U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20459
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarter Ended: Commission File No.:
September 30, 1998 0-22836
SOUTHERN FINANCIAL BANCORP, INC.
Virginia 54-1779978
- ------------------------- ---------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
37 East Main Street 20186
Warrenton, Virginia
-------------------------------------- ----------------------
(address of principal executive office) (Zip Code)
Registrant's Telephone Number, including area code: (540) 349-3900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO _____
As of October 31, 1998, there were 1,603,220 shares of the registrant's Common
Stock outstanding.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1998
TABLE OF CONTENTS
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
as of September 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1998 and 1997
(Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Nine Months Ended September 30, 1998 and
1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7 - 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9 - 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
PART III. SIGNATURES 15
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
September 30,
1998 December 31,
(Unaudited) 1997
------------- -------------
Assets
Cash and due from banks $ 4,113,441 $ 4,559,266
Overnight earning deposits 6,082,598 545,470
Investment securities, available-for-sale 45,246,203 4,692,758
Investment securities, held-to-maturity 60,366,270 80,468,952
Loans held for sale 587,000 1,414,445
Loans receivable, net 127,467,086 128,958,190
Federal Home Loan Bank stock, at cost 1,082,500 930,500
Premises and equipment, net 2,388,383 2,398,541
Other assets 3,783,081 2,629,813
------------- ------------
Total assets $ 251,116,562 $ 226,597,935
============== ==============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 226,609,511 $ 202,200,249
Advances from Federal Home Loan Bank - 4,000,000
Other liabilities 4,168,868 1,855,085
------------- ------------
Total liabilities 230,778,379 208,055,334
------------- ------------
Commitments
Stockholders' equity:
Preferred stock 136 156
Common stock 16,331 16,216
Capital in excess of par value 15,648,527 15,556,882
Retained earnings 4,935,961 3,406,501
Accumulated other comprehensive income 208,315 33,933
Treasury stock, at cost (471,087) (471,087)
------------- ------------
Total stockholders' equity 20,338,183 18,542,601
------------- ------------
Total liabilities and stockholders' equity $ 251,116,562 $ 226,597,935
============== -==============
The accompanying notes are an integral part of these financial statements.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------------ ------------ ---------------- -------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 3,071,959 $ 3,023,761 $ 9,282,779 $ 8,409,895
Investment securities 1,613,003 1,418,003 4,584,017 3,947,916
------------------ ------------ ---------------- -------------
Total interest income 4,684,962 4,441,764 13,866,796 12,357,811
------------------ ------------ ---------------- -------------
Interest expense:
Deposits 2,519,203 2,284,137 7,420,245 6,277,235
Borrowings 80,431 76,772 163,538 246,674
------------------ ------------ ---------------- -------------
Total interest expense 2,599,634 2,360,909 7,583,783 6,523,909
------------------ ------------ ---------------- -------------
Net interest income 2,085,328 2,080,855 6,283,013 5,833,902
Provision for loan losses 225,000 255,000 675,000 560,000
------------------ ------------ ---------------- -------------
Net interest income after provision for loan losses 1,860,328 1,825,855 5,608,013 5,273,902
------------------ ------------ ---------------- -------------
Other income:
Gain on sale of loans 266,618 48,151 486,296 145,981
Fee income 369,817 380,540 1,049,814 1,043,253
Other 31,057 34,228 59,028 77,266
------------------ ------------ ---------------- -------------
Total other income 667,492 462,919 1,595,138 1,266,500
------------------ ------------ ---------------- -------------
Other expense:
Employee compensation and benefits 740,063 632,369 2,111,088 1,857,886
Premises and equipment 287,547 322,608 807,943 870,258
Data processing expense 174,989 181,906 523,519 536,876
Deposit insurance assessments 31,818 27,490 92,903 77,828
Advertising 43,556 57,120 124,931 149,878
Other 293,133 230,034 808,265 659,978
------------------ ------------ ---------------- -------------
Total other expense 1,571,106 1,451,527 4,468,649 4,152,704
------------------ ------------ ---------------- -------------
Income before income taxes 956,714 837,247 2,734,502 2,387,698
Provision for income taxes 298,700 269,500 772,200 761,500
================== ============= ================ ============
Net income $ 658,014 $ 567,747 $ 1,962,302 $ 1,626,198
================== ============= ================ ============
Earnings per common share:
Basic* $ 0.41 $ 0.36 $ 1.22 $ 1.03
Diluted* 0.38 0.34 1.14 0.96
Weighted average shares outstanding:
Basic* 1,602,066 1,587,153 1,595,993 1,572,865
Diluted* 1,717,428 1,669,150 1,715,787 1,694,722
</TABLE>
*Prior period numbers have been restated to conform with SFAS 128, "Earnings per
Share."
