<PAGE>
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, 2000 0-22836
SOUTHERN FINANCIAL BANCORP, INC.
Virginia 54-1779978
------------------------------ ---------------------------------
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
37 East Main Street
Warrenton, Virginia 20186
------------------------------ -----------------------------------
(address of principal executive office) (Zip Code)
Registrant's Telephone Number, including area code: (540) 349-3900
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
As of July 31, 2000, there were 2,658,456 shares of the registrant's Common
Stock outstanding.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
June 30, 2000
TABLE OF CONTENTS
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
as of June 30, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Income for the
Three and Six Months Ended June 30, 2000 and 1999
(Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three and Six Months Ended June 30, 2000 and
1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2000 and 1999
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7 - 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16 -17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
PART III. SIGNATURES 19
2
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30,
2000 December 31,
(Unaudited) 1999
-------------------- --------------------
<S> <C>
Assets
Cash and due from banks $ 14,695,588 $ 12,667,620
Overnight earning deposits 3,038,891 4,464,338
Investment securities, available for sale 106,832,939 97,721,012
Investment securities, held to maturity 41,933,782 37,110,889
Loans held for sale 237,000 442,000
Loans receivable, net 240,888,017 234,086,432
Premises and equipment, net. 6,230,182 6,445,589
Other assets 13,261,560 13,283,684
-------------------- --------------------
Total assets $ 427,117,959 $ 406,221,564
==================== ====================
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 378,707,282 $ 367,187,558
Advances from Federal Home Loan Bank 9,000,000 5,000,000
Capital Trust borrowings 5,000,000 -
Other liabilities 3,749,360 5,169,909
-------------------- --------------------
Total liabilities 396,456,642 377,357,467
-------------------- --------------------
Commitments
Stockholders' equity:
Preferred stock 136 136
Common stock 26,717 26,562
Capital in excess of par value 23,706,325 23,662,935
Retained earnings 8,702,126 6,898,249
Accumulated other comprehensive loss (1,773,987) (1,723,785)
-------------------- --------------------
Total stockholders' equity 30,661,317 28,864,097
-------------------- --------------------
Total liabilities and stockholders' equity $ 427,117,959 $ 406,221,564
==================== ====================
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF INCOME
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Interest income:
Loans $ 5,975,924 $ 4,832,346 $ 11,532,088 $ 9,626,463
Investment securities 2,593,091 2,401,037 5,075,486 4,839,162
----------- ----------- ------------ -----------
Total interest income 8,569,015 7,233,383 16,607,574 14,465,625
----------- ----------- ------------ -----------
Interest expense:
Deposits 3,774,511 3,376,401 7,342,029 6,885,664
Borrowings 392,232 104,492 665,646 207,325
----------- ----------- ------------ -----------
Total interest expense 4,166,743 3,480,893 8,007,675 7,092,989
----------- ----------- ------------ -----------
Net interest income 4,402,272 3,752,490 8,599,899 7,372,636
Provision for loan losses 325,000 440,000 675,000 781,036
----------- ----------- ------------ -----------
Net interest income after provision for loan losses 4,077,272 3,312,490 7,924,899 6,591,600
----------- ----------- ------------ -----------
Other income:
Fee income 623,987 530,353 1,282,601 1,104,818
Gain on sale of loans 271,215 342,743 604,593 686,516
Other 59,184 230,503 90,412 245,151
----------- ----------- ------------ -----------
Total other income 954,386 1,103,599 1,977,606 2,036,485
----------- ----------- ------------ -----------
Other expense:
Employee compensation and benefits 1,691,506 1,561,155 3,349,892 3,111,357
Premises and equipment 622,881 618,215 1,238,430 1,166,510
Data processing expense 271,578 237,375 546,821 454,563
Advertising 48,748 63,034 109,634 140,755
Deposit insurance assessments 18,696 36,762 36,360 73,488
Other 474,710 528,060 968,279 1,028,506
----------- ----------- ------------ -----------
Total other expense 3,128,119 3,044,601 6,249,416 5,975,179
----------- ----------- ------------ -----------
