Exhibit 99.1

                          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, 1998 and 1997, and the
related consolidated  statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1998, 1997 and 1996. These financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.


      We conducted our audits in accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.


      In our opinion,  the consolidated  financial  statements referred to above
present fairly,  in all material  respects,  the financial  position of Marathon
Financial Corporation and subsidiary,  as of December 31, 1998 and 1997, and the
results of their  operations  and their cash flows for the years ended  December
31, 1998,  1997 and 1996,  in  conformity  with  generally  accepted  accounting
principles.

                                    Yount, Hyde & Barbour, P.C.

Winchester, Virginia
January 15, 1999


<PAGE>




                         MARATHON FINANCIAL CORPORATION

                           Consolidated Balance Sheets
                           December 31, 1998 and 1997


            Assets                                     1998             1997
                                                    ----------      ------------

Cash and due from banks                             $4 533 428      $3 477 382
Federal funds sold                                   8 281 000       3 570 000
Securities (fair value:  1998, $10,002,374;
  1997, $3,506,666)                                  9 961 650       3 490 709
Loans held for resale                                  401 671       1 502 438
Loans, net                                          65 065 268      49 014 633
Bank premises and equipment, net                     2 615 175       2 499 374
Accrued interest receivable                            478 820         285 837
Other real estate                                       18 123         448 123
Other assets                                           496 534         537 546
                                                    ----------      ----------


                                                   $91 851 669     $64 826 042
                                                   ===========     ===========


   Liabilities and Shareholders' Equity

Liabilities
  Deposits:
    Noninterest-bearing demand deposits            $10 680 285      $7 992 135
    Savings and interest-bearing demand deposits    24 127 903      16 161 931
    Time deposits                                   47 486 855      32 281 155
                                                    ----------      ----------
          Total deposits                           $82 295 043     $56 435 221
  Interest expense payable                             140 899         104 753
  Accounts payable and accrued expenses                401 395         295 518
  Capital lease payable                                224 219         279 136
  Commitments and contingent liabilities                    --              --
                                                    ----------      ----------
          Total liabilities                        $83 061 556     $57 114 628
                                                   -----------      ----------

Shareholders' Equity
  Preferred stock, Series A, 5% noncumulative,
     no par value; 1,000,000 shares authorized
     and unissued                                   $       --     $        --
  Common stock, $1 par value; 20,000,000 shares
     authorized; 1998, 2,063,186 shares issued
     and outstanding; 1997, 2,055,983 shares
     issued and outstanding                          2 063 186       2 055 983
  Capital surplus                                    7 849 522       7 815 454
  Retained earnings (deficit)                       (1 149 567)     (2 164 825)
  Accumulated other comprehensive income                26 972           4 802
                                                    ----------      ----------
          Total shareholders' equity               $ 8 790 113     $ 7 711 414
                                                    ----------      ----------


                                                   $91 851 669     $64 826 042
                                                   ===========     ===========


See Notes to Consolidated Financial Statements.


<PAGE>



                         MARATHON FINANCIAL CORPORATION

                        Consolidated Statements of Income
                  Years Ended December 31, 1998, 1997 and 1996



<TABLE>
<CAPTION>
                                                     1998          1997           1996
                                              -----------   --------------  --------------
<S>                                           <C>           <C>             <C>
Interest income:
   Interest and fees on loans                 $6 063 709   $4 559 365     $3 554 808
   Interest on investment securities, taxable    184 289       93 379         67 963
   Interest and dividends on securities
     available for sale:
       Taxable                                   169 675       78 588         54 677
       Dividends                                  27 367       21 478          8 373
   Interest on federal funds sold                430 995      129 844        103 606
                                               ---------    ----------     ---------
          Total interest income               $6 876 035   $4 882 654     $3 789 427
                                              ----------   ----------     ----------

Interest expense:
   Interest on deposits                       $2 938 214   $1 918 099     $1 566 223
   Interest on mortgage payable                       --           --         30 045
   Interest on capital lease obligations          20 341       24 637         18 230
   Interest on federal funds purchased                --          673            155
                                              ----------   ----------     ----------
          Total interest expense              $2 958 555   $1 943 409     $1 614 653
                                              ----------   ----------     ----------

          Net interest income                 $3 917 480   $2 939 245     $2 174 774

Provision for loan losses                        285 000      133 000        165 000
                                              ----------   ----------    -----------

          Net interest income after
             provision for loan losses        $3 632 480   $2 806 245     $2 009 774
                                              ----------   ----------     ----------

Other income:
   Service charges on deposit accounts        $  734 243    $  459 695     $ 338 788
   Commissions and fees                          111 048       102 234        72 883
   Gain (loss) on sale of other real estate      (54 249)           --         8 498
   Other                                          27 600        25 250        10 009
                                              ----------    ----------     ---------
          Total other income                  $  818 642    $  587 179     $ 430 178
                                              ----------    ----------     ---------
</TABLE>


See Notes to Consolidated Financial Statements.

