UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
FORM 10-QSB
Quarterly Report Pursuant of Section 13 or 15(d)
of the Securities Exchange Act of 1934
--------------------------
For the quarterly period ended:
September 30, 1999
Commission File No. 0-18868
MARATHON FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Virginia 54-1560968
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4095 Valley Pike, Winchester, Virginia 22602
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 869-6600
</TABLE>
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---------- -------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
<TABLE>
<CAPTION>
Class Number of Shares Outstanding at
------------ ---------------- --------------
<S> <C>
Common Stock 2,046,441 11/10/99
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
The following financial statements are provided at the page numbers
indicated.
<TABLE>
<S> <C>
Consolidated Statements of Condition as of
September 30, 1999 and December 31, 1998.....................................................................3
Consolidated Statements of Income for the Quarter and
the Nine Months Ended September 30, 1999 and 1998............................................................4
Consolidated Statements of Changes in
Stockholders Equity for the Nine Months
Ended September 30, 1999 and 1998............................................................................5
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1999 and 1998..............................................................6-7
Notes to Consolidated Financial Statements.................................................................8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................................11-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................................15
Item 6. Exhibits and Reports on Form 8-K..........................................................................15-16
Signature.............................................................................................................17
</TABLE>
2
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
AS OF
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS 9/30/99 12/31/98
--------- --------
<S> <C>
Cash and due from banks $ 6,011,399 $ 4,533,428
Federal funds sold 12,007,000 8,281,000
Securities (fair value: 1999, $10,543,565 and
1998, $10,002,374) 10,650,866 9,961,650
Loans held for resale 110 401,671
Loans, net 76,849,291 65,065,268
Bank premises and equipment, net 2,533,678 2,615,175
Accrued interest receivable 535,415 478,820
Other real estate 318,556 18,123
Other assets 544,461 496,534
------------ ------------
Total assets $109,450,776 $ 91,851,669
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 15,308,885 $ 10,680,285
Savings and interest bearing demand deposits 30,622,262 24,127,903
Time deposits 53,363,874 47,486,855
------------ ------------
Total deposits $ 99,295,021 $ 82,295,043
Interest expense payable 155,403 140,899
Accounts payable and accrued expenses 411,371 401,395
Capital lease payable 219,628 224,219
------------ ------------
Total liabilities $100,081,423 $ 83,061,556
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, Series A, 5% non-cumulative, no par
value: 1,000,000 shares authorized and unissued - - - - - - - -
Common stock, $1 par value, 20,000,000 shares
Authorized; 1999, 2,050,542 and 1998, 2,063,186 shares
issued and outstanding $ 2,050,542 $ 2,063,186
Capital surplus 7,773,032 7,849,522
Retained earnings (deficit) (362,518) (1,149,567)
Accumulated other comprehensive income (loss) (91,703) 26,972
------------ ------------
Total stockholders' equity $ 9,369,353 $ 8,790,113
------------ ------------
Total liabilities and stockholders' equity $109,450,776 $ 91,851,669
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Nine Months For the Quarter
Ended September 30, Ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
Interest income:
Interest and fees on loans $ 5,381,689 $ 4,493,928 $1,844,795 $1,589,055
Interest on securities held to maturity:
Interest taxable 190,961 116,786 65,569 51,810
Interest non-taxable 4,975 ---- 4,823 ----
Interest and dividends on securities available for sale:
Interest taxable 185,697 108,677 61,694 47,783
Interest non-taxable 10,773 ---- 4,721 ----
Dividends taxable 20,873 16,042 5,505 3,967
Interest on federal funds sold 345,615 311,365 175,090 142,654
----------- ----------- ---------- ----------
Total interest income $ 6,140,583 $ 5,046,798 $2,162,197 $1,835,269
