<PAGE>
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, 1999.
-------------------------------------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (NO FEE REQUIRED)
For the transition 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 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, 1999 were $9,175,041
The aggregate market value of the voting stock held by
non-affiliates of the registrant was $11,544,484 as of March 15,
2000. The aggregate market value was computed by using a market
price of $5.6275 per share.
As of March 15, 2000, the number of shares outstanding of the registrant's
common stock was 2,051,441.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of the 1999 Annual Meeting of
Stockholders ("1999 Proxy Statement") are incorporated by reference
in Part III of this Form 10-KSB.
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 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, 1999, the Bank employed 64
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, discount brokerage service, 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 four 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. 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.
<PAGE>
Recent Developments
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 17,245 shares of common stock
during 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 Compamy 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 provision 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 Commission (the
"FDIC"). Deposits, reserves, investments, 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.
<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>
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 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>
<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,
----------------------------------------------------------------------------
At Period End: 1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C>
(in thousands except per share Data)
Loans-net of unearned income
and allowance for loan losses $ 74,527 $ 65,065 $ 49,015 $ 37,006 $ 28,405
Loans Held for Resale --- 402 1,502 403 369
Allowance for loan loss 769 755 576 503 299
Total assets 103,685 91,852 64,826 47,287 36,070
Deposits 93,343 82,295 56,435 40,725 32,622
Shareholders' equity 9,445 8,790 7,711 5,890 2,678
Income Summary:
Interest income 8,315 6,876 4,882 3,789 2,940
Interest expense 3,482 2,959 1,943 1,614 1,252
---------- ---------- ---------- ---------- ----------
Net interest income 4,833 3,917 2,939 2,175 1,688
Provision for loan losses 260 285 133 165 113
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for
loan losses $ 4,573 $ 3,632 $ 2,806 $ 2,010 $ 1,575
Other income 860 819 587 430 281
Other expenses 3,758 3,193 2,583 1,746 1,435
---------- ---------- ---------- ---------- ----------
Income before income taxes 1,675 $ 1,258 $ 810 $ 694 $ 421
Income taxes (benefits) 564 78 (188) (145) - -
---------- ---------- ---------- ---------- ----------
Net income $ 1,112 $ 1,180 $ 998 $ 839 $ 421
========== ========== ========== ========== ==========
Per Share Data: *
Book value at period ended $ 4.62 $ 4.26 $ 3.75 $ 3.16 $ 2.05
Net income, basic 0.54 0.57 0.51 0.58 .35
Net income, assuming dilution 0.53 0.56 0.50 0.58 .35
Cash dividends declared 184,180 165,053 143,920 111,810 --
Average common shares outstanding 2,054,748 2,058,932 1,951,172 1,445,601 1,205,443
*Changed to reflect stock dividend in 1996.
</TABLE>
<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 1999 and 1998 and shows the average
distribution of assets, liabilities, shareholder'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, 1999 December 31, 1998
---------------------------------------- -----------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Assets: Balances (1) Expense(3) Rate Balances (1) Expense Rate
- ------- ------------ ----------- ---- ------------ ---------- ----
<S> <C>
Interest Earning Assets
Loans, net of unearned discounts (2) $ 73,406,447 $7,252,043 9.9% $58,269,578 $6,063,709 10.4%
Securities 9,974,848 587,258 5.9% 6,257,989 381,331 6.1%
Federal funds sold 9,779,041 491,769 5.0% 7,991,882 430,995 5.4%
------------ -------------- ----------- ----------
Total interest earning assets $ 93,160,336 $8,331,070 8.9% $72,519,449 $6,876,035 9.5%
-------------- ----------
Non-Interest Earning Assets
Cash and due from banks 5,530,765 4,364,755
Bank premises and equipment 2,562,174 2,591,083
Intangible assets 0 0
Other assets 1,148,345 1,263,018
Allowance for loan losses (788,777) (656,014)
------------ -----------
Total assets $101,612,843 $80,082,291
============ ===========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
--------------------------------------- -----------------------------
<S> <C>
Average Earnings/ Yield/ Average Earnings/ Yield/
Liabilities and Shareholders' Equity Balances(1) Expense Rate Balances(1) Expense Rate
- --------------------------------------- ------------- --------------- ------- ------------ ---------- -------
Liabilities
Interest-bearing deposits $ 78,800,817 $3,464,415 4.4% $61,155,144 $2,938,214 4.8%
Federal funds purchased 0 0 0.0% 0 0 0.0%
Capital lease payable 220,925 17,808 8.1% 259,020 20,341 7.9%
------------ --------------- ----------- ----------
Total interest-bearing liabilities $ 79,021,742 $3,482,223 4.4% $61,414,164 $2,958,555 4.8%
--------------- ----------
Non-Interest Bearing Liabilities:
Liabilities:
Demand deposits 12,984,167 9,958,661
Other liabilities 493,303 296,639
------------ -----------
Total liabilities $ 92,499,212 $71,669,464
Shareholders' equity 9,113,631 8,412,827
------------ -----------
Total liabilities and shareholders'
equity $101,612,843 $80,082,291
============ ===========
Net Interest Earnings $4,848,847 3,917,480
=============== ==========
Net Interest Yield on Earnings Assets 5.2% 5.4%
====== ======
</TABLE>
(1) Average balances are calculated using daily balances for each category in
1998 & 1999.
(2) Non-accrual loans are included in the average balance of this category
(3) Amounts are shown on a tax equivalent basis.
<PAGE>
Table 3-Changes in Net Interest Income Attributable to Rate & Volume
<TABLE>
<CAPTION>
December 31, December 31,
1999 vs 1998 1998 vs 1997
---------------------------------------- --------------------------------
<S> <C>
Due To Change In Due To Change In
Interest Earned On: Volume Rate Total Volume Rate Total
----------- ---------- ----------- ----------- ---------- -----------
Loans $1,458,209 ($269,875) $1,188,334 $1,587,785 ($83,441) $1,504,344
Securities 217,959 (12,032) 205,927 199,145 (11,259) 187,886
Federal Funds Sold 90,877 (30,103) 60,774 298,691 2,460 301,151
---------- --------- ---------- ---------- -------- ----------
Total interest earned on interest
Bearing assets $1,767,045 ($312,010) $1,455,035 $2,085,621 ($92,240) $1,993,381
---------- --------- ---------- ---------- -------- ----------
Interest Paid On:
Interest-bearing deposits $ 739,889 ($213,688) $ 526,201 $1,059,500 ($39,385) $1,020,115
Federal funds purchased 0 0 0 (673) 0 (673)
Capital lease payable (3,060) 527 (2,533) (3,369) (927) (4,296)
---------- --------- ---------- ---------- -------- ----------
Total interest paid on interest-bearing
liabilities $ 736,829 ($213,161) $ 523,668 $1,055,458 ($40,312) $1,015,146
---------- --------- ---------- ---------- -------- ----------
Net interest income $1,030,216 ($98,849) $ 931,367 $1,030,163 ($51,928) $ 978,235
========== ========= ========== ========== ======== ==========
</TABLE>
Table 4-Types of Investment Securities
Table 4 summarizes the book value of securities for the two years ending
December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Table 4-Book Value of Securities Available for Sale
---------------------------------------------------
<S> <C>
For the Years Ended
December 31,
---------------------------------------------
1999 1998
------------ ----------
U.S Treasury securities and
obligations of U.S. government
agencies and corporations $ 3,944,510 $ 4,460,218
Obligations of state & political
subdivisions 540,132 0
Mortgage-backed securities 15,765 21,555
Other securities . 580,350 479,800
---------- ----------
$5,080,757 $4,961,573
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Table 4-Book Value of Securities Held to Maturity
-------------------------------------------------
<S> <C>
For the Years Ended
December 31,
-------------------------------------
1999 1998
---------- ----------
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $ 4,687,181 $ 4,899,237
Obligations of state and political
subdivisions. 959,610 100,840
---------- ----------
$5,646,791 $5,000,077
========== ==========
</TABLE>
At December 31, 1999, the securities book value was $10,727,548 and the market
value was $10,564,216, compared to December 31, 1998 values of $9,961,650 and
$10,002,374, respectively. As of December 31, 1999, 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.
<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, 1999. 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, 1999
-------------------------------------------------------------------------
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. $450,235 5.19% $5,856,470 5.73%
Obligations of state & political subdivisions 0 0.00% 553,508 6.61%
Mortgage-backed securities 0 0.00% 15,765 8.72%
Other securities 0 0.00% 0 0.00%
---------- ---- ------------- -------
Total $450,235 5.19% $6,425,743 5.81%
========== ==== ============= =======
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------------------------
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. $2,323,460 5.97% $ 0 0.00%
Obligations of state & political subdivisions 901,044 6.03% 46,716 4.62%
Mortgage-backed securities 0 0.00% 0 0.00%
Other securities 0 0.00% 580,350 6.33%
---------- ---- ----------- ------
Total $3,224,504 5.99% $ 627,066 6.20%
========== ==== =========== ======
</TABLE>
Table 6-Composition of the Loan Portfolio
The following table summarizes the composition of the loan portfolio at December
31, 1999 and 1998.
