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:
June 30, 1997
Commission File Number: 0-22836
_______
SOUTHERN FINANCIAL BANCORP, INC.
Virginia 54-1779978
_______________________________ ____________________________
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number.)
37 East Main Street
Warrenton, Virginia 20186
_______________________________________ ________________________________
(address of principal executive 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 August 11, 1997, there were issued 1,619,132 shares and outstanding
1,589,258 shares of the registrant's Common Stock and issued and outstanding
15,634 shares of preferred stock.
PAGE 2
SOUTHERN FINANCIAL BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
June 30, 1997
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION Page Number
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of June 30, 1997 (Unaudited), and
December 31, 1996 3
Consolidated Statements of Operations for the
Three and Six Months Ended June 30, 1997 and 1996
(Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Six Months
Ended June 30, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 1997 and 1996
(Unaudited) 6
Notes to Consolidated Financial Statements
(Unaudited) 7 - 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10 - 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K. 16
SIGNATURES 17
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
PAGE 3
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
June 30, December 31,
ASSETS 1997 1996
Cash and Due from Banks $ 3,045,156 $ 4,004,149
Interest Earning Deposits with Banks 1,734,218 2,395,574
Investment Securities - Available-for-Sale 4,688,621 5,099,619
Investment Securities - Held-to-Maturity 74,646,184 65,217,243
Loans Held for Sale 262,250 444,500
Loans Receivable, Net 116,108,138 108,286,903
Federal Home Loan Bank Stock, at Cost 930,500 867,600
Premises and Equipment, Net 2,453,813 1,487,446
Interest Receivable 1,562,051 1,328,551
Real Estate Owned 431,249 340,023
Other Assets 1,453,643 1,337,114
____________ ___________
Total Assets $207,315,823 $190,808,722
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $182,170,133 $164,279,105
Advances from Federal Home Loan Bank 6,000,000 8,500,000
Advances from Borrowers for Taxes and
Insurance 135,089 105,292
Accrued Expenses and Other Liabilities 1,642,277 1,523,373
___________ ___________
Total Liabilities 189,947,499 174,407,770
Preferred Stock 156 156
Common Stock 16,070 15,941
Capital in Excess of Par Value 15,376,273 15,276,373
Retained Earnings 2,503,872 1,655,575
Net Unrealized (Loss) on Securities
Available-for-Sale (56,960) (76,006)
Treasury Stock (471,087) (471,087)
__________ __________
Total Stockholders' Equity 17,368,324 16,400,952
____________ ____________
Total Liabilities and Stockholders'
Equity $207,315,823 $190,808,722
The accompanying notes are an integral part of these financial statements.
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
PAGE 4
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Six Months Ended
June 30, June 30,
1997 1996 1997 1996
INTEREST INCOME
Interest and Fees on Loans $2,800,096 $2,541,305 $5,386,134 $5,122,928
Interest and Dividends on
Investment Securities 1,293,369 1,054,065 2,529,913 1,985,139
Total Interest Income 4,093,465 3,595,370 7,916,047 7,108,067
INTEREST EXPENSE
Deposits 2,053,074 1,838,115 3,993,098 3,619,223
Borrowings 96,493 68,679 169,902 152,004
Total Interest Expense 2,149,567 1,906,794 4,163,000 3,771,227
Net Interest Income 1,943,898 1,688,576 3,753,047 3,336,840
Provision for Loan Losses 175,000 160,000 305,000 320,000
Net Interest Income after
Provision for Loan Losses 1,768,898 1,528,576 3,448,047 3,016,840
OTHER INCOME
Gain on Sale of Loans 41,650 56,771 97,830 131,852
0ther Income 359,505 227,358 705,751 407,149
Total Other Income 401,155 284,129 803,581 539,001
OPERATING EXPENSE
Employee Compensation
and Benefits 609,176 557,306 1,225,517 1,048,863
Premises and Equipment 458,068 375,009 902,620 732,023
Deposit Insurance Assessments 25,431 81,399 50,338 154,176
Professional Fees 33,030 21,000 57,413 44,000
Other Expense 229,637 249,398 465,289 464,957
Total Operating Expense 1,355,342 1,284,112 2,701,177 2,444,019
Income Before Income Taxes 814,711 528,593 1,550,451 1,111,822
Provision for Income Taxes 258,800 174,400 492,000 366,900
Net Income $ 555,911 $ 354,193 $1,058,451 $ 744,922
Earnings per Share:
Primary Earnings per Share $ 0.34 $ 0.22 $ 0.65 $ 0.46
Fully Diluted Earnings
per Share $ 0.34 $ 0.22 $ 0.64 $ 0.46
Weighted Average Number of
Common Shares Outstanding 1,566,943 1,529,919 1,565,603 1,526,761
The accompanying notes are an integral part of these financial statements.