----------- ----------- ---------- ----------
Interest expense:
Interest on deposits $ 2,567,666 $ 2,107,473 $ 914,322 $ 784,948
Interest on leases payable 13,426 15,678 4,413 4,947
----------- ----------- ---------- ----------
Total interest expense $ 2,581,092 $ 2,123,151 $ 918,735 $ 789,895
----------- ----------- ---------- ----------
Net interest income $ 3,559,491 $ 2,923,647 $1,243,462 $1,045,374
Provision for loan losses 175,000 170,000 60,000 60,000
----------- ----------- ---------- ----------
Net interest income after provision for loan loss $ 3,384,491 $ 2,753,647 $1,183,462 $ 985,374
----------- ----------- ---------- ----------
Other Income:
Service charges on deposit accounts $ 578,977 $ 499,002 $ 206,076 $ 192,191
Commissions and fees 22,495 23,958 8,502 8,277
Other 38,039 67,232 10,316 9,845
----------- ----------- ---------- ----------
Total other income $ 639,511 $ 590,192 $ 224,894 $ 210,313
----------- ----------- ---------- ----------
Other expenses:
Salaries and employee benefits $ 1,402,414 $ 1,125,779 $ 479,620 $ 381,833
Net occupancy expense of premises 163,514 187,977 54,290 65,052
Furniture and equipment 276,204 277,734 90,139 91,695
Legal and professional 47,506 63,632 10,799 13,389
Stationery and supplies 126,443 74,729 47,303 28,901
Postage 92,647 72,023 36,783 26,411
Marketing 61,786 55,593 22,884 21,354
FDIC assessment 9,756 5,084 5,075 ----
Directors' fees 61,150 62,360 16,550 19,200
ATM expenses 145,716 69,671 69,372 33,179
Overdraft charge-offs 66,850 48,415 8,306 27,158
Other operating expenses 374,023 331,900 136,046 109,462
----------- ----------- ---------- ----------
Total other expenses $ 2,828,009 $ 2,374,897 $ 977,167 $ 817,634
----------- ----------- ---------- ----------
Income before income taxes $ 1,195,993 $ 968,942 $ 431,189 $ 378,053
Provision for income tax expense (benefit) 408,943 (6,654) 142,688 24,783
----------- ----------- ---------- ----------
Net income $ 787,050 $ 975,596 $ 288,501 $ 353,270
=========== =========== ========== ==========
Net income per share, basic $ .38 $ .47 $ .14 $ .17
=========== =========== ========== ==========
Net income per share, assuming dilution $ .38 $ .46 $ .14 $ .17
=========== =========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Stockholders
Stock Surplus (Deficit) Income Income Equity
----- ------- --------- ------ ------ ------
<S> <C>
Balance, December 31, 1997 $2,055,983 $7,815,454 $(2,164,825) $ 4,802 $7,711,414
Comprehensive income:
Net income 975,596 $975,596 975,596
Other comprehensive income:
Unrealized (loss) on
securities available for sale 64,953 64,953 64,953
------
Total comprehensive income $1,040,549
==========
Issuance of common stock -
exercise of stock options
(5,000 shares) 5,000 20,000 25,000
-------- ---------- ---------- ----------- ---------
Balance, September 30, 1998 $2,060,983 $7,835,454 $(1,189,229) $ 69,755 $8,776,963
========== ========== ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Stockholders
Stock Surplus (Deficit) Income Income Equity
------ ------- --------- ------------- ------------- ------------
<S> <C>
Balance, December 31, 1998 $2,063,186 $7,849,522 $(1,149,568) $ 26,973 $8,790,113
Comprehensive income:
Net income 787,050 $787,050 787,050
Other comprehensive income:
unrealized (loss) on
securities available for sale
(net of tax $61,135) (118,676) (118,676) (118,676)
---------
Total comprehensive income $668,374
Issuance of common stock -
exercise of stock options
(500 shares) 500 2,000 2,500
Acquisition of common stock
(13,144 shares) (13,144) (78,490)
---------- --------- ---------- ------------ ------------
Balance, September 30, 1999 $2,050,542 $7,773,032 $ (362,518) $ (91,703) $9,369,353
========== ========== ========== ============ ============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
5
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 787,050 $ 975,596
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization 84,074 39,317
Depreciation 175,360 218,147
Net discount accretion on securities (8,517) (2,101)
Provision for loan loss 175,000 170,000
Deferred tax expense (benefit) 24,826 (21,159)
Gain on sale of other real estate ---- 5,968
Origination of loans available for sale (4,790,566) (5,177,917)
Proceeds from sale of loans available for sale 5,850,309 5,445,216
Changes in assets and liabilities:
(Increase) decrease in other assets (72,753) 45,523
(Increase) in accrued interest receivable (56,595) (118,068)
Increase (decrease) in accounts payable and accrued expenses 175,031 (76,538)
