================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
FORM 8-K/A
Amendment No. 1
to
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report: October 1, 1999
(Date of earliest event reported)
SOUTHERN FINANCIAL BANCORP, INC.
(Exact Name of Registrant as Specified in its Charter)
Virginia 0-22836 54-1779978
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
37 East Main Street
Warrenton, Virginia 20186
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(540) 349-3900
================================================================================
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On October 1, 1999, The Horizon Bank of Virginia ("Horizon"), a
Virginia state bank, was merged with and into Southern Financial Bank (the
"Bank"), a Virginia state bank and a wholly owned subsidiary of Southern
Financial Bancorp, Inc. (the "Company"), a Virginia corporation (the "Merger").
The Merger was consummated pursuant to an Agreement and Plan of Reorganization,
dated as of May 3, 1999, as amended, between Horizon, the Company and the Bank,
and a related Plan of Merger.
Under the terms of the Merger, each outstanding share of Horizon's
common stock, par value $2.50 per share ("Horizon Common Stock"), was converted
into 0.63 shares of the Company's common stock, par value $0.01 per share
("Company Common Stock"), and cash in lieu of fractional shares. In addition,
all rights to acquire Horizon Common Stock pursuant to stock options granted by
Horizon under Horizon's stock option plans were converted into options for
Company Common Stock. As a result, all shareholders of Horizon became
shareholders of the Company.
For a more detailed description of the Merger, see the Company's
definitive Joint Proxy Statement (the "Joint Proxy Statement"), which was filed
with the Securities and Exchange Commission on July 28, 1999 in connection with
the Company's Registration Statement on Form S-4 (File No. 333-82159).
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Businesses Acquired.
The following financial statements of Horizon are included in this
report:
Independent Auditors' Report
Financial Statements
Balance Sheets as of December 31, 1998 and 1997
Statements of Income for the years ended December 31, 1998, 1997 and
1996
Statements of Comprehensive Income for the years ended December 31,
1998, 1997 and 1996
Statements of Changes in Stockholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Statements of Cash Flows for the years ended December 31, 1998, 1997
and 1996
Notes to Financial Statements
Interim Financial Statements
Balance Sheets as of June 30, 1999 and December 31, 1998
Statements of Operations for the three months and six months ended
June 30, 1999 and 1998
Statements of Comprehensive Income for the six months ended June 30,
1999 and 1998
Statements of Changes in Stockholders' Equity for the six months
ended June 30, 1999 and year ended December 31, 1998
Statements of Cash Flows for the six months ended June 30, 1999 and
1998
Notes to Interim Financial Statements (Unaudited)
<PAGE>
[LETTERHEAD OF THOMPSON, GREENSPON & CO., P.C.]
INDEPENDENT AUDITORS' REPORT
To The Board of Directors and Stockholders
The Horizon Bank of Virginia
Merrifield, Virginia
We have audited the accompanying balance sheets of The Horizon Bank of
Virginia as of December 31, 1998 and 1997, and the related statements of
operations, other comprehensive income, changes in stockholders' equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Horizon Bank of
Virginia as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Thompson, Greenspon & Co., P.C.
Fairfax, Virginia
January 29, 1999
<PAGE>
[LETTERHEAD OF THOMPSON, GREENSPON & CO., P.C.]
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders
The Horizon Bank of Virginia
Merrifield, Virginia
We have audited the accompanying balance sheets of The Horizon Bank of
Virginia as of December 31, 1997 and 1996, and the related statements of
operations, changes in stockholders' equity and cash flows for the years then
ended. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Horizon Bank of
Virginia as of December 31, 1997 and 1996, and results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ Thompson, Greenspon & Co., P.C.
Fairfax, Virginia
January 23, 1998
<PAGE>
The Horizon Bank of Virginia
Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets December 31, 1998 December 31, 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 5,445,820 $ 6,467,421
Overnight earning deposits 30,846,000 20,308,000
Investment securities, available-for-sale 9,636,855 12,017,486
Investment securities, held to maturity (estimated market
value of $19,553,348 and $8,104,781, respectively) 19,531,871 8,098,909
Loans receivable, net 74,709,594 75,602,129
Premises and equipment, net 3,152,593 3,220,127
Other assets 2,088,334 1,704,091
- ---------------------------------------------------------------------------------------------------------------
Total assets $145,411,067 $127,418,163
===============================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits $134,979,742 $118,164,235
Other liabilities 728,198 288,464
- ---------------------------------------------------------------------------------------------------------------
Total liabilities 135,707,940 118,452,699
- ---------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $2.50 par value, 2,000,000 authorized,
1,639,729 and 1,557,778 shares issued and
outstanding, respectively 4,099,325 3,894,445
Capital in excess of par value 4,223,773 3,564,319
Retained earnings 1,352,984 1,503,105
Accumulated other comprehensive income 27,045 3,595
- ---------------------------------------------------------------------------------------------------------------
Total stockholders' equity 9,703,127 8,965,464
- ---------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $145,411,067 $127,418,163
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Horizon Bank of Virginia
Statements of Income
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income:
Loans $ 7,189,034 $ 7,021,964 $ 6,129,444
Investment securities 1,937,583 1,509,402 1,551,055
- ---------------------------------------------------------------------------------------------------------------
Total interest income 9,126,617 8,531,366 7,680,499
- ---------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 4,015,542 3,583,289 3,566,500
- ---------------------------------------------------------------------------------------------------------------
Total interest expense 4,015,542 3,583,289 3,566,500
- ---------------------------------------------------------------------------------------------------------------
Net interest income 5,111,075 4,948,077 4,113,999
Provision for loan losses 325,801 385,314 211,152
- ---------------------------------------------------------------------------------------------------------------
Net interest income after provision for
loan losses 4,785,274 4,562,763 3,902,847
- ---------------------------------------------------------------------------------------------------------------
Other income:
Fee income 785,631 518,167 392,358
Gain on sale of investment securities - 1,464 7,354
Other 12,000 9,828 6,905
- ---------------------------------------------------------------------------------------------------------------
Total other income 797,631 529,459 406,617
- ---------------------------------------------------------------------------------------------------------------
Other expense:
Employee compensation and benefits 1,936,704 2,014,174 1,858,954
Premises and equipment 938,142 917,786 738,029
Advertising 42,282 18,544 51,964
Other 1,614,360 1,229,924 1,043,510
- ---------------------------------------------------------------------------------------------------------------
Total other expense 4,531,488 4,180,428 3,692,457
- ---------------------------------------------------------------------------------------------------------------
Income before income taxes 1,051,417 911,794 617,007
Provision for income taxes 357,775 310,000 210,730
- ---------------------------------------------------------------------------------------------------------------
Net income $ 693,642 $ 601,794 $ 406,277
===============================================================================================================
Earnings per common share:
Basic* $ .43 $ .39 $ .26
Diluted* .42 .38 .26
Weighted average shares outstanding:
Basic* 1,620,817 1,557,744 1,551,890
Diluted* 1,633,548 1,571,446 1,564,956
- ---------------------------------------------------------------------------------------------------------------
*1996 amounts have been restated to conform with SFAS 128, "Earnings per Share."