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998
------- ------
Loans secured by real estate: (In Thousands)
<S> <C> <C>
Construction and land development $10,649 $8,900
Secured by farmland 744 733
Secured by 1-4 family residential 16,717 13,773
Multi-family residential 2,349 1,379
Nonfarm, nonresidential loans 12,038 5,168
Loans to farmers (except those secured by real estate) 220 218
Commercial and industrial loans (except those secured by
real estate) 19,041 21,126
Loans to individuals (except those secured by real estate) 13,311 15,468
All other loans 557 100
------- -------
$75,626 $66,865
Less:
Unearned income 330 1,045
Allowance for loan losses 769 755
------- -------
$74,527 $65,065
======= =======
</TABLE>
The Corporation had no loans outstanding to foreign countries or for highly
leveraged transactions as of December 31, 1999 or 1998.
There were no categories of loans that exceeded 10% of outstanding loans as of
December 31, 1999, 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, 1999, commitments for
standby letters of credit totaled $1,432,380 and commitments to extend credit
totaled $13,467,000. At December 31 1998, commitments for standby letter of
credit totaled $851,449 and commitments to extend credit totaled $8,909,000.
<PAGE>
Table 7- Maturity Schedule of Selected Loans
The table below presents the maturities of selected loans outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
<S> <C> <C> <C> <C>
Commercial: 13,041,442 21,836,210 5,496,494 40,374,146
Real estate-construction 6,211,881 1,915,717 1,631,385 9,758,983
----------- ----------- ---------- -----------
$19,253,323 $23,751,927 $7,127,879 $50,133,129
=========== =========== ========== ===========
Interest sensitivity on such loans
maturing after one year:
Fixed $26,456,121
Variable $4,423,685
----------
Total $30,879,806
===========
</TABLE>
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,
-------------------------
1999 1998
---- ----
Non-accrual loans $40,541 $233,200
Loans past due 90 days or more and
still accruing interest 19,862 191,977
Restructured loans - - - -
------- --------
$60,403 $425,177
======= ========
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Loans are placed on nonaccrual at an earlier date or
charged off if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Non-accrual loans at December 31, 1999 were $40,541, compared to $233,200
for 1998. Approximately $2,934 of interest income would have been recorded if
interest had been accrued in 1999.
As of December 31, 1999, the Corporation had a total of $60,403 in
non-accrual, 90 days past due and still accruing interest, and restructured
loans, compared to $425,177 in 1998. This was a decrease of $364,774 or 85.79%.
On December 31 1999, the Corporation had $40,541 in non-accrual loans,
which consist of $27,109 in installment loans, $500 in commercial loans, and
$12,932 in mortgage loans. The $19,862 in 90 days past due and still accruing
interest consists of $16,589 in installment loans, and $3,273 in credit cards.
As of December 31, 1999 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.
<PAGE>
Table 9 - Summary of Loan Loss Experience
1999 1998
---- ----
Balance, beginning of period $754,597 $576,497
Less Charge-off's:
Commercial 153,699 28,735
Real estate-mortgage 29,091 0
Real estate-construction 18,960 0
Installment loans to individuals 70,942 122,376
-------- --------
Total $272,692 $151,111
-------- --------
Plus Recoveries:
Commercial $1,816 $11,925
Real estate-mortgage 0 20,368
Real estate-construction 2,334 0
Installment loans to individuals 23,355 11,918
------ ------
Total $27,505 $44,211
------- -------
Additions charged to operating expense $260,000 $285,000
-------- --------
Balance, end of period $769,410 $754,597
======== ========
Ratio of net charge-offs during the period
to average loans outstanding during the
period. 0.33% 0.18%
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 condition 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, 1999
and 1998.
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, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- ------------------------
% of Loans % of Loans
to to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
<S> <C> <C> <C> <C>
Loans secured by real estate:
Construction and land development $ 30,776 14.1% $ 30,561 13.3%
Secured by farmland 7,219 00.9% 7,169 01.1%
Secured by 1-4 family residential 18,388 22.2% 15,092 20.6%
Multi-family residential 24,062 03.1% 24,373 02.1%
Nonfarm, nonresidential loans 280,314 15.9% 285,426 07.7%
Loans to farmers (except those secured by real
estate) 2,647 00.3% 2,566 00.3%
Commercial and industrial loans (except secured
by R/E) 323,418 25.2% 329,042 31.6%
Loans to individuals (except those secured by
real estate) 76,410 17.6% 55,840 23.1%
All other loans 6,176 00.7% 4,528 00.2%
-------- ------ -------- -----
$769,410 100.0% $754,597 100%
======== ====== ======== =====
</TABLE>
<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, 1999 and 1998.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------------- --------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
<S> <C> <C> <C> <C>
Non-interest bearing:
Demand deposits $12,984,167 $ 9,958,661
----------- ----------
Interest-bearing:
Demand deposits $19,276,178 2.9% $13,868,025 3.3%
Savings deposits 9,457,893 3.0% 7,326,658 3.0%
Time deposits 50,066,746 5.2% 39,960,461 5.7%
----------- ----------
$78,800,817 4.4% $61,155,144 4.8%
----------- -----------
$91,784,984 $71,113,805
=========== ===========
</TABLE>
The Corporation primarily uses deposits to fund its loans and investment
securities. The Corporation offers individuals and small-to-medium-size
businesses a variety of deposit accounts. Deposit accounts, including checking,
savings, money markets and certificates of deposit, are obtained primarily form
the communities which the Corporation services.
Table 12 - Maturities of CDs and Other Time Deposits in Excess of $100,000
The following is a summary of the maturity distribution of cerificates of
deposit and other time deposits in amounts of $100,000 or more as of December
31, 1999.
Amount Percent
------ -------
Three months or less $ 474,214 5.0%
Over three-six months 1,415,178 15.1%
Over six-twelve months 2,754,262 29.3%
Over twelve months 4,749,373 50.6%
--------- -----
Total $9,393,027 100.0%
========== ======
Certificates of deposit in the amounts of $100,000 or more were $9,393,027
at December 31, 1999. This represents 18.6% of the total certificates of deposit
balance of $50,398,868 at December 31, 1999. 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 a pledging
of investment securities.
The Corporation competes with the major regional financial institutions for
money market accounts and certificates of deposits 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.
<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, 1999 and 1998 is illustrated in the
table below:
December 31,
1999 1998
---- ----
Liquid Assets:
Cash and due from banks $8,011,673 $4,533,428
Federal funds sold 6,616,000 8,281,000
Liquid securities 5,329,742 5,211,808
Loans maturing in one year or less 22,238,644 20,733,615
---------- ----------
Total liquid assets $42,196,059 $38,759,851
=========== ===========
Total deposits and other liabilities $94,239,997 $83,061,556
=========== ===========
Ratio of liquid assets to deposits
and other liabilities 44.8% 46.7%
=========== ===========
The high loan to deposit ratio (80.6%) as of December 31, 1999 has provided
the opportunity for the Corporation to achieve a high return on its deposits.
For the year ended December 31, 1999, the Corporation experienced a return on
assets of 1.09% and a net interest margin of 5.2%.
The source of new funds is strong for both long-term and short-term
duration. The growth in deposits was $11.0 million 13.4% during 1999. The
Corporation also has access to overnight federal funds from correspondent banks
totaling up to $5.7 million. In addition, The Corporation has established
borrowing limits through the Federal Reserve Bank's discount window for $2.2
million. 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.
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,
1999 1998
---- ----
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 12.31% 12.79%
Total risk-based capital ratio 13.30% 13.89%
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 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, 1999 and December 31,
1998, the Corporation met the Federal Reserve's minimum capital requirements.
<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, 1999 and 1998.
For the Years Ending
December 31,
---------------------
1999 1998
---- ----
Return on average assets
(Net income/average total assets) 1.09% 1.47%
===== =====
Return on average equity
(Net income/average equity) 12.20% 14.03%
====== ======
Dividends payment ratio
(Dividends declared/
Net income) 16.57% 13.98%
====== ======
Average equity to average asset ratio 8.97% 10.51%
====== ======
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, 1999 and 1998.