Increase in interest expense payable 14,504 28,340
---------- ----------
Net cash provided by operating activities $ 2,357,723 $ 1,532,324
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal
payments on securities held to maturity $ 1,104,571 $ 313,325
Proceeds from maturities on securities available for sale 378,310 250,244
Purchase of securities available for sale (666,920) (2,824,483)
Purchase of securities held to maturity (1,615,335) (2,780,690)
Net (increase) in loans (12,917,638) (11,952,156)
Purchase of bank premises and equipment (177,937) (318,763)
------------- -------------
Net cash used in investing activities $(13,894,949) $17,312,523)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts $11,122,959 $10,921,997
Net increase in certificates of deposits 5,877,019 10,931,061
Principal payments on capital lease payable (4,591) (26,290)
Cash dividends paid (165,055)
Proceeds from issuance of common stock 2,500 25,000
Purchase of common stock (91,634) ----
----------- -----------
Net cash provided by financing activities $16,741,198 $21,851,768
----------- -----------
Increase (decrease) in cash and cash equivalents $ 5,203,972 $ 6,071,569
CASH AND CASH EQUIVALENTS
Beginning 12,814,428 7,047,382
----------- -----------
Ending $18,018,400 $13,118,951
=========== ===========
6
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 2,566,587 $ 2,094,811
=========== ===========
Income taxes $ 237,516 $ 14,505
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Unrealized (loss) gain on securities available for sale $ (179,811) $ 64,953
========== =========
Other real estate acquired in settlement of loans $ (300,433) $ ----
========== =========
See Accompanying Notes to Consolidated Financial Statements
7
</TABLE>
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of September 30, 1999 and December 31, 1998, and the result of
operations and cash flows for the nine months ended September 30, 1999
and 1998. The statements should be read in conjunction with the Notes
to Financial Statements included in the Company's Annual Report for the
year ended December 31, 1998.
2. The results of operations for the nine month period ended September 30,
1999 and 1998 are not necessarily indicative of the results to be
expected for the full year.
3. Securities held to maturity and available for sale as of September 30,
1999 and December 31, 1998 are:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
Held to Maturity Amortized Cost Amortized Cost
---------------- -------------- --------------
<S> <C>
US treasury securities & obligations of
US government corporations & agencies $4,686,865 $4,899,237
Obligations of state and political
Subdivisions 825,448 100,840
---------- ----------
$5,512,313 $5,000,077
========== ==========
Fair Value Fair Value
---------- ----------
US treasury securities & obligations of
US government corporations & agencies $4,590,057 $4,936,539
Obligations of state and political
Subdivisions 814,955 104,262
---------- ----------
$5,405,012 $5,040,801
========== ==========
September 30, 1999 December 31, 1998
Available for Sale Amortized Cost Amortized Cost
------------------ ------------------ -----------------
US treasury securities & obligations of
US government corporations & agencies $4,116,667 $4,420,515
Mortgage backed securities 15,685 20,392
Obligations of state & political subdivisions 567,703 ----
Other securities 577,450 479,800
---------- ----------
$5,277,505 $4,920,707
========== ==========
Fair Value Fair Value
---------- ----------
US treasury securities & obligations of
US government corporations & agencies $4,000,159 $4,460,218
Mortgage backed securities 16,542 21,555
Obligations of state & Political 544,402 ----
subdivisions 577,450 479,800
---------- ----------
Other securities
$5,138,553 $4,961,573
========== ==========
</TABLE>
8
<PAGE>
4. The consolidated entity's loan portfolio is composed of the following:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
<S> <C>
Commercial $40,979,719 $35,388,441
Real estate-mortgage 13,364,875 10,771,332
Real estate-construction 11,755,599 7,873,781
Installment loans to individuals 11,492,123 11,786,311
----------- -----------
$77,592,316 $65,819,865
Less: allowance for loan losses 743,025 754,597
----------- -----------
Loans, net $76,849,291 $65,065,268
=========== ===========
The company had non-accrual loans, which were excluded from the
impaired loan disclosure under FASB 114, which amounted to $2,604 on
September 30, 1999 and $233,200 on December 31, 1998.