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Horizon Bank of Virginia
Statements of Comprehensive Income
December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income $693,642 $601,794 $406,277
Other comprehensive income, net of tax:
Unrealized gain (loss) arising during period 23,450 14,201 (48,021)
---------- ---------- ----------
Other comprehensive income 23,450 14,201 (48,021)
Comprehensive income $717,092 $615,995 $358,256
===============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Horizon Bank of Virginia
Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Net Unrealized Gain
Number Retained (Loss) on Securities
of Shares Par Value Surplus Earnings Available for Sales Totals
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 691,600 $3,458,000 $3,458,000 $ 843,954 $ 37,415 $7,797,369
Options exercised 17,850 87,125 87,125 - - 174,250
Stock dividend of 10 percent 69,784 348,920 - (348,920) - -
Stock split - 2 for 1 778,384 - - - - -
Options adjustment - - 18,794 - - 18,794
Change in other comprehensive
income - - - - (48,021) (48,021)
Net income - - - 406,277 - 406,277
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 1,557,618 3,894,045 3,563,919 901,311 (10,606) 8,348,669
Options exercised 160 400 400 - - 800
Change in other comprehensive
income - - - - 14,201 14,201
Net income - - - 601,794 - 601,794
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 1,557,778 3,894,445 3,564,319 1,503,105 3,595 8,965,464
Options excercised 4,114 10,285 10,285 - - 20,570
Stock dividend 10 percent 77,837 194,595 649,169 (843,764) - -
Change in other comprehensive
income - - - - 23,450 23,450
Net income - - - 693,643 - 693,643
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 1,639,729 $4,099,325 $4,223,773 $1,352,984 $ 27,045 $9,703,127
=================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Horizon Bank of Virginia
Statements of Cash Flows
For the Years Ended December 31, 1998, 1997, and 1996
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 693,642 $ 601,794 $ 406,277
Noncash items included in net income
Depreciation and amortization 291,847 271,477 220,242
Provision for loan losses 325,801 385,314 211,152
Provision for losses on other
real estate owned 120,000 64,513 61,000
Net amortization of premiums on
securities (11,840) (7,605) (5,852)
Stock option compensation - - 18,794
(Increase) Decrease in
Accrued interest receivable (42,861) 41,139 7,507
Other assets (490,930) 279,143` (87,081)
Increase (Decrease) in
Accrued interest payable (2,259) (2,444) (9,535)
Other accrued expenses 441,994 (28,422) 56,530
----------- ----------- -----------
Net Cash Provided by Operating
Activities 1,325,394 1,604,909 879,034
----------- ----------- -----------
Cash Flows from Investing Activities
Net Federal funds sold (10,538,000) (5,423,000) (1,682,000)
Acquisition of bank premises and
equipment (194,765) (360,684) (440,008)
Loans collected (made), net 566,734 (6,026,430) (9,259,523)
Proceeds from the maturities of
investment securities 5,700,000 3,813,750 6,611,031
Purchase of securities available for sale (4,300,000) (8,563,636) (5,642,064)
Purchase of investment securities (17,117,041) (1,811,206) (6,993,917)
Proceeds from the maturities of
securities available for sale 6,700,000 5,924,242 8,285,939
Other real estate owned
Proceeds from sale - 527,376 -
Acquisition of intangible assets - (171,195) (40,500)
Capitalized expenses - - (2,800)
Additions to deposits - - (203,258)
----------- ----------- -----------
Net Cash Used by Investing
Activities (19,183,072) (12,090,783) (9,367,100)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
December 31, December 31, December 31,
- ------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Financing Activities
Proceeds from sale of common stock 20,570 800 174,747
Net increase in deposits 16,815,507 7,471,842 13,614,467
----------- ----------- -----------
Net Cash Provided by
Financing Activities 16,836,077 7,472,642 13,789,214
----------- ----------- -----------
Net Decrease (Increase) in Cash and
Due from Banks (1,021,601) (3,013,232) 5,301,148
Cash and Due from Banks, beginning of year 6,467,421 9,480,653 4,179,505
----------- ----------- -----------
Cash and Due from Banks, end of year $ 5,445,820 $ 6,467,421 $ 9,480,653
=========== =========== ===========
Noncash
Unrealized gain on securities available
for sale, net $ 23,450 $ 14,201 $ (48,021)
=========== =========== ===========
Stock Dividend $ 843,764 $ - $ 348,920
=========== =========== ===========
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Bank follows generally accepted accounting principles and reporting
practices applicable to the banking industry. Significant accounting
policies are summarized below.
Nature of Operations
The Horizon Bank of Virginia is a state member bank of the Federal
Reserve and provides a variety of banking services to its customers. As
a state bank, the Bank is subject to regulations of the Virginia State
Banking Commission and the Federal Reserve. The Bank serves primarily
the Northern Virginia area with services provided at four branch
offices and a mortgage department.
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 revenue
and expenses during the reporting period. Actual results could vary
from the estimates that were used.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
Cash paid for interest amounted to $4,017,801 in 1998, $3,585,733 in
1997, and $3,516,036 in 1996.
Income taxes paid amounted to $287,000 in 1998, $279,040 in 1997, and
$136,717 in 1996.
The Bank is required by regulatory authorities to maintain a specific
portion of its assets in the form of legal cash reserves, computed by
applying prescribed percentages to its various types of deposits. When
the Bank's vault cash reserves and balances maintained at the Federal
Reserve Bank are in excess of that required, it may lend the excess to
other banks on a daily basis. The average balance required to be
maintained at the Federal Reserve Bank for the year ended December 31,
1998 was approximately $1,211,000.
The Bank's available unsecured Federal fund lines of credit with
correspondent banks is based on bank capital. At December 31, 1998, the
lines were approximately $6,330,000. Continued availability of the
lines are reviewed annually by the correspondent bank and the Federal
Reserve. The rate of interest charged fluctuates daily in response to
market conditions. There were no borrowings on these lines at December
31, 1998 and 1997.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Investment Securities
Securities are classified as investment securities to be held to
maturity when management has the intent and the Bank has the ability at
the time of purchase to hold them until maturity or on a long-term
basis. These securities are carried at cost adjusted for amortization
of premium and accretion of discount, computed by the straight-line
method over their contractual lives. If the interest method of
accounting for amortization of premiums and accretion of discounts was
used, it would not have a material effect on the financial statements.
Gains and losses on the sale of such securities are determined by the
specific identification method.
Securities to be held for indefinite periods of time and not intended
to be held to maturity or on a long-term basis are classified as
available for sale and accounted for at fair value on an aggregate
basis. These include securities used as part of the Bank's
asset/liability management strategy and may be sold in response to
changes in interest rates, prepayment risk, the need or desire to
increase capital, to satisfy regulatory requirements and other similar
factors. Unrealized gains and losses of securities available for sale
are excluded from earnings and included in stockholders' equity, net of
related income taxes. Realized gains and losses of securities available
for sale are included in net securities gains (losses) based on the
specific identification method.
Loans and Loan Fees
Loans are stated at the principal amount outstanding, net of deferred
loan fees. Interest on loans is generally computed using the simple
interest method. Loan fees and related direct loan origination costs
are deferred and recognized as an adjustment of yield over the life of
the loan or currently upon the sale or repayment of the loans.
Interest on all categories of loans is accrued based upon the principal
amounts outstanding. The accrual of interest income is discontinued on
loans which are past due ninety or more days as to principal or
interest payments, except for certain guaranteed loans and other
limited exceptions. When loans are placed on nonaccrual status,
interest accrued in the current year is charged against interest
income, and interest accrued in prior years is charged to the allowance
for loan losses. Loans may be reinstated to accrual status when all
payments are brought current, and, in the opinion of management,
collection of the remaining balance can reasonably be expected. The
classification of a loan as nonaccrual is not necessarily indicative of
a potential loan loss.
The Bank originates mortgage loans for both sale and for its own
portfolio in order to insure the availability of a broad range of
mortgage products for its customers. The Bank sells originated
mortgages primarily on the secondary market. The Bank retains
negligible risk of principal loss for mortgages sold.
Allowance for Loan Losses
The Bank grants loans to customers located in Northern Virginia.
Although the Bank has a diversified portfolio, a substantial number of
loans are unsecured or collateralized by real estate.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Allowance for Loan Losses (continued)
The allowance for loan losses is a current estimate of the losses
inherent in the loan portfolio. The allowance is maintained at a level
considered adequate by management to absorb inherent losses based upon
management's evaluation of the portfolio.
The allowance is increased by provisions for loan losses charged to
operating expense and reduced by net chargeoffs. The provisions are
based on management's estimate of net realizable value or fair value of
the collateral, as applicable, considering the current and future
operating or sales conditions. These estimates are susceptible to
changes that could result in a material adjustment to future results of
operations.
