Interest income....................... $ 1,778 $ 1,343 $ 2,940 $ 2,251 $ 1,625 $ 1,361 $ 1,580
Interest expense...................... 740 566 1,252 849 717 768 1,014
-------- -------- ------ -------- -------- -------- --------
Net interest income................... 1,038 777 1,688 1,402 908 593 566
Provision for loan losses............. 73 16 113 151 12 (88) 2,458
-------- -------- ------ -------- -------- -------- --------
Net interest income after provision
for loan losses..................... 965 761 1,575 1,251 896 681 (1,892)
Noninterest income.................... 194 101 281 242 93 111 180
Noninterest expense................... 855 685 1,435 1,175 909 1,266 1,036
-------- -------- ------ -------- -------- -------- --------
Income (loss) before income taxes..... 304 177 421 318 80 (474) (2,748)
Income tax expense.................... 103 59 143 101 -- -- --
Benefit of net operating loss(1)...... (103) (59) (143) (101) -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)..................... $ 304 $ 177 $ 421 $ 318 $ 80 $ (474) $ (2,748)
======== ======== ========= ========= ======== ======== ========
Per Share Data:
Net income (loss)..................... $ .23 $ .16 $ .35 $ .30 $ .08 $ (.40) $ (4.51)
Cash dividends........................ -- -- -- -- -- -- --
Book value at period end.............. 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Tangible book value at period end..... 2.27 1.90 2.05 1.75 1.52 1.25 (1.36)
Balance Sheet Data:
Total assets.......................... $ 41,611 $ 32,266 $ 36,070 $ 27,682 $ 22,379 $ 16,111 $ 15,883
Loans, net............................ 31,596 26,606 28,774 22,618 18,149 10,828 11,545
Securities............................ 1,691 1,506 1,699 1,490 1,517 2,168 2,572
Deposits.............................. 37,866 29,045 32,622 24,604 19,606 13,678 16,391
Stockholders' equity (deficit)........ 2,983 2,434 2,678 2,244 1,934 1,497 (828)
Average shares outstanding(2)......... 1,306 1,091 1,192 1,083 1,055 743 615
Performance Ratios(3):
Return on average assets.............. 1.61% 1.18% 1.31% 1.23% .42% (3.10)% (16.40)%
Return on average equity.............. 21.55 15.13 16.96 15.28 4.51 (90.00) (175.20)
Net interest margin(4)................ 6.14 6.21 5.81 6.04 5.38 4.31 3.67
Efficiency(5)......................... 69.40 78.02 72.88 71.47 90.81 179.83 138.87
Asset Quality Ratios:
Allowance for loan losses to period
end loans........................... 1.45% 1.15% 1.35% 1.31% 1.22% 1.78% 3.85%
Allowance for loan losses to
nonaccrual loans..................... 725.00 107.27 873.33 111.11 1,184.21 0.00 130.51
Nonperforming assets to period end
loans and other real estate owned(6) 0.93(7) 1.07 0.96 1.18 0.10 0.00 2.94
Net charge-offs (recoveries) to
average loans....................... .01 .04 .07 .37 (0.12) 1.63 16.91
Capital and Liquidity Ratios:
Leverage.............................. 7.88% 8.10% 8.32% 8.69% 9.99% 9.38% (5.21)%
Risk based:
Tier I capital...................... 9.20 9.19 9.40 10.04 10.67 11.71 (5.45)
Total capital....................... 10.45 10.37 10.60 11.29 11.92 13.30 (3.33)
Average loans to average deposits..... 90.33% 92.07% 91.57% 91.79% 87.79% 77.70% 84.80%
</TABLE>
- ------------------
(1) At June 30, 1996, the Corporation had available approximately $3.226
million of an operating tax loss carryforward which could be offset against
future income.
(2) All periods have been restated to reflect the stock dividend declared in
1995.
(3) Annualized for the six months ended June 30, 1996 and 1995.
(4) Net interest margin is calculated as net interest income divided by average
earning assets and represents the Corporation's net yield on its earning
assets.
(5) Computed by dividing noninterest expense by the sum of net interest income
and noninterest income, net of securities gains or losses.
(6) Nonperforming assets consist of nonaccrual loans and foreclosed properties.
(7) The Corporation signed a contract to sell its largest piece of other real
estate owned to an unrelated purchaser for cash, which is anticipated to
close in late August 1996. If the transaction is consummated, the
Corporation will reduce its portfolio of other real estate owned by more
than 90%.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF MARATHON FINANCIAL CORPORATION
The following discussion is intended to assist readers in understanding
and evaluating the financial condition and results of operations of the
Corporation. This review should be read in conjunction with the Corporation's
financial statements and accompanying notes included elsewhere herein. This
analysis provides an overview of the significant changes that occurred during
the periods presented.
Overview
The Corporation's performance for the first six months of 1996 showed
an improvement over the same period a year ago. Net income increased 71.75% in
the first half of 1996 to $304 thousand compared to $177 thousand during the
same period of 1995. This increase in earnings was primarily due to higher net
interest income resulting from increased loan growth.
Return on average equity on an annualized basis during the first six
months of 1996 increased to 21.55%, up from 15.13% for the same period in 1995.
Return on average assets on an annualized basis was 1.61% during this period
compared to 1.18% for the first six months of 1995. These performance figures
had been at extremely low levels in 1991 and 1992 due to a provision for loan
losses of $2.1 million related primarily to two unsecured loans in 1991, and
increases in nonperforming assets in the first half of 1992, as a result of
prior management's lending practices, before beginning to improve in the second
half of 1992 under a new management team. Return on average assets was negative
16.40% and negative 3.10% in 1991 and 1992, respectively, and increased steadily
thereafter to positive 0.42% in 1993, to 1.23% in 1994, and to 1.31% in 1995.
Return on average equity, likewise, was negative 175.20% and negative 90.0% in
1991 and 1992, respectively, before increasing steadily to 4.51% in 1993, 15.28%
in 1994 and 16.96% in 1995.
The Corporation experienced limited loan growth from 1990 through 1992
until, under a new chief executive officer and management team, improvement
began in 1993. In 1991, average total assets increased 18.15% to $16.723 million
from $14.154 million in 1990, and declined in 1992 to $15.439 million, a 7.68%
decrease from the prior year. Average total assets increased to $19.184 million
in 1993, up 24.26%, and continued to increase in 1994 to $25.869 million, up
34.85% from the prior year, and in 1995 to $32.090 million, up 24.05% from the
prior year, and, for the first six months of 1996 to $37.739 million, up 26.03%
over the comparable period of 1995. This increase in average assets subsequent
to 1992 was, under the new chief executive officer, the result of new branches
opened in 1993 and 1995 in Front Royal and Winchester, Virginia, respectively,
and an emphasis on consumer and secured commercial loan growth. Average loans
were also relatively flat in the 1990-1992 period, with an increase of 26.33% in
1991 to $12.454 million from $9.858 million in 1990 and a subsequent decline to
$10.948 million in 1992, down 12.09% from the prior year. Average total earning
assets increased 22.83% in 1993 to $16.890 million from the prior year, and to
$23.225 million in 1994, up 37.51% over 1993, and to $29.040 million in 1995, up
25.04% over 1994, and, for the first six months of 1996 to $33.776 million, up
34.98% over the comparable period of 1995. Average installment loans increased
steadily from $1.403 million at December 31, 1993 to $6.902 million at June 30,
1996, an increase of 391.95%. Both commercial and real estate loans also
escalated over the same period. Average commercial loans increased to $13.940
million for the six months ended June 30, 1996, a rise of 68.99% over the
average amount of commercial loans in 1993. Similarly, average real estate loans
grew to $10.055 million for the six months ended June 30, 1996, an increase of
106.72% over the average amount of real estate loans in 1993.
Non-performing assets and past due loans to total loans peaked at
10.39% at June 30, 1992, and net charge-offs peaked in 1991 at $2.106 million,
primarily from the charge-off of two loans. Non-performing assets at June 30,
1996, were $300 thousand, or 0.93% of period end loans and other real estate
owned, and the allowance for loan losses was $464 thousand. The allowance for
loan losses to period end loans at June 30, 1996 was 1.45% and net charge-offs
to average loans in the first six months of 1996, annualized, was 0.01%. The
provision for loan losses in the first six months of 1996 was $73 thousand, up
356.25% from $16 thousand in the comparable period
15
<PAGE>
of 1995, while net charge-offs were $2 thousand versus $5 thousand in the first
half of 1995. In November 1994, the Corporation was released from the Written
Agreement that it entered into in 1992 with the Federal Reserve and the Virginia
Bureau of Financial Institutions.
On an annualized basis, the Corporation's net interest margin declined
slightly to 6.14% in the first half of 1996, from 6.21% during the same period
of 1995. Net interest margin had increased to 6.04% in 1994 from 5.38% in 1993
and 4.31% in 1992. In a period of declining market interest rates, as a result
of the Corporation's increased loan demand, a decline in its average cost of
interest bearing liabilities, an increase in its non-interest bearing deposits
and a shift from securities into higher yielding loans, the Corporation's net
interest margin increased in 1994 over the 1993 level. In 1995 the net interest
margin declined slightly to 5.81% from 6.04% in 1994 under rising interest
rates, as the cost of interest bearing liabilities rose more than the increase
in yields on interest earning assets. In the first six months of 1996 an
increase in average loan volume was partially offset by an increase in the
average cost of funds required to support this growth and a decline in the
average yield in earning assets.
Recent Developments
The Corporation signed a contract to sell its largest piece of other
real estate owned to an unrelated purchaser for cash, which is anticipated to
close in late August 1996. If the transaction is consummated, the Corporation
will reduce its portfolio of other real estate owned by more than 90%.
Net Interest Income
Net interest income is the major component of the Corporation's
earnings and is equal to the amount by which interest income exceeds interest
expense. Earning assets are composed primarily of loans and securities, while
deposits and short-term borrowings represent the major portion of
interest-bearing liabilities. Changes in volume and mix in assets and
liabilities, as well as changes in the yields and rates paid, determine changes
in net interest income. Net interest margin is calculated by dividing net
interest income by average earning assets and represents the Corporation's net
yield on earning assets.
Net interest income was $1.037 million in the first half of 1996,
33.59% greater than the $777 thousand reported during the comparable period of
1995. The improvement in net interest income was primarily due to volume
increases in the loan portfolio, as the loan demand, continued to increase. The
average balance of the loan portfolio was $30.897 million for the first six
months ended June 30, 1996, up $6.391 million, or 26.08%, over the same period
in 1995. The average balances of installment and commercial loans were $6.902
million and $13.940 million, respectively, for the six months ended June 30,
1996, up 60.51% and 13.98% respectively, over the same period of 1995. The
average balance of the securities portfolio was $1.627 million for the six
months ended June 30, 1996, up 7.68% over the comparable 1995 period. Despite
lower interest rates in the first half of 1996 than in the comparable period of
1995, the average yield on loans increased 50 basis points from 10.48% in 1995
to 10.98% in 1996 with an increase of 107 basis points on real estate loan
yields and an increase of 48 basis points in the average yields on commercial
loans offsetting a decline of 48 basis points in the average yields on
installment loans. However, an increase in average federal funds sold of 142.17%
to $1.252 million coupled with a decline in average yields on federal funds sold
of 108 basis points to 5.11% produced a slight decline of 20 basis points in the
average yield on total interest earning assets to 10.53% from 10.73% in 1995.
The average level of interest earning assets increased 34.98% to $33.776
million. Despite the decline of interest rates the average cost of funds to
support the growth in interest increased. Total interest bearing liabilities
increased 27.20% to $29.637 million led by a 35.28% increase in certificates of
deposit under $100,000 to $15.162 million and a 29.47% increase in money market
savings to $3.185 million and a 33.96% increase in interest checking accounts to
$2.154 million. The average costs of interest bearing liabilities increased 14
basis points to 5.00% from 4.86%. This increase was led by a 6 basis point rise
in the average cost of certificates of deposit under $100,000 and a 49 basis
point increase in the average cost of money market certificates to 3.58%. A
28.34% increase in non interest bearing deposits to $5.203 million partially
mitigated the rise in the costs of interest bearing deposits but the net
interest margin declined from 6.21% in 1995's first half to 6.14% in 1996's
comparable period. The increase in the average costs of interest bearing
16
<PAGE>
deposits and the decline in the yield on interest earning assets offset the
volume gains in loans, particularly commercial and installment loans.
Net interest income was $1.688 million in 1995, 20.40% greater than the
$1.402 million reported in 1994. The improvement in net interest income was
primarily due to volume and interest rate increases in the loan portfolio,
particularly installment and real estate loans. The average balance of loans
increased 25.56%, led by a 74.69% increase in installment loans and a 36.68%
increase in real estate loans. The average balance of the securities portfolio
declined 1.19%. Average balances of interest earning assets increased 25.04% to
$29.040 million. The average yields on interest earning assets increased 43
basis points from 10.11% in 1994 to 10.12% in 1995 led by a 46 basis point
increase in the average yield on loans to 10.57% which offset a 92 basis point
decline in the average yield on securities. Commercial, real estate and
installment loan yields increased 36, 79 and 43 basis points, respectively.
Total interest bearing liabilities increased 26.53% to $25.411 million while the
average rates paid on interest bearing liabilities increased 70 basis points to
4.93%, with the cost of interest bearing deposits increasing 73 basis points.
The greater increase in the rates paid for interest bearing deposits than in the
yields earned on interest earning assets produced a decline in the net interest
margin from 6.04% in 1994 to 5.81% in 1995.
Net interest income in 1994 compared to 1993 increased $494 thousand,
or 54.41%, to $1.402 million. This increase in net interest income was due
primarily to volume increases in the loan portfolio. The average balance of
loans increased 44.65% to $20.997 million, with commercial loans up 42.81%, real
estate loans up 30.53% and installment loans up 104.42%. The average balance of
the securities portfolio declined 12.68% to $1.515 million. The average yield
earned on interest earning assets increased 7 basis points to 9.69% despite
generally declining interest rates. The yield on loans increased 2 basis points
to 9.69% led by a 21 basis point increase in the yields on real estate loans
while yields on commercial and installment loans declined. The average yield on
the securities portfolio declined 145 basis points which was somewhat offset by
an increase of 68 basis points in the yields earned on federal funds sold. Total
interest bearing liabilities increased 32.39% to $20.083 million while the
average rates paid on interest earning assets declined 50 basis points to 4.23%.
The decline in the rates paid on interest earning assets coupled with the actual
increase in the average rate earned on interest earning assets and the higher
relative growth in interest earning assets over the increase in interest bearing
liabilities produced an increase in the net interest margin from 5.38% in 1993
to 6.04% in 1994.
17
<PAGE>
The following table illustrates average balances of total interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the distribution of assets, liabilities, stockholder's equity, and the
related income, expense, and corresponding weighted average yields and costs.
The average balances used for the purpose of these tables and other statistical
disclosures were calculated by using the daily average balances. Due to the net
operating loss carryforwards available, the Corporation currently does not pay
income taxes; therefore, income and yields are not reflected on a tax equivalent
basis.
Average Balances, Interest Income and Expenses, and Average Yields and Rates
<TABLE>
<CAPTION>
Six months Ended
June 30, Years Ended December 31,
------------------------------------------------------------------------------------------------
1996 1995 1994
-------------------------------------------------------------------------------------------------
Interest Average Interest Average Interest Average
Average income/ yield/ Average income/ yield/ Average income/ yield/
balance expense rate balance expense rate balance expense rate
-------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S> <C>
Assets:
Interest bearing assets:
Securities.................... $ 1,627 $ 50 6.15% $ 1,497 $ 87 5.81% $ 1,515 $ 102 6.73%
Loans(1):
Commercial.................. 13,940 772 11.08 12,676 1,386 10.93 11,780 1,245 10.57
Real estate................. 10,055 544 10.82 8,678 872 10.05 6,349 588 9.26
Installment................. 6,902 380 11.01 5,010 528 10.54 2,868 290 10.11
------ ------ ------ ----- ------ -----
Total Loans............... 30,897 1,696 10.98 26,364 2,786 10.57 20,997 2,123 10.11
Federal funds sold............ 1,252 32 5.11 1,179 67 5.68 713 26 3.65
------ ------ ------ ------ ------ -----
Total earning assets...... 33,776 1,778 10.53 29,040 2,940 10.12 23,225 2,251 9.69
Less: Allowance for loan losses (423) (324) (260)
Total noninterest earning assets 4,386 3,374 2,904
------ ------ ------
Total Assets.................... $37,739 $32,090 $25,869
======= ======= =======
Liabilities and stockholders equity:
Interest bearing liabilities:
Interest bearing deposits:
Interest checking........... $ 2,154 $ 30 2.79% $ 1,756 $ 48 2.73% $ 1,375 $ 39 2.84%
Regular savings............. 4,823 80 3.32 5,009 158 3.15 6,543 212 3.24
Money market savings........ 3,185 57 3.58 2,661 93 3.49 2,356 86 3.65
Certificates of deposit:
$100,000 and over......... 3,679 105 5.71 2,843 166 5.84 1,277 46 3.60
Under $100,000............ 15,162 446 5.88 12,488 738 5.91 7,870 419 5.32
------ ----- ------ ----- ------ ------
Total interest bearing
deposits................ 29,003 718 4.95 24,757 1,203 4.86 19,421 802 4.13
Short-term borrowings......... 28 1 7.14 25 1 4.00 83 4 4.82
Mortgage payable.............. 502 18 7.17 519 39 7.51 539 40 7.42
Capital lease payable......... 104 4 7.69 110 9 8.18 40 3 7.50
------ ------ ------ ------ ------- ------
Total interest bearing
liabilities................. 29,637 741 5.00 25,411 1,252 4.93 20,083 849 4.23
Non interest bearing liabilities:
Demand deposits............. 5,203 4,034 3,455
Other liabilities........... 78 165 250
------ ------ ------
Total noninterest
liabilities............. 5,281 4,199 3,705
Total liabilities............. 34,918 29,610 23,788
Stockholders' equity.......... 2,821 2,480 2,081
------ ------ ------
Total Liabilities and
Stockholders' equity........ $37,739 $32,090 $25,869
======= ======= =======
Net interest income........... $1,037 $1,688 $1,402
====== ====== ======
Interest rate spread (2)...... 5.53% 5.19% 5.46%
Interest expense as a percent of
average earning assets...... 4.39% 4.31% 3.66%
Net interest margin (3)....... 6.14% 5.81% 6.04%
</TABLE>
1993
---------------------------------------
Interest Average
Average income/ yield/
balances expense rate
---------------------------------------
Assets:
Interest bearing assets:
Securities.................... $ 1,735 $ 142 8.18%
Loans(1):
Commercial.................. 8,249 877 10.63
Real estate................. 4,864 440 9.05
Installment................. 1,403 147 10.48
------ -----
Total Loans............... 14,516 1,464 10.09
Federal funds sold............ 639 19 2.97
------ -----
Total earning assets...... 16,890 1,625 9.62
Less: Allowance for loan losses (212)
Total noninterest earning assets 2,506
------
Total Assets.................... $19,184
=======
Liabilities and stockholders equity:
Interest bearing liabilities:
Interest bearing deposits:
Interest checking........... $ 814 $ 24 2.95%
Regular savings............. 4,721 193 4.09
Money market savings........ 2,471 81 3.28
Certificates of deposit:
$100,000 and over......... 773 43 5.56
Under $100,000............ 5,846 321 5.49
------ -----
Total interest bearing
deposits................ 14,625 662 4.53
Short-term borrowings......... - - 0.00
Mortgage payable.............. 545 55 10.09
Capital lease payable......... - - 0.00
------- ------
Total interest bearing
liabilities................. 15,170 717 4.73
Non interest bearing liabilities:
Demand deposits............. 1,909
Other liabilities........... 333
------
Total noninterest
liabilities............. 2,242
Total liabilities............. 17,412
Stockholders' equity.......... 1,772
------
Total Liabilities and
Stockholders' equity........ $19,184
=======
Net interest income........... $ 908
======
Interest rate spread (2)...... 4.89%
Interest expense as a percent of
average earning assets...... 4.25%
Net interest margin (3)....... 5.38%
- ------------------
(1) Nonaccruing loans are included in average loans outstanding.
(2) Interest spread is the average yield earned on earning assets less the
average rate incurred on interest-bearing liabilities.
(3) Net interest margin is net interest income expressed as a percentage of
average earnings assets.
18
<PAGE>
The following table describes the impact on the interest income of the
Corporation resulting from changes in average balances and average rates for the
periods indicated. The change in interest due to both volume and rate has been
allocated to volume and rate changes in proportion to the relationship of the
absolute dollar amounts of the change in each.
Volume and Rate Analysis
<TABLE>
<CAPTION>
June 30, 1996 compared Years Ended December 31,
------------------------ --------------------------------------------------------
to June 30, 1995 1995 compared to 1994 1994 compared to 1993
----------------------------------------------------------------------- ----------------
Change Due To: Change Due To: Change Due To:
Increase Increase Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
(Dollars in thousands)
<S> <C>
Assets:
Securities....................... $ 3 $ 4 $ 7 $ (1) $(14) $(15) $(17) $(23) $(40)
Loans:
Commercial....................... 94 30 124 97 44 141 373 (5) 368
Real estate...................... 109 46 155 230 54 284 138 10 148
Installment...................... 143 (10) 133 225 13 238 148 (5) 143
---- ----- ---- ---- ----- ---- ----- ----- -----
Total Loans.................... 346 66 412 552 111 663 659 - 659
Federal funds sold................. 18 (2) (16) 22 19 41 2 5 7
---- ----- --- ---- ----- ---- ----- ---- ----
Total earning assets............. 367 68 435 573 116 689 644 (18) 626
---- ---- --- ---- ---- --- ---- ---- ----
Liabilities and Stockholder's Equity:
Interest bearing deposits:
Interest Checking.............. 7 1 8 10 (1) 9 16 (1) 15
Regular savings................ (1) 2 1 (48) (6) (54) 41 (22) 19
Money market savings........... 12 7 19 11 (4) 7 (4) 9 5
Certificates of deposit:
$100,000 and over............ 39 (3) 36 80 40 120 7 (4) 3
Under $100,000............... 105 8 113 268 51 319 108 (10) 98
---- ---- ---- ---- ---- ---- ---- ----- ----
Total interest bearing deposits 162 15 177 321 80 401 168 (28) 140
Short-term borrowings.............. (3) 2 (1) (4) 1 (3) 4 - 4
Mortgage payable................... (1) (1) (2) (1) - (1) (1) (14) (15)
Capital lease payable.............. - 1 1 6 - 6 3 - 3
Total interest-bearing liabilities. 158 17 175 322 81 403 174 (42) 132
---- ----- ---- ---- ---- ---- ---- ---- ----
Change in net interest income...... $209 $ 51 $260 $251 $ 35 $286 $470 $ 24 $494
==== ===== ==== ==== ==== ==== ==== ==== ====
</TABLE>
19
<PAGE>
Interest Sensitivity
An important element of both earnings performance and liquidity is
management of the interest sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive liabilities
in a specific time interval. The gap can be managed by repricing assets or
liabilities, by selling investments available-for-sale, by replacing an asset or
liability at maturity, or by adjusting the interest rate during the life of an
asset or liability. Matching the amounts of assets and liabilities repricing in
the same time interval helps to hedge the risk and minimize the impact on net
interest income in periods of rising or falling interest rates.
The Corporation evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and pricing, funding sources and pricing,
and off-balance sheet commitments in order to decrease sensitivity risk. These
guidelines are based upon management's outlook regarding future interest rate
movements, the state of the regional and national economy, and other financial
and business risk factors.
The following table illustrates the interest sensitivity gap position
of the Corporation as of June 30, 1996. This table presents a position that
existed at one particular day, that changes continually, and that is not
necessarily indicative of the Corporation's position at any other time. The
Corporation has significantly more interest earning assets adjustable within 90
days than interest bearing liabilities adjustable within the same period. As
such, an increase in interest rates would increase the Corporation's net
interest margin, and conversely, a decrease in interest rates would decrease the
net interest margin.
Interest Sensitivity Analysis
<TABLE>
<CAPTION>
June 30, 1996 (1)
Maturing Or Repricing In:
----------------------------------------------------------------------------------
Within 90-365 1-5 Over
90 Days Days Years 5 Years Total
------- ------ ------ ------- -----
(Dollars in thousands)
<S> <C>
Earning Assets:
Loans(2)..................................... $10,363 $ 5,507 $16,738 $ 385 $32,993
Investment securities, at amortized cost..... ___ 100 298 267 665
Securities available for sale, at fair value. ___ ___ 589 134 723
Federal funds sold........................... 3,148 3,148
------ ------- ------- ------- -----
Total Earning Assets....................... $13,511 $ 5,607 $17,625 $ 786 $37,529
======= ======= ======= ======= =======
Interest-Bearing Liabilities:
Interest checking(3)......................... $ ___ $ ___ $ 2,081 $ ___ $ 2,081
Regular savings(3)........................... ___ ___ 5,057 ___ 5,057
Money market savings......................... 3,141 ___ ___ ___ 3,141
Certificates of deposit:
$100,000 and over.......................... 1,219 1,966 1,164 ___ 4,349
Under $100,000............................. 1,429 8,717 6,825 16,971
------ ------ ------ ------ ------
Total Interest-Bearing Liabilities......... $ 5,789 $10,683 $15,127 $ - $31,599
======= ======= ======= ======== =======
Period gap................................... $ 7,722 $(5,076) $ 2,498 $ 786 $ 5,930
Cumulative gap............................... $ 7,722 $ 2,646 $ 5,144 $5,930
Ratio of cumulative gap to
total earning assets....................... 20.58% 7.05% 13.71% 15.80%
</TABLE>
- ------------------
(1) The repricing dates may differ from maturity dates for certain assets
due to prepayment assumptions.
(2) Excludes nonaccrual loans.
(3) The Corporation has determined that interest checking and savings
accounts are not sensitive to changes in related market rates and
therefore it has placed them in the 1 to 5 years column.
20
<PAGE>
Securities
Investment Securities. The carrying value of investment securities
amounted to $665 thousand at June 30, 1996, compared to $926 thousand at
December 31, 1995. The comparison of amortized cost to fair value is shown in
Note 2 of the notes to the consolidated financial statements. Note 2 also
provides an analysis of gross unrealized gains and losses of investment
securities. Investment securities consist of the following:
Portfolio of Investment Securities
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- ------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Book Value:
U.S. Treasury and other U.S.
government agencies and corporations....... $ 298 $ 650 $ 650 $ 649 $ 0
States of the U.S. and political
subdivisions............................... 251 150 150 150 0
Other securities........................... 116 134 126 147 0
----- ------ ------ ------ ---
Total Securities......................... $ 665 $ 934 $ 926 $ 946 $ 0
===== ====== ====== ====== ===
</TABLE>
Securities Available for Sale. Securities available for sale are used
as part of the Corporation's interest rate risk management strategy and may be
sold in response to changes in interest rates, changes in prepayment risk,
liquidity needs, the need to increase regulatory capital and other factors. The
fair value of securities available for sale totaled $1.026 million at June 30,
1996, compared to $773 thousand at December 31, 1995. The comparison of fair
market value to amortized cost is shown in Note 2 of the notes to the
consolidated financial statements. Note 2 also provides an analysis of gross
unrealized gains and losses of securities available for sale.
Securities Available for Sale
<TABLE>
<CAPTION>
June 30, December 31,
----------------------- ---------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Fair Value:
U.S. Treasury and other U.S.
government agencies and corporations.............. $ 589 $ 293 $ 454 $ 281 $ 926
States of the U.S. and political
subdivisions...................................... 0 0 0 0 160
Other securities.................................. 437 279 319 263 472
----- ------ ------ ------ ------
Total Securities................................ $1,026 $ 572 $ 773 $ 544 $ 1,558
===== ====== ====== ====== ======
</TABLE>
The Corporation does not hold any derivative instruments.
21
<PAGE>
The following table sets forth the maturity distribution and weighted
average yields of the investment portfolio at June 30, 1996. The weighted
average yields are calculated on the basis of book value of the investment
portfolio and on the interest income of investments adjusted for amortization of
premium and accretion of discount.
Maturities of Investments
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------------------
Weighted Weighted
Amortized Fair Average Amortized Fair Average
Cost Value Yield Cost Value Yield
--------------------- --------------------------
Held to Maturity Available for Sale
--------------------- --------------------------
(Dollars in thousands)
<S> <C>
U.S. Treasury and other
U.S. government agencies
and corporations
After one year to five years ... $298 $293 5.71% $596 $589 5.99%
--- ---- ---- ----
Total......................... 298 293 5.71 596 589 5.99
---- ---- ---- ----
Other Securities
After one year to five years.... 251 256 6.64 0 0 0.00
Other........................... 116 117 7.33 137 134 7.54
--- --- ---- ----
Total......................... 367 373 6.98 137 134 7.54
---- --- ---- ----
Total securities(1)(2)............ $665 $666 6.76% $733 $723 6.22%
==== === ==== ====
</TABLE>
- ------------------
(1) Excludes equity securities without readily determinable fair values, at
historical costs, as follows: Federal Reserve Bank - $139,550;
Virginia Bankers Bank - $50,000; FHLB stock - $108,300 and CDC Stock -
$5,000
(2) The equity securities have no stated maturity date.
Loan Portfolio
The Corporation's loan portfolio is comprised of commercial loans,
construction loans, real estate loans, and consumer installment loans. The
primary market in which the Corporation makes loans is the Northern Shenandoah
Valley, which includes Frederick, Shenandoah, Warren and Clarke Counties, and
the City of Winchester.
Net loans consist of total loans minus the allowance for loan losses,
and where applicable, unearned discounts. Net loans were $31.596 million at June
30, 1996, an 18.76% increase over June 30, 1995. Net loans were $28.774 million
at December 31, 1995, 27.22% greater than net loans of $22.618 million at
December 31, 1994. The average loans as a percentage of average earning assets
was 90.79%, 90.41%, and 85.94% for the years ended December 31, 1995, 1994, and
1993, respectively, and was 91.48% as of June 30, 1996. The Bank does not and
has not had any loans outstanding to foreign countries or for highly leveraged
transactions.
In the normal course of business, the Corporation makes various
commitments and incurs certain contingent liabilities which are disclosed but
not reflected in its financial statements. These commitments and contingent
liabilities include commitments to extend credit and financial standby letters
of credit. At June 30, 1996, commitments for financial standby letters of credit
totaled $78 thousand and commitments to extend credit were $4.685 million. At
December 31, 1995, commitments for financial standby letters of credit totaled
$77 thousand and commitments to extend credit totaled $3.699 million. At
December 31, 1994, commitments for financial standby letters of credit totaled
$55 thousand and commitments to extend credit totaled $2.969 million.
Interest income on installment, commercial, and real estate mortgage
loans is computed on the principal balance outstanding. Most variable rate loans
carry an interest rate tied to New York Prime, as published in the Wall Street
Journal.
