UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transitions periods from __________________ to __________________
Commission file number: 0-18868
Marathon Financial Corporation
(Name of small business issuer 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)
Issuer's telephone number, including area code (540) 869-6600
Securities registered under Section 12(b) of the Act: Not Applicable
Securities registered under section 12(g) of the xchange Act
Common stock, Par Value 1.00 per share
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
Total revenues for the year ended December 31, 1996 were $4,219,605.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $10,249,223 as of March 15, 1997. The aggregate market value
was computed by using a market price of $5.50 per share.
As of March 15, 1997, the number of shares outstanding of the registrant's
common stock was 1,863,495.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
("1997 Proxy Statement") are incorporated by reference in Part III of this Form
10-KSB.
<PAGE>
In addition to historical information, the following discussion contains
forward looking statements that are subject to risks and uncertainties that
could cause the Corporation's actual results to differ materially from those
anticipated in these forward looking statements. Readers are cautioned not to
place undue reliance on these forward looking statements, which reflect
management's analysis only as of the date hereof.
Part I
Item 1. Description of Business
General
Marathon Financial Corporation ("the Corporation") is a bank holding
company that was incorporated under the laws of the Commonwealth of Virginia in
June 1989. The Corporation owns all of the outstanding stock of its sole
subsidiary, The Marathon Bank ("the 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, operating in the
Bank's offices in the Marathon Financial Center, 4095 Valley Pike, Winchester,
Virginia. On August 12, 1993, The Marathon Bank opened a branch location at 300
Warren Avenue, Post Office Plaza, Front Royal in Warren County, Virginia. On
February 13, 1995, The Marathon Bank opened a branch located at 1041 Berryville
Avenue, Winchester, Virginia. The Corporation is a holding company for the Bank
and is not directly engaged in the operation of any other business.
The Bank, which is chartered under the laws of the Commonwealth of
Virginia, conducts a general banking business through its offices. The Bank's
deposits are insured under the Federal Deposit Insurance Act and the Bank is a
member of the Federal Reserve System. As of December 31, 1996, the Bank employed
34 persons on a full-time basis.
The Bank 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 and other customary bank services (other than trust
services) to its customers. The three principal types of loans made by the Bank
are: (1) commercial and industrial loans; (2) real estate loans; and (3) loans
to individuals for household, family, and other consumer expenditures. The
Bank's premises include drive-up facilities.
The banking business in the area served by the Bank (the counties of
Frederick, Clarke, Shenandoah, and Warren, Virginia) is highly competitive with
respect to both loans and deposits. In the Bank's primary service area, there
are approximately six commercial banks (including three 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. Certain of these institutions have higher
lending limits than the Bank and may provide various services for their
customers that are not offered by the Bank. In addition, there can be no
assurance that other financial institutions, with substantially greater
resources than the Corporation and the Bank, will not establish operations in
the Bank's service area.
1
<PAGE>
Recent Developments
In June of 1996, the Bank moved into permanent quarters at 300 Warren
Avenue, Post Office Plaza, Front Royal, Warren County, Virginia. The Bank also
applied to the State Corporation Commission for permission to open new branches
in the 1000 Block of South Main Street, Woodstock, Virginia and at 1447 North
Frederick Pike, Winchester, Virginia. The opening of these two branches, which
is anticipated to occur in early 1997, will enable the Bank to better serve
customers' needs within its trade area.
On September 26, 1996, the Corporation completed a public stock offering
which increased the Corporation's capital by $2.5 million. In the offering,
567,192 shares of the Corporation's common stock were sold at $5.00 per share.
The stock is now listed on the NASDAQ Small Cap Market under the symbol MFCV.
Supervision and Regulation
The Corporation is a registered bank holding company subject to regulation
and examination by the Federal Reserve under the Bank Holding Company Act of
1956 (the "Bank Holding Company Act.") It is required to file with the Federal
Reserve periodic reports and any additional information that it may require
under the Bank Holding Company Act. The Bank Holding Company Act also requires
every bank holding company to obtain the prior approval of the Federal Reserve
before acquiring substantially all of the assets of or direct or indirect
ownership or control of more than 5% of the voting shares of any bank which is
not already majority owned. The Bank Holding Company Act also prohibits a bank
holding company, with certain exceptions, from itself engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in non-banking activities. One of the principal exceptions to these
provisions is for acquiring shares of a company engaged in activities found by
the Federal Reserve to be so closely related to banking or managing banks as to
be a proper incident thereto.
The Bank, a state member bank of the Federal Reserve, is subject to
supervision, regulation, and examination by the Federal Reserve, the Virginia
State Corporation Commission and the Federal Deposit Insurance Corporation (the
"FDIC"). Deposits, reserves, investment, loans, consumer law compliance,
issuance of securities, payment of dividends, establishment of branches, mergers
and consolidations, changes in control, electronic funds transfer, management
practices, and other aspects of operations are subject to regulation by the
appropriate federal and state supervisory authorities.
2
<PAGE>
Statistical Information
The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.
<TABLE>
<CAPTION>
<S> <C>
INDEX Page
Table 1 Consolidated Financial Data 3
Table 2 Average Balance Sheets, Net Interest Income and Rates 4 and 5
Table 3 Changes in Net Interest Income Attributable to Rate and Volume 6
Table 4 Types of Investment Securities 7
Table 5 Securities Maturity Analysis 8
Table 6 Composition of the Loan Portfolio 9
Table 7 Maturity Schedule of Selected Loans 10
Table 8 Summary of Risk Elements 11
Table 9 Summary of Loan Loss Experience 12
Table 10 Allocation of the Reserve for Loan Losses 13
Table 11 Deposits and Rates 14
Table 12 Maturities of CDs in Excess of $100,000 15
Table 13 Analysis of Liquid Assets 16
Table 14 Minimum Capital Requirements 17
Table 15 Financial Ratios 18
Table 16 Short-Term Borrowings 19
Table 17 Interest Sensitivity Analysis 20
</TABLE>
3
<PAGE>
Table 1 - Consolidated Financial Data
The following selected consolidated financial data is based upon the
Corporation's audited financial statements and related notes and should be read
in conjunction with such financial statements and notes.
<TABLE>
<CAPTION>
<S> <C>
For the Years Ended December 31,
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- --------
At Period End: (in thousands except per share data)
Loans--net of unearned income
and allowance for loan losses $ 37 409 $ 28 774 $ 22 618 $ 18 149 $ 10 828
Allowance for loan losses 503 393 299 225 196
Total assets 47 287 36 070 27 682 22 379 16 111
Deposits 40 725 32 622 24 604 19 606 13 678
Stockholders' equity 5 890 2 678 2 244 1 934 1 497
Income Summary
Interest income 3 789 2 940 2 251 1 625 1 361
Interest expense 1 614 1 252 849 717 768
----------- ---------- ---------- ---------- ----------
Net interest income $ 2 175 $ 1 688 $ 1 402 $ 908 $ 593
Provision for (recovery of)
loan losses 165 113 151 12 (88)
----------- ---------- ---------- ---------- ----------
Net interest income after
provision for (recovery of)
loan losses $ 2 010 $ 1 575 $ 1 251 $ 896 $ 681
Other income 430 281 242 93 111
Other expenses 1 746 1 435 1 175 909 1 266
----------- ---------- ---------- ---------- ----------
Income (loss) before income taxes $ 694 $ 421 $ 318 $ 80 $ (474)
Income taxes (benefits) (145) - - - - - - - -
----------- ---------- ---------- ---------- ----------
Net income (loss) $ 839 $ 421 $ 318 $ 80 $ (474)
=========== ========== ========== ========== ==========
Per Share Data: *
Book value at period ended $ 3.16 $ 2.05 $ 1.75 $ 1.52 $ 1.25
Net income (loss) .58 .35 .30 .08 (.40)
Cash dividends declared 111 810 - - - - - - - -
Average common shares outstanding 1 445 601 1 205 443 1 082 615 1 055 466 743 298
</TABLE>
* Changed to reflect stock dividend in 1996.
4
<PAGE>
Table 2 - Average Balance Sheets, Net Interest Income and Rates
Table 2 illustrates average balances of total earning assets and total
interest-bearing liabilities for 1996 and 1995 and shows the average
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 this table and other statistical
disclosures were calculated by using the daily average balances.
