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:
September 30, 1997
0-22836
---------------
Commission File No.:
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 October 23, 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.
SOUTHERN FINANCIAL BANCORP, INC.
QUARTERLY REPORT ON FORM 10-Q
September 30, 1997
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION Number
------
Item 1. Financial Statements
Consolidated Statements of Financial Condition
as of September 30, 1997, and
December 31, 1996 (Unaudited) 3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1997 and 1996
(Unaudited) 4
Consolidated Statement of Changes in
Stockholders' Equity for the Nine Months
Ended September 30, 1997 (Unaudited) 5
Consolidated Statements of Cash Flows for the
Nine Months Ended September 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
2
SOUTHERN FINANCIAL BANK
FINANCIAL STATEMENTS (UNAUDITED)
September 30, December 31,
1997 1996
------------------- ------------------
ASSETS
Cash and Due From Banks $ 5,119,246 $ 4,004,149
Interest Bearing Deposits with Banks 671,865 2,395,574
Investment Securities - Available for Sale 4,664,795 5,099,619
Investment Securities - Held to Maturity 81,644,581 65,217,243
Loans Held for Sale 403,000 444,500
Loans Receivable, Net 122,661,915 108,286,903
Federal Home Loan Bank Stock, at Cost 930,500 867,600
Premises and Equipment, Net 2,435,166 1,487,446
Interest Receivable 1,588,205 1,328,551
Real Estate Owned 96,226 340,023
Other Assets 1,076,524 1,337,114
------------------- ------------------
Total Assets $ 221,292,023 $ 190,808,722
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 193,455,728 $ 164,279,105
Advances from Federal Home Loan Bank 8,000,000 8,500,000
Accrued Expenses and Other Liabilities 1,964,478 1,628,665
------------------- ------------------
Total Liabilities 203,420,206 174,407,770
------------------- ------------------
Preferred Stock 156 156
Common Stock 16,191 15,941
Capital in Excess of Par Value 15,536,231 15,276,373
Retained Earnings 2,829,831 1,655,575
Treasury Stock,at Cost (29,874 shares) (471,087) (471,087)
Net Unrealized Loss on Securities Available for Sale (39,505) (76,006)
------------------- ------------------
Total Stockholders' Equity 17,871,817 16,400,952
------------------- ------------------
Total Liabilities & Stockholders' Equity $ 221,292,023 $ 190,808,722
=================== ==================
The accompanying notes are an integral part of these financial statements.
3
SOUTHERN FINANCIAL BANCORP, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
-------------------------------- --------------------------------
INTEREST INCOME
Loans $ 3,023,761 $ 2,558,981 $ 8,409,895 $ 7,681,909
Investment Securities 1,418,003 1,153,805 3,947,916 3,138,944
--------------- -------------- --------------- --------------
Total Interest Income 4,441,764 3,712,786 12,357,811 10,820,853
--------------- -------------- --------------- --------------
INTEREST EXPENSE
Deposits 2,284,137 1,889,242 6,277,235 5,508,465
Borrowings 76,772 94,807 246,674 246,811
--------------- -------------- --------------- --------------
Total Interest Expense 2,360,909 1,984,049 6,523,909 5,755,276
--------------- -------------- --------------- --------------
Net Interest Income 2,080,855 1,728,737 5,833,902 5,065,577
Provision for Loan Losses 255,000 190,000 560,000 510,000
--------------- -------------- --------------- --------------
Net Interest Income After Provision 1,825,855 1,538,737 5,273,902 4,555,577
--------------- -------------- --------------- --------------
OTHER INCOME
Gain on Sale of Loans 48,151 16,177 145,981 148,029
Fee Income 367,097 244,783 974,983 603,124
Other Income 47,671 26,225 145,536 75,033
--------------- -------------- --------------- --------------
Total Other Income 462,919 287,185 1,266,500 826,186
--------------- -------------- --------------- --------------
OPERATING EXPENSE
Employee Compensation and Benefits 632,369 536,441 1,857,886 1,585,304
Premises and Equipment 504,514 423,479 1,407,134 1,155,502
Deposit Insurance Assessments 27,490 952,517 77,828 1,106,693
Professional Fees 29,339 21,115 86,752 65,115
Advertising Expense 57,120 26,115 149,878 99,130
Other Expense 200,695 201,372 573,226 593,314
--------------- -------------- --------------- --------------
Total Operating Expense 1,451,527 2,161,039 4,152,704 4,605,058
--------------- -------------- --------------- --------------
Income Before Income Taxes 837,247 (335,117) 2,387,698 776,705
Provision for Income Taxes 269,500 (110,600) 761,500 256,300
--------------- -------------- --------------- --------------
Net Income $ 567,747 $ (224,517) $ 1,626,198 $ 520,405
=============== ============== =============== ==============
Earnings Per Share
Primary $ 0.34 $ (0.14) $ 1.00 $ 0.32
=============== ============== =============== ==============
Fully Diluted $ 0.34 $ (0.14) $ 0.97 $ 0.32
=============== ============== =============== ==============
Weighted Average Number of Primary
Common Shares Outstanding 1,643,925 1,628,291 1,618,928 1,602,638
The accompanying notes are an integral part of these financial statements.
