AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 19, 2002
REGISTRATION NO. 333-88940
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------
SOUTHERN FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 6022 54-1779978
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
37 EAST MAIN STREET
WARRENTON, VIRGINIA 20186
(540) 349-3900
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
GEORGIA S. DERRICO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
37 EAST MAIN STREET
WARRENTON, VIRGINIA 20186
(540) 349-3900
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
----------
Copies to:
WILLIAM T. LUEDKE IV SCOTT H. RICHTER
BRACEWELL & PATTERSON, L.L.P. LECLAIR RYAN, A PROFESSIONAL CORPORATION
711 LOUISIANA STREET, SUITE 2900 707 EAST MAIN STREET, 11TH FLOOR
HOUSTON, TEXAS 77002 RICHMOND, VIRGINIA 23219
----------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective and all other conditions to the proposed merger described herein have
been satisfied or waived.
If any of the Securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
PROPOSED MAXIMUM PROPOSED MAXIMUM
AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES TO BE REGISTERED REGISTERED (1) PER SHARE OFFERING PRICE (3) REGISTRATION FEE
- -------------------------------------------------- -------------- ---------------- ------------------ ----------------
Common Stock, $0.01 par value.................. 490,270 (2) $17,678,945 $1,627
</Table>
(1) Based upon an estimate of the maximum number of shares of common stock of
Southern Financial Bancorp, Inc. to be issued pursuant to the Agreement and
Plan of Reorganization dated as of April 25, 2002 by and among Southern
Financial, Southern Financial Bank and Metro-County Bank of Virginia, Inc.
(2) Not applicable.
(3) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(f)(2) under the Securities Act, based upon the
average of the bid and asked prices of the Metro-County common stock of
$6.90 per share as of May 21, 2002 multiplied by the maximum number of
shares of Metro-County common stock to be acquired by Southern Financial in
the merger described herein.
----------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<Table>
[Logo of Metro-County] [Logo of Southern Financial]
PROXY STATEMENT PROSPECTUS OF
FOR THE SPECIAL MEETING SOUTHERN FINANCIAL BANCORP, INC.
OF SHAREHOLDERS OF IN CONNECTION WITH AN OFFERING OF
METRO-COUNTY BANK OF VIRGINIA, INC. SHARES OF ITS COMMON STOCK
</Table>
You are cordially invited to attend the special meeting of shareholders
of Metro-County Bank of Virginia, Inc. to be held on Thursday, July 25, 2002 at
4:00 p.m. at The Marquee, 3015 Cutshaw Avenue, Richmond, Virginia.
At this important meeting, you will be asked to consider and vote on
the approval of a merger agreement which provides for the merger of Metro-County
with and into Southern Financial Bank, a wholly-owned subsidiary of Southern
Financial Bancorp, Inc. As a result of the merger, Metro-County shareholders
will receive for each share of Metro-County common stock they own, total per
share consideration of $7.25 consisting of (1) $2.90 in cash and (2) a number of
shares of Southern Financial common stock having a market value equal to $4.35,
subject to adjustment in the event that the 20 day average trading price of a
share of Southern Financial common stock exceeds or falls below certain
pre-agreed levels.
Based on the average trading price of Southern Financial common stock
for the 20 trading days ending on June 13, 2002 of $29.12, which would result in
a common stock exchange ratio of 0.1494, Metro-County shareholders would receive
0.1494 shares of Southern Financial common stock which, when combined with the
$2.90 per share in cash, would provide total a per share consideration of $7.25
and a total transaction value of $17.1 million. If the merger were completed as
of June 13, 2002, a total of 351,830 shares of Southern Financial common stock,
including 36,856 shares to be issued to holders of options to acquire shares of
Metro-County common stock, would be issued to Metro-County shareholders and
Metro-County shareholders would own approximately 7.58% of Southern Financial
common stock outstanding after the merger.
Because the common stock exchange ratio is based on the market value of
a share of Southern Financial common stock for the 20 trading days ending on and
including the fifth trading day preceding the effective time of the merger and
is subject to possible adjustment in the event the average closing price of a
share of Southern Financial common stock exceeds or falls below certain
pre-agreed levels, as a Metro-County shareholder you will not know the value of
or exact number of shares of Southern Financial common stock you will receive in
the merger at the time you vote on the merger.
AN INVESTMENT IN SOUTHERN FINANCIAL COMMON STOCK IN CONNECTION WITH THE
MERGER INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON PAGE 15.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER WITH SOUTHERN
FINANCIAL IS IN THE BEST INTERESTS OF METRO-COUNTY AND YOU, OUR SHAREHOLDERS.
ACCORDINGLY, THE BOARD UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE MERGER.
/s/ Stafford M. White, Jr.
--------------------------------------
Stafford M. White, Jr.
Chairman of the Board and
Chief Executive Officer
Metro-County Bank of Virginia, Inc.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS
PROXY STATEMENT-PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT-PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE SECURITIES SOUTHERN FINANCIAL IS OFFERING THROUGH THIS DOCUMENT ARE NOT
SAVINGS OR DEPOSIT ACCOUNTS OR OTHER OBLIGATIONS OF ITS BANK SUBSIDIARY, AND THE
SECURITIES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
BANK INSURANCE FUND OR ANY OTHER GOVERNMENTAL AGENCY.
- --------------------------------------------------------------------------------
Proxy statement-prospectus dated June 19, 2002
and first mailed to Metro-County shareholders on June 24, 2002
[LOGO of Metro-County]
----------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 25, 2002
----------
Notice is hereby given that a special meeting of shareholders of
Metro-County Bank of Virginia, Inc., a Virginia state bank, will be held on
July 25, 2002, at 4:00 p.m., local time, at The Marquee, 3015 Cutshaw Avenue,
Richmond, Virginia for the following purposes:
1. To consider and vote upon a proposal to approve the
Agreement and Plan of Reorganization, dated April 25, 2002, by and
among Southern Financial Bancorp. Inc., Southern Financial Bank and
Metro-County and a related plan of merger (collectively, the "merger
agreement") providing for the merger of Metro-County with and into
Southern Financial Bank. In the merger, shareholders of Metro-County
will receive (1) $2.90 in cash and (2) a number of shares of Southern
Financial common stock with a market value equal to $4.35, subject to
adjustment, in exchange for each share of Metro-County common stock
they own. A copy of the merger agreement is attached as Appendix A to
the accompanying proxy statement-prospectus.
2. To transact such other business as may properly come before
the special meeting or any adjournments or postponements of the special
meeting.
Any action may be taken on the foregoing proposals at the special
meeting on the date specified above or on any date or dates to which the special
meeting may be adjourned or postponed. The close of business on June 12, 2002
has been fixed as the record date for determining those shareholders entitled to
vote at the special meeting or any adjournments or postponements of the special
meeting. A complete list of shareholders entitled to vote at the special meeting
will be available at the main office of Metro-County during the 10 days prior to
the special meeting, as well as at the special meeting.
If your shares are not registered in your own name, you will need
additional documentation from the recordholder in order to vote personally at
the meeting.
By Order of the Board of Directors,
/s/ Stafford M. White, Jr.
Stafford M. White, Jr.
Chairman of the Board and
Chief Executive Officer
Mechanicsville, Virginia
June 19, 2002
YOUR VOTE IS VERY IMPORTANT
A proxy card is enclosed. Whether or not you plan to attend the special
meeting, please complete, sign and date the proxy card and promptly mail it in
the enclosed envelope. You may revoke your proxy card in the manner described in
the proxy statement-prospectus at any time before it is exercised. If you attend
the special meeting, you may vote in person if you wish, even if you have
previously returned your proxy card.
THE BOARD OF DIRECTORS OF METRO-COUNTY UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
APPROVAL OF THE MERGER AGREEMENT.
PLEASE NOTE
We have not authorized anyone to provide you with any information other
than the information included in this document and the documents to which we
refer you. If someone provides you with other information, please do not rely on
it as being authorized by us.
This proxy statement-prospectus has been prepared as of June 19, 2002.
There may be changes in the affairs of Metro-County or Southern Financial since
that date which are not reflected in this document.
HOW TO OBTAIN ADDITIONAL INFORMATION
THIS PROXY STATEMENT-PROSPECTUS INCORPORATES IMPORTANT BUSINESS AND
FINANCIAL INFORMATION ABOUT SOUTHERN FINANCIAL THAT IS NOT INCLUDED IN OR
DELIVERED WITH THIS DOCUMENT. THIS INFORMATION IS DESCRIBED ON PAGE 72 UNDER
"WHERE YOU CAN FIND MORE INFORMATION." YOU CAN OBTAIN FREE COPIES OF THIS
INFORMATION BY WRITING OR CALLING:
PATRICIA A. FERRICK
CHIEF FINANCIAL OFFICER
SOUTHERN FINANCIAL BANCORP, INC.
37 EAST MAIN STREET
WARRENTON, VIRGINIA 20186
TELEPHONE (540) 341-3900
FACSIMILE (540) 349-3904
TO OBTAIN TIMELY DELIVERY OF THE DOCUMENTS, YOU MUST REQUEST THE
INFORMATION BY JULY 18, 2002.
-i-
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
SUMMARY .........................................................................................................1
The Companies ..........................................................................................1
The Merger..............................................................................................1
What You Will Receive in the Merger.....................................................................1
Effect of the Merger on Metro-County Stock Options......................................................2
The Exchange of Metro-County Common Stock for Southern Financial Common Stock Will
Generally Be Tax-Free to Shareholders..........................................................2
Metro-County's Financial Advisor Has Opined that the Merger is Fair to Shareholders.....................2
Southern Financial Plans to Continue to Pay Quarterly Dividends.........................................3
Ownership of Southern Financial After the Merger........................................................3
Comparative Market Prices of Common Stock...............................................................3
Reasons for the Merger..................................................................................3
Special Meeting of Metro-County Shareholders............................................................4
Record Date Set at June 12, 2002; Majority Shareholder Vote Required....................................4
You Will Not Have Dissenter's Rights of Appraisal in Connection With the Merger.........................4
Recommendation of Metro-County's Board to Shareholders..................................................4
Metro-County's Management is Expected to Vote Their Shares For Approval of the Merger Agreement.........5
Effective Time of the Merger............................................................................5
Exchange of Stock Certificates..........................................................................5
Conditions to Completion of the Merger..................................................................5
Regulatory Approvals....................................................................................6
Waiver, Amendment and Termination.......................................................................6
Expenses and Remedies for Termination...................................................................6
Management and Operations After the Merger..............................................................7
Some of the Directors and Officers of Metro-County Have Financial Interests in the Merger that
Differ from Your Interests.....................................................................7
Your Rights as a Shareholder of Southern Financial will be Different than as a Shareholder of
Metro-County ..................................................................................7
Selected Historical Consolidated Financial Data of Southern Financial...................................8
Selected Historical Financial Data of Metro-County.....................................................11
Summary of Historical and Pro Forma Per Share Selected Financial Data..................................13
Comparative Stock Prices...............................................................................14
RISK FACTORS....................................................................................................15
A WARNING ABOUT FORWARD-LOOKING STATEMENTS......................................................................18
METRO-COUNTY SPECIAL MEETING....................................................................................19
Purpose ..............................................................................................19
Date, Place and Time of the Special Meeting............................................................19
Shares Entitled to Vote, Quorum and Vote Required......................................................19
Voting and Revocation of Proxies.......................................................................19
Solicitation of Proxies; Expenses......................................................................20
DESCRIPTION OF THE MERGER.......................................................................................21
Terms of the Merger....................................................................................21
Effect of the Merger on Metro-County Stock Options.....................................................22
Background of the Merger...............................................................................22
Recommendation of the Metro-County Board and Metro-County's Reasons for the Merger.....................24
Reasons of Southern Financial for the Merger...........................................................25
Opinion of Metro-County's Financial Advisor............................................................26
Exchange of Metro-County Stock Certificates............................................................29
Effective Time of the Merger...........................................................................30
Conduct of Business Pending Effective Time.............................................................30
No Solicitation........................................................................................31
Conditions to Completion of the Merger.................................................................32
Additional Agreements..................................................................................33
Representations and Warranties.........................................................................34
Financial Interests of Metro-County Directors and Officers in the Merger...............................34
Employee Matters.......................................................................................35
Amendment and Termination..............................................................................35
</Table>
-ii-
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Expenses...............................................................................................37
Nasdaq Stock Market Listing............................................................................37
Material Federal Income Tax Consequences...............................................................37
Accounting Treatment...................................................................................39
Restrictions on Resales of Southern Financial Common Stock.............................................39
Regulatory Approvals...................................................................................40
COMPARISON OF RIGHTS OF SHAREHOLDERS OF SOUTHERN FINANCIAL AND METRO-COUNTY.....................................41
VIRGINIA ANTI-TAKEOVER STATUTES.................................................................................45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF METRO-COUNTY...........48
Results of Operations..................................................................................48
Analysis of Financial Condition........................................................................52
BUSINESS OF METRO-COUNTY........................................................................................61
BENEFICIAL OWNERSHIP OF METRO-COUNTY STOCK BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF METRO-COUNTY.............65
Principal holders of southern financial common stock............................................................67
COMPARATIVE MARKET PRICES AND DIVIDEND DATA.....................................................................67
DESCRIPTION OF SOUTHERN FINANCIAL CAPITAL STOCK.................................................................69
General ..............................................................................................69
Southern Financial Common Stock........................................................................69
Preferred Stock........................................................................................69
Series A 6% Cumulative Convertible Preferred Stock.....................................................70
BUSINESS OF SOUTHERN FINANCIAL..................................................................................70
EXPERTS ........................................................................................................71
LEGAL MATTERS...................................................................................................71
OTHER MATTERS...................................................................................................71
WHERE YOU CAN FIND MORE INFORMATION.............................................................................71
INDEX TO FINANCIAL STATEMENTS OF METRO COUNTY BANK OF VIRGINIA, INC............................................F-1
Appendix A
AGREEMENT AND PLAN OF REORGANIZATION AND PLAN OF MERGER (excluding certain exhibits)..................A-1
Appendix B
OPINION OF SCOTT & STRINGFELLOW, INC..................................................................B-1
</Table>
-iii-
SUMMARY
This brief summary highlights selected information from this proxy
statement-prospectus and may not contain all of the information that is
important to you. We urge you to carefully read this entire document and the
other documents we refer to in this document. These documents will give you a
more complete description of the transaction we are proposing. For more
information about Southern Financial, see "Where You Can Find More Information"
on page 71. We have included page references in this summary to direct you to
other places in this proxy statement-prospectus where you can find a more
complete description of the topics we have summarized.
THE COMPANIES (PAGES 61 AND 70)
SOUTHERN FINANCIAL BANCORP, INC.
37 East Main Street
Warrenton, Virginia 20186
(540) 341-3900
Southern Financial, a Virginia corporation, is a bank holding company
registered under the Bank Holding Company Act. Through Southern Financial Bank,
its wholly owned subsidiary bank, Southern Financial conducts a complete range
of commercial and personal banking activities throughout its market area which
extends from Winchester in northwest Virginia to Fredericksburg, approximately
100 miles to the southeast. In 2001, Southern Financial expanded its market to
include Charlottesville, Virginia and surrounding counties and the District of
Columbia. In addition to the main office of Southern Financial Bank in
Warrenton, Virginia, the bank operates a total of 20 full-service banking
offices. At March 31, 2002, on a consolidated basis, Southern Financial had
total assets of $791.8 million, total deposits of $634.9 million and
stockholders' equity of $64.9 million.
METRO-COUNTY BANK OF VIRGINIA, INC.
8206 Atlee Road
Mechanicsville, Virginia 23116
(804) 559-1031
Metro-County is a community-oriented Virginia commercial bank that
provides a variety of banking services in the greater Richmond, Virginia area.
In addition to its main banking office in Mechanicsville, Virginia, Metro-County
operates four full-service banking centers. At March 31, 2002, Metro-County had
total assets of $92.2 million, total deposits of $84.1 million and stockholders'
equity of $7.7 million.
THE MERGER (PAGE 21)
We have attached the merger agreement and related plan of merger to
this document as Appendix A. Please read the entire merger agreement. It is the
legal document that governs the merger.
We propose a merger whereby Metro-County will merge with and into
Southern Financial Bank and the existing offices of Metro-County will become
full-service banking offices of Southern Financial. We expect to complete the
merger in the third quarter of 2002.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGE 21)
If the merger is completed, each of your shares of Metro-County common
stock will automatically become the right to receive shares of Southern
Financial common stock and cash. The merger consideration has been generally
structured to provide a total per share consideration of $7.25 in the form of
(1) $2.90 in cash and (2) a number of shares of Southern Financial common stock
with a market value equal to $4.35. The total number of shares of Southern
Financial common stock that you will have the right to receive, subject to the
adjustment described below, will be equal to $4.35 divided by the average
trading price of Southern Financial common stock rounded to the nearest
ten-thousandth. For these purposes, the "average trading price" of Southern
Financial common stock will be the average closing price of a share of Southern
Financial common stock on the Nasdaq National Market for the 20 trading days
ending on and including the fifth trading day preceding the
effective time of the merger.
In the event the average trading price of Southern Financial common
stock exceeds or falls below certain pre-agreed levels, the common stock
exchange ratio becomes fixed and you would receive, for each share of
Metro-County common stock, shares of Southern Financial common stock having a
market value either greater or less than, as the case may be, $4.35. In the
event the average trading price is $22.75 or less, the exchange ratio will
remain fixed at 0.1912 and you will receive shares of Southern Financial common
stock having a market value less than $4.35. In the event the average trading
price is $29.25 or more, the exchange ratio will remain fixed at 0.1487 and you
will receive shares of Southern Financial common stock having a market value
greater than $4.35.
In addition, the parties have agreed that if the average trading price
of a share of Southern Financial common stock is equal to $20.80 or less,
Southern Financial may, at its option, adjust the merger consideration so that
the market value of Southern Financial common stock issued in connection with
the merger is reduced from $4.35 to $3.98. If Southern Financial elects not to
adjust the merger consideration, Metro-County has the right to terminate the
merger agreement. Consequently, you will not know the exact number or value of
the shares of Southern Financial common stock you will receive in the merger
when you vote on the merger, and even if approved by the shareholders, the
merger may ultimately not be completed.
Southern Financial will not issue any certificates for fractional
shares of Southern Financial common stock in connection with the merger but will
instead pay an amount of cash determined by multiplying the fractional share by
the closing price of Southern Financial common stock on the trading day
immediately prior to the effective time of the merger.
You will have to surrender your Metro-County common stock certificates
in order to receive new certificates representing shares of common stock of
Southern Financial and the cash consideration. Do not send in your certificates
until you receive written instructions on or after the completion of the merger.
EFFECT OF THE MERGER ON METRO-COUNTY STOCK OPTIONS (PAGE 22)
In the merger, each option to purchase Metro-County common stock that
is outstanding immediately prior to completion of the merger will represent a
right to receive an amount of cash equal to $1.58 and a number of shares of
Southern Financial common stock with a market value equal to $2.36, subject to
the same adjustments described above. This amount represents the consideration
to be paid in the merger for each share of Metro-County common stock less the
$3.31 per share exercise price of each outstanding option.
THE EXCHANGE OF METRO-COUNTY COMMON STOCK FOR SOUTHERN FINANCIAL COMMON STOCK
WILL GENERALLY BE TAX-FREE TO SHAREHOLDERS (PAGE 37)
Southern Financial has received an opinion from its legal counsel that
generally for United States federal income tax purposes, your exchange of shares
of Metro-County common stock for shares of Southern Financial common stock will
not cause you to recognize any gain or loss. However, you will recognize gain or
loss in connection with the receipt of the cash consideration and the receipt of
cash in lieu of a fractional share of Southern Financial common stock. The
opinion of counsel was filed as an exhibit to the registration statement, of
which this proxy statement-prospectus is a part.
Our obligation to complete the merger is conditioned on, among other
things, receipt by each of Metro-County and Southern Financial of an updated
opinion of counsel for Southern Financial that the exchange of shares, except
for a gain or loss recognized in connection with the receipt of the cash
consideration and cash instead of a fractional share, will be tax-free for
federal income tax purposes.
THIS TAX TREATMENT MAY NOT APPLY TO EVERY METRO-COUNTY SHAREHOLDER.
DETERMINING THE ACTUAL TAX CONSEQUENCES OF THE MERGER TO YOU MAY BE COMPLICATED
AND WILL DEPEND ON YOUR SPECIFIC SITUATION AND ON VARIABLES NOT WITHIN OUR
CONTROL. YOU SHOULD CONSULT YOUR OWN TAX ADVISOR FOR A FULL UNDERSTANDING OF THE
MERGER'S TAX CONSEQUENCES.
METRO-COUNTY'S FINANCIAL ADVISOR HAS OPINED THAT THE MERGER IS FAIR TO
SHAREHOLDERS (PAGE 26)
Scott & Stringfellow, Inc. has delivered a written opinion to the
Metro-County board of directors that, as of the date of this document, the
merger consideration is fair to the holders of Metro-County common stock from a
financial point of view. We have attached this opinion to this document as
Appendix B. You should read this opinion completely to understand the procedures
followed, matters considered and limitations on the reviews undertaken by Scott
& Stringfellow in providing its opinion.
-2-
SOUTHERN FINANCIAL PLANS TO CONTINUE TO PAY QUARTERLY DIVIDENDS (PAGE 68)
Following the merger, subject to applicable statutory and regulatory
restrictions, Southern Financial intends to continue its practice of paying
quarterly cash dividends. For the first quarter of 2002, Southern Financial paid
a cash dividend of $0.12 per share. Metro-County has never paid a cash dividend
on its common stock.
OWNERSHIP OF SOUTHERN FINANCIAL AFTER THE MERGER
Based on the average trading price of Southern Financial common stock
for the 20 trading days ending on June 13, 2002 of $29.12, which would result in
a common stock exchange ratio of 0.1494, upon completion of the merger, Southern
Financial would issue a total of approximately 351,830 shares of its common
stock to former Metro-County shareholders. Based on these numbers, after the
merger on a fully diluted basis (which includes the issuance of 36,856 shares of
Southern Financial common stock to the holders of currently exercisable options
to acquire shares of Metro-County common stock), former Metro-County
shareholders would own approximately 7.58% of the outstanding shares of Southern
Financial common stock.
In addition, as of the date of this proxy statement-prospectus, options
to acquire 453,902 shares of Metro-County common stock are exercisable. If these
options are exercised prior to completion of the merger, Southern Financial must
issue an appropriate amount of additional shares of Southern Financial common
stock for each additional share of Metro-County common stock issued pursuant to
the exercise of such options. Assuming an exchange ratio of 0.1494, if the
options to acquire all 453,902 shares are exercised, Southern Financial would be
required to issue an additional 67,812 shares of Southern Financial common
stock upon completion of the merger.
COMPARATIVE MARKET PRICES OF COMMON STOCK (PAGE 67)
Shares of Southern Financial are quoted on the Nasdaq Stock Market
under the symbol "SFFB." On April 24, 2002, the last trading day before we
announced the merger, Southern Financial common stock closed at $27.23 per
share. On June 13, 2002, Southern Financial common stock closed at $31.50
per share. Shares of Metro-County common stock are quoted on the OTC Bulletin
Board under the symbol "MCBA." The last known sale price of Metro-County common
stock was $ 6.95 per share on June 10, 2002. You should obtain the current stock
quotation for Southern Financial common stock.
REASONS FOR THE MERGER (PAGES 24 AND 25)
Our companies are proposing to merge because we believe that by
combining them we can create a stronger and more diversified company that will
provide significant benefits to our shareholders and customers alike. In
deciding to enter into the merger agreement, Metro-County's board of directors
considered a number of factors, including
o the merger consideration of $7.25 in the form of (1) $2.90 in
cash and (2) a number of shares of Southern Financial common
stock with a market value of $4.35 for each share of
Metro-County common stock;
o the additional capital and resources needed for Metro-County's
operations to continue to grow;
o its concern about management succession;
o its review of other strategic alternatives potentially
available to Metro-County; and
o the tax-free nature of the stock portion of the merger
consideration to Metro-County shareholders for federal income
tax purposes.
In deciding to enter into the merger agreement, Southern Financial's
board of directors considered a number of factors, including the opportunity for
future growth and an expanded geographic presence, as the acquisition of
-3-
Metro-County's locations in the greater Richmond area is a natural extension of
Southern Financial's geographic area and fits well into its expansion plans. In
addition, Southern Financial believes that the merger may create certain revenue
enhancement opportunities as Southern Financial offers new products and services
to existing Metro-County customers and offer cost savings as Southern Financial
integrates the operational functions of Metro-County with its own. However, due
to the contingent nature and timing of these potential revenue enhancements and
cost savings, Southern Financial has not taken them into account in arriving at
its estimates of the impact of the merger on future earnings per share. Southern
Financial expects to incur after tax merger costs of approximately $700,000.
The discussion of our reasons for the merger includes forward-looking
statements about possible or assumed future results of our operations and the
performance of the combined company after the merger. For a discussion of
factors that could affect these future results, see "A Warning About
Forward-Looking Statements" on page 18.
SPECIAL MEETING OF METRO-COUNTY SHAREHOLDERS (PAGE 19)
The special meeting of Metro-County shareholders will be held on
July 25, 2002, at 4:00 p.m., local time, at The Marquee, located
at 3015 Cutshaw Avenue, Richmond, Virginia. At the Metro-County meeting, you
will be asked:
o to approve the merger agreement that provides for the merger
of Metro-County with and into Southern Financial Bank; and
o to act on any other matters that may be submitted to a vote at
the special meeting or any adjournment or postponement of the
special meeting.
RECORD DATE SET AT JUNE 12, 2002; MAJORITY SHAREHOLDER VOTE REQUIRED
(PAGE 19)
You can vote at the special meeting if you owned Metro-County common
stock at the close of business on June 12, 2002, the record date. You can
cast one vote for each share of Metro-County common stock that you owned at that
time. Approval of the merger agreement requires the affirmative vote of the
holders of at least a majority of the outstanding shares of Metro-County common
stock entitled to vote. If you fail to vote, it will have the effect of a vote
against the merger agreement and the merger.
You may vote your shares by attending the meeting or by sending us your
proxy if you are unable to or do not wish to attend the meeting. If you are the
record holder of your shares, you can revoke your proxy at any time before we
take a vote at the meeting by sending a written notice revoking the proxy or a
later-dated proxy to the secretary of Metro-County, or by attending the meeting
and voting in person. If your shares are held in street name, you must contact
your bank or broker if you wish to revoke your proxy.
YOU WILL NOT HAVE DISSENTER'S RIGHTS OF APPRAISAL IN CONNECTION WITH THE MERGER
Virginia law does not provide for dissenters' rights of appraisal in
connection with the merger of two Virginia banks. Consequently, shareholders of
Metro-County are not entitled to dissent from the vote to approve the merger
agreement.
RECOMMENDATION OF METRO-COUNTY'S BOARD TO SHAREHOLDERS (PAGE 24)
The board of directors of Metro-County believes that the merger is fair
to you and in your best interests, and unanimously recommends that you vote FOR
the proposal to approve the merger agreement.
-4-
METRO-COUNTY'S MANAGEMENT IS EXPECTED TO VOTE THEIR SHARES FOR APPROVAL OF THE
MERGER AGREEMENT (PAGE 19)
As of June 12, 2002, the directors and executive officers of
Metro-County were entitled to vote 289,255 shares, or approximately 13.72% of
the outstanding shares of Metro-County common stock and did not beneficially own
any shares of Southern Financial common stock.
Each director and executive officer of Metro-County has executed an
agreement pursuant to which he or she has agreed to vote his or her shares of
common stock for approval of the merger agreement.
EFFECTIVE TIME OF THE MERGER (PAGE 30)
The merger will become final when articles of merger are filed with the
Virginia State Corporation Commission. If Metro-County shareholders approve the
merger at the special meeting, and if we obtain all required regulatory
approvals, we anticipate that the merger will be completed in the third quarter
of 2002, although delays could occur.
We cannot assure you that we can obtain the necessary shareholder and
regulatory approvals or that the other conditions to completion of the merger
can or will be satisfied.
EXCHANGE OF STOCK CERTIFICATES (PAGE 29)
After the effective time of the merger, you will receive a letter and
instructions from Chase Mellon Shareholder Services acting in its role as
Southern Financial's transfer agent with respect to the procedures for
surrendering your stock certificates representing shares of Metro-County common
stock in exchange for stock certificates representing shares of Southern
Financial common stock and cash. You must carefully review and complete these
materials and return them as instructed along with your stock certificates for
Metro-County common stock. PLEASE DO NOT SEND METRO-COUNTY OR SOUTHERN FINANCIAL
ANY STOCK CERTIFICATES UNTIL YOU RECEIVE THESE INSTRUCTIONS.
CONDITIONS TO COMPLETION OF THE MERGER (PAGE 32)
The completion of the merger depends on a number of conditions being
met. These include, among others:
o approval of the merger agreement by Metro-County shareholders;
o approval of the merger by certain federal and state regulatory
authorities;
o receipt by each of us of an opinion of Bracewell & Patterson,
L.L.P. that the merger will qualify as a reorganization under
Section 368(a) of the Internal Revenue Code;
o authorization by the Nasdaq Stock Market for the listing of
the shares of Southern Financial common stock to be issued in
the merger;
o material accuracy of the representations and warranties made
by each of us as of the date of completion of the merger;
o performance or compliance by each of us with all covenants and
conditions required by the merger agreement; and
o absence of a material adverse change in each of our financial
conditions, results of operation or business.
A party to the merger agreement could choose to complete the merger
even though a condition has not been satisfied, as long as the law allows it to
do so. We cannot be certain when or if the conditions to the merger will be
satisfied or waived, or that the merger will be completed.
-5-
REGULATORY APPROVALS (PAGE 40)
We cannot complete the merger unless it is approved by the Board of
Governors of the Federal Reserve System and the Bureau of Financial Institutions
of the Virginia State Corporation Commission. On June 10, 2002, applications
were filed with the Federal Reserve Board and the Virginia State Corporation
Commission. Assuming the Virginia State Corporation Commission approves the
merger, and once the Federal Reserve approves the merger, we may have to wait
anywhere from 15 to 30 days before we can complete the merger, during which time
the Department of Justice can challenge the merger for antitrust reasons.
As of the date of this document, we have not received all of the
required approvals. While we do not know of any reason that we would not be able
to obtain the necessary approvals in a timely manner, we cannot be certain when
or if we will obtain them.
WAIVER, AMENDMENT AND TERMINATION (PAGE 35)
We may jointly amend the merger agreement and each of us may waive our
right to require the other party to adhere to any term or condition of the
merger agreement. However, we may not amend the merger agreement or waive any
term or condition in the merger agreement after the Metro-County special meeting
of shareholders without approval of the Metro-County shareholders if the
amendment or waiver reduces the merger consideration that will be received by
the Metro-County shareholders.
We can mutually agree at any time to terminate the merger agreement
without completing the merger. Also, either of us can decide, without the
consent of the other, to terminate the merger agreement if:
o any government agency denies an approval we need to complete
the merger;
o any governmental entity issues a final non-appealable order
blocking the merger;
o the approval of Metro-County shareholders is not obtained by
reason of the failure to obtain the required vote at the
meeting;
o the merger has not been completed by April 25, 2003 or such
later date approved in writing by our boards of directors,
unless the failure to complete the merger by that time is due
to a breach of the merger agreement by the party that seeks to
terminate the merger agreement;
o the other party fails to comply in any material respect with
any of its covenants or agreements or if any of its
representations or warranties is defective in any material
respect;
o one or more of the conditions to the merger are not met or
waived by the other party; or
o there is a material adverse change in the assets, business or
financial condition of the other company.
In addition, Metro-County may terminate the merger agreement, without
the consent of Southern Financial, if the average trading price (as defined in
the merger agreement) of the Southern Financial common stock is $20.80 or less
and the exchange ratio is not subsequently adjusted by Southern Financial to a
number of shares of Southern Financial common stock equal to $3.98 divided by
the average trading price.
EXPENSES AND REMEDIES FOR TERMINATION (PAGES 36 AND 37)
If we mutually consent to terminate the merger agreement, or if either
of us terminates the merger agreement because the merger has not been completed
by April 25, 2003, then we will each pay our own fees and expenses incurred in
connection with the merger.
If either of us terminates the merger agreement because of a willful
and material breach of the merger agreement by the other party, the breaching
party will pay the other party's costs and expenses, subject to the limits
-6-
set forth below, incurred by the non-breaching party in connection with the
transactions contemplated by the merger agreement. In the event Southern
Financial breaches the merger agreement and Metro-County is not then in breach
of the merger agreement, Southern Financial shall be responsible for up to
$250,000 of the costs and expenses incurred by Metro-County. In the event
Metro-County breaches the merger agreement and Southern Financial is not then in
breach of the merger agreement, Metro-County shall be responsible for up to
$100,000 of the costs and expenses incurred by Southern Financial.
MANAGEMENT AND OPERATIONS AFTER THE MERGER (PAGE 71)
After the merger, the existing officers of Metro-County will become
officers of Southern Financial Bank. The present management of Southern
Financial Bank will continue to have the responsibility of managing Southern
Financial Bank after the completion of the merger. The board of directors of
Southern Financial and Southern Financial Bank will remain the same.
SOME OF THE DIRECTORS AND OFFICERS OF METRO-COUNTY HAVE FINANCIAL INTERESTS IN
THE MERGER THAT DIFFER FROM YOUR INTERESTS (PAGE 34)
Some of the directors and officers of Metro-County have interests in
the merger that differ from, or are in addition to, their interests as
shareholders in Metro-County. These interests include:
o the right of Metro-County's directors and officers to
continued indemnification and insurance coverage by Southern
Financial for acts or omissions occurring prior to the merger;
o Stafford M. White, Jr., Chairman and CEO of Metro-County, will
enter into a non-compete agreement with Southern Financial
Bank upon completion of the merger. Under the terms of the
non-compete agreement Mr. White will be prohibited from
competing with Southern Financial for three years following
completion of the merger and will receive compensation equal
to $245,000 to be made over the three year period following
the merger and be entitled to participate in Southern
Financial's benefit plans for a one year period following the
merger;
o the directors of Metro-County will be invited to serve on
Southern Financial's Richmond Area Advisory Board, and each
director who serves will be compensated in accordance with
Southern Financial's standard schedule of fees for service as
an advisory board member in effect from time to time; and
o three officers of Metro-County have entered into agreements
with Southern Financial pursuant to which they will be
employed by Southern Financial or receive severance payments.
The members of Metro-County's board of directors knew about these
additional interests and considered them in approving the merger agreement and
the merger.
YOUR RIGHTS AS A SHAREHOLDER OF SOUTHERN FINANCIAL WILL BE DIFFERENT THAN AS A
SHAREHOLDER OF METRO-COUNTY (PAGE 41)
Metro-County is a Virginia state bank and the rights of Metro-County
shareholders are governed by Virginia law and Metro-County's articles of
incorporation and bylaws. Southern Financial is a Virginia corporation and the
rights of Southern Financial shareholders are governed by Virginia law and
Southern Financial's articles of incorporation and bylaws. Upon completion of
the merger, Metro-County shareholders will become shareholders of Southern
Financial and their rights will be governed by Southern Financial's articles of
incorporation and bylaws, in addition to Virginia law. Southern Financial's
articles of incorporation and bylaws will remain the same unless later altered,
amended or repealed.
-7-
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SOUTHERN FINANCIAL
The following table summarizes financial results actually achieved by
Southern Financial for the periods and at the dates indicated and should be read
in conjunction with Southern Financial's consolidated financial statements and
the notes to the consolidated financial statements contained in reports that
Southern Financial has previously filed with the Securities and Exchange
Commission. Historical financial information for Southern Financial can be found
in its Quarterly Report on Form 10-Q for the three months ended March 31, 2002
and its Annual Report on Form 10-K for the year ended December 31, 2001. See
"Where You Can Find Additional Information" on page 69 for instructions on how
to obtain the information that has been incorporated by reference. Financial
amounts as of and for the three months ended March 31, 2002 and March 31, 2001
are unaudited, but management of Southern Financial believes that these amounts
reflect all normal recurring adjustments necessary for a fair presentation of
the results of operations and financial position for those periods. You should
not assume the results of operations for past periods and for the three months
ended March 31, 2002 and 2001 indicate results that may be obtained for any
future period.