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Assets Balances (1) Expense Rate Balances (2) Expense Rate
------ -------- --- ------- ---- -------- --- ------- ----
Interest Earning
Assets:
Loans, net of un-
earned discounts (3) $ 33 282 661 $3 554 808 10.7% $ 26 363 947 $2 786 074 10.6%
Securities 2 092 113 131 013 6.3% 1 496 693 87 407 5.8%
Federal funds sold 1 951 410 103 606 5.3% 1 179 068 66 829 5.7%
--------------- ---------- ---- -------------- ---------- ----
Total interest-
bearing assets $ 37 326 184 $3 789 427 10.2% $ 29 039 708 $2 940 310 10.1%
--------------- ---------- ---- -------------- ---------- ----
Non-Interest Earning
Assets:
Cash and due from
banks 2 643 922 1 699 438
Bank premises and
equipment 1 411 295 1 268 132
Intangible assets - - - -
Other assets 585 713 406 041
Allowance for loan
losses (452 202) (323 541)
----------- ---------------
Total assets $ 41 514 912 $ 32 089 778
============== ==============
5
<PAGE>
<CAPTION>
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Liabilities and Balances (1) Expense Rate Balances (2) Expense Rate
Shareholders' Equity -------- --- ------- ---- -------- --- ------- ----
---------------------
Liabilities:
Interest-bearing
deposits $ 31 654 328 $ 1 566 223 4.9% $ 24 757 495 $ 1 203 143 4.9%
Federal funds
purchased 5 361 155 2.9% 24 984 1 536 6.1%
Note payable 473 195 48 275 10.2% 628 588 47 559 7.6%
--------------- -------------- ---- ------------- ------------ ----
Total interest-
bearing liabilities $ 32 132 884 $ 1 614 653 5.0% $ 25 411 067 $ 1 252 238 4.9%
-------------- ------------
Non-Interest-Bearing
Liabilities:
Demand deposits 5 588 802 4 033 534
Other liabilities 174 211 165 081
-------------- ------------
Total liabilities $ 37 895 897 $ 29 609 682
Stockholders'
equity 3 619 015 2 480 096
-------------- ------------
Total liabilities and
stockholders'
equity $ 41 514 912 $ 32 089 778
============== ============
Net Interest Earnings $ 2 174 774 $ 1 688 072
============== ===========
Net Interest Yield
on Earningss Assets 5.8% 5.8%
==== ====
(1) Average balances are calculated using daily balances for each category in 1996.
(2) Average balances are calculated using month end balances for each category in 1995.
(3) Non-accrual loans are included in the average balance of this category.
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Table 3 - Changes in Net Interest Income Attributable to Rate & Volume
December 31, December 31,
1996 vs. 1995 1995 vs. 1994
----------------------------------------------------------------- ----------------------------------
Due to Change In Due to Change In
Volume Rate Total Volume Rate Total
Loans $ 742 058 $ 26 676 $ 768 734 $ 554 742 $ 107 451 $ 662 193
Securities 35 840 7 766 43 606 (1 152) (13 167) (14 319)
Federal funds sold 41 190 (4 413) 36 777 21 771 19 417 41 188
----------- ------------ ----------- ------------ ----------- ------------
Total interest earned
on interest bearing
assets $ 819 088 $ 30 029 $ 849 117 $ 575 361 $ 113 701 $ 689 062
----------- ------------ ----------- ------------ ----------- ------------
Interest-bearing
deposits $ 363 080 $ - - $ 363 080 $ 234 786 $ 166 743 $ 401 529
Federal funds
purchased (828) (553) (1 381) (4 173) 1 776 (2 397)
Notes payable (1 865) 2 581 716 3 638 555 4 193
----------- ------------ ----------- ------------ ----------- ------------
Total interest paid
on interest-bearing
liabilities $ 360 387 $ 2 028 $ 362 415 $ 234 251 $ 169 074 $ 403 325
----------- ------------ ----------- ------------ ----------- ------------
Net interest income $ 458 701 $ 28 001 $ 486 702 $ 341 110 $ (55 373) $ 285 737
=========== ============ =========== ============ ============ ===========
</TABLE>
7
<PAGE>
Table 4 - Types of Investment Securities
Table 4 summarizes the book value of securities for the two years ending
December 31, 1996 and 1995.
Table 4 - Book Value of Securities Available for Sale
For the Years Ended
December 31,
1996 1995
-------------- --------------
U.S. government agencies
and corporation $ 1 343 663 $ 447 801
Obligations of state &
political subdivisions - - - -
Other securities 332 780 317 289
-------------- --------------
$ 1 679 443 $ 765 090
============== ==============
Table 4 - Book Value of Securities Held to Maturity
For the Years Ended
December 31,
1996 1995
-------------- --------------
U.S. government agencies
and corporations $ 1 292 094 $ 649 946
Obligations of state &
political subdivisions 251 227 150 000
Other securities 107 938 126 019
-------------- --------------
$ 1 651 259 $ 925 965
============== ==============
At December 31, 1996, the securities book value was $3,330,702 and the
market value was $3,337,690, compared to December 31, 1995 values of $1,691,055
and $1,708,102, respectively. As of December 31, 1996, there were no obligations
by any one issuer in the investment portfolio, exclusive of obligations of the
U.S. Government or U.S. Agencies and Corporations, which in the aggregate
exceeded 10% of stockholders' equity.
8
<PAGE>
Table 5 - Securities Maturity Analysis
Table 5 sets forth the maturity distribution and weighted average yields of
the securities portfolio at December 31, 1996. The weighted average yields are
calculated on the book value of the portfolio and on securities interest income
adjusted for amortization of premium and accretion of discount.
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Securities of U.S.
government agencies
and corporation $ 993 899 5.38% $ 497 862 6.12% $ 250 053 6.82% $ 34 873 9.02%
States & political
subdivisions - - - - - - - - 251 227 8.84% - - - -
Other securities 348 550 6.18% 648 345 5.80% - - - - 305 893 5.69%
------------- ------------- ------------ -------------
Total $ 1 342 449 5.59% $ 1 146 207 5.94% $ 501 280 7.83% $ 340 766 6.03%
============= ============= ============ =============
</TABLE>
9
<PAGE>
Table 6 - Composition of the Loan Portfolio
The following table summarizes the composition of the loan portfolio at
December 31, 1996 and 1995.
December 31,
1996 1995
-------------- --------------
Commercial $ 18 719 817 $ 13 315 029
Real estate - mortgage 6 882 004 6 133 400
Real estate - construction 3 886 066 3 637 433
Installment loans to individuals 8 424 170 6 081 297
-------------- --------------
$ 37 912 057 $ 29 167 159
Less allowance for loan losses 503 014 393 139
-------------- --------------
Net loans $ 37 409 043 $ 28 774 020
============== ==============
The Corporation had no loans outstanding to foreign countries or for highly
leveraged transactions as of December 31, 1996 or 1995.
There were no categories of loans that exceeded 10% of outstanding loans at
December 31, 1996, which were not disclosed in Table 6.
In the normal course of business, the Corporation makes various commitments
and incurs certain contingent liabilities which are disclosed but not reflected
in the accompanying financial statements. At December 31, 1996, commitments for
standby letters of credit totaled $293,581 and commitments to extend credit
totaled $4,331,307. At December 31, 1995, commitments for standby letters of
credit totaled $76,812 and commitments to extend credit totaled $3,698,658.
10
<PAGE>
Table 7 - Maturity Schedule of Selected Loans
The table below presents the maturities of selected loans outstanding at
December 31, 1996.
<TABLE>
<CAPTION>
<S> <C>
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
Commercial $ 9 816 083 $ 8 325 612 $ 578 122 $ 18 719 817
Real estate - construction 3 387 589 498 477 - - 3 886 066
--------------- ---------------- ---------------- ---------------
$ 13 203 672 $ 8 824 089 $ 578 122 $ 22 605 883
=============== =============== ================ ================
Interest sensitivity on such loans maturing after one year:
Fixed $ 6 593 206
Variable 2 809 005
---------------
Total $ 9 402 211
===============
</TABLE>
11
<PAGE>
Table 8 - Summary of Risk Elements
The following table details information concerning non-accrual, past due
and restructured loans as of December 31 for each of the years indicated:
December 31,
1996 1995
------------- ------------
Non-accrual loans $ 71 515 $ 45 445
Loans past due 90
days or more 58 996 215 348
Restructured loans - - - -
------------- ------------
$ 130 511 $ 260 793
============= ============
Past due loans consist of loans contractually past due ninety days or
longer as to interest or principal payments which continue to accrue interest.
Loans on non-accrual status are those loans (other than consumer installment
loans) which are ninety days past due, unless the loan is both well-secured and
in process of collection. Accrued interest on these loans is subtracted from
income, and thereafter interest is recognized only to the extent payments are
received or the loan has otherwise been rehabilitated.
Non-accrual loans at December 31, 1996 were $71,515, compared to $45,445
for 1995. Approximately $6,638 of interest income would have been recorded if
interest had accrued.
As of December 31, 1996, the Corporation had a total of $130,511 in
non-accrual, 90 days past due and restructured loans, compared to $260,793 in
1995. This was a decrease of $130,282 or 50%.
On December 31, 1996, the Corporation had $71,515 in non-accrual loans,
which consist of $55,974 in installment loans and $15,541 in mortgage loans. The
$58,996 in 90 days past due consists of $41,240 in installment loans and $17,756
in accrual loans.
