================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: November 20, 2000
(Date of earliest event reported)
PREMIER COMMUNITY BANKSHARES, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 0-18868 54-1560968
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
4095 Valley Pike
Winchester, Virginia 22602
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(540) 869-6600
Marathon Financial Corporation
(Former Name or Former Address, if Changed Since Last Report)
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On November 20, 2000, Premier Community Bankshares, Inc. (formerly
Marathon Financial Corporation), a Virginia corporation (the "Company"),
acquired all of the issued and outstanding capital stock of Rockingham Heritage
Bank, a Virginia state bank ("Rockingham"), through a merger by Marathon Merger
Bank, a Virginia state bank and wholly owned subsidiary of the Company, with and
into Rockingham (the "Merger"). The Merger was consummated pursuant to an
Amended and Restated Agreement and Plan of Merger, dated as of June 21, 2000, by
and among Rockingham, the Company, The Marathon Bank, a Virginia state bank and
a wholly owned subsidiary of the Company ("Marathon"), and Marathon Merger Bank
(the "Merger Agreement").
Under the terms of the Merger, each outstanding share of Rockingham's
common stock, par value $5.00 per share ("Rockingham Common Stock"), was
converted into the right to receive 1.58 shares of the Company's common stock,
par value $1.00 per share ("Company Common Stock"), and cash in lieu of
fractional shares. There were 1,589,940 shares of Rockingham Common Stock
outstanding immediately prior to the consummation of the Merger.
In connection with the Merger, Rockingham became a wholly owned
subsidiary of the Company. In addition, the size of the Company's Board of
Directors was reduced from 11 to eight members, and four of the former directors
of Rockingham became directors of the Company.
Furthermore, the Company changed its name from "Marathon Financial
Corporation" to "Premier Community Bankshares, Inc." effective as of November
20, 2000. The Company's subsidiaries, Marathon and Rockingham, will continue to
operate under their current names for the foreseeable future. Effective November
21, 2000, shares of Company Common Stock began trading on The Nasdaq SmallCap
Market ("Nasdaq") under the symbol "PREM." Prior to that date, shares of Company
Common Stock traded on Nasdaq under the symbol "MFCV."
For a more detailed description of the Merger, see the Joint Proxy
Statement/Prospectus that was filed with the Securities and Exchange Commission
on August 17, 2000 in connection with the Company's Registration Statement on
Form S-4 (File No. 333-41844), and which is incorporated herein by reference.
2
<PAGE>
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
The following financial statements of Rockingham are included in
this report:
Independent Auditor's Report of McGladrey & Pullen, LLP
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998
Consolidated Statements of Income for the years ended December
31, 1999 and 1998
Consolidated Statements of Stockholders' Equity for the years
ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the years ended
December 31, 1999 and 1998
Notes to Consolidated Financial Statements
Interim Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of September 30, 2000 and
December 31, 1999
Consolidated Statements of Income for the nine months ended
September 30, 2000 and 1999
Consolidated Statements of Stockholders' Equity for the nine
months ended September 30, 2000 and 1999
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000 and 1999
Notes to Consolidated Financial Statements (unaudited)
3
<PAGE>
[MCGLADREY & PULLEN, LLP LETTERHEAD]
Independent Auditor's Report
To the Board of Directors
Rockingham Heritage Bank
Harrisonburg, Virginia
We have audited the accompanying consolidated balance sheets of Rockingham
Heritage Bank and Subsidiary as of December 31, 1999 and 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Bank'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 Rockingham Heritage
Bank and Subsidiary as of December 31, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ McGladrey & Pullen, LLP
Harrisonburg, Virginia
January 19, 2000, except for Note 17 as to which the date is February 8, 2000
and Notes 18 and 19 as to which the date is July 11, 2000
4
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and due from banks (Note 2) $ 3,906,883 $ 3,820,692
Federal funds sold 7,677,000 5,602,000
-----------------------------------
Cash and cash equivalents 11,583,883 9,422,692
Investment securities available-for-sale (Note 3) 6,410,053 5,495,213
Investment securities held-to-maturity (fair value
market value 1999 $1,941,134; 1998 $2,918,186) (Note 3) 1,948,895 2,861,407
Loans, net (Notes 4 and 5) 77,947,154 64,949,417
Bank premises and equipment (Note 6) 2,169,319 2,077,221
Accrued income receivable 532,872 424,907
Deferred income taxes (Note 9) 342,500 238,300
Income taxes receivable - 90,848
Other assets 207,595 231,354
-----------------------------------
Total assets $ 101,142,271 $ 85,791,359
===================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits: (Note 7)
Interest bearing $ 75,834,932 $ 62,978,999
Noninterest bearing 11,975,914 10,730,087
-----------------------------------
87,810,846 73,709,086
Borrowed funds (Note 8) 1,302,383 1,260,689
Accrued interest and other liabilities 389,670 306,362
Income taxes payable 11,652 -
-----------------------------------
Total liabilities 89,514,551 75,276,137
-----------------------------------
Commitments and Contingencies (Notes 6, 8, 12, 13 and 18)
Stockholders' Equity: (Notes 10 and 14)
Common stock - $5 par value; authorized 2,000,000
shares; issued 1999 1,589,843 shares; 1998 1,589,811 shares 7,949,215 7,570,530
Additional paid-in capital 1,974,989 1,596,273
Retained earnings 1,768,375 1,324,840
Accumulated other comprehensive income (loss) (64,859) 23,579
-----------------------------------
Total stockholders' equity 11,627,720 10,515,222
-----------------------------------
Total liabilities and stockholders' equity $ 101,142,271 $ 85,791,359
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
5
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 6,370,838 $ 5,547,903
Interest and dividends on investment securities 481,900 361,646
Interest on federal funds sold 334,645 359,826
-----------------------------------
7,187,383 6,269,375
-----------------------------------
Interest expense:
Deposits 3,064,799 2,764,875
Borrowed funds 69,863 57,520
-----------------------------------
3,134,662 2,822,395
-----------------------------------
Net interest income 4,052,721 3,446,980
Provision for loan losses (Note 5) 120,000 144,000
-----------------------------------
Net interest income after provision for loan losses 3,932,721 3,302,980
-----------------------------------
Noninterest income:
Service fees 337,687 287,035
Other 33,470 40,994
-----------------------------------
371,157 328,029
-----------------------------------
Noninterest expenses:
Salaries and wages 1,160,657 952,577
Employee benefits 249,327 208,750
Occupancy 380,762 323,159
Outside services 189,454 156,342
Other 504,242 384,309
-----------------------------------
2,484,442 2,025,137
-----------------------------------
Income before provision for income taxes 1,819,436 1,605,872
Provision for income taxes (Note 9) 618,500 544,000
-----------------------------------
Net income $ 1,200,936 $ 1,061,872
===================================
Basic earnings per share $ .76 $ .70
===================================
Diluted earnings per share $ .74 $ .67
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
6
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Shares Stock Capital Earnings Income Total
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 1,265,562 $ 2,869,755 $ 3,018,097 $ 1,056,068 $ 216 $ 6,944,136
------------
Comprehensive income:
Net income - - - 1,061,872 - 1,061,872
Change in unrealized gain on
securities available-for-sale,
net of taxes of $12,100 - - - - 23,363 23,363
------------
Total comprehensive income 1,085,235
------------
Exercise of stock options 70,674 307,355 (134,941) - - 172,414
