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, 1998
-----------------
( ) 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: None
Securities registered under section 12(g) of the Exchange 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 [x]
Total revenues for the year ended December 31, 1998 were $7,694,677.
The aggregate market value of the voting stock held by non-affiliates of the
registrant was $15,197,559 as of March 22, 1999. The aggregate market value was
computed by using a market price of $7.375 per share.
As of March 22, 1999, the number of shares outstanding of the registrant's
common stock was 2,060,686.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders
("1998 Proxy Statement") are incorporated by reference in Part III of this Form
10-KSB.
1
<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. During 1997, The Marathon Bank opened two offices.
A branch located at 1447 North Frederick Pike, Winchester, Virginia was opened
on June 18, 1997 and a branch located at 1014 South Main Street, Woodstock,
Virginia was opened on September 22, 1997. 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, 1998, the Bank employed
61 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 by household, family, and other consumer expenditures. The Bank's
premises include drive-up facilities. There are ATM's located at each of our
offices and an additional five off-premise ATM's.
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 four 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 the commercial banks in this
service area 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.
2
<PAGE>
Recent Developments
- -------------------
During 1998, the bank occupied a new addition consisting of approximately
3,600 square feet to the main office. The addition increased the size of the
building by 50 percent enabling the bank to better serve the needs of a growing
customer base.
During 1998, the Board of Directors authorized management to repurchase
shares of the Corporation's common stock with the following stipulations: the
market price to book value must be 1.70% or below, and the maximum number of
shares purchased during a calendar year does not exceed 1.5% of outstanding
shares. Based on this criteria, the Corporation purchased 3,000 shares of common
stock during the first quarter of 1999.
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 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.
3
<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>
INDEX Page
----- ----
<S> <C> <C>
Table 1 Selected Financial Data 5
Table 2 Average Balance Sheets, Net Interest Income and Rates 6 and 7
Table 3 Changes in Net Interest Income Attributable to Rate and Volume 8
Table 4 Types of Investment Securities 9
Table 5 Securities Maturity Analysis 10
Table 6 Composition of the Loan Portfolio 11
Table 7 Maturity Schedule of Selected Loans 12
Table 8 Summary of Risk Elements 13
Table 9 Summary of Loan Loss Experience 14
Table 10 Allocation of the Reserve for Loan Losses 15
Table 11 Deposits and Rates 16
Table 12 Maturities of CDs in Excess of $100,000 17
Table 13 Analysis of Liquid Assets 18
Table 14 Minimum Capital Requirements 19
Table 15 Financial Ratios 20
Table 16 Short-Term Borrowings 21
Table 17 Interest Sensitivity Analysis 22
</TABLE>
4
<PAGE>
Table 1 - Selected 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>
For the Years Ended December 31,
------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
At Period End: (in thousands except per share data)
Loans-net of unearned income
and allowance for loan losses $65,467 $50,517 $37,409 $28,774 $22,618
Allowance for loan losses 755 576 503 393 299
Total assets 91,852 64,826 47,287 36,070 27,682
Deposits 82,295 56,435 40,725 32,622 24,604
Stockholders' equity 8,790 7,711 5,890 2,678 2,244
Income Summary:
Interest income $ 6,876 $ 4,882 $ 3,789 $ 2,940 $ 2,251
Interest expense 2,959 1,943 1,614 1,252 849
-------------- ------------- ------------- ------------- ------------
Net interest income $3,917 $2,939 $2,175 $1,688 $1,402
Provision for
loan losses 285 133 165 113 151
-------------- ------------- ------------- ------------- ------------
Net interest income after
provision for
loan losses $3,632 $2,806 $2,010 $1,575 $1,251
Other income 819 587 430 281 242
Other expenses 3,193 2,583 1,746 1,435 1,175
-------------- ------------- ------------- ------------- ------------
Income before income taxes $1,258 $810 $694 $421 $318
Income taxes (benefits) 78 (188) (145) -- --
-------------- ------------- ------------- ------------- ------------
Net income $1,180 $998 $839 $421 $318
============== ============= ============= ============= ============
Per Share Data: *
Book value at period ended 4.26 $3.75 $3.16 $2.05 $1.75
Net income , basic 0.57 .51 .58 .35 .30
Net income, assuming dilution 0.56 0.50 .58 .35 .30
Cash dividends declared 165,053 143,920 111,810 -- --
Average common shares outstanding 2,058,932 1,951,172 1,445,601 1,205,443 1,082,615
</TABLE>
* Changed to reflect stock dividend in 1996.
5
<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 1998 and 1997 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>
December 31, 1998 December 31, 1997
-------------------------------------------- --------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Assets Balances (1) Expense Rate Balances (1) Expense Rate
------ -------------- ------------- ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Interest Earning Assets:
Loans, net of unearned discounts(2) $58,269,578 $6,063,709 10.4% $42,875,769 $4,559,365 10.6%
Securities (3) 6,257,989 381,331 6.1% 2,996,467 193,445 6.5%
Federal funds sold 7,991,882 430,995 5.4% 2,428,532 129,844 5.3%
-------------- ------------- ------------- ------------
Total interest earning assets $72,519,449 $6,876,035 9.5% $48,300,768 $4,882,654 10.1%
------------- ------------
Non-Interest Earning Assets:
Cash and due from banks 4,364,755 3,139,921
Bank premises and equipment 2,591,083 2,051,763
Intangible assets 0 0
Other assets 1,263,018 672,261
Allowance for loan losses (656,014) (569,367)
-------------- -------------
Total assets $80,082,291 $53,595,346
============== =============
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
-------------------------------------------- --------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Liabilities and Stockholders' Equity Balances (1) Expense Rate Balances (1) Expense Rate
- ------------------------------------ -------------- ------------- ------------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Liabilities:
Interest-bearing deposits $61,155,144 $2,938,214 4.8% $39,478,773 $1,918,099 4.9%
Federal funds purchased 0 0 0.0% 13,340 673 5.0%
Capital lease payable 259,020 20,341 7.9% 298,727 24,637 8.2%
-------------- ------------- ------------- ------------
Total interest-bearing liabilities $61,414,164 $2,958,555 4.8% $39,790,840 $1,943,409 4.9%
------------- ------------
Non-Interest-Bearing Liabilities:
Liabilities:
Demand deposits 9,958,661 6,945,771
Other liabilities 296,639 199,905
-------------- -------------
Total liabilities 71,669,464 $46,936,516
Stockholders' equity 8,412,827 6,658,830
-------------- -------------
Total liabilities and stockholders' equity $80,082,291 $53,595,346
============== =============
Net Interest Earnings $3,917,480 $2,939,245
============= ============
Net Interest Yield on Earnings Assets 5.4% 6.1%
=========== ============
</TABLE>
(1) Average balances are calculated using daily balances for each category in
1997 & 1998.
(2) Non-accrual loans are included in the average balance of this category.
(3) The Corporation has no tax-free income.
7
<PAGE>
Table 3 - Changes in Net Interest Income Attributable to Rate & Volume
<TABLE>
<CAPTION>
December 31, December 31,
1998 vs. 1997 1997 vs. 1996
-------------------------------------------- --------------------------------------
Due to Change In Due to Change In
Interest Earned On: Volume Rate Total Volume Rate Total
------ ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
Loans $1,587,785 ($83,441) $1,504,344 $1,038,221 ($33,664) $1,004,557
Securities 199,145 (11,259) 187,886 58,161 4,271 62,432
Federal funds sold 298,691 2,460 301,151 26,238 26,238
-------------- ------------- ------------- ------------- ------------ ------------
Total interest earned on interest
bearing assets $2,085,621 ($92,240) $1,993,381 $1,122,620 ($29,393) $1,093,227
-------------- ------------- ------------- ------------- ------------ ------------
Interest Paid On:
Interest-bearing deposits $1,059,500 ($39,385) $1,020,115 $351,876 0 $351,876
Federal funds purchased (673) (673) 348 170 518
Capital lease payable (3,369) (927) (4,296) (15,431) (8,207) (23,638)
-------------- ------------- ------------- ------------- ------------ ------------
Total interest paid on interest-bearing
liabilities $1,055,458 ($40,312) $1,015,146 $336,793 ($8,037) $328,756
-------------- ------------- ------------- ------------- ------------ ------------
Net interest income $1,030,163 ($51,928) $978,235 $785,827 ($21,356) $764,471
============== ============= ============= ============= ============ ============
</TABLE>
8
<PAGE>
Table 4 - Types of Investment Securities
Table 4 summarizes the book value of securities for the two years ending
December 31, 1998 and 1997.