<PAGE>

                         MARATHON FINANCIAL CORPORATION

                        Consolidated Statements of Income
                                   (Continued)
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                  1998          1997           1996
                                              -----------   --------------  --------------
<S>                                           <C>            <C>            <C>
Other expenses:
  Salaries and employee benefits              $1 532 069     $1 213 499     $ 846 609
  Net occupancy expense of premises              262 686        211 293       160 772
  Furniture and equipment                        382 340        263 105       102 575
  Other                                        1 016 120        894 899       636 309
                                              ---------      ----------     ---------
          Total other expenses                $3 193 215     $2 582 796    $1 746 265
                                              ----------     ----------     ----------

          Income before income taxes          $1 257 907     $  810 628     $ 693 687

Provision for income tax (benefit)                77 596       (187 734)     (145 734)
                                              ----------      ----------    ----------


          Net income                          $1 180 311     $  998 362     $ 839 421
                                              ==========     ==========     =========

Earnings per share, basic                     $      .57     $      .51     $     .58
                                              ==========     ==========     =========

Earnings per share, assuming dilution         $      .56     $      .50     $     .58
                                              ==========     ==========     =========
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

                         MARATHON FINANCIAL CORPORATION

           Consolidated Statements of Changes in Shareholders' Equity
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
                                                                                      Accumulated
                                                                         Retained         Other                         Total
                                              Common       Capital       Earnings    Comprehensive   Comprehensive   Shareholders'
                                               Stock       Surplus       (Deficit)       Income         Income         Equity
                                               -----       -------       ---------       ------         ------         ------
<S>                                       <C>            <C>          <C>               <C>          <C>              <C>
Balance, December 31, 1995                $  1 306 303   $5 109 908   $  (3 746 878)    $  8 417                     $ 2 677 750
  Comprehensive income:
   Net income                                      --          --           839 421          --    $  839 421            839 421
   Other comprehensive income,
    unrealized (loss) on securities
    available for sale                             --          --             --          (7 910)      (7 910)            (7 910)
                                                                                                     ---------
   Total comprehensive income                      --          --             --             --    $  831 511               --
                                                                                                     =========
  Dividends declared                               --          --          (111 810)         --                         (111 810)
  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)
                                             ---------     --------         -------      -------                       ---------
Balance, December 31, 1996                $  1 863 495   $7 045 502   $  (3 019 267)    $    507                     $ 5 890 237
  Comprehensive income:
   Net income                                      --          --           998 362          --    $  998 362            998 362
   Other comprehensive income,
    unrealized gain on securities
    available for sale                             --          --             --           4 295        4 295              4 295
                                                                                                    --------
   Total comprehensive income                      --          --             --             --    $1 002 657               --
                                                                                                    =========
  Dividends declared                               --          --          (143 920)         --                         (143 920)
  Issuance of common stock -
   warrants (192,488 shares)                   192 488      769 952             --           --                          962 440
                                             ---------   ----------        ---------      -------                    -----------

Balance, December 31, 1997                $  2 055 983   $7 815 454   $  (2 164 825)    $  4 802                       7 711 414
  Comprehensive income:
   Net income                                      --          --         1 180 311          --    $1 180 311          1 180 311
   Other comprehensive income,
    unrealized gain on securities
    available for sale (net of tax,
    $13,894)                                       --          --             --          22 170       22 170             22 170
                                                                                                    ----------
   Total comprehensive income                      --          --             --             --    $1 202 481               --
                                                                                                    ==========
  Dividends declared                               --          --          (165 053)         --                         (165 053)
  Issuance of common stock -
   exercise of stock options
   (7,203 shares)                                7 203       34 068           --             --                           41 271
                                              --------      -------         -------      -------                        --------
Balance, December 31, 1998                $  2 063 186   $7 849 522   $  (1 149 567)    $ 26 972                     $ 8 790 113
                                             =========    =========      ===========      ======                       =========

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>

                         MARATHON FINANCIAL CORPORATION

                      Consolidated Statements of Cash Flows
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                               1998                    1997                      1996
                                                            -----------             -----------               -----------
<S>                                                             <C>                     <C>                      <C>
Cash Flows from Operating Activities
  Net income                                                 $1 180 311           $    998 362              $    839 421
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
       Amortization                                              52 878                 41 846                    40 581
       Depreciation                                             302 869                198 156                   103 815
       Provision for loan losses                                285 000                133 000                   165 000
       Writedown of other real estate                               --                    --                       8 000
       Deferred tax (benefit)                                    72 346               (200 000)                 (150 000)
       Gain (loss) on sale of other real estate                  54 249                    --                     (8 498)
       Net amortization and accretion on securities               4 316                (13 317)                  (15 807)
       Origination of loans available for sale               (7 520 722)            (5 992 149)               (3 431 800)
       Proceeds from sale of loans available for sale         8 621 489              4 773 003                 3 517 254
       Changes in assets and liabilities:
         (Increase) in other assets                             (77 806)              (125 826)                  (25 973)
         (Increase) in accrued interest receivable             (192 983)               (73 748)                  (53 023)
         Increase (decrease) in accounts payable
           and accrued expenses                                  84 741                (10 491)                   68 870
         Increase in interest expense payable                    36 146                 22 989                    21 613
                                                              ---------             ----------                 ---------
          Net cash provided by (used in) operating
              activities                                     $2 902 834           $   (248 175)             $  1 079 453
                                                              ---------             ----------                ----------