As of December 31, 1996, the Corporation had no loans in addition to the
past due and non-accrual loans mentioned above that are considered to be
potential problem loans.
The Corporation's management and Board of Directors have reviewed the asset
quality of the Bank's loan portfolio and the Bank's loan loss reserve and have
found it to be adequate.
12
<PAGE>
Table 9 - Summary of Loan Loss Experience
<TABLE>
<CAPTION>
<S> <C>
1996 1995
-------------- --------------
Balance, beginning of period $ 393 139 $ 299 203
Less Charge-offs:
Commercial 23 929 5 000
Real estate - mortgage - - - -
Real estate - construction - - - -
Installment loans to individuals 37 203 25 668
-------------- --------------
Total $ 61 132 $ 30 668
-------------- --------------
Plus Recoveries:
Commercial $ 951 $ 7 063
Real estate - mortgage - - - -
Real estate - construction - - - -
Installment loans to individuals 5 056 4 122
-------------- --------------
Total $ 6 007 $ 11 185
-------------- --------------
Additions charged to operating expense $ 165 000 $ 113 419
-------------- --------------
Balance, end of period $ 503 014 $ 393 139
============== ==============
Ratio of net charge offs during the period
to average loans outstanding during the
period 0.17% 0.07%
</TABLE>
The Corporation maintains 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
management 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. An analysis of the allowance for loan losses, including charge-off
activity, is presented above for the years ended December 31, 1996 and 1995.
13
<PAGE>
Table 10 - Allocation of the Reserve for Loan Losses
The following table reflects management's allocation of the reserve for
loan losses for the years ended December 31, 1996 and 1995.
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------
% of Loans to % of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Commercial $ 427 562 49.4% $334 168 45.7%
Real estate - mortgage 10 060 18.2 7 863 21.0
Real estate - construction 25 151 10.2 19 657 12.5
Installment loans to
individuals 40 241 22.2 31 451 20.8
------------ --------- ------------- --------
$ 503 014 100.0% $ 393 139 100.0%
============ ========= ============= ========
</TABLE>
14
<PAGE>
Table 11 - Deposits and Rates
The following table details the average amount of, and the average rate
paid on the following primary deposit categories for the years ended December
31, 1996 and 1995.
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Non-interest bearing:
Demand deposits $ 5 588 802 - - $ 4 033 534 - -
---------------- ----------------
Interest-bearing:
Demand deposits $ 5 774 727 3.4 $ 4 416 757 3.1
Savings deposits 5 040 481 3.2 5 009 402 3.3
Time deposits 20 839 120 5.8 15 331 336 5.9
---------------- ----------------
$ 31 654 328 4.9% $ 24 757 495 4.9%
---------------- ----------------
$ 37 243 130 $ 28 791 029
================ ================
</TABLE>
The Corporation primarily uses deposits to fund its loans and investment
securities. The Corporation offers individuals and small-to-medium-size
businesses a variety of deposit accounts. Deposit accounts, including checking,
savings, money market and certificates of deposit, are obtained primarily from
the communities which the Corporation services.
15
<PAGE>
Table 12 - Maturities of CDs in Excess of $100,000
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1996.
Amount Percent
------ -------
Three months or less $ 765 345 16.1%
Over three - six months 1 601 603 33.7
Over six - twelve months 1 237 796 26.1
Over twelve months 1 143 537 24.1
---------------- ---------
Total $ 4 748 281 100.0%
================ ========
Certificates of deposit in amounts of $100,000 or more were $4,748,281 at
December 31, 1996. This represents 20.2% of the total certificate of deposit
balance of $23,460,361 at December 31, 1996. The Corporation does not solicit
such deposits. Further, the Corporation does not aggressively bid for public
funds deposits in large denominations, as such deposits may require the pledging
of investment securities.
The Corporation competes with the major regional financial institutions for
money market accounts and certificates of deposit less than $100,000. While the
Corporation is competitive with its interest rates, using a tiered rate system
to increase individual account balances, the Corporation has found that it can
continue to maintain its interest margin by matching loan maturities with
certificate maturities and setting loan rates based on the Corporation's cost of
funds.
16
<PAGE>
Table 13 - Analysis of Liquid Assets
Liquidity is a measure of the Corporation's ability to generate sufficient
cash to meet present and future obligations in a timely manner. These
obligations include the credit needs of customers, funding deposit withdrawals,
and the day-to-day operations of the Corporation. The Corporation's ability to
fund these daily commitments at December 31, 1996 and 1995 is illustrated in the
table below:
December 31,
1996 1995
---------------- ---------------
Liquid Assets:
Cash and due from banks $ 2 846 434 $ 2 282 876
Federal funds sold 1 656 000 1 574 000
U.S. government agency securities 2 681 675 447 801
---------------- ---------------
Total liquid assets $ 7 184 109 $ 4 304 677
================ ===============
Total deposits and other liabilities $ 41 396 603 $ 33 392 269
================ ===============
Ratio of liquid assets to deposits
and other liabilities 17.4% 12.9%
=============== ===============
The high loan to deposit ratio (91.9%) as of December 31, 1996, has
provided the opportunity for the Corporation to achieve a high return on its
deposits. For the year ended December 31, 1996, the Corporation experienced a
return on assets of 2.02% and a net interest margin of 6.01%.
The source of new funds is very strong for both long-term and short-term
duration. The growth in deposits was $8.1 million (24.8%) during 1996. The
Corporation also has access to overnight federal funds from correspondent banks
totaling up to $6.1 million. In addition, management believes that the
opportunity for the sale of loans on the market is good. The Corporation's loan
portfolio contains loans of high yields and it enjoys a recent history of low
loan charge offs.
17
<PAGE>
Table 14 - Minimum Capital Requirements
The following table indicates the Federal Reserve's minimum capital
requirements and the Corporation's ability to reach such minimum capital
requirements for the periods indicated.
<TABLE>
<CAPTION>
<S> <C>
December 31,
1996 1995
---------- ----------
Minimum capital requirements set by the Federal Reserve:
Tier 1 risk-based capital ratio 4.00% 4.00%
Total risk-based capital ratio 8.00% 8.00%
Actual capital ratios of the Corporation:
Tier 1 risk-based capital ratio 15.72% 9.40%
Total risk-based capital ratio 16.97% 10.60%
</TABLE>
On August 1, 1990, the Federal Reserve issued transitional capital adequacy
guidelines. These guidelines took effect September 7, 1990. The new capital
standards require an institution to meet two separate minimum capital
requirements: (1) a core capital (consisting of stated capital, capital surplus
and retained earnings) requirement equal to 4% of risk-weighted assets and (2) a
total capital risk-based capital requirement applied to risk-weighted assets
equal to 8%. The risk-based capital requirement includes off-balance sheet
items. Under the risk-based capital requirement, assets are assigned a credit
risk weighting based upon their relative risk ranging from 0% for assets that
are backed by the full faith and credit of the United States or that pose no
credit risk to the Bank to 100% for assets such as delinquent or repossessed
assets.
As indicated in Table 14 above, at December 31, 1996 and December 31, 1995,
the Corporation met the Federal Reserve's minimum capital requirements.
18
<PAGE>
Table 15 - Financial Ratios
The following table summarizes ratios considered to be significant
indicators of the Corporation's profitability and financial condition for the
years ended December 31, 1996 and 1995.
For the Years Ending
December 31,
1996 1995
---------- ----------
Return on average assets
(Net income/average total assets) 2.02% 1.31%
========= =========
Return on average equity
(Net income/average equity) 23.19% 17.00%
========= =========
Dividend payment ratio
(Dividends declared per share/
Net income per share) 10.34% - -%
========= =========
Average equity to average asset ratio 8.70% 7.70%
========= =========
19
<PAGE>
Table 16 - Short-Term Borrowings
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, 1996 and 1995.
