SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------
Form 10-QSB
Quarterly Report Pursuant of Section 13 or 15(d)
of the Securities Exchange Act of 1934
------------------
For the quarterly period ended:
March 31, 1997
Commission File No. 0-18868
MARATHON FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1560968
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4095 VALLEY PIKE
WINCHESTER, VIRGINIA 22602
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, (540) 869-6600
including area code
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Number of Shares Outstanding at
----- ---------------- --------------
Common Stock 1,868,495 5/07/97
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following financial statements are provided at the page numbers
indicated.
Consolidated Statements of Condition as of
March 31, 1997 and December 31, 1996 . . . . . . . . . . . . . . . 3
Consolidated Statements of Income for
the Three Months Ended March 31, 1997 and 1996. . . . . . . . . . . 4
Consolidated Statements of Changes in
Shareholders Equity for the Three
Months Ended March 31, 1997 and 1996. . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows for
the Three Months Ended March 31, 1997 and 1996. . . . . . . . . . 6-7
Notes to Consolidated Financial Statements. . . . . . . . . . . . 8-10
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
as of
March 31, 1997 and December 31, 1996
<CAPTION>
<S> <C>
ASSETS 3/31/97 12/31/96
------- --------
Cash and due from banks $ 3 649 290 $ 2 846 434
Securities (fair value: 1997, $2,325,695 and
1996, $3,337,690) 2 326 811 3 331 209
Federal funds sold 2 949 000 1 656 000
Loans, net 38 460 282 37 409 043
Bank premises and equipment, net 1 693 043 1 587 342
Accrued interest receivable 215 320 212 089
Other real estate 18 123 18 123
Other assets 268 263 226 600
------------ -------------
Total assets $49 580 132 $47 286 840
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $ 7 059 878 $ 6 229 844
Interest bearing 35 900 575 34 495 443
------------ -------------
Total deposits $42 960 453 $40 725 287
Interest expense payable 74 646 81 764
Accounts payable and accrued expenses 112 586 273 900
Mortgage payable - - - -
Capital lease payable 306 764 315 652
Commitments & contingent liabilities - - - -
------------ -------------
Total liabilities $43 454 449 $41 396 603
------------ -------------
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; 1997, 1,865,495 shares issued and
outstanding; 1996, 1,863,495 shares issued and
outstanding 1 865 495 1 863 495
Capital surplus 7 053 502 7 045 502
Retained earnings (deficit) (2 778 414) (3 019 267)
Unrealized gain (loss) on securities available for sale (14 900) 507
------------ -------------
Total stockholders' equity $ 6 125 683 $ 5 890 237
------------ -------------
$49 580 132 $47 286 840
============ =============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
<S> <C>
For the Three Months
Ended March 31,
1997 1996
----------- ----------
Interest income:
Interest and fees on loans $ 1 018 916 $ 834 837
Interest on securities held for maturity 17 680 16 350
Interest on securities available for sale 21 698 3 753
Interest on federal funds sold 16 774 12 125
Dividends 2 678 1 622
----------- ----------
Total interest income $ 1 077 746 $ 868 687
----------- ----------
Interest expense:
Interest on deposits $ 416 323 $ 344 375
Interest on leases payable 6 126 11 390
Interest on fed funds purchased 673 40
----------- ----------
Total interest expense $ 423 122 $ 355 805
----------- ----------
Net interest income $ 654 624 $ 512 882
Provision for loan losses 35 000 30 000
Net interest income after provision
for loan loss $ 619 624 $ 482 882
----------- ----------
Other income:
Service charges on deposit accounts $ 74 239 $ 66 776
Commissions and fees 7 699 3 596
Other 10 111 1 659
----------- ----------
Total other income $ 92 049 $ 72 031
----------- ----------
Other expenses:
Salaries and employee benefits $ 253 485 $ 203 502
Net occupancy expense of premises 52 883 35 190
Furniture and equipment 20 572 17 514
Legal and professional 14 140 18 354
Stationary and Supplies 14 358 15 204
Postage 10 727 11 513
Marketing 14 603 8 079
FDIC assessment 7 955 1 000
Directors' fee 16 950 8 525
ATM expenses 20 083 8 828
Overdraft charge-offs 12 434 3 585
Other 77 651 81 070
----------- ----------
Total other expenses $ 515 841 $ 412 364
----------- ----------
Income before income taxes 195 832 142 549
Provision for income tax expense (benefit) (45 021) 1 933
----------- ----------
Net income $ 240 853 $ 140 616
=========== ==========
Net income per share $ .13 $ .11
=========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 1997 and 1996
<CAPTION>
<S> <C>
Unrealized
Gain
(Loss) on
Securities Retained
Common Capital Available Earnings
Stock Surplus for Sale (Deficit)
---------- ---------- ----------- -----------
Balance, December 31, 1995 $1 306 303 $5 109 908 $ 8 417 $(3 746 878)
Net income - Jan-Mar. 1996 - - - - - - 140 616
Change in unrealized gain
on securities available
for sale - - - - (12 446) - -
---------- ---------- ----------- -----------
Balance, March 31, 1996 $1 306 303 $5 109 908 $ (4 029) $(3 606 262)
========== ========== ========== ===========
Balance, December 31, 1996 $1 863 495 $7 045 502 $ 507 $(3 019 267)
Net income - Jan-Mar. 1997 - - - - - - 240 853