Cash Flows from Investing Activities
  Proceeds from maturities, calls and principal
    payments of investment securities                        $  403 000           $  1 107 991              $    568 892
  Proceeds from maturities, calls and principal
    payments of securities available for sale                   361 404                503 397                   205 004
  Purchase of investment securities                          (3 698 262)            (1 152 890)               (1 280 095)
  Purchase of securities available for sale                  (3 505 333)              (600 386)               (1 122 641)
  Net (increase) in loans                                   (16 335 635)           (12 451 882)               (8 885 477)
  Purchase of equipment                                        (438 969)            (1 137 155)                 (194 815)
  Proceeds from sale of other real estate                       375 751                    --                    218 498
                                                             ----------             ----------                ----------            
           Net cash (used in) investing activities          $22 838 044)          $(13 730 925)             $(10 490 634)
                                                             ----------             ----------                ----------
Cash Flows from Financing Activities
  Net increase in demand deposits, NOW accounts
    and savings accounts                                    $10 654 122           $  6 889 140              $  1 774 085
  Net increase in certificates of deposit                    15 205 700              8 820 794                 6 329 038
  Net proceeds from issuance of common stock                     41 271                962 440                 2 539 038
  Acquisition of common stock                                       --                     --                    (46 252)
  Principal payments on capital lease obligations               (54 917)               (36 516)                  (32 036)
  Principal payments on mortgage payable                            --                     --                   (507 134)
  Payment of dividends                                         (143 920)              (111 810)                      --
                                                             ----------             ----------                ----------   
           Net cash provided by financing activities        $25 702 256           $ 16 524 048              $ 10 056 739
                                                             ----------             ----------                ----------
</TABLE>


See Notes to Consolidated Financial Statements.


<PAGE>



                         MARATHON FINANCIAL CORPORATION

                      Consolidated Statements of Cash Flows
                                   (Continued)
                  Years Ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>

                                                  1998          1997           1996
                                              -----------   --------------  --------------
<S>                                              <C>           <C>            <C>

           Increase in cash and
             cash equivalents                $ 5 767 046    $2 544 948     $  645 558

Cash and Cash Equivalents
  Beginning                                    7 047 382     4 502 434      3 856 876
                                               ---------    ----------      ---------
  Ending                                     $12 814 428    $7 047 382     $4 502 434
                                              ==========     =========      =========

Supplemental Disclosures of Cash Flow
  Information
    Cash payments for:

      Interest                               $ 2 922 409    $1 920 420     $1 593 040
                                              ==========   ===========    ==========

      Income taxes                           $    17 595    $   12 179     $    4 153
                                              ==========    ==========    ==========


Supplemental Schedule of Noncash
  Investing and Financing Activities:
     Other real estate acquired in

        settlement of loans                  $     --       $  430 000     $     --
                                               =========   ==========     =========


     Property and equipment acquired

        under capital lease obligations      $     --       $     --       $  238 088
                                              =========     ===========     =========


     Unrealized gain (loss) on securities

        available for sale                   $    36 064    $    4 295     $   (7 910)
                                               =========    ===========     =========

</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 a separate  component
                of other  comprehensive  income, net of the deferred tax effect.
                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, 1998 and 1997.

           Loans Held for Sale

             Loans held for sale are those loans the  Corporation has the intent
             to sell in the foreseeable future. They are carried at the lower of
             aggregate cost or market value.  Gains and losses on sales of loans
             are  recognized  at  settlement  dates  and are  determined  by the
             difference  between  sales  proceeds and the carrying  value of the
             loans. All sales are made without recourse.

           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  qualify as
             impaired loans 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, 1998 and 1997.

             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.

           Comprehensive Income

             As of  January  1,  1998,  the  Corporation  adopted  Statement  of
             Financial   Accounting   Standards   (SFAS)  No.  130,   "Reporting
             Comprehensive  Income." SFAS No. 130  establishes new rules for the
             reporting and display of  comprehensive  income and its components;
             however,  the  adoption  of this  statement  had no  impact  on the
             Corporation's  net  income or  shareholders'  equity.  SFAS No. 130
             requires other comprehensive income to include the unrealized gains
             or losses on available for sale securities, which prior to adoption
             were reported  separately in  shareholders'  equity.  The financial
             statements for previous  periods have been  reclassified to conform
             to the requirements of SFAS No. 130.

           Income Taxes

             Deferred taxes are provided on a liability  method whereby deferred
             tax assets are  recognized for  deductible  temporary  differences,
             operating  loss  carryforwards,   and  tax  credit   carryforwards.
             Deferred  tax  liabilities  are  recognized  for taxable  temporary
             differences.  Temporary differences are the differences between the
             reported  amounts  of assets and  liabilities  and their tax bases.
             Deferred tax assets are reduced by a valuation  allowance  when, in
             the  opinion of  management,  it is more  likely than not that some
             portion or all of the  deferred  tax assets  will not be  realized.
             Deferred tax assets and liabilities are adjusted for the effects of
             changes in tax laws and rates on the date of enactment.

           Cash and Cash Equivalents

             For purposes of  reporting  cash flows,  cash and cash  equivalents
             include  cash on hand,  amounts  due from banks and  federal  funds
             sold.  Generally,  federal funds are purchased and sold for one-day
             periods.

<PAGE>
                      Notes to Consolidated Financial Statements



           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.

           Advertising

             The  Corporation  follows  the  policy  of  charging  the  costs of
             advertising to expense as incurred.  Advertising  expenses incurred
             for the years ended December 31, 1998,  1997 and 1996 were $39,952,
             $75,870 and $60,155, respectively.