20
<PAGE>
Table 17 - Interest Sensitivity Analysis
<TABLE>
<CAPTION>
<S> <C>
December 31, 1996
91 Days Over
1-90 Days to 1 Year 1-5 Years 5 Years Total
------------ ------------ ------------- ------------- -----------
Earning Assets:
Loans $ 12 474 $ 5 317 $ 19 706 $ 415 $ 37 912
Investment securities -
amortized cost 1 094 - - 298 259 1 651
Securities - AFS -
fair value 250 - - 846 584 1 680
Federal funds sold 1 656 - - - - - - 1 656
------------ ------------ ------------- ------------- -----------
Total earning assets $ 15 474 $ 5 317 $ 20 850 $ 1 258 $ 42 899
------------ ------------ ------------- ------------- -----------
Interest-Bearing Liabilities:
Interest checking $ - - $ - - $ 2 312 $ - - $ 2 312
Regular savings - - - - 5 064 - - 5 064
Money market savings 3 659 - - - - - - 3 659
Certificates of deposit:
$100,000 and over 765 2 840 1 143 - - 4 748
Under $100,000 4 957 7 458 6 297 - - 18 712
------------ ------------ ------------- ------------- -----------
Total interest-bearing
liabilities $ 9 381 $ 10 298 $ 14 816 $ - - $ 34 495
------------ ------------ ------------- ------------- -----------
Period GAP $ 6 093 $ (4 981) $ 6 034 $ 1 258 $ - -
============ ============ ============= ============= ===========
Cumulative GAP $ 6 093 $ 1 112 $ 7 146 $ 8 404 $ - -
============ ============ ============= ============= ===========
Cumulative GAP to
Total earning assets 14.20% 2.59% 16.66% 19.59% - -%
============ ============ ============= ============= ===========
</TABLE>
The present interest rate sensitivity position of the Corporation reflects
a favorable impact upon earnings in the event of rising interest rates. A rate
increase of as much as 200 basis points could have a favorable impact on net
interest income of approximately 4.3% in the first year. Conversely, a decrease
in the rate structure of 200 basis points could have a negative impact on net
interest income of approximately 4.7%. The current earning assets and deposit
structure of the Corporation suggest that these trends in changes in net
interest income would continue beyond 1997 given a rate change of this
magnitude.
21
<PAGE>
Item 2. Description of Properties
The Marathon Bank office is located at 4095 Valley Pike, Winchester,
Virginia. On December 31, 1993, the Marathon Land Trust executed a deed and
transferred the office to The Marathon Bank. This property is owned free of
encumbrances.
On August 12, 1993 the Bank opened its Warren County Branch at 300 Warren
Avenue in Post Office Plaza, Front Royal, Warren County, Virginia. On July 1,
1996, the Bank entered into a new lease with Post Office Plaza, L.C. for the new
branch facility in Front Royal. The terms of the lease include a monthly rent of
$3,846 for the first five years and adjusted annually afterward. The lease term
is twenty years with the option to renew for two additional five year terms.
On February 13, 1995, the Bank opened its Winchester Branch at 1041
Berryville Avenue in the City of Winchester, Virginia. The Bank executed a lease
on October 1, 1994, for five years with a monthly lease payment of $1,000. The
Bank has two five-year options to extend this lease.
Item 3. Legal Proceedings
In the course of normal operations, the Corporation and the Bank are
parties to various legal proceedings. Based upon information currently
available, and after consultations with legal counsel, management believes that
such legal proceedings will not have a material adverse effect on the
Corporation's business, financial position, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Corporation through
a solicitation of proxies or otherwise.
22
<PAGE>
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Corporation's common stock is listed on the NASDAQ Small Cap Market
under the symbol MFCV. Prior to the common stock's listing on NASDAQ on October
3, 1996, there were occasional transactions in the stock and management assisted
in matching persons interested in buying or selling the stock. The trades of
which management is aware between January 1, 1995 and October 3, 1996 occurred
at or about $5.00 per share. For the quarter ending December 31, 1996, the high
and low bid prices of the common stock on NASDAQ were $5.00 and $3.88,
respectively. This bid information reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
At December 31, 1996, the Corporation had approximately 930 stockholders of
record.
Under state law, without the consent of the Virginia Bureau of Financial
Institutions, the Bank may not pay dividends until it has restored any deficit
in its capital funds as originally paid in. Dividends from the Bank serve as the
primary funding to the Corporation for dividend payment. The Corporation
declared a $.06 per share cash dividend to stockholders of record as of December
27, 1996 to be paid in January of 1997. Previously, no cash dividends had been
paid.
Item 6. Management's Discussion and Analysis or Plan of Operations
Marathon Financial Corporation is the holding company for The Marathon
Bank. The following discussion and analysis of the financial condition and
results of operations of the Corporation for the years ending December 31, 1996,
1995 and 1994 should be read in conjunction with the consolidated financial
statements and related notes included as Exhibit 99.1 in this Form 10-KSB.
Results of Operation
The major component of the Corporation's net earnings is net interest
income, which is the excess of interest income earned on earning assets over the
interest expense paid for sources of funds. Net interest income is effected by
changes in volume, resulting from growth and variations in balance sheet
composition, as well as fluctuations in interest rates and maturities of sources
and uses of funds. Management seeks to maximize net interest income by managing
the balance sheet and determining the optimal product mix with respect to yields
on assets and costs of funds in light of projected economic conditions, while
maintaining an acceptable level of risk.
Interest income totaled $3,789,427, $2,940,310 and $2,251,248 for the years
ending December 31, 1996, 1995 and 1994, respectively. This represents an
increase of $849,117 or 29% in 1996 and $689,062 or 31% in 1995. Interest
expense totaled $1,614,653, $1,252,238 and $848,913 for the years ending
December 31, 1996, 1995 and 1994, respectively. This is an increase of $362,415
or 29% in 1996 and an increase of $403,325 or 48% in 1995. The increase in 1996
was the result of significant growth in the Bank's deposit base.
23
<PAGE>
Net interest income, before provision for loan losses, was $2,174,774 for
the year ending December 31, 1996, up $486,702 or 29% over the $1,688,072
reported for the same period in 1995. In 1995, net interest income before
provision for loan losses, increased $285,737 or 20% from $1,402,335 in 1994.
An additional $165,000 was placed into the provision for loan losses in
1996, giving a year end balance of $503,014 or 1.33% of total loans. In 1995,
the provision was $113,419 giving a year-end balance of $393,139 or 1.35% of
total loans. The Corporation maintains the allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. The
allowance is reviewed by management and the Board of Directors on a regular
basis considering several factors including changes in the character and size of
the loan portfolio, related loan loss experiences, a review and examination of
overall loan quality, the assessment of problem loans, and an analysis of
anticipated economic conditions in the market. Based on that analysis,
management believes that the year end balance was sufficient to cover
anticipated losses.
Non-interest income totaled $430,178, $281,329 and $241,989 for the years
ending December 31, 1996, 1995 and 1994, respectively. This represents an
increase of $148,849 or 53% in 1996 over 1995. This was the result of an
increase in service charge income and other income.
Non-interest expense totaled $1,746,265, $1,435,441 and $1,174,315 for the
years ending December 31, 1996, 1995 and 1994 respectively. This represents an
increase of $310,824 or 22% in 1996 and an increase of $261,126 or 22% in 1995.
The increases in 1996 and 1995 were attributable to an increase in salary
expenses, furniture and equipment expenses and occupancy expenses associated
with the Front Royal Branch's move into a permanent building in 1996.
Net income for the years ending December 31, 1996, 1995 and 1994 was
$839,421, $420,541 and $318,476, respectively. This represents an increase of
$418,880 or 99.6% in 1996 over 1995 net income of $420,541.
Capital Adequacy
Total stockholders' equity on December 31, 1996 was $5,890,237, an increase
of $3,212,487 or 120% from $2,677,750 in 1995. The Corporation's primary
capital-to-asset ratio was 12.4% in 1996 versus 7.4% in 1995. This exceeds the
Federal Reserve requirement of 6% for bank holding companies. On September 26,
1996, the bank completed a public offering in which 567,192 shares of common
stock were sold at $5.00 per share, resulting in $2,539,038 of new capital after
payment of fees and expenses associated with the offering. Marathon repurchased
10,000 shares of stock for $46,252 on October 23, 1996.
Liquidity
Liquidity is identified as the ability to generate or acquire sufficient
amounts of cash when needed at reasonable cost, to accommodate withdrawals in
deposits, payments of debt and increases in loan demand. These events may occur
daily or at other short-term intervals in the normal operation of business. Past
experience helps management predict time cycles and the amounts of cash
required.
24
<PAGE>
In assessing liquidity, management gives consideration to many relevant
factors, including stability of deposits, quality of assets, economy of markets
served, concentrations of business and industry, competition and the
Corporation's overall financial condition.
The Corporation's primary sources of liquidity are cash, due from banks,
U.S. Treasury securities, U.S. Agency securities and other short-term
investments including Federal Funds sold and the sale of loans.
Impact of Inflation and Changing Prices
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.
Unlike most industrial companies, 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 to a larger
extent than interest rates.
Accounting Rule Changes
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 No. 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 Corporation's consolidated financial
statements are not expected to be material.
Item 7. Financial Statements
Financial Statements are included in this Form 10-KSB as Exhibit 99.1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
<PAGE>
Part III
The information required by Items 9, 10, 11 and 12 of Part III has been
incorporated herein by reference to the Corporation's 1997 Proxy Statement as
set forth below in accordance with General Instruction E.3 of Form 10-KSB.
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information relating to directors and executive officers of the Company is
set forth in the sections entitled "Election of Directors", "Nominees" and
"Continuing Directors"of the 1997 Proxy Statement and is incorporated herein by
reference.
Information relating to compliance with Section 16(a) of the Exchange Act
is set forth in the section entitled Section 16(a) Beneficial Ownership
Reporting Compliance and is incorporated herein by reference.
