<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.:
March 31, 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 April 30, 2000, there were 2,666,196 shares of the registrant's Common
Stock outstanding.
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
March 31, 2000
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION
- ------- ---------------------
Item 1. Financial Statements
Consolidated Balance Sheets
as of March 31, 2000 (Unaudited) and
December 31, 1999 3
Consolidated Statements of Income for the
Three Months Ended March 31, 2000 and 1999
(Unaudited) 4
Consolidated Statements of Comprehensive Income
for the Three Months Ended March 31, 2000 and
1999 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 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 - 14
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15 - 16
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings 17
Item 2. Changes in Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
PART III. SIGNATURES 18
- -------- ----------
</TABLE>
2
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
2000 December 31,
(Unaudited) 1999
------------- --------------
<S> <C> <C>
Assets
Cash and due from banks $ 12,721,778 $ 12,667,620
Overnight earning deposits 19,903,764 4,464,338
Investment securities, available for sale 99,824,031 97,721,012
Investment securities, held to maturity 39,847,163 37,110,889
Loans held for sale 193,125 442,000
Loans receivable, net 236,739,850 234,086,432
Premises and equipment, net. 6,261,385 6,445,589
Other assets 12,248,022 13,283,684
------------- -------------
Total assets $ 427,739,118 $ 406,221,564
============= =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits $ 387,751,974 $ 367,187,558
Advances from Federal Home Loan Bank 5,000,000 5,000,000
Other liabilities 5,059,771 5,169,909
------------- -------------
Total liabilities 397,811,745 377,357,467
------------- -------------
Commitments
Stockholders' equity:
Preferred stock 136 136
Common stock 26,662 26,562
Capital in excess of par value 23,812,835 23,662,935
Retained earnings 7,750,893 6,898,249
Accumulated other comprehensive loss (1,663,153) (1,723,785)
------------- -------------
Total stockholders' equity 29,927,373 28,864,097
------------- -------------
Total liabilities and stockholders' equity $ 427,739,118 $ 406,221,564
============= =============
</TABLE>
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>
<CAPTION>
Three Months Ended
March 31,
2000 1999
---------------- ----------------
<S> <C> <C>
Interest income:
Loans $ 5,556,164 $ 4,794,117
Investment securities 2,482,395 2,438,125
----------- -----------
Total interest income 8,038,559 7,232,242
----------- -----------
Interest expense:
Deposits 3,567,518 3,509,263
Borrowings 273,414 102,833
----------- -----------
Total interest expense 3,840,932 3,612,096
----------- -----------
Net interest income 4,197,627 3,620,146
Provision for loan losses 350,000 341,036
----------- -----------
Net interest income after provision for loan losses 3,847,627 3,279,110
----------- -----------
Other income:
Fee income 658,614 574,465
Gain on sale of loans 333,378 343,773
Other 31,228 14,648
----------- -----------
Total other income 1,023,220 932,886
----------- -----------
Other expense:
Employee compensation and benefits 1,658,386 1,550,202
Premises and equipment 615,549 548,295
Data processing expense 275,243 217,188
Advertising 60,886 77,721
Deposit insurance expense 17,664 36,726
Other 493,569 500,446
----------- -----------
Total other expense 3,121,297 2,930,578
----------- -----------
Income before income taxes 1,749,550 1,281,418
Provision for income taxes 574,000 394,425
----------- -----------
Net income $ 1,175,550 $ 886,993
=========== ===========
Earnings per common share:
Basic $ 0.44 $ 0.34
Diluted $ 0.44 $ 0.32
Weighted average shares outstanding:
Basic 2,666,196 2,636,544
Diluted 2,688,171 2,734,200
</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
March 31,
2000 1999
------------- -------------
<S> <C> <C>
Net income $ 1,175,550 $ 886,993
Other comprehensive income:
Cash flow hedge:
Unrealized holding gain 79,785 367,013
Reclassification adjustment for net interest
expense included in net income (39,785) 11,272