Income before income taxes 1,903,539 1,371,488 3,653,089 2,652,906
Provision for income taxes 630,600 382,450 1,204,600 776,875
----------- ----------- ------------ -----------
Net income $ 1,272,939 $ 989,038 $ 2,448,489 $ 1,876,031
=========== =========== ============ ===========
Earnings per common share:
Basic $ 0.48 $ 0.37 $ 0.92 $ 0.71
Diluted 0.47 0.36 0.90 0.69
Weighted average shares outstanding:
Basic 2,658,398 2,644,415 2,662,297 2,640,480
Diluted 2,709,025 2,722,633 2,717,050 2,728,417
</TABLE>
The accompanying notes are an integral part of these financial statements
4
<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,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C>
Net income $ 1,272,939 $ 989,038 $ 2,448,489 $ 1,876,031
Other comprehensive income:
Cash flow hedge:
Unrealized holding gain 89,520 334,132 169,305 701,145
Reclassification adjustment for net interest
expense included in net income (67,375) 15,883 (107,160) 27,155
Available-for-sale securities:
Unrealized holding loss (190,075) (932,058) (138,209) (1,069,971)
Reclassification adjustment for gains
included in net income - (88,117) - (88,117)
----------- --------- ----------- -----------
Other comprehensive income before tax (167,930) (670,160) (76,064) (429,788)
Income tax expense related to items of other
comprehensive income (57,096) (225,029) (25,862) (146,129)
----------- --------- ----------- -----------
Other comprehensive income, net of tax (110,834) (445,131) (50,202) (283,659)
Comprehensive income $ 1,162,105 $ 543,907 $ 2,398,287 $ 1,592,372
=========== ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
5
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------------------
2000 1999
---- ----
<S> <C>
Cash flows from operating activities:
Net Income $ 2,448,489 $ 1,876,031
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 472,227 610,307
Provision for loan losses 675,000 781,036
Gain on sale of loans (604,593) (686,516)
Gain on sale of securities - (88,117)
Amortization of deferred loan fees (266,802) (289,101)
Net change in loans held for sale 292,431 380,368
Decrease in other assets 43,817 302,441
Increase (decrease) in other liabilities (1,440,003) 88,646
------------ ------------
Net cash provided by operating activities 1,620,566 2,975,095
------------ ------------
Cash flows from investing activities:
Increase in loans receivable (6,393,387) (7,464,003)
Purchase of investment securities, held-to-maturity (7,644,597) (1,253,846)
Purchase of investment securities, available-for-sale (14,038,754) (28,609,490)
Sale of investment securities available-for-sale - 5,404,657
Paydowns of investment securities 7,559,981 34,921,047
(Increase) decrease in overnight earning deposits, net 1,425,447 (3,056,095)
Increase in premises and equipment, net (244,946) (724,448)
Increase in Federal Home Loan Bank stock (25,000) (171,200)
------------ ------------
Net cash used by investing activities (19,361,256) (953,378)
------------ ------------
Cash flows from financing activities:
Net increase in deposits 11,519,724 5,576,087
Increase (decrease) in advances from FHLB 4,000,000 (3,500,000)
Proceeds from Capital Trust borrowings 5,000,000 -
Proceeds from issuance of common stock 42,296 176,838
Repurchase of common stock (148,750) -
Dividends on preferred and common stock (644,612) (366,650)
------------ ------------
Net cash provided by financing activities 19,768,658 1,886,275
------------ ------------
Net increase in cash and due from banks 2,027,968 3,907,992
Cash and due from banks, beginning of period 12,667,620 10,820,765
------------ ------------
Cash and due from banks, end of period $ 14,695,588 $ 14,728,757
============ ============
</TABLE>
The accompanying notes are an integral part of these statements
6
<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, 2000 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, 1999.
NOTE 2 - HEDGE ACCOUNTING
During the first quarter of 1999, Southern Financial entered into four
interest rate swap agreements that are accounted for as cash flow hedges. In
accordance with SFAS 133, Southern Financial records the change in fair value of
the swaps in comprehensive income. To the extent that the hedge is not
completely effective, the ineffective portion is charged or credited to other
income or expense. The amounts recorded in comprehensive income subsequently are
reclassified into interest expense as a yield adjustment in the same period in
which the related interest on the certificates of deposit (CD's) affects
earnings.