22
<PAGE>
The following table summarizes the composition of the loan portfolio at
the dates indicated:
Loan Portfolio
<TABLE>
<CAPTION>
June 30, December 31,
----------------- -----------------------------------------
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Commercial........................ $15,311 $13,315 $11,976 $ 7,566 $ 5,798 $ 7,132
Real estate construction.......... 4,015 3,638 2,488 1,788 945 1,289
Real estate mortgage.............. 5,747 6,133 4,924 5,807 2,508 2,875
Installment loans................. 6,987 6,081 3,529 3,213 1,773 711
------ ------ ------ ------ ------ ------
Total Loans..................... 32,060 29,167 22,917 18,374 11,024 12,007
Less:
Allowance for loan losses....... (464) (393) (299) (225) (196) (462)
------- ------- ------- ------- ------- -------
Net loans..................... $31,596 $28,774 $22,618 $18,149 $10,828 $11,545
====== ====== ====== ====== ====== ======
</TABLE>
The following table sets forth the composition of the Corporation's
loan portfolio (by percentage) for the five years ended December 31, 1995, and
the six months ended June 30, 1996:
Loan Portfolio by Percentage
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Commercial........................ 47.76% 45.65% 52.26% 41.18% 52.59% 59.40%
Real estate construction.......... 12.52 12.47 10.86 9.73 8.57 10.74
Real estate mortgage.............. 17.93 21.03 21.48 31.60 22.76 23.94
Installment....................... 21.79 20.85 15.40 17.49 16.08 5.92
------ ------ ------ ------ ------ ------
Total Loans................... 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
Real estate secured loans accounted for 30.45% of the loans outstanding
at June 30, 1996. These loans are primarily secured by residential property.
Commercial loans accounted for 47.76% of loans outstanding at June 30, 1996.
Commercial loans are made for business purposes and may be secured by commercial
real estate, demand deposits, stocks, and business equipment. Consumer
installment loans accounted for 21.79% of loans outstanding at June 30, 1996.
Consumer installment loans are normally loans to individuals for household,
automobiles, home improvements, family, and other personal expenditures.
Nonperforming loans as of June 30, 1996, totaled $64 thousand, or 0.20% of the
total loan portfolio.
23
<PAGE>
The following table presents the maturities or repricing periods of
selected loans outstanding at June 30, 1996:
Maturity Schedule of Loans
<TABLE>
<CAPTION>
(Dollars in thousands)
1 year or less 1-5 years After 5 years Total(1)
------------------- ------------------- ----------------- -----------------
Fixed Variable Fixed Variable Fixed Variable Fixed Variable
Rate Rate Rate Rate Rate Rate Rate Rate
<S> <C>
June 30, 1996 $9,627 $6,243 $16,738 -0- $385 -0- $26,750 $6,243
</TABLE>
- ------------------
(1) Excludes nonaccrual loans.
Asset Quality
The Corporation attempts to maintain the allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. Loan
losses are charged directly to the allowance when they occur, while recoveries
are credited to the allowance. The provision for loan losses is determined
periodically by senior management and lending officers based upon consideration
of several factors, including changes in the character and size of the loan
portfolio and related loan loss experience, a review and examination of overall
loan quality which includes the assessment of problem loans, and an analysis of
anticipated economic conditions in the market area. In addition, input from bank
regulatory agencies that regularly review the loan portfolio as part of their
examination process and advice from the Corporation's independent accountants
are considered in reviewing and assessing the adequacy of the allowance for loan
losses.
24
<PAGE>
An analysis of the allowance for loan losses, including charge-off
activity, is presented below for the periods indicated:
<TABLE>
<CAPTION>
ALLOWANCE FOR LOAN LOSSES
SIX MONTHS
ENDED JUNE 30, DECEMBER 31,
---------------------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Average total loans................. $30,897 $24,506 $26,364 $20,997 $14,516 $10,948 $12,454
Balance, beginning of period........ $ 393 $ 299 $ 299 $ 225 $ 196 $ 462 $ 110
Less charge offs:
Commercial........................ _ _ 5 68 ___ 293 2,106
Real Estate....................... _ _ __ ___ ___ ___ ___
Installment....................... 6 7 26 22 4 15
------ ------ ----- ------ ------ ------ ------
Total Charge offs............... 6 7 31 90 4 308 2,106
------ ------ ----- ------ ------ ------ ------
Plus recoveries:
Commercial........................ 1 2 7 12 5 130 ___
Real Estate....................... __ _ _ __ ___ ___ ___
Installment....................... 3 _ 5 1 16 _ _
------ ------- ------ ------ ------ ------ ------
Total recoveries................ 4 2 12 13 21 130 0
------ ------- ------ ------ ------- ------ ------
Net (charge offs) recoveries........ (2) (5) (19) (77) 17 (178) (2,106)
Provision for loan losses........... 73 16 113 151 12 (88) 2,458
------ ------- ------- ------- ------- ------- -------
Balance, end of period.............. $ 464 $ 310 $ 393 $ 299 $ 225 $ 196 $ 462
====== ====== ====== ======= ======= ======= =======
Allowance for loan losses to
period end total loans............ 1.45% 1.15% 1.35% 1.31% 1.22% 1.78% 3.85%
Allowance for loan losses to
nonaccrual loans.................. 725.00% 107.27% 873.33% 111.11% 1,184.21% 0.00% 130.51%
Net charge-offs (recoveries) to average
loans ............................ .01% .04% .07% .37% (.12)% 1.63% 16.91%
</TABLE>
The allowance for loan losses is maintained at a level which in
management's judgment is adequate to absorb credit losses inherent in the loan
portfolio, although no assurance can be given in this regard due to competitive
and economic uncertainties. Management believes that the June 30, 1996 allowance
for loan losses was adequate at 1.45%. Management based such estimate on the
quality of assets held and the strong local economy because of: (i) high quality
and (ii) a strong local economy.
A breakdown of the allowance for loan losses is provided in the
following table. However, management of the Corporation does not believe that
the allowance for loan losses can be fragmented by category with any precision
that would be useful to investors. The breakdown of the allowance for loan
losses is based primarily upon those factors discussed above in computing the
allowance for loan losses as a whole. Because all of these factors are subject
to change, the breakdown is not necessarily indicative of the category of future
loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES IN DOLLARS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C>
Commercial $ 395 $264 $334 $278 $209 $182 $409
Real estate - construction 23 15 20 1 1 1 13
Real estate - mortgage 9 6 8 4 3 2 29
Installment 37 25 31 16 12 11 11
--- --- -- --- --- --- ---
Total allowance for loan
losses $464 $310 $393 $299 $225 $196 $462
=== === === === === === ===
</TABLE>
25
<PAGE>
NONPERFORMING ASSETS
The following table details information concerning nonaccrual and past
due loans, as well as foreclosed assets, for the dates indicated:
<TABLE>
<CAPTION>
NONPERFORMING ASSETS
JUNE 30, DECEMBER 31,
----------------------- ----------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C>
Nonaccrual loans $ 64 $ 289 $ 45 $ 269 $ 19 $ 0 $ 354
Other real estate owned(1) 236 - 236 - - - -
----- ------ ----- ------ ----- ----- ------
Total Nonperforming assets $ 300 $ 289 $ 281 $ 269 $ 19 $ 0 $ 354
===== ===== ===== ===== ===== ===== ======
Loans past due 90 or more
days accruing interest $ 219 $ 270 $ 215 $ 587 $ 16 $ 247 $ 349
Allowance for loan losses
to nonaccrual loans 725.00% 107.27% 873.33% 111.11% 1,184.21% 0.00% 130.51%
Nonperforming assets to
period end loans and
other real estate owned 0.93 1.07 0.96 1.18 0.10 0.00 2.94
</TABLE>
- ------------------
(1) The Corporation signed a contract to sell its largest piece of other
real estate owned to an unrelated purchaser for cash, which is
anticipated to close in late August 1996. If the transaction is
consummated, the Corporation will reduce its portfolio of other real
estate owned by more than 90%.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent 90 days or more. If
interest had been accrued on these loans for the six months of 1996, the
interest income would have been $3 thousand.
Noninterest Income
For the six month period ending June 30, 1996, noninterest income was
$194 thousand, an increase of $93 thousand, or 92.08% compared to noninterest
income of $101 thousand at June 30, 1995. For the twelve month period ended
December 31, 1995, noninterest income increased to $281 thousand from $242
thousand in 1994, or 16.12%. Such increase is a direct result of the
Corporation's increased volume of non-interest bearing deposits and the related
fees and service charges.
Noninterest Expense
Noninterest expense increased from $685 thousand for the six month
period ended June 30, 1995, to $851 thousand for the same period ended June 30,
1996. The category with the largest increase, salaries and benefits, increased
$84 thousand or 25.85%, as a result of salary adjustments due to changes in
positions. Noninterest expense for 1995 was $1.435 million, up 22.13% over the
comparable period of 1994. Noninterest expense for 1994 was $1.175 million, up
29.26%, over the comparable period for 1993.
Income Taxes
There was no income tax expense in 1995, 1994, and 1993 due to
utilization of a net operating loss carryforward. Under the Internal Revenue
Code, the Corporation has net operating loss carryforwards available totaling
$3.226 million at December 31, 1995. The carryforwards expire December 31, 2006.
The full realization of the tax benefits associated with the carryforwards
depends predominantly upon the recognition of ordinary income during the
carryforwards period. Effective January 1, 1993, the Corporation adopted
Statement of Financial
26
<PAGE>
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes. See Note 8
to the Corporation's financial statements for related disclosures.
Deposits
The Corporation primarily uses deposits to fund its loans and
investment portfolio. For the six month period ended June 30, 1996, total
average deposits were $34.206 million, compared to $26.616 million for the
comparable period of 1995, a 28.52% increase. For the year ended December 31,
1995, total average deposits were $28.791 million, up 25.86% from $22.876
million for 1994. Average deposits for 1993 were $16.534 million. For the first
six months of 1996, average noninterest bearing demand deposits were $5.203
million, up 28.34% from $4.054 million for the comparable 1995 period. For the
year ended December 31, 1995, average noninterest bearing demand deposits were
$4.034 million, up 16.76% from $3.455 million during 1994 and up 80.98% from
$1.909 million during 1993. The largest category of interest bearing deposits is
certificates of deposit under $100,000. For the six month period ended June 30,
1996, this category increased $3.954 million, or 35.28%, to $15.162 million from
$11.208 million during the comparable period of 1995. Average certificates of
deposit under $100,000 were $15,162 million at June 30, 1996, $12.488 million,
$7.870 million and $5.846 million for the years 1995, 1994 and 1993,
respectively.
The Corporation offers individuals and small-to-medium sized businesses
a variety of deposit accounts. These accounts, including checking, savings,
money market, and certificates of deposit, are obtained primarily from the
community that the Corporation services. Accordingly, the Corporation enjoys a
stable core deposit base.
The following table details the average amount of, and the average rate
paid on, the following primary deposit categories, for the periods indicated:
Average Deposits and Average Rates Paid
<TABLE>
<CAPTION>
Six months
ended June 30, Years ended December 31,
1996 1995 1994 1993
-------------------- -------------------- ------------------- -------------------
Average Average Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate Balance Rate
(Dollars in thousands)
<S> <C>
Interest-bearing deposits:
Checking ............................. $ 2,154 2.79% $ 1,756 2.73% $ 1,375 2.84% $ 814 2.95%
Regular savings ...................... 4,823 3.32 5,009 3.15 6,543 3.24 4,721 4.09
Money market savings ................. 3,185 3.58 2,661 3.49 2,356 3.65 2,471 3.28
Certificates of deposit:
$100,000 and over .................. 3,679 5.71 2,843 5.84 1,277 3.60 773 5.56
Under $100,000 ..................... 15,162 5.88 12,488 5.91 7,870 5.32 5,846 5.49
------- ------ ------ ------
Total interest-bearing deposits.. 29,003 4.95% 24,757 4.86% 19,421 4.13% 14,625 4.53%
Noninterest-bearing .................... 5,203 4,034 3,455 1,909
------- ------ ------ ------
Total deposits ......................... $34,206 $28,791 $22,876 $16,534
======= ======= ======= =======
</TABLE>
27
<PAGE>
The following is a summary of the maturity distribution of certificates
of deposit in amounts of $100,000 or more as of June 30, 1996:
Maturities of CDs of $100,000 or More
June 30, 1996
------------------------------
Amount Percent
(Dollars in thousands)
Three months or less................... $1,219 28.03%
Over three months to one year.......... 1,966 45.21
Over one year to five years............ 1,164 26.76
----- ------
Total................................ $4,349 100.00%
===== ======
For the six month period ended June 30, 1996, average certificates of
deposit over $100,000 totaled $3.679 million. Average certificates of deposit in
amounts of $100,000 or more were $2.843 million, $1.277 million, and $773
thousand at December 31, 1995, 1994 and 1993, respectively. As of June 30, 1996,
and December 31, 1995, 1994, and 1993, average certificates over $100,000
represented 19.53%, 18.54%, 13.96%, and 1.68%, respectively, of the total
certificates of deposit held on the respective dates. The Corporation competes
with the major regional financial institutions for money market accounts and
certificates of deposit less than $100,000. The Corporation has a relatively
high level of rate sensitive assets and uses a system to adjust loan pricing to
reflect its cost of funds, loan and funding maturities and loan-to-deposit
ratio.
Short-Term Borrowings
The Corporation occasionally finds it necessary to purchase federal
funds on a short-term basis due to fluctuations in loan and deposit levels. The
Corporation had no short-term borrowings with an average balance outstanding of
more than 30% of stockholders' equity for the years ended December 31, 1995 and
1994.
Liquidity
Liquidity represents an institution's ability to meet present and
future financial obligations through either the sale or maturity of existing
assets or the acquisition of additional funds through liability management.
Liquid assets include cash, interest-bearing deposits with banks, federal funds
sold, investments, and loans maturing within one year. As a result of the
Corporation's management of liquid assets and the ability to generate liquidity
through
28
<PAGE>
liability funding, management believes that the Corporation maintains overall
liquidity sufficient to satisfy its depositors' requirements and meet its
customers' credit needs.
Summary of Liquid Assets
<TABLE>
<CAPTION>
June 30, December 31,
-------- --------------------------------
1996 1995 1994 1993
---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Cash and due from banks $ 3,110 $ 2,283 $ 1,789 $ 1,119
Federal funds sold 3,148 1,574 277 240
Investment securities(1) - 448 289 902
Available-for-sale securities 1,026 774 544 1,558
------ ------ ------ ------
Total liquid assets $ 7,284 $ 5,079 $ 2,899 $ 3,819
====== ====== ====== ======
Deposits and other liabilities $38,648 $33,392 $25,438 $20,445
Ratio of liquid assets to
deposits and other liabilities 18.85% 15.21% 11.40% 18.68%
</TABLE>
- ------------------
(1) Only investment securities with a maturity of one year or less are
considered liquid assets for this table.
As of June 30, 1996, the Corporation's liquidity position was tight,
although it had improved somewhat from its position at December 31, 1995, as
management continued its strategy to maximize earning assets in order to restore
previously impaired capital. Deposit growth continued to be invested almost
exclusively in loans and a minimal level of temporary investments. As of June
30, 1996, the Corporation had approximately $1.026 million in available-for-sale
securities at its disposal. Furthermore, the Corporation maintains a $600
thousand federal funds line with a correspondent bank, and can borrow up to 50%
of its capital on an unsecured basis from the Community Bankers' Bank. In
addition, should additional liquidity be required, management has the ability to
sell loans to other institutions to obtain additional capital as needed.
Liquidity is monitored by the institution on several levels. The
officers of the Corporation monitor liquidity on a monthly basis. In addition,
the loan committee, which consists of several directors and officers, monitors
the liquidity position on a biweekly basis. The results of both meetings are
reviewed by the full board at its monthly meeting. The loan-to-deposit ratio is
considered by management to be the key liquidity ratio. As of June 30, 1996,
such ratio was 84.67%. At June 30, 1996, the Corporation had long term debt of
$590 thousand and had no material commitments for capital expenditures.
29
<PAGE>
Return on Equity and Assets
The following table summarizes ratios considered to be significant
indicators of the Corporation's profitability and financial condition during the
periods indicated:
Return on Equity and Assets
<TABLE>
<CAPTION>
Six Months
ended
June 30, Years ended December 31,
1996(1) 1995 1994 1993
---- ---- ---- ----
<S> <C>
Return on average assets....................... 1.61% 1.31% 1.23% 0.42%
Return on average equity....................... 21.55 16.96 15.28 4.51
Average equity to average asset ratio.......... 7.48 7.73 8.04 9.24
</TABLE>
- ------------------
(1) Percentages for the six months ended June 30, 1996, have been annualized.
Impact of Inflation and Changing Prices and Seasonality
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Virtually all of the assets and liabilities of a financial institution
are monetary in nature. As a result, interest rates have a more significant
impact on a financial institution's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the price of goods and services, since
such prices are affected by inflation.
The Corporation's loans and deposits are not typically seasonal or
cyclical.
Accounting Rule Changes
FASB No. 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of, establishes standards for the
impairment of long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangibles to be disposed of. This Statement requires that
long-lived assets and certain identifiable intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Statement is effective for fiscal years beginning after December 15, 1995. The
Statement is not expected to have a material impact on the Corporation.
FASB No. 122, Accounting for Mortgage Servicing Rights, amends FASB No.
65, Accounting for Certain Mortgage Banking Activities, to require that a
mortgage banking enterprise recognize as separate assets rights to service
mortgage loans for others, however those servicing rights are acquired. A
mortgage banking enterprise that acquires mortgage servicing rights through
either the purchase or origination of mortgage loans and sells or securities
those loans with servicing rights retained should allocate the total cost of the
mortgage loans to the mortgage servicing rights and the loans (without the
mortgage servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to estimate
the fair values of the mortgage servicing
30
<PAGE>
rights and the mortgage loans (without the mortgage servicing rights), the
entire cost of purchasing or originating the loans should be allocated to the
mortgage loans (without the mortgage servicing rights) and no cost should be
allocated to the mortgage servicing rights. The Statement is effective for
transactions in fiscal years beginning after December 15, 1995. The Statement is
not expected to have a material impact on the Corporation.
FASB No. 123, Accounting for Stock-Based Compensation, establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which employees
receive shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the price of the
employer's stock. Examples are stock purchase plans, stock options, restricted
stock, and stock appreciation rights. This Statement also applies to
transactions in which an entity issues its equity instruments to acquire goods
or services from nonemployees. Those transactions must be accounted for based on
the fair value of the consideration received or the fair value of the equity
instruments issued, whichever is more reliably measurable.
This Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all entities
to adopt that method of accounting for all of their employee stock compensation
plans. However, it also allows an entity to continue to measure compensation
cost for those plans using the intrinsic value based method of accounting
prescribed by APB Opinion No. 25, Accounting for Stock Issued to Employees. The
fair value based method is preferable to the Opinion 25 method for purposes of
justifying a change in accounting principle under APB Opinion 20, Accounting
Changes. Entities electing to remain with the accounting in Opinion 25 must make
pro forma disclosures of net income and, if presented, earnings per share, as if
the fair value based method of accounting defined in this Statement had been
applied.
The Statement is effective for fiscal years beginning after December
15, 1995. The disclosures must include the pro forma effects of other awards
granted in fiscal years beginning after December 31, 1994. The Statement is not
expected to have a material impact on the Corporation.
31
<PAGE>
BUSINESS
General
The Corporation is a bank holding corporation incorporated under the
laws of the Commonwealth of Virginia in June 1989. The Corporation owns all of
the outstanding stock of its subsidiary, The Marathon Bank ("Bank"), which was
incorporated in August 1987 and acquired by the Corporation in October 1990, in
accordance with the plan of exchange approved by the shareholders of the Bank in
June 1990. The Corporation is headquartered in Frederick County, Virginia. The
Corporation operates three offices. The original branch is located in Frederick
County. The second branch, which opened in August of 1993, is located in the
Town of Front Royal, Virginia. The third branch, which opened in February of
1995, is located in the City of Winchester, Virginia. Collectively, the three
branches service the Northern Shenandoah Valley, which is comprised of Frederick
County, Shenandoah County, Warren County, Clarke County, the City of Winchester,
and the Town of Front Royal.
The Corporation is engaged in the business of offering banking services
to the general public. It offers checking accounts, savings and time deposits,
and commercial, real estate, personal, home improvement, automobile and other
installment and term loans. It also offers travelers checks, safe deposit,
collection, notary public, credit cards and other customary bank services. The
Corporation is also becoming increasingly involved in the origination and sale
of loans in the secondary mortgage market.
The Corporation is the only independent community bank headquartered in
the City of Winchester or Frederick County, Virginia. The Corporation's primary
market is the Northern Shenandoah Valley, which includes Frederick County,
where, based on total financial institution deposits at June 30, 1995, it was
the fourth largest financial institution with approximately 11% of the market,
Warren County, including the Town of Front Royal, where, based on total
financial institution deposits at June 30, 1995, it was the ninth largest
financial institution with approximately 4% of the market. The newest branch is
located in the City of Winchester, the largest market in the four county area of
Frederick, Warren, Shenandoah and Clarke Counties. Winchester and Front Royal
are located at or near the intersections of I-81 and I-66 on the western fringe
of the greater Washington-Baltimore Metropolitan Statistical Area, the fourth
largest market in the United States.
At June 30, 1996, the Corporation had $41.611 million in assets,
$31.596 million in net loans, $37.866 million in deposits, and $2.963 million in
stockholders' equity. It also had, at that date, a tax loss carryforward of
$3.226 million. During the year ended December 31, 1995, the Corporation's net
income grew 32.39% to $421 thousand from $318 thousand in 1994. In the six
months ended June 30, 1996, the Corporation's net income increased 71.75% to
$304 thousand from $177 thousand for the comparable period in 1995, while total
assets increased 28.96% to $41.611 million at June 30, 1996 over the June 30,
1995 level. The annualized return on average assets and equity for the six
months ended June 30, 1996 were 1.61% and 21.55%, respectively. Improvements in
the Bank's earnings and size have been consistent since the employment by the
Corporation of the current chief executive officer in 1992.
Credit Policies
The Corporation employs extensive written policies and procedures to
enhance management of credit risk. The loan portfolio is managed under a
specifically defined credit process. This process includes formulation of
portfolio management strategy, guidelines for underwriting standards and risk
assessment, procedures for on-going identification and management of credit
deterioration, and regular portfolio reviews to estimate loss exposure and to
ascertain compliance with the Corporation's policies. The largest unsecured
individual lending authority currently granted by the Corporation is $100,000.
Loan applications in excess of $50,000 are reviewed by the Loan Committee on a
weekly basis. The Loan Committee consists of the Chief Executive Officer and six
additional directors.
32
<PAGE>
A major element of credit risk management is the diversification of
risk. The Corporation's objective is to maintain a diverse loan portfolio to
minimize the impact of any single event or set of circumstances. Concentration
parameters are based upon individual risk factors, policy constraints, economic
conditions, collateral, and products. The Corporation, as a matter of policy,
generally does not extend credit to any single borrower or group of related
borrowers in excess of $400,000. The Corporation generally does not make loans
outside its market area, except for loan participations, unless the borrower has
an established relationship with the Corporation and lives and conducts his
principal business operations within the Corporation's market area.
Consequently, the Corporation and its borrowers are directly affected by the
economic conditions prevailing in its market area.
Lending Activities
The Corporation's primary market focus is on making loans to small
businesses and consumers in its local market area. Business and consumer
installment loans secured by real estate represent the largest segment of the
Corporation's loan portfolio. In addition, the Corporation also provides a wide
range of business and consumer installment loans that are not secured by real
property. The Corporation's lending activities are principally directed to its
defined market area in the Northern Shenandoah Valley.
Commercial Business Lending. The Corporation's commercial loans are
made primarily to local service and retail oriented businesses for a variety of
purposes, including revolving lines of credit, working capital loans, equipment
financing loans, letters of credit, construction loans, and "mini-permanent"
financing of commercial real estate. Pricing on commercial loans is generally
tied to the depository relationship and/or the perceived risk involved in the
credit.
The Corporation normally looks to the borrower's cash flow and/or
earnings as the principal source of repayment for commercial business loans, and
most of these loans are both secured and personally guaranteed by the principals
of such businesses.
Real Estate Construction Lending. At June 30, 1996, real estate
construction loans comprised $4.015 million, or 12.52%, of the Corporation's
total loan portfolio.
Mortgage Lending. The Corporation's real estate loan portfolio, a
significant portion of which consists of business related loans secured by the
owner's residence or commercial property, was approximately 30.45% of total
loans at June 30, 1996. The mortgage portfolio consists primarily of loans for
individual purposes with 15- to 25-year amortization schedules that mature with
a balloon payment on the third or fifth anniversary of the loan.
Consumer Installment Lending. The Corporation currently offers most
types of consumer time and installment loans, including automobile loans and
home equity lines of credit. The Corporation also extends other consumer credit
through its overdraft protection program. At June 30, 1996, the Corporation's
consumer installment loans, including home equity lines, were 21.79% of the
total loan portfolio. The performance of the consumer installment loan portfolio
is directly tied to and dependent upon the general economic conditions in the
Corporation's market area.
Credit Policies and Administration. The Corporation has adopted a
comprehensive lending policy which includes stringent underwriting standards for
all types of loans and pricing guidelines. In an effort to manage risk, all
credit decisions in excess of the officer's lending authority must be approved
prior to funding by the Loan Committee. Management believes that it employs
experienced lending officers, secures appropriate collateral, and carefully
monitors the financial conditions of its borrowers and the concentration of such
loans in the Corporation's portfolio.
33
<PAGE>
Market Area
The Corporation has three branches located in the Northern Shenandoah
Valley. The Shenandoah Valley is located on the I-81 corridor in Northwestern
Virginia, and borders on the Washington-Baltimore Metropolitan Statistical Area,
the fourth largest market in the United States. The Northern Shenandoah Valley
is the home of major manufacturing facilities of 17 Fortune 500 companies. In
addition, Warren County is becoming a significant center, in the Mid-Atlantic
region, for manufacturing and distribution due to its proximity to the Virginia
Inland Port. Pen-Tab Inc. opened a manufacturing and distribution center in the
first quarter of 1996 which employs over 270 persons. Toray, Inc. recently broke
ground on a $120 million full service manufacturing plant which will employ 120
persons in 1997 and over 500 persons by the year 2000. Major employers in the
four county area include Valley Health Systems, Inc., Crown Cork and Seal,
Automotive Industries Inc., National Fruit Products, Inc., Rubbermaid Commercial
Products, General Electric, AT&T Communications, duPont, Inc. and O'Sullivan
Corporation. The Corporation's headquarters and a branch office are located in
Frederick County. The population of the City of Winchester and Frederick County
is approximately 75,000. The local economy is driven by the manufacturing and
service industries, with over 30% of the area's workforce engaged in
manufacturing. The Corporation's third office is located in Front Royal,
Virginia in Warren County. The combined population of Front Royal and Warren
County is approximately 40,000. The principal employers are in the manufacturing
service industries as well as state and local government. The Corporation also
services Shenandoah and Clarke Counties. The approximate population of such
areas are 33,000 and 12,000, respectively.
Competition
The banking business in the Northern Shenandoah Valley (the counties of
Frederick, Clarke, Shenandoah, and Warren, Virginia and the City of Winchester),
the area served by the Corporation is highly competitive with respect to both
loans and deposits. In the Corporation's primary service area, there are
approximately eleven commercial banks and savings and loans (including six
large, Virginia-wide and national banks with multiple offices); offering
services ranging from deposits and real estate loans to full service banking.
The Corporation is the newest and smallest commercial bank in its service area,
in addition, there can be no assurance that other financial institutions, with
substantially greater resources than the Corporation, will not establish
operations in the service area.
Properties
The Corporation's office is located at 4095 Valley Pike, Winchester,
Virginia, in property owned by the Corporation.
In July 1996, the Bank's branch located in the Town of Front Royal
moved into a newly constructed building located in the Post Office Plaza at 300
Warren Avenue. The Corporation leased the property from a related party under a
20 year lease with no renewal options. See "Management - Indebtedness and Other
Transactions."
On February 13, 1995, the Corporation opened its Winchester Branch at
1041 Berryville Avenue in the City of Winchester, Virginia. The Corporation has
a five year lease, with two five year options.
Employees
At June 30, 1996, the Corporation had the equivalent of 29 full-time
employees. None of its employees is represented by any collective bargaining
unit. The Corporation considers relations with its employees to be good.
Legal Proceedings
In the course of its operations, the Corporation is party to various
legal proceedings. The Corporation does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse effect
on the Bank's business, financial position, or results of operations.
34
<PAGE>
Supervision and Regulation
The Bank is subject to state and federal banking laws and regulations
which impose specific requirements or restrictions and provide for general
regulatory oversight with respect to virtually all aspects of its operations.
The following is a brief summary of certain statutes and regulations affecting
the Bank. This summary is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below, and it is not
intended to be an exhaustive description of all laws applicable to the business
of the Bank. Any change in applicable laws or regulations may have a material
effect on the business and prospects of the Corporation.
State Chartered Banks. The Bank is a state-chartered bank, organized
under Virginia law. It is also a member of the Federal Reserve System and,
therefore, is supervised and examined by the Federal Reserve, its primary
federal regulator. The Federal Reserve and Bureau of Financial Institutions
("BFI") conduct regular examinations of the Bank, reviewing the adequacy of its
allowance for loan losses, quality of loans and investments, propriety of
management practices, compliance with laws and regulations and other aspects of
its operations. In addition to these regular examinations, the Bank must furnish
the Federal Reserve with quarterly reports containing detailed financial
statements and schedules. The Federal Deposit Insurance Corporation ("FDIC"),
which provides deposit insurance, also has authority to examine and regulate the
Bank.
Federal and state banking laws and regulations govern all areas of the
operations of the Bank, including maintenance of cash reserves, loans,
mortgages, maintenance of minimum capital, payment of dividends, and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate dividends paid by insured banks if such
payment is deemed to constitute an unsafe or unsound practice. The Federal
Reserve has authority to impose penalties, initiate civil administrative
actions, and take other steps to prevent the Bank Subsidiaries from engaging in
unsafe or unsound practices. In this regard, the Federal Reserve has adopted
capital adequacy requirements applicable to its member banks. See "Supervision
and Regulation of the Corporation - Capital Requirements" below.
Supervision and Regulation of the Corporation
General. As a bank holding company, the Corporation is subject to state
and federal banking and bank holding company laws and regulations which impose
specific requirements or restrictions and provide for general regulatory
oversight with respect to virtually all aspects of its operations. The following
is a brief summary of certain statutes and regulations affecting the
Corporation. This summary is qualified in its entirety by reference to the
particular statutory and regulatory provisions referred to below, and is not
intended to be an exhaustive description of all laws applicable to the
Corporation's operations. Any change in applicable laws or regulations may have
a material effect on the business and prospects of the Corporation.
Bank Holding Companies. As a bank holding company registered under the
Bank Holding Company Act ("BHC Act"), the Corporation is subject to regulation
by the Federal Reserve. The Federal Reserve has jurisdiction under the BHC Act
to approve any bank or nonbank acquisition, merger or consolidation proposed by
a bank holding company. The BHC Act generally limits the activities of a bank
holding company and its subsidiaries to that of banking, managing or controlling
banks, or any other activity which is so closely related to banking or to
managing or controlling banks as to be a proper incident thereto.
The BHC Act formerly prohibited the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries were principally conducted, unless such an acquisition was
specifically authorized by statute of the state in which the bank whose shares
were to be acquired was located. However, under recently enacted federal
legislation, the restriction on interstate acquisitions was abolished effective
September 29, 1995, and bank holding companies from any state may now acquire
banks and bank holding companies located in any other state. Banks also will be
able to branch across state lines effective June 1, 1997, provided certain
conditions are met, including
35
<PAGE>
that applicable state law must expressly permit such interstate branching. Under
Virginia law effective July 1, 1995, Virginia banks can branch across state
lines in those states with which Virginia has reciprocal agreements.
