EXHIBIT 99.1





                         MARATHON FINANCIAL CORPORATION

                              Winchester, Virginia

                                FINANCIAL REPORT

                                DECEMBER 31, 1996


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                                 C O N T E N T S

                                                                        Page
                                                                        ----

INDEPENDENT AUDITOR'S REPORT                                                1

FINANCIAL STATEMENTS

  Consolidated balance sheets                                               2
  Consolidated statements of income                                   3 and 4
  Consolidated statements of changes in stockholders' equity                5
  Consolidated statements of cash flows                               6 and 7
  Notes to consolidated financial statements                             8-28


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                          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, 1996 and 1995,
and the related  consolidated  statements  of income,  changes in  stockholders'
equity,  and cash flows for the years ended  December 31,  1996,  1995 and 1994.
These   consolidated   financial   statements  are  the  responsibility  of  the
Corporation's  management.  Our responsibility is to express an opinion on these
financial statements based on our audits.


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


         In our opinion, the consolidated financial statements referred to above
present fairly,  in all material  respects,  the financial  position of Marathon
Financial Corporation and Subsidiary,  as of December 31, 1996 and 1995, and the
results of its  operations  and its cash flows for the years ended  December 31,
1996,  1995  and  1994,  in  conformity  with  generally   accepted   accounting
principles.


                                            Yount, Hyde & Barbour, P.C.

Winchester, Virginia
January 24, 1997


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<TABLE>
<CAPTION>
<S> <C>


                                                 MARATHON FINANCIAL CORPORATION

                                                   Consolidated Balance Sheets
                                                   December 31, 1996 and 1995



            Assets                                                               1996                    1995
                                                                            --------------         ----------

Cash and due from banks (Notes 9 and 12)                                    $    2 846 434         $     2 282 876
Securities (fair value:  1996, $3,337,690 and
  1995, $1,708,102) (Note 2)                                                     3 331 209               1 699 472
Federal funds sold                                                               1 656 000               1 574 000
Loans, net (Notes 3 and 4)                                                      37 409 043              28 774 020
Bank premises and equipment, net (Notes 5 and 8)                                 1 587 342               1 288 463
Accrued interest receivable                                                        212 089                 159 066
Other real estate                                                                   18 123                 236 123
Other assets                                                                       226 600                  55 999
                                                                            --------------         ---------------
                                                                            $   47 286 840         $    36 070 019
                                                                            ==============         ===============
   Liabilities and Stockholders' Equity

Liabilities
  Deposits:
    Noninterest bearing                                                     $    6 229 844         $     5 261 411
    Interest bearing                                                            34 495 443              27 360 753
                                                                            --------------         ---------------
          Total deposits (Note 6)                                           $   40 725 287         $    32 622 164
  Interest expense payable                                                          81 764                  60 151
  Accounts payable and accrued expenses                                            273 900                  93 220
  Mortgage payable                                                                     - -                 507 134
  Capital leases payable (Note 8)                                                  315 652                 109 600
  Commitments and contingent liabilities (Notes 9 and 12)                              - -                     - -
                                                                            --------------         ---------------
          Total liabilities                                                 $   41 396 603         $    33 392 269
                                                                            --------------         ---------------

Stockholders' Equity
  Preferred stock,  Series A, 5% noncumulative,  no par value;  1,000,000 shares
     authorized; no shares issued
     and outstanding                                                        $          - -         $           - -
  Common stock, $1 par value; 20,000,000 shares
     authorized; 1996, 1,863,495 shares issued and
     outstanding; 1995, 1,306,303 shares issued and
     outstanding (Note 17)                                                       1 863 495               1 306 303
  Capital surplus                                                                7 045 502               5 109 908
  Retained earnings (deficit)                                                   (3 019 267)             (3 746 878)
  Unrealized gain (loss) on securities available for sale                              507                   8 417
                                                                            --------------         ---------------
          Total stockholders' equity                                        $    5 890 237         $     2 677 750
                                                                            --------------         ---------------

                                                                            $   47 286 840         $    36 070 019
                                                                            ==============         ===============
</TABLE>

See Notes to Consolidated Financial Statements.


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<TABLE>
<CAPTION>
<S> <C>


                                                 MARATHON FINANCIAL CORPORATION

                                                Consolidated Statements of Income
                                          Years Ended December 31, 1996, 1995 and 1994





                                                                         1996                1995                 1994
                                                                   ----------------    ----------------     ----------
Interest income:
   Interest and fees on loans                                      $      3 554 808    $      2 786 074     $     2 123 881
   Interest on investment securities, taxable                                67 963              57 788              82 870
   Interest and dividends on securities
     available for sale:
       Taxable                                                               54 677              16 559              13 452
       Dividends                                                              8 373              13 060               5 404
   Interest on federal funds sold                                           103 606              66 829              25 641
                                                                   ----------------    ----------------     ---------------
          Total interest income                                    $      3 789 427    $      2 940 310     $     2 251 248
                                                                   ----------------    ----------------     ---------------

Interest expense:
   Interest on deposits (Note 6)                                   $      1 566 223    $      1 203 143     $       801 614
   Interest on mortgage payable                                              30 045              38 949              40 550
   Interest on capital lease obligations                                     18 230               8 610               2 816
   Interest on federal funds purchased                                          155               1 536               3 933
                                                                   ----------------    ----------------     ---------------
          Total interest expense                                   $      1 614 653    $      1 252 238     $       848 913
                                                                   ----------------    ----------------     ---------------

          Net interest income                                      $      2 174 774    $      1 688 072     $     1 402 335

Provision for loan losses (Note 4)                                          165 000             113 419             151 533
                                                                   ----------------    ----------------     ---------------

          Net interest income after
             provision for loan losses                             $      2 009 774    $      1 574 653     $     1 250 802
                                                                   ----------------    ----------------     ---------------

Other income:
   Service charges on deposit accounts                             $        338 788    $        227 776     $       112 899
   Commissions and fees                                                      72 883              45 207              31 725
   Gain on redemption of investment securities                                  - -                 - -              19 125
   Settlement of legal disputes                                                 - -                 - -              58 847
   Gain on sale of other real estate                                          8 498                 - -                 - -
   Other                                                                     10 009               8 346              19 393
                                                                   ----------------    ----------------     ---------------
          Total other income                                       $        430 178    $        281 329     $       241 989
                                                                   ----------------    ----------------     ---------------

</TABLE>

See Notes to Consolidated Financial Statements.