Each of the four swap agreements has a notional amount of $5 million,
and Southern Financial agreed to pay a rate fixed for the period of the swap and
receive 3 month LIBOR. Three of the swaps are for a period of five years and
have fixed rates ranging from 5.23% to 5.29%; the fourth swap is for a period of
ten years and has a fixed rate of 5.45%. The purpose of all four of these swaps
was to hedge the variability of cash flows resulting from changes in interest
rates in Southern Financial's floating rate liabilities, specifically Southern
Financial's CD's in amounts greater than $90,000, which have maturities of one
month to six months. Southern Financial performed a regression analysis using
monthly averages of both 3 month LIBOR and Southern Financial's hedged CD's and
determined that there was a highly effective correlation. Southern Financial
designated CD's that were outstanding on the inception dates of the swaps as
being hedged by the swaps, and as the hedged CD's mature, Southern Financial has
identified other individual CD's to replace them. During the remaining six
months of the year ending December 31, 2000, it is estimated that an immaterial
amount of gains in accumulated other comprehensive income related to the
interest rate swaps are expected to be reclassified into interest expense as a
yield adjustment of the hedged CD's.
During the quarter ended June 30, 2000, a portion of the hedge was
"ineffective" as the spread between LIBOR (the denomination of the floating rate
side of the interest rate swaps) and Southern Financial's CD issuance costs
changed. Since there was an unfavorable change in the net present value of the
variance in the spread for the weighted average remaining life of the interest
rate swaps, a loss in the amount of $51 thousand was recognized.
During the quarter ended March 31, 2000, Southern Financial entered
into an interest rate swap agreement in the amount of $10 million in connection
with the issuance of a like amount of its certificates of deposit. The interest
rate swap agreement is accounted for as a fair value hedge. Changes in the
present value of the hedge are accounted for in the income statement, as are
changes in the present value of the certificates of deposit. The swap has a
termination date of September 29, 2005, however it may be terminated on March
29, 2001 or the 29th day of each successive calendar month thereafter by the
other party to the swap transaction. Southern Financial agreed to pay a floating
rate of 1 month LIBOR plus 12 basis points and receive a fixed rate of 7.25%.
7
<PAGE>
NOTE 3 - INVESTMENT SECURITIES
The following table sets forth the investment securities portfolio
as of the dates indicated:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
<S> <C>
Available-for-sale securities:
FHLMC MBS $ 19,426,668 $ 19,255,377 $ 16,361,253 $ 16,369,217
GNMA MBS 9,274,953 9,188,182 2,633,942 2,588,947
FNMA MBS 25,625,896 25,406,670 25,509,631 25,677,821
Collaterized mortgage obligations 27,061,290 25,379,058 27,275,536 25,303,089
Commercial MBS 24,097,943 22,646,875 24,102,513 22,495,000
Obligations of counties and municipalities 3,868,568 3,529,540 3,924,186 3,571,473
Corporate obligations 991,479 950,362 990,745 945,371
U.S. Treasury and agency securities 492,445 476,875 791,301 770,094
$ 110,839,242 $ 106,832,939 $ 101,589,107 $ 97,721,012
============= ============= ============= ============
Held-to-maturity securities:
FHLMC MBS $ 6,440,743 $ 6,421,486 $ 3,837,207 $ 3,805,831
GNMA MBS 15,381,871 15,071,525 17,177,221 16,933,843
FNMA MBS 9,387,678 9,290,495 6,764,242 6,623,910
Collateralized mortgage obligations 3,951,231 3,852,469 4,073,233 4,005,515
Commercial MBS 3,488,255 3,483,011 2,864,392 2,796,697
Obligations of counties and municipalities 2,394,278 2,263,510 2,394,594 2,279,954
U.S. Treasury and agency securities 889,726 909,524 - -
------------ ------------ ------------ ------------
$ 41,933,782 $ 41,292,020 $ 37,110,889 $ 36,445,750
============ ============ ============ ============
</TABLE>
8
<PAGE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
June 30, December 31,
2000 1999
------- -----------
Mortgage:
Residential $ 41,535,422 $ 48,604,205
Nonresidential 121,402,550 109,871,210