<Table>
<Caption>
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31 DECEMBER 31
------------------ ---------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except share and per share data)
INCOME STATEMENT DATA:
Interest income ....................................... $ 12,820 $ 12,381 $ 54,179 $ 37,810 $ 29,756 $ 27,857 $ 25,536
Interest expense ...................................... 4,690 7,112 27,147 20,009 14,308 14,220 12,626
Net interest income ................................... 8,130 5,269 27,032 17,801 15,448 13,637 12,910
Provision for loan losses ............................. 1,500 520 4,470 1,335 2,130 1,301 1,265
Net interest income after provision for
loan losses ........................................... 6,630 4,749 22,562 16,466 13,318 12,336 11,645
Other income .......................................... 893 1,305 6,682 3,648 2,142 2,650 2,257
Gain on sales of SBA loans ............................ -- 252 252 905 692 495 --
Other expense ......................................... 4,254 4,014 16,992 13,440 14,589 10,687 9,762
Income before income taxes ............................ 3,269 2,292 12,504 7,579 1,563 4,795 4,140
Income taxes .......................................... 1,041 694 4,090 2,429 602 1,442 1,332
Net income ............................................ 2,228 1,598 8,414 5,150 961 3,352 2,808
INCOME STATEMENT DATA (EXCLUDING GAINS/LOSSES
ON SECURITIES AND NON-RECURRING ITEMS):
Net interest income after provision
for loan losses ..................................... $ 6,630 $ 4,749 $ 22,562 $ 16,466 $ 14,074(1) $ 12,336 $ 11,645
Other income .......................................... 1,279 1,086 4,454 3,435 2,834 2,582 2,257
Gain on sales of SBA loans ............................ -- 252 252 905 692 495 --
Other expense ......................................... 4,255 4,014 16,992 13,440 12,152 10,687 9,762
Income before income taxes ............................ 3,655 2,073 10,276 7,366 5,448 4,726 4,140
Income taxes .......................................... 1,164 628 3,360 2,361 1,678 1,442 1,332
Net income ............................................ 2,490 1,445 6,916 5,005 3,771 3,284 2,808
PER SHARE DATA:
Earnings per share, basic ............................. $ 0.52 $ 0.48 $ 2.40 $ 1.68 $ 0.33 $ 1.16 $ 1.00
Earnings per share, diluted ........................... 0.50 0.47 2.32 1.65 0.32 1.11 0.96
Earnings per share, basic (excluding
gains/losses on securities and non-recurring items).. 0.58 0.44 1.98 1.63 1.29 1.14 1.00
Earnings per share, diluted (excluding
gains/losses on securities and non-recurring items).. 0.56 0.43 1.91 1.60 1.26 1.09 0.96
Cash basis diluted earnings per share (2) ............. 0.57 0.45 2.00 1.65 1.27 1.09 0.96
Book value per share .................................. 15.14 13.06 15.01 11.97 9.88 10.56 9.72
Tangible book value per share ......................... 14.45 11.97 14.31 10.79 9.70 10.47 9.64
</Table>
-8-
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31 DECEMBER 31
------------------------- -------------------------
2002 2001 2001 2000
--------- --------- --------- ---------
(dollars in thousands, except share and per share data)
Weighted average shares outstanding (basic) ....... 4,284,594 3,316,181 3,500,949 3,065,248
Weighted average shares outstanding (diluted) ..... 4,465,849 3,388,571 3,628,582 3,120,025
Shares outstanding at end of period ............... 4,284,594 3,316,192 4,284,594 3,316,192
PERIOD-END BALANCE SHEET DATA:
Total assets ...................................... $ 791,792 $ 676,176 $ 784,977 $ 609,936
Loans receivable, net of deferred fees ............ 450,494 330,765 418,328 318,912
Allowance for loan losses ......................... 7,561 5,395 7,354 4,921
Investment securities ............................. 269,367 277,974 306,612 233,407
Total deposits .................................... 634,934 556,611 633,326 515,112
Other borrowings .................................. 61,000 55,000 55,500 34,000
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts ............................... 13,000 13,000 13,000 13,000
Total stockholders' equity ........................ 64,882 43,314 64,668 39,689
Total capital (3) ................................. 77,882 56,314 77,668 52,689
SELECTED PERFORMANCE RATIOS AND OTHER DATA:
Yield on earning assets (6) ....................... 6.78% 8.49% 7.97% 8.60%
Cost of funds (6) ................................. 2.83 5.50 4.51 5.37
Cost of funds including non-interest
bearing deposits (6) ............................ 2.57 4.89 4.06 4.64
Net interest margin (6) ........................... 4.30 3.61 3.98 4.05
Efficiency ratio (4) .............................. 44.61 59.60 52.37 60.02
Return on average assets (5) (6) .................. 1.24 0.90 0.96 1.06
Return on average equity (5) (6) .................. 15.27 14.15 14.80 15.51
Stockholders' equity to total assets .............. 8.19 6.41 8.24 6.51
SELECTED AVERAGE BALANCES:
Loans, net of deferred fees ....................... $ 421,969 $ 320,980 $ 353,147 $ 267,186
Investment securities-available for sale .......... 326,669 258,821 320,007 169,248
Overnight deposits ................................ 7,992 3,743 6,213 3,642
Earning assets .................................... 756,631 583,544 679,367 440,076
Total assets ...................................... 804,738 645,645 724,119 473,126
Interest bearing deposits ......................... 557,770 439,111 493,488 338,435
Non-interest bearing deposits ..................... 66,012 64,323 66,305 58,188
Total deposits .................................... 623,781 503,434 559,793 396,623
Other debt (3) .................................... 105,860 78,204 108,209 34,505
Total stockholders' equity ........................ 65,246 40,863 46,739 32,268
ALLOWANCE FOR LOAN LOSSES:
Balance-beginning of period ....................... $ 7,354 $ 4,921 $ 4,921 $ 3,452
Provision for loan losses ......................... 1,500 520 4,470 1,335
Allowance acquired in First Savings merger ........ -- -- -- 594
Net charge-offs ................................... (1,293) (46) (2,037) (460)
Balance-end of period ............................. 7,561 5,395 7,354 4,921
AS OF AND FOR THE YEAR ENDED
DECEMBER 31
----------------------------------------
1999 1998 1997
--------- --------- ---------
Weighted average shares outstanding (basic) ....... 2,913,507 2,880,823 2,814,484
Weighted average shares outstanding (diluted) ..... 2,994,476 3,022,499 2,912,489
Shares outstanding at end of period ............... 2,921,816 2,899,874 2,830,387
PERIOD-END BALANCE SHEET DATA:
Total assets ...................................... $ 406,222 $ 404,254 $ 354,016
Loans receivable, net of deferred fees ............ 237,980 209,417 207,303
Allowance for loan losses ......................... 3,452 3,062 2,743
Investment securities ............................. 136,919 143,569 106,296
Total deposits .................................... 367,188 366,905 320,364
Other borrowings .................................. 5,000 3,500 4,000
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trusts ............................... -- -- --
Total stockholders' equity ........................ 28,864 30,626 27,508
Total capital (3) ................................. 28,864 30,626 27,508
SELECTED PERFORMANCE RATIOS AND OTHER DATA:
Yield on earning assets (6) ....................... 7.82% 8.12% 8.44%
Cost of funds (6) ................................. 4.52 4.94 4.89
Cost of funds including non-interest
bearing deposits (6) ............................ 3.89 4.35 4.38
Net interest margin (6) ........................... 4.07 3.97 4.26
Efficiency ratio (4) .............................. 64.04 63.94 64.36
Return on average assets (5) (6) .................. 0.93 0.90 0.88
Return on average equity (5) (6) .................. 12.24 11.30 10.92
Stockholders' equity to total assets .............. 7.11 7.58 7.77
SELECTED AVERAGE BALANCES:
Loans, net of deferred fees ....................... $ 219,286 $ 205,208 $ 193,094
Investment securities-available for sale .......... 159,013 134,901 107,713
Overnight deposits ................................ 2,504 2,845 1,685
Earning assets .................................... 380,803 342,954 302,492
Total assets ...................................... 404,379 364,348 319,091
Interest bearing deposits ......................... 303,729 282,750 252,014
Non-interest bearing deposits ..................... 50,501 39,369 30,056
Total deposits .................................... 354,230 322,119 282,070
Other debt (3) .................................... 13,159 4,907 5,979
Total stockholders' equity ........................ 30,810 29,067 26,128
ALLOWANCE FOR LOAN LOSSES:
Balance-beginning of period ....................... $ 3,062 $ 2,743 $ 2,374
Provision for loan losses ......................... 2,130 1,301 1,265
Allowance acquired in First Savings merger ........ -- -- --
Net charge-offs ................................... (1,740) (982) (896)
Balance-end of period ............................. 3,452 3,062 2,743
</Table>
-9-
<Table>
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31 DECEMBER 31
-------------------- ---------------------------------------------------------
2002 2001 2001 2000 1999 1998 1997
-------- --------- --------- --------- --------- --------- ---------
(dollars in thousands, except share and per share data)
ASSET QUALITY:
Loans 90 days past due ..................... $ -- $ 42 $ -- $ 9 $ 235 $ 886 $ 77
Nonaccrual loans ........................... 1,877 1,901 1,473 1,872 522 2,906 2,408
Other real estate owned .................... -- 38 -- 17 2,296 498 722
Total nonperforming assets ................. 1,877 1,939 1,473 1,889 2,886 3,404 3,130
Provision for loan losses to net
charge-offs .............................. 116% 1,130% 219% 290% 122% 132% 141%
Net charge-offs to average loans(6) ........ 1.23 0.06 0.58 0.17 0.79 0.48 0.46
Nonperforming assets to total assets ....... 0.24 0.29 0.19 0.31 0.69 0.84 0.88
Allowance for loan losses to
nonperforming assets ..................... 402.91 278.24 499.25 260.51 122.50 89.95 87.64
Allowance for loan losses to total loans ... 1.68 1.63 1.76 1.54 1.45 1.46 1.32
</Table>
- ----------
(1) Excludes special loan loss provision of $756,000, a one-time charge
related to the merger with The Horizon Bank of Virginia in 1999.
(2) Excludes gains and losses on securities and non-recurring items. If
these items were included, cash basis diluted earnings per share would
have been $0.51 and $0.49 for each of the three months ended March 31,
2002 and 2001, respectively, and $2.41, $1.70, $.34, and $1.11 for the
years ended December 31, 2001, 2000, 1999 and 1998, respectively.
(3) Includes company-obligated mandatorily redeemable preferred securities
of subsidiary trusts.
(4) Calculated by dividing total other expense, net of goodwill and
intangibles amortization, by net interest income plus total other
income, excluding securities gains and losses and non-recurring items.
(5) Selected performance ratios exclude gains/losses on securities and
non-recurring items. If these items had been included, return on
average assets would have been 1.11% and 0.99% for the three months
ended March 31, 2002 and 2001, respectively, and 1.16%, 1.09%, 0.24%
and 0.92% for the years ended December 31, 2001, 2000, 1999 and 1998,
respectively and return on average equity would have been 13.65% and
15.64% for the respective three month periods, and 18.00%, 15.96%,
3.11% and 11.62% for the respective years.
(6) Performance ratios for the three months ended March 31, 2002 and 2001
have been annualized.
-10-
SELECTED HISTORICAL FINANCIAL DATA OF METRO-COUNTY
The following table summarizes financial results actually achieved by
Metro-County for the periods and at the dates indicated and should be read in
conjunction with Metro-County's financial statements and the notes to the
financial statements. The selected financial data as of December 31, 2001 and
2000 and for each of the years in the three year period ended December 31, 2001
is derived from Metro-County's audited financial statements and related notes
included elsewhere in this proxy-statement prospectus. The selected financial
data as of December 31, 1999, 1998 and 1997 and for each of the years in the two
year period ended December 31, 1998 is derived from Metro-County's audited
financial statements and related notes which are not included in this proxy
statement-prospectus. Financial amounts as of and for the three months ended
March 31, 2002 and March 31, 2001 are unaudited, but management of Metro-County
believes that such amounts reflect all normal recurring adjustments necessary
for a fair presentation of the results of operations and financial position for
those periods. You should not assume the results of operations for past periods
and for the three months ended March 31, 2002 and 2001 indicate results that may
be obtained for any future period.
<Table>
<Caption>
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31 DECEMBER 31
------------------------ --------------------------------------
2002 2001 2001 2000 1999
----------- ----------- ------------ ----------- -----------
(dollars in thousands, except share and per share data)
INCOME STATEMENT DATA:
Interest income ..................................... $ 1,497 $ 1,605 $ 6,429 $ 5,507 $ 4,195
Interest expense .................................... 614 872 3,378 2,887 2,042
Net interest income ................................. 883 733 3,051 2,620 2,153
Provision for loan losses ........................... 157 62 472 218 342
Net interest income after provision for
loan losses ....................................... 726 671 2,579 2,402 1,811
Other income ........................................ 149 188 675 411 319
Other expense ....................................... 736 732 2,880 2,487 1,839
Income (loss) before income taxes ................... 139 127 374 326 291
Income taxes ........................................ 47 43 120 95 97
Net income (loss) ................................... 92 84 254 231 194
PER SHARE DATA:
Earnings (loss) per share, basic .................... $ 0.04 $ 0.04 $ 0.12 $ 0.11 $ 0.09
Earnings (loss) per share, diluted .................. 0.04 0.04 0.11 0.10 0.08
Book value per share ................................ 3.65 3.53 3.61 3.46 3.26
Tangible book value per share ....................... 3.65 3.53 3.61 3.46 3.26
Weighted average shares outstanding (basic) ......... 2,100,564 2,097,211 2,099,451 2,094,055 2,094,084
Weighted average shares outstanding
(diluted) ......................................... 2,257,195 2,295,224 2,281,803 2,323,067 2,337,835
Shares outstanding at end of period ................. 2,100,564 2,097,542 2,100,564 2,094,241 2,094,082
PERIOD-END BALANCE SHEET DATA:
Total assets ........................................ $ 92,185 $ 81,674 $ 93,760 $ 78,964 $ 61,641
Loans receivable, net of deferred fees .............. 72,273 63,055 74,199 58,209 47,085
Allowance for loan losses ........................... 984 788 831 729 523
Investment securities ............................... 3,234 9,007 2,764 11,113 10,821
Total deposits ...................................... 84,137 73,741 85,799 71,342 54,466
Total stockholders' equity .......................... 7,665 7,408 7,592 7,249 6,826
Total capital ....................................... 7,665 7,408 7,592 7,249 6,826
<Caption>
AS OF AND FOR THE YEAR ENDED
DECEMBER 31
-----------------------------
1998 1997(1)
------------ --------------
(dollars in thousands, except
share and per share data)
INCOME STATEMENT DATA:
Interest income ..................................... $ 2,482 $ 677
Interest expense .................................... 1,209 304
Net interest income ................................. 1,273 373
Provision for loan losses ........................... 156 40
Net interest income after provision for
loan losses ....................................... 1,117 333
Other income ........................................ 112 21
Other expense ....................................... 1,066 465
Income (loss) before income taxes ................... 163 (111)
Income taxes ........................................ -- --
Net income (loss) ................................... 163 (111)
PER SHARE DATA:
Earnings (loss) per share, basic .................... $ 0.08 $ (0.05)
Earnings (loss) per share, diluted .................. 0.07 (0.05)
Book value per share ................................ 3.27 3.21
Tangible book value per share ....................... 3.27 3.21
Weighted average shares outstanding (basic) ......... 2,094,087 2,094,087
Weighted average shares outstanding
(diluted) ......................................... 2,237,545 2,094,087
Shares outstanding at end of period ................. 2,094,087 2,094,087
PERIOD-END BALANCE SHEET DATA:
Total assets ........................................ $ 44,841 $ 22,106
Loans receivable, net of deferred fees .............. 28,731 12,141
Allowance for loan losses ........................... 190 40
Investment securities ............................... 9,656 --
Total deposits ...................................... 37,755 15,312
Total stockholders' equity .......................... 6,855 6,721
Total capital ....................................... 6,855 6,721
</Table>
-11-
<Table>
<Caption>
AS OF AND FOR THE
THREE MONTHS ENDED AS OF AND FOR THE YEAR ENDED
MARCH 31 DECEMBER 31
------------------- ----------------------------------------------------
2002 2001 2001 2000 1999 1998 1997(1)
-------- -------- -------- -------- -------- -------- --------
(dollars in thousands, except share and per share data)
SELECTED PERFORMANCE RATIOS AND OTHER DATA:
Cost of funds including non-interest
bearing deposits (2) ..................... 2.91% 4.87% 4.32% 4.75% 4.33% 4.62% 2.79%
Net interest margin (2) .................... 3.98 3.87 3.71 4.02 4.16 4.00 2.24
Efficiency ratio ........................... 71.32 79.48 77.30 82.06 74.37 77.12 118.02
Return on average assets (2) ............... 0.40 0.42 0.29 0.34 0.36 0.49 (0.33)
Return on average equity (2) ............... 4.81 4.58 3.40 3.31 2.83 2.40 (1.63)
Stockholders' equity to total assets ....... 8.31 9.07 8.10 9.18 11.07 15.29 30.41
SELECTED AVERAGE BALANCES:
Loans, net of deferred fees ................ $ 73,404 $ 60,693 $ 66,707 $ 51,963 $ 38,190 $ 20,666 $ 5,896
Investment securities-available for sale ... 2,689 10,925 4,455 10,852 11,377 3,773 246
Overnight deposits ......................... 12,735 4,197 11,084 2,299 2,149 7,388 10,513
Earning assets ............................. 88,828 75,815 82,246 65,114 51,716 31,827 16,655
Total assets ............................... 92,425 79,447 86,214 68,228 54,328 33,164 17,759
Interest bearing deposits .................. 74,513 64,470 70,193 55,488 42,940 23,735 9,706
Non-interest bearing deposits .............. 9,766 7,129 8,035 5,305 4,239 2,461 1,186
Total deposits ............................. 84,279 71,599 78,228 60,793 47,179 26,196 10,892
Other debt ................................. -- -- -- 34 61 -- --
Stockholders' equity ....................... 7,641 7,344 7,458 6,970 6,858 6,806 6,817
ALLOWANCE FOR LOAN LOSSES:
Balance-beginning of period ................ $ 831 $ 729 $ 729 $ 523 $ 190 $ 40 $ --
Provision for loan losses .................. 157 62 471 218 342 156 40
Net charge-offs ............................ (4) (3) (369) (12) (9) (6) --
Balance-end of period ...................... 984 788 831 729 523 190 40
ASSET QUALITY
Nonaccrual loans ........................... $ 225 $ 357 $ 42 $ -- $ 35 $ -- $ --
Total nonperforming assets ................. 226 361 42 10 35 -- --
Net charge-offs to average loans(2) ........ 0.02% 0.02% 0.55% 0.02% 0.02% 0.03% --%
Nonperforming assets to total assets ....... 0.25 0.44 0.05 0.01 0.06 -- --
Allowance for loan losses to nonperforming
assets ................................... 435.40 218.28 1,978.57 7,290.00 1,494.29 -- --
Allowance for loan losses to total loans ... 1.36 1.25 1.12 1.25 1.11 0.66 0.33
</Table>
- ----------
(1) Metro-County began operations on May 20, 1997.
(2) Performance ratios for the three months ended March 31, 2002 and 2001
have been annualized.
-12-
SUMMARY OF HISTORICAL AND PRO FORMA PER SHARE SELECTED FINANCIAL DATA
Set forth below are the net earnings, diluted earnings, cash dividends
and book value per common share data for Southern Financial and Metro-County on
a historical basis, on a pro forma combined basis and on a pro forma combined
basis per Metro-County equivalent share. Also included are weighted average
shares outstanding and shares outstanding at end of period for Southern
Financial and Metro-County and on a pro forma basis.
The pro forma data was derived by combining the historical consolidated
financial information of Southern Financial and Metro-County using the purchase
method of accounting for business combinations. In July 2001, the Financial
Accounting Standards Board issued Statement No. 142, "Goodwill and Other
Intangible Assets," which eliminates the requirement to amortize goodwill and
requires goodwill to be evaluated annually, or more frequently if impairment
indicators arise, for impairment. However, the pro forma data as of and for the
year ended December 31, 2001 does not include the impact of Statement No. 142
since that statement was not effective for the year ended December 31, 2001.
The Metro-County pro forma equivalent share information shows the
effect of the merger from the perspective of an owner of Metro-County common
stock. The information was computed by multiplying the pro forma information
based on an assumed exchange ratio of 0.1494 plus the cash portion of
the consideration of $2.90.
You should read the information below together with the historical
financial statements and related notes and other information of Metro-County
included in this proxy statement-prospectus and the historical financial
statements and related notes that Southern Financial has presented in its prior
Securities and Exchange Commission filings. We have incorporated the information
related to Southern Financial into this document by reference. See "Where You
Can Find Additional Information" on page 69 for instructions on how to receive
copies of the incorporated information. We expect that Metro-County and Southern
Financial will incur merger and integration charges as a result of combining
their companies. The pro forma information, while helpful in illustrating the
financial characteristics of the combined company under one set of assumptions,
does not reflect these expenses or benefits. The unaudited pro forma combined
data below is for illustrative purposes only. The companies may have performed
differently had they always been combined. You should not rely on this
information as being indicative of the historical results that would have been
achieved had the companies always been combined or the future results that the
combined company will experience after the merger.
<Table>
<Caption>
AS OF AND FOR THE
THREE MONTHS AS OF AND FOR THE
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2002 2001
----------------- -----------------
BASIC EARNINGS PER SHARE
Southern Financial ........................................ $ 0.52 $ 2.40
Metro-County .............................................. 0.04 0.12
Pro Forma ................................................. 0.48 2.18
Equivalent pro forma per share of Metro-County stock ...... 0.07 0.33
DILUTED EARNINGS PER SHARE
Southern Financial ........................................ $ 0.50 $ 2.32
Metro-County .............................................. 0.04 0.11
Pro Forma ................................................. 0.47 2.11
Equivalent pro forma per share of Metro-County stock ...... 0.07 0.32
CASH DIVIDENDS PER SHARE
Southern Financial ........................................ $ 0.12 $ 0.44
Metro-County .............................................. 0.07 0.32
Pro Forma ................................................. 0.11 0.40
Equivalent pro forma per share of Metro-County stock ...... 0.02 0.06
</Table>
-13-
<Table>
<Caption>
AS OF AND FOR THE
THREE MONTHS AS OF AND FOR THE
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
2002 2001
----------------- -----------------
BOOK VALUE PER SHARE
Southern Financial............................................... $ 15.14 $ 15.09
Metro-County..................................................... 3.65 3.61
Pro Forma........................................................ 16.20 16.16
Equivalent pro forma per share of Metro-County stock............. 2.42 2.41
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (BASIC)
Southern Financial............................................... 4,284,594 3,500,949
Metro-County..................................................... 2,100,564 2,099,451
Pro Forma........................................................ 4,636,379 3,852,734
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (DILUTED)
Southern Financial............................................... 4,465,849 3,628,582
Metro-County..................................................... 2,257,195 2,281,803
Pro Forma........................................................ 4,817,634 3,980,367
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT END OF PERIOD
Southern Financial............................................... 4,284,594 4,284,594
Metro-County..................................................... 2,100,564 2,100,564
Pro Forma........................................................ 4,636,424 4,636,424
</Table>
COMPARATIVE STOCK PRICES
The following table summarizes the market values of Metro-County common
stock and Southern Financial common stock on April 24, 2002, the business day
prior to the announcement of the merger and as of the most recent date
practicable preceding the date of this proxy statement-prospectus. Except as
otherwise discussed in this proxy statement-prospectus, the merger consideration
has been generally structured to provide that Metro-County shareholders will
receive total per share consideration of $7.25 consisting of (1) shares of
Southern Financial common stock having a market value of $4.35 and (2) $2.90 in
cash. You should obtain current market quotations for the Southern Financial
common stock.
<Table>
<Caption>
Equivalent
Historical Pro Forma
----------------------------------------- Per Share of
Southern Financial(1) Metro-County (2) Metro-County Stock(3)
--------------------- ---------------- ---------------------
April 24, 2002 $ 27.23 $ 6.00 $ 7.25
June 13, 2002 $ 31.50 $ 6.95 $ 7.25
</Table>
- ----------
(1) Represents the closing price of Southern Financial common stock on the
Nasdaq National Market.
(2) Represents the last sale price of Metro-County common stock on the OTC
Bulletin Board.
(3) Represents the value of the merger consideration per share of
Metro-County common stock pursuant to terms of the merger agreement.
-14-
RISK FACTORS
An investment in the Southern Financial common stock in connection with
the merger involves certain risks. In addition to the other information
contained in this proxy statement-prospectus, you should carefully consider the
following risk factors in deciding whether to vote for approval of the merger
agreement.
RISK FACTORS RELATED TO THE MERGER
FLUCTUATIONS IN MARKET PRICES OF SOUTHERN FINANCIAL COMMON STOCK MAY
CAUSE THE VALUE OF THE STOCK PORTION OF THE MERGER CONSIDERATION TO DECREASE.
Upon completion of the merger, your shares of Metro-County common stock
will be converted into shares of Southern Financial common stock and cash. While
the merger consideration has been generally structured to provide that
shareholders of Metro-County will receive for each of their shares of
Metro-County common stock $2.90 in cash and shares of Southern Financial common
stock having a market value of $4.35, in the event that the average trading
price of Southern Financial common stock exceeds or falls below certain
pre-agreed levels, the amount of cash you will receive would remain the
same, but the common stock exchange ratio becomes fixed and you will receive
shares of Southern Financial common stock having a market value either greater
or less than, as the case may be, $4.35. Stock price changes may result from a
variety of factors that are beyond the control of Southern Financial, including,
among other things, changes in Southern Financial's businesses, operations and
prospects, regulatory considerations and general market and economic conditions.
As a result of the uncertainty of the price of Southern Financial common stock
leading up to the merger, and the relationship of the price to the structure of
the merger consideration, we cannot assure you of the specific number of shares
of Southern Financial common stock you will receive in the merger or the
specific market value of those shares.
Although the aggregate market value of the Southern Financial common
stock that you will receive in the merger is fixed within certain limits,
Metro-County will have the right to terminate the merger agreement and abandon
the merger before the closing if:
o the average trading price for Southern Financial common stock
for the 20 successive trading days ending on and including the
fifth trading day prior to the effective time of the merger is
less than $20.80 per share; and
o Southern Financial fails to adjust the exchange ratio to a
number of shares equal to $3.98 divided by the average trading
price.
As a result, even if the merger is approved by the shareholders, the
merger may ultimately not be completed. Although the Southern Financial board of
directors has the ability to increase the merger consideration and the
Metro-County board of directors has the power to terminate the merger agreement
and abandon the merger if both of the above conditions occur, there is no
obligation of either board to exercise such power.
Accordingly, at the time you vote with respect to the merger, you will
not know the market value or the number of the shares of Southern Financial
common stock that you will receive in the merger.
The price of Southern Financial common stock may vary from its price on
the date of this proxy statement-prospectus, the date of the Metro-County
special meeting and the date for determining the average trading price discussed
above. Because the date the merger is completed will be later than the date of
the special meeting, the price of the Southern Financial common stock on the
date of the special meeting may not be indicative of its price on the date the
merger is completed.
SOUTHERN FINANCIAL MAY HAVE DIFFICULTY COMBINING THE OPERATIONS OF METRO-COUNTY
WITH ITS OWN OPERATIONS.
Because the markets and industries in which Southern Financial operates
are highly competitive, and due to the inherent uncertainties associated with
the integration of acquired companies, Southern Financial may not be able to
integrate the operations of Metro-County without encountering difficulties
including, without limitation, the loss
-15-
of key employees and customers, the disruption of their respective ongoing
businesses and possible inconsistencies in standards, controls, procedures and
policies. Additionally, in determining that the merger is in the best interests
of Southern Financial and Metro-County, as the case may be, the board of
directors of each of Southern Financial and Metro-County considered that
enhanced earnings may result from the consummation of the merger, including from
the reduction of duplicate costs, improved efficiency and cross-marketing
opportunities. However, we cannot assure you that any enhanced earnings will
result from the merger.
YOU WILL HAVE LESS INFLUENCE AS A SHAREHOLDER OF SOUTHERN FINANCIAL
THAN AS A SHAREHOLDER OF METRO-COUNTY.
As a Metro-County shareholder, you currently have the right to vote in
the election of the board of directors of Metro-County and on other matters
affecting Metro-County. The merger will transfer control of Metro-County to
Southern Financial and to the shareholders of Southern Financial. When the
merger occurs, you will become a shareholder of Southern Financial with a
percentage ownership of Southern Financial much smaller than your percentage
ownership of Metro-County. Because of this, you will have less influence on the
management and policies of Southern Financial than you now have on the
management and policies of Metro-County.
RISK FACTORS RELATED TO SOUTHERN FINANCIAL
SOUTHERN FINANCIAL'S PROFITABILITY DEPENDS SIGNIFICANTLY ON LOCAL ECONOMIC
CONDITIONS.
Southern Financial's success depends primarily on the general economic
conditions of the northern Virginia area. Unlike larger banks that are more
geographically diversified, Southern Financial provides banking and financial
services to customers primarily in the northern Virginia area. The local
economic conditions in this area have a significant impact on Southern
Financial's business, real estate and construction loans, the ability of the
borrowers to repay these loans and the value of the collateral securing these
loans. A significant decline in general economic conditions, caused by
inflation, recession, acts of terrorism, an outbreak of hostilities or other
international or domestic calamities, unemployment or other factors beyond
Southern Financial's control could impact these local economic conditions and
could negatively affect the financial results of its banking operations. In
recent years, there has been a proliferation of technology and communications
companies in our market. The current recession in those industries has had a
significant adverse impact on a number of those companies. While Southern
Financial does not have any significant credit exposure to these companies, the
recession in these industries could have a negative impact on local economic
conditions and real estate collateral values generally, which could negatively
affect Southern Financial's profitability.
SOUTHERN FINANCIAL MAY NOT BE ABLE TO MAINTAIN ITS HISTORICAL GROWTH RATE, WHICH
MAY ADVERSELY IMPACT ITS RESULTS OF OPERATIONS AND FINANCIAL CONDITION.
To achieve past levels of growth, Southern Financial initiated internal
growth programs, completed several acquisitions and opened additional branches.
Southern Financial may not be able to sustain its historical rate of growth or
may not even be able to grow at all. Southern Financial may not be able to
obtain the financing necessary to fund additional growth and may not be able to
find suitable candidates for acquisition. Various factors, such as economic
conditions and competition, may impede or prohibit its opening of new branch
offices. Further, Southern Financial's inability to attract and retain
experienced bankers may adversely affect its internal growth. A significant
decrease in Southern Financial's historical rate of growth may adversely impact
its results of operation and financial condition.
SOUTHERN FINANCIAL'S SMALL TO MEDIUM-SIZED BUSINESS TARGET MARKET MAY HAVE FEWER
FINANCIAL RESOURCES TO WEATHER A DOWNTURN IN THE ECONOMY.
Southern Financial targets its business development and marketing
strategy primarily to serve the banking and financial services needs of small to
medium-sized businesses. These small to medium-sized businesses generally have
fewer financial resources in terms of capital or borrowing capacity than larger
entities. If general economic conditions negatively impact this major economic
sector in the northern Virginia area or the other markets in which Southern
Financial operates, Southern Financial's results of operations and financial
condition may be adversely affected.
-16-
THE SUCCESS OF SOUTHERN FINANCIAL'S PARTICIPATION IN SMALL BUSINESS
ADMINISTRATION LOAN PROGRAMS DEPENDS ON RETENTION OF ITS PREFERRED AND CERTIFIED
LENDER STATUS AND ITS COMPLIANCE WITH TECHNICAL CREDIT UNDERWRITING STANDARDS.
As of March 31, 2002, approximately 16% of Southern Financial's loan
portfolio consists of loans made through various lending programs of the Small
Business Administration. The federal government currently guarantees 75% to 90%
of the principal amount of each qualifying loan. Southern Financial has recently
elected to hold the guaranteed portion of these loans in its loan portfolio.
There can be no assurance that the federal government will maintain the SBA
program, or if it does, that the guaranteed portion will remain at its current
funding level. Furthermore, there can be no assurance that Southern Financial
will retain its preferred and certified lender status, which generally enables
Southern Financial to approve and fund SBA loans without prior SBA approval. In
the event of a default on an SBA loan, Southern Financial's pursuit of remedies
against a borrower is subject to SBA approval. If the SBA establishes that its
loss is attributable to deficiencies in the manner in which the loan application
was prepared or submitted, the SBA may decline to honor its guarantee and
Southern Financial may suffer losses.
LOSS OF SOUTHERN FINANCIAL'S SENIOR EXECUTIVE OFFICERS OR OTHER KEY EMPLOYEES
COULD IMPAIR ITS RELATIONSHIP WITH CUSTOMERS AND ADVERSELY AFFECT ITS BUSINESS.
Southern Financial's success is dependent upon the continued service
and skills of Georgia S. Derrico, R. Roderick Porter and other senior officers.
The loss of services of any of these key personnel could have a negative impact
on Southern Financial's business because of their skills, years of industry
experience and the difficulty of promptly finding qualified replacement
personnel. Although Southern Financial currently has an employment agreement
with Ms. Derrico, there can be no assurance that she will continue to be
employed with Southern Financial in the future.
IF SOUTHERN FINANCIAL'S ALLOWANCE FOR LOAN LOSSES IS NOT SUFFICIENT TO COVER
ACTUAL LOAN LOSSES, ITS EARNINGS COULD DECREASE.
Southern Financial's loan customers may not repay their loans according
to the terms of these loans and the collateral securing the payment of these
loans may be insufficient to assure repayment. Southern Financial may experience
significant loan losses which could have a material adverse effect on its
operating results. Management makes various assumptions and judgments about the
collectibility of the loan portfolio, including the creditworthiness of our
borrowers and the value of the real estate and other assets serving as
collateral for the repayment of many of the loans. Southern Financial maintains
an allowance for loan losses in an attempt to cover any loan losses which may
occur. In determining the size of the allowance, Southern Financial relies on an
analysis of the loan portfolio, its experience and our evaluation of economic
conditions. If Southern Financial's assumptions prove to be incorrect, its
current allowance may not be sufficient to cover future loan losses and
adjustments may be necessary to allow for different economic conditions or
adverse developments in its loan portfolio. Material additions to Southern
Financial's allowance would materially decrease its net income.
In addition, federal and state regulators periodically review Southern
Financial's allowance for loan losses and may require it to increase the
provision for loan losses or recognize further loan charge-offs, based on
judgments different than those of Southern Financial's management. Any increase
in Southern Financial's loan allowance or loan charge-offs as required by these
regulatory agencies could have a negative effect on its operating results.
ALTHOUGH PUBLICLY TRADED, SOUTHERN FINANCIAL'S COMMON STOCK HAS SUBSTANTIALLY
LESS LIQUIDITY THAN THE AVERAGE TRADING MARKET FOR A STOCK QUOTED ON THE NASDAQ
NATIONAL MARKET SYSTEM.
Although Southern Financial's common stock is listed for trading on the
National Market System of the Nasdaq Stock Market, the trading market in its
common stock has substantially less liquidity than the average trading market
for companies quoted on the Nasdaq National Market System. A public trading
market having the desired characteristics of depth, liquidity and orderliness
depends on the presence in the market place of willing buyers and sellers of
Southern Financial's common stock at any given time. This presence depends on
the individual decisions of investors and general economic and market conditions
over which Southern Financial has no control.
-17-
A WARNING ABOUT FORWARD-LOOKING STATEMENTS
We have each made forward-looking statements in this proxy
statement-prospectus (and in documents to which we refer you in this proxy
statement-prospectus) that are subject to risks and uncertainties. These
forward-looking statements include information about possible or assumed future
results of our operations or the performance of Southern Financial after the
merger is completed. When we use any of the words "believes," "expects,"
"anticipates," "estimates" or similar expressions, we are making forward-looking
statements. Many possible events or factors could affect the future financial
results and performance of each of our companies before the merger or Southern
Financial after the merger, and could cause those results or performance to
differ materially from those expressed in our forward-looking statements. These
possible events or factors include the following:
o our actual cost savings resulting from the merger are less
than we expected, we are unable to realize those cost savings
as soon as we expected or we incur additional or unexpected
costs;
o our revenues after the merger are less than we expected;
o deposit attrition, operating costs, customer loss and business
disruption before and after the merger are greater than we
expected;
o competition among financial services companies may increase;
o we have more trouble integrating our businesses than we
expected;
o changes in the interest rate environment reduce our interest
margins;
o general business and economic conditions in the markets we
serve change or are less favorable than we expected;
o legislative or regulatory changes adversely affect our
businesses;
o changes occur in business conditions and inflation;
o personal or commercial customers' bankruptcies increase;
o changes occur in the securities markets; and
o technology-related changes are harder to make or more
expensive than we expected.