Table 4 - Book Value of Securities Available for Sale
-----------------------------------------------------
For the Years Ended
December 31,
-----------------------------
1998 1997
---- ----
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $4,460,218 $1,355,054
Mortgage-backed securities 21,555 33,523
Other securities 479,800 395,200
-------------- -------------
$4,961,573 $1,783,777
============== =============
Table 4 - Book Value of Securities Held to Maturity
---------------------------------------------------
For the Years Ended
December 31,
-----------------------------
1998 1997
---- ----
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $4,899,237 $1,452,899
Obligations of state and political
subdivisions 100,840 254,033
------------ -----------
$5,000,077 $1,706,932
============== ============
At December 31, 1998, the securities book value was $9,961,650 and the
market value was $10,002,374, compared to December 31, 1997 values of $3,490,709
and $3,506,666, respectively. As of December 31, 1998, 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.
9
<PAGE>
Table 5 - Securities Maturity Analysis
Table 5 sets forth the maturity of distribution and weighted average yields
of the securities portfolio at December 31, 1998. 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>
December 31, 1998
-----------------------------------------------------------
After One But
Within One Year Within Five Years
----------------------------- ----------------------------
Amount Yield Amount Yield
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $551,378 5.80% $5,132,386 5.63%
Obligations of State & political subdivisions 0 0.00% 100,840 7.10%
Mortgage-Backed Securities 0 0.00% 0 0.00%
Other Securities 0 0.00% 0 0.00%
-------------- ------------- ------------- -------------
Total $551,378 5.80% $5,233,226 5.64%
============== ============= ============= =============
<CAPTION>
December 31, 1998
-----------------------------------------------------------
After Five But
Within Ten Years After Ten Years
-----------------------------------------------------------
Amount Yield Amount Yield
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $3,675,690 6.02% 0 9.01%
Obligations of State & political subdivisions 0 0.00% 0 0.00%
Mortgage-Backed Securities 0 0.00% $21,555 0.00%
Other securities 0 0.00% 479,800 6.07%
-------------- ------------- ------------- -------------
Total $3,675,690 6.02% $501,355 6.19%
============== ============= ============= =============
</TABLE>
10
<PAGE>
Table 6 - Composition of the Loan Portfolio
The following table summarizes the composition of the loan portfolio at
December 31, 1998 and 1997.
December 31,
-------------------------------------------
1998 1997
---- ----
Commercial $35,388,441 $24,399,929
Real estate - mortgage 11,173,003 10,065,627
Real estate - construction 7,873,781 6,075,464
Installment loans to individuals 11,786,311 10,552,548
------------- -------------
$66,221,536 $51,093,568
Less allowance for loan losses 754,597 576,497
------------- -------------
Net loans $65,466,939 $50,517,071
============= =============
The Corporation had no loans outstanding to foreign countries or for highly
leveraged transactions as of December 31, 1998 or 1997.
There were no categories of loans that exceeded 10% of outstanding loans at
December 31, 1998, 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, 1998, commitments for
standby letters of credit totaled $851,449 and commitments to extend credit
totaled $8,909,000. At December 31, 1997, commitments for standby letters of
credit totaled $664,357 and commitments to extend credit totaled $7,193,712.
11
<PAGE>
Table 7 - Maturity Schedule of Selected Loans
The table below presents the maturities of selected loans outstanding at
December 31, 1998.
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Commercial $11,232,291 $21,552,107 $2,604,043 $35,388,441
Real estate - construction 5,741,878 1,238,556 893,347 7,873,781
-------------- ------------- ------------- -------------
$16,974,169 $22,790,663 $3,497,390 $43,262,222
============== ============= ============= =============
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Interest sensitivity on such loans
maturing after one year:
Fixed $24,699,604
Variable $1,588,449
-------------
Total $26,288,053
=============
</TABLE>
12
<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,
-------------
1998 1997
---- ----
Non-accrual loans $233,200 $38,116
Loans past due 90 days or more
and still accruing interest 191,977 172,855
Restructured loans -- --
------------- -------------
$425,177 $210,971
============= =============
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, 1998 were $233,200, compared to $38,116
for 1997. Approximately $15,681 of interest income would have been recorded if
interest had been accrued in 1998.
As of December 31, 1998, the Corporation had a total of $425,177 in
non-accrual, 90 days past due and still accruing interest, and restructured
loans, compared to $210,971 in 1997. This was an increase of $214,206 or
101.53%.
On December 31, 1998, the Corporation had $233,200 in non-accrual loans,
which consist of $39,014 in installment loans, $29,091 in commercial loans, and
$165,095 in mortgage loans. The $191,977 in 90 days past due and still accruing
interest consists of $31,010 in installment loans, and $135,338 in mortgage
loans, $24,500 in commercial loans, and $1,129 in check overline loans.
As of December 31, 1998, 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.
13
<PAGE>
Table 9 - Summary of Loan Loss Experience
1998 1997
---- ----
Balance, beginning of period $576,497 $503,014
Less Charge-off's:
Commercial 28,735 37,340
Real estate - mortgage 0 0
Real estate - construction 0 0
Installment loans to individuals 122,376 50,000
-------------- -------------
Total $151,111 $87,340
-------------- -------------
Plus Recoveries:
Commercial $11,925 $19,988
Real estate - mortgage 20,368 0
Real estate - construction 0 0
Installment loans to individuals 11,918 7,835
-------------- -------------
Total $44,211 $27,823
-------------- -------------
Additions charged to operating expense $285,000 $133,000
-------------- -------------
Balance, end of period $754,597 $576,497
============== =============
Ratio of net charge-offs during the period
to average loans outstanding during the
period 0.18% 0.14%
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 adequacy of the provision for loan losses is reviewed
periodically by management through 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, 1998
and 1997.
14
<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, 1998 and 1997.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
% of Loans to % of Loans to
Amount Total Loans Amount Total Loans
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $641,407 53.8% $490,022 49.2%
Real estate - mortgage 15,092 17.0% 11,530 20.3%
Real estate - construction 37,730 11.3% 28,825 9.2%
Installment loans to individuals 60,368 17.9% 46,120 21.3%
-------------- ------------- ------------- -------------
$754,597 100.0% $576,497 100.0%
============== ============= ============= =============
</TABLE>
15
<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, 1998 and 1997.
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
Average Average Average Average
Balance Rate Balance Rate
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Non-interest bearing:
Demand deposits $9,958,661 $6,945,771
-------------- -------------
Interest-bearing:
Demand deposits $13,868,025 3.3% $7,783,740 3.3%
Savings deposits 7,326,658 3.0% 5,272,418 3.3%
Time deposits 39,960,461 5.7% 26,422,615 5.6%
-------------- -------------
$61,155,144 4.8% $39,478,773 4.9%
-------------- -------------
$71,113,805 $46,424,544
============== =============
</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 deposits accounts. Deposit accounts, including checking,
savings, money market and certificates of deposit, are obtained primarily from
the communities which the Corporation services.
16
<PAGE>
Table 12 - Maturities of CDs and Other Time Deposits in Excess of $100,000
The following is a summary of the maturity distribution of certificates of
deposit and other time deposits in amounts of $100,000 or more as of December
31, 1998.
Amount Percent
------ -------
Three months or less $946,516 10.1%
Over three - six months 1,544,268 16.6%
Over six - twelve months 2,749,184 29.5%
Over twelve months 4,080,287 43.8%
-------------- -------------
Total $9,320,255 100.0%
============== =============
Certificates of deposit in amounts of $100,000 or more were $9,320,255 at
December 31, 1998. This represents 19.6% of the total certificates of deposit
balance of $47,486,855 at December 31, 1998. 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 a higher interest margin than its peers by matching loan
maturities with certificate maturities and setting loan rates based on the
Corporation's cost of funds.
17
<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, 1998 and 1997 is illustrated in the
table below:
December 31,
------------
1998 1997
-------------- -------------
Liquid Assets:
Cash and due from banks $4,533,428 $3,477,382
Federal funds sold 8,281,000 3,570,000
Liquid securities 4,631,730 2,836,674
-------------- -------------
Total liquid assets $17,446,158 $9,884,056
============== =============
Total deposits and other liabilities $83,061,556 $57,114,628
============== =============
Ratio of liquid assets to deposits
and other liabilities 21.0% 17.3%
============== =============
The high loan to deposit ratio (80.0%) as of December 31, 1998, has
provided the opportunity for the Corporation to achieve a high return on its
deposits. For the year ended December 31, 1998, the Corporation experienced a
return on assets of 1.47% and a net interest margin of 5.4%.
The source of new funds is very strong for both long-term and short-term
duration. The growth in deposits was $25.9 million 45.8% during 1998. The
Corporation also has access to overnight federal funds from correspondent banks
totaling up to $5.7 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.
18
<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.
December 31,
-----------------------------
1998 1997
---- ----
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 12.79% 14.97%
Total risk-based capital ratio 13.89% 16.09%
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, 1998 and December 31, 1997,
the Corporation met the Federal Reserve's minimum capital requirements.
19
<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, 1998 and 1997.