Construction:
Residential 4,708,558 7,852,907
Nonresidential 6,788,927 8,270,290
NonMortgage:
Business 62,271,968 54,175,076
Consumer 9,696,031 9,994,326
------------- -------------
Total loans receivable 246,403,456 238,768,014
Less:
Deferred loan fees, net 1,451,652 1,229,451
Allowance for loan losses 4,063,787 3,452,131
------------- -------------
Loans receivable, net $ 240,888,017 $ 234,086,432
============= =============
The following sets forth information regarding the allowance for loan losses:
Six Months Six Months
Ended Ended
6/30/00 6/30/99
Allowance at beginning of period $ 3,452,131 $ 3,061,631
Provision for losses charged to income 675,000 781,036
Chargeoffs (339,022) (739,566)
Recoveries 275,678 217,025
--------------- ----------------
Allowance at end of period $ 4,063,787 $ 3,320,126
=============== =================
9
<PAGE>
NOTE 5 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 three months ended For the six months ended
June 2000 June 1999 June 2000 June 1999
--------- --------- --------- ---------
Per Per Per Per
Share Share Share Share
Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------ ------ ------
<S> <C>
Basic EPS 2,658,398 $0.48 2,644,415 $0.37 2,662,297 $0.92 2,640,480 $0.71
===== ===== ===== =====
Effect of dilutive
securities:
Stock options 28,652 56,243 32,778 65,962
Convertible preferred stock 21,975 21,975 21,975 21,975
--------- --------- --------- ---------
Diluted EPS 2,709,025 $0.47 2,722,633 $0.36 2,717,050 $0.90 2,728,417 $0.69
========= ===== ========= ===== ========= ===== ========= =====
</TABLE>
NOTE 6 OTHER SIGNIFICANT MATTERS
Southern Financial signed a definitive Merger Agreement providing
for a merger with First Savings Bank of Virginia. Southern Financial will issue
.44 shares of its common stock in exchange for each share of common stock of
First Savings Bank of Virginia. Subject to approval of the shareholders of First
Savings Bank of Virginia, closing of the merger is anticipated to occur on
September 1, 2000. The merger will be accounted for under the purchase method.
On May 24, 2000, Southern Financial completed a $5 million
offering of redeemable capital securities through its wholly owned subsidiary,
Southern Financial Capital Trust I. The proceeds from this offering qualify as
capital for regulatory banking purposes. Southern Financial used a portion of
these proceeds to fund earning asset growth.
10
<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. ("Southern Financial")
at June 30, 2000 were $427.1 million, an increase of $20.9 million, or 5.1%,
from total assets of $406.2 million at December 31, 1999. Total liabilities
increased by $19.1 million, or 5.1%, to $396.5 million at June 30, 2000 from
$377.4 million at December 31, 1999. The growth in total assets resulted
primarily from an increase of $13.9 million in investment securities and $6.8
million in loans receivable.
Total loans receivable increased by $6.8 million to $240.9 million at
June 30, 2000 from $234.1 million at December 31, 1999, as new loan originations
more than offset loan sales and prepayments of residential mortgage loans during
the period. In this period the Bancorp sold the guaranteed portion of some of
the Small Business Administration (SBA) loans that it held in portfolio. These
sales totaled $5.8 million. Nonresidential permanent mortgage loans increased
by $11.5 million to $121.4 million at June 30, 2000, from $109.9 million at
December 31, 1999. Nonmortgage business loans increased $8.1 million to $62.3
million at June 30, 2000, from $54.2 million at December 31, 1999. Residential
construction loans decreased $3.1 million from $7.8 million at December 31,
1999, to $4.7 million at June 30, 2000. Residential permanent mortgage loans
decreased $7.1 million from $48.6 million at December 31, 1999, to $41.5 million
at June 30, 2000. Nonresidential construction loans decreased $1.5 million from
$8.3 million at December 31, 1999, to $6.8 million at June 30, 2000
Investment securities available-for-sale increased from $97.7 million
at December 31, 1999, to $106.8 million at June 30, 2000. There were purchases
of $14.0 million of investment securities designated as availableforsale.