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<TABLE>
<CAPTION>
<S> <C>


                                                 MARATHON FINANCIAL CORPORATION

                                                Consolidated Statements of Income
                                                           (Continued)
                                          Years Ended December 31, 1996, 1995 and 1994




                                                                         1996                1995                 1994
                                                                   ----------------    ----------------     ----------

Other expenses:
  Salaries and employee benefits                                   $        846 609    $        675 948     $       523 017
  Net occupancy expense of premises                                         160 772             110 478              91 624
  Furniture and equipment                                                    72 366              98 969              57 100
  Other (Note 11)                                                           666 518             550 046             502 574
                                                                   ----------------    ----------------     ---------------
          Total other expenses                                     $      1 746 265    $      1 435 441     $     1 174 315
                                                                   ----------------    ----------------     ---------------

          Income before income taxes                               $        693 687    $        420 541     $       318 476

  Provision for income tax (benefit) (Note 7)                              (145 734)                - -                 - -
                                                                   ----------------    ----------------     ---------------

          Net income                                               $        839 421    $        420 541     $       318 476
                                                                   ================    ================     ===============

  Earnings per common and equivalent share (Note 1)                $            .58    $            .35     $           .30
                                                                   ================    ================     ===============

</TABLE>

See Notes to Consolidated Financial Statements.


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<TABLE>
<CAPTION>
<S> <C>


                                                 MARATHON FINANCIAL CORPORATION

                                   Consolidated Statements of Changes in Stockholders' Equity
                                          Years Ended December 31, 1996, 1995 and 1994

                                                                                                 Unrealized
                                                                                                   Gain
                                                                                                 (Loss) on
                                                                                    Retained     Securities         Total
                                              Capital Stock       Capital           Earnings      Available       Stockholders'
                                 Preferred         Common        Surplus          (Deficit)       for Sale           Equity
Balance, December 31,
  1993                      $    1 003 440    $  1 068 564    $   4 158 952    $  (4 297 431)   $        - -   $     1 933 525
   Net income - 1994                   - -             - -              - -          318 476             - -           318 476
   Issuance of common
      stock (10,037 shares)            - -          10 037           40 148          (50 185)            - -               - -
   Unrealized gain
      (loss) on securities
      available for sale               - -             - -              - -              - -          (8 032)           (8 032)
                            --------------    ------------    -------------    -------------    ------------   ---------------
Balance, December 31,
  1994                      $    1 003 440    $  1 078 601    $   4 199 100    $  (4 029 140)   $     (8 032)  $     2 243 969
  Net income - 1995                    - -             - -              - -          420 541             - -           420 541
  Issuance of common
    stock (15,045 shares)              - -          15 045           60 180          (75 225)            - -            - -
  Issuance of common
    stock - stock dividend
    (11,969 shares) (Note 10)          - -          11 969           47 876          (59 845)            - -               - -
  Cash to be paid in lieu
    of fractional shares               - -             - -              - -           (3 209)            - -            (3 209)
  Conversion of
    preferred stock to
    common stock
    (200,688 shares)            (1 003 440)        200 688          802 752              - -             - -               - -
  Unrealized gain
    (loss) on securities
    available for sale                 - -             - -              - -              - -          16 449            16 449
                            --------------    ------------    -------------    -------------    ------------   ---------------
Balance, December 31,
  1995                      $          - -    $  1 306 303    $   5 109 908    $  (3 746 878)   $      8 417   $     2 677 750
   Net income - 1996                   - -             - -              - -          839 421             - -           839 421
   Issuance of common
     stock - stock offering
     (567,192 shares)
     (Note 17)                         - -         567 192        1 971 846              - -             - -         2 539 038
   Acquisition of common
     stock (10,000 shares)             - -         (10 000)         (36 252)             - -             - -           (46 252)
   Dividends declared
     (Note 10)                         - -             - -              - -         (111 810)            - -          (111 810)
   Unrealized gain
      (loss) on securities
      available for sale               - -             - -              - -              - -          (7 910)           (7 910)
                            --------------    ------------    -------------    -------------    ------------   ---------------
Balance, December 31,
  1996                      $          - -    $  1 863 495    $   7 045 502    $  (3 019 267)   $        507   $     5 890 237
                            ==============    ============    =============    =============    ============   ===============
</TABLE>

See Notes to Consolidated Financial Statements.


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<TABLE>
<CAPTION>
<S> <C>


                                                  MARATHON FINANCIAL CORPORATION

                                               Consolidated Statements of Cash Flows
                                           Years Ended December 31, 1996, 1995 and 1994

                                                                         1996                1995                 1994
                                                                   ----------------    ----------------     ----------
Cash Flows from Operating Activities
   Net income                                                      $        839 421    $        420 541     $       318 476
   Adjustments to reconcile net income to net cash
      provided by operating activities:
         Amortization                                                        40 581              16 194              34 670
         Depreciation                                                       103 815             103 366              73 710
         Provision for loan losses                                          165 000             113 419             151 533
         Writedown of other real estate                                       8 000              42 581                 - -
         Deferred tax (benefit)                                            (150 000)                - -                 - -
         Gain on redemption of investment securities                            - -                 - -             (19 125)
         Gain on sale of other real estate                                   (8 498)                - -                 - -
         Accretion of securities discounts, net                             (15 807)             (2 567)             (2 210)
         Changes in assets and liabilities:
           (Increase) decrease in other assets                              (25 973)             21 614              (9 440)
           (Increase) decrease in accrued interest
             receivable                                                     (53 023)             13 668             (68 341)
           Increase in accounts payable and
             accrued expenses                                                68 870              35 027              43 672
           Increase (decrease) in interest expense payable                   21 613             (74 818)           (143 266)
                                                                   ----------------    ----------------     ---------------
                Net cash provided by operating
                   activities                                      $        993 999    $        689 025     $       379 679
                                                                   ----------------    ----------------     ---------------

