UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
--------------------------
Form 10-QSB
Quarterly Report Pursuant of Section 13 or 15(d)
of the Securities Exchange Act of 1934
--------------------------
For the quarterly period ended:
September 30, 1998
Commission File No. 0-18868
MARATHON FINANCIAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1560968
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS employer identification no.)
incorporation or organization)
4095 VALLEY PIKE
WINCHESTER, VIRGINIA 22602
-------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (540) 869-6600
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------------- -------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Number of Shares Outstanding at
----- ---------------- --------------
Common Stock 2,060,983 11/06/98
<PAGE>
MARATHON FINANCIAL CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
a. Consolidated Statements of Condition as of
September 30, 1998 and December 31, 1997 . . . . . . . . . . . 3
b. Consolidated Statements of Income for the Nine Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . .4-5
c. Consolidated Statements of Changes in
Shareholders' Equity for the Nine
Months Ended September 30, 1998 and 1997 . . . . . . . . . . .6
d. Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1998 and 1997 . . . . . . .7-8
Notes to Consolidated Financial Statements . . . . . . . . . . 9-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . 12-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . 21
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . .21-23
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
MARATHON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(Unaudited)
as of
September 30, 1998 and December 31, 1997
<CAPTION>
ASSETS September 30, 1998 December 31, 1997
------------------- -------------------
<S> <C> <C>
Cash and due from banks $4,215,951 $3,477,382
Securities (fair value: 1998, $8,665,577 and
1997, $3,506,666) 8,599,366 3,490,709
Federal funds sold 8,903,000 3,570,000
Loans, net 62,031,928 50,517,071
Bank premises and equipment, net 2,560,673 2,499,374
Accrued interest receivable 403,905 285,837
Other real estate 442,155 448,123
Other assets 513,182 537,546
------------------- -------------------
Total assets $87,670,160 $64,826,042
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing $11,185,889 $7,992,135
Interest bearing 67,102,389 48,443,086
------------------- -------------------
Total deposits $78,288,278 $56,435,221
Interest expense payable 133,093 104,753
Accounts payable and accrued expenses 218,980 295,518
Capital lease payable 252,846 279,136
------------------- -------------------
Total liabilities $78,893,197 $57,114,628
------------------- -------------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, 5% non-cumulative, no par
value; 1,000,000 shares authorized and unissued - - - -
Common stock, $1 par value; 20,000,000 shares
authorized; 1998, 2,060,983 shares issued and
outstanding; 1997, 2,055,983 shares issued and
outstanding. $2,060,983 $2,055,983
Capital surplus 7,835,454 7,815,454
Retained earnings (deficit) (1,189,229) (2,164,825)
Accumulated other comprehensive income 69,755 4,802
------------------- -------------------
Total stockholders' equity $8,776,963 $7,711,414
------------------- -------------------
Total liabilities and stockholders' equity $87,670,160 $64,826,042
=================== ===================
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
MARATHON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
For the Nine Months For the Quarter
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Interest income:
Interest and fees on loans $4,493,928 $3,372,427 $1,589,055 $1,243,951
Interest on securities held to maturity 116,786 51,320 51,810 22,867
Interest on securities available for sale 108,677 64,699 47,783 21,450
Interest on federal funds sold 311,365 91,073 142,654 37,304
Dividends on securities available for sale 16,042 12,262 3,967 4,232
----------- ----------- --------- ---------
Total interest income $5,046,798 $3,591,781 $1,835,269 $1,329,804
----------- ----------- ----------- -----------
Interest expense:
Interest on deposits $2,107,473 $1,363,566 $784,948 $496,509
Interest on leases 15,678 17,885 4,947 5,783
Interest on fed funds purchased - - 673 - - - -
---- ---- ---
----------- ----------- --------- ---------
Total interest expense $2,123,151 $1,382,124 $789,895 $502,292
----------- ----------- --------- ---------
Net interest income $2,923,647 $2,209,657 $1,045,374 $827,512
Provision for loan losses 170,000 133,000 60,000 55,000
----------- ----------- --------- ---------
Net interest income after provision for
loan loss $2,753,647 $2,076,657 $985,374 $772,512
----------- ----------- --------- ---------
Other income:
Service charges on deposit accounts $499,002 $274,184 $192,191 $106,781
Commissions and fees 23,958 22,482 8,277 7,188
Other 67,232 22,215 9,845 5,809
----------- ----------- --------- ---------
Total other income $590,192 $318,881 $210,313 $119,778
