<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________
FORM 10-QSB
Quarterly Report Pursuant of Section 13 or 15(d)
of the Securities Exchange Act of 1934
__________________________
For the quarterly period ended:
September 30, 2000
Commission File No. 0-18868
MARATHON FINANCIAL CORPORATION
------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1560968
------------------------------------ -----------------------------------
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
4095 Valley Pike, Winchester, Virginia 22602
-------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (540) 869-6600
Indicate by check mark whether the registrant (1) has filed all documents and
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- ----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
Class Number of Shares Outstanding at
----- ---------------- --------------
Common Stock 2,051,441 11/08/00
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Item 1. Financial Statements.
<S> <C>
The following financial statements are provided at the page numbers indicated.
Consolidated Statements of Condition as of
September 30, 2000 and December 31, 1999 ..................................3
Consolidated Statements of Income for
the Quarter and the Nine Months Ended September 30, 2000 and 1999.........4
Consolidated Statements of Changes in
Shareholders Equity for the Nine Months
Ended September 30, 2000 and 1999..........................................5
Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 2000 and 1999..............................6
Notes to Consolidated Financial Statements....................................7-9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...............................................9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................................12
Item 6. Exhibits and Reports on Form 8-K............................................12-13
Signature...............................................................................14
Exhibit 11..............................................................................15
Exhibit 27..............................................................................16
</TABLE>
2
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
as of
September 30, 2000 and December 31, 1999
<TABLE>
<CAPTION>
ASSETS 2000 1999
------------ ------------
<S> <C> <C>
Cash and due from banks $ 5,835,696 $ 8,011,673
Federal funds sold 14,337,000 6,616,000
Securities (fair value: 2000, $13,181,439 and
1999, $10,564,216) 13,274,232 10,727,548
Loans held for sale 207,216 0
Loans, net 86,222,103 74,526,925
Bank premises and equipment, net 2,789,261 2,591,033
Accrued interest receivable 608,497 534,911
Other real estate 0 183,218
Other assets 547,888 493,870
------------ ------------
Total assets $123,821,893 $103,685,178
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Non-interest bearing demand deposits $ 18,998,655 $ 12,940,831
Savings and interest bearing demand deposits 36,461,203 30,002,843
Time deposits 57,259,720 50,398,868
------------ ------------
Total deposits $112,719,578 $ 93,342,542
Interest expense payable 184,746 147,164
Accounts payable and accrued expenses 253,493 348,075
Capital lease payable 213,063 218,036
Dividends Payable 0 184,180
------------ ------------
Total liabilities $113,370,880 $ 94,239,997
------------ ------------
SHAREHOLDERS' EQUITY
Preferred stock, Series A, 5% non-cumulative, no par
value: 1,000,000 shares authorized and unissued $ 0 $ 0
Common stock, $1 par value; 20,000,000 shares
authorized; 2000, 2,051,441 and 1999, 2,046,441 shares
issued and outstanding 2,051,441 2,046,441
Capital surplus 7,770,987 7,750,987
Retained earnings (deficit) 709,996 (222,155)
Accumulated other comprehensive (loss) (81,411) (130,092)
------------ ------------
Total shareholders' equity $ 10,451,013 $ 9,445,181
------------ ------------
$123,821,893 $103,685,178
Total liabilities and shareholders' equity ============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
3
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the Nine Months For the Quarter
Ended September 30, Ended September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $6,003,836 $5,381,689 $2,124,295 $1,844,795
Interest on investment securities:
Taxable 235,799 190,961 79,357 65,569
Non-taxable 31,379 4,975 11,947 4,823
Interest and dividends on securities available for
sale: 196,240 185,697 68,829 61,694
Taxable 21,491 10,773 10,478 4,721
Non-taxable 28,688 20,873 9,568 5,505
Dividends taxable
Interest on federal funds sold 498,618 345,615 195,150 175,090
---------- ---------- ---------- ----------
Total interest and dividend income $7,016,051 $6,140,583 $2,499,624 $2,162,197
---------- ---------- ---------- ----------
Interest expense:
Interest on deposits $2,959,208 $2,567,666 $1,077,413 $ 914,322