There are a number of obligations and restrictions imposed on bank
holding companies and their depository institution subsidiaries by federal law
and regulatory policy that are designed to reduce potential loss exposure to the
depositors of such depository institutions and to the FDIC insurance fund in the
event the depository institution becomes in danger of default or in default. For
example, under a policy of the Federal Reserve with respect to bank holding
company operations, a bank holding company is required to serve as a source of
financial strength to its subsidiary depository institutions and to commit
resources to support such institutions in circumstances where it might not do so
absent such policy. In addition, the "cross-guarantee" provisions of federal law
require insured depository institutions under common control to reimburse the
FDIC for any loss suffered or reasonably anticipated by either the Savings
Association Insurance Fund ("SAIF") or the Bank Insurance Fund ("BIF") as a
result of the default of a commonly controlled insured depository institution or
for any assistance provided by the FDIC to a commonly controlled insured
depository institution in danger of default. The FDIC may decline to enforce the
cross-guarantee provisions if it determines that a waiver is in the best
interest of the SAIF or the BIF or both. The FDIC's claim for damages is
superior to claims of shareholders of the insured depository institution or its
holding company but is subordinate to claims of depositors, secured creditors
and holders of subordinated debt (other than affiliates) of the commonly
controlled insured depository institutions.
The Federal Deposit Insurance Act also provides that amounts received
from the liquidation or other dissolution of any insured depository institution
by any receiver must be distributed (after payment of secured claims) to pay the
deposit liabilities of the institution prior to payment of any other general or
unsecured senior liability, subordinated liability, general creditor or
shareholder. This provision would give depositors a preference over general and
subordinated creditors and shareholders in the event a receiver is appointed to
distribute the assets of any of the Corporation's subsidiaries.
The Corporation is registered under the bank holding company laws of
Virginia. Accordingly, the Corporation and the Bank are also subject to
regulation and supervision by the BFI.
Capital Requirements. The Federal Reserve, the Office of the
Comptroller of the Currency and the FDIC have issued substantially similar
risk-based and leverage capital guidelines applicable to United States banking
organizations. In addition, those regulatory agencies may from time to time
require that a banking organization maintain capital above the minimum levels
because of its financial condition or actual or anticipated growth. Under the
risk-based capital requirements of these federal bank regulatory agencies, the
Bank is required to maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%. At least half of the total capital is required to be
"Tier 1 capital," which consists principally of common and certain qualifying
preferred shareholders' equity, less certain intangibles and other adjustments.
The remainder, "Tier 2 capital," consists of a limited amount of subordinated
and other qualifying debt (including certain hybrid capital instruments) and a
limited amount of the general loan loss allowance. The Tier 1 and total capital
to risk-weighted asset ratios of the Corporation as of June 30, 1996 were 9.20%
and 10.45%, respectively, exceeding the minimums required.
In addition, each of the federal regulatory agencies has established a
minimum leverage capital ratio (Tier 1 capital to average tangible assets).
These guidelines provide for a minimum ratio of 3% for banks and bank holding
companies that meet certain specified criteria, including that they have the
highest regulatory examination rating and are not contemplating significant
growth or expansion. All other institutions are expected to maintain a leverage
ratio of at least 100 to 200 basis points above the minimum. The leverage ratio
of the Bank as of June 30, 1996, was 7.88%. The guidelines also provide that
banking organizations experiencing internal growth or making acquisitions will
be expected to maintain strong capital positions substantially above the minimum
supervisory levels, without significant reliance on intangible assets.
36
<PAGE>
The following table sets forth in detail the various capital ratios of
the Bank at the dates indicated:
Analysis of Capital
<TABLE>
<CAPTION>
June 30, December 31,
---------- -----------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C>
Tier 1 Capital:
Noncumulative preferred stock........ $ $ 1,003 $ - $ 1,003 $ 1,003
Common stock......................... 1,306 1,079 1,306 1,079 1,069
Capital surplus...................... 5,110 4,199 5,110 4,199 4,159
Retained earnings (deficit).......... (3,443) (3,852) (3,747) (4,029) (4,297)
Less: Intangibles.................. - - - (5) (18)
------- ------- ------- ------- -------
Total Tier 1 capital............... $ 2,973 $2,429 $ 2,669 $ 2,247 $ 1,916
Tier 2 Capital:
Allowance for loan losses(1)......... 404 310 $ 340 $ 280 $ 225
------- ------- ------- ------- -------
Total risk-based Capital........... $ 3,377 $2,739 $3,009 $ 2,527 $ 2,141
======= ======= ======= ======= =======
Risk-weighted assets................... $32,309 $26,419 $28,390 $22,380 $17,961
Capital Ratios:
Tier 1 risk-based capital ratio...... 9.20% 9.19% 9.40% 10.04% 10.67%
Total risk-based capital ratio....... 10.45 10.37 10.60 11.29 11.92
Tier 1 capital to average adjusted
total assets....................... 7.88 8.10 8.32 8.69 9.99
</TABLE>
- ------------------
(1) Limited to 1.25% of risk weighted assets.
Deposit Insurance. The deposits of the Bank are insured up to $100,000
per insured depositor (as defined by law and regulation) by the FDIC through the
BIF. The BIF are administered and managed by the FDIC. As insurer, the FDIC is
authorized to conduct examinations of and to require reporting by SAIF and
BIF-insured institutions. FIRREA also authorizes the FDIC to prohibit any SAIF
and BIF-insured institution from engaging in any activity that the FDIC
determines by regulation or order to pose a serious threat to the SAIF and BIF.
The FDIC also has the authority to initiate enforcement actions against savings
institutions, after first giving the OTS an opportunity to take such action.
From time to time, there are various proposals that involve increasing
the deposit insurance premiums paid by banks and/or savings institutions. The
Corporation is unable to predict whether or to what extent the rates that the
Bank pays for federal deposit insurance may increase in future periods as a
result of such proposals. Such increases would adversely affect its operations.
The FDIC may terminate the deposit insurance of any depository
institution, including the Bank's, if it determines, after a hearing, that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations or has violated any
applicable law, regulation, order or any condition imposed in writing by the
FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If deposit insurance is terminated, the deposits at the
institution at the time of termination, less subsequent withdrawals, shall
continue to be insured for a period from six months to two years, as determined
by the FDIC. Management is aware of no existing circumstances that could result
in termination of the deposit insurance of the Bank.
37
<PAGE>
On December 15, 1994, the Federal Reserve Board, the Office of Thrift
Supervision, the Office of the Controller of the Currency ("OCC"), and the FDIC
(collectively the "agencies") issued a final rule entitled, Risk- Based Capital
Standards; Concentration of Credit Risk and Risks of Nontraditional Activities.
The final rule amends the risk-based capital standards by explicitly identifying
concentrations of credit risk and certain risks arising from nontraditional
activities, as well as an institution's ability to manage these risks, as
important factors in assessing an institution's overall capital adequacy. While
no quantitative measure of such risk is included in the final rule, to the
extent appropriate, the agencies will issue examination guidelines on new
developments in nontraditional activities or concentrations of credit to ensure
that adequate account is taken of the risks of these activities. Moreover, the
agencies also believe that institutions identified through the examination
process as having significant exposure to concentration of credit risk or as not
adequately managing concentration risks should hold capital in excess of the
regulatory minimums. Therefore, due to the subjective nature of this final rule,
the Corporation is unable to determine what effect, if any, this rule may have
on regulatory capital requirements.
On August 2, 1995, the OCC, the Federal Reserve Board, and the FDIC
(collectively the "banking agencies") issued a final rule entitled, Risk-Based
Capital Standards; Interest Rate Risk. The final rule implements minimum capital
standards for interest rate risk exposures in a two-step process. The final rule
implements the first step of that process by revising the capital standards of
the banking agencies to explicitly include a bank's exposure to declines in the
economic value of its capital due to changes in interest rates as a factor that
the banking agencies will consider in evaluating a bank's capital adequacy. The
banking agencies intend to implement this rule on a case-by-case basis during
the examination process. The second step of the banking agencies' process will
be to issue a proposed rule that would establish an explicit minimum capital
charge for interest rate risk, based on the level of the bank's measured
interest rate risk exposure. Due to the subjective nature of the first phase of
this final rule, the Corporation is unable to determine what effect, if any,
this rule may have on its regulatory capital requirements.
On November 16, 1995, the Federal Reserve Board issued guidelines
entitled, Federal Reserve Guidelines for Rating Risk Management at State Member
Banks and Bank Holding Companies (the "Guidelines"). The Guidelines specify that
principles of sound management should apply to the entire spectrum of risks
facing a banking institution including, but not limited to, credit, market,
liquidity, operational, legal, and reputational risk and that, for state member
banks, a single numerical rating for risk management should be provided as part
of the examination process. The Guidelines also specify that examination reports
should make reference to the types and nature of corrective actions that need to
be taken by institutions to address noted risk management and internal control
deficiencies. Where appropriate, institutions should also be advised that the
Federal Reserve Board will initiate supervisory actions if the failure to
separate critical operational duties creates the potential for serious losses or
if material deficiencies or situations that threaten the safe and sound conduct
of their activities are not adequately addressed in a timely manner. Due to the
subjective nature of the risk-management evaluation, the Corporation is not able
to determine what effect, if any, this rule may have on the operation of the
Corporation.
Community Reinvestment Act. The federal supervisory agencies share
authority to implement regulations under the Community Reinvestment Act of 1979,
as amended ("CRA"). The general purpose of the CRA is to encourage lenders,
while operating safely and soundly, to meet the credit needs of their
communities. The CRA specifically directs regulators, when examining a lender,
to assess the lender's record of helping to meet the credit needs of its entire
community, including low and moderate-income neighborhoods. For example, the
regulators will evaluate and take into account a lender's record of meeting its
community credit needs when evaluating a lender's application for creation of a
new branch. The Bank has always had a "Satisfactory" rating with respect to
their compliance with the CRA. The Corporation itself has not been examined or
received a CRA rating.
As a result of a Presidential initiative, each of the federal banking
agencies, including the FDIC, issued a notice of proposed rule making in October
of 1994 to replace the current CRA assessment system with a new evaluation
system that would rate institutions based on their actual performance (rather
than efforts) in meeting community credit needs. The final rule retains, to a
significant extent, the principles and structures underlying the
38
<PAGE>
1994 proposal and will be phased in over 1996 and 1997. The Corporation is
currently studying the new CRA regulations and determining whether the
regulations would require changes to the CRA action plans of the Bank.
Governmental Monetary Policies and Economic Controls. The Corporation
and the Bank are affected by monetary policies of regulatory authorities,
including the Federal Reserve, which regulates the national money supply in
order to mitigate recessionary and inflationary pressures. Among the techniques
available to the Federal Reserve are engaging in open market transactions in
United States Government securities, changing the discount rate on bank
borrowings, and changing reserve requirements against bank deposits. These
techniques are used in varying combinations to influence the overall growth of
bank loans, investments and deposits. Their use may also affect interest rates
charged on loans or paid on deposits. The effect of governmental policies on the
earnings of the Corporation cannot be predicted.
39
<PAGE>
MANAGEMENT
The following table sets forth the names, ages and positions of the
Corporation's Directors and Executive Officers.
<TABLE>
<CAPTION> Director of the
Name Age Position Bank/Corporation Since
<S> <C>
Class I
Frank H. Brumback 71 Chairman of the Board 1987
Robert W. Claytor 48 Director 1987
Clifton L. Good 59 Director 1987
Donald L. Unger 54 Director, President and 1992
Chief Executive Officer
Class II
Joseph W. Hollis 42 Director 1987
Gerald H. Kidwell 74 Director 1987
Lewis W. Spangler 54 Director 1987
Thomas W. Grove 56 Director 1992
Class III
W. Houston Board, III 49 Director 1987
Ralph S. Gregory 57 Director 1987
George R. Irvin, Jr. 60 Director 1987
</TABLE>
Class I Directors
Frank H. Brumback is 71 years old and has served as a director of the
Corporation since 1989 and a director of the Bank since 1987. He is Chairman of
the Bank and the Corporation; Vice President of Woodbine Farms, Incorporated
(orchardist) in Winchester, Virginia, and President of BGW, Incorporated (real
estate) in Winchester, Virginia
Robert W. Claytor is 48 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is President and General
Manager of H. N. Funkhouser & Company (petroleum distributor) in Winchester,
Virginia.
Clifton L. Good is 59 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is retired and the former
President of Clifton L. Good Realty, Incorporated in Front Royal, Virginia.
Donald L. Unger is 54 years old and has served as a director of the
Corporation since 1992 and of the Bank since 1992. He has served as President
and Chief Executive Officer of The Marathon Bank and of the Corporation since
April 1992.
40
<PAGE>
Class II Directors
Joseph W. Hollis is 42 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is President of B. J.
Sager (beer distributor) in Winchester, Virginia.
Gerald H. Kidwell is 74 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is a farmer and former
budget analyst with the federal government in Washington, D.C.
Lewis W. Spangler is 54 years old and has served as a director of the
Corporation since 1989 ard of the Bank since 1987. He is Vice President of Jones
& Frank Corporation (petroleum equipment sales and distribution) in Winchester,
Virginia; and Vice President and Manager of Oil Equipment Properties (real
estate in Winchester, Virginia).
Thomas W. Grove is 56 years old and has served as a director of the
Corporation since 1992 and of the Bank since 1993. He is President of T. W.
Grove Construction, Inc. in Front Royal, Virginia.
Class III Directors
W. Houston Board, III is 49 years old and has served as a director of
the Corporation since 1989 and of the Bank since 1987. He is President and a
Director of B.T.B., Inc. (tire dealer) in Front Royal and Winchester, Virginia.
Ralph S. Gregory is 57 years old and has served as a director of the
Corporation since 1989 and of the Bank since 1987. He is President of Gregory's
Incorporated (commercial contractor) in Stephens City, Virginia.
George R. Irvin, Jr. is 60 years old and has served as a director of
the Corporation since 1989 and of the Bank since 1987. He is retired and the
former chairman of Irvin, Incorporated (wholesale candy and tobacco distributor)
in Edinburg, Virginia.
Board Committees
The Corporation's Board of Directors meets monthly and also holds an
organizational meeting following the conclusion of the Annual Meeting of
Stockholders. Special meetings are held when necessary. The Board of Directors
met 12 times during the fiscal year ended December 31, 1995. Each incumbent
director attended at least 75% of the aggregate of the number of meetings of the
Board and the number of meetings held by all committees on which he served.
The Board of Directors of the Corporation has standing Audit, Loan and
Personnel Committees.
The Audit Committee is responsible for receiving the audit and
examination reports of the internal accounting staff, the independent public
accountants and the banking examiners. The Audit Committee held five meetings in
1995. The present members of the Audit Committee are Messrs. Hollis, Board, Good
and Kidwell.
The Loan Committee considers new loan applications which are in excess
of individual officer limits and monitors (with management) the Corporation's
loan portfolio. The Loan Committee held 36 meetings in 1995. The present members
of the Loan Committee are Messrs. Claytor, Good, Gregory, Brumback, Spangler,
Grove, Kidwell and Unger.
The Personnel Committee is responsible for supervising, hiring and
setting compensation levels for the Bank's personnel. The Personnel Committee
met two times in 1995. The present members of the Personnel Committee are
Messrs. Irvin, Claytor, Hollis, Spangler and Unger.
41
<PAGE>
Indebtedness and Other Transactions
Certain directors and executive officers of the Corporation, members of
their immediate families and corporations, partnerships and other entities with
which such persons are associated are customers of the Corporation. As such,
they had transactions in the ordinary course of business with the Corporation
during the fiscal year ended December 31, 1995, and will have additional
transactions with the Corporation in the future. All loans and commitments to
lend included in such transactions were made in the ordinary course of business
and upon substantially the same terms, including interest rates, collateral and
repayment terms, as those prevailing for comparable transactions with the
general public. In the opinion of management, none of the transactions involved
more than the normal risk of collectibility or presented other unfavorable
features. At June 30, 1996, loans from the Corporation to all executive officers
and directors, their immediate families and/or affiliated companies in which
they are principals amounted to approximately $1.460 million. This amount
represented approximately 49.27% of the stockholders' equity of the Corporation
as of June 30, 1996.
On July 1, 1996, the Corporation entered into a 20 year property lease
with Post Office Plaza, L.C. ("Related Party"), a limited liability corporation,
which is owned 25% by Donald L. Unger, President, Chief Executive Officer and a
director of the Corporation, and 25% by Thomas W. Grove, a director of the
Corporation. The lease provides for fixed annual payments in the amount of
$46,153 for the first five years of the term, after which payments increase
annually in conjunction with the consumer price index. Prior to the consummation
of such lease, the Corporation was permitted to finance and construct a branch
facility on such property with the understanding that upon completion of the
construction the Corporation would enter into a long term lease with the Related
Party and the Related Party would reimburse the Corporation for all direct costs
incurred with respect to the construction of the branch. As of June 30, 1996,
the project was substantially complete, the Corporation had invested $237,365 in
construction costs for which the Related Party had verbally committed to
reimburse the Corporation upon consummation of the lease.
Prior to the execution of the aforementioned Post Office Plaza lease,
the Corporation maintained a portable branch facility on property owned by the
Related Party. The Corporation paid $500 per month to the Related Party for such
use.
Directors' Compensation
The Corporation's Directors receive a fee of $250 per meeting for their
services. Committee members receive $35 per meeting as compensation for their
services.
Executive Compensation
The following table presents information concerning the annual and
long-term compensation of Donald L. Unger who was, at December 31, 1995, the
Corporation's chief executive officer. This table presents compensation for
services rendered in all capacities to the Corporation in 1995, 1994 and 1993.
42
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
All Other
Annual Compensation Compensation(1)
--------------------------------------------- -----------------
Fiscal Other Annual
Name and Principal Year Salary Bonus Compensation(2)
<S> <C>
Donald L. Unger 1995 $100,000 $7,000 $14,600 $2,000
President and CEO 1994 100,000 7,000 14,600 2,000
1993 100,000 0 14,600 0
</TABLE>
(1) Reflects the Corporation's matching contribution under its 401(k)
retirement plan.
(2) Represents deferred compensation payable to Mr. Unger upon termination
of employment, payment of Mr. Unger's country club dues and the value
of the use of a company vehicle.
The following table presents, for the executive officer listed in the
Summary Compensation Table, information regarding (i) his exercise of stock
options in 1995 and (ii) the number and value of all his unexercised stock
options at December 31, 1995.
<TABLE>
<CAPTION>
Aggregated Option Exercises in 1995 and December 31, 1995 Option Values
---------------------------------------------------------------------------------------------------
Number of Unexercised Value of Unexercised
Options at in-the-money Options at
Shares December 31, 1995(#) December 31, 1995($)
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) Upon Exercise ($) Unexercisable Unexercisable(1)
---- ------------ ----------------- -------------------- -----------------------
<S> <C>
Donald L. Unger 0 $0 500/0 $0
</TABLE>
(1) Based upon a market value of $5.00 per share.
Chief Executive Officer Employment Agreement and Incentive Bonus Plan
The Corporation and Donald L. Unger, President and Chief Executive
Officer, entered into a written employment agreement on April 13, 1992, to be
effective as of April 13, 1992 ("Unger Employment Agreement"). The Unger
Employment Agreement provides that Mr. Unger will serve on the Board of
Directors of the Corporation, subject to shareholder election, until his
employment ends. Under the terms of the Unger Employment Agreement, Mr. Unger
receives an annual salary of $100,000, together with certain other customary
benefits. In the event of a change of control of the Corporation (as defined in
the Unger Employment Agreement), Mr. Unger will receive a one time cash payment
equal to his annual salary at the date of change of control multiplied by the
percentage by which the Corporation's appraised value exceeds its book value.
Such payment is not to exceed 300% of Mr. Unger's annual salary at the date of
change in control.
Employee Benefit Plans
The Corporation has adopted a plan that is qualified under Section
401(k) of the Internal Revenue Code for the benefit of its eligible employees.
Employees are not required to contribute to the plan but may contribute, subject
to the statutory maximum, from their annual salary before taxes. Employees who
have attained age 21 and completed six months of service are eligible to
participate in the plan beginning on the January 1 or July 1 following their
six-month anniversary. The Corporation made a contribution to the plan for the
year ending December 31, 1995 in the amount of $9,601. No contributions were
made for the years ending December 31, 1994 and 1993.
43
<PAGE>
Security Ownership of Management
The following table sets forth for (i) each director and executive
officer of the Corporation, (ii) each beneficial owner of 5% or more of the
outstanding shares of the Corporation's Common Stock, and (iii) all directors
and executive officers of the Corporation as a group: (1) the number of shares
of the Corporation's Common Stock beneficially owned on June 30, 1996 and (2)
the percentage of ownership of outstanding shares of the Bank's Common Stock on
said date. All of the Corporation's directors and executive officers receive
mail at the Corporation's principal executive office at 4095 Valley Pike,
Winchester, Virginia 22602.
<TABLE>
<CAPTION>
Name of Number of Shares Percent of
Beneficial Owner Beneficially Owned(1) of Class
<S> <C>
W. Houston Board, III 19,660 2.09%
Frank H. Brumback 35,323(2) 2.70
Robert W. Claytor 44,679(3) 3.42
Clifton L. Good 49,363(4) 3.78
Ralph S. Gregory 69,547(5) 5.32
Thomas W. Grove 8,520 0.66
Joseph W. Hollis 57,951(6) 4.40
George R. Irvin, Jr. 54,012(7) 4.55
Gerald H. Kidwell 55,029(8) 4.21
Lewis W. Spangler 39,267(9) 3.01
Donald L. Unger 4,019(10) 0.31
Beneficial ownership of Common 450,014 34.45
Stock; by all directors and executive
officers as a group (11 persons)
</TABLE>
(1) In calculating the number of shares of Common Stock which are
beneficially owned (and thus the percentage of Common Stock
beneficially owned), a person is deemed to own Common Stock if that
person has the right to acquire beneficial ownership of Common Stock
within sixty (60) days through the exercise of any option, warrant or
right, or through the conversion of any security.
(2) Includes 16,802 shares held jointly.
(3) Includes 34,869 shares held by, or jointly with, spouses, children or
trusts.
(4) Includes 40,966 shares held by, or jointly with, spouses,
children or trusts or Clifton L. Good Realty, Incorporated.
(5) Includes 58,021 shares held by, or jointly with, spouses, children or
trusts.
(6) Includes 39,276 shares held by, or jointly with, spouses, children
or trusts.
(7) Includes 1,110 shares held by, or jointly with, spouses,
children or trusts.
(8) Includes 54,020 shares held by, or jointly with, spouses, children or
trusts.
(9) Includes 402 shares held by, or jointly with, spouses, children or
trusts.
(10) Includes 19 shares held by, or jointly with, spouses, children or
trusts.
Unless otherwise indicated in the footnotes above, the individuals named above
have sole voting and dispositive powers over the shares beneficially owned by
them.
44
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Authorized and Outstanding Capital Stock
The Corporation's Articles of Incorporation authorize 20,000,000 shares
of Common Stock, par value $1.00, of which 1,306,303 shares were issued and
outstanding on June 30, 1996. The Articles of Incorporation also authorize
1,000,000 shares of preferred stock, no par value, of which no shares were
issued and outstanding at June 30, 1996.
Characteristics of Common Stock
Certain characteristics of the Corporation's Common Stock are
summarized below:
Dividend Rights. The Corporation may pay dividends as declared from
time to time by the Board of Directors out of funds legally available therefor,
subject to certain restrictions imposed by federal and state laws. See "Business
- - Supervision and Regulation - Limits on Dividends and Other Payments." The
holders of Common Stock are entitled to receive and share equally in any
dividends as may be declared by the Board of Directors.
Voting Rights. In all elections of directors, each stockholder has the
right to cast one vote for each share of Common Stock owned by him and is
entitled to vote for as many persons as there are directors to be elected.
Stockholders of the Corporation do not have cumulative voting rights. On any
other question to be determined by a vote of shares at any meeting of
stockholders, each stockholder shall be entitled to one vote for each share of
Common Stock owned by him and entitled to vote.
Liquidation Rights. Upon liquidation, after payment of all creditors,
including without limitation the liquidation preference per share of preferred
stock, if any is outstanding, the remaining assets of the Corporation would be
distributed to the holders of the Common Stock on a pro rata basis.
Preemptive Rights. Holders of Common Stock have no preemptive rights
with respect to the issuance of additional shares of Common Stock.
Calls and Assessments. All Common Stock outstanding is fully paid and
nonassessable.
Reports to Stockholders. The Corporation furnishes its stockholders
with annual reports, including audited financial statements, as well as
quarterly reports containing unaudited financial information.
Transfer Agent. The Corporation acts as its own transfer agent.
Characteristics of Preferred Stock
The Board of Directors may determine the preferences, limitations, and
relative rights, to the extent permitted by the Virginia Stock Corporation Act,
of any class or series of shares of Preferred Stock before the issuance of any
shares of that class or series.
Warrants to Acquire Common Stock
As part of the recapitalization of the Corporation in 1992, the
Corporation, in private placements, issued two rounds of Common Stock at $5.00
per share, convertible Preferred Stock convertible into Common Stock at $5.00
per share (which has since been converted) and warrants to purchase Common Stock
at $5.00 per share. At
45
<PAGE>
June 30, 1996, there were warrants to purchase 200,688 shares of Common Stock
outstanding which are exercisable through June 30, 1997.
Limitations on Liability of Directors
Section 13.1-692.1 of the Virginia Stock Corporation Act ("Virginia
Act") authorizes a Virginia corporation to reduce or eliminate the damages that
can be assessed against an officer or director arising out of a single
transaction. The Corporation's bylaws provide that no member of the
Corporation's Board of Directors shall be liable for any amount in any
proceeding brought against him or her as a director. The Virginia Act provides
that the liability of a director may not be limited if the director engages in
willful misconduct or a knowing violation of the criminal law or of any federal
or state securities law, including any claim of unlawful insider trading or
manipulation of the market for any security.
Indemnification of Directors
Sections 13.1-697 and 13.1-698 of the Virginia Act set forth certain
provisions regarding the indemnification of directors. Generally, these
provisions of the Virginia Act allow a corporation to indemnify a director if:
(i) he conducted himself in good faith; (ii) he believed (a) in the case of
conduct in his official capacity, that his conduct was in the corporation's best
interests, and (b) in all other cases, that his conduct was at least not opposed
to its best interests; and (iii) in the case of any criminal proceeding, that he
had no reasonable cause to believe his conduct was unlawful. Under the Virginia
Act, a corporation may not indemnify a director (i) in connection with a
proceeding by or in the right of the corporation in which the director is
adjudged liable to the corporation; or (ii) in any other proceeding charging
improper personal benefit to him, in which he is adjudged liable on the basis
that personal benefit was improperly received by him. The Virginia Act also
prohibits indemnification of a director for willful misconduct or a knowing
violation of the criminal law.
The Corporation's Articles of Incorporation call for the
indemnification of (a) any person who was or is a party to any proceeding,
including a proceeding brought by a shareholder in the right of the Corporation
or brought by or on behalf of shareholders of the Corporation, by reason of the
fact that he is or was a Director or officer of the Corporation, or (b) any
Director or officer who is or was serving at the request of the Corporation as a
director, trustee, partner or officer of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against any liability
incurred by him in connection with such proceeding unless he engaged in willful
misconduct or a knowing violation of criminal law.
Federal Law Restrictions on Acquisition of the Bank
Under the Bank Holding Company Act of 1956 ("BHCA") and regulations
promulgated thereunder by the Federal Reserve, no company may acquire "control"
of institutions that offer demand deposit accounts and make commercial loans
without the prior approval of the Federal Reserve. The ownership of, control,
holding with power to vote of, or holding proxies representing 25% or more of
any class of voting securities is presumed to be a "controlling" interest under
the BHCA, and, depending on the circumstances, control may be found to exist
below this level of ownership. Any company acquiring such control would become a
bank holding company, would be subject to certain limitations and prohibitions
on its operations, and would become subject to registration, examination and
supervision by the Federal Reserve. The Federal Reserve may withhold approval of
an application to become a bank holding company on certain specified grounds.
Articles of Incorporation
Limitation on Ownership in Excess of 9.99%. The Articles of
Incorporation restrict the transfer, sale, assignment, gift, pledge, or bequest
of a beneficial interest in common stock of the Corporation to an "interested
shareholder" without prior approval by a majority of the Corporation's Board of
Directors.
46
<PAGE>
An "interested shareholder" is any person, firm, corporation,
partnership, joint venture, or other entity whom either directly or indirectly,
through the use of an associate or affiliate, is or becomes a beneficial owner
of stock in excess of 9.99% of the total outstanding common shares of the
Corporation. Any shares acquired in excess of the 9.99% threshold will be
considered excess shares, and such transfer will be considered null and void.
Such restriction is marked conspicuously on the front and back of the
stock certificate in compliance with Section 13.1-648.B of the Virginia Code
requiring adequate notification of any such restriction.
The Corporation's Articles of Incorporation provide for a classified
Board of Directors which is divided into three classes, with each class serving
a three-year term and one class of directors being elected each year. In
addition to classifying the Board of Directors, the Articles of Incorporation
also provide, subject to the rights of holders of any outstanding preferred
stock, that directors can be removed during their terms of office for cause only
by the affirmative vote of the holders of more than two-thirds of the then
outstanding voting shares. Thus, holders of a majority (but less than
two-thirds) of the Corporation's outstanding shares might not be able to remove
a director, even for cause, for up to three years. The Articles of Incorporation
also would require the affirmative vote of more than two-thirds of the
outstanding voting shares to increase or decrease the number of directors by
more than 30% of the number of directors last elected by the stockholders.
The Corporation has not adopted many of the conventional anti-takeover
provisions such as a fair-price charter amendment, a super-majority vote charter
amendment, or an anti-greenmail charter amendment. The Articles of Incorporation
do, however, as permitted by Virginia law, in addition to staggering the terms
of the members of the Board of Directors, provide the Board of Directors with
flexibility to eliminate the right of stockholders to call a special meeting
and, as explained below, to fix the stockholder vote required for certain
corporate actions.
Virginia law provides that certain significant corporate actions must
be approved by a vote of more than two-thirds of the votes entitled to be cast
on the matter, unless the Articles of Incorporation provide otherwise. These
actions include amendments to a corporation's articles of incorporation, plans
of merger or exchange, sales of substantially all assets other than in the
ordinary course of business or plans of dissolution ("Fundamental Actions").
Virginia law also provides that a corporation's articles of incorporation may
either increase the vote required to approve Fundamental Actions or decrease the
required vote to not less than a majority of all the votes cast by each voting
group entitled to vote on the transaction at a meeting at which a quorum of
the voting group exists.
The Articles of Incorporation decrease the stockholder vote required to
approve amendments to the Articles of Incorporation to a majority of the shares
cast on such proposed amendments, unless the Board of Directors conditions its
submission of a proposed amendment on receipt of a greater vote. The Articles of
Incorporation also provide that, unless the Board of Directors conditions its
submission of a proposed Fundamental Action (other than an amendment to the
Articles of Incorporation) on receipt of a greater vote, any Fundamental Action
that requires stockholder approval must be approved by a vote of more than
two-thirds of the votes entitled to be cast on such Fundamental Action.
The effect of these provisions is to make stockholder approval of
Fundamental Actions less difficult to obtain in the case of Fundamental Actions
favored by the Board of directors. A lower required stockholder vote on
amendments to the Articles of Incorporation will benefit the Corporation in
terms of cost savings related to the solicitation efforts necessary to obtain a
more than two-thirds vote. If, however, the Board of directors conditions
approval of a Fundamental Action on receipt of a higher stockholder vote, this
provision will make approval of the Fundamental Action more difficult to obtain.
For this reason, these provisions of the Articles of Incorporation and Virginia
law have anti-takeover implications in that they permit the Board of Directors
to make a Fundamental Action not approved by it more difficult to adopt.
