EXHIBIT 99.1
                         MARATHON FINANCIAL CORPORATION

                              Winchester, Virginia

                                FINANCIAL REPORT

                                DECEMBER 31, 1997


<PAGE>


                                 C O N T E N T S


                                                                            Page

INDEPENDENT AUDITOR'S REPORT                                                   1

FINANCIAL STATEMENTS

  Consolidated balance sheets                                                  2
  Consolidated statements of income                                      3 and 4
  Consolidated statements of changes in stockholders' equity                   5
  Consolidated statements of cash flows                                  6 and 7
  Notes to consolidated financial statements                                8-30


<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, 1997 and 1996,
and the related  consolidated  statements  of income,  changes in  stockholders'
equity,  and cash flows for the years ended  December 31,  1997,  1996 and 1995.
These   consolidated   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, 1997 and 1996, and the
results of its  operations  and its cash flows for the years ended  December 31,
1997,  1996  and  1995,  in  conformity  with  generally   accepted   accounting
principles.


                                                     Yount, Hyde & Barbour, P.C.


Winchester, Virginia
January 14, 1998


<PAGE>



                         MARATHON FINANCIAL CORPORATION


<TABLE>
<CAPTION>

                           Consolidated Balance Sheets
                           December 31, 1997 and 1996


            Assets                                             1997                   1996
                                                          -------------           -------------

<S> <C>
Cash and due from banks                                   $   3 477 382           $   2 846 434
Securities (fair value:  1997, $3,506,666;
  1996, $3,337,690)                                           3 490 709               3 331 209
Federal funds sold                                            3 570 000               1 656 000
Loans, net                                                   50 517 071              37 409 043
Bank premises and equipment, net                              2 499 374               1 587 342
Accrued interest receivable                                     285 837                 212 089
Other real estate                                               448 123                  18 123
Other assets                                                    537 546                 226 600
                                                          -------------          --------------

                                                          $  64 826 042          $   47 286 840
                                                          =============          ==============

   Liabilities and Stockholders' Equity

Liabilities
  Deposits:
    Noninterest-bearing demand deposits                   $   7 992 135          $    6 229 844
    Savings and interest-bearing demand deposits             16 161 931              11 035 082
    Time deposits                                            32 281 155              23 460 361
                                                          -------------          --------------
          Total deposits                                  $  56 435 221          $   40 725 287
  Interest expense payable                                      104 753                  81 764
  Accounts payable and accrued expenses                         295 518                 273 900
  Capital leases payable                                        279 136                 315 652
  Commitments and contingent liabilities                            - -                     - -
                                                          -------------          --------------
          Total liabilities                               $  57 114 628          $   41 396 603
                                                          -------------          --------------

Stockholders' 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; 1997, 2,055,983 shares issued and
     outstanding; 1996, 1,863,495 shares issued and
     outstanding                                              2 055 983               1 863 495
  Capital surplus                                             7 815 454               7 045 502
  Retained earnings (deficit)                                (2 164 825)             (3 019 267)
  Unrealized gain on securities available for sale                4 802                     507
                                                          -------------          --------------
          Total stockholders' equity                      $   7 711 414          $    5 890 237
                                                          -------------          --------------

                                                          $  64 826 042          $   47 286 840
                                                          =============          ==============
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


                         MARATHON FINANCIAL CORPORATION

                        Consolidated Statements of Income
                  Years Ended December 31, 1997, 1996 and 1995




<TABLE>
<CAPTION>

                                                          1997                1996           1995
                                                  -----------------   ----------------     ---------------
<S> <C>


Interest income:
   Interest and fees on loans                     $       4 559 365   $      3 554 808     $     2 786 074
   Interest on investment securities, taxable                93 379             67 963              57 788
   Interest and dividends on securities
     available for sale:
       Taxable                                               89 006             54 677              16 559
       Dividends                                             11 060              8 373              13 060
   Interest on federal funds sold                           129 844            103 606              66 829
                                                  -----------------   ----------------     ---------------
          Total interest income                   $       4 882 654   $      3 789 427     $     2 940 310
                                                  -----------------   ----------------     ---------------

Interest expense:
   Interest on deposits                           $       1 918 099   $      1 566 223     $     1 203 143
   Interest on mortgage payable                                 - -             30 045              38 949
   Interest on capital lease obligations                     24 637             18 230               8 610
   Interest on federal funds purchased                          673                155               1 536
                                                  -----------------   ----------------     ---------------
          Total interest expense                  $       1 943 409   $      1 614 653     $     1 252 238
                                                  -----------------   ----------------     ---------------

          Net interest income                     $       2 939 245   $      2 174 774     $     1 688 072

Provision for loan losses                                   133 000            165 000             113 419
                                                  -----------------   ----------------     ---------------

          Net interest income after
             provision for loan losses            $       2 806 245   $      2 009 774     $     1 574 653
                                                  -----------------   ----------------     ---------------

Other income:
   Service charges on deposit accounts            $         459 695   $        338 788     $       227 776
   Commissions and fees                                     102 234             72 883              45 207
   Gain on sale of other real estate                            - -              8 498                 - -
   Other                                                     25 250             10 009               8 346
                                                  -----------------   ----------------     ---------------
          Total other income                      $         587 179   $        430 178     $       281 329
                                                  -----------------   ----------------     ---------------

</TABLE>


See Notes to Consolidated Financial Statements.




<PAGE>


                         MARATHON FINANCIAL CORPORATION

                        Consolidated Statements of Income
                                   (Continued)
                  Years Ended December 31, 1997, 1996 and 1995


<TABLE>
<CAPTION>


                                                   1997                1996                 1995
                                             - ---------------     ---------------      --------------

<S> <C>

Other expenses:
  Salaries and employee benefits               $     1 213 499     $       846 609      $      675 948
  Net occupancy expense of premises                    341 620             160 772             110 478
  Furniture and equipment                              132 778             102 575              98 969
  Other                                                894 899             636 309             550 046
                                               ---------------     ---------------      --------------
          Total other expenses                 $     2 582 796     $     1 746 265      $    1 435 441
                                               ---------------     ---------------      --------------

          Income before income taxes           $       810 628     $       693 687      $      420 541

Provision for income tax (benefit)                    (187 734)           (145 734)                - -
                                               ----------------    ----------------     --------------

          Net income                           $       998 362     $       839 421      $      420 541
                                               ===============     ===============      ==============

Earnings per share, basic                      $           .51     $           .58      $          .35
                                               ===============     ===============      ==============

Earnings per share, assuming dilution          $           .50     $           .58      $          .35
                                               ===============     ===============      ==============

</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>






                         MARATHON FINANCIAL CORPORATION

           Consolidated Statements of Changes in Stockholders' Equity
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>
                                                                                                 Unrealized
                                                                                                Gain (Loss)
                                                                                 Retained       on Securities        Total
                                        Capital Stock           Capital          Earnings        Available       Stockholders'
                               Preferred          Common        Surplus         (Deficit)         for Sale          Equity
                               ---------          ------        -------         ---------      --------------    ------------
<S> <C>