For other factors, risks and uncertainties that could cause actual
results to differ materially from estimates and projections contained in
forward-looking statements, please read the "Risk Factors" section of this proxy
statement-prospectus.
A forward-looking statement may include a statement of the assumptions
or bases underlying the forward-looking statement. We believe we have chosen
these assumptions or bases in good faith and that they are reasonable. However,
we caution you that assumptions or bases almost always vary from actual results,
and the differences between assumptions or bases and actual results can be
material. When considering forward-looking statements, you should keep in mind
the risk factors and other cautionary statements in this proxy
statement-prospectus, any supplement to this proxy statement-prospectus and the
documents we have incorporated by reference. We will not update these statements
unless the securities laws require us to do so.
-18-
METRO-COUNTY SPECIAL MEETING
PURPOSE
This proxy statement-prospectus is furnished in connection with the
solicitation of proxies by the board of directors of Metro-County from the
shareholders of Metro-County for use at the special meeting. The special meeting
is a meeting of the shareholders of Metro-County at which the shareholders will
consider and vote on the approval of the merger agreement. A complete copy of
the merger agreement is attached to this proxy statement-prospectus as Appendix
A.
DATE, PLACE AND TIME OF THE SPECIAL MEETING
The special meeting of Metro-County's shareholders will be held at
4:00, p.m. local time on Thursday, July 25, 2002 at The Marquee located at
3015 Cutshaw Avenue, Richmond, Virginia.
SHARES ENTITLED TO VOTE, QUORUM AND VOTE REQUIRED
The holders of record of the outstanding shares of Metro-County common
stock at the close of business on June 12, 2002 will be entitled to notice of
and to vote at the special meeting and any adjournment or postponement of the
special meeting. At the close of business on that date, there were 2,108,264
shares of Metro-County common stock issued and outstanding and entitled to vote
at the special meeting.
At the special meeting, Metro-County shareholders will be entitled to
one vote for each share of Metro-County common stock owned of record on
June 12, 2002. The holders of a majority of Metro-County common stock must
be present, either in person or by proxy, to constitute a quorum at the meeting.
The affirmative vote of at least a majority of the issued and outstanding
Metro-County common stock is required to approve the merger agreement. The
affirmative vote of at least a majority of the Metro-County common stock present
at the meeting, either in person or by proxy, is required to approve any other
matters that may be properly presented at the meeting.
Abstentions and shares held of record by a broker or nominee that are
voted on any matter are included in determining whether a quorum exists. The
proposal to approve the merger agreement is a "non-discretionary" item, meaning
that brokers and banks who hold shares in an account for customers who are the
beneficial owners of such shares may not give a proxy to vote those shares
without specific instructions from their customers. Any abstentions and broker
non-votes will have the same effect as votes against approval of the merger
agreement. Accordingly, the Metro-County board of directors encourages you to
complete, date and sign the accompanying proxy card and return it promptly in
the enclosed postage-paid envelope.
On the record date, the directors and executive officers of
Metro-County were entitled to vote, in the aggregate, 289,255 shares of
Metro-County common stock, or approximately 13.72% of the outstanding shares
of Metro-County common stock. Each director and executive officer of
Metro-County has executed an agreement to vote his or her shares of Metro-County
common stock in favor of approval of the merger agreement. THE METRO-COUNTY
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE IN FAVOR OF APPROVAL OF
THE MERGER AGREEMENT.
VOTING AND REVOCATION OF PROXIES
Proxies, in the form enclosed, which are properly executed by the
shareholders and returned to Metro-County and not subsequently revoked, will be
voted in accordance with the instructions indicated on the proxies. Any properly
executed proxy on which voting instructions are not specified will be voted FOR
the proposal to approve and adopt the merger agreement. The proxy also grants
authority to the persons designated in the proxy to vote in accordance with
their own judgment if an unscheduled matter is properly brought before the
meeting.
If you are the record holder of your shares, you may revoke any proxy
given pursuant to this solicitation by the Metro-County board of directors at
any time before it is voted at the special meeting by:
-19-
o giving written notice to the Acting Secretary of Metro-County;
o executing a proxy bearing a later date and filing that proxy
with the Acting Secretary of Metro-County at or before the
meeting; or
o attending and voting in person at the meeting.
All written notices of revocation and other communications with respect to
revocation or proxies should be sent to: Metro-County Bank of Virginia, Inc.,
3124 West Broad Street, Richmond, Virginia 23230, Attention: James R. Black,
Chief Financial Officer and Acting Secretary. If you hold your shares in street
name with a bank or broker, you must contact the bank or broker if you wish to
revoke your proxy.
SOLICITATION OF PROXIES; EXPENSES
This proxy solicitation is made by the Metro-County board of directors.
Metro-County is responsible for its expenses incurred in preparing, assembling,
printing, and mailing this proxy statement-prospectus. Proxies will be solicited
through the mail. Additionally, directors, officers and regular employees of
Metro-County intend to solicit proxies personally or by telephone or other means
of communication. These directors, officers and employees will not be
additionally compensated. Metro-County will reimburse banks, brokers and other
custodians, nominees and fiduciaries for their reasonable expenses in forwarding
the proxy materials to beneficial owners.
-20-
DESCRIPTION OF THE MERGER
The following information describes material aspects of the merger. It
is not intended to be a complete description of all information relating to the
merger and is qualified in its entirety by reference to more detailed
information contained in the Appendices to this document, including the merger
agreement. A copy of the merger agreement is included as Appendix A and is
incorporated herein by reference. You are urged to read the Appendices in their
entirety.
TERMS OF THE MERGER
The merger agreement provides for the merger of Metro-County with and
into Southern Financial Bank, a wholly owned subsidiary of Southern Financial.
The merger will be effective as soon as practicable following the receipt of all
necessary regulatory and shareholder approvals and the satisfaction or waiver of
all conditions to the consummation of the merger.
As a result of the merger, for each share of Metro-County common stock
you own, you will be entitled to receive total per share consideration of $7.25
in the form of (1) $2.90 in cash and (2) a number of shares of Southern
Financial common stock having a market value of $4.35. The number of shares of
Southern Financial common stock you will receive for each share of Metro-County
common stock you own, subject to the adjustment described below, will be equal
to $4.35 divided by the average trading price of Southern Financial common
stock. For these purposes, the "average trading price" will be the average
closing price of a share of Southern Financial common stock on the Nasdaq
National Market for the 20 trading days ending on and including the fifth
trading day preceding the effective time of the merger. Based on the average
trading price of Southern Financial common stock for the 20 trading days ending
on June 13, 2002 of $29.12, shareholders of Metro-County would receive, in
addition to $2.90 in cash, 0.1494 shares of Southern Financial common stock for
each share of Metro-County common stock they own. Assuming this exchange ratio,
shareholders of Metro-County would receive a total of 314,974 shares of Southern
Financial common stock. If the merger were completed as of June 13, 2002,
including the 36,856 shares of Southern Financial common stock to be issued to
holders of options to acquire shares of Metro-County common stock, a total of
351,830 shares of Southern Financial common stock would be issued to
Metro-County shareholders. As a result, Metro-County shareholders would own
approximately 7.58% of the issued and outstanding Southern Financial common
stock after the merger.
Southern Financial and Metro-County have agreed that in the event the
average trading price of Southern Financial common stock exceeds or falls below
certain pre-agreed levels, the common stock exchange ratio becomes fixed and you
will receive, for each share of Metro-County common stock you own, shares of
Southern Financial common stock having a market value either greater or less
than, as the case may be, $4.35. In the event the average trading price is
$22.75 or less, the exchange ratio will remain fixed at 0.1912 and you will
receive shares of Southern Financial common stock having a market value less
than $4.35. In the event that the average trading price is $29.25 or greater,
the exchange ratio will remain fixed at 0.1487 and you will receive shares of
Southern Financial common stock having a market value greater than $4.35.
In addition, in the event that the average trading price of Southern
Financial common stock is $20.80 or less, at the option of Southern Financial,
the exchange ratio may be adjusted to a number of shares calculated by dividing
$3.98 by the average trading price. If Southern Financial elects not to adjust
the merger consideration, Metro-County has the right to terminate the merger
agreement. Consequently, you will not know the exact number or value of the
shares of Southern Financial common stock you will receive in the merger when
you vote on the merger, and even if the merger is approved by the shareholders,
the merger may ultimately not be completed.
As a result of the merger, certificates for Metro-County common stock
will only represent the right to receive the merger consideration pursuant to
the merger agreement, and otherwise will be null and void after completion of
the merger.
In addition, as of the date of this proxy statement-prospectus, there
are options to acquire 453,902 shares of Metro-County common stock that are
exercisable. If these options are exercised prior to completion of the merger,
Southern Financial must issue additional shares of Southern Financial common
stock for each additional share of Metro-County common stock issued pursuant to
the exercise of such options. If all of the options to acquire all shares are
exercised, based on an assumed exchange ratio of 0.0812, Southern Financial
would be required to issue an additional 36,846 shares of Southern Financial
common stock upon completion of the merger.
As noted above, Southern Financial will not issue any certificates for
fractional shares of Southern Financial common stock in connection with the
merger but will instead pay cash. The amount of cash will be determined by
multiplying the fractional share interest by the closing price of Southern
Financial common stock on the trading day immediately prior to the effective
time of the merger.
-21-
EFFECT OF THE MERGER ON METRO-COUNTY STOCK OPTIONS
Pursuant to the merger agreement, any options to purchase shares of
Metro-County common stock that are outstanding immediately prior to the
completion of the merger will represent a right to receive payment of an amount
of cash equal to $1.58 and a number of Southern Financial shares with an
aggregate value of $2.36, subject to the same adjustments as described above. As
of June 13, 2002, there were options outstanding to purchase 453,902 shares of
Metro-County common stock at an exercise price of $3.31 per share.
BACKGROUND OF THE MERGER
In the past several years, Metro-County's board of directors and
management have periodically reviewed the future prospects for earnings and
asset growth, and the viability of continued independent operations in
accordance with its business plan, from the perspective of the long-term best
interests of Metro-County and its shareholders. During that time, several
interested parties other than Southern Financial contacted Metro-County to
explore the possibility of a merger or acquisition. Until early 2002, the
Metro-County board elected not to pursue these preliminary expressions of
interests, believing it to be in the best interests of Metro-County and its
shareholders for Metro-County to remain independent and to focus on building a
strong community bank.
A significant aspect of Metro-County's growth strategy since opening in
1997 included taking advantage of the consolidation of both large regional banks
and community banks in the Richmond, Virginia metropolitan area by acquiring
former branches of those financial institutions. Metro-County grew relatively
quickly, and by the end of 2000 had five banking offices throughout the northern
half of the greater Richmond area.
During the fourth quarter of 2001, and in connection with its strategic
review of Metro-County's business plan, the board of directors of Metro-County
recognized that in order for the bank to continue growing at its then current
pace, it needed to raise additional capital. Accordingly, the board directed
Stafford White, Chairman and Chief Executive Officer of Metro-County, to
approach several financial advisors to discuss the bank's strategic planning.
In early November 2001, members of Metro-County's executive management
team met with representatives of two financial advisory firms to generally
discuss and seek guidance on various ways to raise additional capital and to
obtain advice on other strategic options available to the bank. Management
presented the results of the meetings to the Metro-County board at its November
20, 2001 meeting. After hearing the management presentation, the board decided
to further examine several strategic options available for Metro-County,
including possible merger opportunities, and a public securities offering.
In late November 2001, Mr. White received a call from a representative
of Scott & Stringfellow, Inc., a financial advisory firm with extensive
experience and expertise in valuing and advising financial institutions on
strategic issues, including sales of financial institutions. Scott &
Stringfellow was one of the firms that had met with the Metro-County management
team in early November. Scott & Stringfellow inquired of Mr. White whether he
would consider meeting with representatives of other financial institutions to
discuss Metro-County affiliating or merging with those institutions. Consistent
with his duties to evaluate strategic options for Metro-County, and at the
direction of the Metro-County board, Mr. White agreed to engage in preliminary
exploratory discussions about combining Metro-County with another financial
institution. During January and February 2002, Mr. White met with
representatives of several financial institutions, including Southern Financial.
The meetings were general in nature and addressed non-pricing matters such as
financial performance, management and operations. Mr. White informed the
Metro-County board of the principal aspects of these discussions at the board's
regular meetings in January and February 2002.
As a result of these exploratory discussions, Metro-County received
indications of interest from two institutions, neither of which was Southern
Financial. A representative from each institution was invited to a March 19,
2002 board meeting to present, in general terms, a business combination proposal
to Metro-County, including merger consideration pricing, and to provide
background information on each financial institution. Representatives from Scott
& Stringfellow were in attendance at this meeting. The Metro-County board
considered the proposals from each institution and evaluated them on the level
and form of
-22-
consideration proposed, the specificity of the acquisition consideration
proposed, the context of the financial institution making the proposal and the
expected future operation of Metro-County. After deliberating on the terms of
each proposal, the Metro-County board determined that the merger consideration
offered by each institution was inadequate, and during the board meeting on
March 19, 2002, Mr. White was directed to inform the interested institutions of
the board's decision. Metro-County did not receive a follow-up proposal
increasing the proposed merger consideration from either of the two interested
financial institutions.
In early April 2002, Mr. White was contacted again by Scott &
Stringfellow and was asked if the Metro-County board would consider a merger
proposal from Southern Financial. In the context of Metro-County's board having
recently reviewed other business combination offers, Mr. White replied that he
believed the board would consider discussing a potential merger with Southern
Financial. Southern Financial asked Hovde Financial LLC, a financial advisory
firm, to begin reviewing a potential acquisition of Metro-County. Southern
Financial's management and representatives of Hovde Financial met several times
and reviewed preliminary due diligence information on Metro-County that was
provided by Scott & Stringfellow.
At a Metro-County board meeting on April 16, 2002, Georgia Derrico,
Chairman and Chief Executive Officer of Southern Financial, and Roderick Porter,
President and Chief Operating Officer of Southern Financial, outlined the
general terms of a merger offer for Metro-County. Representatives from Hovde
Financial and Scott & Stringfellow were in attendance at the meeting. Ms.
Derrico and Mr. Porter indicated that Southern Financial would be prepared to
pay $7.25 in cash and stock for each share of Metro-County common stock.
Specifically, Southern Financial offered merger consideration in the form of
$2.90 in cash and a number of shares of Southern Financial common stock with a
market value of $4.35 for each share of Metro-County common stock.
At the April 16th meeting, the Metro-County board, along with Scott &
Stringfellow, discussed the reasons for and the benefits of a merger with
Southern Financial. It considered the financial performance, stock performance,
market position, growth prospects and other matters concerning Southern
Financial. The Metro-County board evaluated Southern Financial's offer in
relation to the then current market value of Metro-County common stock and
management's estimate of the future value of the common stock of Metro-County as
an independent entity. After this discussion, the Metro-County board determined
that a merger with Southern Financial, as proposed at the April 16th meeting,
would provide substantial long-term benefits to Metro-County's shareholders and
its constituencies. The Metro-County board then authorized management to proceed
with the negotiation of a definitive merger agreement and related agreements
with Southern Financial. The board also selected Scott & Stringfellow to serve
as its financial advisor in connection with the merger.
Southern Financial's outside counsel, Bracewell & Patterson, L.L.P.,
delivered to Metro-County and its outside counsel, LeClair Ryan, A Professional
Corporation, a draft merger agreement and other related documents on April 19,
2002. During the course of the next week, Metro-County and Southern Financial
and their respective counsel negotiated the terms of the merger documents.
On April 24, 2002, the Metro-County board of directors convened at 2:00
p.m. to consider the merger with Southern Financial. Mr. White reviewed the
events that had occurred since the last meeting of the Metro-County board.
Representatives of Scott & Stringfellow made a presentation to the Metro-County
board on the proposed transaction with Southern Financial, the current bank
merger and acquisition environment and the results of various financial analyses
Scott & Stringfellow had prepared in connection with the proposed transaction.
Scott & Stringfellow then delivered its opinion that the merger consideration in
the form of $2.90 in cash and a number of shares of Southern Financial common
stock with a market value of $4.35 for each share of Metro-County common
-23-
stock, was fair to Metro-County shareholders from a financial point of view.
Representatives of LeClair Ryan then reviewed the merger agreement and related
agreements that had been negotiated with Southern Financial. Throughout the
presentations, representatives of Scott & Stringfellow and LeClair Ryan
responded to numerous questions and comments from the Metro-County board.
Following a thorough discussion of the terms of the merger agreement,
the structure of the transaction and other items related to the proposed merger,
the Metro-County board determined that the merger pursuant to the definitive
agreement was in the best interests of Metro-County and its shareholders,
approved the proposed merger, subject to the satisfactory finalization of the
merger documents, and authorized Mr. White, as Chairman and Chief Executive
Officer of Metro-County, to execute and deliver the merger documents on behalf
of Metro-County.
Southern Financial's board of directors met on April 17, 2002 to
discuss and consider the transaction with Metro-County. Based primarily on an
extensive discussion of the terms of the merger, the financial condition and
valuation for both Metro-County and Southern Financial and the geographic
expansion of Southern Financial's market area as a result of the proposed
merger, Southern Financial's board of directors determined that the transaction
with Metro-County was in the best interests of both Southern Financial and its
shareholders. As a result, Southern Financial's board of directors authorized,
subject to the satisfactory finalization of the merger documents, Ms. Derrico,
as Chairman and Chief Executive Officer of Southern Financial, to execute and
deliver the merger documents on behalf of Southern Financial.
On April 25, 2002, Metro-County and Southern Financial entered into the
merger agreement and each financial institution announced the proposed merger at
their respective annual meetings of shareholders held on that date.
RECOMMENDATION OF THE METRO-COUNTY BOARD AND METRO-COUNTY'S REASONS FOR THE
MERGER
The terms of the merger agreement, including the consideration to be
paid to Metro-County shareholders, were the result of arm's length negotiations
between representatives of Southern Financial and Metro-County. In evaluating
whether to affiliate with Southern Financial, the Metro-County board considered
a number of factors, including, without limitation, the following:
o information regarding the business, operations, earnings,
financial condition, technological capabilities, management,
earnings and prospects of each of Metro-County and Southern
Financial;
o the merger consideration of $7.25 in the form of (1) $2.90 in
cash and (2) a number of shares of Southern Financial with a
market value of $4.35 of Southern Financial common stock for
each share of Metro-County common stock, which represented a
31.8% premium over the closing sales price of Metro-County
common stock of $5.50 on April 22, 2002, the last day the
Metro-County common stock traded preceding the Metro-County
board's approval of the merger agreement;
o the current financial services industry environment, including
the continued consolidation within the industry and the
increased competition in the market areas served by
Metro-County;
o the additional capital and resources needed for Metro-County's
operations to continue to grow;
o the belief of Metro-County's board that the terms of the
merger and the merger agreement are fair to and in the best
interests of Metro-County shareholders;
o the analyses provided by Scott & Stringfellow and the oral and
written opinion of Scott & Stringfellow provided on April 24,
2002 that, as of such date, the exchange ratio as set out in
the merger agreement, was fair from a financial point of view
to Metro-County shareholders (see "Opinion of Metro-County's
Financial Advisor");
o the tax-free nature of the stock portion of the merger
consideration to Metro-County shareholders for federal income
tax purposes;
-24-
o the fact that Southern Financial common stock is publicly
traded on the Nasdaq National Market, thereby representing a
more liquid investment than Metro-County's common stock, which
traded on the OTC Bulletin Board on a more limited basis;
o Southern Financial's record with respect to the employees and
communities of the banks it acquires, and the effect upon
Metro-County's employees and the communities which
Metro-County serves;
o the historical dividends paid by Southern Financial on its
common stock as compared with the dividends paid on
Metro-County common stock;
o the board's concern about management succession;
o the board's review of other strategic alternatives potentially
available to Metro-County;
o Southern Financial's ability to provide the ever-increasing
and broadening array of financial services and products
demanded by Metro-County customers and the communities served
by Metro-County; and
o the financial terms of other recent business combinations in
the banking industry.
Metro-County's board of directors determined that Metro-County's
competitive position and the value of its stock could best be enhanced through
affiliation with Southern Financial. The aggregate price to be paid to holders
of Metro-County common stock resulted from negotiations which considered the
historical earnings and dividends of Southern Financial and Metro-County; the
potential growth in Metro-County's market and earnings, both as an independent
entity and as a part of a larger organization such as Southern Financial;
Metro-County's asset quality; and the effect of the merger on the shareholders,
customers, and employees of Metro-County and the communities that Metro-County
serves.
The above discussion of the information and factors considered by the
Metro-County board is not intended to be exhaustive, but includes the material
factors the Metro-County board considered. In reaching its determination to
approve and recommend the merger, the Metro-County board did not assign any
relative or specific weights to the foregoing factors, and individual directors
may have given differing weights to different factors.
THE METRO-COUNTY BOARD OF DIRECTORS BELIEVES THAT THE MERGER IS IN THE
BEST INTERESTS OF METRO-COUNTY AND ITS SHAREHOLDERS. ACCORDINGLY, THE
METRO-COUNTY BOARD HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND UNANIMOUSLY
RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER AGREEMENT.
REASONS OF SOUTHERN FINANCIAL FOR THE MERGER
As a part of Southern Financial's growth strategy, Southern Financial
routinely evaluates opportunities to acquire financial institutions. The
acquisition of Metro-County is consistent with Southern Financial's expansion
strategy. Southern Financial's board of directors reviewed the business,
financial condition, results of operation and prospects for Metro-County, the
market condition of the Richmond, Virginia area, the compatibility of the
management and the proposed financial terms of the merger. In addition,
management of Southern Financial believes that the acquisition of five new
banking locations will expand Southern Financial's geographic presence in the
greater Richmond, Virginia area, provide opportunities for future growth and
also result in a potential to realize cost savings from a larger organization.
Southern Financial's board of directors also considered the financial condition
and valuation for both Metro-County and Southern Financial, the tax-free nature
of the exchange of Metro-County common stock for shares of Southern Financial
common stock as well as the financial and other effects the merger would have on
Southern Financial's shareholders.
While management of Southern Financial believes that revenue
opportunities will be achieved and costs savings will be obtained following the
merger, Southern Financial has not quantified the amount of enhancements or cost
savings or projected the areas of operation in which these savings will occur.
-25-
In view of the variety of factors considered in connection with its
evaluation of the merger, the Southern Financial board did not find it useful to
and did not attempt to quantify, rank or otherwise assign relative weights to
the factors it considered. Further, individual directors may have given
differing weights to different factors. In addition, the Southern Financial
board did not undertake to make any specific determination as to whether any
particular factor, or any aspect of any particular factor, was favorable or
unfavorable to its ultimate determination. Rather, the board conducted an
overall analysis of the factors it considered material, including thorough
discussions with, and questioning of, Southern Financial's management.
OPINION OF METRO-COUNTY'S FINANCIAL ADVISOR
The fairness opinion of Metro-County's financial advisor, Scott &
Stringfellow is described below. The description contains projections, estimates
and/or other forward-looking statements about the future earnings or other
measures of the future performance of Southern Financial and Metro-County. Scott
& Stringfellow has reviewed and consented to the following description relating
to its opinion. You should not rely on any of these statements as having been
made or adopted by Southern Financial or Metro-County.
Metro-County's board of directors retained Scott & Stringfellow as its
financial advisor in connection with Metro-County's consideration of a possible
business combination with Southern Financial. In connection therewith, the
Metro-County board requested Scott & Stringfellow to render its opinion as to
the fairness, from a financial point of view, of the consideration to the
holders of Metro-County common stock. At the April 24, 2002 meeting at which
Metro-County's board considered and approved the merger agreement, Scott &
Stringfellow delivered to Metro-County's board both its oral and written
opinion that as of such date, the consideration was fair, from a financial
point of view, to the holders of shares of Metro-County common stock. Scott &
Stringfellow has reconfirmed its opinion dated as of April 24, 2002 by
delivering a written opinion to the Metro-County board, dated the date of this
proxy statement-prospectus, to the effect that, as of that date, the
consideration was fair to the holders of shares of Metro-County common stock
from a financial point of view. Scott & Stringfellow is a regional investment
banking firm and was selected by Metro-County based on the firm's reputation and
experience in investment banking, its extensive experience and knowledge of the
Virginia banking market, its recognized expertise in the valuation of commercial
banking businesses and because of its familiarity with, and prior work for,
Metro-County. Scott & Stringfellow, through its investment banking business and
specifically through its Financial Institutions Group, specializes in commercial
banking institutions and is continually engaged in the valuation of such
businesses and their securities in connection with mergers and acquisitions,
negotiated underwritings, competitive biddings and other corporate transactions.
The full text of Scott & Stringfellow's opinion as of the date of this
proxy statement-prospectus sets forth the assumptions made, procedures followed,
matters considered and limits on the review undertaken and is attached as
Appendix B to this proxy statement-prospectus. The description of the Scott &
Stringfellow opinion set forth herein is qualified in its entirety by reference
to Appendix B. The Scott & Stringfellow opinion is provided for the information
of Metro-County shareholders because it was provided to the Metro-County board
in connection with its consideration of the merger.
In developing its opinion, Scott & Stringfellow reviewed and analyzed:
o the merger agreement;
o Metro-County's audited financial statements for the three
years ended December 31, 2001;
o Metro-County's unaudited financial statements for the three
months ended March 31, 2002 and 2001, and other internal
information relating to Metro-County prepared by
Metro-County's management;
o information regarding the trading market for Metro-County
common stock and Southern Financial common stock and the price
ranges within which the respective stocks have traded;
o the relationship of prices paid to relevant financial data
such as net worth and earnings in certain bank and bank
holding company mergers and acquisitions in recent years;
-26-
o Southern Financial's annual reports to shareholders and its
audited financial statements for the three years ended
December 31, 2001;
o Southern Financial's unaudited financial statements for the
three months ended March 31, 2002 and 2001 and other internal
information relating to Southern Financial prepared by
Southern Financial's management; and
o the information obtained from conducting such other studies,
analysis and investigations particularly of the banking
industry, as it deemed appropriate, the material portion of
which is described below.
Scott & Stringfellow also took into account its assessment of general
economic, market and financial conditions and its experience in other
transactions, as well as its experience in securities valuations and knowledge
of the commercial banking industry generally.
Scott & Stringfellow also has discussed with members of Metro-County's
and Southern Financial's management past and current business operations, the
background of the merger, the reasons and basis for the merger, results of
regulatory examinations, and the business and future prospects of Metro-County
and Southern Financial individually and as a combined entity, as well as other
matters relevant to its inquiry.
Scott & Stringfellow relied without independent verification upon the
accuracy and completeness of all of the financial and other information reviewed
by it and discussed with it for purposes of its opinion. With respect to
financial forecasts reviewed by Scott & Stringfellow in rendering its opinion,
Scott & Stringfellow assumed that such financial forecasts were reasonably
prepared on the basis reflecting the best currently available estimates and
judgment of the managements of Metro-County and Southern Financial as to the
future financial performance of Metro-County and Southern Financial,
respectively. Scott & Stringfellow did not make an independent evaluation or
appraisal of the assets or liabilities of Metro-County and Southern Financial
nor was it furnished with any such appraisal.
In connection with rendering its April 24, 2002 opinion, Scott &
Stringfellow performed a variety of financial analyses. Scott & Stringfellow
evaluated the financial terms of the transaction using standard valuation
methods, including stock trading history, comparable acquisition analysis,
contribution analysis, pro forma merger analysis, dividend discount analysis,
ability to pay analysis and comparable company analysis, among others. The
following is a summary of the material analyses presented by Scott &
Stringfellow to the Metro-County board of directors on April 24, 2002, in
connection with its fairness opinion dated as of such date.
SUMMARY OF PROPOSAL. Scott & Stringfellow reviewed the terms of the
proposed transaction, including the consideration and the implied aggregate
transaction value. Based on Southern Financial's closing stock price of $27.05
on April 11, 2002 Scott & Stringfellow calculated an implied transaction value
per share of Metro-County common stock of $7.25, and an implied total
transaction value of approximately $17.0 million. Scott & Stringfellow
calculated the premium over the closing price of Metro-County common stock on
April 11, 2002, price to book and price to trailing twelve months' earnings
multiple for Metro-County based on such implied total transaction value. This
analysis yielded a premium over the closing price of Metro-County common stock
on April 11, 2002 of 37.3%, a price to book value multiple of 2.25x and a price
to trailing twelve months' earnings multiple of 60.4x.
COMPARABLE ACQUISITION ANALYSIS. Scott & Stringfellow reviewed 19
merger transactions announced from January 1, 2001 to April 23, 2002 involving
commercial banking institutions nationwide with assets between $75 and $125
million ("Nationwide Transactions") and 7 merger transactions announced from
July 1, 2000 to April 23, 2002 involving commercial banking institutions in
Virginia ("Virginia Transactions"). Scott & Stringfellow compared the price to
book value, price to tangible book value and price to last twelve months'
earnings for such Nationwide Transactions and Regional Transactions to the
proposed merger at announcement.
<Table>
<Caption>
SOUTHERN FINANCIAL/ NATIONWIDE VIRGINIA
METRO-COUNTY TRANSACTIONS TRANSACTIONS
------------------- ------------ ------------
Deal Price/Book Value 2.25x 1.84x 2.26x
Deal Price/Tangible Book 2.25x 1.85x 2.34x
Deal Price/LTM Earnings 60.40x 16.80x 19.54x
</Table>
-27-
PRO FORMA MERGER ANALYSIS. Scott & Stringfellow analyzed certain pro
forma effects of the merger using the 2003 earnings estimates for Metro-County
and Southern Financial. In addition, Scott & Stringfellow utilized cost savings
assumptions ranging from 5% to 30% of Metro-County's non-interest expense. Such
range of cost savings was based upon Scott & Stringfellow's judgment and
experience in analyzing similar bank merger transactions. This analysis
indicated that the transaction would be slightly dilutive to Southern
Financial's 2003 earnings per share under the 5% cost savings scenario and would
be slightly accretive to Southern Financial's 2003 earnings per share under the
30% cost savings scenario. The merger would be accretive to Southern Financial's
book value per share. The actual results achieved by Southern Financial may vary
from projected results.
<Table>
<Caption>
Cost Savings
------------------------------------
5% 30%
--------------- --------------
2003 EPS Accretion (Dilution) (4.8%) 0.1%
2003 Cash EPS Accretion (Dilution) (1.7%) 3.1%
Book Value Accretion 5.4% 5.4%
</Table>
DIVIDEND DISCOUNT ANALYSIS. Scott & Stringfellow performed a dividend
discount analysis to determine a range of present values per share of
Metro-County common stock assuming Metro-County continued to operate as a
stand-alone entity. To determine a projected dividend stream, Scott &
Stringfellow assumed a dividend payout equal to 40% of Metro-County's projected
net income. The net income projections were grown using an earnings growth rate
of 77% for 2002, 28% for 2003, 20% for 2004, 15% for 2005, and 10% for 2006. The
"terminal value" of Metro-County common stock at the end of the period was
determined by applying a range of price-to-earnings multiples (16.0x to 18.0x)
to year 2006 projected earnings. The dividend stream and terminal values were
discounted to present value using discount rates of 11% to 13%, which Scott &
Stringfellow viewed as the appropriate discount rate range for a commercial bank
with Metro-County's risk characteristics. Based upon the above assumptions, the
stand-alone value of Metro-County common stock ranged from approximately $4.00
to $5.00 per share.
<Table>
<Caption>
Terminal/Price / Earnings Multiple
Discount
Rate 16.0x 16.5x 17.0x 17.5x 18.0x
- -------- ------ ------ ------ ------ ------
11.0% $ 4.41 $ 4.53 $ 4.65 $ 4.78 $ 4.90
11.50% $ 4.31 $ 4.43 $ 4.55 $ 4.67 $ 4.79
12.00% $ 4.22 $ 4.34 $ 4.46 $ 4.57 $ 4.69
12.50% $ 4.13 $ 4.25 $ 4.36 $ 4.48 $ 4.59
13.00% $ 4.04 $ 4.16 $ 4.27 $ 4.38 $ 4.50
</Table>
ANALYSIS OF SELECTED COMPARABLE COMPANIES. Scott & Stringfellow
analyzed the performance and financial condition of Southern Financial relative
to a group of 14 Virginia commercial banks consisting of American National
Bankshares, C&F Financial Corporation, Community Bank of Northern Virginia,
Eastern Virginia Bankshares, FNB Corporation, Independent Community Bankshares,
National Bankshares, Old Point Financial Corporation, Peoples National Bank,
Resource Bankshares Corporation, TowneBank, Union Bankshares, Virginia Commerce
Bancorp and Virginia Financial Group (the "Bank Peer Group"). The financial
ratios shown in the table below are as of March 31, 2002; the market price
multiples are based on market prices as of April 11, 2002.
-28-
<Table>
<Caption>
SOUTHERN BANK PEER
FINANCIAL GROUP AVERAGE
------------- ------------------
Last 12 Months Net Interest Margin 4.14% 4.18%
Last 12 Months Efficiency Ratio 47.49% 62.24%
Last 12 Months Return on Avg. Assets 1.18% 1.15%
Last 12 Months Return on Avg. Equity 17.02% 13.30%
Tangible Equity / Assets 7.85% 8.41%
Equity / Assets 8.19% 8.93%
Nonperforming Assets / Assets 0.24% 0.27%
Reserves / Nonperforming Assets 402.88% 417.63%
Market Price / Last 12 Months Earnings 11.51x 15.36x
Market Price / 2002 Estimated Earnings 13.53x 12.58x
Market Price / Book Value 1.79x 1.91x
</Table>
OTHER ANALYSES. Scott & Stringfellow also reviewed, among other things,
selective investment research reports on, and earnings estimates for,
Metro-County and Southern Financial and analyzed available information regarding
the ownership of Southern Financial common stock. In addition, Scott &
Stringfellow prepared an overview of Southern Financial's business, prepared a
summary of the historical financial performance of Southern Financial,
summarized Southern Financial's financial goals and objectives, and, based on
publicly available information, analyzed Southern Financial's deposit market
share and branch presence in Virginia.
In connection with its opinion dated as of the date of this proxy
statement-prospectus, Scott & Stringfellow performed procedures to update, as
necessary, certain of the analyses described above and reviewed the assumptions
on which such analyses described above were based and the factors considered in
connection therewith.
The summary set forth above includes all the material factors
considered by Scott & Stringfellow in developing its opinion. The preparation of
a fairness opinion involves various determinations as to the most appropriate
and relevant methods of financial analysis and the application of these methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, notwithstanding the separate
factors discussed above, Scott & Stringfellow believes that its analyses must be
considered as a whole and that selecting portions of its analysis and of the
factors considered by it, without considering all analyses and factors, could
create an incomplete view of the evaluation process underlying its opinion. As a
whole, these various analyses contributed to Scott & Stringfellow's opinion that
the exchange ratio is fair from a financial point of view to Metro-County's
shareholders.
Pursuant to an the engagement letter between Metro-County and Scott &
Stringfellow, in exchange for its services, Scott & Stringfellow will receive a
fee equal to 1.50% of the total market value of the consideration received by
Metro-County shareholders, which equates to a fee of approximately $250,000 and
is contingent and payable at closing. In the ordinary course of its business,
Scott & Stringfellow may actively trade the common stock of Metro-County for its
own account or the account of its customers, and, accordingly, may at any time
hold a long or short position in the Metro-County common stock.
EXCHANGE OF METRO-COUNTY STOCK CERTIFICATES
As soon as practicable after the effective time of the merger, Southern
Financial's transfer and exchange agent, Chase Mellon Shareholder Services, will
mail to each Metro-County shareholder a form letter of transmittal, together
with instructions for the exchange of such holder's Metro-County stock
certificates for the cash payment and a certificate representing the shares of
Southern Financial common stock to which he or she is entitled.
-29-
You should not send in your certificates until you receive a letter of
transmittal form and instructions.
After surrendering to the exchange agent one or more certificates for
Metro-County common stock, together with a properly completed letter of
transmittal, the exchange agent will issue and mail to the holder a certificate
representing the number of whole shares of Southern Financial common stock and
the cash payment without any interest thereon to which the holder is entitled.
The exchange agent may issue a certificate for Southern Financial common stock
in a name other than the name in which the surrendered certificate is registered
only if (1) the certificate surrendered is properly endorsed or is otherwise in
proper form for transfer and (2) the person requesting the issuance of the
certificate either pays to the exchange agent any transfer or other taxes
required by the issuance of a certificate for shares in a name other than the
registered holder of the certificate surrendered or establishes to the
satisfaction of the exchange agent that the taxes have been paid or are not due.