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
PAGE 5
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Net Unrealized
Capital in Gain (Loss) Total
Preferred Common Excess of Retained Treasury on Securities Stockholders'
Stock Stock Par Value Earnings Stock Available-for Sale Equity
Balance, December 31, 1996 $156 $15,941 $15,276,373 $1,655,575 $(471,087) $(76,006) $16,400,952
Dividends on Preferred and
Common Stock - - - (97,256) - - (97,256)
Net Unrealized Gain on
Securities
Available-for-Sale - - - - - 20,980 20,980
Net Income - - - 502,540 - - 502,540
Balance, March 31, 1997 $156 $15,941 $15,276,373 $2,060,859 $(471,087) $(55,026) $16,827,216
Dividends on Preferred and
Common Stock - - - (112,898) - - (112,898)
Options exercised - 129 99,900 - - - 100,029
Net Unrealized Loss on
Securities
Available-for-Sale - - - - - (1,934) (1,934)
Net Income - - - 555,911 - - 555,911
Balance, June 30, 1997 $156 $16,070 $15,376,273 $2,503,872 $(471,087) $(56,960) $17,368,324
The accompanying notes are an integral part of these financial statements.
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS
PAGE 6
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Six Months Ended
June 30,
1997 1996
Cash Flows from Operating Activities:
Net Income $ 1,058,451 $ 744,922
Adjustments to Reconcile Net Income to Net Cash
Provided by (Used in) Operating Activities:
Depreciation and Amortization 307,003 245,811
Provision for Loan Losses 305,000 320,000
Provision for Deferred Income Taxes (1,069) (53,390)
Gain on Sale of Loans (97,830) (131,852)
Amortization of Deferred Loan Fees (92,470) (235,895)
Loans Originated for Sale (4,429,882) (8,788,348)
Proceeds from Sales of Loans 4,467,854 6,604,890
Increase in Interest Receivable (233,500) (102,737)
Increase in Other Assets (115,460) (1,801)
Increase (Decrease) in Other Liabilities 118,904 138,056
Net Cash Provided by (Used in)
Operating Activities 1,287,001 (1,260,344)
Cash Flows from Investing Activities:
Net Funding of Loans Receivable (8,000,591) 1,228,746
Purchase of Investment Securities (16,698,727) (23,780,212)
Paydown of Investment Securities 7,601,760 6,603,401
Net (Increase) Decrease in Overnight
Earning Deposits 661,356 (880,121)
Net Increase in Bank Premises and Equipment (966,367) (40,782)
Investment in Real Estate Owned (96,226) -
Paydown of Real Estate Owned 5,000 11,000
Increase (Decrease) in Federal Home
Loan Bank Stock (62,900) 82,400
Net Cash Used in Investing Activities (17,556,695) (16,775,568)
Cash Flows from Financing Activities:
Net Increase in Deposits 17,891,028 16,527,905
Increase (Decrease) in Advances from
Federal Home Loan Bank (2,500,000) 1,500,000
Increase in Advances from Borrowers
for Taxes and Insurance 29,797 65,740
Proceeds from Stock Options Exercised 100,029 123,818
Dividends on Preferred and Common Stock (210,153) (173,446)
Net Cash Provided by Financing Activities 15,310,701 18,044,017
Net Increase (Decrease) in Cash
and Due from Banks (958,993) 8,105
Cash and Due from Banks, Beginning of Period 4,004,149 3,894,884
Cash and Due from Banks, End of Period $ 3,045,156 $ 3,902,989
The accompanying notes are an integral part of these statements.
