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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transitions periods from __________________ to __________________
Commission file number: 0-18868
Marathon Financial Corporation
(Name of small business issuer in its charter)
Virginia 54-1560968
State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization
4095 Valley Pike, Winchester, Virginia 22602
(Address of principal executive offices) (zip code)
Issuer's telephone number, including area code (540) 869-6600
Securities registered under Section 12(b) of the Act: Not Applicable
Securities registered under section 12(g) of the xchange Act
Common stock, Par Value 1.00 per share
(Title of class)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
[X] Yes [ ] No
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB [ ]
Total revenues for the year ended December 31, 1996 were $4,219,605.
The aggregate market value of the voting stock held by non-affiliates of
the registrant was $10,249,223 as of March 15, 1997. The aggregate market value
was computed by using a market price of $5.50 per share.
As of March 15, 1997, the number of shares outstanding of the registrant's
common stock was 1,863,495.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the 1997 Annual Meeting of Stockholders
("1997 Proxy Statement") are incorporated by reference in Part III of this Form
10-KSB.
In addition to historical information, the following discussion contains
forward looking statements that are subject to risks and uncertainties that
could cause the Corporation's actual results to differ materially from those
anticipated in these forward looking statements. Readers are cautioned not to
place undue reliance on these forward looking statements, which reflect
management's analysis only as of the date hereof.
Part I
Item 1. Description of Business
General
Marathon Financial Corporation ("the Corporation") is a bank holding
company that was incorporated under the laws of the Commonwealth of Virginia in
June 1989. The Corporation owns all of the outstanding stock of its sole
subsidiary, The Marathon Bank ("the Bank"), which was incorporated in August
1987 and acquired by the Corporation in October 1990, in accordance with the
Plan of Exchange approved by the shareholders of the Bank in June 1990. The
Corporation is headquartered in Frederick County, Virginia, operating in the
Bank's offices in the Marathon Financial Center, 4095 Valley Pike, Winchester,
Virginia. On August 12, 1993, The Marathon Bank opened a branch location at 300
Warren Avenue, Post Office Plaza, Front Royal in Warren County, Virginia. On
February 13, 1995, The Marathon Bank opened a branch located at 1041 Berryville
Avenue, Winchester, Virginia. The Corporation is a holding company for the Bank
and is not directly engaged in the operation of any other business.
The Bank, which is chartered under the laws of the Commonwealth of
Virginia, conducts a general banking business through its offices. The Bank's
deposits are insured under the Federal Deposit Insurance Act and the Bank is a
member of the Federal Reserve System. As of December 31, 1996, the Bank employed
34 persons on a full-time basis.
The Bank is engaged in the business of offering banking services to the
general public. It offers checking accounts, savings and time deposits, and
commercial, real estate, personal, home improvement, automobile, and other
installment and term loans. It also offers travelers checks, safe deposit,
collection, notary public and other customary bank services (other than trust
services) to its customers. The three principal types of loans made by the Bank
are: (1) commercial and industrial loans; (2) real estate loans; and (3) loans
to individuals for household, family, and other consumer expenditures. The
Bank's premises include drive-up facilities.
The banking business in the area served by the Bank (the counties of
Frederick, Clarke, Shenandoah, and Warren, Virginia) is highly competitive with
respect to both loans and deposits. In the Bank's primary service area, there
are approximately six commercial banks (including three large, Virginia-wide
banks with multiple offices) offering services ranging from deposits and real
estate loans to full service banking. The Bank is the newest and smallest
commercial bank in its service area. Certain of these institutions have higher
lending limits than the Bank and may provide various services for their
customers that are not offered by the Bank. In addition, there can be no
assurance that other financial institutions, with substantially greater
resources than the Corporation and the Bank, will not establish operations in
the Bank's service area.
1
Recent Developments
In June of 1996, the Bank moved into permanent quarters at 300 Warren
Avenue, Post Office Plaza, Front Royal, Warren County, Virginia. The Bank also
applied to the State Corporation Commission for permission to open new branches
in the 1000 Block of South Main Street, Woodstock, Virginia and at 1447 North
Frederick Pike, Winchester, Virginia. The opening of these two branches, which
is anticipated to occur in early 1997, will enable the Bank to better serve
customers' needs within its trade area.
On September 26, 1996, the Corporation completed a public stock offering
which increased the Corporation's capital by $2.5 million. In the offering,
567,192 shares of the Corporation's common stock were sold at $5.00 per share.
The stock is now listed on the NASDAQ Small Cap Market under the symbol MFCV.
Supervision and Regulation
The Corporation is a registered bank holding company subject to regulation
and examination by the Federal Reserve under the Bank Holding Company Act of
1956 (the "Bank Holding Company Act.") It is required to file with the Federal
Reserve periodic reports and any additional information that it may require
under the Bank Holding Company Act. The Bank Holding Company Act also requires
every bank holding company to obtain the prior approval of the Federal Reserve
before acquiring substantially all of the assets of 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 itself engaging in or acquiring
direct or indirect control of more than 5% of the voting shares of any company
engaged in non-banking activities. One of the principal exceptions to these
provisions is for acquiring shares of a company engaged in activities found by
the Federal Reserve to be so closely related to banking or managing banks as to
be a proper incident thereto.
The Bank, a state member bank of the Federal Reserve, is subject to
supervision, regulation, and examination by the Federal Reserve, the Virginia
State Corporation Commission and the Federal Deposit Insurance Corporation (the
"FDIC"). Deposits, reserves, investment, 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.