----------- ----------- --------- ---------
4
<PAGE>
MARATHON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
<CAPTION>
For the Nine Months For the Quarter
Ended September 30, Ended September 30,
1998 1997 1998 1997
---- ---- ---- ----
Other expenses:
Salaries and employee benefits $1,125,779 $865,172 $381,833 $324,839
Net occupancy expense of premises 187,977 197,225 65,052 79,337
Furniture and equipment 277,734 84,402 91,695 37,234
Legal and professional 63,632 37,712 13,389 4,290
Stationary and Supplies 74,729 54,881 28,901 23,983
Postage 72,023 42,407 26,411 17,651
Marketing 55,593 68,301 21,354 26,702
Telephone 58,472 30,795 20,445 17,396
Directors fees 62,360 52,250 19,200 17,450
ATM expense 69,671 45,034 33,179 9,853
Overdraft charge-offs 48,415 51,629 27,158 31,215
Other operating expense 278,512 240,247 89,017 84,314
----------- ----------- --------- ---------
Total other expenses $2,374,897 $1,770,055 $817,634 $674,264
----------- ----------- --------- ---------
Income before income taxes $968,942 $625,483 $378,053 $218,026
Provision for income taxes expense
(Benefit) ($6,654) ($137,734) $24,783 ($50,000)
----------- ----------- --------- ---------
Net income $975,596 $763,217 $353,270 $268,026
=========== =========== ========= =========
Earnings per share, basic $0.47 $0.39 $0.17 $0.14
===== ===== ===== =====
Earnings per share, assuming dilution $0.46 $0.39 $0.17 $0.14
===== ===== ===== =====
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
MARATHON FINANCIAL CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<CAPTION>
Accumulated
Other Retained Total
Common Capital Comprehensive Earnings Comprehensive Stockholders'
Stock Surplus Income (Loss) (Deficit) Income Equity
------ ------- ------------- --------- ------------ -------------
Balance, December 31, 1996 $1,863,495 $7,045,502 $507 ($3,019,267) $5,890,237
Comprehensive income:
Net income 763,217 763,217 763,217
Other comprehensive
income:
Unrealized (loss) on
securities available
for sale (278) (278) (278)
-----
Total comprehensive income $762,939
========
Issuance of common stock/
exercise of stock warrants
(192,488 shares) 192,488 769,952 962,440
---------- ---------- ---- ----------- ----------
Balance, Sept. 30, 1997 $2,055,983 $7,815,454 $229 ($2,256,050) $7,615,616
========== ========== ==== =========== ==========
Balance, December 31, 1997 $2,055,983 $7,815,454 $4,802 ($2,164,825) $7,711,414
Comprehensive income:
Net income 975,596 975,596 975,596
Other comprehensive
income:
Unrealized gain on
securities available
for sale 64,953 64,953 64,953
-------
Total comprehensive income $1,040,549
==========
Issuance of common
stock/exercise of stock
options (5,000 shares) 5,000 20,000 25,000
---------- ---------- ---- ----------- ----------
Balance, Sept. 30, 1998 $2,060,983 $7,835,454 $69,755 ($1,189,229) $8,776,963
========== ========== ==== =========== ==========
See Accompanying Notes to Consolidated Financial Statements
6
<PAGE>
MARATHON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
For the Nine Months Ended September 30, 1998 and 1997
<CAPTION>
1998 1997
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $975,596 $763,217
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization 39,317 30,471
Depreciation 218,147 111,759
Net discount accretion on securities (2,101) (8,488)
Provision for loan loss 170,000 133,000
Deferred tax (benefit) (21,159) (150,000)
Changes in assets and liabilities:
(Increase) decrease in other assets 45,523 (72,600)
(Increase) in accrued
interest receivable (118,068) (65,187)
Decrease in accounts payable
and accrued expenses (76,538) (16,669)
Increase in interest expense payable 28,340 5,784
Decrease in Other Real Estate 5,968
------------------- -------------------
Net cash provided by operating
activities $1,265,025 $731,287
=================== ===================
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal payments
on securities held to maturity $313,325 $1,107,993
Proceeds from maturities and principal payments
on securities available for sale 250,244 97,308
Purchase of securities held to maturity (2,780,690) (1,170,539)
Purchase of securities available for sale (2,824,483) (573,323)
Net (increase) in loans (11,684,857) (7,291,645)
Purchase of bank premises and equipment (318,763) (847,792)
------------------- -------------------
------------------- -------------------
Net cash (used in) investing activities ($17,045,224) ($8,677,998)
------------------- -------------------
7
<PAGE>
MARATHON FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Nine Months Ended September 30, 1998 and 1997
1998 1997
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW
accounts, and savings accounts $10,921,997 $4,464,954
Net increase in certificates of deposits 10,931,061 3,769,201
Principal payments on capital lease payable (26,290) (27,143)
Cash dividends paid (111,810)
Net proceeds from issuance of common stock 25,000 962,439
------------------- -------------------
Net cash provided by financing activities $21,851,768 $9,057,641