           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, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>

                                                      Gross         Gross
                                         Amortized   Unrealized   Unrealized      Fair
                                          Cost        Gains        (Losses)       Value
                                         ---------   ----------   ----------      ------
                                                             1998
                                        ----------------------------------- ------------
<S>                                         <C>         <C>           <C>          <C>
         U.S. Treasury securities
           and obligations of U.S.
           government corporations
           and agencies                $4 420 515   $ 41 769      $ (2 066)    $4 460 218
         Mortgage-backed securities        20 392      1 163            --         21 555
         Other                            479 800         --            --        479 800
                                        ---------    -------      --------      ---------

                                       $4 920 707   $ 42 932      $ (2 066)    $4 961 573
                                       ==========   ========     =========      =========
</TABLE>


<PAGE>

<TABLE>
<CAPTION>

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


         The amortized cost and fair value of the securities  available for sale
         as of December  31, 1998,  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.

                                                       Amortized        Fair
                                                         Cost          Value
                                                       ---------       -----
           Due in one year or less                   $  299 794   $  301 313
           Due after one year through five years      1 563 724    1 585 343
           Due after five years through ten years     2 556 997    2 573 562
           Mortgage-backed securities                    20 392       21 555
                        Other                           479 800      479 800
                                                      ---------     --------
                                                     $4 920 707   $4 961 573
                                                     ==========    =========


         The amortized cost and fair value of securities  being held to maturity
         as of December 31, 1998 and 1997, are as follows:

<TABLE>
<CAPTION>

                                                            Gross       Gross
                                           Amortized      Unrealized  Unrealized       Fair
                                           Cost             Gains      (Losses)       Value
                                           ---------      ----------  ----------     -------
                                                                1998
                                           -------------------------------------------------
<S>                                           <C>            <C>          <C>           <C>
          Obligations of U.S.
           government corporations
           and agencies                   $4 899 237      $  39 376   $  (2 074)   $4 936 539
         Obligations of state and
           political subdivisions            100 840          3 422          --       104 262
                                           ---------      ---------    --------     ---------
                                          $5 000 077      $  42 798   $  (2 074)   $5 040 801
                                          ==========      =========   =========    ==========

</TABLE>

<PAGE>
<TABLE>
<CAPTION>

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

</TABLE>

         The  amortized  cost and fair  value of the  securities  being  held to
         maturity as of December 31, 1998, by  contractual  maturity,  are shown
         below.

                                                Amortized         Fair
                                                  Cost            Value
                                                ---------         -----
           Due in one year or less           $   250 067      $  250 235
           Due after one year through
             five years                        3 647 882       3 679 783
           Due after five years through
             ten years                         1 102 128       1 110 783
                                               ---------       ---------
                                             $ 5 000 077     $ 5 040 801
                                               =========       =========


         Proceeds from  maturities,  calls and principal  payments of securities
         available for sale during 1998,  1997 and 1996 were $361,404,  $503,397
         and  $205,004.   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  1998,  1997 and 1996  were  $403,000,
         $1,107,991  and  $568,892.  There were no  realized  gains or  realized
         losses recognized on these transactions.

         Securities having a book value of $847,910 and $646,873 at December 31,
         1998 and 1997 were  pledged  to secure  public  deposits  and for other
         purposes required by law.

<PAGE>


Note 3.  Loans and Related Party Transactions

         The loan portfolio as of December 31, 1998 and 1997, is composed of the
following:

                                                    1998          1997
                                                ----------    ----------

             Commercial                       $35 388 441    $24 399 929
             Real estate - mortgage            11 173 003     10 065 627
             Real estate - construction         7 472 110      4 573 026
             Installment loans to individuals  11 786 311     10 552 548
                                              -----------    -----------
                                              $65 819 865    $49 591 130

             Less allowance for loan losses       754 597        576 497
                                              -----------    -----------
                                              $65 065 268    $49 014 633
                                              ===========    ===========


         The  Corporation  has had,  and may be  expected to have in the future,
         banking transactions in the ordinary course of business with directors,
         executive officers,  their immediate families and affiliated  companies
         in which  they are  principal  shareholders  (commonly  referred  to as
         related  parties),  on the same  terms,  including  interest  rates and
         collateral, as those prevailing at the time for comparable transactions
         with others.  These  persons and firms  (exclusive of loans to any such
         person which in the aggregate did not exceed  $60,000) were indebted to
         the  Corporation  for  loans  totaling  $2,090,201  and  $1,831,322  at
         December 31, 1998 and 1997, respectively.  During 1998, total principal
         additions were $1,290,364 and total principal payments were $1,031,485.


Note 4.  Allowance for Loan Losses

         Changes in the allowance for loan losses are as follows:

                                                       December 31,
                                             1998           1997         1996
                                           ---------     ----------    ---------

           Balance, beginning          $    576 497    $  503 014     $393 139
             Provision for loan losses      285 000       133 000      165 000
             Recoveries                      44 211        27 823        6 007
             Loan losses charged to
             the allowance                 (151 111)      (87 340)     (61 132)
                                        -----------     ---------     --------
           Balance, ending             $    754 597    $  576 497     $503 014
                                        ===========     =========     ========

         Nonaccrual  loans excluded from impaired loan disclosure under FASB 114
         amounted  to  $233,200  and  $38,116  at  December  31,  1998 and 1997,
         respectively.  If interest on these loans had been accrued, such income
         would  have  approximated   $15,681  and  $8,519  for  1998  and  1997,
         respectively.