Balance, December 31,
  1994                      $   1 003 440     $ 1 078 601     $  4 199 100     $  (4 029 140)   $     (8 032)    $   2 243 969
  Net income - 1995                   - -             - -              - -           420 541             - -           420 541
  Issuance of common
    stock (15,045 shares)             - -          15 045           60 180           (75 225)            - -               - -
  Issuance of common
    stock - stock dividend
    (11,969 shares)                   - -          11 969           47 876           (59 845)            - -               - -
  Cash to be paid in lieu
    of fractional shares              - -             - -              - -            (3 209)            - -            (3 209)
  Conversion of
    preferred stock to
    common stock
    (200,688 shares)           (1 003 440)        200 688          802 752               - -             - -               - -
  Unrealized gain
    on securities
    available for sale                - -             - -              - -               - -         16 449            16 449
                            -------------     -----------     ------------      ------------     -----------    --------------
Balance, December 31,
  1995                      $         - -     $ 1 306 303     $  5 109 908     $  (3 746 878)   $     8 417    $    2 677 750
   Net income - 1996                  - -             - -              - -           839 421            - -           839 421
   Issuance of common
     stock - stock offering
     (567,192 shares)                 - -         567 192        1 971 846              - -             - -         2 539 038
   Acquisition of common
     stock (10,000 shares)            - -         (10 000)         (36 252)             - -             - -           (46 252)
   Dividends declared                 - -             - -              - -         (111 810)            - -          (111 810)
   Unrealized (loss)
      on securities
      available for sale              - -             - -              - -              - -          (7 910)           (7 910)
                            -------------     -----------     ------------     ------------     ------------   ---------------
Balance, December 31,
  1996                      $         - -     $ 1 863 495     $  7 045 502     $ (3 019 267)    $       507    $    5 890 237
  Net income - 1997                   - -             - -              - -          998 362             - -           998 362
  Issuance of common
    stock - warrants
    (192,488 shares)                  - -         192 488          769 952              - -             - -           962 440
  Dividends declared                  - -             - -              - -         (143 920)            - -          (143 920)
  Unrealized gain
    on securities
    available for sale                - -             - -              - -               - -          4 295             4 295
                            -------------     -----------     ------------     ------------     -----------    --------------
Balance, December 31,
  1997                      $         - -     $ 2 055 983     $  7 815 454     $ (2 164 825)    $     4 802    $    7 711 414
                            =============     ===========     ============     =============    ===========    ==============


</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>



                         MARATHON FINANCIAL CORPORATION

                      Consolidated Statements of Cash Flows
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                                       1997                1996                  1995
                                                                   ----------------    ----------------     --------------

<S> <C>

Cash Flows from Operating Activities
   Net income                                                      $       998 362     $       839 421      $      420 541
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Amortization                                                       41 846              40 581              16 194
         Depreciation                                                      198 156             103 815             103 366
         Provision for loan losses                                         133 000             165 000             113 419
         Writedown of other real estate                                        - -               8 000              42 581
         Deferred tax (benefit)                                           (200 000)           (150 000)                - -
         Gain on sale of other real estate                                     - -              (8 498)                - -
         Accretion of securities discounts, net                            (13 317)            (15 807)             (2 567)
         Changes in assets and liabilities:
           (Increase) decrease in other assets                            (125 826)            (25 973)             21 614
           (Increase) decrease in accrued interest
             receivable                                                    (73 748)            (53 023)             13 668
           Increase (decrease) in accounts payable
             and accrued expenses                                          (10 491)             68 870              35 027
           Increase (decrease) in interest expense payable                  22 989              21 613             (74 818)
                                                                   ---------------     ---------------      ---------------
                Net cash provided by operating activities          $       970 971     $       993 999      $      689 025
                                                                   ---------------     ---------------      --------------

Cash Flows from Investing Activities
   Proceeds from maturities, calls and principal
      payments of investments securities                           $      1 107 991     $       568 892      $       21 240
   Proceeds from maturities, calls and principal
      payments of securities available for sale                             503 397             205 004               4 901
   Purchase of investment securities                                     (1 152 890)         (1 280 095)                - -
   Purchase of securities available for sale                               (600 386)         (1 122 641)           (216 806)
   Net (increase) in loans                                              (12 451 882)         (8 885 477)         (6 424 201)
   Origination of loans available for sale                               (5 992 149)         (3 431 800)         (3 502 050)
   Proceeds from sale of loans available for sale                         4 773 003           3 517 254           3 378 405
   Purchase of equipment                                                 (1 137 155)           (194 815)           (128 332)
   Proceeds from sale of other real estate                                     - -              218 498                 - -
                                                                   ---------------     ---------------      --------------
                Net cash (used in) investing activities            $    (14 950 071)   $    (10 405 180)    $    (6 866 843)
                                                                   ----------------    ----------------     ---------------

Cash Flows from Financing Activities
   Net increase in demand deposits, NOW accounts
     and savings accounts                                          $     6 889 140     $     1 774 085      $    2 383 106
   Net increase in certificates of deposit                               8 820 794           6 329 038           5 634 842
   Net proceeds from issuance of common stock                              962 440           2 539 038                 - -
   Principal payments on capital lease obligations                         (36 516)            (32 036)            (26 516)
   Principal payments on mortgage payable                                      - -            (507 134)            (22 234)
   Acquisition of common stock                                                 - -             (46 252)                - -
   Payment of dividends                                                   (111 810)                - -                 - -
                                                                   ----------------    ---------------      --------------
                Net cash provided by financing activities          $    16 524 048     $    10 056 739      $    7 969 198
                                                                   ---------------     ---------------      --------------

</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>


                         MARATHON FINANCIAL CORPORATION

                      Consolidated Statements of Cash Flows
                                   (Continued)
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>



                                                      1997                1996                 1995
                                               ----------------     ---------------      --------------
<S> <C>


              Increase in cash and
                cash equivalents                $     2 544 948     $       645 558      $    1 791 380

Cash and Cash Equivalents
   Beginning                                          4 502 434           3 856 876           2 065 496
                                                ---------------     ---------------      --------------

   Ending                                       $     7 047 382     $     4 502 434      $    3 856 876
                                                ===============     ===============      ==============

Supplemental Disclosures of Cash Flow
  Information
    Cash payments for:
      Interest                                  $     1 920 420     $     1 593 040      $    1 327 056
                                                ===============     ===============      ==============

      Income taxes                              $        12 179     $         4 153      $          - -
                                                ===============     ===============      ==============

Supplemental Schedule of Noncash
   Investing and Financing Activities:
      Other real estate acquired in
         settlement of loans                    $       430 000     $           - -      $      278 704
                                                ===============     ===============      ==============

      Issuance of common stock                  $           - -     $           - -      $      138 279
                                                ===============     ===============      ==============

      Property and equipment acquired
         under capital lease obligations        $           - -     $       238 088      $       21 395
                                                ===============     ===============      ==============

      Conversion of preferred stock
         to common stock                        $           - -     $           - -      $    1 003 440
                                                ===============     ===============      ==============

      Unrealized gain (loss) on securities
         available for sale                     $         4 295     $        (7 910)    $        16 449
                                                ===============     ================     ==============

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>



                         MARATHON FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements




Note 1.       Nature of Banking Activities and Significant Accounting Policies

              Marathon   Financial   Corporation   (the   Corporation)  and  its
              Subsidiary,  the  Marathon  Bank,  grant  commercial,   financial,
              agricultural,  residential  and  consumer  loans to  customers  in
              Virginia.  The loans are  expected  to be repaid from cash flow or
              proceeds from the sale of selected assets of the borrowers.