Bank Premises and Equipment
Premises and equipment are stated at cost, less accumulated
depreciation and amortization. Leasehold improvements are amortized
over the asset life using the straight-line method. Furniture and
equipment are depreciated over estimated useful lives of five and seven
years using the straight-line method. The bank headquarters building is
depreciated over its estimated useful life of approximately 31.5 years
using the straight-line method.
Other Real Estate Owned
Other real estate owned includes properties acquired through
foreclosure or other proceedings in satisfaction of indebtedness. At
the date of acquisition, such property is recorded at the lower of the
recorded investment in the related receivable or net realizable value.
Write-downs at the date of acquisition are charged to the allowance for
loans losses. Subsequent declines in market value, operating expenses
and gains or losses on disposition of other real estate are reflected
in other expenses.
Stockholders' Equity
The Bank was capitalized through a private offering circular dated
October 2, 1989, for $6,421,000. Capital funds were allocated equally
between capital stock and surplus. The Bank has 2,000,000, $2.50 par
value, common shares authorized. There were 1,639,729 outstanding in
1998, and 1,557,778 in 1997.
In January, 1998, the Bank declared a 10 percent stock dividend for
stockholders of record on February 15, 1998 and payable on March 15,
1998.
State banking laws and regulatory compliance restrict the availability
of earnings for the payment of dividends.
The Bank is also required to maintain minimum amounts of capital to
total "risk weighted" assets, as defined by the banking regulators. At
December 31, 1998, the Bank is required to have minimum Tier 1 and
Total capital ratios of 4.00 percent and 8.00 percent, respectively.
The Bank's actual ratios at that date were 12.21 percent and 13.46
percent, respectively.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes
The Bank utilizes an asset and liability approach to accounting for
income taxes. The objective is to recognize the amount of income taxes
payable or refundable in the current year based on the Bank's income
tax return and the deferred tax liabilities and assets for the expected
future tax consequences of events that have been recognized in the
Bank's financial statements or tax returns. The asset and liability
method accounts for deferred income taxes by applying enacted statutory
rates to temporary differences, the difference between financial
statement amounts and tax bases of assets and liabilities. Deferred
income tax liabilities or assets are adjusted to reflect changes in tax
laws or rates in the year of enactment.
The Bank pays state franchise tax in lieu of state income taxes.
Income per Common Share
The Bank has adopted Statement of Financial Accounting Standards
("SFAS") No. 128 which establishes standards for computing and
presenting earnings per share (EPS) for entities with publicly held
common stock. The standard requires presentation of two categories of
earnings per share, basic EPS and diluted EPS. Basic EPS excludes
dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares
outstanding for the year. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the Bank.
The financial statements provide information that considers the effects
of the 10 percent stock dividend.
<TABLE>
<CAPTION>
1998 1997 1997
---------------------------- ---------------------------- ----------------------------
Per - Per - Per -
Share Share Share
Income Shares Amount Income Shares Amount Income Shares Amount
-------- -------- ------ -------- -------- ------ -------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS
Income available
to common
stockholders $693,642 1,620,817 $0.43 $601,794 1,557,744 $0.39 $406,277 1,551,890 $0.26
===== ===== =====
Effect of Dilutive
Securities
Stock options
unexercised - 12,731 - 13,702 - 13,066
-------- --------- -------- --------- -------- ---------
Dilutive EPS
Income available
to common
stockholders
plus assumed
conversions $693,642 1,633,548 $0.42 $601,794 1,571,446 $0.38 $406,277 1,564,956 $0.26
======== ========= ===== ======== ========= ===== ======== ========= =====
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impaired Loans
Effective January 1, 1995, the Bank adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, as amended by SFAS No. 118. SFAS
No. 114, as amended provided that a loan is impaired when, based on
current information and events, it is probable that the creditor will
be unable to collect all principal and interest amounts due according
to the contractual terms of the loan agreement. SFAS No. 114, as
amended provides guidelines relating to recognition of interest income
on impaired loans and requires that impaired loans be measured based on
the present value of the expected future cash flows, discounted at the
loan's effective interest rate. The effective rate of a loan is defined
as the contractual interest rate adjusted for any deferred loan fees or
costs, premiums or discounts existing at the inception or acquisition
of the loan. If the loan is collateral dependent, as a practical
expedient, impairment can be based on a loan's observable market price
of the fair value of the collateral. The value of the loan is adjusted
through a valuation allowance created through a charge against income.
Residential mortgages, consumer installment obligations and credit
cards are excluded. Loans that were treated as in-substance
foreclosures under previous accounting pronouncements are considered to
be impaired loans and under SFAS No. 114 will remain in the loan
portfolio.
A loan may be placed on non-accrual status and not classified as an
impaired loan when in the opinion of management, based on current
information and events, it is probable that the Bank will eventually
collect all principal and interest amounts due according to the
contractual terms of the loan agreement. Interest income for impaired
loans is generally recognized on an accrual basis unless it is deemed
inappropriate to do so. In cases which the receipt of interest payments
is deemed more uncertain, the cash basis of income recognition is
utilized. Loans are placed on non-accrual status when, in the judgement
of management, the probability of timely collection of interest is
deemed to be insufficient to warrant further accrual. As a matter of
policy, the Bank does not accrue interest on loans past due 90 days or
more except when the estimated value of the collateral and collection
efforts are deemed sufficient to ensure full recovery. When a loan is
placed on non-accrual status, previously accrued but unpaid interest is
deducted from interest income.
Management considered loans impaired amounting to $922,460 at December
31, 1998 and $840,663 at December 31, 1997. The total allowance for
possible loan losses related to impaired loans amounted to $381,802 at
December 31, 1998 and $83,899 at December 31, 1997.
Accounting Pronouncements
SFAS No. 133 - Accounting for Derivative Instruments and Hedging
Activities
This statement standardizes the accounting for derivative instruments,
including certain derivative instruments embedded in other contracts,
by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at
fair value. The Bank is evaluating the potential impact of adopting
SFAS No. 133. Management does not expect the adoption of SFAS No. 133
to have a material impact on financial condition or results of
operations. The statement is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
2. INVESTMENT SECURITIES
The portfolio consists of the following:
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
----------- ---------- ---------- --------------
<S> <C> <C> <C> <C>
Available for sale
U.S. Government Treasury
and agency obligations $ 9,595,877 $47,073 $ 6,095 $ 9,636,855
=========== ======= ======= ===========
December 31, 1997
-------------------------------------------------------------
Available for sale:
U.S. Government Treasury
and agency obligations $12,012,038 $36,484 $31,036 $12,017,486
=========== ======= ======= ===========
December 31, 1998
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated Fair
Cost Gains Losses Value
----------- ---------- ---------- --------------
Value
Held to maturity:
U.S. Government Treasury
and agency obligations $19,531,871 $59,187 $37,710 $19,553,348
=========== ======= ======= ===========
December 31, 1997
-------------------------------------------------------------
Held to maturity:
U.S. Government Treasury
and agency obligations $ 8,098,909 $19,032 $13,160 $ 8,104,781
=========== ======= ======= ===========
</TABLE>
The scheduled maturities of the portfolio at December 31, 1998 were as
follows:
<TABLE>
<CAPTION>
Held to Maturity Available for Sale
------------------------------ -------------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Due in one year or less $ 6,029,786 $ 6,022,188 $ 2,699,475 $ 2,708,813
Due from one year to
five years 13,502,085 13,531,160 6,896,402 6,928,042
----------- ----------- ----------- -----------
$19,531,871 $19,553,348 $ 9,595,877 $ 9,636,855
=========== =========== =========== ===========
</TABLE>
Securities with a carrying amount of $16,700,000 and $12,150,000 at
December 31, 1998 and 1997, respectively, were pledged as collateral on
public deposits and for other purposes as required or permitted by law.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
3. LOANS RECEIVABLE
Loans receivable at December 31 include the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Mortgage:
Residential $28,776,000 $30,907,000
Nonresidential 20,234,000 16,944,000
Construction 1,764,000 2,936,000
Nonmortgage:
Business 16,041,000 15,386,000
Consumer 9,134,586 10,369,771
----------- -----------
Total loans receivable 75,949,586 76,542,771
Less: Deferred loan fees (228,973) (233,804)
Less: Allowance for loan losses (1,011,019) (706,838)
----------- -----------
Loans receivable, net $74,709,594 $75,602,129
=========== ===========
</TABLE>
An analysis of the allowance for loan losses at December 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Balance beginning of year $ 706,838 $ 873,378
Provision for loan losses 325,801 385,314
Charge-offs, net (21,620) (551,854)
---------- ---------
$1,011,019 $ 706,838
========== =========
</TABLE>
Loans on which the accrual of interest has been discontinued amount to
$922,460 at December 31, 1998 and $962,496 at December 31, 1997. Had
interest been accrued on those loans, such income would have
approximated $104,143 and $46,449 for the years ended December 31, 1998
and 1997, respectively.