All Southern Financial common stock issued in the merger will be deemed
issued as of the effective time of the merger. No dividends with respect to the
Southern Financial common stock with a record date after the effective time will
be paid to the former shareholders of Metro-County entitled to receive
certificates for shares of Southern Financial common stock until such
shareholders surrender their certificates representing shares of Metro-County
common stock. After the certificates are surrendered, Southern Financial will
pay the shareholder of record any dividends, without any interest thereon, with
respect to the shares of Southern Financial common stock represented by the
certificate which were paid after the effective time of the merger but withheld.
If your certificate for Metro-County common stock is lost, stolen or destroyed,
the exchange agent will issue the shares of Southern Financial common stock upon
your submission of an affidavit by you claiming the certificate to be lost,
stolen or destroyed and the posting of a bond in such amount as Southern
Financial may direct as indemnity against any claim that may be made against
Southern Financial with respect to the certificate.
Upon completion of the merger, you will cease to have any rights as a
shareholder of Metro-County. Until so surrendered, each certificate will be
deemed for all corporate purposes to represent and evidence solely the right to
receive the consideration to be paid pursuant to the merger agreement. Neither
Southern Financial, Metro-County, the exchange agent nor any other party will be
liable to any holder of certificates for any amount paid to a public official
pursuant to any applicable abandoned property, escheat or similar law.
EFFECTIVE TIME OF THE MERGER
Subject to the conditions to complete the merger, the merger will
become effective when articles of merger reflecting the merger become effective
with the Virginia State Corporation Commission. The merger will be completed on
a date and at a time we specify after the conditions to completion of the merger
have been satisfied or waived. Although we anticipate that the merger will
become effective during the third quarter of 2002, delays may occur.
We cannot assume that the necessary shareholder and regulatory
approvals will be obtained or that the other conditions to the merger can or
will be satisfied. Either of our boards of directors may terminate the merger
agreement if the merger is not completed by April 25, 2003, unless it is not
completed because of the willful breach of the merger agreement by the party
seeking termination.
CONDUCT OF BUSINESS PENDING EFFECTIVE TIME
The merger agreement requires Metro-County to maintain the general
character of its business and to conduct its business prior to the merger only
in the ordinary course consistent with past practices and prudent banking
principles.
Without the written consent of Southern Financial, Metro-County and its
subsidiaries may not, among other things:
o make any loans or other extensions of credit in excess of
$250,000 to any borrower, with certain exceptions;
-30-
o issue, sell or obligate itself to issue or sell any shares of
its capital stock or securities convertible into its capital
stock, except that Metro-County may issue shares of its common
stock upon the exercise of Metro-County stock options prior to
completion of the merger;
o open, close, acquire or sell or agree to open, close, acquire
or sell any branch office or any deposit liabilities;
o enter into, amend or terminate any material agreement,
contract or commitment, except in accordance with prudent
banking practices;
o acquire or sell or otherwise dispose of material amount assets
or liabilities other than in the ordinary course of business
consistent with prudent banking practices;
o pay any dividends other than regular periodic cash dividends
paid in the ordinary course of business and consistent with
past practices;
o amend or change any provision of its articles of incorporation
or bylaws;
o sell, transfer, convey or otherwise dispose of any real
property, including other real estate owned;
o foreclose upon or otherwise acquire real property prior to the
receipt and approval of Southern Financial of a Phase I
environmental review of such property;
o establish a new subsidiary or affiliate;
o make any material change in its interest rate risk profile;
o grant any severance or termination pay or enter into any
employment or related agreements;
o materially deviate from policies and procedures existing as of
the date of the merger agreement with respect to
classification of assets, allowance for loan losses or accrual
of interest on assets except as otherwise required by the
merger agreement;
o excluding deposits, certificates of deposit, Federal Home Loan
Bank advances and borrowings consistent with past practices,
undertake any additional borrowings in excess of 90 days;
o modify an outstanding loan or acquire any loan participation
unless such modification is made in the ordinary course of
business, consistent with past practices;
o make any capital expenditure which would exceed an aggregate
amount of $10,000, other than an expenditure in the amount of
$15,000 for the installation of the Automated Teller Machine
to be located at 3003 West Cary Street in Richmond, Virginia;
or
o increase or decrease the rate of interest paid on deposit
accounts other than in accordance with the deposit pricing
guidelines agreed to between Southern Financial and
Metro-County.
We refer you to the merger agreement for additional restrictions on the
conduct of the business of Metro-County pending the merger.
NO SOLICITATION
In addition to the restrictions on Metro-County outlined above, until
the merger is completed or the merger agreement is terminated, Metro-County has
agreed not to take any of the following actions:
o entertain, solicit or encourage any inquiries with respect to
any merger or other acquisition proposal; or
o furnish information to or negotiate with any other party in
furtherance of any merger or other acquisition proposal.
However, Metro-County may furnish information to third parties and
participate in discussions or negotiations with third parties relating to other
merger or acquisition proposals if Metro-County's board determines, upon advice
of counsel, that the failure to do so would constitute a breach of the fiduciary
duties of the Metro-County board to shareholders. Metro-County agreed to
promptly notify Southern Financial of any unsolicited acquisition proposals and
provide reasonable details regarding the nature of the proposed transaction.
-31-
CONDITIONS TO COMPLETION OF THE MERGER
The merger agreement contains a number of conditions to our respective
obligations to complete the merger which must be satisfied as of the closing
date, including, but not limited to, the following:
o receipt of all required regulatory approvals in a manner that
does not impose any restrictions on the operations of Southern
Financial Bank which are unacceptable to Southern Financial;
o the holders of a majority of the outstanding shares of
Metro-County common stock approve the merger agreement;
o the shares of Southern Financial common stock to be issued to
Metro-County shareholders shall have been authorized for
listing on the Nasdaq National Market;
o Stafford M. White, Chairman and Chief Executive Officer of
Metro-County, shall have entered into a non-compete agreement
with Southern Financial Bank;
o the registration statement of which this proxy
statement-prospectus forms a part shall have become effective
and no stop order suspending the effectiveness of the
registration statement shall be in effect and no proceedings
for that purpose shall have been initiated and continuing or
threatened by the Securities and Exchange Commission;
o all representations and warranties of Metro-County (in the
case of Southern Financial's closing obligation) or Southern
Financial (in the case of Metro-County's closing obligation)
must be true in all material respects as of the date of the
merger agreement and the date the merger becomes effective;
o absence of a material adverse change in the financial
condition, results of operation or business of Metro-County
(in the case of Southern Financial's closing obligation) or
Southern Financial and its subsidiaries (in the case of
Metro-County's closing obligation);
o the performance or compliance in all material respects by
Metro-County (in the case of Southern Financial's closing
obligation) or Southern Financial (in the case of
Metro-County's closing obligation) with all covenants and
conditions required by the merger agreement to be performed or
complied with prior to the date the merger becomes effective;
o we must each receive a written opinion of Bracewell &
Patterson, L.L.P. as to the tax-free nature of the exchange of
shares; and
o we must each receive a written opinion of the other company's
counsel regarding the enforceability of the merger agreement,
proper authorization of the merger and other corporate and
related matters.
In addition to the conditions listed above, Southern Financial's
obligation to complete the merger is subject to the satisfaction of the
following conditions:
o each director and executive officer of Metro-County designated
as an affiliate shall have delivered to Southern Financial
Bank an executed copy of an affiliate agreement; and
o each director and certain officers of Metro-County shall have
executed a release agreement.
Any condition to the consummation of the merger, except the required
shareholder and regulatory approvals, and the absence of an order or ruling
prohibiting the merger, may be waived in writing by the party to the merger
agreement entitled to the benefit of such condition.
-32-
ADDITIONAL AGREEMENTS
The merger agreement contains additional agreements made by each party,
some of which are substantially reciprocal, the most significant of which
include:
o we each agreed to take all reasonable action to aid and assist
in the consummation of the merger and the transactions
contemplated thereby and to use our best efforts to take or
cause to be taken all other actions necessary, proper or
advisable to consummate the transactions contemplated by the
merger agreement, including such actions which are necessary,
proper or advisable in connection with filing applications
with, or obtaining approvals from all regulatory authorities
having jurisdiction over the transactions contemplated by the
merger agreement;
o we agreed, upon request, to provide each other all information
concerning ourselves and our subsidiaries, directors, officers
and shareholders and other matters as may be necessary or
advisable in connection with this proxy statement-prospectus,
or any other filing necessary in connection with the merger;
o Metro-County agreed to give Southern Financial access to all
of its properties, books and records and to provide
information about its business, properties and personnel, and
Southern Financial agreed to keep that information
confidential;
o we agreed that neither party will, directly or indirectly,
before or after the consummation of the merger or termination
of the merger agreement, disclose any confidential information
other than in connection with the regulatory notice and
application process, or use such confidential information for
its own purposes or for the benefit of any person, firm,
corporation, association or other entity under any
circumstances;
o Southern Financial has agreed that for a period of six years
after completion of the merger it will indemnify and hold
harmless any person who has indemnification rights from
Metro-County for liabilities from their acts or omissions in
those capacities occurring prior to completion of the merger
to the fullest extent permitted by Virginia law and
Metro-County's articles of incorporation or bylaws;
o Southern Financial agreed that for a period of three years
after completion of the merger it will maintain directors'
liability insurance covering the persons presently covered by
directors' liability policies of Metro-County;
o Southern Financial agreed that it will form a Richmond area
advisory board and all directors of Metro-County will be
invited to serve on the advisory board. The advisory board
members will be compensated for their service in accordance
with Southern Financial's standard fee schedule for service as
an advisory director in effect from time to time;
o we agreed that neither party or any of their respective
subsidiaries, directors or officers shall, directly or
indirectly, purchase or sell, or bid to purchase or offer to
sell, any shares of Southern Financial securities for a period
of 20 trading days ending on and including the fifth trading
day preceding the effective time of the merger;
o employees of Metro-County who continue employment with
Southern Financial or any of its subsidiaries upon completion
of the merger will be entitled to participate in the employee
benefit plans and programs maintained by Southern Financial
and its subsidiaries. Southern Financial will recognize such
employees' prior service with Metro-County for all purposes
under Southern Financial's employee benefit plans and programs
(other than stock option plans); and
o Metro-County has agreed to allow Southern Financial to
designate one representative who will be invited to attend the
Metro-County loan committee meetings held prior to completion
of the merger. Such representative will have no voting rights
and may be excluded from certain sessions.
-33-
REPRESENTATIONS AND WARRANTIES
In the merger agreement, we have made certain representations to each
other. The more significant of these relate to:
o corporate organization and operation;
o capitalization;
o corporate authority;
o financial statements and reports;
o litigation;
o laws and regulatory filings;
o employee benefit plans;
o tax matters;
o loans;
o in the case of Metro-County, certain contracts and
commitments;
o insurance; and
o environmental matters.
FINANCIAL INTERESTS OF METRO-COUNTY DIRECTORS AND OFFICERS IN THE MERGER
In considering the recommendations of the Metro-County board of
directors to vote for the proposal to approve the merger agreement, you should
be aware that certain directors and officers of Metro-County may have interests
in the merger that are in addition to, or different from, their interests as
Metro-County shareholders. The Metro-County board of directors was aware of
these interests and considered them in approving the merger agreement.
Non-compete Agreement. Upon completion of the merger, Southern
Financial will enter into a confidential information, non-solicitation and
non-competition agreement with Stafford M. White Jr., Metro-County's Chairman of
the Board and Chief Executive Officer. In consideration of the covenants agreed
to by Mr. White, he will receive the following:
o a payment of $165,000 payable over the first 12 months
following the merger;
o beginning on the first anniversary of the merger, an annual
fee of $40,000 for his service as a member of the advisory
board for the Richmond, Virginia area for the remaining two
year period following the merger; and
o ability to participate in Southern Financial's benefit plans
for a one year period following the merger.
Mr. White will also receive certain disability and survivor benefits.
If Mr. White dies or becomes disabled, he and/or his beneficiaries shall receive
the remainder of the payments listed above and board fees for which he would
have been entitled under the agreement but for his death or disability. He
and/or his dependents will also be entitled to continue to participate in
Southern Financial's benefit plans for the remainder of the three year period
following the merger.
-34-
For three years following completion of the merger, Mr. White is
prohibited from:
o competing with Southern Financial within a 100 mile radius of
Richmond, Virginia or otherwise owning, operating or becoming
affiliated with or serving as an officer, director or
shareholder in any business competing with Southern Financial
(excluding ownership of not more than 1% of a publicly traded
financial institution);
o soliciting employment or employing employees of Southern
Financial Bank and former employees of the bank within one
year of their employment with the bank; and
o soliciting customers or third party business partners of
Southern Financial to cease or reduce their business
relationships with Southern Financial.
In addition, under the non-compete agreement, Mr. White is prohibited
from disclosing or improperly using any confidential information, former
employee information or third party information.
Employee Arrangements. Southern Financial shall use its commercially
reasonable efforts to continue the employment of James R. Black, Tracy S.
Jackson and W. Darlene Stone, each of whom is a senior officer of Metro-County
in positions at Southern Financial Bank similar to their current positions with
Metro-County. If Southern Financial is unable to continue an officer's
employment after the merger, that employee may terminate his or her employment
and receive a lump sum payment equal to six months' salary.
Advisory Board Service. Southern Financial has agreed to form an
advisory board for the Richmond, Virginia area. Each Metro-County director will
be invited to join the advisory board. As a member of the advisory board, each
person will be compensated in accordance with Southern Financial's standard
schedule of fees for service as an advisory board member in effect from time to
time.
Indemnification. Southern Financial has agreed, for a period of six
years after completion of the merger, to indemnify and hold harmless any person
who has rights to indemnification from of Metro-County from their acts or
omissions in those capacities occurring prior to the merger to the fullest
extent permitted by Virginia law and Metro-County's articles of incorporation or
bylaws.
Insurance. Southern Financial agreed that for a period of three years
after completion of the merger it will maintain directors' liability insurance
covering the persons presently covered by directors' liability policies of
Metro-County.
EMPLOYEE MATTERS
All employees of Metro-County who continue employment with Southern
Financial Bank after the effective time will be eligible to participate in the
employee benefit plans and programs of Southern Financial and Southern Financial
Bank. Southern Financial will credit such employees for their length of service
with Metro-County for all purposes under each of the employee benefit plans and
programs, except stock option plans.
AMENDMENT AND TERMINATION
Mutual Consent. The merger agreement may be terminated and the merger
abandoned at any time upon the mutual consent of Southern Financial and
Metro-County.
By Either Party. The merger agreement may be terminated and the merger
abandoned at any time prior to the effective date by either Southern Financial
or Metro-County if:
o any court of competent jurisdiction or other federal or state
governmental body shall have issued an order, decree, or
ruling or taken any other action restraining, enjoining or
otherwise prohibiting the merger and such order, decree,
ruling or other action shall have been final and
non-appealable;
-35-
o any of the transactions contemplated by the merger agreement
are disapproved by any regulatory authority or other persons
whose approval is required to consummate any of such
transactions;
o the approval of the merger agreement by Metro-County
shareholders is not obtained by reason of the failure to
obtain the required vote at the special meeting;
o the merger shall not have become effective by April 25, 2003
and the party exercising its termination right is not then in
default under the merger agreement; or
o if any of the conditions to the respective obligations of
Southern Financial, Southern Financial Bank or Metro-County
have not been met or waived by the other party.
By Metro-County. The merger agreement may be terminated and the merger
abandoned at any time by Metro-County if:
o Southern Financial fails to comply in any material respect
with any of its covenants or agreements or any of its
representations or warranties shall be defective in any
material respect;
o any of the conditions to the obligations of Metro-County to
complete the merger have not been met or waived by
Metro-County;
o there is a material adverse change in the assets, business or
financial condition of Southern Financial; or
o the average of the daily closing sales prices for Southern
Financial common stock for the 20 successive trading days
ending on and including the fifth trading day preceding the
effective time of the merger is less than $20.80 per share;
provided, however, that Southern Financial has the right to
nullify Metro-County's termination right by adjusting the
exchange ratio to a number of shares equal to $3.98 divided by
the average trading price.
By Southern Financial. The merger agreement may be terminated and the
merger abandoned at any time by Southern Financial if:
o Metro-County fails to comply in any material respect with any
of its covenants or agreements or any of its representations
or warranties shall be defective in any material respect;
o any of the conditions to the obligations of Southern Financial
to complete the merger have not been met or waived by Southern
Financial; or
o there is a material adverse change in the assets, business or
financial condition of Metro-County.
Remedies. In the event of the termination of the merger agreement
without breach by any party, the merger agreement will be void and have no
effect, without liability on the part of any party or the directors, officers or
shareholders of any party, except as specifically contemplated in the merger
agreement.
-36-
If the merger agreement is terminated by either party because of a
willful and material breach by the other of any representation, warranty,
covenant, undertaking or restriction contained in the merger agreement and the
terminating party has not been in breach (in any material respect) of the merger
agreement, then the breaching party shall pay all costs and expenses of the
other party, including fees and expenses of consultants, investment bankers,
accountants, counsel, printers and persons involved in the transactions
contemplated by the merger agreement, including the preparation of this proxy
statement-prospectus; provided, however, that Southern Financial shall only be
responsible for Metro-County's fees and expenses up to $250,000 and Metro-County
shall be responsible for Southern Financial's fees and expenses up to $100,000.
EXPENSES
Except as otherwise noted in the preceding paragraph, Southern
Financial and Metro-County will each pay their own expenses in connection with
the merger.
NASDAQ STOCK MARKET LISTING
Southern Financial has agreed to use its best efforts to cause the
shares of Southern Financial common stock to be issued in the merger to be
approved for quotation on the Nasdaq National Market. The obligations of the
parties to complete the merger are subject to approval for quotation of such
shares on the Nasdaq National Market.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the anticipated
material United States federal income tax consequences of the merger to
Metro-County shareholders who hold Metro-County common stock as a capital asset.
This discussion is based upon the Internal Revenue Code, regulations promulgated
by the United States Treasury Department, court cases and administrative rulings
in each case as in effect as of the date hereof and all of which are subject to
change at any time, possibly with retroactive effect.
The obligations of the parties to complete the merger are conditioned
upon the receipt by Southern Financial and Metro-County of an opinion of counsel
from Bracewell & Patterson, L.L.P. as to the anticipated United States federal
income tax consequences of the merger, but specifically excluding the following:
o state, local, foreign or other federal tax consequences of the
merger not specifically addressed in the opinion;
o federal income tax consequences to Metro-County shareholders
who are subject to special rules under the Internal Revenue
Code, such as foreign persons, tax-exempt organizations,
insurance companies, financial institutions, dealers in
securities and other persons who do not own such stock as a
capital asset;
o federal income tax consequences affecting shares of
Metro-County common stock acquired upon the exercise of stock
options, similar derivative securities or otherwise as
compensation; and
o the federal income tax consequences to holders of options or
other rights to acquire shares of Metro-County common stock
and Southern Financial common stock or persons who hold their
Metro-County common stock as part of a straddle, hedge or
conversion transaction.
Bracewell & Patterson, L.L.P. will render its tax opinion to Southern
Financial and Metro-County, respectively, on the basis of facts, representations
and assumptions set forth or referred to in such opinion which are consistent
with the state of facts existing at the effective time of the merger. In
rendering its tax opinion, such counsel may require and rely upon
representations and covenants, including those contained in certificates of
officers of Southern Financial and Metro-County, reasonably satisfactory in form
and substance to such counsel. An opinion of counsel represents counsel's best
legal judgment, but has no binding effect or official status of any kind, and no
assurance can be given that contrary positions will not be taken by the IRS or a
court considering the issues. We have not requested nor do we intend to request
a ruling from the IRS as to the tax consequences of the merger.
-37-
The opinions to be rendered are that, for United States federal income
tax purposes:
o the merger will constitute a reorganization within the meaning
of Sections 368(a) and 368(a)(2)(D) of the Internal Revenue
Code and Southern Financial, Southern Financial Bank and
Metro-County will each be a party to the transaction;
o except as discussed below, no gain or loss will be recognized
by holders of Metro-County common stock upon receipt of
Southern Financial common stock except for cash received;
o a Metro-County shareholder who receives both Southern
Financial common stock and cash (other than cash in lieu of a
fractional interest in Southern Financial common stock) in the
merger will recognize gain equal to the lesser of (a) the
amount of cash received and (b) the amount by which the sum of
the amount of cash received and the value of the Southern
Financial common stock received exceeds the shareholders'
adjusted tax basis in the shares of Metro-County common stock
exchanged in the merger;
o any gain will generally be capital gain unless the
shareholder's exchange of Metro-County common stock for cash
and Southern Financial common stock, under each such
shareholder's particular facts and circumstances, is deemed to
have the effect of a dividend distribution and not a
redemption treated as an exchange under the principles of
Section 302 of the Code;
o if a shareholder's tax basis in shares of Metro-County common
stock exceeds the sum of the amount of cash received and the
value of the Southern Financial common stock received in
exchange for the shares of Metro-County common stock, such
shareholder will not recognize loss;
o a shareholder's aggregate tax basis in the shares of Southern
Financial common stock received pursuant to the merger will be
equal to the aggregate tax basis of the shares of Metro-County
common stock surrendered in exchange therefor, increased by
the amount of gain recognized and reduced by the amount of
cash received;
o the holding period of the Southern Financial stock common
received by Metro-County shareholders in the merger will
include the holding period of the shares of Metro-County
common stock surrendered in exchange therefor; and
o a shareholder who receives cash in lieu of a fractional share
of Southern Financial common stock in the merger will be
treated for federal income tax purposes as if the fractional
share of Southern Financial common stock had been received and
then redeemed for cash by Southern Financial. A shareholder
will recognize a capital gain or loss in an amount equal to
the difference between the cash received and the tax basis
allocable to the fractional share interest, unless such
payment, under each such shareholder's particular facts and
circumstances, is deemed to have the effect of a dividend
distribution and not a redemption treated as an exchange under
the principles of Section 302 of the Internal Revenue Code.
Capital gain or loss recognized by a Metro-County shareholder on the
share exchange will be long-term capital gain or loss if the holding period of
such share, as determined above, exceeds one year. In the case of individuals,
the maximum federal income tax rate applicable to long-term capital gains
generally is 20%.
Unless an exemption applies, under the backup withholding rules of
Section 3406 of the Internal Revenue Code, the exchange agent shall be required
to withhold, and will withhold, 31% of any cash payments to which a Metro-County
shareholder is entitled pursuant to the merger, unless the shareholder provides
the appropriate form. a holder should complete and sign the substitute Form W-9
enclosed with the letter of transmittal sent by the exchange agent. Unless an
applicable exemption exists and is proved in a manner satisfactory to the
exchange agent, this completed form provides the information, including the
holder's taxpayer identification number, and certification necessary to avoid
backup withholding.
-38-
THE FOREGOING IS A SUMMARY DISCUSSION OF MATERIAL FEDERAL INCOME TAX
CONSEQUENCES OF THE MERGER. THE DISCUSSION IS INCLUDED FOR GENERAL INFORMATION
PURPOSES ONLY AND MAY NOT APPLY TO A PARTICULAR METRO-COUNTY SHAREHOLDER IN
LIGHT OF SUCH SHAREHOLDER'S PARTICULAR CIRCUMSTANCES. METRO-COUNTY SHAREHOLDERS
SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE PARTICULAR TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICATION OF STATE, LOCAL AND FOREIGN TAX
LAWS AND POSSIBLE FUTURE CHANGES IN FEDERAL INCOME TAX LAWS AND THE
INTERPRETATION THEREOF, WHICH CAN HAVE RETROACTIVE EFFECTS.
ACCOUNTING TREATMENT
Under generally accepted accounting principles, it is anticipated that
the merger will be accounted for under the purchase method of accounting. The
assets and liabilities of Metro-County, as well as identifiable intangible
assets arising from the purchase transaction, will be reflected in the
consolidated financial statements of Southern Financial based upon the estimated
fair values as of the effective time of the merger. Results of operations will
be reflected in the consolidated financial statements of Southern Financial for
all periods subsequent to the effective time of the merger. The excess purchase
price over the fair market value of assets is recorded as goodwill and is not
amortized. Instead, goodwill is evaluated annually, or more frequently if
impairment indicators arise, for impairment.
RESTRICTIONS ON RESALES OF SOUTHERN FINANCIAL COMMON STOCK
Southern Financial common stock to be issued in the merger will be
registered under the Securities Act of 1933. Therefore, the Southern Financial
common stock to be issued to Metro-County shareholders in the merger will be
freely transferable by Metro-County shareholders who are not considered to be
"affiliates" of either of us. "Affiliates" generally are defined as persons or
entities who control, are controlled by or are under common control with either
of us at the time of the Metro-County special meeting and generally include
executive officers, directors and beneficial owners of 10% or more of the common
stock.
If you are considered an affiliate of Metro-County or become an
affiliate of Southern Financial after the merger, you may resell the shares of
Southern Financial common stock acquired in connection with the merger only
pursuant to an effective registration statement under the securities laws,
pursuant to Rule 145 of the Securities and Exchange Commission's rules, or in
transactions otherwise exempt from registration under the securities laws. Under
Rule 145, during the first calendar year after the merger becomes effective,
affiliates of Metro-County may publicly resell the Southern Financial common
stock they receive in the merger but only within certain limitations as to the
number of shares of Southern Financial common stock they can sell in any
three-month period and as to the manner of sale. After the one-year period,
affiliates of Metro-County who are not affiliates of Southern Financial may
resell their shares without restriction. Southern Financial must continue to
satisfy its reporting requirements under the Securities Exchange Act of 1934, in
order for affiliates to resell, under Rule 145, shares of Southern Financial
common stock received in the merger. Southern Financial is not obligated and
does not intend to register for resale the shares issued to affiliates of
Metro-County.
Pursuant to the merger agreement, each affiliate of Metro-County will
sign a written agreement to the effect that he will not offer or sell or
otherwise dispose of any of the shares of Southern Financial common stock issued
to him in the merger in violation of the Securities Act.
-39-
REGULATORY APPROVALS
The merger must be approved by the Federal Reserve and the Bureau of
Financial Institutions of the Virginia Stock Corporation Commission ("VBFI"). On
June 10, 2002, Southern Financial filed an application with the Federal
Reserve Bank of Richmond and the VBFI to obtain prior approval of the merger. It
is expected that the Federal Reserve and the VBFI will approve the application
in the third quarter of 2002.
A period of 15 to 30 days must expire following approval by the Federal
Reserve during which time the Department of Justice may file objections to the
merger under the federal antitrust laws. While Metro-County and Southern
Financial believe that the likelihood of such action is remote, there can be no
assurance that the Department of Justice will not initiate such a proceeding, or
if such a proceeding is initiated, as to the result of any such challenge.
The approval of any application merely implies satisfaction of
regulatory criteria for approval, which does not include review of the merger
from the standpoint of the adequacy of the consideration to be received by, or
fairness to, shareholders. Regulatory approvals do not constitute an endorsement
or recommendation of the proposed merger.
Southern Financial and Metro-County are not aware of any governmental
approvals or compliance with banking laws and regulations that are required for
the merger to become effective other than those described above. We cannot
assure you that any required approval or action can be obtained or taken prior
to the special meeting of Metro-County. The receipt of all necessary regulatory
approvals is a condition to effecting the merger.
-40-
COMPARISON OF RIGHTS OF SHAREHOLDERS
OF SOUTHERN FINANCIAL AND METRO-COUNTY
The rights of Metro-County shareholders under the articles of
incorporation and bylaws of Metro-County will differ in some respects from the
rights Metro-County shareholders will have as shareholders of Southern Financial
under the articles of incorporation and bylaws of Southern Financial. Copies of
Southern Financial's articles of incorporation and bylaws have been previously
filed by Southern Financial with the Securities and Exchange Commission. Copies
of Metro-County's articles of incorporation and bylaws are available upon
written request from Metro-County.
Certain differences between the provisions contained in the Virginia
Stock Corporation Act, Metro-County's articles of incorporation and bylaws, and
Southern Financial's articles of incorporation and bylaws as such differences
may affect the rights of shareholders are summarized below. The summary set
forth below is not intended to be complete and is qualified by reference to
Virginia law, the Metro-County articles of incorporation, the Metro-County
bylaws, the Southern Financial articles of incorporation and the Southern
Financial bylaws.
SUMMARY OF MATERIAL DIFFERENCES BETWEEN CURRENT RIGHTS OF
METRO-COUNTY SHAREHOLDERS AND RIGHTS THOSE PERSONS
WILL HAVE AS SHAREHOLDERS OF SOUTHERN FINANCIAL FOLLOWING THE MERGER
<Table>
<Caption>
METRO-COUNTY SOUTHERN FINANCIAL
CAPITALIZATION: Metro-County's articles of Southern Financial's articles of
incorporation authorize the issuance incorporation authorize the issuance of
of up to 3,000,000 shares of common up to 20,000,000 shares of common stock,
stock, par value $4.00. par value $0.01 and 1,000,000 shares of
preferred stock, par value $0.01.
CORPORATE GOVERNANCE: The rights of Metro-County The rights of Southern Financial
shareholders are currently governed shareholders are governed by Virginia
by Virginia corporate law and the corporate law and the articles of
articles of incorporation and bylaws incorporation and bylaws of Southern
of Metro-County. Following the Financial.
completion of the merger, rights of
Metro-County shareholders who become
Southern Financial shareholders will
be governed by Virginia law and the
articles of incorporation and bylaws
of Southern Financial.
CLASSIFICATION OF THE Metro-County's board is divided into Southern Financial also has a
BOARD OF DIRECTORS: three classes, as nearly equal in classified board of directors.
number as possible, with each class serving a
staggered three-year term. This means that
only one-third of the board is elected at
each annual meeting of shareholders. The
classification makes it more difficult to
change the composition of Metro-County's
Board of Directors because at least two
annual meetings of shareholders are required
to change control of the Board of Directors.
</Table>
-41-
<Table>
<Caption>
METRO-COUNTY SOUTHERN FINANCIAL
REMOVAL OF DIRECTORS: Virginia law provides that, absent a Southern Financial's articles of
provision in the articles of incorporation provide that a director
incorporation to the contrary, may only be removed with or without
directors may be removed by the cause upon a two-thirds vote of the
shareholders with or without cause. shareholders at a meeting called for
the purpose of removing the director.
Metro-County's bylaws provide that
any director may be removed from
office at a meeting called expressly
for that purpose, and upon the vote
of the shareholders holding a
majority of the shares entitled to
vote at an election of the directors
VOTE REQUIRED FOR Virginia law provides that a sale of Southern Financial's articles of
CERTAIN SHAREHOLDER all or substantially all of the incorporation contain a provision
ACTIONS: assets may occur if approved by the which reduces the required shareholder
holders of two-thirds of the approval level to a majority for
outstanding shares entitled to vote certain actions such as a merger, a
thereon unless the articles of consolidation, a share exchange,
incorporation provide for a greater certain sales of substantially all of
or lesser vote. Southern Financial's assets or a
dissolution so long as at least
Metro-County's articles of two-thirds of the continuing board of
incorporation provide that a plan of directors approves and recommends the
merger or share exchange, a action. Otherwise, all above listed
transaction including the sale of actions require the affirmative vote
all or substantially all of the of the holders of two-thirds of the
assets of Metro-County, other than outstanding shares entitled to vote
in the regular course of business thereon. The board of directors is
and a plan of dissolution shall be empowered by the articles of
approved by the vote of the incorporation to require a greater
shareholders holding a majority of vote.
the shares entitled to vote thereon
so long as the above described
action is approved and recommended
by at least two-thirds of the
members of the board of directors.
Absent such approval by the board of
directors, the action must be approved by a
vote of eighty percent (80%) or more of all
the votes entitled to be cast on such
transactions by each voting group entitled to
vote on the transaction.
AMENDMENT OF ARTICLES Virginia law provides that a Southern Financial's articles of
OF INCORPORATION AND corporation's articles of incorporation may be amended upon the
BYLAWS: incorporation may be amended upon affirmative vote of a majority of the
approval of the amendment by the votes entitled to be cast by each group
affirmative vote of the holders of entitled to vote thereon, so long as
more than two-thirds of the such amendment is approved by at least
outstanding shares of stock entitled two-thirds of the continuing directors.
to be cast in each voting group. If such an amendment is not approved by
Each voting group must approve the two-thirds of the continuing directors,
amendment. it must be approved by the holders of
at least two-thirds of the Southern
Metro-County's articles of Financial voting stock then issued and
incorporation provide that the outstanding. Continuing director means
articles of incorporation may be any individual who (i) was an initial
amended by the affirmative vote of director of Southern Financial;
the holders of a majority of the (ii) has been elected to the board of
outstanding shares entitled to vote directors of Southern Financial at an
thereon, so long as the amendment is annual meeting of the shareholders more
approved and recommended by at least than one time; or (iii) was elected to
two-thirds of the directors. If the fill a vacancy on the board of
amendment is not approved and directors of Southern Financial by a
recommended by two-thirds of the majority of the then remaining
members of the board of directors, directors and thereafter re-elected at
then the an annual
</Table>
-42-
<Table>
<Caption>
METRO-COUNTY SOUTHERN FINANCIAL
affirmative vote of the holders of eighty meeting of the shareholders.
percent (80%) of the outstanding shares
entitled to vote thereon is required. Southern Financial's bylaws may be
amended by a majority vote of either
Metro-County's bylaws provide that the Southern Financial board of
the bylaws may be amended or directors or its shareholders.
repealed by both the shareholders
and the board of directors, unless
Virginia law reserves such power
solely to shareholders. Virginia
law provides that the board of
directors of a corporation may amend
the corporation's bylaws unless the
shareholders upon adopting or
amending particular bylaws provide
expressly that the board of
directors may not amend or repeal
that bylaw.
SHAREHOLDER ACTIONS Virginia law provides that action Southern Financial's articles of
WITHOUT A MEETING: required or permitted to be taken at incorporation do not provide for less
a shareholder meeting may be taken than unanimous consent when shareholder
without a meeting by written consent action is taken without a meeting, so
signed by all of the shareholders no action may be taken by written
entitled to vote on the action. consent unless all shareholders agree.
There are no provisions to the
contrary contained in Metro-County's
articles of incorporation.
SPECIAL MEETINGS OF Virginia law provides that a special Southern Financial's bylaws provide
SHAREHOLDERS: meeting of the shareholders may be that special meetings of shareholders
called by the chairman of the board, may be called at any time but only by
the president, the board of the chairman of the board, the
directors or the person authorized president or the board of directors.
to do so by the articles of
incorporation or bylaws.
Metro-County's bylaws provide that a special
meeting of the shareholders may be held on
the call of the chairman of the board or a
majority of the board of directors. At a
special meeting, no business shall be
transacted and no corporate action shall be
taken other than as stated in the notice of
the meeting.
NOMINATION OF The Metro-County bylaws contain The Southern Financial bylaws also
DIRECTORS: detailed advance notice and contain advance notice and
informational procedures which must informational procedures which must be
be complied with in order for a complied with in order for a
shareholder to nominate a person to shareholder to nominate a person to
serve as a director. The Metro-County serve as a director. Southern
bylaws require a shareholder to give Financial's bylaws provide that
timely notice of a proposed nominee detailed information along with notice
in advance of the shareholders' of a proposed nomination must be
meeting at which directors will be received by Southern Financial not less
elected. In addition, the Metro- than 60 nor more than 90 days prior to
County bylaws contain detailed the meeting called for the purpose of
advance notice and information electing directors.
requirements which must be met in
order for a Metro-County shareholder
to nominate an individual. To be
timely, a shareholder's notice must
be delivered to Metro-County no later
than 30
</Table>
-43-
<Table>
<Caption>
METRO-COUNTY SOUTHERN FINANCIAL
days prior to the first
anniversary date of the initial
notice given to shareholders of
record of the record date for the
previous annual meting. In no event
shall such notice be required to be
given more than 90 days prior to the
meeting.
PROPOSAL OF BUSINESS: Metro-County's bylaws provide that Southern Financial's bylaws provide
for a shareholder to properly bring that to properly bring an issue before
business before a shareholders' a shareholders' meeting, notice
meeting, notice must be given to the containing certain required information
secretary of the corporation. For must be received by Southern Financial
notice to be timely, it must be given not less than 60 nor more than 90 days
not less than 30 days prior to the prior to any meeting called for the
first anniversary date of the initial election of directors.
notice given for the previous annual
meeting, but in no case more than 90
days prior to the scheduled meeting
date.