SOUTHERN FINANCIAL BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PAGE 7
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, changes in
stockholders' equity 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, 1997 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, 1996.
NOTE 2 - INVESTMENT SECURITIES
The portfolio of investment securities classified as available-for-sale
consists of the following securities:
June 30, 1997 December 31, 1996
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
FHLMC Preferred Stock $3,928,605 $3,845,575 $4,310,235 $4,205,287
FNMA MBS 845,146 843,046 902,824 894,332
Total $4,773,751 $4,688,621 $5,213,059 $5,099,619
The FNMA mortgage backed securities classified as available-for-sale have
a fixed rate of interest and an original maturity of 15 years.
The portfolio of investment securities which are classified as
held-to-maturity consist of the following securities:
June 30, 1997 December 31, 1996
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
FHLB Intermediate Notes $ 3,000,000 $ 2,997,109 $ 2,000,000 $ 2,001,875
FHLB Zero Coupon Notes 617,036 611,641 - -
FHLMC MBS 6,635,130 6,662,917 7,300,246 7,268,332
FNMA MBS 24,485,272 24,472,148 21,981,743 21,840,553
GNMA MBS 34,332,948 34,499,970 27,387,797 27,437,141
CMO 5,575,798 5,502,562 6,547,457 6,426,176
Total $74,646,184 $74,746,347 $65,217,243 $64,974,077
The FHLB notes are due in August, 2002 and earlier and are callable at the
option of the issuer at varying times.
The FHLB Zero Coupon Notes are due in 2012 and are callable at the option
of the issuer commencing June 27, 1998. The remainder of the securities
classified as held-to-maturity are all mortgage backed securities. $13.0
million of the mortgage backed securities have fixed rates of interest and
original maturities of 15 years. The interest rates on $9.5 million of the
mortgage backed securities are indexed to the 11th District and national cost
of funds indices and adjust monthly. The interest rates on the balance of
the mortgage backed securities, $48.5 million, are indexed to the one year
constant maturity treasury index and adjust annually or more frequently.
PAGE 8
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
June 30, 1997 December 31, 1996
Real estate mortgage loans:
Permanent
Residential $ 33,555,283 $ 35,032,684
Nonresidential 48,001,521 46,548,847
Construction
Residential 4,136,226 5,616,121
Nonresidential 12,323,677 7,510,374
Business 17,102,742 12,197,921
Consumer 3,081,260 3,294,171
Total loans receivable 118,200,709 110,200,118
Less:
Deferred loan fees, net (490,642) (412,274)
Allowance for loan losses (1,601,929) (1,500,941)
Loans receivable, net $116,108,138 $108,286,903
The following sets forth information regarding the allowance for loan losses:
Six Months Year
Ended Ended
June 30, 1997 December 31, 1996
Balance, beginning of period $1,500,941 $1,190,249
Charge-offs (223,414) (389,249)
Recoveries 19,402 4,941
Provision charged to operations 305,000 695,000
Balance, end of period $1,601,929 $1,500,941
NOTE 4 - ADVANCES FROM FEDERAL HOME LOAN BANK
At June 30, 1997, advances from the Federal Home Loan Bank ("FHLB") of
Atlanta totaled $6.0 million which consisted of $4.0 million of advances
which reprice daily but may be prepaid at any time without penalty and $2.0
million of fixed rate advances maturing in January, 1998. At December 31,
1996, advances from the FHLB of Atlanta totaled $8.5 million.
These advances are made under a credit availability agreement with the FHLB
of Atlanta totaling $25 million. The agreement does not have a maturity date
and advances are made at the FHLB of Atlanta's discretion.
NOTE 5 - STOCKHOLDERS' EQUITY
At June 30, 1997 and December 31, 1996, the Bancorp had
15,634 shares of 6% cumulative convertible
PAGE 9
preferred stock issued and outstanding. Par value is $0.01 per share.