Stock offering 253,575 575,000 1,609,273 - - 2,184,273
Stock split (2 for 1) - 3,457,920 (3,457,920) - - -
Stock dividend 5% - 360,500 432,600 (793,100) - -
Tax benefit related to exercise
of stock options - - 129,164 - - 129,164
----------------------------------------------------------------------------------------
Balance, December 31, 1998 1,589,811 7,570,530 1,596,273 1,324,840 23,579 10,515,222
------------
Comprehensive income:
Net income - - - 1,200,936 - 1,200,936
Change in unrealized gain on
securities available-for-sale,
net of tax benefit of ($45,700) - - - - (88,438) (88,438)
------------
Total comprehensive income 1,112,498
------------
Adjustment on partial shares
for 5% dividend 32 155 186 (341) - -
Stock dividend 5% - 378,530 378,530 (757,060) - -
----------------------------------------------------------------------------------------
Balance, December 31, 1999 1,589,843 $ 7,949,215 $ 1,974,989 $ 1,768,375 $ (64,859) $ 11,627,720
========================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
7
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net income $ 1,200,936 $ 1,061,872
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 196,400 186,103
Provision for loan losses 120,000 144,000
Deferred income taxes (58,500) (41,300)
(Increase) in accrued income receivable (107,965) (55,750)
Amortization and accretion of bond premiums and discount, net 10,528 7,817
(Increase) in other assets (5,660) (120,453)
(Increase) decrease in income taxes receivable 90,848 (90,848)
Increase in accrued interest and other liabilities 83,308 73,643
Increase in income taxes payable 11,652 98,083
-------------------------------
Net cash provided by operating activities 1,541,547 1,263,167
-------------------------------
Cash Flows From Investing Activities
Available-for-sale securities:
Maturities 1,516,621 1,066,124
Purchases (2,576,913) (5,111,507)
Held-to-maturity securities:
Maturities 913,298 1,024,066
Loans made to customers, net (increase) (13,117,737) (10,150,950)
Purchases of premises and equipment (259,079) (156,065)
-------------------------------
Net cash used in investing activities (13,523,810) (13,328,332)
-------------------------------
</TABLE>
(Continued)
8
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in interest bearing deposits $ 12,855,933 $ 6,250,498
Net increase in noninterest bearing deposits 1,245,827 2,457,086
Increase in borrowed funds 41,694 844,272
Proceeds from exercise of stock options - 172,414
Proceeds from stock issuance - 2,184,273
-------------------------------
Net cash provided by financing activities 14,143,454 11,908,543
-------------------------------
Increase (decrease) in cash and cash equivalents 2,161,191 (156,622)
Cash and cash equivalents:
Beginning 9,422,692 9,579,314
-------------------------------
Ending $ 11,583,883 $ 9,422,692
===============================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 3,039,733 $ 2,758,037
===============================
Income taxes $ 574,500 $ 578,000
===============================
Supplemental Schedule of Noncash Investing Activities
Net unrealized gain (loss) on available-for-sale securities $ (88,438) $ 23,363
===============================
Tax benefit related to exercise of stock options $ - $ 129,164
===============================
</TABLE>
See Notes to Consolidated Financial Statements.
9
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
Nature of business: Rockingham Heritage Bank (the Bank) is a community bank
organized under the laws of the Commonwealth of Virginia in 1990, with branches
located within the city of Harrisonburg and the counties of Augusta and
Rockingham. The Bank offers customary banking services, including acceptance of
checking, savings and time deposits and the making of commercial, agricultural,
real estate and consumer loans, to customers who are predominantly small and
middle-market businesses and individuals.
Basis of financial statement presentation and accounting estimates: The
accounting and reporting policies of the Bank conform to generally accepted
accounting principles and to accepted practice within the banking industry. In
preparing the accompanying financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses for
the reporting period. Actual results could differ from those estimates.
The Bank's consolidated financial statements include the accounts of the Bank
and its wholly owned subsidiary. All material intercompany accounts and
transactions are eliminated in consolidation.
Cash, cash equivalents and cash flows: Cash and cash equivalents include cash on
hand, amounts due from banks (including cash items in process of clearing) and
federal funds sold. Cash flows from loans originated by the Bank and deposits
are reported net.
Investment securities: Investment securities that management has both the
positive intent and ability to hold to maturity are classified as securities
held-to-maturity and are carried at cost, adjusted for amortization of premium
or accretion of discount using the interest method. Securities that may be sold
prior to maturity for asset/liability management purposes, or that may be sold
in response to changes in interest rates, to changes in prepayment risk, to
increase regulatory capital or other similar factors, are classified as
securities available-for-sale and carried at fair value with any adjustments to
fair value, after tax, reported as a separate component of comprehensive income.
Interest and dividends on securities, including the amortization of premiums and
the accretion of discounts, are reported in interest and dividends on
securities. Gains and losses on the sale of securities are recorded on the trade
date and are calculated using the specific-identification method.
10
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. Significant Accounting Policies (Continued)
Loans: Loans are stated at the amount of unpaid principal, reduced by unearned
fees and an allowance for loan losses. The allowance for loan losses is
established through a provision for loan losses charged against income. Loans
are charged against the allowance for loan losses when management believes that
collectibility of the principal is unlikely. The allowance is an amount that
management believes will be adequate to absorb estimated losses on existing
loans, based on an evaluation of the collectibility of loans and prior loss
experience. This evaluation also takes into consideration such factors as
changes in the nature and volume of the loan portfolio, overall portfolio
quality, review of specific problem loans, and current economic conditions that
may affect the borrower's ability to pay. While management uses the best
information available to make its evaluation, future adjustments to the
allowance may be necessary if there are significant changes in economic
conditions. In addition, regulatory agencies, as an integral part of their
examination process, periodically review the Bank's allowance for loan losses,
and may require the Bank to make additions to the allowance based on their
judgment about information available to them at the time of their examinations.
Unearned interest on discounted loans is amortized over the life of the loan
using the interest method. For all loans, interest is accrued daily on the
outstanding balances. For impaired loans, accrual of interest is discontinued on
a loan when management believes, after considering collection efforts and other
factors, that the borrower's financial condition is such that collection of
interest is doubtful. A loan is restored to accrual basis when the borrower's
financial condition improves to the extent collectibility of principal is no
longer in doubt.
A loan is impaired when it is probable the Bank will be unable to collect all
contractual principal and interest payments due in accordance with the terms of
the loan agreement. Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or,
as a practical expedient, at the loan's observable market price or fair value of
the collateral. Interest income on impaired loans is recognized on a cash basis.
At December 31, 1999 and 1998, the Bank had no impaired loans and, therefore, no
specific allowance has been established for impaired loans.