INDEMNIFICATION; Virginia law provides that a Southern Financial's articles of
LIMITATION OF corporation may indemnify an incorporation provide that the
DIRECTOR LIABILITY: individual acting in his capacity as corporation shall indemnify any
a director against liability director made a party to a proceeding
incurred if (1) he conducted himself because he or she is or was a director
in good faith; and (2) he believed: of the corporation against any
(a) in the case of conduct in his liability incurred in the proceeding to
official capacity with the the extent that Virginia law permits.
corporation, that his conduct was in
its best interest and (b) in all Southern Financial's articles provide
other cases, that his conduct was at that no director of Southern Financial
least not opposed to the corporations will be liable to Southern Financial or
best interests; and (3) in the case its shareholders for monetary damages
of a criminal proceeding, he had no for an act or omission in the
reasonable cause to believe his director's capacity as a director to
conduct was unlawful. Furthermore, the extent that Virginia law permits.
unless limited by the articles of
incorporation, a corporation shall
indemnify a director who entirely
prevails in the defense of any
proceeding to which he is a party
because he is or was a director of
the corporation against reasonable
expenses incurred by him in
connection with the proceeding.
Virginia law also provides that a corporation
may not indemnify a director (1) in
connection with a proceeding by or in the
right of the corporation in which the
director is adjudged liable to the
corporation; or (2) in connection with any
other proceeding charging improper personal
benefit to him, whether or not involving
action in his official capacity, in which he
was adjudged liable on the basis that
personal benefit was improperly received by
him.
The Metro-County articles of incorporation
provide that a director shall not be liable
in any monetary amount for damages arising
out of or resulting from a single
transaction, occurrence or course of conduct,
provided,
</Table>
-44-
<Table>
<Caption>
METRO-COUNTY SOUTHERN FINANCIAL
however, the director did not willfully
engage in willful misconduct, a knowing
violation of the criminal law or of any
federal or state securities law. The
articles of incorporation further provide
for the indemnification of the directors
against liability incurred in a proceeding
if (i) he conducted himself in good faith,
(ii) he believed, in the case of conduct in
his official capacity with the corporation,
that his conduct was in its best interest,
and in all other cases his conduct was not
opposed to its best interest and (iii) he
had no reason to believe that his conduct
was unlawful. A director may not be
indemnified against his willful misconduct
or knowing violation of the criminal law, or
against any liability incurred by him in any
proceeding charging improper personal
benefit to him.
</Table>
VIRGINIA ANTI-TAKEOVER STATUTES
The Virginia Stock Corporation Act restricts transactions between a
corporation and its affiliates and potential acquirors. The summary below is
general and is not intended to be a complete description of all the features and
consequences of those provisions, and is qualified in its entirety by reference
to the statutory provisions contained in the Virginia Stock Corporation Act.
Because Southern Financial and Metro-County are Virginia corporations, the
provisions of the Virginia Stock Corporation Act described below apply to them.
Affiliated Transactions. The Virginia Stock Corporation Act contains
provisions governing "Affiliated Transactions," found at Sections 13.1-725 -
727.1 of the Virginia Stock Corporation Act. Affiliated Transactions include
certain mergers and share exchanges, certain material dispositions of corporate
assets not in the ordinary course of business, any dissolution of a corporation
proposed by or on behalf of an Interested Shareholder (as defined below), and
reclassifications, including reverse stock splits, recapitalizations or mergers
of a corporation with its subsidiaries, or distributions or other transactions
which have the effect of increasing the percentage of voting shares beneficially
owned by an Interested Shareholder by more than 5% of all outstanding voting
shares. For purposes of the Virginia Stock Corporation Act, an Interested
Shareholder is defined as any beneficial owner of more than 10% of any class of
the outstanding voting securities of a Virginia corporation.
Subject to certain exceptions discussed below, the provisions governing
Affiliated Transactions require that, for three years following the date upon
which any shareholder becomes an Interested Shareholder, any Affiliated
Transaction must be approved by the affirmative vote of holders of two-thirds of
the outstanding shares of the corporation entitled to vote, other than the
shares beneficially owned by the Interested Shareholder, and by a majority (but
not less than two) of the Disinterested Directors (as defined below). A
Disinterested Director is defined in the Virginia Stock Corporation Act as a
member of a corporation's board of directors who
o was a member before the later of January 1, 1988 or the date on which
an Interested Shareholder became an Interested Shareholder, and
o was recommended for election by, or was elected to fill a vacancy and
received the affirmative vote of, a majority of the Disinterested
Directors then on the corporation's board of directors.
-45-
At the expiration of the three year period after a shareholder becomes an
Interested Shareholder, these provisions require approval of the Affiliated
Transaction by the affirmative vote of the holders of two-thirds of the
outstanding shares of the corporation entitled to vote, other than those
beneficially owned by the Interested Shareholder.
The principal exceptions to the special voting requirement apply to
Affiliated Transactions occurring after the three year period has expired and
require either that the transaction be approved by a majority of the
corporation's Disinterested Directors or that the transaction satisfy certain
fair price requirements of the Affiliated Transactions statute. In general, the
fair price requirements provide that the shareholders must receive the higher
of: the highest per share price for their shares as was paid by the Interested
Shareholder for his, her or its shares, or the fair market value of the shares.
The fair price requirements also require that, during the three years preceding
the announcement of the proposed Affiliated Transaction, all required dividends
have been paid and no special financial accommodations have been accorded the
Interested Shareholder, unless approved by a majority of the Disinterested
Directors.
None of the limitations discussed above and special voting requirements
apply to a transaction with an Interested Shareholder who has been an Interested
Shareholder continuously since the effective date of the statute (January 26,
1988) or who became an Interested Shareholder by gift or inheritance from such a
person or whose acquisition of shares making such person an Interested
Shareholder was approved by a majority of the Disinterested Directors of the
corporation. Further, restrictions of Affiliated Transactions are generally
limited to corporations with more than 300 shareholders of record.
These provisions were designed to deter certain takeovers of Virginia
corporations. In addition, the Virginia Stock Corporation Act provides that by
affirmative vote of a majority of the voting shares other than shares owned by
any Interested Shareholder, a corporation may adopt by meeting certain voting
requirements, an amendment to its articles of incorporation or bylaws providing
that the Affiliated Transactions provisions shall not apply to the corporation.
We have not adopted such an amendment.
Control Share Acquisitions. The Virginia Control Share Acquisitions
statute, found at Sections 13.1-728 - 728.8 of the Virginia Stock Corporation
Act, also is designed to afford shareholders of a public company incorporated in
Virginia protection against certain types of non-negotiated acquisitions in
which a person, entity or group ("Acquiring Person") seeks to gain voting
control of that corporation. With certain enumerated exceptions, the statute
applies to acquisitions of shares of a corporation with 300 or more shareholders
which would result in an Acquiring Person's ownership of the corporation's
shares entitled to vote in the election of directors falling within any one of
the following ranges: 20% to 33 1/3%, 33 1/3% to 50% or 50% or more (a "Control
Share Acquisition").
Shares that are acquired in a Control Share Acquisition ("Control
Shares") will not be entitled to voting rights unless the holders of a majority
of the "Disinterested Shares" vote at an annual or special meeting of
shareholders of the corporation to accord the Control Shares with voting rights.
Disinterested Shares do not include shares owned by the Acquiring Person or by
officers and inside directors of the company whose shares were acquired. Under
certain circumstances, the statute permits an Acquiring Person to call a special
shareholders' meeting for the purpose of considering granting voting rights to
the holders of the Control Shares. As a condition to having this matter
considered at either an annual or special meeting, the Acquiring Person must
provide shareholders, among other things, detailed disclosures about his or her
identity, the method and financing of the Control Share Acquisition and any
plans to engage in certain transactions with, or to make fundamental changes to,
the corporation, its management or business.
-46-
Under certain circumstances, the statute grants dissenters' rights to
shareholders who vote against granting voting rights to the Control Shares. The
Virginia Control Share Acquisitions statute also enables a corporation to make
provisions for redemption of Control Shares with no voting rights. A corporation
may opt-out of the statute, which we have done in our bylaws. Among the
acquisitions specifically excluded from the statute are acquisitions which are a
part of certain negotiated transactions to which the corporation is a party and
which, in the case of mergers or share exchanges, have been approved by the
corporation's shareholders under other provisions of the Virginia Stock
Corporation Act.
The provisions of the Affiliated Transactions statute and the Control
Share Acquisition statue are only applicable to public corporations that have
more than 300 shareholders. Corporations may provide in their articles of
incorporation or bylaws to opt out of the Control Share Acquisition statute.
Neither Metro-County nor Southern Financial has opted out of the statute.
-47-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF METRO-COUNTY
The following discussion, which analyzes the major elements of
Metro-County's financial condition and results of operations, should be read in
conjunction with the financial statements and the accompanying notes contained
elsewhere in this proxy statement-prospectus.
OVERVIEW
As of March 31, 2002, Metro-County had total assets of $92.2 million,
total loans of $72.3 million, total deposits of $84.1 million and total
stockholders' equity of $7.7 million. Metro-County had net income of $91,835 for
the three months ended March 31, 2002, and net income of $230,352 and $253,576
during the years ended December 31, 2000 and 2001, respectively. For the year
ended December 31, 2001 and for the three months ended March 31, 2002 (on an
annualized basis), Metro-County's return on average stockholders' equity was
3.40% and 4.81%, respectively. For the year ended December 31, 2001, and for the
three months ended March 31, 2002 (on an annualized basis), Metro-County's
return on average assets was 0.29% and 0.40%, respectively.
With five full-service branches, Metro-County continues to exhibit a
positive earnings trend and solid asset growth. As in the past, growth in the
loan portfolio continues to be the major driver of net income.
RESULTS OF OPERATIONS
NET INCOME
Net income for the three months ended March 31, 2002 was $91,835, which
represented an increase of $8,350, or 10.0%, over the first three months of
2001. The increase was due primarily to Metro-County's earning asset growth
coupled with an improved net interest margin and solid cost containment. Basic
earnings per share on a split-adjusted basis through the first quarter of 2002
was $0.04 per share compared with $0.04 per share through the first quarter of
2001.
As a result of significant growth in Metro-County's loan portfolio,
Metro-County's net income in 2001 on a split-adjusted basic per share basis was
$253,576, or $0.12 per share, compared to $230,352, or $0.11 per share, in 2000.
Core operating income, defined as net operating income before provisions and
taxes, was the strongest in Metro-County's history at $845,645 for the year
ended December 31, 2001. This represented an increase of $301,724 from 2000
results.
Net income for Metro-County in 2000 was $230,352, or $0.11 per share,
compared with $194,416, or $0.09 per share, in 1999. This represented, on a
pre-tax basis, an increase of 11.3% from fiscal year 1999 results.
NET INTEREST INCOME
The principal source of earnings for Metro-County is net interest
income. Net interest income is the difference between interest and fees
generated by earning assets and interest expense paid to fund those assets. As
such, net interest income represents the gross profit from Metro-County's
lending, investment and funding activities. A large number of variables
interact to affect net interest income. Included are variables such as changes
in the mix and volume of earning assets and interest-bearing liabilities, market
interest rates and the statutory Federal tax rate. It is management's ongoing
policy to maximize net interest income through the development of balance sheet
and pricing strategies while maintaining appropriate risk levels as set by the
board of directors.
For the first quarter of 2002, net interest income increased $150,000,
or 20.5%, over first three months of 2001 due to strong loan growth and lower
funding costs.
Metro-County's net interest income increased 16.4% during the year
ended December 31, 2001 to $3.1 million, despite rate reductions and a tighter
net interest margin than in 2000. The increase was attributed to solid growth in
average interest-earning assets and a reduction in Metro-County's cost of funds.
-48-
As a result of strong loan growth and a higher yields on its loan
portfolio during 2000, Metro-County's net interest income increased $467,163, or
21.7% over the year ended December 31, 1999, to $2.6 million, despite higher
funding costs.
NET INTEREST MARGIN
As experienced by many financial institutions during 2001,
Metro-County's net interest margin tightened from 4.02% in 2000 to 3.71% in
2001. The contraction resulted from a repricing of the earning asset portfolio
at a faster pace than the interest-bearing liability portfolio. The delayed
effect is natural given Metro-County's deposit mix. As such, Metro-County's
costs of funds may continue to decline and alleviate pressure on the net
interest margin.
Metro-County's net interest margin increased from 3.87% at March 31,
2001 to 3.98% at March 31, 2002, as the deposit base repriced in a lower
interest rate environment.
INTEREST EARNING ASSETS
As of March 31, 2002, average interest-earning assets increased $13.0
million, or 17.2%, compared with the March 31, 2001 amount, as Metro-County
continued its historical strategy of building its asset base through loan
growth. Average earning assets in 2001 increased by $17.1 million, with $14.7
million derived from loan portfolio growth. With dramatic interest rate
reductions in 2001, Metro-County reduced its holdings of liquid assets to 18.9%
of average earning assets, compared with 20.2% for 2000. In 2001, Metro-County
continued to maintain an average earning assets to total assets ratio of 95%.
INTEREST-BEARING LIABILITIES
As of March 31, 2002, average interest-bearing liabilities increased
$10.0 million, or 15.6%, compared with the March 31, 2001 amount, and were used
primarily to fund asset growth. During 2001, Metro-County's strong loan growth
was supported with comparable deposit growth, and Metro-County began relying
less on higher costing deposits. At December 31, 2001, noninterest-bearing
demand deposits, in the aggregate, represented 12.0% of total liabilities,
compared with 10.6% at December 31, 2000.
-49-
The following tables provide for each category of earning assets and
interest-bearing liabilities, the average amounts outstanding, the interest
earned or incurred on such amounts, and the average rate earned or incurred for
the three months ended March 31, 2002 and 2001, and for the years ended December
31, 2001 and 2000. The tables also provide the average rate earned on total
earning assets, the average rate paid on total interest-bearing liabilities, and
the net interest margin on average total earning assets for the same periods.
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
<Table>
<Caption>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------------------------------------------------
2002 2001
--------------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Interest-bearing balances (1) ........ $ 8,292 $ 51 2.46% N/A N/A N/A
Investment securities ................ 2,689 29 4.31 10,925 153 5.61%
Total loans (2) ...................... 73,404 1,399 7.62 60,693 1,398 9.21
Federal funds sold ................... 4,443 18 1.62 4,197 54 5.11
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets ................. 88,828 1,497 6.74 75,815 1,605 8.47
---------- ---------- ---------- ----------
less: allowance for loan losses ... (879) (746)
Total nonearning assets .............. 4,476 4,378
--------- ---------
Total assets ......................... $ 92,425 $ 79,447
========= =========
LIABILITIES AND EQUITY:
Interest-bearing deposits:
NOW ............................... $ 6,212 $ 20 1.29% $ 4,966 $ 31 2.48%
Savings ........................... 1,456 5 1.36 1,070 8 3.15
Money market ...................... 26,364 144 2.18 19,799 232 4.69
Time deposits >$100,000 ........... 7,642 81 4.24 8,939 143 6.37
Time deposits <$100,000 ........... 32,839 364 4.43 29,696 458 6.17
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ...... 74,513 614 3.30 64,470 872 5.41
Short-term borrowings ................ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities ... 74,513 614 3.30 64,470 872 5.41
---------- ---------- ---------- ---------- ---------- ----------
Noninterest-bearing liabilities:
Demand deposits ................... 9,766 7,129
Other liabilities ................. 505 504
---------- ----------
Total liabilities .................... 84,784 72,103
Shareholders' equity ................. 7,641 7,344
---------- ----------
Total liabilities and equity ......... $ 92,425 $ 79,447
========== ==========
Net interest income .................. $ 883 $ 733
========== ==========
Interest rate spread (3) ............. 3.44% 3.06%
Interest expense as a percent
of average earning assets ......... 2.77% 4.60%
Net interest margin (4) .............. 3.98% 3.87%
Earning assets/total assets .......... 96.1% 95.4%
</Table>
- ----------
(1) Metro-County began increasing its investment grade certificates of deposit
and money market accounts after the first quarter of 2001. As a result,
Metro-County did not have interest-bearing assets during the first quarter
of 2001 other than as identified in this table.
(2) Nonaccruing loans are included in average loans outstanding.
(3) Interest spread is the average yield earned on earning assets less the
average rate paid on interest-bearing liabilities.
(4) Net interest margin is net interest income expressed as a percentage of
average earning assets.
-50-
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
<Table>
<Caption>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2001 2000
--------------------------------------- ---------------------------------------
INTEREST AVERAGE INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
---------- ---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS:
Investment securities ................ $ 4,455 $ 225 5.05% $ 10,852 $ 606 5.58%
Total loans (1) ...................... 66,707 5,792 8.68 51,963 4,756 9.15
Federal funds sold and interest
bearing bonds ..................... 11,084 411 3.71 2,299 146 6.35
---------- ---------- ---------- ---------- ---------- ----------
Total earning assets ................. 82,246 6,428 7.82% 65,114 5,508 8.46%
---------- ---------- ---------- ---------- ---------- ----------
Less allowance for loan losses ....... 804 575
Total nonearning assets .............. 4,772 3,689
---------- ----------
Total assets ......................... $ 86,214 $ 68,228
========== ==========
LIABILITIES AND EQUITY:
Interest-bearing deposits:
NOW ............................... $ 5,389 $ 117 2.17% $ 4,057 $ 99 2.44%
Savings ........................... 1,201 31 2.58 1,085 35 3.23
Money market ...................... 22,192 830 3.74 17,531 825 4.71
Time deposits >$100,000 ........... 8,912 520 5.83 7,077 425 6.01
Time deposits <$100,000 ........... 32,499 1,879 5.78 25,738 1,502 5.84
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing deposits ...... 70,193 3,377 4.81 55,488 2,886 5.20
---------- ---------- ---------- ---------- ---------- ----------
Short-term borrowings ................ -- -- -- 34 2 5.88
---------- ---------- ---------- ---------- ---------- ----------
Total interest-bearing liabilities ... 70,193 3,377 4.81 55,522 $ 2,888 5.20
---------- ---------- ---------- ---------- ---------- ----------
Noninterest-bearing liabilities:
Demand deposits ................... 8,035 5,305
Other liabilities ................. 528 431
---------- ----------
Total liabilities .................... 78,756 61,258
Shareholders' equity ................. 7,458 6,970
---------- ----------
Total liabilities and equity ......... $ 86,214 $ 68.228
========== ==========
Net interest income .................. $ 3,051 $ 2,620
========== ==========
Interest rate spread (2) ............. 3.01% 3.26%
Net interest margin (3) .............. 3.71% 4.02%
Earning assets/total assets .......... 95.40% 95.50%
</Table>
- ----------
(1) Nonaccruing loans are included in average loans outstanding.
(2) Interest spread is the average yield earned on earning assets less the
average rate paid on interest-bearing liabilities.
(3) Net interest margin is net interest income expressed as a percentage of
average earning assets.
-51-
NON-INTEREST INCOME AND NON-INTEREST EXPENSE
As with net interest income, noninterest income and expenses are
valuable components in Metro-County's profitability model. Noninterest income is
generated through service fees on deposit accounts and merchant income. For the
three months ended March 31, 2002, noninterest income equaled $149,000, down
20.7% from $188,000 for the comparable period in 2001. As management continued
to focus on cost containment, noninterest expense for the three months ended
March 31, 2002 was basically unchanged at $736,000 compared with $732,000 for
the same period in 2001. Salary and benefits expenses during the quarter ended
March 31, 2002 remained unchanged at $300,000 versus the first quarter of 2001.
While 2001 was a successful year in the net interest income segment of
the income statement, Metro-County's strength in generating non-interest income
was even more prevalent with non-interest revenue accelerating 64.17% to
$674,518 from $410,877 in fiscal 2000. The increase resulted from favorable loan
growth and the expansion of the deposit base.
As economies of scale began to materialize, Metro-County's efficiency
ratio improved for 2001 as indicated by an efficiency ratio (defined as
noninterest expense divided by net interest income before provisions plus
noninterest income) of 77.3% versus 82.1% for 2000. Another method in evaluating
efficiency is comparing total operating expense as a percentage of average
assets. This ratio improved for 2001 by declining 20 basis points to 3.45%.
Salaries and benefits expense, which is a major factor in operating expenses,
were well contained at only 1.50% of average assets at December 31, 2001, versus
1.72% of average assets at December 31, 2000.
ANALYSIS OF FINANCIAL CONDITION
ASSETS AND LOANS
At March 31, 2002, Metro-County's total assets were $92.2 million, a
decrease of $1.6 million, or 1.7%, from total assets of $93.8 million at
December 31, 2001. When compared with the first quarter of 2001, total assets
increased $10.5 million, or 12.9%. Asset growth was generated primarily through
the loan portfolio. Average assets at March 31, 2002 were $92.4 million, up 7.2%
from average assets of $86.2 million at December 31, 2001. Average earning
assets represented 96.1% of average total assets at March 31, 2002.
Loans represent the largest component of earning assets. The loan
portfolio is predominately comprised of loans on a secured basis and adequately
diversified among the various loan segments. Consistent with Metro-County's
focus on providing community-based financial services, it generally does not
make loans outside its principal market regions. By policy, it does not
originate or purchase highly leveraged loans. During the first three months of
2002, gross loans have decreased $1.9 million to $72.3 million as loan paydowns
exceeded loan bookings. However, loan demand continues to be strong in
Metro-County's market. As a consequence of lower interest rates, loan yields
declined 159 basis points to 7.6% during the twelve month period ended March 31,
2002. While lower interest rates reduced loan yields, this was more than offset
by lower funding costs. During the twelve month period ended March 31, 2002,
Metro-County has reduced its funding costs 2.11% to 3.30%.
At December 31, 2001, total assets equaled $93.8 million, which was an
18.8% increase over $79.0 million at December 31, 2000. Gross loans represented
79.1% of total assets and 81.1% of average earning assets at December 31, 2001.
During the year ended December 31, 2001, Metro-County's loan portfolio grew
27.5% to $74.2 million as a result of increased loan demand, with a majority of
growth derived from an increase in loans in the commercial and real estate
segments.
At December 31, 2000, Metro-County had total assets of $79.0 million,
representing a 28.1% increase over the December 31, 1999 balance of $61.6
million. Gross loans were $58.2 million at December 31, 2000, representing a
23.6% increase from gross loans of $47.1 million at December 31, 1999. The
increase was primarily the result of strong loan demand and the need for a
locally owned and operated community bank in the Richmond metropolitan area.
-52-
The following table provides information on the composition of
Metro-County's loan portfolio by type of loan on the dates indicated.
LOAN PORTFOLIO COMPOSITION
<Table>
<Caption>
DECEMBER 31,
--------------------------
2001 2000
---------- ----------
LOAN TYPE (IN THOUSANDS)
---------
Commercial ...................... $ 30,444 $ 22,270
Real estate:
Mortgage ............... 30,808 23,530
Construction ........... 5,428 5,510
Consumer ........................ 7,519 6,899
---------- ----------
Total gross loans ........... 74,199 58,209
Allowance for loan losses ....... (831) (729)
---------- ----------
Loans, net ............. $ 73,368 $ 57,480
========== ==========
</Table>
The following table presents the maturities of loans for Metro-County
as of December 31, 2001. Maturities of loans are not readily available by loan
category.
MATURITY SCHEDULE OF SELECTED LOANS
<Table>
<Caption>
MATURITY PERIOD DECEMBER 31, 2001
--------------- -----------------
(IN THOUSANDS)
Within one year ........................ $ 30,444
Over one year through five years ....... 42,579
Over five years ........................ 1,176
------------
Total gross loans ............. $ 74,199
============
</Table>
ASSET QUALITY
As of March 31, 2002, $225,000 in loans were on non-accrual status.
Metro-County had only $1,000 in loans that were 90 days or more past due at the
end of the first quarter of fiscal 2002. The ratio of allowance for loan losses
to loans, net of unearned income and fees, was 1.36% at March 31, 2002 compared
with 1.25% at March 31, 2001 and 1.12% at December 31, 2001. For the first three
months of 2002, $156,600 was provided to the loan loss reserve, and Metro-County
incurred $4,000 of net charge-offs. The ratio of the allowance for loan losses
to non-performing loans was 4.37 times as of March 31, 2002.
At December 31, 2001, there were no loans more than 90 days past due,
no other real estate acquired through foreclosure, and only one non-accrual loan
of $42,000. This single non-accrual loan was reinstated as a performing asset
subsequent to year-end 2001. At December 31, 2000, there were $9,586 of credit
card loans that were more than 90 days past due. During 2000, Metro-County
restructured a $99,000 loan in order to strengthen Metro-County's collateral
position.
Risk elements associated with the loan portfolio are presented below.
Metro-County places a loan on non-accrual status when a loan is specifically
determined to be impaired or when principal is past due for 90 days or more,
unless the debt is both well secured and in the process of being collected.
-53-
RISK ELEMENTS OF LOAN PORTFOLIO
<Table>
<Caption>
DECEMBER 31,
-----------------------------
2001 2000
------------ -----------
(DOLLARS IN THOUSANDS)
Non-accrual loans................................ $ 42 $ --
------------ -----------
Total non-performing assets................. $ 42 $ --
============ ===========
Loans past due 90 days and still
accruing interest........................... $ -- $ 10
============ ===========
Troubled debt restructurings not
included above.............................. $ -- $ 99
============ ===========
</Table>
PROVISION/ALLOWANCE FOR LOAN LOSSES
The provision for loan losses is a charge against earnings necessary to
maintain the allowance for loan losses at a level consistent with management's
evaluation of the credit quality and risk of the loan portfolio. Metro-County
maintains an allowance which management believes represents a conservative
estimate of potential losses in Metro-County's loan portfolio. To achieve this
goal, the loan loss provision must be sufficient to cover loans charged off plus
the growth, if any, in the loan portfolio. In determining the adequacy of the
allowance for loan losses, management uses a methodology that specifically
identifies and reserves for higher risk loans. A general reserve is established
of non-specifically reserved loans. Loans in a non-accrual status and over 90
days past due are considered in this evaluation, as well as other loans that may
be a potential loss.
The provision for loan losses for the period ended March 31, 2002 was
$156,600, an increase of $94,664 compared with the provision made during the
first quarter of 2001. The increased level of the provision reflects the growth
in the loan portfolio and management's discretion. Management anticipates that
additional provision will be needed in future periods to ensure an adequate
allowance for loan losses. Since the amount of the provision is largely
dependent on loan growth, the level of which is difficult to ascertain,
management is unable to precisely determine the amount of provision that may
ultimately be necessary.
During 2001, Metro-County provided $471,494 to the loan loss reserve,
compared with $218,241 in fiscal year 2000. Given these allocations, coupled
with net charge-offs of $369,494 in 2001, the loan loss reserve equaled 1.12% of
total loans. While the level of charge-offs in 2001 exceeded Metro-County's loss
history, $348,546 of this amount was attributable to a one-time event related to
a single borrower that has no other direct or indirect exposure to Metro-County.
The loan loss provision was $218,241 in 2000, compared with $342,119 in
1999. With only $12,241 of net charge-offs, this created an allowance for loan
loss of $729,000, which represented 1.25% of gross loans compared with 1.11% at
December 31, 1999.
-54-
The following table shows Metro-County's loan loss and recovery
experience for the past three years.
SUMMARY OF ALLOWANCE FOR LOAN LOSSES
<Table>
<Caption>
AS OF AND FOR THE
YEARS ENDED DECEMBER 31,
-------------------------------------
2001 2000 1999
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Balance beginning of period .......... $ 729,000 $ 523,000 $ 190,000
Loans charged off Consumer ........... (379,839) (12,241) (14,900)
Recoveries ........................... 10,345 -- 5,781
--------- --------- ---------
Net loans charged off ................ (369,494) (12,241) (9,119)
Provision for loan losses ............ 471,494 281,241 342,119
Balance end of period ................ $ 831,000 $ 729,000 $ 523,000
Net charge-offs to average loans ..... .55% .02% .02%
</Table>
A breakdown of the allowance for loan losses for the past two years,
along with the percent of loans in each major category, is provided in the
following table. Management of Metro-County does not believe that the allowance
for loan losses can be fragmented by category with any precision that would be
useful to investors. The breakdown of the allowance for loan losses is based
primarily upon those factors discussed above in computing the allowance as a
whole. Because all of these factors are subject to change, the breakdown is not
necessarily indicative of the category of future losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<Table>
<Caption>
DECEMBER 31, 2001 DECEMBER 31, 2000
------------------------------- -------------------------------
PERCENT OF LOANS PERCENT OF LOANS
IN EACH CATEGORY IN EACH CATEGORY
ALLOWANCE TO TOTAL LOANS ALLOWANCE TO TOTAL LOANS
--------- ---------------- --------- ----------------
(DOLLARS IN THOUSANDS)
Commercial.................... $ 341 41.03% $ 279 38.25%
Real estate-mortgage.......... 345 41.52 295 40.42
Real estate-construction...... 61 7.32 69 9.47
Consumer...................... 84 10.13 86 11.86
------ ------ ------ ------
Total allowance......... $ 831 100.00% $ 729 100.00%
====== ====== ====== ======
</Table>
Management and the board of directors believe that the allowance at
March 31, 2002 was adequate relative to current levels of risk in the portfolio.
Continued loan growth will warrant additional provisions in the future.
LIQUIDITY AND FUNDING SOURCES
The objective of Metro-County's liquidity planning and management
includes providing adequate funds to meet the needs of depositors and borrowers
at all times, as well as providing funds to meet the basic needs for ongoing
operations, and to allow funding of longer-term investment opportunities and
regulatory requirements. Sufficient assets are maintained on a short-term basis
to meet anticipated and unanticipated liquidity demands. Funding sources also
include a diverse and stable core deposits base. Liquidity is maintained through
maturity management and our ability to liquidate assets, which include federal
funds sold and the available-for-sale portion of
-55-
the investment portfolio. Other sources of liquidity include $9.7 million in
available, unused borrowing facilities at March 31, 2002.
INVESTMENT ACTIVITIES
In accordance with Metro-County's strategy to selectively reinvest and
maintain a short effective duration on the securities portfolio, Metro-County
purchased various U.S. agency securities during the first quarter of 2002. As of
March 31, 2002, the amortized costs of these holding equaled $3.2 million.
Metro-County also holds short-term investments in interest bearing accounts,
including a $5.6 million money market account and $2.5 million of investment
grade certificates of deposit.
At December 31, 2001, Metro-County maintained a strong liquidity
position with ample asset based funds. As a result of a lower rate environment
and the call features that were embedded in Metro-County's securities portfolio,
all of these investments were called during the second quarter of 2001.
Subsequently, a majority of the proceeds were reinvested into cash equivalents,
which consisted of $1.6 million in federal funds and $11.2 million in
interest-bearing deposits. At December 31, 2001, the available-for-sale
securities portfolio totaled $2.7 million and had an average stated maturity of
less than two years.
At December 31, 2000, federal funds sold equaled $5.2 million compared
with $750,000 at December 31, 1999. The entire securities portfolio is
designated as available-for-sale and consists entirely of U.S. Government Agency
securities. As of December 31, 2000, the weighted average maturity of the
investment portfolio was 2.1 years.
The following table provides information on Metro-County's securities
portfolio as of the dates indicated.
SECURITIES PORTFOLIO COMPOSITION
<Table>
<Caption>
DECEMBER 31,
-------------------------
2001 2000
------- ---------
(DOLLARS IN THOUSANDS)
AMORTIZED COST:...................................... $ 2,750 $ 11,204
FAIR VALUE:.......................................... 2,764 11,113
Unrealized Gain or (Loss) in
U.S. Government Agencies and Corporations............ $ 14 $ (91)
</Table>
The following table provides the maturity distribution and weighted
average yield of the investment portfolio of Metro-County as of December 31,
2001.
INVESTMENT MATURITY DISTRIBUTION AND AVERAGE YIELD
<Table>
<Caption>
WEIGHTED
AMORTIZED FAIR MARKET AVERAGE
MATURITY PERIOD COST VALUE YIELD(2)
--------------- --------- ----------- --------
(DOLLARS IN THOUSANDS)
Within one year.................................... -- -- --
After one year to five years....................... $2,512 $2,526 4.47%
After five years through ten years................. -- -- --
Other.............................................. 238 238 --
</Table>
- ----------
(1) Maturity dates represent final stated maturity not next repricing or
call date
(2) Weighted Average Yield is based on amortized cost
-56-
DEPOSITS
The deposit base offers Metro-County a primary source of funds to
support asset growth. As of March 31, 2002, total deposits equaled $84.1 million
and represented 91.3% of total assets. The deposit base is comprised of $40.2
million in certificates of deposit, of which $7.6 million had balances greater
than $100,000, $34.6 million in NOW, money market and savings accounts, and $9.3
million of noninterest-bearing demand deposits. With certificates of deposit
representing 47.8% of total deposits at March 31, 2002, the maturing and
repricing of these deposits is an important variable for Metro-Country's net
interest margin.
Overall, Metro-County experienced favorable changes in the deposit mix
in 2001, which attributed to the reduction in Metro-County's cost of funds.
Total deposits for the year ended 2001 equaled $85.8 million, an increase of
$14.5 million, or 20.3%, from December 31, 2000. The expansion of the deposit
base basically funded Metro-County's substantial loan growth for 2001.
Metro-County experienced solid growth in core deposits, with less funding
reliance on higher costing certificates of deposit. As of December 31, 2001,
certificates of deposit represented 48.8% of total deposits, versus 54.4% as of
December 31, 2000.
Of particular note in 2001 was the $2.8 million increase in
Metro-County's noninterest-bearing deposit base. This reflects Metro-County's
strategy of attracting low cost deposits and customers realizing the significant
benefits and value of banking with Metro-County Bank.
Deposits totaled $71.3 million at December 31, 2000, an increase of
30.8% over the prior year. The growth was concentrated in Metro-County's core
deposit base with time deposits having a balance less than $100,000 increasing
by $7.4 million or 33.0%. In 2000, Metro-County made significant progress
attracting noninterest-bearing "demand deposits." For the year ended December
31, 2000, demand deposits increased to $7.6 million, or 60.2%, from $4.7 million
at December 31, 1999.
The average balance and rates for certain categories of deposits for
the last two years are shown in the following table.
AVERAGE DEPOSITS
<Table>
<Caption>
2001 2000
-------------------------- ------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE BALANCE RATE
---------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
Noninterest-bearing demand deposits..... $ 8,035 -- $ 5,305 --
---------- -----------
Interest-bearing deposits:
Now................................ $ 5,389 2.17% $ 4,057 2.44%
Savings............................ 1,201 2.58 1,085 3.23
Money market....................... 22,192 3.74 17,531 4.71
Time deposits greater than
$100,000......................... 8,912 5.83 7,077 6.01
Time deposits less than $100,000 .. 32,499 5.78 25,738 5.84
---------- ---------- ----------- ---------
Total interest-bearing deposits......... $ 70,193 4.81% $ 55,488 5.20%
---------- ---------- ----------- ---------
Total average deposits.................. $ 78,228 $ 60,793
========== ===========
</Table>
As of March 31, 2002 and December 31, 2001, total time deposits over
$100,000 represented 9.0% and 9.5%, respectively, of total deposits. Of the
amount at March 31, 2002, $6.5 million had a term of one year or less.
-57-
The following table sets forth the amount of Metro-County's
certificates of deposit of $100,000 or more by time remaining until maturity as
of March 31, 2002 and December 31, 2001.
TIME DEPOSITS OF $100,000 OR MORE
<Table>
<Caption>
DECEMBER 31, 2001
--------------------------
AMOUNT PERCENT
------------ ----------
MATURITY PERIOD (DOLLARS IN THOUSANDS)
- ---------------
Three months or less............................ $ 2,288 27.98%
Over three months to twelve months.............. 4,615 56.43
One year through five years..................... 1,275 15.59
Over five years................................. -- --
------------ -----------
Total.................................. $ 8,178 100.00%
</Table>
SHORT-TERM AND LONG-TERM DEBT
During 2000, Metro-County's short-term debt consisted solely of federal
funds purchased, which averaged $34,030 for the year. Metro-County has not
carried short-term debt since 2000. Metro-County has no long-term debt
obligations.
INTEREST RATE SENSITIVITY
Interest rate risk management is the process of managing the maturity
and re-pricing characteristics of Metro-County's assets and liabilities in such
a manner that the downside risk associated with Metro-County's earnings and
capital position are minimized. Measuring and monitoring interest rate risk is a
dynamic and important process that is regularly performed by management.
Metro-County recognizes that correlations and assumptions constantly change and
that forecasted results may vary from actual performance.