There were repayments and amortization of $4.8 million of investment securities
availableforsale during the period. There were no sales of investment
securities availableforsale during the six months ended June 30, 2000.
Investment securities held-to-maturity increased by $4.8 million to
$41.9 million at June 30, 2000, from $37.1 million at December 31, 1999. There
were purchases of $7.6million of investment securities designated as
heldtomaturity. There were repayments and amortization of $2.8 million of
investment securities heldtomaturity during the period.
The increase in total assets was funded by an increase of $11.5 million
in customer deposits. Southern Financial Capital Trust borrowings provided $5.0
million, and advances from the Federal Home Loan Bank of Atlanta increased $4.0
million since December 31, 1999.
Results of Operations
Southern Financial's principal sources of revenue are interest on
loans, gains on sales of loans, fees and service charges on loans, interest and
dividends on investment securities, and service charges on deposit accounts. Net
income is affected by interest on deposits and borrowings and operating
expenses.
The following table presents, for periods indicated, average balances
of and weighted average yields on interestearning assets and average balances
of and weighted average effective rates paid on interestbearing liabilities.
Calculations have been made utilizing monthend average balances for loans and
investment securities and daily average balances for borrowings and deposits,
and the effect of the interest rate swaps is reflected in the average rate on
deposits. Loan balances do not include nonaccrual loans.
11
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999
---- ----
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
------- ---------- ------- ----------
($ in thousands)
<S> <C>
Interest-earning assets
Loans receivable $ 241,012 9.57 % $ 211,832 9.21 %
Investment securities 153,290 6.62 164,328 5.97
------- ---- ------- ----
Total interest-earning assets 394,302 8.42 376,160 7.79
------- ---- ------- ----
Interest-bearing liabilities
Deposits 360,366 4.09 356,335 3.92
Borrowings 20,148 6.54 8,390 4.91
------- ---- ------- ----
Total interest-bearing liabilities 380,514 4.22 364,725 3.94
------- ---- ------- ----
Average dollar difference
between interest-earning assets
and interest-bearing liabilities 13,788 11,435
======= =======
Interest rate spread 4.20 3.85
==== ====
Interest margin 4.35 3.97
==== ====
</TABLE>
The following table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interestearning assets and interestbearing 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. The effect of the interest rate
swaps is reflected in interest expense on deposits.
For The Six Months Ended
June 30, 2000
Versus
June 30, 1999
-------------------------------------------
Volume Rate Net
------ ---- ---
($ in thousands)
Interest income
Loans receivable $ 1,375 $ 531 $ 1,906
Investment securities (338) 574 236
------- ----- -------
Total interest income 1,037 1,105 2,142
------- ----- -------
Interest expense
Deposits 95 361 456
Borrowings 371 88 459
------- ----- -------
Total interest expense 466 449 915
------- ----- -------
Net interest income $ 571 $ 656 $ 1,227
======= ===== =======
12
<PAGE>
Southern Financial's net income was $2.4 million for the six months
ended June 30, 2000, compared to $1.9 million for the six months ended June 30,
1999, an increase of $572 thousand, or 30.5%. Diluted earnings per share were
$.90 and $.69 for the six months ended June 30, 2000 and 1999, respectively. The
weighted average number of diluted shares of common stock outstanding were
2,717,050 and 2,728,417 for the same periods in 2000 and 1999, respectively.
Southern Financial's net income was $1.3 million for the three months
ended June 30, 2000, compared to $989 thousand for the three months ended June
30, 1999, an increase of $284 thousand, or 28.7%. Diluted earnings per share
were $.47 and $.36 for the three months ended June 30, 2000 and 1999,
respectively. The weighted average number of diluted shares of common stock
outstanding were 2,709,025 and 2,722,633 for the same periods in 2000 and 1999,
respectively.
