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.:
June 30, 1998 0-22836
SOUTHERN FINANCIAL BANCORP, INC.
Virginia 54-1779978
- ----------------------- -----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
37 East Main Street
Warrenton, Virginia 20186
- ---------------------------- ------------------------------
(address of principal executive (Zip Code)
office)
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 July 31, 1998, there were 1,597,621 shares of the registrant's Common
Stock outstanding.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
June 30, 1998
TABLE OF CONTENTS
-----------------
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
as of June 30, 1998 (Unaudited) and
December 31, 1997 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 1998 and 1997
(Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Six Months Ended June 30, 1998 and
1997 (Unaudited) 5
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended June 30, 1998 (Unaudited) 6
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1998 and 1997
(Unaudited) 7
Notes to Consolidated Financial Statements
(Unaudited) 8-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults upon Senior Securities 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 15
PART III. SIGNATURES 16
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
June 30,
1998 December 31,
(Unaudited) 1997
------------ ------------
Assets
Cash and due from banks $ 6,553,030 $ 4,559,266
Overnight earning deposits 7,382,801 545,470
Investment securities, available-for-sale 26,964,876 4,692,758
Investment securities, held-to-maturity 67,360,474 80,468,952
Loans held for sale 2,080,094 1,414,445
Loans receivable, net 123,003,385 128,958,190
Federal Home Loan Bank stock, at cost 1,082,500 930,500
Premises and equipment, net 2,444,917 2,398,541
Other assets 3,048,804 2,629,813
------------- -------------
Total assets $239,920,881 $226,597,935
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $218,038,728 $202,200,249
Advances from Federal Home Loan Bank - 4,000,000
Other liabilities 2,317,235 1,855,085
------------- ------------
Total liabilities 220,355,963 208,055,334
Commitments
Stockholders' equity:
Preferred stock 156 156
Common stock 16,275 16,216
Capital in excess of par value 15,615,365 15,556,882
Retained earnings 4,433,215 3,406,501
Accumulated other comprehensive income (29,006) 33,933
Treasury stock, at cost (471,087) (471,087)
------------- -------------
Total stockholders' equity 19,564,918 18,542,601
------------- -------------
Total liabilities and stockholders' equity $239,920,881 $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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
------------ ------------ ----------- -----------
<S> <C>
Interest income:
Loans $ 3,104,518 $ 2,800,096 $ 6,210,820 $ 5,386,134
Investment securities 1,514,394 1,293,369 2,971,014 2,529,913
------------ ------------ ----------- -----------
Total interest income 4,618,912 4,093,465 9,181,834 7,916,047
------------ ------------ ----------- -----------
Interest expense:
Deposits 2,455,354 2,053,074 4,901,042 3,993,098
Borrowings 43,540 96,493 83,107 169,902
------------ ------------ ----------- -----------
Total interest expense 2,498,894 2,149,567 4,984,149 4,163,000
------------ ------------ ----------- -----------
Net interest income 2,120,018 1,943,898 4,197,685 3,753,047
Provision for loan losses 225,000 175,000 450,000 305,000
------------ ------------ ----------- -----------
Net interest income after provision for loan losses 1,895,018 1,768,898 3,747,685 3,448,047
Other income:
Gain on sale of loans 81,715 41,650 219,678 97,830
Fee income 336,069 355,733 679,997 662,713
Other 20,371 3,772 27,971 43,038
------------ ------------ ----------- -----------
Total other income 438,155 401,155 927,646 803,581
Other expense:
Employee compensation and benefits 713,740 609,176 1,371,025 1,225,517
Premises and equipment 271,395 288,374 520,396 547,650
Data processing expense 170,270 169,694 348,530 354,970
Deposit insurance assessments 31,020 25,431 61,085 50,338
Advertising 33,286 45,801 81,375 92,758
Other 267,011 216,866 515,132 429,944
------------ ------------ ----------- -----------
Total other expense 1,486,722 1,355,342 2,897,543 2,701,177