Simulation analysis is the primary tool used to manage the exposure of
net interest income and margin to volatile interest rates. This type of analysis
computes the amount of net interest income at risk from volatile interest rates
along with pricing and balance sheet movements. The simulation model creates
various scenarios looking at increases and/or decreases in interest rates from
an instantaneous parallel-movement in rates. The model utilizes various
correlation factors in determining Metro-County's risk exposure. As with balance
sheet movements, correlations change and are subject to management's discretion.
As of March 31, 2002, Metro-County's interest rate risk exposure was
acceptable under all scenarios. Given an immediate parallel 200 basis point
interest rate increase, net interest income may increase 4.50% within the next
twelve months.
INTEREST RATE SENSITIVITY ANALYSIS
(AT MARCH 31, 2002)
<Table>
<Caption>
WITHIN 90 - 365 1 TO 3 OVER
90 DAYS DAYS YEARS 3 YEARS
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Average interest-earning assets ......... $ 34,677 $ 8,312 $ 21,049 $ 23,042
Average interest-bearing liabilities .... 7,298 56,227 10,303 884
Average period gap ...................... 27,379 (47,915) 10,746 22,158
Average cumulative gap .................. 27,379 (20,536) (9,790) 12,368
Ratio of average cumulative gap to
average earning assets .................. 31.4% (23.6)% (11.2)% 14.2%
</Table>
-58-
(1) Includes non-accrual loans
(2) As a result of correlations and various assumptions used by
management, the ratio of cumulative gap to total earning assets may
not necessarily indicate the sensitivity of the balance sheet due to
fluctuating interest rates. The figures included above are based on a
200 basis point increase in rates.
As of December 31, 2001, Metro-County's interest rate risk model
indicated that, given a 300 basis point fluctuation of interest rates in either
direction, the impact on net interest income would be less than 10% within the
one-year period. The model also indicated that if interest rates increase within
the one-year period, net interest income may rise.
As of December 31, 2000, Metro-County's interest sensitive liabilities
exceeded interest sensitive assets within a one year period by $24.9 million, or
33.09% of average earning assets. Metro-County's liability sensitive position
resulted from it having the ability to reset rates paid on deposits within a
short period of time.
The following table summarizes Metro-County's interest sensitivity
position at December 31, 2001.
INTEREST RATE SENSITIVITY ANALYSIS
(AT DECEMBER 31, 2001)
<Table>
<Caption>
WITHIN 90 - 365 1 TO 3 OVER
90 DAYS DAYS YEARS 3 YEARS TOTAL
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
EARNING ASSETS:
Loans (1) ................................... $ 24,303 $ 5,783 $ 20,350 $ 22,766 $ 73,202
Investments securities ...................... 1,000 -- 1,513 -- 2,513
Federal funds sold & interest-bearing bank
accounts .................................. 11,772 2,000 -- -- 13,772
-------- -------- -------- -------- --------
Total earning assets .................. $ 37,075 $ 7,783 $ 21,863 $ 22,766 $ 89,487
======== ======== ======== ======== ========
INTEREST-BEARING LIABILITIES:
Interest checking ........................... $ -- $ 6,044 $ -- $ -- $ 6,044
Savings ..................................... -- 1,381 -- -- 1,381
Money market deposits ....................... -- 25,211 -- -- 25,211
Time deposits less than $100,000 ............ 7,204 16,511 9,382 996 34,093
Time deposits greater than $100,000 ......... 2,362 4,764 1,316 -- 2,820
-------- -------- -------- -------- --------
Total interest-bearing liabilities .... $ 9,566 $ 53,936 $ 10,699 $ 996 $ 75,196
======== ======== ======== ======== ========
Period gap .................................. 27,509 (46,153) 11,164 21,770 14,290
Cumulative gap .............................. 27,509 (18,644) (7,480) 14,290
Ratio of cumulative gap to
total earning assets .................. 30.74% (20.83)% 8.35% 15.97%
</Table>
- ----------
(1) Includes non-accrual loans.
(2) As a result of correlations and various assumptions used by
management, the ratio of cumulative gap to total earning assets may
not necessarily indicate the sensitivity of the balance sheet due to
fluctuating interest rates. The figures included above are based on a
100 basis point increase in interest rates.
CAPITAL RESOURCES
The adequacy of Metro-County's capital is reviewed by management on an
ongoing basis with reference to the size, composition and quality of its asset
and liability levels and is consistent with regulatory requirements and industry
standards. Management seeks to maintain a capital structure that assures an
adequate level to support anticipated asset growth and absorb potential losses.
During 2001, as Metro-County continued its growth strategy and enhancing
shareholder value in the process, average equity to average assets decreased
from 10.1% at year-end 2000 to 8.7% at year-end 2001.
-59-
Total stockholders' equity at March 31, 2002 was $7.7 million, an
increase of $73,000 from December 31, 2001. The increase was primarily the
result of earnings retention.
In accordance with federal banking regulations, banks must maintain
minimum levels of capital. These banking regulations measure capital adequacy
using three formulas, including Tier 1 capital, Total capital, and Leverage
capital. See "Business of Metro-County - Regulation - Capital Requirements."
Metro-County is considered to be "well-capitalized" under regulatory
guidelines. At March 31, 2002, Metro-County had Total and Tier 1 risk-based
capital ratios of 11.41% and 10.16%, respectively. Metro-County's Leverage ratio
equaled 8.31% at March 31, 2002. As management maximizes shareholders' equity
through asset growth, Metro-County's regulatory capital ratios may decline.
CAPITAL COMPONENTS AND RATIOS
The table below provides information on Metro-County's required and
actual capital components as of March 31, 2002.
<Table>
<Caption>
TO BE WELL
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------ ----------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- --------- ------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted Assets)........ $ 8,620 11.41% $ 6,045 8.0% $ 7,556 10.0%
Tier 1 Capital (to Risk Weighted Assets)....... 7,675 10.16 3,022 4.0 4,533 6.0
Tier 1 Capital (to Average Assets)............. 7,675 8.31 3,696 4.0 4,620 5.0
</Table>
The table below provides information on Metro-County's required and
actual capital components as of December 31, 2001.
<Table>
<Caption>
TO BE WELL
FOR CAPITAL CAPITALIZED
ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------------- ------------------ -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------- ----- --------- ----- --------- ------
(DOLLARS IN THOUSANDS)
Total Capital (to Risk Weighted Assets)........ $ 8,413 10.91% $ 6,167 8.0% $ 7,709 10.0%
Tier 1 Capital (to Risk Weighted Assets)....... 7,582 9.84 3,084 4.0 4,625 6.0
Tier 1 Capital (to Average Assets)............. 7,582 8.22 3,689 4.0 4,612 5.0
</Table>
-60-
BUSINESS OF METRO-COUNTY
GENERAL
Metro-County, a Virginia banking corporation headquartered in
Mechanicsville, Virginia, was incorporated under the laws of the Commonwealth of
Virginia as a state chartered bank in 1996 and began banking operations on May
20, 1997. Metro-County is a community oriented financial institution that
provides a variety of banking services to small and medium-sized businesses,
professionals and individuals located in its market area, which consists of the
Greater Richmond area. Metro-County strives to provide its customers with
products comparable to statewide regional banks located in its market area,
while maintaining the prompt response and personal level of service of a
community bank. Management believes this operating strategy has particular
appeal in Metro-County's market area.
Metro-County currently conducts business from five full-service offices
located in the metropolitan Richmond, Virginia area. In 1998, Metro-County
permanently established its main office at 8206 Atlee Road, Mechanicsville,
Virginia. In October 1998, Metro-County opened its second office at 5419
Lakeside Avenue in Henrico County, and in January 1999, opened a third office at
2801 Parham Road, also in Henrico County. In November 1999, a fourth office was
opened at 6401 Horsepen Road in Henrico County and in May 2000, a fifth office
was opened at 3124 West Broad Street in Richmond. The Richmond office also
serves as an Operations Center. Metro-County has no operating subsidiaries.
Metro-County offers a full range of deposit services, including
checking accounts, NOW accounts, savings accounts and other time deposits of
various types, ranging from daily money market accounts to short-term and
longer-term certificates of deposit. The transaction accounts and time
certificates are tailored to Metro-County's market area at rates competitive to
those offered in the area. In addition, Metro-County offers certain retirement
account services, such as Individual Retirement Accounts (IRAs). Metro-County
solicits such accounts from individuals, businesses, associations and
organizations and governmental authorities.
Metro-County also offers a full range of short-to-medium term
commercial and personal loans. Commercial loans include both secured and
unsecured loans for working capital (including inventory and receivables),
business expansion (including acquisition of real estate and improvements) and
purchase of equipment and machinery. Consumer loans include secured and
unsecured loans for financing automobiles, home improvements, education and
personal investments. Additionally, Metro-County originates fixed and
floating-rate mortgage loans and real estate construction and acquisition loans.
Other services offered by Metro-County include safe deposit boxes,
certain cash management services, travelers checks, direct deposit of payroll
and social security checks and automatic drafts for various accounts. In
addition, Metro-County has become associated with a shared network of automated
teller machines (ATMs) that may be used by Metro-County customers throughout
Virginia and other states located in the Mid-Atlantic region and nationally.
MARKET AREA
Metro-County's market area consists of Hanover, Henrico and Goochland
Counties and the state capital of Richmond. Metro-County's primary service area
is Hanover County, Virginia, as well as the surrounding sections of Henrico
County, eastern Goochland County, and the portion of the City of Richmond north
of the James River.
EMPLOYEES
As of March 31, 2002, Metro-County had 28 full-time equivalent
employees. None of its employees are represented by any collective bargaining
agreements.
-61-
COMPETITION
Metro-County competes as a financial intermediary with other commercial
banks, savings and loan associations, credit unions, mortgage banking firms,
consumer finance companies, securities brokerage firms, insurance companies,
money market mutual funds and other financial institutions operating in the
metropolitan Richmond market area and elsewhere. Many of Metro-County's nonbank
competitors are not subject to the same extensive federal regulations that
govern federally-insured banks and state regulations governing state chartered
banks. As a result, such nonbank competitors may have certain advantages over
Metro-County in providing certain services.
REGULATION
Metro-County is subject to various state and federal banking laws and
regulations that impose specific requirements or restrictions on and provide for
general regulatory oversight with respect to virtually all aspects of
operations. Metro-County is subject to regulation and examination by the Federal
Reserve Board, and is required to file periodic reports and any additional
information that the Federal Reserve Board may require. Metro-County is also
subject to supervision, regulation, and examination by the Bureau of Financial
Institutions of the Virginia Stock Corporation Commission and the Federal
Deposit Insurance Corporation. As such, Metro-County is subject to various
statutes and regulations administered by these agencies that govern, among other
things, required reserves, investments, loans, lending limits, acquisitions of
fixed assets, interest rates payable on deposits, transactions among affiliates
and Metro-County, the payment of dividends, mergers and consolidations, and
establishment of branch offices. The following is a summary of the material
provisions of certain statutes, rules and regulations that affect Metro-County
and is qualified in its entirety by reference to the particular statutory and
regulatory provisions referred to below.
CAPITAL REQUIREMENTS. The various federal bank regulatory agencies,
including the Federal Reserve, have adopted risk-based capital requirements for
assessing bank capital adequacy. In addition, Virginia chartered banks must also
satisfy the capital requirements adopted by the Virginia Bureau of Financial
Institutions. The federal capital standards define capital and establish minimum
capital requirements in relation to assets and off-balance sheet exposure, as
adjusted for credit risk. The risk-based capital standards currently in effect
are designed to make regulatory capital requirements more sensitive to
differences in risk profile among bank holding companies and banks, to account
for off-balance sheet exposure and to minimize disincentives for holding liquid
assets. Assets and off-balance sheet items are assigned to broad risk
categories, each with appropriate risk weights.
The minimum requirement for the ratio of total capital risk-weighted
assets (including certain off-balance sheet obligations, such as stand-by
letters of credit) is 8.0%. At least half of the risk-based capital must consist
of common equity, retained earnings and qualifying perpetual preferred stock,
less deductions for goodwill and various other tangibles (Tier 1 capital). The
remainder (Tier 2 capital) generally consists of a limited amount of
subordinated debt, certain hybrid capital instruments and other debt securities,
preferred stock and a limited amount of the general valuation allowance for loan
losses.
The Federal Reserve also has adopted regulations which supplement the
risk-based guidelines to include a minimum leverage ratio of Tier 1 capital to
quarterly average assets (leverage ratio) of 3%. The Federal Reserve has
emphasized that the foregoing standards are supervisory minimums and that a
banking organization will be permitted to maintain such minimum levels of
capital only if it receives the highest rating under the regulatory rating
system and the banking organization is not experiencing or anticipating
significant growth. All other banking organizations are required to maintain a
leverage ratio of at least 4.0% to 5.0% of Tier 1 capital. These rules further
provide that banking organizations experiencing internal growth or making
acquisitions will be expected to maintain capital positions substantially above
the minimum supervisory levels and comparable to peer group averages, without
significant reliance on intangible assets. The tangible Tier 1 leverage ratio is
the ratio of a banking organization's Tier 1 capital, less deductions for
intangibles otherwise includable in Tier 1 capital, to total tangible assets.
DIVIDENDS. The amount of dividends payable by Metro-County depends upon
its earnings and capital position, and is limited by federal and state law,
regulations and policy. In addition, Virginia law imposes restrictions on the
ability of all banks chartered under Virginia law to pay dividends. Under such
law, no dividend
-62-
may be declared or paid that would impair a bank's paid-in capital. The Virginia
Bureau of Financial Institutions, the Federal Reserve and the FDIC each have the
general authority to limit dividends paid by Metro-County if such payments are
deemed to constitute an unsafe and unsound practice. In particular, the Federal
Deposit Insurance Act would prohibit Metro-County from making a dividend if it
were "undercapitalized" or if such dividend would result in the institution
becoming "undercapitalized."
DEPOSIT INSURANCE. The Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA), requires that the federal banking agencies
establish five capital levels for insured depository institutions - "well
capitalized," "adequately capitalized," "undercapitalized," "significantly
undercapitalized" and "critically undercapitalized" - and requires or permits
such agencies to take certain supervisory actions as an insured institution's
capital level falls. In certain circumstances, a financial institution's low
capital position can lead to enhanced restrictions by the FDIC. An "adequately
capitalized" institution is restricted from accepting brokered deposits, and a
"significantly undercapitalized" institution must develop a capital restoration
plan and is subject to a number of mandatory and discretionary supervisory
actions. These powers and authorities are in addition to the traditional powers
of the federal banking agencies to deal with undercapitalized institutions.
SAFETY AND SOUNDNESS. The federal banking agencies have broad powers
under current federal law to take prompt corrective action to resolve problems
of insured depository institutions. The extent of these powers depends upon
whether the institutions in question are "well capitalized," "adequately
capitalized," "undercapitalized," "significantly undercapitalized," or
"critically undercapitalized," all such terms are defined under uniform
regulations defining such capital levels issued by each of the federal banking
agencies.
FDICIA also requires each federal banking regulatory agency to
prescribe, by regulation or guideline, standards for all insured depository
institution holding companies relating to
o internal controls;
o loan documentation;
o credit underwriting;
o interest rate risk exposure;
o asset growth;
o compensation, fees and benefits; and
o such other operational and managerial standards as the agency
determines to be appropriate.
The compensation standards would prohibit employment contracts or other
compensatory arrangements that provide excess compensation, fees or benefits or
could lead to material financial loss. In addition, each federal banking
regulatory agency must prescribe, by regulation or guideline, standards relating
to asset quality, earnings and stock valuation as the agency determines to be
appropriate. In general, the standards adopted by the federal banking agencies
concerning safety and soundness relate to (1) operational and managerial
matters; (2) asset quality and earnings; and (3) compensation. The operational
and managerial standards cover (a) internal controls and informational systems,
(b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e)
interest rate exposure, (f) asset growth and (g) compensation, fees and
benefits.
ACTIVITIES AND INVESTMENTS OF INSURED STATE-CHARTERED BANKS. The
activities and equity investments of FDIC-insured, state chartered banks are
generally limited to those that are permissible for national banks. Under
regulations dealing with equity investments, an insured state bank generally may
not directly or indirectly acquire or retain any equity investment of a type, or
in an amount, that is not permissible for a national bank. An insured state bank
is not prohibited from, among other things:
o acquiring or retaining a majority interest in a subsidiary;
-63-
o investing as a limited partner in a partnership the sole purpose
of which is direct or indirect investment in the acquisition,
rehabilitation or new construction of a qualified housing
project, provided that such limited partnership investments may
not exceed 2% of Metro-County's total assets;
o acquiring up to 10% of the voting stock of a company that solely
provides or reinsures directors', trustees' and officers'
liability insurance coverage or bankers' blanket bond group
insurance coverage for insured depository institutions; and
o acquiring or retaining the voting shares of a depository
institution if certain requirements are met.
In addition, an insured state-chartered bank may not, directly, or
indirectly through a subsidiary, engage as "principal" in any activity that is
not permissible for a national bank unless the FDIC has determined that such
activities would pose no risk to the insurance fund of which it is a member and
Metro-County is in compliance with applicable regulatory requirements. Any
insured state-chartered bank directly or indirectly engaged in any activity that
is not permitted for a national bank must cease the impermissible activity.
REGULATORY ENFORCEMENT AUTHORITY. Applicable banking laws include
substantial enforcement powers available to federal banking regulators. This
enforcement authority includes, among other thing, the ability to assess civil
money penalties, to issue cease-and-desist or removal orders and to initiate
injunctive actions against banking organizations and institution-affiliated
parties, as defined. In general, these enforcement actions may be initiated for
violations of laws and regulations and unsafe practices.
Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with regulatory
authorities.
GOVERNMENTAL MONETARY POLICIES
The earnings and growth of Metro-County are affected not only by
general economic conditions, but also by the monetary policies of various
governmental regulatory authorities, particularly the Federal Reserve Board. The
Federal Reserve Board implements national monetary policy by its open market
operations in United States Government securities, control of the discount rate
and establishment of reserve requirements against both member and nonmember
financial institutions' deposits. These actions have a significant effect on the
overall growth and distribution of loans, investments and deposits, as well as
the rates earned on loans, or paid on deposits. The effect of governmental
polices on Metro-County's earnings cannot be accurately predicted.
DESCRIPTION OF PROPERTIES
In April 1998, Metro-County Bank established its main banking office at
8206 Atlee Road, Mechanicsville, Virginia. In March of 2000, Metro-County
purchased a branch at 3124 West Broad Street in Richmond. The branch was opened
in May of 2000, and serves as both a full-service branch and operations center.
Metro-County leases its Lakeside branch under a separate 60-month lease, with an
option to renew such lease for two additional 60 month periods. On August 26,
1998, Metro-County, entered into a sublease agreement for the branch at 2801
Parham Road. This lease is under a separate cover and terminates on July 31,
2005. Metro-County leases its branch at 6401 Horsepen Road under a separate
60-month lease, with an option to renew such lease for three five year terms.
LEGAL PROCEEDINGS
Metro-County is not involved in any pending legal proceedings other
than non-material legal proceedings occurring in the ordinary course of
business.
-64-
BENEFICIAL OWNERSHIP OF METRO-COUNTY STOCK BY
MANAGEMENT AND PRINCIPAL SHAREHOLDERS OF METRO-COUNTY
The following table sets forth certain information as of June 12, 2002
regarding the beneficial ownership of Metro-County common stock by (1) each
person who is known by Metro-County to own beneficially more than 5% of
Metro-County common stock, (2) each director and executive officer of
Metro-County and (3) all directors and executive officers as a group. Also
included is the number of shares and percentage of Southern Financial common
stock to be owned by such persons and by directors and executive officers of
Metro-County as a group upon the exchange of Metro-County common stock for
Southern Financial common stock pursuant to the merger. Unless otherwise
indicated, based on information furnished by such shareholders, management of
Metro-County believes that each person has sole voting and dispositive power
with respect to all shares of which he is the beneficial owner and the address
of such shareholder is the same as Metro-County's address.
<Table>
<Caption>
AMOUNT/(PERCENT) PRO FORMA AMOUNT/
AND NATURE (PERCENT)
OF BENEFICIAL OWNERSHIP OF AND NATURE OF BENEFICIAL
NAME OF METRO-COUNTY OWNERSHIP OF SOUTHERN
BENEFICIAL OWNER COMMON STOCK(1) FINANCIAL COMMON STOCK(2)
---------------- -------------------------- -------------------------
SIGNIFICANT SHAREHOLDER 189,405 28,297
Myron H. Reinhart(3).............................. (8.98%) (*)
DIRECTORS AND EXECUTIVE OFFICERS
Richard E. Barrett, Sr. .......................... 84,811(4) 10,520
(3.96%) (*)
Linda M. Duke .................................... 95,389(5) 12,266
(4.46%) (*)
Mary Ann Everette ................................ 44,892(6) 4,722
(2.10%) (*)
Mahlon G. Funk, Jr. .............................. 36,966(7) 3,538
(1.73%) (*)
E. Bruce Heilman ................................. 103,516(8) 13,046
(4.83%) (*)
Elaine R. Jordan ................................. 34,849(9) 3,221
(1.63%) (*)
William T. Patrick, Jr. .......................... 42,714(10) 4,396
(2.00%) (*)
E. Saunders Ruffin ............................... 54,814(11) 6,204
(2.56%) (*)
Stafford M. White ................................ 111,897(12) 9,781
(5.06%) (*)
Gonjoe C. Winn ................................... 51,789(13) 5,752
(2.42%) (*)
Directors and executive officers of Metro-County as
a group (10 persons)(14) ......................... 661,637 73,446
(26.67%) (1.58%)
</Table>
-65-
- ----------
* Indicates ownership which does not exceed 1.0%.
(1) The percentage beneficially owned was calculated based on 2,108,264 shares
of Metro-County common stock issued and outstanding as of June 12, 2002 and
assumes the exercise by the shareholder or group named in each row of all
options for the purchase of common stock held by such shareholder or group
and exercisable within 60 days.
(2) The percentage beneficially owned was calculated based on 4,289,387
shares of Southern Financial common stock issued and outstanding and
assumes the issuance of (1) 0.1494 shares of Southern Financial common
stock in exchange for each share of Metro-County common stock and
(2) 0.0812 shares of Southern Financial common stock in exchange for
each option to acquire shares of Metro-County common stock in connection
with the merger.
(3) Mr. Reinhart's address is 8900 Brennan Road, Richmond, Virginia 23229.
The information regarding beneficial ownership is included solely in
reliance on a Schedule 13D filed with the Federal Reserve on November 2,
2000, which reflected that Mr. Reinhart owned 172,187 shares of
Metro-County common stock. In addition, on June 4, 2001, Metro-County
distributed a stock dividend equal to 10% of the issued and outstanding
shares of Metro-County common stock, thereby increasing the number of
shares held by Mr. Reinhart to 189,405, based on his ownership disclosed
in the Schedule 13D.
(4) Includes 31,521 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(5) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(6) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(7) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(8) Includes 35,453 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(9) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(10) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(11) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(12) Includes 101,701 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(13) Includes 29,101 shares that may be acquired pursuant to the exercise of
fully vested stock options.
(14) For each director and executive officer, the amount of beneficial ownership
includes shares held directly, as well as shares held jointly with family
members, shares held in retirement accounts, held in a fiduciary capacity,
held by certain members of the group members' families, or held by trusts
of which the group member is a trustee or substantial beneficiary, with
respect to which shares the group member may be deemed to have sole or
shared voting and/or investment powers.
-66-
PRINCIPAL HOLDERS OF SOUTHERN FINANCIAL COMMON STOCK
Information regarding ownership of Southern Financial common stock by
(1) each director and executive officer of Southern Financial, (2) all directors
and executive officers of Southern Financial as a group and (3) each person
owning five percent (5%) or more of the outstanding shares of Southern Financial
common stock is contained in Southern Financial's proxy statement dated March
22, 2002 for its annual meeting of shareholders held April 25, 2002, which is
incorporated by reference in this proxy statement-prospectus.
COMPARATIVE MARKET PRICES AND DIVIDEND DATA
Market Prices. The Southern Financial common stock commenced trading on
The Nasdaq Stock Market National Market System under the symbol "SFFB" on
December 14, 1993. Prior to that date, Southern Financial's common stock was
privately held and not listed on any public exchange or quotation system or
actively traded. Quotations of the sales volume and the closing sales prices of
the common stock of Southern Financial are listed daily in Nasdaq's national
market listings.
The Metro-County common stock commenced trading on the OTC Bulletin
Board on August 25, 1998 under the symbol "MCBA." Prior to that date,
Metro-County's common stock was privately held and not listed on any public
exchange or actively traded. Quotations of the sales volume and the closing sale
price of the common stock of Metro-County are listed daily on the OTC Bulletin
Board.
The following table includes the range of high and low sale prices of
Southern Financial's common stock as quoted by Nasdaq's monthly statistical
report and Metro-County's common stock as quoted by the OTC Bulletin Board for
the periods indicated.
<Table>
<Caption>
SOUTHERN FINANCIAL METRO-COUNTY
---------------------- -----------------------
HIGH LOW HIGH LOW
--------- --------- --------- ---------
2000 First Quarter...................... $ 15.80 $ 12.27 $ 8.64 $ 7.05
Second Quarter..................... 14.43 11.36 9.63 7.05
Third Quarter...................... 14.77 11.82 9.00 7.50
Fourth Quarter..................... 13.47 10.34 9.00 6.50
2001 First Quarter...................... 16.65 11.71 6.59 4.77
Second Quarter..................... 23.18 15.46 7.05 5.23
Third Quarter...................... 24.10 20.14 6.00 4.55
Fourth Quarter..................... 26.57 19.74 5.20 4.05
2002 First Quarter...................... 28.00 22.66 5.35 4.65
Second Quarter (through June 13,
2002).............................. 31.50 24.66 7.26 5.00
</Table>
On April 24, 2002, the last trading day prior to the date of the joint
announcement by Southern Financial and Metro-County that they had entered into
the merger agreement, as reported in The Wall Street Journal, the closing per
share sales price of Southern Financial common stock was $27.23. On June 13,
2002, as reported in The Wall Street Journal, the closing price of Southern
Financial common stock was $31.50. You are urged to obtain current market
quotations.
-67-
As of June 12, 2002, Metro-County had approximately 794 shareholders of
record and as of May 20, 2002, Southern Financial had approximately 607
shareholders of record.
Following the merger, Southern Financial common stock will continue to
be traded on and quoted by Nasdaq.
Dividend Data. The following table sets forth, for the periods
indicated, the cash dividends declared per share of Southern Financial common
stock. Metro-County has never paid a cash dividend on its common stock.
<Table>
<Caption>
SOUTHERN
FINANCIAL
---------
2000 First Quarter............................... $ 0.11
Second Quarter.............................. 0.11
Third Quarter............................... 0.11
Fourth Quarter.............................. 0.11
2001 First Quarter............................... 0.11
Second Quarter.............................. 0.11
Third Quarter............................... 0.11
Fourth Quarter.............................. 0.11
2002 First Quarter............................... $ 0.12
</Table>
Until the merger is completed or the merger agreement is terminated,
Metro-County is prohibited from declaring or paying any dividend on its capital
stock without first obtaining Southern Financial's approval. Regardless of this
restriction, Metro-County does not intend, consistent with past practice, to
declare a dividend in the second or third quarter of 2002.
The principal source of cash revenues to Southern Financial is
dividends paid by Southern Financial Bank with respect to its capital stock.
There are certain restrictions on the payment of such dividends imposed by
federal and state banking laws, regulations and authorities. Regulatory
authorities could impose administratively stricter limitations on the ability of
Southern Financial Bank to pay dividends to Southern Financial if such limits
were deemed appropriate to preserve certain capital adequacy requirements.
-68-
DESCRIPTION OF SOUTHERN FINANCIAL CAPITAL STOCK
GENERAL
Southern Financial has authorized two classes of stock: (1) 20,000,000
authorized shares of Southern Financial common stock, par value $0.01 a share,
4,289,387 shares of which are issued and outstanding as of June 12, 2002; and
(2) 1,000,000 authorized shares of preferred stock, par value $0.01 a share, of
which there are 13,621 Series A 6% cumulative convertible preferred stock issued
and outstanding. The following summary is qualified in its entirety by reference
to the articles of incorporation and bylaws of Southern Financial and any
amendments thereto.
SOUTHERN FINANCIAL COMMON STOCK
Voting Rights. The holders of common stock are entitled to one vote for
each share held on all matters submitted to a vote of shareholders. Holders of
shares of common stock do not have cumulative voting rights in the election of
directors, which means that the holders of more than 50% of the shares of our
common stock voting for the nominees for director can elect all of the nominees.
Dividend Rights. Subject to preferences that may be applicable to any
outstanding preferred stock, holders of common stock are entitled to receive
ratably dividends when, as and if declared by the board of directors out of
funds legally available for the payment of dividends.
Liquidation Rights. Subject to the rights of any outstanding preferred
stock, in the event of our liquidation, dissolution or winding up, holders of
common stock are entitled to share pro rata in all of the assets remaining after
payment of liabilities and liquidation preferences, if any, on any outstanding
shares of preferred stock.
Assessment and Redemption. All of the outstanding shares of our common
stock are fully paid and nonassessable. The common stock may not be voluntarily
redeemed.
Other. Holders of common stock have no subscription, sinking fund,
conversion or preemptive rights.
PREFERRED STOCK
The preferred stock is available for issuance from time to time in one
or more series for various purposes as determined by our board of directors,
without further action by our shareholders but subject to limits contained in
our articles of incorporation. The board of directors may fix by resolution the
terms of a series of preferred stock, such as:
o dividend rates and preference of dividends, if any,
o conversion rights,
o voting rights,
o terms of redemption and liquidation preferences, and
o the number of shares constituting each series.
Upon dissolution, liquidation or winding up, the holders of shares of
preferred stock are entitled to receive out of our assets an amount per share
equal to the respective liquidation preference before any payment or
distribution is made on our common stock or any capital stock that ranks junior
to the particular series of preferred stock. If our assets available for
distribution upon our dissolution, liquidation or winding up are insufficient to
pay
-69-
the full liquidation preference payable to the holders of shares of all series
of preferred stock then outstanding, distributions are to be made
proportionately on all outstanding shares of preferred stock.
SERIES A 6% CUMULATIVE CONVERTIBLE PREFERRED STOCK
Each share of our Series A 6% cumulative convertible preferred stock
has a liquidation preference over junior shares of our capital stock, including
our common stock, of $14.50 plus any accrued and unpaid dividends and bears an
annual dividend at the rate of 6%. Dividends are cumulative and payable
quarterly if, as and when declared by the board of directors from funds legally
available therefor. Our Series A 6% cumulative convertible preferred stock is
convertible, at the option of the holder, into 1.6133 shares of our common
stock. The conversion rate will be adjusted upon the occurrence of certain
events, including, among others, if we:
o declare a stock dividend on our common stock,
o subdivide our common stock,
o reduce the number of common shares outstanding, or
o issue any shares of capital stock by reclassification of our
common stock.
Except as indicated below or as provided by applicable law, the holders
of our Series A 6% cumulative convertible preferred stock are not entitled to
vote. However, such holders do have the right as a class to elect two directors
whenever dividends payable on our preferred stock are in arrears in an aggregate
amount equal to six quarterly dividends. Currently, there are no preferred stock
dividends in arrears.
This right to elect two directors continues until such time as the
dividends accumulated on the preferred stock have been paid in full or declared
and set apart for payment at which time such right terminates (subject to
renewal and divestment from time to time upon the same terms and conditions),
and any directors elected by the holders of our Series A 6% cumulative
convertible preferred stock shall cease to be directors. In addition, we may
not, directly or indirectly or through merger or consolidation with any other
corporation, without the consent of the holders of at least two-thirds of our 6%
cumulative convertible preferred stock then outstanding, voting separately as a
class
o create any class of stock ranking prior to the Series A 6%
cumulative convertible preferred stock in rights and preferences
or
o amend, alter or repeal any of the specific terms of our Series A
6% cumulative convertible preferred stock in a manner which
materially and adversely affects such specific terms.
BUSINESS OF SOUTHERN FINANCIAL
Southern Financial is a bank holding company headquartered in
Warrenton, Virginia. Southern Financial conducts business through its subsidiary
Southern Financial Bank. Southern Financial operates 21 full-service banking
locations, 19 in the northern Virginia, one in Georgetown in the District of
Columbia and one in Charlottesville, Virginia.
Southern Financial operates under a community banking philosophy and
seeks to become the premier provider of financial services to small to
medium-sized businesses in its market while maintaining steady asset growth,
consistent core earnings and sound asset quality. Southern Financial offers its
customers, primarily consumers and small to medium-sized businesses, a variety
of traditional loan and deposit products, which it tailors to the specific needs
of customers in a given market.
Southern Financial began operations in 1986 and has grown through a
combination of internal growth, the opening of de novo branches and the
acquisition of community banks. As of March 31, 2002, Southern Financial had
total assets of $791.8 million, total deposits of $634.9 million and total
stockholders' equity of $64.9 million.
-70-
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Certain documents filed by and relating to Southern Financial are
incorporated herein by reference. See "Where You Can Find More Information" on
page 69 for a list of these documents.
INTERESTS OF CERTAIN PERSONS
No director or executive officer of Southern Financial has any material
direct or indirect financial interest in Metro-County or the merger, except as a
director, executive officer or shareholder of Southern Financial or its
subsidiaries.
MANAGEMENT AFTER THE MERGER
The present management of Southern Financial Bank will manage Southern
Financial Bank after completion of the merger. The board of directors of
Southern Financial and Southern Financial Bank will remain the same.
EXPERTS
The consolidated financial statements of Southern Financial Bancorp,
Inc. as of December 31, 2001 and 2000 and for each of the years in the
three-year period ended December 31, 2001 incorporated in this proxy
statement-prospectus by reference from the Southern Financial Annual Report on
Form 10-K for the year ended December 31, 2001 have been audited by KPMG LLP,
independent auditors, as stated in their report which is incorporated herein by
reference, and have been so incorporated in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
The financial statements of Metro-County as of December 31, 2001 and
2000 and for each of the years in the three-year period ended December 31, 2001
included in this proxy statement-prospectus have been audited by Mitchell,
Wiggins & Company, LLP, independent auditors, as stated in their reports
appearing herein, and are included in reliance upon the report of such firm
given upon their authority as experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Southern Financial common stock to be
issued by Southern Financial will be passed upon by Bracewell & Patterson,
L.L.P., Reston, Virginia. Certain legal matters with respect to the merger will
be passed upon for Metro-County by LeClair Ryan, A Professional Corporation,
Richmond, Virginia.
OTHER MATTERS
As of the date of this proxy statement-prospectus, the board of
directors of Metro-County knows of no matters that will be presented for
consideration at the special meeting of its shareholders other than as described
in this proxy statement-prospectus. However, if any other matters are properly
brought before the Metro-County special meeting or any adjournment or
postponement of the special meeting and are voted upon, it is intended that
holders of the proxies will act in accordance with their best judgment unless
otherwise indicated in the appropriate box on the proxy.
WHERE YOU CAN FIND MORE INFORMATION
Southern Financial files reports, proxy statements and other
information with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. You may read and copy this information at the SEC's Public
Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet
site that contains reports, proxy and information statements and
-71-
other information about issuers, like Southern Financial, who file
electronically with the SEC. The address of that site is http://www.sec.gov.
The SEC allows Southern Financial to "incorporate by reference", which
means that Southern Financial can disclose important business and financial
information to you by referring you to another document filed separately with
the SEC. The information that Southern Financial incorporates by reference is an
important part of this proxy statement-prospectus, and information that Southern
Financial files later with the SEC will automatically update and supersede this
incorporated information. Southern Financial incorporates by reference the
documents listed below:
o Annual Report on Form 10-K for the year ended December 31, 2001;
o Quarterly Report on Form 10-Q for the quarter ended March 31,
2002;
o Current Report on Form 8-K dated April 26, 2002; and
o Proxy Statement dated March 22, 2002, relating to its annual
meeting of shareholders held on April 25, 2002.
Southern Financial also incorporates by reference any future filings it
makes with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act
after the date of this proxy statement-prospectus and before the special meeting
at which Metro-County shareholders consider and vote on the merger. Any
statement contained in this proxy statement-prospectus or in a document
incorporated or deemed to be incorporated by reference in this proxy
statement-prospectus shall be deemed to be modified or superseded to the extent
that a statement contained herein or in any subsequently filed document which
also is, or is deemed to be, incorporated by reference herein modified or
superceded such statement.