<TABLE>
<CAPTION>
For the Years Ending
December 31,
------------------------------
1998 1997
---- ----
<S> <C> <C>
Return on average assets
(Net income/average total assets) 1.47% 1.86%
========== =========
Return on average equity
(Net income/average equity) 14.03% 14.99%
========== =========
Dividends payment ratio
(Dividends declared /
Net income) 13.98% 14.42%
========== =========
Average equity to average asset ratio 10.51% 12.42%
========== =========
</TABLE>
20
<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, 1998 and 1997.
21
<PAGE>
<TABLE>
<CAPTION>
Table 17 - Interest Sensitivity Analysis
December 31, 1998
(In Thousands)
90 DAYS OVER
1 - 90 DAYS to 1 YEAR 1-5 YEARS 5 YEARS TOTAL
-------------- ------------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans $15,361 $8,251 $39,385 $2,470 $65,467
Investment Sec - HTM 250 0 3,648 1,102 $5,000
Investment Sec - AFS 150 151 1,586 3,075 $4,962
Fed Funds Sold 8,281 0 0 0 $8,281
-------------- ------------- ------------- ------------- ------------
Total Earning Assets $24,042 $8,402 $44,619 $6,647 $83,710
-------------- ------------- ------------- ------------- ------------
Interest-Bearing Liabilities:
Interest Checking 8,034 8,034
Regular Savings 8,276 8,276
Money Market Savings 7,818 7,818
Certificate of Deposit:
$100,000 and Over 947 4,293 4,080 9,320
$100,000 and Under 6,578 19,173 12,416 38,167
-------------- ------------- ------------- ------------- ------------
Total Interest-Bearing Liabilities $15,343 $23,466 $32,806 $0 $71,615
============== ============= ============= ============= ============
Period GAP $8,699 ($15,064) $11,813 $6,647
============== ============= ============= =============
Cumulative GAP $8,699 ($6,365) $5,448 $12,095
============== ============= ============= =============
Cumulative GAP/Earn Assets 10.39% (7.60%) 6.51% 14.45%
============== ============= ============= =============
</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 2.3% 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 2.9%. The current earning assets and deposit
structure of the Corporation suggest that these trends in changes in net
interest income would continue beyond 1999 given a rate change of this
magnitude.
22
<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.
On June 18, 1997, the Bank opened a second Winchester Branch at 1447 North
Frederick Pike, Winchester, Virginia. The Bank entered into a lease on January
13, 1997 with a termination date of December 31, 2006. The Bank has two
five-year options to extend the lease. The monthly lease payment is $1,750.
On September 22, 1997, the Bank opened its Shenandoah County Branch at 1014
South Main Street, Woodstock, Virginia. A new lease was executed by the Bank on
September 1, 1997, for five years with a monthly lease payment of $500 for the
first year, $700 per month for the second year, $800 per month for the third
year, $900 per month for the fourth year and $1,000 per month for the fifth
year. The bank has options to extend that lease for two five-year options.
On December 16, 1998, the Bank purchased a lot consisting of 1.033 acres
adjacent to the main office property located at 4095 Valley Pike, Winchester.
The Bank acquired the property to be used for additional parking and future
expansion.
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.
23
<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. 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. During 1997 warrants totaling 192,488
were exercised for the same number of shares of common stock at a price of $5.00
per share. For the year of 1997, the low bid price was $4.75 on January 3, and
the high bid price was $10.00 per share on December 8. During 1998 stock options
totaling 7,203 were exercised for an equal number of shares of common stock at
prices ranging from $5.00 to $8.1875 per share. For the year of 1998, the low
bid price for the stock was $6.50 on October 13 and the high bid price was $9.75
on January 8. This bid information reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
At December 31, 1998, the Corporation had approximately 1,020 stockholders
of record.
Under state law, without the consent of the Virginia Bureau of Financial
Institutions, the Corporation 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 $.08 per share cash dividend to stockholders of record as
of December 15, 1998 to be paid in January of 1999. Previously, cash dividends
of $.07 per share had been paid in January of 1998.
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, 1998,
1997 and 1996 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 Corporation experienced growth in both earnings and assets during1998.
The net income of $1,180,311 not only represented an increase of 18.2% over the
$998,362 in 1997, but it was the first time in the Corporation's history net
income exceeded the million-dollar plateau. Basic earnings per share were$.57 on
average shares outstanding as compared to $.51 and $.58 in 1997 and 1996
respectively. Assets totaled a record high of $91.9 million, up 41.7% from the
previous year-end. This growth was primarily due to a 29.6% increase in net
loans to $65.5 million balance at year-end. The funding of the $15.1 million
loan growth was more than offset by a 45.8% increase in deposits. The deposits
totaling $82.3 million at year-end consisted of a mix of 13% non-interest
bearing and 87% interest bearing
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 source
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 $6,876,035,$4,882,654, and $3,789,427 for the years
ending December 31, 1998, 1997 and 1996, respectively. This represents an
increase of $1,993,381 or 40.8% in 1998 and $1,093,227 or 28.8% in 1997.
Interest expense totaled $2,958,555, $1,943,409, and $1,614,653 for the years
ending December 31, 1998, 1997 and 1996, respectively. This is an increase of
$1,015,146 or 52.2% in 1998 and $328,756 or 20.4% in 1997.
24
<PAGE>
Net interest income, before provision for loan losses, was $3,917,480 for
the year ending December 31, 1998, up $978,235 or 33.3% over the $2,939,245
reported for the same period in 1997. In 1997, net interest income before
provision for loan losses, increased $764,471 or 35.2% from $2,174,774 in 1996.
The growth in net interest income is due mainly to the strong economy within the
Corporation's trade area. The demand for all types of loans is strong, with an
increase in the loan portfolio of $15.1 million for 1998. During 1998 commercial
loans grew to $35.4 million, an increase of $11.0 million or 45.0% over 1997
year-end balance of $24.4 million. Real estate construction loans increased to
$7.9 million, an increase of $1.8 million or 29.6% over the $6.1 million at the
end of 1997. Real estate mortgage loans and consumer loans grew at annual rates
of 11.0% and 11.7% respectively during 1998. The demand for loans has been
fueled by new businesses locating within the trade area. This growth has
resulted in the unemployment level falling to record lows and an increase in the
area's population, thereby creating a growing source of deposits. As of 1998
year-end, non-interest bearing-demand deposits had grown by 33.6% to $10.7
million, savings and interest-bearing demand deposits had increased by 49.3% to
$24.1 million and time deposits had shown a 47.1% growth to $47.4 million. The
deposit mix of $82.3 million was virtually unchanged from the previous year with
interest bearing deposits increasing by 1.2% to 87.0% of total deposits.
25
<PAGE>
The return on average assets was 1.47% as compared to 1.86% and 2.02% for
1997 and 1996 respectively. A narrowing of the net interest margin, which is
calculated by dividing the average earning assets into the net interest income,
is the underlying reason for the decrease in R.O.A. from 1997 to 1998. The net
interest margin for 1998 was 5.4%, a decline from 6.1% in 1997 and 5.8% in 1996.
The decrease in market rates is the primary reason for this decline. Return on
average equity was 14.03% as compared to 14.99% in 1997 and 23.19% in 1996. The
decrease in R.O.E. over the past two years is attributed to increases of 7,203
shares outstanding in 1998 due to the exercising of stock options and 192,488
shares in 1997 through the exercising of warrants.
An additional $285,000 was placed into the provision for loan losses in
1998, giving a year-end balance of $754,597 or 1.14% of total loans. In 1997,
the provision was $133,000 giving a year-end balance of $576,497 or 1.13% of
total loans. The net charge offs for loan losses in 1998 was $106,900, for a
ratio to average loans of .18%. In 1997, the Bank experienced $59,517 net
chargeoff for loan losses, which resulted in a .14% ratio to average
loans.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.
The Bank's non-interest income is derived chiefly from service charges on
deposit accounts and commisions and fees from Bank services. Non-interest income
totaled $818,642, $587,179, and $430,178 for the years ending December 31, 1998,
1997, and 1996, respectively. This represents an increase of $231,463 or 39.4%
in 1998 over 1997. The rate of growth in 1997 was 36.5%, based on non-interest
income of $430,178 received in 1996. This was the result of an increase in
service charge income and other income, due mainly to the increase in our demand
deposit accounts.
Non-interest expense consists of salaries and employee benefits, occupancy
expenses, furniture and equipment, and other operating expenses. Non-interest
expense totaled $3,193,215, $2,582,796 and $1,746,265 for the years ending
December 1998, 1997, and 1996, respectively. This represents an increase of
$610,419 or 23.6% in 1998 and an increase of $836,531 or 47.9% in 1997. The
additional expenses over the past two years were attributable in large part to
the opening of two new branches during the last seven months of 1997. Salaries,
depreciation, and occupancy expenses increased during the period as a result of
the additional costs required to operate these new offices. During 1998, there
was a further increase in costs over 1997 as a result of maintaining these two
offices for one complete year, rather than for a partial year. The Corporation
also experienced increases in salaries and other operating expenses because of
the additional staffing required to handle the growth in loans at all locations.