Cash Flows from Investing Activities
   Proceeds from maturities, calls and principal
      payments of investments securities                           $        568 892    $         21 240     $       800 362
   Proceeds from maturities and principal
      payments of securities available for sale                             205 004               4 901              23 648
   Purchase of investment securities                                     (1 280 095)                - -            (538 833)
   Purchase of securities available for sale                             (1 122 641)           (216 806)           (244 336)
   Net (increase) in loans                                               (8 885 477)         (6 424 201)         (4 603 232)
   Origination of loans available for sale                               (3 431 800)         (3 502 050)         (3 156 275)
   Proceeds from sale of loans available for sale                         3 517 254           3 378 405           3 138 762
   Purchase of equipment                                                   (194 815)           (128 332)            (56 076)
   Proceeds from sale of other real estate                                  218 498                 - -                 - -
                                                                   ----------------    ----------------     ---------------
                Net cash (used in) investing activities            $    (10 405 180)   $     (6 866 843)    $    (4 635 980)
                                                                   ----------------    ----------------     ---------------

Cash Flows from Financing Activities
   Net increase in demand deposits, NOW accounts
     and savings accounts                                          $      1 774 085    $      2 383 106     $     1 075 894
   Net increase in certificates of deposit                                6 329 038           5 634 842           3 922 516
   Net proceeds from issuance of common stock                             2 539 038                 - -                 - -
   Principal payments on capital lease obligations                          (32 036)            (26 516)            (14 931)
   Principal payments on mortgage payable                                  (507 134)            (22 234)            (20 632)
   Acquisition of common stock                                              (46 252)                - -                 - -
                                                                   ----------------    ----------------     ---------------
                Net cash provided by financing activities          $     10 056 739    $      7 969 198     $     4 962 847
                                                                   ----------------    ----------------     ---------------
</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>
<TABLE>
<CAPTION>
<S> <C>


                                                  MARATHON FINANCIAL CORPORATION

                                               Consolidated Statements of Cash Flows
                                                            (Continued)
                                           Years Ended December 31, 1996, 1995 and 1994




                                                                         1996                1995                 1994
                                                                   ----------------    ----------------     ----------

              Increase in cash and
                cash equivalents                                   $        645 558    $      1 791 380     $       706 546

Cash and Cash Equivalents
   Beginning                                                              3 856 876           2 065 496           1 358 950
                                                                   ----------------    ----------------     ---------------

   Ending                                                          $      4 502 434    $      3 856 876     $     2 065 496
                                                                   ================    ================     ===============

Supplemental Disclosures of Cash Flow
  Information
    Cash payments for:
      Interest                                                     $      1 593 040    $      1 327 056     $       992 179
                                                                   ================    ================     ===============

      Income taxes                                                 $          4 153    $            - -     $           - -
                                                                   ================    ================     ===============

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

      Issuance of common stock                                     $            - -    $        138 279     $        50 185
                                                                   ================    ================     ===============

      Property and equipment acquired
         under capital lease obligations                           $        238 088    $         21 395     $       129 652
                                                                   ================    ================     ===============

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

      Unrealized gain (loss) on securities
         available for sale                                        $         (7 910)   $         16 449     $        (8 032)
                                                                   ================    ================     ===============

</TABLE>

See Notes to Consolidated Financial Statements.


<PAGE>


                   Notes to Consolidated Financial Statements




                         MARATHON FINANCIAL CORPORATION

                   Notes to Consolidated Financial Statements





Note 1.       Nature of Banking Activities and Significant Accounting Policies

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

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

                 Principles of Consolidation

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

                 Securities

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

                    a. Securities Held to Maturity

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

                    b. Securities Available for Sale

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


<PAGE>


                   Notes to Consolidated Financial Statements





                    c. Trading Securities

                       Trading  securities,  which  are  generally  held for the
                       short term in anticipation  of market gains,  are carried
                       at fair value.  Realized and unrealized  gains and losses
                       on trading account assets are included in interest income
                       on trading  account  securities.  The  Corporation had no
                       trading securities at December 31, 1996 and 1995.

                 Derivative Financial Instruments

                    In October, 1994, FASB No. 119, "Disclosure about Derivative
                    Financial   Instruments   and  Fair   Value   of   Financial
                    Instruments" was issued. It requires various disclosures for
                    derivative financial instruments which are futures, forward,
                    swap, or option  contract,  or other  financial  instruments
                    with similar characteristics.  The Corporation does not have
                    any derivative  financial  instruments as defined under this
                    statement.

                 Loans

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

                    On January 1, 1995,  the  Corporation  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. The Corporation had no
                    loans subject to FASB 114 at December 31, 1996 and 1995.


<PAGE>


                   Notes to Consolidated Financial Statements




                    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.

                 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

                    Earnings per share of common stock are based on the weighted
                    average number of common shares outstanding during each year
                    after  giving  retroactive  effect  to  the  stock  dividend
                    declared in 1995.

                    Weighted  average number of common shares  outstanding  were
                    1,442,478,  1,198,837  and  1,072,424  for the  years  ended
                    December 31, 1996, 1995 and 1994, respectively.