Loan origination and commitment fees and certain direct loan origination costs
are capitalized and recognized as an adjustment of the yield of the related
loan.
Bank premises and equipment: Bank premises and equipment are carried at cost,
less accumulated depreciation and amortization computed principally by the
straight-line method over the following estimated useful lives:
Building and improvements 15-40 years
Furniture and equipment 5-7 years
Income taxes: Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and 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.
11
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. Significant Accounting Policies (Continued)
Accumulated other comprehensive income: Accumulated other comprehensive income
consists solely of unrealized gains and losses on available-for-sale securities.
Earnings per common share: Basic earnings per common share have been computed on
the basis of the weighted-average number of common shares outstanding. Diluted
earnings per share have been computed using the weighted-average of common
shares and potentially dilutive stock options during the year. Following is
information regarding the computation of earnings per share data for the years
ended December 31, 1999 and 1998, respectively:
<TABLE>
<CAPTION>
1999 1998
------------------------------ ------------------------------
Numerator Denominator Numerator Denominator
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic Earnings Per Share
Income Available to Stockholders $ 1,200,936 - $ 1,061,872 -
Average Shares Outstanding - 1,589,843 - 1,522,948
Effect of Dilutive Shares - 34,506 - 57,712
----------- -----------
Dilutive Shares 1,624,349 1,580,660
=========== ===========
</TABLE>
Stock options were treated as dilutive common shares using the treasury stock
method. This method assumes that any proceeds from the options would be used to
purchase common stock at current market prices. Common stock issued and per
share amounts have been adjusted for all years presented to reflect the 1998 two
for one stock split and 5% stock dividends in 1999 and 1998.
Future reporting requirements: In June 1998, the Financial Accounting Standards
Board (FASB) issued Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities, which is required to be adopted in years beginning after
June 15, 2000 (as amended by FASB No. 137). The Statement permits early adoption
as of the beginning of any fiscal quarter after its issuance. The Bank expects
to adopt the new Statement effective January 1, 2001. The Statement will require
the Bank to recognize all derivatives on the balance sheet at fair value.
Derivatives that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge, changes in
the fair value of derivatives will either be offset against the change in fair
value of the hedged assets, liabilities, or from commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings.
Because of the Bank's minimal use of derivatives, management does not anticipate
that the adoption of the new Statement will have a significant effect on the
Bank's earnings or financial position.
12
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 2. Restrictions on Cash and Cash Equivalents
The Bank is required to maintain reserve balances in cash, or on deposit with
the Federal Reserve Bank, based upon a percentage of certain deposits. The total
required balance as of December 31, 1999 and 1998 was approximately $510,000 and
$400,000, respectively.
Note 3. Investment Securities
Carrying amounts and approximate fair values of investment securities as of
December 31, 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
1999:
Securities available-for-sale:
U. S. Government agencies $ 5,003,810 $ - $ 101,025 $ 4,902,785
Mortgage-backed securities 904,705 2,613 - 907,318
Other securities 599,950 - - 599,950
-----------------------------------------------------------------
6,508,465 2,613 101,025 6,410,053
-----------------------------------------------------------------
Securities being held-to-maturity:
U. S. Government agencies 1,597,059 4,306 6,540 1,594,825
Mortgage-backed securities 351,836 - 5,527 346,309
-----------------------------------------------------------------
1,948,895 4,306 12,067 1,941,134
-----------------------------------------------------------------
$ 8,457,360 $ 6,919 $ 113,092 $ 8,351,187
=================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
1998:
Securities available-for-sale:
U. S. Government agencies $ 3,511,895 $ 27,605 $ - $ 3,539,500
Mortgage-backed securities 1,425,492 8,121 - 1,433,613
Other securities 522,100 - - 522,100
-----------------------------------------------------------------
5,459,487 35,726 - 5,495,213
-----------------------------------------------------------------
Securities being held-to-maturity:
U. S. Government agencies 2,095,438 46,082 - 2,141,520
Mortgage-backed securities 765,969 10,697 - 776,666
-----------------------------------------------------------------
2,861,407 56,779 - 2,918,186
-----------------------------------------------------------------
$ 8,320,894 $ 92,505 $ - $ 8,413,399
=================================================================
</TABLE>
13
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 3. Investment Securities (Continued)
The amortized cost and fair value of investment securities, as of December 31,
1999, are shown below by contractual maturity. Maturities may differ from
contractual maturities in mortgage-backed securities because the mortgages
underlying the securities may be called or repaid without penalties.
Mortgage-backed securities and other securities are excluded from the maturity
summary since they do not have a single maturity date.
Amortized Fair
Cost Value
-------------------------------
Available-for-sale:
Due one year or less $ 3,004,435 $ 2,923,100
Due after one year through five years 1,999,375 1,979,685
-------------------------------
$ 5,003,810 $ 4,902,785
===============================
Held-to-maturity:
Due one year or less $ 497,837 $ 499,065
Due after one year through five years 1,099,222 1,095,760
-------------------------------
$ 1,597,059 $ 1,594,825
===============================
Investment securities with an amortized cost of $1,499,221 and $498,752 were
pledged as collateral on public deposits at December 31, 1999 and 1998,
respectively.
Note 4. Loans
The composition of net loans is as follows:
1999 1998
-------------------------------
Commercial $ 30,664,275 $ 27,232,758
Commercial real estate 30,960,871 22,684,448
Residential real estate 11,945,985 11,227,924
Consumer installment 5,412,581 4,728,497
-------------------------------
78,983,712 65,873,627
-------------------------------
Less:
Allowance for loan losses 919,546 835,905
Unearned net loan fees 117,012 88,305
-------------------------------
1,036,558 924,210
-------------------------------
$ 77,947,154 $ 64,949,417
===============================
There were no nonaccruing loans at December 31, 1999 and $28,000 at December 31,
1998. Interest related to these loans was immaterial.
14
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
1999 1998
-------------------------------
Balance, beginning of year $ 835,905 $ 719,159
Provision charged to operations 120,000 144,000
Recoveries of amounts charged off 15,223 7,988
-------------------------------
971,128 871,147
Amounts charged off 51,582 35,242
-------------------------------
Balance, end of year $ 919,546 $ 835,905
===============================
Note 6. Bank Premises and Equipment
The major classes of bank premises and equipment and the total accumulated
depreciation as of December 31 are as follows:
1999 1998
-------------------------------
Land $ 598,350 $ 598,350
Buildings and improvements 1,397,037 1,349,815
Furniture and equipment 1,239,639 1,028,599
-------------------------------
3,235,026 2,976,764
Less accumulated depreciation 1,065,707 899,543
-------------------------------
$ 2,169,319 $ 2,077,221
===============================
The Bank leases space for three branches under operating leases which expire
through 2004. Rental expense was $44,800 in 1999 and $14,400 in 1998. The
minimum rent commitment is as follows:
Year Amount
------------------------------------------------
2000 $ 44,100
2001 43,400
2002 29,000
2003 29,000
2004 4,800
-------------
$ 150,300
=============
15
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 7. Deposits
The composition of deposits is as follows:
1999 1998
-------------------------------
Demand deposits, noninterest bearing $ 11,975,914 $ 10,730,087
NOW and money market accounts 18,013,999 15,832,045
Savings 5,016,171 5,164,542
Time certificates, $100,000 or more 7,302,922 5,704,283
Other time certificates 45,501,840 36,278,129
-------------------------------
$ 87,810,846 $ 73,709,086
===============================
At December 31, 1999, scheduled maturities of time certificates are as follows:
Year Amount
-----------------------------------------------
2000 $ 44,520,522
2001 5,941,814
2002 1,466,242
2003 876,184
-------------
$ 52,804,762
=============
Note 8. Lines of Credit/Borrowed Funds
The Bank has the ability to borrow approximately $21 million from various
correspondent banks.
