As filed with the Securities and Exchange Commission on July 20, 2000.
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
MARATHON FINANCIAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Virginia 6021 54-1560968
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
4095 Valley Pike
Winchester, VA 22602
(540) 869-6600
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Donald L. Unger
President
Marathon Financial Corporation
4095 Valley Pike
Winchester, VA 22602
(540) 869-6600
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent For Service) Copies of
Communications to:
Wayne A. Whitham, Jr., Esq. Phillip C. Stone, Jr., Esq.
Williams, Mullen, Clark & Dobbins Wharton, Aldhizer & Weaver PLC
1021 East Cary Street 100 South Mason Street
Richmond, VA 23219 Harrisonburg, VA 22801
(804) 783-6473 (540) 434-0316
Fax: (804) 783-6507 Fax: (540) 434-5502
Approximate date of commencement of proposed sale to the public: As soon as
practicable following the effectiveness of this Registration Statement.
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
================================= ================= ====================== =================== =================
Proposed Maximum Proposed Maximum
Title Of Each Class Of Amount To Be Offering Price Aggregate Amount of
Securities To Be Registered Registered (1) Per Unit (2) Offering Price (2) Registration Fee
--------------------------------- ----------------- ---------------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, $1.00 par value 2,512,105 shares N/A N/A $3,306
================================= ================= ====================== =================== =================
</TABLE>
(1) Based upon an assumed number of shares that may be issued in the merger
described in this Registration Statement. The assumed number is based upon
the maximum number of shares of common stock of Rockingham Heritage Bank
that may be outstanding immediately prior to the merger.
(2) Reflects the market price of Rockingham Heritage Bank's common stock to be
exchanged for Marathon Financial Corporation common stock in connection
with the merger, computed in accordance with Rule 457(c) and Rule 457(f)
under the Securities Act of 1933, as amended, based upon the average of the
high and low sales prices ($7.875 and $7.875) of Rockingham Heritage Bank
common stock as reported on The Nasdaq SmallCap Market on July 13, 2000.
The proposed maximum aggregate offering price is estimated solely to
determine the registration fee.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 5(a) of the
Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
MERGER PROPOSED - YOUR VOTE IS VERY IMPORTANT
[THE FOLLOWING IS PRESENTED IN TWO-COLUMN FORMAT]
The Boards of Directors of Marathon Financial Corporation and
Rockingham Heritage Bank have agreed to merge the two companies. After the
merger, the combined company will have total assets of approximately $218
million and will serve the area from Waynesboro to Winchester, Virginia, with 11
banking offices. At the time that the merger is effective, Marathon's name will
change to Premier Community Bankshares, Inc. Premier will own and operate two
banks - Rockingham Heritage Bank and The Marathon Bank.
Rockingham shareholders will receive 1.58 shares of Marathon common
stock for each share of Rockingham common stock they own. Marathon shareholders
will continue to hold their existing shares of Marathon common stock after the
merger. We estimate that upon completion of the merger, approximately 55% of the
outstanding Marathon common stock will be owned by current Rockingham
shareholders and approximately 45% will be owned by persons who are Marathon
shareholders just before the merger is completed.
We cannot complete the merger unless the shareholders of Rockingham
approve the merger agreement and shareholders of Marathon approve the issuance
of Marathon common stock to holders of Rockingham common stock and amendments to
the Marathon articles of incorporation that implement important merger terms.
We have each scheduled meetings for our shareholders to vote on these
matters. In Marathon's case, the meeting will be a special meeting at which
shareholders will vote to approve issuing Marathon common stock to Rockingham's
shareholders. Marathon shareholders also will vote on amendments to Marathon's
Articles of Incorporation that will change Marathon's name to Premier Community
Bankshares, Inc. and will elect four Rockingham directors to the Marathon board.
The amendments to Marathon's Articles of Incorporation will take effect only if
the merger is completed.
In Rockingham's case, the meeting will be a special meeting in which
shareholders will only be asked to consider the proposed merger.
Whether or not you plan to attend your shareholders meeting, please
take the time to vote by completing and mailing the enclosed proxy card to us.
If you sign, date and mail your proxy card without indicating how you want to
vote, your proxy will be counted as a vote in favor of the transaction. If you
do not return your card, the effect will be a vote against the merger. If your
shares are held in "street name," you must instruct your broker in order to
vote.
The dates, times and places of the meetings are as follows:
For Marathon shareholders:
________ __, 2000 at __:__ a.m.
__________, Virginia _____
For Rockingham shareholders:
________ __, 2000 at __:__ a.m.
__________, Virginia _____
The document accompanying this letter contains additional information
regarding the merger agreement, the proposed merger and the two companies. We
encourage you to read this entire document carefully.
We strongly support this merger of Marathon and Rockingham and
appreciate your prompt attention to this very important matter.
__________________________________
Donald L. Unger
President
Marathon Financial Corporation
__________________________________
John K. Stephens
Chairman
Rockingham Heritage Bank
[END OF TWO-COLUMN FORMAT]
--------------------------------------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this document. Any representation to the contrary is a
criminal offense. The securities offered hereby are not savings accounts,
deposits or other obligations of a bank or savings association and are not
insured by the Federal Deposit Insurance Corporation or any other government
agency.
--------------------------------------------------------------------------------
The date of this joint proxy statement/prospectus is ________ __, 2000, and it
is first being mailed to shareholders on or about ________ __, 2000.
<PAGE>
MARATHON FINANCIAL CORPORATION
4095 VALLEY PIKE
WINCHESTER, VIRGINIA 22602
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________ __, 2000
A special meeting of shareholders of Marathon Financial Corporation
("Marathon") will be held at _____ a.m. on ________ __, 2000 at the
________________________________________, to consider the following matters:
(1) to approve the issuance of Marathon common stock in connection
with the Amended and Restated Agreement and Plan of Merger,
dated as of June 21, 2000, by and among Rockingham Heritage
Bank ("Rockingham"), Marathon, The Marathon Bank and Marathon
Merger Bank, which provides for Marathon Merger Bank to be
merged with and into Rockingham;
(2) to amend the Articles of Incorporation of Marathon in order to
change its name to Premier Community Bankshares, Inc. and to
elect four directors of Rockingham to the Marathon board of
directors; and
(3) any other business properly brought before the special meeting
or any adjournment or postponement thereof.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF ISSUING SHARES OF
MARATHON COMMON STOCK TO ROCKINGHAM SHAREHOLDERS IN THE MERGER AND AMENDING
MARATHON'S ARTICLES OF INCORPORATION.
Only Marathon shareholders of record at the close of business on
________ __, 2000 are entitled to notice of, and to vote at, this special
meeting and any adjournments or postponements thereof.
Your attention is directed to the joint proxy statement/prospectus
delivered with this Notice.
By Order of the Board of Directors
___________________________________
___________________________________
Corporate Secretary
Winchester, Virginia
________ __, 2000
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON,
YOU ARE URGED TO VOTE PROMPTLY BY DATING, SIGNING AND RETURNING THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR
TO ITS EXERCISE IN THE MANNER PROVIDED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS.
<PAGE>
ROCKINGHAM HERITAGE BANK
110 UNIVERSITY BOULEVARD
HARRISONBURG, VIRGINIA 22801
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON ________ __, 2000
A special meeting of shareholders of Rockingham Heritage Bank
("Rockingham") will be held at _____ a.m. on ________ __, 2000 at the
________________________________________, to consider the following matters:
(1) The proposal to approve the Amended and Restated Agreement and
Plan of Merger, dated as of June 21, 2000, by and among
Rockingham and Marathon Financial Corporation ("Marathon"),
The Marathon Bank, a wholly owned subsidiary of Marathon, and
Marathon Merger Bank, which agreement provides for Marathon
Merger Bank to be merged with and into Rockingham; and
(2) Any other business properly brought before the special meeting
or any adjournment or postponement thereof.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE IN FAVOR OF THE APPROVAL OF
THE MERGER AGREEMENT.
Only Rockingham shareholders of record at the close of business on
________ __, 2000 are entitled to notice of, and to vote at, this special
meeting and any adjournments or postponements thereof.
Your attention is directed to the joint proxy statement/prospectus
delivered with this Notice.
By Order of the Board of Directors
___________________________________
___________________________________
Corporate Secretary
Harrisonburg, Virginia
________ __, 2000
REGARDLESS OF WHETHER YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON,
YOU ARE URGED TO VOTE PROMPTLY BY DATING, SIGNING AND RETURNING THE ENCLOSED
PROXY IN THE ACCOMPANYING ENVELOPE. YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR
TO ITS EXERCISE IN THE MANNER PROVIDED IN THE ACCOMPANYING JOINT PROXY
STATEMENT/PROSPECTUS.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
CHAPTER I
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER.......................................... I-1
WHO CAN HELP ANSWER YOUR QUESTIONS.............................................. I-4
SUMMARY......................................................................... I-5
The Companies.............................................................. I-5
Issuance of Shares......................................................... I-5
Operations after the Merger................................................ I-5
Reasons for the Merger..................................................... I-6
The Meetings............................................................... I-6
Record Date; Voting Power.................................................. I-6
Opinion of Marathon's Financial Advisor.................................... I-6
Opinion of Rockingham's Financial Advisor.................................. I-7
No Right to Appraisal...................................................... I-7
Marathon to Use Pooling-of-Interest Accounting Treatment................... I-7
Comparative Per Share Market Price Information............................. I-7
Fee for Termination........................................................ I-7
Share Ownership of Management.............................................. I-7
Benefits to Management in the Merger....................................... I-8
Transaction Structure...................................................... I-8
Conditions that Must Be Satisfied for the Merger to Occur.................. I-8
Termination of the Merger Agreement........................................ I-9
Selected Historical Financial Data......................................... I-10
Selected Pro Forma Financial Data.......................................... I-11
Comparative Per Share Data................................................. I-12
THE MERGER...................................................................... I-13
Background of the Merger................................................... I-13
Marathon's Reasons for the Merger.......................................... I-14
Rockingham's Reasons for the Merger........................................ I-15
Accounting Treatment....................................................... I-17
Material Federal Income Tax Consequences of the Merger..................... I-17
Absence of Appraisal Rights................................................ I-18
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION............................. I-19
OPINION OF MARATHON'S FINANCIAL ADVISOR......................................... I-26
OPINION OF ROCKINGHAM'S FINANCIAL ADVISOR....................................... I-30
INTERESTS OF CERTAIN PERSONS IN THE MERGER...................................... I-33
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS................................... I-34
TERMS OF THE MERGER AGREEMENT................................................... I-34
Representations and Warranties; Conditions to the Merger................... I-34
Regulatory Approvals....................................................... I-35
Business Pending the Merger................................................ I-35
No Solicitation; Board Action.............................................. I-36
Effective Date............................................................. I-36
Surrender of Stock Certificates............................................ I-36
Waiver, Amendment and Termination.......................................... I-37
Resales of Marathon Common Stock........................................... I-37
Expenses of the Merger and Termination Fee................................. I-38
MARKET PRICES AND DIVIDENDS..................................................... I-39
i
<PAGE>
Page
Market Prices.............................................................. I-39
Dividends.................................................................. I-40
CHAPTER II
INFORMATION ABOUT THE MEETINGS AND VOTING
General......................................................................... II-1
Marathon Meeting................................................................ II-1
Rockingham Meeting.............................................................. II-2
CHAPTER III
DESCRIPTION OF MARATHON
BUSINESS........................................................................ III-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................... III-3
CHAPTER IV
DESCRIPTION OF ROCKINGHAM
BUSINESS........................................................................ IV-1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...................................................... IV-7
CHAPTER V
MANAGEMENT FOLLOWING THE MERGER
The Board of Directors.......................................................... V-1
Executive Officers Who Are Not Directors........................................ V-2
Security Ownership of Management................................................ V-3
Security Ownership of Certain Beneficial Owners................................. V-4
Director Compensation........................................................... V-4
Executive Officer Compensation.................................................. V-5
Stock Options................................................................... V-5
Employment Agreements........................................................... V-6
Certain Relationships and Related Transactions.................................. V-7
CHAPTER VI
LEGAL MATTERS
DESCRIPTION OF MARATHON CAPITAL STOCK........................................... VI-1
COMPARATIVE RIGHTS OF SHAREHOLDERS.............................................. VI-1
General.................................................................... VI-1
ii
<PAGE>
Page
Authorized Capital......................................................... VI-1
Amendment of Articles of Incorporation or Bylaws........................... VI-2
Mergers, Consolidations and Sales of Assets................................ VI-3
Size and Classification of Board of Directors.............................. VI-4
Vacancies and Removal of Directors......................................... VI-4
Director Liability and Indemnification..................................... VI-5
Special Meetings of Shareholders........................................... VI-7
Shareholder Nominations and Proposals...................................... VI-7
Shareholder Voting Rights in General....................................... VI-8
Restrictions on Transfer of Common Stock................................... VI-8
State Anti-Takeover Statutes............................................... VI-9
REGULATION...................................................................... VI-10
General.................................................................... VI-11
Bank Holding Company Regulation............................................ VI-11
Bank Supervision........................................................... VI-12
Regulatory Capital Requirement............................................. VI-12
Limits on Dividends and Other Payments..................................... VI-13
FDIC Regulations........................................................... VI-13
Deposit Insurance.......................................................... VI-14
Community Reinvestment Act................................................. VI-14
Fiscal and Monetary Policy................................................. VI-15
Federal Home Loan Bank System.............................................. VI-15
Federal Reserve System..................................................... VI-16
RESALES OF MARATHON COMMON STOCK................................................ VI-16
SHAREHOLDER PROPOSALS........................................................... VI-16
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS...................... VI-16
EXPERTS......................................................................... VI-17
LEGAL OPINIONS.................................................................. VI-17
WHERE YOU CAN FIND MORE INFORMATION............................................. VI-17
</TABLE>
iii
<PAGE>
APPENDICES
----------
General
-------
A 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.
Marathon Financial Corporation
------------------------------
B Marathon Financial Corporation Financial Statements (including the audited
December 31, 1999 financial statements and the unaudited March 31, 2000
financial statements)
C Opinion of McKinnon & Company, Inc.
Rockingham Heritage Bank
------------------------
D Rockingham Heritage Bank Financial Statements (including the audited
December 31, 1999 financial statements and the unaudited March 31, 2000
financial statements)
E Opinion of Scott & Stringfellow, Inc.
iv
<PAGE>
CHAPTER I
QUESTIONS AND ANSWERS ABOUT THE MERGER
[THE FOLLOWING IS PRESENTED IN TWO-COLUMN FORMAT]
Q: Why are Rockingham and Marathon merging?
A: Both the Rockingham board of directors and the Marathon board of
directors believe the merger is in the best interests of their respective
companies and will provide significant benefits to their respective
shareholders, customers and employees. The boards believe the merger will create
a company with enhanced financial performance which will be better positioned to
be a strong competitor in the rapidly changing and consolidating financial
services industry in Virginia. To review the background and reasons for the
merger in greater detail, see pages I-13 through I-17.
Q: What will I receive in the merger?
A: MARATHON SHAREHOLDERS:
Each share of Marathon common stock held by a Marathon shareholder will continue
to represent one share following the merger. Because Marathon's name will change
to Premier Community Bankshares Inc. when the merger becomes effective, each
Marathon share will represent one Premier share. Marathon shareholders will not
need to exchange share certificates in connection with the merger.
FOR EXAMPLE:
o IF YOU OWN 100 SHARES OF MARATHON COMMON STOCK, AFTER THE MERGER THOSE
SHARES WILL CONTINUE TO REPRESENT 100 SHARES OF MARATHON COMMON STOCK.
ROCKINGHAM SHAREHOLDERS:
Rockingham shareholders will receive 1.58 shares of Marathon common stock in
exchange for each share of Rockingham common stock they hold. This is the
"exchange ratio." Marathon will not issue fractional shares in the merger.
Instead, Rockingham shareholders will receive a cash payment, without interest,
for the value of any fraction of a share of Marathon common stock that they
would otherwise be entitled to receive, based upon the market value (as
determined in the merger agreement) of a share of Marathon common stock at the
time of the merger.
After the merger, Rockingham's former shareholders will own approximately 55% of
Marathon's outstanding shares of common stock and current Marathon shareholders
will own approximately 45% of Marathon's outstanding shares of common stock.
FOR EXAMPLE:
o IF YOU OWN 100 SHARES OF ROCKINGHAM COMMON STOCK, AFTER THE MERGER YOU WILL
RECEIVE 158 SHARES OF MARATHON COMMON STOCK.
o IF YOU OWN 30 SHARES OF ROCKINGHAM COMMON STOCK, AFTER THE MERGER YOU WILL
RECEIVE 47 SHARES OF MARATHON COMMON STOCK AND A CHECK FOR 0.40 TIMES THE
MARKET VALUE OF ONE SHARE OF MARATHON COMMON STOCK.
Q: What will my dividends be after the merger?
A: For 1999 Marathon's annual dividend was $0.09 per share. The board
intends to continue dividends at or above this rate. However, Marathon cannot
assure that these payments will continue in the future. The Marathon board will
use its discretion to decide whether and when to declare dividends and in what
amount, and it will consider all relevant factors in doing so.
Q: What happens as the market price of Marathon common stock fluctuates?
A: The exchange ratio is fixed at 1.58 shares of Marathon common stock for
each share of
I-1
<PAGE>
Rockingham common stock. Since the market value of Marathon common stock will
fluctuate before and after the closing of the merger, the value of the Marathon
common stock that Rockingham shareholders will receive in the merger will
fluctuate as well and could increase or decrease. Rockingham shareholders should
obtain current market prices for shares of Marathon common stock and shares of
Rockingham common stock.
Q: When is the merger expected to be completed?
A: We are working to complete the merger during the third quarter of 2000.
Q: What are the tax consequences of the merger to me?
A: ROCKINGHAM SHAREHOLDERS:
We expect that the exchange of shares by Rockingham shareholders generally will
be tax-free to Rockingham shareholders for U.S. federal income tax purposes.
Rockingham shareholders will, however, have to pay taxes on cash received for
fractional shares. To review the tax consequences to Rockingham shareholders in
greater detail, see page I-17. Your tax consequences may depend on your personal
situation. You should consult your tax advisor for a full understanding of the
tax consequences of the merger to you.
MARATHON SHAREHOLDERS:
The merger will have no tax consequences to Marathon shareholders.
Q: What am I being asked to vote upon?
A: ROCKINGHAM SHAREHOLDERS:
You are being asked to approve the merger agreement which provides for the
merger of Rockingham and Marathon Merger Bank, a corporation owned by Marathon
and the issuance of 1.58 shares of Marathon common stock for each outstanding
share of Rockingham common stock. Approval of the proposal requires the
affirmative vote of more than two-thirds of the outstanding shares of Rockingham
common stock.
The Rockingham board has unanimously approved and adopted the merger agreement.
The Rockingham board recommends voting for the approval of the merger agreement.
MARATHON SHAREHOLDERS:
You are being asked to approve the issuance of Marathon common stock to
Rockingham shareholders in connection with the merger.
You are also being asked to amend the Marathon articles of incorporation in two
ways. None of the proposed amendments will be effective unless the merger is
completed. First, Marathon's name would be changed to Premier Community
Bankshares, Inc. Secondly, the size of the Marathon board would be reduced from
eleven to eight members, and four Rockingham directors would be elected to the
Marathon board. As a result, following the merger, the Marathon board would
consist of four current Marathon directors and four current Rockingham
directors.
Approval of the proposals requires the affirmative vote of the majority of the
shares voted and the shares voted must represent over 50% of the shares entitled
to vote.
The Marathon Board has unanimously approved and adopted the merger agreement,
the stock issuance and the proposed amendments to the articles of incorporation
and recommends voting FOR the approval of those matters.
Q: What should I do now?
A: Just indicate on your proxy card how you want to vote, and sign and
mail it in the enclosed envelope as soon as possible, so that your shares will
be represented at your meeting.
If you are a Marathon shareholder, and if you sign and send in your proxy and do
not indicate how you want to vote, your proxy will be voted in favor of the
stock issuance and the proposed amendments to the articles of incorporation.
If you are a Rockingham shareholder, and if you sign and send in your proxy and
do not indicate
I-2
<PAGE>
how you want to vote, your proxy will be voted in favor of the proposal to
approve the merger. If you do not sign and send in your proxy or you abstain, it
will have the effect of a vote against the merger, as approval requires the
affirmative vote of more than two-thirds of the outstanding shares of Rockingham
common stock.
You may attend your shareholders' meeting and vote your shares in person, rather
than voting by proxy. In addition, you may withdraw your proxy up to and
including the day of your shareholders' meeting by following the directions on
pages II-1 through II-3 and either change your vote or attend your shareholders'
meeting and vote in person.
Q: If my shares are held in "street name" by my broker, will my broker
vote my shares for me?
A: Your broker will vote your shares of Rockingham or Marathon common
stock only if you provide instructions on how to vote. You should instruct your
broker how to vote your shares, following the directions your broker provides.
If you do not provide instructions to your broker, your shares will not be voted
and this will have the effect of voting against the merger.
Q: Should I send in my stock certificates now?
A: No. After the merger is completed we will send you written instructions
for exchanging your Rockingham common stock certificates for Marathon common
stock certificates.
[END OF TWO-COLUMN FORMAT]
I-3
<PAGE>
WHO CAN HELP ANSWER YOUR QUESTIONS
If you want additional copies of this document, or if you want to ask
any questions about the merger, you should contact:
Donald L. Unger
Marathon Financial Corporation
4095 Valley Pike
Winchester, Virginia 22602
(540) 869-6600
John K. Stephens
Rockingham Heritage Bank
110 University Boulevard
Harrisonburg, Virginia 22801
(540) 432-9300
I-4
<PAGE>
SUMMARY
This summary highlights selected information from this document and may
not contain all the information that is important to you. For a more complete
understanding of the merger and for a more complete description of the legal
terms of the merger, you should read this entire document carefully, as well as
the additional documents to which we refer you, including the merger agreement.
See "Where You Can Find More Information" (page VI-17).
[THE FOLLOWING IS PRESENTED IN TWO-COLUMN FORMAT]
The Companies
Marathon Financial Corporation
4095 Valley Pike
Winchester, Virginia 22602
Marathon is a Virginia bank holding company that began operations in
1989. Marathon owns one bank, The Marathon Bank, headquartered in Winchester,
Virginia, which opened in 1988 and now operates five banking offices in
Winchester, Front Royal and Woodstock, Virginia. The Marathon Bank is a member
of the Federal Reserve System and its deposits are insured by the Federal
Deposit Insurance Corporation. On March 31, 2000, Marathon had total assets of
$112.5 million, total deposits of $102.0 million, total loans of $80.2 million
and shareholders' equity of $9.8 million.
Marathon's common stock is listed and traded on The Nasdaq SmallCap
Market under the symbol "MFCV."
Rockingham Heritage Bank
110 University Boulevard
Harrisonburg, Virginia 22801
Rockingham is a Virginia state bank that was incorporated in 1989 and
opened in 1990. Its deposits are insured by the Federal Deposit Insurance
Corporation. Rockingham's headquarters are in Harrisonburg, Virginia. Rockingham
operates six banking offices in Harrisonburg, Elkton, Weyers Cave and
Waynesboro, Virginia. On March 31, 2000, Rockingham had total assets of $105.6
million, total deposits of $89.7 million, total loans of $83.2 million, and
shareholders' equity of $12.0 million.
Rockingham's common stock is listed and traded on The Nasdaq SmallCap
Market under the symbol "RKNG."
Issuance of Shares
The exchange ratio is 1.58 shares of Marathon common stock for each
share of Rockingham common stock. Accordingly, the 1,589,940 shares of
Rockingham common stock will be converted into approximately 2,512,105 shares of
Marathon common stock. Fractional shares of Marathon common stock will not be
issued, and Rockingham shareholders will receive cash payment, without interest,
for the value of any fraction of a share of Marathon common stock that they
would otherwise be entitled to receive based upon the market value of a share of
Marathon common stock at the time of the merger.
Operations after the Merger
After the merger, Rockingham Heritage Bank and The Marathon Bank each
will continue to operate in its markets with no change in its name, board of
directors or officers. No bank branches will close as a result of the merger.
Donald L. Unger will remain the Chairman, President and Chief Executive Officer
of The Marathon Bank. John K. Stephens will continue to hold those same offices
at Rockingham.
At the bank holding company there will be changes. Marathon's board of
directors will be reduced from eleven to eight members, four of whom will be
individuals who currently serve on the Rockingham board. The other four
directors will be current Marathon directors.
After the merger John K. Stephens will become Marathon's chairman,
while Donald L.
I-5
<PAGE>
Unger will remain President and Chief Executive Officer.
When the merger becomes effective, Marathon's name will change to
Premier Community Bankshares, Inc. However, the names of the two banks, The
Marathon Bank and Rockingham Heritage Bank, will not change.
Reasons for the Merger
Both the Marathon board of directors and the Rockingham board of
directors carefully considered the merger decision and unanimously approved and
adopted the merger agreement. The boards had several reasons for approving the
merger. A few of the reasons are set forth below. For a complete discussion, see
pages I-14 through I-17.
o The merger will approximately double the size of Rockingham and Marathon.
While neither Marathon nor Rockingham believes that size alone increases
shareholder value, each recognizes that there are potential benefits
including the ability to spread growth-related expenses over a larger asset
base and higher lending limits.
o The merger will result in more management depth, so that neither Marathon
nor Rockingham is dependent on one or a few officers. Because the
organization will be larger, key employees will have more opportunities to
specialize.
o After the merger, The Marathon Bank and Rockingham will have an equal
number of directors on the holding company board.
o The Marathon Bank and Rockingham Heritage Bank each will operate with a
high degree of autonomy. Neither bank's name will change, nor will there be
any changes in either bank's directors of officers.
The Meetings (pages II-1 and II-2)
The Marathon meeting will be held at the ____________________________
_____________________ Virginia, at _____ a.m., local time, on __________ __,
2000.
The Rockingham meeting will be held at the ____________________________
_____________________ Virginia, at _____ a.m., local time, on __________ __,
2000.
Record Date; Voting Power (pages II-1 and II-2)
You are entitled to vote at the Marathon meeting if you owned shares of
Marathon common stock on ________ __, 2000, the record date. On that date, there
were __________ issued and outstanding shares of Marathon common stock held by
approximately _____ holders of record. Marathon shareholders are entitled to one
vote per share on any matter that may properly come before the Marathon meeting.
You are entitled to vote at the Rockingham meeting if you owned shares
of Rockingham common stock on ________ __, 2000, the record date. On that date,
there were __________ issued and outstanding shares of Rockingham common stock
held by approximately _____ holders of record. Rockingham shareholders are
entitled to one vote per share on any matter that may properly come before the
Rockingham meeting.
Opinion of Marathon's Financial Advisor (page I-26)
At the April 4, 2000 meeting of the Marathon board, McKinnon & Company,
Inc., financial advisor to the Marathon board, gave its opinion to the Marathon
board that as of that date, the exchange ratio was fair to the Marathon
shareholders from a financial point of view. McKinnon & Company, Inc.
subsequently confirmed its April 4, 2000 opinion by delivery to the Marathon
board of a written opinion dated as of the date of this document. A copy of the
fairness opinion, setting forth the information
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reviewed, assumptions made and matters considered, is attached to this document
as Appendix C. Marathon shareholders should read the fairness opinion of
McKinnon & Company, Inc.
Opinion of Rockingham's Financial Advisor (page I-30)
At the April 6, 2000 meeting of the Rockingham board, Scott &
Stringfellow, Inc., financial advisor to the Rockingham board, gave its opinion
to the Rockingham board that as of that date, the exchange ratio was fair to the
Rockingham shareholders from a financial point of view. Scott & Stringfellow,
Inc. subsequently confirmed its April 6, 2000 opinion by delivery to the
Rockingham board of a written opinion dated as of the date of this document. A
copy of the fairness opinion, setting forth the information reviewed,
assumptions made and matters considered, is attached to this document as
Appendix E. Rockingham shareholders should read the fairness opinion of Scott &
Stringfellow, Inc.
No Right to Appraisal (page I-18)
Under Virginia law, neither Marathon nor Rockingham shareholders have
the right to an appraisal of the fair value of their shares in connection with
the merger.
Marathon to Use Pooling-of-Interest Accounting Treatment (page I-17)
We expect that the merger will be accounted for as a pooling of
interests. This accounting method means that after the merger Marathon will
report financial results as if Rockingham had always been combined with
Marathon. The availability of pooling-of-interests accounting treatment is a
condition that must be satisfied to close the merger.
Comparative Per Share Market Price Information
Marathon common stock is traded on The Nasdaq SmallCap Market under the
symbol "MFCV." Marathon common stock is thinly traded. On April 19, 2000, the
last full trading day preceding the public announcement of the proposed merger,
Marathon common stock closed at $6.00. On ________ __, 2000, Marathon common
stock closed at $_____.
Rockingham common stock is traded on The Nasdaq SmallCap Market under
the symbol "RKNG." Rockingham common stock is thinly traded. On April 10, 2000,
the last full day preceding the public announcement of the proposed merger on
which Rockingham common stock traded, it closed at $9.50. On ________ __, 2000,
Rockingham common stock closed at $_____.
Fee for Termination (page I-38)
Marathon or Rockingham will be required to pay the other party $400,000
if the merger agreement is terminated because it pursued a merger or acquisition
proposal or initiated merger or acquisition discussions with a third party and
its board determined that a merger or acquisition by the third party was in the
best interests of the company and its shareholders. No fee is payable in that
situation, however, if the other party wrongfully terminated the merger
agreement. Similarly, no fee is payable by a party if, at the time that the
merger agreement was terminated, that party was entitled to terminate on the
basis of a breach by the other party or there was a failure to satisfy certain
closing conditions (other than approval by either of the companies'
shareholders).
This provision is intended to discourage a third party from interfering
with the merger agreement between Marathon and Rockingham.
Share Ownership of Management (page V-3)
On the Marathon record date, the executive officers and directors of
Marathon, including their affiliates, had voting power with respect to an
aggregate of __________ shares of Marathon common stock, or approximately _____%
of the shares of Marathon common stock then outstanding.
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On the Rockingham record date, the executive officers and directors of
Rockingham, including their affiliates, had voting power with respect to an
aggregate of __________ shares of Rockingham common stock, or approximately
_____% of the shares of Rockingham common stock then outstanding.
We currently expect that the directors and executive officers of
Marathon and Rockingham will vote their shares of Marathon common stock and
Rockingham common stock, respectively, FOR the approval of the merger.
Benefits to Management in the Merger (page I-33)
When considering the recommendation of the Rockingham board, you should
be aware that some Rockingham directors and officers have interests in the
merger that may differ from the interests of other Rockingham shareholders. Four
directors of Rockingham -- John K. Stephens, Paul R. Yoder, Stephen T. Heitz and
Wayne B. Ruck -- will become directors of Marathon. They each will receive an
annual fee of $1,500 for service on the Marathon board, $500 for attendance at
each board meeting and $50 for attendance at each board committee meeting.
The Rockingham board was aware of these and other interests and
considered them before approving and adopting the merger agreement.
Transaction Structure
Marathon Merger Bank, a wholly owned bank subsidiary of Marathon, will
merge into Rockingham. Marathon Merger Bank was formed solely to facilitate the
merger. It has minimal assets and no liabilities. Marathon Merger Bank will
cease to exist when the merger is completed. When the merger is completed,
Marathon's name will change to Premier Community Bankshares, Inc. Premier will
own and operate two banks, Rockingham and The Marathon Bank.
Conditions that Must Be Satisfied for the Merger to Occur (page I-34)
The following conditions must be met for us to complete the merger:
o approval by Rockingham shareholders of the merger agreement;
o approval by Marathon shareholders of the proposals to issue Marathon
common stock to Rockingham shareholders and to amend the Marathon
articles of incorporation;
o the continuing effectiveness of Marathon's registration statement filed
with the Securities and Exchange Commission;
o receipt of an opinion of Marathon's counsel that the merger will be
treated for U.S. federal income tax purposes as a tax-free
reorganization within the meaning of Section 368 of the Internal
Revenue Code of 1986, as amended; and
o receipt of a letter from Marathon's accountants to the effect that the
merger will qualify for pooling-of-interests accounting treatment under
generally accepted accounting principles.
We cannot complete the merger unless Marathon obtains the approval of
the Board of Governors of the Federal Reserve System and the Virginia State
Corporation Commission. Marathon has filed applications with the Federal Reserve
Board and the Virginia State Corporation Commission. While we cannot predict
whether or when Marathon will obtain all required regulatory approvals, we see
no reason why the approvals will not be obtained in a timely manner.
Unless prohibited by law, either Rockingham or Marathon could elect to
waive a condition that has not been satisfied and complete the merger anyway.
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<PAGE>
Termination of the Merger Agreement (page I-37)
Marathon and Rockingham can agree to terminate the merger agreement at
any time without completing the merger. Either company may also terminate the
merger agreement without any penalty if:
o the merger is not completed on or before February 1, 2001 or
o the other party fails to meet one or more conditions of the merger by
October 30, 2000, unless the terminating party has waived the
unsatisfied conditions.
[END OF TWO-COLUMN FORMAT]
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
We are providing the following information to help you analyze the
financial aspects of the merger. We derived this information from audited
financial statements for 1997 through 1999 (Rockingham's 1997 audited financial
statements are not included in this joint proxy statement/prospectus) and
unaudited financial statements for the three months ended March 31, 2000 and
1999. This information is only a summary, and you should read it in conjunction
with the information about Marathon that begins on page III-1, Marathon's
historical financial statements in Appendix B, the information about Rockingham
that begins on page IV-1, and Rockingham's historical financial statements in
Appendix D. You should not rely on the three-month information as being
indicative of results expected for the entire year.
MARATHON - HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
-------------------------------- -------------------------------------------
2000 1999 1999 1998 1997
-------------------------------- -------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,252 $ 1,111 $ 4,833 $ 3,917 $ 2,939
Net income 293 236 1,112 1,180 998
Diluted net income per share 0.14 0.11 0.53 0.56 0.50
Cash dividends per share -- -- 0.09 0.08 0.07
Book value per share 4.75 4.35 4.62 4.26 3.75
Total assets 112,474 95,065 103,685 91,852 64,826
Shareholders' equity 9,753 8,964 9,445 8,790 7,711
</TABLE>
ROCKINGHAM - HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
Three Months Ended Year Ended
March 31, December 31,
-------------------------------- -------------------------------------------
2000 1999 1999 1998 1997
-------------------------------- -------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net interest income $ 1,129 $ 921 $ 4,053 $ 3,447 $ 2,888
Net income 350 275 1,201 1,062 763
Diluted net income per share 0.22 0.17 0.74 0.67 0.58
Cash dividends per share -- -- -- -- --
Book value per share 7.53 6.78 7.31 6.61 5.49
Total assets 105,590 90,025 101,142 85,791 72,626
Shareholders' equity 11,967 10,775 11,628 10,515 6,944
</TABLE>
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<PAGE>
SELECTED PRO FORMA FINANCIAL DATA
The following table sets forth certain unaudited pro forma combined
financial data for Marathon giving effect to the merger accounted for as a
pooling of interests. This information should be read in conjunction with the
historical financial statements of Marathon and Rockingham, including respective
notes thereto, appearing elsewhere in this joint proxy statement/prospectus. See
"Unaudited Pro Forma Condensed Financial Information" on page I-19. The pro
forma financial data may not be indicative of the results that actually would
have occurred had the merger been consummated on the dates indicated or that may
be obtained in the future.
<TABLE>
<CAPTION>
Three Months Year Ended
Ended March 31, December 31,
--------------------------------- -------------------------------------------
2000 1999 1999 1998 1997
--------------------------------- -------------------------------------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Net interest income $ 2,381 $ 2,032 $ 8,886 $ 7,364 $ 5,827
Net income 643 511 2,313 2,242 1,761
Diluted net income per share 0.14 0.11 0.50 0.49 0.43
Cash dividends per share -- -- 0.09 0.08 0.07
Book value per share 4.76 4.32 4.62 4.22 3.61
Total assets 218,064 185,090 204,827 177,643 137,452
Shareholders' equity 21,720 19,739 21,073 19,305 14,655
</TABLE>
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<PAGE>
COMPARATIVE PER SHARE DATA
The following unaudited financial information reflects comparative per
share data relating to (i) net income, cash dividends, and book value per common
share for both Marathon and Rockingham on a historical basis, (ii) net income
and book value per common share on a pro forma basis for Marathon assuming the
Rockingham merger had been effected for the periods presented, and (iii) net
income and book value per common share on a pro forma equivalent basis per
common share for Rockingham assuming the Rockingham merger had been effected for
the periods indicated and accounted for as a pooling of interests. See "The
Merger - Accounting Treatment" on page I-17. The pro forma data reflects the
conversion of each share of Rockingham common stock into 1.58 shares of Marathon
common stock. The information shown below should be read in conjunction with the
historical financial statements of Marathon and Rockingham, including the
respective notes thereto, and in conjunction with the unaudited pro forma
financial statements, including the notes thereto, appearing elsewhere in this
joint proxy statement/prospectus. See "Unaudited Pro Forma Condensed Financial
Information" on page I-19.
<TABLE>
<CAPTION>
Three Months Year Ended
Ended March 31, December 31,
--------------------------------- -----------------------------------------
2000 1999 1999 1998 1997
--------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C>
(Per Common Share)
Net Income Basic
Marathon - Historical $ 0.14 $ 0.11 $ 0.54 $ 0.57 $ 0.51
Rockingham - Historical 0.22 0.17 0.76 0.70 0.61
Pro Forma Combined 0.14 0.11 0.51 0.50 0.45
Rockingham Pro Forma Equivalent 0.22 0.17 0.80 0.79 0.71
Net Income Diluted
Marathon - Historical 0.14 0.11 0.53 0.56 0.50
Rockingham - Historical 0.22 0.17 0.74 0.67 0.58
Pro Forma Combined 0.14 0.11 0.50 0.49 0.43
Rockingham Pro Forma Equivalent 0.22 0.17 0.79 0.77 0.68
Cash Dividends Declared
Marathon - Historical -- -- 0.09 0.08 0.07
Rockingham - Historical -- -- -- -- --
Pro Forma Combined -- -- 0.09 0.08 0.07
Rockingham Pro Forma Equivalent -- -- 0.14 0.13 0.11
Book Value
Marathon - Historical 4.75 4.35 4.62 4.26 3.75
Rockingham - Historical 7.53 6.78 7.31 6.61 5.49
Pro Forma Combined 4.76 4.32 4.62 4.22 3.61
Rockingham Pro Forma Equivalent 7.52 6.82 7.30 6.67 5.71
</TABLE>
I-12
<PAGE>
THE MERGER
Background of the Merger
Marathon and Rockingham operate community banks in geographically
close, but separate markets in northwestern Virginia. Marathon's bank
subsidiary, The Marathon Bank, operates a total of five banking offices that
serve the City of Winchester, the Towns of Woodstock and Front Royal, and the
Counties of Frederick, Shenandoah and Warren, all in Virginia. Rockingham
operates six banking offices that serve the Cities of Harrisonburg and
Waynesboro, the Town of Weyers Cave, and the Counties of Rockingham and Augusta,
all in Virginia. There are no overlapping branch facilities.
In October 1999, Mr. Unger of Marathon and Mr. Stephens of Rockingham
met to discuss the future plans of both financial institutions. The October 1999
discussions were informal and preliminary in nature. Discussions focused on the
desire of both to remain independent and the continued ability to compete with
large statewide and regional financial institutions, including the challenges
presented by increasing technology cost and the development of non-deposit
products and services. During subsequent meetings between October 1999 and April
2000, discussions between Messrs. Unger and Stephens continued. Due diligence
reviews of legal and financial materials were conducted by each and suggested
terms for a merger of equals were exchanged. The discussions concerned, among
other things, the exchange ratio; the corporate structure of the holding
company; terms regarding independent operation of Marathon and Rockingham in
their separate markets; regulatory and cost issues relating to a merger of
equals; composition of the board of directors of the holding company, The
Marathon Bank and Rockingham; management of each entity; employment contracts;
employees; growth plans for the future; the holding company name and potential
income enhancement and economies of scale.
On February 3, 2000, Mr. Unger and Directors Hollis and Good from
Marathon and Mr. Stephens and Directors Yoder and Heitz from Rockingham met
informally to discuss the possible plans for a merger of equals between the two
financial institutions. No negotiations took place at this meeting, and the
parties involved did not make any decision as to the structure or terms of a
possible transaction. The purpose of the meeting was to see if the two boards
had reasons to pursue a merger and to gauge the compatibility of the two
entities. The informal conclusion was that the parties should pursue an
affiliation.
On February 22, 2000, the board of directors of Marathon met to discuss
the possibility of the affiliation with Rockingham. The board reviewed a
five-year history of Rockingham with balance sheets and income statements and
discussed branch structure, structure of a merger of equals, income enhancement,
potential benefits and savings, equal representation from both entities, a
restructuring of the holding company to accommodate the affiliation and the
exchange ratio. The board voted unanimously to proceed with the due diligence.
On March 7, 2000, the board of directors of Marathon further discussed
the affiliation and voted unanimously to authorize President Unger to proceed
with a definitive agreement for a merger of equals.
On March 14, 2000, Rockingham's board of directors met and discussed
proposed general terms of a merger agreement with Marathon and agreed to proceed
further. On March 21, 2000, the board met again and discussed the proposed
transaction. At this meeting, the board engaged Scott & Stringfellow to provide
a fairness opinion to Rockingham. The board held a meeting on April 6, 2000 and
invited representatives from Scott & Stringfellow and the law firm of Wharton,
Aldhizer & Weaver to advise Rockingham on the proposed transaction. Scott &
Stringfellow presented a comparative analysis of the two companies and gave an
oral opinion that the proposed transaction was fair from a financial point of
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<PAGE>
view. Representatives from Wharton, Aldhizer & Weaver discussed director's
duties and responsibilities and then presented a draft version of the merger
agreement.
On March 21, 2000, the board of directors of Marathon authorized
President Unger to employ William McKinnon of McKinnon & Company, Inc. to
provide a fairness opinion and to engage counsel to draft a definitive
agreement. The board of directors of Marathon and Rockingham had an informal
dinner meeting on March 21, 2000 to further pursue the compatibility of the two
entities. There was no set agenda, and no terms were negotiated at this
particular meeting.
On April 4, 2000, the board of directors of Marathon received materials
from Mr. McKinnon and discussed the exchange ratio of 1.58 and other information
provided by Mr. McKinnon as well as by Yount, Hyde & Barbour, P.C., Marathon's
independent auditors.
On April 18, 2000, the Board of Directors of Marathon approved the
agreement and plan of merger and authorized Mr. Unger to execute the agreement
and issue a joint press release with Rockingham. On the same day, the Board of
Directors of Rockingham approved the agreement and plan of merger and authorized
Mr. Stephens to execute the agreement and issue a joint press release with
Marathon.
On April 20, 2000, Mr. Unger and Mr. Stephens executed the merger
agreement.
Marathon's Reasons for the Merger
Between 1996 and 1999, the Marathon board considered various growth
strategies during its long range planning retreats, including branch expansion
and possible acquisitions of branches from out of state bank holding companies.
During this period, Marathon had formal and informal discussions about acquiring
two other financial institutions, but neither materialized. Marathon's rapid
growth in the past and its projections reflected that additional capital was
necessary. McKinnon & Company, Inc., Marathon's investment bankers, successfully
completed a common stock issue that raised approximately $2.5 million. The new
capital allowed Marathon to implement the aggressive growth plan that the board
had adopted.
In deciding to enter into the merger agreement with Rockingham, the
Marathon board of directors considered a number of factors. The board did not
assign any relative or specific weights to the factors considered. The principal
factors that led the Marathon board of directors to approve the merger with
Rockingham were:
o Expansion of Market Presence. The Marathon board of directors, as
part of its strategic plan to increase shareholder value by
expanding its markets and increasing existing markets, believes
that the affiliation with a profitable well-managed financial
institution is an effective means of expanding market presence.
Marathon has concluded that a merger with Rockingham would add
complementary geographic markets. Combining strong economic markets
provides a solid franchise in the northern Shenandoah Valley with
11 offices from Winchester to Waynesboro and surrounding markets.
o Autonomy. The Marathon Bank will continue to operate as a local
bank with its existing employees, management and board of
directors. Marathon's most important asset, its customers, should
not see any change in service except future enhancement of products
and services.
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<PAGE>
o Efficiencies. As technology and the demand for new products and
non-deposit services increases, the ability to absorb costs will be
more effective with the larger organization.
o Quality of Rockingham. The information presented to management and
the board of directors about Rockingham concerning the earnings,
asset quality, management, book value, liquidity and composition of
earning assets demonstrated the attractiveness of Rockingham in the
affiliation decision.
o Depth of Management. While each organization has experienced
management, the merger provides immediate backup and depth for the
holding company. This will allow the Chief Executive Officers of
each bank to explore other expansion opportunities.
o Larger Size. Although Marathon does not believe that increased
size, by itself, increases shareholder value, it does believe that
the larger size provides greater benefits, including operating
efficiencies and the ability to serve larger business
relationships.
Other material factors considered were the well-capitalized position
and earnings of Rockingham; the compatibility of the management of the two
organizations and the fact that each institution would contribute complementary
business strengths resulting in a well-diversified and well-managed institution;
the resulting complimentary branch network; the additional resources that will
enable Marathon to increase financial services to consumers and businesses; and
higher lending limits due to the institutions' combined capital base, allowing
Marathon to better serve its customer base.
Based upon the factors discussed above, the Marathon board of directors
concluded that a merger with Rockingham would be in the best interest of
Marathon and its shareholders and would further its goal of enhancing
shareholder value. The Marathon board of directors has committed unanimously to
vote shares under their control in favor of the merger agreement.
The Marathon board believes that the merger is in the best interest of
Marathon and the Marathon shareholders. The Marathon board recommends that
Marathon shareholders vote FOR the issuance of Marathon common stock to
Rockingham shareholders and FOR the proposed amendments to the Marathon articles
of incorporation.
Rockingham's Reasons for the Merger
The Rockingham board of directors began updating the company's
long-range plan in early 1997. The planning process included a series of
discussions at executive committee and board meetings during 1997, 1998 and
1999. The board considered various growth options that included, among other
things, raising additional capital and expanding through new branches or branch
acquisitions, affiliating with other community banks or selling to a larger
organization. During this time, Rockingham had numerous informal discussions
with other community banks and investment bankers to explore the various options
available. The board concluded that to continue to remain competitive with
larger, statewide banks, Rockingham would need to become larger so that it could
employ resources more efficiently. After evaluating a number of options, the
board determined that pursuing a merger of equals with one or more similarly
sized banks offered the best potential for maximizing shareholder value over the
long term.
During this period, Rockingham grew at a rapid pace and projections
showed that additional capital would be necessary to continue this growth. As a
result, in February of 1998, 115,000 shares of common stock were sold in a
public offering managed by McKinnon & Company, Inc., investment bankers, which
raised approximately $2.1 million of new capital. The added capital was to be
used to
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<PAGE>
support growth in existing branches, as well as to allow Rockingham to open
branches in new market areas.
In deciding to enter into the merger agreement with Marathon, the
Rockingham board of directors considered a number of factors. The board did not
assign any relative or specific weights to the factors considered. The principal
factors that led to the Rockingham board of directors to approve the merger with
Marathon were:
o Larger Size. Based on December 31, 1999 data, the combination would
create a company with approximately twice the size, earnings and
resources of Rockingham. Although Rockingham does not believe that
size, in and of itself, necessarily increases shareholder value, it
does believe that size offers opportunities to improve overall
performance. Increased lending limits, opportunities to achieve
greater operating efficiencies and greater management depth are
three examples of areas where size can benefit a banking
organization.
o Local Autonomy. Rockingham will continue to operate as a separate
bank under the direction of its current board of directors and
management.
o Operating Efficiencies. By eliminating duplication, utilizing joint
purchasing power and sharing resources and responsibilities, the
merger will offer significant opportunities for cost savings.
o Quality of Marathon. The information presented to management and
the board of directors about Marathon concerning the earnings,
asset quality, management, book value, liquidity and composition of
earning assets demonstrated the attractiveness of Marathon in the
affiliation decision.
o Management Depth. Each organization has experienced personnel
covering all facets of the banking operation. Together, Rockingham
and Marathon will immediately have back-up personnel for each
function and will be able to take advantage of the many years of
experience and different perspectives offered by the other's staff.
Employees will have more career opportunities available, as a
larger organization permits more specialization, which should
strengthen Rockingham's ability to attract and develop talented
employees.
o Larger Geographic Coverage. The markets served by both banks are
adjacent and do not overlap. Each bank will be able to offer
financial services to customers operating in both market areas.
o Operating Compatibility. Both banks are relatively young,
aggressive, customer focused and share similar operating styles and
philosophies. At the same time, the organizations have developed
their own areas of specialization that are expected to benefit the
other.
Other material factors considered were the well-capitalized position
and earnings of Marathon; the compatibility of the management of the two
organizations and the fact that each institution would contribute complementary
business strengths resulting in a well-diversified and well-managed institution;
the additional resources that will enable Rockingham to increase financial
services to consumers and businesses; and the larger capital base of the
combined institution, resulting in larger lending limits that will permit
Rockingham to better serve its customer base.
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<PAGE>
Based upon the above, the Rockingham board of directors concluded that
a merger with Marathon would be in the best interest of Rockingham and its
shareholders and would further its goal of enhancing shareholder value.
The Rockingham board believes that the merger is in the best interest
of Rockingham and the Rockingham shareholders. The Rockingham board recommends
that Rockingham shareholders vote to APPROVE the merger.
Accounting Treatment
We anticipate that the merger will be accounted for as a pooling of
interests for accounting and financial reporting purposes. Under this method of
accounting, recorded assets and liabilities of Marathon and Rockingham are
carried forward at their previously recorded amounts, income of the combined
corporations will include income of Marathon and Rockingham for the entire
fiscal year in which the merger occurs, and the reported income of the separate
companies for prior periods will be combined. No recognition of goodwill in the
combination is required of any party to the merger.
For the merger to qualify as a pooling of interests, it must satisfy a
number of conditions. If all of the conditions to pooling-of-interests
accounting are not satisfied, then the merger would not qualify for
pooling-of-interests accounting treatment. The availability of
pooling-of-interests accounting is a condition to the parties' obligation to
consummate the merger. Marathon and Rockingham have agreed that they will use
their respective best efforts to ensure that the merger will qualify for
pooling-of-interests accounting treatment. In addition, certain affiliates of
Marathon and Rockingham have agreed that they will not sell any Marathon common
stock or Rockingham common stock within 30 days before the effective date of the
merger, nor sell any Marathon common stock until such time as Marathon has
published financial results covering at least 30 days of the combined operations
of Marathon and Rockingham after the merger.
Material Federal Income Tax Consequences of the Merger
The following is a discussion of the material federal income tax
consequences of the merger to Rockingham shareholders who receive Marathon
common stock in exchange for Rockingham common stock and cash instead of
fractional shares. The discussion does not deal with all aspects of federal
taxation that may be relevant to particular Rockingham shareholders. Certain tax
consequences of the merger may vary depending upon the particular circumstances
of each Rockingham shareholder and other factors.
You are urged to consult with your tax advisor to determine the
particular tax consequences of the merger to you.
This summary is based on current law and the advice of Williams,
Mullen, Clark & Dobbins, legal counsel to Marathon. The advice in this summary
is based on, among other things, certain customary assumptions and
representations relating to certain facts and circumstances of, and the
intentions of the parties to the merger. Neither Marathon nor Rockingham has
requested a ruling from the Internal Revenue Service in connection with the
merger. As a condition to consummation of the merger, Marathon and Rockingham
will receive from Williams, Mullen, Clark & Dobbins an opinion as to certain
federal income tax consequences of the merger. The opinion is not binding on the
Internal Revenue Service.
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<PAGE>
In the opinion of counsel, the merger will constitute a tax-free
reorganization under Section 368(a) of the Internal Revenue Code, if consummated
in the manner set forth in the merger agreement. Accordingly, among other
things, in the opinion of such counsel:
o No gain or loss will be recognized by Marathon or Rockingham as a
result of the merger;
o No gain or loss will be recognized by a Rockingham shareholder to
the extent he receives Marathon common stock solely in exchange for
his Rockingham common stock pursuant to the merger;
o The tax basis of the Marathon common stock received by each
Rockingham shareholder will be the same as the tax basis of the
Rockingham common stock surrendered in exchange therefor; and
o The holding period for each share of Marathon common stock received
by each Rockingham shareholder in exchange for Rockingham common
stock will include the period for which the shareholder held the
Rockingham common stock exchanged therefor, provided the Rockingham
common stock is a capital asset in the hands of the holder at the
effective date of the merger.
Any cash a Rockingham shareholder receives instead of fractional shares
could result in taxable income. The receipt of that cash will generally be
treated as a sale or exchange of the stock resulting in capital gain or loss
measured by the difference between the cash received and an allocable portion of
the basis of the stock relinquished. The receipt of the cash may be treated as a
dividend and taxed as ordinary income in certain limited situations.
Absence of Appraisal Rights
Under Section 6.1-43 of the Virginia Banking Act, shareholders of
Rockingham will not be entitled to dissent from the merger and obtain the
judicially determined fair value of their shares of Rockingham.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial statements have
been prepared on a consolidated basis based upon the historical financial
statements of Marathon 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 Marathon common stock in connection with the
merger, which in turn is based on the number of shares of Rockingham common
stock outstanding at March 31, 2000. The number of shares of Marathon common
stock to be issued in connection with the merger is subject to certain
adjustments described elsewhere in this joint proxy statement/prospectus. Any
difference in the number of shares of Marathon 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
Marathon in Appendix B and Rockingham's historical financial statements included
in Appendix D (Rockingham's 1997 audited financial statements are not included
in this joint proxy statement/prospectus). 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 which would
actually have been attained if the Rockingham merger had occurred in the past or
which may be attained in the future.
I-19
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 2000
<TABLE>
<CAPTION>
Marathon Rockingham Adjustments Consolidated
-------- ---------- ----------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 5,339 $ 6,598 $ -- $ 11,937
Federal funds sold 12,000 4,942 -- 16,942
Securities 11,604 8,735 -- 20,339
Loans held for resale 176 -- -- 176
Loans, net 79,231 82,082 -- 161,313
Bank premises and equipment, net 2,766 2,175 -- 4,941
Accrued interest receivable 567 532 -- 1,099
Other real estate 165 -- -- 165
Other assets 626 526 -- 1,152
--------- --------- --------- ---------
Total assets $ 112,474 $ 105,590 $ -- $ 218,064
========= ========= ========= =========
Liabilities and Stockholders' Equity
Liabilities:
Deposits
Interest-bearing $ 85,935 $ 75,762 $ -- $ 161,697
Non-interest bearing 16,056 13,904 -- 29,960
Other borrowed money -- 3,383 -- 3,383
Accrued interest payable and other liabilities 514 574 -- 1,088
Capital lease payable 216 -- -- 216
Dividends payable -- -- -- --
--------- --------- --------- ---------
Total liabilities 102,721 93,623 -- 196,344
--------- --------- --------- ---------
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 71 2,113 -- 2,184
Accumulated other comprehensive income (loss) (140) (72) -- (212)
--------- --------- --------- ---------
Total stockholders' equity 9,753 11,967 -- 21,720
--------- --------- --------- ---------
Total liabilities and stockholders' equity $ 112,474 $ 105,590 $ -- $ 218,064
========= ========= ========= =========
</TABLE>
I-20
<PAGE>
MARATHON AND ROCKINGHAM
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR THREE MONTHS ENDED MARCH 31, 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 $ 1,876 $ 1,774 $ 3,650
Interest and dividends on securities:
Taxable 138 140 278
Nontaxable 15 -- 15
Dividends 6 -- 6
Interest on deposits in other banks -- 15 15
Interest on Federal funds sold 130 90 220
---------- ---------- ----------
Total interest and dividend income 2,165 2,019 4,184
---------- ---------- ----------
Interest expense:
Interest on deposits 909 857 1,766
Interest on short-term borrowings -- 33 33
Interest on capital lease obligations 4 -- 4
---------- ---------- ----------
Total interest expense 913 890 1,803
---------- ---------- ----------
Net interest income 1,252 1,129 2,381
Provision for loan losses 73 30 103
---------- ---------- ----------
Net interest income after provision for loan losses 1,179 1,099 2,278
---------- ---------- ----------
Noninterest income:
Service charges on deposit accounts 181 92 273
Commissions and fees 12 3 15
Other 11 -- 11
---------- ---------- ----------
Total noninterest income 204 95 299
---------- ---------- ----------
Noninterest expense:
Salaries and employee benefits 469 394 863
Net occupancy expense of premises 57 44 101
Furniture and equipment expense 74 58 132
Other operating expense 348 168 516
---------- ---------- ----------
Total noninterest expense 948 664 1,612
---------- ---------- ----------
Income before income taxes 435 530 965
Income taxes 142 180 322
---------- ---------- ----------
Net income $ 293 $ 350 $ 643
========== ========== ==========
Earnings per common share:
Basic $ 0.14 $ 0.22 $ 0.14
========== ========== ==========
Diluted $ 0.14 $ 0.22 $ 0.14
========== ========== ==========
Weighted average shares outstanding:
Basic 2,050,764 1,589,940 4,562,869
Diluted 2,071,143 1,616,354 4,628,775
</TABLE>
I-21
<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>
I-22
<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>
I-23
<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>
I-24
<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 Marathon will issue 1.58 shares of Marathon
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
Marathon and Rockingham using the historical weighted average shares
outstanding, adjusted to equivalent shares of Marathon common stock.
(4) Pro forma combined balance sheet adjustments reflect (i) the issuance
of 2,512,105 shares of Marathon common stock at a par value of $1.00
per share and (ii) the elimination of Rockingham common stock.
I-25
<PAGE>
OPINION OF MARATHON'S FINANCIAL ADVISOR
General
Marathon's board of directors retained McKinnon & Company, Inc. in an
engagement letter dated March 22, 2000 to serve as its financial advisor and to
evaluate the terms of the merger agreement. McKinnon & Company has rendered its
opinion to the board of directors of Marathon that the terms of the merger
agreement are fair from a financial point of view to the Marathon shareholders.