2
Statistical Information
The following statistical information is furnished pursuant to the
requirements of Guide 3 (Statistical Disclosure by Bank Holding Companies)
promulgated under the Securities Act of 1933.
INDEX Page
Table 1 Consolidated Financial Data 3
Table 2 Average Balance Sheets, Net Interest Income and Rates 4 and 5
Table 3 Changes in Net Interest Income Attributable to Rate and Volume 6
Table 4 Types of Investment Securities 7
Table 5 Securities Maturity Analysis 8
Table 6 Composition of the Loan Portfolio 9
Table 7 Maturity Schedule of Selected Loans 10
Table 8 Summary of Risk Elements 11
Table 9 Summary of Loan Loss Experience 12
Table 10 Allocation of the Reserve for Loan Losses 13
Table 11 Deposits and Rates 14
Table 12 Maturities of CDs in Excess of $100,000 15
Table 13 Analysis of Liquid Assets 16
Table 14 Minimum Capital Requirements 17
Table 15 Financial Ratios 18
Table 16 Short-Term Borrowings 19
Table 17 Interest Sensitivity Analysis 20
3
Table 1 - Consolidated Financial Data
The following selected consolidated financial data is based upon the
Corporation's audited financial statements and related notes and should be read
in conjunction with such financial statements and notes.
For the Years Ended December 31,
1996 1995 1994 1993 1992
----------- ---------- ---------- ---------- --------
At Period End: (in thousands except per share data)
Loans--net of unearned income
and allowance for loan losses $ 37 409 $ 28 774 $ 22 618 $ 18 149 $ 10 828
Allowance for loan losses 503 393 299 225 196
Total assets 47 287 36 070 27 682 22 379 16 111
Deposits 40 725 32 622 24 604 19 606 13 678
Stockholders' equity 5 890 2 678 2 244 1 934 1 497
Income Summary
Interest income 3 789 2 940 2 251 1 625 1 361
Interest expense 1 614 1 252 849 717 768
----------- ---------- ---------- ---------- ----------
Net interest income $ 2 175 $ 1 688 $ 1 402 $ 908 $ 593
Provision for (recovery of)
loan losses 165 113 151 12 (88)
----------- ---------- ---------- ---------- ----------
Net interest income after
provision for (recovery of)
loan losses $ 2 010 $ 1 575 $ 1 251 $ 896 $ 681
Other income 430 281 242 93 111
Other expenses 1 746 1 435 1 175 909 1 266
----------- ---------- ---------- ---------- ----------
Income (loss) before income taxes $ 694 $ 421 $ 318 $ 80 $ (474)
Income taxes (benefits) (145) - - - - - - - -
----------- ---------- ---------- ---------- ----------
Net income (loss) $ 839 $ 421 $ 318 $ 80 $ (474)
=========== ========== ========== ========== ==========
Per Share Data: *
Book value at period ended $ 3.16 $ 2.05 $ 1.75 $ 1.52 $ 1.25
Net income (loss) .58 .35 .30 .08 (.40)
Cash dividends declared 111 810 - - - - - - - -
Average common shares outstanding 1 445 601 1 205 443 1 082 615 1 055 466 743 298
* Changed to reflect stock dividend in 1996.
4
Table 2 - Average Balance Sheets, Net Interest Income and Rates
Table 2 illustrates average balances of total earning assets and total
interest-bearing liabilities for 1996 and 1995 and shows the average
distribution of assets, liabilities, stockholder's equity, and the related
income, expense, and corresponding weighted average yields and costs. The
average balances used for the purpose of this table and other statistical
disclosures were calculated by using the daily average balances.
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Assets Balances (1) Expense Rate Balances (2) Expense Rate
------ -------- --- ------- ---- -------- --- ------- ----
Interest Earning
Assets:
Loans, net of un-
earned discounts (3) $ 33 282 661 $3 554 808 10.7% $ 26 363 947 $2 786 074 10.6%
Securities 2 092 113 131 013 6.3% 1 496 693 87 407 5.8%
Federal funds sold 1 951 410 103 606 5.3% 1 179 068 66 829 5.7%
--------------- ---------- ---- -------------- ---------- ----
Total interest-
bearing assets $ 37 326 184 $3 789 427 10.2% $ 29 039 708 $2 940 310 10.1%
--------------- ---------- ---- -------------- ---------- ----
Non-Interest Earning
Assets:
Cash and due from
banks 2 643 922 1 699 438
Bank premises and
equipment 1 411 295 1 268 132
Intangible assets - - - -
Other assets 585 713 406 041
Allowance for loan
losses (452 202) (323 541)
----------- ---------------
Total assets $ 41 514 912 $ 32 089 778
============== ==============
5
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------------------
Average Earnings/ Yield/ Average Earnings/ Yield/
Liabilities and Balances (1) Expense Rate Balances (2) Expense Rate
Shareholders' Equity -------- --- ------- ---- -------- --- ------- ----
---------------------
Liabilities:
Interest-bearing
deposits $ 31 654 328 $ 1 566 223 4.9% $ 24 757 495 $ 1 203 143 4.9%
Federal funds
purchased 5 361 155 2.9% 24 984 1 536 6.1%
Note payable 473 195 48 275 10.2% 628 588 47 559 7.6%
--------------- -------------- ---- ------------- ------------ ----
Total interest-
bearing liabilities $ 32 132 884 $ 1 614 653 5.0% $ 25 411 067 $ 1 252 238 4.9%
-------------- ------------
Non-Interest-Bearing
Liabilities:
Demand deposits 5 588 802 4 033 534
Other liabilities 174 211 165 081
-------------- ------------
Total liabilities $ 37 895 897 $ 29 609 682
Stockholders'
equity 3 619 015 2 480 096
-------------- ------------
Total liabilities and
stockholders'
equity $ 41 514 912 $ 32 089 778
============== ============
Net Interest Earnings $ 2 174 774 $ 1 688 072
============== ===========
Net Interest Yield
on Earningss Assets 5.8% 5.8%
==== ====
(1) Average balances are calculated using daily balances for each category in 1996.