<PAGE>

                      Notes to Consolidated Financial Statements

Note 5.  Bank Premises and Equipment, Net

         Bank  premises and  equipment as of December 31, 1998 and 1997 consists
         of the following:

                                                  1998         1997
                                                -------       ------
           Bank premises                   $  2 127 824    $  1 869 457
           Furniture and equipment            1 522 678       1 332 436
           Capital leases - property
              and equipment                     255 604         389 135
                                            -----------    ------------
                                             $3 906 106    $  3 591 028

           Less accumulated depreciation      1 290 931       1 091 654
                                            -----------    ------------
                                             $2 615 175      $2 499 374
                                            ===========    ============


         Depreciation and amortization  included in operating  expense for 1998,
         1997 and 1996 was $323,168, $228,365 and $134,024, respectively.


Note 6.  Deposits

         The  aggregate  amount  of jumbo  time  deposits,  each  with a minimum
         denomination of $100,000,  was approximately  $9,320,255 and $7,127,769
         in 1998 and 1997, respectively.

         At December 31, 1998, the scheduled  maturities of time deposits are as
follows:

            Years Ending December 31:

                   1999                      $30 965 710
                   2000                        5 367 115
                   2001                        4 149 261
                   2002                        2 279 714
                   2003                        4 725 055
                                             -----------
                                             $47 486 855
                                             ===========

<PAGE>



                      Notes to Consolidated Financial Statements




Note 7.  Income Taxes

         Net  deferred  tax assets  consist of the  following  components  as of
         December 31, 1998 and 1997:

                                                             1998         1997
                                                           ---------   ---------
             Deferred tax assets:
                Net operating loss carryforward            $187 705    $697 623
                Writedown of other real estate                2 720       2 720
                Other real estate expenditures                  192       1 524
                Nonaccrual interest                           5 545      12 959
                Allowance for loan losses                    70 963        --
                Alternative minimum tax credits              21 856        --
                Less valuation allowance                       --      (338 889)
                                                           --------    ---------
                                                           $288 981    $375 937
                                                           --------    ---------
             Deferred tax liabilities:
                Allowance for loan losses                  $  --       $ 25 937
                Depreciation                                 11 327        --
                Securities available for sale                13 894        --
                                                           --------    --------
                                                           $ 25 221    $ 25 937
                                                           --------    --------
                                                           $263 760    $350 000
                                                           ========    ========


           The provision  for income taxes  charged to operations  for the years
           ended December 31, 1998, 1997 and 1996, consists of the following:


                                                  1998       1997        1996
                                                --------   --------  ----------

             Current tax expense             $  5 250     $  12 266   $   4 266
             Deferred tax expense             411 235       278 740     239 191
             Change in valuation allowance   (338 889)     (478 740)   (389 191)
                                             ---------    ---------   ---------
                                             $ 77 596     $(187 734)  $(145 734)
                                             ========     =========   =========


           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, 1998,  1997 and 1996, due to
           the following:

<TABLE>
<CAPTION>


                                                            1998         1997        1996
                                                        ----------   ----------  -------------
<S>                                                      <C>          <C>            <C>


             Computed "expected" tax expense           $ 427 688      $ 275 614    $ 235 854
             Increase (decrease) in income taxes
               resulting from:
                 Reduction of valuation allowance       (338 889)      (478 740)    (389 191)
               Other                                     (11 203)        15 392        7 603
                                                       ---------        --------    ---------
                                                        $ 77 596      $(187 734)   $(145 734)
                                                       =========       =========    =========
</TABLE>



           Under the provisions of the Internal  Revenue Code,  the  Corporation
           has  available   approximately   $514,833  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.


<PAGE>



Note 8.  Leases

         Capital Leases

           During 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%.  Capital lease payable at December 31, 1998 in the amount
           of $224,219 represents the present value of the balance due in future
           years for lease rentals discounted at the respective  interest rates.
           Since  the  term  of the  lease  is  approximately  the  same  as the
           estimated  useful  life of the assets,  and the present  value of the
           future   minimum  lease  payments  at  the  beginning  of  the  lease
           approximated  the fair value of the leased  assets at that date,  the
           lease is considered to be a capital lease and has been so recorded.

           The  following  is a schedule  by years of the future  minimum  lease
           payments  under the capital lease  together with the present value of
           the net minimum lease payments as of December 31, 1998:

             Years ending December 31:

                1999                                       $   23 898
                2000                                           23 898
                2001                                           23 898
                2002                                           23 898
                2003                                           23 898
                Later years                                   296 731
                                                             ---------
                  Total minimum lease payments             $  416 221
                Less the amount representing interest         192 002
                                                             ---------
                   Present value of net minimum
                     lease payments                        $  224 219
                                                            ==========


         Lease Commitments and Total Rental Expense

           During 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, 1998 under this lease is $387,630.


<PAGE>



           During 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, 1998 under this lease is $15,000.

           During 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, 1998 under this lease is $248,631.

           During 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, 1998 under this lease is $38,000.