Table 17 - Interest Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1999
-----------------
(In Thousands)
90 DAYS OVER
1-90 DAYS To 1 YEAR 1-5 YEARS 5 YEARS TOTAL
<S> <C> --------- --------- --------- ------- -----
Earning Assets:
Loans $15,342 $10,192 $43,537 $ 6,225 $75,296
Investment Securities 0 450 6,410 3,868 10,728
Fed Funds Sold 6,616 0 0 0 6,616
------- ------- ------- ------- -------
Total Earning Assets $21,958 $10,642 $49,947 $10,093 $92,640
------- ------- ------- ------- -------
Interest-Bearing Liabilities:
Interest Checking $0 $0 $10,435 $ 0 $10,435
Regular Savings 0 0 9,661 0 9,661
Money Market Savings 9,907 0 0 0 9,907
Certificate of Deposit: 0 0 0 0 0
$100,000 and Over 474 4,169 4,750 0 9,393
$100,000 and Under 5,810 20,376 14,820 0 41,006
------- ------- ------ ------ ------
Total Interest-Bearing $16,191 $24,545 $39,666 $ 0 $80,402
------- ------- ------- ------ =======
Liabilities
Period GAP 5,767 (13,903) 10,281 10,093
====== ======== ====== ======
Cumulative Gap 5,767 (8,136) 2,145 12,238
====== ======= ===== ======
Cumulative GAP/Earn Assets 6.23% (8.78%) 2.32% 13.21%
===== ======= ===== ======
</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 no impact on net interest
income 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 0.9%. The current earning assets and deposit structure of the
Corporation suggest that these trends in changes in net interest income would
continue beyond 2000 given a rate change of this magnitude.
<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 $2,500.
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 $800 per month
through the third year, $900 per month for the fourth year and $1,000 per month
for the fifth year. The Bank has two five-year options to extend that lease.
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 fiscal year covered by
this report to a vote of security holders of the Corporation through a
solicitation of proxies or otherwise.
<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 as $9.75
on January 8. The low bid during the year 1999 was $6.00 on September 2 and the
high bid was $7.8 on January 19. During 1999, stock options were exercised for
500 shares for $2,500 and the Corporation repurchased 17,245 shares of common
stock for $117,780. This bid information reflects inter-dealer prices, without
retail mark-up, mark-down, or commission and may not represent actual
transactions.
At December 31, 1999, the Corporation had approximately 1,050 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 $.09 per share cash dividend to stockholders of record as
of December 31, 1999, to be paid in January of 2000. Cash dividends of $.08 per
share, declared in 1998, were paid in January of 1999.
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, 1999, 1998, and
1997 should be read in conjunction with the consolidated financial statements
and related notes included as Exhibit 99.1 in this Form 10-KSB. In addition to
the historical information, the following discussion, as well as other
information appearing throughout this report may contain forward looking
statements that are subject to certain risks and uncertainties which could cause
actual results to differ materially from historical results or those
anticipated. Although the Corporation believes that any forward looking
statements are based upon sound assumptions within the limits of the knowledge
of its operations and the existing economic conditions, there is no certainty
that future results will not differ materially from historical results or those
anticipated by forward looking statements.
Overview
The Corporation's assets grew at a 12.9% pace, ending the year at $103.7
million. This growth was primarily due to a 14.5% increase in net loans with a
balance of $74.5 million at year-end. The loan growth was funded by a 13.4%
increase in deposits. The deposit balance of $93.3 million at year-end consisted
of a mix of 13.9% non-interest bearing and 86.1% interest bearing funds. The net
income for the year was $1,111,592 a decline of 5.8% from the $1,180,311 in
1998. The net income in 1997 was $998,362. The decrease in 1999 was a direct
result of the elimination of a net loss carry-forward from prior years. Marathon
Financial Corporation had an income tax expense of $563,676 for 1999 as compared
to $77,596 during 1998 and a $187,734 tax credit in 1997. Income before taxes
totaled $1,675,268 for 1999, an increase of 33.2% over 1998. In 1998, income
before taxes amounted to $1,257,907 and $810,628 in 1997. Basic earnings per
share were $.54 on average shares outstanding as compared to $.57 and $.51 in
1998 and 1997 respectively.
<PAGE>
Results of Operations
The return on average assets was 1.09% as compared to 1.47% and 1.86% for
1998 and 1997 respectively. Return on average equity was 12.20% as compared to
14.03% in 1998 and 14.99% in 1997. A narrowing of the net interest margin, which
is calculated by dividing the average earning assets into the net interest
income, and the increase in income tax expense are the underlying reasons for
the decreases in R.O.A. and R.O.E. The net interest margin for 1999 was 5.2%, a
decline from 5.4% in 1998 and 6.1% in 1997. The decrease in market rates is the
primary factor for this decline.
Earning assets, which consists mainly of loans, securities and federal
funds sold totaled $92.6 million at year-end. This represents a 9.7% increase
from 1998 and is primarily the reason that the net interest income of $4.833
million for 1999 increased by 23.4% over the previous year. The largest increase
in earning assets occurred in the loan area with an annual growth rate of 14.4%
to $75.3 million gross. The total increase in the loan portfolio was $9.5
million for 1999. Commercial loans decreased 9.9%, real estate construction grew
19.7%, real estate mortgage had a 51.3% rate of growth while consumer loans
experienced a decline of 13.9%. This overall growth in loans is indicative of
the continued strength of the economy within the Bank's service area. This
economy is expected to remain strong well into 2000.
The reserve for loan losses provides for potential losses inherent in the
loan portfolio. Management considers the Bank's loss experience, size of the
loan portfolio, value of collateral and guarantors, non-performing loans and
economic conditions both current and anticipated when performing an analysis on
the entire portfolio to estimate the provision. Using these criteria, management
expensed $260,000 to the reserve for loan losses during 1999, bringing the
year-end balance to $769,410 or 1.02% of total loans. The net charge offs for
loan losses in 1999 was $245,187 for a ratio to average loans of 0.33%. In 1998
the bank contributed $285,000 to the reserve, ending the year with a balance of
$754,597 or 1.14% of total loans. The Bank experienced a $106,900 net charge off
for loan losses, for a ratio to average loans of .18% for 1998. Management
believes that the present level of reserve for loan losses is adequate to cover
any potential losses in the loan portfolio.
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 affected 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 $8,315,492, $6,876,035, and $4,882,654 for the
years ending December 31, 1999, 1998, and 1997, respectively. This represents an
increase of $1,439,457 or 20.9% in 1999 and $1,993,381 or 40.8% in 1998.
Interest expense totaled $3,482,223, $2,958,555, and $1,943,409,for the years
ending December 31, 1999, 1998, and 1997, respectively. This is an increase of
$523,668 or 17.7% in 1999 and $1,015,146 or 52.2% in 1998.
Net interest income, before provision for loan losses, was $4,833,269 for
the year ending December 31, 1999, up $915,789 or 23.4% over the $3,917,480
reported for the same period in 1998. In 1998, net interest income before
provisions for loan losses, increased $978,235 or 33.3% from $2,939,245 in 1997.
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 $9.5 million for 1999. The demand for loans
continues to be 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 1999 year-end, non-interest bearing-demand deposits had grown by
21.2% to $12.9 million, savings and interest bearing demand deposits had
increased by 24.3% to $30.0 million and time deposits had shown a 6.1% growth to
$50.4 million. The deposit mix of $93.3 million was virtually unchanged from the
previous year with interest bearing deposits decreasing by 0.9% to 86.1% of
total deposits.
<PAGE>
Non-interest Income
The Bank's non-interest income is derived chiefly form service charges on
deposit accounts and commissions and fees from bank services. During 1999 the
non-interest income totaled $859,549 or a 5.00% increase over the $818,642
earned in 1998. The rate of growth in 1998 was 39.4% based on non-interest
income of $587,179 received in 1997. This growth is a result of the increase in
the amount of service charges assessed on deposit accounts. The bank has
experienced a large increase in the number of deposit accounts and volume of
activity during the last two years.
Non-interest Expenses
Non-interest expense consists of salaries and employee benefits, occupancy
expenses, furniture and equipment and other operating expenses. The Bank's
non-interest expense for 1999 totaled $3,757,550 or an increase of 17.7% over
the total for 1998 of $3,193,215. The amount for 1998 was 23.6% greater than the
$2,582,796 non-interest expense for 1997. The reduction in the growth rate of
these expenses is a result of the Bank's increased efficiency in the use of its
personnel and facilities. The efficiency ratio for the Bank during 1999 was
65.8%, a decrease from 67.4% in 1998 and 73.2% in 1997. A large portion of the
expenses relating to the Y2K issue was charged to this category.
Income Tax
Under the provisions of the Internal Revenue Code, the Corporation had
available in prior years an operating loss carryforward which was sufficient to
offset any taxable income. However, the carryforwards were completely eliminated
against taxable income during 1999. With the elimination of the carryforwards,
the Bank expensed $563,677 in income taxes for the year. This is a 626.4%
increase over the $77,596 income tax expense in 1998. A detailed discussion of
the Corporation's tax calculation is contained in Note 7 to the Consolidated
Financial Statement.