------------------- -------------------
Increase in cash and cash equivalents $6,071,569 $1,110,930
Beginning 7,047,382 4,052,434
------------------- -------------------
Ending $13,118,951 $5,163,364
=================== ===================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $2,094,811 $1,376,340
=================== ===================
Income Taxes $14,505 $12,266
=================== ===================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
ACTIVITIES
Unrealized gain (loss) on securities
available for sale $64,953 ($278)
=================== ===================
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
8
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as
of September 30, 1998 and December 31, 1997, and the result of operations
and cash flows for the nine months ended September 30, 1998 and 1997. The
statements should be read in conjunction with the Notes to Consolidated
Financial Statements included in the Company's Annual Report for the year
ended December 31, 1997.
2. The results of operations for the nine months period ended September 30,
1998 and 1997, are not necessarily indicative of the results to be expected
for the full year.
3. Securities held to maturity and available for sale as of September 30, 1998
and December 31, 1997, are:
<CAPTION>
September 30, December 31,
1998 1997
Amortized Amortized
Held to Maturity Cost Cost
------------------- -------------------
<S> <C> <C>
US treasury securities & obligations of
US government corporations & agencies $4,007,687 $1,452,899
Obligations of state and political subdivisions 100,887 254,033
=================== ===================
$4,108,574 $1,706,932
=================== ===================
<CAPTION>
Fair Fair
Value Value
------------------- -------------------
US treasury securities & obligations of
US government corporations & agencies $4,068,746 $1,467,012
Obligations of state and political subdivisions 106,039 255,877
=================== ===================
$4,174,785 $1,722,889
=================== ===================
9
<PAGE>
<CAPTION>
September 30, December 31,
1998 1997
Amortized Amortized
Available for Sale Cost Cost
------------------- -------------------
US treasury securities & obligations
of US government corporation & agencies $3,925,556 $1,352,298
Mortgage backed securities 25,430 31,477
Other 470,050 395,200
------------------- -------------------
$4,421,036 $1,778,975
=================== ===================
<CAPTION>
Fair Fair
Value Value
------------------- -------------------
US treasury securities & obligations
of US government corporations & agencies $3,993,875 $1,355,054
Mortgage backed securities 26,867 33,523
Other 470,050 395,200
------------------- -------------------
$4,490,792 $1,783,777
=================== ===================
4. The consolidated entity's loan portfolio is composed of the following:
<CAPTION>
September 30, December 31,
1998 1997
------------------- -------------------
Commercial $32,466,758 $24,399,929
Real estate-mortgage 11,312,735 10,065,627
Real estate-construction 7,335,339 6,075,464
Installment loans to individuals 11,636,747 10,552,548
------------------- -------------------
$62,751,579 $51,093,568
Less: allowance for loan losses 719,651 576,497
------------------- -------------------
Loans, net $62,031,928 $50,517,071
=================== ===================
The company had non-accrual loans which were excluded from the impaired loan
disclosure under FASB 114 which amounted to $391,955 on September 30, 1998 and
$38,116 on December 31, 1997.
<CAPTION>
September 30, December 31,
5. Reserve for Loan Losses: 1998 1997
------------------- -------------------
Balance, beginning $576,497 $503,014
Provision charged to operating expense 170,000 133,000
Recoveries 22,520 27,823
Loan losses charged to the allowance (49,366) (87,340)
------------------- -------------------
Balance, ending $719,651 $576,497
=================== ===================
</TABLE>
10
<PAGE>
6. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement requires corporations to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This statement is not expected to have a
material impact on the Corporation's financial statements. This statement is
effective for fiscal years beginning after June 15, 1999, with earlier adoption
encouraged. The Corporation will adopt this accounting standard as required by
January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This SOP provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. This SOP requires that entities capitalize certain internal-use software
costs once certain criteria are met. This statement is not expected to have a
material impact on the Corporation's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which requires the costs of start-up activities and organization
costs to be expensed as incurred. This statement is effective for the fiscal
year 1999 financial statements. This statement is not expected to have a
material impact on the Corporation's financial statements.