Net income for the years ending December 31, 1998, 1997 and 1996 was
$1,180,311, $998,362 and $839,421, respectively. This represents an increase of
$181,949 or 18.2% in 1998 over 1997 net income. The increase in net income for
1997 was $158,941 or 18.9% over 1996 net income.
26
<PAGE>
Income Tax
- ----------
Under the provisions of the Internal Revenue Code, the Corporation has
available approximately $514,833 in 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 predominantly upon the recognition of ordinary income during the
carryforward period. The Bank expects to use all of the tax loss carryforward
and will be in a taxable position in 1999.
Capital Adequacy
- ----------------
Total stockholders equity on December 31, 1998 was $8,790,113, an increase
of $1,078,699 or 14.0% from $7,711,414 in 1997. The Corporation's primary
capital-to-asset ratio was 9.6% in 1998 versus 11.9% in 1997. The bank depends
primarily upon earnings to maintain a strong capital base. During 1998,
earnings, less dividends of $0.08 per share of common stock totaling $165,053,
increased retained earnings by $1,015,258. An additional $41,271 of capital was
raised through the exercise of stock options equating to 7,203 additional shares
of common stock. These transactions reduced the retained earnings deficit of
$2,164,825 as of December 31, 1997 to a deficit of $1,149,567 at 1998 year-end.
Federal Reserve regulations require banks to maintain certain minimum
capital balances. The minimum requirements for total capital to risk weighted
assets is 8%, of which a minimum of 4% must be Tier 1 Capital. Tier 1 Capital
consists of common stock and surplus and retained earnings. The Corporation had
a total capital to risk-weighted assets ratio of 13.89% and a ratio of Tier 1
Capital to risk-weighted assets of 12.79% at December 31, 1998. These ratios
exceed the minimum ratios required by the regulatory authorities. As of December
31, 1997, these ratios were 16.09% and 14.97% respectively. The large percentage
growth that the Bank experienced during 1998 is the reason for the decline in
theses ratios.
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.
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.
27
<PAGE>
Year 2000 Issue
- ---------------
The Year 2000 issue involves the risk that computer programs and computer
systems may not be able to perform without interruption into the Year 2000. If
computer systems do not correctly recognize the date change from December 31,
1999 to January 1, 2000, computer applications that rely on the date field could
fail or create erroneous results. Such erroneous results could affect interest
payments or due dates and could cause the temporary inability to process
transactions and to engage in ordinary business activities. The failure of the
Corporation, its suppliers, and its borrowers to address the Year 2000 issue
could have a material adverse effect on the Corporation's financial condition,
results of operations,
or liquidity.
In 1997, the Corporation initiated a review and assessment of all hardware
and software. Based on this assessment, the Corporation's mainframe hardware and
banking software was replaced in 1998 to be Year 2000 compliant. However,
testing is required to confirm this. Testing began in the third quarter of 1998
and was completed in the first quarter of 1999. To date, the Corporation has
expended approximately $165,000 related to the assessment of and efforts in
connection with the Year 2000 issue. Remaining expenditures are not expected to
have a material effect on the Corporation's consolidated financial statements.
The Corporation has also initiated formal communications with significant
loan and deposit customers to determine the extent to which the Corporation is
vulnerable to those third parties' failure to remedy their own Year 2000 issue.
Although the Corporation has no reason to conclude that a failure will
occur, there can be no assurances that there will be no problems related to the
Year 2000. This is an unprecedented event. While it is impossible to quantify
the impact, the most reasonably likely worst-case scenario would entail
diminishment of service levels, customer inconveniences, financial losses, legal
liability and similar risks.
Contingency Plans
Simultaneous to the testing of its mission critical systems, the
Corporation will prepare alternate solutions through a business resumption
contingency plan to mitigate potential risks on January 1, 2000. This
contingency plan will be developed for all core business functions and their
supporting information technology systems and will include trigger dates for
implementation of alternative solutions. Core business risks will be prioritized
based upon greatest risk posted to the institution. The contingency plans will
identify financial and human resources necessary for their execution. In
addition, it will contain a buisness risk assessment that identifies potential
disruptions on the bank's operations, the minimum acceptable level of services,
the strategies and resources available to restore system or buisness operations,
and the processes and equipment needed for the institution to function at an
adequate level.
FDIC Insurance
First and foremost, the FDIC wants consumers to know that insured deposits
are safe, and that deposit insurance will not be affected by the century date
change. FDIC-insured deposits are completely safe. FDIC insurance is a constant,
a given, a guarantee you can literally bank on. If a bank was to experience Year
2000 problems and, in the worst case, was unable to operate, the FDIC will be
there to protect insured deposits, as it has been for all 65 years of the FDIC's
existence. No depositor has ever lost a cent of insured funds at an FDIC-insured
bank or savings institution.
Accounting Rule Changes
- -----------------------
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortage Loans
Held for Sale by a Mortgage Banking Enterprise, an amendment of FASB Statement
No. 65." FASB Statement NO. 65, as amended, requires that, after securitization
of a mortgage loan held for sale, an entity engaged in mortgage banking
activities classify the resulting mortgage-backed security as a trading
security. This Statement further amends Statement No. 65 to require that after
the securitizaton of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify the resulting mortgage-backed securities or other
retained interests based on its ability and intent to sell or hold those
investments. This Statement conforms the subsequent accounting for securities
retained after the securitization of mortgage loans by a mortgage banking
enterprise with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking enterprise.
This Statement is effective beginning in 1999. The effect of this Statement on
the Corporation's consolidated financial statements is not expected to be
material.
28
<PAGE>
In June, 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging Activities," which
is required to be adopted in years beginning after June 15, 1999. The Statement
permits early adoption as of the beginning of any fiscal quarter after its
issuance. The Bank has not determined whether to adopt the new statement early.
The Statement will require the Bank to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Because the Bank does not employ such derivative instruments, management
does not anticipate that the adoption of the new Statement will have any effect
on the Bank's earnings or financial position.
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.
29
<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 1999 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 1999 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 1999 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 section entitled "Nominees", "Continuing
Directors" and "Security Ownership of Certain Beneficial Owners" in the 1999
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 1999 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. Incorporation 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.
30
<PAGE>
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
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
Lessor, James Butcher 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
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, incorporated by reference herein by
reference to the Corporation's Annual Report
on Form 10-KSB for the year ended December 31,
1997 (File No. 0-18868).
11. Statement re: Computation of Per Share Earnings.
13. Annual Report to stockholders, filed herewith.
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.
31
<PAGE>
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,
1998 and 1997.
3. Consolidated Statement of Income - Years
Ended December 31, 1998, 1997 and 1996.
4. Consolidated Statements of Changes in
Stockholders' Equity-Years Ended December
31, 1998, 1997 and 1996.
5. Consolidated Statements of Cash Flows -
Years Ended December 31, 1998, 1997
and 1996.
6. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant during the
fourth quarter of 1998.
32
<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 undersig MARATHON FINANCIAL CORPORATION
------------------------------
(Registrant)
DATE By: /s/ Donald L. Unger
----------------------------------
Donald L. Unger, President
March 30, 1999
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 iSIGNATUREaANDiTITLEd on the date indicated.
DATE /s/ Walter H. Aikens
-------------------------------------------
Walter H. Aikens, Director
March 30, 1999
/s/ Frank H. Brumback
-------------------------------------------
Frank H. Brumback, Director
March 30, 1999
/s/ Robert W. Claytor
-------------------------------------------
Robert W. Claytor, Director
March 30, 1999
/s/ Clifton L. Good
-------------------------------------------
Clifton L. Good, Director
March 30, 1999
/s/ Thomas W. Grove
-------------------------------------------
Thomas W. Grove, Director
March 30, 1999
/s/ Ralph S. Gregory
-------------------------------------------
Ralph S. Gregory, Director
March 30, 1999
/s/ Joseph W. Hollis
-------------------------------------------
Joseph W. Hollis, Director
March 30, 1999
/s/ George R. Irvin, Jr.