Asset Quality
Based upon its review and analysis which considers economic conditions,
changes in the nature and value of the portfolio, industry standards and other
relevant factors, management believes that the Bank has sufficient reserves to
cover projected losses that may occur in the total loan portfolio.
Non-performing Assets
Non-performing assets include other real estate owned and loans on which
payment has been delinquent 90 days or more and for which there is a risk of
loss to either principal or interest. Other real estate owned represents real
property taken by the Bank either through foreclosure or through a deed in lieu
thereof from the borrower. Non-accrual loans amounted to $40,541 at year-end,
representing 0.05% of net loans. This is a decrease from 1998 non-accruals which
were $233,200, or 0.36% of the net loans. At the end of 1999 the bank had two
parcels of real estate considered to be non-performing assets with a total
balance of $183,218 as compared to $18,123 for one parcel at 1998 year-end. Of
the two remaining parcels, one has been leased with an option to buy. The value
of that property is $165,095.
Loan Portfolio
The Bank's lending activities are is principal source of income. The Bank's
loan portfolio is comprised of commercial loans, real estate mortgage loans,
real estate construction loans and consumer loans. The primary markets in which
the Bank makes loans are Frederick County, the City of Winchester, Warren
County, the Town of Front Royal, Shenandoah County and the Town of Woodstock,
all located with in the state of Virginia. The major portion the loan portfolio
is secured by real estate.
Securities
Securities are classified as either securities available for sale or
securities held to maturity in accordance to FAS No. 115, "Accounting for
Certain Investment in Debt and Equity Securities". The book value of the
securities included in securities available for sale was $5.278 million at
<PAGE>
December 31, 1999 and $4.921 million at December 31, 1998. The book value for
the securities included in held to maturity was $5.647 million at December 31,
1999 and $5.000 million at December 31, 1998. The increase in both categories of
securities was a result of the growth in funds received from deposits. The bank
does not trade in derivatives and has no plan to do so in the future.
For financial statement reporting purposes, securities available for sale
are reported at fair market value as of the statement date. The fair value for
these securities at 1999 year-end was $197,110 less than the book value. However
this unrealized loss is excluded form earnings and is reported net of tax as a
separate item of shareholders' equity.
Deposits
The Bank experienced growth in the three major components of deposits. As
of 1999 year-end, non-interest bearing demand deposits had grown by 21.2% to
$12.9 million, savings and interest-bearing demand deposits had increased by
24.3% to $30.0 million and time deposits had experienced a 6.1% growth to $50.4
million. The deposit mix of $93.3 million changed slightly with non-interest
bearing demand deposits increasing by 0.9% to 13.9% if total deposits. Savings
and interest-bearing demand deposits grew form 29.3% in 1998 to 32.1% of total
deposits in 1999. Time deposits dropped by 3.7% to 54.0% of total deposits at
the end of 1999.
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, concentration business and industry, competition and the Corporation's
overall financial condition.
The Bank's management believes that the level of liquidity maintained by
the bank is sufficient to satisfy it depositors' requirements and to meet its
customers' credit needs. Sources of liquidity include cash and due from banks,
Federal funds sold, available for sale bond securities, held for maturity
securities maturing within one year or less and loans maturing within one year.
At December 31, 1999, the Bank maintained $42.2 million in liquidity reserves or
77.6% of current liabilities due within one year or less. For the year 1998,
liquidity reserves were $38.8 million or 77.6% of current liabilities.
The Corporation's primary sources of liquidity are cash, due from banks, US
Treasury securities, US Agency securities and other short-term investments
including Federal Funds sold and the sale of loans.
Capital Adequacy
Total stockholders equity on December 31, 1999 was $9,445,181 an increase
of $655,068 or 7.5% from $8,790,113 in 1998. The Corporation's primary
capital-to-asset ratio was 9.1% in 1999 versus 9.6% in 1998. The bank depends
primarily upon earnings to maintain a strong capital base. During 1999, earnings
less dividends increased retained earnings by $927,412. These transactions
reduced the retained earnings deficit of $1,149,567 as of December 31, 1998 to a
deficit of $222,155 at December 31, 1999.
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.
<PAGE>
Year 2000 Issue
The Year 2000 issue involved the risk that computer programs and computer
systems might not be able to perform without interruption into the Year 2000. If
computer systems failed to correctly recognize the date change from December 31,
1999, to January 1, 2000, computer applications that rely on the date field
could have failed or created erroneous results. Such erroneous results would
have affected interest payments or due dates and would have caused the temporary
inability to process transactions and to engage in ordinary business activities.
The Bank's computer programs and computer systems did not fail and all systems
performed in a normal manner. The Corporation will continue to monitor the
systems for potential Y2K related problems. However, management does not
anticipate any future disruptions regarding Y2K. Including the cost of equipment
purchased for becoming Y2K compliant, the Bank spent approximately $230,000
related to the assessment of and efforts in connection with the Year 2000 issue.
Recent Accounting Pronouncements
In June 1998, the FASB issue 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. Statement No. 133 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. This Statement will require the Bank
to recognize all derivatives on the balance sheet at fair value. Because the
Bank does not currently employ such derivative instruments and does not intend
to do so in the future, 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.
<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 2000 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 2000 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 2000 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 2000
Proxy Statement and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is set
forth in the section entitled "Transactions with Management and Board of
Directors" in the 2000 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.
<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 Main Street,
Woodstock, Virginia, and is in the process of constructing a permanent
facility ion the same lot, 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.
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, 1999 and 1998.
3. Consolidated Statement of Income - Years ended December 31, 1999,
1998, and 1997.
4. Consolidated Statements of Changes in Stockholders' Equity - Years
Ended December 31, 1999, 1998, and 1997.
5. Consolidated Statements of Cash Flows - Years Ended December 31,
1999, 1998, and 1997.
6. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant
during the fourth quarter of 1999
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned.
MARATHON FINANCIAL CORPORATION
(Registrant)
By: /s/ Donald L. Unger
--------------------------------
Donald L. Unger, President
DATE
March 23, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the
DATE SIGNATURE AND TITLE
March 23, 2000 /s/ Walter H. Aikens
- --------------------- --------------------------------
(Walter H. Aikens, Director)
March 23, 2000 /s/ Frank H. Brumback
- --------------------- --------------------------------
(Frank H. Brumback, Director)
March 23, 2000 /s/ Robert W. Claytor
- --------------------- --------------------------------
(Robert W. Claytor, Director)
March 23, 2000 /s/ Clifton L. Good
- --------------------- --------------------------------
(Clifton L. Good, Director)
March 23, 2000 /s/ Thomas W. Grove
- --------------------- --------------------------------
(Thomas W. Grove, Director)
March 23, 2000 /s/ Ralph S. Gregory
- --------------------- --------------------------------
(Ralph S. Gregory, Director)
March 23, 2000 /s/ Joseph W. Hollis
- --------------------- --------------------------------
(Joseph W. Hollis, Director)
March 23, 2000 /s/ George R. Irvin
- --------------------- --------------------------------
(George R. Irvin, Director)
March 23, 2000 /s/ Gerald H. Kidwell
- --------------------- --------------------------------
(Gerald H. Kidwell, Director)
March 23, 2000 /s/ Lewis W. Spangler
- --------------------- --------------------------------
(Lewis W. Spangler, Director)
March 23, 2000 /s/ Donald L. Unger
- --------------------- --------------------------------
(Donald L. Unger, Principal Executive,
Financial, Accounting Officer)
<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 From 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 located 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. 33-08995).
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 related
notes and the report of the independent auditors
are included herein: *
1. Consolidated Statements of Cash Flows - Years Ended December 31, 1999,
1998 and 1997.
2. Notes to Consolidated Financial Statements
3. Independent Auditor's Report.
4. Consolidated Balance Sheets - December 31, 1999 and 1998.
5. Consolidated Statement of Income - Years Ended December 31, 1999, 1998
and 1997.
6. Consolidated Statements of Changes in Stockholders' Equity - Years Ended
December 31, 1999, 1998 and 1997.
7. Consolidated Statements of Cash Flows - Years Ended December 31, 1999,
1998 and 1997.
8. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant during the
fourth quarter of 1999.
*Filed Herewith.
<PAGE>
EXHIBIT 11
MARATHON FINANCIAL CORPORATION
Computation of the Weighted Shares Outstanding and Earnings Per Share
<TABLE>
<CAPTION>
Weighted Shares Outstanding End of Month
----------------------------------------
1999 1998
---- ----
<S> <C>
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 2,059,650
July 2,054,730 2,055,983
August 2,051,321 2,055,983
September 2,050,542 2,055,983
October 2,046,838 2,055,983
November 2,046,441 2,055,983
December 2,046,441 2,062,703
----------- ----------
24,656,978 24,707,183
Divided by 12 months 12 months
---------- ----------
Weighed Shares Outstanding $2,054,748 $2,058,932
========== ==========
Net Income $1,111,592 $1,180,311
========== ==========
Net Income Per Share, Basic $ 0.54 $ 0.57
========== ==========
Net Income Per Share, Assuming Dilution $ 0.53 $ 0.56
========== ==========
</TABLE>
<PAGE>
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, 1999 and 1998,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for the years ended December 31, 1999, 1998 and 1997.