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

                        1999                  $   70 056
                        2000                      65 256
                        2001                      63 456
                        2002                      61 006
                        2003                      53 774
                        Later years              375 713
                                               ----------
                                              $  689 261
                                               ==========


           Total rental  expense was $68,556,  $56,933 and $29,823 for the years
           ended December 31, 1998, 1997 and 1996, respectively.

         Fixed Equipment on Land Leased with Related Parties

           Fixed  equipment  with a  depreciated  cost at  December  31, 1998 of
           $15,874 is located on land  leased  from a  partnership  of which the
           Corporation's  president is a partner.  The lease  expires on May 31,
           2016.



<PAGE>



                      Notes to Consolidated Financial Statements


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, 1998 and 1997,  the
         aggregate amounts of daily average required balances were approximately
         $394,000 and $156,000, respectively.

         The  Corporation is conducting a  comprehensive  review of its computer
         systems to identify the systems that could be affected by the Year 2000
         Issue,  and is developing a remediation  plan to resolve the Issue. The
         Issue   is   whether   computer   systems   will   properly   recognize
         date-sensitive  information when the year changes to 2000. Systems that
         do not properly  recognize such  information  could generate  erroneous
         data or cause a system to fail. The Corporation is heavily dependent on
         computer processing in the conduct of its business activities.  Failure
         of these systems could have a significant  impact on the  Corporation's
         operations.


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, 1998,  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 1998,  1997 and 1996.  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. On December 15, 1998, the Board of Directors declared
         a cash  dividend  of  $.08  per  share  payable  January  29,  1999  to
         shareholders of record December 31, 1998.

         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, 1998, no unrestricted  funds could be transferred  from the banking
         subsidiary  to  the  parent   corporation,   without  prior  regulatory
         approval.



<PAGE>



                      Notes to Consolidated Financial Statements


Note 11. Other Expenses

         The  principal  components  of  "Other  expenses"  in the  Consolidated
         Statements of Income are:


<TABLE>
<CAPTION>

                                                    1998         1997        1996
                                              ----------   ----------  ----------
<S>                                              <C>          <C>          <C>


           Telephone                          $   84 232   $   48 709  $   33 257
           Marketing                              39 952       75 870      60 155
           Stationery and supplies               102 716       73 722      52 208
           Postage                                92 296       59 392      49 010
           Directors fees                         83 250       69 315      45 450
           ATM expense                            87 525       56 800      37 048
           Forgery loss                              --        59 870         --
           Other (includes no items in excess
             of 1% of total revenue)             526 149      451 221     359 181
                                               ----------   ---------   ---------
                                              $1 016 120   $  894 899  $  636 309
                                              ==========   ==========  ==========
</TABLE>




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, 1998 and 1997 is
         as follows:

                                                           1998          1997
                                                        ----------   ----------
                                                              (Thousands)
             Financial instruments whose contract
                amounts represent credit risk:
                   Commitments to extend credit        $    8 909  $    7 194
                   Standby letters of credit                  851         664




<PAGE>



                   Notes to Consolidated Financial Statements

         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, 1998,  varies from 0 percent to 100
         percent; the average amount collateralized is 79 percent.

         The Corporation has cash accounts in other commercial banks. The amount
         on deposit at one of these banks at  December  31,  1998  exceeded  the
         insurance  limits  of the  Federal  Deposit  Insurance  Corporation  by
         approximately $1,063,609.


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,
         1998, 1997 and 1996 were $19,500, $15,880 and $12,173.


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,  fair values are based on quoted  market prices or
dealer quotes.



<PAGE>



                   Notes to Consolidated Financial Statements


           Loans Held for Sale

             Fair values are based on quoted market prices of similar loans sold
             on the secondary market.

           Loan Receivables

             For  certain   homogeneous   categories  of  loans,  such  as  some
             residential  mortgages,  and other  consumer  loans,  fair value is
             estimated  using the quoted market prices for securities  backed by
             similar loans,  adjusted for  differences in loan  characteristics.
             The fair value of other types of loans is estimated by  discounting
             the future  cash flows  using the  current  rates at which  similar
             loans would be made to borrowers  with similar  credit  ratings and
             for the same remaining maturities.

           Deposit Liabilities

             The fair value of demand deposits,  savings  accounts,  and certain
             money  market  deposits  is the  amount  payable  on  demand at the
             reporting  date. The fair value of  fixed-maturity  certificates of
             deposit is estimated using the rates currently offered for deposits
             of similar remaining maturities.

           Capital Lease Payable

             The fair values of the  Corporation's  long-term  borrowings (other
             than deposits) are estimated  using  discounted cash flow analyses,
             based on the Corporation's  current incremental borrowing rates for
             similar types of borrowing arrangements.


           Off-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, 1998 and 1997, the difference  between the carrying
             amounts and fair values of loan commitments and stand-by letters of
             credit were immaterial.