              The accounting and reporting  policies of the Corporation  conform
              to  generally  accepted  accounting   principles  and  to  general
              practices within the banking industry.  The following is a summary
              of the more significant policies.

                 Principles of Consolidation

                    The  consolidated   financial  statements  of  the  Marathon
                    Financial  Corporation  and  its  Subsidiary,   include  the
                    accounts  of  all  companies.   All  material   intercompany
                    balances and transactions have been eliminated.

                 Securities

                    Investments are classified in three categories and accounted
                    for as follows:

                    a. Securities Held to Maturity

                       Securities  classified as held to maturity are those debt
                       securities  the  Corporation  has  both  the  intent  and
                       ability  to hold to  maturity  regardless  of  changes in
                       market conditions,  liquidity needs or changes in general
                       economic conditions. These securities are carried at cost
                       adjusted  for  amortization  of premium and  accretion of
                       discount,  computed  by the  interest  method  over their
                       contractual lives.

                    b. Securities Available for Sale

                       Securities  classified  as  available  for sale are those
                       debt and equity  securities that the Corporation  intends
                       to  hold  for an  indefinite  period  of  time,  but  not
                       necessarily to maturity.  Any decision to sell a security
                       classified  as  available  for  sale  would  be  based on
                       various  factors,   including  significant  movements  in
                       interest  rates,  changes  in  the  maturity  mix  of the
                       Corporation's  assets and  liabilities,  liquidity needs,
                       regulatory  capital  considerations,  and  other  similar
                       factors.  Securities  available  for sale are  carried at
                       fair value.  Unrealized  gains or losses are  reported as
                       increases or decreases in stockholders' equity.  Realized
                       gains or losses,  determined  on the basis of the cost of
                       specific securities sold, are included in earnings.


<PAGE>


                   Notes to Consolidated Financial Statements




                    c. Trading Securities

                       Trading  securities,  which  are  generally  held for the
                       short term in anticipation  of market gains,  are carried
                       at fair value.  Realized and unrealized  gains and losses
                       on trading account assets are included in interest income
                       on trading  account  securities.  The  Corporation had no
                       trading securities at December 31, 1997 and 1996.

                 Derivative Financial Instruments

                    FASB  No.  119,   "Disclosure  about  Derivative   Financial
                    Instruments   and  Fair  Value  of  Financial   Instruments"
                    requires  various   disclosures  for  derivative   financial
                    instruments  which are  futures,  forward,  swap,  or option
                    contract,   or  other  financial  instruments  with  similar
                    characteristics.   The   Corporation   does   not  have  any
                    derivative  financial  instruments  as  defined  under  this
                    statement.

                 Loans

                    Loans are stated at the amount of unpaid principal,  reduced
                    by  unearned  discount  and an  allowance  for loan  losses.
                    Unearned  discount on  installment  loans is  recognized  as
                    income over the terms of the loans by the  interest  method.
                    Interest  on other loans is  calculated  by using the simple
                    interest  method on daily  balances of the principal  amount
                    outstanding.  Loans are charged off when management believes
                    that  the  collectibility  of  the  principal  is  unlikely.
                    Accrual  of  interest  is   discontinued   on  a  loan  when
                    management believes, after considering economic and business
                    conditions  and  collection  efforts,  that  the  borrowers'
                    financial  condition is such that  collection of interest is
                    doubtful.

                    The  Corporation  has adopted FASB No. 114,  "Accounting  by
                    Creditors for Impairment of a Loan." This statement has been
                    amended  by FASB  No.  118,  "Accounting  by  Creditors  for
                    Impairment of a Loan Income  Recognition  and  Disclosures."
                    Statement  114, as amended,  requires that the impairment of
                    loans that have been separately identified for evaluation is
                    to be 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.  Statement 114, as amended, also requires
                    certain  disclosures about investments in impaired loans and
                    the  allowance   for  credit  losses  and  interest   income
                    recognized on loans.




<PAGE>


                   Notes to Consolidated Financial Statements




                    The Corporation considers all consumer installment loans and
                    residential  mortgage loans to be homogeneous  loans.  These
                    loans are not subject to  impairment  under FASB 114. A loan
                    is  considered   impaired  when  it  is  probable  that  the
                    Corporation  will be unable to  collect  all  principal  and
                    interest amounts  according to the contractual  terms of the
                    loan agreement.  Factors involved in determining  impairment
                    include, but are not limited to, expected future cash flows,
                    financial  condition of the borrower,  and current  economic
                    conditions. A performing loan may be considered impaired, if
                    the factors above indicate a need for impairment.  A loan on
                    nonaccrual  status may not be  impaired if in the process of
                    collection  or  there  is  an  insignificant   shortfall  in
                    payment.  An  insignificant  delay of less than 30 days or a
                    shortfall  of less  than 5% of the  required  principal  and
                    interest  payment  generally does not indicate an impairment
                    situation, if in management's judgment the loan will be paid
                    in full.  Loans  that  meet the  regulatory  definitions  of
                    doubtful or loss  generally  qualifies  as an impaired  loan
                    under FASB 114.  Charge-offs  for impaired  loans occur when
                    the  loan,  or  portion  of the  loan  is  determined  to be
                    uncollectible, as is the case for all loans. The Corporation
                    had no loans  subject to FASB 114 at  December  31, 1997 and
                    1996.

                    Loans are placed on nonaccrual  when a loan is  specifically
                    determined  to be impaired or when  principal or interest is
                    delinquent  for  90  days  or  more.  Any  unpaid   interest
                    previously  accrued on those loans is reversed  from income.
                    Interest  income  generally  is not  recognized  on specific
                    impaired  loans  unless the  likelihood  of further  loss is
                    remote. Interest payments received on such loans are applied
                    as a  reduction  of the  loan  principal  balance.  Interest
                    income on other  nonaccrual  loans is recognized only to the
                    extent of interest payments received.

                 Allowance for Loan Losses

                    The  allowance  for loan  losses  is  maintained  at a level
                    which,  in  management's  judgment,  is  adequate  to absorb
                    credit losses inherent in the loan portfolio.  The amount of
                    the  allowance is based on  management's  evaluation  of the
                    collectibility of the loan portfolio, credit concentrations,
                    trends in  historical  loss  experience,  specific  impaired
                    loans,  and  economic  conditions.  Allowances  for impaired
                    loans are generally determined based on collateral values or
                    the present value of estimated cash flows.  The allowance is
                    increased by a provision  for loan losses,  which is charged
                    to expense and reduced by  charge-offs,  net of  recoveries.
                    Changes in the  allowance  relating  to  impaired  loans are
                    charged  or  credited  to the  provision  for  loan  losses.
                    Because of uncertainties inherent in the estimation process,
                    management's  estimate of credit losses inherent in the loan
                    portfolio  and the related  allowance may change in the near
                    term.

                 Bank Premises and Equipment

                    Bank   premises  and  equipment  are  stated  at  cost  less
                    accumulated depreciation. Depreciation is computed primarily
                    on the straight-line and declining-balance methods.

                    Maintenance  and  repairs  of  property  and  equipment  are
                    charged   to   operations   and   major   improvements   are
                    capitalized.  Upon retirement,  sale or other disposition of
                    property   and   equipment,   the   cost   and   accumulated
                    depreciation  are  eliminated  from the accounts and gain or
                    loss is included in operations.