Available-for-sale securities:
Unrealized holding gain/(loss) 51,866 (137,913)
------------ ------------
Other comprehensive income before tax 91,866 240,372
Income tax expense related to items of other
comprehensive income (31,234) (78,900)
------------ ------------
Other comprehensive income, net of tax 60,632 161,472
Comprehensive income $ 1,236,182 $ 1,048,465
============ ============
</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>
Three Months Ended
March 31,
---------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net Income $ 1,175,550 $ 886,993
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 217,841 288,955
Provision for loan losses 350,000 341,036
Gain on sale of loans (333,378) (343,773)
Amortization of deferred loan fees (138,236) (148,859)
Net change in loans held for sale 285,319 (115,873)
Decrease in other assets 1,043,627 1,354,342
Decrease in other liabilities (108,448) (186,123)
------------ ------------
Net cash provided by operating activities 2,492,275 2,076,698
------------ ------------
Cash flows from investing activities:
Increase in loans receivable (2,441,655) (2,093,122)
Purchase of investment securities, held-to-maturity (4,143,635) (3,926,622)
Purchase of investment securities, available-for-sale (3,895,287) (24,762,045)
Paydowns of investment securities 3,232,502 38,635,602
Increase in overnight earning deposits, net (15,439,426) (121,941)
Increase in premises and equipment, net (27,125) (768,497)
(Increase) decrease in Federal Home Loan Bank stock 35,000 (171,200)
------------ ------------
Net cash provided by (used) in investing activities (22,679,626) 6,792,175
------------ ------------
Cash flows from financing activities:
Net increase (decrease) in deposits 20,564,416 (5,397,074)
Decrease in advances from FHLB - (500,000)
Proceeds from issuance of common stock - 17,500
Dividends on preferred and common stock (322,907) (179,317)
------------ ------------
Net cash provided by (used) in financing activities 20,241,509 (6,058,891)
------------ ------------
Net increase in cash and due from banks 54,158 2,809,982
Cash and due from banks, beginning of period 12,667,620 10,820,765
------------ ------------
Cash and due from banks, end of period $ 12,721,778 $ 13,630,747
============ ============
</TABLE>
The accompanying notes are an integral part of these financial 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 three-month period ended March 31, 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
the Bancorp 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 nine
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 March 31, 2000, no 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 only minimally. Since there was no change in the net present value of
the favorable variance in the spread for the weighted average remaining life of
the interest rate swaps, no income 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>
March 31, 2000 December 31, 1999
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
---------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Available-for-sale securities:
FHLMC MBS $ 15,994,261 $ 16,053,668 $ 16,361,253 $ 16,369,217
GNMA MBS 6,369,894 6,207,444 2,633,942 2,588,947
FNMA MBS 24,356,493 24,181,572 25,509,631 25,677,821
Collaterized mortgage obligations 27,174,203 25,648,743 27,275,536 25,303,089
Commercial MBS 24,101,024 22,440,000 24,102,513 22,495,000
Obligations of counties and municipalities 3,861,296 3,588,666 3,924,186 3,571,473
Corporate obligations 991,245 931,079 990,745 945,371
U.S. Treasury securities 791,843 772,859 791,301 770,094
$ 103,640,259 $ 99,824,031 $ 101,589,107 $ 97,721,012
============= ============ ============= ============
Held-to-maturity securities:
FHLMC MBS $ 6,668,831 $ 6,625,982 $ 3,837,207 $ 3,805,831
GNMA MBS 16,315,452 15,979,963 17,177,221 16,933,843
FNMA MBS 7,536,024 7,385,308 6,764,242 6,623,910
Collateralized mortgage obligations 4,895,490 4,838,581 4,073,233 4,005,515
Commercial MBS 2,036,971 1,975,000 2,864,392 2,796,697
Obligations of counties and municipalities 2,394,395 2,311,370 2,394,594 2,279,954
------------- ------------ ------------- ------------
$ 39,847,163 $ 39,116,204 $ 37,110,889 $ 36,445,750