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, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ YOUNG, HYDE $ BARBOUR, P.C.
Winchester, Virginia
January 14, 2000
<PAGE>
<TABLE>
<CAPTION>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
----------- -----------
<S> <C> <C>
Cash and due from banks $ 8,011,673 $ 4,533,428
Federal funds sold 6,616,000 8,281,000
Securities available for sale 5,080,757 4,961,573
Securities held to maturity (fair value approximates $5,483,459 and
$5,040,801 at December 31, 1999 and 1998, respectively) 5,646,791 5,000,077
Loans held for sale -- 401,671
Loans, net of allowance for loan losses of $769,410 in 1999
and $754,597 in 1998 74,526,925 65,065,268
Bank premises and equipment, net 2,591,033 2,615,175
Accrued interest receivable 534,911 478,820
Other real estate 183,218 18,123
Other assets 493,870 496,534
--------------- --------------
$ 103,685,178 $ 91,851,669
=============== ==============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 12,940,831 $ 10,680,285
Savings and interest-bearing demand deposits 30,002,843 24,127,903
Time deposits 50,398,868 47,486,855
------------ -------------
Total deposits $ 93,342,542 $ 82,295,043
Interest expense payable 147,164 140,899
Accounts payable and accrued expenses 532,255 401,395
Capital lease payable 218,036 224,219
Commitments and contingent liabilities -- --
------------ -------------
Total liabilities $ 94,239,997 $ 83,061,556
------------ -------------
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;
1999, 2,046,441 shares issued and outstanding;
1998, 2,063,186 shares issued and outstanding 2,046,441 2,063,186
Capital surplus 7,750,987 7,849,522
Retained earnings (deficit) (222,155) (1,149,567)
Accumulated other comprehensive income (loss) (130,092) 26,972
------------ -------------
Total shareholders' equity $ 9,445,181 $ 8,790,113
------------ -------------
$103,685,178 $ 91,851,669
============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,252,043 $ 6,063,709 $ 4,559,365
Interest on investment securities:
Nontaxable 13,875 -- --
Taxable 261,059 184,289 93,379
Interest and dividends on securities
available for sale:
Nontaxable 16,364 -- --
Taxable 245,517 169,675 78,588
Dividends 34,865 27,367 21,478
Interest on federal funds sold 491,769 430,995 129,844
----------- ------------ ------------
Total interest and dividend income $ 8,315,492 $ 6,876,035 $ 4,882,654
----------- ------------ ------------
Interest expense:
Interest on deposits $ 3,464,415 $ 2,938,214 $ 1,918,099
Interest on capital lease obligations 17,808 20,341 24,637
Interest on federal funds purchased -- -- 673
----------- ----------- ------------
Total interest expense $ 3,482,223 $ 2,958,555 $ 1,943,409
----------- ----------- ------------
Net interest income $ 4,833,269 $ 3,917,480 $ 2,939,245
Provision for loan losses 260,000 285,000 133,000
----------- ------------ ------------
Net interest income after
provision for loan losses $ 4,573,269 $ 3,632,480 $ 2,806,245
----------- ------------ -----------
Other income:
Service charges on deposit accounts $ 779,285 $ 734,243 $ 459,695
Commissions and fees 23,373 111,048 102,234
Loss on sale of other real estate (2,119) (54,249) --
Other 59,010 27,600 25,250
----------- ------------ -----------
Total other income $ 859,549 $ 818,642 $ 587,179
----------- ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits $ 1,887,748 $ 1,532,069 $ 1,213,499
Net occupancy expense of premises 225,697 262,686 211,293
Furniture and equipment 360,089 382,340 263,105
Other 1,284,016 1,016,120 894,899
----------- ----------- ------------
Total other expenses $ 3,757,550 $ 3,193,215 $ 2,582,796
----------- ----------- ------------
Income before income taxes $ 1,675,268 $ 1,257,907 $ 810,628
Provision for income tax (benefit) 563,676 77,596 (187,734)
----------- ----------- ------------
Net income $ 1,111,592 $ 1,180,311 $ 998,362
=========== =========== ============
Earnings per share, basic $ 0.54 $ 0.57 $ 0.51
=========== =========== ============
Earnings per share, assuming dilution $ 0.53 $ 0.56 $ 0.50
=========== =========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Shareholders'
Stock Surplus (Deficit) Income (Loss) Income Equity
----------- ----------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 ($.07 per share) -- -- (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 ($.08 per share) -- -- (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
Comprehensive income:
Net income -- -- 1,111,592 -- $ 1,111,592 1,111,592
Other comprehensive income,
unrealized loss on securities
available for sale (net of tax,
$80,912) -- -- -- (157,064) (157,064) (157,064)
------------
Total comprehensive income -- -- -- -- $ 954,528 -
============
Dividends declared ($.09 per share) -- -- (184,180) -- (184,180)
Issuance of common stock
exercise of stock options
(500 shares) 500 2,000 -- -- 2,500
Acquisition of common stock
(17,245 shares) (17,245) (100,535) -- -- (117,780)
----------- ----------- ----------- ------------ -------------
Balance, December 31, 1999 $ 2,046,441 $ 7,750,987 $ (222,155) $ (130,092) $ 9,445,181
============= ============ =========== ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,111,592 $ 1,180,311 $ 998,362
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 52,252 52,878 41,846
Depreciation 302,705 302,869 198,156
Provision for loan losses 260,000 285,000 133,000
Deferred tax expense (benefit) 93,628 72,346 (200,000)
Loss on sale of other real estate 2,119 54,249
Loss on sale of bank premises and equipment 344
Net amortization and (accretion) on securities 11,111 4,316 (13,317)
Origination of loans held for sale (7,473,222) (7,520,722) (5,992,149)
Proceeds from sale of loans held for sale 7,874,893 8,621,489 4,773,003
Changes in assets and liabilities:
(Increase) in other assets (62,303) (77,806) (125,826)
(Increase) in accrued interest receivable (56,091) (192,983) (73,748)
Increase (decrease) in accounts payable
and accrued expenses 111,733 84,741 (10,491)
Increase in interest expense payable 6,265 36,146 22,989
----------- ----------- ------------
Net cash provided by (used in) operating activities $ 2,235,026 $ 2,902,834 $ (248,175)
----------- ----------- ------------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investment securities $ 1,100,000 $ 403,000 $ 1,107,991
Proceeds from maturities, calls and principal
payments of securities available for sale 305,169 361,404 503,397
Purchase of investment securities (1,750,335) (3,698,262) (1,152,890)
Purchase of securities available for sale (669,820) (3,505,333) (600,386)
Net (increase) in loans (10,022,090) (16,335,635) (12,451,882)
Purchase of bank premises and equipment (302,024) (438,969) (1,137,155)
Proceeds from sale of bank premises and equipment 23,117 -- --
Proceeds from sale of other real estate 133,219 375,751 --
------------- ------------- -------------
Net cash (used in) investing activities $(11,182,764) $(22,838,044) $(13,730,925)
------------- ------------- -------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 8,135,486 $ 10,654,122 $ 6,889,140
Net increase in certificates of deposit 2,912,013 15,205,700 8,820,794
Net proceeds from issuance of common stock 2,500 41,271 962,440
Acquisition of common stock (117,780) -- --
Principal payments on capital lease obligations (6,183) (54,917) (36,516)
Payment of dividends (165,053) (143,920) (111,810)
------------ ------------- -------------
Net cash provided by financing activities $ 10,760,983 $ 25,702,256 $ 16,524,048
------------ ------------- -------------
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Increase in cash and cash equivalents $ 1,813,245 $ 5,767,046 $ 2,544,948
Cash and Cash Equivalents
Beginning 12,814,428 7,047,382 4,502,434
------------- ------------ ------------
Ending $ 14,627,673 $ 12,814,428 $ 7,047,382
============= ============ ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,475,958 $ 2,922,409 $ 1,920,420
============= ============ ============
Income taxes $ 437,516 $ 17,595 $ 12,179
============= ============ ============
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 300,433 $ -- $ 430,000
============= ============ ============
Unrealized gain (loss) on securities available for sale $ (237,976) $ 36,064 $ 4,295
============= ============ ============
</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
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to
maturity" and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities
with readily determinable fair values, are classified as
"available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and
reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of available for sale
securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on
the trade date and are determined using the specific
identification method.