The accompanying notes are an integral part of these financial statements
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
---------- ----------- -------------- -------------
<S> <C> <C> <C> <C>
Net income $ 658,014 $ 567,747 $1,962,302 $ 1,626,198
Other comprehensive income, net of tax:
Unrealized holding gain on securities 237,321 17,455 174,382 36,501
---------- ----------- -------------- -------------
Comprehensive income $ 895,335 $ 585,202 $2,136,684 $ 1,662,699
========= ========== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
1998 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,962,302 $ 1,626,198
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 693,002 439,505
Provision for loan losses 675,000 560,000
Provision for deferred income tax (benefit) 320,175 8,992
Gain on sale of loans (486,296) (145,981)
Gain on sale of securities (22,716) -
Amortization of deferred loan fees (477,552) (177,101)
Net funding of loans held for sale 1,313,741 58,049
Increase in other assets (1,246,068) 235,741
Increase in other liabilities 2,235,394 335,813
------------- ------------
Net cash provided by operating activities 4,966,982 2,941,216
------------- ------------
Cash flows from investing activities:
(Increase) decrease in loans receivable 1,117,652 (15,217,497)
Purchase of investment securities, held-to-maturity (1,959,970) (29,446,224)
Purchase of investment securities, available-for-sale (50,748,447) -
Sale of investment securities available-for-sale 6,702,750 -
Paydowns of investment securities 25,364,188 13,512,582
(Increase) decrease in overnight earning deposits, net (5,537,128) 1,723,710
Increase in premises and equipment, net (268,011) (947,720)
Increase in Federal Home Loan Bank stock (152,000) (62,900)
------------- ------------
Net cash used in investing activities (25,480,966) (30,438,049)
------------- ------------
Cash flows from financing activities:
Net increase in deposits 24,409,262 29,176,623
Decrease in advances from FHLB (4,000,000) (500,000)
Proceeds from stock options exercised 91,739 260,108
Dividends on preferred and common stock (432,842) (324,801)
------------- ------------
Net cash provided by financing activities 20,068,159 28,611,930
------------- ------------
Net increase (decrease) in cash and due from banks (445,825) 1,115,097
Cash and due from banks, beginning of period 4,559,266 4,004,149
------------- ------------
Cash and due from banks, end of period $ 4,113,441 $ 5,119,246
============== ============
</TABLE>
The accompanying notes are an integral part of these statements
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q, and, therefore, do
not include all information or footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. However, all adjustments which are, in
the opinion of management, necessary for a fair presentation have been included.
All adjustments are of a normal recurring nature. The results of operations for
the nine-month period ended September 30, 1998 are not necessarily indicative of
the results of the full year. These consolidated financial statements should be
read in conjunction with the consolidated financial statements and the notes
included in Southern Financial Bancorp, Inc.'s Annual Report for the year ended
December 31, 1997.