Net interest income before provision for loan losses for the six months
ended June 30, 2000 was $8.6 million, an increase of $1.2 million, or 16.7%,
from $7.4 million for the six months ended June 30, 1999. The increase resulted
primarily from growth in average interest-earning assets, as well as an increase
in interest margin. Total interest-earning assets in the six months ended June
30, 2000 averaged $394.3 million as compared to $376.2 million for the same
period in 1999. For the six months ended June 30, 2000, the interest rate spread
was 4.20%, an increase of 35 basis points from 3.85% for the six months ended
June 30, 1999. The yield on interest-earning assets for the six months ended
June 30, 2000 was 8.42%, an increase of 63 basis points from the same period
last year. The cost of interest-bearing liabilities increased by 28 basis points
to 4.22% for the six months ended June 30, 2000 from 3.94% for the six months
ended June 30, 1999.
Net interest income before provision for loan losses for the three
months ended June 30, 2000 was $4.4 million, an increase of $650 thousand, or
17.3%, from $3.8 million for the three months ended June 30, 1999. The increase
resulted primarily from growth in average interest-earning assets, as well as an
increase in interest margin. Total interest-earning assets in the three months
ended June 30, 2000 averaged $400.9 million as compared to $376.1 million for
the same period in 1999. For the three months ended June 30, 2000, the interest
rate spread was 4.24%, an increase of 33 basis points from 3.91% for the three
months ended June 30, 1999. The yield on interest-earning assets for the three
months ended June 30, 2000 was 8.56%, an increase of 76 basis points from the
same period last year. The cost of interest-bearing liabilities increased by 43
basis points to 4.32% for the three months ended June 30, 2000 from 3.89% for
the three months ended June 30, 1999.
Total interest income increased by $2.1 million to $16.6 million for
the six months ended June 30, 2000 from $14.5 million for the six months ended
June 30, 1999. This increase was due to an increase of $29.1 million in average
loans receivable to $241.0 million for the six months ended June 30, 2000 from
$211.8 million for the six months ended June 30, 1999, and an increase in the
average yield on loans from 9.21% to 9.57% for the same periods. Average
investment securities decreased by $11.0 million from $164.3 million in the six
months ended June 30, 1999 to $153.3 million in the six months ended June 30,
2000. The yield on average investment securities for the six months ended June
30, 2000 was 6.62%, an increase of 65 basis points from 5.97% for the six months
ended June 30, 1999.
Total interest income increased by $1.4 million to $8.6 million for the
quarter ended June 30, 2000 from $7.2 million for the three months ended June
30, 1999. This increase was due to an increase of $29.7 million in average loans
receivable to $243.8 million for the three months ended June 30, 2000 from
$214.1 million for the three months ended June 30, 1999, and an increase in the
average yield on loans from 9.15% to 9.76% for the same periods. Average
investment securities decreased by $4.8 million from $162.0 million in the three
months ended June 30, 1999 to $157.2 million in the three months ended June 30,
2000. The yield on average investment securities for the quarter ended June 30,
2000 was 6.69%, an increase of 68 basis points from 6.01% for the three months
ended June 30, 1999.
Total interest expense increased by $915 thousand to $8.0 million for
the six months ended June 30, 2000 from $7.1 million for the six months ended
June 30, 1999. Customer deposits averaged $360.3 million for the six months
ended June 30, 2000, an increase of $4.0 million from $356.3 million for the six
months ended June 30, 1999. The average effective rate paid on deposits
increased by 17 basis points to 4.09% in the 2000 period from 3.92% in the 1999
period. Average borrowings were $20.1 million for the six months ended June 30,
2000, an increase of $11.7 million from $8.4 million for the six months ended
June 30, 1999. The average effective rate paid on borrowings increased to 6.54%
for the six months ended June 30, 2000 from 4.91% for the same period in 1999.