Issuance of common stock/exercise
of stock warrants (2,000 shares) 2 000 8 000 - - - -
Change in unrealized gain
on securities available
for sale - - - - (15 407) - -
---------- ---------- ----------- -----------
Balance, March 31, 1997 $1 865 495 $7 053 502 $ (14 900) $(2 778 414)
========== ========== =========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996
<CAPTION>
<S> <C>
1997 1996
------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 240 853 $ 140 616
Adjustments to reconcile net income
to net cash provided by
operating activities:
Amortization 9 400 10 293
Depreciation 29 462 20 859
Net discount accretion on securities (6 859) (535)
Provision for loan loss 35 000 30 000
Deferred tax (benefit) (50 000) - -
Changes in assets and liabilities:
(Increase) decrease in other assets 8 126 (24 760)
(Increase) in accrued interest
receivable ( 3 231) (14 520)
Decrease in accounts payable
and accrued expenses (49 504) (3 724)
Increase (decrease) in interest
expense payable ( 7 118) 4 390
------------- -----------
Net cash provided by
operating activities $ 206 129 $ 162 619
------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal
payments on securities held to maturity $ 1 029 450 $ 555 046
Proceeds from principal payments on
securities available for sale - - 997
Purchase of securities held to maturity (33 600) - -
Purchase of securities available for sale - - (125 466)
Net (increase) in loans (1 086 239) (2 200 858)
Purchase of bank premises and equipment (144 351) (112 018)
------------- -----------
Net cash used in
investing activities $ (234 740) $(1 882 299)
------------- -----------
</TABLE>
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Three Months Ended March 31, 1997 and 1996
<CAPTION>
<S> <C>
1997 1996
------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts $ 1 109 451 $ 606 477
Net increase in certificates of deposits 1 125 714 1 685 829
Principal payments on mortgage payable - - (5 824)
Principal payments on capital lease payable (8 888) (7 099)
Cash dividends paid (111 810) - -
Proceeds from issuance of common stock 10 000 - -
------------- -----------
Net cash provided by financing activities $ 2 124 467 $ 2 279 383
------------- -----------
Increase in cash and cash equivalents $ 2 095 856 $ 559 703
Beginning 4 502 434 3 856 876
------------- -----------
Ending $ 6 598 290 $ 4 416 579
============= ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Payments For:
Interest $ 430 240 $ 351 415
============= ===========
Income taxes $ 4 979 $ 1 933
============= ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Unrealized (loss) on securities
available for sale $ (15 407) $ (12 446)
============= ===========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1997 and December 31, 1996, and the result of operations and cash
flows for the three months ended March 31, 1997 and 1996. The statements should
be read in conjunction with the Notes to Financial Statements included in the
Company's Annual Report for the year ended December 31, 1996.
2. The results of operations for the three month period ended March 31, 1997 and
1996, are not necessarily indicative of the results to be expected for the full
year.
3. Securities held to maturity and available for sale as of March 31, 1997, and
December 31, 1996, are:
<TABLE>
<CAPTION>
<S> <C>
March 31, 1997 December 31, 1996
Amortized Amortized
Held to Maturity Cost Cost
---------- ----------
US treasury securities & obligations
of US government corporations &
agencies $ 298 302 $1 292 094
Obligations of state and political
subdivisions 251 179 251 227
Corporate securities 99 984 99 952
Mortgage backed securities 2 855 7 986
---------- ----------
$ 652 320 $1 651 259
========== ==========
Fair Fair
Value Value
---------- ----------
US treasury securities & obligations
of US government corporations &
agencies $ 294 242 $1 291 573
Obligations of state and political
subdivisions 254 112 258 165
Corporate securities 100 000 100 000
Mortgage backed securities 2 850 8 002
---------- ----------
$ 651 204 $1 657 740
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
March 31, 1997 December 31, 1996
Amortized Amortized
Available for Sale Cost Cost
---------- ----------
US treasury securities & obligations
of US government corporations &
agencies $1 347 327 $1 346 663
Mortgage backed securities 34 117 34 930
Other 307 947 297 850
---------- ----------
$1 689 391 $1 679 443
========== ==========
<CAPTION>
Fair Fair
Value Value
---------- ----------
US treasury securities & obligations
of US government corporations &
agencies $1 330 751 $1 345 184
Mortgage backed securities 35 793 36 916
Other 307 947 297 850
---------- ----------
$1 674 491 $1 679 950
========== ==========
4. The consolidated entity's loan portfolio is composed of the following:
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
Commercial $18 999 764 $18 719 817
Real estate-mortgage 7 752 415 6 882 004
Real estate-construction 3 248 035 3 886 066
Installment loans to individuals 9 000 893 8 424 170
----------- -----------
$39 001 107 $37 912 057
Less: allowance for loan losses 540 825 503 014
----------- -----------
Loans, net $38 460 282 $37 409 043
=========== ===========
The company had non-accrual loans which were excluded from impaired loan
disclosure under FASB 114 which amounted to $310,279 on March 31, 1997 and
$71,515 on December 31, 1996.