------------ ------------ ----------- -----------
Income before income taxes 846,451 814,711 1,777,788 1,550,451
Provision for income taxes 172,000 258,800 473,500 492,000
------------ ------------ ----------- -----------
Net income $ 674,451 $ 555,911 $ 1,304,288 $ 1,058,451
============ ============ =========== ===========
Earnings per common share:
Basic* $ 0.42 $ 0.35 $ 0.81 $ 0.67
Diluted* 0.39 0.34 0.76 0.65
Weighted average shares outstanding:
Basic* 1,593,260 1,566,943 1,592,906 1,565,603
Diluted* 1,720,913 1,631,710 1,714,763 1,629,906
</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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- --------- --------- -----------
<S> <C>
Net income $ 674,451 $ 555,911 $ 1,304,288 $ 1,058,451
Other comprehensive income, net of tax:
Unrealized holding (loss) gain on securities (44,357) (1,934) (62,939) 19,046
---------- --------- ---------- ------------
Comprehensive income $ 630,094 $ 553,977 $ 1,241,349 $ 1,077,497
========== ========= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Capital in Other Total
Preferred Common Excess of Retained Treasury Comprehensive Stockholders'
Stock Stock Par Value Earnings Stock Income Equity
---------------------------------------------------------------------------------------
<S> <C>
Balance, December 31, 1997 $ 156 $ 16,216 $15,556,882 $3,406,501 $(471,087) $ 33,933 $ 18,542,601
Dividends on preferred and common stock - - - (130,823) - - (130,823)
Options exercised - 11 15,020 - - - 15,031
Change in other comprehensive income - - - - - (18,582) (18,582)
Net income - - - 629,837 - - 629,837
--------------------------------------------------------------------------------------
Balance, March 31, 1998 $ 156 $ 16,227 $15,571,902 $3,905,515 $(471,087) $ 15,351 $ 19,038,064
Dividends on preferred and common stock (146,751) (146,751)
Options exercised 48 43,463 43,511
Change in other comprehensive income (44,357) (44,357)
Net income 674,451 674,451
--------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 156 $ 16,275 $15,615,365 $4,433,215 $ 471,087) $ (29,006) $ 19,564,918
=======================================================================================
</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>
Six Months Ended
June 30,
1998 1997
----------- -----------
<S> <C>
Cash flows from operating activities:
Net Income $ 1,304,288 $ 1,058,451
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 422,948 307,003
Provision for loan losses 450,000 305,000
Provision for deferred income tax (benefit) 197,918 (1,069)
Gain on sale of loans (219,678) (97,830)
Gain on sale of securities (5,067) -
Amortization of deferred loan fees (348,467) (92,470)
Net funding of loans held for sale (445,971) 37,972
Increase in other assets (435,571) (343,960)
Increase in other liabilities 383,761 148,701
----------- -----------
Net cash provided by operating activities 1,304,161 1,321,798
----------- -----------
Cash flows from investing activities:
(Increase) decrease in loans receivable 5,797,714 (8,096,817)
Purchase of investment securities, held-to-maturity (1,959,970) (16,698,727)
Purchase of investment securities, available-for-sale (26,345,725) -
Sale of investment securities available-for-sale 2,969,870 -
Paydowns of investment securities 15,826,622 7,601,760
(Increase) decrease in overnight earning deposits, net (6,837,331) 661,356
Increase in premises and equipment, net (229,024) (966,367)
Increase in Federal Home Loan Bank stock (152,000) (62,900)
----------- -----------
Net cash used in investing activities (10,929,844) (17,561,695)
----------- -----------
Cash flows from financing activities:
Net increase in deposits 15,838,479 17,891,028
Decrease in advances from FHLB (4,000,000) (2,500,000)
Proceeds from stock options exercised 58,542 100,029
Dividends on preferred and common stock (277,574) (210,153)
----------- -----------
Net cash provided by financing activities 11,619,447 15,280,904
----------- -----------
Net increase (decrease) in cash and due from banks 1,993,764 (958,993)
Cash and due from banks, beginning of period 4,559,266 4,004,149
----------- -----------
Cash and due from banks, end of period $ 6,553,030 $ 3,045,156
============ ============
</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 six-month period ended June 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>