4
SOUTHERN FINANCIAL BANCORP, INC.
FINANCIAL STATEMENTS (UNAUDITED)
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Capital in
Preferred Common Excess of Retained
Stock Stock Par Value Earnings
----------------------------------------------------------------------------------------
Balance, December 31, 1996 $ 156 $ 15,941 $ 15,276,373 $ 1,655,575
Dividends on Preferred and
Common Stock (97,256)
Net Unrealized Gain on
Securities Available-for-Sale
Net Income 502,540
----------------------------------------------------------------------------------------
Balance, March 31, 1997 156 15,941 15,276,373 2,060,859
Dividends on Preferred and
Common Stock (112,898)
Options Exercised 129 99,900
Net Unrealized Loss on
Securities Available-for-Sale
Net Income 555,911
----------------------------------------------------------------------------------------
Balance, June 30, 1997 $ 156 $ 16,070 $ 15,376,273 $ 2,503,872
Dividends on Preferred and
Common Stock (241,788)
Options Exercised 121 159,958
Net Unrealized Gain on
Securities Available-for-Sale
Net Income 567,747
----------------------------------------------------------------------------------------
Balance, September 30, 1997 $ 156 $ 16,191 $ 15,536,231 $ 2,829,831
========================================================================================
Net Unrealized
Gain (Loss) Total
Treasury on Securities Stockholders'
Stock Available-for-sale Equity
------------------------------------------------------
Balance, December 31, 1996 $ (471,087) $ (76,006) $ 16,400,952
Dividends on Preferred and
Common Stock (97,256)
Net Unrealized Gain on
Securities Available-for-Sale 20,980 20,980
Net Income 502,540
------------------------------------------------------
Balance, March 31, 1997 (471,087) (55,026) 16,827,216
Dividends on Preferred and
Common Stock (112,898)
Options Exercised 100,029
Net Unrealized Loss on
Securities Available-for-Sale (1,934) (1,934)
Net Income 555,911
------------------------------------------------------
Balance, June 30, 1997 $ (471,087) $ (56,960) $ 17,368,324
Dividends on Preferred and
Common Stock (241,788)
Options Exercised 160,079
Net Unrealized Gain on
Securities Available-for-Sale 17,455 17,455
Net Income 567,747
------------------------------------------------------
Balance, September 30, 1997 $ (471,087) $ (39,505) $ 17,871,817
======================================================
The accompanying notes are an integral part of these financial statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
--------------------------------
1997 1996
-------------- ---------------
Cash flows from operating activities:
Net Income $ 1,626,198 $ 520,405
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 439,505 398,030
Provision for loan losses 560,000 510,000
Provision for deferred income taxes 8,992 (58,299)
Gain on sale of loans (145,981) (148,029)
Amortization of deferred loan fees (177,101) (254,986)
Loans originated for sale (6,496,182) (9,121,278)
Proceeds from sales of loans 6,554,231 7,471,656
Increase in interest receivable (259,654) (223,805)
(Increase)decrease in other assets 251,598 (396,720)
Increase in other liabilities 248,846 902,517
-------------- ---------------
Net cash provided by operating activities 2,610,452 (400,509)
-------------- ---------------
Cash flows from investing activities:
Net fundings of loans receivable (15,217,497) (2,289,604)
Purchase of investment securities (29,446,224) (29,796,728)