Interest on capital lease obligations 12,951 13,426 4,284 4,413
---------- ---------- ---------- ----------
Total interest expense $2,972,159 $2,581,092 $1,081,697 $ 918,735
---------- ---------- ---------- ----------
Net interest income $4,043,892 $3,559,491 $1,417,927 $1,243,462
Provision for loan losses 273,400 175,000 130,000 60,000
---------- ---------- ---------- ----------
Net interest income after provision for loan losses $3,770,492 $3,384,491 $1,287,927 $1,183,462
---------- ---------- ---------- ----------
Other income:
Service charges on deposit accounts $ 607,811 $ 578,977 $ 223,745 $ 206,076
Commissions and fees 28,555 22,495 10,043 8,502
Other 43,971 38,039 18,191 10,316
---------- ---------- ---------- ----------
Total other income $ 680,337 $ 639,511 $ 251,979 $ 224,894
---------- ---------- ---------- ----------
Other expenses:
Salaries and employee benefits $1,445,663 $1,402,414 $ 499,838 $ 479,620
Net occupancy expense of premises 168,419 163,514 56,456 54,290
Furniture and equipment 229,695 276,204 72,636 90,139
Legal and professional 189,445 47,506 121,844 10,799
Stationery and supplies 144,055 126,443 49,439 47,303
Postage 94,947 92,647 29,019 36,783
Marketing 61,306 61,786 22,206 22,884
Telephone 89,592 67,081 28,235 25,864
Directors' fees 93,025 61,150 29,725 16,550
ATM expenses 140,597 145,716 41,107 69,372
Other operating expenses 358,073 383,548 118,348 123,563
---------- ---------- ---------- ----------
Total other expenses $3,014,817 $2,828,009 $1,068,853 $ 977,167
---------- ---------- ---------- ----------
Income before income taxes $1,436,012 $1,195,993 $ 471,053 $ 431,189
Provision for income tax 503,861 408,943 184,649 142,688
---------- ---------- ---------- ----------
Net income $ 932,151 $ 787,050 $ 286,404 $ 288,501
========== ========== ========== ==========
Earnings per share, basic $ .45 $ .38 $ .14 $ .14
========== ========== ========== ==========
Earnings per share, assuming dilution $ .45 $ .38 $ .14 $ .14
========== ========== ========== ==========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
4
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Shareholders
Stock Surplus (Deficit) (Loss) Income Equity
----------- ----------- ------------ -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $2,063,186 $7,849,522 $(1,149,568) $ 26,973 $ 8,790,113
Comprehensive income:
Net income 787,050 $ 787,050 787,050
Other comprehensive income,
unrealized (loss) on
securities available for (118,676) (118,676) (118,676)
sale (net of tax $61,135) ---------
Total comprehensive income $ 668,374
=========
Issuance of common stock -
exercise of stock options
(500 shares) 500 2,000 2,500
Acquisition of common stock
(13,144 shares) (13,144) (78,490) ---- ---- (91,634)
---------- ---------- ----------- --------- -----------
Balance, September 30, 1999 $2,050,542 $7,773,032 $ (362,518) $ (91,703) $ 9,369,353
========== ========== =========== ========== ===========
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Shareholders
Stock Surplus (Deficit) Income/(Loss) Income Equity
---------- ---------- ----------- ------------- ------------- ------------
Balance, December 31, 1999 $2,046,441 $7,750,987 $ (222,155) $(130,092) $ 9,445,181
Comprehensive income:
Net income 932,151 $ 932,151 932,151
Other comprehensive income,
Unrealized (loss) on
securities available for
sale (net of tax $25,078) 48,681 48,681 48,681
---------
Total comprehensive income $ 980,832
=========
Issuance of common stock -
Exercise of stock options
(5000 shares) 5,000 20,000 25,000
---------- ---------- ----------- ---------- -----------
Balance, September 30, 2000 $2,051,441 $7,770,987 $ 709,996 $ (81,411) $10,451,013
========== ========== =========== ========= ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
5
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Nine Months Ended September 30, 2000 and 1999
<TABLE>
<S> <C> <C>
2000 1999
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 932,151 $ 787,050
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization 38,229 84,074
Depreciation 181,534 175,360
Net amortization and (accretion) on securities 7,949 (8,517)
Provision for loan loss 273,400 175,000
Deferred tax expense --- 24,826
Loss on sale of other real estate 10,264 ---
Origination of loans available for sale (3,184,469) (4,790,566)
Proceeds from sale of loans available for sale 2,977,553 5,850,309
Changes in assets and liabilities:
(Increase) in other assets (117,325) (72,753)
(Increase) in accrued interest receivable (73,587) (56,595)
Increase (Decrease) in accounts payable and accrued expenses (94,582) 175,031
Increase in interest expense payable 37,582 14,504
------------ ------------
Net cash provided by operating activities $ 988,699 $ 2,357,723
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls and principal payments