NOTE 2 - INVESTMENT SECURITIES
The following table sets forth the Bancorp's investment securities
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
September 30, 1998 December 31, 1997
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
-------------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
FHLMC preferred stock $ 3,807,585 $ 3,826,538 $ 3,865,985 $ 3,907,561
FHLMC MBS 11,919,254 12,035,418 - -
GNMA MBS 5,245,124 5,221,188 - -
FNMA MBS 16,282,418 16,359,399 782,186 785,197
Other MBS 2,005,000 2,006,875 - -
Obligations of counties and municipalities 4,682,087 4,779,885 - -
Corporate obligations 987,934 1,016,900 - -
---------------- ----------------- --------------- -----------------
$44,929,402 $45,246,203 $ 4,648,171 $ 4,692,758
================ ================= ================ =================
Held-to-maturity securities:
GNMA MBS $31,262,795 $31,173,935 $42,471,075 $42,657,909
FNMA MBS 21,448,253 21,641,655 27,075,234 27,186,191
FHLMC MBS 4,308,155 4,305,309 6,077,859 6,109,270
Collateralized mortgage obligations 1,387,507 1,401,297 4,202,852 4,202,559
Obligations of counties and municipalities 1,959,560 1,940,889 - -
FHLB zero-coupon notes - - 641,932 640,000
----------------- ----------------- --------------- -----------------
$60,366,270 $60,463,085 $80,468,952 $80,795,929
================= ================= =============== =================
</TABLE>
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ --------------
<S> <C> <C>
Mortgage:
Residential $ 26,623,102 $ 30,421,147
Nonresidential 63,799,019 57,160,286
Construction:
Residential 4,709,946 6,534,271
Nonresidential 8,189,181 13,160,542
Non-Mortgage:
Business 24,659,772 21,252,681
Consumer 2,415,897 3,092,938
------------ --------------
Total loans receivable 130,396,917 131,621,865
Less:
Unearned income, net 757,056 627,143
Allowance for loan losses 2,172,775 2,036,532
-------------- --------------
Loans receivable, net $127,467,086 $128,958,190
================ ===============
</TABLE>
The following sets forth information regarding the allowance for loan
losses:
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
9/30/98 9/30/97
------------------ -----------------
<S> <C> <C>
Allowance at beginning of period $ 2,036,532 $ 1,500,941
Provision for losses charged to income 675,000 560,000
Charge-offs (546,610) (299,171)
Recoveries 7,853 20,115
------------------ -----------------
Allowance at end of period $ 2,172,775 $ 1,781,885
================== =================
</TABLE>
NOTE 4 - SUBSEQUENT EVENT
Effective October 1, 1998, the Bancorp adopted Statement of Financial
Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS 133). Adoption of SFAS 133 had no cumulative effect on
earnings. Concurrent with this adoption the Bancorp reclassified certain
investment securities, consisting of mortgage-backed securities with original
maturities of 15 and 30 years, from the Held to Maturity category to the
Available for Sale category. These investments had a book value of $18.2 million
and a market value of $18.4 as of October 1, 1998, which increased Stockholders'
Equity by $151.5 thousand.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Financial Condition
Total assets of Southern Financial Bancorp, Inc. (the "Bancorp") at
September 30, 1998 were $251.1 million, an increase of $24.5 million, or 10.8%,
from total assets of $226.6 million at December 31, 1997. Total liabilities
increased by $22.7 million, or 10.9%, to $230.8 million at September 30, 1998
from $208.1 million at December 31, 1997.
The growth in total assets resulted primarily from increases of $20.5
million in investment securities and $5.5 million in overnight earning deposits
from December 31, 1997 to September 30, 1998.
Total loans receivable decreased by $1.5 million to $127.5 million at
September 30, 1998 from $129 million at December 31, 1997, as new loan
originations did not fully offset loan sales and prepayments of residential
mortgage loans during the period. In this period the Bancorp sold for the first
time the guaranteed portion of some of the Small Business Administration (SBA)
loans that it held in portfolio. These sales totaled $5.5 million. Residential
mortgage loans (permanent and construction) decreased $5.6 million, from $36.9
million at December 31, 1997, to $31.3 million at September 30, 1998, as lower
interest rates led to increased refinances. Non-residential construction
mortgage loans decreased by $4.9 million, or 37.8%, to $8.2 million at September
30, 1998, from $13.1 million at December 31, 1997. Non-residential permanent
mortgage loans increased by $6.6 million to $63.8 million at September 30, 1998,
from $57.2 million at December 31, 1997. Non-mortgage business loans increased
$3.4 million to $24.6 million at September 30, 1998, from $21.2 million at
December 31, 1997.
Investment securities available-for-sale increased from $4.7 million at
December 31, 1997, to $45.2 million at September 30, 1998. There were purchases
of $45 million of mortgage-backed securities, $4.7 million of obligations of
counties and municipalities, and $1 million of corporate obligations during the
nine months ended September 30, 1998, all of which were designated as
available-for-sale. There were sales of $6.7 million and repayments and
amortization of $3.5 million of investment securities available-for-sale during
the period.
Investment securities held-to-maturity decreased by $20.1 million, or 25%,
to $60.4 million at September 30, 1998, from $80.5 million at December 31, 1997.
This decrease resulted from $22.1 million in repayments and amortization during
the nine months ended September 30, 1998, partially offset by purchases of $2
million of obligations of counties and municipalities.
The increase in total assets was funded by an increase in customer
deposits of $24.4 million, or 12.1%, to $226.6 million at September 30, 1998
from $202.2 million at December 31, 1997.