June 30, 1998 December 31, 1997
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ----------- -----------
<S> <C>
Available-for-sale securities:
FHLMC preferred stock $ 3,824,385 $ 3,826,538 $ 3,865,985 $ 3,907,561
FHLMC MBS 6,794,663 6,767,751 - -
GNMA MBS 5,804,149 5,779,538 - -
FNMA MBS 10,584,455 10,591,049 782,186 785,197
----------- ----------- ----------- -----------
$ 27,007,652 $ 26,964,876 $ 4,648,171 $ 4,692,758
=========== =========== =========== ============
Held-to-maturity securities:
GNMA MBS $ 34,949,493 $ 34,822,916 $42,471,075 $42,657,909
FNMA MBS 22,998,939 23,108,150 27,075,234 27,186,191
FHLMC MBS 5,108,502 5,114,069 6,077,859 6,109,270
Collateralized mortgage obligations 2,343,570 2,353,239 4,202,852 4,202,559
Obligations of counties and municipalities 1,959,970 1,940,889 - -
FHLB zero-coupon notes - - 641,932 640,000
----------- ----------- ----------- -----------
$ 67,360,474 $ 67,339,263 $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:
June 30, December 31,
1998 1997
------------ ------------
Mortgage:
Residential $ 27,168,397 $ 30,421,147
Nonresidential 58,900,055 57,160,286
Construction:
Residential 5,064,182 6,534,271
Nonresidential 9,832,205 13,160,542
Non-Mortgage:
Business 22,427,561 21,252,681
Consumer 2,324,455 3,092,938
------------ ------------
Total loans receivable 125,716,855 131,621,865
Less:
Unearned income, net 624,887 627,143
Allowance for loan losses 2,088,583 2,036,532
------------ ------------
Loans receivable, net $123,003,385 $128,958,190
============ =============
The following sets forth information regarding the allowance for loan
losses:
Six Months Six Months
Ended Ended
6/30/98 6/30/97
--------------- -----------------
Allowance at beginning of period $ 2,036,532 $ 1,500,941
Provision for losses charged to income 450,000 305,000
Charge-offs (405,210) (223,414)
Recoveries 7,261 19,402
-------------- -----------------
Allowance at end of period $ 2,088,583 $ 1,601,929
============== =================
NOTE 4 - NEW ACCOUNTING STANDARD
On June 15, 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS 133). SFAS 133 requires that all
derivative instruments be recorded on the balance sheet at their fair value.
Changes in the fair value of derivatives are recorded each period in current
earnings or other comprehensive income depending on whether the derivative is
designated as part of a hedge transaction and, if it is, the type of hedge
transaction. SFAS 133 becomes effective for the Bancorp on January 1, 2000.
Management anticipates that the adoption of SFAS 133 will not have a significant
impact on the financial position or results of operations of the Bancorp.
<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
June 30, 1998 were $239.9 million, an increase of $13.3 million, or 5.9%, from
total assets of $226.6 million at December 31, 1997. Total liabilities increased
by $12.3 million, or 5.9%, to $220.4 million at June 30, 1998 from $208.1
million at December 31, 1997.
The growth in total assets resulted primarily from increases of $9.2
million in investment securities, $6.8 million in overnight earning deposits,
and $2 million in cash and due from banks from December 31, 1997 to June 30,
1998.
Total loans receivable decreased by $6 million to $123 million at June
30, 1998 from $129 million at December 31, 1997. 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 $2.2
million. Residential mortgage loans (permanent and construction) decreased $4.7
million, from $36.9 million at December 31, 1997, to $32.2 million at June 30,
1998, as lower interest rates led to increased refinances. Non-residential
construction mortgage loans decreased by $3.3 million, or 25.3%, to $9.8 million
at June 30, 1998, from $13.1 million at December 31, 1997. Non-residential
permanent mortgage loans increased by $1.7 million to $58.9 million at June 30,
1998, from $57.2 million at December 31, 1997. Non-mortgage business loans
increased $1.2 million to $22.4 million at June 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 $27 million at June 30, 1998. There were purchases of
$26.3 million of mortgage-backed securities during the six months ended June 30,
1998, all of which were designated as available-for-sale.