(2) Average balances are calculated using month end balances for each category in 1995.
(3) Non-accrual loans are included in the average balance of this category.
6
Table 3 - Changes in Net Interest Income Attributable to Rate & Volume
December 31, December 31,
1996 vs. 1995 1995 vs. 1994
----------------------------------------------------------------- ----------------------------------
Due to Change In Due to Change In
Volume Rate Total Volume Rate Total
Loans $ 742 058 $ 26 676 $ 768 734 $ 554 742 $ 107 451 $ 662 193
Securities 35 840 7 766 43 606 (1 152) (13 167) (14 319)
Federal funds sold 41 190 (4 413) 36 777 21 771 19 417 41 188
----------- ------------ ----------- ------------ ----------- ------------
Total interest earned
on interest bearing
assets $ 819 088 $ 30 029 $ 849 117 $ 575 361 $ 113 701 $ 689 062
----------- ------------ ----------- ------------ ----------- ------------
Interest-bearing
deposits $ 363 080 $ - - $ 363 080 $ 234 786 $ 166 743 $ 401 529
Federal funds
purchased (828) (553) (1 381) (4 173) 1 776 (2 397)
Notes payable (1 865) 2 581 716 3 638 555 4 193
----------- ------------ ----------- ------------ ----------- ------------
Total interest paid
on interest-bearing
liabilities $ 360 387 $ 2 028 $ 362 415 $ 234 251 $ 169 074 $ 403 325
----------- ------------ ----------- ------------ ----------- ------------
Net interest income $ 458 701 $ 28 001 $ 486 702 $ 341 110 $ (55 373) $ 285 737
=========== ============ =========== ============ ============ ===========
7
Table 4 - Types of Investment Securities
Table 4 summarizes the book value of securities for the two years ending
December 31, 1996 and 1995.
Table 4 - Book Value of Securities Available for Sale
For the Years Ended
December 31,
1996 1995
-------------- --------------
U.S. government agencies
and corporation $ 1 343 663 $ 447 801
Obligations of state &
political subdivisions - - - -
Other securities 332 780 317 289
-------------- --------------
$ 1 679 443 $ 765 090
============== ==============
Table 4 - Book Value of Securities Held to Maturity
For the Years Ended
December 31,
1996 1995
-------------- --------------
U.S. government agencies
and corporations $ 1 292 094 $ 649 946
Obligations of state &
political subdivisions 251 227 150 000
Other securities 107 938 126 019
-------------- --------------
$ 1 651 259 $ 925 965
============== ==============
At December 31, 1996, the securities book value was $3,330,702 and the
market value was $3,337,690, compared to December 31, 1995 values of $1,691,055
and $1,708,102, respectively. As of December 31, 1996, 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.
8
Table 5 - Securities Maturity Analysis
Table 5 sets forth the maturity distribution and weighted average yields of
the securities portfolio at December 31, 1996. 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.
December 31, 1996
After One But After Five But
Within One Year Within Five Years Within Ten Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
Securities of U.S.
government agencies
and corporation $ 993 899 5.38% $ 497 862 6.12% $ 250 053 6.82% $ 34 873 9.02%
States & political
subdivisions - - - - - - - - 251 227 8.84% - - - -
Other securities 348 550 6.18% 648 345 5.80% - - - - 305 893 5.69%
------------- ------------- ------------ -------------
Total $ 1 342 449 5.59% $ 1 146 207 5.94% $ 501 280 7.83% $ 340 766 6.03%
============= ============= ============ =============
9
Table 6 - Composition of the Loan Portfolio
The following table summarizes the composition of the loan portfolio at
December 31, 1996 and 1995.
December 31,
1996 1995
-------------- --------------
Commercial $ 18 719 817 $ 13 315 029
Real estate - mortgage 6 882 004 6 133 400
Real estate - construction 3 886 066 3 637 433
Installment loans to individuals 8 424 170 6 081 297
-------------- --------------
$ 37 912 057 $ 29 167 159
Less allowance for loan losses 503 014 393 139
-------------- --------------
Net loans $ 37 409 043 $ 28 774 020
============== ==============
The Corporation had no loans outstanding to foreign countries or for highly
leveraged transactions as of December 31, 1996 or 1995.
There were no categories of loans that exceeded 10% of outstanding loans at
December 31, 1996, which were not disclosed in Table 6.
In the normal course of business, the Corporation makes various commitments
and incurs certain contingent liabilities which are disclosed but not reflected
in the accompanying financial statements. At December 31, 1996, commitments for
standby letters of credit totaled $293,581 and commitments to extend credit
totaled $4,331,307. At December 31, 1995, commitments for standby letters of
credit totaled $76,812 and commitments to extend credit totaled $3,698,658.