<PAGE>


                   Notes to Consolidated Financial Statements




                 Income Taxes

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

                 Cash and Cash Equivalents

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

                 Organization Costs

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

                 Loan Fees and Costs

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

                 Advertising

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

                 Use of Estimates

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


<PAGE>


                   Notes to Consolidated Financial Statements




Note 2.       Securities

              The amortized cost and fair value of the securities  available for
              sale as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                         Gross            Gross
                                                     Amortized         Unrealized        Unrealized          Fair
                                                       Cost              Gains            (Losses)            Value
                                                       ----              -----            --------            -----
                                                                                    1996
                                                 ----------------------------------------------------------------------
              U.S. Treasury securities
                 and obligations of U.S.
                 government corporations
                 and agencies                    $    1 346 663     $        5 381    $      (6 860)     $    1 345 184

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

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


                                                                                      1995
                                                 ----------------------------------------------------------------------
              Obligations of U.S.
                 government corporations
                 and agencies                    $      447 801     $        6 636    $          - -     $      454 437

              Mortgage-backed securities                 38 639              1 781               - -             40 420

              Other                                     278 650                - -               - -            278 650
                                                 --------------     --------------    --------------     --------------
                                                 $      765 090     $        8 417    $          - -     $      773 507
                                                 ==============     ==============    ==============     ==============
</TABLE>

              The amortized cost and fair value of the securities  available for
              sale as of December 31, 1996, by contractual  maturity,  are shown
              below. Expected maturities may differ from contractual  maturities
              because mortgages underlying the mortgage-backed securities may be
              called  or  prepaid  without  any  penalties.   Therefore,   these
              securities  are not  included in the  maturity  categories  in the
              maturity summary.
<TABLE>
<CAPTION>
<S> <C>
                                                                        Amortized           Fair
                                                                         Cost               Value
                                                                         ----               -----

                 Due in one year or less                              $   248 598       $    250 390
                 Due after one year through five years                    848 012            846 357
                 Due after five years through ten years                   250 053            248 437
                 Mortgage-backed securities                                34 930             36 916
                 Other                                                    297 850            297 850
                                                                  ---------------       ------------
                                                                  $     1 679 443       $  1 679 950
                                                                  ===============       ============
</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements






              The  amortized  cost and fair  value of  securities  being held to
              maturity as of December 31, 1996 and 1995, are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                          Gross            Gross
                                                      Amortized         Unrealized        Unrealized          Fair
                                                       Cost              Gains            (Losses)            Value
                                                       ----              -----            --------            -----
                                                                                  1996
                                                 ----------------------------------------------------------------------
              Obligations of U.S.
                 government corporations
                 and agencies                    $    1 292 094     $          463    $        (984)     $    1 291 573

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

              Corporate securities                       99 952                 48              - -             100 000

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


                                                                                  1995
                                                 ----------------------------------------------------------------------
              U.S. Treasury securities
                 and obligations of U.S.
                 government corporations
                 and agencies                    $      649 946     $           54    $      (2 625)     $      647 375

              Obligations of state and
                 political subdivisions                 150 000             10 590              - -             160 590

              Corporate securities                       99 819                181              - -             100 000

              Mortgage-backed securities                 26 200                430              - -              26 630
                                                 --------------     --------------    -------------      --------------
                                                 $      925 965     $       11 255    $      (2 625)     $      934 595
                                                 ==============     ==============    =============      ==============
</TABLE>

              The amortized cost and fair value of the securities  being held to
              maturity as of December 31, 1996,  by  contractual  maturity,  are
              shown  below.  Expected  maturities  may differ  from  contractual
              maturities   because  the  corporate   securities   and  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.


<PAGE>


                   Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
<S> <C>



                                                                          Amortized           Fair
                                                                           Cost               Value
                                                                           ----               -----

                 Due in one year or less                             $      993 899     $       993 790
                 Due after one year through five years                      298 195             297 783
                 Due after five years through ten years                     251 227             258 165
                 Corporate securities                                        99 952             100 000
                 Mortgage-backed securities                                   7 986               8 002
                                                                     --------------       -------------
                                                                     $    1 651 259       $   1 657 740
                                                                     ==============       =============
</TABLE>

              Proceeds  from  maturities,   calls  and  principal   payments  of
              securities  available  for sale  during  1996,  1995 and 1994 were
              $205,004,  $4,901 and  $23,648.  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 1996, 1995 and 1994 were
              $568,892,  $21,240 and $800,362.  There were no realized  gains or
              realized losses recognized on these  transactions  during 1996 and
              1995. Gross realized gains of $19,125 were recognized in 1994.

              Securities  having  a book  value  of  $647,020  and  $702,448  at
              December 31, 1996 and 1995 were pledged to secure public  deposits
              and for other purposes required by law.


Note 3.       Loans and Related Party Transactions

              The loan  portfolio as of December 31, 1996 and 1995,  is composed
of the following:
<TABLE>
<CAPTION>
<S> <C>
                                                                        1996                 1995
                                                                  ---------------       --------------

                    Commercial                                    $    18 719 817       $   13 315 029
                    Real estate - mortgage                              6 882 004            6 133 400
                    Real estate - construction                          3 886 066            3 637 433
                    Installment loans to individuals                    8 424 170            6 081 297
                                                                  ---------------       --------------
                                                                  $    37 912 057       $   29 167 159
                    Less allowance for loan losses                        503 014              393 139
                                                                  ---------------       --------------
                                                                  $    37 409 043       $   28 774 020
                                                                  ===============       ==============
</TABLE>

              The  Corporation  has  had,  and  may be  expected  to have in the
              future,  banking  transactions  in the ordinary course of business
              with directors,  executive officers,  their immediate families and
              affiliated  companies  in which  they are  principal  stockholders
              (commonly  referred  to as related  parties),  on the same  terms,
              including  interest rates and collateral,  as those  prevailing at
              the time for comparable  transactions  with others.  These persons
              and  firms  (exclusive  of loans to any such  person  which in the
              aggregate did not exceed $60,000) were indebted to the Corporation
              for loans totaling  $1,736,231 and $1,174,885 at December 31, 1996
              and 1995,  respectively.  During 1996,  total principal  additions
              were $1,426,807 and total principal payments were $865,461.