on securities held to maturity $ 250,000 $ 1,104,571
Proceeds from maturities, calls and principal payments
on securities available for sale 51,241 378,310
Purchase of securities available for sale (1,495,634) (666,920)
Purchase of securities held to maturity (1,286,481) (1,615,335)
Net (increase) in loans (11,968,878) (12,917,638)
Purchase of bank premises and equipment (379,761) (177,937)
Proceeds from sale of other real estate 172,954 ----
------------ ------------
Net cash used in investing activities $(14,656,559) $(13,894,949)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts $ 12,516,184 $ 11,122,959
Net increase in certificates of deposits 6,860,852 5,877,019
Principal payments on capital lease obligation (4,973) (4,591)
Cash dividends paid (184,180) (165,055)
Proceeds from issuance of common stock 25,000 2,500
Purchase of common stock ---- (91,634)
------------ ------------
Net cash provided by financing activities $ 19,212,883 $ 16,741,198
------------ ------------
Increase in cash and cash equivalents $ 5,545,023 $ 5,203,972
CASH AND CASH EQUIVALENTS
------------- ------------
Beginning 14,627,673 12,814,428
------------ ------------
Ending $ 20,172,696 $ 18,018,400
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
$ 2,934,577 $ 2,566,587
Interest ============ ============
Income taxes $ 592,820 $ 237,516
============ ============
SUPPLEMENTAL SCHEDULE NONCASH INVESTING ACTIVITIES
Unrealized gain (loss) on securities available for sale $ 73,759 $ (179,811)
============ ============
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
6
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
the instructions for Form 10-QSB. Accordingly, they contain all adjustments
necessary to present fairly the financial position and results of operations
of cash flows for the interim periods. They do not include all of the
information and footnotes required by generally accepted accounting
principles. These statements should be read in conjunction with the Notes
to Financial Statements included in the Company's Annual Report for year
ended December 31, 1999.
2. The results of operations for the nine-month period ended September 30, 2000
and 1999 are not necessarily indicative of the results to be expected for
the full year.
3. Securities held to maturity and available for sale as of September 30, 2000
and December 31, 1999 are:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
Held to Maturity Amortized Cost Amortized Cost
---------------- ------------------------ ------------------
<S> <C> <C>
US government & federal agencies $5,334,750 $4,687,181
Obligations of state and political subdivisions 1,346,610 959,610
---------- ----------
$6,681,360 $5,646,791
========== ==========
Fair Value Fair Value
---------- ----------
US government & federal agencies $5,252,579 $4,541,063
Obligations of state and political subdivisions 1,336,143 942,396
---------- ----------
$6,588,722 $5,483,459
========== ==========
</TABLE>
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
Available for Sale Amortized Cost Amortized Cost
------------------ ------------------------ ------------------
<S> <C> <C>
US government & federal agencies $4,895,943 $4,115,468
Mortgage-backed securities 213,520 15,042
Obligations of state & political subdivisions 776,256 567,007
Other 830,350 580,350
---------- ----------
$6,716,069 $5,277,867
========== ==========
Fair Value Fair Value
---------- ----------
US government & federal agencies $4,785,838 $3,944,510
Mortgage-backed securities 213,333 15,765
Obligations of state & political subdivisions 763,351 540,132
Other 830,350 580,350
---------- ----------
$6,592,872 $5,080,757
========== ==========
</TABLE>
7
<PAGE>
4. The consolidated entity's loan portfolio is composed of the following:
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
-------------------- -----------------
<S> <C> <C>
Loans secured by real estate:
Construction and land development $12,857,779 $10,649,150
Secured by farmland 702,199 744,207
Secured by 1-4 family residential 18,847,027 16,718,530
Multi-family residential 2,050,456 2,348,910
Nonfarm, nonresidential loans 12,403,259 12,037,683
Loans to farmers (except those secured by real
estate) 485,370 219,648
Commercial and industrial loans (except those
secured by real estate) 25,662,629 19,041,184
Loans to individuals (except those secured by real estate) 13,870,460 13,310,704
539,945 556,726
All other loans ----------- -----------
$87,419,124 $75,626,742
Less: 112,274 330,407
Unearned income 877,531 769,410
----------- -----------
Allowance for loan losses $86,429,319 $74,526,925
=========== ===========
</TABLE>
The company had non-accrual loans, which were excluded from the impaired
loan disclosure under FASB 114, which amounted to $414,638 on September 30,
2000 and $40,541 on December 31, 1999.