Loans
The Corporation grants mortgage, commercial and consumer
loans to customers. A substantial portion of the loan
portfolio is represented by mortgage loans throughout the
Frederick County, Warren County and Shenandoah County areas
of Virginia. The ability of the Corporation's debtors to
honor their contracts is dependent upon the real estate and
general economic conditions in this area.
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff
generally are reported at their outstanding unpaid principal
balances less the allowance for loan losses. Interest income
is accrued on the unpaid principal balance. Nonrefundable
loan fees and direct loan origination costs are recognized
in operations when received and incurred, respectively. The
impact of this methodology is not significantly different
from recognizing the net of these fees and costs over the
contractual life of the related loan.
<PAGE>
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent
unless the credit is wellsecured and in process of
collection. Loans are placed on nonaccrual at an earlier
date or charged off if collection of principal or interest
is considered doubtful.
All interest accrued but not collected for loans that are
placed on nonaccrual or charged off is reversed against
interest income. The interest on these loans is accounted
for on the cashbasis or costrecovery method, until
qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts
contractually due are brought current and future payments
are reasonably assured.
Loans Held for Sale
Loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair
value in the aggregate. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to
income.
Allowance for Loan Losses
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular
basis by management and is based upon management's periodic
review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more
information becomes available.
The impairment of loans that have been separately identified
for evaluation is 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. Large groups of smaller
balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for
impairment disclosures.
Classifications of Amortization on Assets Acquired Under Capital Leases
The amortization expense on assets acquired under capital
leases is included with the depreciation expense.
<PAGE>
Earnings Per Share
Basic earnings per share represents income available to
common shareholders divided by the weightedaverage number of
common shares outstanding during the period. Diluted earnings
per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may
be issued by the Corporation relate solely to outstanding
stock options, and are determined using the treasury stock
method.
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 oneday periods.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both
straightline and accelerated methods over the assets'
estimated useful lives. Estimated useful lives range from 10
to 39 years for buildings and 3 to 7 years for furniture,
fixtures and equipment.
Other Real Estate Owned
Foreclosed properties are recorded at the lower of the
outstanding loan balance at the time of foreclosure or the
estimated fair value less estimated costs to sell. At
foreclosure any excess of loan balance over the fair value of
the property is charged to the allowance for loan losses.
Such carrying value is periodically reevaluated and written
down if there is an indicated decline in fair value. Costs to
bring a property to salable condition are capitalized up to
the fair value of the property while costs to maintain a
property in salable condition are expensed as incurred.
Advertising Costs
The Corporation follows the policy of charging the production
costs of advertising to expense as incurred.
<PAGE>
Use of Estimates
In preparing consolidated financial statements in conformity
with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of
the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan
losses, the valuation of foreclosed real estate and deferred
tax assets.
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ------------- -----------
1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 4,115,468 $ -- $ (170,958) $3,944,510
Obligations of state and
political subdivisions 567,007 -- (26,875) 540,132
Mortgagebacked securities 15,042 723 -- 15,765
Other 580,350 -- -- 580,350
----------- ---------- ------------ -----------
$ 5,277,867 $ 723 $ (197,833) $5,080,757
=========== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $4,420,515 $ 41,769 $ (2,066) $ 4,460,218
Mortgagebacked securities 20,392 1,163 21,555
Other 479,800 479,800
----------- -------- ------------ -----------
$4,920,707 $ 42,932 $ (2,066) $ 4,961,573
=========== ======== ============ ===========
</TABLE>
<PAGE>
The amortized cost and fair value of the securities available for
sale as of December 31, 1999, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because mortgages underlying the mortgagebacked securities may be
called or prepaid without any penalties. Therefore, these
securities are not included in the maturity categories in the
maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ 200,167 $ 199,314
Due after one year through five years 4,166,897 3,988,194
Due after five years through ten years 265,168 250,369
Due over ten years 50,243 46,765
Mortgagebacked securities 15,042 15,765
Other 580,350 580,350
----------- -----------
$ 5,277,867 $ 5,080,757
=========== ============
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ----------- -----------
1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 4,687,181 $ 164 $ (146,282) $ 4,541,063
Obligations of state and
political subdivisions 959,610 (17,214) 942,396
----------- --------- ----------- -----------
$ 5,646,791 $ 164 $ (163,496) $ 5,483,459
============ ========= ============ ============
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Government and
federal 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>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1999, by contractual maturity, are
shown below.
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 251,014 $ 248,985
Due after one year through five years 5,264,348 5,106,168
Due after five years through ten years 131,429 128,306
---------- ----------
$5,646,791 $5,483,459
========== ==========
For the years ended December 31, 1999, 1998 and 1997, there were
no sales of securities available for sale.
Securities having a book value of $2,639,891 and $847,910 at
December 31, 1999 and 1998 were pledged to secure public deposits
and for other purposes required by law.
Note 3. Loans and Related Party Transactions
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Construction and land development $ 10,649 $ 8,900
Secured by farmland 744 733
Secured by 14 family residential 16,717 13,773
Multifamily residential 2,349 1,379
Nonfarm, nonresidential loans 12,038 5,168
Loans to farmers (except those secured by real estate) 220 218
Commercial and industrial loans (except those secured by real estate) 19,041 21,126
Loans to individuals (except those secured by real estate) 13,311 15,468
All other loans 557 100
$ 75,626 $ 66,865
---------- ----------
Less:
Unearned income 330 1,045
Allowance for loan losses 769 755
--------- ---------
$ 74,527 $ 65,065
========= =========
</TABLE>
<PAGE>
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 $2,743,082 and $2,090,201 at December 31, 1999
and 1998, respectively. During 1999, total principal additions
were $1,484,378 and total principal payments were $831,497.
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Balance, beginning $ 754,597 $ 576,497 $ 503,014
Provision for loan losses 260,000 285,000 133,000
Recoveries 27,505 44,211 27,823
Loan losses charged to
the allowance (272,692) (151,111) (87,340)
------------ ------------ ------------
Balance, ending $ 769,410 $ 754,597 $ 576,497
============ ============ ============
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $40,541 and $233,200 at December 31, 1999 and
1998, respectively. If interest on these loans had been accrued,
such income would have approximated $2,934 and $15,681 for 1999
and 1998, respectively.
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment as of December 31, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Bank premises $ 2,196,723 $ 2,127,824
Furniture and equipment 1,603,245 1,522,678
Capital leases property and equipment 256,561 255,604
Bank premises and equipment in process 104,342 --
------------ ------------
$ 4,160,871 $ 3,906,106
Less accumulated depreciation 1,569,838 1,290,931
------------ ------------
$ 2,591,033 $ 2,615,175
============ ============
</TABLE>
<PAGE>
Depreciation and amortization included in operating expense for
1999, 1998 and 1997 was $302,705, $323,168 and $228,365,
respectively.
Note 6. Deposits
The aggregate amount of time deposits in denominations of $100,000
or more at December 31, 1999 and 1998 was $9,393,027 and
$9,320,255, respectively.
At December 31, 1999, the scheduled maturities of time deposits
are as follows:
Years Ending December 31:
2000 $ 30,829,450
2001 10,439,380
2002 2,657,044
2003 4,549,994
2004 1,923,000
------------
$ 50,398,868
============
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ -- $ 187,705
Writedown of other real estate 2,720 2,720
Other real estate expenditures 2,641 192
Nonaccrual interest 1,187 5,545
Allowance for loan losses 159,363 70,963
Alternative minimum tax credits -- 21,856
Deferred benefit plans 21,798 --
Securities available for sale 67,017 --
---------- ----------
$ 254,726 $ 288,981
---------- ----------
Deferred tax liabilities:
Depreciation $ 3,683 $ 11,327
Securities available for sale -- 13,894
---------- ---------
$ 3,683 $ 25,221
---------- ----------
$ 251,043 $ 263,760
========== ==========
</TABLE>
<PAGE>
The provision for income taxes (benefit) charged to operations for
the years ended December 31, 1999, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Current tax expense $ 470,048 $ 5,250 $ 12,266
Deferred tax expense 93,628 411,235 278,740
Change in valuation allowance -- (338,889) (478,740)
----------- ----------- ------------
$ 563,676 $ 77,596 $ (187,734)
=========== =========== ============
</TABLE>
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, 1999, 1998 and 1997, due
to the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 569,591 $ 427,688 $ 275,614
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance -- (338,889) (478,740)
Other (5,915) (11,203) 15,392
---------- ------------ -----------
$ 563,676 $ 77,596 $(187,734)
========== ============ ===========
</TABLE>
Note 8. Leases
Capital Leases
The Corporation has 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%. The capital lease payable at December 31,
1999 in the amount of $218,036 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.