10
Table 7 - Maturity Schedule of Selected Loans
The table below presents the maturities of selected loans outstanding at
December 31, 1996.
After One
Within But Within After
One Year Five Years Five Years Total
-------- ---------- ---------- -----
Commercial $ 9 816 083 $ 8 325 612 $ 578 122 $ 18 719 817
Real estate - construction 3 387 589 498 477 - - 3 886 066
--------------- ---------------- ---------------- ---------------
$ 13 203 672 $ 8 824 089 $ 578 122 $ 22 605 883
=============== =============== ================ ================
Interest sensitivity on such loans maturing after one year:
Fixed $ 6 593 206
Variable 2 809 005
---------------
Total $ 9 402 211
===============
11
Table 8 - Summary of Risk Elements
The following table details information concerning non-accrual, past due
and restructured loans as of December 31 for each of the years indicated:
December 31,
1996 1995
------------- ------------
Non-accrual loans $ 71 515 $ 45 445
Loans past due 90
days or more 58 996 215 348
Restructured loans - - - -
------------- ------------
$ 130 511 $ 260 793
============= ============
Past due loans consist of loans contractually past due ninety days or
longer as to interest or principal payments which continue to accrue interest.
Loans on non-accrual status are those loans (other than consumer installment
loans) which are ninety days past due, unless the loan is both well-secured and
in process of collection. Accrued interest on these loans is subtracted from
income, and thereafter interest is recognized only to the extent payments are
received or the loan has otherwise been rehabilitated.
Non-accrual loans at December 31, 1996 were $71,515, compared to $45,445
for 1995. Approximately $6,638 of interest income would have been recorded if
interest had accrued.
As of December 31, 1996, the Corporation had a total of $130,511 in
non-accrual, 90 days past due and restructured loans, compared to $260,793 in
1995. This was a decrease of $130,282 or 50%.
On December 31, 1996, the Corporation had $71,515 in non-accrual loans,
which consist of $55,974 in installment loans and $15,541 in mortgage loans. The
$58,996 in 90 days past due consists of $41,240 in installment loans and $17,756
in accrual loans.
As of December 31, 1996, the Corporation had no loans in addition to the
past due and non-accrual loans mentioned above that are considered to be
potential problem loans.
The Corporation's management and Board of Directors have reviewed the asset
quality of the Bank's loan portfolio and the Bank's loan loss reserve and have
found it to be adequate.
12
Table 9 - Summary of Loan Loss Experience
1996 1995
-------------- --------------
Balance, beginning of period $ 393 139 $ 299 203
Less Charge-offs:
Commercial 23 929 5 000
Real estate - mortgage - - - -
Real estate - construction - - - -
Installment loans to individuals 37 203 25 668
-------------- --------------
Total $ 61 132 $ 30 668
-------------- --------------
Plus Recoveries:
Commercial $ 951 $ 7 063
Real estate - mortgage - - - -
Real estate - construction - - - -
Installment loans to individuals 5 056 4 122
-------------- --------------
Total $ 6 007 $ 11 185
-------------- --------------
Additions charged to operating expense $ 165 000 $ 113 419
-------------- --------------
Balance, end of period $ 503 014 $ 393 139
============== ==============
Ratio of net charge offs during the period
to average loans outstanding during the
period 0.17% 0.07%
The Corporation maintains the allowance for loan losses at a sufficient
level to provide for potential losses in the loan portfolio. Loan losses are
charged directly to the allowance when they occur, while recoveries are credited
to the allowance. The provision for loan losses is determined periodically by
management upon 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 conditions in the market
area. An analysis of the allowance for loan losses, including charge-off
activity, is presented above for the years ended December 31, 1996 and 1995.
13
Table 10 - Allocation of the Reserve for Loan Losses
The following table reflects management's allocation of the reserve for
loan losses for the years ended December 31, 1996 and 1995.
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------
% of Loans to % of Loans to
Amount Total Loans Amount Total Loans
------ ----------- ------ -----------
Commercial $ 427 562 49.4% $334 168 45.7%
Real estate - mortgage 10 060 18.2 7 863 21.0
Real estate - construction 25 151 10.2 19 657 12.5
Installment loans to
individuals 40 241 22.2 31 451 20.8
------------ --------- ------------- --------
$ 503 014 100.0% $ 393 139 100.0%
============ ========= ============= ========
14
Table 11 - Deposits and Rates
The following table details the average amount of, and the average rate
paid on the following primary deposit categories for the years ended December
31, 1996 and 1995.
December 31, 1996 December 31, 1995
--------------------------------------------------------------------------
Average Average Average Average
Balance Rate Balance Rate
------- ---- ------- ----
Non-interest bearing:
Demand deposits $ 5 588 802 - - $ 4 033 534 - -
---------------- ----------------
Interest-bearing:
Demand deposits $ 5 774 727 3.4 $ 4 416 757 3.1
Savings deposits 5 040 481 3.2 5 009 402 3.3
Time deposits 20 839 120 5.8 15 331 336 5.9
---------------- ----------------
$ 31 654 328 4.9% $ 24 757 495 4.9%
---------------- ----------------
$ 37 243 130 $ 28 791 029
================ ================
The Corporation primarily uses deposits to fund its loans and investment
securities. The Corporation offers individuals and small-to-medium-size
businesses a variety of deposit accounts. Deposit accounts, including checking,
savings, money market and certificates of deposit, are obtained primarily from
the communities which the Corporation services.