In developing its opinion, McKinnon & Company reviewed and analyzed material
bearing upon the financial and operating conditions of Marathon, Rockingham, and
on a pro forma basis, Marathon and Rockingham combined, and material prepared in
connection with the merger agreement including, among other things, the
following:
o the merger agreement;
o the registration statement;
o Marathon's and Rockingham's financial results for fiscal years 1992
through 1999, and the first quarter ended March 31, 2000, and
certain documents and information deemed relevant to McKinnon &
Company's analysis;
o discussions with senior management of Marathon and Rockingham
regarding past and current business operations of, and outlook for,
Marathon and Rockingham, including trends, the terms of the
proposed merger, and related matters;
o the reported price and trading activity of Marathon and Rockingham
stock and financial and stock market information (when available)
for Marathon and Rockingham with similar information for certain
other companies and securities that are publicly traded;
o the financial terms of certain recent business combinations
particularly merger of equal combinations which McKinnon & Company
deemed comparable in whole or in part;
o the relationship of prices paid and relative contributions to
relevant financial data such as net worth, assets and earnings in
certain bank and bank holding company affiliations and acquisitions
in Maryland, North Carolina and Virginia and nationally in recent
years and the deal price relative to the seller's price one day
prior to the announcement of the deal; and
o other published information and other factors and information which
McKinnon & Company deemed relevant.
No instruction or limitations were given or imposed in connection with
the scope of the examination or investigations made by McKinnon & Company in
arriving at its findings. McKinnon & Company has performed such other studies
and analyses it deemed appropriate, including an analysis of the pro forma
financial impact of the merger on Marathon and Rockingham. A copy of McKinnon &
Company's opinion, which sets forth the assumptions made, matters considered and
qualifications made on the review undertaken, is attached as Appendix E hereto
and should be read in its entirety.
McKinnon & Company used the information gathered to evaluate the
financial terms of the merger using standard valuation methods, including
discounted cash flow analysis, analysis of historical
I-26
<PAGE>
exchange ratios, comparable selected public trade companies, comparable
historical performance, dilution analysis, comparable merger of equal analysis,
and relative contribution analysis.
Present Value Analysis
McKinnon & Company performed an analysis to determine a range of
present values per share of Marathon common stock assuming Marathon continued to
operate as an independent bank holding company. This range was determined by
present valuing the estimated value of Marathon common stock at the end of year
2004. McKinnon & Company used earnings reported by Marathon for 1999 and
management estimates of $1.350 million in net income for 2000. The net income
projections were grown using earnings growth rates of 8-10% annually in years
2000 through 2004. The future value of the Marathon common stock at the end of
2004 was determined by applying multiples of 8.0 to 12.0 to year 2004 projected
earnings. These values were discounted to present values using discount rates of
10% to 14%, which McKinnon & Company viewed as the appropriate discount rate
range for a commercial bank with Marathon's characteristics. Based upon the
above assumption the value of Marathon common stock ranged from approximately
$5.87 to $9.61 per share on a stand-alone basis.
McKinnon & Company performed a similar analysis to determine a range of
present values per share of Rockingham common stock assuming Rockingham
continued to operate as an independent bank. McKinnon & Company used earnings
reported by Rockingham for 1999 and management estimates of $1.420 million for
2000. Using the same net income growth rate as used for Marathon and the same
multiples of 2004 projected earnings and same discount rates of 10% to 14% the
value of Rockingham common stock ranged from approximately $7.69 to $12.58 per
share as a stand-alone company.
McKinnon & Company also performed an analysis to determine a range of
present values per share of Marathon and Rockingham common stock on a combined
basis. This range was determined by present valuing the estimated value of
Marathon's common stock on a pro forma basis at the end of year 2004. McKinnon &
Company used earnings reported by Marathon and Rockingham for 1999, management
estimates for 2000 net of estimated one time merger expenses of approximately
$245,000 and estimated annual cost savings and revenue enhancements of $310,000
expected to result from the merger. The net income projections were grown using
earnings growth rates of 8-10% annually in years 2001 through 2004. The future
value of the pro forma common stock at the end of year 2004 was determined by
applying multiples of 8.0 to 12.0 to year 2004 projected earnings. These values
were discounted to present value using discount rates of 10% to 14%, which
McKinnon & Company viewed as the appropriate discount rate range for a
commercial bank with Marathon's and Rockingham's pro forma characteristics.
Based upon the above assumptions the value of the pro forma Marathon common
stock ranged from approximately $5.85 to $9.63 per share.
Analysis of Historical Exchange Ratios
McKinnon & Company reviewed the trading behavior of Marathon's and
Rockingham's common stocks and analyzed the ratio of the closing prices of
Rockingham common stock to Marathon common stock from December 31, 1998 through
March 31, 2000. This analysis showed that such ratios ranged from a high of 1.77
to a low of 1.26, with a most recent 12 month average of 1.53x, most recent 6
month average of 1.59x, most recent 3 month average of 1.55x and most recent day
average of 1.61x.
Market Comparable Analysis
McKinnon & Company analyzed the performance and financial condition of
Marathon and Rockingham relative to two groups including the following 18 large
and 51 small financial institutions: Bank of America; First Union Corporation;
Wachovia Corporation; BB&T Corp.; First Virginia Bank,
I-27
<PAGE>
Inc.; Centura Banks, Inc.; Mercantile Bankshares, Inc.; Keystone Financial;
Riggs National Corp.; Provident Bankshares; United Bankshares, Inc.; Susquehanna
Bancshares; F&M National Corporation; First Charter Corporation; F&M Bancorp;
FCNB Corp.; First Community Bankshares; and Union Bankshares Corp.
(collectively, the Large Bank Group); and a group of 51 community banks,
primarily in Virginia, with some in North Carolina, Maryland and the District of
Columbia (collectively, the Small Bank Group). Among the financial information
compared was information relating to equity to assets, loans to deposits, net
interest margin, non-performing assets, total assets, non-accrual loans, loan
loss reserve and asset growth rates. Additional information compared for the
trailing twelve month period ended December 31, 1999 was:
<TABLE>
<CAPTION>
Average of Average of Average Overall
Large Bank Small Bank Comparable
Marathon Rockingham Group Group Bank Groups
-------- ---------- ----- ----- -----------
<S> <C> <C> <C> <C> <C>
Price/
Book Value 124.5% 117.0% 178.0% 124.0% 137.6%
Price/ LTM
Earnings 10.8x 11.8x 11.8x 11.0x 11.1x
Return on
Avg. Assets 1.09% 1.27% 1.29% 1.14% 1.18%
Return on
Avg. Equity 12.20% 10.81% 14.60% 11.16% 11.98%
Dividend
Yield 1.39% N/A 4.10% 2.83% 3.38%
Payout 12% N/A 43% 32% 35%
</TABLE>
Overall, in the opinion of McKinnon & Company, Rockingham's operating
and financial ratios were generally in line with the Small Bank Group and in
line with the Large Bank Group while its common stock was priced by the market
at similar levels to the average Large and Small Bank Group. Rockingham's equity
to asset ratio was slightly higher than the Small Bank Group and Large Bank
Group (11.5% for Rockingham, 8.6% for the Large Bank Group and 10.0% for the
Small Bank Group); its net interest margin (4.59%) was 137.6% of the Large Bank
Group (4.21%) and Small Bank Group (4.33%); its level of non-performing assets
to total assets (0.04%) was better than the Large Bank Group (0.52%) and the
Small Bank Group (0.51%); and its reserves to non-performing assets ( N/M ) was
higher than the Small Bank Group (255.0%) and the Large Bank Group (209.9%).
With a price to earnings ratio of 11.8x trailing twelve months earnings
Rockingham's common stock was priced slightly above the Large Bank Group (11.8
times) and the Small Bank Group (11.0 times). Rockingham's price to book ratio
of 117.0% was at a discount to the Large Bank Group (178.0%) and the Small Bank
Group (137.6%). Accordingly, Rockingham's common stock is reasonably valued when
compared to the Large Bank Group and to the Small Bank Group.
I-28
<PAGE>
Pro Forma Merger Analysis - Dilution
McKinnon & Company analyzed certain pro forma effects of the merger
based upon earnings forecasts of Marathon and Rockingham, as well as estimated
cost savings and revenue enhancements totaling $300,000 expected to result from
the merger. This analysis indicated that the transaction, excluding one time
merger costs, would be dilutive to earnings per share of Marathon in 2000 and
accretive in each year thereafter, once the projected cost savings and projected
revenue enhancements are realized, and that the merger would not be dilutive to
Marathon's book value per share. The actual results achieved by Marathon may
vary from projected results. Specifically, estimated earnings per share are
expected to be diluted 7.69% in 2000 and book value per share is expected to be
unaffected. The pro forma effect on Rockingham's earnings per share, dividends
and market value is an increase in earnings per share of 8.97%, in the cash
dividend of approximately $.08 per share, and from the recent closing price of
$5.75 per share for Marathon and $8.50 per share for Rockingham, an increase of
6.88% in the pro forma market value of Rockingham. Marathon's cash dividend
payout ratio is 12% compared with an average of 35% and 32%, respectively, among
the comparable Large and Small Bank groups. McKinnon & Company concluded from
this that the transaction would not have a significant positive or negative
impact on Marathon and the Marathon shareholders in that the market value of
Marathon's common stock, after giving effect to the exchange ratio, although
there can be no assurance that pro forma amounts are indicative of the future
and there is no assurance that anticipated cost savings will occur.
Comparable Merger of Equals Transactions Analysis
McKinnon & Company analyzed eleven other bank merger transactions
characterized as mergers of equals in the United States in 1998, 1999 and 2000.
This analysis showed that, among other things, the median relative contributions
of the companies was: 55.8% and 44.2% in terms of total assets; 55.0% and 45.0%
in terms of stockholders' equity; 54.8% and 45.2% in terms of trailing twelve
months earnings; and 57.0% and 43.0% in terms of common shares. Marathon's and
Rockingham's relative contributions would be: 50.6% and 49.4% in terms of
assets; 44.8% and 55.2% in terms of stockholders' equity; 48.1% and 51.9% in
terms of trailing earnings; and 44.9% and 55.1% in terms of common shares.
McKinnon & Company also analyzed the same group of eleven comparable
merger of equals transactions in 1998, 1999 and 2000 which showed the market
premium of the consideration received by shareholders of the non-surviving
entity in the transactions to the market values of the common stock of such
entity on the trading date prior to the announcement. Such premiums ranged from
0% to 34.15% and had a mean value of 17.13%. Marathon and Rockingham announced
their proposed merger Thursday, April 20. Based on closing prices of $9.50 for
Rockingham and $6 for Marathon, on Wednesday, April 19, the premium, based on
the closing prices of each and an exchange ratio of 1.58 shares of Marathon to
be issued for each share of Rockingham, such premium was zero.
Relative Contribution Analysis
McKinnon & Company analyzed certain historical balance sheet, income
statement and ratio data for Marathon and Rockingham for 1997 through 1999, as
well as certain projected net income data performed by management of Rockingham
and Marathon for 2000. McKinnon & Company also analyzed the ratio of the closing
monthly prices of Marathon common stock and Rockingham common stock over the
period from December 31, 1998, through March 31, 2000. The analysis showed,
among other things, that from the fiscal years ended 1999, Marathon would have
contributed approximately 48.1% of pro forma combined net income to common
shareholders; for 2000, Marathon was projected to contribute, based on
management projections, 48.7% of pro forma combined projected net income; at
March 31, 2000 Marathon would have contributed 44.9% of pro forma market
capitalization; at December 31, 1999, Marathon would have contributed 44.8% of
pro forma stockholders' equity and
I-29
<PAGE>
50.6% of pro forma total assets. At the exchange ratio of 1.58 shares of
Marathon common stock for each share of Rockingham common stock, the holders of
Marathon common stock will own 44.9% of the continuing corporation.
OPINION OF ROCKINGHAM'S FINANCIAL ADVISOR
Pursuant to an engagement letter dated as of March 27, 2000, Rockingham
retained Scott & Stringfellow, Inc. as a financial advisor in connection with
Rockingham's consideration of a possible business combination with Marathon. In
connection therewith, the Rockingham board requested Scott & Stringfellow to
render its opinion as to the fairness, from a financial point of view, of the
exchange ratio to the holders of Rockingham common stock. Scott & Stringfellow
delivered to Rockingham's board its oral opinion on April 6, 2000 that as of
such date, the exchange ratio was fair, from a financial point of view, to the
holders of shares of Rockingham common stock. Scott & Stringfellow has
reconfirmed its opinion by delivering a written opinion to the Rockingham board,
dated the date of this proxy statement/prospectus, to the effect that, as of the
date thereof, the exchange ratio was fair to the holders of shares of Rockingham
common stock from a financial point of view. Scott & Stringfellow is a regional
investment banking firm and was selected by Rockingham based on the firm's
reputation and experience in investment banking, its extensive experience and
knowledge of the Virginia banking market, its recognized expertise in the
valuation of commercial banking businesses and because of its familiarity with,
and prior work for Rockingham. Scott & Stringfellow, through its investment
banking business and specifically through its Financial Institutions Group,
specializes in commercial banking institutions and is continually engaged in the
valuation of such businesses and their securities in connection with mergers and
acquisitions, negotiated underwritings, competitive biddings and other corporate
transactions.
The full text of Scott & Stringfellow's opinion, dated the date of this
proxy statement/prospectus, which sets forth the assumptions made, procedures
followed, matters considered and limits on the review undertaken, is attached as
Appendix E to this proxy statement/prospectus. The description of the Scott &
Stringfellow opinion set forth herein is qualified in its entirety by reference
to Appendix E. The Scott & Stringfellow opinion is provided for the information
of Rockingham shareholders because it was provided to the Rockingham board in
connection with its consideration of the merger.
In developing its opinion, Scott & Stringfellow reviewed and analyzed:
o the merger agreement;
o this proxy statement/prospectus;
o Rockingham's audited financial statements for the three years ended
December 31, 1999;
o Rockingham's unaudited financial statements for the three months
ended March 31, 2000 and 1999, and other internal information
relating to Rockingham prepared by Rockingham's management;
o information regarding the trading market for Rockingham common
stock and Marathon common stock and the price ranges within which
the respective stocks have traded;
o the relationship of prices paid to relevant financial data such as
net worth, earnings, deposits and assets in certain bank and bank
holding company mergers and acquisitions in recent years;
I-30
<PAGE>
o Marathon's annual reports to shareholders and its audited financial
statements for the three years ended December 31, 1999;
o Marathon's unaudited financial statements for the three months
ended March 31, 2000 and 1999, and other internal information
relating to Marathon prepared by Marathon's management; and
o conducted such other studies, analysis and investigations
particularly of the banking industry, and considered such other
information as it deemed appropriate, the material portion of which
is described below.
o Scott & Stringfellow also took into account its assessment of
general economic, market and financial conditions and its
experience in other transactions, as well as its experience in
securities valuations and knowledge of the commercial banking
industry generally.
o Scott & Stringfellow also has discussed with members of
Rockingham's and Marathon's management past and current business
operations, the background of the merger, the reasons and basis for
the merger, results of regulatory examinations, and the business
and future prospects of Rockingham and Marathon individually and as
a combined entity, as well as other matters relevant to its
inquiry.
Scott & Stringfellow relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by it and discussed with it for purposes of its opinion. With respect to
financial forecasts reviewed by Scott & Stringfellow in rendering its opinion,
Scott & Stringfellow assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgment of the managements of Rockingham and Marathon as to the future
financial performance of Rockingham and Marathon, respectively. Scott &
Stringfellow did not make an independent evaluation or appraisal of the assets
or liabilities of Rockingham and Marathon nor was it furnished with any such
appraisal.
In connection with rendering its opinion, Scott & Stringfellow
performed a variety of financial analyses. Scott & Stringfellow evaluated the
financial terms of the transaction using standard valuation methods, including
contribution analysis, dilution analysis, discounted cash flow analysis, among
others. The following is a summary of the material analyses presented by Scott &
Stringfellow to the Rockingham board of directors in connection with its
fairness opinion.
Summary of Proposal. Scott & Stringfellow reviewed the financial terms
of a proposed transaction whereby Rockingham will be merged into Marathon.
Rockingham shareholders will receive 1.58 shares of Marathon common stock in
exchange for each share of Rockingham common stock they hold. Based upon this
exchange ratio, Scott & Stringfellow estimates that upon completion of the
merger, approximately 55% of the outstanding Marathon common stock will be owned
by current Rockingham shareholders.
Contribution Analysis. Scott & Stringfellow reviewed the relative
contributions of, among other things, last twelve months net interest income,
last twelve months net income, estimated 2000 net income, total assets, total
loans, total deposits, total equity and market capitalization to be made by
Rockingham and Marathon to the combined institution based on data at and for the
twelve months ended March 31, 2000. Scott & Stringfellow compared such
contributions to the consideration to be received by
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Rockingham shareholders. Based upon the exchange ratio, the shareholders of
Rockingham common stock will own approximately 55.0% of Marathon's common stock
after the transaction closes.
<TABLE>
<CAPTION>
Rockingham
Marathon Rockingham Pro Forma
Contribution Contribution Ownership
------------- ------------ ---------
<S> <C> <C> <C>
Last 12 Months Net Interest Income 53.9% 46.1% 55.0%
Last 12 Months Net Income 47.8% 52.2% 55.0%
Estimated 2000 Net Income 48.7% 51.3% 55.0%
Total Assets 51.6% 48.4% 55.0%
Total Loans 49.1% 50.9% 55.0%
Total Deposits 53.2% 46.8% 55.0%
Total Equity 44.9% 55.1% 55.0%
Market Capitalization 47.1% 52.9% 55.0%
</TABLE>
Dilution Analysis. Based upon publicly available financial information
on Rockingham and Marathon, Scott & Stringfellow considered the effect of the
transaction on the last twelve months earnings, estimated 2000 earnings, and
book value of Rockingham and Marathon. The immediate effect on Rockingham was to
increase last twelve months earnings by $0.05 per share or 5.86%, increase
estimated 2000 earnings by $0.08 per share or 7.64%, and decrease book value by
$0.01 per share or 0.09%. The effect on Marathon under the same assumption is to
decrease last twelve months earnings by $0.03 per share or 6.36%, decrease
estimated 2000 earnings by $0.05 per share or 8.02%, and increase book value by
$0.01 per share or 0.11%. This dilution analysis does not take into account the
longer-term benefits for the combined companies resulting from the combination.
Discounted Cash Flow Analysis. Scott & Stringfellow performed a
discounted cash flow analysis under various projections to estimate the fair
market value of Rockingham's common stock. Among other things, Scott &
Stringfellow considered asset and earnings growth of 12.0% and a required equity
capital level of 8.0% of assets. A range of discount rates from 12.0% to 14.0%
was applied to cash flows resulting from the projections during the first five
years and the residual values. The residual values were estimated by
capitalizing the projected final year earnings by the discount rates, less the
projected long-term growth rate of Rockingham's earnings. The discount rates,
growth rates and capital levels were chosen based on what Scott & Stringfellow,
in its judgment, considered to be appropriate taking into account, among other
things, Rockingham's past and current financial performance and conditions, the
general level of inflation, rates of return for fixed income and equity
securities in the marketplace generally and particularly in the banking
industry. Based upon these analyses, Scott & Stringfellow developed, for
purposes of its opinion, a reference range for the value of Rockingham common
stock of
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$9.88 to $12.14 per share. Using similar assumptions, with $300,000 of cost
savings or revenue enhancements included, Scott & Stringfellow performed a
discounted cash flow analysis of Rockingham and Marathon as a combined entity.
The discounted cash flow analysis showed a range of present values that would
imply (based on the exchange ratio) a range of present values for holders of
Rockingham common stock of $10.71 to $13.43 per share.
Other Analyses. Scott & Stringfellow also reviewed, among other things,
selective investment research reports on, and earnings estimates for, Rockingham
and Marathon and analyzed available information regarding the ownership of
Marathon common stock. In addition, Scott & Stringfellow prepared an overview of
Marathon's business, prepared a summary of the historical financial performance
of Marathon, summarized Marathon's financial goals and objectives, and, based on
publicly available information, analyzed Marathon's deposit market share and
branch presence.
In connection with its opinion dated as of the date of this proxy
statement, Scott & Stringfellow performed procedures to update, as necessary,
certain of the analyses described above and reviewed the assumptions on which
such analyses described above were based and the factors considered in
connection therewith.
The summary set forth above includes all the material factors
considered by Scott & Stringfellow in developing its opinion. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefor, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors discussed above, Scott & Stringfellow believes that its analyses must be
considered as a whole and that selecting portions of its analysis and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. As a
whole, these various analyses contributed to Scott & Stringfellow's opinion that
the exchange ratio is fair from a financial point of view to Rockingham's
shareholders.
Pursuant to an engagement letter dated March 27, 2000 between
Rockingham and Scott & Stringfellow, in exchange for its services, Rockingham
has agreed to pay Scott & Stringfellow $10,000, upon the delivery of its
opinion, plus $25,000 payable at the closing of the merger. In addition, Scott &
Stringfellow shall be reimbursed for all reasonable expenses. In the ordinary
course of its business, Scott & Stringfellow may actively trade the equity
securities of Rockingham for its own account or the account of its customers,
and, accordingly, may at any time hold a long or short position in such
securities.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Certain members of Rockingham's management, as well as certain members
of the Rockingham board of directors, have interests in the merger in addition
to their interests as shareholders of Rockingham. These interests are described
below. In each case, the Rockingham board was aware of these interests and
considered them, among other matters, in approving the merger agreement and the
transactions contemplated thereby.
Indemnification. Marathon has generally agreed to indemnify the
officers and directors of Rockingham to the same extent and on the same
conditions as they are entitled to from Rockingham before the merger. Marathon
also has agreed to provide directors' and officers' liability insurance for the
present officers and directors of Rockingham comparable to the coverage
currently provided by Rockingham before the merger.
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<PAGE>
Directors of Rockingham. John K. Stephens, Paul R. Yoder, Stephen T.
Heitz and Wayne B. Ruck, who will serve on the Marathon board, initially will
receive annual retainers and monthly fees for service on Marathon's board. Based
on the existing schedule utilized by Marathon, these individuals will receive an
annual fee of $1,500, $500 for attendance at each board meeting and $50 for
attendance at each board committee meeting.
Employees and Benefit Plans. Marathon will coordinate the participation
of Rockingham's employees in its employee benefit plans and programs. Subject to
restrictions and limitations that applicable law may impose, Marathon will treat
the service of a Rockingham employee with Rockingham as service with Marathon
for purposes of all employee benefit plans and programs. Marathon will also
honor Rockingham's obligations for all accrued and unused vacation, sick leave
and personal leave and all employment, severance, consulting and other
compensation contracts and agreements that Rockingham has previously disclosed
to Marathon.
CERTAIN DIFFERENCES IN RIGHTS OF SHAREHOLDERS
Both Marathon and Rockingham are corporations subject to the provisions
of the Virginia Stock Corporation Act. Rockingham's shareholders' rights are
presently governed by Rockingham's articles of incorporation and bylaws. Upon
consummation of the merger and Rockingham's shareholders becoming shareholders
of Marathon, shareholders' rights will be governed by the articles of
incorporation and bylaws of Marathon.
There are a few material differences between the rights of a Rockingham
shareholder under Rockingham's articles of incorporation and bylaws, on the one
hand, and the rights of a Marathon shareholder under the articles of
incorporation and bylaws of Marathon, on the other hand, which are disclosed in
the section "Comparative Rights of Shareholders" on page VI-1.
TERMS OF THE MERGER AGREEMENT
The following is a summary description in the material aspects of the
merger agreement. This description does not purport to be complete and is
qualified in its entirety by reference to Appendix A that contains the full
merger agreement. We urge you to read Appendix A in its entirety.
Representations and Warranties; Conditions to the Merger
The merger agreement contains representations and warranties by
Marathon and Rockingham, including representations and warranties with respect
to their individual organizations, authorizations to enter into the merger
agreement, capitalization, financial statements and pending and threatened
litigation. These representations and warranties, except as otherwise provided
in the merger agreement, will not survive the effective date of the merger.
The obligations of Marathon and Rockingham to consummate the merger are
subject to the following conditions, among others:
o approval of the merger agreement by the Rockingham shareholders;
o approval of the stock issuance and amendments to the articles of
incorporation by the Marathon shareholders;
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o receipt of all necessary regulatory approvals not conditioned or
restricted in a manner that, in the judgment of the boards of
directors of Marathon or Rockingham, materially adversely affects
the economic or business benefits of the merger so as to render
inadvisable or unduly burdensome consummation of the merger;
o the absence of certain actual or threatened proceedings before a
court or other governmental body relating to the merger;
o the receipt of an opinion of counsel as to certain federal income
tax consequences of the merger;
o the receipt of a letter from Marathon's accountants to the effect
that the merger will qualify for pooling-of-interests accounting
treatment under generally accepted accounting principles;
o performance by the other company of its obligations under the
merger agreement;
o the accuracy, in all material respects, of the representations and
warranties of the other company contained in the merger agreement;
o the receipt of certain opinions and certificates from the other
company;
o the receipt by Marathon of a final fairness opinion from McKinnon &
Company, Inc.; and
o the receipt by Rockingham of a final fairness opinion from Scott &
Stringfellow, Inc.
Regulatory Approvals
As indicated above, the merger is conditioned on the prior approval of
the merger by the Board of Governors of the Federal Reserve System and the
Virginia State Corporation Commission. Marathon has filed applications with the
Federal Reserve and the Virginia State Corporation Commission. While we cannot
predict whether or when Marathon will obtain all required regulatory approvals,
we see no reason why the approvals will not be obtained in a timely manner.
However, there can be no assurance that the necessary approvals will be
obtained, or that any approval will not be conditioned in a manner which makes
consummation of the merger, in the judgment of the board of directors of
Marathon or Rockingham, inadvisable or unduly burdensome.
Business Pending the Merger
Until the effective date of the merger, Marathon and Rockingham each
has agreed that it will operate its business substantially as presently
operated, in the ordinary course of business, and will use its best efforts to
preserve intact its relationships with persons having business dealings with it.
Until the effective date, Marathon and Rockingham each has agreed not to take,
without the other's consent, certain specific actions in connection with the
ongoing operation of its business. Specifically, neither Marathon nor Rockingham
may:
o enter into any merger, consolidation or business combination (other
than the merger) or any acquisition or disposition of a material
amount of assets or securities or solicit proposals in respect
thereof;
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o amend its charter or bylaws (except as may be required by the
merger agreement);
o issue any capital stock, except upon exercise of rights, warrants
or options issued pursuant to existing employee benefits plans,
programs or arrangements or effect any stock split or otherwise
change its capitalization; or
o purchase or redeem any of its capital stock.
No Solicitation; Board Action
Marathon and Rockingham each has agreed not to (i) encourage, solicit
or initiate discussions or negotiations with any other person concerning any
merger, share exchange, sale of substantial assets, tender offer, sale of shares
of capital stock or similar transaction, (ii) enter into any agreement with any
third party providing for a business combination transaction, equity investment
or sale of a significant amount of assets, or (iii) furnish any information to
any other person relating to or in support of such transaction.
Effective Date
If the merger is approved by the shareholders of Rockingham, all
required governmental and other consents are obtained and the other conditions
to the merger are satisfied or waived, the merger will be consummated and made
effective on the date and at the time indicated on the certificate of merger
issued by the Virginia State Corporation Commission pursuant to the Virginia
Stock Corporation Act. See "Terms of the Merger Agreement - Representations and
Warranties; Conditions to the Merger" on page I-34.
It is anticipated that the effective date of the merger will occur in
the third quarter of 2000.
Surrender of Stock Certificates
As soon as practicable after the merger, Marathon will cause Registrar
and Transfer Company, its exchange agent, to mail a letter of transmittal and
instructions for use to surrender the certificates representing shares of
Rockingham common stock in exchange for certificates representing shares of
common stock of Marathon, which by that time will have changed its name to
Premier Community Bankshares, Inc.
Rockingham shareholders should not send in their certificates until
they receive such instructions.
Promptly after surrender of one or more certificates for Rockingham
common stock, together with a properly completed letter of transmittal, you will
receive a certificate or certificates representing the number of shares of
Marathon common stock to which you are entitled and, where applicable, a check
for the amount payable in cash instead of issuing a fractional share. Lost,
stolen, mutilated or destroyed certificates will be treated in accordance with
the existing procedures of Marathon.
After the merger, you will be entitled to vote the number of shares of
Marathon common stock into which your Rockingham common stock has been
converted, regardless of whether you have surrendered your Rockingham
certificates. The merger agreement provides, however, that no dividend or
distribution payable to the holders of record of Marathon common stock at or as
of any time after the
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effective date of the merger will be paid to the holder of any Rockingham
certificate until such holder physically surrenders such certificate, promptly
after which time all such dividends or distributions will be paid, without
interest.
Waiver, Amendment and Termination
At any time on or before the effective date of the merger, any term or
condition of the merger may be waived by the party that is entitled to its
benefits. The merger agreement may be amended at any time before the merger by
agreement of the parties whether before or after the shareholder meetings. Any
material change in a material term of the merger agreement will require a
resolicitation of Marathon's and Rockingham's shareholders. Such a material
change might include, but is not limited to, a decrease in the exchange ratio or
a change in the tax consequences to Rockingham's shareholders.
The merger agreement may be terminated by Marathon or Rockingham,
whether before or after the approval of the merger by the shareholders of both
companies, in the following manner:
o by mutual consent of Rockingham and Marathon;
o unilaterally by Rockingham or Marathon, if the merger has not
occurred on or before February 1, 2001;
o unilaterally by either Rockingham or Marathon if the satisfaction
of one or more conditions of the merger has not been met by the
non-terminating party (unless waived by the terminating party) by
October 30, 2000, provided that the terminating party is not then
in breach of any of its obligations, covenants, representations,
warranty or other agreement contained in the merger agreement;
o unilaterally by either Rockingham or Marathon if, before the merger
occurs, the non-terminating party has agreed to sell substantially
all of its assets and liabilities or voting stock; or
o unilaterally by either Rockingham or Marathon if either party has
received a superior proposal that Rockingham or Marathon believes
in good faith must be accepted for the benefit of either party's
shareholders.
In the event of termination, the merger agreement shall become null and
void, except that certain revisions thereof relating to expenses,
confidentiality of information and any liability due to any intentional breach
of any provision of the merger agreement shall survive any such termination.
Resales of Marathon Common Stock
All shares of Marathon common stock received by Rockingham shareholders
in connection with the merger will be freely transferable, except the Marathon
common stock received by persons who are deemed to be "affiliates" of Rockingham
for purposes of Rule 145 under the Securities Act of 1933, as amended (the
"Securities Act"). To the best knowledge of Rockingham and Marathon, the only
persons who may be deemed to be affiliates of Rockingham subject to these
limitations are the directors and executive officers of Rockingham.
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<PAGE>
Expenses of the Merger and Termination Fee
In general, whether or not the merger is consummated, each of
Rockingham and Marathon will pay its own expenses related to preparing, entering
into and carrying out the merger agreement and preparing and filing the
registration statement of which this joint proxy statement/prospectus is a part.
If the merger agreement terminates because, prior to the date of
termination, either Rockingham or Marathon solicited or pursued a business
combination inquiry or proposal from a third party and either Rockingham's or
Marathon's board determined that a business combination with the third party was
in the best interests of either company and its shareholders, the company
involved in such proposal shall pay the other party $400,000. No payment will be
due, however, if the merger agreement was terminated by the company involved in
such proposal because the other company entered into an agreement to be
acquired. Additionally, no payment will be due if the other company wrongfully
terminated the merger agreement or, if at the time the merger agreement was
terminated, the company involved in the proposal was entitled to terminate or
refuse to close on the grounds that the other company breached any
representation or warranty in the merger agreement. Finally, no payment will be
due if there was a failure to satisfy certain closing conditions; a failure to
obtain regulatory approval; if the Securities and Exchange Commission issued a
stop order or threatened to issue a stop order concerning this joint proxy
statement/prospectus; or, in the case that Rockingham has received a third-party
proposal, if counsel to Marathon did not issue an opinion that the merger is tax
free to the shareholders of Rockingham. This provision is intended to discourage
another party from interfering with the merger agreement between Marathon and
Rockingham.
If either party willfully and materially breaches the merger agreement,
that party must pay the costs associated with this transaction incurred by the
non-breaching party. If the merger agreement is terminated because either the
Rockingham or the Marathon shareholders did not approve the merger agreement,
then the non-approving party will pay 50% of the costs and expenses of the other
party. In either of the above scenarios, such reimbursement will not exceed a
total of $50,000.
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<PAGE>
MARKET PRICES AND DIVIDENDS
Market Prices
Marathon. Marathon common stock is listed and traded on The Nasdaq
SmallCap Market under the symbol "MFCV."
The following table sets forth the high and low closing sales prices of
the common stock as reported by The Nasdaq SmallCap Market for the periods
listed.
Marathon Market Prices
Sales Price ($)
---------------
High Low
---- ---
1998:
1st quarter 9.75 8.50
2nd quarter 9.00 8.00
3rd quarter 9.38 7.25
4th quarter 8.00 6.50
1999:
1st quarter 7.88 6.94
2nd quarter 7.63 6.50
3rd quarter 7.25 6.00
4th quarter 6.75 6.19
2000:
1st quarter 6.75 5.25
2nd quarter 6.25 5.00
3rd quarter 6.25 5.00
(through July 14, 2000)
The closing price of Marathon common stock on The Nasdaq SmallCap
Market on April 19, 2000, the last full trading day preceding the public
announcement of the proposed merger, was $6.00 per share. The closing price of
Marathon common stock on The Nasdaq SmallCap Market on ________ __, 2000, the
latest practicable date before the date of this joint proxy statement/prospectus
was $_____ per share.
As of ________ __, 2000, Marathon had approximately _____ shareholders
of record.
Rockingham. Rockingham common stock has been listed and traded on The
Nasdaq SmallCap Market under the symbol "RKNG" since October 1998.
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<PAGE>
The following table sets forth the high and low closing sales prices of
the common stock as reported by The Nasdaq SmallCap Market since October 1998.
Information presented for periods prior to October 1998 reflects those trades
known to Rockingham during that time.
Rockingham Market Prices
Sales Price ($)
---------------
High Low
---- ---
1998:
1st quarter 10.89 10.09
2nd quarter 13.16 10.20
3rd quarter 13.16 9.98
4th quarter 10.89 9.30
1999:
1st quarter 10.89 9.53
2nd quarter 10.00 8.63
3rd quarter 11.42 8.58
4th quarter 12.38 9.05
2000:
1st quarter 10.47 8.00
2nd quarter 9.50 7.25
3rd quarter 9.50 7.25
(through July 14, 2000)
The closing price of Rockingham common stock on The Nasdaq SmallCap
Market on April 10, 2000, the last trading day preceding the public announcement
of the proposed merger on which Rockingham common stock traded, was $9.50 per
share. The closing price of Rockingham common stock on The Nasdaq SmallCap
Market on ________ __, 2000, the latest practicable date before the date of this
joint proxy statement/prospectus was $_____ per share.
As of ________ __, 2000, Rockingham had approximately _____
shareholders of record.
Dividends
Marathon. Marathon declared a $.09 per share cash dividend to
shareholders of record as of December 31, 1999, which was paid in January of
2000. A cash dividend of $.08 per share, declared in 1998, was paid in January
1999. A cash dividend of $.07 per share, declared in 1997, was paid in 1998.
Rockingham. Rockingham declared stock dividends on its common stock in
February 2000, February 1999, March 1998, January 1997 and January 1996.
Rockingham has not paid cash dividends.
Regulation on Payment of Dividends. Certain state law restrictions are
imposed on distributions of dividends to the shareholders of Marathon and
Rockingham. Shareholders are entitled to receive dividends as declared by the
respective board of directors. However, no such distribution may be made if,
after giving effect to the distribution, it would not be able to pay its debts
as they become due in the usual course of business or its total assets would be
less than its total liabilities. There are similar restrictions with respect to
stock repurchases and redemptions.
Banks have limitations imposed upon all "capital distributions,"
including cash dividends, payments to repurchase or otherwise acquire their
shares, payments to shareholders of another institution
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in a cash-out merger, and other distributions charged against capital. As of
March 31, 2000, The Marathon Bank had the capacity to pay no more than $______
million in total dividends to its sole shareholder, Marathon without regulatory
approval, and Rockingham had the capacity to pay $2.6 million in total dividends
to its shareholders.
Similarly, The Marathon Bank and Rockingham each are subject to legal
limitations on capital distributions including the payment of dividends, if,
after making such distribution, the institution would become "undercapitalized"
(as such term is used in the statute). For all state member banks of the Federal
Reserve seeking to pay dividends, the prior approval of the applicable Federal
Reserve Bank is required if the total of all dividends declared in any calendar
year will exceed the sum of the bank's net profits for that year and its
retained net profits for the preceding two calendar years. Federal law also
generally prohibits a depository institution from making any capital
distribution (including payment of a dividend or payment of a management fee to
its holding company) if the depository institution would thereafter fail to
maintain capital above regulatory minimums. Federal Reserve Banks are also
authorized to limit the payment of dividends by any state member bank if such
payment may be deemed to constitute an unsafe or unsound practice. In addition,
under Virginia law no dividend may be declared or paid that would impair a
Virginia chartered bank's paid-in capital. The Virginia State Corporation
Commission has general authority to prohibit payment of dividends by a Virginia
chartered bank if it determines that the limitation is in the public interest
and is necessary to ensure the bank's financial soundness.
Following the consummation of the merger, most of the revenues of
Marathon and Marathon's ability to pay dividends to its shareholders will depend
on dividends paid to it by The Marathon Bank and Rockingham. Based on the
current financial condition of The Marathon Bank and Rockingham, Marathon
expects that the above-described provisions will have no impact on Marathon's
ability to obtain dividends from The Marathon Bank and Rockingham or on
Marathon's ability to pay dividends to its shareholders.
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CHAPTER II
INFORMATION ABOUT THE MEETINGS AND VOTING
General
We are furnishing this document in connection with the solicitation of
proxies by the board of directors of Marathon for use at the special meeting of
Marathon shareholders including any adjournments or postponements of the
meeting, to be held on ________ __, 2000 , and by the board of directors of
Rockingham for use at the special meeting of Rockingham shareholders including
any adjournments or postponements of the meeting, to be held on ________ __,
2000, at the times and places set forth in the accompanying notices.
Marathon Meeting
General. The Marathon meeting will be held on ________ __, 2000 at ____
a.m., local time, at the ___________________________________________________,
Virginia. At the Marathon meeting, holders of Marathon common stock will be
asked to consider and approve the issuance of Marathon common stock to
Rockingham shareholders and amendments to the Marathon articles of
incorporation. The amendments to the articles of incorporation would make two
changes. Neither of the proposed changes would take effect unless the merger is
completed. The first change would be to change Marathon's name to Premier
Community Bankshares, Inc. Secondly, the board of directors would be changed to
include four current Marathon directors and four current Rockingham directors.
Please refer to Chapter V for information on who will manage Marathon after the
merger.
Marathon shareholders may also be asked to vote upon a proposal to
adjourn or postpone the Marathon meeting for the purpose of, among other things,
allowing additional time for the solicitation of proxies from Marathon
shareholders to approve the merger agreement.
Record Date; Voting Power. Only holders of record of shares of Marathon
common stock at the close of business on _____ ___, 2000 are entitled to notice
of and to vote at the Marathon meeting. As of such date, there were __________
issued and outstanding shares of Marathon common stock held by approximately
______ holders of record. Holders of record of Marathon common stock on the
Marathon record date are entitled to one vote per share on any matter that may
properly come before the Marathon meeting. Brokers who hold shares of Marathon
common stock as nominees will not have discretionary authority to vote such
shares in the absence of instructions from the beneficial owners thereof. Any
such shares of Marathon common stock for which a broker has submitted an
executed proxy but for which the beneficial owner thereof has not given
instructions on voting to such broker are referred to as "broker non-votes."
Vote Required. The presence in person or by proxy of the holders of a
majority of the shares of Marathon common stock outstanding on the Marathon
record date will constitute a quorum for the transaction of business at the
Marathon meeting. Abstentions and broker non-votes will be counted for purposes
of establishing the presence of a quorum at the Marathon meeting. The approval
of the proposals to issue Marathon common stock to Rockingham shareholders and
to amend the Marathon articles of incorporation each requires a greater number
of votes cast in favor of each matter than the number of votes opposing the
matter.
On the record date, the executive officers and directors of Marathon,
including their affiliates, had voting power with respect to an aggregate of
__________ shares of Marathon common stock or
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approximately _______% of the shares of Marathon common stock then outstanding.
We expect that such directors and officers will vote all of such shares in favor
of the proposal to approve the merger agreement.
Recommendation of the Marathon Board. The Marathon board has
unanimously approved and adopted the merger agreement, the stock issuance and
the proposed amendments to the articles of incorporation. The Marathon board
believes that the merger and related actions are fair to and in the best
interests of Marathon and the Marathon shareholders and recommends that the
Marathon shareholders vote "FOR" approval of the stock issuance and amendments
to the articles of incorporation. See "The Merger - Marathon's Reasons for the
Merger" on page I-14.
Solicitation and Revocation of Proxies. A form of proxy is enclosed
with this document. All shares of Marathon common stock represented by properly
executed proxies (whether through the return of the enclosed proxy card or by
telephone) will, unless such proxies have been previously revoked, be voted in
accordance with the instructions indicated on such proxies. If no instructions
are indicated, such shares will be voted FOR approval of the issuance of
Marathon common stock to Rockingham shareholders, FOR the proposed amendments to
Marathon's articles of incorporation and in the discretion of the proxy holder
as to any other matter which may properly come before the Marathon meeting.
Each holder of Marathon common stock is requested to vote by
completing, dating and signing the accompanying proxy card and returning it
promptly to marathon in the enclosed, postage-paid envelope. Marathon
shareholders should not send stock certificates with their proxy cards.
Any Marathon shareholder who has previously delivered a properly
executed proxy may revoke such proxy at any time before its exercise. A proxy
may be revoked either by (i) filing with the secretary of Marathon prior to the
Marathon meeting, at Marathon's principal executive offices, either a written
revocation of such proxy or a duly executed proxy bearing a later date or (ii)
attending the Marathon meeting and voting in person. Presence at the Marathon
meeting will not revoke a shareholder's proxy unless such shareholder votes in
person.
The cost of soliciting proxies will be borne by Marathon. Proxies may
be solicited by personal interview, mail or telephone. In addition, Marathon may
reimburse brokerage firms and other persons representing beneficial owners of
shares of Marathon common stock for their expenses in forwarding solicitation
materials to beneficial owners. Proxies may also be solicited by certain of
Marathon's executive officers, directors and regular employees, without
additional compensation, personally or by telephone or facsimile transmission.
Other Matters. Marathon is unaware of any matter to be presented at the
Marathon meeting other than the proposal to approve the merger agreement. If
other matters are properly presented at the Marathon meeting, the persons named
in the enclosed form of proxy will have authority to vote all properly executed
proxies in accordance with their judgment on any such matter, including, without
limitation, any proposal to adjourn or postpone the Marathon meeting, provided
that no proxy that has been designated to vote against approval of the merger
agreement will be voted in favor of any proposal to adjourn or postpone the
Marathon meeting for the purpose of soliciting additional proxies to approve the
merger agreement.
Rockingham Meeting
General. The Rockingham meeting will be held on ________ __, 2000 at
____ a.m., local time, at the ________________________________, Virginia. At the
Rockingham
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<PAGE>
meeting, holders of Rockingham common stock will be asked to consider and vote
upon a proposal to approve the merger agreement. Rockingham shareholders may
also be asked to vote upon a proposal to adjourn or postpone the Rockingham
meeting for the purpose of, among other things, allowing additional time for the
solicitation of proxies from Rockingham shareholders to approve the merger
agreement.
Record Date; Voting Power. Only holders of record of shares of
Rockingham common stock at the close of business on _____ ___, 2000 are entitled
to notice of and to vote at the Rockingham meeting. As of such date, there were
__________ issued and outstanding shares of Rockingham common stock held by
approximately ______ holders of record. Holders of record of Rockingham common
stock on the Rockingham record date are entitled to one vote per share on any
matter that may properly come before the Rockingham meeting. Brokers who hold
shares of Rockingham common stock as nominees will not have discretionary
authority to vote such shares in the absence of instructions from the beneficial
owners thereof. Any such shares of Rockingham common stock for which a broker
has submitted an executed proxy but for which the beneficial owner thereof has
not given instructions on voting to such broker are referred to as "broker
non-votes."
Vote Required. The presence in person or by proxy of the holders of a
majority of the shares of Rockingham common stock outstanding on the Rockingham
record date will constitute a quorum for the transaction of business at the
Rockingham meeting. Abstentions and broker non-votes will be counted for
purposes of establishing the presence of a quorum at the Rockingham meeting. The
approval of the proposal to approve the merger agreement requires the
affirmative vote of holders of more than two-thirds of the shares of Rockingham
common stock outstanding on the record date. Broker non-votes and abstentions
will be counted and will have the effect of a vote against the proposal to
approve the merger agreement.
On the record date, the executive officers and directors of Rockingham,
including their affiliates, had voting power with respect to an aggregate of
__________ shares of Rockingham common stock or approximately _______% of the
shares of Rockingham common stock then outstanding. We expect that such
directors and officers will vote all of such shares in favor of the proposal to
approve the merger agreement. In addition, on the Rockingham record date, the
directors and executive officers of Rockingham beneficially owned 700 shares of
Marathon common stock.
Recommendation of the Rockingham Board. The Rockingham board has
unanimously approved and adopted the merger agreement. The Rockingham board
believes that the merger is fair to and in the best interests of Rockingham and
the Rockingham shareholders and recommends that the Rockingham shareholders vote
"FOR" approval of the merger agreement and the transactions contemplated
thereby. See "The Merger - Rockingham's Reasons for the Merger" on page I-15.
Solicitation and Revocation of Proxies. A form of proxy is enclosed
with this document. All shares of Rockingham common stock represented by
properly executed proxies (whether through the return of the enclosed proxy card
or by telephone) will, unless such proxies have been previously revoked, be
voted in accordance with the instructions indicated on such proxies. If no
instructions are indicated, such shares will be voted FOR approval of the merger
agreement and in the discretion of the proxy holder as to any other matter which
may properly come before the Rockingham meeting.
Each holder of Rockingham common stock is requested to vote by
completing, dating and signing the accompanying proxy card and returning it
promptly to Rockingham in the enclosed, postage-paid envelope. Rockingham
shareholders should not send stock certificates with their proxy cards.
II-3
<PAGE>
Any Rockingham shareholder that has previously delivered a properly
executed proxy may revoke such proxy at any time before its exercise. A proxy
may be revoked either by (i) filing with the secretary of Rockingham prior to
the Rockingham meeting, at Rockingham's principal executive offices, either a
written revocation of such proxy or a duly executed proxy bearing a later date
or (ii) attending the Rockingham meeting and voting in person. Presence at the
Rockingham meeting will not revoke a shareholder's proxy unless such shareholder
votes in person.
The cost of soliciting proxies will be borne by Rockingham. Proxies may
be solicited by personal interview, mail or telephone. In addition, Rockingham
may reimburse brokerage firms and other persons representing beneficial owners
of shares of Rockingham common stock for their expenses in forwarding
solicitation materials to beneficial owners. Proxies may also be solicited by
certain of Rockingham's executive officers, directors and regular employees,
without additional compensation, personally or by telephone or facsimile
transmission.
Other Matters. Rockingham is unaware of any matter to be presented at
the Rockingham meeting other than the proposal to approve the merger agreement.
If other matters are properly presented at the Rockingham meeting, the persons
named in the enclosed form of proxy will have authority to vote all properly
executed proxies in accordance with their judgment on any such matter,
including, without limitation, any proposal to adjourn or postpone the
Rockingham meeting, provided that no proxy that has been designated to vote
against approval of the merger agreement will be voted in favor of any proposal
to adjourn or postpone the Rockingham meeting for the purpose of soliciting
additional proxies to approve the merger agreement.
II-4
<PAGE>
CHAPTER III
DESCRIPTION OF MARATHON
BUSINESS
General
Marathon is a bank holding company that was incorporated under the laws
of the Commonwealth of Virginia in June 1989. Marathon owns all of the
outstanding stock of its sole subsidiary, The Marathon Bank ("The Marathon
Bank"), which was incorporated in August 1987 and acquired by Marathon in
October 1990. Marathon is headquartered in Frederick County, Virginia. The
Marathon Bank's offices are located in the Marathon Financial Center, 4095
Valley Pike, Winchester, Virginia. Marathon is a holding company for The
Marathon Bank and is not directly engaged in the operation of any other
business.
The Marathon Bank, which is chartered under the laws of the
Commonwealth of Virginia, conducts a general banking business through its
offices. The Marathon Bank's deposits are insured under the Federal Deposit
Insurance Act and The Marathon Bank is a member of the Federal Reserve System.
As of December 31, 1999, The Marathon Bank employed 64 persons on a full-time
basis.
The banking business in the area served by The Marathon Bank (the
counties of Frederick, Clarke, Shenandoah, and Warren, Virginia) is highly
competitive with respect to both loans and deposits. In The Marathon Bank's
primary service area, there are approximately six commercial banks (including
four large, Virginia-wide banks with multiple offices) offering services ranging
from deposits and real estate loans to full service banking. Certain of the
commercial banks in this service area have higher lending limits than The
Marathon Bank and may provide various services for their customers that are not
offered by The Marathon Bank. In addition, there can be no assurance that other
financial institutions, with substantially greater resources than Marathon and
The Marathon Bank, will not establish operations in The Marathon Bank's service
area.
Recent Developments
During 1998, the Board of Directors authorized management to repurchase
shares of Marathon's common stock with the following stipulations: the market
price to book value must be 1.70% or below, and the maximum number of shares
purchased during a calendar year does not exceed 1.50% of outstanding shares.
Based on this criteria, Marathon purchased 17,245 shares of its common stock
during 1999.
Supervision and Regulation
Marathon is a registered bank holding company subject to regulation and
examination by the Federal Reserve under the Bank Holding Company Act of 1956.
It is required to file with the Federal Reserve periodic reports and any
additional information that it may require under the Bank Holding Company Act.
The Bank Holding Company Act also requires every bank holding company to obtain
the prior approval of the Federal Reserve before acquiring substantially all of
the assets or direct or indirect ownership or control of more than 5% of the
voting shares of any bank which is not already majority owned. The Bank Holding
Company Act also prohibits a bank holding company, with certain exceptions, from
engaging in or acquiring direct or indirect control of more than 5% of the
voting shares of any company engaged in non-banking activities. One of the
principal exceptions to these provisions is for
III-1
<PAGE>
acquiring shares of a company engaged in activities found by the Federal Reserve
to be so closely related to banking or managing banks as to be a proper incident
thereto.
The Marathon Bank, a state member bank of the Federal Reserve, is
subject to supervision, regulation, and examination by the Federal Reserve, the
Virginia State Corporation Commission and the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits, reserves, investments, loans, consumer law
compliance, issuance of securities, payment of dividends, establishment of
branches, mergers and consolidations, changes in control, electronic funds
transfer, management practices, and other aspects of operations are subject to
regulation by the appropriate federal and state supervisory authorities.
Properties
The Marathon Bank office is located at 4095 Valley Pike, Winchester,
Virginia. On December 31, 1993, the Marathon Land Trust executed a deed and
transferred the office to The Marathon Bank. This property is owned free of
encumbrances.
On August 12, 1993, The Marathon Bank opened its Warren County Branch
at 300 Warren Avenue in Post Office Plaza, Front Royal, Warren County, Virginia.
On July 1,1996, The Marathon Bank entered into a new lease with Post
Office Plaza, L.C. for the new branch facility in Front Royal. The terms of the
lease include a monthly rent of $3,846 for the first five years, to be adjusted
annually afterward. The lease term is twenty years with the option to renew for
two additional five-year terms.
On February 13, 1995, The Marathon Bank opened its Winchester Branch at
1041 Berryville Avenue in the City of Winchester, Virginia. The Marathon Bank
executed a lease on October 1, 1994, for five years with a monthly lease payment
of $1,000. The Marathon Bank has two five-year options to extend this lease.
On June 18, 1997, The Marathon Bank opened a second Winchester Branch
at 1447 North Frederick Pike, Winchester, Virginia. The Marathon Bank entered
into a lease on January 13, 1997, with a termination date of December 31, 2006.
The Marathon Bank has two five-year options to extend the lease. The monthly
lease payment is $2,500.
On September 22, 1997, The Marathon Bank opened its Shenandoah County
Branch at 1014 South Main Street, Woodstock, Virginia. A new lease was executed
by The Marathon Bank on September 1, 1997, for five years with a monthly lease
payment of $800 per month through the third year, $900 per month for the fourth
year and $1,000 per month for the fifth year. The Marathon Bank has two
five-year options to extend that lease.
On December 16, 1998, The Marathon Bank purchased a lot consisting of
1.033 acres adjacent to the main office property located at 4095 Valley Pike,
Winchester. The Marathon Bank acquired the property to be used for additional
parking and future expansion.
Legal Proceedings
In the course of normal operations, Marathon and The Marathon Bank are
parties to various legal proceedings. Based upon information currently
available, and after consultations with legal counsel, management believes that
such legal proceedings will not have a material adverse effect on Marathon's
business, financial position, or results of operations.
III-2
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Marathon is the holding company for The Marathon Bank. The following
discussion is intended to assist readers in understanding and evaluating the
financial condition and results of operations of Marathon and The Marathon Bank.
This review should be read in conjunction with the consolidated financial
statements and related notes included in Appendix B to this joint proxy
statement/prospectus. This analysis provides an overview of the significant
changes that occurred during the periods presented.
In addition to the historical information, the following discussion, as
well as other information appearing throughout this joint proxy
statement/prospectus, may contain forward looking statements that are subject to
certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Although Marathon
believes that any forward looking statements are based upon sound assumptions
within the limits of the knowledge of its operations and the existing economic
conditions, there is no certainty that future results will not differ materially
from historical results or those anticipated by forward looking statements.
III-3
<PAGE>
Selected Financial Data
The income statement data, per share data, and balance sheet data
contained in the following summary financial data for the five years ended
December 31, 1999 are derived from the audited financial statements of Marathon.
The financial data for the three month periods ended March 31, 2000 and 1999 are
taken from unaudited financial statements. The summary should be reviewed in
conjunction with the historical financial statements included in Appendix B of
this document.
<TABLE>
<CAPTION>
For the Three Months Ended
March 31, For the Years Ended December 31,
----------------------------------------------------------------------------------------------------
2000 1999 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ---- ----
(In thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income $ 2,165 $ 1,939 $ 8,315 $ 6,876 $ 4,882 $ 3,789 $ 2,940
Interest expense 913 828 3,482 2,959 1,943 1,614 1,252
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income 1,252 1,111 4,833 3,917 2,939 2,175 1,688
Provision for loan losses 73 60 260 285 133 165 113
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net interest income after
provision for
loan losses 1,179 1,051 4,573 3,632 2,806 2,010 1,575
Other income 204 199 859 819 587 430 281
Other expenses 948 882 3,757 3,193 2,583 1,746 1,435
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income before income taxes $ 435 $ 368 $ 1,675 $ 1,258 $ 810 $ 694 $ 421
Income taxes (benefits) 142 132 563 78 (188) (145) --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net income $ 293 $ 236 $ 1,112 $ 1,180 $ 998 $ 839 $ 421
=========== =========== =========== =========== =========== =========== ===========
Per Share Data: (1)
Book value at period ended $ 4.75 $ 4.35 $ 4.62 $ 4.26 $ 3.75 $ 3.16 $ 2.05
Net income, basic 0.14 0.11 0.54 0.57 0.51 0.58 0.35
Net income, assuming dilution 0.14 0.11 0.53 0.56 0.50 0.58 0.35
Cash dividends declared $ -- $ -- $ .09 $ .08 $ .07 $ .08 $ --
Average common shares outstanding 2,050,764 2,062,524 2,050,748 2,058,932 1,951,172 1,445,601 1,205,443
Balance Sheet Data:
Loans, net $ 79,231 $ 71,467 $ 74,527 $ 65,065 $ 49,015 $ 37,006 $ 28,405
Loans held for resale 176 230 -- 402 1,502 403 369
Allowance for loan loss 802 816 769 755 576 503 393
Total assets 112,474 95,065 103,685 91,852 64,826 47,287 36,070
Deposits 101,991 85,458 93,343 82,295 56,435 40,725 32,622
Shareholders' equity 9,753 8,964 9,445 8,790 7,711 5,890 2,678
Performance Ratios:
Return on average assets (2) 1.10% 1.01% 1.09% 1.47% 1.86% 2.02% 1.32%
Return on average equity (2) 12.17% 10.59% 12.20% 14.03% 14.99% 23.19% 16.96%
Net interest margin (3) 5.14% 5.14% 5.21% 5.40% 6.09% 5.83% 5.81%
Average loans to deposits 80.43% 81.98% 79.98% 81.94% 92.36% 89.37% 92.94%
Average equity to average assets 9.03% 9.48% 8.97% 10.51% 12.42% 8.72% 7.78%
Asset Quality Ratios:
Allowance for loan losses to
period end loans 1.00% 1.13% 1.02% 1.14% 1.13% 1.32% 1.34%
Allowance for loan losses to
non-accrual loans 11.28x 17.79x 18.98x 30.86x 15.12x 70.30x 86.50x
Non-performing assets to period
end loans and other real estate 0.30% 0.66% 0.30% 0.38% 0.07% 0.19% 0.15%
Net charge-offs to average loans 0.05% 0.00% 0.34% 0.18% 0.14% 1.00% 1.05%
</TABLE>
____________________
(1) Shares outstanding and per share data for years prior to 1997 adjusted to
reflect the impact of the February 8, 1996, 15% of net income stock
dividend.
(2) Annualized for the three months ended March 31, 2000 and 1999.
(3) Net interest margin is calculated as tax equivalent net interest income
divided by average earning assets.