5. Reserve for Loan Losses:
September 30, 1999 December 31, 1998
------------------ -----------------
Balance, beginning $ 754,597 $ 576,497
Provision charged to operating expense 175,000 285,000
Recoveries 20,789 44,211
Loan losses charged to the allowance (207,361) (151,111)
--------- --------
Balance, ending $ 743,025 $ 754,597
========= ========
6. Weighted average shares outstanding computation
The following shows the weighted average number of shares used in
computing basic earnings per share and the effect on weighted average
number of shares of diluted potential common stock.
9/30/99 9/30/98
------- -------
Per Share Per Share
Shares Amount Shares Amount
Basic earnings per share 2,057,473 $ .38 2,058,053 $ .47
====== ======
Effect of dilutive securities:
Stock options 37,022 55,249
--------- ---------
Diluted earnings per share 2,094,495 $ .38 2,113,302 $ .46
========= ====== ========= ======
</TABLE>
7. New Accounting Pronouncements
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage 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 securitization 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 investment. 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.
9
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which was originally required to be adopted in years
beginning after June 15, 1999. Statement No. 137, issued in June 1999,
subsequently amended the effective date of Statement No. 133 to years
beginning after June 15, 2000. 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.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
-------
Marathon Financial Corporation ("the Corporation") is a bank holding
company that was incorporated under the laws of the Commonwealth of
Virginia in June 1989. The Corporation owns all of the outstanding
stock of its sole subsidiary, The Marathon Bank ("the Bank"), which was
incorporated in August 1987 and acquired by the Corporation in October
1990, in accordance with the Plan of Exchange approved by the
shareholders of the Bank in June 1990. The Corporation is headquartered
in Frederick County, Virginia. The Corporation is a holding company for
the Bank and is not directly engaged in the operation of any other
business.
The Bank is engaged in the business of offering banking services to the
general public. It offers checking accounts, savings and time deposits,
and commercial, real estate, personal, home improvement, automobile and
other installment and term loans. It also offers travelers checks, safe
deposit, collection, notary public and other customary bank services
(with the exception of trust services) to its customers. The three
principal types of loans made by the Bank are: (1) commercial and
industrial loans; (2) real estate loans; and (3) loans to individuals
for household, family and other consumer expenditures.
Total Assets
------------
Total assets for the first nine months ending September 30, 1999
increased $17,599,107 or 19.2% since December 31, 1998. This increase
in total assets resulted from a $11,784,023 or 18.1% increase in net
loans, an increase in federal funds sold of $3,726,000 or 45.0% and an
increase of $689,216 or 6.9% in securities. This equates to an addition
in earning assets of $15,785,285 or 18.7% in the nine months ending
September 30, 1999.
Allowance for Loan Losses
-------------------------
The allowance for loan losses, as of September 30, 1999, was $743,025.
This is a decrease of $11,572 or 1.5% since December 31, 1998. This
gives the bank a .96% allowance for loan losses to total loans.
Management has completed an analysis on the reserve and feels the
reserve is adequate.
11
<PAGE>
Liabilities
-----------
Total deposits for the nine months ending September 30, 1999, increased
$16,999,978 or 20.7% since December 31, 1998. Non-interest bearing
deposits increased by $4,628,600 or 43.3% and interest bearing deposits
increased by $12,371,378 or 17.3%. Non-interest bearing deposits
represented 15.4% of total deposits as of September 30, 1999 as
compared to 13.0% at 1998 year end. Savings and money market deposits
were 30.8% of total deposits at the 1999 third quarter mark, which was
an increase from 29.3% on December 31, 1998.
Stockholders' Equity
--------------------
Total equity has increased by $579,240 or 6.6% since December 31, 1998.