<PAGE>


                 Classifications of  Amortization  on Assets  Acquired  Under
                 Capital Leases

                    The  amortization  expense on assets  acquired under capital
                    leases is included with the depreciation expense.

                 Earnings Per Share

                   In 1997,  the  Financial  Accounting  Standards  Board issued
                   Statement  No.  128,  "Earnings  per  Share."  Statement  128
                   replaced  the   calculation  of  primary  and  fully  diluted
                   earnings per share with basic and diluted earnings per share.
                   Basic  earnings per share  excludes  any dilutive  effects of
                   options,   warrants  and  convertible   securities.   Diluted
                   earnings per share is very similar to the previously reported
                   fully  diluted  earnings  per share.  All  earnings per share
                   amounts  for all  periods  have  been  presented,  and  where
                   appropriate,   restated  to  conform  to  the  Statement  128
                   requirements.

                 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
                    carry-forwards.  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 one-day periods.

                 Organization Costs

                    The Marathon  Financial  Corporation was organized under the
                    laws of the State of Virginia as a bank  holding  company on
                    October 2, 1990.  Certain  expenses  incurred  prior to this
                    date   were   deferred   and  were   amortized   using   the
                    straight-line method over a 60-month period.

                 Loan Fees and Costs

                    Loan   origination  and  commitment  fees  and  direct  loan
                    origination  costs are being  recognized  as  collected  and
                    incurred.  The use of this  method of  recognition  does not
                    produce  results that are materially  different from results
                    which  would have been  produced if such costs and fees were
                    deferred and  amortized as an  adjustment  of the loan yield
                    over the life of the related loan.




<PAGE>


                 Advertising

                    The  Corporation follows the policy of charging the costs of
                    advertising to expense as incurred.

                 Use of Estimates

                    The  preparation of financial  statements in conformity with
                    generally accepted accounting principles requires management
                    to make estimates and  assumptions  that affect the reported
                    amounts  of  assets  and   liabilities   and  disclosure  of
                    contingent  assets  and  liabilities  at  the  date  of  the
                    financial  statements  and the reported  amounts of revenues
                    and expenses  during the reporting  period.  Actual  results
                    could differ from those estimates.


Note 2.       Securities

              The  amortized  cost and fair value of the  securities  available
              for sale as of December 31, 1997 and 1996, are as follows:

<TABLE>
<CAPTION>


                                                                       Gross             Gross
                                                   Amortized         Unrealized        Unrealized           Fair
                                                     Cost              Gains            (Losses)            Value
                                                  -----------       ------------     --------------        -------
                                                                                 1997
                                                  ---------------------------------------------------------------------
<S> <C>

              U.S. Treasury securities
                 and obligations of U.S.
                 government corporations
                 and agencies                    $    1 352 298     $        4 884    $      (2 128)     $    1 355 054

              Mortgage-backed securities                 31 477              2 046              - -              33 523

              Other                                     395 200                - -              - -             395 200
                                                 --------------     --------------    -------------      --------------
                                                 $    1 778 975     $        6 930    $      (2 128)     $    1 783 777
                                                 ==============     ==============    =============      ==============

                                                                                  1996
                                                  ---------------------------------------------------------------------
              U.S. Treasury securities
                 and obligations of U.S.
                 government corporations
                 and agencies                    $    1 346 663     $        5 381    $      (6 860)     $    1 345 184

              Mortgage-backed securities                 34 930              1 986              - -              36 916

              Other                                     297 850                - -              - -             297 850
                                                 --------------     --------------    -------------      --------------
                                                 $    1 679 443     $        7 367    $      (6 860)     $    1 679 950
                                                 ==============     ==============    =============      ==============

</TABLE>



<PAGE>


              The amortized cost and fair value of the securities  available for
              sale as of December 31, 1997, by contractual  maturity,  are shown
              below. Expected maturities may differ from contractual  maturities
              because mortgages underlying the mortgage-backed 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>
                 Due in one year or less                          $       150 091       $       150 469
                 Due after one year through five years                    952 207               953 010
                 Due after five years through ten years                   250 000               251 575
                 Mortgage-backed securities                                31 477                33 523
                 Other                                                    395 200               395 200
                                                                  ---------------       ---------------
                                                                  $     1 778 975       $     1 783 777
                                                                  ===============       ===============

               The  amortized  cost and fair value of  securities  being held to
               maturity as of December  31, 1997 and 1996,  are as follows:


</TABLE>
<TABLE>
<CAPTION>

                                                                       Gross          Gross
                                                    Amortized       Unrealized     Unrealized                 Fair
                                                       Cost            Gains        (Losses)                 Value
                                                       ----            -----        --------                 -----
                                                                                 1997
                                                 ----------------------------------------------------------------------
<S> <C>
              Obligations of U.S.
                 government corporations
                 and agencies                    $    1 452 899     $       14 254    $        (141)     $    1 467 012

              Obligations of state and
                 political subdivisions                 254 033              1 844              - -             255 877
                                                 --------------     --------------    -------------      --------------
                                                 $    1 706 932     $       16 098    $        (141)     $    1 722 889
                                                 ==============     ==============    =============      ==============

                                                                                 1996
                                                 ----------------------------------------------------------------------
              Obligations of U.S.
                 government corporations
                 and agencies                    $    1 292 094     $          463    $        (984)     $    1 291 573

              Obligations of state and
                 political subdivisions                 251 227              6 938              - -             258 165

              Corporate securities                       99 952                 48              - -             100 000

              Mortgage-backed securities                  7 986                 23               (7)              8 002
                                                 --------------     --------------    -------------      --------------
                                                 $    1 651 259     $        7 472    $        (991)     $    1 657 740
                                                 ==============     ==============    =============      ==============

</TABLE>



<PAGE>


              The amortized cost and fair value of the securities  being held to
              maturity as of December 31, 1997,  by  contractual  maturity,  are
              shown  below.  Expected  maturities  may differ  from  contractual
              maturities  because  the  corporate  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>
                 Due in one year or less                             $      402 716       $     402 575
                 Due after one year through five years                      699 906             705 093
                 Due after five years through ten years                     604 310             615 221
                                                                     --------------       -------------
                                                                     $    1 706 932       $   1 722 889
                                                                     ==============       =============
</TABLE>


              Proceeds  from  maturities,   calls  and  principal   payments  of
              securities  available  for sale  during  1997,  1996 and 1995 were
              $503,397,  $205,004  and $4,901.  There were no realized  gains or
              realized losses recognized on these transactions.

              Proceeds  from  maturities,   calls  and  principal   payments  of
              securities  being held to maturity during 1997, 1996 and 1995 were
              $1,107,991,  $568,892 and $21,240. There were no realized gains or
              realized losses recognized on these transactions.

              Securities  having  a book  value  of  $646,873  and  $647,020  at
              December 31, 1997 and 1996 were pledged to secure public  deposits
              and for other purposes required by law.