Effective January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This statement
establishes standards for reporting and the display of comprehensive income and
its components (revenues, expenses, gains and losses) in full for general
purpose financial statements. Financial statements for prior periods have been
restated as required.
11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
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. The
Corporation is a holding company for the Bank and is not directly
engaged in the operation of any other business.
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.
Total Assets
------------
Total assets for the nine months ending September 30, 1998, increased
$22,844,118 or 35.2% since December 31, 1997. This increase in total
assets resulted from a $11,514,857 increase in net loans or 22.8%, an
increase in federal funds sold of $5,333,000 or 149.4%, and an
increase of
12
<PAGE>
$5,108,677 or 146.4% in securities. This equates to an increase in
earning assets of $21,956,514 or 38.1% in the nine months ending
September 30, 1998. The main components of the loan portfolio growth
was reflected in an increase of $8,066,829 or 33.1% in commercial
loans. Over half or 51.7% of the corporation's total loans are in the
commercial area. The remaining portfolio consists of real estate
loans, 29.7% and installment loans, 18.6%.
Over $5.5 million in securities were purchased which were comprised
entirely of United States Treasury notes and U. S. government
agencies. These purchases netted against the maturing of over
$500,000 of securities account for the increase in total securities.
Allowance for Loan Losses
-------------------------
The allowance for loan losses, as of September 30, 1998, was
$719,651. This is an increase of $143,154 or 24.8% since December 31,
1997. This gives the bank a 1.15% allowance for loan losses to total
loans. Management has completed an analysis on the reserve and feels
the reserve is adequate.
Liabilities
-----------
Total deposits for the nine months ending September 30, 1998,
increased $21,853,057 or 38.7% since December 31, 1997. Non-interest
bearing deposits increased by $3,193,754 or 40.0% and interest
bearing deposits increased by $18,659,303 or 38.5%. The ratio of
non-interest bearing deposits to total deposits remained constant at
14.3% as of September 30, 1998 as compared to 14.2% for the same
period of 1997.
13
<PAGE>
Stockholders' Equity
--------------------
Total equity has increased by $1,065,549 or 13.8% since December 31,
1997. The increase was due to a nine months profit of $975,596, the
exercise of stock options of $25,000, and an increase in unrealized
gains on securities available for sale of $64,953. The primary
capital to assets ratio is 9.9%. For the year ended on December 31,
1997, this ratio was 11.9%. The decline is due to the large growth
the bank has experienced over the nine months period.
Interest Income
---------------
Interest income totaled $5,046,798 for the nine months ending
September 30, 1998, $1,455,017 or 40.5% higher than the nine months
ending September 30, 1997. This is a direct result of the increase in
our earning assets, which increased the interest and fee income.
Interest Expense
----------------
Total interest expense for the nine months ending September 30, 1998
was $2,123,151, $741,027 or 53.6% higher than the nine months ending
September 30, 1997. Interest on deposits increased by $743,907 or
54.6% over the same period in 1997. This was the result of an overall
increase in deposits. Interest on capital leases for the quarter was
$15,678, $2,207 or 12.3% less than the same period in 1997.
Net Interest Income
-------------------
Net interest income for the nine months ending September 30, 1998 was
$2,923,647 $713,990 or 32.3% higher than the six months ending
September 30, 1997. This was the result of an increase in our earning
assets which more than offset the effects of a decline in the net
interest margin. For the period ending September 30, 1998, the net
interest margin was 5.69%, down from 5.94% for the nine months ended
September 30, 1997.
14
<PAGE>
Other Income
------------
Total other income for the nine months ending September 30, 1998 was
$590,192, $271,311 or 85.1% higher than the same period in 1997. This
partially is a result of a $45,000 recovery of a charged off deposit
account. In addition the bank experienced an increase in the demand
deposit area which has contributed $499,002 in service charges for
the first nine months of 1998. This is a 82.0% increase over the same
period of 1997.