Results of Operations
The Bancorp's principal sources of revenue are interest on loans, gains on
sales of loans, fees and service charges on loans, interest and dividends on
investment securities, and service charges on deposit accounts. Net income is
affected by interest on deposits and borrowings and operating expenses.
The following table presents, for periods indicated, average balances of
and weighted average yields on interest-earning assets and average balances of
and weighted average effective rates paid on interest-bearing liabilities.
Calculations have been made utilizing month-end average balances for loans and
investment securities and daily average balances for borrowings and deposits.
Loan balances do not include non-accrual loans.
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1998 1997
---------------------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------------------------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Interest-earning assets
Loans receivable $ 127,689 9.72 % $ 115,567 9.73 %
Investment securities 100,569 6.08 81,949 6.42
---------- ---------- ---------- ----------
Total interest-earning assets 228,258 8.12 197,516 8.36
---------- ---------- ---------- ----------
Interest-bearing liabilities
Deposits 210,253 4.72 179,051 4.69
Borrowings 3,807 5.68 5,925 5.57
---------- ---------- ---------- ----------
Total interest-bearing liabilities 214,060 4.74 184,976 4.72
---------- ---------- ---------- ----------
Average dollar difference
between interest-earning assets
and interest-bearing liabilities 14,198 12,540
=========== ==========
Interest rate spread 3.38 3.64
=========== ==========
Interest margin 3.67 3.94
=========== ===========
</TABLE>
The following table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to changes in volume (changes in volume
multiplied by old rate) and changes in rate (changes in rate multiplied by old
volume). The dollar changes in interest income and interest expense attributable
to changes in rate/volume (change in rate multiplied by change in volume) have
been allocated between rate and volume variances based on the percentage
relationship of such variances to each other.
<TABLE>
<CAPTION>
Nine Months Ended
September 30, 1998
Compared to Nine Months Ended
September 30, 1997
--------------------------------------------------
Volume Rate Total
--------------------------------------------------
($ in thousands)
<S> <C> <C> <C>
Interest income
Loans receivable $ 882 $ (9) $ 873
Investment securities 854 (218) 636
--------------- ----------------- ----------
Total interest income 1,736 (227) 1,509
-------------- ---------------- ----------
Interest expense
Deposits 1,103 40 1,143
Borrowings (88) 5 (83)
--------------- ----------------- -----------
Total interest expense 1,015 45 1,060
Net interest income 721 (272) 449
=============== ================= ===========
</TABLE>
<PAGE>
The Bancorp's net income was $2 million for the nine months ended
September 30, 1998, compared to $1.6 million for the nine months ended September
30, 1997, an increase of $336 thousand, or 20.7%. Diluted earnings per share
were $1.14 and $0.96 for the nine months ended September 30, 1998 and 1997,
respectively. The weighted average number of diluted shares of common stock
outstanding were 1,715,787 and 1,694,722 for the same periods in 1998 and 1997,
respectively.
Net income for the three months ended September 30, 1998 was $658
thousand, an increase of $90 thousand, or 15.9%, over $568 thousand for the same
period last year. Diluted earnings per share were $0.38 and $0.34 for the
quarters ended September 30, 1998 and 1997, respectively. The weighted average
number of diluted shares of common stock outstanding were 1,717,428 and
1,669,150 for the three months ended September 30, 1998 and 1997, respectively.
Net interest income before provision for loan losses for the nine months
ended September 30, 1998 was $6.3 million, an increase of $449 thousand, or
7.7%, from $5.8 million for the nine months ended September 30, 1997. The
increase resulted primarily from growth in average interest-earning assets,
which was partially offset by a decrease in interest margin. Total
interest-earning assets in the nine months ended September 30, 1998 averaged
$228.3 million as compared to $197.5 million for the same period in 1997. For
the nine months ended September 30, 1998, the interest rate spread was 3.38%, a
decrease of 26 basis points from 3.64% for the nine months ended September 30,
1997. The yield on interest-earning assets for the nine months ended September
30, 1998 was 8.12%, a decrease of 24 basis points from the same period last
year. The cost of interest-bearing liabilities increased by 2 basis points to
4.74% for the nine months ended September 30, 1998 from 4.72% for the nine
months ended September 30, 1997.