15
Table 12 - Maturities of CDs in Excess of $100,000
The following is a summary of the maturity distribution of certificates of
deposit in amounts of $100,000 or more as of December 31, 1996.
Amount Percent
------ -------
Three months or less $ 765 345 16.1%
Over three - six months 1 601 603 33.7
Over six - twelve months 1 237 796 26.1
Over twelve months 1 143 537 24.1
---------------- ---------
Total $ 4 748 281 100.0%
================ ========
Certificates of deposit in amounts of $100,000 or more were $4,748,281 at
December 31, 1996. This represents 20.2% of the total certificate of deposit
balance of $23,460,361 at December 31, 1996. The Corporation does not solicit
such deposits. Further, the Corporation does not aggressively bid for public
funds deposits in large denominations, as such deposits may require the pledging
of investment securities.
The Corporation competes with the major regional financial institutions for
money market accounts and certificates of deposit less than $100,000. While the
Corporation is competitive with its interest rates, using a tiered rate system
to increase individual account balances, the Corporation has found that it can
continue to maintain its interest margin by matching loan maturities with
certificate maturities and setting loan rates based on the Corporation's cost of
funds.
16
Table 13 - Analysis of Liquid Assets
Liquidity is a measure of the Corporation's ability to generate sufficient
cash to meet present and future obligations in a timely manner. These
obligations include the credit needs of customers, funding deposit withdrawals,
and the day-to-day operations of the Corporation. The Corporation's ability to
fund these daily commitments at December 31, 1996 and 1995 is illustrated in the
table below:
December 31,
1996 1995
---------------- ---------------
Liquid Assets:
Cash and due from banks $ 2 846 434 $ 2 282 876
Federal funds sold 1 656 000 1 574 000
U.S. government agency securities 2 681 675 447 801
---------------- ---------------
Total liquid assets $ 7 184 109 $ 4 304 677
================ ===============
Total deposits and other liabilities $ 41 396 603 $ 33 392 269
================ ===============
Ratio of liquid assets to deposits
and other liabilities 17.4% 12.9%
=============== ===============
The high loan to deposit ratio (91.9%) as of December 31, 1996, has
provided the opportunity for the Corporation to achieve a high return on its
deposits. For the year ended December 31, 1996, the Corporation experienced a
return on assets of 2.02% and a net interest margin of 6.01%.
The source of new funds is very strong for both long-term and short-term
duration. The growth in deposits was $8.1 million (24.8%) during 1996. The
Corporation also has access to overnight federal funds from correspondent banks
totaling up to $6.1 million. In addition, management believes that the
opportunity for the sale of loans on the market is good. The Corporation's loan
portfolio contains loans of high yields and it enjoys a recent history of low
loan charge offs.
17
Table 14 - Minimum Capital Requirements
The following table indicates the Federal Reserve's minimum capital
requirements and the Corporation's ability to reach such minimum capital
requirements for the periods indicated.
December 31,
1996 1995
---------- ----------
Minimum capital requirements set by the Federal Reserve:
Tier 1 risk-based capital ratio 4.00% 4.00%
Total risk-based capital ratio 8.00% 8.00%
Actual capital ratios of the Corporation:
Tier 1 risk-based capital ratio 15.72% 9.40%
Total risk-based capital ratio 16.97% 10.60%
On August 1, 1990, the Federal Reserve issued transitional capital adequacy
guidelines. These guidelines took effect September 7, 1990. The new capital
standards require an institution to meet two separate minimum capital
requirements: (1) a core capital (consisting of stated capital, capital surplus
and retained earnings) requirement equal to 4% of risk-weighted assets and (2) a
total capital risk-based capital requirement applied to risk-weighted assets
equal to 8%. The risk-based capital requirement includes off-balance sheet
items. Under the risk-based capital requirement, assets are assigned a credit
risk weighting based upon their relative risk ranging from 0% for assets that
are backed by the full faith and credit of the United States or that pose no
credit risk to the Bank to 100% for assets such as delinquent or repossessed
assets.
As indicated in Table 14 above, at December 31, 1996 and December 31, 1995,
the Corporation met the Federal Reserve's minimum capital requirements.
18
Table 15 - Financial Ratios
The following table summarizes ratios considered to be significant
indicators of the Corporation's profitability and financial condition for the
years ended December 31, 1996 and 1995.
For the Years Ending
December 31,
1996 1995
---------- ----------
Return on average assets
(Net income/average total assets) 2.02% 1.31%
========= =========
Return on average equity
(Net income/average equity) 23.19% 17.00%
========= =========
Dividend payment ratio
(Dividends declared per share/
Net income per share) 10.34% - -%
========= =========
Average equity to average asset ratio 8.70% 7.70%
========= =========
19
Table 16 - Short-Term Borrowings
The Corporation had no short-term borrowings with an average balance
outstanding of more than 30% of stockholders' equity for the years ended
December 31, 1996 and 1995.