Other Expenses
--------------
Total other expenses for the nine months ending September 30, 1998
were $2,374,897, $604,842 or 34.2% higher than the nine months ending
September 30, 1997. Salary expense increased $260,607 or 30.1%,
occupancy expense decreased $9,248 or 4.7%, furniture and equipment
expense increased by $193,332 or 229.1%, and stationery and supplies
expense increased by $19,848 or 36.2% over the same period in 1997.
Directors fees were $62,360, an increase of 19.3% due to a change in
the monthly meeting rates. Legal and professional fees increased
$25,920 or 68.7%, mainly as a result of legal fees incurred in the
recoveries of charged off accounts. The net increase in other
expenses is in part a result of staffing and furnishing for two
additional branches which opened late in 1997. The depreciation of
new equipment and the costs of maintenance contracts on the equipment
associated with the branch openings caused an increase in furniture
and equipment expense. The company also made a substantial investment
in computer and proof equipment to keep pace with the bank's growth.
15
<PAGE>
Net Income
----------
Net income for the nine months ending September 30, 1998 was
$975,596, compared to $763,217 in the same period in 1997. This is an
increase of $212,379 or 27.8% over the same period of 1997. Net
income for the third quarter of 1998 was $353,270, representing a
gain of $85,244 or 31.8% greater than the third quarter of 1997.
Liquidity and Capital Resources
-------------------------------
The liquidity position of the Bank is less than it peer's because of
a loan to deposit ratio of 80.2%. In order to maximize earning
assets, management has exceeded the bank's policy by maintaining a
higher ratio than that of it's peers'. This policy exception has been
approved by the Board of Directors. As the core deposits of of the
bank continue to increase, this ratio will become more in line with
that of the industry, as evidenced with the comparison of the loan to
deposit ratio of 90.4% as of December 31, 1997 and 85.1% as of June
30, 1998.
Year 2000 Related Issues
------------------------
Current Status:
As was reported in the 10-K report for year-end 1997, in accordance
with sound management policy and Federal Reserve directives, the bank
appointed a Year 2000 coordinator in early 1997. A review of computer
software and related hardware was initiated and completed. In
addition to information system issues, the Bank's plant and equipment
including heating and air conditioning systems, vaults, security
equipment, drive-in equipment, ATM's, and office equipment were
included in this review. Items that were not Year 2000 compliant were
identified. Third party software vendors and hardware maintenance
providers were contacted and submitted estimates to bring
non-compliant processes up to Year 2000 compatibility.
16
<PAGE>
Major functions to conduct business in a routine manner were
identified as: the ability to process the deposits and loan payments
made to existing accounts (also known as the items processing and/or
proof function), and the ability to maintain accurate customer
account information.
Upon the conclusion of this review it was determined that the most
significant and costly portion of the Year 2000 readiness (Y2K)
project would be the Bank's in-house computer system used to run the
core banking applications that maintain customer account information.
The Bank's core system is provided by BancTec Financial Systems and
is run on an NCR computer using a UNIX operating system. All three of
these components were found to be non Y2K compliant. The banking
application software, the hardware, and the operating system have
been replaced and the Bank's files were converted to the new computer
system in July of 1998. The new system has functioned without
problems (other than routine items) since that time. The Bank is in
the testing phase to insure that the system will operate without
difficulty as the date enters the year 2000 and beyond. A test data
base has been created on the system. This test data base is a
duplicate of the entire actual banking system data base as it existed
in July 1998, not just a sampling of selected accounts. The test data
base will be processed through the year 2000 and sampling will be
used to evaluate individual account results. It is anticipated that
this testing will be completed in November 1998. In addition, as a
primary banking application vendor BancTec Financial Systems was
subject to review by Federal Banking Regulators as well. The Bank's
core system will be ready. The Bank does not use a software package
to process new deposit accounts and the software to prepare new loan
documents has presented no difficulty in preparing loan
17
<PAGE>
documentation for loans that extend into the year 2000. The items
processing area (proof machine) has been reviewed and was found to be
Y2K compliant. No physical plant or security equipment issues have
been discovered. One of the ATM's required upgrading and this is
scheduled to occur in November 1998. Several PC's need to be
replaced. One will be taken out of service when the Bank's credit
card processor converts to a Y2K platform in November 1998. A second
computer is used to store reports on optical media. This system will
be upgraded in early 1999. A third computer is used to communicate
with our ATM processor, HONOR, and our correspondent bank, Community
Bankers Bank. This computer will be replaced before year-end 1998.