Total interest income increased by $1.5 million, or 12.2%, to $13.9
million for the nine months ended September 30, 1998 from $12.4 million for the
nine months ended September 30, 1997. This increase was primarily due to an
increase of $12.1 million in average loans receivable to $127.7 million for the
nine months ended September 30, 1998 from $115.6 million for the nine months
ended September 30, 1997. Average investment securities increased by $18.7
million from $81.9 million in the nine months ended September 30, 1997 to $100.6
million in the nine months ended September 30, 1998. The yield on average
investment securities for the nine months ended September 30, 1998 was 6.08%, a
decrease of 34 basis points from 6.42% for the nine months ended September 30,
1997.
Total interest expense increased by $1.1 million, or 16.3%, to $7.6
million for the nine months ended September 30, 1998 from $6.5 million for the
nine months ended September 30, 1997. Customer deposits averaged $210.3 million
for the nine months ended September 30, 1998, up $31.2 million from $179.1
million for the nine months ended September 30, 1997. The average effective rate
paid on deposits increased by 3 basis points to 4.72% in the 1998 period from
4.69% in the 1997 period. Average borrowings were $3.8 million for the nine
months ended September 30, 1998, a decrease of $2.1 million from $5.9 million
for the nine months ended September 30, 1997. The average effective rate paid on
borrowings increased to 5.68% for the nine months ended September 30, 1998 from
5.57% for the same period in 1997.
The provision for loan losses for the nine months ended September 30, 1998
was $675 thousand, as compared to $560 thousand for the nine months ended
September 30, 1997. The provision for loan losses is a current charge to
earnings to increase the allowance for loan losses. The Bancorp has established
the allowance for loan losses to absorb the inherent risk in lending after
considering an evaluation of the loan portfolio, current economic conditions,
changes in the nature and volume of lending and past loan experience. Recently,
the Bancorp's volume of non-residential mortgage loans and business loans has
increased, and these loans tend to carry a higher risk classification. The
increase in the provision for loan losses reflects the growth in the portfolio
of non-residential mortgage loans and business loans. It is the opinion of the
Bancorp that the allowance for loan losses at September 30, 1998 remains
adequate. Although the Bancorp believes that the allowance is adequate, there
can be no assurances that additions to such allowance will not be necessary in
<PAGE>
future periods, which would adversely affect the Bancorp's results of
operations. The allowance for loan losses at September 30, 1998 was $2.2
million, or 1.7% of total loans receivable, versus $2 million at December 31,
1997, which was 1.6% of total loans receivable.
Other income for the nine months ended September 30, 1998 was $1.6 million
as compared to $1.3 million for the nine months ended September 30, 1997, an
increase of $329 thousand, or 26%. Gain on sale of loans increased by $340
thousand from $146 thousand during the nine months ended September 30, 1997, to
$486 thousand for the nine months ended September 30, 1998. This increase was
primarily the result of the sale of the guaranteed portion of SBA loans on which
gains have been recognized. Fee income increased $7 thousand during the nine
months ended September 30, 1998, compared to the same period last year. Other
income decreased from $77 thousand during the nine months ended September 30,
1997, to $59 thousand for the nine months ended September 30, 1998, because the
1997 period included a one-time payment from the Bancorp's health insurance
provider related to their public issuance of stock.
Other expense increased by $316 thousand, or 7.6%, to $4.5 million for the
nine months ended September 30, 1998 from $4.2 million for the nine months ended
September 30, 1997. Employee compensation and benefits increased by $253
thousand, or 13.6%, reflecting normal wage increases for existing personnel and
the cost of opening of a new branch in April 1998. Expenses for premises and
equipment decreased by $62 thousand, or 7.2%, primarily because of moving the
Fairfax branch to a location owned by the Bancorp and eliminating the rent
expense. Other expense increased by $148 thousand, or 22.5%, reflecting higher
miscellaneous expenses during the nine-month period ended September 30, 1998.