47
<PAGE>
<PAGE>
UNDERWRITING
The Underwriter, McKinnon & Company, Inc., 555 Main Street, Norfolk,
Virginia, has agreed, subject to the terms and conditions contained in an
underwriting agreement with the Corporation, to sell, as selling agent for the
Corporation on a best efforts basis, the Shares offered in the Subscription
Offering that are not purchased by stockholders, together with 400,000
additional Shares. The Underwriter is not obligated to purchase the Shares if
they are not sold to the public.
The Underwriter has informed the Corporation that it proposes to offer
the Shares as selling agent for the Corporation, subject to prior sale, when, as
and if issued by the Corporation, in part to the public at the Public Offering
price, and in part through certain selected dealers to customers of such
selected dealers at the Public Offering price. The Underwriter reserves the
right to reject any order for the purchase of Shares through it, in whole or in
part.
Neither the Subscription Offering nor the Public Offering is contingent
upon the occurrence of any event or the sale of a minimum or maximum number of
Shares. Funds received by the Underwriter from investors in the Public Offering
will be deposited with and held by Crestar Bank as escrow agent (the "Escrow
Agent") in a non-interest bearing escrow account until the closing of the both
the Subscription Offering and Public Offering.
Prior to the Offerings, there has been no established market for the
Corporation's Common Stock. The Corporation has applied to list its Common Stock
on the NASDAQ SmallCap Market under the symbol "MCFV"; however, there can be no
assurance that an active trading market for the Corporation's Common Stock will
develop after the Offerings, or if developed, that such a market will be
sustained.
The Underwriter advised the Corporation on the structure of the
Subscription Offering. The Subscription Offering price was determined by the
Corporation after consultation with the Underwriter. The Public Offering price
will be determined by negotiations between the Corporation and the Underwriter.
Among the factors that will be considered in determining the price of the Public
Offering Shares are the history and the prospects for the Corporation, its past
and present earnings and trend of such earnings, the prospects for future
earnings, the current performance and prospects of the banking industry in which
it competes, the general condition of the securities market at the time of the
Public Offering, and the prices of equity securities of comparable companies.
The directors of the Corporation have agreed that they will not sell,
contract to sell, or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable for any shares of Common Stock for a
period of 120 days after the date of the commencement of the Offerings without
the prior written consent of the Underwriter. Officers of the Corporation who
are not directors have not entered into any agreements restricting their sale of
the Corporation's Common Stock. The Underwriter may from time to time be a
customer of, engage in transactions with, and perform services for the
Corporation in the ordinary course of business.
The Corporation has agreed to indemnify the Underwriter against certain
civil liabilities, including liability under the Securities Act of 1933, as
amended. The Corporation has agreed to pay the Underwriter's legal fees, which
will not exceed $10,000, and to reimburse the Underwriter for up to $1,000 for
costs of informational and due diligence meetings.
<PAGE>
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be
passed upon for the Corporation by Kaufman & Canoles, P.C. of Norfolk, Virginia.
Certain legal matters are being passed upon for the Underwriter by Kaufman &
Canoles, P.C.
EXPERTS
The financial statements of the Bank at December 31, 1995 and 1994 and
for the three year period ended December 31, 1995 included in this Prospectus
have been audited by Yount, Hyde & Barbour, P.C., independent certified public
accountants, to the extent and for the periods indicated in their report
thereon, and are included in reliance upon the authority of Yount, Hyde &
Barbour, P.C., as experts in accounting and auditing.
49
<PAGE>
Part F/S
Index to Consolidated Financial Statements
Independent Auditor's Report.............................................. F- 2
Consolidated Balance Sheets at December 31, 1995 and 1994................. F- 3
Consolidated Statements of Income for the Three Years Ended
December 31, 1995, 1994 and 1993....................................... F- 4
Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1995, 1994 and 1993..................... F- 6
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 1995, 1994 and 1993....................................... F- 7
Notes to Consolidated Financial Statements................................ F- 9
Consolidated Balance Sheet at June 30, 1996 (unaudited)................... F-29
Consolidated Statements of Income for the Six Months Ended June 30,
1996 and 1995 (unaudited).............................................. F-30
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 30, 1996 and 1995 (unaudited).................... F-32
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 1996 and 1995 (unaudited)..................................... F-33
Notes to Consolidated Financial Statements (unaudited).................... F-35
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Marathon Financial Corporation
Winchester, Virginia
We have audited the accompanying consolidated balance sheets of
Marathon Financial Corporation and Subsidiaries, as of December 31, 1995 and
1994, and the related consolidated statements of income, changes in
stockholders' equity, and cash flows for the years ended December 31, 1995, 1994
and 1993. These consolidated financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
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 consolidated financial statements referred
to above present fairly, in all material respects, the financial position of
Marathon Financial Corporation and Subsidiaries, as of December 31, 1995 and
1994, and the results of its operations and its cash flows for the years ended
December 31, 1995, 1994 and 1993, in conformity with generally accepted
accounting principles.
As discussed in Note 1, the Corporation changed its method of
accounting for investments in debt and equity securities to adopt the provisions
of Statements of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" in 1994.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 31, 1996
F-2
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
-------------- ---------------
<S> <C>
Cash and due from banks $ 2 282 876 $ 1 788 496
Securities (fair value: 1995, $1,708,102 and
1994, $1,450,973) (Note 2) 1 699 472 1 489 791
Federal funds sold 1 574 000 277 000
Loans, net (Notes 3 and 4) 28 774 020 22 618 297
Bank premises and equipment, net (Notes 5 and 9) 1 288 463 1 242 102
Organization costs, at amortized cost (Note 6) - - 5 064
Accrued interest receivable 159 066 172 734
Other real estate 236 123 - -
Other assets 55 999 88 743
-------------- ---------------
$ 36 070 019 $ 27 682 227
============== ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing $ 5 261 411 $ 3 759 042
Interest bearing 27 360 753 20 845 174
-------------- ---------------
Total deposits (Note 7) $ 32 622 164 $ 24 604 216
Interest expense payable 60 151 134 969
Accounts payable and accrued expenses 93 220 54 984
Mortgage payable 507 134 529 368
Capital lease payable (Note 9) 109 600 114 721
Commitments and contingent liabilities (Notes 10 and 13) - - - -
-------------- ---------------
Total liabilities $ 33 392 269 $ 25 438 258
-------------- ---------------
Stockholders' Equity
Preferred stock, Series A, 5% noncumulative, no par value; 1,000,000 shares
authorized; 1995, no shares issued and outstanding; 1994, 200,688 shares
issued and outstanding $ - - $ 1 003 440
Common stock, $1 par value; 20,000,000 shares
authorized; 1995, 1,306,303 shares issued and
outstanding; 1994, 1,078,601 shares issued and
outstanding 1 306 303 1 078 601
Capital surplus 5 109 908 4 199 100
Retained earnings (deficit) (3 746 878) (4 029 140)
Unrealized gain (loss) on securities available for sale 8 417 (8 032)
-------------- ---------------
Total stockholders' equity $ 2 677 750 $ 2 243 969
-------------- ---------------
$ 36 070 019 $ 27 682 227
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
<S> <C>
Interest income:
Interest and fees on loans $ 2 786 074 $ 2 123 881 $ 1 463 942
Interest on investment securities:
Taxable 42 788 67 870 - -
Nontaxable 15 000 15 000 - -
Interest and dividends on securities available for sale:
Taxable 16 559 13 452 123 143
Nontaxable - - - - 15 000
Dividends 13 060 5 404 3 374
Interest on federal funds sold 66 829 25 641 19 683
--------------- ---------------- ----------------
Total interest income $ 2 940 310 $ 2 251 248 $ 1 625 142
--------------- ---------------- ----------------
Interest expense:
Interest on deposits (Note 7) $ 1 203 143 $ 801 614 $ 661 920
Interest on mortgage payable 38 949 40 550 54 742
Interest on capital lease obligation 8 610 2 816 - -
Interest on federal funds purchased 1 536 3 933 430
--------------- ---------------- ----------------
Total interest expense $ 1 252 238 $ 848 913 $ 717 092
--------------- ---------------- ----------------
Net interest income $ 1 688 072 $ 1 402 335 $ 908 050
Provision for loan losses (Note 4) 113 419 151 533 12 100
--------------- ---------------- ----------------
Net interest income after
provision for loan losses $ 1 574 653 $ 1 250 802 $ 895 950
--------------- ---------------- ----------------
Other income:
Service charges on deposit accounts $ 227 776 $ 112 899 $ 56 264
Commissions and fees 45 207 31 725 27 062
Gain on redemption of investment securities - - 19 125 - -
Settlement of legal disputes - - 58 847 - -
Other 8 346 19 393 10 098
---------------- ---------------- ----------------
Total other income $ 281 329 $ 241 989 $ 93 424
---------------- ---------------- ----------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ----------------
<S> <C>
Other expenses:
Salaries and employee benefits $ 675 948 $ 523 017 $ 385 230
Net occupancy expense of premises 110 478 91 624 75 701
Furniture and equipment 98 969 57 100 75 632
Other (Note 12) 550 046 502 574 372 292
---------------- ---------------- ----------------
Total other expenses $ 1 435 441 $ 1 174 315 $ 908 855
---------------- ---------------- ----------------
Income before income taxes $ 420 541 $ 318 476 $ 80 519
Provision for income taxes (Note 8) - - - - - -
---------------- ---------------- ----------------
Net income $ 420 541 $ 318 476 $ 80 519
================ ================ ================
Earnings per common and equivalent share (Note 1) $ .35 $ .30 $ .08
================ ================ ================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Retained Securities Total
Capital Stock Capital Earnings Available Stockholders'
Preferred Common Surplus (Deficit) for Sale Equity
-------------- ------------- ------------- ------------- ------------ ---------------
<S> <C>
Balance, December 31,
1992 $ 1 003 440 $ 992 335 $ 3 854 036 $ (4 352 800) $ - - $ 1 497 011
Net income - 1993 - - - - - - 80 519 - - 80 519
Sale of common stock
(71,199 shares) - - 71 199 284 796 - - - - 355 995
Issuance of common
stock (5,030 shares) - - 5 030 20 120 (25 150) - - - -
-------------- ------------- ------------- ------------- ------------ ---------------
Balance, December 31,
1993 $ 1 003 440 $ 1 068 564 $ 4 158 952 $ (4 297 431) $ - - $ 1 933 525
Net income - 1994 - - - - - - 318 476 - - 318 476
Issuance of common
stock (10,037 shares) - - 10 037 40 148 (50 185) - - - -
Unrealized gain
(loss) on securities
available for sale - - - - - - - - (8 032) (8 032)
-------------- ------------- ------------- ------------- ------------ ---------------
Balance, December 31,
1994 $ 1 003 440 $ 1 078 601 $ 4 199 100 $ (4 029 140) $ (8 032) $ 2 243 969
Net income - 1995 - - - - - - 420 541 - - 420 541
Issuance of common
stock (15,045 shares) - - 15 045 60 180 (75 225) - - - -
Issuance of common
stock - stock dividend
(11,969 shares) (Note 11) - - 11 969 47 876 (59 845) - - - -
Cash to be paid in lieu
of fractional shares - - - - - - (3 209) - - (3 209)
Unrealized gain
(loss) on securities
available for sale - - - - - - - - 16 449 16 449
Conversion of
preferred stock to
common stock
(200,688 shares) (1 003 440) 200 688 802 752 - - - - - -
-------------- ------------- ------------- ------------- ------------ ---------------
Balance, December 31,
1995 $ - - $ 1 306 303 $ 5 109 908 $ (3 746 878) $ 8 417 $ 2 677 750
============== ============= ============= ============= ============ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ---------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 420 541 $ 318 476 $ 80 519
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 16 194 34 670 41 428
Depreciation 103 366 73 710 88 118
Provision for loan losses 113 419 151 533 12 100
Writedown of other real estate 42 581 - - - -
Gain on redemption of investment securities - - (19 125) - -
Accretion of securities discounts, net (2 567) (2 210) (4 299)
Changes in assets and liabilities:
(Increase) decrease in other assets 21 614 (9 440) (6 496)
(Increase) decrease in accrued interest
receivable 13 668 (68 341) 26 444
Increase (decrease) in accounts payable
and accrued expenses 35 027 43 672 (112 626)
Increase (decrease) in interest expense payable (74 818) (143 266) 15 282
---------------- ---------------- ---------------
Net cash provided by operating activities $ 689 025 $ 379 679 $ 140 470
---------------- ---------------- ---------------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investments securities $ 21 240 $ 800 362 $ - -
Proceeds from maturities and principal
payments of securities available for sale 4 901 23 648 861 703
Purchase of investment securities - - (538 833) - -
Purchase of securities available for sale (216 806) (244 336) (207 000)
Net (increase) in loans (6 547 846) (4 620 745) (7 333 303)
Purchase of equipment (128 332) (56 076) (80 329)
---------------- ---------------- ---------------
Net cash (used in) investing activities $ (6 866 843) $ (4 635 980) $ (6 758 929)
---------------- ---------------- ---------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 2 383 106 $ 1 075 894 $ 4 742 518
Net increase in certificates of deposit 5 634 842 3 922 516 1 185 182
Net proceeds from issuance of common stock - - - - 355 995
Principal payments on capital lease obligations (26 516) (14 931) - -
Proceeds on refinance of mortgage payable - - - - 550 000
Principal payments on mortgage payable (22 234) (20 632) (548 648)
---------------- ---------------- ---------------
Net cash provided by financing activities $ 7 969 198 $ 4 962 847 $ 6 285 047
---------------- ---------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
---------------- ---------------- ---------------
<S> <C>
Increase (decrease) in cash
and cash equivalents $ 1 791 380 $ 706 546 $ (333 412)
Cash and Cash Equivalents
Beginning 2 065 496 1 358 950 1 692 362
---------------- ---------------- ---------------
Ending $ 3 856 876 $ 2 065 496 $ 1 358 950
================ ================ ===============
Supplemental Disclosures of Cash Flow
Information, cash payments for interest $ 1 327 056 $ 992 179 $ 701 810
================ ================ ===============
Supplemental Schedule of Noncash
Investing and Financing Activities:
Other real estate acquired in
settlement of loans $ 278 704 $ - - $ - -
================ ================ ===============
Issuance of common stock $ 138 279 $ 50 185 $ 25 150
================ ================ ===============
Equipment acquired under capital
lease obligations $ 21 395 $ 129 652 $ - -
================ ================ ===============
Conversion of preferred stock
to common stock $ 1 003 440 $ - - $ - -
================ ================ ===============
Unrealized gain (loss) on securities
available for sale $ 16 449 $ (8 032) $ - -
================ ================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
F-8
<PAGE>
MARATHON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Banking Activities and Significant Accounting Policies
Marathon Financial Corporation and Subsidiary (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans
to customers in Virginia. The loans are expected to be repaid from
cash flow or proceeds from the sale of selected assets of the
borrowers.
On December 31, 1993, the Marathon Land Trust was merged into the
Marathon Bank. The Marathon Bank acquired all assets and assumed all
liabilities of the Trust. This transaction had no effect on the
consolidated financial statements presented.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Principles of Consolidation
The consolidated financial statements of the Marathon Financial
Corporation and its Subsidiaries, include the accounts of all
companies. All material intercompany balances and transactions
have been eliminated.
Securities
The Corporation adopted FASB No. 115, "Accounting for Certain
Investment in Debt and Equity Securities" effective beginning
January 1, 1994. This statement addresses the accounting and
reporting for investments in equity securities that have
readily determinable fair values and for all investments in
debt securities. Those investments are classified in three
categories and accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability
to hold to maturity regardless of changes in market
conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted
for amortization of premium and accretion of discount,
computed by the interest method over their contractual
lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt
and equity securities that the Corporation intends to hold
for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors,
including significant movements in interest rates, changes
in the maturity mix of the Corporation's assets and
liabilities, liquidity needs, regulatory capital
considerations, and other similar factors. Securities
available for sale are carried at fair
F-9
<PAGE>
value. Unrealized gains or losses are reported as increases
or decreases in stockholders' equity. Realized gains or
losses, determined on the basis of the cost of specific
securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short
term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading
account assets are included in interest income on trading
account securities. The Corporation had no trading
securities at December 31, 1995 and 1994.
Prior to 1994, the Corporation also classified its securities
into three investment categories: trading, available for sale,
and held to maturity. The accounting policies for these
categories were the same except for securities available for
sale, which were carried at the lower of cost or market.
Derivative Financial Instruments
In October, 1994, FASB No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments"
was issued. It requires various disclosures for derivative
financial instruments which are futures, forward, swap, or
option contract, or other financial instruments with similar
characteristics. The Corporation does not have any derivative
financial instruments as defined under this statement.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses. Unearned
discount on installment loans is recognized as income over the
terms of the loans by the interest method. Interest on other
loans is calculated by using the simple interest method on
daily balances of the principal amount outstanding. Loans are
charged off when management believes that the collectibility of
the principal is unlikely. Accrual of interest is discontinued
on a loan when management believes, after considering economic
and business conditions and collection efforts, that the
borrowers' financial condition is such that collection of
interest is doubtful.
On January 1, 1995, the Corporation adopted FASB No. 114,
"Accounting by Creditors for Impairment of a Loan." This
statement has been amended by FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the
impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that
is, if repayment of those loans is expected to be provided
solely by the underlying collateral) and for which management
has determined foreclosure is probable, the measure of
impairment of those loans is to be based on the fair value of
the collateral. Statement 114, as amended, also requires
certain disclosures about investments in impaired loans and the
allowance for credit losses and
F-10
<PAGE>
interest income recognized on loans. The Corporation had no
loans subject to FASB 114 at December 31, 1995.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which,
in management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, credit concentrations, trends in historical
loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of
estimated cash flows. The allowance is increased by a provision
for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance
relating to impaired loans are charged or credited to the
provision for loan losses. Because of uncertainties inherent in
the estimation process, management's estimate of credit losses
inherent in the loan portfolio and the related allowance may
change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the
straight-line and declining-balance methods. Lease amortization
is included in depreciation expense.
Maintenance and repairs of property and equipment are charged
to operations and major improvements are capitalized. Upon
retirement, sale or other disposition of property and
equipment, the cost and accumulated depreciation are eliminated
from the accounts and gain or loss is included in operations.
Classifications of Amortization on Assets Acquired Under Capital
Leases
The amortization expense on assets acquired under capital
leases is included with the depreciation expense.
Earnings Per Share
Earnings per share of common stock are based on the weighted
average number of common shares outstanding during each year
after giving retroactive effect to the stock dividend declared
in 1995.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards, and tax credit
carry-forwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all
of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes
in tax laws and rates on the date of enactment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased and sold for
one-day periods.
Organization Costs
The Marathon Bank was organized under the laws of the State of
Virginia and commenced operations as a commercial bank on
December 15, 1988. Certain expenses incurred prior to this date
were deferred and were amortized using the straight-line method
over a 60-month period.
In addition, the Marathon Financial Corporation was organized
under the laws of the State of Virginia as a bank holding
company on October 2, 1990. Certain expenses incurred prior to
this date were deferred and were amortized using the
straight-line method over a 60-month period.
Loan Fees and Costs
Loan origination and commitment fees and direct loan
origination costs are being recognized as collected and
incurred. The use of this method of recognition does not
produce results that are materially different from results
which would have been produced if such costs and fees were
deferred and amortized as an adjustment of the loan yield over
the life of the related loan.
Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1995
<S> <C>
Obligations of U.S.
government corporations
and agencies $ 447 801 $ 6 636 $ - - $ 454 437
Mortgage-backed securities 38 639 1 781 - - 40 420
Other 278 650 - - - - 278 650
-------------- -------------- -------------- --------------
$ 765 090 $ 8 417 $ - - $ 773 507
============== ============== ============== ==============
<CAPTION>
1994
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 289 035 $ 8 $ (8 040) $ 281 003
Other 262 750 - - - - 262 750
-------------- -------------- ------------- --------------
$ 551 785 $ 8 $ (8 040) $ 543 753
============== ============== ============= ==============
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of the securities available for
sale as of December 31, 1995, by contractual maturity, are shown
below.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due in one year or less $ 246 895 $ 252 500
Due after one year through five years 200 906 201 937
Mortgage-backed securities 38 639 40 420
Other 278 650 278 650
------------ ---------
$ 765 090 $ 773 507
============ =========
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1995 and 1994, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1995
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 649 946 $ 54 $ (2 625) $ 647 375
Obligations of state and
political subdivisions 150 000 10 590 - - 160 590
Corporate securities 99 819 181 - - 100 000
Mortgage-backed securities 26 200 430 - - 26 630
-------------- ------------- ------------- ------------
$ 925 965 $ 11 255 $ (2 625) $ 934 595
============== ============== ============= ============
<CAPTION>
1994
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 649 290 $ - - $ (38 322) $ 610 968
Obligations of state and
political subdivisions 150 000 4 995 - - 154 995
Corporate securities 99 686 - - (2 686) 97 000
Mortgage-backed securities 47 062 229 (3 034) 44 257
-------------- -------------- ------------- --------------
$ 946 038 $ 5 224 $ (44 042) $ 907 220
============== ============== ============= ==============
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1995, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because the corporate securities and mortgages underlying the
mortgage-backed securities may be called or prepaid without any
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due in one year or less $ 199 946 $ 200 000
Due after one year through five years 450 000 447 375
Due after ten years 150 000 160 590
Corporate securities 99 819 100 000
Mortgage-backed securities 26 200 26 630
-------------- ----------
$ 925 965 $ 934 595
============== ==========
</TABLE>
Proceeds from maturities, calls and principal payments of securities
available for sale during 1995, 1994 and 1993 were $4,901, $23,648
and $861,703. There were no realized gains or realized losses
recognized on these transactions.
Proceeds from maturities, calls and principal payments of securities
being held to maturity during 1995 and 1994 were $21,240 and
$800,362. There were no realized gains or realized losses recognized
on these transactions.
Securities having a book value of $702,448 and $686,478 at December
31, 1995 and 1994 were pledged to secure public deposits and for
other purposes required by law.
Note 3. Loans and Related Party Transactions
The loan portfolio as of December 31, 1995 and 1994, is composed of
the following:
<TABLE>
<CAPTION>
1995 1994
--------------- --------------
<S> <C>
Commercial $ 13 315 029 $ 11 976 315
Real estate - mortgage 6 133 400 4 923 825
Real estate - construction 3 637 433 2 487 939
Installment loans to individuals 6 081 297 3 529 421
--------------- --------------
$ 29 167 159 $ 22 917 500
Less allowance for loan losses 393 139 299 203
--------------- --------------
$ 28 774 020 $ 22 618 297
=============== ==============
</TABLE>
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as
related parties), on the same terms, including interest rates and
collateral, as those prevailing at the time for
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
comparable transactions with others. These persons and firms
(exclusive of loans to any such person which in the aggregate did not
exceed $60,000) were indebted to the Bank for loans totaling
$1,174,885 and $1,294,697 at December 31, 1995 and 1994,
respectively. During 1995, total principal additions were $839,888
and total principal payments were $959,700.
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
1995 1994 1993
------------- ------------- -----------
<S> <C>
BALANCE, BEGINNING $ 299 203 $ 224 758 $ 196 476
Provision for loan losses 113 419 151 533 12 100
Recoveries 11 185 12 744 20 367
Loan losses charged to
the allowance (30 668) (89 832) (4 185)
------------- ------------- -----------
BALANCE, ENDING $ 393 139 $ 299 203 $ 224 758
============= ============= ===========
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $45,445 and $269,314 at December 31, 1995 and 1994,
respectively. If interest on these loans had been accrued, such
income would have approximated $3,679 and $4,770 for 1995 and 1994,
respectively.
NOTE 5. BANK PREMISES AND EQUIPMENT, NET
Bank premises and equipment as of December 31, 1995 and 1994 consists
of the following:
1995 1994
------------ ------------
Capital leases - computer $ 151 047 $ 129 652
Bank premises 1 314 922 1 268 464
Furniture and equipment 553 837 472 290
------------ ------------
$ 2 019 806 $ 1 870 406
Less accumulated depreciation 731 343 628 304
------------ ------------
$ 1 288 463 $ 1 242 102
============ ============
Depreciation included in operating expense for 1995, 1994, and
1993 was $103,366, $73,710, and $88,118, respectively.
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. ORGANIZATION COSTS
Certain costs incurred by the Bank prior to commencing operations
on December 15, 1988, were capitalized and amortized over a
60-month life. These costs totaled $108,361.
Certain costs incurred by the Corporation prior to commencing
operations on October 2, 1990, were capitalized and amortized over
a 60-month life. These costs totaled $60,350.
NOTE 7. DEPOSITS
Deposits outstanding at December 31, 1995, 1994 and 1993 and the
related interest expense for the years then ended, are summarized
as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1995 December 31, 1994
Amount Expense Amount Expense
<S> <C>
Noninterest bearing $ 5 261 411 $ - - $ 3 759 042 $ - -
------------ ----------- ------------ -----------
Interest bearing:
Interest checking $ 1 941 150 $ 48 524 $ 1 731 740 $ 38 974
Money market accounts 3 307 328 92 892 2 366 898 86 388
Regular savings 4 980 952 157 793 5 250 054 211 531
Certificates of deposit:
Less than $100,000 13 870 161 738 106 9 496 559 418 561
$100,000 and more 3 261 162 165 828 1 999 923 46 160
------------ ----------- ------------ -----------
Total interest bearing $ 27 360 753 $ 1 203 143 $ 20 845 174 $ 801 614
------------ ----------- ------------ -----------
Total deposits $ 32 622 164 $ 1 203 143 $ 24 604 216 $ 801 614
============ =========== ============ ===========
</TABLE>
Year Ended
December 31, 1993
Expense Amount
Noninterest bearing $ 2 480 666 $ - -
----------- ---------
Interest bearing:
Interest checking $ 1 120 707 $ 23 864
Money market accounts 2 217 352 81 396
Regular savings 6 213 115 192 527
Certificates of deposit:
Less than $100,000 6 763 082 321 022
$100,000 and more 810 884 43 111
----------- ---------
Total interest bearing $17 125 140 $ 661 920
----------- ---------
Total deposits $19 605 806 $ 661 920
=========== =========
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. INCOME TAXES
Effective January 1, 1993, the Corporation adopted FASB No. 109,
"Accounting for Income Taxes". The cumulative effect of the change in
accounting principle is deemed immaterial in determining net income
for the year ended December 31, 1993.
Net deferred tax assets consist of the following components as of
December 31, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ------------ ------------
<S> <C>
Deferred tax assets:
Net operating loss carryforward $ 1 291 762 $ 1 469 716 $ 1 610 105
Writedown of other real estate 14 478 - - - -
Less valuation allowance (1 206 820) (1 349 715) (1 450 418)
------------ ------------ ------------
$ 99 420 $ 120 001 $ 159 687
------------ ------------ ------------
Deferred tax liabilities:
Allowance for loan losses $ 99 420 $ 120 001 $ 155 450
Deferred loan fees - - - - 4 237
------------ ------------ ------------
$ 99 420 $ 120 001 $ 159 687
------------ ------------ ------------
$ - - $ - - $ - -
============ ============ ============
</TABLE>
The provision for income taxes charged to operations for the years
ended December 31, 1995, 1994 and 1993, consists of the following:
<TABLE>
<CAPTION>
1995 1994 1993
------------ ----------- --------
<S> <C>
Current tax effect $ - - $ - - $ - -
Deferred tax expense 142 895 100 703 - -
Benefit of net operating loss (142 895) (100 703) - -
------------ ----------- --------
$ - - $ - - $ - -
============ =========== ========
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1995, 1994 and 1993, due
to the following:
<TABLE>
<CAPTION>
1995 1994 1993
----------- ----------- ----------
<S> <C>
Computed "expected" tax expense $ 142 984 $ 108 282 $ 29 401
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance (142 895) (100 703) (14 451)
Tax exempt interest income (3 173) (4 754) (3 200)
Reduced tax due to marginal tax rates - - (826) (11 750)
Other 3 084 (1 999) - -
----------- ----------- ----------
$ - - $ - - $ - -
=========== =========== ==========
</TABLE>
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the provisions of the Internal Revenue Code, the Corporation
has available approximately $3,799,300 of net operating loss
carryforwards which can be offset against future taxable income.
The carryforwards expire December 31, 2006. The full realization
of the tax benefits associated with the carryforwards depends
predominately upon the recognition of ordinary income during the
carryforward period.
The loss carryforward at December 31, 1995, for financial
reporting purposes is approximately $3,529,874. The differences
between the loss carryforward for financial reporting and income
tax purposes results principally from timing differences in
recognizing start-up costs and the provision for loan losses. No
deferred taxes are recorded on these timing differences due to the
net operating loss carryforward position of the Corporation.
NOTE 9. LEASES
CAPITAL LEASE
During the year ended December 31, 1994, the Corporation entered
into a lease agreement on computer equipment and software.
Additional equipment and software was added to the lease during
1995 in the amount of $21,395. The balance of the liability under
capital leases at December 31, 1995 in the amount of $109,600
represents the present value of the balance due in future years
for lease rentals discounted at 7%. The liability is payable in
quarterly installments of $9,017 for principal and interest to
June 1, 1999. Since the term of the lease is approximately the
same as the estimated useful life of the assets, and the present
value of the future minimum lease payments at the beginning of the
lease approximated the fair value of the leased assets at that
date, the leases are considered to be capital leases and have been
so recorded. The lease also requires additional maintenance
payments of $4,853 per quarter.
The following is a schedule by years of the future minimum lease
payments under the capital leases together with the present value
of the net minimum lease payments as of December 31, 1995:
Years ending December 31:
1996 $ 55 480
1997 55 480
1998 55 480
1999 25 821
--------------
Total minimum lease payments $ 192 261
Less estimated executory costs
(such as maintenance) included in
the total minimum lease payments 67 942
--------------
Net minimum lease payments $ 124 319
Less the amount representing interest 14 719
-----------
Present value of net minimum
lease payments $ 109 600
=============
F-19
<PAGE>
LEASE COMMITMENTS AND TOTAL RENTAL EXPENSE
During the year ended December 31, 1994, the Corporation entered
into a five-year operating lease for the rental of a branch
location. The lease expires on September 30, 1999 and has two
five-year renewal options. The lease provides that the Corporation
pay all property taxes, insurance and maintenance plus an annual
rental of $12,000 for the initial lease period commencing on April
1, 1995. The total minimum lease commitment at December 31, 1995
under this lease is $51,000 which is due as follows:
1996 $ 12 000
1997 12 000
1998 12 000
1999 12 000
2000 3 000
--------------
$ 51 000
==============
There was $9,000 in rental expense resulting from this lease
included in the consolidated statements of income for the year
ended December 31, 1995.
FIXED EQUIPMENT ON LAND LEASED WITH RELATED PARTIES
Fixed equipment with a depreciated cost at December 31, 1995 of
$21,904 is located on land leased from a partnership of which the
Corporation's president is a partner. The lease expires on June
30, 1996, and includes an option to buy agreement; whereby the
Corporation can purchase the property for $150,000 at any time on
or before June 30, 1996. The total minimum lease commitment at
December 31, 1995, under this lease is $6,600 payable in 1996.
As of December 31, 1995 the Corporation has invested $36,614 in
the construction of a new building on this site. The total
estimated cost of the finished building is $225,000. The
Corporation has agreed to finance the construction of the building
with the understanding that the lessor will reimburse the
Corporation for all costs and will lease the building to the
Corporation for a rental expense to be determined based on the
total cost of the finished building and a land value of $150,000.
The estimated date of completion for the project is June 1, 1996
at which time the lease terms will be renegotiated.
NOTE 10. COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in the
accompanying financial statements. See Note 13 with respect to
financial instruments with off-balance-sheet risk.