============= ============ ============= ============
</TABLE>
8
<PAGE>
NOTE 4 - LOANS RECEIVABLE
Loans receivable consist of the following:
March 31, December 31,
2000 1999
-------------- -------------
Mortgage:
Residential $ 43,910,911 $ 48,604,205
Nonresidential 120,488,013 109,871,210
Construction:
Residential 7,784,703 7,852,907
Nonresidential 7,055,624 8,270,290
Non-Mortgage:
Business 51,804,245 54,175,076
Consumer 10,684,105 9,994,326
------------- -------------
Total loans receivable 241,727,601 238,768,014
Less:
Deferred loan fees, net 1,387,233 1,229,451
Allowance for loan losses 3,600,518 3,452,131
------------- -------------
Loans receivable, net $ 236,739,850 $ 234,086,432
============= =============
The following sets forth information regarding the allowance for loan
losses:
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
03/31/2000 03/31/1999
-------------- --------------
<S> <C> <C>
Allowance at beginning of period $ 3,452,131 $ 3,061,631
Provision for losses charged to income 350,000 341,036
Charge-offs (207,186) (402,153)
Recoveries 5,573 203,312
----------- -----------
Allowance at end of period $ 3,600,518 $ 3,203,826
=========== ===========
</TABLE>
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.
Earnings per Share
<TABLE>
<CAPTION>
For the three months ended
March 2000 March 1999
---------------------------- ----------------------------
Per Per
Share Share
Shares Amount Shares Amount
------------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
Basic EPS 2,666,196 $ 0.44 2,636,544 $ 0.34
====== ======
Effect of dilutive
Securities:
Stock Options - 75,681
Convertible Preferred Stock 21,975 21,975
--------- ---------
Diluted EPS 2,688,171 $ 0.44 2,734,200 $ 0.32
========= ====== ========= ======
</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 certain conditions including receipt of
regulatory approval and approval of the shareholders of First Savings Bank of
Virginia, closing of the merger is anticipated to occur in the third quarter of
2000. The merger will be accounted for under the purchase method.
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
March 31, 2000 were $427.7 million, an increase of $21.5 million, or 5.3%, from
total assets of $406.2 million at December 31, 1999. Total liabilities
increased by $20.4 million, or 5.4%, to $397.8 million at March 31, 2000 from
$377.4 million at December 31, 1999. The growth in total assets resulted
primarily from increases of $15.4 million in overnight earning deposits, $4.8
million in investment securities, and $2.6 million in loans receivable.
Total loans receivable increased by $2.6 million to $236.7 million at March
31, 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 Southern Financial sold the guaranteed portion of some
of the Small Business Administration (SBA) loans that it held in portfolio.
These sales totaled $2.9 million. Non-residential permanent mortgage loans
increased by $10.6 million to $120.5 million at March 31, 2000, from $109.9
million at December 31, 1999. Non-mortgage business loans decreased $2.4 million
to $51.8 million at March 31, 2000, from $54.2 million at December 31, 1999.
Non-residential construction loans decreased $1.2 million from $8.3 million at
December 31, 1999, to $7.1 million at March 31, 2000. Residential permanent
mortgage loans decreased $4.7 million from $48.6 million at December 31, 1999,
to $43.9 million at March 31, 2000.
Investment securities available-for-sale increased from $97.7 million at
December 31, 1999, to $99.8 million at March 31, 2000. There were purchases of
$3.9 million of investment securities designated as available-for-sale. There
were repayments and amortization of $1.8 million of investment securities
available-for-sale during the period. There were no sales of investment
securities available-for-sale during the three months ended March 31, 2000.
Investment securities held-to-maturity increased by $2.7 million to $39.8
million at March 31, 2000, from $37.1 million at December 31, 1999. There were
purchases of $4.1million of investment securities designated as held-to-
maturity. There were repayments and amortization of $1.4 million of investment
securities held-to-maturity during the period.