<PAGE>
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, 1999:
Lease Commitments and Total Rental Expense
Years ending December 31:
2000 $ 23,898
2001 23,898
2002 23,898
2003 23,898
2004 23,898
Later years 272,834
---------
Total minimum lease payments $ 392,324
Less the amount representing interest 174,288
---------
Present value of net minimum
lease payments $ 218,036
=========
The Corporation entered into a twentyyear 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 May 31, 2016 and has two fiveyear 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, 1999 under this lease
is $367,224.
The Corporation leases a branch location. The lease expires on
March 30, 2000 and has two fiveyear 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, 1999 under this lease
is $3,000.
The Corporation entered into a tenyear operating lease for the
rental of a branch location. The lease expires on December 31,
2006 and has two fiveyear 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, 1999 under this lease is $221,631.
The Corporation entered into a fiveyear operating lease for
the rental of a branch location. The lease expires on August
31, 2002 and has two fiveyear 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, 1999 under this lease is $29,200.
<PAGE>
The total minimum lease commitment for these operating leases is due as
follows:
2000 $ 65,256
2001 63,456
2002 61,006
2003 53,774
2004 54,563
Later years 321,150
----------
$ 619,205
==========
Total rental expense was $86,594, $68,556 and $56,933 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Fixed Equipment on Land Leased with Related Parties
Fixed equipment with a depreciated cost at December 31, 1999 of
$16,160 is located on land leased from a partnership of which
the Corporation's president is a partner. The lease expires on
May 31, 2016.
Note 9. Commitments and Contingent Liabilities
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in
the accompanying financial statements. See Note 12 with respect to
financial instruments with offbalancesheet 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, 1999
and 1998, the aggregate amounts of daily average required balances
were approximately $495,000 and $394,000, respectively.
The Corporation is required to maintain certain required reserve
balances with its correspondent bank. Those required balances were
$900,000 and $950,000 for 1999 and 1998, respectively.
Note 10. Dividend Restrictions
Federal and state regulations limit the amount of dividends which
the Corporation can pay without obtaining prior approval and,
additionally, federal regulations require that the Corporation
maintain minimum capital requirements. As of December 31, 1999,
the Corporation was required to obtain prior approval on any
dividend declared.
<PAGE>
The Corporation did obtain approval from the State Corporation
Commission to pay dividends in 1999, 1998 and 1997. 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. On December 21, 1999,
the Board of Directors declared a cash dividend of $.09 per share
payable January 31, 2000 to shareholders of record December 31,
1999.
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, 1999 no unrestricted funds could be transferred from
the banking subsidiary to the parent corporation, without prior
regulatory approval.
Note 11. Other Expenses
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Telephone $ 96,841 $ 84,232 $ 48,709
Advertising 27,351 39,952 75,870
Stationery and supplies 171,893 102,716 73,722
Postage 119,678 92,296 59,392
Directors fees 89,300 83,250 69,315
ATM expense 165,613 87,525 56,800
Forgery loss -- -- 59,870
Other (includes no items in excess
of 1% of total revenue) 613,340 526,149 451,221
----------- ------------- -----------
$ 1,284,016 $ 1,016,120 $ 894,899
=========== ============= ===========
</TABLE>
Note 12. Financial Instruments With OffBalanceSheet Risk
The Corporation is party to financial instruments with
offbalancesheet 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
and commercial lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance
sheets.
The Corporation's exposure to credit loss is represented by the
contractual amount of these commitments. The Corporation follows
the same credit policies in making commitments as it does for
onbalancesheet instruments.
<PAGE>
At December 31, 1999 and 1998, the following financial instruments
were outstanding whose contract amounts represent credit risk:
Contract Amount
------------------------------
1999 1998
----------- ------------
(Thousands)
Commitments to grant loans $ 608 $ 4,415
Standby letters of credit 1,432 851
Unfunded commitments under lines
of credit 12,859 4,494
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 casebycase basis. The amount
of collateral obtained, if it is deemed necessary by the
Corporation, is based on management's credit evaluation of the
counterparty.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments
for possible future extensions of credit to existing customers.
These lines of credit are uncollateralized and usually do not
contain a specified maturity date and may not be drawn upon to the
total extent to which the Corporation is committed.
Commercial and standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance
of a customer to a third party. Those letters of credit are
primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have
expiration dates within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation
generally holds collateral supporting those commitments for which
collateral is deemed necessary.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at December 31, 1999
exceeded the insurance limits of the Federal Deposit Insurance
Corporation by approximately $1,091,544.
Note 13. Defined Contribution Retirement Plan
The Corporation has a 401(k) Profit Sharing Plan covering
employees who have completed six months of service and who are at
least 21 years of age. Employees may contribute up to 20 percent
of their compensation subject to certain limits based on federal
tax laws. The Corporation makes discretionary matching
contributions equal to 50 percent of an employee's compensation
contributed to the Plan up to 3 percent of the employee's
compensation. Additional amounts may be contributed, at the option
of the Corporation's Board of Directors. These additional
contributions generally amount to 2 percent of eligible employee's
compensation. Employer contributions vest to the employee over a
sixyear period. For the years ended December 31, 1999, 1998 and
1997, expense attributable to the Plan amounted to $43,100,
$40,494 and $31,361, respectively.
<PAGE>
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 ShortTerm Investments
For those shortterm 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.
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
fixedmaturity certificates of deposit is estimated using
the rates currently offered for deposits of similar
remaining maturities.
Accrued Interest
The carrying amounts of accrued interest approximate fair
value.
Capital Lease Payable
The fair values of the Corporation's longterm 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-BalanceSheet 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 fixedrate loan commitments, fair value
also considers the difference between current levels of
interest rates and the committed rates.
<PAGE>
The fair value of standby 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, 1999 and 1998, the difference between the
carrying amounts and fair values of loan commitments and
standby letters of credit were immaterial.
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- --------------- ------------
(Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and shortterm
investments $ 14,628 $ 14,628 $ 12,814 $ 12,814
Securities 10,727 10,564 9,962 10,002
Loans held for sale -- -- 402 402
Loans 74,527 75,915 65,065 68,265
Accrued interest receivable 535 535 479 479
Financial liabilities:
Deposits $ 93,343 $ 93,384 $ 82,295 $ 83,935
Longterm debt 218 218 224 247
Accrued interest payable 147 147 141 141
</TABLE>
Note 15. Minimum Regulatory Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject
to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Corporation's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of their
assets, liabilities and certain offbalancesheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors. Prompt correction action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to riskweighted
assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999
and 1998, that the Corporation and the Bank met all capital
adequacy requirements to which they are subject.
<PAGE>
As of December 31, 1999, the most recent notification from the
Federal Reserve Bank categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain
minimum total riskbased, Tier 1 riskbased and Tier 1 leverage
ratios as set forth in the table below.
There are no conditions or events since the notification that
management believes have changed the Bank's category. The
Corporation's and the Bank's capital amounts and ratios as of
December 31, 1999 and 1998 are also presented in the table.
<TABLE>
<CAPTION>
Minimum Capital
Actual Requirement
------------------ -----------------------------------------
Amount Ratio Amount Ratio
--------- --------- ---------- -------
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk
Weighted Assets:
Consolidated $10,344 13.30% (greater than or equal to) $6,221 (greater than or equal to) 8.00%
Marathon Bank $ 9,900 12.75% (greater than or equal to) $6,210 (greater than or equal to) 8.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated $ 9,575 12.31% (greater than or equal to) $3,110 (greater than or equal to) 4.00%
Marathon Bank $ 9,131 11.76% (greater than or equal to) $3,105 (greater than or equal to) 4.00%
Tier 1 Capital to
Average Assets:
Consolidated $ 9,575 8.90% (greater than or equal to) $4,305 (greater than or equal to) 4.00%
Marathon Bank $ 9,131 8.52% (greater than or equal to) $4,284 (greater than or equal to) 4.00%
As of December 31, 1998:
Total Capital to Risk
Weighted Assets:
Consolidated $ 9,518 13.89% (greater than or equal to) $5,481 (greater than or equal to) 8.00%
Marathon Bank $ 8,787 12.84% (greater than or equal to) $5,476 (greater than or equal to) 8.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated $ 8,763 12.79% (greater than or equal to) $2,740 (greater than or equal to) 4.00%
Marathon Bank $ 8,032 11.73% (greater than or equal to) $2,738 (greater than or equal to) 4.00%
Tier 1 Capital to
Average Assets:
Consolidated $ 8,763 9.63% (greater than or equal to) $3,640 (greater than or equal to) 4.00%
Marathon Bank $ 8,032 8.90% (greater than or equal to) $3,610 (greater than or equal to) 4.00%
</TABLE>
<TABLE>
<CAPTION>
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
--------------------------------------------
Amount Ratio
--------- --------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $7,763 (greater than or equal to) 10.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank $4,658 (greater than or equal to) 6.00%
Tier 1 Capital to
Average Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $5,356 (greater than or equal to) 5.00%
As of December 31, 1998:
Total Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $6,845 (greater than or equal to) 10.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $4,107 (greater than or equal to) 6.00%
Tier 1 Capital to
Average Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $4,512 (greater than or equal to) 5.00%
</TABLE>
<PAGE>
Note 16. Stock Option Plans
The LongTerm Incentive 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. All options expire ten
years from the grant date.