<PAGE>


                   Notes to Consolidated Financial Statements






Note 4.       Allowance for Loan Losses

              Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                                                   December 31,
                                                                1996                1995                1994
                                                           -------------       --------------      -------------

                 Balance, beginning                        $     393 139       $      299 203      $     224 758
                   Provision for loan losses                     165 000              113 419            151 533
                   Recoveries                                      6 007               11 185             12 744
                   Loan losses charged to
                    the allowance                                (61 132)             (30 668)           (89 832)
                                                           -------------       --------------      -------------
                 Balance, ending                           $     503 014       $      393 139      $     299 203
                                                           =============       ==============      =============
</TABLE>

              Nonaccrual loans excluded from impaired loan disclosure under FASB
              114 amounted to $71,515 and $45,445 at December 31, 1996 and 1995,
              respectively.  If interest on these loans had been  accrued,  such
              income  would  have  approximated  $6,638  and $3,679 for 1996 and
              1995, respectively.


Note 5.       Bank Premises and Equipment, Net

              Bank  premises  and  equipment  as of  December  31, 1996 and 1995
consists of the following:
<TABLE>
<CAPTION>
<S> <C>
                                                                                     1996               1995
                                                                               ---------------     --------------

                 Bank premises                                                 $     1 297 361     $    1 314 922
                 Furniture and equipment                                               722 602            553 837
                 Capital leases - property and equipment                               389 135            151 047
                 Construction in progress                                               44 774                - -
                                                                               ---------------     --------------
                                                                               $     2 453 872     $    2 019 806
                 Less accumulated depreciation                                         866 530            731 343
                                                                               ---------------     --------------
                                                                               $     1 587 342     $    1 288 463
                                                                               ===============     ==============
</TABLE>

              Depreciation  included in operating  expense for 1996,  1995,  and
              1994 was $103,815, $103,366, and $73,710, respectively.


<PAGE>


                   Notes to Consolidated Financial Statements





Note 6.       Deposits

              Deposits  outstanding at December 31, 1996,  1995 and 1994 and the
              related  interest expense for the years then ended, are summarized
              as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                                                          Year Ended
                                                                   December 31, 1996                    December 31, 1995
                                                      Amount            Expense            Amount            Expense
                                                ---------------    ---------------    --------------    ---------------
                 Noninterest bearing            $     6 229 844    $           - -    $    5 261 411    $           - -
                                                ---------------    ---------------    --------------    ---------------

                 Interest bearing:
                   Interest checking            $     2 312 261    $        64 874    $    1 941 150    $        48 524
                   Money market accounts              3 659 235            133 054         3 307 328             92 892
                   Regular savings                    5 063 586            159 434         4 980 952            157 793
                   Certificates of deposit:
                     Less than $100,000              18 712 080            975 718        13 870 161            738 106
                     $100,000 and more                4 748 281            233 143         3 261 162            165 828
                                                ---------------    ---------------    --------------    ---------------
                       Total interest bearing   $    34 495 443    $     1 566 223    $   27 360 753    $     1 203 143
                                                ---------------    ---------------    --------------    ---------------

                       Total deposits           $    40 725 287    $     1 566 223    $   32 622 164    $     1 203 143
                                                ===============    ===============    ==============    ===============

                                                                      Year Ended
                                                                   December 31, 1994
                                                      Amount            Expense
                                                ---------------    ---------------

                 Noninterest bearing            $     3 759 042    $           - -
                                                ---------------    ---------------

                 Interest bearing:
                   Interest checking            $     1 731 740    $        38 974
                   Money market accounts              2 366 898             86 388
                   Regular savings                    5 250 054            211 531
                   Certificates of deposit:
                     Less than $100,000               9 496 559            418 561
                     $100,000 and more                1 999 923             46 160
                                                ---------------    ---------------
                       Total interest bearing   $    20 845 174    $       801 614
                                                ---------------    ---------------

                       Total deposits           $    24 604 216    $       801 614
                                                ===============    ===============
</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements




Note 7.       Income Taxes

              Net deferred tax assets consist of the following  components as of
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
<S> <C>
                                                                         1996              1995
                                                                   --------------     -------------
                    Deferred tax assets:
                       Net operating loss carryforward             $    1 036 066     $   1 291 762
                       Writedown of other real estate                       2 720            14 478
                       Less valuation allowance                          (817 629)       (1 206 820)
                                                                   ---------------    -------------
                                                                   $      221 157     $      99 420
                                                                   --------------     -------------
                    Deferred tax liabilities,
                       allowance for loan losses                   $       71 157     $      99 420
                                                                   --------------     -------------

                                                                   $      150 000     $         - -
                                                                   ==============     =============

                 The provision  for income taxes  charged to operations  for the
                 years ended December 31, 1996,  1995 and 1994,  consists of the
                 following:
<CAPTION>
                                                                         1996              1995               1994
                                                                   --------------     -------------     --------------

                    Current tax expense                            $        4 266     $         - -     $          - -
                    Deferred tax expense                                  239 191           142 895            100 703
                    Change in valuation allowance                        (389 191)         (142 895)          (100 703)
                                                                   --------------     -------------     --------------
                                                                   $     (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, 1996,  1995 and
                 1994, due to the following:
<CAPTION>
                                                                         1996              1995               1994
                                                                   --------------     -------------     --------------

                    Computed "expected" tax expense                $      235 854     $     142 984     $      108 282
                    Increase (decrease) in income taxes
                      resulting from:
                        Reduction of valuation allowance                 (389 191)         (142 895)          (100 703)
                        Reduced tax due to marginal tax rates                 - -               - -               (826)
                        Other                                               7 603               (89)            (6 753)
                                                                   --------------     -------------     --------------
                                                                   $     (145 734)    $         - -     $          - -
                                                                   ==============     =============     ==============
</TABLE>

                 Under  the  provisions  of  the  Internal   Revenue  Code,  the
                 Corporation  has  available  approximately  $3,039,720  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>


                   Notes to Consolidated Financial Statements





Note 8.       Leases

              Capital Leases

                 During  the year  ended  December  31,  1996,  the  Corporation
                 entered into a lease agreement on a branch facility, located on
                 land  leased  from a  partnership  of which  the  Corporation's
                 president  is a partner.  The  liability  is payable in monthly
                 installments of $1,991 through May 31, 2016 at an interest rate
                 of 8%.