Total interest expense increased by $686 thousand to $4.2 million for
the three months ended June 30, 2000 from $3.5 million for the quarter ended
June 30, 1999. Customer deposits averaged $364.3 million for the three months
ended June 30, 2000, an increase of $9.2 million from $355.1 million for the
three months ended June 30, 1999. The average effective rate paid on deposits
increased by 30 basis points to 4.16% in the 2000 period from 3.86% in the 1999
period. Average borrowings were $22.2 million for the quarter ended June 30,
2000, an increase of $13.8 million from $8.4 million for the three months ended
June 30, 1999. The average effective rate paid on borrowings increased to 7.00%
for the three months ended June 30, 2000 from 4.95% for the same period in 1999.
13
<PAGE>
The provision for loan losses for the six months ended June 30, 2000
was $675 thousand, as compared to $781 thousand for the six months ended June
30, 1999. The provision for loan losses is a current charge to earnings to
increase the allowance for loan losses. Southern Financial 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, past loan experience and other
relevant factors. It is the opinion of Southern Financial that the allowance for
loan losses at June 30, 2000 remains adequate. Although Southern Financial
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 results of operations. The allowance for loan losses at
June 30, 2000 was $4.1 million, or 1.66% of total loans receivable less deferred
fees, versus $3.5 million at December 31, 1999, which was 1.45% of total loans
receivable less deferred fees.
Other income for the six months ended June 30, 2000 was $1.9 million, a
slight decrease from $2.0 for the six months ended June 30, 1999. Fee income
increased $178 thousand during the six months ended June 30, 2000, compared to
the same period last year, due to fees earned by Southern WebTech.com.
Other expense increased by $274 thousand, or 4.6%, to $6.2 million for
the six months ended June 30, 2000 from $5.9 million for the six months ended
June 30, 1999. Employee compensation and benefits increased by $239 thousand, or
7.7%, reflecting normal wage increases for existing personnel and some
additional staffing.
14
<PAGE>
Regulatory Capital Requirements
At June 30, 2000 Southern Financial exceeded all regulatory capital
standards, which were as follows:
<TABLE>
<CAPTION>
Actual Capital Required Capital Excess Captial
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C>
Leverage capital $ 37,135 8.89% $ 16,708 4.00% $ 20,427 4.89%
(to average assets)
Tier 1 capital 37,135 12.89% 11,525 4.00% 25,610 8.89%
(to risk-weighted assets)
Tier 1 and Tier 2 capital 40,742 14.14% 23,050 8.00% 17,692 6.14%
(to risk-weighted assets)
</TABLE>
Liquidity
Southern Financial'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
approximately $85 million. At June 30, 2000, Southern Financial had $31.8
million of unfunded lines of credit and undisbursed construction loan funds of
$8.4 million. Approved loan commitments were $14.3 million at June 30, 2000, and
Southern Financial had commitments from investors to purchase loans in the
amount of $632 thousand. It is anticipated that funding requirements for these
commitments can be met from the normal sources of funds.
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 Southern Financial, 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 Southern Financial'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 Southern Financial 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, Southern Financial undertakes no obligation to correct or update a
forward-looking statement should Southern Financial later become aware that it
is not likely to be achieved. If Southern Financial were to update or correct a
forward-looking statement, investors and others should not conclude that
Southern Financial will make additional updates or corrections thereafter.
15
<PAGE>
Item 3 Quantitative and Qualitative Disclosure about Market Risk
Southern Financial's interest rate sensitivity is primarily monitored
by management through the use of a model which generates estimates of the change
in Southern Financial's market value of portfolio equity ("MVPE") over a range
of interest rate scenarios. Such analysis was prepared by a third party. MVPE is
the present value of expected cash flows from assets, liabilities, and
off-balance sheet contracts using standard industry assumptions about estimated
loan prepayment rates, reinvestment rates, and deposit decay rates. The
following table sets forth an analysis of Southern Financial's interest rate
risk as measured by the estimated change in MVPE resulting from instantaneous
and sustained parallel shifts in the yield curve (plus or minus 300 basis
points, measured in 100 basis point increments) as of June 30, 2000.