Regulatory Capital Requirements
At September 30, 1998 the Bancorp exceeded all regulatory capital
standards, which were as follows:
<TABLE>
<CAPTION>
Actual Capital Required Capital Excess Captial
Amount Ratio Amount Ratio Amount Ratio
---------------------- ----------------------- ---------------------
($ in thousands)
<S> <C> <C> <C> <C> <C> <C>
Leverage capital $ 19,965 8.23% $ 9,706 4.00% $10,259 4.23%
Tier 1 capital 19,965 14.35% 5,566 4.00% 14,399 10.35%
Tier 1 and Tier 2 capital 21,864 15.71% 11,132 8.00% 10,732 7.71%
</TABLE>
Liquidity
The Bancorp's primary sources of funds are deposits, loan repayments,
proceeds from the sale of loans and investment securities, repayments and
maturities of investment securities, and borrowings from the Federal Home Loan
Bank of Atlanta under a credit availability in the amount of $45 million. At
September 30, 1998, the Bancorp had $6.9 million of unfunded lines of credit and
undisbursed construction loan funds of $7.1 million. Approved loan commitments
were $8.6 million at September 30, 1998, and the Bancorp had commitments from
investors to purchase loans in the amount of $3.3 million. It is anticipated
that funding requirements for these commitments can be met from the normal
sources of funds.
Year 2000
In June of 1998, Southern Financial Bank's Board of Directors approved a
Plan to mitigate the risks associated with Year 2000. The Plan was developed in
response to the Federal Financial Institutions Examination Council ("FFIEC")
Interagency Statement titled "Year 2000 Project Management Awareness." The Plan
will be updated as further guidance is received from the FFIEC.
The Plan covers five phases: Awareness, Assessment, Renovation, Validation
and Implementation.
<PAGE>
The Bancorp has completed the Awareness phase. In conjunction with the
Plan a mission statement was drafted and made available to employees and
customers. Progress reports are sent to customers via statement stuffers,
newsletters, and the Bancorp's website. The Board of Directors receives an
update on the Bancorp's Year 2000 readiness at each meeting.
The Bancorp has also completed the Assessment phase. Each of the Bancorp's
mission-critical systems, most of which are provided by third-party vendors, has
been reviewed in the context of Year 2000 risks. The Bancorp has worked closely
with Intrieve, Inc., its data processing service bureau based in Cincinnati,
Ohio, on the Plan. All other mission-critical vendors have been contacted. Each
of the Bancorp's computers has been tested to determine which require upgrading
and which need to be replaced. Customer surveys have been conducted to determine
whether there are risks within the Bancorp's customer base that should be
mitigated.
The Bancorp is currently working on the Renovation, Validation and
Implementation phases. Schedules have been developed to upgrade and/or replace
all of the Bancorp's computers that are not Year 2000 ready by October 31, 1998.
As part of the validation of the Plan, Intrieve, Inc. has selected a group of
users to participate in Proxy Testing of its system in October 1998. The primary
purpose of the test is to ensure that the systems handle the critical date
change without losing the integrity of the data processing systems. In addition,
Intrieve, Inc., has scheduled testing of communications between the host
computer and the Bancorp's terminals and ATM's through the Bancorp's satellites
and tail circuits. The ATM's were tested in September 1998, and end-to-end
testing for the teller systems is scheduled for November 1998. Other
mission-critical systems are being reviewed and tested.
Since most of the Bancorp's systems are provided by third party vendors,
such as Intrieve, Inc., on a contractual basis, the Bancorp's out of pocket
expenses through September 30, 1998 have not been material. During the fourth
quarter of 1998, the Bancorp expects to incur expenses and costs related to the
purchase of new computers and the upgrade of software not exceeding $50
thousand.
The Bancorp expects to complete work on its contingency plan by December
15, 1998.
Special Note Regarding Forward-looking Information
Certain statements under the caption "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and elsewhere in this
Quarterly Report and the documents incorporated herein by reference constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Bancorp, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in the Bancorp's market area, inflation, fluctuations in interest
rates, changes in government regulations and competition, which will, among
other things, impact demand for loans and banking services; the ability of the
Bancorp to implement its business strategy; and changes in, or the failure to
comply with, government regulations.
Forward-looking statements are intended to apply only at the time they are
made. Moreover, whether or not stated in connection with a forward-looking
statement, the Bancorp undertakes no obligation to correct or update a
forward-looking statement should the Bancorp later become aware that it is not
likely to be achieved. If the Bancorp were to update or correct a
forward-looking statement, investors and others should not conclude that the
Bancorp will make additional updates or corrections thereafter.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Not applicable
Item 2. CHANGES IN SECURITIES
Not applicable.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits Required
None.
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
Part III. SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN FINANCIAL BANCORP, INC.
--------------------------------
(Registrant)
Date 11/13/98 By:____________________________
Georgia S. Derrico
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date 11/13/98 By:_____________________________
William H. Lagos
Senior Vice President and Controller
Principal Accounting Officer
(Duly Authorized Representative)
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