As members of the Federal Reserve System, the Corporation is required
to maintain certain average reserve balances. For the final weekly
reporting period in the year ended December 31, 1995 this requirement
was $65,000. For the final weekly reporting period in the year ended
December 31, 1994, there was no daily average required balance.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DIVIDEND RESTRICTIONS
Federal and state regulations limit the amount of dividends which the
Corporation can pay without obtaining prior approval and,
additionally, federal regulations require that the Corporation
maintain minimum capital requirements. As of December 31, 1995, the
Corporation was required to obtain prior approval on any dividend
declared.
The Corporation did obtain approval from the State Corporation
Commission to pay a stock dividend and on December 19, 1995, the
Board of Directors declared a stock dividend equal to 15% of net
income, payable February 8, 1996, to stockholders of record December
19, 1995. This dividend has been reflected in the accompanying
financial statements.
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of
December 31, 1995, no unrestricted funds could be transferred from
the banking subsidiary to the parent corporation, without prior
regulatory approval.
NOTE 12. OTHER EXPENSES
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
1995 1994 1993
-------------- -------------- -----------
<S> <C>
FDIC assessment $ 33 798 $ 52 377 $ 39 513
Other real estate valuation 42 581 - - - -
Marketing 53 619 32 522 16 193
Stationery and supplies 48 225 30 486 16 976
Other (includes no items in excess
of 1% of total revenue) 371 823 387 189 299 610
-------------- -------------- --------------
$ 550 046 $ 502 574 $ 372 292
============== ============== ==============
</TABLE>
NOTE 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes
of financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of December 31, 1995 and 1994
is as follows:
1995 1994
---------- ---------
Financial instruments whose
contract amounts represent
credit risk:
Commitments to extend credit $ 3 698 658 $ 2 969 252
Standby letters of credit 76 812 54 500
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 are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing
commercial properties.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds no
collateral supporting those commitments.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at December 31, 1995 exceeded
the insurance limits of the Federal Deposit Insurance Corporation by
approximately $274,000.
NOTE 14. DEFINED CONTRIBUTION RETIREMENT PLAN
The Corporation has a defined contribution retirement plan under Code
Section 401(k) of the Internal Revenue Service covering employees who
have completed six months of service and who are at least 21 years of
age. Contributions made to the plan for the year ended December 31,
1995 was $9,601. No contributions were made for the years ended
December 31, 1994 and 1993.
NOTE 15. WRITTEN AGREEMENT
On January 28, 1992, a written agreement was entered into by the
Board of Directors of the Bank with the Federal Reserve Bank of
Richmond and the Bureau of Financial Institutions. The written
agreement was terminated effective November 23, 1994.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND SHORT-TERM INVESTMENTS
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
SECURITIES
For securities held for investment purposes, fair values are
based on quoted market prices or dealer quotes.
LOAN RECEIVABLES
For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value
is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on demand
at the reporting date. The fair value of fixed-maturity
certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining
maturities.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar agreements,
taking into account the remaining terms of the agreements and
the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the
committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations
with the counterparties at the reporting date.
At December 31, 1995, the carrying amounts and fair values of
loan commitments and stand-by letters of credit were
immaterial.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The estimated fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
1995
CARRYING FAIR
AMOUNT VALUE
(THOUSANDS)
Financial assets:
<S> <C>
Cash and short-term investments $ 3 857 $ 3 857
Securities 1 699 1 708
Loans 29 167 29 716
Less: allowance for loan losses 393 - -
------------ -----------
Total financial assets $ 34 330 $ 35 281
============ ===========
Financial liabilities:
Deposits $ 32 622 $ 33 136
Long-term debt 617 634
------------ -----------
Total financial liabilities $ 33 239 $ 33 770
============ ===========
</TABLE>
NOTE 17. NEW ACCOUNTING PRONOUNCEMENTS
FASB No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of," establishes standards for the
impairment of long-lived assets, certain identifiable intangibles, and
goodwill related to those assets to be held and used and for long-lived
assets and certain identifiable intangibles to be disposed of. This
Statement requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. The Statement is effective
for fiscal years beginning after December 15, 1995. The Statement is
not expected to have a material impact on the Corporation.
FASB No. 122, "Accounting for Mortgage Servicing Rights," amends FASB
No. 65, "Accounting for Certain Mortgage Banking Activities," to
require that a mortgage banking enterprise recognize as separate assets
rights to service mortgage loans for others, however those servicing
rights are acquired. A mortgage banking enterprise that acquires
mortgage servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing
rights retained should allocate the total cost of the mortgage loans to
the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable to
estimate the fair values of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire cost
of purchasing or originating the loans should be allocated to the
mortgage loans (without the mortgage servicing rights) and no cost
should be allocated to the mortgage servicing rights. The Statement is
effective for transactions in fiscal years beginning after December 15,
1995. The Statement is not expected to have a material impact on the
Corporation.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FASB No. 123, "Accounting for Stock-Based Compensation," establishes
financial accounting and reporting standards for stock-based employee
compensation plans. Those plans include all arrangements by which
employees receive shares of stock or other equity instruments of the
employer or the employer incurs liabilities to employees in amounts
based on the price of the employer's stock. Examples are stock purchase
plans, stock options, restricted stock, and stock appreciation rights.
This Statement also applies to transactions in which an entity issues
its equity instruments to acquire goods or services from nonemployees.
Those transactions must be accounted for based on the fair value of the
consideration received or the fair value of the equity instruments
issued, whichever is more reliably measurable.
This Statement defines a fair value based method of accounting for an
employee stock option or similar equity instrument and encourages all
entities to adopt that method of accounting for all of their employee
stock compensation plans. However, it also allows an entity to continue
to measure compensation cost for those plans using the intrinsic value
based method of accounting prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The fair value based method
is preferable to the Opinion 25 method for purposes of justifying a
change in accounting principle under APB Opinion 20, "Accounting
Changes." Entities electing to remain with the accounting in Opinion 25
must make pro forma disclosures of net income and, if presented,
earnings per share, as if the fair value based method of accounting
defined in this Statement had been applied.
The Statement is effective for fiscal years beginning after December
15, 1995. The disclosures must include the pro forma effects of other
awards granted in fiscal years beginning after December 31, 1994. The
Statement is not expected to have a material impact on the Corporation.
NOTE 18. STOCK OPTIONS AND WARRANTS OUTSTANDING
On June 15, 1992 the Corporation issued one stock purchase warrant
("warrant") for each share of preferred stock purchased in a private
offering. A total of 200,688 warrants were issued. Warrants were
immediately transferable and entitle the holder to purchase one share
of common stock at a price of $5.00 per share until June 30, 1997. As
of December 31, 1995 all 200,688 warrants were outstanding.
On April 13, 1992 the Corporation granted 500 stock options to the
Corporation's chief executive officer pursuant to his employment
agreement with the Corporation. The stock options are exercisable at
$5.00 per share and expire on June 1, 1997. As of December 31, 1995 all
500 stock options were outstanding.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. PARENT CORPORATION ONLY FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
MARATHON FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
BALANCE SHEETS
December 31, 1995 and 1994
1995 1994
-------------- --------------
ASSETS
<S> <C>
Cash $ 370 $ 370
Organization cost, at amortized costs - - 5 064
Prepaid expenses 578 213
Investment in capital stock of subsidiary 2 681 486 2 238 322
--------------- ---------------
Total assets $ 2 682 434 $ 2 243 969
============== ==============
LIABILITIES, accounts payable $ 4 684 $ - -
-------------- --------------
STOCKHOLDERS' EQUITY
Preferred stock $ - - $ 1 003 440
Common stock 1 306 303 1 078 601
Capital surplus 5 109 908 4 199 100
Retained earnings (deficit) (3 746 878) (4 029 140)
Unrealized gain (loss) on securities
available for sale 8 417 (8 032)
-------------- --------------
Total stockholders' equity $ 2 677 750 $ 2 243 969
-------------- --------------
Total liabilities and stockholders'
equity $ 2 682 434 $ 2 243 969
============== ==============
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- -----------
<S> <C>
INCOME, miscellaneous $ - - $ - - $ 3 250
------------- -------------- -----------
EXPENSES:
Amortization $ 5 064 $ 12 072 $ 12 072
Other 1 110 849 776
------------- -------------- -----------
Total expenses $ 6 174 $ 12 921 $ 12 848
------------- -------------- -----------
(Loss) before undistributed
income of subsidiaries $ (6 174) $ (12 921) $ (9 598)
------------- -------------- ------------
Undistributed income of
subsidiary $ 426 715 $ 331 397 $ 90 117
------------- -------------- ------------
Net income $ 420 541 $ 318 476 $ 80 519
============= ============== ============
</TABLE>
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARATHON FINANCIAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
Years Ended December 31, 1995, 1994 and 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------- -------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C>
Net income $ 420 541 $ 318 476 $ 80 519
Adjustments to reconcile net income to
net cash (used in) operating activities:
Amortization 5 064 12 071 12 072
Undistributed (income) of subsidiary (426 715) (331 397) (90 117)
(Increase) in prepaid expenses (365) - - (71)
Increase (decrease) in accounts payable,
subsidiary company 1 475 - - (3 250)
------------- ----------- -----------
Net cash (used in)
operating activities $ - - $ (850) $ (847)
------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of common stock $ - - $ - - $ 355 995
Purchase of stock from subsidiary - - - - (355 998)
------------- ------------ -------------
Net cash (used in)
financing activities $ - - $ - - $ (3)
------------- ------------- -------------
(Decrease) in cash
and cash equivalents $ - - $ (850) $ (850)
CASH AND CASH EQUIVALENTS
Beginning 370 1 220 2 070
------------- -------------- ------------
Ending $ 370 $ 370 $ 1 220
=============== ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of common stock $ 138 279 $ 50 185 $ 25 150
============= ============== =============
Unrealized gain (loss) on securities
available for sale $ 16 449 $ (8 032) $ - -
============= ============== =============
Conversion of preferred stock to
common stock $ 1 003 440 $ - - $ - -
=============== ============= =============
</TABLE>
F-28
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheet
(Unaudited)
June 30, 1996
<TABLE>
<CAPTION>
Assets
<S> <C>
Cash and due from banks $ 3 110 122
Securities (fair value: $1,692,099) (Note 2) 1 691 345
Federal funds sold 3 148 000
Loans, net (Notes 3 and 4) 31 596 179
Bank premises and equipment, net (Notes 5 and 9) 1 327 924
Accrued interest receivable 199 174
Other real estate 236 123
Other assets 301 870
------------
$ 41 610 737
============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing $ 6 267 152
Interest bearing 31 598 997
------------
Total deposits (Note 7) $ 37 866 149
Interest expense payable 73 100
Accounts payable and accrued expenses 117 873
Mortgage payable 495 377
Capital lease payable (Note 9) 95 278
Commitments and contingent liabilities (Notes 10 and 13) - -
------------
Total liabilities $ 38 647 777
------------
Stockholders' Equity
Preferred stock, Series A, 5% noncumulative, no par
value; 1,000,000 shares authorized; no shares
issued and outstanding $ - -
Common stock, $1 par value; 20,000,000 shares
authorized; 1,306,303 shares issued and
outstanding 1 306 303
Capital surplus 5 109 908
Retained earnings (deficit) (3 443 316)
Unrealized (loss) on securities available for sale (9 935)
------------
Total stockholders' equity $ 2 962 960
------------
$ 41 610 737
============
</TABLE>
See Notes to Consolidated Financial Statements.
F-29
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C>
Interest income:
Interest and fees on loans $ 1 696 282 $ 1 283 690
Interest on investment securities:
Taxable 15 905 19 272
Nontaxable 8 337 7 500
Interest and dividends on securities available for sale:
Taxable 21 239 9 080
Dividends 4 187 6 833
Interest on federal funds sold 32 403 16 448
------------- -------------
Total interest income $ 1 778 353 $ 1 342 823
------------- -------------
Interest expense:
Interest on deposits (Note 7) $ 717 718 $ 541 037
Interest on mortgage payable 18 835 19 683
Interest on capital lease obligation 3 712 3 495
Interest on federal funds purchased 414 1 474
------------- -------------
Total interest expense $ 740 679 $ 565 689
------------- -------------
Net interest income $ 1 037 674 $ 777 134
Provision for loan losses (Note 4) 72 500 16 000
------------- -------------
Net interest income after
provision for loan losses $ 965 174 $ 761 134
------------- -------------
Other income:
Service charges on deposit accounts $ 149 003 $ 75 799
Commissions and fees 35 409 20 028
Other 9 450 4 951
------------- -------------
Total other income $ 193 862 $ 100 778
------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Unaudited)
(Continued)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C>
Other expenses:
Salaries and employee benefits $ 408 531 $ 324 801
Net occupancy expense of premises 65 756 54 564
Furniture and equipment 56 186 39 053
Other (Note 12) 320 935 266 801
------------- -------------
Total other expenses $ 851 408 $ 685 219
------------- -------------
Income before income taxes $ 307 628 $ 176 693
Provision for income taxes (Note 8) 4 066 - -
------------- -------------
Net income $ 303 562 $ 176 693
============= =============
Earnings per common and equivalent share (Note 1) $ .23 $ .16
============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-31
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Retained Securities Total
Capital Stock Capital Earnings Available Stockholders'
Preferred Common Surplus (Deficit) for Sale Equity
<S> <C>
Balance, December 31,
1994 $ 1 003 440 $ 1 078 601 $4 199 100 $(4 029 140) $ (8 032) $ 2 243 969
Net income - 1995 - - - - - - 176 693 - - 176 693
Unrealized gain (loss)
on securities avail-
able for sale - - - - - - - - 12 899 12 899
----------- ----------- ---------- ----------- ----------- -----------
Balance, June 30,
1995 $ 1 003 440 $ 1 078 601 $4 199 100 $(3 852 447) $ 4 867 $ 2 433 561
=========== =========== ========== =========== =========== ===========
Balance, December 31,
1995 $ - - $ 1 306 303 $5 109 908 $(3 746 878) $ 8 417 $ 2 677 750
Net income - 1996 - - - - - - 303 562 - - 303 562
Unrealized gain
(loss) on securities
available for sale - - - - - - - - (18 352) (18 352)
---------- ----------- ---------- ----------- ----------- -----------
Balance, June 30,
1996 $ - - $ 1 306 303 $5 109 908 $(3 443 316) $ (9 935) $ 2 962 960
=========== =========== ========== =========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C>
Cash Flows from Operating Activities
Net income $ 303 562 $ 176 693
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 5 451 10 576
Depreciation 56 820 48 223
Provision for loan losses 72 500 16 000
Accretion of securities discounts, net (1 228) (1 071)
Changes in assets and liabilities:
(Increase) in other assets (251 322) (71 083)
(Increase) decrease in accrued interest
receivable (40 108) 2 167
Increase in accounts payable and
accrued expenses 27 862 47 758
Increase (decrease) in interest expense payable 12 949 (72 536)
------------ ------------
Net cash provided by operating activities $ 186 486 $ 156 727
------------ ------------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investments securities $ 559 340 $ 2 300
Proceeds from maturities and principal
payments of securities available for sale 204 087 11 004
Purchase of investment securities (299 221) - -
Purchase of securities available for sale (473 203) (15 900)
Net (increase) in loans (2 894 659) (4 003 977)
Purchase of equipment (96 281) (50 592)
------------ ------------
Net cash (used in) investing activities $ (2 999 937) $ (4 057 165)
------------ ------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 1 055 295 $ 589 354
Net increase in certificates of deposit 4 188 690 3 851 348
Cash paid in lieu of fractional shares (3 209) - -
Principal payments on capital lease obligations (14 322) (11 037)
Principal payments on mortgage payable (11 757) (10 909)
------------ ------------
Net cash provided by financing activities $ 5 214 697 $ 4 418 756
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Unaudited)
(Continued)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ --------
<S> <C>
Increase in cash and
cash equivalents $ 2 401 246 $ 518 318
Cash and Cash Equivalents
Beginning 3 856 876 2 065 496
------------ ------------
Ending $ 6 258 122 $ 2 583 814
============ ============
Supplemental Disclosures of Cash Flow
Information, cash payments for interest $ 727 730 $ 638 225
============ ============
Supplemental Schedule of Noncash
Investing and Financing Activities
Equipment acquired under capital
lease obligations $ - - $ 21 395
============ ============
Unrealized gain (loss) on securities
available for sale $ (18 352) $ 12 899
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
F-34
<PAGE>
MARATHON FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
Note 1. Nature of Banking Activities and Significant Accounting Policies
Marathon Financial Corporation and Subsidiary, The Marathon Bank,
(the Corporation) grant commercial, financial, agricultural,
residential and consumer loans to customers in Virginia. The loans
are expected to be repaid from cash flow or proceeds from the sale of
selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform to
generally accepted accounting principles and to general practices
within the banking industry. The following is a summary of the more
significant policies.
Principles of Consolidation
The consolidated financial statements of the Marathon Financial
Corporation and its Subsidiary, include the accounts of all
companies. All material intercompany balances and transactions
have been eliminated.
Securities
Securities are classified in three categories and accounted for
as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to
hold to maturity regardless of changes in market conditions,
liquidity needs or changes in general economic conditions.
These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed
by the interest method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt
and equity securities that the Corporation intends to hold
for an indefinite period of time, but not necessarily to
maturity. Any decision to sell a security classified as
available for sale would be based on various factors,
including significant movements in interest rates, changes in
the maturity mix of the Corporation's assets and liabilities,
liquidity needs, regulatory capital considerations, and other
similar factors. Securities available for sale are carried at
fair value. Unrealized gains or losses are reported as
increases or decreases in stockholders' equity. Realized
gains or losses, determined on the basis of the cost of
specific securities sold, are included in earnings.
F-35
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
c. Trading Securities
Trading securities, which are generally held for the short
term in anticipation of market gains, are carried at fair
value. Realized and unrealized gains and losses on trading
account assets are included in interest income on trading
account securities. The Corporation had no trading securities
at June 30, 1996 and 1995.
Derivative Financial Instruments
FASB No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" requires various
disclosures for derivative financial instruments which are
futures, forwards, swaps, or option contracts, or other
financial instruments with similar characteristics. The
Corporation does not have any derivative financial instruments
as defined under this statement.
Loans
Loans are stated at the amount of unpaid principal, reduced by
unearned discount and an allowance for loan losses. Unearned
discount on installment loans is recognized as income over the
terms of the loans by the interest method. Interest on other
loans is calculated by using the simple interest method on daily
balances of the principal amount outstanding. Loans are charged
off when management believes that the collectibility of the
principal is unlikely. Accrual of interest is discontinued on a
loan when management believes, after considering economic and
business conditions and collection efforts, that the borrowers'
financial condition is such that collection of interest is
doubtful.
On January 1, 1995, the Corporation adopted FASB No. 114,
"Accounting by Creditors for Impairment of a Loan." This
statement has been amended by FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures." Statement 114, as amended, requires that the
impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the collateral.
However, for those loans that are collateral dependent (that is,
if repayment of those loans is expected to be provided solely by
the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of
those loans is to be based on the fair value of the collateral.
Statement 114, as amended, also requires certain disclosures
about investments in impaired loans and the allowance for credit
losses and interest income recognized on loans. The Corporation
had no loans subject to FASB 114 at June 30, 1996 and 1995.
Loans are placed on nonaccrual when a loan is specifically
determined to be impaired or when principal or interest is
delinquent for 90 days or more. Any unpaid interest previously
accrued on those loans is reversed from income. Interest income
generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments
received on such loans are applied as a reduction of the loan
principal balance. Interest income on other nonaccrual loans is
recognized only to the extent of interest payments received.
F-36
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, credit concentrations, trends in historical loss
experience, specific impaired loans, and economic conditions.
Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows.
The allowance is increased by a provision for loan losses, which
is charged to expense and reduced by charge-offs, net of
recoveries. Changes in the allowance relating to impaired loans
are charged or credited to the provision for loan losses.
Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan
portfolio and the related allowance may change in the near term.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed primarily on the
straight-line and declining-balance methods. Lease amortization
is included in depreciation expense.
Maintenance and repairs of property and equipment are charged to
operations and major improvements are capitalized. Upon
retirement, sale or other disposition of property and equipment,
the cost and accumulated depreciation are eliminated from the
accounts and gain or loss is included in operations.
Classifications of Amortization on Assets Acquired Under Capital
Leases
The amortization expense on assets acquired under capital leases
is included with the depreciation expense.
Earnings Per Share
Earnings per share of common stock are based on the weighted
average number of common shares outstanding during each year
after giving retroactive effect to the stock dividend declared
in 1995.
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards, and tax credit
carry-forwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it
is more likely than not that some portion or all of the deferred
tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
F-37
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks and federal funds
sold. Generally, federal funds are purchased and sold for
one-day periods.
Organization Costs
The Marathon Financial Corporation was organized under the laws
of the State of Virginia as a bank holding company on October 2,
1990. Certain expenses incurred prior to this date were deferred
and were amortized using the straight-line method over a
60-month period.
Loan Fees and Costs
Loan origination and commitment fees and direct loan origination
costs are being recognized as collected and incurred. The use of
this method of recognition does not produce results that are
materially different from results which would have been produced
if such costs and fees were deferred and amortized as an
adjustment of the loan yield over the life of the related loan.
Advertising
The Company follows the policy of charging the costs of
advertising to expense as incurred.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
F-38
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of June 30, 1996, is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1996
<S> <C>
Obligations of U.S.
government corporations
and agencies $ 595 744 $ 1 862 $ (8 545) $ 589 061
Mortgage-backed securities 137 134 1 558 (4 810) 133 882
Other 302 850 - - - - 302 850
----------- ----------- ---------- ------------
$ 1 035 728 $ 3 420 $ (13 355) $ 1 025 793
=========== =========== ========== ============
</TABLE>
The amortized cost and fair value of the securities available for
sale as of June 30, 1996, by contractual maturity, are shown below.
Expected maturities may differ from contractual maturities because
mortgages underlying the mortgage-backed securities may be called or
prepaid without any penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due after one year through five years $ 595 744 $ 589 061
Mortgage-backed securities 137 134 133 882
Other 302 850 302 850
------------ ------------
$ 1 035 728 $ 1 025 793
============ ============
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of June 30, 1996 is as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
1996
<S> <C>
U.S. Treasuries and
obligations of U.S.
government corporations
and agencies $ 297 980 $ - - $ (4 713) $ 293 267
Obligations of state and
political subdivisions 251 324 6 330 (1 154) 256 500
Corporate securities 99 885 115 - - 100 000
Mortgage-backed securities 16 363 176 - - 16 539
----------- ----------- ---------- ------------
$ 665 552 $ 6 621 $ (5 867) $ 666 306
=========== =========== ========== ============
</TABLE>
F-39
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
The amortized cost and fair value of the securities being held to
maturity as of June 30, 1996, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because the corporate securities and mortgages underlying the
mortgage-backed securities may be called or prepaid without any
penalties.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
<S> <C>
Due after one year through five years $ 297 980 $ 293 267
Due after five years through ten years 251 324 256 500
Corporate securities 99 885 100 000
Mortgage-backed securities 16 363 16 539
--------- ----------
$ 665 552 $ 666 306
========= ==========
</TABLE>
Proceeds from maturities, calls and principal payments of securities
available for sale during 1996 and 1995 were $204,087 and $11,004.
There were no realized gains or realized losses recognized on these
transactions.
Proceeds from maturities, calls and principal payments of securities
being held to maturity during 1996 and 1995 were $559,340 and $2,300.
There were no realized gains or realized losses recognized on these
transactions.
Securities having a book value of $547,589 and $695,655 at June 30,
1996 and 1995 were pledged to secure public deposits and for other
purposes required by law.
Note 3. Loans and Related Party Transactions
The loan portfolio as of June 30, 1996, is composed of the following:
Commercial $ 15 310 722
Real estate - mortgage 5 747 258
Real estate - construction 4 015 021
Installment loans to individuals 6 986 771
------------
$ 32 059 772
Less allowance for loan losses 463 593
------------
$ 31 596 179
============
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors,
executive officers, their immediate families and affiliated companies
in which they are principal stockholders (commonly referred to as
related parties), on the same terms, including interest rates and
collateral, as those prevailing at the time for comparable
transactions with others. These persons and firms (exclusive of loans
to any such person which in the aggregate did not exceed $60,000)
were indebted to the Bank for loans totaling $1,459,760 at June 30,
1996. During 1996, total principal additions were $528,117 and total
principal payments were $243,242.
F-40
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
June 30,
1996 1995
----------- ------------
Balance, beginning $ 393 139 $ 299 203
Provision for loan losses 72 500 16 000
Recoveries 4 265 2 050
Loan losses charged to
the allowance (6 311) (7 411)
------------- ------------
Balance, ending $ 463 593 $ 309 842
============= ============
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $63,819 at June 30, 1996. If interest on these loans
had been accrued, such income would have approximated $2,518 for
1996.
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment as of June 30, 1996 consists of the
following:
Capital leases - computer $ 151 047
Bank premises 1 222 881
Furniture and equipment 742 159
------------
$ 2 116 087
Less accumulated depreciation 788 163
------------
$ 1 327 924
============
Depreciation included in operating expense for 1996 and 1995 was
$56,820 and $48,223, respectively.
Note 6. Organization Costs
Certain costs incurred by the Corporation prior to commencing
operations on October 2, 1990, were capitalized and amortized over a
60-month life. These costs totaled $60,350.
F-41
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 7. Deposits
Deposits outstanding at June 30, 1996 and 1995 and the related
interest expense for the years then ended, are summarized as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------
Amount Expense Amount Expense
<S> <C>
Noninterest bearing $ 6 267 152 $ - - $ 4 348 396 $ - -
----------- ----------- ----------- ------------
Interest bearing:
Interest checkin $ 2 080 895 $ 30 098 $ 1 855 975 $ 21 523
Money market accounts 3 140 621 56 858 2 536 310 38 187
Regular savings 5 057 468 79 657 4 844 164 79 153
Certificates of deposit:
Less than $100,000 16 971 439 445 950 12 457 447 333 088
$100,000 and more 4 348 574 105 155 3 002 626 69 086
----------- ----------- ----------- ------------
Total interest bearing $31 598 997 $ 717 718 $24 696 522 $ 541 037
----------- ----------- ----------- ------------
Total deposits $37 866 149 $ 717 718 $29 044 918 $ 541 037
=========== =========== =========== ============
</TABLE>
Note 8. Income Taxes
Net deferred tax assets consist of the following components as of
June 30, 1996:
Deferred tax assets:
Net operating loss carryforward $1 163 263
Writedown of other real estate 14 478
Less valuation allowance (1 103 668)
----------
$ 74 073
----------
Deferred tax liabilities:
Allowance for loan losses $ 74 073
----------
$ - -
==========
The provision for income taxes charged to operations for the years
ended June 30, 1996 and 1995, consists of the following:
1996 1995
---------- ----------
Current tax expense $ 4 066 $ - -
Deferred tax expense 103 152 59 425
Benefit of net operating loss (103 152) (59 425)
---------- ----------
$ 4 066 $ - -
========== ==========
F-42
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
The current tax expense incurred in 1996 is related to the
alternative minimum tax calculated for the Corporation.
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the six months ended June 30, 1996 and 1995, due to the
following:
1996 1995
---------- ----------
Computed "expected" tax expense $ 104 594 $ 60 076
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance (103 152) (59 425)
Tax exempt interest income (1 157) (1 611)
Other 3 781 960
---------- ----------
$ 4 066 $ - -
========== ==========
Under the provisions of the Internal Revenue Code, the Corporation
has available approximately $3,421,362 of net operating loss
carryforwards which can be offset against future taxable income.
The carryforwards expire December 31, 2006. The full realization
of the tax benefits associated with the carryforwards depends
predominately upon the recognition of ordinary income during the
carryforward period.
The loss carryforward at June 30, 1996, for financial reporting
purposes is approximately $3,225,670. The differences between the
loss carryforward for financial reporting and income tax purposes
results principally from timing differences in recognizing
start-up costs and the provision for loan losses. No deferred
taxes are recorded on these timing differences due to the net
operating loss carryforward position of the Corporation.
Note 9. Leases
Capital Lease
During the year ended December 31, 1994, the Corporation entered
into a lease agreement on computer equipment and software.
Additional equipment and software was added to the lease during
1995 in the amount of $21,395. The balance of the liability under
capital leases at June 30, 1996 in the amount of $95,278
represents the present value of the balance due in future years
for lease rentals discounted at 7%. The liability is payable in
quarterly installments of $9,017 for principal and interest to
June 1, 1999. Since the term of the lease is approximately the
same as the estimated useful life of the assets, and the present
value of the future minimum lease payments at the beginning of the
lease approximated the fair value of the leased assets at that
date, the leases are considered to be capital leases and have been
so recorded. The lease also requires additional maintenance
payments of $4,853 per quarter.
The following is a schedule by years of the future minimum lease
payments under the capital leases together with the present value
of the net minimum lease payments as of June 30, 1996:
F-43
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
For the Year Ended December 31:
1996 $ 27 740
1997 55 480
1998 55 480
1999 25 821
-----------
Total minimum lease payments $ 164 521
Less estimated executory costs
(such as maintenance) included in
the total minimum lease payments 58 236
-----------
Net minimum lease payments $ 106 285
Less the amount representing interest 11 007
-----------
Present value of net minimum
lease payments $ 95 278
===========
Lease Commitments and Total Rental Expense
During the year ended December 31, 1994, the Corporation entered
into a five-year operating lease for the rental of a branch
location. The lease expires on September 30, 1999 and has two
five-year renewal options. The lease provides that the Corporation
pay all property taxes, insurance and maintenance plus an annual
rental of $12,000 for the initial lease period commencing on April
1, 1995. The total minimum lease commitment at June 30, 1996 under
this lease is $45,000 which is due as follows:
For the Year Ended December 31:
1996 $ 6 000
1997 12 000
1998 12 000
1999 12 000
2000 3 000
-----------
$ 45 000
===========
There was $6,000 in rental expense resulting from this lease
included in the consolidated statements of income for the six
months ended June 30, 1996.
F-44
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Fixed Equipment on Land Leased with Related Parties
As of June 30, 1996 the Corporation has invested $237,365 in the
construction of a new building on this site. The Corporation has
agreed to finance the construction of the building with the
understanding that the lessor will reimburse the Corporation for
all costs and will lease the building to the Corporation for a
rental expense to be determined based on the total cost of the
finished building and a land value of $150,000. The project was
completed on June 30, 1996.
Note 10. Commitments and Contingent Liabilities
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in the
accompanying financial statements. See Note 13 with respect to
financial instruments with off-balance-sheet risk.
As members of the Federal Reserve System, the Corporation is required
to maintain certain average reserve balances. For the final weekly
reporting period in the year ended June 30, 1996 this requirement was
$72,000.
Note 11. Dividend Restrictions
Federal and state regulations limit the amount of dividends which the
Corporation can pay without obtaining prior approval and,
additionally, federal regulations require that the Corporation
maintain minimum capital requirements. As of June 30, 1996, the
Corporation was required to obtain prior approval on any dividend
declared.
The Corporation did obtain approval from the State Corporation
Commission to pay a stock dividend and on December 19, 1995, the
Board of Directors declared a stock dividend equal to 15% of net
income, payable February 8, 1996, to stockholders of record December
19, 1995. This dividend has been reflected in the accompanying
financial statements.
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of June
30, 1996, no unrestricted funds could be transferred from the banking
subsidiary to the parent corporation, without prior regulatory
approval.
F-45
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 12. Other Expenses
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
1996 1995
----------- -----------
FDIC assessment $ 1 500 $ 27 490
Marketing 32 531 32 100
Stationery and supplies 23 894 24 377
Professional fees 25 069 26 258
Postage 24 924 12 640
Other (includes no items in excess
of 1% of total revenue) 213 017 143 936
----------- -----------
$ 320 935 $ 266 801
=========== ===========
Note 13. Financial Instruments With Off-Balance-Sheet Risk
The Corporation is party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the
financing needs of its customers. These financial instruments include
commitments to extend credit and standby letters of credit. Those
instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Corporation has in particular classes
of financial instruments.