Paydowns of investment securities 13,512,582 9,007,597
(Increase) decrease in overnight earning deposits, net 1,723,710 (1,004,397)
Increase in bank premises and equipment, net (947,720) (580,346)
Investment in Real Estate Owned (96,226) -
Sale of Real Estate Owned 340,023 14,000
(Increase) decrease in Federal Home Loan Bank stock (62,900) 82,400
-------------- ---------------
Net cash used in investing activities (30,194,252) (24,567,078)
-------------- ---------------
Cash flows from financing activities:
Net increase in deposits 29,176,623 19,809,140
Increase (decrease) in advances from FHLB (500,000) 5,000,000
Increase in advances from borrowers for taxes and insurance 86,967 120,526
Proceeds from Stock Options Exercised 260,108 123,831
Dividends on preferred and common stock (324,801) (263,812)
-------------- ---------------
Net cash provided by financing activities 28,698,897 24,789,685
-------------- ---------------
Net increase (decrease) in cash and due from banks 1,115,097 (177,902)
Cash and due from banks, beginning of period 4,004,149 3,894,884
-------------- ---------------
Cash and due from banks, end of period $ 5,119,246 $ 3,716,982
============== ===============
The accompanying notes are an integral part of these financial statements.
6
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, 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 nine-month period ended September 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
(the "Bancorp") 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:
September 30, 1997 December 31, 1996
---------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- --------------- ----------------
FHLMC Preferred Stock $ 3,907,233 $ 3,845,575 $ 4,310,235 $ 4,205,287
FNMA MBS 816,245 819,220 902,824 894,332
---------------- ---------------- --------------- ----------------
Total $ 4,723,478 $ 4,664,795 $ 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:
September 30, 1997 December 31, 1996
---------------------------------- ---------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---------------- ---------------- --------------- ----------------
FHLB Intermediate Notes $ 1,000,000 $ 1,001,875 $ 2,000,000 $ 2,001,875
FHLB Zero Coupon Notes 629,361 623,750 - -
FHLMC MBS 6,408,607 6,441,703 7,300,246 7,268,332
FNMA MBS 28,849,122 28,973,983 21,981,743 21,840,553
GNMA MBS 39,876,919 40,099,545 27,387,797 27,437,141
CMO 4,880,572 4,820,058 6,547,457 6,426,176
---------------- ---------------- --------------- ----------------
$ 81,644,581 $ 81,960,914 $ 65,217,243 $ 64,974,077
================ ================ =============== ================
The FHLB notes have fixed rates of interest, are due in August, 2002 and
are callable quarterly at the option of the issuer. The FHLB Zero Coupon
Notes have fixed rates of interest, are due in 2012 and are callable
semi-annually 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. $18.1 million of the mortgage backed securities have
fixed rates of interest and original maturities of 15 years. The interest
rates on $8.6 million of the mortgage backed securities are indexed to the
11th District and national cost of funds indices and adjust annually or
more frequently. The interest rates on the balance of the mortgage backed
securities, $53.3 million, are indexed to the one year constant maturity
treasury index and adjust annually or more frequently.