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

                 The balance of the liability  under capital  leases at December
                 31, 1996 in the amount of $315,652 represents the present value
                 of the balance due in future years for lease rentals discounted
                 at the respective  interest rates.  Since the term of the lease
                 is  approximately  the same as the estimated useful life of the
                 assets,  and the  present  value of the  future  minimum  lease
                 payments at the  beginning of the lease  approximated  the fair
                 value  of the  leased  assets  at that  date,  the  leases  are
                 considered to be capital leases and have been so recorded.

                 The  following  is a schedule  by years of the  future  minimum
                 lease  payments  under the  capital  leases  together  with the
                 present value of the net minimum lease  payments as of December
                 31, 1996:

                    Years ending December 31:

                     1997                                        $        79 378
                     1998                                                 79 378
                     1999                                                 49 719
                     2000                                                 23 898
                     2001                                                 23 898
                     Later years                                         344 529
                                                                 ---------------
                       Total minimum lease payments              $       600 800
                     Less estimated executory costs
                       (such as maintenance) included in
                       the total minimum lease payments                   48 530
                                                                 ---------------
                     Net minimum lease payments                  $       552 270
                     Less the amount representing interest               236 618
                                                                 ---------------
                        Present value of net minimum
                          lease payments                         $       315 652
                                                                   =============


<PAGE>


                   Notes to Consolidated Financial Statements




              Lease Commitments and Total Rental Expense

                 During  the year  ended  December  31,  1996,  the  Corporation
                 entered into a twenty-year  operating  lease with a partnership
                 of which  the  Corporation's  president  is a  partner  for the
                 rental of a branch location and improvements. The lease expires
                 on June 30, 2016 and has two  five-year  renewal  options.  The
                 lease  provides that the  Corporation  pay all property  taxes,
                 insurance  and  maintenance  costs  plus an  annual  rental  of
                 $22,256 for the initial lease beginning July 1, 1996. The total
                 minimum lease  commitment at December 31, 1996 under this lease
                 is $433,992.

                 During  the year  ended  December  31,  1994,  the  Corporation
                 entered  into a five-year  operating  lease for the rental of a
                 branch  location.  The lease  expires on March 30, 2000 and has
                 two  five-year  renewal  options.  The lease  provides that the
                 Corporation pay all property  taxes,  insurance and maintenance
                 plus an annual  rental of $12,000 for the initial  lease period
                 commencing   on  April  1,  1995.   The  total   minimum  lease
                 commitments at December 31, 1996 under this lease is $39,000.

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

                                    1997                   $        34 256
                                    1998                            34 256
                                    1999                            34 256
                                    2000                            28 256
                                    2001                            22 256
                                    Later years                    319 712
                                                           ---------------
                                                           $       472 992
                                                           ===============

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

              Fixed Equipment on Land Leased with Related Parties

                 Fixed equipment with a depreciated cost at December 31, 1996 of
                 $7,790 is located on land  leased from a  partnership  of which
                 the Corporation's  president is a partner. The lease expires on
                 May 31, 2016.


Note 9.       Commitments and Contingent Liabilities

              In the  normal  course of  business,  there are other  outstanding
              commitments and contingent  liabilities which are not reflected in
              the accompanying financial statements. See Note 12 with respect to
              financial instruments with off-balance-sheet risk.


<PAGE>


                   Notes to Consolidated Financial Statements




              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, 1996
              and 1995, the aggregate amounts of daily average required balances
              were approximately $84,000 and $65,000, respectively.


Note 10.      Dividend Restrictions

              Federal and state  regulations limit the amount of dividends which
              the  Corporation  can pay without  obtaining  prior  approval and,
              additionally,  federal  regulations  require that the  Corporation
              maintain  minimum capital  requirements.  As of December 31, 1996,
              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 1996 and 1995.  On December  19,
              1995,  the Board of Directors  declared a stock  dividend equal to
              15% of net income,  payable  February 8, 1996, to  stockholders of
              record  December  19, 1995.  On December  17,  1996,  the Board of
              Directors  declared  a cash  dividend  of $.06 per  share  payable
              January 27, 1997 to  shareholders  of record  December  27,  1996.
              These dividends have been reflected in the accompanying  financial
              statements.

              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, 1996, no unrestricted funds could be transferred from
              the banking  subsidiary to the parent  corporation,  without prior
              regulatory approval.


Note 11.      Other Expenses

              The principal  components of "Other  expenses" in the Consolidated
Statements of Income are:
<TABLE>
<CAPTION>
<S> <C>
                                                                         1996              1995               1994
                                                                   ---------------    --------------    ---------------

                 FDIC assessment                                   $         2 000    $       33 798    $        52 377
                 Other real estate valuation                                 8 000            42 581                - -
                 Marketing                                                  60 155            53 619             32 522
                 Stationery and supplies                                    52 208            48 225             30 486
                 Postage                                                    49 010            31 545             20 292
                 Directors fees                                             45 450            21 675             16 950
                 Other (includes no items in excess
                    of 1% of total revenue)                                449 695           318 603            349 947
                                                                   ---------------    --------------    ---------------
                                                                   $       666 518    $      550 046    $       502 574
                                                                   ===============    ==============    ===============
</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements




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

              The   Corporation   is  party  to   financial   instruments   with
              off-balance-sheet  risk in the normal  course of  business to meet
              the financing needs of its customers.  These financial instruments
              include  commitments  to extend  credit  and  standby  letters  of
              credit. Those instruments involve, to varying degrees, elements of
              credit and interest  rate risk in excess of the amount  recognized
              in the balance  sheet.  The contract or notional  amounts of those
              instruments  reflect the extent of involvement the Corporation has
              in particular classes of financial instruments.