Sensitivity of Market Value of Portfolio Equity
(amounts in thousands)
Change in Market Value of Portfolio Equity Market Value of
Interest Rates Amount $ Change % Change Portfolio Equity as a % of
In Basis Points From Base From Total Portfolio
(Rate Shock) Base Assets Equity
Book Value
--------------------------------------------------------------------------------
Up 300 28,911 (13,342) 31.58% 6.78% 96.03%
Up 200 33,605 (8,648) 20.47% 7.88% 111.62%
Up 100 37,923 (4,330) 10.25% 8.89% 125.96%
Base 42,253 - 0.00% 9.91% 140.34%
Down 100 45,658 3,405 8.06% 10.71% 151.65%
Down 200 48,532 6,279 14.86% 11.38% 161.20%
Down 300 51,901 9,648 22.83% 12.17% 172.39%
16
<PAGE>
Southern Financial's interest rate sensitivity is also monitored by
management through the use of a model that generates estimates of the change in
the adjusted net interest income over a range of interest rate scenarios. Such
analysis was also prepared by a third party. Net interest income represents the
difference between income on interest-earning assets and expense on interest-
bearing liabilities including the effect of the interest rate swaps. Net
interest income also depends upon the relative amounts of interest-earning
assets and interest-bearing liabilities and the interest rate earned or paid on
them. In this regard, the model assumes that the composition of Southern
Financial's interest sensitive assets and liabilities existing at the beginning
of a period remains constant over the period being measured and also assumes
that a particular change in interest rates is reflected uniformly across the
yield curve regardless of the duration to maturity or repricing of specific
assets and liabilities.
Sensitivity of Net Interest Income
(amounts in thousands)
Change in Adjusted Net
Interest Rates Interest Income Net Interest Margin
In Basis Points % Change % Change
(Rate Shock) Amount From Base Percent From Base
------------ ------ --------- ------- ---------
Up 300 14,241 8.14% 3.34% 8.24%
Up 200 14,745 4.89% 3.46% 4.95%
Up 100 15,206 1.92% 3.57% 1.92%
Base 15,503 0.00% 3.64% 0.00%
Down 100 15,693 1.23% 3.68% 1.10%
Down 200 15,901 2.57% 3.73% 2.47%
Down 300 16,286 5.05% 3.82% 4.95%
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in MVPE and in Sensitivity of
Net Interest Income require the making of certain assumptions which may or may
not reflect the manner in which actual yields and costs respond to changes in
market interest rates. Accordingly, although the MVPE table and Sensitivity of
Net Interest Income table provide an indication of Southern Financial's interest
rate risk exposure at a particular point in time, such measurements are not
intended to and do not provide a precise forecast of the effect of changes in
market interest rates on its worth and net interest income.
17
<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
The Annual Meeting of Shareholders was held on April 27, 2000 at 2:00 p.m. at
the Fauquier Springs Country Club, Springs Road, Warrenton, Virginia. The
following is a summary of items voted upon at the meeting:
1. The following Directors were elected to serve three year terms
expiring in the year 2003:
John C. Belotti (2,036,101 for; 26,696 against; 14,173 abstain)
Neil J. Call (2,043,559 for; 19,214 against; 14,197 abstain)
David de Give (2,036,521 for; 26,276 against; 14,173 abstain)
R. Roderick Porter (2,037,880 for; 24,917 against; 14,173 abstain)
2. The following Director was elected to serve a one year term expiring in
the year 2001:
Richard E. Smith (2,008,559 for; 60,802 against; 7,609 abstain)
3. The appointment of KPMG LLP as independent auditors for the year
ending December 31, 2000 was approved by the following vote: For 2,054,006;
Against 20,022; Abstain 2,942
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8K.
Exhibits Required
None.
Reports on Form 8K
Southern Financial filed a report on Form 8K on June 29,
2000, which announced that its board of directors approved the
purchase of up to 100,000 shares of its common stock.
18
<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 8/11/00 By: /s/ Georgia S. Derrico
---------------------------------------
Georgia S. Derrico
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date 8/11/00 By: /s/ William H. Lagos
--------------------------------------
William H. Lagos
Senior Vice President and Controller
Principal Accounting Officer
(Duly Authorized Representative)
19