7
NOTE 3 - LOANS RECEIVABLE
Loans receivable consist of the following:
September 30, December 31,
1997 1996
------------------- ------------------
Mortgages:
Residential $ 30,652,932 $ 35,032,684
Nonresidential 52,957,960 46,548,847
Construction:
Residential 5,635,113 5,616,121
Nonresidential 12,247,326 7,510,374
Non-Mortgages:
Business 20,436,994 12,197,921
Consumer 3,084,290 3,294,171
------------------- ------------------
Total loans receivable 125,014,615 110,200,118
Less:
Deferred loan fees, net 570,815 412,274
Allowance for loan losses 1,781,885 1,500,941
=================== ==================
Loans receivable, net $ 122,661,915 $ 108,286,903
=================== ==================
The following sets forth information regarding the allowance for loan
losses:
Nine Months
Ended Year Ended
9/30/97 12/31/96
------------------ ------------------
Allowance at Beginning of Period $ 1,500,941 $ 1,190,249
Provision for Losses Charged to Income 560,000 695,000
Charge-offs (299,171) (389,249)
Recoveries 20,115 4,941
------------------ ------------------
Allowance at End of Period $ 1,781,885 $ 1,500,941
================== ==================
NOTE 4 - ADVANCES FROM FEDERAL HOME LOAN BANK
At September 30, 1997, advances from the Federal Home Loan Bank ("FHLB") of
Atlanta totaled $8.0 million which consisted of $6.0 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 September 30, 1997 and December 31, 1996, the Bancorp had 15,634 shares
of 6% cumulative convertible preferred stock issued and outstanding. Par
value is $0.01 per share. Five hundred thousand shares are authorized.
8
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 September 30, 1997 the Bancorp had 1,619,132 shares of common stock
issued and 1,589,258 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. In June and July, 1997 a total
of 25,010 new shares were issued as a result of the exercise of stock
options. 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.
9
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. (the "Bancorp") at
September 30, 1997 were $221.3 million, an increase of $30.5 million, or 16.0%,
from total assets of $190.8 million at December 31, 1996. Total liabilities
increased by $29.0 million, or 16.6%, to $203.4 million at September 30, 1997
from $174.4 million at December 31, 1996.
The increase in total assets resulted from increases of $14.4 million
in net total loans receivable and $16.4 million in investment securities held
to maturity from December 31, 1996 to September 30, 1997.
Although net total loans receivable increased by $14.4 million, or
13.3%, to $122.7 million at September 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 mortgage loans of $6.4 million, an
increase in non-residential construction loans of $4.7 million, and an increase
in non-mortgage business loans of $8.2 million. These increases were offset by a
decrease in residential permanent loans of $4.4 million, reflecting an ongoing
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
September 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
September 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 $16.4 million, or
25.2%, to $81.6 million at September 30, 1997 from $65.2 million at December 31,
1996. This increase was due to the purchase of $29.4 million in securities
offset by paydowns of securities of $13.5 million during the nine months ended
September 30, 1997.
The increase in total assets was funded by an increase in customer
deposits of $29.2 million, or 17.8%, to $193.5 million at September 30, 1997
from $164.3 million at December 31, 1996. Part of the increase in customer
deposits went to fund a decrease of $500,000 in advances from the Federal Home
Loan Bank ("FHLB") of Atlanta which decreased from $8.5 million at December 31,
1996 to $8.0 million at September 30, 1997. At September 30, 1997 the advances
from the FHLB of Atlanta consisted of $6.0 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 and mortgage backed securities, sales of loans,
and new savings deposits and borrowings. The Bancorp had outstanding commitments
under existing construction loan agreements to fund loans approximating $10.1
million at September 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 investment securities and daily average balances for loans, borrowings and
deposits. Loan balances do not include non-accrual loans.