The fair value of each employeerelated grant is estimated at the
grant date using the BlackScholes optionpricing model. The
estimates were calculated using the following weightedaverage
assumptions for grants in 1998 and 1997: Dividend rate of .12% and
.16%, price volatility of 20.65% and 35.00%, riskfree interest
rate of 4.50% and 5.00%, respectively, and expected lives of 5
years. There were no options granted in 1999.
The Corporation applies APB Opinion 25 in accounting for its stock
option plans. Accordingly, no compensation expense has been
recognized for 1999, 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:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Net income
As reported $ 1,111,592 $ 1,180,311 $ 998,362
=========== =========== ==========
Proforma $ 1,103,762 $ 1,166,453 $ 970,561
=========== =========== ==========
Basic earnings per share
As reported $ 0.54 $ 0.57 $ 0.51
=========== =========== ==========
Proforma $ 0.54 $ 0.57 $ 0.50
=========== =========== ==========
Diluted earnings per share
As reported $ 0.53 $ 0.56 $ 0.50
=========== =========== ==========
Proforma $ 0.53 $ 0.55 $ 0.48
=========== =========== ==========
</TABLE>
<PAGE>
Changes in the stock options outstanding related to the LongTerm
Incentive Plan for employees is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 44,875 $ 5.25 42,078 $ 5.12 -- $ --
Granted -- -- 5,000 7.25 42,078 5.12
Exercised (500) 5.00 (2,203) 7.39 -- --
Forfeited -- -- -- -- -- --
-------- -------- --------
Outstanding at end of year 44,375 $ 5.25 44,875 $ 5.25 42,078 $ 5.12
======== ======== ========
Options execisable at yearend 26,625 $ 5.25 20,875 $ 5.22 14,721 $ 5.12
Weightedaverage fair value of
options granted during the year $ -- $ 2.02 $ 1.97
</TABLE>
Changes in the stock options outstanding related to the Long-Term
Incentive Plan for directors is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 90,000 $ 5.00 100,000 $ 5.00 -- $ --
Granted -- -- -- -- 100,000 5.00
Exercised -- -- (5,000) 5.00 -- --
Forfeited -- -- (5,000) 5.00 -- --
--------- ---------- --------- -------- --------- ---------
Outstanding at end of year 90,000 $ 5.00 90,000 $ 5.00 100,000 $ 5.00
========= ========= ---------
Options execisable at yearend 63,000 $ 5.00 54,000 $ 5.00 50,000 $ 5.00
Weightedaverage fair value of
options granted during the year $ -- $ -- $ 1.94
</TABLE>
<PAGE>
Information pertaining to options outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- ------------------ ----------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 5.00 129,375 6.75 years $ 5.00 86,625 $ 5.00
7.25 5,000 8.75 years 7.25 3,000 7.25
-----------
Outstanding at
end of year 134,375 6.82 years $ 5.08 89,625 $ 5.08
=========== ===========
</TABLE>
Note 17. 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>
1999 1998 1997
--------------------- ------------------ ---------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
-------- --------- --------- ------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share 2,054,748 $ 0.54 2,058,932 $ 0.57 1,951,172 $ 0.51
======== ======= ========
Effect of dilutive
securities:
Stock options 34,655 53,077 45,421
Warrants -- -- 19,560
---------- --------- ---------
Diluted earnings
per share 2,089,403 $ 0.53 2,112,009 $ 0.56 2,016,153 $ 0.50
========== ======== ========= ======= ========= ========
</TABLE>
Options of 5,000 were not included in computing diluted EPS for 1999 because
their effects were antidilutive.
<PAGE>
Note 18. Parent Corporation Only Financial Statements
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash on deposit with subsidiary bank $ 127,156 $ 130,241
Securities 495,728 761,344
Accrued interest receivable 7,168 14,545
Investment in capital stock of subsidiary 9,004,126 8,052,263
Other assets 1,805 --
----------- -----------
Total assets $ 9,635,983 $ 8,958,393
=========== ===========
Liabilities
Income taxes payable $ 6,622 $ 3,225
Dividends payable 184,180 165,055
----------- -----------
$ 190,802 $ 168,280
----------- -----------
Shareholders' Equity
Preferred stock $ -- $ --
Common stock 2,046,441 2,063,186
Capital surplus 7,750,987 7,849,522
Retained earnings (deficit) (222,155) (1,149,567)
Accumulated other comprehensive income (loss) (130,092) 26,972
----------- -----------
Total shareholders' equity $ 9,445,181 $ 8,790,113
----------- -----------
Total liabilities and shareholders' equity $ 9,635,983 $ 8,958,393
=========== ===========
</TABLE>
<PAGE>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income
Interest on investment securities, taxable $ 31,514 $ 14,447 $ 5,945
Interest on securities available for sale, taxable 606 31,647 8,625
---------- ---------- ----------
Total income $ 32,120 $ 46,094 $ 14,570
---------- ---------- ----------
Expenses, other $ 13,069 18,607 $ 11,927
---------- ---------- ----------
Income before income taxes and
undistributed income of subsidiary $ 19,051 $ 27,487 $ 2,643
Provision for income tax 6,622 -- --
---------- ---------- ----------
Income before undistributed
income of subsidiary $ 12,429 $ 27,487 $ 2,643
Undistributed income of subsidiary 1,099,163 1,152,824 995,719
---------- ---------- ----------
Net income $1,111,592 $1,180,311 $ 998,362
========== ========== ==========
</TABLE>
<PAGE>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,111,592 $ 1,180,311 $ 998,362
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of securities discounts, net 820 2,195 --
Undistributed income of subsidiary (1,099,163) (1,152,824) (995,719)
Decrease in prepaid expenses -- -- 283
(Increase) decrease in accrued interest receivable 7,377 1 (14,545)
Increase (decrease) in accounts payable 6,622 -- (1,363)
----------- ----------- -----------
Net cash provided by (used in)
operating activities $ 27,248 $ 29,683 $ (12,982)
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from maturities of investment securities $ 250,000 $ 150,000 $ --
Purchase of investment securities -- -- (401,490)
Purchase of securities available for sale -- -- (502,561)
----------- ----------- -----------
Net cash provided by (used in)
investing activities $ 250,000 $ 150,000 $ (904,051)
----------- ----------- -----------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock $ 2,500 $ 41,271 $ 962,440
Acquisition of common stock (117,780) -- --
Payment of dividends (165,053) (143,920) (111,810)
----------- ----------- -----------
Net cash provided by (used in)
financing activities $ (280,333) $ (102,649) $ 850,630
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents $ (3,085) $ 77,034 $ (66,403)
Cash and Cash Equivalents
Beginning 130,241 53,207 119,610
----------- ----------- -----------
Ending $ 127,156 $ 130,241 $ 53,207
=========== =========== ===========
Supplemental Schedule of Noncash
Investing and Financing Activities,
unrealized gain (loss) on securities
available for sale $ (237,976) $ 36,064 $ 4,295
=========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 8,011,673
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,616,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,080,757
<INVESTMENTS-CARRYING> 5,646,791
<INVESTMENTS-MARKET> 5,483,459
<LOANS> 75,296,335
<ALLOWANCE> 769,410
<TOTAL-ASSETS> 103,685,178
<DEPOSITS> 93,342,542
<SHORT-TERM> 0
<LIABILITIES-OTHER> 679,419
<LONG-TERM> 218,036
0
0
<COMMON> 2,046,441
<OTHER-SE> 7,398,740
<TOTAL-LIABILITIES-AND-EQUITY> 103,685,178
<INTEREST-LOAN> 7,252,043
<INTEREST-INVEST> 571,680
<INTEREST-OTHER> 491,769
<INTEREST-TOTAL> 8,315,492
<INTEREST-DEPOSIT> 3,464,415
<INTEREST-EXPENSE> 3,482,223
<INTEREST-INCOME-NET> 4,833,269
<LOAN-LOSSES> 260,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,757,550
<INCOME-PRETAX> 1,675,268
<INCOME-PRE-EXTRAORDINARY> 1,675,268
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,111,592
<EPS-BASIC> .54
<EPS-DILUTED> .53
<YIELD-ACTUAL> 5.2
<LOANS-NON> 40,541
<LOANS-PAST> 19,862
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 754,597
<CHARGE-OFFS> 272,692
<RECOVERIES> 27,505
<ALLOWANCE-CLOSE> 769,410
<ALLOWANCE-DOMESTIC> 769,410
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>