Five hundred thousand shares are authorized. Each share of the Bancorp's
preferred stock is convertible to 1.61 shares of common stock. The
preferred stock has an annual dividend rate of 6%. Dividends are payable
quarterly and are cumulative.
At June 30, 1997 the Bancorp had 1,607,029 shares of common stock issued and
1,577,155 shares of common stock outstanding, while at December 31, 1996,
the Bancorp had 1,594,122 shares of common stock issued and 1,564,248 shares
of common stock outstanding. On June 12, 1997 12,907 new shares were issued
as a result of the exercise of a stock option. The par value is $0.01 per
share. There were 5,000,000 shares authorized by the Bancorp's charter. The
Bancorp's board of directors declared a 10 percent stock dividend in July,
1996. Prior period earnings per share amounts have been restated to reflect
the effect of this dividend.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
PAGE 10
Financial Condition
Total assets of Southern Financial Bancorp, Inc. (the "Bancorp") at June 30,
1997 were $207.3 million, an increase of $16.5 million, or 8.7%, from total
assets of $190.8 million at December 31, 1996. Total liabilities
increased by $15.5 million, or 8.9%, to $189.9 million at June 30, 1997
from $174.4 million at December 31, 1996.
The increase in total assets resulted from increases of $7.8 million in
total loans receivable, net and $9.4 million in investment securities
(held-to-maturity) from December 31, 1996 to June 30, 1997.
Although total loans receivable, net increased by $7.8 million, or 7.2%, to
$116.1 million at June 30, 1997 from $108.3 million at December 31, 1996,
a shift occurred in the composition of the categories. The principal
changes were an increase in non-residential construction mortgage loans of
$4.8 million and an increase in non-mortgage business loans of $4.9 million.
These increases were offset by decreases in residential permanent and
construction loans totaling $3.0 million, reflecting a change in emphasis on
the part of the Bancorp from residential mortgage lending to business lending.
Investment securities available-for-sale declined to $4.7 million at June
30, 1997 from $5.1 million at December 31, 1996, primarily due to the fact
that $375,000 of FHLMC Preferred Stock was called by the issuer. At
June 30, 1997 investment securities available-for-sale consisted entirely of
Federal Home Loan Mortgage Corporation ("FHLMC") preferred stock and 15 year
Federal National Mortgage Association (FNMA) mortgage backed securities
and were recorded at current market value.
Investment securities held-to-maturity increased by $9.4 million, or 14.5%,
to $74.6 million at June 30, 1997 from $65.2 million at December 31, 1996.
This increase was due to the purchase of $1.6 million of Federal Home
Loan Bank securities and a net increase in mortgage backed securities of $7.8
million during the six months ended June 30, 1997.
The increase in total assets was funded by an increase in customer deposits
of $17.9 million, or 10.9%, to $182.2 million at June 30, 1997 from $164.3
million at December 31, 1996. Part of the increase in customer deposits
went to fund a decrease of $2.5 million in advances from the Federal Home
Loan Bank ("FHLB") of Atlanta which decreased from $8.5 million at December
31, 1996 to $6.0 million at June 30, 1997. At June 30, 1997 the advances
from the FHLB of Atlanta consisted of $4.0 million of adjustable-rate
advances and $2.0 million of fixed-rate advances all of which mature in one
year or less.
The primary sources of funds for operations of the Bancorp include principal
repayments on loans, sales of loans and mortgage-backed securities, and new
savings deposits and borrowings. The Bancorp had outstanding commitments
under existing construction loan agreements to fund loans approximating $8.2
million at June 30, 1997.
In the opinion of management, the Bancorp's liquid assets are adequate to
meet commitments for loan fundings and other obligations and expenditures.
Results of Operations
The Bancorp's principal sources of revenues are interest and fees on loans
and mortgage-backed securities and interest and dividends on investments as
well as service fees on deposit accounts. Net income is affected by
operating expenses and interest paid on deposits and borrowings from the
Federal Home Loan Bank of Atlanta.