              The  Corporation's  exposure  to  credit  loss  in  the  event  of
              nonperformance by the other party to the financial  instrument for
              commitments  to extend  credit  and  standby  letters of credit is
              represented by the contractual  amount of those  instruments.  The
              Corporation  uses the same credit  policies in making  commitments
              and  conditional  obligations  as  it  does  for  on-balance-sheet
              instruments.

              A summary of the contract or notional amount of the  Corporation's
              exposure to  off-balance-sheet  risk as of  December  31, 1996 and
              1995 is as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                         1996              1995
                                                                   ---------------    -------------
                    Financial instruments whose contract
                      amounts  represent credit risk:
                          Commitments to extend credit             $     4 331 307    $    3 698 658
                          Standby letters of credit                        293 581            76 812
</TABLE>

              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,  1996,  varies  from 0 percent to 100  percent;  the
              average amount collateralized is 30 percent.

              The Corporation has cash accounts in other  commercial  banks. The
              amount on  deposit  at two of these  banks at  December  31,  1996
              exceeded the  insurance  limits of the Federal  Deposit  Insurance
              Corporation by approximately $733,246.


<PAGE>


                   Notes to Consolidated Financial Statements




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, 1996 and 1995 were $12,173 and $9,601. No
              contributions were made for the year ended December 31, 1994.


Note 14.      Disclosures About Fair Value of Financial Instruments

              The following  methods and  assumptions  were used to estimate the
              fair value of each class of financial  instruments for which it is
              practicable to estimate that value:

                 Cash and Short-Term Investments

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

                 Securities

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

                 Loan Receivables

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

                 Deposit Liabilities

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

                 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.


<PAGE>


                   Notes to Consolidated Financial Statements




                    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, 1996 and 1995,  the  difference  between the
                    carrying  amounts  and fair values of loan  commitments  and
                    stand-by letters of credit were immaterial.

                    The  estimated  fair values of the  Corporation's  financial
instruments are as follows:
<TABLE>
<CAPTION>
<S> <C>
                                                                  1996                                   1995
                                              --------------------------------------------------------------------------
                                                   Carrying            Fair                Carrying           Fair
                                                    Amount             Value                Amount            Value
                                              --------------      --------------     --------------      ---------------
                                                          (Thousands)                              (Thousands)
               Financial assets:
                 Cash and short-term
                   investments                $        4 502      $        4 502     $        3 857      $         3 857
                 Securities                            3 331               3 338              1 699                1 708
                 Loans                                37 912              38 286             29 167               29 716
                 Less:  allowance for
                  loan losses                           (503)                - -               (393)                 - -
                                              --------------      --------------     --------------      ---------------
                    Total financial assets    $       45 242      $       46 126     $       34 330      $        35 281
                                              ==============      ==============     ==============      ===============

               Financial liabilities:
                  Deposits                    $       40 725      $       40 892     $       32 622      $        33 136
                  Long-term debt                         316                 402                617                  634
                                              --------------      --------------     --------------      ---------------
                    Total financial
                       liabilities            $       41 041      $       41 294     $       33 239      $        33 770
                                              ==============      ==============     ==============      ===============
</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  offbalance-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, 1996, that the Corporation meets all capital adequacy
              requirements to which it is subject.


<PAGE>


                   Notes to Consolidated Financial Statements




              As of December 31,  1996,  the most recent  notification  from the
              Federal   Reserve  Bank   categorized   the  Corporation  as  well
              capitalized  under the regulatory  framework for prompt corrective
              action.  To be categorized as well  capitalized,  the  Corporation
              must maintain  minimum total  risk-based,  Tier 1 risk-based,  and
              Tier 1 leverage ratios as set forth in the table.

              The  Corporation's  actual  capital  amounts  and  ratios are also
              presented in the table.
<TABLE>
<CAPTION>
<S> <C>
                                                                                                              To Be Well
                                                                                                          Capitalized Under
                                                                               For Capital                Prompt Corrective
                                                 Actual                     Adequacy Purposes             Action Provisions
                                          -------------------              --------------------          ---------------------
                                          Amount        Ratio              Amount         Ratio          Amount          Ratio
                                          ------        -----              ------         -----          ------          -----
                                                                       (Amount in Thousands)
As of December 31, 1996:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated                    $     6 359        16.97%       >=$    2 998    >=    8.00%                   N/A
      Marathon Bank                   $     6 352        16.95%       >=$    2 998    >=    8.00%   >=$     3 748       >=   10.00%
  Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated                    $     5 890        15.72%       >=$    1 499    >=    4.00%                   N/A
      Marathon Bank                   $     5 883        15.70%       >=$    1 499    >=    4.00%   >=$     2 249       >=    6.00%
  Tier 1 Capital (to
    Average Assets)
      Consolidated                    $     5 890        12.51%       >=$    1 883    >=    4.00%                   N/A
      Marathon Bank                   $     5 883        12.50%       >=$    1 883    >=    4.00%   >=$     2 353       >=    5.00%

As of December 31, 1995:
  Total Capital (to Risk
    Weighted Assets)
      Consolidated                    $     3 009        10.60%       >=$    2 271    >=    8.00%                   N/A
      Marathon Bank                   $     3 009        10.60%       >=$    2 271    >=    8.00%   >=$     2 839       >=   10.00%
  Tier 1 Capital (to Risk
    Weighted Assets)
      Consolidated                    $     2 669         9.40%       >=$    1 136    >=    4.00%                   N/A
      Marathon Bank                   $     2 669         9.40%       >=$    1 136    >=    4.00%   >=$     1 703       >=    6.00%
  Tier 1 Capital (to
    Average Assets)
      Consolidated                    $     2 669         8.32%       >=$    1 284    >=    4.00%                   N/A
      Marathon Bank                   $     2 669         8.32%       >=$    1 283    >=    4.00%   >=$     1 604       >=    5.00%
</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements




Note 16.       Stock Options and Warrants Outstanding

               On June 15,  1992  the  Corporation  issued  one  stock  purchase
               warrant  ("warrant")  for each share of preferred stock purchased
               in a private  offering.  A total of 200,688 warrants were issued.
               Warrants were immediately  transferable and entitle the holder to
               purchase  one share of common stock at a price of $5.00 per share
               until June 30, 1997. As of December 31, 1996 all 200,688 warrants
               were outstanding.