The amount of the allowance deducted for Federal income tax purposes in
1998 was $390,000, in 1997 was $646,000, and in 1996 was $199,724.
4. BANK PREMISES AND EQUIPMENT
Bank premises and equipment include the following:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Land $ 1,304,033 $ 1,304,033
Building 494,633 494,633
Automobiles 103,360 103,360
Leasehold improvements 1,085,350 1,014,025
Furniture and equipment 1,638,059 1,514,935
----------- -----------
4,625,435 4,430,986
Less accumulated depreciation (1,472,842) (1,210,859)
----------- -----------
$ 3,152,593 $ 3,220,127
=========== ===========
</TABLE>
Depreciation of bank premises and equipment charged to expense amounted
to $262,299 in 1998, $258,477 in 1997, and $214,842 in 1996.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
5. OTHER REAL ESTATE OWNED
Activity related to foreclosed real estate is as follow:
Expenses related to other real estate owned are included in other
operating expenses and amounted to $12,750 in 1998, $3,066 in 1997, and
$3,441 in 1996.
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $ 546,177 $ 966,871
Additions - 171,195
Sales - (527,376)
Allowance for losses (120,000) (64,513)
---------- ----------
Balance, December 31 $ 426,177 $ 546,177
========== ==========
</TABLE>
Activity of the allowance for other real estate owned losses is as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $ 125,513 $ 61,000
Additions 120,000 64,513
---------- ----------
Balance, December 31 $ 245,513 $ 125,513
========== ==========
</TABLE>
6. OTHER ASSETS
In addition to Other Real Estate Owned and Accrued Interest Receivable,
other assets include the following:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Goodwill, net of accumulated amortization
of $98,353 in 1998 and $68,805 in 1997 $ 92,552 $ 55,002
Prepaid taxes and expenses 139,032 101,403
Deposits and other 41,716 42,933
Deferred tax asset 368,000 187,000
Covenant not to compete 206,420 -
---------- ---------
$ 847,720 $ 386,338
========== =========
</TABLE>
The goodwill of $190,905 is being amortized over sixty months under the
straight-line method. Amortization charged to expense amounted to
$29,548 in 1998, $13,000 in 1997 and $5,400 in 1996.
7. TIME DEPOSITS
The maturity distribution of time certificates of deposit in
denominations of $100,000 or more was approximately $25,107,867 at
December 31, 1998 and $16,735,561 at December 31, 1997.
At December 31, 1998, the scheduled maturities of time deposits are as
follows:
3 months or less $ 8,294,176
3 to 12 months 21,407,321
1 to 5 years 21,676,063
Over 5 years -
-----------
$51,377,560
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
8. INCOME TAXES
The provision for income taxes charged to operations was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Current income taxes $ 538,775 $ 286,500 $ 257,230
Deferred tax (benefit) expense (181,000) 23,500 (46,500)
--------- --------- ---------
Total income tax expense $ 357,775 $ 310,000 $ 210,730
========= ========= =========
</TABLE>
Net deferred tax assets are comprised of the following at December 31:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred Source
Unearned loan fees $ 68,903 $ 72,841
Organization/start-up costs and other 2,110 2,016
Loan loss and other real estate reserve 277,289 117,337
Net unrealized loss on securities available for sale - 1,852
Non accrued loan interest 28,625 -
Depreciation 5,006 -
--------- ---------
Gross deferred tax assets 381,933 194,046
--------- ---------
Net unrealized gain on securities available for sale 13,933 -
Depreciation - 7,046
--------- ---------
Gross deferred tax liability 13,933 7,046
--------- ---------
Net deferred tax asset $ 368,000 $ 187,000
========= =========
</TABLE>
Net deferred tax assets for 1998 and 1997 are included in Other Assets.
Income taxes payable of $266,000 for 1998 are included in other accrued
expenses.
A reconciliation between the amount of reported income tax expense and
the amount computed by multiplying the applicable statutory Federal
income tax rate is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income before income taxes $1,051,417 $ 911,794 $ 617,007
Applicable statutory income tax rate 34% 34% 34%
---------- ---------- ----------
Computed "expected" Federal tax expense 357,482 310,010 209,782
Adjustments to Federal income tax
resulting from:
Nondeductible items and other 293 (10) 948
---------- ---------- ----------
Provision for Federal income taxes $ 357,775 $ 310,000 $ 210,730
========== ========== ==========
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
9. OPERATING LEASES
In 1998, the Bank entered into two new lease agreements for a new
branch and additional office space. The lease agreement provides for a
term of ten years ending April 30, 2008, with annual lease payments of
$45,000 plus 5 percent annual increases. The office space agreement is
a six year lease beginning February 1, 1999 at $59,598 per year with
three percent increases annually.
In July, 1996, the Bank commenced occupancy in a new branch location in
Fairfax City. The current rent expense being paid by the Bank is
$124,689 per year. The initial ten year lease began with the date of
occupancy and includes four additional five year options to extend the
lease. Additionally, the Bank currently holds a $650,000 first deed of
trust loan on the building and land on which the Fairfax City branch is
located.
The Bank leased office space for its mortgage department at $30,500 per
year, net of a sublease. The lease expired in September 1998.
In January, 1995, the Bank entered into a lease agreement for a new
branch located in Vienna. The agreement provides for a term of ten
years ending in February, 2005 with an automatic ten year renewal
option unless the Bank issues an advance written notice. Total base
annual lease payments are $107,870 adjusted 1.5 percent per annum.
In 1995, the Bank amended its current lease agreement for office space
and signed a new lease for an additional floor of office space. The
agreements call for total annual lease payments of $119,700 per year
plus two thirds of all real estate taxes. The leases are in force for a
term of 5 years, ending on June 30, 1999. The Bank has the option for
five additional terms of five years each and may terminate the leases
after the third year with proper notice.
The following are the future minimum lease payments at December 31,
1998:
Years ending December 31,
-------------------------
1999 $ 437,977
2000 415,145
2001 421,353
2002 427,775
2003 and thereafter 1,291,184
----------
Total $2,993,434
==========
Rent expense amounted to $420,000 in 1998, $401,500 in 1997 and
$319,500 in 1996.
10. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
In the ordinary course of business, the Bank has granted loans to
directors, executive officers, employees and their associates. These
transactions have been made on substantially the same terms, including
interest rates and collateral, as those prevailing at the time for
comparable transactions with unrelated persons. Directors, officers and
their affiliated companies were indebted to the Bank for loans totaling
$1,622,674 at December 31, 1998 and $1,667,022 at December 31, 1997.
Activity of loans to directors, officers and their affiliated companies
is as follows:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Balance, January 1 $1,667,022 $1,291,000
Advances 255,345 727,772
Repayments (299,693) (351,750)
---------- ----------
Balance, December 31 $1,624,672 $1,667,022
========== ==========
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
11. STOCK OPTIONS
Stock Option Plan
On April 9, 1991, the stockholders approved a stock option plan
authorizing options for 160,000 shares of the Bank's common stock, of
which 154,000 shares have been granted to eligible directors. On May
31, 1996, 4,650 options were granted to officers and employees. On
January 1, 1997, 1,350 options were granted to employees. Under the
terms of the plan the purchase price of the stock will be $5.00 per
share. Compensation expense has been recognized for options granted at
less than the market price at the measurement date. All options expire
April 9, 1999.