Note 3.       Loans and Related Party Transactions

              The loan  portfolio as of December 31, 1997 and 1996,  is composed
of the following:

<TABLE>
<CAPTION>


                                                                      1997                  1996
                                                                  --------------        ---------------
<S> <C>
                    Commercial                                    $    24 399 929       $    18 719 817
                    Real estate - mortgage                             10 065 627             6 882 004
                    Real estate - construction                          6 075 464             3 886 066
                    Installment loans to individuals                   10 552 548             8 424 170
                                                                  ---------------       ---------------
                                                                  $    51 093 568       $    37 912 057
                    Less allowance for loan losses                        576 497               503 014
                                                                  ---------------       ---------------
                                                                  $    50 517 071       $    37 409 043
                                                                  ===============       ===============
</TABLE>

              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  stockholders
              (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  $1,831,322 and $1,736,231 at December 31, 1997
              and 1996,  respectively.  During 1997,  total principal  additions
              were $824,680 and total principal payments were $729,589.


Note 4.       Allowance for Loan Losses

              Changes in the allowance for loan losses are as follows:

<TABLE>
<CAPTION>
                                                                                December 31,
                                                               1997                1996                1995
                                                           -------------       -------------       -------------
<S> <C>
                 Balance, beginning                        $    503 014        $     393 139       $    299 203
                   Provision for loan losses                    133 000              165 000            113 419
                   Recoveries                                    27 823                6 007             11 185
                   Loan losses charged to
                    the allowance                               (87 340)             (61 132)           (30 668)
                                                           -------------       --------------      -------------
                 Balance, ending                           $    576 497        $     503 014       $    393 139
                                                           =============       ==============      ==============
</TABLE>

              Nonaccrual loans excluded from impaired loan disclosure under FASB
              114 amounted to $38,116 and $71,515 at December 31, 1997 and 1996,
              respectively.  If interest on these loans had been  accrued,  such
              income  would  have  approximated  $8,519  and $6,638 for 1997 and
              1996, respectively.


Note 5.       Bank Premises and Equipment, Net

              Bank  premises  and  equipment  as of  December  31, 1997 and 1996
              consists of the following:
<TABLE>
<CAPTION>


                                                              1997               1996
                                                        ---------------      -----------
<S> <C>
                 Bank premises                            $ 1 869 457        $ 1 340 468
                 Furniture and equipment                    1 332 436            724 269
                 Capital leases - property and equipment      389 135            389 135
                                                            ---------         ----------
                                                          $ 3 591 028        $ 2 453 872
                 Less accumulated depreciation              1 091 654            866 530
                                                        ---------------     --------------
                                                          $ 2 499 374        $ 1 587 342
                                                        ===============     ==============
</TABLE>


               Depreciation and amortization  included in operating  expense for
               1997,  1996 and 1995 was  $228,365,  $134,024 and  $103,366,
               respectively.

                   Notes to Consolidated Financial Statements

<PAGE>


Note 6.       Deposits

              The aggregate  amount of jumbo time deposits,  each with a minimum
              denomination  of  $100,000,   was  approximately   $7,127,769  and
              $4,748,281 in 1997 and 1996, respectively.

              At December 31, 1997,  the  scheduled  maturities of time deposits
              (in thousands) are as follows:

                    Three months or less                         $         3 730
                    Over three months through twelve months               16 866
                    Over one year through three years                      7 913
                    Over three years                                       3 772
                                                                 ---------------
                                                                 $        32 281
                                                                 ===============


Note 7.       Income Taxes

              Net deferred tax assets consist of the following  components as of
              December 31, 1997 and 1996:
<TABLE>
<CAPTION>

                                                                      1997              1996
                                                                   -------------     -----------
<S> <C>
                    Deferred tax assets:
                       Net operating loss carryforward             $     697 623    $  1 036 066
                       Writedown of other real estate                      2 720           2 720
                       Other real estate expenditures                      1 524             - -
                       Nonaccrual interest                                12 959             - -
                       Less valuation allowance                         (338 889)       (817 629)
                                                                    ------------    ------------
                                                                   $     375 937    $    221 157
                                                                   -------------    ------------
                    Deferred tax liabilities,
                       allowance for loan losses                   $      25 937    $     71 157
                                                                     -----------    ------------

                                                                   $     350 000    $    150 000
                                                                   =============    ============
</TABLE>

                 The provision  for income taxes  charged to operations  for the
                 years ended December 31, 1997,  1996 and 1995,  consists of the
                 following:
<TABLE>
<CAPTION>
                                                            1997                1996                1995
                                                        --------------      ------------    ---------------
<S> <C>

                    Current tax expense                 $       12 266     $       4 266    $           - -
                    Deferred tax expense                       278 740           239 191            142 895
                    Change in valuation allowance             (478 740)         (389 191)          (142 895)
                                                         --------------     -------------     --------------
                                                        $     (187 734)    $    (145 734)    $          - -
                                                        ==============     =============     ==============



</TABLE>

<PAGE>




                 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, 1997,  1996 and
                 1995, due to the following:

<TABLE>
<CAPTION>

                                                                        1997             1996                1995
                                                                   -------------      ------------      -------------
<S> <C>

                    Computed "expected" tax expense                $     275 614      $    235 854      $     142 984
                    Increase (decrease) in income taxes
                      resulting from:
                        Reduction of valuation allowance                (478 740)         (389 191)          (142 895)
                      Other                                               15 392             7 603                (89)
                                                                   -------------      ------------      --------------
                                                                   $    (187 734)    $    (145 734)    $          - -
                                                                   ==============     =============     ==============
</TABLE>

                 Under  the  provisions  of  the  Internal   Revenue  Code,  the
                 Corporation  has  available  approximately  $2,047,350  of  net
                 operating loss carryforwards which can be offset against future
                 taxable income. The carryforwards expire December 31, 2006. The
                 full  realization  of the  tax  benefits  associated  with  the
                 carryforwards  depends  predominately  upon the  recognition of
                 ordinary income during the carryforward period.


Note 8.       Leases

              Capital Leases

                 During  the year  ended  December  31,  1996,  the  Corporation
                 entered into 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%.

                 During  the year  ended  December  31,  1994,  the  Corporation
                 entered  into a  lease  agreement  on  computer  equipment  and
                 software.  Additional  equipment  and software was added to the
                 lease  during 1995 in the amount of $21,395.  The  liability is
                 payable in  quarterly  installments  of $9,017  through June 1,
                 1999,  at an  interest  rate of 7%.  The  lease  also  requires
                 additional maintenance payments of $4,853 per quarter.

                 Capital  lease  payable at  December  31, 1997 in the amount of
                 $279,136  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 leases are  considered  to be
                 capital leases and have been so recorded.




<PAGE>


                 The  following  is a schedule  by years of the  future  minimum
                 lease  payments  under the  capital  leases  together  with the
                 present value of the net minimum lease  payments as of December
                 31, 1997:

                    Years ending December 31:

                       1998                                       $       79 378
                       1999                                               51 638
                       2000                                               23 898
                       2001                                               23 898
                       2002                                               23 898
                       Later years                                       320 629
                                                                  --------------
                         Total minimum lease payments             $      523 339
                       Less estimated executory costs
                         (such as maintenance) included in
                         the total minimum lease payments                 29 118
                                                                  --------------
                       Net minimum lease payments                 $      494 221
                      Less the amount representing interest              215 085
                                                                  --------------
                          Present value of net minimum
                            lease payments                        $      279 136
                                                                  ==============

              Lease Commitments and Total Rental Expense

                 During  the year  ended  December  31,  1996,  the  Corporation
                 entered into a twenty-year  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 June 30, 2016 and has two  five-year  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, 1997 under this lease
                 is $409,886.