Borrowed funds consist of treasury tax and loan deposits which are generally
repaid within 30 days from the transaction date and a $1 million borrowing from
the Federal Home Loan Bank of Atlanta at an interest rate of 5.52%.
16
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 9. Income Taxes
Deferred tax assets and liabilities included in deferred income taxes at
December 31, 1999 and 1998 consist of the following components:
1999 1998
-------------------------------
Deferred tax assets:
Allowance for loan losses $ 305,500 $ 273,500
Deferred loan fees 39,800 30,000
Deferred compensation 17,500 -
Other 33,500 -
-------------------------------
396,300 303,500
-------------------------------
Deferred tax liabilities:
Accumulated depreciation 42,700 41,000
Other 11,100 24,200
-------------------------------
53,800 65,200
-------------------------------
Deferred income taxes $ 342,500 $ 238,300
===============================
The provision for income taxes charged to income for the years ended December
31, 1999 and 1998 consists of the following:
1999 1998
-------------------------------
Current tax expense $ 677,000 $ 585,300
Deferred tax (benefit) (58,500) (41,300)
-------------------------------
$ 618,500 $ 544,000
===============================
17
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 10. Regulatory Capital Requirements
The Bank is subject to certain restrictions on the amount of dividends that can
be declared without prior regulatory approval. At December 31, 1999,
substantially all retained earnings were available for dividend declaration
without regulatory approval.
The Bank is 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the 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
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes that, as of December 31, 1999, the Bank meets all capital adequacy
requirements to which it is subject.
As of December 31, 1998, the most recent notification from the State Corporation
Commission of the Commonwealth of Virginia categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, the Bank must maintain minimum total
risk-based, Tier 1 risk-based, Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification which management
believes have changed the Bank's category.
The Bank's actual capital amounts and ratios are also presented in the table.
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital
(to Risk Weighted Assets) $ 12,612,125 15.49% > $ 6,511,846 > 8.0% > $ 8,139,808 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) 11,692,579 14.36% > 3,255,923 > 4.0% > 4,883,885 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) 11,692,579 12.40% > 3,771,020 > 4.0% > 4,713,775 > 5.0%
- - - -
As of December 31, 1998:
Total Capital
(to Risk Weighted Assets) $ 11,327,548 16.30% > $ 5,559,346 > 8.0% > $ 6,949,183 > 10.0%
- - - -
Tier 1 Capital
(to Risk Weighted Assets) 10,491,643 15.10% > 2,779,673 > 4.0% > 4,169,510 > 6.0%
- - - -
Tier 1 Capital
(to Average Assets) 10,491,643 13.28% > 3,160,059 > 4.0% > 3,950,074 > 5.0%
- - - -
</TABLE>
18
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 11. Fair Value of Financial Instruments
Management uses its best judgment in estimating the fair value of the Bank's
financial instruments; however, there are inherent weaknesses in any estimation
technique. Therefore, for substantially all financial instruments, the fair
value estimates herein are not necessarily indicative of the amounts the Bank
could have realized in a sales transaction on the dates indicated. The estimated
fair value amounts have been measured as of their respective year ends, and have
not been reevaluated or updated for purposes of these consolidated financial
statements subsequent to those respective dates. As such, the estimated fair
values of these financial instruments subsequent to the respective reporting
dates may be different than the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Bank since a fair value calculation is only provided for a
limited portion of the Bank's assets. Due to a wide range of valuation
techniques and the degree of subjectivity used in making the estimates,
comparisons between the Bank's disclosures and those of other companies may not
be meaningful. The following methods and assumptions were used to estimate the
fair values of the Bank's financial instruments for which it is practicable to
estimate that value:
Cash and cash equivalents: The carrying amounts reported in the balance sheet
for cash and due from banks and federal funds sold approximate their fair
values.
Investment securities: For U. S. Government agencies and mortgage-backed
securities, fair values are based on quoted market prices. For other securities
which are not tradable, fair value approximates carrying value.
Loans receivable: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values. 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 values of other types of loans are estimated by
discounting the future cash flows using the interest rates currently being
offered for loans with similar terms to borrowers with similar credit quality.
Deposit liabilities: The fair value of demand deposits, savings accounts, and
variable rate money market deposits, represents the amount payable on demand at
the reporting date. The fair values of fixed-rate, fixed-maturity certificates
of deposit are estimated using a discounted cash flow calculation that applies
the interest rates currently offered for deposits of similar remaining
maturities.
Borrowed funds: The carrying amount of borrowed funds approximates its fair
value.
Commitments to extend credit and standby letters of credit: Since the majority
of the Bank's off-balance-sheet instruments consists of nonfee-producing,
variable rate commitments, the Bank has determined they do not have a
distinguishable fair value.
19
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 11. Fair Value of Financial Instruments (Continued)
The estimated fair value of the Bank's financial instruments as of December 31,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 11,584 $ 11,584 $ 9,423 $ 9,423
Investment securities available-for-sale 6,410 6,410 5,495 5,495
Investment securities held-to-maturity 1,949 1,941 2,862 2,918
Loans 77,947 77,749 64,949 65,596
-------------------------------------------------------------
Total financial assets 97,890 $ 97,684 82,729 $ 83,432
Nonfinancial assets 3,252 ============ 3,062 ===========
------------ ------------
Total assets $ 101,142 $ 85,791
============ ============
Financial liabilities:
Deposits $ 87,811 $ 88,070 $ 73,709 $ 74,003
Borrowed funds 1,302 1,298 1,261 1,261
-------------------------------------------------------------
Total financial liabilities 89,113 $ 89,368 74,970 $ 75,264
Nonfinancial liabilities 401 ============ 306 ===========
Shareholders' equity 11,628 10,515
------------ ------------
Total liabilities and shareholders' equity $ 101,142 $ 85,791
============ ============
</TABLE>
20
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 12. Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the consolidated balance sheets. The
contract amounts of those instruments reflect the extent of the Bank's
involvement in particular classes of financial instruments.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and standby
letters of credit is represented by the contractual amount of those instruments.
The Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance-sheet instruments. A summary of the Bank's
commitments at December 31, 1999 are as follows:
Commitments to extend credit $ 15,025,000
Loan commitments 2,833,000
Standby letters of credit 687,000
--------------
$ 18,545,000
==============
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 Bank evaluates each customer's credit in
determining the amount of collateral to obtain. Collateral held varies but may
include accounts receivable; inventory; property, plant and equipment; and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Those guarantees are
primarily issued to support public and private borrowing arrangements. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
Note 13. Concentrations of Credit Risk
The majority of the Bank's loans, commitments to extend credit, and standby
letters of credit have been granted to customers in the Bank's market area. The
concentrations of credit by type of loan are set forth in Note 4. The
distribution of commitments to extend credit approximates the distribution of
loans outstanding. The Bank, as a matter of policy, does not extend credit to
any single borrower in excess of $1,500,000.
21
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 14. Transactions With Related Parties
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
A summary of detail activity for the years ended December 31, 1999 and 1998 are
as follows:
1999 1998
--------------------------------
Balance, beginning $ 2,336,000 $ 2,334,000
New loans 763,000 1,130,000
Repayments (1,301,000) (1,128,000)
--------------------------------
Balance, ending $ 1,798,000 $ 2,336,000
================================
Note 15. Stock Option Plans
In April 1991, a stock option plan was adopted and 182,324 shares, as adjusted
for stock splits and dividends, of the Bank's common stock were reserved to be
granted under the plan. As of December 31, 1999, there are 1,926 of these shares
available for the granting of options. All options were granted at their
estimated fair value at date of grant. The 50,458 director's options are
exercisable currently. The 9,522 employee options, which were issued in 1998,
vest and become exercisable in 2001. Beginning in 1998, directors desiring to
exercise their options must tender their options using a cashless format whereby
shares of stock are issued for the net value of the options tendered.
In July 1999, a second stock option plan was adopted and 131,250 shares, as
adjusted for the 2000 5% dividend, of the Bank's common stock were reserved to
be granted under the plan. As of December 31, 1999, there are 56,461 of these
shares available for the granting of options. All options were granted at their
estimated fair value at date of grant. All 74,789 options granted in 1999 under
the new plan vest and become exercisable at 20% per year starting in July 2000.
Grantees desiring to exercise their options may choose to tender their options
using a cashless format whereby shares of stock are issued for the net value of
the options tendered.
22
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 15. Stock Option Plans (Continued)
The following table is a summary of stock option activity for 1999 and 1998. All
information is restated for stock dividends issued each year.
<TABLE>
<CAPTION>
Weighted-Average
Number of Shares Exercise Price Per Share
--------------------- ------------------------
1999 1998 1999 1998
--------------------- ------------------------
<S> <C> <C> <C> <C>
Options outstanding, beginning of year 61,426 140,897 $ 5.32 $ 4.16
Granted 74,789 12,127 9.34 10.84
Terminated (1,446) (2,248) 10.71 8.21
Exercised/tendered - (89,350) - 4.18
---------------------
Options outstanding, end of year 134,769 61,426 7.49 5.32
=====================
Options exercisable 50,458 50,458 4.11 4.11
</TABLE>
Grants of options under the Plans are accounted for following Accounting
Principles Board Opinion No. 25 and related interpretations. Accordingly, no
compensation costs have been recorded. FASB Statement No. 123 requires
disclosures concerning the fair value of options and encourages accounting
recognition for options using the fair value method. The Bank has elected to
apply the disclosure-only provisions of the Statement.
The fair value of options is estimated at the grant date using the Black-Scholes
option-pricing model with the following assumptions for 1998: dividend rate of
0%, risk-free interest rates of 6.36% to 6.86% for 1999 and 4.65% for 1998,
expected lives of 2 years to 10 years for 1999 and 3 years for 1998, and price
volatility of 41.84% for 1999 and 30.42% for 1998. The fair value per option of
options granted during the year is $6.99 for 1999 and $2.87 for 1998. Had
compensation cost been recorded based on the fair value of awards at the grant
date, the pro forma impact on the Bank's net income and net income per common
share would have been to decrease net income and earnings per share by
approximately $87,000 for 1999 and $20,000 for 1998 and $0.06 for 1999 and $0.01
for 1998.
Note 16. Retirement Plans
The Bank has a defined contribution money purchase pension plan for all eligible
employees and a 401(k) plan for all eligible employees electing to participate.
Retirement plan expense for the years ended December 31, 1999 and 1998 was
$78,000 and $74,000, respectively.
23
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 17. Subsequent Events
On February 8, 2000, the Board of Directors of the Bank declared a 5% stock
dividend to shareholders of record on February 23, 2000 which resulted in
approximately 75,700 new shares being issued. All per share and stock option
information has been restated to give effect to this stock dividend.
Note 18. Merger with Marathon Financial Corporation
On April 18, 2000, the Board of Directors approved an Agreement and Plan of
Merger with Marathon Financial Corporation (Marathon). Marathon's Board of
Directors also approved the agreement on April 18, 2000. Under the terms of the
agreement, the Bank's shareholders will receive 1.58 shares of Marathon common
stock for each outstanding share. The merger is subject to regulatory and
shareholder approval.
Note 19. Recission of Stock Options
On July 11, 2000, the Board of Directors rescinded options to purchase 74,789
shares of the Bank's stock, which had been granted under the Bank's 1999 stock
option plan. All grantees acknowledged and agreed to the recission.
24
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
(unaudited)
---------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Cash and due from banks $ 7,038,540 $ 3,906,883
Federal funds sold 3,107,000 7,677,000
--------------- ---------------
Cash and cash equivalents 10,145,540 11,583,883
Investment securities available-for-sale 6,841,090 6,410,053
Investment securities held-to-maturity (fair value September 2000
$1,367,386; December 1999 $1,941,134) 1,367,815 1,948,895
Loans, net 90,359,556 77,947,154
Bank premises and equipment, net 2,152,739 2,169,319
Accrued income receivable 620,378 532,872
Deferred income taxes 325,258 342,500
Other assets 388,424 207,595
--------------- ---------------
$ 112,200,800 $ 101,142,271
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Interest bearing $ 77,958,179 $ 75,834,932
Noninterest bearing 14,464,529 11,975,914
--------------- ---------------
92,422,708 87,810,846
Borrowed money 6,525,022 1,302,383
Accrued interest and other liabilities 496,067 401,322
--------------- ---------------
99,443,797 89,514,551
--------------- ---------------
Stockholders' Equity
Common stock, $5 par value, authorized 2,000,000 shares; issued
September 2000 1,589,940 shares; December 1999 1,589,843
shares 7,949,700 7,949,215
Additional paid-in capital 1,975,474 1,974,989
Accumulated other comprehensive loss (31,366) (64,859)
Retained earnings 2,863,195 1,768,375
--------------- ---------------
12,757,003 11,627,720
--------------- ---------------
$ 112,200,800 $ 101,142,271
=============== ===============
</TABLE>
See notes to Consolidated Financial Statements.