5. Reserve for Loan Losses:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1999
------------------ -----------------
<S> <C> <C>
Balance, beginning $ 769,410 $ 754,597
Provision charged to operating expense 273,400 260,000
Recoveries 61,946 27,505
Loan losses charged to the allowance (227,225) (272,692)
--------- ---------
Balance, ending $ 877,531 $ 769,410
========= =========
</TABLE>
6. Weighted average shares outstanding computation
The following shows the weighted average number of shares used in computing
basic earnings per share and the effect on weighted average number of
shares of diluted potential common stock.
<TABLE>
<CAPTION>
9/30/00 9/30/99
Per Share Per Share
Shares Amount Shares Amount
------------------ --------------- -------------- -------------
<S> <C> <C> <C> <C>
Basic earnings per share 2,051,215 $.45 2,057,473 $.38
==== ====
Effect of dilutive securities:
Stock options 15,027 37,022
--------- ---------
Diluted earnings per share 2,066,242 $.45 2,094,495 $.38
========= ==== ========= ====
</TABLE>
Stock options of 5,000 shares were not included in computing diluted
earnings per share for the first, second and third quarters of 2000 because
their effects were antidilutive.
7. New Accounting Pronouncements
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities ", which was originally required to be
adopted in years beginning after June 15, 1999. Statement No. 137, issued
in June 1999, subsequently amended the effective date of Statement No. 133
to years beginning after June 15, 2000. 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.
8
<PAGE>
8. Proposed Merger
Rockingham Heritage Bank (NASDAQ Small Cap: RKNG) and the Corporation
have approved a definitive merger of equals agreement. This transaction
has been approved by the regulatory authorities and shareholders of
both MFC and RKNG. Under the terms of the merger agreement, the
existing holding company of Marathon Financial Corporation will be
utilized, changing its name to Premier Community Bankshares, Inc.
(Premier). Marathon and Rockingham will operate as separate banks.
Rockingham Heritage shareholders will receive 1.58 shares of Premier
common stock for each share of Rockingham Heritage common stock. The
transaction will be a tax-free exchange of shares and be accounted for
as a pooling-of-interest. It is anticipated that the merger will become
effective in the fourth quarter of 2000. As of December 31, 1999,
RKNG had assets of $101.1million, net loans of $77.9 million, total
deposits of $87.8 million and total shareholders' equity of $11.6
million.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
-------
Marathon Financial Corporation ("the Corporation") is a bank holding company
that was incorporated under the laws of the Commonwealth of Virginia in June
1989. The Corporation owns all of the outstanding stock of its sole subsidiary.
The Marathon Bank ("the Bank"), which was incorporated in August 1987 and
acquired by the Corporation in October 1990, in accordance with the Plan of
Exchange approved by the shareholders of the Bank in June 1990. The Corporation
is headquartered in Frederick County, Virginia. The Corporation is a holding
company for the Bank and is not directly engaged in the operation of any other
business.
The Bank is engaged in the business of offering banking services to the general
public. It offers checking accounts, savings and time deposits, and commercial,
real estate, personal, home improvement, automobile and other installment and
term loans, It also offers travelers checks, safe deposit, collection, notary
public and other customary bank services (with the exception of trust services)
to its customers. The three principal types of loans made by the Bank are: (1)
commercial and industrial loans; (2) real estate loans; and (3) loans to
individuals for household, family and other consumer expenditures.
FINANCIAL CONDITION
-------------------
Assets
------
Total assets at September 30, 2000 were $123.8 million compared to $103.7
million at December 31, 1999, an increase of $20.1 million or 19.4%. Net loans
increased $11.7 million or 15.7% during the first nine months of 2000 to $86.2
million at September 30, 2000. Commercial loans increased by $12.2 million or
32.0%, real estate loans decreased $1.0 million or 4.5%, and consumer loans
decreased $500 thousand or 3.7% during the first nine months of 2000.