<PAGE>



                      Notes to Consolidated Financial Statements

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


<TABLE>
<CAPTION>

                                                  1998                       1997
                                       -------------------------    ------------------------
                                         Carrying        Fair        Carrying        Fair
                                          Amount        Value         Amount         Value
                                       ------------   ---------     -----------    ---------
                                               (Thousands)                 (Thousands)
<S>                              <C>              <C>       <C>           <C>
          Financial assets:
            Cash and short-term
             investments                 $ 12 814     $ 12 814      $  7 047     $    7 047
            Securities                      9 962       10 002         3 491          3 507
            Loans held for resale             402          402         1 502          1 502
            Loans                          65 065       68 265        49 015         49 529
                                          --------     --------      --------     ---------
            Total financial assets       $ 88 243     $ 91 483      $ 61 055     $   61 585
                                         =========     ========      ========     =========


          Financial liabilities:
             Deposits                    $ 82 295     $ 83 935      $ 56 435     $   56 867
            Long-term debt                    224          247           279            327
                                         --------     --------      --------     ----------
              Total financial
                liabilities              $ 82 519     $ 84 182      $ 56 714     $   57 194
                                         ========     ========      ========     ==========
</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.

          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,
          1998, that the Corporation meets all capital adequacy  requirements to
          which it is subject.

          As of December 31, 1998, 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.




<PAGE>



          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>       <C>         <C>        <C>       <C>           <C>
As of December 31, 1998:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated                    $  9 518   13.89%     =>$ 5 481   =>8.00%              N/A
      Marathon Bank                   $  8 787   12.84%     =>$ 5 476   =>8.00%   =>$ 6 845     =>10.00%
  Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated                    $  8 763   12.79%     =>$ 2 740   =>4.00%              N/A
      Marathon Bank                   $  8 032   11.73%     =>$ 2 738   =>4.00%   =>$ 4 107     => 6.00%
  Tier 1 Capital (to
     Average Assets)
      Consolidated                    $  8 763    9.63%     =>$ 3 640   =>4.00%              N/A
      Marathon Bank                   $  8 032    8.90%     =>$ 3 610   =>4.00%   =>$ 4 512     => 5.00%

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%

</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.

          In 1997,  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 18,875 were vested as of December 31,  1998.  The
          remaining  options will vest at 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 54,000 shares were vested as of December 31,
          1998 with the remaining  options  vesting 10,000 per year on September
          17 for the next four years. The options expire September 16, 2006.

          In 1998,  the Board  granted  5,000  options to key  employees  of the
          Corporation  at $7.25.  Of the 5,000  options,  a total of 2,000  were
          vested as of December 31,  1998.  The  remaining  options will vest at
          1,000 per year on  September 1 for the next three  years.  The options
          expire August 31, 2008.

          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. The estimates
          were calculated using the following  weighted-average  assumptions for
          grants  in 1998  and  1997:  Dividend  rate of .12%  and  .16%,  price
          volatility of 20.65% and 35.00%,  risk-free interest rate of 4.50% and
          5.00%, respectively, 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 1998 or 1997. Had  compensation  cost been determined on the basis
          of fair value  pursuant  to FASB  Statement  No.  123,  net income and
          earnings per share would have been as follows:

                                                       1998            1997
                                                    ----------     -----------
                      Net income

                        As reported                 $1 180 311     $ 998 362
                                                    ==========     =========
                        Proforma                    $1 166 453     $ 970 561
                                                    ==========     =========


                      Basic earnings per share

                        As reported                 $      .57     $     .51
                                                    ==========     =========
                        Proforma                    $      .57     $     .50
                                                    ==========     =========


                      Diluted earnings per share

                        As reported                 $      .56     $     .50
                                                    ==========     =========
                        Proforma                    $      .55     $     .48
                                                    ==========     =========





<PAGE>



      Changes in the  incentive  stock  options  outstanding  are  summarized as
follows:

<TABLE>
<CAPTION>

                                                            Long-Term            Long-Term
                                                          Incentive Plan -     Incentive Plan -
                                                            Employee             Director
                                                     -------------------   --------------------
                                                                Weighted              Weighted
                                                     Number     Average    Number     Average
                                                      of        Exercise    of        Exercise
                                                     Shares      Price     Shares     Price
                                                     ------    --------    ------     ---------
<S>                                                    <C>       <C>         <C>         <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 January 1, 1998            42 078       5.12    100 000       5.00
           Granted during 1998                        5 000       7.25       --          --
           Exercised during 1998                     (2 203)      7.39     (5 000)      5.00
           Forfeited during 1998                        --          --     (5 000)      5.00
                                                     -----                -------
           Outstanding at December 31, 1998          44 875       5.25     90 000       5.00
                                                     ======               =======


           Options exercisable at December 31,
             1998                                    20 875                54 000
                                                     ======               =======
           Weighted average fair value of
            options granted during 1998             $  2.02             $    --
                                                     ======               =======
           Weighted average fair value of
             options granted during 1997            $  1.97             $    1.94
                                                     ======               =======
</TABLE>



         The  status of the  options  outstanding  at  December  31,  1998 is as
follows:

                                          Remaining
                  Exercise               Contractual
                  Price       Number    Life in Years
               ---------      ------    -------------
               $  5.00        129 875     7.75
                  7.25        5 000       9.75


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 entitled 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 shareholders.