10
Nine Months Ended September 30,
1997 1996
------------------------------------------------------------
Average Average Average Average
Balance Yield/Rate Balance Yield/Rate
----------------------------- ----------------------------
(Thousands) (%) (Thousands) (%)
Interest-Earning Assets
Loans Receivable $ 115,567 9.73 $ 105,564 9.72
Investment Securities 81,949 6.42 66,213 6.33
-------------- ------------ -------------- -----------
Total Interest-Earning Assets 197,516 8.36 171,777 8.41
-------------- ------------ -------------- -----------
Interest-Bearing Liabilities
Deposits 179,051 4.69 155,969 4.71
Borrowings 5,925 5.57 5,650 5.82
-------------- ------------ -------------- -----------
Total Interest-Bearing Liabilities 184,976 4.72 161,619 4.75
-------------- ------------ -------------- -----------
Average Dollar Difference
Between Interest-Earning Assets
and Interest-Bearing Liabilities $ 12,540 $ 10,158
============== ==============
Interest Rate Spread 3.64 3.66
============ ===========
Interest Margin 3.94 3.94
============ ===========
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 Nine Months Ended
September 30, 1997
Versus
September 30, 1996
------------------------------------------------------------
Volume Rate Rate/Volume Net
-------------- ------------ -------------- -----------
(Dollars in Thousands)
Interest income
Loans Receivable $ 729 $ 8 $ 1 $ 738
Investment Securities 750 45 11 806
-------------- ------------ -------------- -----------
Total interest income 1,479 53 12 1,544
-------------- ------------ -------------- -----------
Interest expense
Deposits 802 (23) (3) 776
Borrowings 12 (11) (1) (0)
-------------- ------------ -------------- -----------
Total interest expense 814 (34) (4) 776
-------------- ------------ -------------- -----------
Net interest income $ 665 $ 87 $ 16 $ 768
============== ============ ============== ===========
11
The Bancorp recorded net income of $1.6 million for the nine months
ended September 30, 1997, compared to $520,405 for the nine months ended
September 30, 1996, an increase of $1.1 million, or 212.5%. There was a one-time
charge of $870,000 for the Bancorp's share of the cost to recapitalize the
Savings Association Insurance Fund (SAIF) in the 1996 period, and there was no
comparable charge in the 1997 period. Primary earnings per share were $1.00 and
$0.32 for the nine months ended September 30, 1997 and 1996, respectively.
Weighted average number of primary common shares outstanding were 1,618,928 and
1,602,638 for the same periods in 1997 and 1996, respectively.
Net interest income before provision for loan losses for the nine
months ended September 30, 1997 was $5.8 million, an increase of $768,325, or
15.2%, from $5.1 million for the nine months ended September 30, 1996. The
increase resulted primarily from a growth in average interest-earning assets,
which was partially offset by a decrease in interest rate spread. Total
interest-earning assets in the nine months ended September 30, 1997 averaged
$197.5 million as compared to $171.8 million for the same period in 1996. For
the nine months ended September 30, 1997 the interest rate spread was 3.64%, a
decrease of 2 basis points from 3.66% for the nine months ended September 30,
1996. This was primarily due to the fact that there was a proportionally greater
increase in lower yielding investment securities than in loans receivable. The
interest margin remained constant at 3.94% for both periods. The yield on
interest-earning assets decreased by 5 basis points from 8.41% for the nine
months ended September 30, 1996 to 8.36% for the nine months ended September 30,
1997 due to the previously mentioned emphasis on lower yielding investment
securities. The cost of interest bearing liabilities decreased by 3 basis points
to 4.72% for the nine months ended September 30, 1997 from 4.75% for the nine
months ended September 30, 1996.
For the three months ended September 30, 1997, the Bancorp recorded net
income of $567,747 as compared to a loss of $224,517 for the three months ended
September 30, 1996, an increase of $792,264. Primary earnings per share were
$0.34 and a loss of $0.14 for the three months ended September 30, 1997 and
1996, respectively. Weighted average number of primary common shares outstanding
were 1,643,925 and 1,628,291 for the same periods in 1997 and 1996,
respectively.
Net interest income before provision for loan losses for the three
months ended September 30, 1997 was $2.1 million, an increase of $352,118, or
20.4%, from $1.7 million for the three months ended September 30, 1996. The
increase resulted primarily from a growth in average interest-earning assets.
Total interest income increased by $1.5 million, or 14.2%, to $12.4
million for the nine months ended September 30, 1997 from $10.8 million for the
nine months ended September 30, 1996. This increase was primarily due to an
increase in average loans receivable of $10.0 million from $105.6 million in the
nine months ended September 30, 1996 to $115.6 million in the nine months ended
September 30, 1997 and to an increase of $15.7 million in average investment
securities to $81.9 million for the nine months ended September 30, 1997 from
$66.2 million for the nine months ended September 30, 1996. In addition, there
was as an increase in the average yield on loans from 9.72% to 9.73% and an
increase in the average yield on investment securities from 6.33% to 6.42% for
the same periods.