Investment securities held-to-maturity decreased by $13.1 million, or
16.3%, to $67.4 million at June 30, 1998, from $80.5 million at December 31,
1997. This decrease resulted from $15.1 million in repayments and amortization
during the six months ended June 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 $15.8 million, or 7.8%, to $218 million at June 30, 1998 from $202.2
million at December 31, 1997. Part of the increase in customer deposits was used
to fund the repayment of $4.0 million in advances from the Federal Home Loan
Bank ("FHLB") of Atlanta which were outstanding 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>
Six Months Ended June 30,
1998 1997
---------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------- --------------------------
$ in thousands)
<S> <C>
Interest-earning assets
Loans receivable $ 127,294 9.76% $ 113,147 9.52%
Investment securities 95,625 6.21 78,878 6.41
------------ ------------ ------------ ---------
Total interest-earning assets 222,919 8.24 192,025 8.24
------------ ------------ ------------ ---------
Interest-bearing liabilities
Deposits 207,071 4.77 173,353 4.64
Borrowings 2,939 5.69 6,173 5.55
Total interest-bearing liabilities 210,010 4.78 179,526 4.67
------------ ------------ ------------ ---------
Average dollar difference
between interest-earning assets
and interest-bearing liabilities 12,909 12,499
============ ============
Interest rate spread 3.46 3.57
============ ============
Interest margin 3.74 3.87
============ ============
</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.
Six Months Ended
June 30, 1998
Compared to Six Months Ended
June 30, 1997
----------------------------------------
Volume Rate Total
------- --------- --------
($ in thousands)
Interest income
Loans receivable $ 686 $ 139 $ 825
Investment securities 522 (81) 441
------- --------- --------
Total interest income 1,208 58 1,266
------- --------- --------
Interest expense
Deposits 793 115 908
Borrowings (91) 4 (87)
------- --------- --------
Total interest expense 702 119 821
------- --------- --------
Net interest income 506 (61) 445
======== ========== ========
<PAGE>
The Bancorp's net income was $1.3 million for the six months
ended June 30, 1998, compared to $1.1 million for the six months ended June 30,
1997, an increase of $246 thousand, or 23.2%. Diluted earnings per share were
$0.76 and $0.65 for the six months ended June 30, 1998 and 1997, respectively.
The weighted average number of diluted shares of common stock outstanding were
1,714,763 and 1,629,906 for the same periods in 1998 and 1997, respectively.
Net income for the three months ended June 30, 1998 was $674
thousand, an increase of $118 thousand, or 21.3%, over $556 thousand for the
same period last year. Diluted earnings per share were $0.39 and $0.34 for the
quarters ended June 30, 1998 and 1997, respectively. The weighted average number
of diluted shares of common stock outstanding were 1,720,913 and 1,631,710 for
the three months ended June 30, 1998 and 1997, respectively.
Net interest income before provision for loan losses for the
six months ended June 30, 1998 was $4.2 million, an increase of $445 thousand,
or 11.8%, from $3.8 million for the six months ended June 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 six months ended June 30, 1998 averaged $222.9 million as compared to
$192 million for the same period in 1997. For the six months ended June 30,
1998, the interest rate spread was 3.46%, a decrease of 11 basis points from
3.57% for the six months ended June 30, 1997. The yield on interest-earning
assets for the six months ended June 30, 1998 was 8.24% reflecting no change
from the same period last year. The cost of interest-bearing liabilities
increased by 11 basis points to 4.78% for the six months ended June 30, 1998
from 4.67% for the six months ended June 30, 1997.
Net interest income before provision for loan losses for the
three months ended June 30, 1998 was $2.1 million, an increase of $176 thousand,
or 9.1%, from $1.9 million for the quarter ended June 30, 1997.
Total interest income increased by $1.3 million, or 16%, to
$9.2 million for the six months ended June 30, 1998 from $7.9 million for the
six months ended June 30, 1997. This increase was primarily due to an increase
of $14.2 million in average loans receivable to $127.3 million for the six
months ended June 30, 1998 from $113.1 million for the six months ended June 30,
1997, as well as an increase in the average yield on loans from 9.52% to 9.76%
for the same periods. Average investment securities increased by $16.7 million
from $78.9 million in the six months ended June 30, 1997 to $95.6 million in the
six months ended June 30, 1998. The yield on average investment securities for
the six months ended June 30, 1998 was 6.21%, a decrease of 20 basis points from
6.41% for the six months ended June 30, 1997.