Overnight earning deposits increased by $15.4 million from $4.5 million at
December 31, 1999, to $19.9 million at March 31, 2000. This increase was due to
an increase in deposits occurring near the end of the quarter.
The increase in total assets was funded primarily by an increase of $20.6
million in deposits.
Results of Operations
- ---------------------
Southern Financial's principal sources of revenue are interest on loans,
gains on sales of loans, fees and service charges on loans, interest and
dividends on investment securities, and service charges on deposit accounts.
Net income is affected by interest on deposits and borrowings and operating
expenses.
The following table presents, for periods indicated, average balances of
and weighted average yields on interest-earning assets and average balances of
and weighted average effective rates paid on interest-bearing liabilities.
Calculations have been made utilizing month-end average balances for loans and
investment securities and daily average balances for borrowings and deposits,
and the effect of the interest rate swaps is reflected in the average rate on
deposits. Loan balances do not include non-accrual loans.
11
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
-------------------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
--------------------------------- ------------------------------------
($ in thousands)
<S> <C> <C> <C> <C>
Interest-Earning Assets
Loans Receivable $ 238,286 9.46% $ 209,326 9.29%
Investment Securities 152,435 6.60 167,320 5.91
--------- ----- --------- -----
Total Interest-Earning Assets 390,721 8.34 376,646 7.79
--------- ----- --------- -----
Interest-Bearing Liabilities
Deposits 356,461 4.01 357,583 3.98
Borrowings 18,137 5.95 8,383 4.91
--------- ----- --------- -----
Total Interest-Bearing Liabilities 374,598 4.10 365,966 4.00
--------- ----- --------- -----
Average Dollar Difference
Between Interest-Earning Assets
and Interest-Bearing Liabilities 16,123 10,680
========= =========
Interest Rate Spread 4.24 3.79
===== =====
Interest Margin 4.41 3.90
===== =====
</TABLE>
The following table presents information regarding changes in interest
income and interest expense for the periods indicated. For each category of
interest-earning assets and interest-bearing liabilities, information is
provided on changes attributable to changes in volume (changes in volume
multiplied by old rate) and changes in rate (changes in rate multiplied by old
volume). The dollar changes in interest income and interest expense
attributable to changes in rate/volume (change in rate multiplied by change in
volume) have been allocated between rate and volume variances based on the
percentage relationship of such variances to each other. The effect of the
interest rate swaps is reflected in interest expense on deposits.
<TABLE>
<CAPTION>
For The Three Months Ended
March 31, 2000
Versus
March 31, 1999
-----------------------------------------------
Volume Rate Net
-------------- ------------ -------------
($ in thousands)
<S> <C> <C> <C>
Interest income
Loans Receivable $ 672 $ 89 $ 761
Investment Securities (227) 272 45
----- ----- -----
Total interest income 445 361 806
----- ----- -----
Interest expense
Deposits (11) 109 98
Borrowings 127 4 131
----- ----- -----
Total interest expense 116 113 229
----- ----- -----
Net interest income $ 329 $ 248 $ 577
===== ===== =====
</TABLE>
12
<PAGE>
Southern Financial's net income was $1.2 million for the three months ended
March 31, 2000, compared to $887 thousand for the three months ended March 31,
1999, an increase of $289 thousand, or 32.5%. Diluted earnings per share were
$.44 and $.32 for the three months ended March 31, 2000 and 1999, respectively.
The weighted average number of diluted shares of common stock outstanding were
2,688,171 and 2,734,200 for the same periods in 2000 and 1999, respectively.
Net interest income before provision for loan losses for the three months
ended March 31, 2000 was $4.2 million, an increase of $577 thousand, or 15.9%,
from $3.6 million for the three months ended March 31, 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 March 31, 2000 averaged $390.7 million as compared to $376.6 million for
the same period in 1999. For the three months ended March 31, 2000, the interest
rate spread was 4.24%, an increase of 45 basis points from 3.79% for the three
months ended March 31, 1999. The yield on interest-earning assets for the three
months ended March 31, 2000 was 8.34%, an increase of 55 basis points from the
same period last year. The cost of interest-bearing liabilities increased by 10
basis points to 4.10% for the three months ended March 31, 2000 from 4.00% for
the three months ended March 31, 1999.