               The   Corporation   has  granted   1,500  stock  options  to  the
               Corporation's  chief executive officer pursuant to his employment
               agreement with the Corporation. The stock options are exercisable
               at $5.00 per share.  As of  December  31,  1996,  all 1,500 stock
               options were outstanding.

               In August 1996,  the  Corporation's  Board of Directors  approved
               creation of the 1996  Long-Term  Incentive  Plan,  which provides
               stock options to the employees and directors of the  Corporation.
               Awards have been approved under such plan in the aggregate amount
               of  141,875   shares,   68,125  of  which  will  be   exercisable
               immediately upon shareholder approval of the plan.


Note 17.       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>


                   Notes to Consolidated Financial Statements




Note 18.       Parent Corporation Only Financial Statements
<TABLE>
<CAPTION>
<S> <C>

                                             MARATHON FINANCIAL CORPORATION
                                                (Parent Corporation Only)

                                                     Balance Sheets
                                               December 31, 1996 and 1995


                                                                                   1996                 1995
                                                                              --------------       --------------
               Assets
                  Cash on deposit with subsidiary bank                        $      119 610       $          370
                  Prepaid expenses                                                       283                  578
                  Investment in capital stock of subsidiary                        5 883 516            2 681 486
                                                                              --------------       --------------

                     Total assets                                             $    6 003 409       $    2 682 434
                                                                              ==============       ==============

               Liabilities
                   Accounts payable                                           $        1 362       $        4 684
                   Dividends payable                                                 111 810                  - -
                                                                              --------------       --------------
                                                                              $      113 172       $        4 684
                                                                              --------------       --------------

               Stockholders' Equity
                  Preferred stock                                             $          - -       $          - -
                  Common stock                                                     1 863 495            1 306 303
                  Capital surplus                                                  7 045 502            5 109 908
                  Retained earnings (deficit)                                     (3 019 267)          (3 746 878)
                  Unrealized gain on securities
                     available for sale                                                  507                8 417
                                                                              --------------       --------------
                     Total stockholders' equity                               $    5 890 237       $    2 677 750
                                                                              --------------       --------------

                     Total liabilities and stockholders'
                              equity                                          $    6 003 409       $    2 682 434
                                                                              ==============       ==============
</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
<S> <C>


                                             MARATHON FINANCIAL CORPORATION
                                                (Parent Corporation Only)

                                                  Statements of Income
                                      Years Ended December 31, 1996, 1995 and 1994



                                                                  1996                1995                1994
                                                             -------------       --------------      -------------

               Income, miscellaneous                         $        6 000      $          - -      $         - -
                                                             --------------      --------------      -------------

               Expenses:
                  Amortization                               $          - -      $        5 064      $      12 072
                  Other                                               1 248               1 110                849
                                                             --------------      --------------      -------------
                  Total expenses                             $        1 248      $        6 174       $     12 921
                                                             --------------      --------------      -------------

                  Income (loss) before
                        undistributed income
                        of subsidiaries                      $        4 752      $       (6 174)     $     (12 921)
                                                             --------------      --------------      -------------

                  Undistributed income of
                    subsidiary                               $      834 669      $      426 715      $     331 397
                                                             --------------      --------------      -------------

                  Net income                                 $      839 421      $      420 541      $     318 476
                                                             ==============      ==============      =============
</TABLE>


<PAGE>


                   Notes to Consolidated Financial Statements

<TABLE>
<CAPTION>
<S> <C>


                                             MARATHON FINANCIAL CORPORATION
                                                (Parent Corporation Only)

                                                Statements of Cash Flows
                                      Years Ended December 31, 1996, 1995 and 1994



                                                                  1996                1995                1994
                                                             -------------       --------------      -------------
Cash Flows from Operating Activities
  Net income                                                 $     839 421       $      420 541      $     318 476
  Adjustments to reconcile net income to net cash
    provided by (used in) operating activities:
      Amortization                                                     - -                5 064             12 071
      Undistributed income of subsidiary                          (834 669)            (426 715)          (331 397)
      (Increase) decrease in prepaid expenses                          295                 (365)               - -
      Increase (decrease) in accounts payable                       (3 322)               1 475                - -
                                                             -------------       --------------      -------------
         Net cash provided by (used in)
                  operating activities                       $       1 725       $          - -      $        (850)
                                                             -------------       --------------      -------------

Cash Flows from Financing Activities
  Net proceeds from issuance of common stock                 $   2 539 038       $          - -      $         - -
  Acquisition of common stock                                      (46 252)                 - -                - -
  Transfer of capital to subsidiary                             (2 375 271)                 - -                - -
                                                             -------------       --------------      -------------

               Net cash provided by
                 financing activities                        $     117 515       $          - -      $         - -
                                                             -------------       --------------      -------------

         Increase (decrease) in cash
                  and cash equivalents                       $     119 240       $          - -      $        (850)

Cash and Cash Equivalents
  Beginning                                                            370                  370              1 220
                                                             -------------       --------------      -------------

  Ending                                                     $     119 610       $          370      $         370
                                                             =============       ==============      =============

Supplemental Schedule of Noncash
  Investing and Financing Activities
    Issuance of common stock                                 $         - -       $      138 279      $      50 185
                                                             =============       ==============      =============

    Unrealized gain (loss) on securities
      available for sale                                     $      (7 910)      $       16 449      $      (8 032)
                                                             =============       ==============      =============

    Conversion of preferred stock to
      common stock                                           $         - -       $    1 003 440      $         - -
                                                             =============       ==============      =============
</TABLE>