<PAGE>
5. Reserve for Loan Losses:
March 31, 1997 December 31, 1996
-------------- -----------------
Balance, beginning $ 503 014 $ 393 139
Provision charged to
operating expense 35 000 165 000
Recoveries 3 676 6 007
Loan losses charged to the allowance (865) (61 132)
---------- ----------
Balance, ending $ 540 825 $ 503 014
========== ==========
</TABLE>
6. Weighted average shares outstanding computation
The weighted average number of shares outstanding for the three month
periods ended March 31, 1997 and 1996 were 1,863,828 shares and 1,306,303 shares
respectively.
7. New Accounting Pronouncements
FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", was issued in June 1996 and
establishes, among other things, new criteria for determining whether a transfer
of financial assets in exchange for cash or other consideration should be
accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain Provisions of
FASB Statement 125", defers for one year the effective date (a) of paragraph 15
of Statement 125 and (b) for repurchase agreement, dollar-roll, securities
lending, or similar transactions, of paragraph 9-12 and 237(b) of Statement 125.
The effects of these Statements on the Bank's financial statements are not
expected to be material.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Total Assets
------------
Total assets for the three months ending March 31, 1997,
increased $2,293,292 or 4.8% since December 31, 1996. This increase in
total assets resulted from a $1,051,239 increase in loans or 2.8%, an
increase in federal funds sold of $1,293,000 or 78.1%, and an increase
of $802,856 or 28.2% in cash and due from banks. This equates to an
increase in earning assets of $1,339,841 or 3.2% in the three months
ending March 31, 1997.
Allowance for Loan Losses
-------------------------
The allowance for loan losses, as of March 31, 1997, was
$540,825. This is an increase of $37,811 or 7.5% since December 31,
1996. This gives the bank a 1.39% allowance for loan losses to total
loans. Management has completed an analysis on the reserve and feels
the reserve is adequate.
Liabilities
-----------
Total deposits for the three months ending March 31, 1997,
increased $2,235,166 or 5.5% since December 31, 1996. Non-interest
bearing deposits increased by $830,034 or 13.3% and interest bearing
deposits increased by $1,405,132 or 4.1%.
<PAGE>
Stockholders' Equity
--------------------
Total equity has increased by $235,446 or 4.0% since December
31, 1996. The increase was due to a first quarter profit of $240,853
and an increase in unrealized losses on securities available for sale
of $15,407. Stock rights totaling $10,000 were also exercised during
the quarter. This gives a primary capital to assets ratio of 12.36%.
Interest Income
---------------
Interest income totaled $1,077,746 for the three months ending
March 31, 1997, $209,059 or 24.1% higher than the three months ending
March 31, 1996. This is a direct result of the increase in our earning
assets, which increased the interest and fee income.
Interest Expense
----------------
Total interest expense for the three months ending March 31,
1997 was $423,122, $67,317 or 18.9% higher than the three months ending
March 31, 1996. Interest on deposits increased by $71,948 or 20.9% over
the same period in 1996, and this was the result of an overall increase
in deposits. Mortgage interest for the quarter was $6,126, $5,264 or
46.2% less than the same period in 1996. This reflects the payoff in
the fourth quarter of 1996 of the mortgage on the bank's main office
building.
Net Interest Income
-------------------
Net interest income for the three months ending March 31, 1997
was $654,624, $141,742 or 27.6% higher than the three months ending
March 31, 1996. This was the result of an increase in our earning
assets.
<PAGE>
Other Income
------------
Total other income for the three months ending March 31, 1997
was $92,049, $20,018 or 27.8% higher than the same period in 1996. This
is a result of our increase in the demand deposit area, which has
improved our service charge income.