III-4
<PAGE>
Average Balances, Interest Income and Expenses and Average Yields and Rates
The following table sets forth information relating to The Marathon
Bank's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated and the average yields
earned and rates paid for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average daily balances of assets
and liabilities, respectively, for the periods presented.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999 December 31, 1998
-----------------------------------------------------------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/ Average Earnings/ Yield/
Assets: Balances Expense(2) Rate Balances Expense(2) Rate Balances Expense(2) Rate
------- -------- ---------- ---- -------- ---------- ---- -------- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Earning Assets
Loans, net of unearned discounts (1) $ 77,506,235 $ 1,876,065 9.7% $ 73,406,447 $7,252,043 9.9% $58,269,578 $6,063,709 10.4%
Securities:
Taxable $ 9,750,971 $ 143,853 5.9% $ 9,356,267 $553,766 5.9% $ 6,257,989 $ 381,331 6.1%
Non-Taxable 1,425,431 22,740 6.4% 618,581 33,492 5.4% -- -- --
------------ ----------- ------------ ---------- ----------- ----------
Total Securities $ 11,176,402 $ 166,593 $ 9,974,848 $ 587,258 $ 6,257,989 $ 381,331
Federal funds sold 9,310,181 130,231 5.6% 9,779,041 491,769 5.0% 7,991,882 430,995 5.4%
------------ ----------- ------------ ---------- ----------- ----------
Total interest earning assets $ 97,992,818 $ 2,172,889 8.9% $ 93,160,336 $8,331,070 8.9% $72,519,449 $6,876,035 9.5%
----------- ----------
Non-Interest Earning Assets
Cash and due from banks 5,451,908 5,530,765 4,364,755
Bank premises and equipment 2,661,946 2,562,174 2,591,083
Other assets 1,268,362 1,148,345 1,263,018
Allowance for loan losses (790,455) (788,777) (656,014)
------------ ------------ -----------
Total assets $106,584,579 $101,612,843 $80,082,291
============ ============ ===========
Liabilities and Shareholders' Equity
Interest-bearing Liabilities:
Interest-bearing deposits $ 82,960,445 $ 908,889 4.4% $ 78,800,817 $3,464,415 4.4% $61,155,144 $2,938,214 4.8%
Capital lease payable 216,943 4,350 8.1% 220,925 17,808 8.1% 259,020 20,341 7.9%
------------ ----------- ------------ ---------- ----------- ----------
Total interest-bearing liabilities $ 83,177,388 $ 913,239 4.4% $ 79,021,742 $3,482,223 4.4% $61,414,164 $2,958,555 4.8%
----------- ----------
Non-Interest Bearing Liabilities:
Liabilities:
Demand deposits 13,401,590 12,984,167 9,958,661
Other liabilities 377,098 493,303 296,639
------------ ------------ -------
Total liabilities $ 96,956,076 $ 92,499,212 $71,669,464
Shareholders' equity 9,628,503 9,113,631 8,412,827
------------ ------------ -----------
Total liabilities and shareholders' equity $106,584,579 $101,612,843 $80,082,291
============ ============ ===========
Net Interest Income $ 1,259,650 $4,848,847 $3,917,480
=========== ========== ==========
Interest Rate Spread 4.5% 4.5% 4.7%
Net Interest Margin 5.1% 5.2% 5.4%
==== ==== ====
</TABLE>
______________________
(1) Non-accrual loans are included in the average balance of this category
(2) Amounts are shown on a tax equivalent basis.
III-5
<PAGE>
Volume and Rate Analysis
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 compared to 1999
----------------------------------------
Increase (Decrease)
Due to Changes in
Volume Rate Total
------------ ------------- -------------
<S> <C> <C> <C>
Interest Earned On:
Loans receivable, net $ 4,483 $ 5,061 $ 9,544
Securities, taxable 21,436 (200) 21,236
Securities, non-taxable 217,906 (56,136) 161,770
Federal funds sold 23,423 17,224 40,647
------------ ------------- -------------
Total interest income 267,248 (34,051) 233,197
------------ ------------- -------------
Interest Paid On:
Interest-bearing deposits 91,916 (6,567) 85,349
Federal funds purchased -- -- --
Capital lease payable (125) -- (125)
------------ ------------- -------------
Total interest expense 91,791 (6,567) 85,224
------------ ------------- -------------
Net interest income $ 175,457 $ (27,484) $ 147,973
============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31,
1999 compared to 1998 1998 compared to 1997
------------------------------------------ -------------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Changes in Due to Changes in
Volume Rate Total Volume Rate Total
Interest Earned On: ------------ ------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Loans receivable, net $ 1,458,209 $ (269,875) $ 1,188,334 $ 1,587,785 $ (83,441) $ 1,504,344
Securities, taxable 184,664 (12,229) 172,435 199,145 (11,259) 187,886
Securities, nontaxable 16,746 16,746 33,492 -- -- --
Federal Funds Sold 90,877 (30,103) 60,774 298,691 2,460 301,151
----------- ----------- ----------- ----------- ----------- -----------
Total interest income $ 1,750,496 $ (295,461) $ 1,455,035 $ 2,085,621 $ (92,240) $ 1,993,381
----------- ----------- ----------- ----------- ----------- -----------
Interest Paid On:
Interest-bearing deposits $ 739,889 $ (213,688) $ 526,201 $ 1,059,500 $ (39,385) $ 1,020,115
Federal funds purchased -- -- -- (673) -- (673)
Capital lease payable (3,060) 527 (2,533) (3,369) (927) (4,296)
----------- ----------- ----------- ----------- ----------- -----------
Total interest expense $ 736,829 $ (213,161) $ 523,668 $ 1,055,458 $ (40,312) $ 1,015,146
----------- ----------- ----------- ----------- ----------- -----------
Net interest income $ 1,013,667 $ (82,300) $ 931,367 $ 1,030,163 $ (51,928) $ 978,235
=========== =========== =========== =========== =========== ===========
</TABLE>
III-6
<PAGE>
Securities
The following table summarizes the book value of securities for the
periods indicated:
Book Value of Securities Available for Sale
-------------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended For the Years Ended
March 31, December 31,
--------------------------- -------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $4,226,546 $3,944,510 $4,460,218
Obligations of state & political
subdivisions 539,792 540,132 --
Mortgage-backed securities 15,316 15,765 21,555
Other securities 580,350 580,350 479,800
---------- ---------- ----------
$5,362,004 $5,080,757 $4,961,573
========== ========== ==========
</TABLE>
Book Value of Securities Held to Maturity
-----------------------------------------
<TABLE>
<CAPTION>
For the Three Months Ended For the Years Ended
March 31, December 31,
-------------------------- -------------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
U.S. Treasury securities and
obligations of U.S. government
agencies and corporations $5,283,421 $4,687,181 $4,899,237
Obligations of state and political
subdivisions 958,794 959,610 100,840
---------- ---------- ----------
$6,242,215 $5,646,791 $5,000,077
========== ========== ==========
</TABLE>
At March 31, 2000, the securities book value was $11,604,219 compared
to $10,727,548 and $9,961,650 as of December 31, 1999 and 1998, respectively.
The market value of securities at March 31, 2000 was $11,414,315 compared to
$10,564,216 and $10,002,374 at December 31, 1999 and 1998, respectively. As of
March 31, 2000, there were no obligations by any one issuer in the investment
portfolio, exclusive of obligations of the U.S. Government or U.S. Agencies and
Corporations, which in the aggregate exceeded 10% of stockholders' equity.
III-7
<PAGE>
Investment Portfolio - Maturity and Yields
The following table sets forth the maturity distribution and weighted
average yields of the securities portfolio at March 31, 2000. The weighted
average yields are calculated on the book value of the portfolio and on
securities interest income adjusted for amortization of premium and accretion of
discount.
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------------------
After One But
Within One Year Within Five Years
--------------------------------- ----------------------------------
Amount Yield Amount Yield
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 697,754 5.29% $6,690,270 6.00%
Obligations of state and political subdivisions -- 0.00% 794,884 6.37%
Mortgage-backed securities -- 0.00% -- 0.00%
Other securities -- 0.00% -- 0.00%
--------------- -------------- --------------- ---------------
Total $ 697,754 5.29% $7,485,154 6.04%
=============== ============== =============== ===============
</TABLE>
<TABLE>
<CAPTION>
March 31, 2000
-----------------------------------------------------------------------
After Five But
Within Ten Years After Ten Years
--------------------------------- ----------------------------------
Amount Yield Amount Yield
--------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations
of U.S. government agencies and
corporations $ 2,121,943 5.96% $ -- 0.00%
Obligations of state and political subdivisions 656,066 6.04% 47,636 4.62%
Mortgage-backed securities 11,812 8.72% 3,504 8.78%
Other securities -- 0.00% 580,350 6.42%
--------------- -------------- --------------- ---------------
Total $ 2,789,821 5.99% $ 631,490 6.30%
=============== ============== =============== ===============
</TABLE>
Loan Portfolio
The following table summarizes the composition of the loan portfolio at
the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
--------------- --------------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Loans secured by real estate: (In thousands)
Construction $12,412 $10,649 $ 8,900
Secured by farmland 738 744 733
Secured by 1-4 family residential 17,100 16,717 13,773
Multi-family residential 2,072 2,349 1,379
Nonfarm, nonresidential loans 12,063 12,038 5,168
Loans to farmers (except those secured by real estate) 232 220 218
Commercial and industrial loans (except those secured by real estate) 21,604 19,041 21,126
Loans to individuals (except those secured by real estate) 13,495 13,311 15,468
All other loans 550 557 100
------- ------- -------
$80,266 $75,626 $66,865
Less:
Unearned income 233 330 1,045
Allowance for loan losses 802 769 755
------- ------- -------
$79,231 $74,527 $65,065
======= ======= =======
</TABLE>
III-8
<PAGE>
Marathon had no loans outstanding to foreign countries or for highly
leveraged transactions as of March 31, 2000, December 31, 1999 or December 31,
1998.
There were no categories of loans that exceeded 10% of outstanding
loans as of March 31, 2000, which were not disclosed in the above table.
In the normal course of business, the corporation makes various
commitments and incurs certain contingent liabilities, which are disclosed but
not reflected in the accompanying financial statements. At March 31, 2000,
commitments for standby letters of credit totaled $1,470,735 and commitments to
extend credit totaled $13,879,018. At December 31, 1999, commitments for standby
letters of credit totaled $1,432,380 and commitments to extend credit totaled
$13,467,000. At December 31 1998, commitments for standby letter of credit
totaled $851,449 and commitments to extend credit totaled $8,909,000.
Maturity Schedule of Selected Loans
The table below presents the maturities of selected loans outstanding
at March 31, 2000.
<TABLE>
<CAPTION>
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial: $ 6,416 $11,623 $3,565 $21,604
Real estate-construction 7,720 2,458 2,234 12,412
------- ------- ------ -------
$14,136 $14,081 $5,799 $34,016
======= ======= ====== =======
Interest sensitivity on such loans
maturing after one year:
Fixed $17,376
Variable 2,504
-------
Total $19,880
=======
</TABLE>
Non-Performing Assets
The following table details information concerning non-accrual, past
due and restructured loans as well as other real estate owned, for the periods
indicated:
<TABLE>
<CAPTION>
March 31, December 31,
------------- ---------------------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Non-accrual loans $ 71,087 $ 40,541 $233,200
Other Real Estate 165,095 183,218 18,123
Restructured loans -- -- --
-------- -------- --------
Total Non-performing assets $236,182 $223,759 $251,323
Non-performing assets to period end loans and other real estate owned .30% .30% .38%
==== ==== ====
Loans past due 90 days or more and still accruing interest $113,206 $ 19,862 $191,977
======== ======== ========
</TABLE>
III-9
<PAGE>
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless the credit is
well-secured and in process of collection. Loans are placed on nonaccrual at an
earlier date or charged off if collection of principal or interest is considered
doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
As of March 31, 2000, Marathon had a total of $236,182 in nonperforming
assets compared to $223,759 at December 31, 1999, representing an increase of
5.55%.
On March 31 2000, Marathon had $71,087 in non-accrual loans, which
consist of $24,201 in installment loans, $10,968 in commercial loans, and
$35,918 in mortgage loans. Approximately $6,450 of interest income would have
been recorded if interest had been accrued during the first quarter of 2000. The
$113,206 in 90 days past due and still accruing interest consists of $2,363 in
installment loans, and $110,843 in commercial loans.
As of March 31, 2000, Marathon had no loans in addition to the past due
and non-accrual loans mentioned above that are considered to be potential
problem loans.
Marathon's management and Board of Directors have reviewed the asset
quality of The Marathon Bank's loan portfolio and The Marathon Bank's loan loss
reserve and have found it to be adequate.
Loan Loss Summary
<TABLE>
<CAPTION>
March 31, December 31,
-------- ------------
2000 1999 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Balance, beginning of period $769,410 $754,597 $754,597 $576,497
Less Charge-off's:
Commercial $ -- $ -- $153,699 $ 28,735
Real estate-mortgage -- -- 29,091 --
Real estate-construction 13,319 642 18,960 --
Installment loans to individuals 35,841 -- 70,942 122,376
-------- -------- -------- --------
Total Charge-offs $ 49,160 $ 642 $272,692 $151,111
-------- -------- -------- --------
Plus Recoveries:
Commercial $ 50 $ 82 $ 1,816 $ 11,925
Real estate-mortgage -- -- -- 20,368
Real estate-construction 1,008 996 2,334 --
Installment loans to individuals 7,430 777 23,355 11,918
-------- -------- -------- --------
Total Recoveries $ 8,488 $ 1,855 $ 27,505 $ 44,211
-------- -------- -------- --------
Provision for loan losses $ 73,400 $ 60,000 $260,000 $285,000
-------- -------- -------- --------
Balance, end of period $802,138 $815,810 $769,410 $754,597
======== ======== ======== ========
Ratio of net charge-offs during the period to
average loans outstanding during the period 0.05% 0.00% 0.34% 0.18%
</TABLE>
Marathon maintains the allowance for loan losses at a sufficient level
to provide for potential losses in the loan portfolio. Loan losses are charged
directly to the allowance when they occur, while
III-10
<PAGE>
recoveries are credited to the allowance. The adequacy of the provision for loan
losses is reviewed periodically by management through consideration of several
factors including changes in the character and size of the loan portfolio and
related loan loss experience, a review and examination of overall loan quality
which includes the assessment of problem loans and an analysis of anticipated
economic condition in the market area. An analysis of the allowance for loan
losses, including charge-off activity, is presented above for the periods
indicated.
Allocation of the Reserve for Loan Losses
The following table reflects management's allocation of the reserve for
loan losses for the periods indicated.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999 December 31, 1998
-------------- ----------------- -----------------
% of Loans to % of Loans to % of Loans to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Loans secured by real estate:
Construction $ 32,086 15.5% $ 30,776 14.1% $ 30,561 13.3%
Secured by farmland 7,299 00.9% 7,219 00.9% 7,169 01.1%
Secured by 1-4 family residential 20,053 21.3% 18,388 22.2% 15,092 20.6%
Multi-family residential 24,064 02.6% 24,062 03.1% 24,373 02.1%
Nonfarm, nonresidential loans 296,791 15.0% 280,314 15.9% 285,426 07.7%
Loans to farmers (except those secured by real estate) 2,026 00.3% 2,647 00.3% 2,566 00.3%
Commercial and industrial loans (except those
secured by real estate) 324,365 26.9% 323,418 25.2% 329,042 31.6%
Loans to individuals (except those secured by
real estate) 88,235 16.8% 76,410 17.6% 55,840 23.1%
All other loans 7,219 00.7% 6,176 00.7% 4,528 00.2%
-------- ----- -------- ----- -------- -----
$802,138 100.0% $769,410 100.0% $754,597 100.0%
======== ===== ======== ===== ======== =====
</TABLE>
III-11
<PAGE>
Average Deposits and Average Rates Paid
The following table details the average amount of, and the average rate
paid on the following primary deposit categories for the years ended December
31, 1999 and 1998, and first quarter of 2000.
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999 December 31, 1998
-------------- ----------------- -----------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
<S> <C> <C> <C>
Non-interest bearing:
Demand deposits $13,401,590 $12,984,167 $9,958,661
----------- ----------- ----------
Interest-bearing:
Demand deposits $20,825,615 2.8% $19,276,178 2.9% $13,868,025 3.3%
Savings deposits 9,777,847 3.0% 9,457,893 3.0% 7,326,658 3.0%
Time deposits 52,356,983 5.3% 50,066,746 5.2% 39,960,461 5.7%
----------- ----------- -----------
$82,960,445 4.4% $78,800,817 4.4% $61,155,144 4.8%
----------- ----------- -----------
$96,362,035 $91,784,984 $71,113,805
=========== =========== ===========
</TABLE>
Marathon primarily uses deposits to fund its loans and investment
securities. Marathon offers individuals and small-to-medium-size businesses a
variety of deposit accounts. Deposit accounts, including checking, savings,
money markets and certificates of deposit, are obtained primarily from the
communities which Marathon services.
Maturities of CDs and Other Time Deposits in Excess of $100,000
The following is a summary of the maturity distribution of certificates
of deposit and other time deposits in amounts of $100,000 or more as of March
31, 2000.
March 31, 2000
--------------
Amount Percent
------ -------
Three months or less $ 1,577,888 14.3%
Over three-six months 1,175,689 10.6%
Over six-twelve months 4,070,375 36.8%
Over twelve months 4,237,364 38.3%
----------- ------
Total $11,061,316 100.0%
=========== ======
Certificates of deposit in the amounts of $100,000 or more were
$11,061,316 at March 31, 2000. This represents 20.7% of the total certificates
of deposit balance of $53,471,305 at March 31, 2000. Marathon does not solicit
such deposits. Further, Marathon does not aggressively bid for public funds
deposits in large denominations, as such deposits may require a pledging of
investment securities.
Marathon competes with the major regional financial institutions for
money market accounts and certificates of deposits less than $100,000. While
Marathon is competitive with its interest rates, using a tiered rate system to
increase individual account balances, Marathon has found that it can continue to
III-12
<PAGE>
maintain a higher interest margin than its peers by matching loan maturities
with certificate maturities and setting loan rates based on Marathon's cost of
funds.
Summary of Liquid Assets
Liquidity is a measure of Marathon's ability to generate sufficient
cash to meet present and future obligations in a timely manner. These
obligations include the credit needs of customers, funding deposit withdrawals,
and the day-to-day operations of Marathon. Marathon's ability to fund these
daily commitments is illustrated in the following table for the periods
indicated:
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
2000 1999 1998
---- ---- ----
<S> <C> <C> <C>
Liquid Assets:
Cash and due from banks $ 5,338,800 $ 8,011,673 $ 4,533,428
Federal funds sold 12,000,000 6,616,000 8,281,000
Liquid securities 5,612,602 5,329,742 5,211,808
Loans maturing in one year or less 22,152,094 22,238,644 20,733,615
------------ ----------- -----------
Total liquid assets $ 45,103,496 $42,196,059 $38,759,851
============ =========== ===========
Total deposits and other liabilities $102,720,807 $94,239,997 $83,061,556
============ =========== ===========
Ratio of liquid assets to deposits
and other liabilities 43.9% 44.8% 46.7%
============ =========== ===========
</TABLE>
The high loan to deposit ratio (80.6%) as of December 31, 1999 has
provided the opportunity for Marathon to achieve a high return on its deposits.
For the year ended December 31, 1999, Marathon experienced a return on assets of
1.09% and a net interest margin of 5.2%.
The source of new funds is strong for both long-term and short-term
duration. The growth in deposits was $11.0 million or 13.4% during 1999.
Marathon also has access to overnight federal funds from correspondent banks
totaling up to $5.7 million. In addition, Marathon has established borrowing
limits through the Federal Reserve Bank's discount window for $2.2 million.
Management believes that the opportunity for the sale of loans on the market is
good. Marathon's loan portfolio contains loans of high yields and it enjoys a
recent history of low loan charge-offs.
III-13
<PAGE>
Capital Ratios
The following table indicates the Federal Reserve's minimum capital
requirements and Marathon's capital ratios at the dates indicated.
<TABLE>
<CAPTION>
March 31, December 31,
---------- ------------ Regulatory
2000 1999 1998 Minimum
---- ---- ---- -------
<S> <C> <C> <C> <C>
Leverage Ratio 9.26% 8.90% 9.63% 4.00%
Tier 1 risk-based capital ratio 11.82% 12.31% 12.79% 4.00%
Total risk-based capital ratio 12.78% 13.30% 13.89% 8.00%
</TABLE>
On August 1, 1990, the Federal Reserve issued transitional capital
adequacy guidelines. These guidelines took effect September 7, 1990. The new
capital standards require an institution to meet two separate minimum capital
requirements: (1) a core capital (consisting of stated capital, capital surplus
and retained earnings) requirement equal to 4% of risk-weighted assets and (2) a
total risk-based capital requirement applied to risk weighted assets equal to
8%. The risk based capital requirement includes off-balance sheet items. Under
the risk-based capital requirement, assets are assigned a credit risk weighting
based upon their relative risk ranging from 0% for assets that are backed by the
full faith and credit of United States or that pose no credit risk to The
Marathon Bank to 100% for assets such as delinquent or repossessed assets.
As indicated in table above, Marathon met the Federal Reserve's minimum
capital requirements as of March 31, 2000 and December 31, 1999 and 1998.
Financial Ratios
The following table summarizes ratios considered to be significant
indicators of Marathon's profitability and financial condition for the periods
indicated.
<TABLE>
<CAPTION>
For the Three
Months Ended For the Years Ended
March 31, December 31,
------------------ ----------------------------------------
2000 1999 1998
------------------ ------------------ ------------------
<S> <C> <C> <C>
Return on average assets (Net income/average total assets) (1) 1.10% 1.09% 1.47%
================== ================== ==================
Return on average equity (Net income/average equity) (1) 12.17% 12.20% 14.03%
================== ================== ==================
Dividends payment ratio (Dividends declared/ Net income) -- 16.57% 13.98%
================== ================== ==================
Average equity to average asset ratio 9.03% 8.97% 10.51%
================== ================== ==================
_______________
</TABLE>
(1) Annualized for the three months ended March 31, 2000.
III-14
<PAGE>
Short-Term Borrowings
Marathon had no short-term borrowings with an average balance
outstanding of more than 30% of stockholders' equity for the three months ended
March 31, 2000 and the years ended December 31, 1999 and 1998.
Interest Sensitivity Analysis
The following table illustrates the interest sensitivity gap position
of The Marathon Bank at March 31, 2000. This table presents a position that
existed at that one particular day, and since it changes continually, it is not
necessarily indicative of The Marathon Bank's position at any other time.
<TABLE>
<CAPTION>
March 31, 2000
--------------
(In thousands)
90 Days Over
1-90 Days To 1 Year 1-5 Years 5 Years Total
--------- --------- --------- ------- -----
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans (1) $ 16,742 $ 11,525 $ 43,350 $ 8,416 $ 80,033
Securities -- 698 7,486 3,420 11,604
Federal funds sold 12,000 -- -- -- 12,000
-------- -------- -------- -------- --------
Total interest-sensitive assets $ 28,742 $ 12,223 $ 50,836 $ 11,836 $103,637
-------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Interest-bearing demand deposits $ -- $ -- $ 12,506 $ -- $ 12,506
Savings -- -- 10,043 -- 10,043
Money Market Savings 9,915 -- -- -- 9,915
Certificate of Deposit: -- -- -- -- --
$100,000 and Over 1,578 5,246 4,237 -- 11,061
$100,000 and Under 7,987 20,910 13,513 -- 42,410
-------- -------- -------- -------- --------
Total interest-sensitive
liabilities $ 19,480 $ 26,156 $ 40,299 $ -- $ 85,935
-------- -------- -------- -------- ========
Period GAP $ 9,262 $(13,933) $ 10,537 $11,836
======== ======== ======== =======
Cumulative Gap $ 9,262 $ (4,671) $ 5,866 $17,702
======== ======== ======== =======
Cumulative GAP/Earning Assets 8.94% (4.51%) 5.66% 17.08%
======== ======== ======== =======
</TABLE>
_________________
(1) Nonaccrual loans are included in the totals reflected.
The present interest sensitivity position of Marathon reflects a
favorable impact upon earnings in the event of rising interest rates. A rate
increase of as much as 200 basis points could have no impact on net interest
income in the first year. Conversely, a decrease in the rate structure of 200
basis points could have a negative impact on net interest income of
approximately 0.9%. The current earning assets and deposit structure of Marathon
suggest that these trends in changes in net interest income would continue
beyond 2000 given a rate change of this magnitude.
III-15
<PAGE>
Results of Operations for the Three Months Ended March 31, 2000 and 1999
------------------------------------------------------------------------
General
Net income for the three months ending March 31, 2000 was $292,733
compared to $236,488 in the same period in 1999. This is an increase of $56,245
or 23.8%. The provision for income tax expense increased $10,176 from $132,140
in 1999 to $142,316 in 2000. The return on assets on an annualized basis was
1.10% for the first three months of 2000 as compared to 1.09% for the year of
1999. For the first quarter of 2000 the return on equity on an annualized basis
was 12.17%, down slightly from 12.20% for all of 1999.
Interest income totaled $2,165,157 for the three months ended March 31,
2000, which was $225,977 or 11.7% higher than for the three months ended March
31, 1999. This is a direct result of the increase in earning assets, which
increased the interest and fee income.
Total interest expense for the three months ended March 31, 2000 was
$913,239, which was $85,225 or 10.3% higher than the three months ended March
31, 1999. Interest on deposits increased by $85,349 or 10.4% over the same
period in 1999 due to an overall increase in deposits.
Net interest income for the three months ended March 31, 2000 was
$1,251,918, which was $140,752 or 12.7% higher than the three months ended March
31, 1999. This was the result of an increase in our earning assets. The net
interest margin declined slightly in the first quarter of 2000 to 5.14% from the
average for 1999 of 5.21%.
Non-interest Income
Total other income for the three months ending March 31, 2000 of
$203,159 was $4,065 or 2.0% higher than for the same period in 1999. This is a
result of an increase in the demand deposit accounts, which has increased our
service charge income.
Non-interest Expenses
Total other expenses for the three months ending March 31, 2000 of
$946,628 were $64,996 or 7.4% higher than for the three months ending March 31,
1999. Salary expense increased $9,366 or 2.0%. Postage expense increased $4,084
or 14.8%. Furniture and equipment expense decreased by $12,469 or 14.5%. ATM
expense increased $19,673 or 63.4% and stationery and supplies increased $9,270
or 27.8% over the same period in 1999. Telephone costs were $28,144, an increase
of 91.2%. Marathon experienced a net recovery of $13,623 from overdrafts for the
first quarter. This compares to a $19,642 net chargeoff for the same period of
1999. The net increase in other expenses is in part a result of additional
staffing to handle the growth and the costs involved in processing an increased
number of accounts and transactions. In spite of rising costs in certain
categories, The Marathon Bank's efficiency ratio improved from 67.25% for the
first quarter of 1999 to 64.71% for the same period of 2000.
Results of Operations for the Years Ended December 31, 1999, 1998 and 1997
--------------------------------------------------------------------------
Marathon's assets increased 12.9% from December 31, 1998 to December
31, 1999, ending 1999 at $103.7 million. This growth was primarily due to a
14.5% increase in net loans with a balance of $74.5 million at year-end. The
loan growth was funded by a 13.4% increase in deposits. The deposit balance of
$93.3 million at year-end consisted of a mix of 13.9% non-interest bearing and
86.1% interest bearing funds. The net income for the year was $1,111,592, a
decline of 5.8% from the $1,180,311 in 1998. The net income in 1997 was
$998,362. The decrease in 1999 was a direct result of the significant increase
in
III-16
<PAGE>
income taxes resulting from the elimination of a net operating loss
carry-forward from prior years. Marathon Financial Corporation had an income tax
expense of $563,676 for 1999 as compared to $77,596 during 1998 and a $187,734
tax benefit in 1997. Income before taxes totaled $1,675,268 for 1999, an
increase of 33.2% over 1998. In 1998, income before taxes amounted to $1,257,907
and $810,628 in 1997. Basic earnings per share for 1999 were $.54 on average
shares outstanding as compared to $.57 and $.51 in 1998 and 1997 respectively.
The return on average assets was 1.09%, compared to 1.47% and 1.86% for
1998 and 1997, respectively. Return on average equity was 12.20% as compared to
14.03% in 1998 and 14.99% in 1997. A narrowing of the net interest margin, which
is calculated by dividing the average earning assets into the net interest
income, and the increase in income tax expense are the underlying reasons for
the decreases in return of assets and return in equity. The net interest margin
for 1999 was 5.2%, a decline from 5.4% in 1998 and 6.1% in 1997. The decrease in
market rates is the primary factor for this decline.
Earning assets, which consists mainly of loans, securities and federal
funds sold totaled $92.6 million at the end of 1999. This represents a 9.7%
increase from 1998 and is the primary reason that net interest income for the
previous year increased by 23.4% to $4.833 million for 1999. The largest
increase in earning assets occurred in loans with an annual growth rate of 14.4%
to $75.3 million. The total increase in the loan portfolio was $9.5 million for
1999. Commercial loans decreased 9.9%, real estate construction loans grew
19.7%, real estate mortgage loans had a 51.3% rate of growth, while consumer
loans experienced a decline of 13.9%. This overall growth in loans is indicative
of the continued strength of the economy within The Marathon Bank's service
area. This economy is expected to remain strong in 2000.
The reserve for loan losses provides for potential losses inherent in
the loan portfolio. Management considers The Marathon Bank's loss experience,
size of the loan portfolio, value of collateral and guarantors, non-performing
loans and economic conditions both current and anticipated when performing an
analysis on the entire portfolio to estimate the provision. Using these
criteria, management expensed $260,000 to the reserve for loan losses during
1999, bringing the year-end balance to $769,410 or 1.02% of total loans. The net
charge offs for loan losses in 1999 was $245,187 for a ratio to average loans of
0.34%. In 1998, The Marathon Bank added $285,000 to the reserve, ending the year
with a balance of $754,597 or 1.14% of total loans. The Marathon Bank
experienced a $106,900 net charge off for loan losses, for a ratio to average
loans of .18% for 1998. Management believes that the present level of reserve
for loan losses is adequate to cover any potential losses in the loan portfolio.
The major component of Marathon's net earnings is net interest income,
which is the excess of interest income earned on earning assets over the
interest expense paid for sources of funds. Net interest income is affected by
changes in volume, resulting from growth and variations in balance sheet
composition, as well as fluctuations in interest rates and maturities of source
and uses of funds. Management seeks to maximize net interest income by managing
the balance sheet and determining the optimal product mix with respect to yields
on assets and costs of funds in light of projected economic conditions while
maintaining an acceptable level of risk.
Interest income totaled $8,315,492, $6,876,035, and $4,882,654 for the
years ending December 31, 1999, 1998, and 1997, respectively. This represents an
increase of $1,439,457 or 20.9% in 1999 and $1,993,381 or 40.8% in 1998.
Interest expense totaled $3,482,223, $2,958,555, and $1,943,409,for the years
ending December 31, 1999, 1998, and 1997, respectively. This is an increase of
$523,668 or 17.7% in 1999 and $1,015,146 or 52.2% in 1998.
Net interest income, before provision for loan losses, was $4,833,269
for the year ending December 31, 1999, up $915,789 or 23.4% over the $3,917,480
reported for the same period in 1998. In
III-17
<PAGE>
1998, net interest income before provisions for loan losses, increased $978,235
or 33.3% from $2,939,245 in 1997. The growth in net interest income is due
mainly to the strong economy within Marathon's trade area. The demand for all
types of loans is strong, with an increase in the loan portfolio of $9.5 million
for 1999. The demand for loans continues to be fueled by new businesses locating
within the trade area. This growth has resulted in the unemployment level
falling to record lows and an increase in the area's population, creating a
growing source of deposits. As of 1999 year-end, non-interest bearing-demand
deposits had grown by 21.2% to $12.9 million, savings and interest bearing
demand deposits had increased by 24.3% to $30.0 million and time deposits had
shown a 6.1% growth to $50.4 million. The deposit mix of $93.3 million was
virtually unchanged from the previous year with interest bearing deposits
decreasing by 0.9% to 86.1% of total deposits.
Non-interest Income
The Marathon Bank's non-interest income is derived chiefly from service
charges on deposit accounts and commissions and fees from bank services. During
1999 the non-interest income totaled $859,549 or a 5.00% increase over the
$818,642 earned in 1998. The rate of growth in 1998 was 39.4% based on
non-interest income of $587,179 received in 1997. This growth is a result of the
increase in the amount of service charges assessed on deposit accounts. The bank
has experienced a large increase in the number of deposit accounts and volume of
activity during the last two years.
Non-interest Expenses
Non-interest expense consists of salaries and employee benefits,
occupancy expenses, furniture and equipment and other operating expenses. The
Marathon Bank's non-interest expense for 1999 totaled $3,757,550 or an increase
of 17.7% over the total for 1998 of $3,193,215. The amount for 1998 was 23.6%
greater than the $2,582,796 non-interest expense for 1997. The reduction in the
growth rate of these expenses is a result of The Marathon Bank's increased
efficiency in the use of its personnel and facilities. The efficiency ratio for
The Marathon Bank during 1999 was 65.8%, a decrease from 67.4% in 1998 and 73.2%
in 1997. A large portion of the expenses relating to the Y2K issue was charged
to this category.
Income Tax
Under the provisions of the Internal Revenue Code, Marathon had
available in prior years an operating loss carryforward which was sufficient to
offset any taxable income. However, the carryforwards were completely eliminated
against taxable income during 1999. With the elimination of the carryforwards,
The Marathon Bank expensed $563,676 in income taxes for 1999. This is a 626.4%
increase over the $77,596 income tax expense in 1998. A detailed discussion of
Marathon's tax calculation is contained in Note 7 to the Consolidated Financial
Statement.
Comparison of Financial Condition at March 31, 2000 and December 31, 1999
-------------------------------------------------------------------------
Total assets at March 31, 2000 increased $8,788,623 or 8.5% from
December 31, 1999. This increase in total assets resulted from a $4,703,752 or
6.3% increase in loans, an increase in federal funds sold of $5,384,000 or 81.4%
and an increase of $876,671 or 8.2% in securities. The increase in earning
assets was $11,140,740 or 12.1% in the three months ending March 31, 2000.
III-18
<PAGE>
Allowance for loan losses
The allowance for loan losses, at March 31, 2000, was $802,138, an
increase of $32,728 or 4.3% from December 31, 1999. This gives Marathon a 1.00%
allowance for loan losses to total loans. Management has completed an analysis
on the reserve and feels the reserve is adequate.
Liabilities
Total deposits for the three months ending March 31, 2000 increased
$8,647,970 or 9.3% from December 31, 1999. Non-interest bearing deposits
increased by $3,114,964 or 24.1% and interest bearing deposits increased by
$5,533,006 or 6.9%. Non-interest bearing deposits represented 15.7% of total
deposits as of March 31, 2000, compared to 13.9% at 1999 year end. Savings and
money market deposits were 31.8% of total deposits at March 31, 2000, which was
a slight decrease from 32.1% on December 31, 1999.
Stockholders' Equity
Total equity has increased by $307,813 or 3.3% from December 31, 1999
to March 31, 2000. The increase was due to the net of a first quarter profit of
$292,733 and an increase in unrealized losses on securities available for sale
of $9,920 net of tax. An additional $25,000 of capital was raised through the
exercise of stock options equating to 5,000 additional shares of common stock.
The primary capital to assets ratio is 8.8%.
Financial Condition at December 31, 1999
----------------------------------------
Asset Quality
Based upon its review and analysis which considers economic conditions,
changes in the nature and value of the portfolio, industry standards and other
relevant factors, management believes that The Marathon Bank has sufficient
reserves to cover projected losses that may occur in the total loan portfolio.
Non-performing Assets
Non-performing assets include other real estate owned and loans on
which payment has been delinquent 90 days or more and for which there is a risk
of loss to either principal or interest. Other real estate owned represents real
property taken by The Marathon Bank either through foreclosure or through a deed
in lieu thereof from the borrower. Non-accrual loans amounted to $40,541 at
December 31, 1999, representing 0.05% of net loans. This is a decrease from 1998
year end non-accrual loans which were $233,200, or 0.36% of the net loans. At
the end of 1999 Marathon had two parcels of real estate considered to be
non-performing assets with a total balance of $183,218 as compared to $18,123
for one parcel at 1998 year-end. Of the two remaining parcels, one has been
leased with an option to buy. The value of that property is $165,095.
Loan Portfolio
The Marathon Bank's lending activities are its principal source of
income. The loan portfolio is comprised of commercial loans, real estate
mortgage loans, real estate construction loans and consumer loans. The primary
markets in which The Marathon Bank makes loans are Frederick County, the City of
Winchester, Warren County, the Town of Front Royal, Shenandoah County and the
Town of Woodstock, all located in Virginia. The major portion of the loan
portfolio is secured by real estate.
III-19
<PAGE>
Securities
Securities are classified as either securities available for sale or
securities held to maturity in accordance to FAS No. 115, "Accounting for
Certain Investment in Debt and Equity Securities". The book value of the
securities included in securities available for sale was $5.278 million at
December 31, 1999 and $4.921 million at December 31, 1998. The book value for
the securities included in held to maturity was $5.647 million at December 31,
1999 and $5.000 million at December 31, 1998. The increase in both categories of
securities was a result of the growth in funds received from deposits. The bank
does not trade in derivatives and has no plan to do so in the future.
For financial statement reporting purposes, securities available for
sale are reported at fair market value as of the statement date. The fair value
for these securities at 1999 year-end was $197,110 less than the book value.
However this unrealized loss is excluded from earnings and is reported net of
tax as a separate item of shareholders' equity.
Deposits
The Marathon Bank experienced growth in the three major components of
deposits. As of 1999 year-end, non-interest bearing demand deposits had grown by
21.2% to $12.9 million, savings and interest-bearing demand deposits had
increased by 24.3% to $30.0 million and time deposits had experienced a 6.1%
growth to $50.4 million. The deposit mix of $93.3 million changed slightly with
non-interest bearing demand deposits increasing by 0.9% to 13.9% of total
deposits. Savings and interest-bearing demand deposits grew from 29.3% of total
deposits in 1998 to 32.1% of total deposits in 1999. Time deposits dropped by
3.7% to 54.0% of total deposits at the end of 1999.
Liquidity
Liquidity is identified as the ability to generate or acquire
sufficient amounts of cash when needed at reasonable cost, to accommodate
withdrawals in deposits, payments of debt and increases in loan demand. These
events may occur daily or at other short-term intervals in the normal operation
of business. Past experience helps management predict time cycles and the
amounts of cash required.
In assessing liquidity, management gives consideration to many relevant
factors including stability of deposits, quality of assets, economy of markets
served, concentration of business and industry, competition and Marathon's
overall financial condition.
Management believes that the Marathon Bank's level of liquidity
maintained is sufficient to satisfy its depositors' requirements and to meet its
customers' credit needs. Sources of liquidity include cash and due from banks,
Federal funds sold, available for sale securities, held for maturity securities
maturing within one year or less and loans maturing within one year. At December
31, 1999, The Marathon Bank maintained $42.2 million in liquidity reserves or
77.6% of current liabilities due within one year or less. For the year 1998,
liquidity reserves were $38.8 million or 77.6% of current liabilities.
Marathon's primary sources of liquidity are cash and due from banks, US
Treasury securities, US Agency securities and other short-term investments
including Federal Funds sold and the sale of loans.
Capital Adequacy
Total stockholders equity on December 31, 1999 was $9,445,181 an
increase of $655,068 or 7.5% from $8,790,113 in 1998. Marathon's primary
capital-to-asset ratio was 9.1% in 1999 versus 9.6% in 1998. Marathon depends
primarily upon earnings to maintain a strong capital base. During 1999,
III-20
<PAGE>
earnings less dividends increased retained earnings by $927,412. These
transactions reduced the retained earnings deficit of $1,149,567 as of December
31, 1998 to a deficit of $222,155 at December 31, 1999.
Impact of Inflation and Changing Prices
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars, without considering changes in the relative purchasing power
of money over time due to inflation.
Unlike most industrial companies, virtually all of the assets and
liabilities of a financial institution are monetary in nature. As a result,
interest rates have a more significant impact on a financial institution's
performance than the effects of general levels of inflation. Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
Year 2000 Issue
The Year 2000 issue involved the risk that computer programs and
computer systems might not be able to perform without interruption into the Year
2000. If computer systems failed to correctly recognize the date change from
December 31, 1999, to January 1, 2000, computer applications that rely on the
date field could have failed or created erroneous results. Such erroneous
results would have affected interest payments or due dates and would have caused
the temporary inability to process transactions and to engage in ordinary
business activities. The Marathon Bank's computer programs and computer systems
did not fail and all systems performed in a normal manner. Marathon will
continue to monitor the systems for potential Y2K related problems. However,
management does not anticipate any future disruptions regarding Y2K. Including
the cost of equipment purchased for becoming Y2K compliant, The Marathon Bank
spent approximately $230,000 related to the assessment of and efforts in
connection with the Year 2000 issue.
Recent Accounting Pronouncements
In June 1998, the FASB issue Statement No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which was originally required to
be adopted in years beginning after June 15, 1999. Statement No. 137, issued in
June 1999, subsequently amended the effective date of Statement No. 133 to years
beginning after June 15, 2000. Statement No. 133 permits early adoption as of
the beginning of any fiscal quarter after its issuance. The Marathon Bank has
not determined whether to adopt the new statement early. This Statement will
require The Marathon Bank to recognize all derivatives on the balance sheet at
fair value. Because The Marathon 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
Marathon Bank's earnings or financial position.
III-21
<PAGE>
CHAPTER IV
DESCRIPTION OF ROCKINGHAM
BUSINESS
General
Rockingham is a bank chartered under the laws of the Commonwealth of
Virginia and a member of the Federal Reserve System. Rockingham was incorporated
on June 7, 1989 under the laws of Virginia and opened for business on November
15, 1990 in a temporary office at 181 C Neff Avenue, Harrisonburg, Virginia. On
December 7, 1991, Rockingham moved into its present facility at 110 University
Boulevard, Harrisonburg, Virginia. On January 3, 1994, Rockingham opened its
first branch office in the Red Front Supermarket on Chicago Avenue,
Harrisonburg, Virginia, and Rockingham opened its second branch office at 1980
South Main Street, Harrisonburg, Virginia on June 21, 1995. On November 13, 1996
Rockingham opened a third branch office at 410 W. Spotswood Trail, in the town
of Elkton, Virginia. On April 15, 1999, Rockingham opened a branch at 51
Franklin Street in Weyers Cave, Virginia and on June 1, 1999 it opened another
at 2556 Jefferson Highway, Suite 110, just outside of Waynesboro, Virginia.
Rockingham has one wholly owned subsidiary, RHB Services, Inc. At December 31,
1999 Rockingham had total assets of $101.1 million, total loans (net) of $77.9
million, total deposits of $87.8 million, and total stockholders' equity of
$11.6 million.
Principal Market Area
Rockingham's principal market area is the City of Harrisonburg, the
County of Rockingham, and the County of Augusta, all in Virginia, which together
have a population over 200,000 according to the 1990 census. Harrisonburg is
located in the heart of the historic Shenandoah Valley in western Virginia. The
area is served by two universities and three colleges and has a diverse economic
base. It is a retail-trading center for a number of surrounding counties in both
Virginia and West Virginia. Augusta County adjoins Rockingham County and also
enjoys a diverse economic base.
Banking Services
Rockingham has two lines of business. The first is providing deposit
services to the local market. This includes checking, savings and money market
accounts, as well as certificates of deposit. The second line of business is
making loans. Rockingham makes loans to businesses and consumers for a variety
of purposes including construction, permanent mortgages, automobile and other
major consumer goods, lines-of-credit and equipment purchases. Rockingham also
provides other related services such as traveler's checks, cashiers checks, safe
deposit boxes, equipment leasing and investment and insurance through a third
party affiliation. Rockingham structures its lending and deposit policies and
products to meet the needs of its local market.
Rockingham intends to continue to compete aggressively for customers in
its principal market area by offering a more personalized and responsive level
of customer service. By processing all information and documents in Rockingham's
offices, Rockingham believes it has a competitive advantage in serving customers
by providing immediate attention and solutions to customer account questions and
problems. Rockingham's policies, procedures and services are all designed for
the local community by directors and employees who are familiar with local needs
and market conditions. Rockingham intends to expand its principal market area in
the future as opportunities and resources become available and will consider
branching or making acquisitions in adjoining counties.
IV-1
<PAGE>
Lending Activities
Loan Portfolio. Rockingham is an active lender to small businesses,
professionals and individuals. A majority of Rockingham's loans are secured by
commercial and/or residential real estate. Loan terms vary from ninety days to
five years as Rockingham attempts to spread maturities to better manage cash
flow and interest rate exposure. At December 31, 1999, approximately 41% of
total loans were variable rate and/or mature in one year or less while the
remaining loans were fixed rate. Rockingham's loan committee approves all loans
over $500,000. Rockingham maintains an internal lending limit of $1,500,000.
The risk associated with residential mortgage loans and installment
loans to individuals varies based upon factors such as job stability, income
levels and general economic conditions. Loans to small businesses contain a
higher level of risk, as they are more directly affected by economic conditions.
Real estate construction loans, most of which qualify for or have permanent
mortgage commitments, are affected by supply and demand and economic conditions.
Commercial Business Loans. Rockingham's primary lending efforts are
directed toward small business. This is a market segment that requires more
flexibility and personal attention. Consequently, Rockingham believes that as a
local institution, it is better able to serve those customers. At December 31,
1999, commercial loans, including commercial mortgages, made up approximately
78% of the principal amount of Rockingham's loan portfolio. Commercial loans are
made on a secured and unsecured basis. Security is usually real estate coupled
with equipment, receivables and/or inventories. The borrower's ability to repay
the loan is largely dependent upon the success of the business and as a result
these loans often carry a higher degree of risk than other types of loans made
by Rockingham. Additionally some collateral values are more difficult to assess
due to the specialized use of the asset and/or the limited resale market for the
collateral. In cases such as these, Rockingham often seeks secondary sources of
collateral or repayment in the form of other assets and/or guarantees.
Residential Real Estate Loans. Rockingham is an active real estate
lender both for its own portfolio and as an originator of residential mortgage
loans for the secondary market. Residential real estate loans made up
approximately 15% of the principal amount of Rockingham's loan portfolio at
December 31, 1999. Primarily single family residences secure these loans and the
majority are three to five year balloon notes with amortization periods ranging
from ten to thirty years. Construction loans are included in this category and
are made primarily to individuals for the purpose of building single family
residences. To limit risk, Rockingham generally loans no more than 80% of the
lower of cost or appraised value of the collateral and requires the borrower to
qualify for, or have a commitment for, permanent financing.
Installment Loans. Rockingham offers various types of personal loans to
purchase automobiles and other large consumer items. At December 31, 1999,
installment loans made up approximately 7% of the principal amount of
Rockingham's loan portfolio.
Subsidiary - RHB Services, Inc.
RHB Services, Inc., a wholly owned subsidiary of Rockingham Heritage
Bank, was incorporated on February 27, 1997. Since 1997, RHB Services, Inc. has
owned stock in a title insurance company. In July 1999, RHB Services, Inc.
purchased stock of a new insurance company just being formed.
IV-2
<PAGE>
Competition
Rockingham is the only independent bank headquartered in the City of
Harrisonburg, Virginia. Rockingham competes with a number of branches of, and
banks owned by, both small and large out-of-market banking organizations, most
of which have substantially greater resources than Rockingham. Rockingham also
competes with mortgage companies, credit unions, savings and loans, finance
companies and money market funds.
Employees
Rockingham currently has thirty-six full-time employees and twelve
part-time employees. Employee relations are considered to be good.
Supervision and Regulation
General
Rockingham is extensively regulated under both federal and state law.
The following is a brief summary of certain statutes, rules and regulations
affecting Rockingham. This summary is qualified in its entirety by reference to
the particular statutory and regulatory provisions referred to below and is not
intended to be an exhaustive description of the statutes or regulations
applicable to Rockingham's business. Supervision, regulation and examination of
banks by the bank regulatory agencies are intended primarily for the protection
of depositors rather than shareholders. The various laws and regulations
administered by the regulatory agencies affect corporate practices, such as
payment of dividends, incurring debt and acquisition of financial institutions
and other companies, and affect business practices, such as payment of interest
on deposits, the charging of interest on loans, types of business conducted and
location of offices. Any change in applicable law or regulation may have a
material effect on the business and prospects of Rockingham.
Rockingham is organized as a Virginia-chartered banking corporation and
is regulated and supervised by the Bureau of Financial Institutions of the
Virginia State Corporation Commission. In addition, Rockingham is regulated and
supervised by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"), which serves as its primary federal regulator, and is subject
to certain regulations promulgated by the Federal Deposit Insurance Corporation
("FDIC"). The Virginia State Corporation Commission and the Federal Reserve
Board conduct regular examinations of Rockingham, reviewing the adequacy of the
loan loss reserves, quality of the loans and investments, propriety of
management practices, compliance with laws and regulations, and other aspects of
Rockingham's operations. In addition to these regular examinations, Rockingham
must furnish to the Federal Reserve Board quarterly reports containing detailed
financial statements and schedules.
Federal and Virginia banking laws and regulations govern all areas of
the operations of Rockingham, including reserves, loans, mortgages, capital,
issuance of securities, payment of dividends and establishment of branches.
Federal and state bank regulatory agencies also have the general authority to
limit the dividends paid by insured banks. As its primary federal regulator, the
Federal Reserve Board has authority to impose penalties, initiate civil and
administrative actions and take other steps intended to prevent Rockingham from
engaging in unsafe or unsound practices. In this regard, the Federal Reserve
Board has adopted capital adequacy requirements applicable to state member
banks, such as Rockingham. See "Supervision and Regulation -- Capital
Requirements."
Under the provisions of federal law, federally insured banks are
subject, with certain exceptions, to certain restrictions on extensions of
credit to their affiliates, on investments in the stock or other
IV-3
<PAGE>
securities of affiliates and on the taking of such stock or securities as
collateral from any borrower. In addition, such banks are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or the providing of any property or service.
Banks are also subject to the provisions of the Community Reinvestment
Act of 1977, which requires the appropriate federal bank regulatory agency, in
connection with its regular examination of a bank, to assess the bank's record
in meeting the credit needs of the community serviced by the bank, including
low- and moderate-income neighborhoods. The regulatory agency's assessment of
the bank's record is made available to the public. Further, such assessment is
required by any bank which has applied to, among other things, establish a new
branch office that will accept deposits, relocate an existing office, or merge,
consolidate with or acquire the assets or assume the liabilities of a federally
regulated financial institution.
Current Federal law authorizes interstate acquisitions of banks and
bank holding companies without geographic limitation. Effective June 1, 1997, a
bank headquartered in one state is able to merge with a bank headquartered in
another state, as long as neither of the states has opted out of such interstate
merger authority prior to such date. States are authorized to enact laws
permitting such interstate bank merger transactions prior to June 1, 1997, as
well as authorizing a bank to establish "de novo" interstate branches. Virginia
enacted early "opt in" laws, permitting interstate bank merger transactions.
Once a bank has established branches in a state through an interstate merger
transaction, the bank may establish and acquire additional branches at any
location in the state where a bank headquartered in that state could have
established or acquired branches under applicable Federal or state law.
Deposit Insurance
Rockingham is subject to FDIC deposit insurance assessments. See
"Supervision and Regulation--Recent Legislative Developments" as filed in the
original Registration Form 10-SB.
Governmental Policies
The operations of Rockingham are affected not only by general economic
conditions, but also by the policies of various regulatory authorities. In
particular, the Federal Reserve Board regulates money, credit and interest rates
in order to influence general economic conditions. These policies have a
significant influence on overall growth and distribution of loans, investments,
and deposits and affect interest rates charged on loans or paid for time and
savings deposits. Federal Reserve Board monetary policies have had a significant
effect on the operating results of commercial banks in the past and are expected
to continue to do so in the future.
Limits on Dividends and Other Payments
As a state member bank subject to the regulations of the Federal
Reserve Board, Rockingham must obtain the approval of the Federal Reserve Board
for any dividend if the total of all dividends declared in any calendar year
would exceed the total of its net profits, as defined by the Federal Reserve
Board for that year, combined with its retained net profits for the preceding
two years. In addition, Rockingham may not pay a dividend in an amount greater
than its undivided profits then on hand after deducting its losses and bad
debts. For this purpose, bad debts are generally defined to include the
principal amount of loans which are in arrears with respect to interest by six
months or more unless such loans are fully secured and in the process of
collection. Moreover, for purposes of this limitation, Rockingham is not
permitted to add the balance in its allowance for loan losses account to its
undivided profits then on hand; however, it may net the sum of its bad debts as
so defined against the balance in its
IV-4
<PAGE>
allowance for loan losses account and deduct from undivided profits only bad
debts that are so defined in excess of that account.
In addition, the Federal Reserve Board is authorized to determine under
certain circumstances relating to the financial condition of a state member bank
that the payment of dividends would be an unsafe and unsound practice and to
prohibit payment thereof. The payment of dividends that depletes a bank's
capital base could be deemed to constitute such an unsafe or unsound practice.
The Federal Reserve Board has indicated that banking organizations should
generally pay dividends only out of current operating earnings.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") provides that no insured depository institution may make any capital
distribution (which would include a cash dividend) if, after making the
distribution, the institution would not satisfy one or more of its minimum
capital requirements.
Capital Requirements
In January 1989, the Federal Reserve Board published risk-based capital
guidelines in final form, which are applicable to Rockingham. The Federal
Reserve Board guidelines redefine the components of capital, categorize assets
into different risk classes and include certain off-balance sheet items in the
calculation of risk-weighted assets. These guidelines became effective on March
15, 1989. The minimum ratio of qualified total capital to risk-weighted assets
(including certain off-balance sheet items, such as standby letters of credit)
is 8.00%. At least half of the total capital must be comprised of common equity,
retained earnings and a limited amount of permanent preferred stock, less
goodwill ("Tier 1 capital"). The remainder ("Tier 2 capital") may consist of a
limited amount of subordinated debt, other preferred stock, certain other
instruments and a limited amount of loan and lease loss reserves. Rockingham's
Tier 1 and Total Risk Based Capital ratios as of December 31, 1999, were 15.49%
and 14.36%.
In addition, the Federal Reserve Board has established minimum Leverage
ratio (Tier 1 capital to total average assets less intangibles) guidelines that
are applicable to Rockingham. These guidelines provide for a minimum ratio of
4.00% for banks that meet certain specified criteria, including that they have
the highest regulatory rating. All other banks will be required to maintain a
Leverage ratio of 3.0% plus an additional cushion of at least 100 to 200 basis
points. Rockingham's Leverage ratio as of December 31, 1999, was 12.40%. The
guidelines also provide that banks experiencing internal growth or making
acquisitions will be expected to maintain strong capital internal growth or
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
Properties
Rockingham presently owns three facilities: its main office at 110
University Boulevard in Harrisonburg, a second branch located at 1980 South Main
Street, and a building located at 410 W. Spotswood Trail in Elkton, Virginia
which serves as a third branch location. The main office is a one story brick
building with approximately 5,800 square feet and was constructed in 1991. The
site is 1.9 acres and will accommodate up to 5,000 square feet of additional
building space. It is located in a relatively new and rapidly growing retail and
professional area of the city. The South Main Branch is located on a .75 acre
site on the south end of the city and provides 3,000 square feet of office
space. The Elkton Branch resides on a .33 acre site providing 2,500 square feet
of office space. Rockingham also owns an undeveloped commercial lot on Evelyn
Byrd Avenue, approximately 100 yards from the main office. This .4 acre lot is
for possible future expansion purposes.
IV-5
<PAGE>
Additionally, Rockingham has a branch located in the Red Front
Supermarket on Chicago Avenue in the City of Harrisonburg. This is a leased
facility with approximately 260 square feet of space. The lease expires December
31, 2001. The minimum rent commitment at December 31, 1999 totals $28,800.
Rockingham has entered into a lease agreement for its new Weyers Cave branch.
The lease was for one year and the space is approximately 900 square feet.
Rockingham is currently on a month to month lease until a new building is
complete later in 2000. The minimum rent commitment at December 31, 1999 totals
$700. The new Waynesboro lease agreement is for space of approximately 2,040
square feet. The lease runs for five years with options for four more terms of
five years each. The minimum rental commitment for Waynesboro at December 31,
1999 totals $120,720. All properties are in sound physical condition and are
deemed to be adequately insured. There are no mortgages, liens or other
limitations on Rockingham's ownership of its properties.
Legal Proceedings
Rockingham is a party to various routine legal proceedings incidental
to the ordinary course of its business. Management believes that there are no
legal proceedings outside the normal course of business and thus no material
effect from any legal proceedings.
IV-6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
Management's discussion and analysis is intended to aid the reader in
understanding and evaluating the results of operations and the financial
condition of Rockingham. The analysis attempts to identify trends and material
changes that occurred during the reporting periods. The discussion should be
read in conjunction with the consolidated financial statements and their related
notes included in Appendix D to this joint proxy statement/prospectus.
In addition to the historical information, the following discussion, as
well as other information appearing throughout this joint proxy
statement/prospectus, may contain forward looking statements that are subject to
certain risks and uncertainties which could cause actual results to differ
materially from historical results or those anticipated. Although Rockingham
believes that any forward looking statements are based upon sound assumptions
within the limits of the knowledge of its operations and the existing economic
conditions, there is no certainty that future results will not differ materially
from historical results or those anticipated by forward looking statements.
Results of Operations
The following table provides a summary of the results of operations for
the three months ended March 31, 2000 and 1999 and the years ended December 31,
1999 and 1998, as well as certain information regarding Rockingham's financial
condition during those periods.
<TABLE>
<CAPTION>
Selected Financial Data
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
At and for the Three Months ended March 31, 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Results of Operations
Interest Income $ 2,019 $ 1,642
Interest Expense 890 721
---------------------------------
Net Interest Income 1,129 921
Provision for Loan Losses 30 30
---------------------------------
Net Interest Income After Provision for Loan Losses 1,099 891
Non-Interest Income 95 89
Non-Interest Expense 664 563
---------------------------------
Income Before Income Taxes 530 417
Provision for Income Tax Expense 180 142
---------------------------------
Net Income $ 350 $ 275
=================================
Share Data
Basic Earnings Per Share $ 0.22 $ 0.17
Diluted Earnings Per Share $ 0.22 $ 0.17
Book Value $ 7.53 $ 6.78
Shares Outstanding 1,589,940 1,589,940
Financial Condition
Total Investments $ 8,735 $ 8,545
Total Loans 82,082 69,058
Total Assets 105,590 90,025
Total Deposits 89,666 77,723
Total Equity 11,967 10,775
</TABLE>
IV-7
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
At and for the Years ended December 31, 1999 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Results of Operations
Interest Income $ 7,188 $ 6,269
Interest Expense 3,135 2,822
---------------------------------
Net Interest Income 4,053 3,447
Provision for Loan Losses 120 144
---------------------------------
Net Interest Income After Provision for Loan Losses 3,933 3,303
Non-Interest Income 371 328
Non-Interest Expense (2,485) (2,025)
---------------------------------
Income Before Income Taxes 1,819 1,606
Provision for Income Tax Expense 618 544
---------------------------------
Net Income $ 1,201 $ 1,062
=================================
Share Data
Basic Earnings Per Share $ .76 $ .70
Diluted Earnings Per Share $ .74 $ .67
Book Value at Year-End $ 7.31 $ 6.61
Shares Outstanding 1,589,843 1,589,811
Financial Condition
Total Investments $ 8,359 $ 8,357
Total Loans 78,984 65,874
Total Assets 101,142 85,791
Total Deposits 87,811 73,709
Total Equity 11,628 10,515
</TABLE>
Results of Operations - March 31, 2000 vs. March 31, 1999
---------------------------------------------------------
Net income for the first three months of 2000 was $350,000, a 27%
increase over the $275,000 earned in the same period last year. An increase in
net interest income of $208,000 after provision for loan loss was the primary
reason for improvement in earnings.