The increase was due in part to a profit for the nine months of
$787,050 and an increase in unrealized losses on securities available
for sale of $118,676 net of tax. In addition, during the first nine
months $2,500 of capital was raised through the exercise of stock
options equating to 500 additional shares of common stock and the
Corporation repurchased 13,144 shares of common stock for $91,634 under
the guidelines approved by the Board of Directors. The primary capital
to assets ratio is 8.6%.
Interest Income
---------------
Interest income totaled $6,140,583 for the nine months ending September
30, 1999, $1,093,785 or 21.7% higher than the nine months ending
September 30, 1998. This is a direct result of the increase in earning
assets, which increased the interest and fee income.
Interest Expense
----------------
Total interest expense for the nine months ending September 30, 1999
was $2,581,092, an increase of $457,941 or 21.6% over the nine months
ending September 30, 1998. Interest on deposits increased by $460,193
or 21.8% over the same period in 1998. This was the result of an
overall increase in deposits. Interest on capital leases for the
quarter was $13,426, $2,252 or 14.3% less than the same period in 1998.
Net Interest Income
-------------------
Net interest income for the nine months ending September 30, 1999 was
$3,559,491, $635,844 or 21.7% higher than the nine months ending
September 30, 1998. This was the result of an increase in our earning
assets. The average rate of the net interest margin has shown a steady
12
<PAGE>
decline due to a reduction in loan yields. The bank's net interest
income remains in the mid to upper 80 percentile range when compared
with its peer group.
Other Income
------------
Total other income for the nine months ending September 30, 1999 was
$639,511, $49,319 or 8.4% higher than the same period in 1998. This is
a result of a continued increase in the demand deposit accounts, which
has increased our service charge income.
Other Expenses
--------------
Total other expenses for the nine months ending September 30, 1999 were
$2,828,009, $453,112 or 19.1% higher than the nine months ending
September 30, 1998. Salary expense increased $276,635 or 24.6%, postage
expense increased $20,624 or 28.6%, furniture and equipment expense
decreased by $1,530 or .6%, ATM expense increased $76,045 or 109.1% and
stationery and supplies increased $51,714 or 69.2% over the same period
in 1998. Director's fees were $61,150, a decrease of 1.9%. Overdraft
charge-offs reflect an increase of $18,435 or 38.1% as a result of some
bad check returns and the purging of demand deposits accounts. Legal
and professional fees decreased $16,126 or 25.3%. The increase in
salary expense was in part a result of additional employees hired to
assist with the bank's increased growth. Postage and supplies were both
impacted by this growth. The large increase in ATM expense reflects a
conversion of the bank's ATM system to another provider.
Net Income
----------
Net income for the nine months ending September 30, 1999 was $787,050
compared to $975,596 in the same period in 1998. This is a decrease of
$188,546 or 19.3% over the same period of 1998. The reduction in net
income was the result of the Corporation having to recognize income tax
expense for the first time due to the elimination of net operating loss
carryforwards during 1999. The provision for income taxes expense
increased $415,597 from a $6,654 benefit in 1998 to an expense of
$408,943 in 1999.
Liquidity and Capital Resources
-------------------------------
The liquidity position of the bank is less than its peers because of a
loan to deposit ratio of 78.1%. In order to maximize earning assets,
management has carried a higher ratio than that of its peers. This
policy has been approved by the Board of Directors. As the core
deposits of the bank continue to increase, this ratio has become more
in line with that of the industry.
13
<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 borrower to address the Year 2000 issue could
have 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. A business resumption contingency plan has been tested
and is in place. To date, the Corporation has expended approximately
$220,000 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 likely worst-case scenario
would entail a diminishment of service levels, customer inconveniences,
financial losses, legal liability and similar risks.
14
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Change in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation or
succession - N/A
3. (i) Articles of Incorporation. Incorporated by reference as
Exhibit 3(i) to the Corporation's Registration Statement on
Form S-1 filed on August 26, 1992 (File No. 33-51366). (ii)
By-laws. Incorporated by reference as Exhibit 3(ii) to the
Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
4. Instruments defining the rights of security holders, including
indentures - N/A
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 16, 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).
15
<PAGE>
Exhibit 10.5 Lease between The Marathon Bank and Lessors,
Keith R. Lantz and Mary G. Lantz for land upon which the bank
has placed a double-wide modular unit to house the branch
office at 1014 South Main Street, Woodstock, Virginia, filed
herein (File No. 0-18868).