Item 10. Executive Compensation
Information regarding compensation of officers and directors is set forth
in the sections entitled "Executive Compensation", "Employment Contracts,
Termination of Employment and Changes in Control Arrangements" and "Directors'
Compensation" in the 1997 Proxy Statement and is incorporated herein
by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning the security ownership of certain beneficial owners
and management is set forth in the sections entitled "Nominees", "Continuing
Directors" and "Security Ownership of Certain Beneficial Owners" in the 1997
Proxy Statement and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is set
forth in the section entitled "Transactions with Management and Board of
Directors" in the 1997 Proxy Statement and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibit Index
2. Not applicable.
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).
26
<PAGE>
(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. Not applicable.
9. Not applicable
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.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Subsidiary of Marathon Financial Corporation, incorporated
herein by reference as Exhibit 21 to the Corporation's
Registration Statement on Form S-1 filed July 26, 1996 (File
No. 333-08995).
22. None.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
27
<PAGE>
99. Additional Exhibits.
Exhibit 99.1 The following consolidated financial
statements of the Corporation including the
related notes and the report of the
independent auditors, are included herein:
1. Independent Auditor's Report.
2. Consolidated Balance Sheets - December 31,
1996 and 1995.
3. Consolidated Statement of Income - Years
Ended December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Changes in
Stockholders' Equity-Years Ended December
31, 1996, 1995 and 1994.
5. Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and
1994.
6. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant during
the fourth quarter of 1996.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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 (Registrant)
March 31 , 1997 By: /s/ Donald L. Unger
-----------------------
Donald L. Unger, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C>
DATE SIGNATURE AND TITLE
- ---- -------------------
March 31, 1997 /s/ Frank H. Brumback
- ------------------------------------ ------------------------------
Frank H. Brumback, Director
- ------------------------------------
W. Houston Board, III, Director
- ------------------------------------
Robert W. Claytor, Director
- ------------------------------------
Clifton L. Good, Director
March 31, 1997 /s/ Thomas W. Grove
- ------------------------------------ ----------------------------
Thomas W. Grove, Director
March 31, 1997 /s/ Ralph S. Gregory
- ------------------------------------ -----------------------------
Ralph S. Gregory, Director
March 31, 1997 /s/ Joseph W. Hollis
- ------------------------------------ -----------------------------
Joseph W. Hollis, Director
March 31, 1997 /s/ George R. Irvin, Jr.
- ------------------------------------ ---------------------------------
George R. Irvin, Jr., Director
- ------------------------------------
Gerald H. Kidwell, Director
March 31, 1997 /s/ Lewis W. Spangler
- ------------------------------------ ------------------------------
Lewis W. Spangler, Director
March 31, 1997 /s/ Donald L. Unger
- ------------------------------------ ------------------------------
Donald L. Unger, Principal Executive,
Financial, Accounting Officer
</TABLE>
<PAGE>
Exhibit Index
2. Not applicable.
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. Not applicable.
9. Not applicable
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.*
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Subsidiary of Marathon Financial Corporation, incorporated
herein by reference as Exhibit 21 to the Corporation's
Registration Statement on Form S-1 filed July 26, 1996 (File
No. 333-08995).
22. None.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule.*
28. Not applicable.
99. Additional Exhibits.
Exhibit 99.1 The following consolidated financial
statements of the Corporation including the
related notes and the report of the
independent auditors, are included herein:*
1. Independent Auditor's Report.
2. Consolidated Balance Sheets - December 31,
1996 and 1995.
3. Consolidated Statement of Income - Years
Ended December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Changes in
Stockholders' Equity-Years Ended December
31, 1996, 1995 and 1994.
5. Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and
1994.
6. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant during
the fourth quarter of 1996.
*Filed Herewith.
EXHIBIT 11
MARATHON FINANCIAL CORPORATION
Computation of Weighted Average Shares Outstanding and Earnings Per Share
Shares Outstanding End of Month
1996 1995
------------- ---------
January 1 306 303 1 078 601
February 1 306 303 1 078 601
March 1 306 303 1 078 601
April 1 306 303 1 078 601
May 1 306 303 1 078 601
June 1 306 303 1 294 334
July 1 306 303 1 294 334
August 1 306 303 1 294 334
September 1 306 303 1 294 334
October 1 863 495 1 294 334
November 1 863 495 1 294 334
December 1 863 495 1 306 303
------------- -------------
17 347 212 14 465 312
Divided by 12 months 12 months
------------- -------------
Weighted Shares Outstanding 1 445 601 1 205 443
============= =============
Net Income $ 839 421 $ 420 541
============= =============
Net Income Per Share $ .58 $ .35
============= =============
EXHIBIT 99.1
MARATHON FINANCIAL CORPORATION
Winchester, Virginia
FINANCIAL REPORT
DECEMBER 31, 1996
<PAGE>
C O N T E N T S
Page
----
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3 and 4
Consolidated statements of changes in stockholders' equity 5
Consolidated statements of cash flows 6 and 7
Notes to consolidated financial statements 8-28
<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 Subsidiary, as of December 31, 1996 and 1995,
and the related consolidated statements of income, changes in stockholders'
equity, and cash flows for the years ended December 31, 1996, 1995 and 1994.
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 Subsidiary, as of December 31, 1996 and 1995, and the
results of its operations and its cash flows for the years ended December 31,
1996, 1995 and 1994, in conformity with generally accepted accounting
principles.
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 24, 1997
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1996 and 1995
Assets 1996 1995
-------------- ----------
Cash and due from banks (Notes 9 and 12) $ 2 846 434 $ 2 282 876
Securities (fair value: 1996, $3,337,690 and
1995, $1,708,102) (Note 2) 3 331 209 1 699 472
Federal funds sold 1 656 000 1 574 000
Loans, net (Notes 3 and 4) 37 409 043 28 774 020
Bank premises and equipment, net (Notes 5 and 8) 1 587 342 1 288 463
Accrued interest receivable 212 089 159 066
Other real estate 18 123 236 123
Other assets 226 600 55 999
-------------- ---------------
$ 47 286 840 $ 36 070 019
============== ===============
Liabilities and Stockholders' Equity
Liabilities
Deposits:
Noninterest bearing $ 6 229 844 $ 5 261 411
Interest bearing 34 495 443 27 360 753
-------------- ---------------
Total deposits (Note 6) $ 40 725 287 $ 32 622 164
Interest expense payable 81 764 60 151
Accounts payable and accrued expenses 273 900 93 220
Mortgage payable - - 507 134
Capital leases payable (Note 8) 315 652 109 600
Commitments and contingent liabilities (Notes 9 and 12) - - - -
-------------- ---------------
Total liabilities $ 41 396 603 $ 33 392 269
-------------- ---------------
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; 1996, 1,863,495 shares issued and
outstanding; 1995, 1,306,303 shares issued and
outstanding (Note 17) 1 863 495 1 306 303
Capital surplus 7 045 502 5 109 908
Retained earnings (deficit) (3 019 267) (3 746 878)
Unrealized gain (loss) on securities available for sale 507 8 417
-------------- ---------------
Total stockholders' equity $ 5 890 237 $ 2 677 750
-------------- ---------------
$ 47 286 840 $ 36 070 019
============== ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- ---------------- ----------
Interest income:
Interest and fees on loans $ 3 554 808 $ 2 786 074 $ 2 123 881
Interest on investment securities, taxable 67 963 57 788 82 870
Interest and dividends on securities
available for sale:
Taxable 54 677 16 559 13 452
Dividends 8 373 13 060 5 404
Interest on federal funds sold 103 606 66 829 25 641
---------------- ---------------- ---------------
Total interest income $ 3 789 427 $ 2 940 310 $ 2 251 248
---------------- ---------------- ---------------
Interest expense:
Interest on deposits (Note 6) $ 1 566 223 $ 1 203 143 $ 801 614
Interest on mortgage payable 30 045 38 949 40 550
Interest on capital lease obligations 18 230 8 610 2 816
Interest on federal funds purchased 155 1 536 3 933
---------------- ---------------- ---------------
Total interest expense $ 1 614 653 $ 1 252 238 $ 848 913
---------------- ---------------- ---------------
Net interest income $ 2 174 774 $ 1 688 072 $ 1 402 335
Provision for loan losses (Note 4) 165 000 113 419 151 533
---------------- ---------------- ---------------
Net interest income after
provision for loan losses $ 2 009 774 $ 1 574 653 $ 1 250 802
---------------- ---------------- ---------------
Other income:
Service charges on deposit accounts $ 338 788 $ 227 776 $ 112 899
Commissions and fees 72 883 45 207 31 725
Gain on redemption of investment securities - - - - 19 125
Settlement of legal disputes - - - - 58 847
Gain on sale of other real estate 8 498 - - - -
Other 10 009 8 346 19 393
---------------- ---------------- ---------------
Total other income $ 430 178 $ 281 329 $ 241 989
---------------- ---------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- ---------------- ----------
Other expenses:
Salaries and employee benefits $ 846 609 $ 675 948 $ 523 017
Net occupancy expense of premises 160 772 110 478 91 624
Furniture and equipment 72 366 98 969 57 100
Other (Note 11) 666 518 550 046 502 574
---------------- ---------------- ---------------
Total other expenses $ 1 746 265 $ 1 435 441 $ 1 174 315
---------------- ---------------- ---------------
Income before income taxes $ 693 687 $ 420 541 $ 318 476
Provision for income tax (benefit) (Note 7) (145 734) - - - -
---------------- ---------------- ---------------