Investment securities amounted to $13.3 million at September 30, 2000, an
increase of $2.5 million or 23.7% over the first nine months. This increase
consisted mainly of a $1.5 million jump in federal agency securities or 17.2%
and an increase in municipal securities of $610 thousand or 40.7% above the
December 31, 1999 balance. Federal funds sold increased from $6.6 million to
$14.3 million at September 30, 2000. This increase is the result of deposits
growing at a faster rate than loan growth. Total earning assets increased by
$22.2 million or 24.1% during the first nine months of 2000. The amount of
total earning assets of $114.0 million represented 92.1% of total assets at
September 30, 2000.
9
<PAGE>
Liabilities
-----------
Total liabilities at September 30, 2000 were $113.4 million, a $19.1 million or
20.3% increase over the balance at December 31, 1999. Total deposits at
September 30, 2000 grew to $112.7 million, an increase of $19.4 million or
20.8% above the 1999 year end balance. The rate of growth was uniform for all
types of deposits with little change in the product mix over the first nine
months of 2000. At September 30, 2000 non-interest bearing deposits were 15.3%
of total assets compared to only 12.5% at December 31, 1999. Interest bearing
demand deposit balances represented 20.8% of total assets after the first nine
months of 2000, an increase from 19.7 % at 1999 year end. This growth in low
interest bearing and non-interest bearing deposits coupled with a $2.2 million
decrease in cash held allowed the bank to invest a greater percentage of assets
in federal funds and still maintain a net interest margin above that of its
peers.
Capital Resources
-----------------
Total shareholders' equity amounted to $10.5 million as of September 30, 2000,
an increase of $1.0 million or 10.6% over the $9.4 million at December 31,
1999. The increase was due to net income for the first nine months of $932.2
thousand and a decrease in unrealized losses on securities available for sale of
$48.7 thousand net of tax. An additional $25.0 thousand of capital was raised
through the exercise of stock options equating to 5000 additional shares of
common stock. The Corporation's leverage ratio at September 30, 2000 was 9.3%,
while the tier 1 risk-based capital ratio was 11.48%.
Non-performing Assets
---------------------
The Corporation's non-performing assets consists of non-accrual loans and
property acquired through foreclosure. At December 31, 1999 foreclosed property
and non-accruals totaled $183 thousand and $41 thousand respectively. At
September 30, 2000 non-accruals totaled $415 thousand while all foreclosed
property had been sold leaving a zero balance. The non-accruals consisted of
$320.8 thousand secured by real estate.
RESULTS OF OPERATIONS
---------------------
Net Operating Results
---------------------
Net income for the nine months ending September 30, 2000 was $932.2 thousand
compared to net income for the corresponding period in 1999 of $787.1 thousand.
This represented an increase of $145.1 thousand or 18.4%. Basic diluted
earnings per share for the first three quarters of 2000 was $0.45, up from $0.38
per share for the first nine months of 1999. The annualized returns on assets
and equity for the nine month period through September 30, 2000 were 1.10% and
12.52% respectively compared to 1.05% return on assets and 11.62% return on
equity for the same period in 1999. The increase in net income is attributed to
the growth in earning assets and a continuing strong net interest margin that
runs well above other banks in the peer group. The Bank has improved its
efficiency ratio during 2000, which is an overhead cost control indicator.
10
<PAGE>
For the third quarter of 2000 net income was $286.4. Basic and diluted earnings
per share were $0.14. The annualized returns on assets and equity were 0.95%
and 11.03% respectively. This compares with net income for the third quarter of
1999 of $288.5 thousand resulting in an earnings per share of $0.14 for both
basic and diluted with returns on assets and equity of 1.07% and 12.38%
respectively.
Provision for Loan Losses
-------------------------
The reserve for loan losses at September 30, 2000 was $877.5 thousand.
Provisions to the reserve totaling $273.4 thousand were partially offset by a
net loan charge-off of $165.3 during the first nine months of the year. The
increase in provision is in proportion to the loan growth. The reserve balance
is 1.01% of gross loans at September 30, 2000. Management has analyzed the
credit quality of loans and believes the reserve balance is adequate.
Non-Interest Income
-------------------
Non-interest income for the first three quarters of 2000 was $680.3 thousand, an
increase of $40.8 thousand or 6.4% above the same period of 1999. Most of this
increase occurred from NSF charges resulting from a growing checking account
portfolio.