Upon your written or oral request, Southern Financial will provide you
without charge a copy of any or all of the documents incorporated by reference
herein, other than the exhibits to those documents, unless the exhibits are
specifically incorporated by reference into the information that this proxy
statement-prospectus incorporates. Your written or oral requests for copies of
this proxy statement-prospectus and documents Southern Financial has
incorporated by reference should be directed to:
SOUTHERN FINANCIAL BANCORP, INC.
37 EAST MAIN STREET
WARRENTON, VIRGINIA 20186
ATTENTION: PATRICIA A. FERRICK
TELEPHONE (540) 341-3900
FACSIMILE (540) 349-3904
TO OBTAIN TIMELY DELIVERY, YOU MUST MAKE A WRITTEN OR ORAL REQUEST FOR
A COPY OF SUCH INFORMATION BY JULY 18, 2002.
Any statement contained in a document incorporated or deemed to be
incorporated by reference into this proxy statement-prospectus will be deemed to
be modified or superseded for purposes of this proxy statement-prospectus to the
extent that a statement contained in this proxy statement-prospectus or any
other subsequently filed document that is deemed to be incorporated by reference
into this proxy statement-prospectus modifies or supersedes the statement. Any
statement so modified or superseded will not be deemed, except as so modified or
superseded, to constitute a part of this proxy statement/prospectus.
Southern Financial has filed a registration statement on Form S-4 under
the Securities Act with the SEC with respect to Southern Financial common stock
to be issued to Metro-County shareholders in the merger. This proxy
statement-prospectus constitutes the prospectus of Southern Financial filed as
part of the registration statement. This proxy statement-prospectus does not
contain all of the information set forth in the registration statement because
certain parts of the registration statement are omitted in accordance with the
rules and regulations of the SEC. The registration statement and its exhibits
are available for inspection and copying as set forth above.
-72-
You should rely only on the information contained in this proxy
statement-prospectus or contained in documents incorporated by reference into
this document. Neither Southern Financial nor Metro-County have authorized
anyone to provide you with different information. Therefore, if anyone gives you
different or additional information, you should not rely on it. The information
contained in this proxy statement-prospectus is correct as of its date. It may
not continue to be correct after this date. Metro-County has supplied all of the
information about Metro-County contained in this proxy statement-prospectus and
Southern Financial supplied all of the information contained in this proxy
statement-prospectus about Southern Financial and its subsidiaries. Each of us
is relying on the correctness of the information supplied by the other.
This proxy statement-prospectus does not constitute an offer to sell,
or a solicitation of an offer to purchase, the securities offered by this proxy
statement-prospectus, or the solicitation of a proxy, in any jurisdiction to or
from any person to whom or from it is unlawful to make such offer, solicitation
of an offer or proxy solicitation in such jurisdiction.
-73-
INDEX TO FINANCIAL STATEMENTS OF
METRO-COUNTY BANK OF VIRGINIA, INC.
<Table>
<Caption>
Page
----
Balance Sheets as of March 31, 2002 (Unaudited) and December 31, 2001........................................F-2
Statements of Income for the Three Months Ended March 31,
2002 and 2001 (Unaudited)...........................................................................F-3
Statements of Changes in Stockholders' Equity for the Three Months Ended March 31,
2002 and 2001 (Unaudited)...........................................................................F-4
Statements of Cash Flows for the Three Months Ended March 31, 2002
and 2001 (Unaudited)................................................................................F-5
Notes to Financial Statements................................................................................F-6
Independent Auditors' Report for the Years Ended December 31, 2001,
2000 and 1999 .....................................................................................F-11
Balance Sheets as of December 31, 2001 and 2000.............................................................F-12
Statements of Income for the Years Ended December 31, 2001,
2000 and 1999 .....................................................................................F-13
Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 2001, 2000 and 1999 ..................................................................F-14
Statements of Cash Flows for the for the Years Ended December 31, 2001,
2000 and 1999 .....................................................................................F-15
Notes to Financial Statements ..............................................................................F-16
</Table>
F-1
METRO-COUNTY BANK OF VIRGINIA, INC.
BALANCE SHEETS
MARCH 31, 2002 (UNAUDITED) AND DECEMBER 31, 2001
(000'S EXCEPT PER SHARE DATA)
<Table>
<Caption>
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
ASSETS
Cash & due from banks $ 4,002 $ 2,584
Interest Bearing Balances 8,072 11,210
Federal Funds sold 3,346 1,571
-------- --------
Total cash & cash equivalents 15,420 15,365
Securities available for sale 3,234 2,764
Loans:
Loans, gross 72,273 74,199
Less: allowance for loan losses (984) (831)
-------- --------
Loans, net 71,289 73,368
Premises and equipment, net 1,537 1,564
Other Assets 705 698
-------- --------
TOTAL ASSETS $ 92,185 $ 93,760
======== ========
LIABILITIES
Deposits:
Noninterest-bearing demand $ 9,303 $ 10,365
Savings and interest-bearing demand deposits 34,642 33,609
Time deposits 40,192 41,825
-------- --------
Total deposits 84,137 85,799
Fed Funds Purchased 0 0
Securities sold under agreements to repurchase 0 0
Other liabilities 383 370
-------- --------
TOTAL LIABILITIES 84,520 86,169
STOCKHOLDERS' EQUITY
Common stock, $1.60 par value: 3,000,000 shares authorized;
2,100,564 shares issued and outstanding 3,361 3,361
Surplus 6,292 6,292
Retained earnings (deficit) (1,979) (2,071)
Accumulated other comprehensive income (9) 9
-------- --------
TOTAL STOCKHOLDERS' EQUITY 7,665 7,591
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 92,185 $ 93,760
======== ========
</Table>
See accompanying notes to interim financial statements
F-2
METRO-COUNTY BANK OF VIRGINIA, INC.
STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(000'S EXCEPT PER SHARE DATA)
<Table>
<Caption>
2002 2001
------ ------
INTEREST INCOME:
Interest and fees on loans $1,399 $1,398
Investment securities 29 153
Interest Bearing Balances 51 N/A
Federal funds sold 18 54
------ ------
Total interest and dividend income 1,497 1,605
INTEREST EXPENSE:
Money market and NOW accounts 164 263
Savings 5 8
Time deposits, $100,000 and over 81 142
Other time deposits 364 459
Federal Funds Purchased 0 0
------ ------
Total interest expense 614 872
Net interest income 883 733
Provision for loan losses 157 62
------ ------
Net interest income after provision for loan losses 726 671
NONINTEREST INCOME:
Service charges on deposit accounts 37 35
Other noninterest income 112 153
Net gain (loss) on sale of securities 0 0
------ ------
Total noninterest income 149 188
NONINTEREST EXPENSE:
Salaries and employee benefits 300 299
Occupancy 69 74
Equipment expense 53 67
Marketing expense 3 11
Data Processing 54 51
Merchant services 55 62
Other expenses 202 168
------ ------
Total noninterest expense 736 732
NET INCOME BEFORE INCOME TAX EXPENSE 139 127
Income tax expense 47 43
------ ------
Net Income $ 92 $ 84
====== ======
Net income per common share, basic $0.044 $0.040*
====== ======
Net income per common share, diluted $0.041 $0.036*
====== ======
</Table>
See accompanying notes to interim financial statements
* Adjusted for a 10% stock dividend payable to stockholders of record May 18,
2001, Payable June 4, 2001.
F-3
METRO-COUNTY BANK OF VIRGINIA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(000'S EXCEPT FOR PER SHARE DATA)
<Table>
<Caption>
Retained Accumulated Other Common
Total Earnings Comprehensive Income Stock Surplus
------- -------- -------------------- ------- -------
BALANCE AT DECEMBER 31, 2000 $ 7,249 $(1,092) $ (60) $ 3,046 $ 5,355
Comprehensive income:
Net Income 84 84 0 0 0
Change in Net Unrealized Gains (Losses) on 64 0 64 0 0
Securities Available For Sale Net of
Income Tax Benefit
Exercise of stock options (3,000 shares) 11 0 0 5 6
BALANCE AT MARCH 31, 2001 $ 7,408 $(1,008) $ 4 $ 3,051 $ 5,361
======= ======= ======= ======= =======
BALANCE AT DECEMBER 31, 2001 $ 7,591 $(2,071) $ 9 $ 3,361 $ 6,292
Comprehensive income:
Net income 92 92 0 0 0
Change in Net Unrealized Gains (Losses) on (18) 0 (18) 0 0
Securities Available For Sale Net of
Income Tax Benefit
BALANCE AT MARCH 31, 2002 $ 7,655 $(1,979) $ (9) $ 3,361 $ 6,292
======= ======= ======= ======= =======
</Table>
See accompanying notes to interim financial statements
F-4
METRO-COUNTY BANK OF VIRGINIA, INC.
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
(UNAUDITED)
(000'S OMITTED EXCEPT PER SHARE DATA)
<Table>
<Caption>
2002 2001
-------- --------
Operating activities:
Net income $ 92 $ 84
Adjustments to reconcile net income to net cash provided by operating
activities:
Provision for loan losses 157 62
Depreciation and amortization 49 58
Net amortization of premiums and accretion of 2 0
Discounts on securities
Decrease (increase) in interest receivable 17 (95)
Increase (decrease) in interest payable (25) (3)
Increase (decrease) in other operating assets and liabilities (3) 123
-------- --------
Net cash provided by operating activities 289 229
-------- --------
Investing activities:
Maturities and calls of available for sale securities 1,000 2,000
Purchase of available for sale securities (1,472) 0
Paydowns of held to maturity securities 0 0
Net (increase) decrease in loans 1,922 (4,846)
Purchase of premises and equipment (22) (5)
Proceeds from sale of equipment 0 0
Net cash provided by (used in) investing activities 1,428 (2,851)
-------- --------
Financing activities:
Net increase (decrease) in deposits (1,662) 2,399
Net proceeds from the issuance of common stock 0 11
Net increase in short-term borrowing 0 0
-------- --------
Net cash provided by financing activities (1,662) 2,410
Increase in cash and cash equivalents 55 (212)
Cash and cash equivalents at beginning of period 15,365 7,886
-------- --------
Cash and cash equivalents at end of period $ 15,420 $ 7,674
======== ========
Supplemental cash flow information, Interest paid 639 872
======== ========
Income Taxes Paid 0 0
======== ========
</Table>
See accompanying notes to interim financial statements
F-5
METRO-COUNTY BANK OF VIRGINIA, INC.
MARCH 31, 2002
NOTES TO INTERIM FINANCIAL STATEMENTS
1. The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions for the preparation of
interim financial statements. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles. In management's opinion, the financial information, which
is unaudited, reflects all adjustments necessary for a fair
presentation of the financial position and results of operations and
cash flows for the interim periods. The statements should be read in
conjunction with the Notes to Financial Statements included in the
Bank's Annual Report for the year ended December 31, 2001.
2. The results of operations for the three-month period ended March 31,
2002 and 2001 are not necessarily indicative of the results to be
expected for the full year.
3. Loans are summarized as follows:
<Table>
<Caption>
($000's) March 31, 2002 December 31, 2001
-------------- -----------------
Commercial $29,936 $30,444
Real estate:
Construction and land development 6,098 5,428
Mortgage 29,077 30,808
Consumer 7,162 7,519
------- -------
Total Gross Loans $72,273 $74,199
------- -------
</Table>
4. Securities Available For Sale
The following sets forth the composition of securities available for sale, which
are carried at market value as of March 31, 2002.
<Table>
<Caption>
Gross Gross
Amortized Unrealized Unrealized Fair Market
Cost Gains Losses Value
--------- ---------- ---------- -----------
($000's)
March 31, 2002
U.S. Government Agencies $ 3,010 $ 0 $ (14) $ 2,996
Other Equity Securities 238 0 0 238
------- ------- ------- -------
Total
3,248 0 (14) 3,234
======= ======= ======= =======
December 31, 2001
U.S. Government Agencies 2,512 14 0 2,526
Other Equity Securities 238 0 0 238
------- ------- ------- -------
Total
2,750 14 0 2,764
======= ======= ======= =======
</Table>
F-6
4. Earnings per share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amount for all periods have been presented and, where appropriate, restated to
conform to the Statement 128 requirements.
For the three months ended March 31, 2002, weighted average shares for
computation of basic earnings per share and diluted earnings per share were
2,100,564 and 2,257,195 respectively.
METRO-COUNTY BANK OF VIRGINIA, INC.
SELECTED BALANCE SHEET DATA
<Table>
<Caption>
($000's) March 31, 2002 December 31, 2001
-------------- -----------------
Selected Data at Period-end
Loans, net $71,289 $73,368
Total securities (Fair Market Value) 3,234 2,764
Total assets 92,185 93,760
Total deposits 84,137 85,799
Stockholders' equity 7,655 7,591
Selected Data (YTD) Daily Averages
Loans, net $72,526 $65,903
Total securities 2,937 4,455
Total assets 92,425 86,214
Total deposits 84,278 78,228
Stockholders' equity 7,641 7,458
</Table>
F-7
METRO-COUNTY BANK OF VIRGINIA, INC
SELECTED INCOME STATEMENT DATA
<Table>
<Caption>
($000's except per share data) 3 Months Ended 3 Months Ended 12 Months Ended
March 31, 2002 March 31, 2001 December 31, 2001
-------------- -------------- -----------------
Selected Income Statement Data
Interest income $1,497 $1,605 $6,428
Interest expense 614 872 3,377
Net interest income 883 733 3,051
Provision for loan losses 157 62 471
Noninterest income 149 188 674
Noninterest expense 736 732 2,880
Income taxes 47 43 120
Net income 92 84 254
Selected Ratios and Per Share Data
Return on average assets .40% .42% .29%
Return on average equity 4.81% 4.59% 3.39%
Net income (loss) per share (basic) $ .044 $ .040 $ .12
Book value per share (basic) $ 3.65 $ 3.53 $ 3.61
</Table>
Note: Return on average equity, book value and basic earnings per share have
been computed including a 10% stock dividend for stockholders as of May 18,
2001, payable to stockholders on June 4, 2001.
F-8
AVERAGE BALANCES, INCOME AND EXPENSES, YIELDS AND RATES
The following table depicts interest income on earnings assets and
related average yields as well as interest expense on interest-bearing
liabilities and related average rates paid for the periods indicated.
<Table>
<Caption>
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 2002 MARCH 31, 2001
YTD INTEREST AVERAGE YTD INTEREST AVERAGE
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
(dollars in thousands) BALANCE EXPENSE RATE* BALANCE EXPENSE RATE*
-------- -------- -------- -------- -------- --------
ASSETS:
Interest Bearing Balances $ 8,292 $ 51 2.46% N/A N/A N/A
Investment securities 2,689 29 4.31 10,925 153 5.61%
Total Loans(1) 73,404 1,399 7.62 60,693 1,398 9.21
Federal funds sold 4,443 18 1.62 4,197 54 5.11
-------- -------- -------- -------- -------- --------
Total earning assets 88,828 1,497 6.74 75,815 1,605 8.47
-------- -------- -------- --------
less: allowance for loan losses (879) (746)
Total nonearning assets 4,476 4,378
-------- --------
Total Assets 92,425 79,447
======== ========
Liabilities & Equity
Interest-bearing deposits:
NOW $ 6,212 $ 20 1.29% $ 4,966 $ 31 2.48%
Savings 1,456 5 1.36 1,070 8 3.15
Money market 26,364 144 2.18 19,799 232 4.69
Time deposits >$100,000 7,642 81 4.24 8,939 143 6.37
Time deposits <$100,000 32,839 364 4.43 29,696 458 6.17
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits 74,513 64,470 872 5.41
Short-term borrowings 0 0 0 0 0 0
-------- -------- -------- -------- -------- --------
Total interest bearing liabilities 74,513 614 3.30 64,470 872 5.41
-------- -------- -------- --------
Noninterest-bearing liabilities:
Demand deposits 9,766 7,129
Other liabilities 505 504
-------- --------
Total Liabilities 84,784 72,103
Shareholders' equity 7,641 7,344
-------- --------
Total Liabilities & Equity 92,425 79,447
======== ========
Net interest Income 883 733
======== ========
Interest rate spread(2) 3.44% 3.06%
Interest expense as a percent of 2.77% 4.60%
average earning assets
NET INTEREST MARGIN(3) 3.98% 3.87%
Earning Assets/Total Assets 96.1% 95.4%
</Table>
(1) Nonaccruing loans are included in average loans outstanding
(2) Interest spread is the average yield earned on earning assets less the
average rate paid on interest-bearing liabilities
(3) Net interest margin is net interest income expressed as a percentage of
average earning assets
F-9
METRO-COUNTY BANK OF VIRGINIA, INC.
LOAN LOSS DATA
<Table>
<Caption>
For the periods ended March 31, 2002 March 31, 2001 December 31, 2001
-------------- -------------- -----------------
($000's)
Balance at beginning of period $ 831 $ 729 $ 729
Provision for loan losses 157 62 471
Loans charged off 4 3 380
Recoveries 0 0 10
Balance at end of period 984 788 831
Ratio of allowance for loan losses to loans, net
of unearned income and deferred fees 1.36% 1.25% 1.12%
Ratio of net charged-offs to average loans, net
of unearned and deferred fees(1) 0.01% 0.02% 0.55%
Ratio of allowance for loan losses to
nonperforming loans(2) 4.37x 2.21x 20.27x
</Table>
(1) Net charge-offs are calculated on an annualized basis.
(2) The Company defines nonperforming loans as total nonaccrual and
restructured loans. Loans 90 days past due and still accruing are excluded
from nonperforming loans.
F-10
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
Metro-County Bank of Virginia, Inc.
Mechanicsville, Virginia
We have audited the accompanying balance sheets of Metro-County Bank of
Virginia, Inc., as of December 31, 2001 and 2000, and the related statements of
income, changes in stockholders' equity, and cash flows for the years ended
December 31, 2001, 2000, and 1999. These financial statements are the
responsibility of the Bank's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Metro-County Bank of Virginia,
Inc., as of December 31, 2001 and 2000, and the results of its operations and
its cash flows for the years ended December 31, 2001, 2000, and 1999, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ MITCHELL, WIGGINS & COMPANY LLP
Richmond, Virginia
January 11, 2002
F-11
METRO-COUNTY BANK OF VIRGINIA, INC.
BALANCE SHEETS
December 31, 2001 and 2000
<Table>
<Caption>
ASSETS 2001 2000
------------ ------------
Cash and due from banks $ 2,583,658 $ 2,736,150
Federal funds sold 1,571,133 5,150,000
Interest-bearing deposits 11,210,442 --
------------ ------------
TOTAL CASH AND CASH EQUIVALENTS 15,365,233 7,886,150
Securities available for sale 2,763,790 11,113,150
Loans, net 73,368,001 57,480,024
Bank premises and equipment, net 1,564,497 1,681,973
Accrued interest receivable 368,047 389,189
Other assets 330,354 413,923
------------ ------------
$ 93,759,922 $ 78,964,409
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits:
Demand deposits $ 10,364,823 $ 7,605,766
Interest-bearing demand deposits 32,056,467 23,853,670
Savings deposits 1,552,972 1,075,884
Time deposits, $100,000 and over 8,178,395 9,012,186
Other time deposits 33,646,372 29,794,642
------------ ------------
85,799,029 71,342,148
Accrued interest payable 239,665 308,767
Other liabilities 129,734 64,617
------------ ------------
86,168,428 71,715,532
------------ ------------
Commitments and Contingencies (Note 8)
Stockholders' Equity
Common stock, $1.60 par value; 3,000,000 authorized;
2,100,564 and 1,903,856 shares issued and outstanding
in 2001 and 2000, respectively 3,360,902 3,046,170
Surplus 6,292,321 5,355,147
Retained earnings (deficit) (2,070,682) (1,092,399)
Accumulated other comprehensive income 8,953 (60,041)
------------ ------------
7,591,494 7,248,877
------------ ------------
$ 93,759,922 $ 78,964,409
============ ============
</Table>
See Notes to Financial Statements.
F-12
METRO-COUNTY BANK OF VIRGINIA, INC.
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
2001 2000 1999
----------- ----------- -----------
Interest income:
Interest and fees on loans $ 5,791,899 $ 4,755,874 $ 3,464,374
Interest on securities:
U. S. government agencies and corporations 225,262 605,838 625,304
Other securities 251,158 -- --
Interest on federal funds sold 160,132 145,828 105,955
----------- ----------- -----------
TOTAL INTEREST INCOME 6,428,451 5,507,540 4,195,633
----------- ----------- -----------
Interest expense:
Interest on deposits 3,377,523 2,884,666 2,039,879
Other -- 2,450 2,493
----------- ----------- -----------
TOTAL INTEREST EXPENSE 3,377,523 2,887,116 2,042,372
----------- ----------- -----------
NET INTEREST INCOME 3,050,928 2,620,424 2,153,261
Provision for loan losses 471,494 218,241 342,119
----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,579,434 2,402,183 1,811,142
----------- ----------- -----------
Other income:
Service charges, commissions and fees 631,059 407,364 301,373
Gain (loss) on sale and maturity of
securities available for sale 122 -- (2,188)
Other 43,337 3,513 20,078
----------- ----------- -----------
TOTAL OTHER INCOME 674,518 410,877 319,263
----------- ----------- -----------
Other expenses:
Salaries and wages 1,099,861 1,012,909 717,890
Employee benefits 195,070 157,577 107,758
Occupancy expense 291,264 263,036 200,303
Equipment expense 224,191 191,790 132,784
Data processing expense 206,104 163,315 112,418
Merchant services expenses 189,549 114,178 123,675
Advertising and public relations 55,995 77,899 75,019
Taxes and licenses 54,036 57,200 57,762
Other operating expenses 563,731 449,476 311,078
----------- ----------- -----------
TOTAL OTHER EXPENSES 2,879,801 2,487,380 1,838,687
----------- ----------- -----------
INCOME BEFORE INCOME TAXES 374,151 325,680 291,718
Income taxes 120,575 95,328 97,302
----------- ----------- -----------
NET INCOME $ 253,576 $ 230,352 $ 194,416
=========== =========== ===========
Basic earnings per share $ 0.12 $ 0.11 $ 0.09
=========== =========== ===========
Diluted earnings per share $ 0.11 $ 0.10 $ 0.08
=========== =========== ===========
</Table>
See Notes to Financial Statements.
F-13
METRO-COUNTY BANK OF VIRGINIA, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
Accumulated
Retained Other
Common Earnings Comprehensive
Stock Surplus (Deficit) Income Total
----------- ----------- ----------- ------------- -----------
Balance, January 1, 1999 $ 2,769,040 $ 4,139,388 $ (24,485) $ (29,181) $ 6,854,762
-----------
Comprehensive income:
Net income -- -- 194,416 -- 194,416
Other comprehensive income, net of tax:
Unrealized loss on securities available
for sale, net of deferred income tax
benefit of $114,259 -- -- -- (221,798) (221,798)
Less reclassification adjustment for losses included in
net income, net of deferred income taxes of $744 -- -- -- (1,444) (1,444)
-----------
Total comprehensive income (28,826)
-----------
Purchase of common stock:
Payment for 4 fractional shares of common stock (6) (44) -- -- (50)
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 2,769,034 4,139,344 169,931 (252,423) 6,825,886
-----------
Comprehensive income:
Net income -- -- 230,352 -- 230,352
Other comprehensive income, net of tax:
Unrealized gain on securities available
for sale, net of deferred income tax
expense of $99,106 -- -- -- 192,382 192,382
-----------
Total comprehensive income 422,734
-----------
Purchase of common stock:
Payment for 55 fractional shares of common stock -- -- (471) -- (471)
Issuance of common stock:
10% stock dividend (173,010 shares) 276,816 1,215,395 (1,492,211) -- --
Exercise of stock options (200 shares) 320 408 -- -- 728
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2000 3,046,170 5,355,147 (1,092,399) (60,041) 7,248,877
-----------
Comprehensive income:
Net income -- -- 253,576 -- 253,576
Other comprehensive income, net of tax:
Unrealized gain on securities available
for sale, net of deferred income tax
expense of $35,584 -- -- -- 69,075 69,075
Less reclassification adjustment for gains included in
net income, net of deferred income taxes of $42 -- -- -- (81) (81)
-----------
Total comprehensive income 322,570
-----------
Purchase of common stock:
Payment for 278 fractional shares of common stock -- -- (1,793) -- (1,793)
Issuance of common stock:
10% stock dividend (190,708 shares) 305,132 924,934 (1,230,066) -- --
Exercise of stock options (6,000 shares) 9,600 12,240 -- -- 21,840
----------- ----------- ----------- ----------- -----------
Balance, December 31, 2001 $ 3,360,902 $ 6,292,321 $(2,070,682) $ 8,953 $ 7,591,494
=========== =========== =========== =========== ===========
</Table>
See Notes to Financial Statements.
F-14
METRO-COUNTY BANK OF VIRGINIA, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999
<Table>
<Caption>
2001 2000 1999
------------ ------------ ------------
OPERATING ACTIVITIES
Net income $ 253,576 $ 230,352 $ 194,416
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 206,468 182,545 130,797
Amortization 17,604 12,673 12,673
Deferred income taxes (34,365) (77,284) (84,376)
Provision for loan losses 471,494 218,241 342,119
Amortization and accretion on securities (633) (798) (798)
Realized (gain) loss on sale and maturity of
securities available for sale (122) -- 2,188
Loss on disposal of equipment -- 22,009 1,295
Change in operating assets and liabilities:
(Increase) decrease in accrued interest receivable 21,142 (103,172) (56,059)
Increase (decrease) in accrued interest payable (69,102) 142,905 47,793
Net increase (decrease) in other operating assets
and liabilities 129,903 (233,884) 56,880
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 995,965 393,587 646,928
------------ ------------ ------------
INVESTING ACTIVITIES
Proceeds from maturities of securities
available for sale 11,500,000 -- --
Proceeds from sale of securities available for sale -- -- 697,813
Purchase of securities available for sale (3,013,297) -- (1,996,875)
Purchase of Federal Reserve Bank stock (32,050) -- (1,300)
Net increase in loans (16,359,471) (11,136,291) (18,363,306)
Proceeds from sale of equipment -- 800 2,100
Purchase of premises and equipment (88,992) (212,190) (652,188)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES (7,993,810) (11,347,681) (20,313,756)
------------ ------------ ------------
FINANCING ACTIVITIES
Net increase in deposits 14,456,881 16,876,025 16,711,290
Net proceeds from issuance of common stock 21,840 728 --
Payment for purchase of fractional shares of
common stock (1,793) (471) (50)
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 14,476,928 16,876,282 16,711,240
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 7,479,083 5,922,188 (2,955,588)
Cash and cash equivalents, beginning 7,886,150 1,963,962 4,919,550
------------ ------------ ------------
Cash and cash equivalents, ending $ 15,365,233 $ 7,886,150 $ 1,963,962
------------ ------------ ------------
Supplemental Disclosures Of Cash Flow Information
Interest paid $ 3,446,625 $ 2,744,211 $ 1,994,579
Income taxes paid 164,157 319,165 55,638
------------ ------------ ------------
Supplemental Schedule Of Noncash Investing and
and Financing Activities
Acquisition of premises and equipment:
Purchase price $ 95,182 $ -- $ --
Book value of assets traded in (6,190) -- --
------------ ------------ ------------
CASH PAID TO ACQUIRE PREMISES AND EQUIPMENT $ 88,992 $ -- $ --
============ ============ ============
</Table>
See Notes to Financial Statements.
F-15
METRO-COUNTY BANK OF VIRGINIA, INC.
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Nature of operations: Metro-County Bank of Virginia, Inc., (the Bank) was
organized and incorporated under the laws of the Commonwealth of Virginia on
March 29, 1996. The Bank commenced operations on May 20, 1997, once the charter
was obtained, and currently operates five branches providing a variety of
financial services to individuals and corporate customers located in the
metropolitan Richmond area. The Bank's primary deposit products are checking
accounts, savings accounts, and certificates of deposit. Its primary lending
products are residential mortgage, construction, installment and commercial
business loans.
Use of estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. In connection with the determination
of the estimated losses on loans, management obtains independent appraisals for
significant collateral.
The Bank's loans are generally secured by specific items of collateral including
real property, consumer assets, and business assets. Although the Bank has a
diversified loan portfolio, a substantial portion of its debtors' ability to
honor their contracts is dependent on local real estate market conditions.
While management uses available information to recognize losses on loans, future
reductions in the carrying amount of loans may be necessary based on changes in
local economic conditions. In addition, regulatory agencies, as an integral part
of their examination process, periodically review the estimated losses on loans.
Such agencies may require the Bank to recognize additional losses based on their
judgments about information available to them at the time of their examination.
Because of these factors, it is reasonably possible that the estimated losses on
loans may change materially in the near term. However, the amount of the change
that is reasonably possible cannot be estimated.
Cash and cash equivalents: For purposes of reporting the statements of cash
flows, the Bank includes cash on hand, amounts due from banks, interest-bearing
deposits, and federal funds sold as cash and cash equivalents on the
accompanying balance sheets. Cash flows from deposits and loans are reported
net.
The Bank maintains amounts due from banks which, at times, may exceed federally
insured limits. The Bank has not experienced any losses in such accounts.
F-16
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Bank is required to maintain average reserve and clearing balances in cash
with the Federal Reserve Bank. The total of these balances, after receiving
credit for vault cash on hand, was approximately $100,000 at December 31, 2001
and 2000.
Securities: Debt securities are classified as held to maturity when the Bank has
the positive intent and ability to hold the securities to maturity. Securities
held to maturity are carried at amortized cost. The amortization of premiums and
accretion of discounts are recognized in interest income using methods
approximating the interest method over the period to maturity.
Debt securities not classified as held to maturity are classified as available
for sale. Securities available for sale are carried at fair value with aggregate
gains and losses reported in other comprehensive income. Realized gains (losses)
on securities available for sale are included in net income and, when
applicable, are reported as a reclassification adjustment, net of tax, in other
comprehensive income. Gains and losses on sales of securities available for sale
are determined on the specific identification method.
Declines in the fair value of individual held to maturity and available for sale
securities below their cost that are other than temporary result in write-downs
of the individual securities to their fair value. The related write-downs are
included in earnings as realized losses.
Loans and allowance for loan losses: Loans are stated at unpaid principal
balances, less the allowance for loan losses and unearned discounts.
Loan origination and commitment fees, as well as certain direct loan origination
costs, are deferred and amortized as a yield adjustment over the lives of the
related loans using methods approximating the interest method.
The allowance for loan losses is maintained at a level which, in management's
judgment, is adequate to absorb credit losses inherent in the loan portfolio.
The amount of the allowance is based on management's evaluation of the
collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, economic conditions, and other risks inherent in the portfolio.
Allowances for impaired loans are generally determined based on collateral
values or the present value of estimated cash flows. Although management uses
available information to recognize losses on loans, because of uncertainties
associated with local economic conditions, collateral values, and future cash
flows on impaired loans, it is reasonably possible that a material change could
occur in the allowance for loan losses in the near term. However, the amount of
the change that is reasonably possible cannot be estimated. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the allowance relating to
impaired loans are charged or credited to the provision for loan losses.
F-17
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Impaired loans are measured based on the present value of expected future cash
flows discounted at the loan's effective interest rate or as an expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. A loan is impaired when it is probable the
creditor will be unable to collect all contractual principal and interest
payments due in accordance with the terms of the loan agreement.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other impaired loans is recognized only to the extent of interest payments
received.
Bank premises and equipment: Bank premises and equipment are carried at cost
less accumulated depreciation. Depreciation is computed using the straight-line
method over the following estimated useful lives.
<Table>
<Caption>
Years
------
Buildings and improvements 7 - 39
Furniture and equipment 3 - 7
</Table>
Advertising costs: Advertising costs are expensed as incurred.
Income taxes: Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of the
allowance for loan losses, unrealized gains (losses) on securities available for
sale, net deferred loan origination fees, and accumulated depreciation. The
deferred tax assets and liabilities represent the future tax return consequences
of those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled. Deferred tax assets and liabilities
are reflected at income tax rates applicable to the period in which the deferred
tax assets or liabilities are expected to be realized or settled. As changes in
tax laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes.
F-18
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share: In 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 (SFAS 128) "Earnings per
Share." This Statement specifies the computation, presentation, and disclosure
requirements for earnings per share for entities with publicly held common stock
or potential common stock. The Statement replaces the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants, and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented and, where appropriate, restated to
conform to the SFAS 128 requirements.
The following data show the amounts used in computing earnings per share and the
effect on income and the weighted average number of shares of dilutive potential
common stock.
<Table>
<Caption>
2001 2000 1999
---------- ---------- ----------
Income available to common stockholders
used in basic EPS $ 253,576 $ 230,352 $ 194,416
========== ========== ==========
Weighted average number of common
shares used in basic EPS 2,099,451 1,903,686 1,903,713
Effect of dilutive securities:
Stock options 182,352 208,246 221,538
---------- ---------- ----------
Weighted average number of common shares and
dilutive potential stock used in diluted EPS 2,281,803 2,111,932 2,125,251
---------- ---------- ----------
</Table>
F-19
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES
A summary of the amortized cost and approximate fair values of securities
available for sale is as follows:
<Table>
<Caption>
December 31, 2001
-----------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- -----------
U. S. government agencies
and corporations $2,512,524 $ 13,566 $ -- $2,526,090
Federal Reserve Bank stock 237,700 -- -- 237,700
---------- ---------- ---------- ----------
$2,750,224 $ 13,566 $ -- $2,763,790
========== ========== ========== ==========
</Table>
<Table>
<Caption>
December 31, 2000
--------------------------------------------------------------------------
Gross Gross Approximate
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ----------- ----------- -----------
U. S. government agencies
and corporations $10,998,472 $ -- $ 90,972 $10,907,500
Federal Reserve Bank stock 205,650 -- -- 205,650
----------- ----------- ----------- -----------
$11,204,122 $ -- $ 90,972 $11,113,150
=========== =========== =========== ===========
</Table>
The amortized cost and approximate fair value of securities available for sale
at December 31, 2001, by contractual maturity, are as follows:
<Table>
<Caption>
Approximate
Amortized Fair
Cost Value
---------- -----------
Due in one year or less $ -- $ --
Due after one year through five years 2,512,524 2,526,090
Due after five years through ten years -- --
Due after ten years -- --
Other 237,700 237,700
---------- ----------
$2,750,224 $2,763,790
========== ==========
</Table>
F-20
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 3. LOANS
Major classifications of loans are summarized as follows:
<Table>
<Caption>
December 31,
-----------------------------------
2001 2000
------------ ------------
Commercial $ 30,444,464 $ 22,269,958
Real estate:
Mortgage 30,808,063 23,530,203
Construction 5,427,754 5,510,337
Consumer 7,518,720 6,898,526
------------ ------------
74,199,001 58,209,024
Allowance for loan losses (831,000) (729,000)
------------ ------------
Loans, net $ 73,368,001 $ 57,480,024
============ ============
</Table>
Changes in the allowance for loan losses were as follows:
<Table>
<Caption>
Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------- --------- ---------
Balance, beginning of year $ 729,000 $ 523,000 $ 190,000
Provision charged to operations 471,494 218,241 342,119
Loans charged off (379,839) (12,241) (14,900)
Recoveries 10,345 -- 5,781
--------- --------- ---------
Balance, end of year $ 831,000 $ 729,000 $ 523,000
========= ========= =========
</Table>
At December 31, 2001 and 1999, nonaccruing loans totaled $41,267 and $34,772,
respectively, which had the effect of reducing net income $2,149 ($.001 per
common share) and $1,650 ($.001 per common share) for the years then ended. The
Bank had no material impaired or nonaccrual loans at December 31, 2000.