Net Interest Income. Net interest income is the difference between
interest income and interest expense and represents Rockingham's gross profit
margin. The net interest margin represents net interest income divided by
average earning assets. It reflects the average effective rate earned by
Rockingham on its earning assets. Net interest income and the net interest
margin are influenced by fluctuations in market rates and changes in both volume
and mix of average earning assets and the liabilities that fund those assets.
IV-8
<PAGE>
Rockingham's net interest income for the first three months of 2000 was
$1,129,000 versus $921,000 for the same period last year. The following table
sets forth Rockingham's average daily interest earning assets and average daily
interest bearing liabilities, the average yields earned on such assets and rates
paid on such liabilities, and the net interest margin, for all periods
indicated.
<TABLE>
<CAPTION>
Yield/Cost Analysis
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Three Months Ended March 31,
--------------------------------------------------------------------------
2000 1999
------------------------------------- ------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal Funds $ 6,388 $ 90 5.67% $ 4,491 $ 52 4.70%
Interest-Bearing Deposits 1,010 15 5.97% -- -- 0.00%
Investment Securities 8,604 140 6.54% 8,298 127 6.21%
Loans 81,659 1,774 8.74% 67,383 1,463 8.81%
--------------------------------------------------------------------------
Total Earning Assets $ 97,661 $ 2,019 8.31% $ 80,172 $ 1,642 8.31%
==========================================================================
Liabilities
Borrowed Funds $ 2,319 $ 33 5.72% $ 1,210 $ 17 5.70%
Deposits
Interest-Bearing Demand (NOW) 13,493 91 2.71% 11,530 78 2.74%
Savings 10,296 79 3.07% 9,909 75 3.07%
Time Deposits 52,652 687 5.25% 42,309 551 5.28%
--------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 78,760 $ 890 4.55% $ 64,958 $ 721 4.51%
==========================================================================
Net Interest Income $ 1,129 $ 921
Net Interest Margin 4.63% 4.60%
</TABLE>
Net interest income is the difference between interest income and
interest expense and represents Rockingham's gross profit margin. The $208,000
improvement in net interest income from the first three months of 1999 to the
same period of 2000 was primarily the result of a 22% increase in average daily
earning assets.
The net interest margin is a measure of net interest income
performance. It represents the difference between interest income, including net
loan fees earned, and interest expense reflected as a percentage of average
daily interest earning assets. For the first three months of 2000, the net
interest margin remained relatively the same at 4.63% compared to 4.60% for the
same period in 1999.
IV-9
<PAGE>
Net interest income is affected by changes in both average interest
rates and average volumes of interest earning assets and interest bearing
liabilities. The following table sets forth the amounts of the total change in
interest income that can be attributed to rate (change in rate multiplied by old
volume) and volume (change in volume multiplied by old rate) for the periods
indicated. The amount of change not solely due to rate or volume changes was
allocated between the change due to rate and the change due to volume based on
the relative size of the rate and volume changes.
Analysis of Changes in Net Interest Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31, 2000
over Three Months Ended March 31, 1999
----------------------------------------------------
Increase (Decrease)
Due to Change in
----------------------------------------------------
Net
Average Increase
Volume Rate (Decrease)
----------------------------------------------------
<S> <C> <C> <C>
Interest Income
Federal Funds $ 25 $ 13 $ 38
Deposits 15 --
Investment Securities 5 8 15
Loans 322 (11) 13
----------------------------------------------------
Total Interest Income 367 10 377
----------------------------------------------------
Interest Expense
Borrowed Funds 16 -- 16
Deposits
Interest-Bearing Demand (NOW) 13 -- 13
Savings 4 -- 4
Time deposits 140 (4) 136
----------------------------------------------------
Total Interest Expense 173 (4) 169
----------------------------------------------------
Change in Net Interest Income $ 194 $ 14 $ 208
====================================================
</TABLE>
Non-Interest Income. Rockingham's total non-interest income increased
from $89,000 in the first three months of 1999 to $95,000 in the same period of
2000. The increase is attributable to the service charges on an increased number
of checking accounts.
Non-Interest Expense. In the first three months of 2000, total
non-interest expense increased $101,000 or 18% compared to the same period last
year. Salaries and benefits increased $73,000 most of which was due to new hires
for two new branches. In addition, occupancy rose $10,000 from the prior period
while equipment depreciation and maintenance increased $14,000 due to the new
branches.
Income Taxes. Income tax expense was $180,500 for the first three
months of 2000. The provision for the same period of 1999 was $141,500. The
increase was due to the increase in pretax income.
IV-10
<PAGE>
Results of Operations - December 31, 1999 vs. December 31, 1998
---------------------------------------------------------------
Net income in 1999 was $1,201,000, surpassing by 13 percent the 1998
income of $1,062,000. Consequently, diluted earnings per share rose from $.67
per share in 1998 to $.74 per share in 1999. An analysis of factors that
influenced net income in 1999 and 1998 is presented in the sections that follow.
Net Interest Income. As indicated in the tables below, net interest
income increased from $3,447,000 to $4,053,000 or 18 percent from 1998 to 1999.
The majority of the $606,000 increase in net interest income can be attributed
to volume changes in average balances of assets. The volume change in average
earning assets of $14.5 million provided $1,213,000 of additional interest
income in 1999. The yield on earning assets decreased 35 basis points causing a
$294,000 decline in interest income that resulted in a net increase of $919,000.
By comparison, the average volume increase in interest-bearing liabilities of
$10.9 million accounted for $481,000 of the growth in interest expense and a 28
basis point decrease in average rates paid accounted for a $168,000 offset
resulting in a net gain in interest expense of $313,000.
<TABLE>
<CAPTION>
Yield/Cost Analysis
----------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
1999 1998
------------------------------------- ------------------------------------
Interest Average Interest Average
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Cost Balance Expense Cost
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Assets
Federal Funds $ 6,625 $ 335 5.06% $ 6,650 $ 360 5.41%
Investment Securities 7,633 482 6.31% 5,662 361 6.38%
Loans 74,031 6,371 8.61% 61,507 5,548 9.02%
--------------------------------------------------------------------------
Total Earning Assets $ 88,289 $ 7,188 8.14% $ 73,819 $ 6,269 8.49%
==========================================================================
Liabilities
Borrowed Funds $ 1,265 $ 70 5.53% $ 1,031 $ 58 5.63%
Deposits
Interest-Bearing Demand (NOW) 12,409 334 2.69% 10,401 313 3.01%
Money Market 4,923 173 3.51% 3,425 125 3.65%
Savings 5,400 140 2.59% 4,718 130 2.76%
Time Deposits 47,036 2,418 5.14% 40,510 2,196 5.42%
--------------------------------------------------------------------------
Total Interest-Bearing Liabilities $ 71,033 $ 3,135 4.42% $ 60,085 $ 2,822 4.70%
==========================================================================
Net Interest Income $ 4,053 $ 3,447
Net Interest Margin 4.59% 4.67%
</TABLE>
IV-11
<PAGE>
Analysis of Changes in Net Interest Income
(Dollars in thousands)
<TABLE>
<CAPTION>
Year 1999 over 1998 Year 1998 over 1997
---------------------------------------- ----------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Change in Due to Change in
---------------------------------------- ----------------------------------------
Net Net
Average Increase Average Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------------------------------------- ----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income
Federal Funds $ (1) $ (24) $ (25) $ 168 $ (2) $ 166
Investment Securities 125 (4) 121 (9) 3 (6)
Loans 1,089 (266) 823 963 (69) 894
---------------------------------------- ----------------------------------------
Total Interest Income 1,213 (294) 919 1,122 (68) 1,054
---------------------------------------- ----------------------------------------
Interest Expense
Borrowed Funds 13 (1) 12 36 5 41
Deposits
Interest-Bearing Demand (NOW) 56 (35) 21 65 17 82
Money Market 53 (5) 48 33 9 42
Savings 18 (8) 10 14 (1) 13
Time deposits 341 (119) 222 285 32 317
---------------------------------------- ----------------------------------------
Total Interest Expense 481 (168) 313 433 62 495
---------------------------------------- ----------------------------------------
Change in Net Interest Income $ 732 $ (126) $ 606 $ 689 $ (130) $ 559
======================================== ========================================
</TABLE>
Non-Interest Income. Non-interest income is comprised of service
charges and other fee related income from services rendered by Rockingham as
well as fees from the origination of mortgage loans and fees from the sale of
securities.
Non-interest income rose $43,000, or 13 percent, from 1998 to 1999.
Service charges on deposit accounts, the largest component, increased 18 percent
due to higher volumes of business.
Non-Interest Expense. Non-interest expense represents the overhead of
Rockingham. Rockingham's management actively monitors all categories of
non-interest expense in an attempt to improve productivity and earnings
performance.
In 1999, non-interest expense increased $459,000 or 23 percent to
$2,484,000. Of this increase, 53 percent was related to the new Waynesboro and
Weyers Cave branches. Salaries associated with the new branches were
approximately $145,000 while over $100,000 of the increase was directly
attributed to supplying, equipping, and running the new branches. This means
that general bank growth only increased expenses by 11 percent.
Income Taxes. The provision for income tax expense was $618,000 in
1999, compared with $544,000 in 1998. The increase was due to an increase in
pretax income.
Financial Condition
-------------------
Rockingham's financial condition is measured in terms of its asset and
liability composition, asset quality, capital resources, and liquidity. These
factors affecting Rockingham's financial condition are discussed below.
IV-12
<PAGE>
Assets
Total assets at December 31, 1999 amounted to $101.1 million, or 18
percent above the 1998 mark of $85.8 million. This growth in total assets is
indicative of the overall growth that Rockingham has experienced since its
inception in 1990.
Loans. Net loans increased $4,135,000 or 21%, (annualized) from December
31, 1999 to March 31, 2000. The net loan to deposit ratio was 92% at March 31,
2000, compared to 89% at December 31, 1999.
Net loans increased 20 percent to $77.9 million on December 31, 1999
from $64.9 million a year earlier. Average loans also increased 20 percent to
$74.0 million in 1999 from $61.5 million in 1998.
The following table sets forth the composition of Rockingham's loan
portfolio at the dates indicated:
<TABLE>
<CAPTION>
December 31,
March 31, ---------------------------------------------
2000 1999 1998
-------------------- ------------------- --------------------
<S> <C> <C> <C>
Commercial $ 31,707,780 $ 30,664,275 $ 27,232,758
Commercial real estate 33,589,194 30,960,871 22,684,448
Residential real estate 12,304,525 11,945,985 11,227,924
Consumer installment 5,571,962 5,412,581 4,728,497
-------------------- ------------------- --------------------
83,173,461 78,983,712 65,873,627
-------------------- ------------------- --------------------
Less:
Allowance for loan losses 981,821 919,546 835,905
Unearned net loan fees 109,855 117,012 88,305
-------------------- ------------------- --------------------
1,091,676 1,036,558 924,210
-------------------- ------------------- --------------------
$ 82,081,785 $ 77,947,154 $ 64,949,417
==================== =================== ====================
</TABLE>
Net loan charge-offs in 1999 were $36,000, or .05 percent of average
loans. In 1998, Rockingham experienced net charge-offs of $27,000, or .04
percent of average loans. At March 31, 2000, Rockingham had one non-accrual loan
of $75,000 and five loans 90 days or more past due totaling $133,000. At
December 31, 1999, Rockingham had no non-accrual loans and three loans 90 days
or more past due totaling $126,000. At December 31, 1998, Rockingham had one
non-accrual loan of $28,000 and one loan 90 or more days past due totaling
$7,000.
The following table sets forth the scheduled maturity of selected loans
as of December 31, 1999:
<TABLE>
<CAPTION>
Over 1 Year
Through 5 Years Over 5 Years
------------------------ -------------------------
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
------------- ---------- ---------- ---------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Real estate - construction $ 1,813 -- -- -- -- $ 1,813
Business 17,388 6,755 679 679 650 26,151
------------- ---------- ---------- ---------- ---------- -----------
Total $ 19,201 6,755 679 679 650 $ 27,964
============= ========== ========== ========== ========== ===========
</TABLE>
IV-13
<PAGE>
Rockingham maintains a general allowance for loan losses and does not
allocate its allowance for loan losses to individual categories of loans. In
determining the adequacy for loan losses, management considers the size and
composition of the loan portfolio, historical experience, economic conditions,
the value and adequacy of collateral and guarantors, and the current level of
the allowance. In addition, consideration is given to potential losses
associated with non-accrual loans and loans that are considered to be potential
problems.
At December 31, 1999, the allowance for loan losses was $920,000, or
1.16 percent of loans. A year earlier, the allowance was $836,000, or 1.27
percent of loans. Management believes that the allowance is adequate, subject to
unforeseen economic changes or unexpected regulatory developments. The following
table demonstrates these various key loan portfolio relationships.
<TABLE>
<CAPTION>
Selected Loan Data
------------------------------------------------------------------------------------------
(Dollars in thousands)
1999 1998
------------------------------------------------------------------------------------------
<S> <C> <C>
Loans Outstanding at Year-End $ 78,984 $ 65,874
Average Loans 74,031 61,507
Allowance at Year-End 920 836
Net Charge-Offs 36 27
Non-Accrual Loans to Year-End Loans -- 0.04%
Loans 90 or More Days Past Due to Year-End Loans 0.15% 0.01%
Allowance to Year-End Loans 1.16% 1.27%
Charge-Offs to Average Loans 0.05% 0.04%
</TABLE>
The following table sets forth the changes in the allowance for loan
losses for the periods indicated:
<TABLE>
<CAPTION>
Three Months Year Ended
Ended December 31,
March 31, -------------------------------------
2000 1999 1998
----------------- ----------------- ----------------
<S> <C> <C> <C>
Balance, beginning of year $ 919,546 $ 835,905 $ 719,159
Provision charged to operations 30,000 120,000 144,000
Recoveries of amounts charged off 32,305 15,223 7,988
----------------- ----------------- ----------------
981,851 971,128 871,147
Amounts charged off 30 51,582 35,242
----------------- ----------------- ----------------
Balance, end of year $ 981,821 $ 919,546 $ 835,905
================= ================= ================
</TABLE>
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
collection 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 ability to collect 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
IV-14
<PAGE>
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 Rockingham's allowance for loan losses,
and may require Rockingham to make additions to the allowance based on their
judgment about information available to them at the time of their examinations.
Management does not assign specific reserves to categories of loans but believes
that the overall allowance is sufficient to cover all loans in total.
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 that the ability to collect principal
is no longer in doubt.
A loan is impaired when it is probable Rockingham 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 March 31, 2000 and December 31, 1999 and 1998,
Rockingham 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.
The following table sets forth information regarding past due loans and
nonperforming assets at the dates indicated:
<TABLE>
<CAPTION>
March 31, December 31,
----------------- ------------------------------
2000 1999 1998
----------------- ------------- --------------
(Dollars in thousands)
<S> <C> <C> <C>
Accruing Loans 90 Days or More Delinquent (1)
Residential $ - $ - $ -
Nonresidential 109 109 -
Business 24 16 -
Consumer - 1 7
------------- ------------- --------------
Total 133 126 7
============= ============= ==============
Nonperforming Loans
Residential - - -
Nonresidential 74 - -
Business - - 28
Consumer - - -
------------- ------------- --------------
Subtotal 74 0 28
------------- ------------- --------------
Renegotiated Loans:
Nonresidential - - -
Real Estate Owned:
Nonresidential - - -
------------- ------------- --------------
Total Nonperforming Assets $ 207 $ 126 $ 35
============= ============= ==============
Nonperforming Assets to Total Assets 0.20% 0.12% 0.04%
============= ============= ==============
_______________
(1) Includes portion guaranteed by the Small Business Administration.
</TABLE>
IV-15
<PAGE>
Investment Securities. Investment securities represent the second
largest component of earning assets. On December 31, 1999, investment securities
totaled $8.4 million. Investment securities accounted for 8 percent and 10
percent of total assets at December 31, 1999 and 1998, respectively.
On March 31, 2000, the fair market value of the investment portfolio
was 98.6 percent of its book value compared with 100.6 percent on March 31,
1999. At March 31, 2000, the portfolio had $123,000 of net unrealized losses.
This loss of market value was consistent with market conditions in 200.
On December 31, 1999, the fair market value of the investment portfolio
was 98.7 percent of its book value compared with 101.1 percent on December 31,
1998. At year-end 1999, the portfolio had $106,000 of net unrealized losses.
This loss of market value was consistent with market conditions in 1999. Gross
amounts of appreciation and depreciation for each category of investment
securities, as well as other information with respect to yields and maturities,
are set forth in the following tables.
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
March 31, 2000:
Securities available-for-sale:
U. S. Government agencies $ 5,501,607 $ 312 $ 111,689 $ 5,390,230
Mortgage-backed securities 816,766 2,713 -- 819,497
Other securities 595,740 -- -- 595,740
-----------------------------------------------------------------
6,914,113 3,043 111,689 6,805,467
-----------------------------------------------------------------
Securities being held-to-maturity:
U. S. Government agencies 1,598,032 1,493 6,600 1,592,925
Mortgage-backed securities 331,965 -- 8,753 323,212
-----------------------------------------------------------------
1,929,997 1,493 15,353 1,916,137
-----------------------------------------------------------------
$ 8,844,110 $ 4,536 $ 127,042 $ 8,721,604
=================================================================
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
December 31, 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
=================================================================
</TABLE>
IV-16
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
December 31, 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 0 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 0 2,918,186
-----------------------------------------------------------------
$ 8,320,894 $ 92,505 $ 0 $ 8,413,399
=================================================================
</TABLE>
The amortized cost and fair value of investment securities, as of March
31, 2000, 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.
<TABLE>
<CAPTION>
Amortized Fair Weighted
Cost Value Average Rate
-------------- ------------------------------------
<S> <C> <C> <C>
Available-for-sale:
Due one year or less $ 3,002,545 $ 2,923,100 5.97%
Due after one year through five years 2,499,062 1,979,685 7.03%
-------------- ---------------
$ 5,501,607 $ 4,902,785 6.45%
============== ===============
Held-to-maturity:
Due one year or less $ 498,753 $ 499,065 6.77%
Due after one year through five years 1,099,279 1,095,760 6.75%
-------------- ---------------
$ 1,598,032 $ 1,594,825 6.76%
============== ===============
</TABLE>
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.
Liabilities
Deposits and Short-Term Borrowings. Rockingham's primary source of funds
is depository accounts. The deposit base is made up of demand deposits, savings
and money market accounts and certificates of deposit. Rockingham does not
solicit funds outside of its principal market area and as a result, almost all
of the deposits are provided by individuals and businesses located within the
local community.
Rockingham is a note option depository for the Treasury, Tax & Loan
system. This allows Rockingham to use customers' tax deposits for short-term
periods. Rockingham also has borrowed funds from the Federal Home Loan Bank of
Atlanta. Rockingham pays an interest rate on funds held for the Treasury and the
FHLB as shown below.
IV-17
<PAGE>
As shown below, the quarterly average interest bearing deposits
increased by 12% (annualized) from December 31, 1999 to March 31, 2000. The
average rates paid by Rockingham reflect the interest rates nationally.
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
March 31, 2000 December 31, 1999
------------------------ -----------------------
(Dollars in thousands)
Average Average Average Average
Balance Rate Balance Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest bearing demand $ 13,493 2.71% $ 13,050 2.68%
Savings 10,296 3.07% 10,744 3.01%
Certificates of deposit 52,652 5.25% 51,362 5.11%
-----------------------------------------------------
Total deposits 76,441 4.51% 75,156 4.39%
Borrowed money 2,319 5.72% 1,252 5.70%
-----------------------------------------------------
Total (weighted average rate) $ 78,760 4.55% $ 76,408 4.41%
=====================================================
</TABLE>
Total deposits on December 31, 1999 were $87.8 million, or 19 percent
above the prior year total of $73.7 million. This growth in Rockingham's deposit
base is attributable to the addition of Rockingham's fifth and sixth branch
offices in 1999. The table below shows the balances in each of the types of
deposit accounts at March 31, 2000 and December 31, 1999.
<TABLE>
<CAPTION>
Deposits
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
March 31, December 31,
2000 1999
-------------------------------- --------------------------------
As a % of As a % of
Total Total
Balance Deposits Balance Deposits
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Demand $ 13,904 15.51% $ 11,976 13.64%
NOW and money market accounts 18,921 21.10% 18,014 20.51%
Savings 4,943 5.51% 5,016 5.71%
Time certificates, $100,000 or more 7,120 7.94% 7,303 8.32%
Other time certificates 44,778 49.94% 45,502 51.82%
-------------------------------------------------------------------------
$ 89,666 100.00% $ 87,811 100.00%
=========================================================================
</TABLE>
The following table summarizes the maturity distribution of certificates
of deposit in amounts of $100,000 or more as of March 31, 2000:
Less than 3 months $ 545,169
3 months to 6 months 2,594,051
6 months to 12 months 3,164,527
Greater than 12 months 816,258
---------------
$ 7,120,005
===============
IV-18
<PAGE>
Impact of Inflation and Changing Prices
The financial statements and accompanying footnotes have been prepared
in accordance with generally accepted accounting principles, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The assets and liabilities of Rockingham
Heritage Bank are primarily monetary in nature and changes in interest rates
have a greater impact on Rockingham Heritage Bank's performance than do the
effects of inflation.
Capital Resources
Total stockholders' equity on December 31, 1999 was $11.6 million, or
11 percent above the 1998 level of $10.5 million. Return on average equity in
1999 was 10.81 percent as compared to 11.22 percent in 1998.
The Federal Reserve mandates minimum capital requirements for banks.
Under this system, all balance sheet assets are assigned a certain risk category
with a prescribed weight. Off-balance-sheet items, such as loan commitments and
letters of credit, are also assigned a risk rating. The sum of the balance sheet
and off-balance-sheet amounts multiplied by their respective risk weight factors
must then meet a required minimum test. Tier 1 Capital is defined as
stockholders' equity minus certain intangible assets. Tier 2 Capital consists of
Tier 1 Capital plus a certain amount of the allowance for loan losses. At
December 31, 1999, Rockingham substantially exceeded all minimum requirements.
See Note 10 of the Notes to Consolidated Financial Statements.
Liquidity
Liquidity is defined as Rockingham's ability to provide funds for
customers' demands for loans and deposit withdrawals without impairing
profitability. To meet these needs, Rockingham maintains cash reserves and
overnight and readily marketable investments. Funds can also be obtained through
increasing deposits or through Rockingham's borrowing privileges with several
correspondent banks.
A related concern of liquidity management is interest rate sensitivity.
Changes in interest rates may affect funding requirements, as well as the
relative liquidity of certain assets. As of December 31, 1999, Rockingham's
interest sensitive liabilities maturing or repricing within one year exceeded
interest sensitive assets maturing or repricing within one year, creating a
negative "gap" position. To assist further in the analysis and management
process, Rockingham calculates the effects of sudden interest rate changes upon
net interest income by taking into account the balance sheet gap position and
the degree of sensitivity to rate changes of each grouping of assets and
liabilities. Rockingham's objective is to minimize risk associated with sudden
changes in interest rates and, accordingly, avoid speculating on interest rate
movement. The following table demonstrates the relationship between interest
sensitive assets and interest sensitive liabilities on December 31, 1999.
IV-19
<PAGE>
<TABLE>
<CAPTION>
Interest Sensitivity Analysis
--------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Over 3 Over 1 Over 2 Over 3 Over 4
3 Months Year Years Years Years
Months Through Through Through Through Through Over 5
At December 31 or Less 12 Mos. 2 Years 3 Years 4 Years 5 Years Years
--------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings Assets
Federal Funds Sold $ 7,677 $ - $ - $ - $ - $ - $ -
Investment Securities 968 2,600 2,479 - 805 - 907
Loans (Net) 19,894 11,689 7,664 8,747 13,180 17,048 695
---------------------------------------------------------------------------------------
Total Earning Assets 28,539 14,289 10,143 8,747 13,985 17,048 1,602
---------------------------------------------------------------------------------------
Interest-Bearing Liabilities
NOW and Money Market Accounts 18,014 - - - - - -
Savings 5,016 - - - - - -
Time certificates 12,180 32,341 5,942 1,466 876 - -
---------------------------------------------------------------------------------------
Total Interest-Bearing Liabilities 35,210 32,341 5,942 1,466 876 - -
---------------------------------------------------------------------------------------
Interest Sensitivity Gap
Asset (Liability) Sensitive $ (6,671) $ (18,052) $ 4,201 $ 7,281 $ 13,109 $ 17,048 $ 1,602
---------------------------------------------------------------------------------------
Cumulative Gap $ (6,671) $ (24,723) $ (20,522) $ (13,241) $ (132) $ 16,916 $ 18,518
---------------------------------------------------------------------------------------
</TABLE>
IV-20
<PAGE>
CHAPTER V
MANAGEMENT FOLLOWING THE MERGER
The Board of Directors
The Marathon board of directors currently is comprised of 11 members.
The merger agreement requires that Marathon reduce the size of the
board to eight members. In connection with this reduction, seven current
directors of Marathon will resign, and four current directors of Rockingham will
become directors of Marathon. In addition, the board of directors will be
divided into three classes, two of which will consist of three members and one
of which will consist of two members. The directors of Marathon following the
merger will serve for the terms of their respective classes, which expire in
2001, 2002 and 2003.
The following table sets forth the composition of the board of
directors following the merger.
<TABLE>
<CAPTION>
Class II Class III Class I
(Term Expiring in 2001) (Term Expiring in 2002) (Term Expiring in 2003)
<S> <C> <C>
Walter H. Aikens Clifton L. Good Stephen T. Heitz*
Paul R. Yoder* Joseph W. Hollis John K. Stephens*
Wayne B. Ruck* Donald L. Unger
</TABLE>
_______________________
* Rockingham director
The following paragraphs set forth certain information, as of May 31,
2000, for the eight individuals who are expected to serve as directors of
Marathon following the consummation of the merger. Unless otherwise indicated,
each director has held his or her current position for more than five years.
Class I
(Term Expiring in 2003)
Stephen T. Heitz, 47, has served as a director of Rockingham since
1989. He is an attorney and partner in the firm of Litten and Sipe, L.L.P. in
Harrisonburg, Virginia.
John K. Stephens, 57, has been President and Chief Executive Officer of
Rockingham since 1994 and Chairman of the Board of Rockingham since 1998. From
1990 to 1998, he served as Vice Chairman of the Board of Rockingham.
Donald L. Unger, 58, has been President and Chief Executive Officer of
Marathon and The Marathon Bank since 1992. He also has served as a director of
Marathon and The Marathon Bank since 1993. Mr. Unger was elected Chairman of The
Marathon Bank in May 2000.
V-1
<PAGE>
Class II
(Term Expiring in 2001)
Walter H. Aikens, 50, has served as a director of Marathon since 1998
and of The Marathon Bank since 1998. He is President of H & W Construction Co.,
Inc., President of Aikens Corporation, and develops real estate for rental
property.
Paul R. Yoder, Jr., 58, is Vice Chairman of the Board of Rockingham and
has served as a director of Rockingham since 1989. He is a physician and surgeon
and is a partner in the professional firm of Rockingham Eye Physicians, P.C.
Class III
(Term Expiring in 2002)
Clifton L. Good, 63, has served as a director of Marathon since 1989
and of The Marathon Bank since 1987. He is President of Clifton L. Good Realty,
Incorporated, in Front Royal, Virginia.
Joseph W. Hollis, 46, has served as a director of Marathon since 1989
and of The Marathon Bank since 1987. He is President of B. J. Sager (beer
distributor) in Winchester, Virginia.
Wayne B. Ruck, 60, has served as a director of Rockingham since 1996.
He is co-founder and co-owner of Packaging Services, Inc. of Weyers Cave,
Virginia, and seven other packaging-related companies in the Mid-Atlantic
region.
Executive Officers Who Are Not Directors
Following the closing of the merger, the officers of each of The
Marathon Bank and Rockingham will retain the same or similar positions that they
held with the respective bank prior to the merger. See the information set forth
above for certain information with respect to Messrs. John K. Stephens and
Donald L. Unger, who are expected to serve as the executive officers of Marathon
following the consummation of the merger.
V-2
<PAGE>
Security Ownership of Management
The following table sets forth, based on information as of ________ __,
2000, the beneficial ownership of Marathon common stock, the beneficial
ownership of Rockingham common stock and the anticipated beneficial ownership,
after giving effect to the merger, of Marathon common stock by each director and
executive officer of Marathon and Rockingham and by each person who will serve
as a director or executive officer of Marathon following the merger.
<TABLE>
<CAPTION>
Ownership Before Ownership After
the Merger the Merger
---------- ----------
Marathon
Common Stock
------------
Marathon Rockingham Number Percent
Common Stock (1) Common Stock (1) of Shares of Class (%)
---------------- ---------------- --------- ------------
<S> <C> <C> <C> <C>
Marathon Directors:
Walter H. Aikens* 19,864 - 19,864 **
Frank H. Brumback 42,055 - 42,055 **
Robert W. Claytor 55,061 - 55,061 1.2
Clifton L. Good* 64,943 - 64,943 1.4
Ralph S. Gregory 74,856 - 74,856 1.6
Thomas W. Grove 16,009 - 16,009 **
Joseph W. Hollis* 65,701 - 65,701 1.4
George R. Irvin, Jr. 74,710 551 75,580 1.7
Gerald H. Kidwell 62,529 728 63,679 1.4
Lewis W. Spangler 44,031 - 44,031 **
Donald L. Unger* 24,022 - 24,022 **
All current Marathon Directors
and Executive Officers as a
group (11 Persons) 543,781 1,279 545,801 11.8
Rockingham Directors:
Paul S. Cline - 12,507 19,050 **
Betty N. Curry - 8,438 13,332 **
Margaret E. Haynes - 21,553 34,053 **
Stephen T. Heitz* - 11,784 18,618 **
Elmer T. Kramer - 5,851 9,244 **
Wayne B. Ruck* - 71,576 113,090 2.5
Donald E. Showalter - 3,312 5,232 **
John K. Stephens* 400 61,983 98,333 2.2
Jeremiah B. Sullivan, Ph.D. - 8,765 13,848 **
Richard G. Tutwiler - 34,334 54,247 1.2
Paul R. Yoder, Jr., M.D.* - 32,029 50,605 1.1
All current Rockingham
Directors and Executive
Officers as a group (13
Persons) 400 287,203 454,175 9.9
All post-merger Marathon
Directors and Executive
Officers as a
group (8 persons) 455,176 9.9
___________________
</TABLE>
V-3
<PAGE>
* Director of Marathon following the consummation of the merger.
** Percentage of ownership will be less than one percent of the outstanding
shares of Marathon common stock.
(1) Amounts include beneficial ownership of shares of common stock, if any,
held in the name of the spouse, minor children or other relatives of a
director living in such person's home, as well as shares, if any, held in
the name of another person under an arrangement whereby the director or
executive officer can vest title in himself at once or at some future time.
Amounts also include beneficial ownership of shares of common stock
issuable upon the exercise of stock options exercisable within 60 days of
________ __, 2000.
Security Ownership of Certain Beneficial Owners
The following table sets forth, to the knowledge of Marathon and
Rockingham and based on information as of ________ __, 2000, (i) the beneficial
ownership of each person who owns more than five percent of the outstanding
shares of Rockingham common stock and (ii) the anticipated beneficial ownership
of each person expected to own more than five percent of the outstanding shares
of Marathon common stock after giving effect to the merger. No person is known
to be the beneficial owner of more than five percent of the outstanding shares
of Marathon common stock.
<TABLE>
<CAPTION>
Ownership of Ownership of
Rockingham Common Stock Marathon Common Stock
Before the Merger After the Merger
----------------- ----------------
Number Percent Number Percent
of Shares of Class (%) of Shares of Class (%)
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
J. Gray Ferguson 88,440 5.6 139,735 3.1
P.O. Box 4400
Charlottesville, VA 22905
</TABLE>
Director Compensation
Each director of Marathon is paid an annual retainer fee of $1,500 and
directors' fees for meetings attended as follows:
Board of Directors Meetings $ 500
Loan, Audit and Compensation Committee Meetings $ 50
V-4
<PAGE>
Executive Officer Compensation
The following table presents information concerning the compensation of
Messrs. Unger and Stephens. This table presents compensation for services
rendered in all capacities to Marathon and its subsidiaries by Mr. Unger and to
Rockingham by Mr. Stephens in 1999, 1998 and 1997.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
------------------- ------------
Securities
Underlying All Other
Name Year Salary Bonus Options (#) (1) Compensation (2)
---- ---- ------ ----- --------------- ----------------
<S> <C> <C> <C> <C>
Donald L. Unger 1999 $122,000 $8,050 -- $9,760
President and Chief 1998 115,000 8,050 -- $9,200
Executive Officer of 1997 108,000 6,040 2,203 $8,000
Marathon
John K. Stephens 1999 $125,445 $27,400 21,279 (3) $14,921
Chairman, President and 1998 115,915 23,500 1,306 13,748
Chief Executive 1997 95,919 17,000 30,482 9,586
Officer of Rockingham
</TABLE>
_____________________
(1) Amounts have been adjusted to reflect (i) stock dividends paid by
Rockingham and (ii) the exchange ratio in the merger.
(2) For Mr. Unger, amounts represent contributions to Marathon's 401(k) Plan
and to Marathon's Excess Benefit Plan on behalf of Mr. Unger pursuant to
Mr. Unger's employment agreement. For Mr. Stephens, amounts represent
contributions to the Rockingham Heritage Bank Employee Retirement Plan and
the Rockingham Heritage Bank Money Purchase Plan on behalf of Mr. Stephens.
(3) On July 11, 2000, Rockingham rescinded the options to purchase shares of
Rockingham common stock that were granted to Mr. Stephens in 1999.
Stock Options
Option Grants. No stock options were granted to Mr. Unger in 1999. The
table below provides information concerning stock options granted by Rockingham
to Mr. Stephens during 1999.
Option Grants In Last Fiscal Year
<TABLE>
<CAPTION>
Percent of Total
Number of Securities Options Granted to
Underlying Options Employees in Exercise or Base
Granted (#)(1)(2) Fiscal Year (%) Price ($/Share) Expiration Date
----------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
John K. Stephens 19,908 (3) 26 9.34 July 13, 2009
</TABLE>
_________________
(1) Stock options were awarded at or above the fair market value of the shares
of Rockingham common stock at the date of award.
V-5
<PAGE>
(2) The total number of securities underlying unexercised options have been
adjusted to reflect the exchange ratio in the merger.
(3) On July 11, 2000, Rockingham rescinded the options to purchase shares of
Rockingham common stock that were granted to Mr. Stephens in 1999.
Option Exercises and Holdings. The following table sets forth
information with respect to exercised and unexercised options held by Messrs.
Unger and Stephens as of December 31, 1999. No stock options were exercised by
Messrs. Unger or Stephens in 1999.
Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at Options at
Name December 31, 1999 (#)(1)(2) December 31, 1999 ($)(3)
---- --------------------------- ------------------------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Donald L. Unger 17,500 7,500 20,790 8,910
John K. Stephens 28,803 19,908 116,125 14,364
</TABLE>
_______________________
(1) The total number of securities underlying unexercised options have been
adjusted to reflect (i) stock dividends paid by Rockingham and (ii) the
exchange ratio in the merger.
(2) On July 11, 2000, Rockingham rescinded the options to purchase shares of
Rockingham common stock that were granted to Mr. Stephens in 1999.
(3) The value of unexercised in-the-money options at fiscal year end was
calculated by determining the difference between (i) the fair market value
of common stock underlying the options at December 31, 1999 and (ii) the
exercise price of the options.
Employment Agreements
Marathon and Mr. Unger entered into an employment agreement on April 1,
1998 (the "Agreement"). The Agreement was automatically renewed on March 31,
2000 for a one year period, and will automatically renew for successive one year
periods thereafter unless expressly terminated by Marathon.
As compensation under the Agreement, Mr. Unger receives a base salary
of $108,000. As additional compensation under the Agreement and at the election
and in the discretion of the Board of Directors, Mr. Unger may receive a bonus
in the form of cash or options to purchase common stock of Marathon. The
Agreement permits Mr. Unger to participate in any benefit plans adopted by
Marathon under the same terms and conditions as other employees of Marathon.
In the event of a change in control of Marathon, the Agreement provides
that Mr. Unger shall receive a cash payment equal to the greater of (i) the
amount of salary due to Mr. Unger for the remainder of the term of the Agreement
or (ii) the product of his annual salary and the multiple of the book value per
share of Marathon's Common Stock received by Marathon's stockholders in
connection with such change of control, provided such multiple does not exceed
3.
V-6
<PAGE>
Certain Relationships and Related Transactions
Marathon's officers, directors, their immediate families and affiliated
companies in which they are stockholders maintain normal business relationships
with The Marathon Bank. Loans made by The Marathon Bank are made in the ordinary
course of business on the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with others, and do
not involve more than normal risks of collectibility or present other
unfavorable features. The aggregate amount of such loans was approximately
$2,743,000 at December 31, 1999.
The Marathon Bank also has a lease with Post Office Plaza, L.C. of
which Donald L. Unger, President, Chief Executive Officer and director of
Marathon, and Thomas W. Grove, a director of Marathon, each own 25%. The lease
arrangement was approved by the Bureau of Financial Institutions of the Virginia
State Corporation Commission and the Federal Reserve Board in regard to
establishing a branch at 300 Warren Avenue, Front Royal, Warren County,
Virginia. The land lease became effective in July 1993 and converted into a
lease for both the land and building thereon in June 1996. The lease expires on
June 30, 2016. The rent paid on the lease totaled $47,354 for the year 1999.
The firm of Litten and Sipe, LLP of which Stephen T. Heitz, a director
of Rockingham and a director nominee for the post-merger Marathon board, is a
partner, rendered legal services to Rockingham in 1999. The firm of Wharton
Aldhizer & Weaver, PLC of which Donald E. Showalter, a director of Rockingham,
is a partner, also rendered legal services to Rockingham in 1999. Rockingham
expects to retain both law firms for 2000.
In 1999, and up to the present time, there were transactions between
Rockingham and some of Rockingham's officers and directors. These transactions
consisted of extensions of credit by Rockingham in the ordinary course of its
business. In addition, some of these persons are at present, as in the past,
directors or officers of corporations, which are customers with Rockingham in
the ordinary course of business. Each transaction was made on substantially the
same terms, including interest rates, collateral and repayment terms, as those
prevailing at the time for comparable transactions with the general public. In
the opinion of management, none of the transactions involved more than the
normal risk of collectibility or present other unfavorable features. The
aggregate amount of such loans was approximately $1,798,000 at December 31,
1999. Additional information on the activity in such loans is set forth in Note
14 to Rockingham's financial statements, which are attached as Appendix D to
this joint proxy statement/prospectus.
V-7
<PAGE>
CHAPTER VI
LEGAL MATTERS
DESCRIPTION OF MARATHON CAPITAL STOCK
Common Stock
Voting Rights. Each share of Marathon common stock entitles the holder
thereof to one vote on all matters voted on by shareholders. The shares of
Marathon common stock do not have cumulative voting rights, which means that the
holders of more than 50% of the shares of Marathon common stock voting for the
election of directors can elect all of the directors, in which event the holders
of the remaining shares of Marathon common stock will not be able to elect any
of the directors.
Dividend Rights. Holders of Marathon common stock are entitled to
receive dividends when, as and if declared by the board of directors out of
funds legally available for the payment of dividends.
Liquidation Rights. Subject to the rights of holders of Marathon
preferred stock, upon any liquidation, dissolution or winding up of the affairs
of the Marathon, holders of Marathon common stock are entitled to receive pro
rata all of the assets of Marathon for distribution to shareholders. No shares
of Marathon preferred stock are currently outstanding.
Assessment and Redemption. Shares of Marathon common stock presently
outstanding are validly issued, fully paid and nonassessable. There is no
provision for any voluntary redemption of the Marathon common stock.
Other. Holders of Marathon common stock have no subscription, sinking
fund, conversion or preemptive rights.
COMPARATIVE RIGHTS OF SHAREHOLDERS
General
Marathon and Rockingham are corporations subject to the provisions of
the Virginia Stock Corporation Act. Rights as a shareholder of Rockingham are
governed by Rockingham's articles of incorporation and bylaws and by the
Virginia Stock Corporation Act. Upon consummation of the merger, Rockingham
shareholders will become shareholders of Marathon, and as such shareholder
rights will then be governed by the articles of incorporation and bylaws of
Marathon and by the Virginia Stock Corporation Act.
The following is a summary of the material differences in the rights of
shareholders of Rockingham and Marathon. This summary is qualified in its
entirety by reference to the articles of incorporation and bylaws of Marathon
and Rockingham and to the Virginia Stock Corporation Act.
Authorized Capital
Rockingham. The Rockingham Articles authorize the issuance of up to
2,000,000 shares of Rockingham common stock, par value $5.00 per share, of which
1,589,940 shares were issued and outstanding as of ________ __, 2000. Rockingham
is not authorized to issue preferred stock.
VI-1
<PAGE>
Marathon. The Marathon Articles authorize the issuance of up to
20,000,000 shares of Marathon common stock, par value $1.00 per share, of which
2,051,441 shares were issued and outstanding as of ________ __, 2000. The
Marathon Articles further authorize 1,000,000 shares of preferred stock, without
par value, 300,000 of which shares have been designated as Series "A" 1992
Preferred Stock. No shares of Marathon preferred stock were issued and
outstanding as of ________ __, 2000.
Marathon's Articles authorize the Marathon board, without shareholder
approval, to fix the preferences and relative rights of the preferred stock,
within certain limitations, and to establish series of such preferred stock and
determine the variations, such as in dividends, voting rights, redemption price
and conditions, and conversion features, between each series. Although series
may have different features, all series shall rank on a parity as to dividends
and assets with all other series according to the respective dividend rates and
amounts distributable upon any voluntary or involuntary liquidation of the
corporation fixed for each such series and without preference or priority of any
series over any other series. All shares of preferred stock within a series
shall be identical, and all shares of preferred stock shall be preferred over
common stock as to both dividends and amounts distributable upon any voluntary
or involuntary liquidation of the corporation. If any additional shares of
preferred stock are issued, the rights of holders of Marathon common stock would
be subject to the rights and preferences conferred to holders of such preferred
stock.
The authority to create and issue separate classes and series of
preferred stock allows a corporation greater flexibility in structuring
financings and acquisitions. While such issuances could, under certain
circumstances, be considered to have the effect of making a change in control
more difficult, any issuance of such stock would be subject to applicable law,
including, without limitation, the duty of the Marathon board to exercise its
good faith business judgment in the best interests of Marathon and its
shareholders. Under Marathon's Articles, the Marathon board would be authorized
to issue a series of preferred stock with more than one vote, less than one
vote, no vote or one vote per share.
Marathon's ability to pay dividends is limited by restrictions imposed
by the Virginia Stock Corporation Act on Virginia corporations. In general,
dividends paid by a Virginia corporation may be paid only if, after giving
effect to the distribution, (i) the corporation is still able to pay its debts
as they become due in the usual course of business, or (ii) the corporation's
total assets are greater than or equal to the sum of its total liabilities plus
(unless the corporation's Articles permit otherwise) the amount that would be
needed, if the corporation were to be dissolved at the time of the distribution,
to satisfy the preferential rights, upon the dissolution, of shareholders whose
preferential rights are superior to those receiving the distribution.
No dividends may be declared or paid on Marathon common stock unless
dividends accrued on the preferred stock for that period have been paid or
declared and a sum sufficient for the payment thereof set apart for such
payment.
Amendment of Articles of Incorporation or Bylaws
The Virginia Stock Corporation Act provides that an amendment to a
corporation's articles of incorporation must be approved by each voting group
entitled to vote on the proposed amendment. Under Virginia law, an amendment to
the corporation's articles of incorporation must be approved by more than
two-thirds of all votes entitled to be cast by that voting group. However, the
corporation's articles of incorporation may require a greater vote or a lesser
vote, which may not be not less than a majority, by each voting group entitled
to vote on the transaction. A corporation's board of directors may require a
greater vote.
VI-2
<PAGE>
Rockingham. Rockingham's Articles do not address amendments, so
Rockingham is governed by the provisions of the Virginia Stock Corporation Act.
Accordingly, amendments to Rockingham's Articles must be approved by two-thirds
of all votes entitled to be cast by each voting group, except that certain minor
amendments may be made to the Rockingham Articles by the Rockingham board
without shareholder action.
The Rockingham Bylaws provide that the Rockingham Bylaws may be amended
or repealed, and new bylaws adopted, by a majority vote of the full Board of
Directors at any regular or special meeting. The Rockingham Bylaws also provide
that the Rockingham Board has no power to adopt a bylaw that would (i) require
more than a majority of voting shares for a quorum or more than a majority of
the votes cast to constitute shareholder action unless otherwise required by
law, or (ii) that would permit management other than by a board of directors.
The Rockingham Bylaws further enable the shareholders to prescribe that any
bylaws adopted or amended by the shareholders may not be amended or repealed by
the Rockingham Board.
Marathon. As noted above, amendments to the articles of incorporation
of Virginia corporations, such as Marathon, can be submitted to the shareholders
for a vote only by the board of directors. Additionally, Virginia law provides,
as a general rule, that an amendment to the articles of incorporation must be
approved by each voting group entitled to vote on the proposed amendment by more
than two-thirds of all votes entitled to be cast by each voting group. However,
Virginia law also permits the articles of incorporation to provide for a greater
or lesser vote. Marathon's Articles contain such a provision. Marathon's
Articles provide that amendments must be approved by a majority of the votes
entitled to be cast by each voting group entitled to vote at a meeting at which
a quorum of each class exists. The Marathon Articles also contain a special
provision regarding amendment to the Articles with respect to the size,
classification, and terms of the board of directors and related election and
removal provisions. Such an amendment to the Articles would need the affirmative
vote of either (i) at least two-thirds of the outstanding shares entitled to
vote or (ii) a majority of the originally elected board of directors or their
replacements after a vacancy and a majority of the outstanding shares entitled
to vote. The effect of this latter provision is to make it more difficult to
replace the Marathon board in a takeover attempt.
Marathon's Bylaws may be amended or altered by either the board of
directors or the shareholders by a majority vote. Moreover, the shareholders
have the power to enact bylaws which may not be altered or repealed by the
Board.
Mergers, Consolidations and Sales of Assets
Rockingham. The Rockingham Articles do not address the vote required in
the event of mergers, consolidations and sales of assets. Accordingly, pursuant
to Virginia law, a merger, share exchange, or direct or indirect sale, lease,
exchange or other disposition of all or substantially all of the property of
Rockingham must be approved by two-thirds of the issued and outstanding shares
of each voting class.
Marathon. Marathon's Articles provide that a plan of merger or share
exchange, or direct or indirect sale, lease, exchange or other disposition of
all or substantially all of the property of Marathon not in the ordinary course
of business may be approved by a two-thirds vote of each class of voting stock
at a meeting at which a quorum exists. Additionally, consistent with Virginia
law, the Marathon board may condition its submission of such plan of merger or
share exchange or such a sale or disposition of assets to the shareholders on
any basis, including the requirement of a greater or lesser vote than the
required vote described above, provided that the vote may not be less than a
majority of all votes cast. The provision for an alternative vote on mergers,
share exchanges and certain sales, leases, exchanges or dispositions of assets
in Marathon's Articles may make it easier for the board of directors to gain
VI-3
<PAGE>
shareholder approval of such actions than would be the case if a favorable vote
of two-thirds of the outstanding shares were required in all cases.
Size and Classification of Board of Directors
Rockingham. The Rockingham Bylaws provide for a board of directors
consisting of not less than five or more than fifteen individuals. Rockingham
currently has 11 directors. Directors are not elected for multiple-year terms
and shall continue to hold office until their respective successors are elected
and qualify, unless the director dies, resigns, retires, becomes disqualified,
or is removed from office.
Marathon. Marathon's Articles and Bylaws provide that its board of
directors shall consist of 11 individuals. Marathon's Articles and Bylaws
provide further, subject to the rights of holders of any series of preferred
stock, for the division of the directors into three classes, as nearly equal in
number as possible, with staggered three-year terms of office. The Marathon
Articles permit the Marathon board to amend the Marathon Bylaws from time to
time to increase or decrease the number of directors by up to 30% of the number
last elected by the Shareholders. If the number of directors has changed, any
increase or decrease shall be apportioned among the classes so as to maintain
the number of directors in each class as nearly equal as possible, but in no
case will a decrease in the number of directors shorten the term of any
incumbent director.
A classified board of directors makes it more difficult for
shareholders, including those holding a majority of shares, to force an
immediate change in the composition of a majority of the board of directors,
even when the reason for a proposed removal is poor performance. Since the terms
of only approximately one-third of Marathon's directors expire each year, at
least two annual elections are required for the shareholders to change a
majority, whereas a majority of a non-classified board may be changed in one
year.
Vacancies and Removal of Directors
Rockingham. The Rockingham Bylaws provide that directors may be
removed, with or without cause, by a majority vote of the shares entitled to
vote for directors. A vacancy on the Board of Directors, however occurring, may
be filled by a majority vote of the remaining directors, although the remaining
directors may be less than a quorum.
Marathon. Marathon's Articles and Bylaws allow removal of a director
from office only for cause, by the affirmative vote of at least two-thirds of
the votes cast by each class of Marathon voting stock at a meeting called for
that purpose. Such a meeting could be the annual shareholder meeting or a
special shareholder meeting, although only the president, the chairman of the
board, or the board itself has a right to call a special shareholder meeting.
Under Marathon's Articles, newly created directorships resulting from
any vacancies on the board of directors can be filled only by the affirmative
vote of a majority of the remaining directors then in office, even if that
number is less than a quorum of the board of directors. This provision would
enable incumbent directors to fill vacancies on the board of directors of
Marathon to the exclusion of Marathon's shareholders, regardless of the reason
for the vacancy.
The provisions of Marathon's Articles relating to the removal of
directors and the filling of vacancies would preclude a holder of a majority of
the voting stock from removing incumbent directors and simultaneously gaining
control of the board of directors by filling the vacancies so created with its
own nominees. Accordingly, except with the concurrence of a majority of the
directors remaining in
VI-4
<PAGE>
office, persons seeking representation either by enlarging the board of
directors or by filling the newly created directorships with their own nominees
would be unsuccessful.
Director Liability and Indemnification
The Virginia Stock Corporation Act provides that in any proceeding
brought by or in the right of a corporation or brought by or on behalf of
shareholders of the corporation, the damages assessed against an officer or
director arising out of a single transaction, occurrence or course of conduct
may not exceed the lesser of (1) the monetary amount, including the elimination
of liability, specified in the articles of incorporation or, if approved by the
shareholders, in the bylaws as a limitation on or elimination of the liability
of the officer or director; or (2) the greater of (a) $100,000 or (b) the amount
of cash compensation received by the officer or director from the corporation
during the twelve months immediately preceding the act or omission for which
liability was imposed. The liability of an officer or director is not limited
under the Virginia Stock Corporation Act or a corporation's articles of
incorporation and bylaws if the officer or director engaged in willful
misconduct or a knowing violation of the criminal law or of any federal or state
securities law.
In addition, the Virginia Stock Corporation Act permits a Virginia
corporation to indemnify any director or officer for reasonable expenses
incurred in any legal proceeding in advance of final disposition of the
proceeding, if the director or officer furnishes the corporation a written
statement of his good faith belief that he has conducted himself in good faith
and that he believed that his conduct was in the best interests of the
corporation, and a determination is made by the board of directors that such
standard has been met. In a proceeding by or in the right of the corporation, no
indemnification shall be made in respect of any matter as to which an officer or
director is adjudged to be liable to the corporation, unless the court in which
the proceeding took place determines that, despite such liability, such person
is reasonably entitled to indemnification in view of all the relevant
circumstances. In any other proceeding, no indemnification shall be made if the
director or officer is adjudged liable to the corporation on the basis that
personal benefit was improperly received by him. Corporations are given the
power to make any other or further indemnity, including advancement of expenses,
to any director or officer that may be authorized by the articles of
incorporation or any bylaw made by the shareholders, or by any resolution
adopted, before or after the event, by the shareholders, except an indemnity
against willful misconduct or a knowing violation of the criminal law. Unless
limited by its articles of incorporation, indemnification of a director or
officer is mandatory when he entirely prevails in the defense of any proceeding
to which he is a party because he is or was a director or officer.
Rockingham. The Rockingham Articles provide that, to the extent that
Virginia permits the limitation or elimination of liability of directors or
officers, the maximum liability of an officer or director to Rockingham or its
shareholders is limited to one hundred dollars for a single transaction,
occurrence or course of conduct. The Rockingham Articles require Rockingham to
indemnify any director or officer of Rockingham who is made a party to any
proceeding against any liability incurred in the proceeding, because he was or
is a director or officer of Rockingham or any controlled entity or because,
while a director or officer of Rockingham, he served in any capacity at another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise at the request of Rockingham. "Proceeding" is broadly defined to
include pending, threatened or completed actions of all types, and includes
actions by or in the right of Rockingham. Similarly, "liability" is defined to
include, not only judgments, but also settlements, penalties, fines, and certain
excise taxes. The Rockingham Articles also provide that the Rockingham board
may, upon majority vote of a quorum, but is not obligated to, indemnify its
other employees or agents and any person serving in any capacity at the request
of Rockingham. Rockingham is also required to pay reasonable expenses, including
counsel fees, incurred by a director or officer of Rockingham in a proceeding in
advance of the final disposition of any such proceeding, provided that the
indemnified person undertakes to repay Rockingham if it is ultimately determined
that such person was
VI-5
<PAGE>
not entitled to indemnification. Determination of eligibility for
indemnification, of meeting the requisite standard of conduct, and of the
reasonableness of expenses, all with respect to an indemnification of claims of
officers, employees, agents and others, shall be made by the Rockingham board of
directors. Such a determination relating to a claim for indemnification by a
Rockingham director shall be made in accordance with Virginia law, i.e., by a
majority vote of a disinterested quorum of directors or director committee, by
majority vote of disinterested shareholders, or by special legal counsel
appointed by the board of directors. At this time, Virginia law does not permit
indemnification against willful misconduct or a knowing violation of the
criminal law.
The rights of indemnification provided in Rockingham's Articles are not
exclusive of any other rights which may be available under any insurance or
other agreement. In addition, the Rockingham Articles authorize Rockingham to
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of Rockingham, whether or not Rockingham would have the power
to provide indemnification to such person. Corporate indemnification is not
available if a person is indemnified through insurance or some other source.
Marathon. Marathon's Articles provide that, to the extent that Virginia
permits the limitation or elimination of liability of directors or officers, a
director or officer shall not be liable to Marathon or its shareholders for
monetary damages in any action brought by or on behalf of Marathon or its
shareholders. Marathon's Articles require it to indemnify, to the extent
permitted by Virginia law, any person who is made a party to any proceeding
because he was or is a director or officer of Marathon, or because he is or was
an officer or director who served at the request of Marathon as a director,
officer, trustee or partner of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against any liability,
including reasonable expenses and legal fees, incurred in the proceeding. Under
Marathon's articles of incorporation, "proceeding" is broadly defined to include
pending, threatened or completed actions of all types and includes an action
brought by or on behalf of Marathon shareholders. "Liability" is defined to
include, not only judgments, but also settlements, penalties, fines and certain
excise taxes.
The indemnification provisions also require Marathon to pay reasonable
expenses incurred by a director or officer of Marathon in a proceeding in
advance of the final disposition of any such proceeding, provided that the
indemnified person provides a written statement of his good faith belief that he
has met the requisite standard of conduct and undertakes to repay Marathon if it
is ultimately determined that such person was not entitled to indemnification.
At this time, Virginia law does not permit indemnification against willful
misconduct or a knowing violation of the criminal law.
Determination of eligibility for indemnification, of meeting the
requisite standard of conduct and the reasonableness of expenses shall be made
by the Marathon board of directors by a majority vote of a quorum of directors
not a party to the proceeding, by a director committee if a quorum cannot be
obtained from the full board, by special legal counsel selected by the board of
directors, or by the shareholders, excluding shares owned by the directors who
are parties to the proceeding.
Marathon is also empowered, by a majority vote of a quorum of
disinterested directors, to extend such indemnification to Marathon employees or
agents.
The rights of indemnification provided in Marathon's Articles are not
exclusive of any other rights which may be available under any insurance or
other agreement, by vote of shareholders or disinterested directors or
otherwise. In addition, the Marathon Articles authorize Marathon to maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of Marathon, whether or not Marathon would have the power to provide
indemnification to such person. The rights of indemnification provided to
directors of Marathon could reduce the likelihood of shareholder derivative
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actions and may discourage other third party claims against the directors, even
if such actions otherwise would be beneficial to shareholders of Marathon.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling Marathon
pursuant to the foregoing provisions, Marathon has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
Special Meetings of Shareholders
Rockingham. The Rockingham Bylaws provide that special meetings of
shareholders may be held on the call of the Chairman of the Board, Chief
Executive Officer, President, Secretary, or the Rockingham Board, which means
that the shareholders of Rockingham do not have the right to call special
meetings.
Marathon. Marathon's Bylaws provide that special meetings of
shareholders may be held whenever called by the president, chairman of the board
of directors or by the board of directors itself, which means that the
shareholders of Marathon do not have the right to call special meetings. The
inability of shareholders to call a special meeting could affect changes in
control of Marathon by delaying the presentation to shareholders of proposals
relating to, or facilitating, such a change in control until the annual meeting.
Shareholder Nominations and Proposals
Rockingham. The Rockingham Articles and Bylaws do not address
shareholder nominations and proposals.
Marathon. Under Marathon's Bylaws, notice of a proposed nomination or a
shareholder proposal meeting certain specified requirements must be received by
Marathon not less than 45 days prior to the meeting of shareholders.
Marathon's Bylaws require that the shareholder's notice of nomination
for director set forth as to each nominee (i) the name and business address of
such nominee, (ii) the fact that the nominee has consented to his name being
placed in nomination, (iii) the name and record address of the shareholder
making the nomination, (iv) the class and amount of beneficial ownership of
Marathon capital stock by the nominating shareholder, and (v) any material
interest of the shareholder in the proposed nomination.
Marathon's Bylaws require that the notice relating to a shareholder
proposal contain (i) a brief description of the shareholder proposal and the
reason for conducting such business at the meeting, (ii) the name and record
address of the shareholder proposing such business, (iii) the class and number
of shares of Marathon stock which are beneficially owned by the shareholder
making the proposal and (iv) any material interest (financial or otherwise) of
such shareholder in the proposal.
If the information supplied by a shareholder is deficient in any
material aspect or if the foregoing procedure is not followed, the chairman of
the meeting may announce to the meeting that such shareholder's nomination or
purpose should not be brought before the annual meeting and that such nominee
shall not be eligible for election as a director of Marathon or such business is
not properly brought before the meeting.