The Corporation's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual amount of those instruments. The
Corporation uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
A summary of the contract or notional amount of the Corporation's
exposure to off-balance-sheet risk as of June 30, 1996 is as follows:
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 4 684 904
Standby letters of credit 78 000
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 are expected to expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash
requirements. The Corporation evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Corporation upon extension of
credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing
commercial properties.
F-46
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and
private borrowing arrangements, including commercial paper, bond
financing, and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Corporation holds no
collateral supporting those commitments.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at June 30, 1996 exceeded the
insurance limits of the Federal Deposit Insurance Corporation by
approximately $797,183.
Note 14. Defined Contribution Retirement Plan
The Corporation has a defined contribution retirement plan under Code
Section 401(k) of the Internal Revenue Service covering employees who
have completed six months of service and who are at least 21 years of
age. No contributions were made to the plan for the six months ended
June 30, 1996 and 1995.
Note 15. Stock Options and Warrants Outstanding
On June 15, 1992 the Corporation issued one stock purchase warrant
("warrant") for each share of preferred stock purchased in a private
offering. A total of 200,688 warrants were issued. Warrants were
immediately transferable and entitle the holder to purchase one share
of common stock at a price of $5.00 per share until June 30, 1997. As
of June 30, 1996 all 200,688 warrants were outstanding.
On April 13, 1992 the Corporation granted 500 stock options to the
Corporation's chief executive officer pursuant to his employment
agreement with the Corporation. The stock options are exercisable at
$5.00 per share and expire on June 1, 1997. As of June 30, 1996 all
500 stock options were outstanding.
F-47
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
Note 16. Parent Corporation Only Financial Statements
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheet
(Unaudited)
June 30, 1996
Assets
Cash $ 732
Prepaid expenses 690
Investment in capital stock of subsidiary 2 961 538
------------
Total assets $ 2 962 960
============
Liabilities, accounts payable $ - -
------------
Stockholders' Equity
Preferred stock $ - -
Common stock 1 306 303
Capital surplus 5 109 908
Retained earnings (deficit) (3 443 316)
Unrealized (loss) on securities
available for sale (9 935)
------------
Total stockholders' equity $ 2 962 960
------------
Total liabilities and stockholders'
equity $ 2 962 960
============
F-48
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------- ----------
<S> <C>
Income, dividends from subsidiary $ 6 000 $ - -
------------- ----------
Expenses:
Amortization $ - - $ 5 064
Other 841 425
------------- ----------
Total expenses $ 841 $ 5 489
------------- ----------
Income (loss) before undistributed
income of subsidiaries $ 5 159 $ (5 489)
Undistributed income of
subsidiary 298 403 182 182
------------- ----------
Net income $ 303 562 $ 176 693
============= ==========
</TABLE>
F-49
<PAGE>
Notes to Consolidated Financial Statements
(Unaudited)
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
(Unaudited)
For the Six Months Ended June 30, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
------------ ----------
<S> <C>
Cash Flows from Operating Activities
Net income $ 303 562 $ 176 693
Adjustments to reconcile net income to
net cash provided by operating activities:
Amortization - - 5 064
Undistributed (income) of subsidiary (298 403) (182 182)
(Increase) decrease in prepaid expenses (113) 425
(Decrease) in accounts payable, subsidiary
company (1 475) - -
------------ ----------
Net cash provided by
operating activities $ 3 571 $ - -
------------ ----------
Cash Flows from Financing Activities,
cash paid in lieu of financial shares $ (3 209) $ - -
------------ ----------
Increase in cash and
cash equivalents $ 362 $ - -
Cash and Cash Equivalents
Beginning 370 370
------------ ----------
Ending $ 732 $ 370
============ ==========
</TABLE>
F-50
<PAGE>
No person has been authorized in connection with this offering to give
any information or to make any representation not contained in this Prospectus
and, if given or made, such information or representation must not be relied
upon as having been authorized by the Corporation or the Underwriter. This
Prospectus does not constitute an offer of any securities other than the Common
Stock to which it relates or an offer to sell, or a solicitation of an offer to
buy, in any jurisdiction to any person to whom it is unlawful to make such offer
or solicitation in such jurisdiction. Neither the delivery of this Prospectus
nor any sale made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the Corporation
since the date hereof or that the information contained or incorporated by
reference herein is correct as of any time subsequent to its date.
--------------------
TABLE OF CONTENTS
Page
Available Information............... 3
Reports to Stockholders............. 3
Prospectus Summary.................. 4
Summary Financial Data.............. 7
The Corporation..................... 8
Investment Considerations........... 10
Offering to Stockholders............ 11
Use of Proceeds..................... 11
Capitalization...................... 12
Market Price and Dividend Data...... 13
Selected Financial Data............. 14
Management's Discussion and Analysis
of Financial Condition and Results of
Operations........................ 15
Business............................ 32
Management.......................... 40
Description of Capital Stock........ 45
Underwriting........................ 48
Legal Matters....................... 49
Experts............................. 49
Index to Financial Statements....... F1
[LOGO]
100,000 Shares
Common Stock
-----------------
PROSPECTUS
-----------------
McKinnon & Company, Inc.
, 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth the fees and expenses, other than
underwriting discounts and commissions, in connection with the issuance and
distribution of the Common Stock being registered hereunder. Except for the SEC
registration fee and NASD filing fees, all amounts are estimates.
Expenses Amount
SEC Registration Fee............................... $1,140.09
NASD Fees.......................................... 830.63
Nasdaq SmallCap Market Fees........................ *
Printing Expenses.................................. *
Legal Fees and Expenses............................ *
Transfer Agent and Registrar Fees.................. *
Accounting Fees and Expenses....................... *
Blue Sky Fees and Expenses......................... *
Miscellaneous Expenses............................. *
---------
TOTAL............................ $ *
=========
* To be filed by amendment.
Item 14. Indemnification of Officers and Directors.
The Corporation was incorporated in Virginia. The Virginia Stock
Corporation Act ("Virginia Stock Corporation Act") contains the following
provisions with respect to the indemnification of officers, directors, employees
and agents and the limitation on liability of officers and directors:
Section 13.1-692.1. Limitation on liability of officers and directors;
exception.
A. In any proceeding brought by or in the right of a corporation
or brought by or on behalf of shareholders of the corporation, the damages
assessed against an officer or director arising out of a single transaction,
occurrence or course of conduct shall not exceed the lesser of:
1. The monetary amount, including the elimination of
liability, specified in the articles of incorporation or, if approved by the
shareholders, in the bylaws as a limitation on or elimination of the liability
of the officer or director; or
2. The greater of (i) $100,000 or (ii) the amount of cash
compensation received by the officer or director from the corporation during the
twelve months immediately preceding the act or omission for which liability was
imposed.
B. The liability of an officer or director shall not be limited
as provided in this section if the officer or director engaged in willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities law, including, without limitation, any claim of unlawful insider
trading or manipulation of the market for any security.
<PAGE>
C. No limitation on or elimination of liability adopted pursuant
to this section may be affected by any amendment of the articles of
incorporation or bylaws with respect to any act or omission occurring before
such amendment.
Section 13.1-696. Definitions. - In this article:
"Corporation" includes any domestic or foreign predecessor entity of a
corporation in a merger or other transaction in which the predecessor's
existence ceased upon consummation of the transaction.
"Director" means an individual who is or was a director of a
corporation or an individual who, while a director of a corporation, is or was
serving at the corporation's request as a director, officer, partner, trustee,
employee, or agent of another foreign or domestic corporation, partnership,
joint venture, trust, employee benefit plan, or other enterprise. A director is
considered to be serving an employee benefit plan at the corporation's request
if his duties to the corporation also impose duties on, or otherwise involve
services by, him to the plan or to participants in or beneficiaries of the plan.
"Director" includes, unless the context requires otherwise, the estate or
personal representative of a director.
"Expenses" includes counsel fees.
"Liability" means the obligation to pay a judgment, settlement,
penalty, fine, including any excise tax assessed with respect to an employee
benefit plan, or reasonable expenses incurred with respect to a proceeding.
"Official capacity" means, (i) when used with respect to a director,
the office of director in a corporation; or (ii) when used with respect to an
individual other than a director, as contemplated in Section 13.1-702, the
office in a corporation held by the officer or the employment or agency
relationship undertaken by the employee or agent on behalf of the corporation.
"Official capacity" does not include service for any other foreign or domestic
corporation or any partnership, joint venture, trust, employee benefit plan, or
other enterprise.
"Party" includes an individual who was, is, or is threatened to be made
a named defendant or respondent in a proceeding.
"Proceeding" means any threatened, pending, or completed action, suit,
or proceeding, whether civil, criminal, administrative or investigative and
whether formal or informal.
Section 13.1-697. Authority to indemnify.
A. Except as provided in subsection D of this section, a
corporation may indemnify an individual made a party to a proceeding because he
is or was a director against liability incurred in the proceeding if:
1. He conducted himself in good faith; and
2. He believed:
a. In the case of conduct in his official capacity with the
corporation, that his conduct was in its best interests; and
b. In all other cases, that his conduct was at least not
opposed to its best interest; and
II-2
<PAGE>
3. In the case of any criminal proceeding, he had no
reasonable cause to believe his conduct was unlawful.
B. A director's conduct with respect to an employee benefit plan
for a purpose he believed to be in the interests of the participants in and
beneficiaries of the plan is conduct that satisfies the requirement of paragraph
2b of subsection A of this section.
C. The termination of a proceeding by judgment, order, settlement
or conviction is not, of itself, determinative that the director did not meet
the standard of conduct described in this section.
D. A corporation may not indemnify a director under this section:
1. In connection with a proceeding by or in the right of the
corporation in which the director was adjudged liable to the corporation; or
2. In connection with any other proceeding charging improper
personal benefit to him, whether or not involving action in his official
capacity, in which he was adjudged liable on the basis that personal benefit was
improperly received by him.
E. Indemnification permitted under this section in connection
with a proceeding by or in the right of the corporation is limited to reasonable
expenses incurred in connection with the proceeding.
Section 13.1-698. Mandatory indemnification. Unless limited by its
articles of incorporation, a corporation shall indemnify a director who entirely
prevails in the defense of any proceeding to which he was a party because he is
or was a director of the corporation against reasonable expenses incurred by him
in connection with the proceeding.
Section 13.1-699. Advance for expenses.
A. A corporation may pay for or reimburse the reasonable expenses
incurred by a director who is a party to a proceeding in advance of final
disposition of the proceeding if:
1. The director furnishes the corporation a written
statement of his good faith belief that he has met the standard of conduct
described in Section 13.1-697;
2. The director furnishes the corporation a written
undertaking, executed personally or on his behalf, to repay the advance if it is
ultimately determined that he did not meet the standard of conduct; and
3. A determination is made that the facts then known to
those making the determination would not preclude indemnification under this
article.
B. The undertaking required by paragraph 2 of subsection A of
this section shall be an unlimited general obligation of the director but need
not be secured and may be accepted without reference to financial ability to
make repayment.
C. Determinations and authorizations of payments under this
section shall be made in the manner specified in Section 13.1-701.
II-3
<PAGE>
Section 13.1-700.1. Court orders for advances, reimbursement or
indemnification.
A. An individual who is made a party to a proceeding because he
is or was a director of a corporation may apply to a court for an order
directing the corporation to make advances or reimbursement for expenses or to
provide indemnification. Such application may be made to the court conducting
the proceeding or to another court of competent jurisdiction.
B. The court shall order the corporation to make advances and/or
reimbursement for expenses or to provide indemnification if it determines that
the director is entitled to such advances, reimbursement or indemnification and
shall also order the corporation to pay the director's reasonable expenses
incurred to obtain the order.
C. With respect to a proceeding by or in the right of the
corporation, the court may (i) order indemnification of the director to the
extent of his reasonable expenses if it determines that, considering all the
relevant circumstances, the director is entitled to indemnification even though
he was adjudged liable to the corporation and (ii) also order the corporation to
pay the director's reasonable expenses incurred to obtain the order of
indemnification.
D. Neither (i) the failure of the corporation, including its
board of directors, its independent legal counsel and its shareholders, to have
made an independent determination prior to the commencement of any action permit
ted by this section that the applying director is entitled to receive advances
and/or reimbursement nor (ii) the determination by the corporation, including
its board of directors, its independent legal counsel and its shareholders, that
the applying director is not entitled to receive advances and/or reimbursement
or indemnification shall create a presumption to that effect or otherwise of
itself be a defense to that director's application for advances for expenses,
reimbursement or indemnification.
Section 13.1-701. Determination and authorization of
indemnification.
A. A corporation may not indemnify a director under Section
13.1-697 unless authorized in the specific case after a determination has been
made that indemnification of the director is permissible in the circumstances
because he has met the standard of conduct set forth in Section 13.1-697.
B. The determination shall be made:
1. By the board of directors by a majority vote of a quorum
consisting of directors not at the time parties to the proceeding;
2. If a quorum cannot be obtained under paragraph 1 of this
subsection, by majority vote of a committee duly designated by the board of
directors (in which designation directors who are parties may participate),
consisting solely of two or more directors not at the time parties to the
proceeding;
3. By special legal counsel:
a. Selected by the board of directors or its committee in
the manner prescribed in paragraph 1 or 2 of this subsection; or
b. If a quorum of the board of directors cannot be obtained
under paragraph 1 of this subsection and a committee cannot be designated under
paragraph 2 of this subsection, selected by majority vote of the full board of
directors, in which selection directors who are parties may participate; or
II-4
<PAGE>
4. By the shareholders, but shares owned by or voted under
control of directors who are at the time parties to the proceeding may not be
voted on the determination.
C. Authorization of indemnification and evaluation as to
reasonableness of expenses shall be made in the same manner as the determination
that indemnification is permissible, except that if the determination is made by
special legal counsel, authorization of indemnification and evaluation as to
reasonableness of expenses shall be made by those entitled under paragraph 3 of
subsection B of this section to select counsel.
Section 13.1-702. Indemnification of officers, employees and
agents. Unless limited by a corporation's articles of incorporation,
1. An officer of the corporation is entitled to mandatory
indemnification under Section 13.1-698, and is entitled to apply for
court-ordered indemnification under Section 13.1-700.1, in each case to the same
extent as a director; and
2. The corporation may indemnify and advance expenses under
this article to an officer, employee, or agent of the corporation to the same
extent as to a director.
Section 13.1-703. Insurance. A corporation may purchase and
maintain insurance on behalf of an individual who is or was a director, officer,
employee, or agent of the corporation, or who, while a director, officer,
employee, or agent of the corporation, is or was serving at the request of the
corporation as a director, officer, partner, trustee, employee, or agent of
another foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise, against liability asserted against
or incurred by him in that capacity or arising from his status as a director,
officer, employee, or agent, whether or not the corporation would have power to
indemnify him against the same liability under Section 13.1-697 or Section
13.1-698.
Section 13.1-704. Application of article.
A. Unless the articles of incorporation or bylaws expressly
provide otherwise, any authorization of indemnification in the articles of
incorporation or bylaws shall not be deemed to prevent the corporation from
providing the indemnity permitted or mandated by this article.
B. Any corporation shall have power to make any further
indemnity, including indemnity with respect to a proceeding by or in the right
of the corporation, and to make additional provisions for advances and
reimbursement of expenses, to any director, officer, employee or agent that may
be authorized by the articles of incorporation or any bylaw made by the
shareholders or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against (i) his willful misconduct, or (ii) a
knowing violation of the criminal law. Unless the articles of incorporation, or
any such bylaw or resolution expressly provide otherwise, any determination as
to the right to any further indemnity shall be made in accordance with Section
13.1-701B. Each such indemnity may continue as to a person who has ceased to
have the capacity referred to above and may inure to the benefit of the heirs,
executors and administrators of such a person.
C. No right provided to any person pursuant to this section
may be reduced or eliminated by any amendment of the articles of incorporation
or bylaws with respect to any act or omission occurring before such amendment.
II-5
<PAGE>
Article V of the Corporation's Articles of Incorporation reads
as follows:
"ARTICLE V
(1) In this Article:
"applicant" means the person seeking indemnification
pursuant to this Article.
"expenses" includes counsel fees.
"liability" means the obligation to pay a judgment,
settlement, penalty, fine, including any excise tax assessed with respect to an
employee benefit plan, or reasonable expenses incurred with respect to a
proceeding.
"party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in a proceeding.
"proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal.
(2) In any proceeding brought by or in the right of the
Corporation or brought by or on behalf of shareholders of the Corporation, no
Director or officer of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages in excess of $0.00 with respect to any
transaction, occurrence, or courses of conduct, whether prior or subsequent to
the effective date of these Articles, except for liability resulting from such
person's having engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
(3) The Corporation shall indemnify (a) any person who was or is
a party to any proceeding, including a proceeding brought by a shareholder in
the right of the Corporation or brought by or on behalf of the shareholders of
the Corporation, by reason of the fact that he is or was a Director or officer
of the Corporation, or (b) any Director or officer who is or was serving at the
request of the Corporation as a director, trustee, partner or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability incurred by him in connection with such
proceeding unless he engaged in willful misconduct or a knowing violation of
criminal law. A person is considered to be serving an employee benefit plan at
the Corporation's request if his duties to the Corporation also impose duties
on, or otherwise involve services by him to the plan or to participants in or
beneficiaries of the plan. The Board of Directors is hereby empowered, by a
majority vote of a quorum of disinterested Directors, to enter into a contract
to indemnify any Director or officer in respect of any proceedings arising from
any act or omission, whether occurring before or after the execution of such
contract.
(4) The provisions of this Article shall be applicable to all
proceedings commenced after the effectiveness of these Articles, arising from
any act or omission, whether occurring before or after such effectiveness. No
amendment or repeal of this Article shall have any effect on the rights provided
under this Article with respect to any act or omission occurring prior to such
amendment or repeal. The Corporation shall promptly take all such actions, and
make all such determinations, as shall be necessary or appropriate to comply
with its obligation to make any indemnity under this Article and shall promptly
pay or reimburse all reasonable expenses, including attorneys' fees, incurred by
any such Director or officer in connection with such actions and determinations
or proceedings of any kind arising therefrom.
II-6
<PAGE>
(5) The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that the applicant did not meet the
standard of conduct described in Sections (2) or (3) of this Article.
(6) Any indemnification under Section (3) of this Article (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the applicant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in Section (3).
The determination shall be made:
(a) By the Board of Directors by a majority vote of a quorum
consisting of Directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under subsection (a) of
this Section, by majority vote of a committee duly designated by the Board of
Directors (in which designation Directors who are parties may participate),
consisting solely of two or more Directors not at the time parties to the
proceeding;
(c) By special legal counsel:
(i) Selected by the Board of Directors or its committee in
the manner prescribed in subsection (a) or (b) of this Section; or
(ii) If a quorum of the Board of Directors cannot be
obtained under subsection (a) of this Section and a committee cannot be
designated under subsection (b) of this Section, selected by majority vote of
the full Board of Directors, in which selected Directors who are parties may
participate; or
(d) By the shareholders, but share owned by or voted under
the control of Directors who are at the time parties to the proceeding may not
be voted on the determination.
Any evaluation as to reasonableness of expenses shall be
made in the same manner as the determination that indemnification is
appropriate, except that if the determination is made by special legal counsel,
such evaluation as to reasonableness of expenses shall be made by those entitled
under subsection (c) of this Section (6) to select counsel.
Notwithstanding the foregoing, in the event there has been a
change in the composition of a majority of the Board of Directors after the date
of the alleged act or omission with respect to which indemnification is claimed,
any determination as to indemnification and advancement of expenses with respect
to any claim for indemnification made pursuant to this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the applicant.
If the Board of Directors and the applicant are unable to agree upon such
special legal counsel the Board of Directors and the applicant each shall select
a nominee, and the nominees shall select such special legal counsel.
(7) (a) The Corporation shall pay for or reimburse the reasonable
expenses incurred by any applicant who is a party to a proceeding in advance of
final disposition of the proceeding or the making of any determination under
Section (3) if the applicant furnishes the Corporation;
II-7
<PAGE>
(i) a written statement of his good faith belief that he has
met the standard of conduct described in Section (3); and
(ii) A written undertaking, executed personally or on his
behalf, to repay the advance if it is ultimately determined that he did not meet
such standard of conduct.
(b) The undertaking required by paragraph (ii) of subsection
(a) of this Section shall be an unlimited general obligation of the applicant
but need not be secured and may be accepted without reference to financial
ability to make repayment.
(c) Authorizations of payments under this Section shall be
made by the persons specified in Section (6).
(8) The Board of Directors is hereby empowered, by majority vote
of a quorum consisting of disinterested Directors, to cause the Corporation to
indemnify or contract to indemnify any person not specified in Sections (2) or
(3) of this Article who was, is or may become a party to any proceeding, by
reason of the fact that he is or was an employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, to the same extent as if such person
were specified as one to whom indemnification is granted in Section (3). The
provisions of Sections (4) through (7) of this Article shall be applicable to
any indemnification provided hereafter pursuant to this Section (8).
(9) The Corporation may purchase and maintain insurance to
indemnify it against the whole or any portion of the liability assumed by it in
accordance with this Article and may also procure insurance, in such amounts as
the Board of Directors may determine, on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a Director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by him in
any such capacity or arising from his status as such, whether or not the
Corporation would have power to indemnify him against such liability under the
provisions of this Article.
(10) Every reference herein to directors, officers, employees or
agents shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators. The indemnification hereby
provided and provided hereafter pursuant to the power hereby conferred by this
Article on the Board of Directors shall not be exclusive of any other rights to
which any person may be entitled, including any right under policies of
insurance that may be purchased and maintained by the Corporation or others,
with respect to claims, issues or matters in relation to which the Corporation
would not have the power to indemnify such person under the provisions of this
Article. Such rights shall not prevent or restrict the power of the Corporation
to make or provide for any further indemnity, or provisions for determining
entitlement to indemnity, pursuant to one or more indemnification agreements,
by-laws, or other arrangements (including without limitation, creation of trust
funds or security interests funded by letters of credit or other means) approved
by the Board of Directors (whether or not any of the Directors of the
Corporation shall be a party to or beneficiary of any such agreements, by-laws
or arrangements); provided, however, that any provision of such agreements,
by-laws or other arrangements shall not be effective if an and to the extent
that it is determined to be contrary to this Article or applicable laws of the
Commonwealth of Virginia.
(11) Each provision of this Article shall be severable, and an
adverse determination as to any such provision shall in no way affect the
validity of any other provision."
II-8
<PAGE>
Item 15. Recent Sales of Unregistered Securities
On July 1, 1995, the Corporation issued 200,688 shares of unregistered
common stock in exchange for all of its outstanding unregistered preferred
stock. The 200,688 shares of preferred stock converted in the exchange were
originally issued (the "Preferred Stock Offering") as part of a private
placement which closed in May of 1992. The Preferred Stock Offering was limited
to accredited investors and no more than 35 qualified nonaccredited investors.
Accordingly, the Preferred Stock Offering was exempt from registration under the
Securities Act of 1933 (the "Act") pursuant to Sections 3(b) and 4(2) of the Act
and Regulation D promulgated thereunder by the Securities and Exchange
Commission.
Item 16. Exhibits and Financial Statement Schedules
(a) The following exhibits either are filed as part of this
Registration Statement or are incorporated herein by reference:
Exhibit
Number Description of Exhibit
**1.1 Form of Underwriting Agreement.
3.1 Articles of Incorporation of Marathon Financial Corporation,
as amended (incorporated herein by reference to the
Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366)).
3.2 By-Laws of Marathon Financial Corporation, as amended,
(incorporated herein by reference as to the Corporation's
Registration Statement on Form S-1 filed on August 26, 1992
(File No. 33-51366)).
*4.1 Form of Specimen Stock Certificate.
*5.1 Opinion of Kaufman & Canoles.
10.1 401(k) Plan of Marathon Financial Corporation (incorporated
herein by reference to the Corporation's Registration Statement
on Form S-1 filed on August 26, 1992 (File No. 33-51366)).
10.2 Employment Agreement between The Marathon Bank and Donald L. Unger
(incorporated herein by reference to the Corporation's Registration
Statement on Form S-1 filed on August 26, 1992 (File No. 33-51366)).
**10.3 Lease dated July 1, 1996, between The Marathon Bank and Post
Office Plaza Partnership for the branch office at 300 Warren
Avenue, Front Royal, Virginia.
10.4 Lease between The Marathon Bank and the Lessors, Rogers M. Fred
and Clifton G. Stoneburner for the branch office at 1041
Berryville Avenue Winchester, Virginia (incorporated herein by
reference to the Corporation's Annual Report on Form 10-K for
the yeaer ended December 31, 1995 (File No. 0-18868)).
**21 Subsidiaries of the Corporation.
**23.1 Consent of Yount, Hyde & Barbour, P.C.
*23.2 Consent of Kaufman & Canoles, P.C. (included in Opinion filed as
Exhibit 5).
24.1 Power of Attorney (included on Signature Page).
*99.1 Form of Subscription Agreement.
- ------------------
* To be filed by amendment
** Filed herewith
II-9
<PAGE>
(b) Financial Statement Schedules.
None
Item 17. Undertakings.
The undersigned registrant hereby undertakes the supplement to the
Prospectus, after the expiration of the subscription period to set forth the
results of the subscription offer, the transactions by the underwriters during
the subscription period, the amount of unsubscribed securities to be purchased
by the underwriters, and the terms of any subsequent reoffering thereof. If any
public offering by the underwriters is to be made on terms differing from those
set forth on the cover page of the Prospectus, a post-effective amendment will
be filed to set forth the terms of such offering.
Insofar as indemnification for liabilities arising out of the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense in any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the County of
Frederick, Commonwealth of Virginia, on July 23 , 1996.
MARATHON FINANCIAL CORPORATION
By: /s/ Donald L. Unger
Donald L. Unger, President and
Chief Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated. Each person whose signature appears below
constitutes and appoints Donald L. Unger and Joseph W. Hollis his true and
lawful attorney-in-fact and agent, each acting along with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any or all amendments (including post-effective
amendments) to this Registration Statement on Form S-1, and to any registration
statement filed under Security and Exchange Commission Rule 462, and to file the
same, with all exhibits thereto, and all documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorney-in-fact and agent, or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Witness our hands and common seals on the date set forth below.
Signature Title Date
/s/ Frank H. Brumback Chairman of The Board, Director July 23, 1996
- ----------------------------
Frank H. Brumback
/s/ Donald L. Unger Director, President and Chief July 23, 1996
- ---------------------------- Chief Executive Officer
Donald L. Unger (Principal Executive Officer and
Chief Financial Officer)
/s/ Robert W. Claytor Director July 23, 1996
- ----------------------------
Robert W. Claytor
/s/ Clifton L. Good Director July 23, 1996
- ----------------------------
Clifton L. Good
II-11
<PAGE>
/s/ Joseph W. Hollis Director July 23, 1996
- ----------------------------
Joseph W. Hollis
/s/ Gerald H. Kidwell Director July 23, 1996
- ----------------------------
Gerald H. Kidwell
/s/ Lewis W. Spangler Director July 23, 1996
- ----------------------------
Lewis W. Spangler
/s/ Thomas W. Grove Director July 23, 1996
- ----------------------------
Thomas W. Grove
/s/ W. Houston Board, III Director July 23, 1996
- ---------------------------
W. Houston Board, III
/s/ Ralph S. Gregory Director July 23, 1996
- ----------------------------
Ralph S. Gregory
/s/ George R. Irvin, Jr. Director July 23, 1996
- ----------------------------
George R. Irvin, Jr.
II-12
MARATHON FINANCIAL CORPORATION
Common Stock
($1.00 par value)
UNDERWRITING AGREEMENT
October __, 1996
McKinnon & Company, Inc.
555 Main Street
First Virginia Building, 16th Floor
Norfolk, VA 23510
Gentlemen:
Marathon Financial Corporation, a Virginia corporation (the "Company"),
proposes to employ you (the "Underwriter") to advise the Company in the
structure of subscription and public offerings of the Company's Common Stock par
value $1.00 (the "Common Stock"), and, as agent of the Company, to assist in the
sale on a best efforts basis of (i) 500,000 shares of the Company's Common Stock
(collectively, the "Shares") in the public offering, less (ii) any shares that
are subscribed for by October __, 1996 in the Company's subscription offering of
100,000 shares of its Common Stock (the "Subscription Offering").
You have advised the Company (a) that you are authorized to enter into
this Agreement and (b) that you are willing to sell on a best efforts basis the
Shares as agent for the Company.
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the Company
and the underwriter hereby agree as follows:
1. Representation and Warranties of the Company. The Company represents
and warrants as follows:
(a) The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") in accordance with the provisions of the
Securities Act of 1933, as amended, and the rules and regulations of the
Commission thereunder (collectively, the "Act") a registration statement on Form
S-1 (SEC File No. ________, including a preliminary prospectus, relating to the
Shares. The Company expects to file on or prior to the effective date of a
post-effective amendment to the above-described registration statement. Such
registration statement, as amended, at the time it becomes effective, is
referred to in this Agreement as the "Registration Statement," and the
prospectuses in the form filed with the Commission as part of the Registration
Statement or pursuant to Rule 424(b), if any, after the Registration Statement
becomes effective are collectively referred to as the "Prospectus."
(b) Each preliminary prospectus filed as part of the Registration
Statement as originally filed or as part of any amendment or supplement thereto
when so filed complied in all material respects with the provisions of the Act;
except that this representation and warranty does not apply to statements in or
omissions from any such preliminary prospectus (or any amendment or supplement
thereto) made in reliance upon and conformity with information relating to the
Underwriter furnished to the Company in writing by such Underwriter expressly
for use therein.
(c) The Registration Statement in the form in which it becomes
effective and also in such form as it may be when any post-effective amendment
thereto shall become effective, and the Prospectus filed as part of the
Registration Statement and in the form first filed with the Commission under its
Rule 424(b), if any, and when any supplement thereto is filed with the
Commission, will comply in all material respects with the provisions of the Act
and will not at any such times contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the Registration
Statement or the Prospectus (or any amendment or supplement thereto) made in
reliance upon information relating to the Underwriter furnished to the Company
in writing by the Underwriter expressly for use therein.
(d) All the outstanding shares of Common Stock of the Company are
duly authorized and validly issued, fully paid and non-assessable and free of
preemptive or similar rights, (other than the right to purchase one share for
each __ shares held of record on ________, 19__); the Shares to be issued and
sold by the Company have been duly authorized and upon delivery to the
subscribers therefor (the "Subscribers") against payment therefor in accordance
with the terms hereof, will have been validly issued and fully paid and will be
nonassessable and free of preemptive or similar rights; and the Common Stock
conforms in all material respects to the description thereof in the Registration
Statement and the Prospectus (or any amendment or supplement thereto).
(e) The Company and its wholly-owned subsidiary, Marathon Bank
Corporation (the "Bank"), are duly organized and validly existing and in good
standing under Virginia law and are duly qualified to do business and are in
good standing in all jurisdictions which require such qualification or in which
the failure to qualify in such jurisdictions could, in the aggregate, have any
material adverse effect on the business, condition or properties of the Company
or the Bank. The Company and the Bank hold all material licenses, certificates
and permits from governmental authorities necessary for the conduct of their
businesses as described in the Prospectus and own, or possess adequate rights to
use, all material rights necessary for the conduct of their business and have
not received any notice of conflict with the asserted rights of others in
respect thereof; and the Company and the Bank have the corporate power and
authority to own their properties and conduct their businesses as described in
the Prospectus.