The following table presents, for periods indicated, average monthly balances
of and weighted average yields on interest-earning assets and average
balances and weighted average effective interest paid on interest-
bearing liabilities. Calculations have been made utilizing month-end average
balances for all balnace sheet categories except for borowings which utilize
daily average balances.
PAGE 11
Six Months Ended June 30,
1997 1996
Average Average
Average Yield/ Average Yield/
Balance Rate Balance Rate
(Dollars in Thousands)
Interest-Earning Assets:
Loans Receivable $113,147 9.52% $104,911 9.77%
Investment Securities 78,878 6.41 62,796 6.32
Total Interest-Earning
Assets 192,025 8.24 167,707 8.48
Interest-Bearing Liabilities:
Deposits 173,353 4.64 152,501 4.79
Borrowings 6,173 5.55 5,538 5.53
Total Interest-Bearing
Liabilities $179,526 4.67% $158,039 4.82%
Average Dollar Difference
Between Interest-Earning
Assets and Interest-Bearing
Liabilities $ 12,499 $ 9,668
Interest Rate Spread 3.57% 3.66%
Interest Margin 3.87% 3.94%
PAGE 12
The following table presents information regarding changes in interest income
and interest expense for the periods indicated. For each category of
interest-earning asset and interest-bearing liability, information is
provided on changes attributable to changes in volume (change in volume
multiplied by old rate), changes in rate (change in rate multiplied by old
volume), and changes in rate-volume (change in rate multiplied by the change
in volume).
For the Six Months Ended
June 30, 1997
Versus
June 30, 1996
(Dollars in Thousands)
Rate/
Volume Rate Volume Net
Interest Income:
Loans Receivable $402 ($131) ($10) $261
Investment Securities 508 28 7 543
Total Interest Income 910 ( 103) ( 3) 804
Interest Expense:
Deposits 499 ( 114) ( 16) 369
Borrowings 18 0 0 18
Total Interest Expense 517 ( 114) ( 16) 387
Net Interest Income $393 $ 11 $13 $417
The Bancorp recorded net income of $1,058,451 for the six months ended June
30, 1997, compared to $744,922 for the six months ended June 30, 1996, an
increase of $313,529, or 42.1%. Primary earnings per share were $0.65 and
$0.46 for the six months ended June 30, 1997 and 1996, respectively.
Weighted average shares of common stock outstanding were 1,565,603 and
1,526,761 for the same periods in 1997 and 1996, respectively. As
explained in footnote 6, in order to provide consistency, the weighted
average number of common shares outstanding for current and prior periods
have been adjusted to give effect to a 10% stock dividend in July, 1996.
Net interest income before provision for loan losses for the six months ended
June 30, 1997 was $3.8 million, an increase of $416,207, or 12.5%, from $3.3
million for the six months ended June 30, 1996. The increase resulted
primarily from a growth in average interest-earning assets, which was
partially offset by a decrease in interest margin. Total interest-earning
assets in the six months ended June 30, 1997 averaged $192.0 million as
compared to $167.7 million for the same period in 1996. For the six months
ended June 30, 1997 the interest rate spread was 3.57%, a decrease of 9 basis
points from 3.66% for the six months ended June 30, 1996. The yield on
interest-earning assets decreased by 24 basis points from 8.48% for the six
months ended June 30, 1996 to 8.24% for the six months ended June 30, 1997.
The cost of interest bearing liabilities decreased by 15 basis points to
4.67% for the six months ended June 30, 1997 from 4.82% for the six months
ended June 30, 1996.
For the three months ended June 30, 1997, the Bancorp recorded net income of
$555,911 as compared to $354,193 for the three months ended June 30, 1996, an
increase of $201,718, or 57.0%. Primary earnings per share were $0.34 and
$0.22 for the three months ended June 30, 1997 and 1996, respectively.
Weighted average shares of common stock outstanding were 1,566,943 and
1,529,919 for the same periods in 1997 and 1996, respectively.
Net interest income before provision for loan losses for the three months
ended June 30, 1997 was $1.9 million, an increase of $255,322, or 15.1%, from
$1.7 million for the three months ended June 30, 1996. The increase
resulted primarily from a growth in average interest-earning assets, which
was partially offset by a decrease in interest margin.