-------------------------------------------
George R. Irvin, Jr., Director
March 30, 1999
/s/ Gerald H. Kidwell
-------------------------------------------
Gerald H. Kidwell, Director
March 30, 1999
/s/ Lewis W. Spangler
-------------------------------------------
Lewis W. Spangler, Director
March 30, 1999
/s/ Donald L. Unger
-------------------------------------------
Donald L. Unger, Principal Executive,
Financial, Accounting Officer
March 30, 1999
33
<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 Lessor,
James Butcher 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
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, Incorporated herein by
reference to the Corporation's Annual Report on Form
10-KSB for the year ended December 31, 1997. (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:*
34
EXHIBIT 11
MARATHON FINANCIAL CORPORATION
Computation of Weighted Shares Outstanding and Earnings Per Share
Weighted Shares Outstanding End of Month
----------------------------------------
1998 1997
---- ----
January 2,055,983 1,863,495
February 2,055,983 1,863,495
March 2,055,983 1,864,462
April 2,055,983 1,865,495
May 2,055,983 1,874,000
June 2,059,650 1,874,000
July 2,060,983 1,938,226
August 2,060,983 2,055,983
September 2,060,983 2,055,983
October 2,060,983 2,055,983
November 2,060,983 2,055,983
December 2,062,703 2,055,983
------------- -------------
24,707,183 23,423,088
Divided by 12 months 12 months
------------- -------------
Weighted Shares Outstanding $2,058,932 $1,951,924
============= =============
Net Income $1,180,311 $998,362
============= =============
Net Income Per Share, Basic $0.57 $0.51
============= =============
Net Income Per Share,
Assuming Dilution $0.56 $0.50
============= =============
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 4,533,428
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 8,281,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,961,573
<INVESTMENTS-CARRYING> 5,000,077
<INVESTMENTS-MARKET> 5,040,801
<LOANS> 65,819,865
<ALLOWANCE> 754,597
<TOTAL-ASSETS> 91,851,669
<DEPOSITS> 82,295,043
<SHORT-TERM> 0
<LIABILITIES-OTHER> 542,294
<LONG-TERM> 224,219
2,063,186
0
<COMMON> 0
<OTHER-SE> 6,726,927
<TOTAL-LIABILITIES-AND-EQUITY> 91,851,669
<INTEREST-LOAN> 6,063,709
<INTEREST-INVEST> 381,331
<INTEREST-OTHER> 430,995
<INTEREST-TOTAL> 6,876,035
<INTEREST-DEPOSIT> 2,938,214
<INTEREST-EXPENSE> 2,958,555
<INTEREST-INCOME-NET> 3,917,480
<LOAN-LOSSES> 285,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,193,215
<INCOME-PRETAX> 1,257,907
<INCOME-PRE-EXTRAORDINARY> 1,257,907
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,180,311
<EPS-PRIMARY> 0.57
<EPS-DILUTED> 0.56
<YIELD-ACTUAL> 5.40
<LOANS-NON> 233,200
<LOANS-PAST> 191,977
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 576,497
<CHARGE-OFFS> 151,111
<RECOVERIES> 44,211
<ALLOWANCE-CLOSE> 754,597
<ALLOWANCE-DOMESTIC> 754,597
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
Exhibit 99.1
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, 1998 and 1997, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1998, 1997 and 1996. These 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, 1998 and 1997, and the
results of their operations and their cash flows for the years ended December
31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 15, 1999
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1998 and 1997
Assets 1998 1997
---------- ------------
Cash and due from banks $4 533 428 $3 477 382
Federal funds sold 8 281 000 3 570 000
Securities (fair value: 1998, $10,002,374;
1997, $3,506,666) 9 961 650 3 490 709
Loans held for resale 401 671 1 502 438
Loans, net 65 065 268 49 014 633
Bank premises and equipment, net 2 615 175 2 499 374
Accrued interest receivable 478 820 285 837
Other real estate 18 123 448 123
Other assets 496 534 537 546
---------- ----------
$91 851 669 $64 826 042
=========== ===========
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $10 680 285 $7 992 135
Savings and interest-bearing demand deposits 24 127 903 16 161 931
Time deposits 47 486 855 32 281 155
---------- ----------
Total deposits $82 295 043 $56 435 221
Interest expense payable 140 899 104 753
Accounts payable and accrued expenses 401 395 295 518
Capital lease payable 224 219 279 136
Commitments and contingent liabilities -- --
---------- ----------
Total liabilities $83 061 556 $57 114 628
----------- ----------
Shareholders' Equity
Preferred stock, Series A, 5% noncumulative,
no par value; 1,000,000 shares authorized
and unissued $ -- $ --
Common stock, $1 par value; 20,000,000 shares
authorized; 1998, 2,063,186 shares issued
and outstanding; 1997, 2,055,983 shares
issued and outstanding 2 063 186 2 055 983
Capital surplus 7 849 522 7 815 454
Retained earnings (deficit) (1 149 567) (2 164 825)
Accumulated other comprehensive income 26 972 4 802
---------- ----------
Total shareholders' equity $ 8 790 113 $ 7 711 414
---------- ----------
$91 851 669 $64 826 042
=========== ===========
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------------- --------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans $6 063 709 $4 559 365 $3 554 808
Interest on investment securities, taxable 184 289 93 379 67 963
Interest and dividends on securities
available for sale:
Taxable 169 675 78 588 54 677
Dividends 27 367 21 478 8 373
Interest on federal funds sold 430 995 129 844 103 606
--------- ---------- ---------
Total interest income $6 876 035 $4 882 654 $3 789 427
---------- ---------- ----------
Interest expense:
Interest on deposits $2 938 214 $1 918 099 $1 566 223
Interest on mortgage payable -- -- 30 045
Interest on capital lease obligations 20 341 24 637 18 230
Interest on federal funds purchased -- 673 155
---------- ---------- ----------
Total interest expense $2 958 555 $1 943 409 $1 614 653
---------- ---------- ----------
Net interest income $3 917 480 $2 939 245 $2 174 774
Provision for loan losses 285 000 133 000 165 000
---------- ---------- -----------
Net interest income after
provision for loan losses $3 632 480 $2 806 245 $2 009 774
---------- ---------- ----------
Other income:
Service charges on deposit accounts $ 734 243 $ 459 695 $ 338 788
Commissions and fees 111 048 102 234 72 883
Gain (loss) on sale of other real estate (54 249) -- 8 498
Other 27 600 25 250 10 009
---------- ---------- ---------
Total other income $ 818 642 $ 587 179 $ 430 178
---------- ---------- ---------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------------- --------------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits $1 532 069 $1 213 499 $ 846 609
Net occupancy expense of premises 262 686 211 293 160 772
Furniture and equipment 382 340 263 105 102 575
Other 1 016 120 894 899 636 309
--------- ---------- ---------
Total other expenses $3 193 215 $2 582 796 $1 746 265
---------- ---------- ----------
Income before income taxes $1 257 907 $ 810 628 $ 693 687
Provision for income tax (benefit) 77 596 (187 734) (145 734)
---------- ---------- ----------
Net income $1 180 311 $ 998 362 $ 839 421
========== ========== =========
Earnings per share, basic $ .57 $ .51 $ .58
========== ========== =========
Earnings per share, assuming dilution $ .56 $ .50 $ .58
========== ========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Shareholders'
Stock Surplus (Deficit) Income Income Equity
----- ------- --------- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $ 1 306 303 $5 109 908 $ (3 746 878) $ 8 417 $ 2 677 750
Comprehensive income:
Net income -- -- 839 421 -- $ 839 421 839 421
Other comprehensive income,
unrealized (loss) on securities
available for sale -- -- -- (7 910) (7 910) (7 910)
---------
Total comprehensive income -- -- -- -- $ 831 511 --
=========
Dividends declared -- -- (111 810) -- (111 810)
Issuance of common stock - stock
offering (567,192 shares) 567 192 1 971 846 -- -- 2 539 038
Acquisition of common stock
(10,000 shares) (10 000) (36 252) -- -- (46 252)
--------- -------- ------- ------- ---------
Balance, December 31, 1996 $ 1 863 495 $7 045 502 $ (3 019 267) $ 507 $ 5 890 237
Comprehensive income:
Net income -- -- 998 362 -- $ 998 362 998 362
Other comprehensive income,
unrealized gain on securities
available for sale -- -- -- 4 295 4 295 4 295
--------
Total comprehensive income -- -- -- -- $1 002 657 --
=========
Dividends declared -- -- (143 920) -- (143 920)
Issuance of common stock -
warrants (192,488 shares) 192 488 769 952 -- -- 962 440
--------- ---------- --------- ------- -----------
Balance, December 31, 1997 $ 2 055 983 $7 815 454 $ (2 164 825) $ 4 802 7 711 414
Comprehensive income:
Net income -- -- 1 180 311 -- $1 180 311 1 180 311
Other comprehensive income,
unrealized gain on securities
available for sale (net of tax,
$13,894) -- -- -- 22 170 22 170 22 170
----------
Total comprehensive income -- -- -- -- $1 202 481 --
==========
Dividends declared -- -- (165 053) -- (165 053)
Issuance of common stock -
exercise of stock options
(7,203 shares) 7 203 34 068 -- -- 41 271
-------- ------- ------- ------- --------
Balance, December 31, 1998 $ 2 063 186 $7 849 522 $ (1 149 567) $ 26 972 $ 8 790 113
========= ========= =========== ====== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $1 180 311 $ 998 362 $ 839 421
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 52 878 41 846 40 581
Depreciation 302 869 198 156 103 815
Provision for loan losses 285 000 133 000 165 000
Writedown of other real estate -- -- 8 000
Deferred tax (benefit) 72 346 (200 000) (150 000)
Gain (loss) on sale of other real estate 54 249 -- (8 498)
Net amortization and accretion on securities 4 316 (13 317) (15 807)
Origination of loans available for sale (7 520 722) (5 992 149) (3 431 800)
Proceeds from sale of loans available for sale 8 621 489 4 773 003 3 517 254
Changes in assets and liabilities:
(Increase) in other assets (77 806) (125 826) (25 973)
(Increase) in accrued interest receivable (192 983) (73 748) (53 023)
Increase (decrease) in accounts payable