20
Table 17 - Interest Sensitivity Analysis
December 31, 1996
91 Days Over
1-90 Days to 1 Year 1-5 Years 5 Years Total
------------ ------------ ------------- ------------- -----------
Earning Assets:
Loans $ 12 474 $ 5 317 $ 19 706 $ 415 $ 37 912
Investment securities -
amortized cost 1 094 - - 298 259 1 651
Securities - AFS -
fair value 250 - - 846 584 1 680
Federal funds sold 1 656 - - - - - - 1 656
------------ ------------ ------------- ------------- -----------
Total earning assets $ 15 474 $ 5 317 $ 20 850 $ 1 258 $ 42 899
------------ ------------ ------------- ------------- -----------
Interest-Bearing Liabilities:
Interest checking $ - - $ - - $ 2 312 $ - - $ 2 312
Regular savings - - - - 5 064 - - 5 064
Money market savings 3 659 - - - - - - 3 659
Certificates of deposit:
$100,000 and over 765 2 840 1 143 - - 4 748
Under $100,000 4 957 7 458 6 297 - - 18 712
------------ ------------ ------------- ------------- -----------
Total interest-bearing
liabilities $ 9 381 $ 10 298 $ 14 816 $ - - $ 34 495
------------ ------------ ------------- ------------- -----------
Period GAP $ 6 093 $ (4 981) $ 6 034 $ 1 258 $ - -
============ ============ ============= ============= ===========
Cumulative GAP $ 6 093 $ 1 112 $ 7 146 $ 8 404 $ - -
============ ============ ============= ============= ===========
Cumulative GAP to
Total earning assets 14.20% 2.59% 16.66% 19.59% - -%
============ ============ ============= ============= ===========
The present interest rate sensitivity position of the Corporation reflects
a favorable impact upon earnings in the event of rising interest rates. A rate
increase of as much as 200 basis points could have a favorable impact on net
interest income of approximately 4.3% 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 4.7%. The current earning assets and deposit
structure of the Corporation suggest that these trends in changes in net
interest income would continue beyond 1997 given a rate change of this
magnitude.
21
Item 2. Description of Properties
The Marathon Bank office is located at 4095 Valley Pike, Winchester,
Virginia. On December 31, 1993, the Marathon Land Trust executed a deed and
transferred the office to The Marathon Bank. This property is owned free of
encumbrances.
On August 12, 1993 the Bank opened its Warren County Branch at 300 Warren
Avenue in Post Office Plaza, Front Royal, Warren County, Virginia. On July 1,
1996, the Bank entered into a new lease with Post Office Plaza, L.C. for the new
branch facility in Front Royal. The terms of the lease include a monthly rent of
$3,846 for the first five years and adjusted annually afterward. The lease term
is twenty years with the option to renew for two additional five year terms.
On February 13, 1995, the Bank opened its Winchester Branch at 1041
Berryville Avenue in the City of Winchester, Virginia. The Bank executed a lease
on October 1, 1994, for five years with a monthly lease payment of $1,000. The
Bank has two five-year options to extend this lease.
Item 3. Legal Proceedings
In the course of normal operations, the Corporation and the Bank are
parties to various legal proceedings. Based upon information currently
available, and after consultations with legal counsel, management believes that
such legal proceedings will not have a material adverse effect on the
Corporation's business, financial position, or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of the Corporation through
a solicitation of proxies or otherwise.
22
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Corporation's common stock is listed on the NASDAQ Small Cap Market
under the symbol MFCV. Prior to the common stock's listing on NASDAQ on October
3, 1996, there were occasional transactions in the stock and management assisted
in matching persons interested in buying or selling the stock. The trades of
which management is aware between January 1, 1995 and October 3, 1996 occurred
at or about $5.00 per share. For the quarter ending December 31, 1996, the high
and low bid prices of the common stock on NASDAQ were $5.00 and $3.88,
respectively. This bid information reflects inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.
At December 31, 1996, the Corporation had approximately 930 stockholders of
record.
Under state law, without the consent of the Virginia Bureau of Financial
Institutions, the Bank may not pay dividends until it has restored any deficit
in its capital funds as originally paid in. Dividends from the Bank serve as the
primary funding to the Corporation for dividend payment. The Corporation
declared a $.06 per share cash dividend to stockholders of record as of December
27, 1996 to be paid in January of 1997. Previously, no cash dividends had been
paid.
Item 6. Management's Discussion and Analysis or Plan of Operations
Marathon Financial Corporation is the holding company for The Marathon
Bank. The following discussion and analysis of the financial condition and
results of operations of the Corporation for the years ending December 31, 1996,
1995 and 1994 should be read in conjunction with the consolidated financial
statements and related notes included as Exhibit 99.1 in this Form 10-KSB.
Results of Operation
The major component of the Corporation's net earnings is net interest
income, which is the excess of interest income earned on earning assets over the
interest expense paid for sources of funds. Net interest income is effected by
changes in volume, resulting from growth and variations in balance sheet
composition, as well as fluctuations in interest rates and maturities of sources
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 $3,789,427, $2,940,310 and $2,251,248 for the years
ending December 31, 1996, 1995 and 1994, respectively. This represents an
increase of $849,117 or 29% in 1996 and $689,062 or 31% in 1995. Interest
expense totaled $1,614,653, $1,252,238 and $848,913 for the years ending
December 31, 1996, 1995 and 1994, respectively. This is an increase of $362,415
or 29% in 1996 and an increase of $403,325 or 48% in 1995. The increase in 1996
was the result of significant growth in the Bank's deposit base.
23
Net interest income, before provision for loan losses, was $2,174,774 for
the year ending December 31, 1996, up $486,702 or 29% over the $1,688,072
reported for the same period in 1995. In 1995, net interest income before
provision for loan losses, increased $285,737 or 20% from $1,402,335 in 1994.
