Filed by Southern Financial Bancorp, Inc.
Pursuant to Rule 425 under the Securities Act of 1933
and deemed filed pursuant to Rule 14a-12
of the Securities Exchange Act of 1934
Subject Company: Essex Bancorp, Inc.
Commission File No. 001-10506
In connection with the proposed merger of Essex Bancorp, Inc. into Southern Financial Bancorp, Inc., Southern Financial has filed with the Securities and Exchange Commission a registration statement on Form S-4 to register the shares of Southern Financial’s common stock to be issued to the shareholders of Essex Bancorp. The registration statement includes a proxy statement/prospectus which has been sent to the shareholders of Essex Bancorp seeking their approval of the proposed transaction.
Investors and security holders are advised to read the registration statement and the proxy statement/prospectus included within the registration statement because they contain important information about Southern Financial, Essex Bancorp, the proposed transaction and the persons soliciting proxies relating to the merger. Investors and security holders may obtain free copies of these documents through the website maintained by the SEC athttp://www.sec.gov. Free copies of the proxy statement/prospectus may also be obtained by directing a request by telephone or mail to Southern Financial Bancorp, Inc., 37 East Main Street, Warrenton, Virginia 20186, Attn: Investor Relations. Southern Financial’s telephone number is (540) 349-3900.
The following is the text of a press release issued on January 21, 2004 by Southern Financial Bancorp, Inc.:
[LOGO]
Southern Financial Bancorp, Inc.
37 E. Main Street
Warrenton, VA 20186
SOUTHERN FINANCIAL BANCORP REPORTS RECORD NET INCOME OF $3.6 MILLION FOR FOURTH QUARTER 2003 and $13.2 MILLION FOR 2003 YEAR
| • | Record net income totals $3.6 million for 4Q 2003, an increase of 42.0% over 4Q 2002 |
| • | Announcement of merger with Essex Bancorp, Inc. to close in 1Q 2004 |
| • | Announcement of merger into Provident Bankshares Corporation, to close in 2Q 2004 |
| GAAP Earnings | Non-GAAP Earnings (Earnings excluding gains (losses) on investment securities and other assets and merger-related expenses) | |||||||||||||||||
| 4Q03 | 4Q02 | change | 4Q03 | 4Q02 | change | |||||||||||||
Net Income | ||||||||||||||||||
(In thousands) | $ | 3,552 | $ | 2,501 | 42.0 | % | $ | 3,671 | $ | 3,320 | 10.6 | % | ||||||
Diluted EPS | ||||||||||||||||||
(In dollars) | $ | .56 | $ | .40 | 40.0 | % | $ | .58 | $ | .53 | 9.4 | % | ||||||
For Immediate Release
Wednesday, January 21, 2004
Contact: Patricia A. Ferrick, Senior VP and CFO
Southern Financial Bancorp, Inc. NASDAQ Symbol “SFFB”
Website:www.southernfinancialbank.com
Phone (540) 349-3900 Fax (540) 349-3904
Warrenton, VA—The Board of Directors of Southern Financial Bancorp, Inc. (NASDAQ: SFFB) reported record net income of $3.6 million ($.56 diluted earnings per share) for the quarter ended December 31, 2003, an increase in net income of 42.0% over the $2.5 million ($.40 diluted earnings per share) earned for the quarter ended December 31, 2002. The increase in net income for the quarter ended December 31, 2003 compared with the prior year fourth quarter was primarily due to increased net interest income driven by the higher level of earning assets. In addition, net income was also positively impacted by increased fee income, and gains on sale of loans and net gains on securities. Conversely, operating expenses, including merger-related expenses and the provision for loan losses increased for the quarter. For the year ended December 31, 2003, net income was $13.2 million ($2.10 diluted earnings per share), an increase of 31.7% from $10.0 million ($1.71 diluted earnings per share), for the year ended December 31,
2002. The increase was primarily due to earning asset growth, increased non-interest income, and a decrease in the provision for loan losses partially offset by increases in non-interest expenses and the provision for income taxes.