Exhibit 10.6 1996 Long-Term Incentive Plan incorporated herein
by reference as to the Corporation's Proxy Statement for 1997
Annual Meeting of Stockholders filed April 7, 1997.
11. Statement re computation of per share earnings
15. Letter re unaudited interim financial information - N/A
18. Letter re change in accounting principles - N/A
19. Report furnished to security holders - N/A
22. Published report regarding matters submitted to vote of security
holders - N/A
23. Consents of experts and counsel - N/A
24. Power of attorney - N/A
27. Financial Data Schedule - N/A
99. Additional Exhibits - None
(b) Reports on Form 8-K - None
16
<PAGE>
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARATHON FINANCIAL CORPORATION
DATE: September 30, 1999 /s/ Donald L. Unger
--------------------------------------
DONALD L. UNGER
PRINCIPAL EXECUTIVE OFFICER
DATE: September 30, 1999 /s/ Frederick A. Board
--------------------------------------
FREDERICK A. BOARD
PRINCIPAL FINANCIAL OFFICER
17
EXHIBIT 11
MARATHON FINANCIAL CORPORATION
Computation of Weighted Average Shares Outstanding and Earnings Per Share
Shares Outstanding End of Month - 3rd Quarter
1999 1998
---- ----
July 2,054,730 2,060,983
August 2,051,321 2,060,983
September 2,050,542 2,060,983
--------- ---------
6,156,593 6,182,949
Divided by: 3 months 3 months
----------- ----------
2,052,198 2,060,983
========= =========
Add Dilutive Shares 31,770 49,739
2,083,968 2,110,722
========= =========
Net Income $ 288,501 $353,270
========= =========
Net Income Per Share - Basic
and Assuming Dilution $ 0.14 $ 0.17
========= =========
Shares Outstanding End of Month - Year-to-date:
1999 1998
---- ----
January 2,063,605 2,055,983
February 2,063,365 2,055,983
March 2,060,686 2,055,983
April 2,060,686 2,055,983
May 2,057,137 2,055,983
June 2,055,186 2,059,610
July 2,054,730 2,060,983
August 2,051,321 2,060,983
September 2,050,542 2,060,983
--------- ---------
18,517,258 18,522,474
Divided by: 9 months 9 months
----------- ---------
2,057,473 2,058,053
========== =========
Add Dilutive Shares 37,022 55,249
2,094,495 2,113,302
=========== ==========
Net Income $787,050 $ 975,596
========== ==========
Net Income Per Share-
Basic $ 0.38 $ 0.47
========== ==========
Net Income Per Share -
Assuming Dilution $ 0.38 $ 0.46
========== ==========
18
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<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,011,399
<INT-BEARING-DEPOSITS> 32,719
<FED-FUNDS-SOLD> 12,007,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,138,553
<INVESTMENTS-CARRYING> 5,512,313
<INVESTMENTS-MARKET> 5,405,012
<LOANS> 76,849,291
<ALLOWANCE> 743,025
<TOTAL-ASSETS> 109,450,776
<DEPOSITS> 99,295,021
<SHORT-TERM> 0
<LIABILITIES-OTHER> 566,774
<LONG-TERM> 219,628
0
0
<COMMON> 2,050,542
<OTHER-SE> 7,318,811
<TOTAL-LIABILITIES-AND-EQUITY> 109,450,776
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<INTEREST-INVEST> 413,279
<INTEREST-OTHER> 345,615
<INTEREST-TOTAL> 6,140,583
<INTEREST-DEPOSIT> 2,567,666
<INTEREST-EXPENSE> 2,581,092
<INTEREST-INCOME-NET> 3,559,491
<LOAN-LOSSES> 175,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,828,009
<INCOME-PRETAX> 1,195,993
<INCOME-PRE-EXTRAORDINARY> 1,195,993
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 787,050
<EPS-BASIC> .38
<EPS-DILUTED> .38
<YIELD-ACTUAL> 5.20
<LOANS-NON> 2,604
<LOANS-PAST> 824,944
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<CHARGE-OFFS> (207,361)
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