<TABLE>
<CAPTION>


                                                  1998                             1997       1996
                                    ------------------------------   --------------------------

                                                Per                          Per                   Per
                                                Share                       Share                 Share
                                    Shares      Amount          Shares      Amount   Shares       Amount
                                   ----------  -------          ------      ------   ------       ------

<S>                                  <C>          <C>              <C>       <C>       <C>           <C>


          Basic earnings
            per share               2 058 932    $   .57      1 951 172    $  .51   1 442 478   $    .58
                                                 =======                   ======                ========

          Effect of dilutive
            securities:
              Stock options            53 077                    45 421                  --
              Warrants                    --                     19 560                  --
                                    ---------                  ---------          ------------
          Diluted earnings
            per share               2 112 009    $   .56      2 016 153    $  .50   1 442 478   $    .58
                                 ============    =======   ============    ====== ============  ==========
</TABLE>





          Warrants and options of 200,688 were not included in computing diluted
          EPS for 1996 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, 1998 and 1997


<TABLE>
<CAPTION>


                                                                 1998         1997
                                                            -----------   ----------
<S>                                                           <C>            <C>

          Assets
            Cash on deposit with subsidiary bank            $   130 241  $   53 207
            Securities                                          761 344     906 894
            Accrued interest receivable                          14 545      14 546
            Investment in capital stock of subsidiary         8 052 263   6 880 687
                                                            -----------   ----------
                Total assets                                $ 8 958 393  $7 855 334
                                                            ===========   ==========



          Liabilities
            Deferred income taxes payable                   $     3 225  $     --
            Dividends payable                                   165 055     143 920
                                                            ----------- ------------
                                                            $   168 280  $  143 920
                                                            ----------   -----------

          Shareholders' Equity
            Preferred stock                                 $    --      $     --
            Common stock                                      2 063 186   2 055 983
            Capital surplus                                   7 849 522   7 815 454
            Retained earnings (deficit)                      (1 149 567) (2 164 825)
            Accumulated other comprehensive income               26 972       4 802
                                                            -----------  -----------
                Total shareholders' equity                  $ 8 790 113  $7 711 414
                                                            -----------  -----------
                Total liabilities and shareholders' equity  $ 8 958 393  $7 855 334
                                                            ===========  ===========
</TABLE>







<PAGE>



                         MARATHON FINANCIAL CORPORATION
                            (Parent Corporation Only)

                              Statements of Income
                  Years Ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>

                                                              1998        1997          1996
                                                         -----------  ------------  -----------
<S>                                                            <C>          <C>           <C>
          Income
             Interest on investment securities,
              taxable                                   $    14 447    $    5 945  $       --
             Interest on securities available
              for sale, taxable                              31 647         8 625          --
             Miscellaneous                                     --           --            6 000
                                                         ----------    ----------  -----------
               Total income                             $    46 094    $   14 570  $      6 000
                                                        -----------    ----------  ------------
          Expenses, other                               $    18 607    $   11 927  $      1 248
                                                        -----------    ----------  ------------
               Income before undistributed
                income of subsidiary                    $    27 487    $    2 643  $      4 752
             Undistributed income of
              subsidiary                                  1 152 824       995 719       834 669
                                                       -------------  ----------  -------------
               Net income                               $ 1 180 311    $  998 362  $    839 421
                                                        ============  =========== =============
</TABLE>






<PAGE>



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

                            Statements of Cash Flows
                  Years Ended December 31, 1998, 1997 and 1996


<TABLE>
<CAPTION>


                                                                     1998          1997        1996
                                                                  ----------    ----------   ---------
<S>                                                                 <C>            <C>          <C>

Cash Flows from Operating Activities
 Net income                                                      $ 1 180 311   $ 998 362   $   839 421
 Adjustments to reconcile net income to net cash
   provided by (used in) operating activities:
    Amortization of securities discounts, net                          2 195        --         --
    Undistributed income of subsidiary                            (1 152 824)    (995 719)    (834 669)
    Decrease in prepaid expenses                                        --            283          295
    (Increase) decrease in accrued interest receivable                     1      (14 545)     --
    (Decrease) in accounts payable                                      --         (1 363)      (3 322)
       Net cash provided by (used in)
         operating activities                                    $    29 683   $  (12 982) $     1 725
                                                                   ----------   ---------   ----------


Cash Flows from Investing Activities
 Proceeds from maturities of investment securities               $   150 000   $   --      $   --
 Purchase of investment securities                                     --       (401 490)      --
 Purchase of securities available for sale                             --       (502 561)      --
                                                                   -----------  ---------   -----------
       Net cash provided by (used in)
         investing activities                                    $   150 000   $(904 051)  $   --
                                                                   -----------  ---------   -----------


Cash Flows from Financing Activities
 Net proceeds from issuance of common stock                      $    41 271   $ 962 440   $ 2 539 038
 Acquisition of common stock                                            --          --         (46 252)
 Transfer of capital to subsidiary                                      --          --          (2 375
271)
 Payment of dividends                                               (143 920)   (111 810)        --
                                                                    ---------   ----------  ----------

       Net cash provided by (used in)
         financing activities                                    $  (102 649)   $ 850 630  $   117 515
                                                                    ---------   ----------  ----------
       Increase (decrease) in cash
         and cash equivalents                                    $    77 034    $ (66 403) $   119 240

Cash and Cash Equivalents
 Beginning                                                            53 207      119 610          370
                                                                     --------    ---------   ---------
 Ending                                                          $   130 241    $  53 207  $   119 610
                                                                   ===========  ==========   =========
Supplemental Schedule of Noncash
 Investing and Financing Activities,
 unrealized gain (loss) on securities
 available for sale                                              $    36 064    $   4 295    $  (7 910)
                                                                   ===========     ========  =========
</TABLE>