Non-GAAP net income excludes net gains and losses on investment securities and other assets and merger expenses related to the pending merger with Provident Bankshares Corporation, During the fourth quarter of 2003, Southern Financial incurred costs in connection with this merger, which was announced in early November of 2003. These merger-related expenses totaled $770 thousand. Non-GAAP net income totaled $3.7 million ($.58 diluted earnings per share) and $3.3 million ($.53 diluted earnings per share), an increase of 10.6% for the quarters ended December 31, 2003 and 2002, respectively. Non-GAAP net income for the fourth quarter excluded $839 thousand in gains on investment securities and $770 thousand of merger related expenses. Non-GAAP net income for the fourth quarter 2002 excluded losses on investment securities. For the years ended December 31, 2003 and 2002, respectively, non-GAAP net income increased 23.4 % to $13.7 million ($2.19 diluted earnings per share) from $11.1 million ($1.89 diluted earnings per share). Non-GAAP net income for the years ended 2003 and 2002 excluded net losses on investment securities totaling $95 thousand, net gains on other assets totaling $289 thousand and $770 thousand of merger related expenses, compared with $1.6 million of net losses on investment securities and $17 thousand of net losses on other assets, respectively. Management believes that these Non-GAAP financial measures are a meaningful presentation because they exclude those items that are not considered part of Southern Financial’s core operating activity.
Georgia S. Derrico, Chairman and CEO, stated, “2003 was an exceptional year for our Bank. In addition to record earnings in each consecutive quarter and for the year, we opened a new branch on Main Street in Richmond, Virginia. In addition, we announced our plans to acquire Essex Bancorp, Inc. which is on schedule to close in the 1st quarter of 2004. Finally, we signed a definitive agreement for the merger of Southern Financial into Provident Bankshares Corporation, planned for the 2nd quarter of 2004. We are proud of our accomplishments this year.”
Net interest income for the quarter was $10.6 million, an increase of 14.6% over the same quarter in the prior year. The increase in net interest income was primarily due to growth in earning assets resulting from loan originations, and purchases of investment securities. Average earning assets increased 16.4% to $1.0 billion for the quarter ended December 31, 2003 compared with the same quarter in 2002. The net interest margin was 4.06% and 4.12% for the same respective quarters. The decline in the net interest margin is primarily the result of the larger increase in average investment securities compared with loans outstanding which reduced the overall yield on earning assets.
Credit quality for the fourth quarter of 2003 remained sound. For the quarters ended December 31, 2003 and 2002, annualized net charge-offs were .85% and .65% of average loans, respectively. For the years ended December 31, 2003 and 2002, respectively, the net charge-offs were .71% and .67% of average loans, respectively. The ratios of allowance for loan losses to loans receivable outstanding were 1.72% and 1.70% at December 31, 2003 and 2002, respectively, and the ratio of nonperforming assets to total assets was .53% and .23%, for the same respective periods.
Total non-interest income increased to $2.8 million from $663 thousand for the quarters ended December 31, 2003 and 2002, respectively. Included in non-interest income were gains on investment securities totaling $839 thousand compared with losses of $1.2 million for the quarters ended December 31, 2003 and 2002, respectively. Fee income increased 6.2% for the quarter ended December 31, 2003 compared with the prior year quarter. Fee income includes account maintenance and electronic banking fees, commercial service fees, system maintenance fees and other loan fees. Non-interest income also includes income from bank owned life insurance, which declined slightly compared with the prior year. Gains on sale of loans, which include primarily the sales of SBA loans, increased compared with the prior year.
Total non-interest expenses for the quarter were $6.6 million, an increase of 28.0% when compared to the fourth quarter of 2002. Excluding merger-related expenses totaling $770 thousand, non-interest expenses increased 13.1% compared with the fourth quarter of 2002. This increase was largely due to operating expenses associated with the de novo branch in Charlottesville which opened in February. Employee compensation and benefits, which represents 48.1% of non-interest expenses, increased 17.1%, due, in part, to personnel associated with the new branch, as well as general merit increases and other new hires to support the expanding customer base. The efficiency ratio remained strong at 46.22% for the fourth quarter of 2003 compared with 45.69% for the quarter ended December 31, 2002.