                 During  the year  ended  December  31,  1994,  the  Corporation
                 entered  into a five-year  operating  lease for the rental of a
                 branch  location.  The lease  expires on March 30, 2000 and has
                 two  five-year  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, 1997 under this lease is $27,000.

                 During  the year  ended  December  31,  1997,  the  Corporation
                 entered  into a  ten-year  operating  lease for the rental of a
                 branch location. The lease expires on December 31, 2006 and has
                 two  five-year  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, 1997 under this lease is $272,631.



<PAGE>





                 During  the year  ended  December  31,  1997,  the  Corporation
                 entered  into a five-year  operating  lease for the rental of a
                 branch  location.  The lease expires on August 31, 2002 and has
                 two  five-year  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, 1997 under this lease is $44,800.

                 The total minimum lease  commitment for these operating  leases
                 is due as follows:

                                    1998                         $        65 056
                                    1999                                  70 056
                                    2000                                  65 256
                                    2001                                  63 456
                                    2002                                  61 006
                                    Later years                          429 487
                                                                 ---------------
                                                                 $       754 317
                                                                 ===============

                 There  was  $56,933,  $29,823  and  $9,000  in  rental  expense
                 resulting  from  these  leases  included  in  the  consolidated
                 statements  of income for the years ended  December  31,  1997,
                 1996 and 1995, respectively.

              Fixed Equipment on Land Leased with Related Parties

                 Fixed equipment with a depreciated cost at December 31, 1997 of
                 $16,556 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 off-balance-sheet 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, 1997
              and 1996, the aggregate amounts of daily average required balances
              were approximately $156,000 and $84,000, respectively.



<PAGE>


                   Notes to Consolidated Financial Statements




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, 1997,
              the  Corporation  was  required  to obtain  prior  approval on any
              dividend declared.

              The  Corporation  did obtain  approval from the State  Corporation
              Commission  to pay  dividends in 1997,  1996 and 1995. On December
              19, 1995,  the Board of Directors  declared a stock dividend equal
              to 15% of net income, payable February 8, 1996, to stockholders of
              record  December  19, 1995.  On December  17,  1996,  the Board of
              Directors  declared  a cash  dividend  of $.06 per  share  payable
              January 27, 1997 to  shareholders  of record December 27, 1996. 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.

              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, 1997, 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>

                                                          1997              1996               1995
                                                      ---------------    --------------    ---------------
<S> <C>
                 FDIC assessment                      $        10 699    $        2 000    $        33 798
                 Other real estate valuation                      - -             8 000             42 581
                 Marketing                                     75 870            60 155             53 619
                 Stationery and supplies                       73 722            52 208             48 225
                 Postage                                       59 392            49 010             31 545
                 Directors fees                                69 315            45 450             21 675
                 ATM expense                                   56 800            37 048             26 877
                 Forgery loss                                  59 870               - -                - -
                 Other (includes no items in excess
                    of 1% of total revenue)                   489 231           382 438            291 726
                                                      ---------------    --------------    ---------------
                                                      $       894 899    $      636 309    $       550 046
                                                      ===============    ==============    ===============

</TABLE>



<PAGE>


                   Notes to Consolidated Financial Statements


Note 12.      Financial Instruments With Off-Balance-Sheet Risk

              The   Corporation   is  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. Those instruments involve, to varying degrees, elements of
              credit and interest  rate risk in excess of the amount  recognized
              in the balance  sheet.  The contract or notional  amounts of those
              instruments  reflect the extent of involvement the Corporation has
              in particular classes of financial instruments.

              The  Corporation'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
              Corporation  uses the same credit  policies in making  commitments
              and  conditional  obligations  as  it  does  for  on-balance-sheet
              instruments.

              A summary of the contract or notional amount of the  Corporation's
              exposure to  off-balance-sheet  risk as of  December  31, 1997 and
              1996 is as follows:


                                                            1997          1996
                                                        ------------   ---------
                                                                (Thousands)

               Financial  instruments  whose contract
               amounts  represent credit risk:

               Commitments to extend credit             $     7 194   $    4 331
               Standby letters of credit                        664          294

              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 case-by-case  basis. The amount
              of collateral  obtained,  if deemed  necessary by the  Corporation
              upon  extension  of  credit,  is  based  on  management's   credit
              evaluation  of the  counterparty.  Collateral  held varies but may
              include accounts  receivable,  inventory,  property and equipment,
              and income-producing commercial properties.

              Standby  letters of credit are conditional  commitments  issued by
              the  Corporation  to guarantee the  performance of a customer to a
              third party.  Those  guarantees  are  primarily  issued to support
              public and private borrowing  arrangements,  including  commercial
              paper, bond financing,  and similar transactions.  The credit risk
              involved in issuing  letters of credit is essentially  the same as
              that  involved in extending  loan  facilities  to  customers.  The
              Corporation  holds real  estate and bank  deposits  as  collateral
              supporting  those  commitments  for  which  collateral  is  deemed
              necessary.  The extent of collateral held for those commitments at
              December  31,  1997,  varies  from 0 percent to 100  percent;  the
              average amount collateralized is 88 percent.


<PAGE>


                   Notes to Consolidated Financial Statements







              The Corporation has cash accounts in other  commercial  banks. The
              amount on  deposit  at one of these  banks at  December  31,  1997
              exceeded the  insurance  limits of the Federal  Deposit  Insurance
              Corporation by approximately $697,277.


Note 13.      Defined Contribution Retirement Plan

              The Corporation has a defined  contribution  retirement plan under
              Code  Section  401(k) of the  Internal  Revenue  Service  covering
              employees who have  completed six months of service and who are at
              least  21  years  of age.  Contributions  made to the plan for the
              years ended December 31, 1997, 1996 and 1995 were $15,880, $12,173
              and $9,601.


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 Short-Term Investments

                    For those short-term  instruments,  the carrying amount is a
                    reasonable estimate of fair value.

                 Securities

                    For securities held for investment purposes, fair values are
                    based on quoted market prices or dealer quotes.

                 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
                    fixed-maturity  certificates  of deposit is estimated  using
                    the  rates   currently   offered  for  deposits  of  similar
                    remaining maturities.




<PAGE>


                   Notes to Consolidated Financial Statements


                 Off-Balance Sheet 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 fixed-rate loan commitments, fair value
                    also  considers the  difference  between  current  levels of
                    interest rates and the committed rates.

                    The fair  value of  stand-by  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, 1997 and 1996,  the  difference  between the
                    carrying  amounts  and fair values of loan  commitments  and
                    stand-by letters of credit were immaterial.