Total interest income increased by $806 thousand to $8.0 million for the
quarter ended March 31, 2000 from $7.2 million for the three months ended March
31, 1999. This increase was due to an increase of $29 million in average loans
receivable to $238.3 million for the three months ended March 31, 2000 from
$209.3 million for the three months ended March 31, 1999, and an increase in the
average yield on loans from 9.29% to 9.46% for the same periods. Average
investment securities decreased by $14.9 million from $167.3 million in the
three months ended March 31, 1999 to $152.4 million in the three months ended
March 31, 2000. The yield on average investment securities for the quarter ended
March 31, 2000 was 6.60%, an increase of 69 basis points from 5.91% for the
three months ended March 31, 1999.
Total interest expense increased by $229 thousand to $3.8 million for the
three months ended March 31, 2000 from $3.6 million for the quarter ended March
31, 1999. Customer deposits averaged $356.5 million for the three months ended
March 31, 2000, a decrease of $1.1 million from $357.6 million for the three
months ended March 31, 1999. The average effective rate paid on deposits
increased by 3 basis points to 4.01% in the 2000 period from 3.98% in the 1999
period. Average borrowings were $18.1 million for the quarter ended March 31,
2000, an increase of $9.7 million from $8.4 million for the three months ended
March 31, 1999. The average effective rate paid on borrowings increased to 5.95%
for the three months ended March 31, 2000 from 4.91% for the same period in
1999.
The provision for loan losses for the three months ended March 31, 2000 was
$350 thousand, as compared to $341 thousand for the three months ended March 31,
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.
During the three months ended March 31, 2000, Southern Financial's volume of
non-residential mortgage loans has increased, and these loans tend to carry a
higher risk classification. The increase in the provision for loan losses
reflects the growth in the portfolio of non-residential mortgage loans. It is
the opinion of Southern Financial that the allowance for loan losses at March
31, 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 March 31, 2000 was
$3.6 million, or 1.50% 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.
During the three months ended March 31, 2000 charge-offs amounted to $207
thousand compared to $402 thousand during the same period last year. These
charge-offs were related primarily to non-mortgage business loans and
nonresidential mortgage loans. Recoveries amounted to $6 thousand during the
quarter ended March 31, 2000, which was related to non-mortgage business loans
that were charged off in prior years. Recoveries amounted to $203 thousand
during the three months ended March 31, 1999, most of which was related to one
non-residential mortgage loan that was charged off in 1996.
Other income for the three months ended March 31, 2000 was $1 million as
compared to $933 thousand for the three months ended March 31, 1999, an increase
of $90 thousand, or 9.7%. Fee income increased $84 thousand during the three
months ended March 31, 2000, compared to the same period last year, due to fees
earned by Southern WebTech.com.
Other expense increased by $191 thousand, or 6.5%, to $3.1 million for the
three months ended March 31, 2000 from $2.9 million for the three months ended
March 31, 1999. Employee compensation and benefits increased by $108 thousand,
or 6.9%, reflecting normal wage increases for existing personnel and some
additional staffing. Expenses for premises and equipment increased by $67
thousand, or 12.3%, primarily because of increased rent expense.
13
<PAGE>
Regulatory Capital Requirements
- -------------------------------
At March 31, 2000 Southern Financial exceeded all regulatory capital
standards, which were as follows:
<TABLE>
<CAPTION>
Actual Capital Required Capital Excess Capital
Amount Ratio Amount Ratio Amount Ratio
------------------------- ------------------------ ------------------------
(Dollars in thousands)
<S> <C> <C> <C>
Leverage capital $ 31,270 7.65% $ 16,355 4.00% $ 14,915 3.65%
(to average assets)
Tier 1 capital 31,270 11.06% 11,307 4.00% 19,963 7.06%
(to risk-weighted assets)
Tier 1 and Tier 2 capital 34,804 12.31% 22,614 8.00% 12,190 4.31%
(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 March 31, 2000, Southern Financial had $31
million of unfunded lines of credit and undisbursed construction loan funds of
$10.3 million. Approved loan commitments were $6.4 million at March 31, 2000,
and Southern Financial had commitments from investors to purchase loans in the
amount of $841 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.