Total assets increased to $1.1 billion at December 31, 2003, from $970.2 million at December 31, 2002, an increase of 12.7%. Total loans receivable, including loans held for sale, increased $15.2 million or 2.5% compared with December 31, 2002. Loan closings for the 2003 year totaled $260.7 million, $60.7 million of which closed during the fourth quarter. Much of the growth from the loan closings were offset by higher loan repayments which were noted in the previous quarter as well. Investment securities increased to $377.5 million, or 85.5% from December 31, 2002 to December 31, 2003, and included $250.2 million of securities classified as held to maturity. The investment securities increased to partially lever the trust preferred securities issued during the second quarter of 2003. The increase in securities was funded by a series of borrowings with different terms to coincide with estimated prepayments of the securities.
Southern Financial Bancorp, Inc. is the holding company of Southern Financial Bank, a bank operating 28 full service branches including 27 locations in Virginia and one in the District of Columbia.
This press release may contain statements that certain results are expected or anticipated to occur or otherwise state the company’s predictions for the future, are forward-looking statements. These particular forward-looking statements and all other statements that are not historical facts are subject to a number of risks and uncertainties and actual results may differ materially. Such factors include but are not limited to: general economic conditions in the company’s markets; major slowdowns in the commercial lending markets that impact credit quality; the impact of competitive products and pricing; significant fluctuations in interest rates that could reduce net interest margin; difficulties or delays in the development, production, and marketing of new products; a reduction in fee revenue from existing products and services due to the economy and/or competition; and the amount and rate of growth of the company’s general and administrative expenses. Consequently, these cautionary statements qualify all forward-looking statements made herein and cautionary language in the company’s most recent form 10-K report and other documents filed with the Securities and Exchange Commission.
Southern Financial Bancorp, Inc.
37 East Main Street
Warrenton, Virginia 20186
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Thousand)
| December 31, 2003 | December 31, 2002 | |||||
Assets | ||||||
Cash and overnight deposits | $ | 36,386 | $ | 93,398 | ||
Investment securities-available for sale | 127,332 | 203,563 | ||||
Investment securities-held to maturity | 250,201 | — | ||||
Loans receivable, net | 601,118 | 594,323 | ||||
Loans held for sale | 8,651 | 514 | ||||
Bank premises & equipment, net | 9,573 | 8,264 | ||||
Cash surrender value of life insurance | 23,378 | 22,287 | ||||
Intangible assets | 14,167 | 14,558 | ||||
Other assets | 23,582 | 33,723 | ||||
Total assets | $ | 1,094,388 | $ | 970,630 | ||
Liabilities | ||||||
Deposits | 743,737 | 776,083 | ||||
Borrowings from Federal Home Loan Bank | 71,796 | 65,000 | ||||
Securities sold under agreements to repurchase | 137,959 | 18,456 | ||||