Non-Interest Expense
--------------------
Non-interest expense through the first three quarters of 2000 totaled $3,014.8
thousand, an increase of $186.8 thousand or 6.6% over the same period of 1999.
During the third quarter of 2000 The Bank expensed $102.8 thousand for legal and
professional costs associated with the pending merger with Rockingham Heritage
Bank in Harrisonburg, Virginia. The Bank is required to reflect these costs
in the income statement during the period that they are incurred. Furthermore,
these costs are not deductible for federal income tax purposes. Telephone
expense for the nine months period was $89.6 thousand, up $22.5 thousand or
33.6% from the corresponding period of 1999. Additional activity on data
entry lines for the computer system was partially responsible for this
increase. The Bank's efficiency ratio improved from 67.3% for the first nine
months of 1999 to 63.2% for the same period of 2000.
LIQUIDITY
---------
The liquidity position of The Corporation reflects its ability to meet current
and future obligations through the management of current assets. Current or
liquid assets include cash, balances with other banks, federal funds sold,
investments, and loans maturing within one year. At September 30, 2000 the
Corporation has $45.3 million in cash and assets that could be converted to cash
within one year to meet the financial requirements of depositors and the credit
needs of customers. This balance consists of $5.8 million in cash and due from
banks, $14.3 million in federal funds sold, $5.1 million in investments
available for sale, and $20.1 million in loans maturing
11
<PAGE>
within one year. In addition to these funds The Bank has access to borrowing in
federal funds totaling $6.6 million and a line of credit availability through
the Federal Home Loan Bank equal to 16% of The Marathon Bank's total assets. At
September 30, 2000 The Bank had unused commitments to fund loans totaling $14.6
million of which $8.4 are secured by real estate. Management believes that this
level of liquidity is more than adequate to meet its customers credit needs.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Change in Securities.
None
Item 3. Defaults upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
2. Plan of acquisition, reorganization, arrangement, liquidation
or succession - N/A
3. (i) Articles of Incorporation. Incorporated by reference as
Exhibit 3(i) to the Corporation's Registration Statement on
Form S-1 filed on August 26, 1992 (File No. 33-51366).
(ii) By-laws. Incorporated by reference as Exhibit 3(ii) to
the Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
4. Instruments defining the rights of security holders, including
indentures - N/A
10. Material Contracts.
Exhibit 10.1 401(k) Plan of Marathon Financial Corporation,
incorporated herein by reference as Exhibit 10.1 to the
Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
Exhibit 10.2 Employment Agreement between The Marathon Bank
and Donald L. Unger, incorporated herein by reference as
Exhibit 10.2 to the Corporation's Registration Statement on
Form S-1 filed on August 26, 1992 (File No. 33-51366).
Exhibit 10.3 Lease between The Marathon Bank and Post Office
Plaza, L.C. for the branch office at 300 Warren Avenue, Front
Royal, Virginia, incorporated herein by reference as Exhibit
10.3 to the Corporation's Registration Statement on Form S-1
filed July 16, 1996 (File No. 333-08995).
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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 Lessors,
Keith R. Lantz and Mary G. Lantz for land upon which the bank
has erected a permanent structure 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-K for the year ended December 31, 1997
(File No. 0-18868).
Exhibit 10.6 1996 Long-Term Incentive Plan incorporated herein
by reference as to the Corporation's Proxy Statement for 1997
Annual Meeting of Stockholders filed April 7, 1997.
11. Statement re computation of per share earnings
15. Letter re unaudited interim financial information - N/A
18. Letter re change in accounting principles - N/A
19. Report furnished to security holders - N/A
22. Published report regarding matters submitted to vote of security
holders - N/A
23. Consents of experts and counsel - N/A
24. Power of attorney - N/A
27. Financial Data Schedule
99. Additional Exhibits - None
(b) Reports on Form 8-K - None
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SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
MARATHON FINANCIAL CORPORATION
DATE: September 30, 2000
/s/ Donald L. Unger
-------------------------
DONALD L. UNGER
PRINCIPAL EXECUTIVE OFFICER
DATE: September 30, 2000
/s/ Frederick A. Board
--------------------------
FREDERICK A. BOARD
PRINCIPAL FINANCIAL OFFICER
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