Net income $ 839 421 $ 420 541 $ 318 476
================ ================ ===============
Earnings per common and equivalent share (Note 1) $ .58 $ .35 $ .30
================ ================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Stockholders' Equity
Years Ended December 31, 1996, 1995 and 1994
Unrealized
Gain
(Loss) on
Retained Securities Total
Capital Stock Capital Earnings Available Stockholders'
Preferred Common Surplus (Deficit) for Sale Equity
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 10) - - 11 969 47 876 (59 845) - - - -
Cash to be paid in lieu
of fractional shares - - - - - - (3 209) - - (3 209)
Conversion of
preferred stock to
common stock
(200,688 shares) (1 003 440) 200 688 802 752 - - - - - -
Unrealized gain
(loss) on securities
available for sale - - - - - - - - 16 449 16 449
-------------- ------------ ------------- ------------- ------------ ---------------
Balance, December 31,
1995 $ - - $ 1 306 303 $ 5 109 908 $ (3 746 878) $ 8 417 $ 2 677 750
Net income - 1996 - - - - - - 839 421 - - 839 421
Issuance of common
stock - stock offering
(567,192 shares)
(Note 17) - - 567 192 1 971 846 - - - - 2 539 038
Acquisition of common
stock (10,000 shares) - - (10 000) (36 252) - - - - (46 252)
Dividends declared
(Note 10) - - - - - - (111 810) - - (111 810)
Unrealized gain
(loss) on securities
available for sale - - - - - - - - (7 910) (7 910)
-------------- ------------ ------------- ------------- ------------ ---------------
Balance, December 31,
1996 $ - - $ 1 863 495 $ 7 045 502 $ (3 019 267) $ 507 $ 5 890 237
============== ============ ============= ============= ============ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- ---------------- ----------
Cash Flows from Operating Activities
Net income $ 839 421 $ 420 541 $ 318 476
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization 40 581 16 194 34 670
Depreciation 103 815 103 366 73 710
Provision for loan losses 165 000 113 419 151 533
Writedown of other real estate 8 000 42 581 - -
Deferred tax (benefit) (150 000) - - - -
Gain on redemption of investment securities - - - - (19 125)
Gain on sale of other real estate (8 498) - - - -
Accretion of securities discounts, net (15 807) (2 567) (2 210)
Changes in assets and liabilities:
(Increase) decrease in other assets (25 973) 21 614 (9 440)
(Increase) decrease in accrued interest
receivable (53 023) 13 668 (68 341)
Increase in accounts payable and
accrued expenses 68 870 35 027 43 672
Increase (decrease) in interest expense payable 21 613 (74 818) (143 266)
---------------- ---------------- ---------------
Net cash provided by operating
activities $ 993 999 $ 689 025 $ 379 679
---------------- ---------------- ---------------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investments securities $ 568 892 $ 21 240 $ 800 362
Proceeds from maturities and principal
payments of securities available for sale 205 004 4 901 23 648
Purchase of investment securities (1 280 095) - - (538 833)
Purchase of securities available for sale (1 122 641) (216 806) (244 336)
Net (increase) in loans (8 885 477) (6 424 201) (4 603 232)
Origination of loans available for sale (3 431 800) (3 502 050) (3 156 275)
Proceeds from sale of loans available for sale 3 517 254 3 378 405 3 138 762
Purchase of equipment (194 815) (128 332) (56 076)
Proceeds from sale of other real estate 218 498 - - - -
---------------- ---------------- ---------------
Net cash (used in) investing activities $ (10 405 180) $ (6 866 843) $ (4 635 980)
---------------- ---------------- ---------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 1 774 085 $ 2 383 106 $ 1 075 894
Net increase in certificates of deposit 6 329 038 5 634 842 3 922 516
Net proceeds from issuance of common stock 2 539 038 - - - -
Principal payments on capital lease obligations (32 036) (26 516) (14 931)
Principal payments on mortgage payable (507 134) (22 234) (20 632)
Acquisition of common stock (46 252) - - - -
---------------- ---------------- ---------------
Net cash provided by financing activities $ 10 056 739 $ 7 969 198 $ 4 962 847
---------------- ---------------- ---------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
---------------- ---------------- ----------
Increase in cash and
cash equivalents $ 645 558 $ 1 791 380 $ 706 546
Cash and Cash Equivalents
Beginning 3 856 876 2 065 496 1 358 950
---------------- ---------------- ---------------
Ending $ 4 502 434 $ 3 856 876 $ 2 065 496
================ ================ ===============
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 1 593 040 $ 1 327 056 $ 992 179
================ ================ ===============
Income taxes $ 4 153 $ - - $ - -
================ ================ ===============
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
================ ================ ===============
Property and equipment acquired
under capital lease obligations $ 238 088 $ 21 395 $ 129 652
================ ================ ===============
Conversion of preferred stock
to common stock $ - - $ 1 003 440 $ - -
================ ================ ===============
Unrealized gain (loss) on securities
available for sale $ (7 910) $ 16 449 $ (8 032)
================ ================ ===============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Notes to Consolidated Financial Statements
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.
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
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 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.
<PAGE>
Notes to Consolidated Financial Statements
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, 1996 and 1995.
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
interest income recognized on loans. The Corporation had no
loans subject to FASB 114 at December 31, 1996 and 1995.
<PAGE>
Notes to Consolidated Financial Statements
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.
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.
Weighted average number of common shares outstanding were
1,442,478, 1,198,837 and 1,072,424 for the years ended
December 31, 1996, 1995 and 1994, respectively.
<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 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 Corporation 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.
<PAGE>
Notes to Consolidated Financial Statements
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
1996
----------------------------------------------------------------------
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 1 346 663 $ 5 381 $ (6 860) $ 1 345 184
Mortgage-backed securities 34 930 1 986 - - 36 916
Other 297 850 - - - - 297 850
-------------- -------------- ------------- --------------
$ 1 679 443 $ 7 367 $ (6 860) $ 1 679 950
============== ============== ============= ==============
1995
----------------------------------------------------------------------
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
============== ============== ============== ==============
</TABLE>
The amortized cost and fair value of the securities available for
sale as of December 31, 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. Therefore, these
securities are not included in the maturity categories in the
maturity summary.
<TABLE>
<CAPTION>
<S> <C>
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 248 598 $ 250 390
Due after one year through five years 848 012 846 357
Due after five years through ten years 250 053 248 437
Mortgage-backed securities 34 930 36 916
Other 297 850 297 850
--------------- ------------
$ 1 679 443 $ 1 679 950
=============== ============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
The amortized cost and fair value of securities being held to
maturity as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- -----
1996
----------------------------------------------------------------------
Obligations of U.S.
government corporations
and agencies $ 1 292 094 $ 463 $ (984) $ 1 291 573
Obligations of state and
political subdivisions 251 227 6 938 - - 258 165
Corporate securities 99 952 48 - - 100 000
Mortgage-backed securities 7 986 23 (7) 8 002
-------------- -------------- ------------- --------------
$ 1 651 259 $ 7 472 $ (991) $ 1 657 740
============== ============== ============= ==============
1995
----------------------------------------------------------------------
U.S. Treasury securities
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
============== ============== ============= ==============
</TABLE>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 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. Therefore, these securities are not
included in the maturity categories in the maturity summary.
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
Amortized Fair
Cost Value
---- -----
Due in one year or less $ 993 899 $ 993 790
Due after one year through five years 298 195 297 783
Due after five years through ten years 251 227 258 165
Corporate securities 99 952 100 000
Mortgage-backed securities 7 986 8 002
-------------- -------------
$ 1 651 259 $ 1 657 740
============== =============
</TABLE>
Proceeds from maturities, calls and principal payments of
securities available for sale during 1996, 1995 and 1994 were
$205,004, $4,901 and $23,648. 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, 1995 and 1994 were
$568,892, $21,240 and $800,362. There were no realized gains or
realized losses recognized on these transactions during 1996 and
1995. Gross realized gains of $19,125 were recognized in 1994.
Securities having a book value of $647,020 and $702,448 at
December 31, 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 December 31, 1996 and 1995, is composed
of the following:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
--------------- --------------
Commercial $ 18 719 817 $ 13 315 029
Real estate - mortgage 6 882 004 6 133 400
Real estate - construction 3 886 066 3 637 433
Installment loans to individuals 8 424 170 6 081 297
--------------- --------------
$ 37 912 057 $ 29 167 159
Less allowance for loan losses 503 014 393 139
--------------- --------------
$ 37 409 043 $ 28 774 020
=============== ==============
</TABLE>
The Corporation 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 Corporation
for loans totaling $1,736,231 and $1,174,885 at December 31, 1996
and 1995, respectively. During 1996, total principal additions
were $1,426,807 and total principal payments were $865,461.