Transaction data received from other sources via telecommunications,
while important, is not material in that the volumes could be handled
by a manual process if required.
Costs:
Thus far the Bank has incurred approximately $160M in costs related
to the Y2K project. The majority of this expenditure has been to
replace the core application operating system described above.
Previously the Bank was leasing this system at a cost of $56M
annually. As a capitalized item, annual expense will actually go down
as a result of the lease cancellation. The operating system on the
LAN used for internal communications and other office applications
was upgraded as well and will be a capitalized expenditure. Both of
these systems would have been upgraded in the normal course of
business regardless of the Y2K project but may have been delayed
until 1999. Other directly expensed items attributable to the Y2K
project in 1998, are not material and are expected to total less than
$25M. The Y2K project will continue into 1999 and the overall impact
to income is not projected to exceed $50M.
18
<PAGE>
Risks:
Worst case risk scenarios related to Year 2000 have been categorized
in three areas: Technical problems related to sporadic or no electric
power and no telephone communications. Liquidity problems caused by
excessive withdrawals prior to the millennium change based upon
public perception of the Y2K problem or after the millennium change
based upon actual losses of individual depositors as a result of Y2K.
Capital depletion as a result of loan losses if individual borrowers
are unable to repay debt as agreed as a result of Y2K.
Contingency Plans:
The Bank has determined that the worst case scenarios cannot be
overcome without an insurmountable negative impact on 1999 earnings
and will not attempt to plan for backup power generation or telephone
service. However, regarding liquidity, the Bank plans to maintain a
more liquid balance sheet than usual during the last quarter of 1999,
specifically including more cash on hand, to allow for withdrawal
amounts in excess of normal volumes. This increased liquidity will
have a negative impact on earnings rates that will not be significant
based upon current estimates. While the Bank's customer base is very
diverse and industry concentrations are minimal, the Bank has started
and will continue a review of large deposit and loan relationships.
Selected customers have and will be polled regarding their Y2K
preparedness to help isolate potential problem relationships prior to
the third quarter of 1999. Due to the extensive testing of the core
computer system, the Bank does not plan to have contingency plans in
place to migrate to core software provided by another vendor or run
on the hardware of a different manufacturer. There are however,
computer processes within the Bank that can be accomplished via
manual methods for varying amounts of time. The Bank will investigate
the viability of accomplishing those task manually.
Y2K Loan Maintenance:
To date, the bank's focus relative to determining whether our major
loan customers are ready for Y2K has revolved around a questionnaire.
Each loan officer has been given a list of their customers who have
been identified as potential Y2K risks. The criteria for being named
19
<PAGE>
on the list included having a loan balance in excess of $100,000 and
being technologically dependent to the extent that any Y2K
noncompliance would materially affect the normal course of business.
The technological dependence "test" included a determination of
whether the loan customer's suppliers and/or customers were running
shops that were also technologically dependent.
Loan officers have been calling on their list of customers and
completing the questionnaire with the customer's assistance. This
procedure has helped the customer understand more completely the
risks to their business associated with Y2K and has helped the bank
determine which customers pose material risks to the banks earnings
relative to Y2K interruptions.
Earlier, all business customers were invited to attend a year 2000
seminar sponsored by the bank. Speakers familiar with the Y2K problem
conducted the meeting and highlighted the risks involved.
20
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 2. Change in Securities.
None.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information.
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2. Plan of acquisition, reorganization, arrangement,
liquidation or succession - N/A
3. (i) Articles of incorporation. Incorporated by reference
as Exhibit 3(i) to the Corporation's Registration
Statement on Form S-1 filed on August 26, 1992 (File No.
33-51366).
(ii) By-laws. Incorporated by reference as Exhibit 3(ii)
to the Corporation's Registration Statement on Form S-1
filed on August 26, 1992 (File No. 33-51366).
4. Instruments defining the rights of security holders,
including Indentures - N/A
21
<PAGE>
10. Material contracts
Exhibit 10.1 401(k) Plan of Marathon Financial Corporation,
incorporated herein by reference as Exhibit
10.1 to the Corporation's Registration
Statement on Form S-1 filed 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).
Exhibit 10.5 Lease between The Marathon Bank and the
lessor, H. K. Benham, III for the branch
office at 1447 North Frederick Pike,
Winchester, Virginia.