The advance notice procedure of Marathon's Bylaws affords the Marathon
board the opportunity to consider the qualifications of the proposed nominees
and to inform shareholders about such qualifications. Although such procedure
does not give the board of directors of Marathon any power to
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approve or disapprove of shareholder nominations for election of directors, it
may have the effect of precluding surprise nominations and a contest for the
election if directors if such procedure established by it is not followed.
Furthermore, such procedure may discourage or deter a third party from
conducting a solicitation of proxies to elect its own slate of directors.
The procedures regarding shareholder proposals and nominations provide
the Marathon board with the information necessary to evaluate a shareholder
proposal or nomination and other relevant information, such as existing
shareholder support, as well as the time necessary to consider and evaluate such
information in advance of the applicable meeting. The proposed procedures,
however, give incumbent directors advance notice of a business proposal or
nomination. This may make it easier for the incumbent directors to defeat a
shareholder proposal or nomination, even when certain shareholders view such
proposal or nomination as in the best interests of Marathon or its shareholders.
Marathon's Articles and Bylaws do not prevent shareholders from making proposals
under the Commission's rules and regulations.
Shareholder Voting Rights in General
The Virginia Stock Corporation Act generally provides that shareholders
do not have cumulative voting rights unless those rights are provided in the
corporation's articles of incorporation. The Virginia Stock Corporation Act also
specifies additional voting requirements for Affiliated Transactions which are
discussed below under "State Anti-Takeover Statutes."
Rockingham. The Rockingham Articles do not permit shareholders to
cumulate votes for the election of directors. Each share entitled to vote is
entitled to one vote on each matter submitted to a vote.
The Rockingham Articles eliminate the pre-emptive right of shareholders
to subscribe for and purchase unissued shares of Rockingham stock.
The Rockingham Bylaws also prohibit the use of any voting trust
agreement or any other type of agreement conferring to another person the
authority to vote one's shares.
Marathon. Marathon's Articles do not provide shareholders cumulative
rights for the election of directors. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election. The holders of Marathon common stock are entitled to
one vote per share on all matters submitted to a vote of shareholders. Except to
the extent to which the board of directors shall have specified voting power
with respect to any other class of stock and except as otherwise provided by
law, the exclusive voting power shall be vested in the holders of Marathon
common stock.
The Marathon Articles eliminate the pre-emptive right of shareholders
to subscribe for and purchase any shares of any class of Marathon stock or other
securities, or any other options, warrants, or rights to purchase.
Restrictions of Transfer of Common Stock
Rockingham. The Rockingham Articles and Bylaws do not contain any
restriction relating to the identity of the transferee of any share of stock.
Marathon. The Marathon Articles provide that shares of common stock may
not be transferred (whether by sale, assignment, gift, pledge, hypothecation or
bequest) to any person, other than a Marathon subsidiary or employee benefit
plan, who is or who would become as a result of the transfer, an owner of
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10% or more of the outstanding shares of Marathon common stock, unless such
transfer has been approved in advance by a majority of the Marathon board of
directors. Any prohibited transfer is void to the extent of shares that exceed
9.99% ownership by the transferee. Any transfer of stock may be conditioned upon
the transferor's affidavit that the transfer would not violate this restriction.
The restriction on transfer is to be noted conspicuously on the stock
certificate.
State Anti-Takeover Statutes
The Virginia Stock Corporation Act restricts transactions between a
corporation and its affiliates and potential acquirors. The summary below is
necessarily general and is not intended to be a complete description of all the
features and consequences of those provisions, and is qualified in its entirety
by reference to the statutory provisions contained in the Virginia Stock
Corporation Act. Because both Rockingham and Marathon are Virginia corporations,
the provisions of the Virginia Stock Corporation Act described below apply to
Rockingham and Marathon and will continue to apply to Marathon after the merger.
Affiliated Transactions. The Virginia Stock Corporation Act contains
provisions governing "Affiliated Transactions," found at Sections 13.1-725 -
727.1 of the Virginia Stock Corporation Act. Affiliated Transactions include
certain mergers and share exchanges, certain material dispositions of corporate
assets not in the ordinary course of business, any dissolution of a corporation
proposed by or on behalf of an Interested Shareholder (as defined below), and
reclassifications, including reverse stock splits, recapitalizations or mergers
of a corporation with its subsidiaries, or distributions or other transactions
which have the effect of increasing the percentage of voting shares beneficially
owned by an Interested Shareholder by more than 5%. For purposes of the Virginia
Stock Corporation Act, an Interested Shareholder is defined as any beneficial
owner of more than 10% of any class of the voting securities of a Virginia
corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
Disinterested Director is defined in the Virginia Stock Corporation Act as a
member of a corporation's board of directors who (i) was a member before the
later of January 1, 1988 or the date on which an Interested Shareholder became
an Interested Shareholder and (ii) was recommended for election by, or was
elected to fill a vacancy and received the affirmative vote of, a majority of
the Disinterested Directors then on the corporation's board of directors. At the
expiration of the three year period after a shareholder becomes an Interested
Shareholder, these provisions require approval of the Affiliated Transaction by
the affirmative vote of the holders of two-thirds of the outstanding shares of
the corporation entitled to vote, other than those beneficially owned by the
Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the statute. In general, the fair price requirements
provide that the shareholders must receive the higher of: the highest per share
price for their shares as was paid by the Interested Shareholder for his or its
shares, or the fair market value of the shares. The fair price requirements also
require that, during the three years preceding the announcement of the proposed
Affiliated Transaction, all required dividends have been paid and no special
financial accommodations have been accorded the interested Shareholder, unless
approved by a majority of the Disinterested Directors.
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None of the foregoing limitations and special voting requirements
applies to a transaction with an Interested Shareholder who has been an
Interested Shareholder continuously since the effective date of the statute
(January 26, 1988) or who became an Interested Shareholder by gift or
inheritance from such a person or whose acquisition of shares making such person
an Interested Shareholder was approved by a majority of the Disinterested
Directors of the corporation.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia Stock Corporation Act provides that by
affirmative vote of a majority of the voting shares other than shares owned by
any Interested Shareholder, a corporation may adopt by meeting certain voting
requirements, an amendment to its articles of incorporation or bylaws providing
that the Affiliated Transactions provisions shall not apply to the corporation.
Neither Rockingham nor Marathon has adopted such an amendment. Currently, no
person owns or controls 10% or more of either Rockingham common stock or
Marathon common stock, and there are no Interested Shareholders of Rockingham or
Marathon as defined by the Virginia Stock Corporation Act.
Control Share Acquisitions. The Virginia Control Share Acquisitions
statute, found at Sections 13.1-728.1 - 728.8 of the Virginia Stock Corporation
Act, also is designed to afford shareholders of a public company incorporated in
Virginia protection against certain types of non-negotiated acquisitions in
which a person, entity or group ("Acquiring Person") seeks to gain voting
control of that corporation. With certain enumerated exceptions, the statute
applies to acquisitions of shares of a corporation which would result in an
Acquiring Person's ownership of the corporation's shares entitled to vote in the
election of directors falling within any one of the following ranges: 20% to
33-1/3%, 33-1/3% to 50% or 50% or more (a "Control Share Acquisition"). Shares
that are the subject of a Control Share Acquisition ("Control Shares") will not
be entitled to voting rights unless the holders of a majority of the
"Disinterested Shares" vote at an annual or special meeting of shareholders of
the corporation to accord the Control Shares with voting rights. Disinterested
Shares do not include shares owned by the Acquiring Person or by officers and
inside directors of the target company. Under certain circumstances, the statute
permits an Acquiring Person to call a special shareholders' meeting for the
purpose of considering granting voting rights to the holders of the Control
Shares. As a condition to having this matter considered at either an annual or
special meeting, the Acquiring Person must provide shareholders with detailed
disclosures about his identity, the method and financing of the Control Share
Acquisition and any plans to engage in certain transactions with, or to make
fundamental changes to, the corporation, its management or business. Under
certain circumstances, the statute grants dissenters' rights to shareholders who
vote against granting voting rights to the Control Shares. The Virginia Control
Share Acquisitions Statute also enables a corporation to make provisions for
redemption of Control Shares with no voting rights. A corporation may opt-out of
the statute, which Rockingham has not done, by so providing in its articles of
incorporation or bylaws. Marathon, however, has opted out of the statute by so
providing in its Bylaws. Among the acquisitions specifically excluded from the
statute are acquisitions which are a part of certain negotiated transactions to
which the corporation is a party and which, in the case of mergers or share
exchanges, have been approved by the corporation's shareholders under other
provisions of the Virginia Stock Corporation Act.
REGULATION
Set forth below is a brief description of the material laws and
regulations that affect Marathon. The description of these laws and regulations,
as well as descriptions of laws and regulations contained elsewhere herein, is
not necessarily complete and is qualified in its entirety by reference to these
laws and regulations.
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General
Marathon is a bank holding company within the meaning of the Bank
Holding Company Act of 1956, as amended. As such, Marathon is supervised by the
Board of Governors of the Federal Reserve System. Marathon is also subject to
Virginia laws that regulate banks and bank holding companies. Virginia's banking
laws are administered by the Bureau of Financial Institutions of the State
Corporation Commission of Virginia. Marathon is also affected by rules and
regulations of the Federal Deposit Insurance Corporation. Marathon is a member
of the Federal Reserve System and the Federal Home Loan Bank of Atlanta. The
various laws and regulations administered by the regulatory agencies affect
corporate practices, expansion of business, and provisions of services. Also,
monetary and fiscal policies of the United States directly affect bank loans and
deposits and thus may affect Marathon's earnings. The future impact of these
policies and of the continuing regulatory changes in the financial services
industry cannot be predicted.
The supervision, regulation and examination of The Marathon Bank are
intended primarily for the protection of depositors rather than holders of
Marathon securities.
Bank Holding Company Regulation
Marathon is required to file with the Federal Reserve its periodic
reports and any additional information the Federal Reserve may require. The
Federal Reserve examines Marathon and may examine its subsidiaries. The State
Corporation Commission also may examine Marathon.
The Bank Holding Company Act requires prior Federal Reserve approval
for, among other things, the acquisition of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all of the assets
of any bank, or a merger or consolidation of a bank holding company with another
bank holding company. A bank holding company may acquire direct or indirect
ownership or control of voting shares of any company that is engaged directly or
indirectly in banking or managing or controlling banks or performing services
for its authorized subsidiaries. A bank holding company also may engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking as to be a proper incident thereto.
The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the
anti-affiliation provisions of the Glass-Steagall Act to permit the common
ownership of commercial banks, investment banks and insurance companies. Under
Gramm-Leach-Bliley, a bank holding company can elect to be treated as a
financial holding company. A financial holding company may engage in any
activity and acquire and retain any company that the Federal Reserve determines
to be financial in nature. A financial holding company also may engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Federal Reserve must consult with the Secretary
of the Treasury in determining whether an activity is financial in nature or
incidental to a financial activity.
Marathon is a legal entity separate and distinct from The Marathon
Bank. Section 23A of the Federal Reserve Act restricts loans from The Marathon
Bank to Marathon. Section 23A defines "covered transactions," which include
loans, and limits a bank's covered transactions with any affiliate to 10% of the
bank's capital and surplus. It also requires that all of a bank's loans to an
affiliate be secured by acceptable collateral, generally United States
government or agency securities. Marathon and The Marathon Bank also are subject
to Section 23B of the Federal Reserve Act, which requires that
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transactions between The Marathon Bank and Marathon or its other subsidiaries be
on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to The Marathon Bank as those
prevailing at the time for transactions with unaffiliated companies.
Federal Reserve policy requires a bank holding company to act as a
source of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. As a result, a bank holding company may be required
to lend money to its subsidiaries in the form of capital notes or other
instruments which qualify as capital under regulatory rules. Any loans from the
holding company to such subsidiary banks likely will be unsecured and
subordinated to such bank's depositors and perhaps to other creditors of its
bank subsidiaries.
Bank Supervision
As a Virginia bank that is a member of the Federal Reserve System, The
Marathon Bank is regulated and examined by the State Corporation Commission and
by its primary federal regulator, the Federal Reserve. The State Corporation
Commission and the Federal Reserve regulate and monitor all of The Marathon
Bank's operations, including reserves, loans, mortgages, payments of dividends
and the establishment of branches.
Various statutes limit the ability of The Marathon Bank to pay
dividends, extend credit or otherwise supply funds to Marathon and its non-bank
subsidiaries. Dividends from The Marathon Bank are expected to constitute
Marathon' major source of funds.
Regulatory Capital Requirements
All banks are required to maintain minimum levels of regulatory
capital. The federal bank regulatory agencies have established substantially
similar risked based and leverage capital standards for banks that they
regulate. These regulatory agencies also may impose capital requirements in
excess of these standards on a case-by-case basis for various reasons, including
financial condition or actual or anticipated growth. Under the risk-based
capital requirements of these regulatory agencies, Marathon and The Marathon
Bank are required to maintain a minimum ratio of total capital to risk-weighted
assets of at least 8%. At least half of the total capital is required to be tier
1 capital, which consists principally of common and certain qualifying preferred
shareholders' equity, less certain intangibles and other adjustments. The
remainder, tier 2 capital, consists of a limited amount of subordinated and
other qualifying debt and a limited amount of the general loan loss allowance.
Based upon the applicable Federal Reserve regulations, at December 31, 1999, The
Marathon Bank was considered to be "well capitalized."
In addition, the federal regulatory agencies have established a minimum
leverage capital ratio, tier 1 capital divided by tangible assets. These
guidelines provide for a minimum leverage capital ratio of 3% for banks and
their respective holding companies that meet certain specified criteria,
including that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.
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Limits on Dividends and Other Payments
Virginia law restricts distributions of dividends to shareholders of
Marathon. Marathon shareholders are entitled to receive dividends as declared by
the Marathon Board of Directors. No distribution to Marathon shareholders may be
made if, after giving effect to the distribution, Marathon would not be able to
pay its debts as they become due in the usual course of business or its total
assets would be less than its total liabilities. There are similar restrictions
on stock repurchases and redemptions.
Banks have limits on all capital distributions, including cash
dividends, payments to repurchase or otherwise acquire shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. As of December 31, 1999, The Marathon
Bank had the capacity to pay no more than $5.2 million in total dividends to its
sole shareholder, Marathon.
The Marathon Bank may not make a capital distribution, including the
payment of a dividend, if, after the distribution, it would become
undercapitalized . The prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal Reserve Banks also may limit the
payment of dividends by any state member bank if it considers the payment an
unsafe or unsound practice. In addition, under Virginia law no dividend may be
declared or paid that would impair a Virginia chartered bank's paid-in capital.
The State Corporation Commission has general authority to prohibit payment of
dividends by a Virginia chartered bank if it determines that the limit is in the
public interest and is necessary to ensure the bank's financial soundness.
FDIC Regulations
The Federal Deposit Insurance Corporation Improvements Act of 1991
required each federal banking agency to revise its risk-based capital standards
to ensure that those standards take adequate account of interest rate risk,
concentration of credit risk and the risks of non-traditional activities. Each
federal banking agency has issued regulations, specifying the levels at which a
financial institution would be considered "well capitalized", "adequately
capitalized", "under capitalized", "significantly under capitalized", or
"critically under capitalized", and to take certain mandatory and discretionary
supervisory actions based on the capital level of the institution. Those
supervisory actions become increasingly severe for banks that are
under-capitalized or worse.
Under the Federal Reserve's regulations implementing the prompt
corrective action provisions, an institution is considered well capitalized if
it has total risk-based capital of 10% or more, has a tier I risk-based capital
ratio of 6% or more, has a leverage capital ratio of 5% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure.
An adequately capitalized institution has a total risk-based capital
ratio of 8% or more, a tier I risk-based ratio of 4% or more and a leverage
capital ratio of 4% or more (3% under certain circumstances) and does not meet
the definition of well capitalized.
An undercapitalized institution has a total risk-based capital ratio
that is less than 8%, a tier I risk-based capital ratio that is less than 4% or
a leverage capital ratio that is less than 4% (3% in certain circumstances).
Undercapitalized banks are subject to growth limits and are required to submit a
capital restoration plan for approval. For a capital restoration plan to be
acceptable, the bank's parent holding company must guarantee that the bank will
comply with the capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of 5% of the bank's total assets at the
time it became undercapitalized and the amount necessary to bring the
institution into compliance with
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applicable capital standards. If a bank fails to submit an acceptable plan, it
is treated as if it is significantly undercapitalized. If the controlling
holding company fails to fulfill its obligations and files (or has filed against
it) a petition under the federal Bankruptcy Code, the claim would be entitled to
a priority in such bankruptcy proceeding over third-party creditors of Marathon.
A significantly undercapitalized institution has a total risk-based
capital ratio that is less than 6%, a tier I risk-based capital ratio that is
less than 3% or a leverage capital ratio that is less than 3%. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks.
A critically undercapitalized institution has a ratio of tangible
equity to total assets that is equal to or less than 2%. A critically
undercapitalized bank is likely to be put in receivership and liquidated.
In addition, under certain circumstances, a federal banking agency may
reclassify a well capitalized institution as adequately capitalized and may
require an adequately capitalized institution or an undercapitalized institution
to comply with supervisory actions as if it were in the next lower category.
The Federal Deposit Insurance Corporation Improvements Act also
required federal banking regulators to draft standards in a number of other
important areas to assure bank safety and soundness, including internal
controls, information systems and internal audit systems, credit underwriting,
asset growth, compensation, loan documentation and interest rate exposure. The
Federal Deposit Insurance Corporation Improvements Act also required the
regulators to establish maximum ratios of classified assets to capital, and
minimum earnings sufficient to absorb losses without impairing capital. The
legislation also contained other provisions which restricted the activities of
state-chartered banks, amended various consumer banking laws, limited the
ability of undercapitalized banks to borrow from the Federal Reserve's discount
window and required federal banking regulators to perform annual onsite bank
examinations.
The 1991 legislation also contains a variety of other provisions that
may affect the operations of Marathon and The Marathon Bank, including new
reporting requirements, regulatory standards for estate lending, "truth in
savings" provisions, the requirement that a depository institution give 90 days'
prior notice to customers and regulatory authorities before closing any branch,
and a prohibition on the acceptance or renewal of brokered deposits by
depository institutions that are not well capitalized or are adequately
capitalized and have not received a waiver from the FDIC.
Deposit Insurance
The deposits of The Marathon Bank are currently insured to a maximum of
$100,000 per depositor, subject to certain aggregation rules. The FDIC has
implemented a risk-related assessment system for deposit insurance premiums. All
depository institutions have been assigned to one of nine risk assessment
classifications based on certain capital and supervisory measures. Marathon's
deposits are subject to the rates of the Savings Associations Insurance Fund
since Marathon converted to a commercial bank from a federal savings bank on
December 1, 1995. Based on its current risk classifications, Marathon pays the
minimum Savings Associations Insurance Fund assessment and Bank Insurance Fund
assessments.
Community Reinvestment Act
Marathon and The Marathon Bank are subject to the provisions of the
Community Reinvestment Act of 1977, as amended ("CRA"). Under the Community
Reinvestment Act, all banks have an
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obligation, consistent with its safe and sound operation, to help meet the
credit needs for their entire communities, including low and moderate-income
neighborhoods. The Community Reinvestment Act does not establish specific
lending requirements or programs for financial institutions, nor does it limit
an institution's discretion to develop the types of products and services that
it believes are best suited to its particular community consistent with the
Community Reinvestment Act. A depository institution's primary federal
regulator, in connection with its examination of the institution, must assess
the institution's record in assessing and meeting the credit needs of the
community served by that institution, including low and moderate-income
neighborhoods. The regulatory agency's assessment of the institution's record is
made available to the public. Further, such assessment is required of any
institution which has applied to charter a national bank, obtain deposit
insurance coverage for a newly chartered institution, establish a new branch
office that accepts deposits, relocate an office or merge or consolidate with,
or acquire the assets or assume the liabilities of, a federally regulated
financial institution. If a bank holding company applies for approval to acquire
a bank or other bank holding company, the Federal Reserve will assess the
records of each subsidiary depository institution of the applicant bank holding
company, and such records may be the basis for denying the application.
Following the most recent Community Reinvestment Act examination in February
1999 The Marathon Bank received a "satisfactory" Community Reinvestment Act
rating.
Fiscal and Monetary Policy
Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of Marathon and The Marathon Bank will be subject to the
influence of economic conditions generally, both domestic and foreign, and also
to the monetary and fiscal policies of the United States and its agencies,
particularly the Federal Reserve. The Federal Reserve regulates the supply of
money through various means, including open market dealings in United States
government securities, the discount rate at which banks may borrow from the
Federal Reserve, and the reserve requirements on deposits. The nature and timing
of any changes in such policies and their effect on Marathon and The Marathon
Bank cannot be predicted.
Federal Home Loan Bank System
Marathon is a member of the Federal Home Loan Bank System, which
consists of 12 district Federal Home Loan Banks with each subject to supervision
and regulation by the Federal Housing Finance Board. The Federal Home Loan Banks
provide a central credit facility for member institutions. Marathon, as a member
of the Federal Home Loan Bank of Atlanta, is required to acquire and hold shares
of capital stock in that Federal Home Loan Bank in an amount equal to at least
1% of the aggregate principal amount of their unpaid residential mortgage loans,
home purchase contracts and similar obligations at the beginning of each year,
or 5% of their borrowings from the Federal Home Loan Bank of Atlanta, whichever
is greater. At December 31, 1999, Marathon had an investment of $1.8 million in
the stock of the Federal Home Loan Bank of Atlanta and was in compliance with
these requirements.
Advances from the Federal Home Loan Bank of Atlanta are secured.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the Federal Home Loan Bank of Atlanta and the purpose of the borrowing.
At December 31, 1999, Marathon had $___ million outstanding in borrowings from
the Federal Home Loan Bank of Atlanta.
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Federal Reserve System
The Federal Reserve Board of Governors requires all depository
institutions to maintain reserves against their transaction accounts and
non-personal time deposits. Because required reserves must be maintained in the
form of vault cash or a noninterest-bearing account at a Federal Reserve Bank,
the effect of this reserve requirement is to reduce the earning assets of
Marathon.
RESALES OF MARATHON COMMON STOCK
Rockingham Shareholders. The shares of Marathon common stock to be
issued to Rockingham shareholders in the merger have been registered under the
Securities Act. These shares may be traded freely and without restriction by
those shareholders not deemed to be "affiliates" of Rockingham as that term is
defined under the Securities Act. An affiliate of a corporation, as defined by
the rules promulgated under the Securities Act, is a person who directly or
indirectly, through one or more intermediaries, controls, is controlled by, or
is under common control with, that corporation. Any subsequent transfer by an
affiliate of Rockingham must be one permitted by the resale provisions of Rule
145 promulgated under the Securities Act or as otherwise permitted under the
Securities Act.
Affiliates of Marathon and Rockingham. Commission guidelines regarding
qualifying for the pooling-of-interests method of accounting also limit sales of
shares of the acquiring company and acquired company by affiliates of either
company in a business combination such as the merger. These guidelines indicate
that the pooling-of-interests method of accounting will generally not be
challenged on the basis of sales by such affiliates if these persons do not
dispose of any of the shares of the corporation they own or any shares of the
corporation they receive in connection with a merger during the period beginning
30 days prior to the merger and ending when financial results covering at least
30 days of post-merger operations of the combined entity have been published
(the "Pooling Restricted Period").
Rockingham has agreed to deliver to Marathon not less than 30 days
prior to the effective date, for each of its affiliates, an agreement that such
person will not dispose of (i) any Marathon common stock in violation of the
Securities Act or (ii) any Rockingham common stock or Marathon common stock
during the Pooling Restricted Period.
SHAREHOLDER PROPOSALS
Proposals of Marathon's shareholders intended to be presented at the
next Annual Meeting must be received by Marathon no later than December 6, 2000,
in order to be considered for inclusion in Marathon's proxy materials for the
2001 Annual Meeting of Shareholders.
Proposals of shareholders intended to be presented at Rockingham's 2001
Annual Meeting must be received by the Secretary of Rockingham, at its principal
executive offices, 110 University Boulevard, Harrisonburg, Virginia 22801, for
inclusion in its proxy statement relating to that meeting by November 23, 2000.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus, including information included
or incorporated by reference herein, contains certain forward-looking statements
with respect to the financial condition, results of operations, plans,
objectives, future performance and businesses of each of Marathon and
Rockingham. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities:
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<PAGE>
o competitive pressure from banks and other financial service
providers increases significantly;
o changes in the interest rate environment reduce margins;
o general economic conditions, either nationally or regionally,
are less favorable than expected, resulting in, among other
things, a deterioration in credit quality;
o changes occur in the regulatory environment;
o changes occur in business conditions and inflation; and
o changes occur in the securities markets.
EXPERTS
The financial statements of Marathon Financial Corporation as of
December 31, 1999 and 1998 and for each of the years ended December 31, 1999,
1998 and 1997 have been included herein and in the registration statement in
reliance upon the report of Yount, Hyde & Barbour, PC, independent certified
public accountants, appearing elsewhere herein, and upon the authority of said
firm as experts in accounting and auditing.
The financial statements of Rockingham Heritage Bank as of December 31,
1999 and 1998 and for each of the years then ended have been included herein and
in the registration statement in reliance upon the report of McGladrey & Pullen,
LLP, independent certified public accountants, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
LEGAL OPINIONS
The validity of the shares of Marathon common stock offered hereby is
being passed upon for Marathon by Williams, Mullen, Clark & Dobbins, Richmond,
Virginia. Williams, Mullen, Clark & Dobbins will deliver an opinion to Marathon
and Rockingham concerning certain federal income tax consequences of the merger.
See "The Merger - Material Federal Income Tax Consequences of the Merger" on
page 15.
Certain matters relating to the merger will be passed upon for
Rockingham by Wharton, Aldhizer & Weaver, PLC, Harrisonburg, Virginia.
WHERE YOU CAN FIND MORE INFORMATION
Marathon maintains an Internet site at www.themarathonbank.com, which
contains information relating to Marathon and its business.
In addition, Marathon files annual, quarterly and current reports,
proxy statements and other information with the Securities and Exchange
Commission. You may read and copy any document that Marathon files at the
Commission's public reference room facility located at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices at 7 World Trade
Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite 1400,
Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661. Please call
the Commission at 1-800-SEC-0330 for further information on the public reference
room. The Commission maintains an Internet site at www.sec.gov that contains
reports, proxy and information statements and other information regarding
issuers, including Marathon, that file documents with the Commission
electronically through the Commission's electronic data gathering, analysis and
retrieval system known as EDGAR. Marathon's reports, proxy and information
statements
VI-17
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may also be reviewed at the offices of the National Association of Securities
Dealers, Inc., 1735 K Street, N.W., Washington D.C. 20006.
This joint proxy statement/prospectus is part of a registration
statement filed by Marathon with the Commission. Because the rules and
regulations of the Commission allow the omission of certain portions of the
registration statement from this document, this joint proxy statement/prospectus
does not contain all the information contained in the registration statement.
You may review the registration statement and the exhibits filed with the
registration statement for further information regarding Marathon. The
registration statement and its exhibits may be inspected at the public reference
facilities of the Commission at the addresses mentioned above.
VI-18
<PAGE>
Appendix A
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
BY AND AMONG
ROCKINGHAM HERITAGE BANK
("Rockingham")
MARATHON FINANCIAL CORPORATION
("MFC")
MARATHON BANK
AND
MARATHON MERGER BANK
("Merger Subsidiary")
JUNE 21, 2000
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
ARTICLE 1
The Merger and Related Matters
<S> <C> <C>
1.1 The Merger.............................................................................................A-4
1.2 Management of Rockingham and MFC.......................................................................A-5
1.3 The Closing and Effective Date.........................................................................A-5
1.4 Definitions............................................................................................A-6
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of Shares...................................................................................A-6
2.2 Manner of Exchange.....................................................................................A-7
2.3 No Fractional Shares...................................................................................A-8
2.4 Dividends..............................................................................................A-8
2.5 Rockingham Stock Option Plans..........................................................................A-8
ARTICLE 3
Representation and Warranties
3.1 Representations and Warranties of Rockingham...........................................................A-8
3.2 Representations and Warranties of MFC.................................................................A-16
ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties......................................................................A-25
4.2 Confidentiality.......................................................................................A-25
4.3 Registration Statement, Proxy Statement and Shareholder Approval......................................A-25
4.4 Operation of the Business of Rockingham and MFC.......................................................A-26
4.5 Dividends.............................................................................................A-29
4.6 No Solicitation.......................................................................................A-29
4.7 Regulatory Filings....................................................................................A-29
4.8 Public Announcements..................................................................................A-30
4.9 Notice of Breach......................................................................................A-30
4.10 Accounting Treatment..................................................................................A-30
4.11 Merger Consummation...................................................................................A-30
4.12 Notification of Certain Matters.......................................................................A-30
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<PAGE>
ARTICLE 5
Additional Agreements
5.1 Registration of Shares................................................................................A-31
5.2 Benefit Plans.........................................................................................A-31
5.3 Indemnification.......................................................................................A-31
ARTICLE 6
Conditions to the Merger
6.1 Conditions to Each Party's Obligations to Effect the Merger...........................................A-31
6.2 Conditions to Obligations of MFC......................................................................A-33
6.3 Conditions to Obligations of Rockingham...............................................................A-34
ARTICLE 7
Termination
7.1 Termination...........................................................................................A-35
7.2 Effect of Termination.................................................................................A-36
7.3 Non-Survival of Representations, Warranties and Covenants.............................................A-37
7.4 Expenses..............................................................................................A-37
ARTICLE 8
General Provisions
8.1 Entire Agreement......................................................................................A-39
8.2 Waiver and Amendment..................................................................................A-39
8.3 Descriptive Headings..................................................................................A-39
8.4 Governing Law.........................................................................................A-39
8.5 Notices...............................................................................................A-39
8.6 Counterparts..........................................................................................A-40
8.7 Severability..........................................................................................A-40
8.8 Brokers and Finders...................................................................................A-40
8.9 Subsidiaries..........................................................................................A-40
Exhibit A - Plan of Merger between Rockingham Heritage Bank and Marathon Merger Bank
Exhibit B - Amended and Restated Articles of Incorporation
</TABLE>
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<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AMENDED AND RESTATED AGREEMENT AND PLAN OF MERGER (the
"Agreement") is made and entered into June 21, 2000 by and between Rockingham
Heritage Bank, a Virginia state bank with its principal office located in
Harrisonburg, Virginia ("Rockingham"), Marathon Financial Corporation, a
Virginia corporation with its principal office located in Winchester, Virginia
("MFC"), Marathon Bank, a wholly-owned bank subsidiary of MFC ("Marathon Bank"),
and Marathon Merger Bank, a wholly-owned bank subsidiary of MFC (the "Merger
Subsidiary"). Rockingham and MFC are sometimes referred to herein individually
as a "Party" or together as "the Parties". The Agreement amends and restates the
Agreement and Plan of Merger by and among the parties (the "Original Agreement")
dated as of April 20, 2000.
WITNESSETH:
WHEREAS, MFC and Rockingham have agreed in the Original Agreement to an
affiliation of their two companies through a merger under Virginia law, in which
Rockingham will become a wholly-owned subsidiary of MFC; and
WHEREAS, in order to effect the merger, the Merger Subsidiary has been
incorporated as a wholly-owned subsidiary of MFC, which will merge with and into
Rockingham, pursuant to the terms and conditions of this Amended and Restated
Agreement and Plan of Merger and the Plan of Merger in the form attached hereto
as Exhibit A (the "Plan of Merger"); and
WHEREAS, the Board of Directors of each of Rockingham and MFC (i) has
determined that this Agreement and the business combination and related
transactions contemplated hereby are in the best interests of Rockingham and
MFC, respectively, and in the best long-term interests of their respective
shareholders, (ii) has determined that this Agreement and the transactions
contemplated hereby are consistent with, and in furtherance of, its respective
business strategies and (iii) has authorized, at meetings of each of such Boards
of Directors, the execution of this Agreement; and
WHEREAS, the parties hereto intend that the Merger as defined herein
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended ("IRC"), for federal income tax
purposes, and that the Merger shall be accounted for as a pooling-of-interests
transaction for accounting purposes.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
ARTICLE 1
The Merger and Related Matters
1.1 The Merger. Subject to the terms and conditions of this
Agreement, the Merger Subsidiary shall be merged with and into Rockingham,
pursuant to the Plan of Merger attached hereto as Exhibit A and made a part
hereof (the "Merger"), as follows: at 11:59 p.m. on the
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<PAGE>
Effective Date (defined below) (the "Effective Time"), (i) each of the shares of
the capital stock of the Merger Subsidiary issued and outstanding immediately
prior to the Effective Time shall cease to be outstanding and shall be converted
into and become one share of common stock of Rockingham, and (ii) each of the
shares of capital stock of Rockingham issued and outstanding immediately prior
to the Effective Time, excluding shares held by MFC (other than in a fiduciary
capacity or as a result of debts previously contracted), shall cease to be
outstanding and shall be converted into and become shares of common stock of MFC
based upon the Exchange Ratio (defined below). The separate corporate existence
of Merger Subsidiary shall thereupon cease, and from and after the Effective
Time, the Merger shall have the effect set forth in Section 13.1-721 of the
Virginia Stock Corporation Act (the "VSCA"). Rockingham will be the surviving
corporation in the Merger and its name and corporate existence, with all of its
rights, privileges, immunities, powers and franchises, shall continue in
accordance with applicable law. The Articles of Incorporation and Bylaws of
Rockingham in effect prior to the Effective Date shall be the Articles of
Incorporation and Bylaws of Rockingham subsequent to the Effective Date until
thereafter amended in accordance with applicable law.
1.2 Management of Rockingham and MFC. From and after the Effective
Date, John K. Stephens ("Stephens"), current President and Chief Executive
Officer of Rockingham, shall become the Chairman of the Board of Directors of
MFC, and Donald Unger ("Unger") shall remain President and Chief Executive
Officer of MFC. All other executive management positions in MFC, Marathon Bank
and Rockingham shall be held by those individuals currently holding the same or
similar executive management positions in the respective entities prior to the
Effective Date. As of the Effective Date, MFC and the Board of Directors of MFC
shall have amended the Bylaws of MFC to reduce the number of Directors to eight
(8) members and taken such other steps as are reasonably necessary to provide
for (i) the resignation of six current Board members, (ii) the staggering of
such vacancies such that, with the addition of four Rockingham Board Members, to
be designated by Rockingham, all Board seats will be apportioned nearly equally
between the four continuing Marathon Board Members and the four joining
Rockingham Board Members and (iii) the placement of Stephens and Unger in Board
seats to serve concurrent three (3) year terms. After the Effective Date, the
continuing and new Directors shall serve until expiration of the respective
terms of the Board seats held by them as provided in the Articles of
Incorporation, as amended. On or about the Effective Date, MFC shall have
obtained shareholder approval for and filed its Amended and Restated Articles of
Incorporation, substantially in the form attached hereto as Exhibit B which
Articles may be changed prior to filing upon the mutual consent of the Parties.
MFC will also make corresponding changes to its bylaws to conform to alterations
made to the Articles.
1.3 The Closing and Effective Date. All documents required by the
terms of this Agreement to be delivered at or prior to the Effective Date will
be exchanged by the parties at the closing of the Merger (the "Merger Closing"),
which shall be held before the Effective Date. The Merger Closing shall take
place at the offices of Wharton, Aldhizer & Weaver, PLC, in Harrisonburg,
Virginia, or at such other place as may be mutually agreed upon by the parties.
At or after the Merger Closing, MFC, Merger Subsidiary and Rockingham shall
execute and deliver to the Virginia State Corporation Commission ("SCC")
Articles of Merger containing the Plan of Merger. The Merger shall become
effective on the date (the "Effective Date") shown on the Certificate of Merger
issued by the SCC. Unless otherwise agreed upon in writing
A-5
<PAGE>
by the chief executive officers of MFC and Rockingham, subject to the conditions
to the obligations of the parties to effect the Merger as set forth in Article
6, the parties shall use their best efforts to cause the Effective Date to occur
on the first day of the first quarter following the month in which the
conditions set forth in Article 6 are satisfied.
1.4 Definitions. Any term defined anywhere in this Agreement shall
have the meaning ascribed to it for all purposes of this Agreement (unless
expressly noted to the contrary). In addition:
(a) the term "knowledge" when used with respect to a
party shall mean the knowledge, after due inquiry, of any "Executive Officer" of
such party and the Executive Officers of its wholly owned subsidiaries, as such
term is defined in Regulation O (12 C.F.R. 215);
(b) the term "material adverse effect", when applied to a
party, shall mean an event, occurrence or circumstance (including without
limitation (i) the making of any provisions for possible loan and lease losses,
write-downs of other real estate and taxes and (ii) any breach of a
representation or warranty by such party) which (a) has or is reasonably likely
to have a material adverse effect on the financial position, results of
operations or business of the Party or its subsidiaries, or (b) would materially
impair the Party's, or its subsidiary's, ability to perform its obligations
under this Agreement or the consummation of the Merger and the other
transactions contemplated by this Agreement. Solely for purposes of measuring
whether an event, occurrence or circumstance has a material adverse effect on
such Party's results of operations, the term "results of operations" shall mean
net interest income plus non-interest income (less securities gains) less gross
expenses (excluding provisions for possible loan and lease losses, write-downs
of other real estate and taxes); and provided further, that material adverse
effect shall not be deemed to include the impact of (i) changes in banking and
similar laws of general applicability or interpretations thereof by courts or
governmental authorities, (ii) changes in generally accepted accounting
principles or regulatory accounting requirements applicable to banks and bank
holding companies generally, and (iii) the Merger on the operating performance
of the Parties to this Agreement; and
(c) The term "Disclosure" shall mean the written
disclosure statement of each Party setting forth the information specified
below, to be delivered by such Party to the other prior to execution of this
Agreement.
ARTICLE 2
Basis and Manner of Exchange
2.1 Conversion of Shares. Upon and by reason of the Merger
becoming effective and except as set forth in Section 2.3 below, no cash shall
be allocated to the shareholders of Rockingham and stock shall be issued and
allocated as follows: Each share of Rockingham Common Stock (defined below)
issued and outstanding immediately prior to the Effective Date shall, by
operation of law, cease to be outstanding and shall automatically be converted
into and exchanged for 1.58 shares (the "Exchange Ratio") of MFC Common Stock
(defined in Section 3.2(d)). In the event MFC changes the number of shares of
MFC Common Stock issued and
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<PAGE>
outstanding prior to the Effective Date as a result of any stock split, stock
dividends, recapitalization or similar transaction with respect to the
outstanding MFC Common Stock, and the record date therefor shall be prior to the
Effective Date, the Exchange Ratio shall be proportionately adjusted. Nothing in
this Section 2.1 shall be deemed to prohibit the issuance by MFC or Rockingham
of any stock pursuant to the MFC Option Plan and Rockingham Option Plans (each
defined below), without requiring an adjustment to the Exchange Ratio; any
issuances of stock other than pursuant to the MFC Option Plan and Rockingham
Option Plans shall remain subject to the limitations, covenants and obligations
in this Agreement.
2.2 Manner of Exchange.
(a) Prior to the Effective Date, MFC shall reserve for
issuance with the Exchange Agent (defined below) a sufficient number of shares
of MFC Common Stock to provide for payment of the consideration set forth in
Section 2.1. At and after the Effective Date, each Rockingham Certificate
previously representing shares of Rockingham Common Stock shall represent only
the right to receive the consideration set forth in Sections 2.1 and 2.3 of this
Agreement (hereinafter, the "Merger Consideration"). As promptly as practicable
after the Effective Date, MFC shall cause Registrar and Transfer Corporation,
acting as the exchange agent ("Exchange Agent"), to send to each shareholder of
record of Rockingham immediately prior to the Effective Date, transmittal
materials for use in exchanging such shareholder's certificates of properly
endorsed Rockingham Common Stock (or an indemnity and such affidavit or other
documentation satisfactory to MFC and the Exchange Agent, in their reasonable
judgment, if any of such certificates are lost, stolen or destroyed) (together
"Rockingham Certificates") for the Merger Consideration. Each shareholder, upon
the surrender of his Rockingham Certificates to the Exchange Agent, duly
endorsed for transfer, will be entitled to receive in exchange therefore (i) the
Merger Consideration, and (ii) the right to receive any dividends previously
declared but unpaid as to such stock, provided, however, that no interest will
be paid on any such fractional share checks or dividends to which the holder of
such shares shall be entitled to receive upon such delivery.
(b) After the Effective Date there shall be no transfers
on the stock transfer records of Rockingham of any shares of Rockingham Common
Stock. The Exchange Agent shall not be entitled to vote or exercise any rights
of ownership with respect to the shares of MFC Common Stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto.
(c) Any portion of the aggregate amount of cash to be
paid in lieu of fractional shares pursuant to Section 2.3, and dividends or
other distributions to be paid pursuant to Section 2.4, or any interest or
investment proceeds from such sums that remain unclaimed by the shareholders of
Rockingham for six months after the Effective Date shall be paid by the Exchange
Agent to MFC upon the written request of MFC. Thereafter, any shareholders of
Rockingham who have not theretofore complied with this Section 2 shall look only
to MFC for the Merger Consideration deliverable in respect of each share of
Rockingham Common Stock such shareholder holds, without any interest thereon.
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<PAGE>
(d) If any outstanding Rockingham Certificates are not
surrendered prior to the date on which such payments would otherwise escheat to
or become the property of any governmental unit or agency, the unclaimed items
shall, to the extent permitted by any abandoned property, escheat or other
applicable laws, become the property of MFC immediately prior to such date (and,
to the extent not in its possession, shall be paid over to it), free and clear
of all claims or interest of any person previously entitled to such claims.
Notwithstanding the foregoing, neither the Exchange Agent nor any party to this
Agreement (or any subsidiary thereof) shall be liable to any former holder of
Rockingham Common Stock for any amount delivered to a public official pursuant
to applicable abandoned property, escheat or similar laws.
2.3 No Fractional Shares. No certificates or scrip for fractional
shares of MFC Common Stock will be issued. In lieu thereof, MFC will pay the
value of such fractional shares in cash on the basis of the fair market value of
MFC Common Stock immediately preceding the Effective Date. The market value of
MFC Common Stock will be its average closing sales price as reported on the
NASDAQ for each of the ten full trading days ending on the fifth day prior to
the Effective Date.
2.4 Dividends. No dividend or other distribution payable to the
holders of record of MFC Common Stock at or as of any time after the Effective
Date shall be paid to a Rockingham shareholder until such holder surrenders the
Rockingham Certificates for exchange as provided in Section 2.2 of this
Agreement, promptly after which time all such dividends or distributions shall
be paid without interest.
2.5 Rockingham Stock Option Plans. At the Effective Date, by
virtue of the Merger and without any action on the part of any holder of an
option, each option to acquire shares of Rockingham Common Stock (a "Rockingham
Option") granted pursuant to Rockingham's 1991 Stock Option Plan and the 1999
Long Term Incentive Plan (the "Rockingham Option Plans") that is then
outstanding and unexercised shall be converted into and become an option to
acquire MFC Common Stock on the same terms and conditions as are in effect with
respect to the Rockingham Option immediately prior to the Effective Date (such
option being referred to herein as a "Converted Option"), except that (i) the
number of shares of MFC Common Stock subject to such Rockingham Option shall be
equal to the number of shares of Rockingham Common Stock subject to such
Rockingham Option immediately prior to the Effective Date multiplied by the
Exchange Ratio, the product being rounded, if necessary, up or down to the
nearest whole share, and (ii) the per share exercise price of the Rockingham
Option (as such price is established under the Rockingham Option Plans) shall be
adjusted by dividing the per share exercise price of the Rockingham Option by
the Exchange Ratio, and rounding to the nearest whole cent. It is intended that
the foregoing assumption of the Rockingham Options shall be effected in a manner
which is consistent with the requirements of Section 424 of the IRC as to any
Rockingham Option that is an incentive stock option.
ARTICLE 3
Representation and Warranties
3.1 Representations and Warranties of Rockingham. Subject to
Section 8.9 below, Rockingham represents and warrants to MFC as follows:
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(a) Organization, Standing and Power. Rockingham is a
corporation and a Virginia state bank, duly organized, validly existing and in
good standing under the laws of Virginia, and it has all requisite corporate
power and authority to carry on its business as now being conducted and to own
and operate its assets, properties and business. Rockingham has the corporate
power and authority to execute and deliver this Agreement and perform the
respective terms of this Agreement and the Plan of Merger. Rockingham is a
member of the Federal Reserve System, and except as set forth in the Disclosure
is in compliance in all material respects with all rules and regulations
promulgated by the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), the Virginia State Corporation Commission ("SCC") and any
other relevant regulatory authority. Rockingham is an "insured bank" as defined
in the Federal Deposit Insurance Act ("FDIA") and applicable regulations
thereunder. Rockingham is, except as set forth in the Disclosure, in compliance
in all material respects with all rules and regulations promulgated by the
Federal Reserve, the SCC and any other relevant regulatory authority.
(b) Bank Subsidiaries. Rockingham does not own, directly
or indirectly, 5% or more of the outstanding capital stock or other equity
securities of any corporation, bank or other organization, actively engaged in
business except RHB Services, Inc., a wholly-owned subsidiary of Rockingham
(hereinafter, "Rockingham Subsidiary" and together with Rockingham, the
"Rockingham Companies"). Set forth in the Disclosure is (i) the jurisdiction of
incorporation, capitalization and ownership of the Rockingham Subsidiary; (ii)
the names of the officers and directors of the Rockingham Subsidiary; and (iii)
the jurisdictions in which the Rockingham Subsidiary is qualified or licensed to
do business as a foreign corporation. The Rockingham Subsidiary is a corporation
duly organized and validly existing under the laws of its jurisdiction of
incorporation. The Articles of Incorporation and Bylaws of the Rockingham
Subsidiary delivered by Rockingham with the Disclosure is complete and correct
as of the date hereof. To Rockingham's knowledge, the Rockingham Subsidiary (i)
has full corporate power and authority to own, lease and operate its properties
and to carry on its business as now conducted except where the absence of such
power or authority would not have a material adverse effect on the financial
condition, results of operations or business of Rockingham on a consolidated
basis, and (ii) is duly qualified to do business in the states of the United
States and foreign jurisdictions where its ownership or leasing of property or
the conduct of its business requires such qualification and where failure to so
qualify would have a material adverse effect on the financial condition, results
of operations or business of Rockingham on a consolidated basis. To Rockingham's
knowledge, the Rockingham Subsidiary has all federal, state, local and foreign
governmental authorizations and licenses necessary for it to own or lease its
properties and assets and to carry on its business as it is now being conducted,
except where failure to obtain such authorization or license would not have a
material adverse effect on the financial condition, results of operations or
business of Rockingham on a consolidated basis. Except as set forth in the
Disclosure, Rockingham owns the stock and/or interests in the Rockingham
Subsidiary free and clear of any claims, liens, encumbrances or restrictions and
there are no agreements or understandings with respect to the voting or
disposition of any such shares.
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(c) Authority.
(1) The execution and delivery of this
Agreement, the Plan of Merger and the consummation of the Merger have been duly
and validly authorized by all necessary corporate action on the part of
Rockingham, except the approval of shareholders. The Agreement represents the
legal, valid, and binding obligations of Rockingham, enforceable against
Rockingham in accordance with its terms (except in all such cases as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(2) Except as set forth in the Disclosure, and
subject to the receipt of the requisite approvals referred to in Sections 4.7
and 6.1, neither the execution and delivery of this Agreement, the consummation
of the transactions contemplated herein, nor compliance by Rockingham with any
of the provisions hereof will: (i) conflict with or result in a breach of any
provision of Rockingham's Articles of Incorporation or Bylaws; (ii) constitute
or result in the breach of any term, condition or provision of, or constitute a
default under, or give rise to any right of termination, cancellation or
acceleration with respect to, or result in the creation of any lien, charge or
encumbrance upon, any property or assets of Rockingham pursuant to (A) any note,
bond, mortgage, indenture, or (B) any material license, agreement, lease, or
other instrument or obligation, to which Rockingham is a party or by which it or
any of its properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to Rockingham or any
or its properties or assets.
(d) Capital Structure. The authorized capital stock of
Rockingham consists of Two Million (2,000,000) shares of common stock, par value
$5.00 per share, of which, as of the date hereof, One Million Five Hundred
Eighty-nine Thousand Nine Hundred Forty (1,589,940) shares are issued and
outstanding (the "Rockingham Common Stock"). The issued and outstanding shares
of Rockingham Common Stock are fully paid and nonassessable, not subject to
shareholder preemptive rights, and not issued in violation of any other
agreement to which Rockingham is a party or otherwise bound, or of any
registration or qualification provisions of any federal or state securities
laws. Except for outstanding options to purchase 134,769 shares of Rockingham
Common Stock, of which 50,458 options are vested as of the date hereof, pursuant
to the Rockingham Option Plans, there are no outstanding understandings or
commitments of any character pursuant to which Rockingham could be required or
expected to issue shares of capital stock.
(e) Financial Statements. The "Rockingham Financial
Statements" shall mean all materials provided in Rockingham's Annual Report, for
the period ending December 31, 1999. Except as set forth in the Disclosure, the
Rockingham Financial Statements fairly present the financial position of
Rockingham as of the dates indicated and the results of operations, changes in
shareholders' equity and statements of cash flows for the periods or as of the
dates set forth therein in conformity with generally accepted accounting
principles applicable to financial institutions applied on a consistent basis.
The books and records of Rockingham fairly reflect in all material respects the
transactions to which it is a party or by which its
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properties are subject or bound. Such books and records have been properly kept
and maintained and are in compliance in all material respects with all
applicable legal and accounting requirements.
(f) Absence of Undisclosed Liabilities. At December 31,
1999, Rockingham did not have any obligation or liability (contingent or
otherwise) of any nature which was not reflected in the Rockingham Financial
Statements, except for those which in the aggregate are immaterial or are
otherwise set forth in the Disclosure.
(g) Legal Proceedings; Compliance with Laws. Except as
set forth in the Disclosure there are no actions, suits or proceedings
instituted or pending or, to the knowledge of Rockingham, threatened or probable
of assertion against the Rockingham Companies, or against any property, asset,
interest or right, that are reasonably expected to have, either individually or
in the aggregate a material adverse effect on the financial condition of
Rockingham or that are reasonably expected to threaten or impede the
consummation of the Merger. None of the Rockingham Companies is a party to any
agreement or instrument or subject to any judgment, order, writ, injunction,
decree or rule that might reasonably be expected to have a material adverse
effect on the condition (financial or otherwise), business or prospects of
Rockingham. Except as set forth in the Disclosure, as of the date of this
Agreement, neither Rockingham nor any of its properties is a party to or is
subject to any order, decree, agreement, memorandum of understanding or similar
arrangement with, or a commitment letter or similar submission to, any federal
or state governmental agency or authority charged with the supervision or
regulation of depository institutions or mortgage lenders or engaged in the
insurance of deposits which restricts or purports to restrict in any material
respect the conduct of its business or its properties, or in any manner relates
to the capital, liquidity, credit policies or management of it; and except as
set forth in the Disclosure none of the Rockingham Companies has been advised by
any such regulatory authority that such authority is contemplating issuing or
requesting (or is considering the appropriateness of issuing or requesting) any
such order, decree, agreement, memorandum of understanding, commitment letter or
similar submission. To the knowledge of Rockingham, the Rockingham Companies
have complied in all material respects with all laws, ordinances, requirements,
regulations or orders applicable to its business (including environmental laws,
ordinances, requirements, regulations or orders).
(h) Regulatory Approvals. To the knowledge of Rockingham,
there is no reason why the regulatory approvals referred to in Section 6.1(b)
should not be obtained without the imposition of any condition of the type
referred to in Section 6.1(b).
(i) Labor Relations. Rockingham is not a party to or
bound by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor is it the subject of
a proceeding asserting that it has committed an unfair labor practice (within
the meaning of the National Labor Relations Act) or seeking to compel it to
bargain with any labor organization as to wages and conditions of employment,
nor is there any strike or other labor dispute involving it, pending or, to the
best of its knowledge, threatened, nor is it aware of any activity involving its
employees seeking to certify a collective bargaining unit or engaging in any
other organizational activity.
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(j) Tax Matters. The Rockingham Companies have filed all
federal, state and local tax returns and reports required to be filed, and all
taxes shown by such returns to be due and payable have been paid or are
reflected as a liability in the Rockingham Financial Statements or are being
contested in good faith and are disclosed as set forth in the Disclosure. Except
to the extent that liabilities therefor are specifically reflected in the
Rockingham Financial Statements, there are no federal, state or local tax
liabilities of the Rockingham Companies other than liabilities that have arisen
since December 31, 1999, all of which have been properly accrued or otherwise
provided for on the books and records of Rockingham. Except as set forth in the
Disclosure no tax return or report of the Rockingham Companies is under
examination by any taxing authority or the subject of any administrative or
judicial proceeding, and no unpaid tax deficiency has been asserted against any
Rockingham Company by any taxing authority.
(k) Property. Except as disclosed or reserved against in
the Rockingham Financial Statements or as set forth in the Disclosure, the
Rockingham Companies have good and marketable title free and clear of all
material liens, encumbrances, charges, defaults or equities of whatever
character to all of the material properties and assets, tangible or intangible,
reflected in the Rockingham Financial Statements as being owned by the
Rockingham Companies as of the date thereof. To the best knowledge of
Rockingham, all buildings, and all fixtures, equipment, and other property and
assets which are material to its business on a consolidated basis, held under
leases or subleases by the Rockingham Companies are held under valid instruments
enforceable in accordance with their respective terms, subject to bankruptcy,
insolvency, reorganization, moratorium and similar laws. The buildings,
structures, and appurtenances owned, leased, or occupied by the Rockingham
Companies are in good operating condition and in a state of good maintenance and
repair, and to the knowledge of Rockingham (i) comply with applicable zoning and
other municipal laws and regulations, and (ii) there are no latent defects
therein.
(l) Reports. Since January 1, 1995, the Rockingham
Companies have filed all reports and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
the SCC, the Federal Reserve, and to the best knowledge of Rockingham, any other
governmental or regulatory authority or agency having jurisdiction over its
operations.
(m) Employee Benefit Plans.
(1) Except as set forth in the Disclosure all
material pension, retirement, profit sharing, deferred compensation, stock
option, bonus, vacation or other material incentive plans or agreements, all
material medical, dental or other health plans, all life insurance plans and all
other material employee benefit plans or fringe benefit plans, including without
limitation, all "Employee Benefit Plans" as that term is defined in Section 3(3)
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
currently adopted, maintained by, sponsored in whole or in part by, or
contributed to by the Rockingham Companies for the benefit of employees,
retirees or other beneficiaries eligible to participate (collectively, the
"Rockingham ERISA Plans") are in compliance with the applicable terms of ERISA
and the
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IRC and any other applicable laws, rules and regulations the breach or violation
of which could result in a material liability to Rockingham on a consolidated
basis.
(2) No Rockingham ERISA Plan which is a defined
benefit pension plan has any "Unfunded Current Liability," as that term is
defined in Section 302(d)(8)(A) of ERISA, and the present fair market value of
the assets of any such plan exceeds the plan's "Benefit Liabilities," as that
term is defined in Section 4001(a)(16) of ERISA, when determined under actuarial
factors that would apply if the plan was terminated in accordance with all
applicable legal requirements.
(n) Investment Securities. Subject to FASB 115, and except for
pledges to secure public and trust deposits and obligations under agreements
pursuant to which Rockingham has sold securities subject to an obligation to
repurchase, or as set forth in the Disclosure none of the investment securities
reflected in the Rockingham Financial Statements is subject to any restriction,
contractual, statutory, or otherwise, which would impair materially the ability
of the holder of such investment to dispose freely of any such investment at any
time.
(o) Certain Contracts.
(1) Except as set forth in the Disclosure, or
agreements entered into in the ordinary course of the banking business of
Rockingham, Rockingham is not a party to, or bound by, (i) any material
agreement, arrangement or commitment, (ii) any agreement, indenture or other
instrument relating to the borrowing of money by Rockingham or the guarantee by
Rockingham of any such obligation, (iii) any agreement, arrangement or
commitment relating to the employment of a consultant or the employment,
election, retention in office or severance of any present or former director or
officer, (iv) any agreement to make loans or for the provision, purchase or sale
of goods, services or property between Rockingham and any director or officer of
Rockingham, or any member of the immediate family or affiliate of any of the
foregoing, or (v) any agreement between Rockingham and any 5% or more
shareholder of Rockingham.
(2) None of the Rockingham Companies, nor to the
knowledge of Rockingham, the other party thereto, is in default under any
material agreement, commitment, arrangement, lease, insurance policy or other
instrument whether entered into in the ordinary course of business or otherwise,
nor has there occurred any event that, with the lapse of time or giving of
notice or both, would constitute such a default, other than defaults of loan
agreements by borrowers from Rockingham in the ordinary course of its business.
(3) Since December 31, 1999, the Rockingham
Companies have not incurred or paid any obligation or liability that would be
material to the Rockingham Companies, except obligations incurred or paid in
connection with transactions in the ordinary course of business of the
Rockingham Companies consistent with its practice and, except as set forth in
the Disclosure from December 31, 1999 to the date hereof, the Rockingham
Companies have not taken any action that, if taken after the date hereof, would
breach any of the covenants contained in Section 4.4 hereof.
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(p) Insurance. A complete list of all policies or binders
of fire, liability, product liability, workmen's compensation, vehicular and
other insurance held by or on behalf of the Rockingham Companies shall be set
forth in the Disclosure and all such policies or binders are valid and
enforceable in accordance with their terms, are in full force and effect, and
insure against risks and liabilities to the extent and in the manner customary
for the industry and are deemed appropriate and sufficient by Rockingham. The
Rockingham Companies are not in default with respect to any provision contained
in any such policy or binder and has not failed to give any notice or present
any claim under any such policy or binder in due and timely fashion. The
Rockingham Companies have not received notice of cancellation or non-renewal of
any such policy or binder. To the knowledge of Rockingham there is no inaccuracy
in any application for such policies or binders, any failure to pay premiums
when due or any similar state of facts or the occurrence of any event that is
reasonably likely to form the basis for any material claim against it not fully
covered (except to the extent of any applicable deductible) by the policies or
binders referred to above. None of the Rockingham Companies have received notice
from any of its insurance carriers that any insurance premiums will be increased
materially in the future or that any such insurance coverage will not be
available in the future on substantially the same terms as now in effect.
(q) Absence of Material Changes and Events. Except as set
forth in the Disclosure since December 31, 1999, there has not been any material
adverse change in the condition (financial or otherwise), aggregate assets or
liabilities, cash flow, earnings or business of the Rockingham Companies, and
the Rockingham Companies have conducted their businesses only in the ordinary
course consistent with past practice.