Callable long term debt | 23,000 | 13,000 | ||||
Other liabilities | 25,039 | 16,788 | ||||
Total liabilities | 1,001,531 | 889,327 | ||||
Stockholders’ equity | 92,857 | 81,303 | ||||
Total liabilities and stockholders’ equity | $ | 1,094,388 | $ | 970,630 | ||
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
For the Quarters Ended December 31, | For the Twelve Months Ended December 31, | ||||||||||||||
| 2003 | 2002 | 2003 | 2002 | ||||||||||||
Interest income | $ | 14,342 | $ | 13,376 | $ | 54,270 | $ | 51,130 | |||||||
Interest expense | 3,787 | 4,162 | 14,773 | 17,375 | |||||||||||
Net interest income | 10,555 | 9,214 | 39,497 | 33,755 | |||||||||||
Provision for loan losses | 1,250 | 1,040 | 4,805 | 5,050 | |||||||||||
Net interest income after provision for loan losses | 9,305 | 8,174 | 34,692 | 28,705 | |||||||||||
Account maintenance and electronic banking fees | 782 | 747 | 3,132 | 2,707 | |||||||||||
Commercial service fees | 169 | 152 | 691 | 544 | |||||||||||
Other loan fees | 166 | 130 | 606 | 427 | |||||||||||
System maintenance and license fees | 59 | 78 | 211 | 254 | |||||||||||
Income from bank owned life insurance | 240 | 293 | 1,091 | 1,126 | |||||||||||
Gain on sale of loans | 524 | 453 | 1,796 | 918 | |||||||||||
Gains (losses) on investment securities, net | 839 | (1,198 | ) | (95 | ) | (1,603 | ) | ||||||||
Other income (loss) | — | 8 | 299 | (4 | ) | ||||||||||
Non interest income | 2,779 | 663 | 7,731 | 4,369 | |||||||||||
Employee compensation and benefits | 3,184 | 2,719 | 12,008 | 10,001 | |||||||||||
Premises, equipment and data processing | 1,502 | 1,470 | 6,028 | 5,295 | |||||||||||
Merger-related expenses (Provident Bankshares) | 770 | — | 770 | — | |||||||||||
Other expenses | 1,169 | 987 | 4,055 | 3,105 | |||||||||||
Non interest expense | 6,625 | 5,176 | 22,861 | 18,401 | |||||||||||
Net income before taxes | 5,459 | 3,661 | 19,562 | 14,673 | |||||||||||
Provision for income taxes | 1,907 | 1,160 | 6,378 | 4,661 | |||||||||||
Net income | $ | 3,552 | $ | 2,501 | $ | 13,184 | $ | 10,012 | |||||||
Southern Financial Bancorp, Inc.
Financial Highlights
For the Quarters Ended December 31, | For the Twelve Months Ended December 31, | |||||||||||||||
| (dollars in thousands, except per share data) | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Income Statement Data: | ||||||||||||||||
Interest income | $ | 14,342 | $ | 13,376 | $ | 54,270 | $ | 51,130 | ||||||||
Interest expense | 3,787 | 4,162 | 14,773 | 17,375 | ||||||||||||
Net interest income | 10,555 | 9,214 | 39,497 | 33,755 | ||||||||||||
Provision for loan losses | 1,250 | 1,040 | 4,805 | 5,050 | ||||||||||||
Net interest income after provision for loan losses | 9,305 | 8,174 | 34,692 | 28,705 | ||||||||||||
Other income | 2,779 | 663 | 7,731 | 4,369 | ||||||||||||
Other expense | 6,625 | 5,176 | 22,861 | 18,401 | ||||||||||||
Income before income taxes | 5,459 | 3,661 | 19,562 | 14,673 | ||||||||||||
Income taxes | 1,907 | 1,160 | 6,378 | 4,661 | ||||||||||||
Net income | 3,552 | 2,501 | 13,184 | 10,012 | ||||||||||||
Reconciliation to Pro forma Net Income | ||||||||||||||||
(excluding gains (losses) on investment securities | ||||||||||||||||