Exhibit 10.6 Lease between the Marathon Bank and the
Lessors, Keith R. Lantz and Mary G. Lantz for
land upon which the Bank has placed a
double-wide modular unit to house the branch
office at 1014 South Main Street, Woodstock,
Virginia, filed herein (File No. 0-18868).
Exhibit 10.7 1996 Long-Term Incentive Plan incorporated
herein by reference as to the Corporation's
Proxy Statement for 1997 Annual Meeting of
Stockholders filed April 7, 1997.
11. Statement re:Computation of Per Share Earnings - See attached
15. Letter re:unaudited interim financial information - N/A
18. Letter re:change in accounting principles - N/A
19. Report furnished to security holders - N/A
22
<PAGE>
22. Published report regarding matters submitted to vote of security
holders - N/A
23. Consents of experts and counsel - N/A
24. Power of attorney - N/A
27. Financial Data Schedule - See attached
99. Additional Exhibits - None
(b) Reports on Form 8-K - None
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARATHON FINANCIAL CORPORATION
DATE: September 30, 1998 /s/ Donald L. Unger
--------------------------------------
DONALD L. UNGER
PRINCIPAL EXECUTIVE OFFICER
DATE: September 30, 1998 /s/ Frederick A. Board
--------------------------------------
FREDERICK A. BOARD
PRINCIPAL FINANCIAL OFFICER
24
Exhibit 11
MARATHON FINANCIAL CORPORATION
Computation of Weighted Average Shares Outstanding and Earnings Per Share
Shares Outstanding End of Month - 3rd Quarter
1998 1997
---- ----
July 2,060,983 2,055,983
August 2,060,983 2,055,983
September 2,060,983 2,055,983
---------------- -------------------
6,182,949 6,167,949
Divided by: 3 months 3 months
-------- --------
2,060,983 2,055,983
================ ===================
Add Dilutive Shares 49,739 43,419
2,110,722 2,099,402
================ ===================
Net Income $353,270 $268,026
================ ===================
Net Income Per Share - Basic
and Assuming Dilution $0.17 $0.13
================ ===================
Shares Outstanding End of Month - Year-to-date:
1998 1997
---- ----
January 2,055,983 1,863,495
February 2,055,983 1,863,495
March 2,055,983 1,865,495
April 2,055,983 1,868,495
May 2,055,983 1,888,167
June 2,059,610 2,055,983
July 2,060,983 2,055,983
August 2,060,983 2,055,983
September 2,060,983 2,055,983
---------------- -------------------
18,522,474 17,573,079
Divided by 9 months 9 months
-------- --------
2,058,053 1,952,564
================ ===================
Add Dilutive Shares 55,249 30,927
2,113,302 1,983,491
================ ===================
Net Income $975,596 $763,217
================ ===================
Net Income Per Share-Basic $0.47 $0.39
================ ===================
Net Income Per Share-
Assuming Dilution $0.46 $0.38
================ ===================
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> $4,215,951
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,903,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,490,792
<INVESTMENTS-CARRYING> 4,108,574
<INVESTMENTS-MARKET> 4,174,785
<LOANS> 62,751,579
<ALLOWANCE> 719,651
<TOTAL-ASSETS> 87,670,160
<DEPOSITS> 78,288,278
<SHORT-TERM> 0
<LIABILITIES-OTHER> 352,073
<LONG-TERM> 252,846
2,060,983
0
<COMMON> 0
<OTHER-SE> 6,715,980
<TOTAL-LIABILITIES-AND-EQUITY> 87,670,160
<INTEREST-LOAN> 4,493,928
<INTEREST-INVEST> 241,505
<INTEREST-OTHER> 311,365
<INTEREST-TOTAL> 5,046,798
<INTEREST-DEPOSIT> 2,107,473
<INTEREST-EXPENSE> 2,123,151
<INTEREST-INCOME-NET> 2,923,647
<LOAN-LOSSES> 170,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,374,897
<INCOME-PRETAX> 968,942
<INCOME-PRE-EXTRAORDINARY> 968,942
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 975,596
<EPS-PRIMARY> 0.47
<EPS-DILUTED> 0.46
<YIELD-ACTUAL> 5.69
<LOANS-NON> 391,956
<LOANS-PAST> 184,092
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 576,497
<CHARGE-OFFS> (49,366)
<RECOVERIES> 22,520
<ALLOWANCE-CLOSE> 719,651
<ALLOWANCE-DOMESTIC> 719,651
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