                    The  estimated  fair values of the  Corporation's  financial
                    instruments are as follows:

<TABLE>
<CAPTION>

                                                             1997                                  1996
                                             -----------------------------------    -----------------------------------
                                                  Carrying            Fair               Carrying            Fair
                                                   Amount             Value               Amount             Value
                                                   ------             -----               ------             -----
                                                           (Thousands)                            (Thousands)
                                             -----------------------------------    -----------------------------------
<S> <C>

               Financial assets:
                 Cash and short-term
                   investments                $       7 047       $        7 047     $       4 502       $         4 502
                 Securities                           3 491                3 507             3 331                 3 338
                 Loans                               51 094               51 031            37 912                38 286
                 Less:  allowance for
                   loan losses                         (576)                 - -              (503)                  - -
                                              --------------      --------------     --------------      ---------------
                    Total financial assets    $      61 056       $       61 585     $      45 242       $        46 126
                                              =============       ==============     =============       ===============

               Financial liabilities:
                  Deposits                    $      56 435       $       56 867     $      40 725       $        40 892
                  Long-term debt                        279                  327               316                   402
                                              -------------       --------------     -------------       ---------------
                    Total financial
                       liabilities            $      56 714       $       57 194     $      41 041       $        41 294
                                              =============       ==============     =============       ===============

</TABLE>


Note 15.      Capital Requirements

              The   Corporation  is  subject  to  various   regulatory   capital
              requirements administered by the federal banking agencies. Failure
              to  meet  minimum  capital   requirements   can  initiate  certain
              mandatory  -  possibly  additional   discretionary  -  actions  by
              regulators  that,  if  undertaken,  could  have a direct  material
              effect on the Corporation's  financial  statements.  Under capital
              adequacy  guidelines  and  the  regulatory  framework  for  prompt
              corrective  action,  the  Corporation  must meet specific  capital
              guidelines that involve quantitative measures of the Corporation's
              assets,  liabilities,   and  certain  off-balance-sheet  items  as
              calculated   under   regulatory    accounting    practices.    The
              Corporation's  capital amounts and classification are also subject
              to qualitative judgments by the regulators about components,  risk
              weightings, and other factors.



<PAGE>


                   Notes to Consolidated Financial Statements

              Quantitative  measures established by regulation to ensure capital
              adequacy  require the Corporation 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,  as of
              December 31, 1997, that the Corporation meets all capital adequacy
              requirements to which it is subject.

              As of December 31,  1997,  the most recent  notification  from the
              Federal   Reserve  Bank   categorized   the  Corporation  as  well
              capitalized  under the regulatory  framework for prompt corrective
              action.  To be categorized as well  capitalized,  the  Corporation
              must maintain  minimum total  risk-based,  Tier 1 risk-based,  and
              Tier 1 leverage ratios as set forth in the table.

              The  Corporation's  actual  capital  amounts  and  ratios are also
              presented in the table.

<TABLE>
<CAPTION>

                                                                                                    To Be Well
                                                                                                Capitalized Under
                                                                        For Capital             Prompt Corrective
                                          Actual                  Adequacy Purposes             Action Provisions
                                          ------                  -----------------             -----------------
                                   Amount         Ratio           Amount      Ratio             Amount      Ratio
                                   ------         -----           ------      -----             ------      -----
                                                                (Amount in Thousands)
<S> <C>
As of December 31, 1997:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated              $     8 283         16.09%      >=$      4 117   >=     8.00%                N/A
      Marathon Bank             $     7 455         14.50%      >=$      4 112   >=     8.00%  >=$  5 140     >= 10.00%
  Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated              $     7 707         14.97%      >=$      2 059   >=     4.00%                N/A
      Marathon Bank             $     6 879         13.38%      >=$      2 056   >=     4.00%  >=$  3 084     >=  6.00%
  Tier 1 Capital (to
    Average Assets)
      Consolidated              $     7 707         12.68%      >=$      2 431   >=     4.00%                N/A
      Marathon Bank             $     6 879         11.49%      >=$      2 394   >=     4.00%  >=$  2 993     >=  5.00%

As of December 31, 1996:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated              $     6 359         16.97%      >=$      2 998   >=     8.00%                N/A
      Marathon Bank             $     6 352         16.95%      >=$      2 998   >=     8.00%  >=$  3 748     >= 10.00%
  Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated              $     5 890         15.72%      >=$      1 499   >=     4.00%                N/A
      Marathon Bank             $     5 883         15.70%      >=$      1 499   >=     4.00%  >=$  2 249     >=  6.00%
  Tier 1 Capital (to
    Average Assets)
      Consolidated              $     5 890         12.51%      >=$      1 883   >=     4.00%                N/A
      Marathon Bank             $     5 883         12.50%      >=$      1 883   >=     4.00%  >=$  2 353     >=  5.00%


</TABLE>

<PAGE>





Note 16. Stock Option Plans

         In 1997, the shareholders  approved the 1996 Long-Term  Incentive Plan.
         The 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.
         The Board granted 42,078 options to key employees of the Corporation at
         $5.12 (weighted average exercise price). Of the 42,078 options, a total
         of  14,721  were  vested as of  December  31,  1997 with the  remaining
         options  vesting  6,357 in 1998 and 5,250 per year on  September 17 for
         the next four  years.  Directors  also  received  options  to  purchase
         100,000  shares at $5.00,  of which  50,000  shares  were  vested as of
         December 31, 1997 with the remaining options vesting 10,000 per year on
         September 17 for the next five years.  The options expire September 16,
         2006.

         Under the Employee and Director  Plans,  in no event may the shares for
         which awards may be granted under the plan exceed 10% of the issued and
         outstanding shares of Common Stock of the Corporation at any time.

         The fair value of each employee-related grant is estimated at the grant
         date using the  Black-Scholes  option-pricing  model with the following
         weighted-average assumptions for grants in 1997: Dividend rate of .16%,
         price  volatility  of  35.00%,  risk-free  interest  rate of 5.00%  and
         expected lives of 5 years.

         The  Corporation  applies  APB Opinion 25 in  accounting  for its stock
         option plans. Accordingly,  no compensation expense has been recognized
         for 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:

            Net income
              As reported                                       $     998 362
                                                                =============
              Proforma                                          $     970 561
                                                                =============

            Basic earnings per share
              As reported                                       $         .51
                                                                =============
              Proforma                                          $         .50
                                                                =============

            Diluted earnings per share
              As reported                                       $         .50
                                                                =============
              Proforma                                          $         .48
                                                                =============



<PAGE>


         The status of the stock option plans during 1997 is as follows:

<TABLE>
<CAPTION>


                                                                    1996 Long-Term                    1996 Long-Term
                                                                     Incentive Plan -                Incentive Plan -
                                                                        Employee                         Director
                                                                        --------                         --------
                                                                                Weighted                         Weighted
                                                                    Number      Average          Number          Average
                                                                      of        Exercise           of            Exercise
                                                                   Shares        Price           Shares            Price
                                                                   ------       ---------        -------         --------
<S> <C>

                Outstanding at January 1, 1997                          - -     $     - -              - -       $    - -
                Granted during 1997                                  42 078          5.12          100 000           5.00
                Exercised during 1997                                   - -           - -              - -            - -
                Forfeited during 1997                                   - -           - -              - -            - -
                                                                -----------                    -----------
                Outstanding at December 31, 1997                     42 078          5.12          100 000           5.00
                                                                ===========                    ===========

                Weighted average fair value of
                 options granted during 1997                    $      1.97                    $      1.94
                                                                ===========                    ===========
</TABLE>


             The status of the options  outstanding  at December  31, 1997 is as
             follows:

                                                                  Remaining
                             Exercise                           Contractual
                              Price              Number         Life in Years
                             --------            ------         -------------

                              $ 5.00            139 875             8.75
                                8.19                542             8.75
                                7.13              1 661             8.75


Note 17. Warrants Outstanding

         On June 15, 1992, the  Corporation  issued one stock  purchase  warrant
         ("warrant")  for each share of preferred  stock  purchased in a private
         offering.  A total of  200,688  warrants  were  issued.  Warrants  were
         immediately  transferable  and entitle the holder to purchase one share
         of  common  stock at a price of $5.00 per share  until  June 30,  1997.
         During 1997,  192,488  warrants were  exercised.  The  remaining  8,200
         warrants expired.