and accrued expenses 84 741 (10 491) 68 870
Increase in interest expense payable 36 146 22 989 21 613
--------- ---------- ---------
Net cash provided by (used in) operating
activities $2 902 834 $ (248 175) $ 1 079 453
--------- ---------- ----------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investment securities $ 403 000 $ 1 107 991 $ 568 892
Proceeds from maturities, calls and principal
payments of securities available for sale 361 404 503 397 205 004
Purchase of investment securities (3 698 262) (1 152 890) (1 280 095)
Purchase of securities available for sale (3 505 333) (600 386) (1 122 641)
Net (increase) in loans (16 335 635) (12 451 882) (8 885 477)
Purchase of equipment (438 969) (1 137 155) (194 815)
Proceeds from sale of other real estate 375 751 -- 218 498
---------- ---------- ----------
Net cash (used in) investing activities $22 838 044) $(13 730 925) $(10 490 634)
---------- ---------- ----------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $10 654 122 $ 6 889 140 $ 1 774 085
Net increase in certificates of deposit 15 205 700 8 820 794 6 329 038
Net proceeds from issuance of common stock 41 271 962 440 2 539 038
Acquisition of common stock -- -- (46 252)
Principal payments on capital lease obligations (54 917) (36 516) (32 036)
Principal payments on mortgage payable -- -- (507 134)
Payment of dividends (143 920) (111 810) --
---------- ---------- ----------
Net cash provided by financing activities $25 702 256 $ 16 524 048 $ 10 056 739
---------- ---------- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------------- --------------
<S> <C> <C> <C>
Increase in cash and
cash equivalents $ 5 767 046 $2 544 948 $ 645 558
Cash and Cash Equivalents
Beginning 7 047 382 4 502 434 3 856 876
--------- ---------- ---------
Ending $12 814 428 $7 047 382 $4 502 434
========== ========= =========
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 2 922 409 $1 920 420 $1 593 040
========== =========== ==========
Income taxes $ 17 595 $ 12 179 $ 4 153
========== ========== ==========
Supplemental Schedule of Noncash
Investing and Financing Activities:
Other real estate acquired in
settlement of loans $ -- $ 430 000 $ --
========= ========== =========
Property and equipment acquired
under capital lease obligations $ -- $ -- $ 238 088
========= =========== =========
Unrealized gain (loss) on securities
available for sale $ 36 064 $ 4 295 $ (7 910)
========= =========== =========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
Marathon Financial Corporation (the Corporation) and its subsidiary,
the Marathon Bank, 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 a separate component
of other comprehensive income, net of the deferred tax effect.
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, 1998 and 1997.
Loans Held for Sale
Loans held for sale are those loans the Corporation has the intent
to sell in the foreseeable future. They are carried at the lower of
aggregate cost or market value. Gains and losses on sales of loans
are recognized at settlement dates and are determined by the
difference between sales proceeds and the carrying value of the
loans. All sales are made without recourse.
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.
The Corporation has 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.
<PAGE>
Notes to Consolidated Financial Statements
The Corporation considers all consumer installment loans and
residential mortgage loans to be homogeneous loans. These loans are
not subject to impairment under FASB 114. A loan is considered
impaired when it is probable that the Corporation will be unable to
collect all principal and interest amounts according to the
contractual terms of the loan agreement. Factors involved in
determining impairment include, but are not limited to, expected
future cash flows, financial condition of the borrower, and current
economic conditions. A performing loan may be considered impaired,
if the factors above indicate a need for impairment. A loan on
nonaccrual status may not be impaired if in the process of
collection or there is an insignificant shortfall in payment. An
insignificant delay of less than 30 days or a shortfall of less
than 5% of the required principal and interest payment generally
does not indicate an impairment situation, if in management's
judgment the loan will be paid in full. Loans that meet the
regulatory definitions of doubtful or loss generally qualify as
impaired loans under FASB 114. Charge-offs for impaired loans occur
when the loan, or portion of the loan is determined to be
uncollectible, as is the case for all loans. The Corporation had no
loans subject to FASB 114 at December 31, 1998 and 1997.
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.
<PAGE>
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
In 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share
excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings
per share amounts for all periods have been presented, and where
appropriate, restated to conform to the Statement 128 requirements.
Comprehensive Income
As of January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the
Corporation's net income or shareholders' equity. SFAS No. 130
requires other comprehensive income to include the unrealized gains
or losses on available for sale securities, which prior to adoption
were reported separately in shareholders' equity. The financial
statements for previous periods have been reclassified to conform
to the requirements of SFAS No. 130.
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 carryforwards.
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.
<PAGE>
Notes to Consolidated Financial Statements
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. Advertising expenses incurred
for the years ended December 31, 1998, 1997 and 1996 were $39,952,
$75,870 and $60,155, respectively.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Note 2. Securities
The amortized cost and fair value of the securities available for sale
as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ------
1998
----------------------------------- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $4 420 515 $ 41 769 $ (2 066) $4 460 218
Mortgage-backed securities 20 392 1 163 -- 21 555
Other 479 800 -- -- 479 800
--------- ------- -------- ---------
$4 920 707 $ 42 932 $ (2 066) $4 961 573
========== ======== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ------
1997
--------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $1 352 298 $ 4 884 $ (2 128) $1 355 054
Mortgage-backed securities 31 477 2 046 -- 33 523
Other 395 200 -- -- 395 200
--------- -------- -------- ---------
$1 778 975 $ 6 930 $ (2 128) $1 783 777
========== ========= ========= ==========
</TABLE>
The amortized cost and fair value of the securities available for sale
as of December 31, 1998, 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.
Amortized Fair
Cost Value
--------- -----
Due in one year or less $ 299 794 $ 301 313
Due after one year through five years 1 563 724 1 585 343
Due after five years through ten years 2 556 997 2 573 562
Mortgage-backed securities 20 392 21 555
Other 479 800 479 800
--------- --------
$4 920 707 $4 961 573
========== =========
The amortized cost and fair value of securities being held to maturity
as of December 31, 1998 and 1997, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -------
1998
-------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S.
government corporations
and agencies $4 899 237 $ 39 376 $ (2 074) $4 936 539
Obligations of state and
political subdivisions 100 840 3 422 -- 104 262
--------- --------- -------- ---------
$5 000 077 $ 42 798 $ (2 074) $5 040 801
========== ========= ========= ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- -----
1997
----------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of U.S.
government corporations
and agencies $1 452 899 $ 14 254 $ (141) $1 467 012
Obligations of state and
political subdivisions 254 033 1 844 -- 255 877
--------- --------- -------- ---------
$1 706 932 $ 16 098 $ (141) $1 722 889
========== ========= ========= ==========
</TABLE>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1998, by contractual maturity, are shown
below.
Amortized Fair
Cost Value
--------- -----
Due in one year or less $ 250 067 $ 250 235
Due after one year through
five years 3 647 882 3 679 783
Due after five years through
ten years 1 102 128 1 110 783
--------- ---------
$ 5 000 077 $ 5 040 801
========= =========
Proceeds from maturities, calls and principal payments of securities
available for sale during 1998, 1997 and 1996 were $361,404, $503,397
and $205,004. There were no realized gains or realized losses
recognized on these transactions.
Proceeds from maturities, calls and principal payments of securities
being held to maturity during 1998, 1997 and 1996 were $403,000,
$1,107,991 and $568,892. There were no realized gains or realized
losses recognized on these transactions.
Securities having a book value of $847,910 and $646,873 at December 31,
1998 and 1997 were pledged to secure public deposits and for other
purposes required by law.
<PAGE>
Note 3. Loans and Related Party Transactions
The loan portfolio as of December 31, 1998 and 1997, is composed of the
following:
1998 1997
---------- ----------
Commercial $35 388 441 $24 399 929
Real estate - mortgage 11 173 003 10 065 627
Real estate - construction 7 472 110 4 573 026
Installment loans to individuals 11 786 311 10 552 548
----------- -----------
$65 819 865 $49 591 130
Less allowance for loan losses 754 597 576 497
----------- -----------
$65 065 268 $49 014 633
=========== ===========
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 shareholders (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 $2,090,201 and $1,831,322 at
December 31, 1998 and 1997, respectively. During 1998, total principal
additions were $1,290,364 and total principal payments were $1,031,485.