(f) All of the outstanding shares of capital stock of the Bank
are owned by the Company, have been duly authorized and are validly issued,
fully paid and non-assessable and are owned by the Company free and clear of any
lien, claim, security interest or other encumbrance. The Bank is the Company's
only subsidiary.
(g) The Company and the Bank have good and marketable title to
all property described in the Prospectus as being owned by them, free and clear
of all liens, claims, security interests or other encumbrances except such as
are described in the Registration Statement and the Prospectus (or any amendment
or supplement thereto or in a document filed as an exhibit to the Registration
Statement) or such as are not material and do not interfere in any material
respect with the use of the property or the conduct of the business of the
Company and the Bank taken as a whole, and the property held under lease by the
Company and the Bank is held by them under valid and enforceable leases with
only such exceptions as in the aggregate are not material and do not interfere
in any material respect with the conduct of the business of the Company and the
Bank taken as a whole; provided that no representation or warranty is made
hereby to the title of the lessor of any such property.
(h) There are no legal or governmental proceedings pending, or to
the knowledge of the Company threatened, required to be described in the
Registration Statement or the Prospectus (or any amendment or supplement
thereto) which are not described as required, and there is no contract or
document of a character required to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required.
(i) Neither the Company nor the Bank is in violation of its
respective articles of incorporation or bylaws or in default in any material
respect in the performance of any obligation, agreement or condition contained
in any bond, debenture, note or any other evidence of indebtedness or in any
agreement, indenture, lease or other instrument material to the Company and the
Bank which default is material to the Company and the Bank taken as a whole.
Neither the issuance nor the sale of the Shares nor the execution and delivery
of this Agreement nor the performance of the obligations of the Company set
forth herein nor the consummation of the transactions herein contemplated
requires any consent, approval, authorization or other order of any court,
regulatory, body, administrative agency or other governmental body (except such
as may be required under the Act or other securities laws or Blue Sky laws) or
will conflict with or constitute a breach of, or default under, the articles of
incorporation or by-laws of the Company or the Bank, or constitute a breach or
default under any agreement, indenture or other instrument to which the Company
or the Bank is a party or by which either of them or any of their property is
bound, or any law, administrative regulation or ruling or court decree
applicable to the Company or the Bank or any of their properties, which breach
or default is material to the business property of the Company and the Bank
taken as a whole.
(j) Except as disclosed in the Registration Statement and the
Prospectus (or any amendment or supplement thereto), subsequent to the
respective dates as of which such information is given in the Registration
Statement and the Prospectus (or any amendment or supplement thereto), the
Company has not incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business, that is
material to the Company or the Bank taken as a whole, and there has not been any
material change in the capital stock, or material increase in the short-term
debt or long-term debt, of the Company or the Bank, or any material adverse
change, or any development involving a prospective material adverse change, in
the condition (financial or otherwise), business, net worth or results of
operations of the Company and the Bank taken as a whole.
(k) Yount, Hyde & Barbour, P.C., who have certified certain of
the financial statements filed with the Commission as part of, or incorporated
by reference in, the Registration Statement and Prospectus, are independent
public accountants as required by the Act.
(l) The Company's financial statements, together with related
schedules and notes, forming part of the Registration Statement and Prospectus,
present fairly the financial position and the results of operations of the
Company and the Bank at the respective dates or for the respective periods to
which they apply; said statements and related notes have been prepared in
accordance with generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the financial
and statistical information and data set forth in the Registration Statement and
the Prospectus is fairly presented and prepared on a basis consistent with such
financial statements and the books and records of the Company and the Bank. The
Company and the Bank have no material contingent obligations, liabilities or
losses which are not disclosed in the Registration Statement and the Prospectus,
as they may be amended or supplemented.
(m) No holders of securities of the Company have rights to the
registration of such securities in the offering contemplated hereby.
(n) The Company and the Bank have filed all Federal, state and
foreign income tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by them or any
of them to the extent that such taxes have become due, and are not being
contested in good faith.
(o) The Company and the Bank hold all material licenses,
certificates and permits from governmental authorities which are necessary to
the conduct of their businesses; and neither the Company nor the Bank have
infringed any patents, patent rights, trade names, trademarks or copyrights in
any manner material to the business of the Company and the Bank taken as a
whole.
(p) This Agreement has been duly authorized, executed and
delivered by the Company and is a valid and binding agreement of the Company
enforceable in accordance with its terms.
(q) All employee benefit plans established, maintained or
contributed by the Company comply in all material respects with requirements of
the Employee Retirement Income Security Act of 1974 ("ERISA") and no such plan
incurred or assumed any "accumulated funding deficiency" within the meaning of
ss. 302 of ERISA or has incurred or assumed any material liability to the
Pension Benefit Guaranty Corporation.
2. Advisory Fee. You have advised and agree to continue to advise the
Company on the structure, format and manner of consummation of the Subscription
Offering. You have also agreed to use your best efforts to sell any Shares
offered by the Company in the Subscription Offering and not purchased by the
Company's shareholders. For such assistance, the Company shall pay you a fee
equal to $10,000.
3. Sale of the Shares. On the basis of the representations, warranties
and covenants herein contained, and subject to the conditions herein set forth,
the Company agrees to issue and sell 500,000 of the Shares through a combination
of the Subscription Offering and Public Offering. All Shares to be offered and
sold to the public shall be issued and sold through the Underwriter, as agent
for the Company, and the Underwriter agrees to use its best efforts to sell the
Shares as agent for the Company, at the price per share set forth on the cover
page of the Prospectus for the Public Offering (the "Public Offering Price").
The Company agrees to pay the Underwriter a commission equal to ____ percent
(___%) of the Public Offering Price of all Shares sold through the Underwriter
(including Shares sold through selected dealers) that were offered but not sold
in the Subscription Offering and _____ percent (___%) of the Public Offering
Price of all other Shares sold through the Underwriter (including Shares sold
through selected dealers). The Underwriter may reject any offer to purchase the
Shares made through the Underwriter in whole or in part, and any such rejection
shall not be deemed a breach of the Underwriter's agreement contained herein.
4. Sales by the Underwriter. It is understood that, after the
Registration Statement becomes effective, you propose to sell the Shares to the
public as agent for the Company upon the terms and conditions set forth in the
Prospectus. The escrow procedures established by the Underwriter shall comply
with Securities and Exchange Commission Rule 15c2-4 promulgated under the
Securities Exchange Act of 1934 (the "1934 Act"). All subscribers to whom the
Underwriter directly sells Shares shall be instructed to make their checks for
payment of the Shares payable to "Marathon Financial Corporation Escrow
Account." In addition, the Underwriter shall comply with Rule 15c2-4. The
Underwriter shall transmit all funds it receives from subscribers to Crestar
Bank, the escrow agent (the "Escrow Agent") by noon of the next business day
following receipt thereof. Only broker/dealers who are either (i) members in
good standing of the National Association of Securities Dealers, Inc. (the
"NASD") that are registered with the NASD and maintain net capital pursuant to
Rule 15c3-1 promulgated under the 1934 Act of not less than $250,000 or (ii)
dealers with their principal places of business located outside the United
States, its territories and its possessions and not registered as brokers or
dealers under the 1934 Act, who have agreed not to make any sales within the
United States, its territories or its possessions or to persons who are
nationals thereof or residents therein shall be designated selected dealers by
the Underwriter. The Underwriter shall require all selected dealers to comply
with Rule 15c2-4.
5. Payment and Delivery. The Underwriter shall direct the Escrow Agent
to make payment for the Shares sold hereunder by wire transfer or certified or
bank cashier's checks drawn to the order of the Company in next day funds. Such
payment is to be made at the offices of Marathon Financial Corporation, 4095
Valley Pike, Winchester, VA 22602, at _____ _.m. local time, on or about
_______, 1996, or at such other time, date and place as you and the Company
shall agree upon, such time and date being herein referred to as the "Closing
Date." The certificates for the Shares will be delivered in such denominations
and in such registrations as the Underwriter requests in writing not later than
the third (3rd) full business day prior to the Closing Date, and will be made
available for inspection by the Underwriter at least twenty-four (24) hours
prior to the Closing Date. Such certificates will be delivered to the Escrow
Agent by 12:00 p.m. (noon) on the day prior to the Closing Date, along with
addressed labels to be used to mail the certificates to the purchasers thereof.
The Company shall direct the Escrow Agent to deliver (i) payment of the advisory
fee and the portion of the selling commission due to the Underwriter by wire
transfer or certified or bank cashier's check drawn to the order of the
Underwriter in next day funds, to the Underwriter on the Closing Date and (ii)
payment of the portion of the selling commission due to each selected dealer by
wire transfer or certified or bank cashier's check drawn to the order of such
selected dealer in next day funds, to each selected dealer on the Closing Date.
6. Covenants of the Company. The Company covenants and agrees with the
Underwriter as follows:
(a) The Company will endeavor to cause the Registration Statement
to become effective and will advise you promptly and, if requested by you, will
confirm such advice in writing (i) when the Registration Statement has become
effective and when any amendment thereto thereafter becomes effective, (ii) of
any request by the Commission for amendments or supplements to the Registration
Statement or Prospectus or for additional information, (iii) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction, or the initiation or contemplation of any
proceeding for such purposes and (iv) within the period of time referred to in
Section 6(e), of the happening of any event which makes any statement made in
the Registration Statement or Prospectus (as then amended or supplemented)
untrue in any material respect or which requires the making of any addition to
or change in the Registration Statement or Prospectus (as then amended or
supplemented) to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or of the necessity to
amend or supplement the Prospectus (as then amended or supplemented) to comply
with the Act or any other law. If at any time the Commission shall issue any
stop order suspending the effectiveness of the Registration Statement, the
Company will make every reasonable effort to obtain the withdrawal of such order
at the earliest possible time.
(b) The Company will furnish you, without charge, three signed
copies of the Registration Statement as originally filed with the Commission and
of each amendment to it, including financial statements and all exhibits
thereto, and will also furnish to you, such number of conformed copies of the
Registration Statement (without exhibits) as originally filed and of each
amendment thereto as you may reasonably request.
(c) The Company will not file any amendment to the Registration
Statement or make any amendment or supplement to the Prospectus of which you
shall not previously have been advised or to which you shall promptly after
being so advised reasonably object in writing.
(d) Prior to the effective date of the Registration Statement,
the Company has delivered or will deliver to you, without charge, in such
quantities as you have requested or may hereafter reasonably request, copies of
each form of preliminary prospectus. The Company consents to the use, in
accordance with the provisions of the Act and with the securities or Blue Sky
laws of the jurisdictions in which the Shares are offered by the Underwriter and
by dealers to whom Shares may be sold, prior to the effective date of the
Registration Statement, of each preliminary prospectus so furnished by the
Company.
(e) On the effective date of the Registration Statement and
thereafter from time to time, for such period as in the opinion of counsel for
the Underwriter a prospectus is required by law to be delivered in connection
with sales by an Underwriter or a dealer, the Company will deliver to you and
each dealer through whom Shares may be sold without charge (except as provided
below) as many copies of the Prospectus (and of any amendment or supplement
thereto) as they may reasonably request. The Company consents to the use of such
Prospectus (and of any amendment or supplement thereto) in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the Underwriter and by dealers
through whom Shares may be sold, both in connection with the offering or sale of
the Shares and for such period of time thereafter as the Prospectus is required
by law to be delivered in connection therewith. If during such period of time
any event shall occur which is in the judgment of the Company or in the opinion
of counsel for the Underwriter requires that a material fact be stated in the
Prospectus (as then amended or supplemented) in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading, or if it is necessary to amend or supplement the Prospectus to
comply with the Act or any other law, the Company at its own expense (except as
provided below) will forthwith prepare and file with the Commission an
appropriate amendment or supplement thereto, and will furnish to the Underwriter
and each dealer through whom Shares may be sold without charge (except as
provided below), a reasonable number of copies thereof.
(f) The Company will cooperate with you and your counsel in
connection with the registration or qualification of the Shares for offer and
sale by you and by dealers through whom Shares may be sold under the securities
or Blue Sky laws of such jurisdictions as you may designate and will file such
consents to service of process or other documents as may be necessary in order
to effect such registration or qualification; provided that in no event shall
the Company be obligated to qualify to do business in any jurisdiction where it
is not now so qualified or to take any action which would subject it to the
service of process in suits, other than those arising out of the offer and sale
of the Shares, in any jurisdiction where it is not now so subject.
(g) The Company will make generally available to its security
holders an earnings statement, which need not be audited, covering a
twelve-month period commencing after the effective date of the Registration
Statement and ending no later than 15 months thereafter, as soon as practicable
after the end of such period, which earnings statement shall satisfy the
provisions of Section 11(a) of the Act and any applicable regulation.
(h) During the period of five years hereafter, the Company will
furnish to you (i) as soon as available, a copy of each report of the Company
mailed to shareholders or filed with the Commission and (ii) from time to time
such other proper information concerning the business and financial condition of
the Company as you may reasonably request.
(i) Neither the Company nor the directors of the Company will
sell, contract to sell or otherwise dispose of any Common Stock or rights to
purchase Common Stock (other than Common Stock and rights pursuant to an
employee benefit or stock option plan existing at the time of effectiveness of
the Registration Statement), except pursuant to this Agreement, for a period of
120 days after the date of the commencement of the Subscription Offering without
your prior written consent.
7. Costs and Expenses.
(a) The Company will pay all costs and expenses incident to the
performance by it of its obligations hereunder, including (i) the preparation,
printing and filing of the Registration Statement (including financial
statements and exhibits), each preliminary prospectus, the Prospectus and all
amendments and supplements to any of the foregoing, during the period specified
in Section 6(e) but not exceeding nine months after the date on which the Shares
are first offered to the public, (ii) the preparation, printing, authentication,
issuance and delivery of certificates for the Shares, including any stamp tax in
connection with the original issuance of the Shares, (iii) the preparation and
delivery of the preliminary and supplemental Blue Sky Memoranda (including the
reasonable fees and disbursements of counsel for the Underwriter relating
thereto), (iv) the registration or qualification of the Shares for offer and
sale under the securities or Blue Sky laws of the several states as provided in
Section 6(b) (including the reasonable fees and disbursements of counsel for the
Underwriter relating thereto), (v) the fees and expenses of the Company's
accountants and the fees and expenses of counsel for the Company, (vi) during
the period specified in Section 6(e) but not exceeding nine months after the
date on which the Shares are first offered to the public, delivery to the
Underwriter and dealers through whom Shares may be sold (including postage, air
freight and the expenses of counting and packaging) of such copies of the
Registration Statement, Prospectus, each preliminary prospectus and amendments
or supplements to the Registration Statement and the Prospectus as may be
requested for use by the Underwriter or by dealers through whom Shares may be
sold in connection with the offering and sale of the Shares and during such
period of time thereafter as the Prospectus is required, in the judgment of the
Company or in the opinion of counsel for the Underwriter, to be delivered in
connection with the offer and sale of the Shares by you and by dealers, (vii)
filing fees with the NASD in connection with the offering, (viii) filing fees
and costs associated with the application for and listing on NASDAQ/SmallCap
market; (ix) fees and expenses of the Underwriter's counsel in connection with
due diligence, review of the Offering Circular, NASD filings and preparation of
this Agreement, the Selected Dealer Agreement and the Escrow Agreement, and
matters related thereto which should not exceed $10,000; provided, further, that
the aggregate legal fees paid by the Company for preparation and filing of the
Registration Statement and the items listed in this (ix) shall not exceed
$50,000; (x) the costs of all informational and/or investor due diligence
meetings, which shall not exceed $1,000; and (xi) the performance by the Company
of its other obligations under this Agreement. The Underwriter shall pay its own
costs and expenses except as otherwise provided in this Agreement.
(b) If this Agreement shall be terminated pursuant to any of the
provisions hereof (other than by notice given by you terminating this Agreement
pursuant to Section 12 hereof), or if this Agreement shall be terminated by you
because of any failure or refusal on the part of the Company to comply in any
material respect with the terms or fulfill in any material respect any of the
conditions of this Agreement, the Company agrees without further obligation to
reimburse you for all out-of-pocket expenses (including fees and expenses of
your counsel) reasonably and actually incurred in connection herewith.
8. Conditions of the Underwriter's Obligations. The obligations of you
hereunder are subject to the following conditions:
(a) That the Registration Statement shall have become effective
not later than 6:30 p.m. Winchester, Virginia time, on the date hereof, or at
such later date and time as shall be consented to by you.
(b) That subsequent to the effective date of the Registration
Statement, there shall not have occurred any change, or any development
involving a prospective change, in or affecting particularly the condition
(financial or otherwise), business, properties, net worth or results of
operations of the Company or the Bank not contemplated by the Prospectus (or any
supplement thereto) which, in your opinion, would materially adversely affect
the market for the Shares.
(c) That you shall have received on the Closing Date an opinion
dated the Closing Date, satisfactory to you and your counsel, of Kaufman &
Canoles, P.C. counsel for the Company and the Underwriter, to the effect that:
(i) the Company and the Bank have been duly incorporated,
are validly existing as corporations in good standing under the laws of the
Commonwealth of Virginia and are duly qualified to do business and are in good
standing in all jurisdictions which require such qualification or in which the
failure to qualify in such jurisdictions could, in the aggregate, have any
material adverse effect on the business, condition or properties of the Company
or the Bank;
(ii) the Bank is the Company's only subsidiary and all the
outstanding shares of capital stock of the Bank are owned by the Company, have
been duly authorized and validly issued, and are fully paid and nonassessable
and, to the knowledge of such counsel, are owned by the Company free and clear
of any lien, claim, security interest or other encumbrance, except as otherwise
described in the Registration Statement and the Prospectus (or any amendment or
supplement thereto) or such as are not material;
(iii) the Shares to be issued and sold by the Company
hereunder have been duly authorized, and when issued and delivered in accordance
with the terms of this Agreement, will have been validly issued and will be
fully paid and non-assessable, and the issuance of such Shares is not subject to
any preemptive rights or, to the knowledge of such counsel, similar rights other
than the right to purchase one share for each 12 shares held of record on June
24, 1996 in the Subscription Offering;
(iv) the certificates for the Shares are in proper legal
form;
(v) this Agreement has been duly authorized, executed and
delivered by the Company and (assuming due authorization, execution and delivery
by the Underwriter) is a valid and binding agreement of the Company enforceable
in accordance with its terms, except in all cases as rights of indemnity or
contribution hereunder may be limited under applicable law and subject, as to
enforcement, to (A) the effect of bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium, conservatorship, receivership, or other similar laws
of general applicability relating to or affecting creditors' rights in general
or the rights of creditors of state banking corporations, (B) the application of
general principles of equity (regardless of whether enforceability is considered
in a proceeding in equity or at law) and (C) the unenforceability under certain
circumstances of contribution provisions or provisions indemnifying a party
against liability where such contribution or indemnification is contrary to
public policy;
(vi) neither the Company nor the Bank, to the knowledge of
such counsel, is in violation of its articles of incorporation or its bylaws, or
in default in any material respect in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or other evidence
of indebtedness or in any agreement, indenture or other instrument known to such
counsel which is material to the conduct of the business of the Company and the
Bank taken as a whole and the execution, delivery and performance of this
Agreement, compliance by the Company with all provisions hereof and the
consummation of the transactions contemplated hereby will not conflict with or
constitute a breach of any of the terms or provisions of, or a default under,
the articles of incorporation or bylaws of the Company or the Bank or, to the
knowledge of such counsel, any material agreement, indenture or other instrument
to which the Company or the Bank is a party or by which either of them is bound,
or (assuming compliance with the Act and other securities or Blue Sky laws)
violate any law, administrative regulation or ruling (except as the
indemnification or contribution provisions in this Agreement may be limited by
applicable law) or, to the knowledge of such counsel, court decree applicable to
the Company or the Bank or any of their respective properties;
(vii) except for the order of the Commission making the
Registration Statement effective and permits and similar authorizations required
under other securities or Blue Sky laws, no consent, approval, authorization or
other order of any court, regulatory body, administrative agency or other
governmental body is required for the consummation of the sale of the Shares to
the purchasers through the Underwriter as contemplated by this Agreement;
(viii) the statements in the Prospectus in the last _____
paragraphs under the caption "Market Price and Dividend Data", and the
statements under the captions "Business Supervision and Regulation";
"Description of Capital Stock"; and "Certain Restrictions on Acquisitions of the
Corporation" insofar as such statements constitute a summary of the documents,
legal matters or proceedings referred to therein, fairly and accurately present
in all material respects the information called for by the Act with respect to
such documents, legal matters or proceedings; and
(ix) to the knowledge of such counsel, there are no material
legal or governmental proceedings or contracts or other documents which are
required to be described in the Registration Statement or Prospectus or to be
filed as an exhibit to the Registration Statement which are not described or
filed as required.
Subject to its customary practices and limitations relating to the
scope of such counsel's participation in the preparation of the Registration
Statement and the Prospectus and its investigation or verification of
information contained therein, Kaufman & Canoles, P.C., also shall state nothing
has come to such counsel's attention to cause it to believe that the
Registration Statement and the Prospectus (except for financial statements,
schedules and other financial data included therein, as to which such counsel
need not express any belief) at the time the Registration Statement became
effective contained any untrue statement of any material fact or omitted to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus and any amendment or
supplement thereto (except as aforesaid) as of their respective dates contains
any untrue statement of a material fact or omits to state any material fact
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
In rendering the opinions required by this Section 8(c), such counsel
may rely, as to matters of fact, upon certificates and representations of
officers of the Company and the Bank and on certificates of public officials.
(d) That you shall have received on the Closing Date the opinion
of your counsel, Kaufman & Canoles, dated the Closing Date, covering such
matters as you may have reasonably requested.
(e) That you shall have received letters addressed to you and
dated September __, 1996, the date hereof and the Closing Date from Yount, Hyde
& Barbour, P.C., independent public accountants, substantially in the forms
heretofore approved by you.
(f) That (i) no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or, to the knowledge of the Company, shall be
contemplated by the Commission at or prior to the Closing Date; (ii) there shall
not have been any material change in the capital stock of the Company nor any
material increase in long-term debt of the Company or the Bank from that set
forth or contemplated in the Registration Statement and Prospectus (or any
amendment or supplement thereto); (iii) there shall not have been, since the
respective dates as of which information is given in the Registration Statement
and Prospectus (or any amendment or supplement thereto), except as may otherwise
be stated in the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition (financial or
otherwise), business, properties, net worth or results of operations of the
Company and the Bank, taken as a whole; (iv) neither the Company nor the Bank
shall have any material liability or obligation, direct or contingent, other
than those liabilities or obligations reflected in the Registration Statement
and the Prospectus (or any amendment or supplement thereto) or incurred or
arising in the ordinary course of business; and (v) all the representations and
warranties of the Company contained in this Agreement shall be true and correct
in all material respects on and as of the date hereof and the Closing Date as if
made on and as of such date, and you shall have received a certificate, dated
the Closing Date and signed by the President and the chief financial officer of
the Company to the effect set forth in this Section (f) and (g) hereof.
(g) That the Company shall not have failed at or prior to the
Closing Date to have performed or complied in any material respect with any of
the agreements herein contained and required to be performed or complied with by
it at or prior to the Closing Date.
(h) The Company shall have furnished you such further
certificates and documents confirming the representations and warranties
contained herein and related matters as you may reasonably have requested.
9. Conditions to the Obligations of the Company. The obligations of the
Company to sell and deliver the portion of the Shares required to be delivered
as and when specified in this Agreement are subject to the conditions that at or
before 6:30 p.m., Winchester, Virginia time, on the date of this Agreement, or
such later time and date to which the Company and the Underwriter may from time
to time consent, the Registration Statement shall have become effective; and at
the Closing Date, no stop order suspending the effectiveness of the Registration
Statement shall have been issued and in effect or proceedings therefor initiated
or threatened.
10. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless the
Underwriter and each person, if any, who controls the Underwriter within the
meaning of Section 15 of the Act or Section 20 of the Securities Exchange Act of
1934 (the "Exchange Act") from and against any and all losses, claims, damages,
liabilities or expenses (including reasonable costs of investigation) arising
out of or based upon any untrue statement or alleged untrue statement of a
material fact contained in any preliminary prospectus or in the Registration
Statement or the Prospectus or in any amendment or supplement thereto [if used
within the period set forth in Section 6(e)], or arising out of or based upon
any omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, liabilities or expenses arise
out of or are based upon any untrue statement or omission or alleged untrue
statement based upon information relating to the Underwriter furnished in
writing to the Company by or on behalf of the Underwriter expressly for use in
connection therewith; provided that the indemnification contained in this
paragraph with respect to any preliminary prospectus shall not inure to the
benefit of the Underwriter (or any person controlling the Underwriter) on
account of any such loss, claim, damage, liability or expense arising from the
sale of the Shares by the Underwriter to any person if a copy of the Prospectus
shall not have been delivered or sent to such person with or prior to the
written confirmation of the sale involved (or any supplement to the Prospectus
at the time of such confirmation was not so delivered or sent) and the statement
or omission giving rise to such loss, claim, damage, liability or expense was
contained in the preliminary prospectus and corrected in the Prospectus (or any
supplement thereto at the time such confirmation was delivered or sent).
(b) If any action or claim shall be brought against the
Underwriter or any person controlling the Underwriter, in respect of which
indemnity may be sought against the Company in accordance with Section 10(a),
the Underwriter shall promptly notify the Company in writing and the Company
shall assume the defense thereof, including the employment of counsel and
payment of all fees and expenses. The Underwriter or any such person controlling
the Underwriter shall have the right to employ separate counsel in any such
action and participate in the defense thereof, but the reasonable fees and
expenses of such counsel shall be at the expense of the Underwriter or such
controlling person unless (i) the Company has agreed in writing to pay such fees
and expenses, (ii) the Company has failed to assume the defense and employ
counsel or (iii) the named parties to any such action (including any impleaded
party) include both the Underwriter or controlling person and the Company and
representations of both parties by the same counsel would be inappropriate due
to actual or potential differing interests between them (in which case, if such
Underwriter or controlling person notifies the Company in writing that it elects
to employ separate counsel at the expense of the Company, the Company shall not
have the right to assume the defense of such action on behalf of the Underwriter
or such controlling person, it being understood, however, that the Company shall
not, in connection with any such action or separate but substantially related
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the reasonable fees and expenses of more than one
separate firm of attorneys at any time for the Underwriter and controlling
persons, which firm shall be designated in writing by you). The Company shall
not be liable for any settlement of any such action effected without the written
consent of the Company, but if settled with such written consent, or if there be
a final judgment for the plaintiff in any such action, the Company agrees to
indemnify and hold harmless the Underwriter and any such controlling person from
and against any loss, liability, damage or expense by reason of such settlement
or judgment.
(c) The Underwriter agrees to indemnify and hold harmless the
Company, its directors, its officers who sign the Registration Statement, any
person controlling the Company to the same extent as the foregoing indemnity
from the Company to the Underwriter, but only with respect to information in the
last paragraph on the front cover of the Prospectus and in the section of the
Prospectus entitled "Underwriting," which were furnished by or on behalf of the
Underwriter expressly for use in the Registration Statement, the Prospectus or
any preliminary prospectus, or any amendment or supplement thereto. If any
action or claim shall be brought or asserted against the Company, its directors,
any such officer or any such controlling person based on the Registration
Statement, the Prospectus or any preliminary prospectus, or any amendment or
supplement thereto and in respect of which indemnity may be sought against the
Underwriter, the Underwriter shall have the rights and duties given to the
Company by Section 10(b) (except that if the Company shall have assumed the
defense thereof, the Underwriter shall not be required to do so, but may employ
separate counsel therein and participate in the defense thereof but the fees and
expenses of such counsel shall be at the expense of the Underwriter), and the
Company, its directors, any such officer, any such controlling person shall have
the rights and duties given to the Underwriter by Section 10(b).
(d) If the indemnification of the Underwriter or the Company
provided for in this Section 10 is unavailable as a matter of law to the
Underwriter or the Company, as the case may be, in respect of any loss, claim,
damage, liability or expense referred to therein, then the indemnifying party,
in lieu of indemnifying such indemnified party thereunder, shall contribute to
the amount paid or payable by such indemnified party as a result of such loss,
claim, damage, liability or expense (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company, as the case may be, on
the one hand and the Underwriter on the other from the offering of the Shares or
(ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company, on the one hand and of the Underwriter on the other in connection
with the statements or omissions which resulted in such loss, claims, damage,
liability or expense, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
Underwriter on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company, bear to the total underwriting commissions (and advisory fee) received
by the Underwriter as set forth in the table on the cover page of the Prospectus
(as amended or supplemented and in the section entitled "Underwriting" in the
Prospectus as amended or supplemented). The relative fault of the Company on the
one hand and of the Underwriter on the other shall be determined by reference
to, among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material fact
related to information supplied by the Company on the one hand or by the
Underwriter on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriter agree that it would not be just and
equitable if contribution pursuant to this Section 10(d) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an indemnified party as a result of the
losses, claims, damages, liabilities and expenses referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses actually and reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 10(d), the
Underwriter shall not be required to contribute any amount in excess of the
amount by which the total price at which the Shares sold by it as agent for the
Company exceeds the amount of any damages which the Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentations.
(e) In any proceeding relating to the Registration Statement, any
preliminary prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 10 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) The indemnity and contribution agreements contained in this
Section 10 and the respective agreements, representations, warranties and other
statements of the Company or its officers and the Underwriter set forth in or
made pursuant to this Agreement shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of the
Underwriter or the Company or any person controlling the Underwriter, the
Company or its directors, officers (or any person controlling the Company), (ii)
acceptance of any Shares and payment therefor hereunder and (iii) any
termination of this Agreement. A successor of the Underwriter or the Company or
its directors or officers referred to above (or of any person controlling the
Underwriter or the Company) shall be entitled to the benefits of the indemnity
contribution and reimbursement agreements contained in this Section 10.
11. Effective Date of Agreement. This Agreement shall become effective
when (i) notification of the effectiveness of a Post-Effective Amendment to the
Registration Statement has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company
by notifying you, or by you by notifying the Company; provided, however, that
the provisions of this Section and of Section 7 and Section 10 hereof shall at
all times be effective.
12. Termination of Agreement. This Agreement shall be subject to
termination in your sole discretion, without liability on your part, by notice
given to the Company, if prior to the Closing Date (i) trading in securities
generally on the New York Stock Exchange or American Stock Exchange shall have
been suspended or materially limited, (ii) a general moratorium on commercial
banking activities in Virginia or the United States shall have been declared by
either Federal or state authorities or (iii) there shall have occurred any
outbreak or escalation of hostilities or other international or domestic
calamity, crisis or change in political, financial or economic conditions, the
effect of which on the financial markets of the United States is such as to make
it, in your judgment, impracticable or inadvisable to proceed with the offering.
Notice of such cancellation shall be given to the Company by telegraph or
telephone but shall be subsequently confirmed by letter.
13. Notices. All communications hereunder shall be in writing and,
except as otherwise provided herein, will be mailed, delivered or telegraphed
and confirmed as follows: if to the Underwriter, to McKinnon & Company, Inc.,
555 Main Street, 16th Floor, First Virginia Bank Building, Norfolk, Virginia
23510, Attention: William J. McKinnon, Jr.; if to the Company, to Marathon
Financial Corporation, 4095 Valley Pike, Winchester, Virginia 22602, Attention:
Donald L. Unger.
14. Successors. This Agreement has been and is made solely for the
benefit of the Underwriter, the Company and their respective successors,
executors, administrators, heirs and assigns, and the officers, directors and
controlling persons referred to herein, and no other person will have any right
or obligation hereunder. The term "successor" shall not include any purchaser of
the Shares merely because of such purchase.
15. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
16. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the Commonwealth of Virginia.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement between the Company and the
Underwriter in accordance with its terms.
Very truly yours,
MARATHON FINANCIAL CORPORATION
By:____________________________
President
The foregoing Underwriting
Agreement is hereby confirmed
and accepted as of the date
first above written.
McKINNON & COMPANY, INC.
By:__________________________
President
ESCROW AGREEMENT
This Escrow Agreement made and entered into as of the ____ day of October,
1996, by and among McKINNON & COMPANY, INC., a Virginia corporation (the
"Underwriter"), MARATHON FINANCIAL CORPORATION, a Virginia banking corporation
(the "Corporation"), and CRESTAR BANK, a national banking association (the
"Escrow Agent").
R E C I T A L S:
A. The Corporation proposes to sell up to 500,000 shares (the "Shares") of
the Corporation's common capital stock, par value $1.00 (the "Common Stock"), to
the public at a price of between $4.75 and $5.75 per share ("Public Offering").
B. Of the 500,000 Shares, 100,000 of the Shares have been offered first to
the Corporation's shareholders of record on June 24, 1996 at $5.00 per share
("Subscription Offering").
C. The Corporation has retained the Underwriter, as selling agent for the
Corporation on a best efforts basis, to sell the Shares in the Public Offering,
and the Underwriter has agreed to sell the Shares as the Corporation's selling
agent on a best efforts basis in the Public Offering, and the Corporation has
retained the Underwriter as a financial advisor for the Subscription Offering,
and to use its best efforts to sell shares in the Public Offering that are not
sold in the Subscription Offering, and the Underwriter has agreed to serve in
these capacities, the terms of which relationship are set forth in an
Underwriting Agreement between the Corporation and the Underwriter of even date
herewith (the "Underwriting Agreement").
D. The Underwriter will enter into agreements with other brokers/dealers
(the "Selected Dealers" or individually, the "Selected Dealer") to assist in the
sale of the Shares.
E. The Escrow Agent is willing to hold the proceeds in escrow pursuant to
this Agreement.
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained in this Agreement, it is hereby agreed as follows:
1. Establishment of the Escrow Account. On or prior to the date of
commencement of the Public Offering, the parties shall establish a
non-interest-bearing account with the Escrow Agent, which escrow account shall
be entitled "Marathon Financial Corporation - Escrow Account" (the "Escrow
Account"). The Underwriter will instruct subscribers to make checks payable to
"Crestar Bank - Marathon Financial Corporation Escrow Account." Any checks
received by the Underwriter or the Escrow Agent that are made payable to a party
other than the Escrow Agent shall be returned to the party that submitted the
check.
2. Escrow Period. The escrow period (the "Escrow Period") shall begin
with the commencement of the Public Offering and shall terminate upon the
Closing Date (as defined in Section 7 of this Agreement), or November 30, 1996,
whichever first occurs. During the Escrow Period, the Corporation is aware and
understands that it is not entitled to any funds received into escrow and no
amounts deposited by the Escrow Agent shall become property of the Corporation
or any other entity, or be subject to the debts of the Corporation or any other
entity.
3. Deposits into the Escrow Account.
(a) The Underwriter agrees that it shall deliver by noon of the
next business day after receipt all monies received from subscribers for the
payment of the Shares to the Escrow Agent for deposit in the Escrow Account
together with a written account of each sale, which account shall set forth,
among other things, (i) the subscriber's name and address, (ii) the number of
Shares purchased by the subscriber, (iii) the amount paid therefor by the
subscriber, (iv) whether the consideration received from the subscriber was in
the form of a check, draft or money order, and (v) the subscriber's social
security or tax identification number.
(b) Funds received from Selected Dealers shall be deposited in
the Escrow Account, and the Underwriter shall use its best efforts to
immediately provide the Escrow Agent with any of the following information not
previously received by the Escrow Agent: (i) the name and address of the
Selected Dealer, (ii) the number of Shares purchased through the Selected
Dealer, (iii) the amount of funds delivered by the Selected Dealer, (iv) whether
the consideration received from the Selected Dealer was in the form of a check,
draft or money order, and (v) the Selected Dealer's tax identification number.
(c) In the event the Selected Dealers transfer subscriber monies
directly to the Escrow Agent, the Selected Dealer shall provide the Escrow Agent
with the following information: (i) the subscriber's name and address; (ii) the
number of shares purchased by the subscriber; (iii) the amount paid therefor by
the subscriber; (iv) whether the consideration received from the subscriber was
in the form of a check, draft or money order, and (v) the subscriber's social
security or tax identification number. To the extent a Selected Dealer fails to
provide all such information to the Escrow Agent, the Underwriter shall use its
best efforts to promptly provide, or cause such Selected Dealer to provide, the
Escrow Agent with such information.
All monies so deposited in the Escrow Account are hereinafter referred to
as the "Escrow Amount."
4. Collection Procedure.
(a) The Escrow Agent is hereby authorized to deposit each check
in the Escrow Account.
(b) In the event any check paid by a subscriber and deposited in
the Escrow Account shall be returned, the Escrow Agent shall notify the
Underwriter by telephone of such occurrence and advise it of the name of the
purchaser, the amount of the check returned, and any other pertinent
information. The Escrow Agent shall then transmit the returned check directly to
the subscriber and shall transmit the statement previously delivered by the
Underwriter relating to such purchase to the Underwriter.
(c) If the Underwriter rejects any subscription for which the
Escrow Agent has already collected funds, the Escrow Agent shall promptly issue
a refund check to the rejected subscriber. If the Underwriter rejects any
subscription for which the Escrow Agent has not yet collected funds but has
submitted the subscriber's check for collection, the Escrow Agent shall promptly
issue a check in the amount of the subscriber's check to the rejected subscriber
after the Escrow Agent has cleared such funds. If the Escrow Agent has not yet
submitted a rejected subscriber's check for collection, the Escrow Agent shall
promptly remit the subscriber's check directly to the subscriber.
5. Delivery of Escrow Account and the Shares.
(a) At least two (2) business days prior to the Closing (as
hereinafter defined), the Underwriter and the Corporation shall provide the
Escrow Agent with a statement, executed by both parties, containing the
following information:
(i) The total number of Shares sold by the Underwriter and
through the Selected Dealers in the Public Offering;
(ii) A listing of the number of Shares sold through the
Selected Dealers and the manner in which such Shares should be registered upon
issuance;
(iii) The total number of Shares sold by the Underwriter
directly to subscribers (excluding Selected Dealers) and a list of each
subscriber, and the number of Shares purchased by such subscriber, and
specification of the manner in which such Shares should be registered upon
issuance; and
(iv) A calculation by the Underwriter and the Corporation as
to the manner in which the Escrow Account should be distributed to the
Corporation, the Underwriter and the Selected Dealers, and in the event of
oversubscription or rejection of certain subscription agreements, the aggregate
amount to be returned to individual subscribers and Selected Dealers and a
listing of the exact amount to be returned to each such subscriber and Selected
Dealer.
The Escrow Agent shall hold the Escrow Account and distribute it in accordance
with the above-described statement on the date of Closing or such later date
that it receives the above-described statement.
(b) The Corporation shall deliver the following to the Escrow
Agent by 12:00 p.m. on the day prior to Closing:
(i) certificates for the Shares; and
(ii) pressure sensitive address labels for each subscriber
to whom Shares are being sold and for each Selected Dealer (who has not
requested a different method of delivery) through whom Shares are being sold.
On the day of Closing, the Escrow Agent shall mail to each subscriber and
Selected Dealer (who has not requested a different method of delivery) the
certificate for the Shares purchased, using the labels provided to the Escrow
Agent by the Corporation. If any Selected Dealer has requested a different
method of delivery of the Shares being purchased for its customers, the
Underwriter shall inform the Escrow Agent of such request and the Escrow Agent
shall use its best efforts to comply with such request.
(c) Upon cancellation of the Public Offering by the Corporation
or the Underwriter for any reason, the Escrow Agent shall return to the
subscribers and/or Selected Dealers who contributed to the Escrow Account the
exact amount contributed by them.
6. Investment of Escrow Account. The Escrow Agent shall deposit
subscription funds in the Escrow Account, which shall be a non-interest-bearing
bank account at Crestar Bank. The Escrow Agent shall invest escrowed funds only
in investments permissible under Securities and Exchange Commission Rule 15c2-4.
7. Closing Date. The "Closing" and "Closing Date" shall be that date
specified in the Underwriting Agreement.
8. Compensation of Escrow Agent. The Underwriter shall pay the Escrow
Agent a fee for its services hereunder in an amount equal to one thousand five
hundred dollars ($1,500), which amount shall be paid on the Closing Date. In the
event the Public Offering is canceled for any reason, the Sales Agent shall pay
the Escrow Agent its fee within ten (10) days after the Escrow Account is
refunded to subscribers and Selected Dealers. No such fee or any other monies
whatsoever shall be paid out of or chargeable to the funds on deposit in the
Escrow Account.
9. Duties and Rights of the Escrow Agent. The foregoing agreements and
obligations of the Escrow Agent are subject to the following provisions:
(a) The Escrow Agent's duties hereunder are limited solely to the
safekeeping of the Escrow Account and the delivery of the Shares in accordance
with the terms of this Agreement. It is agreed that the duties of the Escrow
Agent are only such as herein specifically provided, being purely of a
ministerial nature, and the Escrow Agent shall incur no liability whatsoever
except for negligence, willful misconduct or bad faith. The Escrow Agent shall
have no duty with respect to the Shares other than to exercise reasonable care
in acquiring and delivering the same in accordance with this Agreement.
(b) The Escrow Agent is authorized to rely on any document
believed by the Escrow Agent to be authentic in making any delivery of the
Escrow Account or the Shares. It shall have no responsibility for the
genuineness or the validity of any document or any other item deposited with it
and it shall be fully protected in acting in accordance with this Agreement or
instructions received.
(c) The Corporation and the Underwriter hereby waive any suit,
claim, demand or cause of action of any kind which they may have or may assert
against the Escrow Agent arising out of or relating to the execution or
performance by the Escrow Agent of this Agreement, unless such suit, claim,
demand or cause of action is based upon the negligence, willful misconduct, or
bad faith of the Escrow Agent.
10. Notices. It is further agreed as follows:
(a) All notices given hereunder will be in writing, served by
registered or certified mail, return receipt requested, postage prepaid, or by
hand-delivery, to the parties at the following addresses:
To the Corporation:
Marathon Financial Corporation
4095 Valley Pike
Winchester, Virginia 22602
Attention: Mr. Donald L. Unger
To the Underwriter:
McKinnon & Company, Inc.
1609 First Virginia Tower
555 Main Street
Norfolk, VA 23510
Attention: Mr. William J. McKinnon, Jr.
To the Escrow Agent:
Crestar Bank
Corporate Trust Department
P.O. Box 26665
Richmond, VA 23261
Attention: S. A. McMahon, Vice President
<PAGE>
11. Miscellaneous.
(a) This Agreement shall be binding upon, inure to the benefit of
and be enforceable by the parties hereto and their respective successors and
assigns.
(b) If any provision of this Agreement shall be held invalid by
any court of competent jurisdiction, such holding shall not invalidate any other
provision hereof.
(c) This Agreement shall be governed by the applicable laws of
the Commonwealth of Virginia.
(d) This Agreement may not be modified except in writing signed
by the parties hereto.
(e) All demands, notices, approvals, consents, requests and other
communications hereunder shall be given in the manner provided in this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their respective names, all as of the date first above written.
McKINNON & COMPANY, INC.
By:______________________________
William J. McKinnon, Jr.,
President
MARATHON FINANCIAL CORPORATION
By:______________________________
Donald L. Unger
President
CRESTAR BANK
By:______________________________
Title:___________________________
THIS LEASE AGREEMENT, made and dated as of the 1st day of July, 1996,
between POST OFFICE PLAZA, L.C., hereinafter called Lessor, whether one or more,
and MARATHON BANK, a subsidiary of Marathon Financial Corporation, hereinafter
called Lessee.
WITNESSETH: That the said Lessor, in consideration of the payment of
rent and performance of the covenants hereinafter set forth, has agreed to let
and by these premises does let, to the said Lessee, and the said Lessee has
agreed to take and by these presents does take from the Lessor, all those two
(2) lots or parcels of land, with all improvements thereon, together with all
appurtenances and hereditaments thereunto belonging or in anywise appertaining,
lying and being situate in the Shenandoah Magisterial District, Town of Front
Royal, Warren County, Virginia, and being known and designated as Parcels 1A and
1B as shown on a certain plat and survey entitled, "Plat Showing Survey Parcels
1A & 1B of the Division of the Land of Post Office Plaza Partnership Town of
Front Royal, Warren County, Virginia, prepared by Land Surveys, Inc., dated
October 26, 1994, which said plat is hereto attached for recordation and
incorporated into and made a part of this Deed of Trust; AND BEING the identical
real estate which was conveyed to Post Office Plaza Partnership, from Donald L.
Unger, Larry L. LeHew, Kenneth G. Campbell and W. Allen Nicholls, which said
deed is of record in the aforesaid Clerk's Office in Deed Book 440 at Page 588.
(Schedule A and A-1).
1. Lessee shall use the premises only for a banking facility and related
businesses. Lessee shall make no other use of said premises without Lessor's
prior written consent, which consent shall not be unreasonably withheld.
However, Lessee may use the premises for any legally permissible use which
proves to be economically feasible, to be determined by Lessee within its good
faith discretion.
2. The term of this Lease shall be for a period of twenty (20) years,
commencing on July 1, 1996 and ending on June 30, 2116, at a monthly rental as
hereinafter set forth on Schedule B attached hereto and by this reference made a
part hereof as if set out in full. All rental payments to be made to Lessor at
316 Warren Avenue, Front Royal, Virginia 22630.
3. Lessee shall pay all taxes assessed against the demised premises and
any improvements thereon. The taxes shall be determined by the value of the new
improvements constructed on said property and the land taxes on $150,000 of the
land value at the rate assessed by the County of Warren and the Town of Front
Royal.
4. In the event that the Lessor decides to sell said real estate and
improvements thereon, the Lessor will grant the Lessee first right to purchase
said real estate and improvements. In the event that Lessor sells the subject
property, said sale shall be subject to this Lease or any renewals or extensions
properly exercised thereunder.
5. In the event that the Lessor does not receive from the Lessee any
installment of rent by the 10th day of the month for which said installment is
due, a "late
<PAGE>
fee" of five percent (5%) of the rent installment due shall be due as additional
rent, and in the event of any sublease of the property by Lessee, Lessee shall
obtain the written consent of Lessor, which consent shall not be unreasonably
withheld.
6. The defaulting party hereby agrees to pay all costs, expenses, fees
and charges incurred by the other in enforcing, by legal action or otherwise,
any of the provisions, covenants and conditions of this Lease, including such
reasonable attorney's fees as may be recoverable by law.
7. At the expiration of the term of this Lease, any holdover by the
Lessee shall be deemed to be a month-to-month tenancy.
8. The Lessee agrees that it will not cause waste to the premises and
that it shall be the Lessee's duty to see that the toilet and water pipes in the
demised premises do not freeze during the winter. The Lessee shall pay all
charges for gas, electricity, water, light, heat or other utility services
provided to the subject premises and shall indemnify the Lessor against any
liability on such account.
9. (a) If any portion of or interest in the building shall be taken by
condemnation under any right of eminent domain or any transfer in lieu thereof,
Lessee shall remain in possession with this Lease continuing as to the remaining
portion of the building but with the base rent payable hereunder reduced by the
ratio which the part of the building taken bears to the total building area of
the premises preceding such condemnation.
(b) If all the premises shall be taken by condemnation under
any right of eminent domain or any transfer in lieu thereof then this Lease
shall cease and terminate as of the date of such taking or transfer in lieu
thereof and all obligations of the Lessee to pay rent shall cease.
(c) In the event of taking of all or any portion of the
premises by condemnation under right of eminent domain or any transfer in lieu
thereof, Che Lessor and the Lessee shall be entitled to their respective rights
as then exist under applicable law.
10. If all or a substantial part of the property shell be acquired for
any public use by the right of eminent domain, then this Lease and all rights of
the Lessee under it shall immediately terminate and the rent shall be adjusted
as of the time of such acquisition, but Lessee shall have no claim against
Lessor for any value of the unexpired term nor shall Lessee be entitled to any
part of the condemnation award or purchase price in lieu of such award,
11. In the event of damage to the property by fire or other casualty,
Lessor shall repair the same with reasonable dispatch after written notice of
such damage by
2
<PAGE>
Lessee If the property, or any part of it, is damaged by fire or other
casualties to such an extent that the enjoyment of the property is substantially
impaired, Lessee may immediately vacate the property and notify Lessor in
writing within fourteen (14) cays after such vacating of the intention of the
Lessee to terminate this Lease, in which case this Lease terminates as of the
day of vacating. If, however, the damage to the property by fire or otherwise
was caused by the deliberate or negligent act of Lessee or the agents, servants,
employees, visitors, or licensees of Lessee, no option to terminate by the
Lessee shall exist and Lessee shall be liable for the rent during the unexpired
term of this Lease, without abatement, unless Lessor elects to terminate this
Lease, a right which Lessor hereby reserves in such contingency
12. The Lessee shall maintain liability insurance covering the leased
premises and covering the Lessor, with limits of $300.000 00 for death or injury
to one person, $500,000.00 for death or injury of more than one person, and
$100,000.00 for property damage, with a clause agreeing not to cancel the
insurance Without first notifying the Lessor
Lessee will reimburse the Lessor the cost of extended coverage
on the new building in the amount of 100% of cost or 12% of the existing
building, as the Lessee is leasing 12% of existing building.
Lessor will provide a copy of the policy showing The Marathon
Bank as loss payee on said policy.
All proceeds of any such insurance shall be deemed a trust
fund Lessor shall have the right at any time to demand that an appraisal be made
as to the replacement value of its building or any buildings by a qualified
appraiser approved by the parties. The cost of such appraisal shall be borne
equally by the parties. All proceeds of any such insurance shall be deemed a
trust fund to be applied against the restoration and rebuilding as provided for
below and shall be deposited in escrow (pound)or that purpose with an escrow
agent agreed to by the parties Lessee shall furnish a certificate of such
insurance to Lessor upon request by Lessor,
13. Lessee shall not assign this Lease or sublet the described property
or any part thereof without the written consent of the Lessor, which consent
shall not be unreasonably withheld It is mutually agreed by the parties hereto
that if the Lessee is merged or acquired by another entity that the same shall
not be deemed an assignment of the Lease and as such no permission shall be
needed to continue the operation of the banking facility
14. The Lessor shall have the right, upon reasonable notice, to enter the
property at reasonable times for the purpose of inspecting the premises and
performing any work for which the Lessor is responsible, or exhibiting the
leased premises for sale, lease or mortgage financing.
3
<PAGE>
15. The Lessee has made an inspection of the property and agrees to take
the property in its existing condition. Lessor will turn over the said premises
to the Lessee in good working condition which includes without limitation, the
heating, air conditioning, plumbing, electrical, roof, doors, windows, paving,
curbing, etc. The Lessee shall, throughout the term of this Lease, maintain the
parking areas, sidewalks and driveways in front and south of the new addition to
be used as a bank the Lessee shall maintain the portion of the building
described in said Lease at the Lessee's expense,
16. The Lessee will maintain the interior of the building in good working
condition and in addition, the Lessee shall be responsible for painting the
exterior wooden portions o(pound) the building as and when necessary. Lessee
shall be liable for all glass breakage and Lessee shall have full responsibility
for maintaining and repairing the electrical system, the plumbing system and
mechanical systems, including air conditioning Lessee shall at the termination
of this lease return the said property co the Lessor in the same condition as at
the commencement of this Lease, ordinary wear and tear accepted
17. It is expressly agreed that if the Lessee shall neglect to make any
payment of rent when due and such default continues for a period of five (5)
business days after written notice from the Lessor calling attention to such
default, the Lessor may declare this Lease terminated and canceled and take
possession of the said premises without prejudice to any other legal remedy it
may have on account of such default failure to terminate said Lease in such
event shall not operate as a waiver of any subsequent default in the payment of
rent,
18. Lessor may give notice under this Lease to Lessee:
(a) By delivering such notice in writing to Lessee in hand;
or,
(b) By mailing such notice to Lessee at the address of the
leased property or to the last known place of residence of Lessee by registered
or certified mail.
Lessee may give notice under this Lease to the Lessor:
(a) By delivering such notice in writing to Lessor in hand;
or,
(b) By mailing such notice to Lessor at the address of Lessor
listed below
Lessee may contest by appropriate proceedings the amount, validity, or
application of any imposition, legal requirement, or any lien arising
there(pound)rom, including any tax assessment, provided that: (a) such
proceedings suspend the collection thereof; (b) no part of the premises or of
any rent would be subject to loss, sale, or forfeiture before determination of
any contest, (c) Lessor would not be subject to any criminal liability for
failure to pay; Id) such proceedings do not affect the payment of rent
4
<PAGE>
hereunder or prevent Lessee from using the premises for its intended purposes;
and (f) Lessee notifies Lessor of any such proceedings at which the amount in
contest exceeds $5,000.00 within twenty (20) days a(pound)ter the commencement
thereof, ard describes such proceedings in reasonable detail, Lessee will
conduct all such contests in good faith and with due diligence and will,
promptly after the determination of such contest, pay and discharge all amounts
determined to be payable therein,
All refunds or rebates of impositions paid by Lessee shall belong to
Lessee. All refunds received by Lessor shall be deemed trust funds and as such
shall be received by Lessor in trust and paid to Lessee forthwith. Lessor shall,
at Lessee's request, sign all receipts which may be necessary to secure the
payment of any refund or rebate, and shall pay over to Lessee all refunds or
rebates received by Lessor.
19. Lessee hereby indemnifies, and shall protect and hold Lessor harmless
from and against all liabilities, losses, claims, demands, costs, expenses, and
judgments of any nature arising, or alleged to arise, from or ir connection with
the following: (a) any injury to, or the death of, any person or loss or damage
to property on or about the premises, and its business invitees, employees, and
agents, arising from or connected with the Lessee's use of the premises during
the term; (b) performance of any labor or services or the furnishing of any
materials or other property in respect of the premises or any part thereof by or
at the Lessee's request of Lessee; (c) any contest permitted by paragraph 19
Lessee will resist and defend any action, suit or proceeding brought against
Lessor by reason of such occurrence
20. Either party shall, without charge at any time within ten (10) days
after the other s written request, from time to time, certify by written
instrument duly executed and acknowledged to any actual or proposed mortgagee or
purchaser, or any other person specified in the request, as to the following:
(a) whether this Lease has been supplemented or amended, and if so, the
substance and manner of such supplement or amendment; (b) the validity and force
and effect of this Lease, in accordance with sts tenor as then constituted; (c)
the existence of any default thereunder; (d) the existence of any offsets,
counterclaims, or defenses thereto by the other party; (e) the commencement and
expiration dates of che term of this Lease; and (f) all other matters that may
reasonably be so requested ny such certificate may be relied upon by the party
requesting it and any other person to whom it may be exhibited or delivered The
contents of the certificate shall be binding on the party executing it
21. Any of the following occurrences, conditions, or acts shall
constitute an "Event of Default" under this Lease:
(a) if Lessee
5
<PAGE>
(i) defaults in making payment when due of any Basic
Rent or insurance, maintenance fees, taxes, and the default continues for five
(5) days after Lessor gives written notice to Lessee specifying the default and
demanding that it be cured, or
(ii) defaults in the observance or performance of any
other provision of this Lease, and the default continues for thirty (30) days
after Lessor gives written notice to Lessee specifying the default and demanding
that it be cured However, if the default cannot be cured by the payment of money
and cannot with due diligence be wholly cured within the thirty-day period,
Lessee may have any longer period that is necessary to cure the default, so long
as Lessee proceeds promptly to cure it within that period, prosecutes the cure
to completion with due diligence, and advises Lessor from time to time, upon
Lessor's request, of the actions that Lessee is taking and the progress being
made:
(b) if the premises are abandoned by Lessee for a period of
fifteen (15) consecutive days;
(c) if Lessee files a petition in bankruptcy, for
reorganization or for an arrangement under the Bankruptcy law or any similar
federal or state law, is adjudicated a bankrupt or becomes insolvent, is unable
to meet Lessee's obligations as they become due, or takes any corporate action
in furtherance of any of the foregoing;
(d) Notwithstanding the provisions of sub-paragraph (c) above,
if at any time during the term of this Lease, proceedings in bankruptcy,
insolvency, or similar proceedings are instituted by or against Lessee, whether
or not they result in an adjudication against Lessee, or if a receiver of
Lessee's business or assets is appointed, the proceedings or adjudications shall
not affect che validity of this Lease so long as rent and additional rent
reserved under it continues to be paid to Lessor and Lessee performs all its
other terms, covenants, and conditions under this Lease In that event, this
Lease shall continue to remain in full force and in accordance with its terms.
22. If there is any default under the above section, the following shall
occur: (a) the rent shall immediately become due and be paid up to the time of
reentry, expiration, and/or dispossess; (b) Lessor may relet the premises or any
part or parts of the premises, either in Lessor's name or otherwise, for a term
or terms which may, at Lessor's option, be less than or exceed the then
remaining term of this Lease; and (c) Lessee shall also pay to Lessor, as
liquidated damages for Lessee's failure to observe and perform its covenants
under this Lease, any deficiency between the rent hereby reserved and/or agreed
to be paid and the net amount, if any, of the rents collected on account of the
premises' lease or leases for each month of the period which would otherwise
have constituted the balance of the term of this Lease However, any such
deficiency shall be paid as the rent becomes due and payable in monthly
installments In computing the liquidated damages, there shall be added to the
deficiency all reasonable expenses that
6
<PAGE>
Lessor may incur in connection with reletting, such as brokerage and preparation
for reletting Lessee shall pay any such liquidated damages in monthly
installments on the rent payment dates specified in the Lease Any suit brought
to collect the deficiency for any month shall not prejudice in any way Lessor's
rights to collect the deficiency for any subsequent month by a similar
proceeding Lessor may make all alterations, repairs, replacements, and
decorations in the premises that Lessor, in Lessor's sole judgment, considers
advisable and necessary for the purpose of reletting the premises. Such action
by Lessor shall not operate or be construed to release Lessee from its liability
under this Lease. Lessor shall use Lessor's best effort to mitigate all damages
and to relet the premises if there is any Event of Default by Lessee
23. The covenants and conditions herein contained are the entire
agreement between the parties hereto and shall not be modified in any manner
except by an instrument in writing executed by the parties hereto and that the
conditions and agreements herein are binding on and may be enforced by the
parties hereto, their heirs, executors, administrators, successors and assigns,
respectively and that no waiver of any breach of any condition or agreement
contained herein shall be construed to be a waiver of that condition or
agreement or of any subsequent breach thereof, or of this agreement,
24. Time is of the essence to this agreement and all of the covenants
herein contained.
25. It is further understood that if the Lessee is sold, has a change in
control, has a name change, has change in ownership, said Lease conveys and will
be the obligation of the new party Change in control, ownership or name does not
terminate, cancel or void said Lease as this addition was constructed for
special use (a bank) and would not be suitable for other uses.
WITNESS the following signatures and seals:
LESSOR:
POST OFFICE PLAZA, L.C.
By: (SEAL)
T. W. Grove
By: (SEAL)
John K. Marlow
DATE SIGNED: __________________
7
<PAGE>
LESSEE:
THE MARATHON BANK
By: (SEAL)
By: (SEAL)
DATE SIGNED: __________________
8
<PAGE>
SCHEDULE B
I. RENT PAYMENTS
(A) Lessor shall provide the premises to the Lessee on June 1, 1996.
(B) REIMBURSEMENT TO BANK BY POST OFFICE PLAZA, L.C.:
C. B. Thompson - Construction $207,765.00
Davis Paving - Paving 11,110.83
Clint Good - Architect 13,701.13
Ebert Reproductions - Blueprints 191.87
Triad Engineering - Foundation 2,122.92
S. R. Ragan - Interim Design 780.00
Boyer Landscaping 3,896.00
-----------
Total Construction Cost: $239,537.75
(C) BASIS FOR RENT:
Construction Cost $239,537.75
Land Value 150,000.00
$389,537.75
10% Return on Investment x 10
Annual Lease $ 38,953.78
Monthly Amount 3,246.15
720 sq. ft. Existing Space (per month) 600.00
-----------
Monthly Lease Amount $ 3,846.15
Annual Lease Amount $ 46,153.80
During the first five (5) years of this Lease, Lessee shall pay an
annual rental of $46,153.80. Such yearly rental to be paid in equal monthly
installments of $3,846.15 each, starting on June 1, 1996 and which rent shall
continue on the first day of each month thereafter through May 31, 2001.
Starting on June 1, 2001 and continuing on the first day of each June
thereafter, during this Lease, such yearly rental of $46,153.80 shall be
adjusted based upon the increases in the "Consumer Price Index For All Urban
Consumers," U.S. City Average - All Items (1967 = 100), hereinafter referred to
as the CPI-U, as published by the Bureau of Labor Statistics of the U.S.
Department of Labor, Washington D.C., using the CPI-U for the year 1996 as the
base. More specifically, such adjustment, during the renewal period, based upon
the CPI-U, shall be made as of June 1 as set forth above, and the Lessor shall
obtain the CPI-U for the month of June of that year and calculate as follows:
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(i) Divide such CPI-U for the current year by the base
CPI-U (the Index Number which was the CPI-U for the
base year);
(ii) Determine the difference between that result and
1.000;
(iii) Multiply such result obtained in (ii) by the basic
rent;
(iv) Round off that result to the nearest whole dollar;
(v) If such CPI-U during such period increased, add the
amount determined in (iv) to the base yearly rental
of $46,153.80;
(vi) Such amount determined in (v) will be the new
yearly rental for each year period beginning June 1
of each such particular year. Such yearly rental
shall be paid in twelve equal monthly installments
beginning on June 1 of that year and continuing on
the 1st day of each month thereafter through May of
each of the next ensuing year during which that
particular rental is in effect.
Lessor will advise Lessee of the new monthly rentals at the address
herein set forth.
EXAMPLE 1: Suppose that the CPI-U for June 1, 1996 is 200 and the
CPI-U for May 31, 2001 equals 210.
(i) Divide 210 by 200 = 1.05
(ii) Subtract 1.000 from 1.05 = .05
(iii) Multiply .05 by $46,153.80 = $2,307.69
(iv) Add $2,307.69 to $46.153.80 = $48,461.49
(Such sum being the basic rental during the
period of June 1, 2001 through May 31, 2002.
In the event the CPI-U is discontinued, ceases to incorporate a
significant number of the items previously incorporated therein, or if a
substantial change is made in the manner in which such CPI-U is calculated, the
parties hereto shall attempt to agree on an alternative form and if agreement
cannot be reached, the matter shall be submitted to arbitration under the Rules
of the American Arbitration Association then in effect. It is recited that the
purpose for the use of the CPI-U is to serve as a basis for calculating the cost
of living increase as of June of each year after June 1, 2001 for determining
the basic rent for the next ensuing year period (using $46,153.80 per year as of
June 1, 1996 as the
2
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basis for such determination). In no event shall the rent be less than the
basic rent set forth above.
EXHIBIT 21
SUBSIDIARY OF MARATHON FINANCIAL CORPORATION
The Marathon Bank (Virginia) - 100%
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Marathon Financial Corporation
We consent to the use of our report included herein and to the reference to our
Firm under the heading "EXPERTS" in the Prospectus.
YOUNT, HYDE & BARBOUR, P.C.
Winchester, VA
July 26, 1996