25
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF INCOME
Nine Months ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income
Interest and fees on loans $ 5,698,007 $ 4,669,923
Interest and dividends on investment securities 426,055 353,514
Interest on federal funds sold 259,800 206,007
Interest bearing deposits 37,637 -
--------------- ---------------
6,421,499 5,229,444
Interest expense
Interest expense on borrowed money 192,552 51,663
Interest expense on deposits 2,739,858 2,233,524
--------------- ---------------
Net interest income before provision for loan losses 3,489,089 2,944,257
Provision for loan losses 90,000 90,000
--------------- ---------------
Net interest income after provision for loan losses 3,399,089 2,854,257
Noninterest income
Service fees 298,994 244,620
Commissions 13,564 23,884
--------------- ---------------
312,558 268,504
Noninterest expenses
Salaries and wages 981,396 847,878
Employee benefits 227,152 183,886
Occupancy and equipment 296,934 277,580
Outside services 296,764 279,550
Other 242,404 233,918
--------------- ---------------
2,044,650 1,822,812
Income before provision for income taxes 1,666,997 1,299,949
Provision for income taxes 567,000 442,000
--------------- ---------------
Net income $ 1,099,997 $ 857,949
=============== ===============
Earnings per common share - Basic $ 0.69 $ 0.54
=============== ===============
Earnings per common share - Diluted $ 0.68 $ 0.53
=============== ===============
</TABLE>
See notes to Consolidated Financial Statements.
26
<PAGE>
Rockingham Heritage Bank
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Shares Stock Capital Earnings Income(Loss) Total
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1999 1,589,811 $ 7,570,530 $ 1,596,273 $1,324,840 $ 23,579 $10,515,222
--------------
Comprehensive income
Net income 857,949 857,949
Change in unrealized gain(loss)
on securities available-for-sale,
net of taxes of $23,255 (45,143) (45,143)
--------------
Total comprehensive income 812,806
--------------
Adjustment on partial shares for 5% 32 155 186 (341) 0
dividend
-------------------------------------------------------------------------------------------
Balance, September 30, 1999 1,589,843 $ 7,570,685 $ 1,596,459 $2,182,448 $ (21,564) $11,328,028
===========================================================================================
Balance, January 1, 2000 1,589,843 $ 7,949,215 $ 1,974,989 $1,768,375 $ (64,859) $11,627,720
--------------
Comprehensive income
Net income 1,099,997 1,099,997
Change in unrealized gain(loss)
on securities available-for-sale,
net of taxes of $17,254 33,493 33,493
--------------
Total comprehensive income 1,133,490
--------------
Other (4,207) (4,207)
Adjustment on partial shares for 5% 97 485 485 (970) 0
dividend
-------------------------------------------------------------------------------------------
Balance, September 30, 2000 1,589,940 $7,949,700 $1,975,474 $2,863,195 $ (31,366) $12,757,003
===========================================================================================
</TABLE>
See notes to Consolidated Financial Statements.
27
<PAGE>
Rockingham Heritage Bank
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 1,099,997 $ 857,949
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation 160,202 139,891
Provision for loan losses 90,000 90,000
Increase in accrued income receivable (87,506) (73,035)
Amortization and accretion of bond premiums and
discount, net 4,216 (2,581)
(Increase)decrease in income taxes receivable (7,664) 46,500
(Increase)decrease in other assets (194,725) 48,365
Increase in deferred income taxes (152) -
Increase in accrued interest and other liabilities 106,397 105,123
Decrease in income taxes payable (11,652) -
-------------- --------------
Net cash provided by operating activities 1,159,113 1,212,212
-------------- --------------
Cash Flows From Investing Activities
Available-for-sale securities
Maturities 238,444 1,409,438
Purchases (629,235) (1,566,038)
Held-to-maturity securities
Maturities 583,298 851,641
Net increase in loans (12,502,402) (11,933,444)
Purchases of premises and equipment (122,062) (294,941)
-------------- --------------
Net cash used in investing activities (12,431,957) (11,533,344)
-------------- --------------
</TABLE>
(Continued)
28
<PAGE>
Rockingham Heritage Bank
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
September 30, September 30,
2000 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase in interest bearing liabilities $ 2,123,247 $ 10,406,136
Net increase in noninterest bearing deposits 2,488,615 1,525,061
Increase in borrowed funds 5,222,639 225,079
-------------- --------------
Net cash provided by financing activities 9,834,501 12,156,276
-------------- --------------
Increase(Decrease) in cash and cash equivalents (1,438,343) 1,835,144
Cash and cash equivalents
Beginning 11,583,883 9,422,692
-------------- --------------
Ending $ 10,145,540 $ 11,257,836
============== ==============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 2,713,509 $ 2,221,929
============== ==============
Income taxes $ 586,409 $ 395,500
============== ==============
Supplemental Schedule of Noncash Investing Activities
Net unrealized gain(loss) on available-for-sale securities $ 33,493 $ (45,143)
============== ==============
</TABLE>
See notes to Consolidated Financial Statements.
29
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
--------------------------------------------------------------------------------
Note 1. Nature of Business
Rockingham Heritage Bank (the Bank) is a community bank organized under the laws
of the Commonwealth of Virginia in 1990, with branches located within the city
of Harrisonburg and the counties of Rockingham and Augusta. The Bank offers
customary banking services, including acceptance of checking, savings and time
deposits and the making of commercial, agricultural, real estate and consumer
loans, to customers who are predominantly small and middle-market businesses and
individuals.
Note 2. Basis of Presentation
The accompanying unaudited consolidated financial statements (expect for the
consolidated balance sheet at December 31, 1999, which is audited) have been
prepared in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (none of which were
other than normal recurring accruals) necessary for a fair presentation of the
financial position and results of operations for the periods presented have been
included. The results of operations for the three and nine month periods ended
September 30, 2000 are not necessarily indicative of the results of operations
that may be expected for the Bank's year ending December 31, 2000.
The accounting policies followed are as set forth in Note 1 of the Notes to
Consolidated Financial Statements in the Bank's 1999 Annual Report to
Stockholders.
Note 3. Earnings per Share
Basic earnings per common share have been computed on the basis of the
weighted-average number of common shares outstanding. Diluted earnings per share
have been computed using the weighted-average of common shares and potentially
dilutive stock options during the year. Following is information regarding the
computation of earnings per share data for the three months and nine months
ended September 30, 2000 and 1999.
<TABLE>
<CAPTION>
Three months ended 9/30/00 Three months ended 9/30/99
-------------------------- --------------------------
Numerator Denominator Numerator Denominator
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Basic earnings per share
Income available to stockholders $ 365,490 $ 315,246
Average shares outstanding 1,589,940 1,589,843
Effect of dilutive shares 25,496 27,513
------------------ -----------------
Dilutive shares 1,615,436 1,617,356
================== =================
</TABLE>
30
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Nine months ended 9/30/00 Nine months ended 9/30/99
------------------------- -------------------------
Numerator Denominator Numerator Denominator
----------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
Basic earnings per share
Income available to stockholders $ 1,099,997 $ 857,949
Average shares outstanding 1,589,940 1,589,843
Effect of dilutive shares 27,576 27,513
------------------ -----------------
Dilutive shares 1,617,516 1,617,356
================== =================
</TABLE>
Stock options were treated as dilutive common shares using the treasury stock
method. This method assumes that any proceeds from the options would be used to
purchase common stock at current market prices. Common stock issued and per
share amounts have been adjusted for all periods presented to reflect the 5%
stock dividends in 2000 and 1999.