PAGE 13
Total interest income increased by $807,980, or 11.4%, to $7.9 million for
the six months ended June 30, 1997 from $7.1 million for the six months ended
June 30, 1996. This increase was primarily due to an increase in average
loans receivable of $8.2 million from $104.9 million in the six months ended
June 30, 1996 to $113.1 million in the six months ended June 30, 1997 and to
an increase of $16.1 million in average investment securities to $78.9
million for the six months ended June 30, 1997 from $62.8 million for the six
months ended June 30, 1996. In addition, there was as an increase in the
average yield on investment securities from 6.32% to 6.41% for the same
periods. The yield on average loans receivable for the six months ended June
30, 1997 was 9.52%, a decrease of 25 basis points from 9.77% for the six
months ended June 30, 1996.
Total interest expense increased by $391,773, or 10.4%, to $4.2 million for
the six months ended June 30, 1997 from $3.8 million for the six months ended
June 30, 1996, primarily due to an increase in customer deposits
which averaged $173.4 million for the six months ended June 30, 1997, up
$20.9 million from $152.5 million for the six months ended June 30, 1996.
This was offset, however, by a decrease in the average effective rate paid on
deposits of 15 basis points to 4.64% in the 1997 period from 4.79% in the
1996 period. FHLB of Atlanta advances averaged $6.2 million for the six
months ended June 30, 1997, an increase of $635,000 from $5.5 million for
the six months ended June 30, 1996. The average effective rate paid on FHLB
of Atlanta advances increased to 5.55% for the six months ended June 30, 1997
from 5.53% for the same period in 1996.
The provision for loan losses for the six months ended June 30, 1997 was
$305,000, as compared to $320,000 for the six months ended June 30, 1996. In
recognition of any nonperforming loans and the inherent risk in lending,
the Bancorp has established a provision for loan losses. The provision for
loan losses is a reserve of funds established to absorb the inherent risk in
lending, after evaluating the loan portfolio, considering current economic
conditions, changes in the nature and volume of lending and past loan loss
experience. In management's opinion the allowance for loan losses is adequate
to absorb potential losses in the current loan portfolio. The allowance for
loan losses at June 30, 1997 was $1.6 million, or 1.4% of total loans
receivable and 91.9% of nonperforming loans and real estate owned, versus
$1.5 million at December 31, 1996, which was 1.4% of total loans receivable
and 75.5% of nonperforming loans and real estate owned.
Total other income for the six months ended June 30, 1997 was $803,581 as
compared to $539,001 for the six months ended June 30, 1996, an increase of
$264,580, or 49.1%. This was primarily due to an increase in fees on deposit
accounts, resulting from an increased retail deposit base, and was offset by
a decline in the gain on sale of loans of $34,022.
Total operating expense increased by $257,158, or 10.5%, to $2.7 million for
the six months ended June 30, 1997 from $2.4 million for the six months ended
June 30, 1996. Employee compensation and benefits increased by $176,654, or
16.8%, reflecting the cost of opening one new branch in Winchester in July,
1996, as well as normal growth of the Bancorp. Premises and equipment
increased by $170,597, or 23.3% which principally reflects the cost of
opening the new branch in Winchester in July, 1996, as well as investment
in new computers and the upgrading of existing equipment.
Deposit insurance assessments decreased $103,838, or 67.4%, to $50,338 for
the six months ended June 30, 1997 from $154,176 for the six months ended
June 30, 1996 as a result of the reduction in the periodic insurance
payments to the Savings Association Insurance Fund (SAIF) which occurred
after the one-time recapitalization of the fund in the third quarter of 1996.
PAGE 14
Regulatory Capital Requirements
At June 30, 1997 the Bancorp exceeded all regulatory capital standards, which
were as follows:
Actual Capital Required Capital Excess Capital
(Amounts in thousands)
Amount Ratio Amount Ratio Amount Ratio
Leverage
Capital $17,176 8.39% $8,184 4.00% $8,992 4.39%
Tier I
Capital $17,176 14.48% $4,746 4.00% $12,430 10.48%
Tier I and II
Capital $18,661 15.73% $9,493 8.00% $9,168 7.73%
Impact of Inflation and Changing Prices
The consolidated financial statements and accompanying notes presented herein
have been prepared in accordance with generally accepted accounting principles
which require the measurement of financial position and operating results in
terms of historical dollars without considering changes in the relative
purchasing power of money over time due to inflation.