(r) Loans, OREO and Allowance for Loan Losses.
(1) Except as set forth in the Disclosure, and
except for matters which individually or in the aggregate do not have a material
adverse effect on the Merger or the financial condition of Rockingham, to the
best knowledge of Rockingham, each loan reflected as an asset in the Rockingham
Financial Statements (i) is evidenced by notes, agreements, or other evidences
of indebtedness which are true, genuine and what they purport to be, (ii) to the
extent secured, has been secured by valid liens and security interests which
have been perfected, and (iii) is the legal, valid and binding obligation of the
obligor named therein, enforceable in accordance with its terms, subject to
bankruptcy, insolvency and other laws of general applicability relating to or
affecting creditors' rights and to general equity principles. All loans and
extensions of credit which are subject to regulation by the Federal Reserve
which have been made by Rockingham comply therewith.
(2) The classification on the books and records
of Rockingham of loans and/or non-performing assets as nonaccrual, troubled debt
restructuring, OREO or other similar classification, complies in all material
respects with generally accepted accounting principles and applicable regulatory
accounting principles.
(3) Except for liens, security interests,
claims, charges, or such other encumbrances as have been appropriately reserved
for in the Rockingham Financial Statements or are not material, title to the
OREO is good and marketable, and there are no adverse claims or
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encumbrances on the OREO. All title, hazard and other insurance claims and
mortgage guaranty claims with respect to the OREO have been timely filed and
Rockingham has not received any notice of denial of any such claim.
(4) Rockingham is in possession of all of the
OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and Rockingham is diligently pursuing
such eviction or summary proceedings or such rental arrangements. Except as set
forth in the Disclosure, no legal proceeding or quasi-legal proceeding is
pending or, to the knowledge of Rockingham, threatened concerning any OREO or
any servicing activity or omission to provide a servicing activity with respect
to any of the OREO.
(5) Except as set forth in the Disclosure, all
loans made by Rockingham to facilitate the disposition of OREO are performing in
accordance with their terms.
(6) Except as set forth in the Disclosure, the
allowance for possible loan losses and the reserve for OREO shown on the
Rockingham Financial Statements was, and the allowance for possible loan losses
and the reserve for OREO shown on the financial statements of Rockingham as of
dates subsequent to the execution of this Agreement will be, in each case as of
the dates thereof, adequate in all material respects to provide for possible
losses, net of recoveries relating to loans previously charged off, on loans
outstanding (including accrued interest receivable) of Rockingham and other
extensions of credit (including letters of credit and commitments to make loans
or extend credit) by Rockingham, and for possible losses on OREO.
(s) Statements True and Correct. None of the information
supplied or to be supplied by the Rockingham Companies for inclusion in the
Registration Statement on Form S-4 (the "Registration Statement") to be filed by
MFC with the SEC, the Joint Proxy Statement (as defined in Section 4.3) to be
mailed to every Rockingham shareholder or any other document to be filed with
the SEC, the SCC, the Federal Reserve, or any other regulatory authority in
connection with the transactions contemplated hereby, will, at the respective
time such documents are filed, and, in the case of the Registration Statement,
when it becomes effective and with respect to the Proxy Statement/Prospectus,
when first mailed to Rockingham shareholders, be false or misleading with
respect to any material fact or omit to state any material fact necessary in
order to make the statements therein not misleading, or, in the case of the
Joint Proxy Statement or any supplement thereto, at the time of the Rockingham
Shareholders' Meeting or the MFC Shareholders' Meeting (as defined in Section
4.3), be false or misleading with respect to any material fact or omit to state
any material fact necessary to correct any statement in any earlier
communication with respect to the solicitation of any proxy for the Rockingham
Shareholders' Meeting or the MFC Shareholders' Meeting.
(t) Brokers and Finders. No Rockingham Company nor any of
their respective officers, directors or employees, has employed any broker,
finder or financial advisor or incurred any liability for any fees or
commissions in connection with the transactions
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contemplated herein, except for the retention of Scott & Stringfellow, Inc. to
provide a fairness opinion.
(u) Repurchase Agreements. With respect to all agreements
pursuant to which any Rockingham Company has purchased securities subject to an
agreement to resell, if any, any such Rockingham Company has a valid, perfected
first lien or security interest in the government securities or other collateral
securing the repurchase agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby.
(v) Administration of Trust Accounts. Rockingham has
properly administered, in all respects material and which could reasonably be
expected to be material to the business, operations or financial condition of
Rockingham, all accounts for which it acts as a fiduciary including but not
limited to accounts for which it serves as trustee, agent, custodian, personal
representative, guardian, conservator or investment advisor, in accordance with
the terms of the governing documents and applicable state and federal law and
regulation and common law. To the knowledge of Rockingham, neither Rockingham,
nor any director, officer or employee of Rockingham has committed any breach of
trust with respect to any such fiduciary account which is material to or could
reasonably be expected to be material to the business, operations or
consolidated financial condition of Rockingham, and the accountings for each
such fiduciary account are true and correct in all material respects and
accurately reflect the assets of such fiduciary account in all material
respects.
(w) Takeover Laws; No Dissenters Rights. The Rockingham
Companies have taken all action necessary to exempt this Agreement and the
transactions contemplated hereby from the requirements of any "control share,"
"fair price," "affiliate transaction" or other anti-takeover laws and
regulations of any state, including without limitation Sections 13.1-725 through
13.1-728 of the VSCA, and Sections 13.1-728.1 through 13.1-728,9 of the VSCA.
Holders of Rockingham Common Stock do not have dissenters' rights in connection
with the Merger.
(x) Environmental Matters. To the knowledge of
Rockingham, the Rockingham Companies are in substantial compliance with all
Environmental Laws. None of the Rockingham Companies has received any
communication alleging that any Rockingham Company is not in such compliance
and, to the knowledge of Rockingham, there are no present circumstances that
would prevent or interfere with the continuation of such compliance.
3.2 Representations and Warranties of MFC. Subject to Section 8.9
below, MFC represents and warrants to Rockingham as follows:
(a) Organization, Standing and Power. The Marathon
Companies (defined below) are corporations duly organized, validly existing and
in good standing under the laws of Virginia. Each Marathon Company has all
requisite corporate power and authority to carry on its business as now being
conducted and to own and operate its assets, properties and business. The
Marathon Companies have the corporate power and authority to execute and deliver
this Agreement and perform the respective terms of this Agreement and Plan of
Merger. MFC and Marathon Bank are members of the Federal Reserve System, and
except as set forth in the
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Disclosure are in compliance in all material respects with all rules and
regulations promulgated by the Board of Governors of the Federal Reserve, the
SCC and any other relevant regulatory authority. MFC is duly registered as a
bank holding company under the Bank Holding Company Act of 1956, and the
Marathon Bank is a Virginia state bank and an "Insured Bank" as defined in the
FDIA and applicable regulations thereunder. No other Marathon Company is an
Insured Bank. The Marathon Bank is, except as set forth in the Disclosure, in
compliance in all material respects with all rules and regulations promulgated
by the Federal Reserve, the SCC and any other relevant regulatory authority.
(b) Bank Subsidiaries. MFC does not own, directly or
indirectly, 5% or more of the outstanding capital stock or other voting
securities of any corporation, bank or other organization actively engaged in
business except (i) Marathon Bank, (ii) the Merger Subsidiary, (hereinafter MFC,
Marathon Bank and Merger Subsidiary each may be referred to individually as a
"Marathon Company" and collectively as the "Marathon Companies"), (iii) a 51%
ownership interest in Shenandoah Valley Title Company, a Virginia limited
liability company ("Shenandoah') (hereinafter Marathon Bank, Merger Subsidiary
and Shenandoah Valley Title Company each may be referred to individually as a
"Marathon Subsidiary" and collectively as the "Marathon Subsidiaries"), and (iv)
a 20% ownership interest in Professional Titles of Virginia, LLC, a Virginia
limited liability company ("PTV"). Set forth in the Disclosure is (i) the
jurisdiction of incorporation, capitalization and ownership of each Marathon
Subsidiary; (ii) the names of the officers and directors of each Marathon
Subsidiary; and (iii) the jurisdictions in which each Marathon Subsidiary is
qualified or licensed to do business as a foreign corporation. Each Marathon
Subsidiary is a corporation duly organized and validly existing under the laws
of its jurisdiction of incorporation. The Articles of Incorporation and Bylaws
of each of the Marathon Subsidiaries delivered by Marathon with the Disclosure
are complete and correct as of the date hereof. To MFC's knowledge, each of the
Marathon Subsidiaries and PTV (i) has full corporate power and authority to own,
lease and operate its properties and to carry on its business as now conducted
except where the absence of such power or authority would not have a material
adverse effect on the financial condition, results of operations or business of
MFC on a consolidated basis, and (ii) is duly qualified to do business in the
states of the United States and foreign jurisdictions where its ownership or
leasing of property or the conduct of its business requires such qualification
and where failure to so qualify would have a material adverse effect on the
financial condition, results of operations or business of MFC on a consolidated
basis. To MFC's knowledge, each of the Marathon Subsidiaries and PTV has all
federal, state, local and foreign governmental authorizations and licenses
necessary for it to own or lease its properties and assets and to carry on its
business as it is now being conducted, except where failure to obtain such
authorization or license would not have a material adverse effect on the
financial condition, results of operations or business of MFC on a consolidated
basis. Except as set forth in the Disclosure, MFC owns its stock and/or
interests in each of the Marathon Companies and PTV free and clear of any
claims, liens, encumbrances or restrictions and there are no agreements or
understandings with respect to the voting or disposition of any such shares.
(c) Authority.
(1) The execution and delivery of this
Agreement, the Plan of Merger and the consummation of the Merger have been duly
and validly authorized by all necessary
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corporate action on the part of the Marathon Companies, except the approval of
shareholders in the case of MFC. The Agreement represents the legal, valid, and
binding obligation of the Marathon Companies, enforceable against the Marathon
Companies in accordance with its terms (except in all such cases as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and except that the availability of the equitable
remedy of specific performance or injunctive relief is subject to the discretion
of the court before which any proceeding may be brought).
(2) Except as set forth in the Disclosure, and
subject to the receipt of the requisite approvals referred to in Sections 4.7
and 6.1, neither the execution and delivery of this Agreement the consummation
of the transactions contemplated herein, nor the compliance by the Marathon
Companies with any of the provisions hereof will (i) conflict with or result in
a breach of any provision of their respective Articles of Incorporation or
Bylaws, (ii) constitute or result in the breach of any term, condition or
provision of, or constitute default under, or give rise to any right of
termination, cancellation or acceleration with respect to, or result in the
creation of any lien, charge or encumbrance upon, any property or assets of the
Marathon Companies pursuant to (A) any note, bond, mortgage, indenture, or (B)
any material license, agreement, lease or other instrument or obligation, to
which any of the Marathon Companies is a party or by which any of them or any of
their properties or assets may be bound, or (iii) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to any of the
Marathon Companies or any of their properties or assets.
(d) Capital Structure.
(1) The authorized capital stock of MFC consists
of Twenty Million (20,000,000) shares of common stock, par value $1.00 per
share, ("MFC Common Stock") of which Two Million Fifty-one Thousand Four Hundred
Forty-one (2,051,441) shares are issued and outstanding and One Million
(1,000,000) shares of preferred stock, none of which is issued. The issued and
outstanding shares of MFC Common Stock are fully paid and nonassessable, not
subject to shareholder preemptive rights, and not issued in violation of any
agreement to which MFC is a party or otherwise bound, or of any registration or
qualification provisions of any federal or state securities laws provided,
however, that the transfer of shares of the Common Stock in MFC to holders of
10% or more of MFC's Common Stock is restricted by Article II, Section 4(c) of
the MFC Articles of Incorporation. Except for outstanding options to purchase
129,375 shares of MFC Common Stock, of which 84,625 are vested as of the date
hereof, pursuant to the Marathon Long-Term Incentive Plan (the "Marathon Option
Plan"), there are no outstanding understandings or commitments of any character
pursuant to which MFC or any of the Marathon Companies could be required or
expected to issue shares of capital stock. The shares of MFC Common Stock to be
issued in exchange for shares of Rockingham Common Stock upon consummation of
the Merger will have been duly authorized and, when issued in accordance with
the terms of this Agreement, will be validly issued, fully paid and
nonassessable and subject to no preemptive rights.
(2) The outstanding shares of capital stock of
the Marathon Bank have been duly authorized and are validly issued, and are
fully paid and nonassessable and all such
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shares are owned by MFC, free and clear of all liens, claims and encumbrances.
No rights are authorized, issued or outstanding with respect to the capital
stock of the Marathon Bank and there are no agreements, understandings or
commitments relating to the right of MFC to vote or to dispose of said shares.
None of the shares of capital stock of the Marathon Bank has been issued in
violation of the preemptive rights of any person.
(e) Financial Statements. The "MFC Financial Statements"
shall mean all materials provided in the consolidated Marathon Financial Report,
dated December 31, 1999. Except as set forth in the Disclosure, the MFC
Financial Statements fairly present the financial position of MFC and Marathon
Bank as of the dates indicated and the results of operations, changes in
shareholders' equity and statements of cash flows for the periods or as of the
dates set forth therein in conformity with generally accepted accounting
principles applicable to financial institutions applied on a consistent basis.
The books and records of MFC and Marathon Bank fairly reflect in all material
respects the transactions to which it is a party or by which its properties are
subject or bound. Such books and records have been properly kept and maintained
and are in compliance in all material respects with all applicable legal and
accounting requirements.
(f) Absence of Undisclosed Liabilities. At December 31,
1999, neither MFC nor Marathon Bank had any obligation or liability (contingent
or otherwise) of any nature which were not reflected in the MFC Financial
Statements except for those which in the aggregate are immaterial or are
otherwise set forth in the Disclosure.
(g) Legal Proceedings; Compliance with Laws. Except as
set forth in the Disclosure there are no actions, suits or proceedings
instituted or pending or, to the knowledge of MFC, threatened or probable of
assertion against any of the Marathon Companies, or against any property, asset,
interest or right of any of them, that are reasonably expected to have, either
individually or in the aggregate, a material adverse effect on the financial
condition of the Marathon Companies or that are reasonably expected to threaten
or impede the consummation of the Merger. None of the Marathon Companies is a
party to any agreement or instrument or subject to any judgment, order, writ,
injunction, decree or rule that might reasonably be expected to have a material
adverse effect on the condition (financial or otherwise), business or prospects
of MFC on a consolidated basis. Except as set forth in the Disclosure as of the
date of this Agreement, none of the Marathon Companies nor any of their
properties is a party to or is subject to any order, decree, agreement,
memorandum of understanding or similar arrangement with, or a commitment letter
or similar submission to, any federal or state governmental agency or authority
charged with the supervision or regulation of depository institutions or
mortgage lenders or engaged in the insurance of deposits which restricts or
purports to restrict in any material respect the conduct of the business of it
or its subsidiary or properties, or in any manner relates to the capital,
liquidity, credit policies or management of it; and except set forth in the
Disclosure, none of the Marathon Companies has been advised by any such
regulatory authority that such authority is contemplating issuing or requesting
(or is considering the appropriateness of issuing or requesting) any such order,
decree, agreement, memorandum of understanding, commitment letter or similar
submission. To the knowledge of MFC, the Marathon Companies have complied in all
material respects with all laws, ordinances, requirements, regulations
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or orders applicable to its business (including environmental laws, ordinances,
requirements, regulations or orders).
(h) Regulatory Approvals. To the knowledge of MFC, there
is no reason why the regulatory approvals referred to in Section 6.1(b) should
not be obtained without the imposition of any condition of the type referred to
in Section 6.1(b).
(i) Labor Relations. None of the Marathon Companies is a
party to, or is bound by any collective bargaining agreement, contract or other
agreement or understanding with a labor union or labor organization, nor is it
the subject of a proceeding asserting that has committed an unfair labor
practice (within the meaning of the National Labor Relations Act) or seeking to
compel it to bargain with any labor organization as to wages and conditions of
employment, nor is there any strike or other labor dispute involving it, pending
or, to the best of its knowledge, threatened, nor is it aware of any activity
involving its employees seeking to certify a collective bargaining unit or
engaging in any other organizational activity.
(j) Tax Matters. The Marathon Companies have filed all
federal, state, and local tax returns and reports required to be filed, and all
taxes shown by such returns to be due and payable have been paid or are
reflected as a liability in the MFC Financial Statements or are being contested
in good faith and are set forth in the Disclosure. Except to the extent that
liabilities therefor are specifically reflected in the MFC Financial Statements,
there are no federal, state or local tax liabilities of the Marathon Companies
other than liabilities that have arisen since December 31, 1999, all of which
have been properly accrued or otherwise provided for on the books and records of
the Marathon Companies. Except as set forth in the Disclosure, no tax return or
report of any of the Marathon Companies is under examination by any taxing
authority or the subject of any administrative or judicial proceeding, and no
unpaid tax deficiency has been asserted against any of the Marathon Companies by
any taxing authority.
(k) Property. Except as disclosed or reserved against in
the MFC Financial Statements or as set forth in the Disclosure the Marathon
Companies have good and marketable title free and clear of all material liens,
encumbrances, charges, defaults or equities of whatever character to all of the
material properties and assets, tangible or intangible, reflected in the MFC
Financial Statements as being owned by MFC or Marathon Bank as of the date
thereof. To the knowledge of MFC, all buildings, and all fixtures, equipment,
and other property and assets which are material to its business on a
consolidated basis, held under leases or subleases by the Marathon Companies are
held under valid instruments enforceable in accordance with their respective
terms, subject to bankruptcy, insolvency, reorganization, moratorium and similar
laws. The buildings, structures, and appurtenances owned, leased, or occupied by
the Marathon Companies are in good operating condition and in a state of good
maintenance and repair, and to the knowledge of MFC (i) comply with applicable
zoning and other municipal laws and regulations, and (ii) there are no latent
defects therein.
(1) Reports. Since January 1, 1995, the Marathon
Companies have filed all reports and statements, together with any amendments
required to be made with respect thereto, that were required to be filed with
the SEC, the Federal Reserve, the SCC, and any other governmental or regulatory
authority or agency having jurisdiction over their operations.
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(m) Employee Benefit Plans.
(1) Except as set forth in the Disclosure all
material pension, retirement, profit sharing, deferred compensation, stock
option, bonus, vacation or other material incentive plans or agreements, all
material medical, dental or other health plans, all life insurance plans and all
other material employee benefit plans or fringe benefit plans, including without
limitation, all Employee Benefit Plans, currently adopted, maintained by,
sponsored in whole or in part by, or contributed to by the Marathon Companies or
for the benefit of employees, retirees or other beneficiaries eligible to
participate (collectively, the "MFC ERISA Plans") are in compliance with the
applicable terms of ERISA and the IRC and any other applicable laws, rules and
regulations the breach or violation of which could result in a material
liability to the Marathon Companies.
(2) No MFC ERISA Plan which is a defined benefit
pension plan has any Unfunded Current Liability (as defined in Section
3.1(m)(2)) and the present fair market value of the assets of any such plan
exceeds the plan's Benefit Liabilities (as defined in Section 3.1(m)(2)), when
determined under actuarial factors that would apply if the plan was terminated
in accordance with all applicable legal requirements.
(n) Investment Securities. Subject to FASB 115, and
except for pledges to secure public and trust deposits and obligations under
agreements pursuant to which MFC or Marathon Bank has sold securities subject to
an obligation to repurchase, or as set forth in the Disclosure none of the
investment securities reflected in the MFC Financial Statements is subject to
any restriction, contractual, statutory, or otherwise, which would impair
materially the ability of the holder of such investment to dispose freely of any
such investment at any time.
(o) Certain Contracts.
(1) Except as set forth in the Disclosure, or
agreements entered into in the ordinary course of the banking business of the
Marathon Companies, the Marathon Companies are not a party to, or bound by, (i)
any material agreement, arrangement or commitment, (ii) any agreement, indenture
or other instrument relating to the borrowing of money by any of the Marathon
Companies or the guarantee by any of the Marathon Companies of any such
obligation, (iii) any agreement, arrangement or commitment relating to the
employment of a consultant or the employment, election, retention in office or
severance of any present or former director or officer, (iv) any agreement to
make loans or for the provision, purchase or sale of goods, services or property
between any of the Marathon Companies and any director or officer of any of the
Marathon Companies, or any member of the immediate family or affiliate of any of
the foregoing, or (v) any agreement between any of the Marathon Companies and
any 5% or more shareholder of MFC.
(2) None of the Marathon Companies, nor to the
knowledge of MFC, the other party thereto, is in default under any material
agreement, commitment, arrangement, lease, insurance policy or other instrument
whether entered into in the ordinary course of business or otherwise, nor has
there occurred any event that, with the lapse of time or giving of
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notice or both, would constitute such a default, other than defaults of loan
agreements by borrowers from Marathon Bank in the ordinary course of its
business.
(3) Since December 31, 1999, the Marathon
Companies have not incurred or paid any obligation or liability that would be
material to the Marathon Companies, except obligations incurred or paid in
connection with transactions in the ordinary course of business of the Marathon
Companies consistent with their practices and, except as set forth in the
Disclosure from December 31, 1999 to the date hereof, the Marathon Companies
have not taken any action that, if taken after the date hereof, would breach any
of the covenants contained in Section 4.4 hereof
(p) Insurance. A complete list of all policies or binders
of fire, liability, product liability, workmen's compensation, vehicular and
other insurance held by or on behalf of the Marathon Companies shall be set
forth in the Disclosure and all such policies or binders are valid and
enforceable in accordance with their terms, are in full force and effect, and
insure against risks and liabilities to the extent and in the manner customary
for the industry and are deemed appropriate and sufficient by MFC. The Marathon
Companies are not in default with respect to any provision contained in any such
policy or binder and have not failed to give any notice or present any claim
under any such policy or binder in due and timely fashion. None of the Marathon
Companies has received notice of cancellation or non-renewal of any such policy
or binder. To the knowledge of MFC, there are no inaccuracies in any application
for such policies or binders, any failure to pay premiums when due or any
similar state of facts or the occurrence of any event that is reasonably likely
to form the basis for any material claim against it not fully covered (except to
the extent of any applicable deductible) by the policies or binders referred to
above. None of the Marathon Companies has received notice from any of its
insurance carriers that any insurance premiums will be increased materially in
the future or that any such insurance coverage will not be available in the
future on substantially the same terms as now in effect.
(q) Absence of Material Changes and Events. Except as set
forth in the Disclosure since December 31, 1999, there (i) has not been any
material adverse change in the condition (financial or otherwise), aggregate
assets or liabilities, cash flow, earnings or business of the Marathon Companies
(and to the knowledge of MFC, of Shenandoah and PTV), and the Marathon Companies
have conducted their businesses only in the ordinary course consistent with past
practice, and (ii) there has been no change in any accounting principles,
practices or methods of the Marathon Companies (and to the knowledge of MFC, of
Shenandoah and PTV) other than as required by GAAP.
(r) Loans, OREO and Allowance for Loan Losses.
(1) Except as set forth in the Disclosure, and
except for matters which individually or in the aggregate do not have a material
adverse effect on the Merger or the financial condition of the Marathon
Companies, to the knowledge of MFC, each loan reflected as an asset in the MFC
Financial Statements (i) is evidenced by notes, agreements, or other evidences
of indebtedness which are true, genuine and what they purport to be, (ii) to the
extent secured, has been secured by valid liens and security interests which
have been perfected, and
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(iii) is the legal, valid and binding obligation of the obligor named therein,
enforceable in accordance with its terms, subject to bankruptcy, insolvency and
other laws of general applicability relating to or affecting creditors' rights
and to general equity principles. All loans and extensions of credit which are
subject to regulation by the Federal Reserve which have been made by Marathon
Bank comply therewith.
(2) The classification on the books and records
of Marathon Bank of loans and/or non-performing assets as nonaccrual, troubled
debt restructuring, OREO or other similar classification, complies in all
material respects with generally accepted accounting principles and applicable
regulatory accounting principles.
(3) Except for liens, security interests,
claims, charges, or such other encumbrances as have been appropriately reserved
for in the MFC Financial Statements or are not material, title to the OREO is
good and marketable, and there are no adverse claims or encumbrances on the
OREO. All title, hazard and other insurance claims and mortgage guaranty claims
with respect to the OREO have been timely filed and the Marathon Companies have
not received any notice of denial of any such claim.
(4) The Marathon Bank is in possession of all of
the OREO or, if any of the OREO remains occupied by the mortgagor, eviction or
summary proceedings have been commenced or rental arrangements providing for
market rental rates have been agreed upon and Marathon Bank is diligently
pursuing such eviction or summary proceedings or such rental arrangements.
Except as set forth in the Disclosure, no legal proceeding or quasi-legal
proceeding is pending or, to the knowledge of MFC, threatened concerning any
OREO or any servicing activity or omission to provide a servicing activity with
respect to any of the OREO.
(5) Except as set forth in the Disclosure, all
loans made by Marathon Bank to facilitate the disposition of OREO are performing
in accordance with their terms.
(6) Except as set forth in the Disclosure, the
allowance for possible loan losses and the reserve for OREO shown on the MFC
Financial Statements was, and the allowance for possible loan losses and the
reserve for OREO shown on the consolidated financial statements of MFC as of
dates subsequent to the execution of this Agreement will be, in each case as of
the dates thereof, adequate in all material respects to provide for possible
losses, net of recoveries relating to loans previously charged off, on loans
outstanding (including accrued interest receivable) of the Marathon Bank and
other extensions of credit (including letters of credit and commitments to make
loans or extend credit) by the Marathon Bank, and for possible losses on OREO.
(s) Statements True and Correct. None of the information
supplied or to be supplied by the Marathon Companies (or to MFC's knowledge, any
information provided by Shenandoah and PTV) for inclusion in the Registration
Statement, the Joint Proxy Statement or any other document to be filed with the
SEC or any other regulatory authority in connection with the transactions
contemplated hereby, will, at the respective time such documents are filed, and,
in the case of the Registration Statement, when it becomes effective and with
respect to the Joint Proxy Statement, when first mailed to MFC shareholders, be
false or misleading with respect to
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any material fact or omit to state any material fact necessary in order to make
the statements therein not misleading, or, in the case of the Joint Proxy
Statement or any supplement thereto, at the time of the Rockingham Shareholders'
Meeting or the MFC Shareholders' Meeting, be false or misleading with respect to
any material fact or omit to state any material fact necessary to correct any
statement in any earlier communication with respect to the solicitation of any
proxy for the Rockingham Shareholders' Meeting or the MFC Shareholders' Meeting.
(t) Brokers and Finders. No Marathon Companies, nor any
of their respective officers, directors or employees, has employed any broker,
finder or financial advisor or incurred any liability for any fees or
commissions in connection with the transactions contemplated herein, except for
the retention of McKinnon & Company, Inc. to provide a fairness opinion.
(u) Repurchase Agreements. With respect to all agreements
pursuant to which any Marathon Company has purchased securities subject to an
agreement to resell, if any, any such Marathon Company has a valid, perfected
first lien or security interest in the government securities or other collateral
securing the repurchase agreement, and the value of such collateral equals or
exceeds the amount of the debt secured thereby.
(v) Administration of Trust Accounts. The Marathon
Companies have properly administered, in all respects material and which could
reasonably be expected to be material to the business, operations or financial
condition of the Marathon Companies, all accounts for which it acts as a
fiduciary including but not limited to accounts for which it serves as trustee,
agent, custodian, personal representative, guardian, conservator or investment
advisor, in accordance with the terms of the governing documents and applicable
state and federal law and regulation and common law. To the knowledge of MFC,
neither Marathon Bank, nor any director, officer or employee of Marathon Bank
has committed any breach of trust with respect to any such fiduciary account
which is material to or could reasonably be expected to be material to the
business, operations or consolidated financial condition of Marathon Companies,
and the accountings for each such fiduciary account are true and correct in all
material respects and accurately reflect the assets of such fiduciary account in
all material respects.
(w) Takeover Laws; No Dissenters Rights. The Marathon
Companies have taken all action necessary to exempt this Agreement and the
transactions contemplated hereby from the requirements of any "control share,"
"fair price," "affiliate transaction" or other anti-takeover laws and
regulations of any state, including without limitation Sections 13.1-725 through
13.1-728 of the VSCA, and Sections 13.1-728.1 through 13.1-728.9 of the VSCA.
Holders of MFC Common Stock do not have dissenters' rights in connection with
the Merger.
(x) Environmental Matters. To the knowledge of MFC, the
Marathon Companies are in substantial compliance with all Environmental Laws.
None of the Marathon Companies has received any communication alleging that any
Marathon Company is not in such compliance and, to the knowledge of MFC, there
are no present circumstances that would prevent or interfere with the
continuation of such compliance.
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ARTICLE 4
Conduct Prior to the Effective Date
4.1 Access to Records and Properties. Rockingham will keep MFC,
and the Marathon Companies will keep Rockingham, advised of all material
developments relevant to their respective businesses prior to consummation of
the Merger. Prior to the Effective Date, the Marathon Companies, on the one
hand, and Rockingham on the other, agree to give to the other party reasonable
access to all the premises, books, records (including tax returns filed and
those in preparation), properties, personnel and such other reasonably requested
information of it and its subsidiaries and to cause its officers to furnish the
other with such financial and operating data and other information with respect
to the business and properties as the other shall from time to time request for
the purposes of verifying the warranties and representations set forth herein;
provided, however, that (a) any such investigation shall be conducted in such
manner as not to interfere unreasonably with the operation of the respective
business of the other, and (b) no investigation pursuant to this Section 4.1
shall affect or be deemed to modify any representation or warranty made herein.
4.2 Confidentiality. Between the date of this Agreement and the
Effective Date or the date on which this Agreement is terminated per Article 7,
the Marathon Companies, Shenandoah and PTV and the Rockingham Companies each
will maintain in confidence, and cause its directors, officers, employees,
agents and advisors to maintain in confidence, and not use to the detriment of
the other party, any written, oral or other information obtained in confidence
from the other party or a third party in connection with this Agreement or the
transactions contemplated hereby unless such information is already known to
such party or to others not bound by a duty of confidentiality or unless such
information becomes publicly available through no fault of such party, unless
use of such information is necessary or appropriate in making any filing or
obtaining any consent or approval required for the consummation of the
transactions contemplated hereby or unless the furnishing or use of such
information is required by or necessary or appropriate in connection with legal
proceedings. If the Merger is not consummated, each party will return or destroy
as much of such written information as may be requested by the other Party.
4.3 Registration Statement, Proxy Statement and Shareholder
Approval. The Board of Directors of Rockingham, and the Board of Directors of
MFC, each will duly call and will hold a meeting of their respective
shareholders as soon as practicable for the purpose of approving the Merger, in
the case of Rockingham, and approving the Amended and Restated Articles of
Incorporation of MFC, substantially in the form attached hereto as Exhibit B,
and the issuance of MFC Common Stock ("Stock Approval"), in the case of MFC,
(the "Rockingham Shareholders' Meeting" and the "MFC Shareholders' Meeting",
respectively). Subject to the duties of the Board of Directors of Rockingham and
of MFC (as advised in writing by their respective counsel), Rockingham and MFC
each shall use its best efforts to solicit and obtain votes of the holders of
its Common Stock in favor of the Merger, in the case of
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Rockingham, and the Stock Approval, in the case of MFC, and will comply with the
provisions in their respective Articles of Incorporation and Bylaws relating to
the call and holding of a meeting of shareholders for such purpose; no member of
the Board of Directors of Rockingham or MFC shall advise or encourage
shareholders not to vote in favor of the Merger, in the case of Rockingham, or
Stock Approval, in the case of MFC; and Rockingham and MFC shall, at the other's
request, recess or adjourn the meeting if such recess or adjournment is deemed
by the other to be necessary or desirable. MFC and Rockingham will prepare
jointly the proxy statement/prospectus to be used in connection with the
Rockingham Shareholders' Meeting and the MFC Shareholders' Meeting (the "Joint
Proxy Statement"). MFC will prepare and file with the SEC the Registration
Statement, of which such Joint Proxy Statement shall be a part and will use its
best efforts to have the Registration Statement declared effective as promptly
as possible and will advise Rockingham promptly after MFC receives notice of the
time when the Registration Statement has become effective or any supplement or
amendment has been filed, of the issuance of any stop order or the suspension of
the qualification of the shares of capital stock issuable pursuant to the
Registration Statement, or the initiation or threat known to MFC of any
proceeding for any such purpose, or of any request by the SEC for the amendment
or supplement of the Registration Statement or for additional information. When
the Registration Statement or any post-effective amendment or supplement thereto
shall become effective, and at all times subsequent to such effectiveness, up to
and including the dates of the MFC and Rockingham Shareholders' Meetings, such
Registration Statement and all amendments or supplements thereto, with respect
to all information set forth therein furnished or to be furnished by Rockingham
and by the Marathon Companies relating to the Marathon Companies, (i) will
comply in all material respects with the provisions of the Securities Act of
1933 and any other applicable statutory or regulatory requirements, including
applicable state blue-sky and securities laws, and (ii) will not contain any
untrue statement of a material fact or omit to state a material fact required to
be stated therein or necessary to make the statements contained therein not
misleading; provided, however, in no event shall any party hereto be liable for
any untrue statement of a material fact or omission to state a material fact in
the Registration Statement made in reliance upon, and in conformity with,
written information concerning another party furnished by such other party
specifically for use in the Registration Statement. MFC shall use its best
efforts to obtain prior to the effective date of the Registration Statement, all
necessary state securities laws or "blue sky" permits and approvals required to
carry out the transactions contemplated by this Agreement. Prior to the
Effective Date, MFC shall notify the NASDAQ of the additional shares of Marathon
Common Stock to be issued by MFC in exchange for the shares of Rockingham Common
Stock.
4.4 Operation of the Business of Rockingham and MFC.
(1) The Rockingham Companies and each of the Marathon
Companies agree that from the date hereof to the Effective Date it shall use its
best efforts to (a) conduct its business in the regular, ordinary and usual
course consistent with past practice; (b) maintain and preserve intact its
business organization, properties, leases, employees and advantageous business
relationships and retain the services of its officers and key employees, (c)
take no action which would adversely affect or delay the ability of Rockingham
or the Marathon Companies to perform their respective covenants and agreements
on a timely basis under this Agreement and (d) take no action which would
adversely affect or delay the ability of the Marathon Companies to obtain any
necessary approvals, consents or waivers of any governmental authority required
for the transactions contemplated hereby or which would reasonably be expected
to result in any such approvals, consents or waivers containing any material
condition or restriction.
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(2) Without limiting the generality of the foregoing, and
except as otherwise provided in this Agreement and except to the extent required
by law or regulation or any governmental entity or to effect this merger, during
the period from the date of this Agreement to the Effective Date, neither the
Rockingham Companies nor the Marathon Companies shall without the prior written
consent of the other Party:
(a) Issue any shares of capital stock except
pursuant to the exercise of stock options or warrants outstanding as of the date
of this Agreement; (ii) change the terms of any outstanding stock options or
warrants; (iii) issue, grant or sell any option, warrant, call, commitment,
stock appreciation right, right to purchase or agreement of any character
relating to its authorized or issued capital stock; or (iv) split, combine,
reclassify or adjust any shares of its capital stock or otherwise change its
capitalization;
(b) Voluntarily make any changes in the
composition of its officers, directors or other key management personnel;
(c) Make any change in the compensation or title
of any Executive Officer (as defined in Regulation O) or any director or make
any change in the compensation or title of any other employee, other than in
accordance with past employment policies and practices in the ordinary course of
business, any of which changes shall be reported in writing promptly to the
other Party;
(d) Enter into, modify, or accelerate any bonus,
incentive compensation, stock option, deferred compensation, profit sharing,
thrift, retirement, pension, group insurance or other benefit plan or any
employment or consulting agreement;
(e) Incur any obligation, guarantee or liability
(whether absolute or contingent, excluding suits instituted against it), make
any pledge, encumber any of its assets, or dispose of any of its assets in any
other manner, except in the ordinary course of its business and for adequate
value;
(f) Make, or commit to make, capital
expenditures of $20,000 individually, or aggregating $100,000 or more;
(g) Knowingly waive any right to substantial
value;
(h) Enter into any material transactions
otherwise than in the ordinary course of its business;
(i) Alter, amend or repeal its Bylaws or
Articles of Incorporation;
(j) Implement or adopt any change in its
accounting principles, practices or methods, except as may be required by GAAP
or regulatory guidelines;
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(k) Settle any claim, action or proceeding
involving any liability for money damages in excess of $100,000 or imposing
material restrictions upon the operations of the Rockingham Companies or the
Marathon Companies;
(1) Acquire or agree to acquire, by merging or
consolidating with, or by purchasing a substantial equity interest in or a
substantial portion of the assets of, or by any other manner, any business or
any corporation, partnership, association or other business organization or
division thereof or otherwise acquire or agree to acquire any assets of such
business organizations;
(m) except for Rockingham's proposed branch
office in Weyers Cave, Virginia, establish or commit to the establishment of any
new branch or other office facilities;
(n) other than in the ordinary course of
business consistent with past practice, in individual amounts not to exceed
$50,000, make any investment either by purchase of stock or securities,
contributions to capital, property transfers, or purchase of any property or
assets of any other individual, corporation or other entity other than a
subsidiary;
(o) make any investment in any debt security,
including mortgage-backed and mortgaged-related securities (other than US
government and US government agency securities with final maturities not greater
than five years, mortgage-backed or mortgage related securities which would not
be considered "high risk" securities pursuant to Thrift Bulletin Number 52
issued by the OTS or securities of the FHLB, in each case that are purchased in
the ordinary course of business consistent with past practice);
(p) enter into, renew, amend or terminate any
contract or agreement, or make any change in any of its leases or contracts,
other than with respect to those involving aggregate payments of less than, or
the provision of goods or services with a market value of less than, $20,000 per
annum;
(q) knowingly take any action that would prevent
or impede the Merger from qualifying (i) for pooling-of-interests accounting
treatment or (ii) as a reorganization within the meaning of Section 368 of the
IRC;
(r) take any action that is intended or expected
to result in any of its representations and warranties set forth in this
Agreement becoming untrue at any time prior to the Effective Date, or in any of
the conditions to the Merger set forth in Article 6 not being satisfied, or in a
violation of any provision of this Agreement, except, in every case, as may be
required by applicable law; or
(s) other than in the ordinary course of
business consistent with past practice, (i) sell, transfer, mortgage, encumber
or otherwise dispose of any of its material properties, leases or assets to any
individual, corporation or other entity or (ii) cancel, release or assign any
material indebtedness of any such individual, corporation or other entity;
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(t) make, renew, increase, extend or purchase
any material loans other than in conformance with a written lending policy in
effect as of the date of this Agreement, or in the ordinary course of business
consistent with past practices;
(u) agree or make any commitment to take any
action that is prohibited by this Section 4.4.
4.5 Dividends. Neither Party shall make, declare or pay any cash
or stock dividend from the date of this Agreement through the Effective Date.
4.6 No Solicitation. Without the prior consent of the President of
the other Party, unless and until this Agreement shall have been terminated
pursuant to its terms, the Rockingham Companies and Marathon Companies, nor any
of their respective officers, directors, representatives or agents shall,
directly or indirectly, (i) encourage, solicit or initiate discussions or
negotiations with any person other than the other Party concerning any merger,
share exchange, sale of substantial assets, tender offer, sale of shares of
capital stock or similar transaction involving either of the Parties, (ii) enter
into any agreement with any third party providing for a business combination
transaction, equity investment or sale of a significant amount of assets
involving either of the Parties, or (iii) furnish any information to any other
person relating to or in support of such transaction; provided, however, that
nothing contained in this Section 4.6 shall prohibit the Board of Directors of
either Party from (i) furnishing information to, or entering into discussions or
negotiations with any person or entity that makes an unsolicited written, bona
fide proposal to acquire such Party pursuant to a merger, consolidation, share
exchange, business combination, tender or exchange offer or other similar
transaction, if, and only to the extent that, (A) such Board of Directors
receives a written opinion from its independent financial advisor that such
proposal may be superior to the Merger from a financial point-of-view to the
Party's shareholders, (B) the Board of Directors of such Party, after
consultation with its legal counsel, determines in its good faith business
judgment that such action is necessary for the Board of Directors to comply with
its duties to shareholders under applicable law (such proposal that satisfies
(A) and (B) being referred to herein as a "Superior Proposal") and (C) prior to
furnishing such information to, or entering into discussions or negotiations
with, such person or entity, such Party (1) provides reasonable notice to the
other Party to the effect that it is furnishing information to, or entering into
discussions or negotiations with, the party making the unsolicited proposal, and
(2) receives from such person or entity an executed confidentiality agreement in
reasonably customary form, (ii) complying with Rule l4e-2 promulgated under the
Exchange Act with regard to a tender or exchange offer, or (iii) failing to make
or withdrawing or modifying its recommendation to approve the Merger and
entering into the Superior Proposal if such Board of Directors, after
consultation with and based upon the advice of legal counsel, determines in its
good faith business judgment that such action is necessary for the Board of
Directors to comply with its duties to shareholders under applicable law.
4.7 Regulatory Filings. MFC shall (i) prepare all regulatory
filings required to consummate the transactions contemplated by the Agreement
and the Plan of Merger and submit the filings for approval with the Federal
Reserve Board and the SCC, and any other governing regulatory authority, as soon
as practicable after the date hereof, and (ii) provide copies of same
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to Rockingham contemporaneously with the Submission to the respective regulatory
authority MFC shall use its best efforts to obtain approvals of such filings.
4.8 Public Announcements. Each Party will consult with the other
before issuing any press release or otherwise making any public statements with
respect to the Merger and shall not issue any such press release or make any
such public statement prior to such consultations except as may be required by
law.
4.9 Notice of Breach. MFC and Rockingham will give written notice
to the other Party promptly upon becoming aware of the impending or threatened
occurrence of any event which would cause or constitute a breach of any of the
representations, warranties or covenants made to the other party in this
Agreement and will use its best efforts to prevent or promptly remedy the same.
4.10 Accounting Treatment. The Marathon Companies and Rockingham
shall each use their best efforts to ensure that the Merger qualifies for
pooling-of-interests accounting treatment.
4.11 Merger Consummation. Subject to the terms and conditions of
this Agreement, the Rockingham Companies and the Marathon Companies shall use
their best efforts in good faith to take, or cause to be taken, all actions, and
to do or cause to be done all things necessary, proper or desirable, or
advisable under applicable laws, as promptly as practicable so as to permit
consummation of the Merger at the earliest possible date, consistent with
Section 1.3 herein, and to otherwise enable consummation of the transactions
contemplated hereby and shall cooperate fully with the other Parties hereto to
that end, and each of Rockingham and MFC shall use, and shall cause each of
their respective subsidiaries to use, its best efforts to obtain all consents
(governmental or other) necessary or desirable for the consummation of the
transactions contemplated by this Agreement.
4.12 Notification of Certain Matters. The Marathon Companies and
Rockingham Companies shall give prompt notice to the other Party of: (i) any
event or notice of, or other communication relating to, a default or event that,
with notice or lapse of time or both, would become a default, received by such
party subsequent to the date of this Agreement and prior to the Effective Date,
under any contract material to the financial condition, properties, businesses
or results of operations of the Marathon Companies or Rockingham Companies; and
(ii) any event, condition, change or occurrence which individually or in the
aggregate has, or which, so far as reasonably can be foreseen at the time of its
occurrence, is reasonably likely to result in a material adverse effect or which
would have been required to be disclosed in such party's Disclosure had such
event, condition, change or occurrence been known at the time such party
delivered its Disclosure; provided, however, that no notice provided pursuant to
this Section 4.12 shall affect or be deemed to modify any representation or
warranty made herein. Each of the Rockingham Companies and the Marathon
Companies shall give prompt notice to the other party of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with any of the transactions contemplated by
this Agreement.
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ARTICLE 5
Additional Agreements
5.1 Registration of Shares. MFC shall take such steps as are
reasonably necessary to provide that shares of MFC Common Stock to be issued to
shareholders of Rockingham pursuant to this Agreement (including shares issued
upon the exercise of outstanding options for Rockingham Common Stock) will be
registered under the Securities Act of 1933, as amended.
5.2 Benefit Plans. As soon as administratively practicable after
the Effective Date, the Parties shall use their best efforts to combine all
existing employee pension, benefit, health and similar plans on the same terms
and conditions, without waiting periods or exceptions for pre-existing
conditions, giving effect to years of service with the respective Parties, and
as otherwise required by law.
5.3 Indemnification. MFC agrees that following the Effective Date,
it shall indemnify and hold harmless any person who has rights to
indemnification from Rockingham, to the same extent and on the same conditions
as such person is entitled to indemnification pursuant to Virginia law and
Rockingham's Articles of Incorporation or Bylaws, as in effect on the date of
this Agreement, to the extent legally permitted to do so, with respect to
matters occurring on or prior to the Effective Date. MFC further agrees that any
such person who has rights to indemnification pursuant to this Section 5.3 is
expressly made a third party beneficiary of this Section 5.3 and may directly,
in such person's personal or representative capacity, enforce such rights
through an action at law or in equity or through any other manner or means of
redress allowable under Virginia law to the same extent as if such person were a
party hereto. Without limiting the foregoing, in any case in which corporate
approval may be required to effectuate any indemnification, MFC shall direct, at
the election of the party to be indemnified, that the determination of
permissibility of indemnification shall be made by independent counsel mutually
agreed upon between MFC and the indemnified party. MFC shall maintain
Rockingham's existing directors' and officers' liability policy or some other
policy providing coverage (i) in amounts and upon terms no less favorable to the
persons currently covered by Rockingham's existing policy and (ii) such that
there will be continuous and uninterrupted insurance for potential or existing
claims, whether made or not made, upon terms no less favorable to the persons
currently covered by Rockingham's existing policy. In the event MFC or any of
its successors or assigns (i) consolidates with or merges into any other person
or entity and shall not be the continuing or surviving corporation or entity of
such consolidation or merger, or (ii) transfers or conveys all or substantially
all of its properties and assets to any person or entity, then, and in each such
case, to the extent necessary, proper provision shall be made so that the
successors and assigns of MFC assume the obligations set forth in this Section
5.3.
ARTICLE 6
Conditions to the Merger
6.1 Conditions to Each Party's Obligations to Effect the Merger.
The respective obligations of each of the Marathon Companies and the Rockingham
Companies to effect the
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Merger and the other transactions contemplated by this Agreement shall be
subject to the fulfillment or waiver at or prior to the Effective Date of the
following conditions:
(a) Shareholder Approvals. Shareholders of Rockingham
shall have approved all matters relating to this Agreement and the Merger
required to be approved by such shareholders in accordance with Virginia law,
and shareholders of MFC shall have approved the Stock Approval in accordance
with Virginia law.
(b) Regulatory Approvals. This Agreement and the Plan of
Merger shall have been approved by all regulatory authorities whose approval is
required for consummation of the transactions contemplated hereby, and such
approvals shall not have imposed any condition or requirement which would so
materially adversely impact the economic or business benefits of the
transactions contemplated by this Agreement as to render inadvisable the
consummation of the Merger in the reasonable opinion of the Board of Directors
of MFC or Rockingham.
(c) Registration Statement. The Registration Statement
shall have been declared effective and shall not be subject to a stop order or
any threatened stop order.
(d) Opinions of Counsel. Rockingham shall have delivered
to MFC and MFC shall have delivered to Rockingham opinions of counsel, dated as
of the Effective Date, as to such matters as they may each reasonably request
with respect to the transactions contemplated by this Agreement and in a form
reasonably acceptable to each of them.
(e) Legal Proceedings. Neither the Marathon Companies nor
the Rockingham Companies shall be subject to any order, decree or injunction of
a court or agency of competent jurisdiction which enjoins or prohibits the
consummation of the Merger, and there shall not be pending or instituted any
material proceeding, for the purpose of enjoining or prohibiting the
consummation of the Merger or any transactions contemplated by this Agreement.
No statute, rule or regulation shall have been enacted, entered, promulgated or
enforced by any governmental entity which prohibits, restricts or makes illegal
consummation of the Merger.
(f) Accountants' Letter. MFC and Rockingham shall have
received letters, dated as of the Effective Date, from both Yount, Hyde &
Barbour, P.C. and McGladrey & Pullen, L.L.C., satisfactory in form and substance
to both Parties, that the Merger will qualify for pooling-of-interests
accounting treatment under generally accepted accounting principles.
(g) Employment Agreements. The Board of Directors of each
MFC and Rockingham will have approved substantially similar employment
agreements for Unger and Stephens, respectively.
(h) Registration Statement; Blue Sky Laws. The
Registration Statement shall have been declared effective by the SEC and no
proceedings shall be pending or threatened by the SEC to suspend the
effectiveness of the Registration Statement, and MFC shall have
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received all required approvals by state securities or "blue sky" authorities
with respect to the transactions contemplated by this Agreement.
(i) Third Party Consents. The Parties shall have obtained
the consent or approval of each person (other than the regulatory approvals
referred to in Sections 4.7 and 6.1(b)) whose consent or approval shall be
required under any loan or credit agreement, note, mortgage, indenture, lease,
license, guarantee, indemnification or other agreement or instrument to which
the Rockingham Companies are a party or are otherwise bound, except those for
which failure to obtain such consents and approvals would not, individually or
in the aggregate, have a material adverse effect upon the consummation of the
transactions contemplated by this Agreement.
(j) Articles of Amendment. The Articles of Amendment in
the form attached hereto shall have been filed with the State Corporation
Commission, reflecting an effective date prior to the date of the Merger
Closing.
6.2 Conditions to Obligations of MFC. The obligations of MFC to
effect the Merger shall be subject to the fulfillment or waiver at or prior to
the Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the
representations and warranties contained herein of Rockingham shall be true and
correct as of the date of this Agreement and upon the Effective Date with the
same effect as though all such representations and warranties had been made on
the Effective Date, except (i) for any such representations and warranties made
as of a specified date, which shall be true and correct as of such date, (ii) as
expressly contemplated by this Agreement, or (iii) for representations and
warranties the inaccuracies of which relate to matters that, individually or in
the aggregate, do not materially adversely affect the Merger and the other
transactions contemplated by this Agreement and MFC shall have received a
certificate or certificates signed by the Chief Executive Officer and Chief
Financial Officer of Rockingham dated the Effective Date, to such effect.
(b) Performance of Obligations. Rockingham shall have
performed in all material respects all obligations required to be performed by
it under this Agreement prior to the Effective Date, and MFC shall have received
a certificate signed by the Chief Executive Officer of Rockingham to that
effect.
(c) Affiliate Letters. Each shareholder of Rockingham who
may be deemed by counsel for MFC to be an "affiliate" of Rockingham within the
meaning of Rule 145 under the Securities Act of 1933 shall have executed and
delivered a commitment and undertaking to the effect that (1) such shareholder
will dispose of the shares of MFC Common Stock received by him in connection
with the Merger only in accordance with the provisions of paragraph (d) of Rule
145 and in a manner that would not prevent the Merger from qualifying for
pooling-of-interests accounting treatment; (2) such shareholders will not
dispose of any such shares until MFC has received an opinion of counsel
acceptable to it that such proposed disposition will not violate the provisions
of any applicable securities laws; and (3) the certificates representing said
shares may bear a conspicuous legend referring to the forgoing restrictions.
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(d) Investment Banking Letter. MFC shall have received a
written opinion in form and substance satisfactory to MFC from McKinnon &
Company, Inc. addressed to MFC and dated the date the Joint Proxy Statement is
mailed to shareholders of MFC, to the effect that the terms of the Merger,
including the Exchange Ratio, are fair, from a financial point of view, to NEC.
At its option, MFC may require that such fairness opinion be updated as of the
Effective Date and, in such event, it shall also be a condition to MFC's
obligation to consummate the Merger that MFC receive such updated opinion.
(e) Good Standing and Other Certificates. MFC shall have
received certificates (such certificates to be dated as of a day as close as
practicable to the Merger Closing Date) from appropriate authorities as to the
corporate existence of the Rockingham Companies and such other documents and
certificates to evidence fulfillment of the conditions set forth in Sections 6.1
and 6.2 as MFC may reasonably require.
6.3 Conditions to Obligations of Rockingham. The obligations of
Rockingham to effect the Merger shall be subject to the fulfillment or waiver at
or prior to the Effective Date of the following additional conditions:
(a) Representations and Warranties. Each of the
representations and warranties contained herein of the Marathon Companies shall
be true and correct as of the date of this Agreement and upon the Effective Date
with the same effect as though all such representations and warranties had been
made on the Effective date, except (i) for any such representations and
warranties made as of a specified date, which shall be true and correct as of
such date, (ii) as expressly contemplated by this Agreement, or (iii) for
representations and warranties the inaccuracies of which relate to matters that,
individually or in the aggregate, do not materially adversely affect the Merger
and the other transactions contemplated by this Agreement and Rockingham shall
have received a certificate or certificates signed by the Chief Executive
Officer and Chief Financial Officer of each of the Marathon Companies dated the
Effective Date, to such effect.
(b) Performance of Obligations. The Marathon Companies
shall have performed in all material respects all obligations required to be
performed by it under this Agreement prior to the Effective Date, and Rockingham
shall have received a certificate signed by the Chief Executive Officer of each
of the Marathon Companies to that effect.
(c) Investment Banking Letter. Rockingham shall have
received a written opinion in form and substance satisfactory to Rockingham from
Scott & Stringfellow, P.C. addressed to Rockingham and dated the date the Joint
Proxy Statement is mailed to shareholders of Rockingham, to the effect that the
terms of the Merger, including the Exchange Ratio, are fair, from a financial
point of view, to Rockingham. At its option, Rockingham may require that such
fairness opinion be updated as of the Effective Date and, in such event, it
shall also be a condition to Rockingham's obligation to consummate the Merger
that Rockingham receive such updated opinion.
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(d) Tax Opinion. Rockingham shall have received an
opinion of Kaufman & Canoles, or other counsel reasonably satisfactory to
Rockingham, to the effect that the Merger will constitute a reorganization
within the meaning of Section 368 of the Internal Revenue Code and that (i) no
gain or loss will be recognized by the shareholders of Rockingham to the extent
they receive MFC Common Stock solely in exchange for their Rockingham Common
Stock in the Merger, (ii) the holding period of the shares of MFC Common Stock
received pursuant to the Merger by Rockingham's shareholders will include the
holding period of the shares of Rockingham Common Stock exchanged therefor,
provided that the Rockingham Common Stock was held as a capital asset at the
effective time of the Merger.
(e) Good Standing and Other Certificates. Rockingham
shall have received certificates (such certificates to be dated as of a day as
close as practicable to the Merger Closing Date) from appropriate authorities as
to the corporate existence of the Marathon Companies and such other documents
and certificates to evidence fulfillment of the conditions set forth in Sections
6.1 and 6.2 as Rockingham may reasonably require.
ARTICLE 7
Termination
7.1 Termination. Notwithstanding any other provision of this
Agreement, and notwithstanding the approval of this Agreement and the Plan of
Merger by the shareholders of MFC and Rockingham, this Agreement may be
terminated and the Merger abandoned at any time prior to the Effective Date:
(a) By the mutual consent of the Board of Directors of
each of MFC and Rockingham in a written instrument;
(b) By the respective Boards of Directors of MFC or
Rockingham if the conditions set forth in Section 6.1 have not been met, or
waived by both Parties, by October 30, 2000, provided that the party seeking
termination is not then in material breach of any of its obligations, covenants,
representations, warranties or other agreement contained in this Agreement.
(c) By the Board of Directors of MFC if the conditions
set forth in Section 6.2 have not been met by Rockingham or waived by MFC by
October 30, 2000, provided that the Marathon Companies are not then in material
breach of any of their obligations, covenants, representations, warranty or
other agreement contained in this Agreement;
(d) By the Board of Directors of Rockingham if the
conditions set forth in Section 6.3 have not been met by the Marathon Companies
or waived by Rockingham by October 30, 2000, provided that the Rockingham
Companies are not then in material breach of any of their obligations,
covenants, representations, warranty or other agreement contained in this
Agreement;
(e) By either MFC or Rockingham, if its Board of
Directors so determines, by vote of a majority of the members of its entire
Board, in the event that the Merger is not
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consummated by February 1, 2001, unless the failure to so consummate by such
time is due to the breach of any representation, warranty or covenant contained
in this Agreement by the party seeking to terminate;
(f) By the Board of Directors of Rockingham if, before
the Effective Date, MFC shall enter into any agreement or letter of intent
providing for the direct or indirect acquisition of substantially all of the
assets and liabilities or voting stock of any of the Marathon Companies.
(g) By the Board of Directors of MFC, if, before the
Effective Date, Rockingham shall enter into any agreement or letter of intent
providing for the direct or indirect acquisition of substantially all of the
assets and liabilities or voting stock of any of the Rockingham Companies.
(h)(i) By a vote of a majority of the Board of Directors of
MFC at any time during the 45 day period following the date of this Agreement if
MFC determines in its sole good faith business judgment that, in the aggregate,
the financial condition, business, prospects or regulatory status of the
Rockingham Companies are materially and adversely different from what was
reasonably expected by MFC, based on the Rockingham Financial Statements, the
Disclosure, and other information disclosed by Rockingham prior to the execution
of this Agreement; provided that MFC shall inform Rockingham upon any such
termination as to the reasons for MFC's determination, and provided further,
that this Section 7.1(h)(i) shall not limit in any way the due diligence
investigation of Rockingham which MFC may perform, or otherwise affect any other
rights which MFC has after the date hereof and after the expiration of such 45
day period following the date hereof, under the terms of this Agreement;
(ii) By a vote of a majority of the Board of
Directors of Rockingham at any time during the 45 day period following the date
of this Agreement, if Rockingham determines in its sole good faith business
judgment that, in the aggregate, the financial condition, business, prospects or
regulatory status of the Marathon Companies, Shenandoah and PTV is materially
adversely different from what was reasonably expected by Rockingham, based on
the MFC Financial Statements, the Disclosure, and other information disclosed by
the Marathon Companies prior to the execution of this Agreement; provided that
Rockingham shall inform MFC upon any such termination as to the reasons for
Rockingham's determination; and, provided further, that this Section 7.1(h)(ii)
shall not limit in any way the due diligence investigation of the Marathon
Companies which Rockingham may perform, or otherwise affect any other rights
which Rockingham has after the date hereof and after the expiration of such 45
day period following the date hereof, under the terms of this Agreement;
(i) By the respective Boards of Directors of MFC or
Rockingham, if a Party has received an unsolicited Superior Proposal, as defined
in Section 4.6, and the Board of such Party determines in its good faith
business judgment that the Superior Proposal must be accepted in order to comply
with the Board of Directors' duties to shareholders under applicable law.
7.2 Effect of Termination. In the event of the termination and
abandonment of this agreement and the Merger pursuant to Section 7.1, this
Agreement shall become void and have
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no effect, except that all of Sections 4.2, 4.8 and 7.4 shall survive any such
termination and abandonment and no party shall be relieved or released from any
liability arising out of an intentional breach of any provision of this
Agreement.