Note 4. Merger with Marathon Financial Corporation
On April 18, 2000, the Board of Directors approved an Agreement and Plan of
Merger with Marathon Financial Corporation (Marathon). Marathon's Board of
Directors also approved the agreement on April 18, 2000. Under the terms of the
Agreement, the Bank's shareholders will receive 1.58 shares of Marathon common
stock for each outstanding share. The merger is subject to regulatory and
shareholder approval. The bank's shareholders approved the merger on September
13, 2000 and the regulatory approval was obtained on November 3, 2000.
Note 5. Recission of Stock Options
On July 11, 2000 the Board of Directors rescinded options to purchase 74,789
shares of the Bank's stock, which had been granted under the Bank's 1999 stock
option plan. All grantees acknowledged and agreed to the recission.
31
<PAGE>
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed financial statements have
been prepared on a consolidated basis based upon the historical financial
statements of the Company and Rockingham. The pro forma combined information
gives effect to the Merger accounted for as a pooling of interests, and is based
on the issuance of 2,512,105 shares of Company Common Stock in connection with
the Merger, which in turn is based on the number of shares of Rockingham Common
Stock outstanding at September 30, 2000. The number of shares of Company Common
Stock to be issued in connection with the Merger is subject to certain
adjustments set forth in the Merger Agreement. Any difference in the number of
shares of Company Common Stock issued in connection with the Merger would affect
the pro forma financial information set forth below.
The pro forma financial statements should be read in conjunction with
the separate historical financial statements and the related notes thereto of
the Company, which have been filed with the Commission, and Rockingham's
historical financial statements, which are included in Item 7(a) above
(Rockingham's 1997 audited financial statements are not included in this
report). It has been assumed that the Merger, if consummated, will be accounted
for as a pooling of interests, and therefore no adjustments have been made to
the historical results of operations as a result of these transactions. The pro
forma combined financial position and results of operations are not necessarily
indicative of the results that would actually have been attained if the Merger
had occurred in the past or that may be attained in the future.
32
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED BALANCE SHEET
September 30, 2000
<TABLE>
<CAPTION>
Marathon Rockingham Adjustments Consolidated
-------- ---------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 5,836 $ 7,039 $ -- $ 12,875
Federal funds sold 14,337 3,107 -- 17,444
Securities 13,274 8,209 -- 21,483
Loans held for resale 207 -- -- 207
Loans, net 86,222 90,360 -- 176,582
Bank premises and equipment, net 2,789 2,153 -- 4,942
Accrued interest receivable 609 620 -- 1,229
Other real estate -- -- -- -
Other assets 548 713 -- 1,261
------------------------------------------------------------
Total assets $ 123,822 $ 112,201 $ -- $ 236,023
============================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Interest-bearing $ 93,721 $ 77,958 $ -- $ 171,679
Non-interest bearing 18,999 14,465 -- 33,464
Other borrowed money -- 6,525 -- 6,525
Accrued interest payable and other liabilities 438 496 -- 934
Capital lease payable 213 -- -- 213
Dividends payable -- -- -- -
------------------------------------------------------------
Total liabilities $ 113,371 $ 99,444 $ -- $ 212,815
------------------------------------------------------------
Commitments -- -- -- --
Stockholders' Equity:
Preferred stock $ -- $ -- $ -- $ --
Common stock 2,051 7,950 (5,438) 4,563
Capital surplus 7,771 1,976 5,438 15,185
Retained earnings 710 2,863 -- 3,573
Accumulated other comprehensive income (loss) (81) (32) -- (113)
------------------------------------------------------------
Total stockholders' equity $ 10,451 $ 12,757 $ -- $ 23,208
------------------------------------------------------------
Total liabilities and stockholders' equity $ 123,822 $ 112,201 $ -- $ 236,023
============================================================
</TABLE>
33
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED INCOME STATEMENT
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
Marathon Rockingham Combined
-------- ---------- --------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 6,004 $ 5,698 $ 11,702
Interest and dividends on securities:
Taxable 432 426 858
Nontaxable 53 -- 53
Dividends 29 -- 29
Interest on deposits in other banks -- 38 38
Interest on Federal funds sold 498 260 758
--------- --------- ---------
Total interest and dividend income $ 7,016 $ 6,422 $ 13,438
--------- --------- ---------
Interest expense:
Interest on deposits $ 2,959 $ 2,740 $ 5,699
Interest on short-term borrowings -- 193 193
Interest on capital lease obligations 13 -- 13
--------- --------- ---------
Total interest expense $ 2,972 $ 2,933 $ 5,905
--------- --------- ---------
Net interest income $ 4,044 $ 3,489 $ 7,533
Provision for loan losses 273 90 363
--------- --------- ---------
Net interest income after provision for loan losses $ 3,771 $ 3,399 $ 7,170
--------- --------- ---------
Non Interest Income:
Service charges on deposit accounts $ 608 $ 299 $ 907
Commissions and fees 28 14 42
Other 44 -- 44
--------- --------- ---------
Total Non Interest Income $ 680 $ 313 $ 993
--------- --------- ---------
Non Interest Expense:
Salaries and employee benefits $ 1,446 $ 1,209 $ 2,655
Net occupancy expense of premises 168 130 298
Furniture and equipment expense 230 167 397
Other operating expense 1,171 539 1,710
--------- --------- ---------
Total Non Interest Expense $ 3,015 $ 2,045 $ 5,060
--------- --------- ---------
Income before income taxes $ 1,436 $ 1,667 $ 3,103
Income taxes 504 567 1,071
--------- --------- ---------
Net income $ 932 $ 1,100 $ 2,032
========= ========= =========
Earnings per common share:
Basic $ 0.45 $ 0.69 $ 0.45
========= ========= =========
Diluted $ 0.45 $ 0.68 $ 0.44
========= ========= =========
Weighted average shares outstanding:
Basic 2,051,215 1,589,940 4,563,320
Diluted 2,066,237 1,617,516 4,621,619
</TABLE>
34
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Marathon Rockingham Combined
----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,252 $ 6,371 $ 13,623
Interest and dividends on securities:
Taxable 506 482 988
Nontaxable 30 -- 30
Dividends 35 -- 35
Interest on federal funds sold 492 335 827
----------- ----------- -----------
Total interest and dividend income 8,315 7,188 15,503
----------- ----------- -----------
Interest expense:
Interest on deposits 3,464 3,065 6,529
Interest on short-term borrowings -- 70 70
Interest on capital lease obligations 18 -- 18
----------- ----------- -----------
Total interest expense 3,482 3,135 6,617
----------- ----------- -----------
Net interest income 4,833 4,053 8,886
Provision for loan losses 260 120 380
----------- ----------- -----------
Net interest income after provision for loan losses 4,573 3,933 8,506