Total interest expense increased by $768,633, or 13.4%, to $6.5 million
for the nine months ended September 30, 1997 from $5.8 million for the nine
months ended September 30, 1996, primarily due to an increase in customer
deposits which averaged $179.1 million for the nine months ended September 30,
1997, up $23.1 million from $156.0 million for the nine months ended September
30, 1996. This was offset, however, by a decrease in the average effective rate
paid on deposits of 2 basis points to 4.69% in the 1997 period from 4.71% in the
1996 period. FHLB of Atlanta advances averaged $5.9 million for the nine months
ended September 30, 1997, an increase of $275,000 from $5.7 million for the nine
months ended September 30, 1996. The average effective rate paid on FHLB of
Atlanta advances decreased to 5.57% for the nine months ended September 30, 1997
from 5.82% for the same period in 1996.
The provision for loan losses for the nine months ended September 30,
1997 was $560,000, as compared to $510,000 for the nine months ended September
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
12
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 September 30, 1997 was $1.8 million, which provided coverage
of 1.4% of total loans receivable and 135.9% of nonperforming loans and real
estate owned, versus $1.5 million at December 31, 1996, which provided coverage
of 1.4% of total loans receivable and 75.0% of nonperforming loans and real
estate owned.
Total other income for the nine months ended September 30, 1997 was
$1,.3 million as compared to $826,186 for the nine months ended September 30,
1996, an increase of $440,314, or 53.3%. This was primarily due to an increase
in fees earned on a larger retail deposit base.
Total operating expense decreased by $452,354, or 9.8%, to $4.2 million
for the nine months ended September 30, 1997 from $4.6 million for the nine
months ended September 30, 1996, due to a reduction in deposit insurance
assessments which were offset by the following increased expenses. Employee
compensation and benefits increased by $272,582, or 17.2%, reflecting the cost
of opening one new branch in Winchester in July, 1996, as well as increases in
staff to accommodate growth of the Bancorp. Premises and equipment increased by
$251,632, or 21.8% which principally reflects the cost of opening the new branch
in Winchester in July, 1996, the cost of relocating the Fairfax branch to an
improved location, and investment in new computers and the upgrading of existing
equipment.
Deposit insurance assessments decreased $1.0 million, or 93.0%, to
$77,828 for the nine months ended September 30, 1997 from $1.1 million for the
nine months ended September 30, 1996 due to the reduction in the ongoing
periodic insurance payments to the Savings Association Insurance Fund (SAIF)
which occurred as a result of the one-time recapitalization of the SAIF in the
third quarter of 1996. In addition, there was a one-time charge of $870,000 for
the Bancorp's share of the cost to recapitalize the SAIF in the 1996 period, and
there was no comparable charge in the 1997 period.
13
Regulatory Capital Requirements
At September 30, 1997 the Bancorp exceeded all regulatory capital
standards, which were as follows:
Actual Capital Required Capital Excess Capital
----------------------- ----------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
----------------------- ----------------------- -----------------------
(Amounts in Thousands)
Leverage Capital $ 17,683 8.21% $ 8,615 4.00% $ 9,068 4.21%
Tier 1 Capital $ 17,683 14.00% $ 5,056 4.00% $ 12,627 10.00%
Tier 1 and 2 Capital $ 19,431 15.37% $ 10,111 8.00% $ 9,320 7.37%
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
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, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 establishes standards
14
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.
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 the Bancorp, or industry
results, to be materially different from any future results, performance, or
achievements of the Bancorp, 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 the Bancorp's market
area, inflation, fluctuations in interest rates, changes in government
regulations and competition, which will, among other things, impact demands for
loans and banking services; the ability of the Bancorp 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,
the Bancorp undertakes no obligation to correct or update a forward-looking
statement should the Bancorp later become aware that it is not likely to be
achieved. If the Bancorp were to update or correct a forward-looking statement,
investors and others should not conclude that the Bancorp will make additional
updates or corrections thereafter.
15
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
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.
16
SOUTHERN FINANCIAL BANCORP, INC.
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 November 6, 1997 By: /s/ Georgia S. Derrico
------------------- ---------------------------
Georgia S. Derrico
Chairman and
Chief Executive Officer
(Duly Authorized Representative)
Date November 6, 1997 By: /s/ William H. Lagos
------------------- -------------------------------
William H. Lagos
Senior Vice President and
Controller
Principal Accounting Officer
(Duly Authorized Representative)
17