7.3 Non-Survival of Representations, Warranties and Covenants.
Except for Sections 1.2, 1.4, 2.1, 2.2, 2.3, 2.4, 2.5, 4.2, 4.8, 4.10, 5.1, 5.2,
5.3, 7.4 and Article 8 of this Agreement, none of the respective representations
and warranties, obligations, covenants and agreements of the parties shall
survive the Effective Date, provided that no such representations, warranties,
obligations, covenants and agreements shall be deemed to be terminated or
extinguished so as to deprive MFC or Rockingham (or any director, officer, or
controlling person thereof of any defense in law or equity which otherwise would
be available against the claims of any person, including without limitation any
shareholder or former shareholder of either MFC or Rockingham.
7.4 Expenses. The Parties provide for the payment of expenses as
follows:
(a) Except as provided below, each of the Parties shall
bear and pay all costs and expenses incurred by it or on its behalf in
connection with the transactions contemplated herein, including fees and
expenses of its own consultants, investment bankers, accountants and counsel.
(b) Notwithstanding the provisions of Section 7.4(a)
hereof, if for any reason the Merger is not approved by the shareholders of
Rockingham or the Stock Approval is not approved by the shareholders of MFC, the
non-approving party shall bear and pay 50% of the costs and expenses incurred by
the other Party with respect to the fees and expenses of accountants, counsel,
printers and persons involved in the transactions contemplated by this
Agreement, including the preparation of the Registration Statement and the Joint
Proxy Statement.
(c) If this Agreement is terminated by MFC or Rockingham
because of a willful and material breach by the other of any representation,
warranty, covenant, undertaking or restriction set forth herein, and provided
that the terminating Party shall not have been in breach (in any material
respect) of any representation and warranty, covenant, undertaking or
restriction contained herein, then the breaching Party shall bear and pay all
such costs and expenses of the other Party, including fees and expenses of
consultants, investment bankers, accountants, counsel, printers, and persons
involved in the transactions contemplated by this Agreement, including the
preparation of the Registration Statement and the Joint Proxy Statement.
(d) Any liability to the other incurred by Rockingham or
MFC pursuant to Section 7.4(b) and (c), above, shall not exceed a total of
$50,000.
(e) If this Agreement is terminated by MFC or Rockingham
(i) under Section 7.1(i) due to Rockingham's pursuit of a Superior Proposal, or
(ii) any Specified Event (as defined below) occurs after the date of this
Agreement, then Rockingham shall pay MFC the amount of $400,000 to compensate
MFC for all of its out-of-pocket and internal costs and
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expenses associated with this transaction. The term "Specified Event" for
purposes of this subsection shall mean the following:
(1) Rockingham, without having received MFC's
prior written consent, shall have entered into an agreement with any person
other than MFC to (i) acquire, merge or consolidate, or enter into any similar
transaction, with Rockingham, (ii) purchase, lease, or otherwise acquire all or
substantially all of the assets of Rockingham, or (iii) purchase or otherwise
acquire directly from Rockingham securities representing 10% or more of the
voting power of Rockingham; or
(2) After the date of this Agreement, any person
shall have made a bona fide proposal to Rockingham by public announcement or
written communication that is or becomes the subject of public disclosure to
acquire Rockingham by merger, share exchange, consolidation, purchase of all or
substantially all of its assets or any other similar transaction, and within six
(6) months after the termination of this Agreement, Rockingham enters into an
agreement to be acquired by such person.
(f) If this Agreement is terminated by Rockingham or MFC
(i) for any reason under Section 7.1(i) due to MFC's pursuit of a Superior
Proposal, or (ii) any Specified Event (as defined below) occurs after the date
of this Agreement, then MFC shall pay Rockingham the amount of $400,000 to
compensate Rockingham for all of its out-of-pocket and internal costs and
expenses associated with this transaction. The term "Specified Event" for
purposes of this subsection shall mean the following:
(1) MFC, without having received Rockingham's
prior written consent, shall have entered into an agreement with any person
other than Rockingham to (i) acquire, merge or consolidate, or enter into any
similar transaction, with MFC, (ii) purchase, lease, or otherwise acquire all or
substantially all of the assets of MFC, or (iii) purchase or otherwise acquire
directly from MFC securities representing 10% or more of the voting power of
MFC; or
(2) After the date of this Agreement, any person
shall have made a bona fide proposal to MFC by public announcement or written
communication that is or becomes the subject of public disclosure to acquire MFC
by merger, share exchange, consolidation, purchase of all or substantially all
of its assets or any other similar transaction, and within six (6) months after
the termination of this Agreement, MFC enters into an agreement to be acquired
by such person.
(g) Final settlement with respect to the payment of such
fees and expenses by the Parties shall be made within thirty (30) days after the
termination of this Agreement, except in the case of subsections 7.4(e)(2) and
7.4(f)(2) for which settlement must be made within thirty (30) days after such
party enters into an agreement as described therein.
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ARTICLE 8
General Provisions
8.1 Entire Agreement. This Agreement contains the entire agreement
among the Marathon Companies and Rockingham with respect to the Merger and the
related transactions and supersedes all prior arrangements or understandings
with respect thereto.
8.2 Waiver and Amendment. Any term or provision of this Agreement
may be waived in writing at any time by the party which is, or whose
shareholders are, entitled to the benefits thereof, and this Agreement may be
amended or supplemented by written instructions duly executed by the parties
hereto at any time, whether before or after the meetings of Rockingham and MFC
shareholders referred to in Section 6.1(a) hereof, except statutory requirements
and requisite approvals of shareholders and regulatory authorities.
8.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning and construction of any
provisions of this Agreement.
8.4 Governing Law. Except as required otherwise or otherwise
indicated herein, this Agreement shall be construed and enforced according to
the laws of the Commonwealth of Virginia.
8.5 Notices. All notices or other communications which are
required or permitted hereunder shall be in writing and sufficient if delivered
personally or sent by registered or certified mail, postage prepaid, addressed
as follows:
If to MFC:
Donald Unger, President
MFC Financial Corporation
4095 Valley Pike
Winchester, Virginia 22602
(Tel. (540) 869-6600)
Copy to:
Wayne A. Whitham, Jr.
Williams, Mullen, Clark & Dobbins, P.C.
1021 E. Cary Street
P. O. Box 1320
Richmond, VA 23218-1320
(Tel. (804) 783-6473)
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If to Rockingham
John K. Stephens, President
Rockingham Heritage Bank
110 University Boulevard
Harrisonburg, Virginia 22801
Copy to
Stephen T. Heitz, Esq.
Litten & Sipe, L.L.P.
410 Neff Avenue
Harrisonburg, VA 22801
(Tel. (540) 434-5353)
Stephan W. Milo, Esq.
Wharton, Aldhizer & Weaver, PLC
100 South Mason Street
Harrisonburg, VA 22801-7528
8.6 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but such counterparts together
shall constitute one and the same agreement.
8.7 Severability. In the event any provisions of this Agreement
shall be held invalid or unenforceable by any court of competent jurisdiction,
such holding shall not invalidate or render unenforceable any other provisions
hereof. Any provision of this Agreement held invalid or unenforceable only in
part or degree shall remain in full force and effect to the extent not held
invalid or unenforceable. Further, the parties agree that a court of competent
jurisdiction may reform any provision of this Agreement held invalid or
unenforceable so as to reflect the intended agreement of the parties hereto.
8.8 Brokers and Finders. Except for McKinnon & Company and Scott &
Stringfellow, P.C., each of the Parties represents and warrants that neither it
nor any of its officers, directors, employees, affiliates, or subsidiaries has
employed any broker or finder or incurred any liability for any financial
advisory fees, investment banker's fees, brokerage fees, commissions, or
finders' fees in connection with this Agreement or the transactions contemplated
hereby. In the event of any claim by any broker or finder based upon his or its
representing or being retained by or allegedly representing or being retained by
either MFC or Rockingham, the Marathon Companies or Rockingham, as the case may
be, agrees to indemnify and hold the other party harmless of and from any such
claim.
8.9 Subsidiaries. To the extent any representations, warranties,
and covenants in this Agreement are made relative to a Party's subsidiary, such
subsidiary shall be deemed to have made such representations, warranties, and
covenants together with such Party.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in counterparts by their duly authorized officers and their corporate
seals to be affixed hereto, all as of the date first written above.
MFC FINANCIAL CORPORATION
By: /s/ Donald Unger
-----------------------------------------
Donald Unger
President and Chief Executive Officer
MARATHON MERGER BANK
By: /s/ Donald Unger
-----------------------------------------
Donald Unger
President and Chief Executive Officer
MARATHON BANK
By: /s/ Donald Unger
-----------------------------------------
Donald Unger
President and Chief Executive Officer
ROCKINGHAM HERITAGE BANK
By: /s/ John K. Stephens
------------------------------------------
John K. Stephens
President and Chief Executive Officer
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EXHIBIT A
to the Agreement and
Plan of Merger
PLAN OF MERGER
BETWEEN
ROCKINGHAM HERITAGE BANK,
AND
MARATHON MERGER BANK
Pursuant to this Plan of Merger ("Plan of Merger"), Marathon Merger
Bank ("Merger Subsidiary") a wholly-owned subsidiary of Marathon Financial
Corporation, a Virginia corporation ("MFC"), shall be merged with and into
Rockingham Heritage Bank, a Virginia banking corporation ("Rockingham") pursuant
to a merger under Section 13.1-716, et seq. of the Virginia Stock Corporation
Act (the "Merger").
ARTICLE 1
Terms of the Merger
1.1 The Merger. Subject to the terms and conditions of the Amended
and Restated Agreement and Plan of Merger ("Agreement'), dated as of June 21,
2000 between Rockingham, MFC Merger Subsidiary and Marathon Bank, the Merger
Subsidiary shall be merged with and into Rockingham, as follows: at 11:59 p.m.
on the Effective Date (the "Effective Time"), (i) each of the shares of the
capital stock of the Merger Subsidiary issued and outstanding immediately prior
to the Effective Time shall cease to be outstanding and shall be converted into
and become one share of common stock of Rockingham, and (ii) each of the shares
of capital stock of Rockingham issued and outstanding immediately prior to the
Effective Time, excluding shares held by MFC (other than in a fiduciary capacity
or as a result of debts previously contracted), shall cease to be outstanding
and shall be converted into and become shares of common stock of MFC based upon
the Exchange Ratio (defined below). The separate corporate existence of Merger
Subsidiary shall thereupon cease, and from and after the Effective Date, the
Merger shall have the effect set forth in Section 13.1-721 of the Virginia Stock
Corporation Act. Rockingham will be the surviving corporation in the Merger and
its name and corporate existence, with all of its rights, privileges,
immunities, powers and franchises, shall continue in accordance with applicable
law.
1.2 Articles of Incorporation and Bylaws. The Articles of
Incorporation and Bylaws of Rockingham in effect immediately prior to the
consummation of the Merger shall remain in effect subsequent to the Effective
Date until otherwise amended or repealed.
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ARTICLE 2
Manner of Exchanging Shares
2.1 Conversion of Shares. Upon and by reason of the Merger
becoming effective and except as set forth in Section 2.3 below, no cash shall
be allocated to the shareholders of Rockingham and stock shall be issued and
allocated as follows: each share of Rockingham common stock issued and
outstanding immediately prior to the Effective Date shall, by operation of law,
cease to be outstanding and shall automatically be converted into and exchanged
for 1.58 shares (the "Exchange Ratio") of MFC common stock. In the event MFC
changes the number of shares of MFC common stock issued and outstanding prior to
the Effective Date as a result of any stock split, stock dividends,
recapitalization or similar transaction with respect to the outstanding MFC
common stock, and the record date therefor shall be prior to the Effective Date,
the Exchange Ratio shall be proportionately adjusted. The Merger shall become
effective on the date (the "Effective Date") shown on the Certificate of Merger
issued by the SCC. Unless otherwise agreed upon in writing by the chief
executive officers of MFC and Rockingham, subject to the conditions to the
obligations of the parties to effect the Merger as set forth in Article 6 of the
Agreement, the Parties shall use their best efforts to cause the Effective Date
to occur on the first day of the first quarter following the month in which the
conditions set forth in Article 6 are satisfied.
2.2 Manner of Exchange
(a) At and after the Effective Date, each Rockingham
Certificate previously representing shares of Rockingham common stock shall
represent only the right to receive the consideration set forth in Sections 2.1
and 2.3 (hereinafter, the "Merger Consideration"). As promptly as practicable
after the Effective Date, Merger Subsidiary shall cause Registrar and Transfer
Corporation acting as the exchange agent ("Exchange Agent"), to send to each
shareholder of record of Rockingham immediately prior to the Effective Date,
transmittal materials for use in exchanging such shareholder's certificates of
properly endorsed Rockingham common stock (or an indemnity and such affidavit or
other documentation satisfactory to MFC and the Exchange Agent, in their
reasonable judgment, if any of such certificates are lost, stolen or destroyed)
(together "Rockingham Certificates") for the Merger Consideration. Each
shareholder, upon the surrender of his Rockingham Certificates to the Exchange
Agent, duly endorsed for transfer, will be entitled to receive in exchange
therefore (i) the Merger Consideration, and (ii) the right to receive any
dividends previously declared but unpaid as to such stock, provided, however,
that no interest will be paid on any such fractional share checks or dividends
to which the holder of such shares shall be entitled to receive upon such
delivery.
(b) After the Effective Date there shall be no transfers
on the stock transfer records of Rockingham of any shares of Rockingham common
stock. The Exchange Agent shall not be entitled to vote or exercise any rights
of ownership with respect to the shares of MFC common stock held by it from time
to time hereunder, except that it shall receive and hold all dividends or other
distributions paid or distributed with respect to such shares for the account of
the persons entitled thereto.
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<PAGE>
(c) Any portion of the aggregate amount of cash to be
paid in lieu of fractional shares pursuant to Section 2.3 hereof, and dividends
or other distributions to be paid pursuant to Section 2.4 of the Agreement, or
any interest or investment proceeds from such sums that remain unclaimed by the
shareholders of Rockingham for six months after the Effective Date shall be paid
by the Exchange Agent to Merger Subsidiary upon the written request of Merger
Subsidiary. Thereafter, any shareholders of Rockingham who have not theretofore
complied with this Section 2 shall look only to Merger Subsidiary for the Merger
Consideration deliverable in respect of each share of Rockingham common stock
such shareholder holds, without any interest thereon.
(d) If any outstanding Rockingham Certificates are not
surrendered prior to the date on which such payments would otherwise escheat to
or become the property of any governmental unit or agency, the unclaimed items
shall, to the extent permitted by any abandoned property, escheat or other
applicable laws, become the property of Merger Subsidiary immediately prior to
such date (and, to the extent not in its possession, shall be paid over to it),
free and clear of all claims or interest of any person previously entitled to
such claims. Notwithstanding the foregoing, neither the Exchange Agent nor any
party to this Agreement (or any subsidiary thereof) shall be liable to any
former holder of Rockingham common stock for any amount delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
2.3 No Fractional Shares. No certificates or scrip for fractional
shares of MFC common stock will be issued. In lieu thereof, Rockingham
shareholders shall be paid the value of such fractional shares in cash on the
basis of the fair market value of MFC common stock immediately preceding the
Effective Time. The market value of MFC common stock will be its average closing
sales price as reported on the NASDAQ for each of the ten full trading days
ending on the fifth day prior to the Effective Date.
ARTICLE 3
Termination
This Plan of Merger may be terminated at any time prior to the
Effective Date by the parties hereto as provided in Article 7 of the Agreement.
MARATHON MERGER BANK
By:_____________________________________
Donald Unger
President and Chief Executive Officer
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<PAGE>
ROCKINGHAM HERITAGE BANK
By:_____________________________________
John K. Stephens
President and Chief Executive Officer
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<PAGE>
EXHIBIT B
to the Agreement and
Plan of Merger
AMENDED AND RESTATED
ARTICLES OF INCORPORATION OF
PREMIER COMMUNITY BANKSHARES, INC.
ARTICLE I
The name of the Corporation is:
PREMIER COMMUNITY BANKSHARES, INC,
ARTICLE II
(1) Authorized Shares; No Preemptive Rights. The Corporation shall
have authority to issue 20,000,000 shares of Common Stock, par value $1.00 per
share, and 1,000,000 shares of Preferred Stock, without par value. No holder of
shares of any class of the Corporation shall have any preemptive or preferential
right to purchase or subscribe to (i) any shares of any class of the
Corporation, whether now or hereafter authorized; (ii) any warrants, rights or
options to purchase any such shares; or (iii) any securities or obligations
convertible into any such shares or into warrants, rights or options to purchase
any such shares.
(2) Preferred Stock. The Board of Directors may determine the
preferences, limitations and relative rights, to the extent permitted by the
Virginia Stock Corporation Act, of any class of shares of Preferred Stock before
the issuance of any shares of such class, or of one or more series within a
class of Preferred Stock before the issuance of any shares of such series. Each
such class or series shall be appropriately designated by a distinguishing
designation prior to the issuance of any shares thereof. The Preferred Stock of
all series shall have preferences, limitations and relative rights identical
with those of other shares of the same series and, except to the extent
otherwise provided in the description of the series, with those of shares of
other series of the same class.
Prior to the issuance of any shares of a class or series of Preferred
Stock, (a) the Board of Directors shall establish such class or series by
adopting a resolution and by filing with the State Corporation Commission of
Virginia articles of amendment setting forth the designation and number of
shares of the class or series and the relative rights and preferences thereof,
and (b) the State Corporation Commission of Virginia shall have issued a
certificate of amendment.
(3) Common Stock. The holders of Common Stock shall, to the
exclusion of the holders of any other class of stock of the Corporation, have
the sole and full power to vote for the election of directors and for all other
purposes without limitation except only (a) as otherwise provided in the
articles of amendment for a particular class or series of Preferred Stock, and
(b)
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<PAGE>
as otherwise expressly provided by the then existing statutes of the
Commonwealth of Virginia. The holders of Common Stock shall have one vote for
each share of Common Stock held by them.
Subject to the provisions of any articles of amendment for a class or
series of Preferred Stock, the holders of Common Stock shall be entitled to
receive dividends if, when and as declared by the Board of Directors out of
funds legally available therefor and to the net assets remaining after payment
of all liabilities upon voluntary or involuntary liquidation of the Corporation.
(4) Restrictions on Transfer of Common Stock.
(a) For purposes of this Article, the following terms
shall have the meanings indicated:
(i) "Affiliate" shall mean any person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with the person specified.
(ii) "Associate" shall mean as to any specific
person
(aa) Any corporation or organization
(other than the Corporation and its Subsidiaries) of which such person is an
officer or partner or is, directly or indirectly, the beneficial owner of 10% or
more of any class of equity securities;
(bb) any trust or other estate in which
such person has a substantial beneficial interest or as to which such person
serves as trustee or in a similar fiduciary capacity; and
(cc) any relative or spouse of such
person, or any relative of such spouse, who has the same home as such person,
(iii) A person shall be a "beneficial owner" of
any securities as to which such person and any of such person's Affiliates or
Associates, individually or in the aggregate, have or share directly, or
indirectly through any contract, arrangement, understanding, relationship, or
otherwise:
(aa) voting power, which includes the
power to vote, or to direct the voting of such securities;
(bb) investment power, which includes
the power to dispose of or to direct the disposition of such securities; or
(cc) the right to acquire voting power
or investment power (whether such right is exercisable immediately or only after
the passage of time) pursuant to any
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<PAGE>
agreement, arrangement or understanding or upon the exercise of conversion
rights, exchange rights, warrants or options, or otherwise;
provided, that
(ww) in no case shall a director of the
Corporation be deemed the beneficial owner of any securities beneficially owned
by another director of the Corporation, solely by reason of actions undertaken
by such persons in their capacity as directors of the Corporation;
(xx) a person shall not be deemed the
beneficial owner of any securities as a result of any voting power that arises
solely from a revocable proxy given in response to a public proxy solicitation
made pursuant to and in accordance with the applicable provisions of the General
Rules and Regulations under the Securities Exchange Act of 1934 and that is not
reportable by such person on Schedule 13D (or any successor schedule) under such
Act;
(yy) any person engaged in business as
an underwriter of securities who acquires securities through such person's
participation in good faith in a firm commitment underwriting registered under
the Securities Act of 1933 shall not be deemed the beneficial owner of such
securities until the expiration of forty days after the date of such
acquisition; and
(zz) a clearing agency, a broker or
dealer in securities, a bank or voting trustee or other nominee shall not be
deemed the beneficial owner of securities held of record by such person but as
to which a third party has the power to direct the vote.
(iv) "Control" shall mean the possession, direct
or indirect, of the power to direct or to cause the direction of the affairs of
a person, whether through the ownership of voting securities or by agreement or
understanding or otherwise.
(v) "Excess Shares" shall mean that number of
shares of Common Stock transferred to an acquiring person which, when added to
all other shares of Common Stock of which the acquiring person is the beneficial
owner, exceeds 9.99% of the outstanding Common Stock of the Corporation.
(vi) "Interested Shareholder" shall mean any
person who or which is the beneficial owner, directly or indirectly, of 10% or
more of the outstanding shares of Common Stock; provided, however that the term
"Interested Shareholder" shall not include any Subsidiary, or any savings,
employee stock ownership or other employee benefit plan of the Corporation or
any Subsidiary, or any fiduciary with respect to any such plan then acting in
such capacity. For purposes of determining whether a person is an Interested
Shareholder, the number of shares of Common Stock deemed to be outstanding shall
include shares deemed owned through application of subsection (4)(a)(iii)(cc) of
this Article but shall not include any other shares of Common Stock that may be
issuable pursuant to any agreement, arrangement or understanding, or upon
exercise of conversion rights, warrants or options, or otherwise.
A-48
<PAGE>
(vii) A "person" shall mean any individual, firm,
corporation, partnership, joint venture, or other entity.
(viii) "Subsidiary" means any corporation of which
a majority of any class of equity security is owned, directly or indirectly, by
the Corporation; provided, however, that for purposes of the definition of
Interested Shareholder set forth herein, the term "Subsidiary" shall mean only a
corporation of which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
(ix) A "transfer" shall mean any sale,
assignment, gift, pledge, hypothecation, or bequest of Common Stock.
(b) The Board of Directors shall have the power to
determine for purposes of these Articles, on the basis of information known to
it after such inquiry as it deems to be sufficient: (i) whether a particular
person is an Interested Shareholder or would be an Interested Shareholder
following any proposed transfer of Common Stock; (ii) whether any person is an
Affiliate or Associate of any person; (iii) the number of shares of Common Stock
beneficially owned by any person; and (iv) whether there has been a change in
Control of any person. Any such determination by the Board of Directors shall be
final.
(c) Transfer of shares of Common Stock shall be
restricted as follows: Holders of shares of common Stock shall, upon demand,
disclose promptly to the Corporation in writing such information with respect to
the beneficial ownership of the Common Stock as the Board of Directors in its
sole and absolute discretion shall deem advisable for determining the existence
or identity of an Interested Shareholder; and a beneficial owner of Common Stock
by virtue of becoming a beneficial owner shall be deemed to consent to and to
waive any objections to such disclosure. The Corporation may, as a condition to
transfer or registration of transfer of shares of Common Stock, require that the
record holder establish to the satisfaction of the Corporation, by filing with
the transfer agent an appropriate affidavit or certificate or such other proof
as the Corporation shall deem necessary, that such transferee is not an
Interested Shareholder and would not become an Interested Shareholder as a
result of such transfer.
(d) The existence of the restrictions on transfer of
Common Stock set forth in this Article shall be noted conspicuously on the front
or back of the certificate evidencing shares of such stock or contained in any
information statement required by ss. 13.1-648.B of the Virginia Code.
(5) Share Options. Shareholder approval shall not be required for
the issuance of rights, options, or warrants for the purchase of shares of the
Corporation to any director, officer, or employee of the Corporation or any of
its subsidiaries.
ARTICLE III
(1) Directors. On and after the date these Amended and Restated
Articles of Incorporation are effective, the Board of Directors of the
Corporation shall consist of
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<PAGE>
the following eight individuals who shall hold office in the Class and for the
term expiring as set forth in Section (2) below:
Class I:
Donald L. Unger
John K. Stephens
Stephen T. Heitz
Class II:
Walter H. Aikens
Paul R. Yoder, Jr.
Class III:
Clifton L. Good
Joseph W. Hollis
Wayne B. Ruck
(2) Number, Election and Term of Directors. The Board of Directors
may amend the by-laws from time to time to increase or decrease the number of
Directors by up to 30% of the number of Directors last elected by the
shareholders. The Board of Directors shall be divided into three classes, Class
I, Class II and Class III, which shall be as nearly equal in number as possible.
The Directors of the first class (Class I) shall hold office for a term expiring
at the 2003 Annual Meeting of Shareholders; the Directors of the second class
(Class II) shall hold office for a term expiring at the 2001 Annual Meeting of
the Shareholders; and the Directors of the third class (Class III) shall hold
office for a term expiring at the 2002 Annual Meeting of Shareholders. At each
annual meeting of shareholders thereafter the successors to the class of
Directors whose terms shall then expire shall be identified as being of the same
class as the Directors they succeed and elected to hold office for a term
expiring at the third succeeding annual meeting of shareholders. Whenever the
number of Directors is changed, any newly-created directorships or any decrease
in directorships shall be so apportioned among the classes by the Board of
Directors so as to make all classes as nearly equal in number as possible.
(3) Newly-Created Directorships and Vacancies. Subject to the
rights of the holders of any Preferred Stock then outstanding, any vacancy
occurring in the Board of Directors may be filled by the affirmative vote of a
majority of the remaining Directors though less than a quorum of the Board of
Directors, and the Directors so chosen shall hold office for a term expiring at
the next annual meeting of shareholders at which Directors are elected. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
(4) Removal of Directors. In addition to any other vote that may
be required by statute, these Articles of Incorporation or any amendment
thereto, or the By-laws of the
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<PAGE>
Corporation, any Director may be removed only for cause by the affirmative vote
of more than 66 2/3% of the outstanding voting Shares.
(5) Amendment or Repeal. In addition to any other vote that may be
required by statute, these Articles of Incorporation or any amendment thereto,
or the By-laws of the Corporation, the provisions of this Article shall not be
amended or repealed, nor shall any provision of these Articles of Incorporation
be adopted that is inconsistent with this Article, unless such action shall have
been approved by the affirmative vote of either:
(a) the holders of more than 66 2/3% of the outstanding
Voting Shares (notwithstanding anything to the contrary in Article IV); or
(b) a majority of those Directors who are Continuing
Directors and the holders of the requisite number of shares specified by the
Board of Directors pursuant to Article IV for the amendment of these Articles of
Incorporation.
(6) Certain Definitions. For purposes of this Article:
(a) "Continuing Director" means any member of the Board
of Directors who:
(i) was elected to the Board of Directors of the
Corporation at the Corporation's organizational meeting on May 16, 1989; or
(ii) was recommended for election by, or was
elected to fill a vacancy and received the affirmative vote of, a majority of
the Continuing Directors then on the Board.
(b) "Voting Shares" shall mean the outstanding shares of
all classes or series of the Corporation's stock entitled to vote generally in
the election of Directors.
ARTICLE IV
Unless the Board of Directors conditions its submission of a proposed
amendment to these Articles of Incorporation on receipt of a greater vote, any
amendment to these Articles of Incorporation that requires shareholder approval
under ss. 13.1-707 of the Virginia Code shall be approved by not less than a
majority of the votes cast on the proposed amendment by each class or series of
stock entitled to vote on such amendment at a meeting at which a quorum of each
such class or series exists. Unless the Board of Directors conditions its
submission of a proposed extraordinary corporate event (as defined below) on
receipt of a greater vote, any extraordinary corporate event that requires
shareholder approval under the Virginia Code shall be approved by more than
two-thirds of all votes by each class or series of stock entitled to vote on
such event at a meeting at which a quorum of each such class or series exists.
For the purposes of this Article IV, "extraordinary corporate event" means any
merger pursuant to Virginia Code ss. 13.1-716, any statutory share exchange
pursuant to Virginia Code ss. 13.1-717, any sale of all or substantially all of
the assets of the Corporation pursuant to Virginia Code ss. 13.1-724 or any
dissolution of the Corporation pursuant to Virginia Code ss. 13.742. The
provisions of this Article
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<PAGE>
IV shall not be deemed to affect any shareholder vote required by Article 14 of
the Virginia Stock Corporation Act.
ARTICLE V
(1) In this Article:
"applicant" means the person seeking indemnification pursuant
to this Article.
"expenses" includes counsel fees.
"liability" means the obligation to pay a judgment,
settlement, penalty, fine, including any excise tax assessed with respect to an
employee benefit plan, or reasonable expenses incurred with respect to a
proceeding.
"party" includes an individual who was, is, or may be
threatened to be made a named defendant or respondent in a proceeding.
"proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal.
(2) In any proceeding brought by or in the right of the
Corporation or brought by or on behalf of shareholders of the Corporation, no
Director or officer of the Corporation shall be liable to the Corporation or its
shareholders for monetary damages in excess of $0.00 with respect to any
transaction, occurrence, or course of conduct, whether prior or subsequent to
the effective date of these Articles, except for liability resulting from such
person's having engaged in willful misconduct or a knowing violation of the
criminal law or any federal or state securities law.
(3) The Corporation shall indemnify (a) any person who was or is a
party to any proceeding, including a proceeding brought by a shareholder in the
right of the Corporation or brought by or on behalf of shareholders of the
Corporation, by reason of the fact that he is or was a Director or officer of
the Corporation, or (b) any Director or officer who is or was serving at the
request of the Corporation as a director, trustee, partner or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against any liability incurred by him in connection with such
proceeding unless he engaged in willful misconduct or a knowing violation of
criminal law. A person is considered to be serving an employee benefit plan at
the Corporation's request if his duties to the Corporation also impose duties
on, or otherwise involve services by him to the plan or to participants in or
beneficiaries of the plan. The Board of Directors is hereby empowered, by a
majority vote of a quorum of disinterested Directors, to enter into a contract
to indemnify any Director or officer in respect of any proceedings arising from
any act or omission, whether occurring before or after the execution of such
contract.
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<PAGE>
(4) The provisions of this Article shall be applicable to all
proceedings commenced after the effectiveness of these Articles, arising from
any act or omission, whether occurring before or after such effectiveness. No
amendment or repeal of this Article shall have any effect on the right, provided
under this Article with respect to any act or omission occurring prior to such
amendment or repeal. The Corporation shall promptly take all such actions, and
make all such determinations, as shall be necessary or appropriate to comply
with its obligation to make any indemnity under this Article and shall promptly
pay or reimburse all reasonable expenses, including attorneys' fees, incurred by
any such Director or officer in connection with such actions and determinations
or proceedings of any kind arising therefrom.
(5) The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
shall not of itself create a presumption that the applicant did not meet the
standard of conduct described in Sections (2) or (3) of this Article.
(6) Any indemnification under Section (3) of this Article (unless
ordered by a court) shall be made by the Corporation only as authorized in the
specific case upon a determination that indemnification of the applicant is
proper in the circumstances because he has met the applicable standard of
conduct set forth in Section (3).
The determination shall be made:
(a) By the Board of Directors by a majority vote of a
quorum consisting of Directors not at the time parties to the proceeding;
(b) If a quorum cannot be obtained under subsection (a)
of this Section, by majority vote of a committee duly designated by the Board of
Directors (in which designation Directors who are parties may participate),
consisting solely of two or more Directors not at the time parties to the
proceeding;
(c) By special legal counsel;
(i) Selected by the Board of Directors or its
committee in the manner prescribed in subsection (a) or (b) of this Section; or
(ii) If a quorum of the Board of Directors cannot
be obtained under subsection (a) of this Section and a committee cannot be
designated under subsection (b) of this Section, selected by majority vote of
the fall Board of Directors, in which selected Directors who are parties may
participate; or
(d) By the shareholders, but shares owned by or voted
under the control of Directors who are at the time parties to the proceeding may
not be voted on the determination.
Any evaluation as to reasonableness of expenses shall be made in the
same manner as the determination that indemnification is appropriate, except
that if the determination is made by special legal counsel, such evaluation as
to reasonableness of expenses shall be made by those entitled under subsection
(c) of this Section (6) to select counsel.
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<PAGE>
Notwithstanding the foregoing, in the event there has been a change in
the composition of a majority of the Board of Directors after the date of the
alleged act or omission with respect to which indemnification is claimed, any
determination as to indemnification and advancement of expenses with respect to
any claim for indemnification made pursuant to this Article shall be made by
special legal counsel agreed upon by the Board of Directors and the applicant.
If the Board of Directors and the applicant are unable to agree upon such
special legal counsel the Board of Directors and the applicant each shall select
a nominee, and the nominees shall select such special legal counsel.
(7) (a) The Corporation shall pay for or reimburse the
reasonable expenses incurred by any applicant who is a party to a proceeding in
advance of final disposition of the proceeding or the making of any
determination under Section (3) if the applicant furnishes the Corporation:
(i) a written statement of his good faith belief that he
has met the standard of conduct described in Section (3); and
(ii) a written undertaking, executed personally or on his
behalf, to repay the advance if it is ultimately determined that he did not meet
such standard of conduct,
(b) The undertaking required by paragraph (ii) of
subsection (a) of this Section shall be an unlimited general obligation of the
applicant but need not be secured and may be accepted without reference to
financial ability to make repayment.
(c) Authorizations of payments under this Section shall
be made by the persons specified in Section (6).
(8) The Board of Directors is hereby empowered, by majority vote
of a quorum consisting of disinterested directors, to cause the Corporation to
indemnify or contract to indemnify any person not specified in Sections (2) or
(3) of this Article who was, is or may become a party to any proceeding, by
reason of the fact that he is or was an employee or agent of the Corporation, or
is or was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust,
employee benefit plan or other enterprise, to the same extent as if such person
were specified as one to whom indemnification is granted in Section (3). The
provisions of Sections (4) through (7) of this Article shall be applicable to
any indemnification provided hereafter pursuant to this Section (8).
(9) The Corporation may purchase and maintain insurance to
indemnify it against the whole or any portion of the liability assumed by it in
accordance with this Article and may also procure insurance, in such amounts as
the Board of Directors may determine, on behalf of any person who is or was a
Director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a Director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, against any liability asserted against or incurred by him in
any such capacity or arising from his status as
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<PAGE>
such, whether or not the Corporation would have power to indemnify him against
such liability under the provisions of this Article.
(10) Every reference herein to directors, officers, employees or
agents shall include former directors, officers, employees and agents and their
respective heirs, executors and administrators. The indemnification hereby
provided and provided hereafter pursuant to the power hereby conferred by this
Article on the Board of Directors shall not be exclusive of any other rights to
which any person may be entitled, including any right under policies of
insurance that may be purchased and maintained by the Corporation or others,
with respect to claims, issues or matters in relation to which the Corporation
would not have the power to indemnify such person under the provisions of this
Article. Such rights shall not prevent or restrict the power of the Corporation
to make or provide for any further indemnity, or provisions for determining
entitlement to indemnity, pursuant to one or more indemnification agreements,
by-laws, or other arrangements (including, without limitation, creation of trust
funds or security interests funded by letters of credit or other means) approved
by the Board of Directors (whether or not any of the Directors of the
Corporation shall be a party to or beneficiary of any such agreements, by-laws
or arrangements); provided, however that any provision of such agreements,
by-laws or other arrangements shall be effective if and to the extent that it is
determined to be contrary to this Article or applicable laws of the Commonwealth
of Virginia.
(11) Each provision of this Article shall be severable, and an
adverse determination as to any such provision shall in no way affect the
validity of any other provision.
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<PAGE>
Appendix B
INDEX TO FINANCIAL STATEMENTS
MARATHON FINANCIAL CORPORATION
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report of Yount, Hyde & Barbour, P.C......................................................B-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998...............................................B-3
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997.....................B-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1999, 1998 and 1997........................................................................B-6
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997.................B-7
Notes to Consolidated Financial Statements...............................................................B-9 - B-30
Interim Consolidated Financial Statements (Unaudited)
Consolidated Statements of Condition as of March 31, 2000 and December 31, 1999...........................B-31
Consolidated Statements of Income for the three months ended
March 31, 2000 and 1999................................................................................B-32
Consolidated Statements of Changes in Stockholders' Equity for the three months
ended March 31, 2000 and 1999..........................................................................B-33
Consolidated Statements of Cash Flow for the the three months ended
March 31, 2000 and 1999................................................................................B-34
Notes to Consolidated Financial Statements (unaudited)..................................................B-35 - B-37
</TABLE>
B-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Marathon Financial Corporation
Winchester, Virginia
We have audited the accompanying consolidated balance sheets of
Marathon Financial Corporation and subsidiary, as of December 31, 1999 and 1998,
and the related consolidated statements of income, changes in shareholders'
equity, and cash flows for the years ended December 31, 1999, 1998 and 1997.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Marathon
Financial Corporation and subsidiary, as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
January 14, 2000
B-2
<PAGE>
<TABLE>
<CAPTION>
MARATHON FINANCIAL CORPORATION
Consolidated Balance Sheets
December 31, 1999 and 1998
Assets 1999 1998
----------- -----------
<S> <C> <C>
Cash and due from banks $ 8,011,673 $ 4,533,428
Federal funds sold 6,616,000 8,281,000
Securities available for sale 5,080,757 4,961,573
Securities held to maturity (fair value approximates $5,483,459 and
$5,040,801 at December 31, 1999 and 1998, respectively) 5,646,791 5,000,077
Loans held for sale -- 401,671
Loans, net of allowance for loan losses of $769,410 in 1999
and $754,597 in 1998 74,526,925 65,065,268
Bank premises and equipment, net 2,591,033 2,615,175
Accrued interest receivable 534,911 478,820
Other real estate 183,218 18,123
Other assets 493,870 496,534
--------------- -------------
$ 103,685,178 $ 91,851,669
=============== =============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 12,940,831 $ 10,680,285
Savings and interest-bearing demand deposits 30,002,843 24,127,903
Time deposits 50,398,868 47,486,855
--------------- -------------
Total deposits $ 93,342,542 $ 82,295,043
Interest expense payable 147,164 140,899
Accounts payable and accrued expenses 532,255 401,395
Capital lease payable 218,036 224,219
Commitments and contingent liabilities -- --
--------------- -------------
Total liabilities $ 94,239,997 $ 83,061,556
--------------- -------------
Shareholders' Equity
Preferred stock, Series A, 5% noncumulative, no par
value; 1,000,000 shares authorized and unissued $ -- $ --
Common stock, $1 par value; 20,000,000 shares authorized;
1999, 2,046,441 shares issued and outstanding;
1998, 2,063,186 shares issued and outstanding 2,046,441 2,063,186
Capital surplus 7,750,987 7,849,522
Retained earnings (deficit) (222,155) (1,149,567)
Accumulated other comprehensive income (loss) (130,092) 26,972
--------------- -------------
Total shareholders' equity $ 9,445,181 $ 8,790,113
--------------- -------------
$ 103,685,178 $ 91,851,669
=============== =============
</TABLE>
See Notes to Consolidated Financial Statements.
B-3
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
--------------- ------------- -------------
<S> <C> <C> <C>
Interest and dividend income:
Interest and fees on loans $ 7,252,043 $ 6,063,709 $ 4,559,365
Interest on investment securities:
Nontaxable 13,875 -- --
Taxable 261,059 184,289 93,379
Interest and dividends on securities
available for sale:
Nontaxable 16,364 -- --
Taxable 245,517 169,675 78,588
Dividends 34,865 27,367 21,478
Interest on federal funds sold 491,769 430,995 129,844
----------- ------------ -----------
Total interest and dividend income $ 8,315,492 $ 6,876,035 $ 4,882,654
----------- ------------ -----------
Interest expense:
Interest on deposits $ 3,464,415 $ 2,938,214 $ 1,918,099
Interest on capital lease obligations 17,808 20,341 24,637
Interest on federal funds purchased -- -- 673
----------- ----------- -----------
Total interest expense $ 3,482,223 $ 2,958,555 $ 1,943,409
----------- ----------- -----------
Net interest income $ 4,833,269 $ 3,917,480 $ 2,939,245
Provision for loan losses 260,000 285,000 133,000
----------- ----------- -----------
Net interest income after
provision for loan losses $ 4,573,269 $ 3,632,480 $ 2,806,245
----------- ----------- ----------
Other income:
Service charges on deposit accounts $ 779,285 $ 734,243 $ 459,695
Commissions and fees 23,373 111,048 102,234
Loss on sale of other real estate (2,119) (54,249) --
Other 59,010 27,600 25,250
----------- ----------- ----------
Total other income $ 859,549 $ 818,642 $ 587,179
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
B-4
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Income
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- ------------
<S> <C> <C> <C>
Other expenses:
Salaries and employee benefits $ 1,887,748 $ 1,532,069 $ 1,213,499
Net occupancy expense of premises 225,697 262,686 211,293
Furniture and equipment 360,089 382,340 263,105
Other 1,284,016 1,016,120 894,899
----------- ----------- -----------
Total other expenses $ 3,757,550 $ 3,193,215 $ 2,582,796
----------- ----------- -----------
Income before income taxes $ 1,675,268 $ 1,257,907 $ 810,628
Provision for income tax (benefit) 563,676 77,596 (187,734)
----------- ----------- -----------
Net income $ 1,111,592 $ 1,180,311 $ 998,362
=========== =========== ===========
Earnings per share, basic $ 0.54 $ 0.57 $ 0.51
=========== =========== ===========
Earnings per share, assuming dilution $ 0.53 $ 0.56 $ 0.50
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
B-5
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Changes in Shareholders' Equity
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Shareholders'
Stock Surplus (Deficit) Income (Loss) Income Equity
----------- ----------- ------------ ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,863,495 $ 7,045,502 $ (3,019,267) $ 507 $ 5,890,237
Comprehensive income:
Net income -- -- 998,362 -- $ 998,362 $ 998,362
Other comprehensive income,
unrealized gain on securities
available for sale -- -- -- 4,295 4,295 4,295
-----------
Total comprehensive income -- -- -- -- $ 1,002,657 --
===========
Dividends declared ($.07 per share) -- -- (143,920) -- (143,920)
Issuance of common stock
warrants (192,488 shares) 192,488 769,952 -- -- 962,440
----------- ----------- ------------- ----------- -------------
Balance, December 31, 1997 $ 2,055,983 $ 7,815,454 $ (2,164,825) $ 4,802 $ 7,711,414
Comprehensive income:
Net income -- -- 1,180,311 -- $ 1,180,311 1,180,311
Other comprehensive income,
unrealized gain on securities
available for sale (net of tax,
$13,894) -- -- -- 22,170 22,170 22,170
-----------
Total comprehensive income -- -- -- -- $ 1,202,481 --
===========
Dividends declared ($.08 per share) -- -- (165,053) -- (165,053)
Issuance of common stock
exercise of stock options
(7,203 shares) 7,203 34,068 -- -- 41,271
----------- ----------- ------------- ---------- -------------
Balance, December 31, 1998 $ 2,063,186 $ 7,849,522 $ (1,149,567) $ 26,972 $ 8,790,113
Comprehensive income:
Net income -- -- 1,111,592 -- $ 1,111,592 1,111,592
Other comprehensive income,
unrealized loss on securities
available for sale (net of tax,
$80,912) -- -- -- (157,064) (157,064) (157,064)
----------
Total comprehensive income -- -- -- -- $ 954,528 -
==========
Dividends declared ($.09 per share) -- -- (184,180) -- (184,180)
Issuance of common stock
exercise of stock options
(500 shares) 500 2,000 -- -- 2,500
Acquisition of common stock
(17,245 shares) (17,245) (100,535) -- -- (117,780)
------------- ------------ ----------- ----------- -------------
Balance, December 31, 1999 $ 2,046,441 $ 7,750,987 $ (222,155) $ (130,092) $ 9,445,181
============= ============ =========== =========== =============
</TABLE>
See Notes to Consolidated Financial Statements.
B-6
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,111,592 $ 1,180,311 $ 998,362
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization 52,252 52,878 41,846
Depreciation 302,705 302,869 198,156
Provision for loan losses 260,000 285,000 133,000
Deferred tax expense (benefit) 93,628 72,346 (200,000)
Loss on sale of other real estate 2,119 54,249
Loss on sale of bank premises and equipment 344
Net amortization and (accretion) on securities 11,111 4,316 (13,317)
Origination of loans held for sale (7,473,222) (7,520,722) (5,992,149)
Proceeds from sale of loans held for sale 7,874,893 8,621,489 4,773,003
Changes in assets and liabilities:
(Increase) in other assets (62,303) (77,806) (125,826)
(Increase) in accrued interest receivable (56,091) (192,983) (73,748)
Increase (decrease) in accounts payable
and accrued expenses 111,733 84,741 (10,491)
Increase in interest expense payable 6,265 36,146 22,989
----------- ----------- -----------
Net cash provided by (used in) operating activities $ 2,235,026 $ 2,902,834 $ (248,175)
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from maturities, calls and principal
payments of investment securities $ 1,100,000 $ 403,000 $ 1,107,991
Proceeds from maturities, calls and principal
payments of securities available for sale 305,169 361,404 503,397
Purchase of investment securities (1,750,335) (3,698,262) (1,152,890)
Purchase of securities available for sale (669,820) (3,505,333) (600,386)
Net (increase) in loans (10,022,090) (16,335,635) (12,451,882)
Purchase of bank premises and equipment (302,024) (438,969) (1,137,155)
Proceeds from sale of bank premises and equipment 23,117 -- --
Proceeds from sale of other real estate 133,219 375,751 --
------------ ------------ ------------
Net cash (used in) investing activities $(11,182,764) $(22,838,044) $(13,730,925)
------------ ------------ ------------
Cash Flows from Financing Activities
Net increase in demand deposits, NOW accounts
and savings accounts $ 8,135,486 $ 10,654,122 $ 6,889,140
Net increase in certificates of deposit 2,912,013 15,205,700 8,820,794
Net proceeds from issuance of common stock 2,500 41,271 962,440
Acquisition of common stock (117,780) -- --
Principal payments on capital lease obligations (6,183) (54,917) (36,516)
Payment of dividends (165,053) (143,920) (111,810)
------------ ------------ ------------
Net cash provided by financing activities $ 10,760,983 $ 25,702,256 $ 16,524,048
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
B-7
<PAGE>
MARATHON FINANCIAL CORPORATION
Consolidated Statements of Cash Flows
(Continued)
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Increase in cash and cash equivalents $ 1,813,245 $ 5,767,046 $ 2,544,948
Cash and Cash Equivalents
Beginning 12,814,428 7,047,382 4,502,434
------------ ------------ -----------
Ending $ 14,627,673 $ 12,814,428 $ 7,047,382
============ ============ ===========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 3,475,958 $ 2,922,409 $ 1,920,420
============ ============ ===========
Income taxes $ 437,516 $ 17,595 $ 12,179
============ ============ ============
Supplemental Schedule of Noncash Investing and
Financing Activities:
Other real estate acquired in settlement of loans $ 300,433 $ -- $ 430,000
============ ============ ===========
Unrealized gain (loss) on securities available for sale $ (237,976) $ 36,064 $ 4,295
============ ============ ===========
</TABLE>
See Notes to Consolidated Financial Statements.
B-8
<PAGE>
MARATHON FINANCIAL CORPORATION
Notes to Consolidated Financial Statements
Note 1. Nature of Banking Activities and Significant Accounting Policies
Marathon Financial Corporation (the Corporation) and its
subsidiary, the Marathon Bank, grant commercial, financial,
agricultural, residential and consumer loans to customers in
Virginia. The loans are expected to be repaid from cash flow or
proceeds from the sale of selected assets of the borrowers.
The accounting and reporting policies of the Corporation conform
to generally accepted accounting principles and to general
practices within the banking industry. The following is a summary
of the more significant policies.
Principles of Consolidation
The consolidated financial statements of the Marathon
Financial Corporation and its subsidiary, include the
accounts of all companies. All material intercompany
balances and transactions have been eliminated.
Securities
Debt securities that management has the positive intent and
ability to hold to maturity are classified as "held to
maturity" and recorded at amortized cost. Securities not
classified as held to maturity, including equity securities
with readily determinable fair values, are classified as
"available for sale" and recorded at fair value, with
unrealized gains and losses excluded from earnings and
reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest
income using the interest method over the terms of the
securities. Declines in the fair value of available for sale
securities below their cost that are deemed to be other than
temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on
the trade date and are determined using the specific
identification method.
Loans
The Corporation grants mortgage, commercial and consumer
loans to customers. A substantial portion of the loan
portfolio is represented by mortgage loans throughout the
Frederick County, Warren County and Shenandoah County areas
of Virginia. The ability of the Corporation's debtors to
honor their contracts is dependent upon the real estate and
general economic conditions in this area.
Loans that management has the intent and ability to hold for
the foreseeable future or until maturity or payoff
generally are reported at their outstanding unpaid principal
balances less the allowance for loan losses. Interest income
is accrued on the unpaid principal balance. Nonrefundable
loan fees and direct loan origination costs are recognized
in operations when received and incurred, respectively. The
impact of this methodology is not significantly different
from recognizing the net of these fees and costs over the
contractual life of the related loan.
B-9
<PAGE>
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent
unless the credit is wellsecured and in process of
collection. Loans are placed on nonaccrual at an earlier
date or charged off if collection of principal or interest
is considered doubtful.
All interest accrued but not collected for loans that are
placed on nonaccrual or charged off is reversed against
interest income. The interest on these loans is accounted
for on the cashbasis or costrecovery method, until
qualifying for return to accrual. Loans are returned to
accrual status when all the principal and interest amounts
contractually due are brought current and future payments
are reasonably assured.
Loans Held for Sale
Loans originated and intended for sale in the secondary
market are carried at the lower of cost or estimated fair
value in the aggregate. Net unrealized losses, if any, are
recognized through a valuation allowance by charges to
income.
Allowance for Loan Losses
The allowance for loan losses is established as losses are
estimated to have occurred through a provision for loan
losses charged to earnings. Loan losses are charged against
the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if
any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular
basis by management and is based upon management's periodic
review of the collectibility of the loans in light of
historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's
ability to repay, estimated value of any underlying
collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more
information becomes available.
The impairment of loans that have been separately identified
for evaluation is measured based on the present value of
expected future cash flows or, alternatively, the observable
market price of the loans or the fair value of the
collateral. However, for those loans that are collateral
dependent (that is, if repayment of those loans is expected
to be provided solely by the underlying collateral) and for
which management has determined foreclosure is probable, the
measure of impairment of those loans is to be based on the
fair value of the collateral. Large groups of smaller
balance homogeneous loans are collectively evaluated for
impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for
impairment disclosures.
Classifications of Amortization on Assets Acquired Under Capital Leases
The amortization expense on assets acquired under capital
leases is included with the depreciation expense.
B-10
<PAGE>
Earnings Per Share
Basic earnings per share represents income available to
common shareholders divided by the weightedaverage number of
common shares outstanding during the period. Diluted earnings
per share reflects additional common shares that would have
been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result
from the assumed issuance. Potential common shares that may
be issued by the Corporation relate solely to outstanding
stock options, and are determined using the treasury stock
method.
Income Taxes
Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary
differences, operating loss carryforwards, and tax credit
carryforwards. Deferred tax liabilities are recognized for
taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, amounts due from banks and
federal funds sold. Generally, federal funds are purchased
and sold for oneday periods.
Bank Premises and Equipment
Bank premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both
straightline and accelerated methods over the assets'
estimated useful lives. Estimated useful lives range from 10
to 39 years for buildings and 3 to 7 years for furniture,
fixtures and equipment.
Other Real Estate Owned
Foreclosed properties are recorded at the lower of the
outstanding loan balance at the time of foreclosure or the
estimated fair value less estimated costs to sell. At
foreclosure any excess of loan balance over the fair value of
the property is charged to the allowance for loan losses.
Such carrying value is periodically reevaluated and written
down if there is an indicated decline in fair value. Costs to
bring a property to salable condition are capitalized up to
the fair value of the property while costs to maintain a
property in salable condition are expensed as incurred.
Advertising Costs
The Corporation follows the policy of charging the production
costs of advertising to expense as incurred.
B-11
<PAGE>
Use of Estimates
In preparing consolidated financial statements in conformity
with generally accepted accounting principles, management is
required to make estimates and assumptions that affect the
reported amounts of assets and liabilities as of the date of
the balance sheet and reported amounts of revenues and
expenses during the reporting period. Actual results could
differ from those estimates. Material estimates that are
particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan
losses, the valuation of foreclosed real estate and deferred
tax assets.
Note 2. Securities
The amortized cost and fair value of the securities available for
sale as of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ------------- -----------
1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 4,115,468 $ -- $ (170,958) $3,944,510
Obligations of state and
political subdivisions 567,007 -- (26,875) 540,132
Mortgagebacked securities 15,042 723 -- 15,765
Other 580,350 -- -- 580,350
----------- ---------- ------------ -----------
$ 5,277,867 $ 723 $ (197,833) $5,080,757
=========== ========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $4,420,515 $ 41,769 $ (2,066) $ 4,460,218
Mortgagebacked securities 20,392 1,163 21,555
Other 479,800 479,800
----------- -------- -------- -----------
$4,920,707 $ 42,932 $ (2,066) $ 4,961,573
=========== ======== ======== ===========
</TABLE>
B-12
<PAGE>
The amortized cost and fair value of the securities available for
sale as of December 31, 1999, by contractual maturity, are shown
below. Expected maturities may differ from contractual maturities
because mortgages underlying the mortgagebacked securities may be
called or prepaid without any penalties. Therefore, these
securities are not included in the maturity categories in the
maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
---------- ----------
<S> <C> <C>
Due in one year or less $ 200,167 $ 199,314
Due after one year through five years 4,166,897 3,988,194
Due after five years through ten years 265,168 250,369
Due over ten years 50,243 46,765
Mortgagebacked securities 15,042 15,765
Other 580,350 580,350
----------- -----------
$ 5,277,867 $ 5,080,757
=========== ===========
</TABLE>
The amortized cost and fair value of securities being held to
maturity as of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- ----------- -----------
1999
----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 4,687,181 $ 164 $ (146,282) $ 4,541,063
Obligations of state and
political subdivisions 959,610 (17,214) 942,396
----------- --------- ---------- -----------
$ 5,646,791 $ 164 $ (163,496) $ 5,483,459
=========== ========= ========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 4,899,237 $ 39,376 $ (2,074) $ 4,936,539
Obligations of state and
political subdivisions 100,840 3,422 -- 104,262
----------- -------- -------- -----------
$ 5,000,077 $ 42,798 $ (2,074) $ 5,040,801
=========== ======== ======== ===========
</TABLE>
B-13
<PAGE>
The amortized cost and fair value of the securities being held to
maturity as of December 31, 1999, by contractual maturity, are
shown below.
Amortized Fair
Cost Value
---------- ----------
Due in one year or less $ 251,014 $ 248,985
Due after one year through five years 5,264,348 5,106,168
Due after five years through ten years 131,429 128,306
---------- ----------
$5,646,791 $5,483,459
========== ==========
For the years ended December 31, 1999, 1998 and 1997, there were
no sales of securities available for sale.
Securities having a book value of $2,639,891 and $847,910 at
December 31, 1999 and 1998 were pledged to secure public deposits
and for other purposes required by law.
Note 3. Loans and Related Party Transactions
The composition of the net loans is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
-------------- --------------
(in thousands)
<S> <C> <C>
Loans secured by real estate:
Construction and land development $ 10,649 $ 8,900
Secured by farmland 744 733
Secured by 14 family residential 16,717 13,773
Multifamily residential 2,349 1,379
Nonfarm, nonresidential loans 12,038 5,168
Loans to farmers (except those secured by real estate) 220 218
Commercial and industrial loans (except those secured by real estate) 19,041 21,126
Loans to individuals (except those secured by real estate) 13,311 15,468
All other loans 557 100
$ 75,626 $ 66,865
--------- ---------
Less:
Unearned income 330 1,045
Allowance for loan losses 769 755
--------- ---------
$ 74,527 $ 65,065
========= =========
</TABLE>
B-14
<PAGE>
The Corporation has had, and may be expected to have in the
future, banking transactions in the ordinary course of business
with directors, executive officers, their immediate families and
affiliated companies in which they are principal shareholders
(commonly referred to as related parties), on the same terms,
including interest rates and collateral, as those prevailing at
the time for comparable transactions with others. These persons
and firms (exclusive of loans to any such person which in the
aggregate did not exceed $60,000) were indebted to the Corporation
for loans totaling $2,743,082 and $2,090,201 at December 31, 1999
and 1998, respectively. During 1999, total principal additions
were $1,484,378 and total principal payments were $831,497.
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Balance, beginning $ 754,597 $ 576,497 $ 503,014
Provision for loan losses 260,000 285,000 133,000
Recoveries 27,505 44,211 27,823
Loan losses charged to
the allowance (272,692) (151,111) (87,340)
---------- ---------- ----------
Balance, ending $ 769,410 $ 754,597 $ 576,497
========== ========== ==========
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $40,541 and $233,200 at December 31, 1999 and
1998, respectively. If interest on these loans had been accrued,
such income would have approximated $2,934 and $15,681 for 1999
and 1998, respectively.
Note 5. Bank Premises and Equipment, Net
Bank premises and equipment as of December 31, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Bank premises $ 2,196,723 $ 2,127,824
Furniture and equipment 1,603,245 1,522,678
Capital leases property and equipment 256,561 255,604
Bank premises and equipment in process 104,342 --
----------- ------------
$ 4,160,871 $ 3,906,106
Less accumulated depreciation 1,569,838 1,290,931
----------- ------------
$ 2,591,033 $ 2,615,175
=========== ============
</TABLE>
B-15
<PAGE>
Depreciation and amortization included in operating expense for
1999, 1998 and 1997 was $302,705, $323,168 and $228,365,
respectively.
Note 6. Deposits
The aggregate amount of time deposits in denominations of $100,000
or more at December 31, 1999 and 1998 was $9,393,027 and
$9,320,255, respectively.