An additional $165,000 was placed into the provision for loan losses in
1996, giving a year end balance of $503,014 or 1.33% of total loans. In 1995,
the provision was $113,419 giving a year-end balance of $393,139 or 1.35% of
total loans. The Corporation maintains the allowance for loan losses at a
sufficient level to provide for potential losses in the loan portfolio. The
allowance is reviewed by management and the Board of Directors on a regular
basis considering several factors including changes in the character and size of
the loan portfolio, related loan loss experiences, a review and examination of
overall loan quality, the assessment of problem loans, and an analysis of
anticipated economic conditions in the market. Based on that analysis,
management believes that the year end balance was sufficient to cover
anticipated losses.
Non-interest income totaled $430,178, $281,329 and $241,989 for the years
ending December 31, 1996, 1995 and 1994, respectively. This represents an
increase of $148,849 or 53% in 1996 over 1995. This was the result of an
increase in service charge income and other income.
Non-interest expense totaled $1,746,265, $1,435,441 and $1,174,315 for the
years ending December 31, 1996, 1995 and 1994 respectively. This represents an
increase of $310,824 or 22% in 1996 and an increase of $261,126 or 22% in 1995.
The increases in 1996 and 1995 were attributable to an increase in salary
expenses, furniture and equipment expenses and occupancy expenses associated
with the Front Royal Branch's move into a permanent building in 1996.
Net income for the years ending December 31, 1996, 1995 and 1994 was
$839,421, $420,541 and $318,476, respectively. This represents an increase of
$418,880 or 99.6% in 1996 over 1995 net income of $420,541.
Capital Adequacy
Total stockholders' equity on December 31, 1996 was $5,890,237, an increase
of $3,212,487 or 120% from $2,677,750 in 1995. The Corporation's primary
capital-to-asset ratio was 12.4% in 1996 versus 7.4% in 1995. This exceeds the
Federal Reserve requirement of 6% for bank holding companies. On September 26,
1996, the bank completed a public offering in which 567,192 shares of common
stock were sold at $5.00 per share, resulting in $2,539,038 of new capital after
payment of fees and expenses associated with the offering. Marathon repurchased
10,000 shares of stock for $46,252 on October 23, 1996.
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.
24
In assessing liquidity, management gives consideration to many relevant
factors, including stability of deposits, quality of assets, economy of markets
served, concentrations of business and industry, competition and the
Corporation's overall financial condition.
The Corporation's primary sources of liquidity are cash, due from banks,
U.S. Treasury securities, U.S. Agency securities and other short-term
investments including Federal Funds sold and the sale of loans.
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.
Accounting Rule Changes
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued in June 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", defers for one year the effective date
(a) of paragraph 15 of Statement 125 and (b) for repurchase agreement,
dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and
237(b) of Statement 125.
The effects of these Statements on the Corporation's consolidated financial
statements are not expected to be material.
Item 7. Financial Statements
Financial Statements are included in this Form 10-KSB as Exhibit 99.1.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
25
Part III
The information required by Items 9, 10, 11 and 12 of Part III has been
incorporated herein by reference to the Corporation's 1997 Proxy Statement as
set forth below in accordance with General Instruction E.3 of Form 10-KSB.
Item 9. Directors and Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Information relating to directors and executive officers of the Company is
set forth in the sections entitled "Election of Directors", "Nominees" and
"Continuing Directors"of the 1997 Proxy Statement and is incorporated herein by
reference.
Information relating to compliance with Section 16(a) of the Exchange Act
is set forth in the section entitled Section 16(a) Beneficial Ownership
Reporting Compliance and is incorporated herein by reference.
Item 10. Executive Compensation
Information regarding compensation of officers and directors is set forth
in the sections entitled "Executive Compensation", "Employment Contracts,
Termination of Employment and Changes in Control Arrangements" and "Directors'
Compensation" in the 1997 Proxy Statement and is incorporated herein
by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning the security ownership of certain beneficial owners
and management is set forth in the sections entitled "Nominees", "Continuing
Directors" and "Security Ownership of Certain Beneficial Owners" in the 1997
Proxy Statement and is incorporated herein by reference.
Item 12. Certain Relationships and Related Transactions
Information regarding certain relationships and related transactions is set
forth in the section entitled "Transactions with Management and Board of
Directors" in the 1997 Proxy Statement and is incorporated herein by reference.
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibit Index
2. Not applicable.
3. (i) Articles of Incorporation. Incorporated by reference as
Exhibit 3(i) to the Corporation's Registration Statement on
Form S-1 filed on August 26, 1992 (File No. 33-51366).
26
(ii) By-laws. Incorporated by reference as Exhibit 3(ii) to
the Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
4. Not applicable.
9. Not applicable
10. Material Contracts.
Exhibit 10.1 401(k) Plan of Marathon Financial
Corporation, incorporated herein by reference
as Exhibit 10.1 to the Corporation's
Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
Exhibit 10.2 Employment Agreement between The Marathon
Bank and Donald L. Unger, incorporated herein
by reference as Exhibit 10.2 to the
Corporation's Registration Statement on Form
S-1 filed on August 26, 1992 (File No.
33-51366).
Exhibit 10.3 Lease between The Marathon Bank and Post
Office Plaza, L.C. for the branch office at
300 Warren Avenue, Front Royal, Virginia,
incorporated herein by reference as Exhibit
10.3 to the Corporation's Registration
Statement on Form S-1 filed July 26, 1996
(File No. 333-08995).