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
December 31,
1998 1997 1996
--------- ---------- ---------
Balance, beginning $ 576 497 $ 503 014 $393 139
Provision for loan losses 285 000 133 000 165 000
Recoveries 44 211 27 823 6 007
Loan losses charged to
the allowance (151 111) (87 340) (61 132)
----------- --------- --------
Balance, ending $ 754 597 $ 576 497 $503 014
=========== ========= ========
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $233,200 and $38,116 at December 31, 1998 and 1997,
respectively. If interest on these loans had been accrued, such income
would have approximated $15,681 and $8,519 for 1998 and 1997,
respectively.
<PAGE>
Notes to Consolidated Financial Statements
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment as of December 31, 1998 and 1997 consists
of the following:
1998 1997
------- ------
Bank premises $ 2 127 824 $ 1 869 457
Furniture and equipment 1 522 678 1 332 436
Capital leases - property
and equipment 255 604 389 135
----------- ------------
$3 906 106 $ 3 591 028
Less accumulated depreciation 1 290 931 1 091 654
----------- ------------
$2 615 175 $2 499 374
=========== ============
Depreciation and amortization included in operating expense for 1998,
1997 and 1996 was $323,168, $228,365 and $134,024, respectively.
Note 6. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was approximately $9,320,255 and $7,127,769
in 1998 and 1997, respectively.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
Years Ending December 31:
1999 $30 965 710
2000 5 367 115
2001 4 149 261
2002 2 279 714
2003 4 725 055
-----------
$47 486 855
===========
<PAGE>
Notes to Consolidated Financial Statements
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1998 and 1997:
1998 1997
--------- ---------
Deferred tax assets:
Net operating loss carryforward $187 705 $697 623
Writedown of other real estate 2 720 2 720
Other real estate expenditures 192 1 524
Nonaccrual interest 5 545 12 959
Allowance for loan losses 70 963 --
Alternative minimum tax credits 21 856 --
Less valuation allowance -- (338 889)
-------- ---------
$288 981 $375 937
-------- ---------
Deferred tax liabilities:
Allowance for loan losses $ -- $ 25 937
Depreciation 11 327 --
Securities available for sale 13 894 --
-------- --------
$ 25 221 $ 25 937
-------- --------
$263 760 $350 000
======== ========
The provision for income taxes charged to operations for the years
ended December 31, 1998, 1997 and 1996, consists of the following:
1998 1997 1996
-------- -------- ----------
Current tax expense $ 5 250 $ 12 266 $ 4 266
Deferred tax expense 411 235 278 740 239 191
Change in valuation allowance (338 889) (478 740) (389 191)
--------- --------- ---------
$ 77 596 $(187 734) $(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, 1998, 1997 and 1996, due to
the following:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- -------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 427 688 $ 275 614 $ 235 854
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance (338 889) (478 740) (389 191)
Other (11 203) 15 392 7 603
--------- -------- ---------
$ 77 596 $(187 734) $(145 734)
========= ========= =========
</TABLE>
Under the provisions of the Internal Revenue Code, the Corporation
has available approximately $514,833 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>
Note 8. Leases
Capital Leases
During 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%. Capital lease payable at December 31, 1998 in the amount
of $224,219 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
lease is considered to be a capital lease and has been so recorded.
The following is a schedule by years of the future minimum lease
payments under the capital lease together with the present value of
the net minimum lease payments as of December 31, 1998:
Years ending December 31:
1999 $ 23 898
2000 23 898
2001 23 898
2002 23 898
2003 23 898
Later years 296 731
---------
Total minimum lease payments $ 416 221
Less the amount representing interest 192 002
---------
Present value of net minimum
lease payments $ 224 219
==========
Lease Commitments and Total Rental Expense
During 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, 1998 under this lease is $387,630.
<PAGE>
During 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, 1998 under this lease is $15,000.
During 1997, the Corporation entered into a ten-year operating lease
for the rental of a branch location. The lease expires on December
31, 2006 and has two five-year renewal options. The lease provides
that the Corporation pay all property taxes, insurance and
maintenance plus rental payments for the initial lease period
commencing on January 13, 1997. The total minimum lease commitments
at December 31, 1998 under this lease is $248,631.
During 1997, the Corporation entered into a five-year operating lease
for the rental of a branch location. The lease expires on August 31,
2002 and has two five-year renewal options. The lease provides that
the Corporation pay all property taxes, insurance and maintenance
plus rental payments for the initial lease period commencing on
September 1, 1997. The total minimum lease commitments at December
31, 1998 under this lease is $38,000.
The total minimum lease commitment for these operating leases is due
as follows:
1999 $ 70 056
2000 65 256
2001 63 456
2002 61 006
2003 53 774
Later years 375 713
----------
$ 689 261
==========
Total rental expense was $68,556, $56,933 and $29,823 for the years
ended December 31, 1998, 1997 and 1996, respectively.
Fixed Equipment on Land Leased with Related Parties
Fixed equipment with a depreciated cost at December 31, 1998 of
$15,874 is located on land leased from a partnership of which the
Corporation's president is a partner. The lease expires on May 31,
2016.
<PAGE>
Notes to Consolidated Financial Statements
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.
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, 1998 and 1997, the
aggregate amounts of daily average required balances were approximately
$394,000 and $156,000, respectively.
The Corporation is conducting a comprehensive review of its computer
systems to identify the systems that could be affected by the Year 2000
Issue, and is developing a remediation plan to resolve the Issue. The
Issue is whether computer systems will properly recognize
date-sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous
data or cause a system to fail. The Corporation is heavily dependent on
computer processing in the conduct of its business activities. Failure
of these systems could have a significant impact on the Corporation's
operations.
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, 1998, 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 1998, 1997 and 1996. 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.
On January 7, 1998, the Board of Directors declared a cash dividend of
$.07 per share payable January 26, 1998 to shareholders of record
January 17, 1998. On December 15, 1998, the Board of Directors declared
a cash dividend of $.08 per share payable January 29, 1999 to
shareholders of record December 31, 1998.
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, 1998, no unrestricted funds could be transferred from the banking
subsidiary to the parent corporation, without prior regulatory
approval.
<PAGE>
Notes to Consolidated Financial Statements
Note 11. Other Expenses
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Telephone $ 84 232 $ 48 709 $ 33 257
Marketing 39 952 75 870 60 155
Stationery and supplies 102 716 73 722 52 208
Postage 92 296 59 392 49 010
Directors fees 83 250 69 315 45 450
ATM expense 87 525 56 800 37 048
Forgery loss -- 59 870 --
Other (includes no items in excess
of 1% of total revenue) 526 149 451 221 359 181
---------- --------- ---------
$1 016 120 $ 894 899 $ 636 309
========== ========== ==========
</TABLE>
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, 1998 and 1997 is
as follows:
1998 1997
---------- ----------
(Thousands)
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $ 8 909 $ 7 194
Standby letters of credit 851 664
<PAGE>
Notes to Consolidated Financial Statements
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, 1998, varies from 0 percent to 100
percent; the average amount collateralized is 79 percent.
The Corporation has cash accounts in other commercial banks. The amount
on deposit at one of these banks at December 31, 1998 exceeded the
insurance limits of the Federal Deposit Insurance Corporation by
approximately $1,063,609.
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,
1998, 1997 and 1996 were $19,500, $15,880 and $12,173.
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, fair values are based on quoted market prices or
dealer quotes.
<PAGE>
Notes to Consolidated Financial Statements
Loans Held for Sale
Fair values are based on quoted market prices of similar loans sold
on the secondary market.
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.
Capital Lease Payable
The fair values of the Corporation's long-term borrowings (other
than deposits) are estimated using discounted cash flow analyses,
based on the Corporation's current incremental borrowing rates for
similar types of borrowing arrangements.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter similar agreements, taking into
account the remaining terms of the agreements and the present
credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At December 31, 1998 and 1997, the difference between the carrying
amounts and fair values of loan commitments and stand-by letters of
credit were immaterial.
<PAGE>
Notes to Consolidated Financial Statements
The estimated fair values of the Corporation's financial
instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ --------- ----------- ---------
(Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term
investments $ 12 814 $ 12 814 $ 7 047 $ 7 047
Securities 9 962 10 002 3 491 3 507
Loans held for resale 402 402 1 502 1 502
Loans 65 065 68 265 49 015 49 529
-------- -------- -------- ---------
Total financial assets $ 88 243 $ 91 483 $ 61 055 $ 61 585
========= ======== ======== =========
Financial liabilities:
Deposits $ 82 295 $ 83 935 $ 56 435 $ 56 867
Long-term debt 224 247 279 327
-------- -------- -------- ----------
Total financial
liabilities $ 82 519 $ 84 182 $ 56 714 $ 57 194
======== ======== ======== ==========
</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 off-balance-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,
1998, that the Corporation meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, 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.