A summary of activities is as follows:
<TABLE>
<CAPTION>
Amount Price
--------- -----
<S> <C> <C>
Authorized 160,000
=========
Balance outstanding at December 31, 1996 24,800 $5
Granted 1,350 $5
Exercised (160) $5
---------
Balance outstanding at December 31, 1997 25,990 $5
Granted -
Exercised (4,114)
---------
Balance outstanding at December 31, 1998 21,876 $5
=========
</TABLE>
Stock Compensation
In 1996, the Bank adopted the disclosure-only provisions of Statement
of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation and will continue to apply Accounting Principles Board No.
25 and related interpretations in accounting for its plans. SFAS No.
123 establishes standards of financial accounting and reporting for
stock-based employee compensation plans including stock option plans,
stock purchase plans and other arrangements by which employees receive
shares of stock or other equity instruments based on the market price
of an entity's stock.
If the Bank had elected to recognize compensation cost for the plan
based on the fair value at the grant dates for awards under those
plans, consistent with the method prescribed by SFAS No. 123, net
income and earnings per share would have been changed to the pro forma
amounts indicated below;
<TABLE>
<CAPTION>
Year ended Year ended Year ended
December 31, December 31, December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Net income As reported $693,643 $601,794 $406,277
Pro forma $693,643 $601,215 $392,939
Earnings per share As reported $ .43 $ .39 $ .26
Pro forma $ .43 $ .39 $ .25
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
11. STOCK OPTION PLAN (continued)
Stock Compensation (continued)
The fair value of Horizon Bank stock options used to compute pro forma
net income and earnings per share disclosures is the estimated present
value at grant date using the Minimum Value pricing model with the
following assumptions for 1998: a risk free interest rate of 6.50
percent, an estimated dividend yield of 3 percent and an expected
holding period of four years.
12. EMPLOYEE BENEFIT PLAN
In 1995, the Bank adopted a contributory 401 (k) savings plan covering
substantially all employees. Effective as of January 1, 1996, the plan
allows eligible employees to contribute a fixed percentage of their
compensation with the Bank matching a portion of each employee's
contribution. The Bank's contributions amounted to $22,513 in 1998,
$16,308 in 1997 and $17,378 in 1996.
13. BUSINESS COMBINATIONS
On March 13, 1996, the Bank completed its acquisition of the assets and
assumed certain liabilities of VIP Mortgage Corporation. The excess of
the total acquisition cost over the fair value of the net assets
acquired of $73,902 is being amortized over 5 years on a straight-line
basis. The acquisition has been accounted for as a purchase and results
of operations of VIP Mortgage Corporation since the date of acquisition
are included in the Bank's financial statements. A director of the Bank
was also an owner of the mortgage corporation. Certain contingent
payments relating to the purchase were made to former stockholders in
1998 and 1997.
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate fair value
of each class of financial instrument for which it is practicable to
estimate that value.
Cash and Short-term Investment
For cash, due from banks, Federal funds sold and other short-term
instruments, the carrying amount approximates fair value.
Investment Securities and Securities Available for Sale
Fair values are based on quoted market prices or dealer quotes. If a
quoted market price is not available, fair value is estimated using
quoted market prices for similar securities.
Loans Receivable
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.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
14. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Deposit Liabilities
The fair value of demand deposits, savings account, 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.
Commitments to Extend Credit, Stand-by Letters of Credit, and Financial
Guarantees Written
The fair value of commitments is estimated using the fees currently
charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of
the counter parties. For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and
the committed rates. The fair value of guarantees and 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.
Unrecognized financial instrument accrual and deferral fees were not
considered material.
The estimated fair value of the Bank's financial instruments are as
follows:
<TABLE>
<CAPTION>
1998 (In Thousands) 1997 (In Thousands)
------------------------- -------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Financial Assets:
Cash and short-term investments $ 36,292 $ 36,292 $ 26,775 $ 26,775
Securities 29,169 29,190 20,116 20,123
Loans 75,721 75,659 76,309 76,199
Less allowance for loan losses (1,011) - (707) -
Net loans 74,710 75,659 75,602 76,199
--------- --------- --------- ---------
Total financial liabilities $ 140,171 $ 141,141 $ 122,507 $ 123,097
========= ========= ========= =========
Financial Liabilities:
Deposits $ 134,980 $ 135,247 $ 118,164 $ 118,698
========= ========= --------- ---------
Total financial liabilities $ 134,980 $ 135,247 $ 118,164 $ 118,698
========= ========= ========= =========
Unrecognized financial instruments:
Commitments to extend credit $ 24,400 $ 24,400 $ 15,900 $ 15,900
Standby letters $ 1,880 $ 1,880 $ 1,848 $ 1,848
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
15. SEGMENT INFORMATION
The Bank adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, in 1998 which changes the way the
Bank reports information about its segments.
The Bank currently considers its banking operations and mortgage
operations as reportable segments.
Banking: This segment consists of all banking services and products
which are not reported under the mortgage operations.
Mortgage: This segment consists of mortgage banking products and
services. The main product of the mortgage department is providing
residential mortgage loans in the Northern Virginia metro area.
<TABLE>
<CAPTION>
Banking Mortgage Total
------- -------- -----
<S> <C> <C> <C>
1998 (In Thousands)
----
Interest Income $ 7,630 $ 1,497 $ 9,127
Interest Expense (2,909) (1,107) (4,016)
------- ------- -------
Net Interest Income 4,721 390 5,111
Provision for Loan Losses (303) (23) (326)
Other Income 454 344 798
Operating Expense (4,182) (349) (4,531)
Income Taxes (235) (123) (358)
------- ------- -------
Net Income $ 455 $ 239 $ 694
======= ======= =======
Banking Mortgage Total
------- -------- -----
1997 (In Thousands)
----
Interest Income $ 7,247 $ 1,284 $ 8,531
Interest Expense (2,993) (590) (3,583)
------- ------- -------
Net Interest Income 4,254 694 4,948
Provision for Loan Losses (343) (42) (385)
Other Income 302 227 529
Operating Expense (3,723) (457) (4,180)
Income Taxes (167) (143) (310)
------- ------- -------
Net Income $ 323 $ 279 $ 602
======= ======= =======
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997, AND 1996
16. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT
In the normal course of business, the Bank incurs certain contingent
liabilities that are not reflected in the accompanying financial
statements. These contingent liabilities include standby letters of
credit and unfunded commitments. Commitments under standby letters of
credit approximated $1,880,553 in 1998 and $1,848,305 in 1997, and
unfunded commitments approximated $24,413,106 in 1998 and $15,899,877
in 1997. The Bank does not anticipate any material losses as a result
of these commitments.
The Bank uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments.
The amount of collateral obtained, if deemed necessary by the Bank upon
extension of credit, is based on management's credit evaluation of the
counter-party. Collateral held varies but may include cash, securities,
accounts receivable, inventory, property, plant and equipment and
income-producing commercial properties and residential properties.
All of the Bank's loans, commitments, and commercial and standby
letters of credit have been granted to customers in the Banks market
area. The concentrations of credit by type of loan are set forth in
Note 3. The distribution of commitments to extend credit approximates
the distribution of loans outstanding. Commercial and standby letters
of credit were granted primarily to commercial borrowers. The Bank does
not extend credit to any single borrower or group of related borrowers
in excess of their legal limit. The Bank does not have a payroll
processing customer which may have deposits in excess of ten percent of
total deposits during seasonal peaks.
From time to time, the Bank is party to litigation and claims arising
in the normal course of business. Management, after consultation with
legal counsel, believes that the liabilities, if any, arising from such
litigation and claims will not be material to the financial position.