Exhibit 10.4 Lease between The Marathon Bank and the
Lessors, Rogers M. Fred and Clifton G.
Stoneburner for the branch office at 1041
Berryville Avenue, Winchester, Virginia,
incorporated herein by reference to the
Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No.
0-18868).
11. Statement re: Computation of Per Share Earnings.
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Subsidiary of Marathon Financial Corporation, incorporated
herein by reference as Exhibit 21 to the Corporation's
Registration Statement on Form S-1 filed July 26, 1996 (File
No. 333-08995).
22. None.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule.
28. Not applicable.
27
99. Additional Exhibits.
Exhibit 99.1 The following consolidated financial
statements of the Corporation including the
related notes and the report of the
independent auditors, are included herein:
1. Independent Auditor's Report.
2. Consolidated Balance Sheets - December 31,
1996 and 1995.
3. Consolidated Statement of Income - Years
Ended December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Changes in
Stockholders' Equity-Years Ended December
31, 1996, 1995 and 1994.
5. Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and
1994.
6. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant during
the fourth quarter of 1996.
28
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MARATHON FINANCIAL CORPORATION
DATE (Registrant)
March 31 , 1997 By: /s/ Donald L. Unger
-----------------------
Donald L. Unger, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
DATE SIGNATURE AND TITLE
- ---- -------------------
March 31, 1997 /s/ Frank H. Brumback
- ------------------------------------ ------------------------------
Frank H. Brumback, Director
- ------------------------------------
W. Houston Board, III, Director
- ------------------------------------
Robert W. Claytor, Director
- ------------------------------------
Clifton L. Good, Director
March 31, 1997 /s/ Thomas W. Grove
- ------------------------------------ ----------------------------
Thomas W. Grove, Director
March 31, 1997 /s/ Ralph S. Gregory
- ------------------------------------ -----------------------------
Ralph S. Gregory, Director
March 31, 1997 /s/ Joseph W. Hollis
- ------------------------------------ -----------------------------
Joseph W. Hollis, Director
March 31, 1997 /s/ George R. Irvin, Jr.
- ------------------------------------ ---------------------------------
George R. Irvin, Jr., Director
- ------------------------------------
Gerald H. Kidwell, Director
March 31, 1997 /s/ Lewis W. Spangler
- ------------------------------------ ------------------------------
Lewis W. Spangler, Director
March 31, 1997 /s/ Donald L. Unger
- ------------------------------------ ------------------------------
Donald L. Unger, Principal Executive,
Financial, Accounting Officer
Exhibit Index
2. Not applicable.
3. (i) Articles of Incorporation. Incorporated by reference as
Exhibit 3(i) to the Corporation's Registration Statement on
Form S-1 filed on August 26, 1992 (File No. 33-51366).
(ii) By-laws. Incorporated by reference as Exhibit 3(ii) to
the Corporation's Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
4. Not applicable.
9. Not applicable
10. Material Contracts.
Exhibit 10.1 401(k) Plan of Marathon Financial
Corporation, incorporated herein by reference
as Exhibit 10.1 to the Corporation's
Registration Statement on Form S-1 filed on
August 26, 1992 (File No. 33-51366).
Exhibit 10.2 Employment Agreement between The Marathon
Bank and Donald L. Unger, incorporated herein
by reference as Exhibit 10.2 to the
Corporation's Registration Statement on Form
S-1 filed on August 26, 1992 (File No.
33-51366).
Exhibit 10.3 Lease between The Marathon Bank and Post
Office Plaza, L.C. for the branch office at
300 Warren Avenue, Front Royal, Virginia,
incorporated herein by reference as Exhibit
10.3 to the Corporation's Registration
Statement on Form S-1 filed July 26, 1996
(File No. 333-08995).
Exhibit 10.4 Lease between The Marathon Bank and the
Lessors, Rogers M. Fred and Clifton G.
Stoneburner for the branch office at 1041
Berryville Avenue, Winchester, Virginia,
incorporated herein by reference to the
Corporation's Annual Report on Form 10-K for
the year ended December 31, 1995 (File No.
0-18868).
11. Statement re: Computation of Per Share Earnings.*
13. Not applicable.
16. Not applicable.
18. Not applicable.
21. Subsidiary of Marathon Financial Corporation, incorporated
herein by reference as Exhibit 21 to the Corporation's
Registration Statement on Form S-1 filed July 26, 1996 (File
No. 333-08995).
22. None.
23. Not applicable.
24. Not applicable.
27. Financial Data Schedule.*
28. Not applicable.
99. Additional Exhibits.
Exhibit 99.1 The following consolidated financial
statements of the Corporation including the
related notes and the report of the
independent auditors, are included herein:*
1. Independent Auditor's Report.
2. Consolidated Balance Sheets - December 31,
1996 and 1995.
3. Consolidated Statement of Income - Years
Ended December 31, 1996, 1995 and 1994.
4. Consolidated Statements of Changes in
Stockholders' Equity-Years Ended December
31, 1996, 1995 and 1994.
5. Consolidated Statements of Cash Flows -
Years Ended December 31, 1996, 1995 and
1994.
6. Notes to Consolidated Financial Statements.
(b) Reports on Form 8-K. No reports were filed by the registrant during
the fourth quarter of 1996.
*Filed Herewith.