and other assets and merger-related expenses) | ||||||||||||||||
Income before taxes | 5,459 | 3,661 | 19,562 | 14,673 | ||||||||||||
Gains (losses) on investment securities | 839 | (1,198 | ) | (95 | ) | (1,603 | ) | |||||||||
Gains (losses) on other assets | — | — | 289 | (17 | ) | |||||||||||
Merger-related expenses (4) | (770 | ) | — | (770 | ) | — | ||||||||||
Pro forma income before income taxes | 5,390 | 4,859 | 20,138 | 16,293 | ||||||||||||
Pro forma income taxes | 1,719 | 1,539 | 6,416 | 5,176 | ||||||||||||
Pro forma net income | 3,671 | 3,320 | 13,722 | 11,117 | ||||||||||||
Per Share Data: | ||||||||||||||||
Reconciliation to Pro forma Earnings per share | ||||||||||||||||
(excluding gains (losses) on investment | ||||||||||||||||
securities and other assets and merger-related expenses) | ||||||||||||||||
Earnings per basic share | $ | 0.58 | $ | 0.42 | $ | 2.19 | $ | 1.78 | ||||||||
Gains (losses) on investment securities | ||||||||||||||||
and other assets | 0.09 | (0.14 | ) | 0.02 | (0.20 | ) | ||||||||||
Merger-related expenses (4) | (0.11 | ) | — | (0.11 | ) | — | ||||||||||
Pro forma earnings per basic share | $ | 0.60 | $ | 0.56 | $ | 2.27 | $ | 1.98 | ||||||||
Earnings per diluted share | $ | 0.56 | $ | 0.40 | $ | 2.10 | $ | 1.71 | ||||||||
Gains (losses) on investment securities | ||||||||||||||||
and other assets | 0.08 | (0.13 | ) | 0.02 | (0.18 | ) | ||||||||||
Merger-related expenses (4) | (0.10 | ) | — | (0.11 | ) | — | ||||||||||
Pro forma earnings per diluted share | $ | 0.58 | $ | 0.53 | $ | 2.19 | $ | 1.89 | ||||||||
Book value per share | $ | 14.96 | $ | 13.58 | ||||||||||||
Tangible book value per share | $ | 12.67 | $ | 11.15 | ||||||||||||
Weighted average shares outstanding: | ||||||||||||||||
Basic | 6,126,178 | 5,935,967 | 6,032,566 | 5,614,255 | ||||||||||||
Diluted | 6,394,159 | 6,217,442 | 6,269,387 | 5,868,093 | ||||||||||||
Shares outstanding at end of period | 6,208,589 | 5,985,298 | ||||||||||||||
Selected Performance Ratios and Other Data: | ||||||||||||||||
Return on Average Assets | 1.29 | % | 1.04 | % | 1.27 | % | 1.18 | % | ||||||||
Return on Average Equity | 16.07 | % | 12.42 | % | 15.50 | % | 14.14 | % | ||||||||
Selected performance ratios (based on non-GAAP | ||||||||||||||||
net income) | ||||||||||||||||
Return on Average Assets | 1.33 | % | 1.37 | % | 1.32 | % | 1.31 | % | ||||||||
Return on Average Equity | 16.61 | % | 16.48 | % | 16.13 | % | 15.70 | % | ||||||||
Yield on Earning Assets | 5.51 | % | 5.98 | % | 5.60 | % | 6.44 | % | ||||||||
Cost of Funds | 1.67 | % | 2.11 | % | 1.76 | % | 2.50 | % | ||||||||
Cost of Funds including non-interest | ||||||||||||||||
bearing deposits | 1.51 | % | 1.90 | % | 1.58 | % | 2.26 | % | ||||||||
Net Interest Margin | 4.06 | % | 4.12 | % | 4.08 | % | 4.25 | % | ||||||||
Efficiency Ratio (1) | 46.22 | % | 45.69 | % | 46.29 | % | 45.53 | % | ||||||||
Stockholders’ equity to total assets | 8.48 | % | 8.38 | % | ||||||||||||
Stockholders’ equity to total tangible assets | 7.28 | % | 6.98 | % | ||||||||||||
Intangible assets | 14,167 | 14,558 | ||||||||||||||
Amortization of intangibles | 80 | 117 | 320 | 306 | ||||||||||||
Unrealized gains (losses) | (1,409 | ) | 82 | |||||||||||||
Southern Financial Bancorp, Inc.