Unlike many industrial companies, substantially all of the assets and
virtually all of the liabilities of the Bancorp are monetary in nature. As
a result, interest rates have a more significant impact on the Bancorp's
performance than the effects of general levels of inflation. Interest rates
may not necessarily move in the same direction or in the same magnitude as
the prices of goods and services. However, other expenses do reflect general
levels of inflation.
Impact of Accounting Pronouncements
In February 1997, the Financial Accounting Standards board issued
Statement of Financial Accounting Standards (SFAS) No. 128,
"Earnings per Share" (EPS). This statement, which supersedes APB
Opinion No. 15, simplifies the standards for computing EPS and
makes them comparable to international standards. SFAS No. 128
replaces the current "primary" and "fully diluted" earnings per
share with "basic" and "diluted" earnings per share. Basic EPS
is computed by dividing income available to common stockholders
by the weighted-average number of common shares outstanding for
the period. Diluted EPS reflects the potential dilution that
could occur if securities or other contracts to issue common
stock were exercised or converted into common stock, or resulted
in the issuance of common stock that then shared in the earnings
or the company. Diluted EPS is computed similarly to fully
diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128 is
effective for financial statements issued for the periods ending
after December 15, 1997. Early application is not permitted and
prior period restatement is required. Management has not yet
determined the impact, if any, of this statement on the Bancorp.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 130,
Reporting Comprehensive Income. This statement establishes
standards for the reporting and display of comprehensive income
and its components in a full set of general-purpose financial
statements. SFAS No. 130 requires that all items that are
required to be recognized as components of comprehensive income
be reported in a financial statement that is displayed with the
same prominence as other financial statements. The statement
does not require a specific format for that financial statement
but requires that an enterprise display an amount representing total
PAGE 15
comprehensive income for the period in that financial
statement. SFAS No. 130 is effective for fiscal years beginning
after December 15, 1997. Management has not yet determined the
impact, if any, of this statement on the Bancorp.
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 131,
Disclosure About Segments of an Enterprise and Related
Information. SFAS No. 131 establishes standards for the way that
public business enterprises report information about operating
segments in annual financial statements and requires that those
enterprises report selected information about operating segments
in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographical areas, and major customers. SFAS No. 131
is effective for financial statements for periods beginning after
December 15, 1997. Management has not yet determined the impact,
if any, of this statement on the Bancorp.
SOUTHERN FINANCIAL BANCORP, INC.
PAGE 16
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 Anual Meeting of Shareholders was held on April 24, 1997 at 3:00 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 2000:
Neil J. Call
David de Give
R. Roderick porter
2. The appointment of Arthur Andersen, LLP as independent auditors for the
year ending December 31, 1997 was approved by the following vote:
For 1,326,724; Against 1,909; Abstain 4,175.
3. The amendment to the Bancorp's 1993 stock Option and Incentive Plan
increasing the shares authorized under the plan from 161,000 to 261,000
was approved by the following vote: For 741,281; Against 224,293;
Abstain 13,270.
Item 5. OTHER INFORMATION
Not applicable.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
Exhibits Required
None.
Reports on Form 8-K
The Bancorp filed a report on Form 8-K on July 3, 1997 in connection with the
termination by the Bancorp on June 26, 1997 of the services of Arthur
Andersen LLP as independent accountants of the Bancorp and the engagement of
KPMG Peat Marwick LLP as new independent accountants for the Bancorp.
SOUTHERN FINANCIAL BANCORP, INC.
PAGE 17
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 8/12/97 By: /s/Georgia S. Derrico
Georgia S. Derrico
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date 8/12/97 By: /s/William H. Lagos
William H. Lagos
Senior Vice President and Controller
Principal Accounting Officer
(Duly Authorized Representative)