<PAGE>





Note 18. 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 stockholders.

<TABLE>
<CAPTION>


                                                  1997                             1996                         1995
                                      ------------------------        -----------------------       ---------------------
                                                         Per                            Per                         Per
                                                        Share                          Share                       Share
                                       Shares           Amount        Shares           Amount       Shares         Amount
                                      ------           ------        ------           ------       ------         ------
<S> <C>

         Basic earnings
           per share                 1 951 172    $     .51         1 442 478    $     .58        1 198 837  $     .35
                                                     =========                      =========                   =========
         Effect of dilutive
           securities:
             Stock options              45 421                            - -                          - -
             Warrants                   19 560                            - -                          - -
                                    -----------                   --------------                 -------------
         Diluted earnings
           per share                 2 016 153    $     .50         1 442 478    $     .58        1 198 837  $     .35
                                    ===========      =========    ==============    =========    =============  =========

</TABLE>


         Warrants  and  options of 200,688  and  1,500,  respectively,  were not
         included  in  computing  diluted  EPS for 1996 and 1995  because  their
         effects were antidilutive.


Note 19. Capitalization

         In October  1996,  the  Corporation  sold 567,192  shares of its common
         stock in a public offering.  Net proceeds from the sale were $2,539,038
         after  deducting  underwriting   commissions  of  $123,844  and  direct
         offering costs of $183,078. Of the net proceeds,  $567,192 was credited
         to common stock and $1,971,846 was credited to capital surplus.




<PAGE>


Note 20. Parent Corporation Only Financial Statements


                         MARATHON FINANCIAL CORPORATION
                            (Parent Corporation Only)

                                 Balance Sheets
                           December 31, 1997 and 1996

<TABLE>
<CAPTION>

                                                                             1997                 1996
                                                                        -------------        -------------
<S> <C>
       Assets
            Cash on deposit with subsidiary bank                        $      53 207        $     119 610
            Securities                                                        906 894                  - -
            Prepaid expenses                                                      - -                  283
            Accrued interest receivable                                        14 546                  - -
            Investment in capital stock of subsidiary                       6 880 687            5 883 516
                                                                        -------------        -------------

              Total assets                                              $   7 855 334        $   6 003 409
                                                                        =============        =============
        Liabilities
                   Accounts payable                                     $         - -        $       1 362
                   Dividends payable                                          143 920              111 810
                                                                        -------------        -------------
                                                                        $     143 920        $     113 172
                                                                        -------------        -------------

         Stockholders' Equity
            Preferred stock                                             $         - -        $         - -
            Common stock                                                    2 055 983            1 863 495
            Capital surplus                                                 7 815 454            7 045 502
            Retained earnings (deficit)                                    (2 164 825)          (3 019 267)
            Unrealized gain on securities
              available for sale                                                4 802                  507
                                                                        --------------       --------------
              Total stockholders' equity                                $   7 711 414        $   5 890 237
                                                                       --------------       --------------
              Total liabilities and stockholders'
                     equity                                             $   7 855 334        $   6 003 409
                                                                        =============        =============

</TABLE>


<PAGE>


                         MARATHON FINANCIAL CORPORATION
                            (Parent Corporation Only)

                              Statements of Income
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>


                                                1997          1996           1995
                                           ------------    ----------     ----------

<S> <C>

     Income
       Interest on investment securities,
         taxable                           $     5 945     $      - -     $     - -
       Interest on securities available
         for sale, taxable                       8 625            - -           - -
       Miscellaneous                               - -          6 000           - -
                                           -----------     ----------     ----------
         Total income                      $    14 570     $    6 000     $     - -
                                           -----------     ----------     ----------

       Expenses:
         Amortization                      $       - -     $      - -     $    5 064
         Other                                  11 927          1 248          1 110
                                           -----------     ----------     ----------
           Total expenses                  $    11 927     $    1 248     $    6 174
                                           -----------     ----------     ----------

           Income (loss) before
             undistributed income
             of subsidiaries               $     2 643     $    4 752     $   (6 174)
                                           -----------     ----------     ----------

        Undistributed income of
         subsidiary                        $   995 719     $  834 669     $  426 715
                                           ------------    ----------     ----------

          Net income                       $   998 362     $  839 421     $  420 541
                                           ===========     ==========     ==========

</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements
                         MARATHON FINANCIAL CORPORATION
                            (Parent Corporation Only)

                            Statements of Cash Flows
                  Years Ended December 31, 1997, 1996 and 1995

<TABLE>
<CAPTION>

                                                                        1997               1996            1995
                                                                  --------------      -------------    ------------
<S> <C>

Cash Flows from Operating Activities
  Net income                                                      $      998 362     $     839 421     $    420 541
  Adjustments  to  reconcile  net  income  to net cash
  provided  by  (used  in)
  operating activities:
   Amortization                                                              - -               - -            5 064
      Undistributed income of subsidiary                                (995 719)         (834 669)        (426 715)
      (Increase) decrease in prepaid expenses                                283               295             (365)
      (Increase) in accrued interest receivable                          (14 545)              - -              - -
      Increase (decrease) in accounts payable                             (1 363)           (3 322)           1 475
                                                                  --------------     -------------      -----------
   Net cash provided by (used in)
      operating activities                                        $      (12 982)    $       1 725      $       - -
                                                                  --------------     -------------      -----------

Cash Flows from Investing Activities
  Purchase of investment securities                               $     (401 490)    $         - -      $       - -
  Purchase of securities available for sale                             (502 561)              - -              - -
                                                                  --------------     -------------      -----------
   Net cash (used in) investing
     activities                                                    $    (904 051)    $     - -          $       - -
                                                                   -------------     -------------      -----------
Cash Flows from Financing Activities
  Net proceeds from issuance of common stock                      $      962 440     $   2 539 038      $       - -
  Acquisition of common stock                                                - -           (46 252)             - -
  Transfer of capital to subsidiary                                          - -        (2 375 271)             - -
  Payment of dividends                                                  (111 810)              - -              - -
                                                                  --------------     -------------      -----------
     Net cash provided by
     financing activities                                         $      850 630     $     117 515      $       - -
                                                                  --------------     -------------      -----------

   Increase (decrease) in cash
      and cash equivalents                                        $      (66 403)    $     119 240      $       - -

Cash and Cash Equivalents
  Beginning                                                              119 610               370              370
                                                                  --------------      ------------      -----------
  Ending                                                          $       53 207     $     119 610      $       370
                                                                  ==============      ============     ============

Supplemental Schedule of Noncash
  Investing and Financing Activities
    Issuance of common stock                                      $          - -     $         - -      $   138 279
                                                                  ==============      ============      ===========

    Unrealized gain (loss) on securities
      available for sale                                          $        4 295     $      (7 910)     $    16 449
                                                                  ==============     =============      ===========
    Conversion of preferred stock to
      common stock                                                $          - -     $         - -      $ 1 003 440
                                                                  ==============     =============      ===========

</TABLE>