Total interest expense increased by $821 thousand, or 19.7%,
to $5 million for the six months ended June 30, 1998 from $4.2 million for the
six months ended June 30, 1997. Customer deposits averaged $207 million for the
six months ended June 30, 1998, up $33.7 million from $173.3 million for the six
months ended June 30, 1997. The average effective rate paid on deposits
increased by 13 basis points to 4.77% in the 1998 period from 4.64% in the 1997
period. Average borrowings were $2.9 million for the six months ended June 30,
1998, a decrease of $3.2 million from $6.1 million for the six months ended June
30, 1997. The average effective rate paid on borrowings increased to 5.69% for
the six months ended June 30, 1998 from 5.55% for the same period in 1997.
The provision for loan losses for the six months ended June
30, 1998 was $450 thousand, as compared to $305 thousand for the six months
ended June 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 June 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 future
periods, which would adversely affect the Bancorp's results of operations. The
allowance for loan losses at June 30, 1998 was $2.1 million, or 1.7% of total
loans receivable, versus $2 million at December 31, 1997, which was 1.6% of
total loans receivable.
<PAGE>
Other income for the six months ended June 30, 1998 was $928
thousand as compared to $804 thousand for the six months ended June 30, 1997, an
increase of $124 thousand, or 15.4%. Gain on sale of loans increased by $122
thousand from $98 thousand during the six months ended June 30, 1997, to $220
thousand for the six months ended June 30, 1998. This increase was primarily the
result of a $3.1 million increase in sales volume including the guaranteed
portion of SBA loans on which gains have been recognized. Fee income increased
$17 thousand to $680 thousand for the six months ended June 30, 1998, from $663
thousand for the same period last year. Most of the growth in fee income
resulted from increases in service charges related to deposit accounts,
particularly ATM fees. Other income decreased from $43 thousand during the six
months ended June 30, 1997, to $28 thousand for the six months ended June 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 $196 thousand, or 7.3%, to $2.9
million for the six months ended June 30, 1998 from $2.7 million for the six
months ended June 30, 1997. Employee compensation and benefits increased by $146
thousand, or 11.9%, 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 $27 thousand, or 5%, primarily because of moving the
Fairfax branch to a location owned by the Bancorp and eliminating the rent
expense. Other expense increased by $85 thousand, or 19.8%, reflecting higher
miscellaneous expenses during the six-month period ended June 30, 1998.
The provision for income taxes declined from $259 thousand for
the three months ended June 30, 1997, to $172 thousand for the quarter ended
June 30, 1998, because of an adjustment to provisions made in prior periods.
Regulatory Capital Requirements
At June 30, 1998 the Bancorp exceeded all regulatory capital
standards, which were as follows:
<TABLE>
<CAPTION>
Actual Capital Required Capital Excess Captial
Amount Ratio Amount Ratio Amount Ratio
--------------------- ------------------- ----------------------
($ in thousands)
<S> <C>
Leverage capital $ 19,368 8.33% $ 9,296 4.00% $ 10,072 4.33%
Tier 1 capital 19,368 14.74% 5,256 4.00% 14,112 10.74%
Tier 1 and Tier 2 capital 21,182 16.12% 10,512 8.00% 10,670 8.12%
</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 June 30, 1998, the Bancorp had $7.1 million of unfunded lines of
credit and undisbursed construction loan funds of $7.3 million. Approved loan
commitments were $12.2 million at June 30, 1998, and the Bancorp had commitments
from investors to purchase loans in the amount of $ 2.3 million. It is
anticipated that funding requirements for these commitments can be met from the
normal sources of funds.
<PAGE>
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 June 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 8/14/98 By: /s/Georgia S. Derrico
------- -------------------------------------
Georgia S. Derrico
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date 8/14/98 By: /s/William H. Lagos
------- -------------------------------------
William H. Lagos
Senior Vice President and Controller
Principal Accounting Officer
(Duly Authorized Representative)
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