Other Expenses
--------------
Total other expenses for the three months ending March 31,
1997 were $515,841, $103,477 or 25.1% higher than the three months
ending March 31, 1996. Salary expense increased $49,983 or 24.6%,
occupancy expense increased $17,693 or 50.3%, furniture and equipment
expense increased by $3,058 or 17.5%, marketing expense increased
$6,524 or 80.8%, and the FDIC assessment increased $6,955 or 695.5%
over the same period in 1996. Directors fees were $16,950, an increase
of 98.8% due to a change in the monthly meeting rates. Overdraft
charge-offs reflect an increase of $12,434 or 246.8% as a result of
some bad check returns and by purging demand deposit accounts. ATM
expenses increased $11,255 or 127.5%. The net increase in other
expenses is in part a result of moving one of the offices into a
permanent facility from a mobile unit. In addition, the bank is getting
primed to open two additional branches late in the second quarter of
1997. A portion of this increase in expense is directly attributable to
the hiring of additional employees to staff these offices.
Net Income
----------
Net income for the three months ending March 31, 1997 was
$240,853, compared to $140,616 in the same period in 1996. This is an
increase of $100,237 or 71.3% over the same period of 1996.
Liquidity and Capital Resources
--------------------------------
The liquidity position of the Bank is less than its peer's
because of a loan to deposit ratio of 89.5%. Management is maximizing
earning assets, which exceed policy guidelines to improve
profitability. This policy exception has been approved by Management
and the Board of Directors. The core deposits of the bank continue to
increase.
<PAGE>
Part II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Change in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation
or succession - N/A
3. (i) Articles of Incorporation. Incorporated by reference as
Exhibit 3(i) to the Corporation's Registration Statement on
Form S-1 filed on August 26, 1992 (File No. 33-51366).
(ii) By-laws. Incorporated by reference as Exhibit 3(ii) to
the Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
4. Instruments defining the rights of security holders,
including indentures - N/A
<PAGE>
10. Material Contracts.
Exhibit 10.1 401(k) Plan of Marathon Financial
Corporation, incorporated herein by reference
as Exhibit 10.1 to the Corporation's
Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
Exhibit 10.2 Employment Agreement between The Marathon
Bank and Donald L. Unger, incorporated herein
by reference as Exhibit 10.2 to the
Corporation's Registration Statement on Form
S-1 filed on August 26, 1992 (File No.
33-51366).
Exhibit 10.3 Lease between The Marathon Bank and Post
Office Plaza, L.C. for the branch office at
300 Warren Avenue, Front Royal, Virginia,
incorporated herein by reference as Exhibit
10.3 to the Corporation's Registration
Statement on Form S-1 filed July 26, 1996
(File No. 333-08995).
Exhibit 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 year ended December 31, 1995 (File No.
0-18868).
11. Statement re computation of per share earnings - N/A
15. Letter re unaudited interim financial information - N/A
18. Letter re change in accounting principles - N/A
19. Report furnished to security holders - N/A
22. Published report regarding matters submitted to vote of
security holders - N/A
23. Consents of experts and counsel - N/A
24. Power of attorney - N/A
27. Financial Data Schedule - N/A
99. Additional Exhibits - None
(b) Reports on Form 8-K - None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARATHON FINANCIAL CORPORATION
DATE: March 31, 1997 /s/ DONALD L. UNGER
------------------------------
DONALD L. UNGER
PRINCIPAL EXECUTIVE OFFICER
DATE: March 31, 1997 /s/ FREDERICK A. BOARD
-----------------------------
FREDERICK A. BOARD
PRINCIPAL FINANCIAL OFFICER
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<CASH> 3,649,290
<INT-BEARING-DEPOSITS> 35,900,575
<FED-FUNDS-SOLD> 2,949,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,674,491
<INVESTMENTS-CARRYING> 652,320
<INVESTMENTS-MARKET> 651,204
<LOANS> 39,001,107
<ALLOWANCE> 540,825
<TOTAL-ASSETS> 49,580,132
<DEPOSITS> 42,960,453
<SHORT-TERM> 0
<LIABILITIES-OTHER> 187,232
<LONG-TERM> 306,764
1,865,495
0
<COMMON> 0
<OTHER-SE> 4,260,188
<TOTAL-LIABILITIES-AND-EQUITY> 49,580,132
<INTEREST-LOAN> 1,018,916
<INTEREST-INVEST> 42,056
<INTEREST-OTHER> 16,774
<INTEREST-TOTAL> 1,077,746
<INTEREST-DEPOSIT> 416,323
<INTEREST-EXPENSE> 423,122
<INTEREST-INCOME-NET> 654,624
<LOAN-LOSSES> 35,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 515,841
<INCOME-PRETAX> 195,832
<INCOME-PRE-EXTRAORDINARY> 240,853
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 240,853
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
<YIELD-ACTUAL> 6.00
<LOANS-NON> 310,279
<LOANS-PAST> 28,311
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 338,590
<ALLOWANCE-OPEN> 503,014
<CHARGE-OFFS> 865
<RECOVERIES> 3,676
<ALLOWANCE-CLOSE> 540,825
<ALLOWANCE-DOMESTIC> 210,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 330,825
</TABLE>