<PAGE>
The Corporation's actual capital amounts and ratios are also presented
in the table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------- ------------------ -------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------ ------- ------- -------- -------
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1998:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 9 518 13.89% =>$ 5 481 =>8.00% N/A
Marathon Bank $ 8 787 12.84% =>$ 5 476 =>8.00% =>$ 6 845 =>10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 8 763 12.79% =>$ 2 740 =>4.00% N/A
Marathon Bank $ 8 032 11.73% =>$ 2 738 =>4.00% =>$ 4 107 => 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 8 763 9.63% =>$ 3 640 =>4.00% N/A
Marathon Bank $ 8 032 8.90% =>$ 3 610 =>4.00% =>$ 4 512 => 5.00%
As of December 31, 1997:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 8 283 16.09% =>$ 4 117 =>8.00% N/A
Marathon Bank $ 7 455 14.50% =>$ 4 112 =>8.00% =>$ 5 140 =>10.00%
Tier 1 Capital
(to Risk
Weighted Assets)
Consolidated $ 7 707 14.97% =>$ 2 059 =>4.00% N/A
Marathon Bank $ 6 879 13.38% =>$ 2 056 =>4.00% =>$ 3 084 => 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 7 707 12.68% =>$ 2 431 =>4.00% N/A
Marathon Bank $ 6 879 11.49% =>$ 2 394 =>4.00% =>$ 2 993 => 5.00%
</TABLE>
<PAGE>
Note 16. Stock Option Plans
In 1997, the shareholders approved the 1996 Long-Term Incentive Plan.
The plan allows for incentive stock options and nonqualified stock
options to be granted with an exercise price to be not less than 100%
of the Fair Market Value of the Stock on the day the stock option is
granted. 350,000 shares of the Corporation's Common Stock have been
reserved for the issuance of stock options under the Incentive Plan.
In 1997, the Board granted 42,078 options to key employees of the
Corporation at $5.12 (weighted average exercise price). Of the 42,078
options, a total of 18,875 were vested as of December 31, 1998. The
remaining options will vest at 5,250 per year on September 17 for the
next four years. Directors also received options to purchase 100,000
shares at $5.00, of which 54,000 shares were vested as of December 31,
1998 with the remaining options vesting 10,000 per year on September
17 for the next four years. The options expire September 16, 2006.
In 1998, the Board granted 5,000 options to key employees of the
Corporation at $7.25. Of the 5,000 options, a total of 2,000 were
vested as of December 31, 1998. The remaining options will vest at
1,000 per year on September 1 for the next three years. The options
expire August 31, 2008.
Under the Employee and Director Plans, in no event may the shares for
which awards may be granted under the plan exceed 10% of the issued
and outstanding shares of Common Stock of the Corporation at any time.
The fair value of each employee-related grant is estimated at the
grant date using the Black-Scholes option-pricing model. The estimates
were calculated using the following weighted-average assumptions for
grants in 1998 and 1997: Dividend rate of .12% and .16%, price
volatility of 20.65% and 35.00%, risk-free interest rate of 4.50% and
5.00%, respectively, and expected lives of 5 years.
The Corporation applies APB Opinion 25 in accounting for its stock
option plans. Accordingly, no compensation expense has been recognized
for 1998 or 1997. Had compensation cost been determined on the basis
of fair value pursuant to FASB Statement No. 123, net income and
earnings per share would have been as follows:
1998 1997
---------- -----------
Net income
As reported $1 180 311 $ 998 362
========== =========
Proforma $1 166 453 $ 970 561
========== =========
Basic earnings per share
As reported $ .57 $ .51
========== =========
Proforma $ .57 $ .50
========== =========
Diluted earnings per share
As reported $ .56 $ .50
========== =========
Proforma $ .55 $ .48
========== =========
<PAGE>
Changes in the incentive stock options outstanding are summarized as
follows:
<TABLE>
<CAPTION>
Long-Term Long-Term
Incentive Plan - Incentive Plan -
Employee Director
------------------- --------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
------ -------- ------ ---------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 -- $ -- -- $ --
Granted during 1997 42 078 5.12 100 000 5.00
Exercised during 1997 -- -- -- --
Forfeited during 1997 -- -- -- --
----- -------
Outstanding at January 1, 1998 42 078 5.12 100 000 5.00
Granted during 1998 5 000 7.25 -- --
Exercised during 1998 (2 203) 7.39 (5 000) 5.00
Forfeited during 1998 -- -- (5 000) 5.00
----- -------
Outstanding at December 31, 1998 44 875 5.25 90 000 5.00
====== =======
Options exercisable at December 31,
1998 20 875 54 000
====== =======
Weighted average fair value of
options granted during 1998 $ 2.02 $ --
====== =======
Weighted average fair value of
options granted during 1997 $ 1.97 $ 1.94
====== =======
</TABLE>
The status of the options outstanding at December 31, 1998 is as
follows:
Remaining
Exercise Contractual
Price Number Life in Years
--------- ------ -------------
$ 5.00 129 875 7.75
7.25 5 000 9.75
Note 17. 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 entitled the holder to purchase one share
of common stock at a price of $5.00 per share until June 30, 1997.
During 1997, 192,488 warrants were exercised. The remaining 8,200
warrants expired.
<PAGE>
Note 18. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of diluted potential common stock. Potential dilutive common
stock had no effect on income available to common shareholders.
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------ --------------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
---------- ------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share 2 058 932 $ .57 1 951 172 $ .51 1 442 478 $ .58
======= ====== ========
Effect of dilutive
securities:
Stock options 53 077 45 421 --
Warrants -- 19 560 --
--------- --------- ------------
Diluted earnings
per share 2 112 009 $ .56 2 016 153 $ .50 1 442 478 $ .58
============ ======= ============ ====== ============ ==========
</TABLE>
Warrants and options of 200,688 were not included in computing diluted
EPS for 1996 because their effects were antidilutive.
Note 19. 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>
Note 20. Parent Corporation Only Financial Statements
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Assets
Cash on deposit with subsidiary bank $ 130 241 $ 53 207
Securities 761 344 906 894
Accrued interest receivable 14 545 14 546
Investment in capital stock of subsidiary 8 052 263 6 880 687
----------- ----------
Total assets $ 8 958 393 $7 855 334
=========== ==========
Liabilities
Deferred income taxes payable $ 3 225 $ --
Dividends payable 165 055 143 920
----------- ------------
$ 168 280 $ 143 920
---------- -----------
Shareholders' Equity
Preferred stock $ -- $ --
Common stock 2 063 186 2 055 983
Capital surplus 7 849 522 7 815 454
Retained earnings (deficit) (1 149 567) (2 164 825)
Accumulated other comprehensive income 26 972 4 802
----------- -----------
Total shareholders' equity $ 8 790 113 $7 711 414
----------- -----------
Total liabilities and shareholders' equity $ 8 958 393 $7 855 334
=========== ===========
</TABLE>
<PAGE>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
----------- ------------ -----------
<S> <C> <C> <C>
Income
Interest on investment securities,
taxable $ 14 447 $ 5 945 $ --
Interest on securities available
for sale, taxable 31 647 8 625 --
Miscellaneous -- -- 6 000
---------- ---------- -----------
Total income $ 46 094 $ 14 570 $ 6 000
----------- ---------- ------------
Expenses, other $ 18 607 $ 11 927 $ 1 248
----------- ---------- ------------
Income before undistributed
income of subsidiary $ 27 487 $ 2 643 $ 4 752
Undistributed income of
subsidiary 1 152 824 995 719 834 669
------------- ---------- -------------
Net income $ 1 180 311 $ 998 362 $ 839 421
============ =========== =============
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 1 180 311 $ 998 362 $ 839 421
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of securities discounts, net 2 195 -- --
Undistributed income of subsidiary (1 152 824) (995 719) (834 669)
Decrease in prepaid expenses -- 283 295
(Increase) decrease in accrued interest receivable 1 (14 545) --
(Decrease) in accounts payable -- (1 363) (3 322)
Net cash provided by (used in)
operating activities $ 29 683 $ (12 982) $ 1 725
---------- --------- ----------
Cash Flows from Investing Activities
Proceeds from maturities of investment securities $ 150 000 $ -- $ --
Purchase of investment securities -- (401 490) --
Purchase of securities available for sale -- (502 561) --
----------- --------- -----------
Net cash provided by (used in)
investing activities $ 150 000 $(904 051) $ --
----------- --------- -----------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock $ 41 271 $ 962 440 $ 2 539 038
Acquisition of common stock -- -- (46 252)
Transfer of capital to subsidiary -- -- (2 375
271)
Payment of dividends (143 920) (111 810) --
--------- ---------- ----------
Net cash provided by (used in)
financing activities $ (102 649) $ 850 630 $ 117 515
--------- ---------- ----------
Increase (decrease) in cash
and cash equivalents $ 77 034 $ (66 403) $ 119 240
Cash and Cash Equivalents
Beginning 53 207 119 610 370
-------- --------- ---------
Ending $ 130 241 $ 53 207 $ 119 610
=========== ========== =========
Supplemental Schedule of Noncash
Investing and Financing Activities,
unrealized gain (loss) on securities
available for sale $ 36 064 $ 4 295 $ (7 910)
=========== ======== =========
</TABLE>