<PAGE>
Notes to Consolidated Financial Statements
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
<S> <C>
December 31,
1996 1995 1994
------------- -------------- -------------
Balance, beginning $ 393 139 $ 299 203 $ 224 758
Provision for loan losses 165 000 113 419 151 533
Recoveries 6 007 11 185 12 744
Loan losses charged to
the allowance (61 132) (30 668) (89 832)
------------- -------------- -------------
Balance, ending $ 503 014 $ 393 139 $ 299 203
============= ============== =============
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $71,515 and $45,445 at December 31, 1996 and 1995,
respectively. If interest on these loans had been accrued, such
income would have approximated $6,638 and $3,679 for 1996 and
1995, respectively.
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment as of December 31, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
--------------- --------------
Bank premises $ 1 297 361 $ 1 314 922
Furniture and equipment 722 602 553 837
Capital leases - property and equipment 389 135 151 047
Construction in progress 44 774 - -
--------------- --------------
$ 2 453 872 $ 2 019 806
Less accumulated depreciation 866 530 731 343
--------------- --------------
$ 1 587 342 $ 1 288 463
=============== ==============
</TABLE>
Depreciation included in operating expense for 1996, 1995, and
1994 was $103,815, $103,366, and $73,710, respectively.
<PAGE>
Notes to Consolidated Financial Statements
Note 6. Deposits
Deposits outstanding at December 31, 1996, 1995 and 1994 and the
related interest expense for the years then ended, are summarized
as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Ended
December 31, 1996 December 31, 1995
Amount Expense Amount Expense
--------------- --------------- -------------- ---------------
Noninterest bearing $ 6 229 844 $ - - $ 5 261 411 $ - -
--------------- --------------- -------------- ---------------
Interest bearing:
Interest checking $ 2 312 261 $ 64 874 $ 1 941 150 $ 48 524
Money market accounts 3 659 235 133 054 3 307 328 92 892
Regular savings 5 063 586 159 434 4 980 952 157 793
Certificates of deposit:
Less than $100,000 18 712 080 975 718 13 870 161 738 106
$100,000 and more 4 748 281 233 143 3 261 162 165 828
--------------- --------------- -------------- ---------------
Total interest bearing $ 34 495 443 $ 1 566 223 $ 27 360 753 $ 1 203 143
--------------- --------------- -------------- ---------------
Total deposits $ 40 725 287 $ 1 566 223 $ 32 622 164 $ 1 203 143
=============== =============== ============== ===============
Year Ended
December 31, 1994
Amount Expense
--------------- ---------------
Noninterest bearing $ 3 759 042 $ - -
--------------- ---------------
Interest bearing:
Interest checking $ 1 731 740 $ 38 974
Money market accounts 2 366 898 86 388
Regular savings 5 250 054 211 531
Certificates of deposit:
Less than $100,000 9 496 559 418 561
$100,000 and more 1 999 923 46 160
--------------- ---------------
Total interest bearing $ 20 845 174 $ 801 614
--------------- ---------------
Total deposits $ 24 604 216 $ 801 614
=============== ===============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
-------------- -------------
Deferred tax assets:
Net operating loss carryforward $ 1 036 066 $ 1 291 762
Writedown of other real estate 2 720 14 478
Less valuation allowance (817 629) (1 206 820)
--------------- -------------
$ 221 157 $ 99 420
-------------- -------------
Deferred tax liabilities,
allowance for loan losses $ 71 157 $ 99 420
-------------- -------------
$ 150 000 $ - -
============== =============
The provision for income taxes charged to operations for the
years ended December 31, 1996, 1995 and 1994, consists of the
following:
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
Current tax expense $ 4 266 $ - - $ - -
Deferred tax expense 239 191 142 895 100 703
Change in valuation allowance (389 191) (142 895) (100 703)
-------------- ------------- --------------
$ (145 734) $ - - $ - -
============== ============= ==============
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, 1996, 1995 and
1994, due to the following:
<CAPTION>
1996 1995 1994
-------------- ------------- --------------
Computed "expected" tax expense $ 235 854 $ 142 984 $ 108 282
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance (389 191) (142 895) (100 703)
Reduced tax due to marginal tax rates - - - - (826)
Other 7 603 (89) (6 753)
-------------- ------------- --------------
$ (145 734) $ - - $ - -
============== ============= ==============
</TABLE>
Under the provisions of the Internal Revenue Code, the
Corporation has available approximately $3,039,720 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.
<PAGE>
Notes to Consolidated Financial Statements
Note 8. Leases
Capital Leases
During the year ended December 31, 1996, the Corporation
entered into a lease agreement on a branch facility, located on
land leased from a partnership of which the Corporation's
president is a partner. The liability is payable in monthly
installments of $1,991 through May 31, 2016 at an interest rate
of 8%.
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 liability is
payable in quarterly installments of $9,017 through June 1,
1999, at an interest rate of 7%. The lease also requires
additional maintenance payments of $4,853 per quarter.
The balance of the liability under capital leases at December
31, 1996 in the amount of $315,652 represents the present value
of the balance due in future years for lease rentals discounted
at the respective interest rates. 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 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, 1996:
Years ending December 31:
1997 $ 79 378
1998 79 378
1999 49 719
2000 23 898
2001 23 898
Later years 344 529
---------------
Total minimum lease payments $ 600 800
Less estimated executory costs
(such as maintenance) included in
the total minimum lease payments 48 530
---------------
Net minimum lease payments $ 552 270
Less the amount representing interest 236 618
---------------
Present value of net minimum
lease payments $ 315 652
=============
<PAGE>
Notes to Consolidated Financial Statements
Lease Commitments and Total Rental Expense
During the year ended December 31, 1996, the Corporation
entered into a twenty-year operating lease with a partnership
of which the Corporation's president is a partner for the
rental of a branch location and improvements. The lease expires
on June 30, 2016 and has two five-year renewal options. The
lease provides that the Corporation pay all property taxes,
insurance and maintenance costs plus an annual rental of
$22,256 for the initial lease beginning July 1, 1996. The total
minimum lease commitment at December 31, 1996 under this lease
is $433,992.
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 March 30, 2000 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
commitments at December 31, 1996 under this lease is $39,000.
The total minimum lease commitment for these operating leases
is due as follows:
1997 $ 34 256
1998 34 256
1999 34 256
2000 28 256
2001 22 256
Later years 319 712
---------------
$ 472 992
===============
There was $29,823 and $9,000 in rental expense resulting from
these leases included in the consolidated statements of income
for the years ended December 31, 1996 and 1995, respectively.
Fixed Equipment on Land Leased with Related Parties
Fixed equipment with a depreciated cost at December 31, 1996 of
$7,790 is located on land leased from a partnership of which
the Corporation's president is a partner. The lease expires on
May 31, 2016.
Note 9. 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 12 with respect to
financial instruments with off-balance-sheet risk.
<PAGE>
Notes to Consolidated Financial Statements
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 years ended December 31, 1996
and 1995, the aggregate amounts of daily average required balances
were approximately $84,000 and $65,000, respectively.
Note 10. 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, 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 dividends in 1996 and 1995. 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. On December 17, 1996, the Board of
Directors declared a cash dividend of $.06 per share payable
January 27, 1997 to shareholders of record December 27, 1996.
These dividends have 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, 1996, no unrestricted funds could be transferred from
the banking subsidiary to the parent corporation, without prior
regulatory approval.
Note 11. Other Expenses
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
<S> <C>
1996 1995 1994
--------------- -------------- ---------------
FDIC assessment $ 2 000 $ 33 798 $ 52 377
Other real estate valuation 8 000 42 581 - -
Marketing 60 155 53 619 32 522
Stationery and supplies 52 208 48 225 30 486
Postage 49 010 31 545 20 292
Directors fees 45 450 21 675 16 950
Other (includes no items in excess
of 1% of total revenue) 449 695 318 603 349 947
--------------- -------------- ---------------
$ 666 518 $ 550 046 $ 502 574
=============== ============== ===============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 12. 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 December 31, 1996 and
1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
--------------- -------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 4 331 307 $ 3 698 658
Standby letters of credit 293 581 76 812
</TABLE>
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 real estate and bank deposits as collateral
supporting those commitments for which collateral is deemed
necessary. The extent of collateral held for those commitments at
December 31, 1996, varies from 0 percent to 100 percent; the
average amount collateralized is 30 percent.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at December 31, 1996
exceeded the insurance limits of the Federal Deposit Insurance
Corporation by approximately $733,246.