14
<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 March 31, 2000.
Sensitivity of Market Value of Portfolio Equity
(amounts in thousands)
<TABLE>
<CAPTION>
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
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Up 300 34,465 (10,587) -23.50% 8.06% 115.39%
Up 200 38,380 (6,672) -14.81% 8.97% 128.50%
Up 100 41,659 (3,393) -7.53% 9.74% 139.48%
Base 45,052 - 0.00% 10.53% 150.84%
Down 100 48,009 2,957 6.56% 11.22% 160.74%
Down 200 50,803 5,751 12.77% 11.88% 170.10%
Down 300 54,772 9,720 21.58% 12.80% 183.39%
</TABLE>
15
<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 14,305 -4.79% 3.34% -4.84%
Up 200 14,597 -2.84% 3.41% -2.85%
Up 100 14,862 -1.08% 3.47% -1.14%
Base 15,024 0.00% 3.51% 0.00%
Down 100 15,026 0.01% 3.51% 0.00%
Down 200 15,033 0.06% 3.51% 0.00%
Down 300 15,133 0.73% 3.54% 0.85%
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.
16
<PAGE>
SOUTHERN FINANCIAL BANCORP, INC.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
-----------------
Not applicable
Item 2. CHANGES IN SECURITIES
---------------------
Not applicable
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable
Item 5. OTHER INFORMATION
-----------------
Not applicable
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
---------------------------------
Exhibits Required
None
Reports on Form 8-K
No reports on Form 8-K were filed during the three months ended
March 31, 2000.
17
<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 5/15/00 By:___________________________________
------------------ Georgia S. Derrico
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date 5/15/00 By:____________________________________
----------------- William H. Lagos
Senior Vice President and Controller
Principal Accounting Officer
(Duly Authorized Representative)
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 12,721,778
<INT-BEARING-DEPOSITS> 19,903,764
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 99,824,031
<INVESTMENTS-CARRYING> 39,847,163
<INVESTMENTS-MARKET> 39,116,204
<LOANS> 236,739,850
<ALLOWANCE> 3,600,518
<TOTAL-ASSETS> 427,739,118
<DEPOSITS> 387,751,974
<SHORT-TERM> 0
<LIABILITIES-OTHER> 5,059,771
<LONG-TERM> 5,000,000
0
136
<COMMON> 26,662
<OTHER-SE> 29,900,575
<TOTAL-LIABILITIES-AND-EQUITY> 427,739,118
<INTEREST-LOAN> 5,556,164
<INTEREST-INVEST> 2,482,395
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 8,038,559
<INTEREST-DEPOSIT> 3,567,518
<INTEREST-EXPENSE> 3,840,932
<INTEREST-INCOME-NET> 4,197,627
<LOAN-LOSSES> 350,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,121,297
<INCOME-PRETAX> 1,749,550
<INCOME-PRE-EXTRAORDINARY> 1,175,550
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,175,550
<EPS-BASIC> 0.44
<EPS-DILUTED> 0.44
<YIELD-ACTUAL> 8.34
<LOANS-NON> 533,664
<LOANS-PAST> 108,028
<LOANS-TROUBLED> 63,021
<LOANS-PROBLEM> 2,832,833
<ALLOWANCE-OPEN> 3,452,131
<CHARGE-OFFS> 207,186
<RECOVERIES> 5,573
<ALLOWANCE-CLOSE> 3,600,518
<ALLOWANCE-DOMESTIC> 3,600,518
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 1,012,173
</TABLE>