In connection with the retirement of the former Chief Executive
Officer, the Bank entered into a contract with the former executive
which provided for his continued employment as a consultant through
December 31, 1997. In addition, the Bank received his agreement not to
compete which is effective upon resignation from the Board of Directors
and will remain in effect until April 30, 2000, in return for monthly
payments of $12,350 and continuation of certain benefits during the
agreement period.
<PAGE>
Horizon Bank of Virginia
Balance Sheets
June 30, 1999 and December 31, 1998
<TABLE>
<CAPTION>
(Unaudited)
Assets June 30, 1999 December 31, 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Bank $ 6,643,520 $ 5,445,820
Federal Funds Sold 17,522,000 30,846,000
Investment Securities 20,785,717 19,531,871
Securities Available for Sale 15,050,245 9,636,855
Loans Receivable, net 70,305,194 74,709,594
Bank Premises and Equipment, Net 3,034,061 3,152,593
Accrued Interest Receivable 859,554 814,437
Other Real Estate Owned 223,000 426,177
Other Assets 926,794 847,720
- ---------------------------------------------------------------------------------------------------
Total Assets $135,350,085 $145,411,067
===================================================================================================
Liabilities and Stockholders' Equity
- ---------------------------------------------------------------------------------------------------
Liabilities
Deposits $125,031,866 $134,979,742
Other liabilities 317,055 728,198
- ---------------------------------------------------------------------------------------------------
Total Liabilities 125,348,921 135,707,940
Stockholders' Equity
Common stock 4,149,738 4,099,325
Capital in excess of par value 4,274,185 4,223,773
Retained earnings 1,744,417 1,352,984
Accumulated other comprehensive income (167,176) 27,045
- ---------------------------------------------------------------------------------------------------
Total Stockholders' Equity 10,001,164 9,703,127
- ---------------------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $135,350,085 $145,411,067
===================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Horizon Bank of Virginia
Statements of Operations
Three Months and Six Months Ended June 30, 1999 and June 30, 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest income:
Loans $ 1,738,409 $ 1,471,125 $ 3,335,999 $ 3,109,630
Investments securities 618,409 657,075 1,251,601 1,099,431
- --------------------------------------------------------------------------------------------------------------------
Total Interest Income 2,356,818 2,128,200 4,587,600 4,209,061
Interest expense:
Deposits 968,837 1,061,542 2,041,358 1,905,209
- --------------------------------------------------------------------------------------------------------------------
Net Interest Income 1,387,981 1,066,658 2,546,242 2,303,852
Provision for Possible Loan
Losses 45,001 103,500 111,037 167,000
- --------------------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 1,342,980 963,158 2,435,205 2,136,852
- --------------------------------------------------------------------------------------------------------------------
Other income:
Fee income 81,371 312,162 411,828 573,252
Other 4,089 3,050 7,928 5,825
- --------------------------------------------------------------------------------------------------------------------
Total other income 85,460 315,212 419,756 579,077
- --------------------------------------------------------------------------------------------------------------------
Other expense:
Employee compensation and
benefits 500,580 453,685 1,027,684 956,399
Premises and equipment 257,976 237,207 506,787 466,655
Data processing expense 31,080 30,708 61,708 61,152
Other 332,691 275,654 666,274 668,070
- --------------------------------------------------------------------------------------------------------------------
Total other expense 1,122,327 997,254 2,262,453 2,152,276
- --------------------------------------------------------------------------------------------------------------------
Income before income taxes 306,113 281,116 592,508 563,653
Provision for income taxes 104,150 97,730 201,075 191,930
- --------------------------------------------------------------------------------------------------------------------
Net Income $ 201,963 $ 183,386 $ 391,433 $ 371,723
====================================================================================================================
Earnings per common share:
Basic $.12 $.11 $0.24 $0.23
Diluted $.13 $.11 $0.24 $0.23
Weighted average shares outstanding:
Basic 1,649,735 1,604,053 1,649,735 1,604,053
Diluted 1,649,735 1,616,784 1,649,735 1,616,784
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Horizon Bank of Virginia
Statements of Comprehensive Income
Six Months Ended June 30, 1999 and June 30, 1998
(Unaudited)
Six Months Ended
June 30,
1999 1998
---------- ----------
Net income $ 391,433 $ 371,723
Other comprehensive income, net of tax:
Unrealized gain (loss) on securities, net (194,221) 5,521
---------- ----------
Other comprehensive income (194,221) 5,521
Comprehensive income $ 197,212 $ 377,244
========== ==========
The accompanying notes are an integral part of these financial statements
<PAGE>
Horizon Bank of Virginia
Statements of Changes in Stockholders' Equity
Six Months Ended June 30, 1999 and Year Ended December 31, 1998
<TABLE>
<CAPTION>
Accumulated
Other
Number Retained Comprehensive
of Shares Par Value Surplus Earnings Income Totals
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 1,557,778 $3,894,445 $3,564,319 $1,503,105 $ 3,595 $8,965,464
Exercise of stock options 4,114 10,285 10,285 - - 20,570
5 Percent Stock
Dividend 77,837 194,595 649,169 (843,764) - -
Net Change in Unrealized
Gain on Securities
Available for Sale - - - - 23,450 23,450
Net Income for the
Year Ended
December 31, 1998 - - - 693,643 - 693,643
- -------------------------------------------------------------------------------------------------------------------
Balance,
December 31, 1998 1,639,729 4,099,325 4,223,773 1,352,984 27,045 9,703,127
- -------------------------------------------------------------------------------------------------------------------
(Unaudited)
Exercise of Stock
Options 20,165 50,413 50,412 - - 100,825
Net Change in
Unrealized Gain on
Securities Available
for Sale - - - - (194,221) (194,221)
Net Income for the
Period Ended
June 30, 1999 - - - 391,433 - 391,433
- -------------------------------------------------------------------------------------------------------------------
Balance,
June 30, 1999 1,659,894 $4,149,738 $4,274,185 $1,744,417 $(167,176) $10,001,164
===================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
Horizon Bank of Virginia
Statements of Cash Flows
Six Months Ended June 30, 1999 and 1998
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
June 30, June 30,
1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 391,433 $ 371,723
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 128,056 126,901
Provision for loan losses 118,660 167,000
(Increase) Decrease in other assets (78,986) 451,763
Increase (Decrease) in other expenses 411,143 (117,336)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 970,306 1,000,051
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities
Net Federal funds sold 13,324,000 8,573,000
Increase in premises and equipment (17,147) (127,585)
Loans collected (made), net 3,434,828 (2,688,070)
Proceeds from the maturities of investment securities - 1,800,000
Purchase of securities available for sale (5,413,390) -
Purchase of investment securities (1,253,846) -
Proceeds from the maturities of securities available for sale - 1,256,000
- --------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Investing Activities 10,074,445 8,813,345
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities
Proceeds from sale of common stock 100,825 5,570
Net decrease in deposits (9,947,876) (8,706,969)
- --------------------------------------------------------------------------------------------------------------------
Net Cash Used by Financing Activities (9,847,051) (8,701,399)
- --------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Due from Banks 1,197,700 1,111,997
Cash and Due from Banks, beginning of period 5,445,820 6,467,421
- --------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks, end of period $ 6,643,520 $ 7,579,418
====================================================================================================================
Noncash
Unrealized gain (loss) on securities available for sale, net $ (194,221) $ 5,521
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited 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 periods
ended June 30, 1999 and 1998 are not necessarily indicative of the
results of the full year. These financial statements should be read in
conjunction with the financial statements and the notes included in The
Horizon Bank of Virginia's Annual Report for the year ended December
31, 1998.