Financial Highlights
For the Quarters Ended December 31, | For the Twelve Months Ended December 31, | |||||||||||||||
| (dollars in thousands, except per share data) | 2003 | 2002 | 2003 | 2002 | ||||||||||||
Period-end Balance Sheet Data: | ||||||||||||||||
Total assets | $ | 1,094,388 | $ | 970,630 | ||||||||||||
Total loans receivable, net of deferred fees | 611,616 | 604,580 | ||||||||||||||
Allowance for loan losses | 10,498 | 10,257 | ||||||||||||||
Loans held for sale | 8,651 | 514 | ||||||||||||||
Total investment securities & overnight deposits | 389,060 | 268,256 | ||||||||||||||
Total deposits | 743,737 | 776,083 | ||||||||||||||
Other borrowings | 209,755 | 83,456 | ||||||||||||||
Callable long term debt | 23,000 | 13,000 | ||||||||||||||
Total Liabilities | 1,001,531 | 889,327 | ||||||||||||||
Total Stockholders’ Equity | 92,857 | 81,303 | ||||||||||||||
Total Capital (2) | 115,857 | 94,303 | ||||||||||||||
Selected Average Balances: | ||||||||||||||||
Total loans receivable, net of deferred fees | $ | 643,523 | $ | 641,352 | $ | 640,159 | $ | 524,271 | ||||||||
Total investment securities | 390,307 | 232,835 | 309,985 | 258,535 | ||||||||||||
Overnight deposits | 7,114 | 20,161 | 18,190 | 10,548 | ||||||||||||
Earning assets | 1,040,944 | 894,348 | 968,334 | 793,354 | ||||||||||||
Total assets | 1,104,095 | 966,218 | 1,038,764 | 851,118 | ||||||||||||
Interest bearing deposits | 638,586 | 684,964 | 650,101 | 613,634 | ||||||||||||
Other debt (2) | 267,119 | 105,838 | 190,411 | 80,769 | ||||||||||||
Total interest-bearing liabilities | 905,706 | 790,802 | 840,513 | 694,403 | ||||||||||||
Non-interest bearing deposits | 97,047 | 86,953 | 92,921 | 74,161 | ||||||||||||
Total deposits | 735,633 | 771,917 | 743,022 | 687,795 | ||||||||||||
Stockholders’ equity | 88,411 | 80,549 | 85,047 | 70,812 | ||||||||||||
Allowance for loan losses: | ||||||||||||||||
Balance-beginning of period | 10,615 | 10,264 | 10,257 | 7,354 | ||||||||||||
Acquired from Metro-County Bank | — | — | — | 1,350 | ||||||||||||
Provision for loan losses | 1,250 | 1,040 | 4,805 | 5,050 | ||||||||||||
Net charge-offs | (1,367 | ) | (1,047 | ) | (4,564 | ) | (3,497 | ) | ||||||||
Balance-end of period | 10,498 | 10,257 | 10,498 | 10,257 | ||||||||||||
Asset Quality | ||||||||||||||||
Nonaccrual loans, including SBA guaranteed portion (3) | 5,798 | 2,271 | ||||||||||||||
Other Real Estate Owned | — | — | ||||||||||||||
Total Nonperforming Assets | 5,798 | 2,271 | ||||||||||||||
Provision for Loan Losses to net charge-offs | 105.28 | % | 144.41 | % | ||||||||||||
Net Charge-offs to Average Loans | 0.71 | % | 0.67 | % | ||||||||||||
Nonperforming Assets to Total Assets | �� | 0.53 | % | 0.23 | % | |||||||||||
Allowance for Loan Losses to Nonperforming Assets | 181.06 | % | 451.67 | % | ||||||||||||
Allowance for Loan Losses to Total Loans | 1.72 | % | 1.70 | % | ||||||||||||
| (1) | Calculated by dividing total other expense, net of amortization of goodwill and intangibles and merger-related expenses, by net interest income plus total other income, excluding securities gains and losses and other assets. |
| (2) | Includes callable long term debt. |
| (3) | The SBA guaranteed portion of nonaccrual loans totaling $2.0 million and $822 thousand at December 31, 2003 and 2002, respectively, are included in the total. |
| (4) | Certain merger-related expenses were not tax effected because they were not deductible for tax purposes. |