At December 31, 1999, the scheduled maturities of time deposits
are as follows:
Years Ending December 31:
2000 $ 30,829,450
2001 10,439,380
2002 2,657,044
2003 4,549,994
2004 1,923,000
------------
$ 50,398,868
============
Note 7. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ -- $ 187,705
Writedown of other real estate 2,720 2,720
Other real estate expenditures 2,641 192
Nonaccrual interest 1,187 5,545
Allowance for loan losses 159,363 70,963
Alternative minimum tax credits -- 21,856
Deferred benefit plans 21,798 --
Securities available for sale 67,017 --
---------- ----------
$ 254,726 $ 288,981
---------- ----------
Deferred tax liabilities:
Depreciation $ 3,683 $ 11,327
Securities available for sale -- 13,894
---------- ----------
$ 3,683 $ 25,221
---------- ----------
$ 251,043 $ 263,760
========== ==========
</TABLE>
B-16
<PAGE>
The provision for income taxes (benefit) charged to operations for
the years ended December 31, 1999, 1998 and 1997, consists of the
following:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ------------
<S> <C> <C> <C>
Current tax expense $ 470,048 $ 5,250 $ 12,266
Deferred tax expense 93,628 411,235 278,740
Change in valuation allowance -- (338,889) (478,740)
--------- ---------- ----------
$ 563,676 $ 77,596 $ (187,734)
========= ========== ==========
</TABLE>
The income tax provision differs from the amount of income tax
determined by applying the U.S. federal income tax rate to pretax
income for the years ended December 31, 1999, 1998 and 1997, due
to the following:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ------------
<S> <C> <C> <C>
Computed "expected" tax expense $ 569,591 $ 427,688 $ 275,614
Increase (decrease) in income taxes
resulting from:
Reduction of valuation allowance -- (338,889) (478,740)
Other (5,915) (11,203) 15,392
--------- ---------- ----------
$ 563,676 $ 77,596 $(187,734)
========= ========== ==========
</TABLE>
Note 8. Leases
Capital Leases
The Corporation has a lease agreement on a branch facility,
located on land leased from a partnership of which the
Corporation's president is a partner. The liability is payable
in monthly installments of $1,991 through May 31, 2016 at an
interest rate of 8%. The capital lease payable at December 31,
1999 in the amount of $218,036 represents the present value of
the balance due in future years for lease rentals discounted at
the respective interest rates. Since the term of the lease is
approximately the same as the estimated useful life of the
assets, and the present value of the future minimum lease
payments at the beginning of the lease approximated the fair
value of the leased assets at that date, the lease is
considered to be a capital lease and has been so recorded.
B-17
<PAGE>
The following is a schedule by years of the future minimum
lease payments under the capital lease together with the
present value of the net minimum lease payments as of December
31, 1999:
Lease Commitments and Total Rental Expense
Years ending December 31:
2000 $ 23,898
2001 23,898
2002 23,898
2003 23,898
2004 23,898
Later years 272,834
---------
Total minimum lease payments $ 392,324
Less the amount representing interest 174,288
---------
Present value of net minimum
lease payments $ 218,036
=========
The Corporation entered into a twentyyear operating lease with
a partnership of which the Corporation's president is a partner
for the rental of a branch location and improvements. The lease
expires on May 31, 2016 and has two fiveyear renewal options.
The lease provides that the Corporation pay all property taxes,
insurance and maintenance costs plus an annual rental of
$22,256 for the initial lease beginning July 1, 1996. The total
minimum lease commitment at December 31, 1999 under this lease
is $367,224.
The Corporation leases a branch location. The lease expires on
March 30, 2000 and has two fiveyear renewal options. The lease
provides that the Corporation pay all property taxes, insurance
and maintenance plus an annual rental of $12,000 for the
initial lease period commencing on April 1, 1995. The total
minimum lease commitments at December 31, 1999 under this lease
is $3,000.
The Corporation entered into a tenyear operating lease for the
rental of a branch location. The lease expires on December 31,
2006 and has two fiveyear renewal options. The lease provides
that the Corporation pay all property taxes, insurance and
maintenance plus rental payments for the initial lease period
commencing on January 13, 1997. The total minimum lease
commitments at December 31, 1999 under this lease is $221,631.
The Corporation entered into a fiveyear operating lease for
the rental of a branch location. The lease expires on August
31, 2002 and has two fiveyear renewal options. The lease
provides that the Corporation pay all property taxes, insurance
and maintenance plus rental payments for the initial lease
period commencing on September 1, 1997. The total minimum lease
commitments at December 31, 1999 under this lease is $29,200.
B-18
<PAGE>
The total minimum lease commitment for these operating leases is due as
follows:
2000 $ 65,256
2001 63,456
2002 61,006
2003 53,774
2004 54,563
Later years 321,150
----------
$ 619,205
==========
Total rental expense was $86,594, $68,556 and $56,933 for the
years ended December 31, 1999, 1998 and 1997, respectively.
Fixed Equipment on Land Leased with Related Parties
Fixed equipment with a depreciated cost at December 31, 1999 of
$16,160 is located on land leased from a partnership of which
the Corporation's president is a partner. The lease expires on
May 31, 2016.
Note 9. Commitments and Contingent Liabilities
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in
the accompanying financial statements. See Note 12 with respect to
financial instruments with offbalancesheet risk.
As members of the Federal Reserve System, the Corporation is
required to maintain certain average reserve balances. For the
final weekly reporting period in the years ended December 31, 1999
and 1998, the aggregate amounts of daily average required balances
were approximately $495,000 and $394,000, respectively.
The Corporation is required to maintain certain required reserve
balances with its correspondent bank. Those required balances were
$900,000 and $950,000 for 1999 and 1998, respectively.
Note 10. Dividend Restrictions
Federal and state regulations limit the amount of dividends which
the Corporation can pay without obtaining prior approval and,
additionally, federal regulations require that the Corporation
maintain minimum capital requirements. As of December 31, 1999,
the Corporation was required to obtain prior approval on any
dividend declared.
B-19
<PAGE>
The Corporation did obtain approval from the State Corporation
Commission to pay dividends in 1999, 1998 and 1997. On January 7,
1998, the Board of Directors declared a cash dividend of $.07 per
share payable January 26, 1998 to shareholders of record January
17, 1998. On December 15, 1998, the Board of Directors declared a
cash dividend of $.08 per share payable January 29, 1999 to
shareholders of record December 31, 1998. On December 21, 1999,
the Board of Directors declared a cash dividend of $.09 per share
payable January 31, 2000 to shareholders of record December 31,
1999.
Transfers of funds from the banking subsidiary to the parent
corporation in the form of loans, advances and cash dividends are
restricted by federal and state regulatory authorities. As of
December 31, 1999 no unrestricted funds could be transferred from
the banking subsidiary to the parent corporation, without prior
regulatory approval.
Note 11. Other Expenses
The principal components of "Other expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Telephone $ 96,841 $ 84,232 $ 48,709
Advertising 27,351 39,952 75,870
Stationery and supplies 171,893 102,716 73,722
Postage 119,678 92,296 59,392
Directors fees 89,300 83,250 69,315
ATM expense 165,613 87,525 56,800
Forgery loss -- -- 59,870
Other (includes no items in excess
of 1% of total revenue) 613,340 526,149 451,221
----------- ------------ ----------
$ 1,284,016 $ 1,016,120 $ 894,899
=========== ============ ==========
</TABLE>
Note 12. Financial Instruments With OffBalanceSheet Risk
The Corporation is party to financial instruments with
offbalancesheet risk in the normal course of business to meet
the financing needs of its customers. These financial instruments
include commitments to extend credit and standby letters of credit
and commercial lines of credit. Those instruments involve, to
varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the consolidated balance
sheets.
The Corporation's exposure to credit loss is represented by the
contractual amount of these commitments. The Corporation follows
the same credit policies in making commitments as it does for
onbalancesheet instruments.
B-20
<PAGE>
At December 31, 1999 and 1998, the following financial instruments
were outstanding whose contract amounts represent credit risk:
Contract Amount
------------------------------
1999 1998
----------- ------------
(Thousands)
Commitments to grant loans $ 608 $ 4,415
Standby letters of credit 1,432 851
Unfunded commitments under lines
of credit 12,859 4,494
Commitments to extend credit are agreements to lend to a customer
as long as there is no violation of any condition established in
the contract. Commitments generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Since
many of the commitments are expected to expire without being drawn
upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each
customer's credit worthiness on a casebycase basis. The amount
of collateral obtained, if it is deemed necessary by the
Corporation, is based on management's credit evaluation of the
counterparty.
Unfunded commitments under commercial lines of credit, revolving
credit lines and overdraft protection agreements are commitments
for possible future extensions of credit to existing customers.
These lines of credit are uncollateralized and usually do not
contain a specified maturity date and may not be drawn upon to the
total extent to which the Corporation is committed.
Commercial and standby letters of credit are conditional
commitments issued by the Corporation to guarantee the performance
of a customer to a third party. Those letters of credit are
primarily issued to support public and private borrowing
arrangements. Essentially all letters of credit issued have
expiration dates within one year. The credit risk involved in
issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation
generally holds collateral supporting those commitments for which
collateral is deemed necessary.
The Corporation has cash accounts in other commercial banks. The
amount on deposit at two of these banks at December 31, 1999
exceeded the insurance limits of the Federal Deposit Insurance
Corporation by approximately $1,091,544.
Note 13. Defined Contribution Retirement Plan
The Corporation has a 401(k) Profit Sharing Plan covering
employees who have completed six months of service and who are at
least 21 years of age. Employees may contribute up to 20 percent
of their compensation subject to certain limits based on federal
tax laws. The Corporation makes discretionary matching
contributions equal to 50 percent of an employee's compensation
contributed to the Plan up to 3 percent of the employee's
compensation. Additional amounts may be contributed, at the option
of the Corporation's Board of Directors. These additional
contributions generally amount to 2 percent of eligible employee's
compensation. Employer contributions vest to the employee over a
sixyear period. For the years ended December 31, 1999, 1998 and
1997, expense attributable to the Plan amounted to $43,100,
$40,494 and $31,361, respectively.
B-21
<PAGE>
Note 14. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and ShortTerm Investments
For those shortterm instruments, the carrying amount is a
reasonable estimate of fair value.
Securities
For securities, fair values are based on quoted market
prices or dealer quotes.
Loans Held for Sale
Fair values are based on quoted market prices of similar
loans sold on the secondary market.
Loan Receivables
For certain homogeneous categories of loans, such as some
residential mortgages, and other consumer loans, fair value
is estimated using the quoted market prices for securities
backed by similar loans, adjusted for differences in loan
characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the
current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same
remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and
certain money market deposits is the amount payable on
demand at the reporting date. The fair value of
fixedmaturity certificates of deposit is estimated using
the rates currently offered for deposits of similar
remaining maturities.
Accrued Interest
The carrying amounts of accrued interest approximate fair
value.
Capital Lease Payable
The fair values of the Corporation's longterm borrowings
(other than deposits) are estimated using discounted cash
flow analyses, based on the Corporation's current
incremental borrowing rates for similar types of borrowing
arrangements.
Off-BalanceSheet Financial Instruments
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar
agreements, taking into account the remaining terms of the
agreements and the present credit worthiness of the
counterparties. For fixedrate loan commitments, fair value
also considers the difference between current levels of
interest rates and the committed rates.
B-22
<PAGE>
The fair value of standby letters of credit is based on
fees currently charged for similar agreements or on the
estimated cost to terminate them or otherwise settle the
obligations with the counterparties at the reporting date.
At December 31, 1999 and 1998, the difference between the
carrying amounts and fair values of loan commitments and
standby letters of credit were immaterial.
<TABLE>
<CAPTION>
1999 1998
--------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------- --------------- ------------
(Thousands) (Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and shortterm
investments $ 14,628 $ 14,628 $ 12,814 $ 12,814
Securities 10,727 10,564 9,962 10,002
Loans held for sale -- -- 402 402
Loans 74,527 75,915 65,065 68,265
Accrued interest receivable 535 535 479 479
Financial liabilities:
Deposits $ 93,343 $ 93,384 $ 82,295 $ 83,935
Longterm debt 218 218 224 247
Accrued interest payable 147 147 141 141
</TABLE>
Note 15. Minimum Regulatory Capital Requirements
The Corporation (on a consolidated basis) and the Bank are subject
to various regulatory capital requirements administered by the
federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the
Corporation's and Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, the Corporation and the Bank must meet specific
capital guidelines that involve quantitative measures of their
assets, liabilities and certain offbalancesheet items as
calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by the regulators about components, risk weightings, and
other factors. Prompt correction action provisions are not
applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum
amounts and ratios (set forth in the table below) of total and
Tier 1 capital (as defined in the regulations) to riskweighted
assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 1999
and 1998, that the Corporation and the Bank met all capital
adequacy requirements to which they are subject.
B-23
<PAGE>
As of December 31, 1999, the most recent notification from the
Federal Reserve Bank categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized, an institution must maintain
minimum total riskbased, Tier 1 riskbased and Tier 1 leverage
ratios as set forth in the table below.
There are no conditions or events since the notification that
management believes have changed the Bank's category. The
Corporation's and the Bank's capital amounts and ratios as of
December 31, 1999 and 1998 are also presented in the table.
<TABLE>
<CAPTION>
Minimum Capital
Actual Requirement
------------------ -----------------------------------------
Amount Ratio Amount Ratio
--------- --------- ---------- -------
(Amount in Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk
Weighted Assets:
Consolidated $10,344 13.30% (greater than or equal to) $6,221 (greater than or equal to) 8.00%
Marathon Bank $ 9,900 12.75% (greater than or equal to) $6,210 (greater than or equal to) 8.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated $ 9,575 12.31% (greater than or equal to) $3,110 (greater than or equal to) 4.00%
Marathon Bank $ 9,131 11.76% (greater than or equal to) $3,105 (greater than or equal to) 4.00%
Tier 1 Capital to
Average Assets:
Consolidated $ 9,575 8.90% (greater than or equal to) $4,305 (greater than or equal to) 4.00%
Marathon Bank $ 9,131 8.52% (greater than or equal to) $4,284 (greater than or equal to) 4.00%
As of December 31, 1998:
Total Capital to Risk
Weighted Assets:
Consolidated $ 9,518 13.89% (greater than or equal to) $5,481 (greater than or equal to) 8.00%
Marathon Bank $ 8,787 12.84% (greater than or equal to) $5,476 (greater than or equal to) 8.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated $ 8,763 12.79% (greater than or equal to) $2,740 (greater than or equal to) 4.00%
Marathon Bank $ 8,032 11.73% (greater than or equal to) $2,738 (greater than or equal to) 4.00%
Tier 1 Capital to
Average Assets:
Consolidated $ 8,763 9.63% (greater than or equal to) $3,640 (greater than or equal to) 4.00%
Marathon Bank $ 8,032 8.90% (greater than or equal to) $3,610 (greater than or equal to) 4.00%
</TABLE>
<TABLE>
<CAPTION>
Minimum
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
--------------------------------------------
Amount Ratio
--------- --------
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $7,763 (greater than or equal to) 10.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank $4,658 (greater than or equal to) 6.00%
Tier 1 Capital to
Average Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $5,356 (greater than or equal to) 5.00%
As of December 31, 1998:
Total Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $6,845 (greater than or equal to) 10.00%
Tier 1 Capital to Risk
Weighted Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $4,107 (greater than or equal to) 6.00%
Tier 1 Capital to
Average Assets:
Consolidated N/A
Marathon Bank (greater than or equal to) $4,512 (greater than or equal to) 5.00%
</TABLE>
B-24
<PAGE>
Note 16. Stock Option Plans
The LongTerm Incentive Plan allows for incentive stock options
and nonqualified stock options to be granted with an exercise
price to be not less than 100% of the Fair Market Value of the
Stock on the day the stock option is granted. 350,000 shares of
the Corporation's Common Stock have been reserved for the issuance
of stock options under the Incentive Plan. All options expire ten
years from the grant date.
The fair value of each employeerelated grant is estimated at the
grant date using the BlackScholes optionpricing model. The
estimates were calculated using the following weightedaverage
assumptions for grants in 1998 and 1997: Dividend rate of .12% and
.16%, price volatility of 20.65% and 35.00%, riskfree interest
rate of 4.50% and 5.00%, respectively, and expected lives of 5
years. There were no options granted in 1999.
The Corporation applies APB Opinion 25 in accounting for its stock
option plans. Accordingly, no compensation expense has been
recognized for 1999, 1998 or 1997. Had compensation cost been
determined on the basis of fair value pursuant to FASB Statement
No. 123, net income and earnings per share would have been as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- ---------
<S> <C> <C> <C>
Net income
As reported $ 1,111,592 $ 1,180,311 $ 998,362
=========== =========== ==========
Proforma $ 1,103,762 $ 1,166,453 $ 970,561
=========== =========== ==========
Basic earnings per share
As reported $ 0.54 $ 0.57 $ 0.51
=========== =========== ==========
Proforma $ 0.54 $ 0.57 $ 0.50
=========== =========== ==========
Diluted earnings per share
As reported $ 0.53 $ 0.56 $ 0.50
=========== =========== ==========
Proforma $ 0.53 $ 0.55 $ 0.48
=========== =========== ==========
</TABLE>
B-25
<PAGE>
Changes in the stock options outstanding related to the LongTerm
Incentive Plan for employees is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 44,875 $ 5.25 42,078 $ 5.12 -- $ --
Granted -- -- 5,000 7.25 42,078 5.12
Exercised (500) 5.00 (2,203) 7.39 -- --
Forfeited -- -- -- -- -- --
-------- -------- --------
Outstanding at end of year 44,375 $ 5.25 44,875 $ 5.25 42,078 $ 5.12
======== ======== ========
Options execisable at yearend 26,625 $ 5.25 20,875 $ 5.22 14,721 $ 5.12
Weightedaverage fair value of
options granted during the year $ -- $ 2.02 $ 1.97
</TABLE>
Changes in the stock options outstanding related to the Long-Term
Incentive Plan for directors is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------------------- -------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 90,000 $ 5.00 100,000 $ 5.00 -- $ --
Granted -- -- -- -- 100,000 5.00
Exercised -- -- (5,000) 5.00 -- --
Forfeited -- -- (5,000) 5.00 -- --
--------- ---------- --------- -------- --------- --------
Outstanding at end of year 90,000 $ 5.00 90,000 $ 5.00 100,000 $ 5.00
========= ========= ---------
Options execisable at yearend 63,000 $ 5.00 54,000 $ 5.00 50,000 $ 5.00
Weightedaverage fair value of
options granted during the year $ -- $ -- $ 1.94
</TABLE>
B-26
<PAGE>
Information pertaining to options outstanding at December 31, 1999
is as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
-------------------- ----------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$ 5.00 129,375 6.75 years $ 5.00 86,625 $ 5.00
7.25 5,000 8.75 years 7.25 3,000 7.25
-----------
Outstanding at
end of year 134,375 6.82 years $ 5.08 89,625 $ 5.08
=========== ===========
</TABLE>
Note 17. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average
number of shares of diluted potential common stock. Potential
dilutive common stock had no effect on income available to common
shareholders.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------- ------------------ ---------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
-------- --------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Basic earnings
per share 2,054,748 $ 0.54 2,058,932 $ 0.57 1,951,172 $ 0.51
======== ======= ========
Effect of dilutive
securities:
Stock options 34,655 53,077 45,421
Warrants -- -- 19,560
--------- --------- ---------
Diluted earnings
per share 2,089,403 $ 0.53 2,112,009 $ 0.56 2,016,153 $ 0.50
========= ======== ========= ======= ========= ========
</TABLE>
Options of 5,000 were not included in computing diluted EPS for 1999 because
their effects were antidilutive.
B-27
<PAGE>
Note 18. Parent Corporation Only Financial Statements
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash on deposit with subsidiary bank $ 127,156 $ 130,241
Securities 495,728 761,344
Accrued interest receivable 7,168 14,545
Investment in capital stock of subsidiary 9,004,126 8,052,263
Other assets 1,805 --
----------- -----------
Total assets $ 9,635,983 $ 8,958,393
=========== ===========
Liabilities
Income taxes payable $ 6,622 $ 3,225
Dividends payable 184,180 165,055
----------- -----------
$ 190,802 $ 168,280
----------- -----------
Shareholders' Equity
Preferred stock $ -- $ --
Common stock 2,046,441 2,063,186
Capital surplus 7,750,987 7,849,522
Retained earnings (deficit) (222,155) (1,149,567)
Accumulated other comprehensive income (loss) (130,092) 26,972
----------- -----------
Total shareholders' equity $ 9,445,181 $ 8,790,113
----------- -----------
Total liabilities and shareholders' equity $ 9,635,983 $ 8,958,393
=========== ===========
</TABLE>
B-28
<PAGE>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Income
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Income
Interest on investment securities, taxable $ 31,514 $ 14,447 $ 5,945
Interest on securities available for sale, taxable 606 31,647 8,625
---------- ---------- ----------
Total income $ 32,120 $ 46,094 $ 14,570
---------- ---------- ----------
Expenses, other $ 13,069 18,607 $ 11,927
---------- ---------- ----------
Income before income taxes and
undistributed income of subsidiary $ 19,051 $ 27,487 $ 2,643
Provision for income tax 6,622 -- --
---------- ---------- ----------
Income before undistributed
income of subsidiary $ 12,429 $ 27,487 $ 2,643
Undistributed income of subsidiary 1,099,163 1,152,824 995,719
---------- ---------- ----------
Net income $1,111,592 $1,180,311 $ 998,362
========== ========== ==========
</TABLE>
B-29
<PAGE>
MARATHON FINANCIAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 1,111,592 $ 1,180,311 $ 998,362
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Amortization of securities discounts, net 820 2,195 --
Undistributed income of subsidiary (1,099,163) (1,152,824) (995,719)
Decrease in prepaid expenses -- -- 283
(Increase) decrease in accrued interest receivable 7,377 1 (14,545)
Increase (decrease) in accounts payable 6,622 -- (1,363)
----------- ----------- -----------
Net cash provided by (used in)
operating activities $ 27,248 $ 29,683 $ (12,982)
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from maturities of investment securities $ 250,000 $ 150,000 $ --
Purchase of investment securities -- -- (401,490)
Purchase of securities available for sale -- -- (502,561)
----------- ----------- -----------
Net cash provided by (used in)
investing activities $ 250,000 $ 150,000 $ (904,051)
----------- ----------- -----------
Cash Flows from Financing Activities
Net proceeds from issuance of common stock $ 2,500 $ 41,271 $ 962,440
Acquisition of common stock (117,780) -- --
Payment of dividends (165,053) (143,920) (111,810)
----------- ----------- -----------
Net cash provided by (used in)
financing activities $ (280,333) $ (102,649) $ 850,630
----------- ----------- -----------
Increase (decrease) in cash
and cash equivalents $ (3,085) $ 77,034 $ (66,403)
Cash and Cash Equivalents
Beginning 130,241 53,207 119,610
----------- ----------- -----------
Ending $ 127,156 $ 130,241 $ 53,207
=========== =========== ===========
Supplemental Schedule of Noncash
Investing and Financing Activities,
unrealized gain (loss) on securities
available for sale $ (237,976) $ 36,064 $ 4,295
=========== =========== ===========
</TABLE>
B-30
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CONDITION
as of
March 31, 2000 and December 31, 1999
<CAPTION>
ASSETS
3/31/00 12/31/99
------- --------
<S> <C> <C>
Cash and due from banks $ 5,338,800 $ 8,011,673
Federal funds sold 12,000,000 6,616,000
Securities (fair value: 2000, $11,414,315 and
1999, $10,564,216) 11,604,219 10,727,548
Loans held for resale 176,316 0
Loans, net 79,230,677 74,526,925
Bank premises and equipment, net 2,765,810 2,591,033
Accrued interest receivable 567,147 534,911
Other real estate 165,095 183,218
Other assets 625,737 493,870
------------ ------------
Total assets $112,473,801 $103,685,178
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing demand deposits $ 16,055,795 $12,940,831
Savings and interest bearing demand deposits 32,463,412 30,002,843
Time deposits 53,471,305 50,398,868
------------ ------------
Total deposits $101,990,512 $93,342,542
Interest expense payable 163,821 147,164
Accounts payable and accrued expenses 350,063 348,075
Capital lease payable 216,411 218,036
Dividends Payable 0 184,180
------------ ------------
Total liabilities $102,720,807 $94,239,997
------------ ------------
STOCKHOLDERS' 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) 70,579 (222,155)
Accumulated other comprehensive income (loss) (140,013) (130,092)
------------ ------------
Total stockholders' equity $ 9,752,994 $ 9,445,181
------------ ------------
Total liabilities and stockholders' equity $112,473,801 $103,685,178
============ ============
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
B-31
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
For the Three Months
Ended March 31,
2000 1999
---- ----
<S> <C> <C>
Interest and dividend income:
Interest and fees on loans $1,876,065 $1,714,295
Interest on investment securities held for maturity:
Taxable 75,543 67,294
Nontaxable 9,418 0
Interest and dividends on securities available for sale:
Taxable 62,365 62,997
Nontaxable 5,591 992
Dividends 5,944 4,018
Interest on federal funds sold 130,231 89,584
---------- ----------
Total interest and dividend income $2,165,157 $1,939,180
---------- ----------
Interest expense:
Interest on deposits $ 908,889 $ 823,540
Interest on leases payable 4,350 4,474
---------- ----------
Total interest expense $ 913,239 $ 828,014
---------- ----------
Net interest income $1,251,918 $1,111,166
Provision for loan losses 73,400 60,000
---------- ----------
Net interest income after provision for loan losses $1,178,518 $1,051,166
---------- ----------
Other Income:
Service charges on deposit accounts $ 180,768 $ 180,737
Commissions and fees 11,653 5,861
Other 10,738 12,496
---------- ----------
Total other income $ 203,159 $ 199,094
---------- ----------
Other expenses:
Salaries and employee benefits $ 468,547 $ 459,181
Net occupancy expense of premises 56,956 54,823
Furniture and equipment 73,641 86,110
Legal and professional 18,215 18,047
Stationery and supplies 42,602 33,332
Postage 31,600 27,516
Marketing 17,079 14,097
Telephone 28,144 14,720
Directors' fees 29,175 25,100
ATM expenses 50,720 31,047
Other operating expenses 129,949 117,659
---------- ----------
Total other expenses $946,628 $ 881,632
---------- ----------
Income before income taxes $435,049 $ 368,628
Provision for income tax expense 142,316 132,140
---------- ----------
Net income $ 292,733 $ 236,488
========== ==========
Net income per share, basic and assuming dilution $ .14 $ .11
========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
B-32
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the Three Months Ended March 31, 2000 and 1999
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Stockholders
Stock Surplus (Deficit) Income/Loss Income Equity
----- ------- --------- ----------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $2,063,186 $7,849,522 $(1,149,567) $ 26,972 $8,790,113
Comprehensive income:
Net income 236,488 $236,488 236,488
Other comprehensive income,
unrealized (loss) on
securities available for sale
(Net of Tax, $22,412) (43,507) (43,507) (43,507)
--------
Total comprehensive income $192,981
========
Issuance of common stock -
exercise of stock options
(500 shares) 500 2,000 2,500
Acquisition of common stock
(3,000 shares) (3,000) (18,752) -- -- (21,752)
---------- ---------- ----------- ---------- ----------
Balance, March 31, 1999 $2,060,686 $7,832,770 $ (913,079) $ (16,535) $8,963,842
========== ========== =========== ========== ==========
<CAPTION>
Accumulated
Retained Other Total
Common Capital Earnings Comprehensive Comprehensive Stockholders
Stock Surplus (Deficit) Loss Income Equity
----- ------- --------- ---- ------ ------
Balance, December 31, 1999 $2,046,441 $7,750,987 $(222,154) $(130,092) $9,445,182
Comprehensive income:
Net income 292,733 $292,733 292,733
Other comprehensive income,
unrealized (loss) on
securities available for sale
(Net of Tax, $5,111) (9,921) (9,921) (9,921)
--------
Total comprehensive income $282,812
========
Issuance of common stock -
exercise of stock options
(5000 shares) 5,000 20,000 -- -- 25,000
---------- ---------- ----------- ---------- ----------
Balance, March 31, 2000 $2,051,441 $7,770,987 $70,579 $(140,013) $9,752,994
========== ========== =========== ========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
B-33
<PAGE>
<TABLE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Three Months Ended March 31, 2000 and 1999
<CAPTION>
2000 1999
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $292,733 $236,488
Adjustments to reconcile net income
to net cash provided by operating activities:
Amortization 12,595 27,897
Depreciation 57,503 58,284
Net discount accretion on securities 2,397 (1,842)
Provision for loan loss 73,400 60,000
Loss on sale of other real estate 10,264 --
Origination of loans available for sale (1,090,332) (2,320,809)
Proceeds from sale of loans available for sale 914,316 2,492,913
Changes in assets and liabilities:
(Increase) in other assets (139,351) (4,748)
(Increase) decrease in accrued interest receivable (32,237) 1,809
Increase in accounts payable and accrued expenses 1,988 45,685
Increase (decrease) in interest expense payable 16,657 (1,915)
---------- ----------
Net cash provided by operating activities $119,933 $593,762
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities and principal
Payments on securities held to maturity -- 650,000
Proceeds from maturities on securities available for sale 461 176,937
Purchase of securities available for sale (298,758) (427,570)
Purchase of securities held to maturity (595,803) --
Net (increase) in loans (4,777,452) (6,461,610)
Purchase of bank premises and equipment (232,278) (48,497)
Proceeds from sale of other real estate 7,859 --
---------- ----------
Net cash used in investing activities $(5,895,971) $(6,110,740)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits,
NOW accounts and savings accounts $ 5,575,533 $ 3,550,388
Net increase (decrease) in certificates of deposits 3,072,437 (387,841)
Principal payments on capital lease payable (1,625) (1,500)
Cash dividends paid (184,180) (165,055)
Proceeds from issuance of common stock 25,000 2,500
Purchase of common stock -- (21,752)
---------- ----------
Net cash provided by financing activities $ 8,487,165 $ 2,976,740
---------- ----------
Increase (decrease) in cash and cash equivalents $2,711,127 $(2,540,238)
Beginning 14,627,673 12,814,428
---------- ----------
Ending $17,338,800 $10,274,190
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 896,582 $ 829,929
========= =========
Income taxes $ 7,601 $ 19,516
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING ACTIVITIES
Unrealized (loss) on securities available for sale $ (15,032) $ (65,920)
========== ==========
See Accompanying Notes to Consolidated Financial Statements
</TABLE>
B-34
<PAGE>
MARATHON FINANCIAL CORPORATION & SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position
as of March 31, 2000 and December 31, 1999, and the result of
operations and cash flows for the three months ended March 31, 2000 and
1999. The statements should be read in conjunction with the Notes to
Financial Statements included in the Corporation's Annual Report for
the year ended December 31, 1999.
2. The results of operations for the three month period ended March 31,
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 March 31, 2000
and December 31, 1999 are:
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
Held to Maturity Amortized Cost Amortized Cost
---------------- -------------- --------------
<S> <C> <C>
US government & federal agencies $5,283,421 $4,687,181
Obligations of state & political subdivisions 958,794 959,610
---------- ----------
$6,242,215 $5,646,791
========== ==========
<CAPTION>
Fair Value Fair Value
---------- ----------
US government & federal agencies $5,119,876 $4,541,063
Obligations of state & political subdivisions 932,435 942,396
---------- ----------
$6,052,311 $5,483,459
========== ==========
<CAPTION>
March 31, 2000 December 31, 1999
Available for Sale Amortized Cost Amortized Cost
------------------ -------------- --------------
US government & federal agencies $4,412,726 $4,115,468
Mortgage backed securities 14,687 15,042
Obligations of state & political subdivisions 566,310 567,007
Other Securities 580,350 580,350
---------- ----------
$5,574,073 $5,277,867
========== ==========
<CAPTION>
Fair Value Fair Value
---------- ----------
US government & federal agencies $4,226,546 $3,944,510
Mortgage backed securities 15,316 15,765
Obligations of state & Political 539,792 540,132
subdivisions 580,350 580,350
---------- ----------
Other Securities $5,362,004 $5,080,757
========== ==========
</TABLE>
B-35
<PAGE>
<TABLE>
4. The consolidated entity's loan portfolio is composed of the following:
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
<S> <C> <C>
Commercial $44,003,236 $40,374,011
Real estate-mortgage 14,285,892 14,353,721
Real estate-construction 10,729,688 9,759,118
Installment loans to individuals 11,013,999 10,809,485
----------- -----------
$80,032,815 $75,296,335
Less: allowance for loan losses 802,138 769,410
----------- -----------
Loans, net $79,230,677 $74,526,925
=========== ===========
The company had non-accrual loans, which were excluded from the
impaired loan disclosure under FASB 114, which amounted to $71,087 on
March 31, 2000 and $40,541 on December 31, 1999.
5. Reserve for Loan Losses:
<CAPTION>
March 31, 2000 December 31, 1999
-------------- -----------------
Balance, beginning $ 769,410 $ 754,597
Provision charged to operating expense 73,400 260,000
Recoveries 8,487 27,505
Loan losses charged to the allowance (49,159) (272,692)
----------- -----------
Balance, ending $ 802,138 $769,410
=========== ===========
6. Earnings Per Share
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.
<CAPTION>
3/31/00 3/31/99
------- -------
Per Share Per Share
Shares Amount Shares Amount
------ ------ ------ ------
Basic earnings per share 2,050,764 $ .14 2,062,524 $ .11
======= ======
Effect of dilutive securities:
Stock options 20,379 43,958
--------- ------- --------- ------
Diluted earnings per share 2,071,143 $ .14 2,106,482 $ .11
========= ======= ========= ======
</TABLE>
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.
B-36
<PAGE>
8. Proposed Merger
Rockingham Heritage Bank (NASDAQ Small Cap: RKNG) and the Corporation
have approved a definitive merger of equals agreement. This transaction
is subject to the approval of 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 third quarter of 2000. As of December 31, 1999, RKNG
had assets of $101.1 million, net loans of $77.9 million, total
deposits of $87.8 million and total stockholders' equity of $11.6
million.
B-37
<PAGE>
Appendix C
July __, 2000
Board of Directors
Marathon Financial Corporation
4095 Valley Pike
Stephens City, Virginia 22655-0998
Dear Board Members:
In connection with the proposed "merger of equals" of Marathon
Financial Corporation ("Marathon") and Rockingham Heritage Bank ("Rockingham")
you have asked us to render an opinion as to whether the financial terms of the
Amended and Restated Agreement and Plan of Merger, including the Plan of Merger
attached thereto (the "Plan of Merger") dated as of June 21, 2000 between
Marathon and Rockingham, are fair from a financial point of view, to the
stockholders of Marathon. The Amended and Restated Plan of Merger provides for
the merger of Marathon Merger Bank, a wholly owned subsidiary of Marathon (the
"Merger Subsidiary") with and into Rockingham and stockholders of Rockingham
will receive common stock of Marathon (the "Merger"). Under the terms of the
Agreement, upon consummation of the Merger, each share of common stock of
Rockingham, par value $2.50 per share, automatically shall become and be
converted into 1.58 shares of the common stock of Marathon, par value $1.00 per
share ("Marathon Common Stock") and each option outstanding of Rockingham shall
be converted to options of Marathon Common Stock based upon the same exchange
ratio. Cash will be paid in lieu of fractional shares. As of the date of the
Plan of Merger, Rockingham had 1,589,940 shares of common stock issued and
outstanding. Under the terms of the Plan of Merger, and based on the exchange
ratio of 1.58 shares of Marathon for each share of Rockingham common stock, an
aggregate of 2,512,105 shares of Marathon Common Stock may be issued for the
Rockingham common stock outstanding, and options for shares of Marathon Common
Stock will be exchanged for options for Rockingham Common Stock.
McKinnon & Company, Inc. ("McKinnon") is an investment banking firm
that specializes in Virginia community banks and thrifts. In twelve years
McKinnon has been lead managing underwriter in approximately thirty-six public
stock offerings for Virginia community banks and thrifts and has served as
financial advisor, including providing fairness opinions, to numerous Virginia
community banks and thrifts. McKinnon, as part of its investment banking
business, is engaged in the evaluation of businesses, particularly banks, and
their securities, in connection with mergers and acquisitions, initial public
offerings, private placements and evaluations for estates and corporate
recapitalizations. McKinnon is also a market maker in Marathon's and
Rockingham's Common Stocks on the NASDAQ Small Cap Bulletin Board Market and was
the exclusive managing underwriter of the common stock issues of each, including
575,000 of Marathon issued September 26, 1996 at $5.00 per
C-1
<PAGE>
Page 2
share, and approximately 253,575 shares of Rockingham at $9.50 per share on
February 4, 1998 (adjusted for a subsequent 2/1 stock split and two 5% stock
dividends). McKinnon is also a market maker in Virginia community bank stocks
listed on NASDAQ and the OTC Bulletin Board. McKinnon believes it has a thorough
working knowledge of the banking industry throughout Virginia.
In developing our opinion, we have among other things, reviewed and
analyzed material bearing upon the financial and operating conditions of
Marathon, Rockingham, and, on a pro forma basis, Marathon and Rockingham
combined, and material proposed in connection with the Agreement, including,
among other things, the following:
(1) the Agreement and Plan of Merger and the Plan of Merger, dated as
of April 18, 2000 among Marathon and Rockingham;
(2) the registration statement filed with the Securities and Exchange
Commission in connection with the proposed Merger, including a prospectus
relating to 2,512,105 shares of common stock of Marathon, and the Proxy
Statement relating to the special meetings of stockholders of Marathon and
Rockingham held on August ___, 2000;
(3) Marathon's and Rockingham's financial results for fiscal years 1992
through 1999, and the first and second quarters ended March 31, 2000,
respectively, and certain documents and information we deem relevant to our
analysis;
(4) held discussions with senior management of Marathon and Rockingham
regarding past and current business operations of, and outlook for, Marathon,
Rockingham, including trends, the terms of the proposed Merger, and related
matters;
(5) reviewed the reported price and trading activity of Marathon's and
Rockingham Common Stock and compared financial and stock market information
(when available) for Marathon and Rockingham with similar information for
certain other companies, and securities for which are publicly traded;
(6) reviewed the financial terms of certain recent business
combinations which we deemed comparable in whole or in part;
(7) performed such other studies and analyses as we considered
appropriate, including an analysis of the pro forma financial impact of the
Merger on Marathon and Rockingham;
(8) reviewed other published information, performed certain financial
analyses and considered other factors and information which we deem relevant.
C-2
<PAGE>
Page 3
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of Marathon and Rockingham. We have not attempted
independently to verify such information, nor have we made any independent
appraisal of the assets of Marathon or Rockingham. We have taken into account
our assessment of general economic, financial market and industry conditions as
they exist and can be evaluated at the date hereof, as well as our experience in
business valuation in general.
We have been retained by you as a financial advisor to Marathon with
respect to the proposed Merger. In the normal course of business McKinnon &
Company, Inc. is a market maker in the common stock of Marathon and Rockingham
listed on the NASDAQ Small Cap Bulletin Board System. Our opinion is directed to
the Board of Directors of Marathon. We participated in some of the discussions
but we did not recommend the structure or give any opinion regarding the
business reasons for doing this proposed Merger.
On the basis of our analysis and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, ti is our opinion that, as of the date hereof, the terms
of the Agreement are fair, from a financial point of view, to the holders of
Marathon Common Stock.
Very truly yours,
McKinnon & Company, Inc.
C-3
<PAGE>
Appendix D
INDEX TO FINANCIAL STATEMENTS
ROCKINGHAM HERITAGE BANK
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditor's Report of McGladrey & Pullen, LLP.........................................................D-2
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 1999 and 1998...............................................D-3
Consolidated Statements of Income for the years ended December 31, 1999 and 1998...........................D-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998.................................................................................D-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999 and 1998.......................D-6
Notes to Consolidated Financial Statements...............................................................D-8 - D-22
Interim Consolidated Financial Statements (Unaudited)
Consolidated Balance Sheets as of March 31, 2000 and December 31, 1999....................................D-23
Consolidated Statements of Income for the three months ended March 31, 2000 and 1999......................D-24
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 2000
and 1999..................................................................................................D-25
Consolidated Statements of Cash Flows for the three months ended March 31, 2000 and 1999..................D-26
Notes to Consolidated Financial Statements (unaudited).........................................................D-28
</TABLE>
D-1
<PAGE>
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
D-2
<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.
D-3
<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.
D-4
<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.
D-5
<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)
D-6
<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.
D-7
<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.
D-8
<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.
D-9
<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.
D-10
<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>
D-11
<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.
D-12
<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
=============
D-13
<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%.
D-14
<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
===============================
D-15
<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>
D-16
<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.
D-17
<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>
D-18
<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.
D-19
<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.
D-20
<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.
D-21
<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.
D-22
<PAGE>
ROCKINGHAM HERITAGE BANK
COSOLIDATED BALANCE SHEETS
March 31, 2000 and December 31, 1999
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
--------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Note)
<S> <C> <C>
Cash and due from banks $ 6,598,477 $ 3,906,883
Federal funds sold 4,942,000 7,677,000
------------------------------------------
Cash and cash equivalents 11,540,477 11,583,883
Investment securities available-for-sale 6,805,467 6,410,053
Investment securities held-to-maturity (approximate market value
Mar 1999 $1,916,137; Dec 1999 $1,941,134) 1,929,997 1,948,895
Loans, net 82,081,785 77,947,154
Bank premises and equipment, net 2,174,579 2,169,319
Accrued income receivable 531,724 532,872
Deferred income taxes 345,980 342,500
Other assets 180,113 207,595
------------------------------------------
Total assets $ 105,590,122 $ 101,142,271
==========================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Interest bearing $ 75,761,805 $ 75,834,932
Noninterest bearing 13,904,554 11,975,914
------------------------------------------
89,666,359 87,810,846
Borrowed money 3,382,646 1,302,383
Accrued interest and other liabilities 403,115 389,670
Income taxes payable 171,245 11,652
------------------------------------------
93,623,365 89,514,551
------------------------------------------
Stockholders' Equity:
Common stock, $5 par value, authorized 2,000,000 shares; issued
Mar 2000 1,589,940 shares; Dec 1999 1,589,843 shares 7,949,700 7,949,215
Surplus 1,975,474 1,974,989
Accumulated other comprehensive income (loss) (71,707) (64,859)
Retained earnings 2,113,290 1,768,375
------------------------------------------
Total stockholders' equity 11,966,757 11,627,720
------------------------------------------
Total liabilities and stockholders' equity $ 105,590,122 $ 101,142,271
==========================================
</TABLE>
See notes to Consolidated Financial Statements. Note - extracted from the
December 31, 1999 audited financial information.
D-23
<PAGE>
ROCKINGHAM HERITAGE BANK
COSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 1,773,580 $ 1,462,968
U.S. Government agencies and mortgage backed securities 140,467 127,077
Interest on deposits 15,373 0
Interest on federal funds sold 90,060 52,294
----------------- ----------------
2,019,480 1,642,339
Interest expense on borrowed money 33,300 17,366
Interest expense on deposits 856,816 704,510
----------------- ----------------
Net interest income 1,129,364 920,463
Provision for loan losses 30,000 30,000
----------------- ----------------
Net interest income after provision for loan losses 1,099,364 890,463
Other income:
Service fees 91,910 82,025
Commissions 3,097 7,070
----------------- ----------------
95,007 89,095
Other expenses:
Salaries and wages 318,211 258,780
Employee benefits 75,366 61,399
Occupancy 44,214 34,048
Equipment depreciation and maintenance 58,217 44,183
Other 167,771 164,476
----------------- ----------------
663,779 562,886
Income before taxes 530,592 416,672
Federal income taxes 180,500 141,500
----------------- ----------------
Net income $ 350,092 $ 275,172
================= ================
Earnings per common share - Basic $ 0.22 $ 0.17
================= ================
Earnings per common share - Diluted $ 0.22 $ 0.17
================= ================
</TABLE>
See notes to Consolidated Financial Statements.
D-24
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
Three Months Ended March 31, 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 275,172 275,172
Change in unrealized gain/
(loss) on securities available-
for-sale, net of taxes of $7,900 (15,407) (15,407)
--------------
Total comprehensive income 259,765
--------------
Split shares for stock dividend 32 155 186 (341) 0
--------------------------------------------------------------------------------------------
Balance, March 31, 1999 1,589,843 $ 7,570,685 $ 1,596,459 $1,599,671 $ 8,172 $10,774,987
============================================================================================
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 350,092 350,092
Change in unrealized gain/
(loss) on securities available-
for-sale, net of taxes of $3,480 (6,848) (6,848)
--------------
Total comprehensive income 343,244
Other (4,207) (4,207)
Split shares for stock dividend 97 485 485 (970) 0
--------------------------------------------------------------------------------------------
Balance, March 31, 2000 1,589,940 $7,949,700 $1,975,474 $2,113,290 $ (71,707) $11,966,757
============================================================================================
</TABLE>
See notes to Consolidated Financial Statements.
D-25
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Operating Activities
Net Income $ 350,092 $ 275,172
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation 54,306 42,801
Provision for loan losses 30,000 30,000
(Increase)/decrease in accrued income receivable 1,148 (82,470)
Amortization and accretion of bond premiums and discount, net 1,569 16,454
Decrease in income taxes receivable 0 90,848
Decrease in other assets 18,481 121,476
(Increase) in deferred income taxes 0 (13,175)
Increase/(decrease) in accrued interest and other liabilities 13,445 (47,910)
Increase in income taxes payable 159,593 50,651
---------------------------------------
Net cash provided by operating activities $ 628,634 $ 483,847
---------------------------------------
Cash Flows From Investing Activities
Available-for-sale securities:
Maturities $ 87,297 $ 126,585
Purchases (499,687) (539,188)
Held-to-maturity securities:
Maturities 19,770 197,997
Purchases 0 0
Loans made to customers, net (increase) (4,164,631) (4,058,901)
Purchases of premises and equipment (50,565) (64,579)
---------------------------------------
Net cash used in investing activities $ (4,607,816) $ (4,338,086)
---------------------------------------
</TABLE>
(Continued)
D-26
<PAGE>
ROCKINGHAM HERITAGE BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Three Months Ended March 31, 2000 and 1999 (Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
2000 1999
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows From Financing Activities
Net increase/(decrease) in interest bearing liabilities $ (73,127) $ 3,545,387
Net increase in noninterest bearing deposits 1,928,640 468,257
(Decrease) in borrowed funds 2,080,263 (42,985)
---------------------------------------
Net cash provided by financing activities $ 3,935,776 $ 3,970,659
---------------------------------------
Increase (decrease) in cash and cash equivalents (43,406) 116,420
Cash and cash equivalents:
Beginning 11,583,883 9,422,692
---------------------------------------
Ending $ 11,540,477 $ 9,539,112
=======================================
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest paid to depositors $ 856,276 $ 699,620
---------------------------------------
Income taxes $ 21,000 $ 0
---------------------------------------
Supplemental Schedule of Noncash Investing Activities
Net unrealized loss on available-for-sale securities $ (6,848) $ (15,407)
---------------------------------------
</TABLE>
See notes to Consolidated Financial Statements.
D-27
<PAGE>
ROCKINGHAM HERITAGE BANK
NOTES TO FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
Note 1. Significant Accounting Policies
The financial statements conform to generally accepted accounting principles and
to general practice within the banking industry. In the opinion of management,
the accompanying unaudited financial statements contain all adjustments
necessary to present fairly the financial position as of March 31, 2000, and the
results of operations for the three months ended March 31, 2000 and 1999. The
notes included herein should be read in conjunction with the audited financial
statements for the year ended December 31, 1999. The results of operations for
the three months ended March 31, 2000 and 1999 are not necessarily indicative of
the results to be expected for the full year.
Note 2. Subsequent Events
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.
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.
D-28
<PAGE>
Appendix E
July __, 2000
Board of Directors
Rockingham Heritage Bank
110 University Blvd.
Harrisonburg, VA 22801
Dear Madams and Gentlemen:
You have asked us to render our opinion relating to the fairness, from
a financial point of view, to the shareholders of Rockingham Heritage Bank
("Rockingham") of the terms of an Amended and Restated Plan of Merger between
Rockingham and Marathon Financial Corporation ("Marathon") dated June 21, 2000
(the "Merger Agreement") pursuant to which Rockingham will be merged with and
into Marathon (the "Merger") and further provides that each share of common
stock of Rockingham issued and outstanding shall be exchanged for 1.58 shares of
common stock of Marathon.
Scott & Stringfellow, as a customary part of its investment banking
business, is engaged in the valuation of financial institutions and their
securities in connection with mergers and acquisitions, negotiated
underwritings, private placements, and valuations for estate, corporate and
other purposes. We have acted as financial advisor to the Board of Directors of
Rockingham in connection with the transaction described above. We are familiar
with Rockingham, having acted as its financial advisor in the past and have
provided certain investment banking services from time to time.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Merger Agreement; (2) the joint Proxy Statement; (3)
Rockingham's audited financial statements for the three years ended December 31,
1999; (4) Rockingham's unaudited financial statements for the three months ended
March 31, 2000 and 1999, and other internal information relating to Rockingham
prepared by Rockingham's management; (5) information regarding the trading
market for the common stocks of Rockingham and Marathon and the price ranges
within which the respective stocks have traded; (6) the relationship of prices
paid to relevant financial data such as net worth, earnings, assets and deposits
in certain bank and bank holding company mergers and acquisitions in recent
years; (7) Marathon's annual reports to shareholders and its financial
statements for the three years ended December 31, 1999; (8) Marathon's unaudited
financial statements for the three months ended March 31, 2000 and 1999, and
certain other internal information relating to Marathon prepared by Marathon's
management. We have discussed with members of management of Rockingham and
Marathon the background of the Merger, the reasons and basis for the Merger and
the business and future prospects of Rockingham and Marathon individually and as
a combined entity. Finally, we have conducted such other studies, analyses and
investigations, particularly of the banking industry, and considered such other
information as we have deemed appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the
E-1
<PAGE>
Board of Directors
Rockingham Heritage Bank
July ____, 2000
Page 2
accuracy and completeness of the information furnished to us by or on behalf of
Rockingham and Marathon. We have not attempted independently to verify such
information, nor have we made any independent appraisal of the assets of
Rockingham or Marathon. With respect to the information relating to the
prospects of Rockingham and Marathon, we have assumed that such information
reflects the best currently available judgments and estimates of the managements
of Rockingham and Marathon as to the likely future financial performances of
their respective companies and of the combined entity. We have taken into
account our assessment of general economic, financial market and industry
conditions as they exist and can be evaluated as of the date hereof, as well as
our experience in business valuation in general. We have also assumed that, in
the course of obtaining regulatory and third party consents for the Merger and
the transactions contemplated by the Merger Agreement, no restriction will be
imposed that will have a material adverse effect on the future results of
operations or financial condition of Rockingham or Marathon.
Our advisory services and opinion expressed herein were prepared for
the use of the Board of Directors of Rockingham and do not constitute a
recommendation to the Rockingham shareholders as to how they should vote at the
shareholders' meeting in connection with the Merger. We hereby consent, however,
to the inclusion of this opinion as an exhibit to the proxy statement
distributed in connection with the Merger.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions and assumptions noted above, it is our opinion that, as of the date
hereof, the terms of the Merger Agreement are fair from a financial point of
view to the shareholders of Rockingham common stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By:
------------------------------------------
Gary S. Penrose
Managing Director
Financial Institutions Group
E-2
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia permits a
Virginia corporation to indemnify any director or officer for reasonable
expenses incurred in any legal proceeding in advance of final disposition of the
proceeding, if the director or officer furnishes the corporation a written
statement of his good faith belief that he has met the standard of conduct
prescribed by the Code and a determination is made by the board of directors
that such standard has been met. In a proceeding by or in the right of the
corporation, no indemnification shall be made in respect of any matter as to
which an officer or director is adjudged to be liable to the corporation, unless
the court in which the proceeding took place determines that, despite such
liability, such person is reasonably entitled to indemnification in view of all
the relevant circumstances. In any other proceeding, no indemnification shall be
made if the director or officer is adjudged liable to the corporation on the
basis that personal benefit was improperly received by him. Corporations are
given the power to make any other or further indemnity, including advancement of
expenses, to any director or officer that may be authorized by the articles of
incorporation or any bylaw made by the shareholders, or any resolution adopted,
before or after the event, by the shareholders, except an indemnity against
willful misconduct or a knowing violation of the criminal law. Unless limited by
its articles of incorporation, indemnification of a director or officer is
mandatory when he entirely prevails in the defense of any proceeding to which he
is a party because he is or was a director or officer.
The Articles of Incorporation of the Registrant contain provisions
indemnifying the directors and officers of the Registrant to the full extent
permitted by Virginia law. In addition, the Articles of Incorporation eliminate
the personal liability of the Registrant's directors and officers to the
Registrant or its shareholders for monetary damages to the full extent permitted
by Virginia law.
Item 21. Exhibits and Financial Statement Schedules
(a) Exhibits:
The following exhibits are filed on behalf of the Registrant as part of
this Registration Statement:
Exhibit No. Document
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of June 21, 2000, by and and among Rockingham Heritage Bank,
Marathon Financial Corporation, The Marathon Bank and
Marathon Merger Bank, included as Appendix A to the Joint
Proxy Statement/Prospectus included in this Registration
Statement.*
3.1 Articles of Incorporation of Marathon Financial Corporation,
incorporated herein by reference to Exhibit 3(i) of the
Registrant's Registration Statement on Form S-1,
Registration No. 33-51366, filed August 26, 1992.
II-1
<PAGE>
3.2 Bylaws of Marathon Financial Corporation, incorporated
herein by reference to Exhibit 3(ii) of the Registrant's
Registration Statement on Form S-1, Registration No.
33-51366, filed August 26, 1992.
5.1 Legal opinion of Williams, Mullen, Clark & Dobbins.*
8.1 Tax opinion of Williams, Mullen, Clark & Dobbins.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Williams, Mullen, Clark & Dobbins (included in
Exhibit 5.1).*
23.2 Consent of Yount, Hyde & Barbour, P.C.*
23.3 Consent of McGladrey & Pullen, L.L.C.*
23.4 Consent of McKinnon & Company, Inc.*
23.5 Consent of Scott & Stringfellow, P.C.*
24.1 Powers of attorney (included on signature page).*
99.1 Form of Proxy of Marathon Financial Corporation.*
99.2 Form of Proxy of Rockingham Heritage Bank.*
-------------------
*Filed herewith
Item 22. Undertakings
(a) Undertakings Required by Item 512 of Regulation S-K.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
(i) To include any prospectus required by
Section 10(a)(3) of the Securities Act of
1933;
(ii) To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement. Notwithstanding the foregoing,
any increase or decrease in volume of
securities offered (if the total dollar
value of securities offered would not exceed
that which was registered) and any deviation
from the low or high end of the
II-2
<PAGE>
estimated maximum offering range may be
reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b)
if, in the aggregate, the changes in volume
and price represent no more than 20 percent
change in the maximum aggregate offering
price set forth in the "Calculation of
Registration Fee" table in the effective
registration statement; and
(iii) To include any material information with
respect to the plan of distribution not
previously disclosed in the registration
statement or any material change to such
information in the registration statement;
provided, however, that paragraph (1)(i) and (1)(ii)
shall not apply if the registration statement is on
Form S-3, Form S-8 or Form F-3, and the information
required to be included in a post-effective amendment
by those paragraphs is contained in periodic reports
filed with or furnished to the Commission by the
registrant pursuant to Section 13 or Section 15(d) of
the Exchange Act that are incorporated by reference
in the registration statement.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new
registration statement relating to the securities
offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities being
registered which remain unsold at the termination of
the offering.
The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party which is deemed to be an underwriter within the meaning of Rule 145(c),
the issuer undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
The registrant undertakes that every prospectus: (i) that is filed
pursuant to the paragraph immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and
II-3
<PAGE>
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Winchester,
Commonwealth of Virginia, on July 14, 2000.
MARATHON FINANCIAL CORPORATION
By: /s/ Donald L. Unger
-------------------------------------
Donald L. Unger
President and Chief Executive Officer
POWER OF ATTORNEY
Each of the undersigned hereby appoints Donald L. Unger as
attorney-in-fact and agent for the undersigned, with full power of substitution,
for and in the name, place and stead of the undersigned, to sign and file with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, any and all amendments (including post-effective amendments) to this
Registration Statement, with any schedules or exhibits thereto, and any and all
supplements or other documents to be filed with the Securities and Exchange
Commission pertaining to the registration of securities covered hereby, with
full power and authority to do and perform any and all acts and things as may be
necessary or desirable in furtherance of such registration.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Donald L. Unger President and Chief Executive Officer July 14, 2000
------------------------------------------- and Director
Donald L. Unger (Principal Executive, Financial and
Accounting Officer)
/s/ Walter H. Aikens Director July 14, 2000
-------------------------------------------
Walter H. Aikens
/s/ Frank W. Brumback Director July 14, 2000
-------------------------------------------
Frank H. Brumback
/s/ Robert W. Claytor Director July 14, 2000
-------------------------------------------
Robert W. Claytor
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Clifton L. Good Director July 14, 2000
-------------------------------------------
Clifton L. Good
/s/ Thomas W. Grove Director July 14, 2000
-------------------------------------------
Thomas W. Grove
/s/ Ralph S. Gregory Director July 14, 2000
-------------------------------------------
Ralph S. Gregory
/s/ Joseph W. Hollis Director July 14, 2000
-------------------------------------------
Joseph W. Hollis
/s/ George R. Irvin, Jr. Director July 14, 2000
-------------------------------------------
George R. Irvin, Jr.
/s/ Gerald H. Kidwell Director July 14, 2000
-------------------------------------------
Gerald H. Kidwell
/s/ Lewis W. Spangler Director July 14, 2000
-------------------------------------------
Lewis W. Spangler
</TABLE>
<PAGE>
EXHIBIT INDEX
Exhibit No. Document
2.1 Amended and Restated Agreement and Plan of Merger, dated as
of June 21, 2000, by and and among Rockingham Heritage Bank,
Marathon Financial Corporation, The Marathon Bank and
Marathon Merger Bank, included as Appendix A to the Joint
Proxy Statement/Prospectus included in this Registration
Statement.*
3.1 Articles of Incorporation of Marathon Financial Corporation,
incorporated herein by reference to Exhibit 3(i) of the
Registrant's Registration Statement on Form S-1,
Registration No. 33-51366, filed August 26, 1992.
3.2 Bylaws of Marathon Financial Corporation, incorporated
herein by reference to Exhibit 3(ii) of the Registrant's
Registration Statement on Form S-1, Registration No.
33-51366, filed August 26, 1992.
5.1 Legal opinion of Williams, Mullen, Clark & Dobbins.*
8.1 Tax opinion of Williams, Mullen, Clark & Dobbins.*
21.1 Subsidiaries of the Registrant.*
23.1 Consent of Williams, Mullen, Clark & Dobbins (included in
Exhibit 5.1).*
23.2 Consent of Yount, Hyde & Barbour, P.C.*
23.3 Consent of McGladrey & Pullen, L.L.C.*
23.4 Consent of McKinnon & Company, Inc.*
23.5 Consent of Scott & Stringfellow, P.C.*
24.1 Powers of attorney (included on signature page).*
99.1 Form of Proxy of Marathon Financial Corporation.*
99.2 Form of Proxy of Rockingham Heritage Bank.*
-------------------
*Filed herewith