<PAGE>
Notes to Consolidated Financial Statements
Note 13. 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
years ended December 31, 1996 and 1995 were $12,173 and $9,601. No
contributions were made for the year ended December 31, 1994.
Note 14. 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.
<PAGE>
Notes to Consolidated Financial Statements
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, 1996 and 1995, the difference between the
carrying amounts and fair values of loan commitments and
stand-by letters of credit were immaterial.
The estimated fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 1995
--------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------- -------------- -------------- ---------------
(Thousands) (Thousands)
Financial assets:
Cash and short-term
investments $ 4 502 $ 4 502 $ 3 857 $ 3 857
Securities 3 331 3 338 1 699 1 708
Loans 37 912 38 286 29 167 29 716
Less: allowance for
loan losses (503) - - (393) - -
-------------- -------------- -------------- ---------------
Total financial assets $ 45 242 $ 46 126 $ 34 330 $ 35 281
============== ============== ============== ===============
Financial liabilities:
Deposits $ 40 725 $ 40 892 $ 32 622 $ 33 136
Long-term debt 316 402 617 634
-------------- -------------- -------------- ---------------
Total financial
liabilities $ 41 041 $ 41 294 $ 33 239 $ 33 770
============== ============== ============== ===============
</TABLE>
Note 15. Capital Requirements
The Corporation is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure
to meet minimum capital requirements can initiate certain
mandatory possibly additional discretionary - actions by
regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation must meet specific capital
guidelines that involve quantitative measures of the Corporation's
assets, liabilities, and certain offbalance-sheet items as
calculated under regulatory accounting practices. The
Corporation's capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets, and of
Tier 1 capital to average assets. Management believes, as of
December 31, 1996, that the Corporation meets all capital adequacy
requirements to which it is subject.
<PAGE>
Notes to Consolidated Financial Statements
As of December 31, 1996, the most recent notification from the
Federal Reserve Bank categorized the Corporation as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized, the Corporation
must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the table.
The Corporation's actual capital amounts and ratios are also
presented in the table.
<TABLE>
<CAPTION>
<S> <C>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Amount in Thousands)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 6 359 16.97% >=$ 2 998 >= 8.00% N/A
Marathon Bank $ 6 352 16.95% >=$ 2 998 >= 8.00% >=$ 3 748 >= 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 5 890 15.72% >=$ 1 499 >= 4.00% N/A
Marathon Bank $ 5 883 15.70% >=$ 1 499 >= 4.00% >=$ 2 249 >= 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 5 890 12.51% >=$ 1 883 >= 4.00% N/A
Marathon Bank $ 5 883 12.50% >=$ 1 883 >= 4.00% >=$ 2 353 >= 5.00%
As of December 31, 1995:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 3 009 10.60% >=$ 2 271 >= 8.00% N/A
Marathon Bank $ 3 009 10.60% >=$ 2 271 >= 8.00% >=$ 2 839 >= 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 2 669 9.40% >=$ 1 136 >= 4.00% N/A
Marathon Bank $ 2 669 9.40% >=$ 1 136 >= 4.00% >=$ 1 703 >= 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 2 669 8.32% >=$ 1 284 >= 4.00% N/A
Marathon Bank $ 2 669 8.32% >=$ 1 283 >= 4.00% >=$ 1 604 >= 5.00%
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Note 16. 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, 1996 all 200,688 warrants
were outstanding.
The Corporation has granted 1,500 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. As of December 31, 1996, all 1,500 stock
options were outstanding.
In August 1996, the Corporation's Board of Directors approved
creation of the 1996 Long-Term Incentive Plan, which provides
stock options to the employees and directors of the Corporation.
Awards have been approved under such plan in the aggregate amount
of 141,875 shares, 68,125 of which will be exercisable
immediately upon shareholder approval of the plan.
Note 17. Capitalization
In October 1996, the Corporation sold 567,192 shares of its
common stock in a public offering. Net proceeds from the sale
were $2,539,038 after deducting underwriting commissions of
$123,844 and direct offering costs of $183,078. Of the net
proceeds, $567,192 was credited to common stock and $1,971,846
was credited to capital surplus.
<PAGE>
Notes to Consolidated Financial Statements
Note 18. Parent Corporation Only Financial Statements
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1996 and 1995
1996 1995
-------------- --------------
Assets
Cash on deposit with subsidiary bank $ 119 610 $ 370
Prepaid expenses 283 578
Investment in capital stock of subsidiary 5 883 516 2 681 486
-------------- --------------
Total assets $ 6 003 409 $ 2 682 434
============== ==============
Liabilities
Accounts payable $ 1 362 $ 4 684
Dividends payable 111 810 - -
-------------- --------------
$ 113 172 $ 4 684
-------------- --------------
Stockholders' Equity
Preferred stock $ - - $ - -
Common stock 1 863 495 1 306 303
Capital surplus 7 045 502 5 109 908
Retained earnings (deficit) (3 019 267) (3 746 878)
Unrealized gain on securities
available for sale 507 8 417
-------------- --------------
Total stockholders' equity $ 5 890 237 $ 2 677 750
-------------- --------------
Total liabilities and stockholders'
equity $ 6 003 409 $ 2 682 434
============== ==============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- -------------
Income, miscellaneous $ 6 000 $ - - $ - -
-------------- -------------- -------------
Expenses:
Amortization $ - - $ 5 064 $ 12 072
Other 1 248 1 110 849
-------------- -------------- -------------
Total expenses $ 1 248 $ 6 174 $ 12 921
-------------- -------------- -------------
Income (loss) before
undistributed income
of subsidiaries $ 4 752 $ (6 174) $ (12 921)
-------------- -------------- -------------
Undistributed income of
subsidiary $ 834 669 $ 426 715 $ 331 397
-------------- -------------- -------------
Net income $ 839 421 $ 420 541 $ 318 476
============== ============== =============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------- -------------- -------------
Cash Flows from Operating Activities
Net income $ 839 421 $ 420 541 $ 318 476
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization - - 5 064 12 071
Undistributed income of subsidiary (834 669) (426 715) (331 397)
(Increase) decrease in prepaid expenses 295 (365) - -
Increase (decrease) in accounts payable (3 322) 1 475 - -
------------- -------------- -------------
Net cash provided by (used in)
operating activities $ 1 725 $ - - $ (850)
------------- -------------- -------------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock $ 2 539 038 $ - - $ - -
Acquisition of common stock (46 252) - - - -
Transfer of capital to subsidiary (2 375 271) - - - -
------------- -------------- -------------
Net cash provided by
financing activities $ 117 515 $ - - $ - -
------------- -------------- -------------
Increase (decrease) in cash
and cash equivalents $ 119 240 $ - - $ (850)
Cash and Cash Equivalents
Beginning 370 370 1 220
------------- -------------- -------------
Ending $ 119 610 $ 370 $ 370
============= ============== =============
Supplemental Schedule of Noncash
Investing and Financing Activities
Issuance of common stock $ - - $ 138 279 $ 50 185
============= ============== =============
Unrealized gain (loss) on securities
available for sale $ (7 910) $ 16 449 $ (8 032)
============= ============== =============
Conversion of preferred stock to
common stock $ - - $ 1 003 440 $ - -
============= ============== =============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,846,434
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,656,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,679,950
<INVESTMENTS-CARRYING> 1,651,259
<INVESTMENTS-MARKET> 1,657,740
<LOANS> 37,912,057
<ALLOWANCE> 503,014
<TOTAL-ASSETS> 37,409,043
<DEPOSITS> 40,725,287
<SHORT-TERM> 0
<LIABILITIES-OTHER> 355,664
<LONG-TERM> 315,652
1,863,495
0
<COMMON> 0
<OTHER-SE> 4,026,742
<TOTAL-LIABILITIES-AND-EQUITY> 47,286,840
<INTEREST-LOAN> 3,554,808
<INTEREST-INVEST> 131,013
<INTEREST-OTHER> 103,606
<INTEREST-TOTAL> 3,789,427
<INTEREST-DEPOSIT> 1,566,223
<INTEREST-EXPENSE> 1,614,653
<INTEREST-INCOME-NET> 2,174,774
<LOAN-LOSSES> 165,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,746,265
<INCOME-PRETAX> 693,687
<INCOME-PRE-EXTRAORDINARY> 693,687
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 839,421
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
<YIELD-ACTUAL> 6
<LOANS-NON> 71,515
<LOANS-PAST> 58,996
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 393,139
<CHARGE-OFFS> 61,132
<RECOVERIES> 6,007
<ALLOWANCE-CLOSE> 503,014
<ALLOWANCE-DOMESTIC> 503,014
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