2. INVESTMENT SECURITIES
The following table sets forth the Bank's investment securities
portfolio as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Available-for-sale
securities:
U.S. Government
Treasury and
agency obligations $15,303,543 $15,050,245 $ 9,595,877 $ 9,636,855
Held-to-maturity
securities:
U.S. Government
Treasury and
agency obligations $20,785,717 $20,515,549 $19,531,871 $19,553,348
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
3. LOANS RECEIVABLE
Loans receivable consist of the following:
June 30, December 31,
1999 1998
------------ ------------
Mortgage:
Residential $25,891,408 $28,776,000
Nonresidential 22,233,537 20,234,000
Construction: 2,148,112 1,764,000
Non-Mortgage:
Business 14,194,703 16,041,000
Consumer 7,143,960 9,134,586
------------ ------------
Total loan receivable 71,611,720 75,949,586
Less:
Deferred loan fees, net 193,554 228,973
Allowance for loan losses 1,112,972 1,011,019
------------ ------------
Loans receivable, net $70,305,194 $74,709,594
============ ============
The following sets forth information regarding the allowance for loan
losses:
Six Months Six Months
Ended Ended
6/30/99 6/30/98
------------ ------------
Allowance at beginning of period $1,011,019 $706,838
Provision for losses charged to income 118,660 167,000
Charge-offs, net (16,707) (3,541)
Allowance at end of period $1,112,972 $870,297
4. EARNINGS PER SHARE
The following table shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of dilutive common stock equivalents.
<TABLE>
<CAPTION>
For the six months ended
June 1999 June 1998
----------------------- -------------------------
Per Per
Share Share
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Basic EPS 1,649,735 $0.24 1,604,053 $0.23
===== =====
Effect of dilutive
Securities:
Stock Options
unexercised - 12,731
--------- ---------
Diluted EPS 1,649,735 $0.24 1,616,784 $0.23
========= ===== ========= =====
</TABLE>
<PAGE>
THE HORIZON BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
5. Other significant matters
The Bank signed a definitive Merger Agreement providing for a merger
with Southern Financial Bancorp, Inc. Stockholders of the Bank will
receive .63 shares of Southern Financial Bancorp common stock in
exchange for each share of its common stock. Subject to certain
conditions including receipt of regulatory approval and approval of the
shareholders of the Southern Financial Bancorp and the Bank, closing of
the merger is anticipated to occur in the third quarter of 1999. The
merger will be accounted for under the pooling method.
<PAGE>
(b) Pro Forma Financial Information.
The following unaudited pro forma condensed financial statements have
been prepared on a consolidated basis based upon the historical financial
statements of the Company and Horizon. The pro forma combined information gives
effect to the Merger accounted for as a pooling of interests, and is based on
the issuance of 1,045,734 shares of Company Common Stock in connection with the
Merger, which in turn is based on the number of shares of Horizon Common Stock
outstanding at June 30, 1999. The number of shares of Company Common Stock to be
issued in connection with the Merger is subject to certain adjustments described
in the Joint Proxy Statement. Any difference in the number of shares of Company
Common Stock issued in connection with the Merger would affect the pro forma
financial information set forth below.
The pro forma financial statements should be read in conjunction with
the separate historical financial statements and the related notes thereto of
the Company, which have been filed with the Commission, and Horizon's historical
financial statements, which are included in Item 7(a) above. There are no
adjustments necessary to the historical results of operations as a result of
these transactions. The pro forma combined financial position and results of
operations are not necessarily indicative of the results which would actually
have been attained if the Merger had occurred in the past or which may be
attained in the future.
<PAGE>
SOUTHERN FINANCIAL AND HORIZON
PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1999
<TABLE>
<CAPTION>
Southern Financial Horizon Adjustments Consolidated
----------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $ 8,085 $ 6,644 $ 14,729
Overnight earning deposits 3,984 17,522 21,506
Investment securities, available-for-sale 77,020 15,050 92,070
Investment securities, held-to-maturity 30,625 20,786 51,411
Loans held for sale 763 - 763
Loans receivable, net 140,039 70,305 210,344
Federal Home Loan Bank stock, at cost 1,254 - 1,254
Premises and equipment, net 2,871 3,034 5,905
Other assets 7,008 2,009 9,017
----------------------------------------------------------------------
Total assets $ 271,649 $ 135,350 $ 406,999
======================================================================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 247,450 $ 125,032 $ 372,482
Advances from Federal Home Loan Bank - - -
Other liabilities 2,172 317 2,489
----------------------------------------------------------------------
Total liabilities 249,622 125,349 374,971
----------------------------------------------------------------------
Commitments
Stockholders' equity:
Preferred stock - - - -
Common stock 16 4,150 (4,139) 27
Capital in excess of par value 15,725 4,274 4,139 24,138
Retained earnings 6,587 1,744 - 8,331
Accumulated other comprehensive income 170 (167) - 3
Treasury stock, at cost (471) - - (471)
----------------------------------------------------------------------
Total stockholders' equity 22,027 10,001 - 32,028
----------------------------------------------------------------------
Total liabilities and stockholders' equity $ 271,649 $ 135,350 $ - $ 406,999
======================================================================
</TABLE>
<PAGE>
SOUTHERN FINANCIAL AND HORIZON
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 6,331 $ 3,336 $ 9,667
Investment securities 3,583 1,252 4,835
---------------------------------------------------------
Total interest income 9,914 4,588 14,502
---------------------------------------------------------
Interest expense:
Deposits 4,845 2,042 6,887
Borrowings 207 - 207
---------------------------------------------------------
Total interest expense 5,052 2,042 7,094
---------------------------------------------------------
Net interest income 4,862 2,546 7,408
Provision for loan losses 670 111 781
---------------------------------------------------------
Net interest income after provision for loan losses 4,192 2,435 6,627
---------------------------------------------------------
Other income:
Fee income 790 412 1,202
Gain on sale of loans 541 - 541
Gain on sale of investment securities 139 - 139
Other 106 8 114
---------------------------------------------------------
Total other income 1,576 420 1,996
---------------------------------------------------------
Other expense:
Employee compensation and benefits 1,840 1,028 2,868
Premises and equipment 1,035 568 1,603
Deposit insurance assessments 68 6 74
Advertising 134 7 141
Other 631 653 1,284
---------------------------------------------------------
Total other expense 3,708 2,262 5,970
---------------------------------------------------------
Income before income taxes 2,060 593 2,653
Provision for income taxes 576 201 777
---------------------------------------------------------
Net income $ 1,484 $ 392 $ 1,876
=========================================================
Earnings per common share:
Basic $ 0.92 $ 0.24 $ 0.71
Diluted 0.88 0.24 0.69
Weighted average shares outstanding:
Basic 1,604,156 1,649,735 2,643,489
Diluted 1,684,217 1,649,735 2,723,550
</TABLE>
<PAGE>
SOUTHERN FINANCIAL AND HORIZON
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 6,211 $ 3,110 $ 9,321
Investment securities 2,971 1,099 4,070
---------------------------------------------------------
Total interest income 9,182 4,209 13,391
---------------------------------------------------------
Interest expense:
Deposits 4,901 1,905 6,806
Borrowings 83 - 83
---------------------------------------------------------
Total interest expense 4,984 1,905 6,889
---------------------------------------------------------
Net interest income 4,198 2,304 6,502
Provision for loan losses 450 167 617
---------------------------------------------------------
Net interest income after provision for loan losses 3,748 2,137 5,885
---------------------------------------------------------
Other income:
Fee income 680 573 1,253
Gain on sale of loans 220 - 220
Gain on sale of investment securities - - 0
Other 28 6 34
---------------------------------------------------------
Total other income 928 579 1,507
---------------------------------------------------------
Other expense:
Employee compensation and benefits 1,371 956 2,327
Premises and equipment 869 528 1,397
Deposit insurance assessments 61 6 67
Advertising 81 8 89
Other 516 654 1,170
---------------------------------------------------------
Total other expense 2,898 2,152 5,050
---------------------------------------------------------
Income before income taxes 1,778 564 2,342