----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 779 338 1,117
Commissions and fees 23 -- 23
Loss on sale of other real estate (2) -- (2)
Other 59 33 92
----------- ----------- -----------
Total noninterest income 859 371 1,230
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,888 1,410 3,298
Net occupancy expense of premises 225 381 606
Furniture and equipment expense 360 -- 360
Outside services -- 190 190
Other operating expense 1,284 504 1,788
----------- ----------- -----------
Total noninterest expense 3,757 2,485 6,242
----------- ----------- -----------
Income before income taxes 1,675 1,819 3,494
Income taxes 563 618 1,181
----------- ----------- -----------
Net income $ 1,112 $ 1,201 $ 2,313
=========== =========== ===========
Earnings per common share:
Basic $ 0.54 $ 0.76 $ 0.51
=========== =========== ===========
Diluted $ 0.53 $ 0.74 $ 0.50
=========== =========== ===========
Weighted average shares outstanding:
Basic 2,054,748 1,589,843 4,566,701
Diluted 2,089,403 1,624,349 4,651,106
</TABLE>
35
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Marathon Rockingham Combined
----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 6,064 $ 5,548 $ 11,612
Interest and dividends on securities:
Taxable 354 361 715
Dividends 27 -- 27
Interest on federal funds sold 431 360 791
----------- ----------- -----------
Total interest and dividend income 6,876 6,269 13,145
----------- ----------- -----------
Interest expense:
Interest on deposits 2,938 2,765 5,703
Interest on short-term borrowings -- 57 57
Interest on capital lease obligations 21 -- 21
----------- ----------- -----------
Total interest expense 2,959 2,822 5,781
----------- ----------- -----------
Net interest income 3,917 3,447 7,364
Provision for loan losses 285 144 429
----------- ----------- -----------
Net interest income after provision for loan losses 3,632 3,303 6,935
----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 734 287 1,021
Commissions and fees 111 -- 111
Loss on sale of other real estate (54) -- (54)
Other 28 41 69
----------- ----------- -----------
Total noninterest income 819 328 1,147
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,532 1,162 2,694
Net occupancy expense of premises 263 323 586
Furniture and equipment expense 382 -- 382
Outside services -- 156 156
Other operating expense 1,016 384 1,400
----------- ----------- -----------
Total noninterest expense 3,193 2,025 5,218
----------- ----------- -----------
Income before income taxes 1,258 1,606 2,864
Income taxes 78 544 622
----------- ----------- -----------
Net income $ 1,180 $ 1,062 $ 2,242
=========== =========== ===========
Earnings per common share:
Basic $ 0.57 $ 0.70 $ 0.50
=========== =========== ===========
Diluted $ 0.56 $ 0.67 $ 0.49
=========== =========== ===========
Weighted average shares outstanding:
Basic 2,058,932 1,522,948 4,465,190
Diluted 2,112,009 1,580,660 4,575,861
</TABLE>
36
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Marathon Rockingham Combined
----------- ----------- -----------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 4,559 $ 4,655 $ 9,214
Interest and dividends on securities:
Taxable 172 366 538
Dividends 21 -- 21
Interest on federal funds sold 130 194 324
----------- ----------- -----------
Total interest and dividend income 4,882 5,215 10,097
----------- ----------- -----------
Interest expense:
Interest on deposits 1,918 2,310 4,228
Interest on federal funds purchased 1 -- 1
Interest on short-term borrowings -- 17 17
Interest on capital lease obligations 24 -- 24
----------- ----------- -----------
Total interest expense 1,943 2,327 4,270
----------- ----------- -----------
Net interest income 2,939 2,888 5,827
Provision for loan losses 133 144 277
----------- ----------- -----------
Net interest income after provision for loan losses 2,806 2,744 5,550
----------- ----------- -----------
Noninterest income:
Service charges on deposit accounts 460 230 690
Commissions and fees 102 -- 102
Loss on sale of other real estate -- -- --
Other 25 32 57
----------- ----------- -----------
Total noninterest income 587 262 849
----------- ----------- -----------
Noninterest expense:
Salaries and employee benefits 1,214 1,052 2,266
Net occupancy expense of premises 211 297 508
Furniture and equipment expense 263 -- 263
Outside services -- 137 137
Other operating expense 895 365 1,260
----------- ----------- -----------
Total noninterest expense 2,583 1,851 4,434
----------- ----------- -----------
Income before income taxes $ 810 $ 1,155 $ 1,965
Income taxes (benefit) (188) 392 204
----------- ----------- -----------
Net income $ 998 $ 763 $ 1,761
=========== =========== ===========
Earnings per common share:
Basic $ 0.51 $ 0.61 $ 0.45
=========== =========== ===========
Diluted $ 0.50 $ 0.58 $ 0.43
=========== =========== ===========
Weighted average shares outstanding:
Basic 1,951,172 1,254,713 3,933,619
Diluted 2,016,153 1,319,502 4,082,477
</TABLE>
37
<PAGE>
Notes to Pro Forma Combined Financial Information
(1) The pro forma combined information presented is not necessarily
indicative of the results of operations or the financial position
that would have resulted had the Merger been consummated at the
beginning of the periods indicated, nor is it necessarily
indicative of the results of operations in future periods or the
future financial position of the combined entities.
(2) It is assumed that the Merger will be accounted for on a
pooling-of-interests accounting basis and, accordingly, the
related pro forma combined balance sheet adjustments have been
calculated using the exchange ratio, whereby the Company will
issue 1.58 shares of Company Common Stock for each share of
Rockingham Common Stock.
(3) Per share data for all periods presented has been computed based
on the combined historical income applicable to common
shareholders of the Company and Rockingham using the historical
weighted average shares outstanding, adjusted to equivalent shares
of Company Common Stock.
(4) Pro forma combined balance sheet adjustments reflect (i) the
issuance of 2,512,105 shares of Company Common Stock at a par
value of $1.00 per share and (ii) the elimination of Rockingham
Common Stock.
38
<PAGE>
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Amended and Restated Agreement and Plan of
Merger, dated as of June 21, 2000, by and among
Rockingham, the Company, Marathon and Marathon
Merger Bank, filed as Exhibit 2.1 to the
Registration Statement on Form S-4 (File No.
333-41844), dated July 20, 2000, incorporated
herein by reference.
39
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
PREMIER COMMUNITY BANKSHARES, INC.
Dated: December 5, 2000 By: /s/ Donald L. Unger
-------------------------------------
Donald L. Unger
President and Chief Executive Officer
<PAGE>
INDEX TO EXHIBITS
No. Description
--- -----------
2.1 Amended and Restated Agreement and Plan of Merger, dated as of June
21, 2000, by and among Rockingham Heritage Bank, Marathon Financial
Corporation, The Marathon Bank and Marathon Merger Bank, filed as
Exhibit 2.1 to the Registration Statement on Form S-4 (File No.
333-41844), dated July 20, 2000, incorporated herein by reference.