Provision for income taxes 474 192 666
---------------------------------------------------------
Net income $ 1,304 $ 372 $ 1,676
=========================================================
Earnings per common share:
Basic $ 0.81 $ 0.23 $ 0.64
Diluted 0.76 0.23 0.61
Weighted average shares outstanding:
Basic 1,592,906 1,604,053 2,603,456
Diluted 1,714,763 1,616,784 2,733,337
</TABLE>
<PAGE>
SOUTHERN FINANCIAL AND HORIZON
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 12,365 $ 7,189 $ 19,554
Investment securities 6,366 1,938 8,304
---------------------------------------------------------
Total interest income 18,731 9,127 27,858
---------------------------------------------------------
Interest expense:
Deposits 9,935 4,016 13,951
Borrowings 270 - 270
---------------------------------------------------------
Total interest expense 10,205 4,016 14,221
---------------------------------------------------------
Net interest income 8,526 5,111 13,637
Provision for loan losses 975 326 1,301
---------------------------------------------------------
Net interest income after provision for loan losses 7,551 4,785 12,336
---------------------------------------------------------
Other income:
Fee income 1,433 786 2,219
Gain on sale of loans 796 - 796
Gain on sale of investment securities 68 - 68
Other 50 12 62
---------------------------------------------------------
Total other income 2,347 798 3,145
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,921 1,937 4,858
Premises and equipment 1,783 938 2,721
Deposit insurance assessments 124 - 124
Advertising 185 42 227
Other 1,142 1,614 2,756
---------------------------------------------------------
Total other expense 6,155 4,531 10,686
---------------------------------------------------------
Income before income taxes 3,743 1,052 4,795
Provision for income taxes 1,084 358 1,442
---------------------------------------------------------
Net income $ 2,659 $ 694 $ 3,353
=========================================================
Earnings per common share:
Basic $ 1.66 $ 0.43 $ 1.28
Diluted 1.55 0.42 1.22
Weighted average shares outstanding:
Basic 1,597,815 1,620,817 2,618,930
Diluted 1,713,815 1,633,548 2,742,950
</TABLE>
<PAGE>
SOUTHERN FINANCIAL AND HORIZON
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 11,568 $ 7,022 $ 18,590
Investment securities 5,437 1,509 6,946
---------------------------------------------------------
Total interest income 17,005 8,531 25,536
---------------------------------------------------------
Interest expense:
Deposits 8,709 3,583 12,292
Borrowings 334 - 334
---------------------------------------------------------
Total interest expense 9,043 3,583 12,626
---------------------------------------------------------
Net interest income 7,962 4,948 12,910
Provision for loan losses 880 385 1,265
---------------------------------------------------------
Net interest income after provision for loan losses 7,082 4,563 11,645
---------------------------------------------------------
Other income:
Fee income 1,447 518 1,965
Gain on sale of loans 192 - 192
Gain on sale of investment securities - 1 1
Other 89 10 99
---------------------------------------------------------
Total other income 1,728 529 2,257
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,532 2,014 4,546
Premises and equipment 1,840 918 2,758
Deposit insurance assessments 109 - 109
Advertising 214 18 232
Other 887 1,230 2,117
---------------------------------------------------------
Total other expense 5,582 4,180 9,762
---------------------------------------------------------
Income before income taxes 3,228 912 4,140
Provision for income taxes 1,022 310 1,332
---------------------------------------------------------
Net income $ 2,206 $ 602 $ 2,808
=========================================================
Earnings per common share:
Basic $ 1.39 $ 0.39 $ 1.09
Diluted 1.33 0.38 1.06
Weighted average shares outstanding:
Basic 1,577,243 1,557,744 2,558,622
Diluted 1,657,706 1,571,446 2,647,717
</TABLE>
<PAGE>
SOUTHERN FINANCIAL AND HORIZON
PRO FORMA COMBINED STATEMENTS OF INCOME
FOR YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Southern Financial Horizon Combined
---------------------------------------------------------
(Dollars in thousands, except per share data)
<S> <C> <C> <C>
Interest income:
Loans $ 10,308 $ 6,129 $ 16,437
Investment securities 4,306 1,551 5,857
---------------------------------------------------------
Total interest income 14,614 7,680 22,294
---------------------------------------------------------
Interest expense:
Deposits 7,433 3,566 10,999
Borrowings 342 - 342
---------------------------------------------------------
Total interest expense 7,775 3,566 11,341
---------------------------------------------------------
Net interest income 6,839 4,114 10,953
Provision for loan losses 695 211 906
---------------------------------------------------------
Net interest income after provision for loan losses 6,144 3,903 10,047
---------------------------------------------------------
Other income:
Fee income 950 393 1,343
Gain on sale of loans 210 - 210
Gain on sale of investment securities - 7 7
Other 26 7 33
---------------------------------------------------------
Total other income 1,186 407 1,593
---------------------------------------------------------
Other expense:
Employee compensation and benefits 2,148 1,859 4,007
Premises and equipment 1,591 738 2,329
Deposit insurance assessments 1,085 - 1,085
Advertising 143 52 195
Other 940 1,044 1,984
---------------------------------------------------------
Total other expense 5,907 3,693 9,600
---------------------------------------------------------
Income before income taxes 1,423 617 2,040
Provision for income taxes 469 211 680
---------------------------------------------------------
Net income $ 954 $ 406 $ 1,360
=========================================================
Earnings per common share:
Basic $ 0.61 $ 0.26 $ 0.53
Diluted 0.59 0.26 0.52
Weighted average shares outstanding:
Basic 1,544,338 1,551,890 2,522,029
Diluted 1,621,958 1,564,956 2,607,880
</TABLE>
<PAGE>
Notes to Pro Forma Combined Financial Information
(1) The pro forma combined information presented is not necessarily
indicative of the results of operations or the financial position that
would have resulted had the merger been consummated at the beginning of
the periods indicated, nor is it necessarily indicative of the results
of operations in future periods or the future financial position of the
combined entities.
(2) It is assumed that the merger will be accounted for on a
pooling-of-interests accounting basis and, accordingly, the related pro
forma adjustments have been calculated using the exchange ratio,
whereby Southern Financial will issue 0.63 shares of Southern Financial
common stock for each share of Horizon common stock.
(3) Per share data for all periods has been computed based on the combined
historical income applicable to common shareholders of Southern
Financial and Horizon using the historical weighted average shares
outstanding, adjusted to equivalent shares of Southern Financial common
stock.
(4) Pro forma combined balance sheet adjustments reflect (i) the issuance
of shares of Southern Financial common stock and (ii) the elimination
of Horizon common stock.
<PAGE>
(c) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Agreement and Plan of Reorganization between The
Horizon Bank of Virginia, Southern Financial
Bancorp, Inc. and Southern Financial Bank, dated
as of May 3, 1999, as amended, filed as Exhibit
2.1 to the Registration Statement on Form S-4
(File No. 333-82159), incorporated herein by
reference.
23.1 Consent of Thompson, Greenspon & Co., P.C.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned hereunto duly authorized.
SOUTHERN FINANCIAL BANCORP, INC.
Dated: November 10, 1999 By: /s/ William H. Lagos
--------------------------------
William H. Lagos
Senior Vice President
<PAGE>
INDEX TO EXHIBITS
No. Description
- --- -----------
2.1 Agreement and Plan of Reorganization between The Horizon Bank
of Virginia, Southern Financial Bancorp, Inc. and Southern
Financial Bank, dated as of May 3, 1999, as amended, filed as
Exhibit 2.1 to the Registration Statement on Form S-4 (File No.
333-82159), incorporated herein by reference.
23.1 Consent of Thompson, Greenspon & Co., P.C.
[Letterhead of Thompson, Greenspon & Co., P.C.]
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors
The Horizon Bank of Virginia
We consent to the incorporation by reference in Registration Statement Nos.
33-08285 and 33-80287 on Form S-8, and 333-00916 on Form S-3 of Southern
Financial Bancorp, Inc. of our reports dated January 29, 1999 and January 23,
1998, relating to the balance sheets of The Horizon Bank of Virginia as of
December 31, 1998, and 1997, and the related statements of operations, other
comprehensive income, changes in stockholders equity, and cash flows for the
years ended December 31, 1998, 1997 and 1996, which reports appear in the Form
8-K of Southern Financial Bancorp, Inc. dated October 1, 1999.
/s/ Thompson, Greenspon & Co., P.C.
Fairfax, Virginia
November 10, 1999