NOTE 4. BANK PREMISES AND EQUIPMENT
Major classifications of bank premises and equipment and the total accumulated
depreciation are summarized as follows:
<Table>
<Caption>
December 31,
------------------------------
2001 2000
---------- ----------
Land $ 159,120 $ 159,120
Buildings and improvements 958,893 958,893
Furniture and equipment 963,119 894,467
Leasehold improvements 80,650 80,650
---------- ----------
Totals 2,161,782 2,093,130
Less accumulated depreciation 597,285 411,157
---------- ----------
$1,564,497 $1,681,973
========== ==========
</Table>
F-21
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 5. MATURITIES OF CERTIFICATES OF DEPOSITS
The scheduled maturities of certificates of deposits at December 31, 2001, are
as follows:
<Table>
<Caption>
Year Ending
December 31,
- ------------
2002 $ 30,307,312
2003 7,187,457
2004 3,347,961
2005 266,338
2006 and later 715,699
------------
$ 41,824,767
============
</Table>
NOTE 6. INCOME TAXES
The components of the Bank's income tax provision are as follows:
<Table>
<Caption>
Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------- --------- ---------
Currently payable $ 154,940 $ 172,612 $ 181,678
Deferred (34,365) (77,284) (84,376)
--------- --------- ---------
$ 120,575 $ 95,328 $ 97,302
========= ========= =========
</Table>
A reconciliation of the expected income tax expense computed at 34 percent to
the income tax expense included in the statements of income is as follows:
<Table>
<Caption>
Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------- --------- ---------
Computed "expected" income tax expense $ 127,211 $ 110,731 $ 99,184
Other (6,636) (15,403) (1,882)
--------- --------- ---------
$ 120,575 $ 95,328 $ 97,302
========= ========= =========
</Table>
F-22
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 6. INCOME TAXES (CONTINUED)
The deferred income tax provision consists of the following items:
<Table>
<Caption>
Years Ended December 31,
-------------------------------------------------
2001 2000 1999
--------- --------- ---------
Difference between loan loss provision charged
to operating expense and the bad debt
deduction taken for income tax purposes $ (16,209) $ (86,924) $(112,090)
Interest income on nonaccrual loans recognized
for income tax purposes, but not recognized
for financial statements until received -- 561 (561)
Difference between the depreciation methods
used for financial statements and for income
tax purposes 7,174 20,178 14,043
Accretion of discount recognized for financial
statements, but not recognized for income
tax purposes until realized (543) 272 271
Difference between deferred loan origination
fees and costs recognized in the financial
statements and for income tax purposes (24,787) (11,371) 13,961
--------- --------- ---------
$ (34,365) $ (77,284) $ (84,376)
========= ========= =========
</Table>
Net deferred tax assets consist of the following components:
<Table>
<Caption>
December 31,
--------------------------
2001 2000
-------- --------
Deferred tax assets:
Allowance for loan losses $248,533 $232,324
Unrealized loss on securities available for sale -- 30,930
Deferred loan origination fees, net 47,463 22,676
-------- --------
295,996 285,930
-------- --------
Deferred tax liabilities:
Property and equipment 62,543 55,369
Unrealized gain on securities available for sale 4,612 --
Investment securities -- 543
-------- --------
67,155 55,912
-------- --------
Net deferred tax asset $228,841 $230,018
======== ========
</Table>
F-23
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 7. RETIREMENT PLAN
The Bank has a 401(K) profit-sharing plan for those employees who meet the
eligibility requirements set forth in the Plan. Substantially all the full-time
employees are covered. Contributions to the Plan are determined each year by the
Board of Directors. The plan may be amended or terminated by the Board of
Directors at any time. Contributions for the years ended December 31, 2001,
2000, and 1999, were $25,488, $13,984, and $4,186, respectively.
NOTE 8. COMMITMENTS AND CONTINGENCIES
Financial instruments with off-balance-sheet risk: In the normal course of
business, the Bank has outstanding commitments and contingent liabilities, such
as commitments to extend credit and standby letters of credit, which are not
included in the accompanying financial statements. The Bank's exposure to credit
loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is
represented by the contractual or notional amount of those instruments. The Bank
uses the same credit policies in making such commitments as it does for
instruments that are included in the balance sheets. A summary of financial
instruments whose contract amount represents credit risk is as follows:
<Table>
<Caption>
December 31,
--------------------------------
2001 2000
----------- -----------
Commitments to extend credit $21,871,934 $19,617,387
Letters of credit 683,539 570,627
----------- -----------
$22,555,473 $20,188,014
=========== ===========
</Table>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's
credit-worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Bank upon extension of credit, is based on management's
credit evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party. Standby letters of
credit generally have fixed expiration dates or other termination clauses and
may require payment of a fee. The credit risk involved in issuing letters of
credit is essentially the same as that involved in extending loan facilities to
customers. The Bank's policy for obtaining collateral, and the nature of such
collateral, is essentially the same as that involved in making commitments to
extend credit.
F-24
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Concentrations of credit risk: All of the Bank's loans, commitments to extend
credit, and standby letters of credit have been granted to customers within the
state and, more specifically, the area surrounding Richmond, Virginia. The
concentrations of credit by type of loan are set forth in Note 3.
Other commitments and contingencies: In the normal course of business, there are
outstanding various commitments and contingent liabilities, which are not
reflected in the accompanying financial statements. The Bank does not anticipate
any material loss as a result of these transactions.
Borrowing facilities: The Bank has entered into various borrowing arrangements
with other financial institutions for Fed Funds or repurchase agreements. The
total amount of borrowing facilities available at December 31, 2001, was
approximately $4,700,000. No amounts were outstanding on any of the agreements
mentioned above.
Lease commitments: The Bank leases facilities and equipment for use in its
business under operating leases expiring at various dates. Total rental expense
amounted to $124,403, $130,625, and $95,217 for the years ended December 31,
2001, 2000, and 1999, respectively. At December 31, 2001, minimum annual lease
payments for the next four years and in total were as follows:
<Table>
<Caption>
Year Ending
December 31,
- ------------
2002 $ 125,903
2003 118,803
2004 69,000
2005 14,000
---------
$ 327,706
=========
</Table>
NOTE 9. RELATED PARTY TRANSACTIONS
The Bank has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
officers, their immediate families and affiliated companies in which they are
principal stockholders (commonly referred to as related parties), all of which
have been, in the opinion of management, on the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with others.
F-25
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 9. RELATED PARTY TRANSACTIONS (CONTINUED)
Aggregate loan transactions with related parties were as follows:
<Table>
<Caption>
Years Ended December 31,
---------------------------------
2001 2000
----------- -----------
Balance, beginning $ 1,734,391 $ 1,781,809
New loans 484,938 610,277
Repayments (1,285,151) (657,695)
----------- -----------
Balance, ending $ 934,178 $ 1,734,391
=========== ===========
</Table>
NOTE 10. STOCK DIVIDENDS AND SPLITS
During 2001, the Bank's Board of Directors declared a 10% stock dividend for
stockholders of record as of May 18, 2001, payable to stockholders on June 4,
2001.
During 2000, the Bank's Board of Directors declared a 10% stock dividend for
stockholders of record as of May 19, 2000, payable to stockholders on June 2,
2000.
During 1999, the Bank's Board of Directors declared a five-for-four split of the
common stock for stockholders of record as of May 14, 1999, payable to
stockholders on June 1, 1999.
All references in the accompanying financial statements to the number of common
shares and per share amounts have been restated to reflect these stock dividends
and splits.
NOTE 11. STOCK OPTION PLAN
The Bank has a stock option plan which makes available a maximum of 688,930
shares of common stock for the granting of both incentive and nonqualified stock
options to key employees and directors. The options are exercisable in varying
amounts from the date of grant and expire ten years thereafter. The option price
of incentive stock options will not be less than the fair market value of the
stock at the time an option is granted. Nonqualified stock options may be
granted at a price established by the Board of Directors including prices less
than the fair market value on the date of grant.
During 2000, the plan and all prior actions were clarified. Under this
clarification, it was determined that options were granted during 1998 for the
purchase of common stock at a price which was the approximate market value of
the common stock at the inception of the bank.
F-26
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 11. STOCK OPTION PLAN (CONTINUED)
The following table presents a summary of the activity in the stock option plan:
<Table>
<Caption>
Shares Under Option
----------------------------------------------
December 31,
----------------------------------------------
2001 2000 1999
-------- -------- --------
Outstanding, beginning of year 458,399 427,533 430,033
Granted 16,123 31,066 --
Exercised (6,000) (200) --
Forfeited (6,920) -- (2,500)
-------- -------- --------
Outstanding, end of year 461,602 458,399 427,533
======== ======== ========
</Table>
All stock options outstanding at December 31, 2001, are at an exercise price of
$3.31 per share.
The Bank applies APB Opinion 25 and related interpretations in accounting for
its plan. Accordingly, no compensation cost has been recognized. Had
compensation cost for the Bank's stock option plan been determined based on the
fair value at the grant date consistent with the methods of FASB Statement 123,
the Bank's net income and net income per share would have been reduced to the
pro forma amounts indicated below.
<Table>
<Caption>
Years Ended December 31,
-----------------------------------------------------
2001 2000 1999
----------- ----------- -----------
Net income (loss):
As reported $ 253,576 $ 230,352 $ 194,416
Pro forma 230,669 141,569 194,416
Basic earnings per share:
As reported 0.12 0.11 0.09
Pro forma 0.11 0.07 0.09
Diluted earnings per share:
As reported 0.11 0.10 0.08
Pro forma 0.10 0.06 0.08
</Table>
For purposes of computing the pro forma amounts indicated above, the fair value
of each option on the date of grant is estimated using the Black-Scholes
option-pricing model with the following assumptions for the grants in 2001 and
2000: dividend yield of 0%, expected volatility of 20%, risk-free interest rate
of 5.0% and an expected option life of 5 years. The fair value of each option
granted in 2001 was approximately $3.67. The fair value of each option granted
in 2000 was between $5.27 - $5.42.
F-27
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. REGULATORY MATTERS
The Bank is subject to various regulatory capital requirements administered by
its primary federal regulator, the Federal Reserve Bank. Failure to meet minimum
capital requirements can initiate certain mandatory, and possible additional
discretionary actions by regulators, that if undertaken, could have a direct
material effect on the Bank and the financial statements. Under the regulatory
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines involving quantitative
measures of the Bank's assets, liabilities, and certain off-balance sheet items
as calculated under regulatory accounting practices. The Bank's capital amounts
and classification under the prompt corrective action guidelines are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of: total risk-based
capital and Tier 1 capital to risk-weighted assets (as defined in the
regulations), and Tier 1 capital to adjusted total assets (as defined).
Management believes, as of December 31, 2001, that the Bank meets all the
capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Federal Reserve
Bank, the Bank was categorized as well capitalized under the regulatory
framework for prompt corrective action. To remain categorized as well
capitalized, the Bank will have to maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as disclosed in the table below. There
are no conditions or events since the most recent notification that management
believes have changed the Bank's prompt corrective action category.
The Bank's actual and required capital amounts and ratios are as follows:
<Table>
<Caption>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------- -------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ ------
(Dollars in Thousands)
As of December 31, 2001:
Total Risk-Based Capital
(to Risk-Weighted Assets) $8,413 10.91% $6,167 8.00% $7,709 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) 7,582 9.84% 3,084 4.00% 4,625 6.00%
Tier 1 Capital
(to Adjusted Total Assets) 7,582 8.22% 3,689 4.00% 4,612 5.00%
As of December 31, 2000:
Total Risk-Based Capital
(to Risk-Weighted Assets) 8,020 13.44% 4,776 8.00% 5,969 10.00%
Tier 1 Capital
(to Risk-Weighted Assets) 7,291 12.21% 2,388 4.00% 3,582 6.00%
Tier 1 Capital
(to Adjusted Total Assets) 7,291 9.53% 3,059 4.00% 3,823 5.00%
</Table>
F-28
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 12. REGULATORY MATTERS (CONTINUED)
Banking laws and regulations limit the amount of dividends that may be paid
without prior approval of the Bank's regulatory agency. As of December 31, 2001,
the Bank would have been required to obtain prior approval on any dividends
declared.
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS
FASB Statement No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of fair value information about financial instruments,
whether or not recognized in the balance sheet, for which it is practicable to
estimate that value.
Fair value estimates made as of December 31, 2001, are based on relevant market
information about the financial instruments. These estimates do not reflect any
premium or discount that could result from offering for sale at one time the
Bank's entire holding of a particular financial instrument. In cases where
quoted market prices are not available, fair value estimates are based on
judgments regarding future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the estimates. In
addition, the tax ramifications related to the realization of the unrealized
gains and losses can have a significant effect on fair value estimates and have
not been considered in the estimates.
The following methods and assumptions were used by the Bank in estimating the
fair value of its financial instruments:
Cash and cash equivalents: The carrying amounts reported in the balance sheets
for cash and short-term instruments approximate their fair values.
Investment securities: Fair values for investment securities are based on quoted
market prices, where available. If quoted market prices are not available, fair
values are based on quoted market prices of comparable instruments.
Loans: The carrying values, reduced by estimated inherent credit losses, of
variable-rate loans and other loans with short-term characteristics were
considered fair values. For other loans, the fair values were calculated by
discounting scheduled future cash flows using current interest rates offered on
loans with similar terms adjusted to reflect the estimated credit losses
inherent in the portfolio.
Accrued interest receivable and accrued interest payable: The carrying amounts
reported in the balance sheets for accrued interest receivable and accrued
interest payable approximate their fair value.
F-29
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
NOTE 13. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposit liabilities: The fair value of deposits with no stated maturity, such as
noninterest-bearing demand deposits, NOW, savings and money market deposits,
was, by definition, equal to the amount payable on demand as of December 31,
2001. The fair value of fixed-rate certificates of deposit was based on the
discounted value of contractual cash flows, calculated using the discount rates
that equaled the interest rates offered at the valuation date for deposits of
similar remaining maturities.
The following is a summary of the carrying amounts and estimated fair values of
the Bank's financial assets and liabilities:
<Table>
<Caption>
December 31,
-------------------------------------------------
2001 2000
---------------------- ----------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
(Dollars in thousands)
Financial assets:
Cash and cash equivalents $ 15,365 $15,365 $ 7,886 $ 7,886
Securities available for sale 2,764 2,764 11,113 11,113
Loans, net 73,368 74,550 57,480 56,759
Accrued interest receivable 368 368 389 389
Financial liabilities:
Demand and variable-rate deposits 43,974 43,974 32,535 32,535
Fixed-rate certificates of deposit 41,825 42,466 38,807 38,721
Accrued interest payable 240 240 309 309
</Table>
At December 31, 2001 and 2000, the Bank had outstanding letters of credit and
fixed and variable rate commitments to extend credit. For fair value, the fixed
rate loan commitments were considered based on committed rates versus market
rates for similar transactions. Due to market constraints and the short-term
nature of the majority of the commitments, rates have remained relatively
unchanged on these products, therefore, management has determined fair value to
be the same as the committed value. Letters of credit and variable rate
commitments are generally exercisable at the market rate prevailing at the date
the underlying transaction will be completed, and, therefore, they were deemed
to have no current fair market value.
F-30
APPENDIX A
----------
AGREEMENT AND PLAN OF REORGANIZATION
BY AND AMONG
SOUTHERN FINANCIAL BANCORP, INC.,
SOUTHERN FINANCIAL BANK
AND
METRO-COUNTY BANK OF VIRGINIA, INC.
DATED AS OF APRIL 25, 2002
----------
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
I. THE MERGER..............................................................................................1
Section 1.1 Merger............................................................................1
Section 1.2 Articles of Incorporation, Bylaws and Facilities of the Continuing Bank;
Directors and Officers............................................................1
Section 1.3 Merger Consideration..............................................................2
Section 1.4 Metro-County Stock Options........................................................3
Section 1.5 Exchange of Shares................................................................4
Section 1.6 Ratification by Shareholders......................................................5
Section 1.7 Tax Consequences..................................................................6
II. REPRESENTATIONS AND WARRANTIES OF METRO-COUNTY..........................................................6
Section 2.1 Organization......................................................................6
Section 2.2 Capitalization....................................................................7
Section 2.3 Approvals; Authority..............................................................7
Section 2.4 Financial Statements..............................................................7
Section 2.5 Investments.......................................................................8
Section 2.6 Loan Portfolio and Reserve for Loan Losses........................................8
Section 2.7 Certain Loans and Related Matters.................................................9
Section 2.8 Real Property Owned or Leased.....................................................9
Section 2.9 Personal Property................................................................10
Section 2.10 Environmental Laws...............................................................10
Section 2.11 Litigation and Other Proceedings.................................................11
Section 2.12 Taxes............................................................................11
Section 2.13 Contracts and Commitments........................................................12
Section 2.14 Insurance........................................................................13
Section 2.15 No Conflict With Other Instruments...............................................14
Section 2.16 Laws and Regulatory Filings......................................................14
Section 2.17 Absence of Certain Changes.......................................................14
Section 2.18 Employment Relations.............................................................15
Section 2.19 Employee Benefit Plans...........................................................15
Section 2.20 Deferred Compensation Arrangements...............................................16
</Table>
-i-
TABLE OF CONTENTS
(continued)
<Table>
<Caption>
PAGE
Section 2.21 Brokers and Finders..............................................................16
Section 2.22 Derivative Contracts.............................................................16
Section 2.23 Deposits.........................................................................17
Section 2.24 Accounting Controls..............................................................17
Section 2.25 Community Reinvestment Act.......................................................17
Section 2.26 Federal Reserve Reporting Obligations............................................17
Section 2.27 Intellectual Property Rights.....................................................17
Section 2.28 Shareholders' List...............................................................18
III. REPRESENTATIONS AND WARRANTIES OF SOUTHERN FINANCIAL AND SOUTHERN FINANCIAL BANK.......................18
Section 3.1 Organization.....................................................................18
Section 3.2 Capitalization...................................................................18
Section 3.3 Approvals; Authority.............................................................19
Section 3.4 No Conflict With Other Instruments...............................................19
Section 3.5 Financial Statements and Reports.................................................19
Section 3.6 Securities and Exchange Commission Reporting Obligations.........................20
Section 3.7 Litigation and Other Proceedings.................................................20
Section 3.8 Laws and Regulatory Filings......................................................20
Section 3.9 Southern Financial Employee Benefit Plans........................................21
Section 3.10 Insurance........................................................................21
Section 3.11 Taxes............................................................................21
Section 3.12 Allowance for Loan Losses........................................................21
Section 3.13 Environmental Matters............................................................22
Section 3.14 Brokers and Finders..............................................................22
IV. COVENANTS OF METRO-COUNTY..............................................................................22
Section 4.1 Shareholder Approval and Best Efforts............................................22
Section 4.2 Activities of Metro-County Pending Closing.......................................22
Section 4.3 Access to Properties and Records.................................................24
Section 4.4 Information for Regulatory Applications and SEC Filings..........................25
Section 4.5 Attendance at Certain Metro-County Meetings......................................25
</Table>
-ii-
TABLE OF CONTENTS
(continued)
<Table>
<Caption>
PAGE
Section 4.6 Standstill Provision.............................................................25
Section 4.7 Voting Agreement.................................................................26
Section 4.8 Affiliates' Letters..............................................................26
Section 4.9 Conforming Accounting Adjustments................................................26
V. COVENANTS OF SOUTHERN FINANCIAL AND SOUTHERN FINANCIAL BANK............................................27
Section 5.1 Best Efforts.....................................................................27
Section 5.2 Information for Regulatory Applications and Proxy Solicitation...................27
Section 5.3 Registration Statement...........................................................27
Section 5.4 Nasdaq Listing...................................................................28
Section 5.5 Issuance of Southern Financial Common Stock......................................28
Section 5.6 Employee Benefit Plans...........................................................28
Section 5.7 Indemnification..................................................................29
Section 5.8 Employment Matters...............................................................29
Section 5.9 Richmond Area Advisory Board.....................................................29
VI. MUTUAL COVENANTS OF SOUTHERN FINANCIAL, SOUTHERN FINANCIAL BANK AND METRO-COUNTY.......................30
Section 6.1 Notification; Updated Disclosure Schedules.......................................30
Section 6.2 Confidentiality..................................................................30
Section 6.3 Restrictions on Trading in Southern Financial Common Stock.......................30
VII. CLOSING................................................................................................30
Section 7.1 Closing..........................................................................30
Section 7.2 Effective Time...................................................................31
VIII. TERMINATION............................................................................................31
Section 8.1 Termination......................................................................31
Section 8.2 Effect of Termination............................................................32
Section 8.3 Damages..........................................................................32
IX. CONDITIONS TO OBLIGATIONS OF SOUTHERN FINANCIAL AND SOUTHERN FINANCIAL BANK............................33
Section 9.1 Compliance with Representations and Warranties...................................33
Section 9.2 Performance of Obligations.......................................................33
</Table>
-iii-
TABLE OF CONTENTS
(continued)
<Table>
<Caption>
PAGE
Section 9.3 Absence of Material Adverse Changes and Events...................................33
Section 9.4 Legal Opinion....................................................................33
Section 9.5 Releases.........................................................................33
Section 9.6 Affiliates' Letters..............................................................34
Section 9.7 Acknowledgment of Option Cancellation............................................34
X. CONDITIONS TO OBLIGATIONS OF METRO-COUNTY..............................................................34
Section 10.1 Compliance with Representations and Warranties...................................34
Section 10.2 Performance of Obligations.......................................................34
Section 10.3 Absence of Material Adverse Changes and Events...................................34
Section 10.4 Legal Opinion....................................................................34
Section 10.5 Opinion of Financial Advisor.....................................................35
XI. CONDITIONS TO RESPECTIVE OBLIGATIONS OF SOUTHERN FINANCIAL, SOUTHERN FINANCIAL BANK AND
METRO-COUNTY...........................................................................................35
Section 11.1 Government Approvals.............................................................35
Section 11.2 Shareholder Approval.............................................................35
Section 11.3 Tax Opinion......................................................................35
Section 11.4 Registration of Southern Financial Common Stock..................................35
Section 11.5 Listing of Southern Financial Common Stock.......................................36
Section 11.6 Non-Compete Agreement............................................................36
XII. MISCELLANEOUS..........................................................................................36
Section 12.1 Non-Survival of Representations and Warranties...................................36
Section 12.2 Definition of Knowledge..........................................................36
Section 12.3 Amendments.......................................................................36
Section 12.4 Expenses.........................................................................36
Section 12.5 Notices..........................................................................36
Section 12.6 Controlling Law..................................................................37
Section 12.7 Headings.........................................................................38
Section 12.8 Modifications or Waiver..........................................................38
Section 12.9 Severability.....................................................................38
Section 12.10 Assignment.......................................................................38
</Table>
-iv-
TABLE OF CONTENTS
(continued)
<Table>
<Caption>
PAGE
Section 12.11 Consolidation of Agreements......................................................38
Section 12.12 Counterparts.....................................................................38
Section 12.13 Binding on Successors............................................................38
Section 12.14 Gender...........................................................................38
Section 12.15 Disclosures......................................................................38
Section 12.16 Publicity........................................................................38
</Table>
-v-
AGREEMENT AND PLAN OF REORGANIZATION
This Agreement and Plan of Reorganization ("Agreement") dated as of
April 25, 2002 is by and among Southern Financial Bancorp, Inc., a Virginia
corporation ("Southern Financial"), Southern Financial Bank, a Virginia state
bank, and Metro-County Bank of Virginia, Inc., a Virginia state bank
("Metro-County").
WHEREAS, Metro-County desires to affiliate with Southern Financial and
Southern Financial Bank, and Southern Financial and Southern Financial Bank
desire to affiliate with Metro-County in the manner provided in this Agreement;
and
WHEREAS, Southern Financial, Southern Financial Bank and Metro-County
believe that the acquisition of Metro-County by Southern Financial in the manner
provided by, and subject to the terms and conditions set forth in, this
Agreement and all exhibits, schedules and supplements hereto is desirable and in
the best interests of their respective shareholders; and
WHEREAS, the respective Boards of Directors of Southern Financial,
Southern Financial Bank and Metro-County have approved this Agreement and the
transactions proposed herein substantially on the terms and conditions set forth
in this Agreement;
NOW, THEREFORE, in consideration of such premises and the mutual
representations, warranties, covenants and agreements contained herein, the
parties agree as set forth below.
INTRODUCTION
This Agreement provides for the merger of Metro-County with and into
Southern Financial Bank with Southern Financial Bank as the survivor (the
"Merger"), all pursuant to this Agreement and a Plan of Merger by and between
Metro-County and Southern Financial Bank, a copy of which is attached hereto as
Exhibit A and all of the terms of which are incorporated herein by reference for
all purposes. In connection with the Merger, Southern Financial will acquire all
of the issued and outstanding shares of common stock, $1.60 par value, of
Metro-County ("Metro-County Common Stock") for an aggregate consideration as set
forth in this Agreement.
I. THE MERGER
Section 1.1 Merger. Metro-County shall be merged with and into Southern
Financial Bank (which, as the receiving bank, is hereinafter referred to as the
"Continuing Bank" whenever reference is made to it at or after the Effective
Time (as defined in Section 7.2 of this Agreement)) under the Articles of
Incorporation of Southern Financial Bank pursuant to the provisions of, and with
the effect provided in Section 13.1-721 of the Virginia Stock Corporation Act
("Virginia Act").
Section 1.2 Articles of Incorporation, Bylaws and Facilities of the
Continuing Bank; Directors and Officers. At the Effective Time and until
thereafter amended in accordance with applicable law, the Articles of
Incorporation of the Continuing Bank shall be the Articles of Incorporation of
Southern Financial Bank as in effect at the Effective Time. Until altered,
amended or repealed as therein provided and in the Articles of Incorporation of
the Continuing Bank, the Bylaws of the Continuing Bank shall be the Bylaws of
Southern Financial Bank as in effect at the Effective Time. Unless and until
changed by the Board of Directors of the Continuing Bank, the main office of the
Continuing Bank shall be the main office of Southern Financial Bank as of the
Effective Time. The established offices and facilities of Metro-County
immediately prior to the Merger shall become established offices and facilities
of the Continuing Bank. Until thereafter changed in accordance with law or the
Articles of Incorporation or Bylaws of the Continuing Bank, all corporate acts,
plans, policies, contracts, approvals and authorizations of Metro-County and
Southern Financial Bank and their respective shareholders, boards of directors,
committees elected or appointed thereby, officers and agents, which were valid
and effective immediately prior to the Effective Time, shall be taken for all
purposes as the acts, plans, policies, contracts, approvals and authorizations
of the Continuing Bank and shall be as effective and binding thereon as the same
were with respect to Metro-County and Southern Financial Bank, respectively, as
of the Effective Time. At the Effective Time, the directors and officers of
Southern Financial Bank shall become the directors and officers of the
Continuing Bank.
Section 1.3 Merger Consideration.
(a) Unless otherwise adjusted as provided in Section 1.3(b)
and (c), at the Effective Time, by virtue of the Merger and without any action
on the part of the holders thereof, each share of Metro-County Common Stock
issued and outstanding immediately prior to the Effective Time shall be
converted into and exchanged for (i) an amount of cash equal to $2.90 and (ii) a
number of shares of common stock, par value $0.01 per share, of Southern
Financial ("Southern Financial Common Stock"), with an aggregate market value
equal to $4.35 (collectively, the "Merger Consideration"). All such shares of
Metro-County Common Stock shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist, and each certificate
previously representing any such shares shall thereafter represent the right to
receive the Merger Consideration.
(b) The number of shares of Southern Financial Common Stock
into which each share of Metro-County Common Stock will be converted into and
exchanged for will equal $4.35 divided by the Average Trading Price of Southern
Financial Common Stock (rounded to the nearest ten thousandth); provided,
however, that subject to Section 1.3(c), such number of shares of Southern
Financial Common Stock shall be no more than 0.1912 or no less than 0.1487 (the
exchange ratio, as adjusted if applicable, is hereinafter referred to as the
"Exchange Ratio"). The "Average Trading Price" of Southern Financial Common
Stock shall be the average of the closing sale price per share of Southern
Financial Common Stock on The Nasdaq Stock Market, Inc. National Market System
("Nasdaq") (as reported in The Wall Street Journal or, if not reported thereby,
another alternative source as chosen by Southern Financial) for the twenty (20)
trading days ending on and including the fifth trading day preceding the
Effective Time.
(c) The Exchange Ratio may, if the Average Trading Price of
the Southern Financial Common Stock is $20.80 or less, be adjusted at the option
of Southern Financial to a number of shares equal to $3.98 divided by the
Average Trading Price. If Southern Financial elects not to adjust the Exchange
Ratio, Metro-County may terminate this Agreement as provided in Section 8.1(f)
hereof.
-2-
(d) Notwithstanding the other provisions of this Section 1.3,
in the event (i) Southern Financial shall have entered into an agreement with
any person to (A) acquire, merge or consolidate, or enter into any similar
transaction, with Southern Financial, (B) purchase, lease or otherwise acquire
all or substantially all of the assets of Southern Financial or (C) purchase or
otherwise acquire securities representing 25% or more of the voting power of
Southern Financial; or (ii) any person shall have made a bona fide proposal to
Southern Financial by public announcement or written communication that is or
becomes the subject of public disclosure, to acquire Southern Financial by
merger, share exchange, consolidation, purchase of all or substantially all of
its assets or any similar transaction, the Average Trading Price of Southern
Financial Common Stock will be based on the average of the closing price per
share of Southern Financial Common Stock on Nasdaq (as reported by The Wall
Street Journal or, if not reported thereby, another alternative source as chosen
by Southern Financial) for each of the twenty (20) trading days immediately
preceding the public announcement of a transaction or event described in either
(i) or (ii).
(e) In the event Southern Financial changes (or establishes a
record date for changing) the number of shares of Southern Financial Common
Stock issued and outstanding before the Effective Time as a result of a stock
split, stock dividend, recapitalization or similar transaction with respect to
the outstanding Southern Financial Common Stock and the record date therefor
shall be prior to the Effective Time, appropriate and proportional adjustments
will be made to either (i) the maximum and minimum number of shares of Southern
Financial Common Stock that may be issued for each share of Metro-County Common
Stock in accordance with Section 1.3(a) or (ii) the Exchange Ratio in the event
Southern Financial changes (or establishes a record date for changing) the
number of shares of Southern Financial Common Stock issued and outstanding after
the Exchange Ratio has been established and before the Effective Time.
(f) Notwithstanding anything in this Agreement to the
contrary, Southern Financial will not issue any certificates or scrip
representing fractional shares of Southern Financial Common Stock otherwise
issuable pursuant to the Merger. In lieu of the issuance of any such fractional
shares, Southern Financial shall pay to each former holder of Metro-County
Common Stock otherwise entitled to receive such fractional share an amount of
cash determined by multiplying (i) the closing price per share of Southern
Financial Common Stock on the Nasdaq (as reported by The Wall Street Journal or,
if not reported thereby, another alternative source as chosen by Southern
Financial) on the trading day immediately prior to the Effective Time by (ii)
the fraction of a share of Southern Financial Common Stock which such holder
would otherwise be entitled to receive pursuant to this Section 1.3.
Section 1.4 Metro-County Stock Options.
(a) At the Effective Time, each option to acquire shares of
Metro-County Common Stock which is outstanding and unexercised immediately prior
thereto ("Metro-County Option") pursuant to the Metro-County Stock Option Plan,
shall represent the right to receive (i) cash equal to $1.58 and (ii) a number
of shares of Southern Financial Common Stock, with an aggregate market value
equal to $2.36, subject to adjustment as provided in Sections 1.3(b) and (c).
-3-
(b) Subject to adjustment in the manner provided in Section
1.3(e), the number of shares of Southern Financial Common Stock into which each
Metro-County Option will be converted into and exchanged for will equal $2.36
divided by the Average Trading Price of Southern Financial Common Stock (rounded
to the nearest ten thousandth); provided, however, that subject to Section
1.3(c), such number of shares of Southern Financial Common Stock shall be no
more than 0.0808 or no less than 0.1039.
(c) Metro-County shall take all actions necessary or
reasonably requested by Southern Financial to ensure that at the Effective Time,
no holder of any Metro-County Option will have any right thereunder to acquire
any equity securities of Metro-County, Southern Financial or any of its
subsidiaries or any right to payment in respect of any such securities of
Metro-County, except for payment as provided in this Section 1.4.
Section 1.5 Exchange of Shares.
(a) Southern Financial shall deposit or cause to be deposited
in trust with Chase Mellon Shareholder Services (the "Exchange Agent") prior to
the Effective Time (i) certificates representing shares of Southern Financial
Common Stock and (ii) cash, each in an aggregate amount sufficient to make the
payments of the Merger Consideration set forth in Section 1.3 of this Agreement.
The Exchange Agent shall promptly deliver the stock certificates representing
shares of Southern Financial Common Stock and the cash portion of the Merger
Consideration upon surrender of certificates representing shares of Metro-County
Common Stock.
(b) As soon as practicable after the Effective Time, the
Exchange Agent shall mail to each record holder of an outstanding certificate or
certificates which represent shares of Metro-County Common Stock (the
"Certificates"), a form letter of transmittal which will specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent and contain
instructions for use in effecting the surrender of the Certificates for payment
therefor. At and after the Closing (as defined herein) and upon surrender to the
Exchange Agent of a Certificate, together with such letter of transmittal duly
executed, the holder of such Certificate shall be entitled to receive in
exchange therefor the Merger Consideration provided in Section 1.3 hereof in the
manner described herein, and such Certificate shall forthwith be canceled. No
interest will be paid or accrued on the shares of Southern Financial Common
Stock or cash payable upon surrender of the Certificates. If certificates
representing shares of Southern Financial Common Stock are to be delivered or
payment of cash is to be made to a person other than the person in whose name
the Certificate surrendered is registered, it shall be a condition of payment
that the Certificate so surrendered shall be properly endorsed or otherwise in
proper form for transfer and that the person requesting such payment shall pay
any transfer or other taxes required by reason of the payment to a person other
than the registered holder of the Certificate surrendered or established to the
satisfaction of Southern Financial that such tax has been paid or is not
applicable. Until surrendered in accordance with the provisions of this Section
1.5, each Certificate shall represent for all purposes the right to receive the
Merger Consideration without any interest thereon.
(c) After the Effective Time, the stock transfer ledger of
Metro-County shall be closed and there shall be no transfers on the stock
transfer books of Metro-County of the
-4-
shares of Metro-County Common Stock which were outstanding immediately prior to
the Effective Time. If, after the Effective Time, Certificates are presented to
Metro-County, they shall be promptly presented to the Exchange Agent and
exchanged as provided in this Section 1.5.
(d) Any portion of the Merger Consideration (including the
proceeds of any investments thereof) that remains unclaimed by the shareholders
of Metro-County for six months after the Effective Time shall be returned to
Southern Financial, and the holders of shares of Metro-County Common Stock not
theretofore presented to the Exchange Agent shall look to Southern Financial
only, and not the Exchange Agent, for the payment of any of the Merger
Consideration in respect of such shares.
(e) Former shareholders of Metro-County shall be entitled to
vote after the Effective Time at any meeting of Metro-County's shareholders the
number of shares of Southern Financial Common Stock into which their shares are
converted, regardless of whether such shareholders of Metro-County have
surrendered their Certificates in exchange therefor.
(f) No dividends or other distributions declared after the
Effective Time with respect to shares of Southern Financial Common Stock and
payable to the holders thereof shall be paid to the holder of a Certificate
until such holder surrenders such Certificate to the Exchange Agent in
accordance with this Section 1.5. After the surrender of a Certificate in
accordance with this Section 1.5, the holder thereof shall be entitled to
receive any such dividends or other distributions, without interest thereon,
which had become payable after the Effective Time with respect to the shares of
Southern Financial Common Stock represented by such Certificate.
(g) None of Southern Financial, Metro-County, the Exchange
Agent or any other person shall be liable to any former holder of shares of
Metro-County Common Stock for any Southern Financial Common Stock (or dividends
or distributions with respect thereto) or cash properly delivered to a public
official pursuant to applicable abandoned property, escheat or similar laws.
(h) In the event any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Southern Financial or the Exchange Agent, the posting by such person of a bond
in such amount as Southern Financial or the Exchange Agent may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate the shares of Southern Financial Common Stock deliverable
in respect thereof pursuant to this Agreement.
Section 1.6 Ratification by Shareholders. This Agreement shall be
submitted to the shareholders of Metro-County in accordance with applicable
provisions of law and the Articles of Incorporation and Bylaws of Metro-County.
Metro-County and Southern Financial shall proceed expeditiously and cooperate
fully in the procurement of any other consents and approvals and the taking of
any other actions in satisfaction of all other requirements prescribed by law or
otherwise necessary for consummation of the Merger on the terms herein provided,
including, without limitation, the preparation and submission of all necessary
filings, requests for
-5-
waivers and certificates with the Securities and Exchange Commission ("SEC"),
Board of Governors of the Federal Reserve System ("Federal Reserve"), the
Federal Deposit Insurance Corporation ("FDIC") and the State Corporation
Commission of Virginia (the "Virginia Commission").
Section 1.7 Tax Consequences. It is intended by the parties hereto that
the Merger shall constitute a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and the
parties hereto hereby adopt this Agreement as a "plan of reorganization" within
the meaning of Sections 1.368-2(g) and 1.368-3(a) of the United States Treasury
Regulations.
II. REPRESENTATIONS AND WARRANTIES OF METRO-COUNTY
Metro-County represents and warrants to Southern Financial and Southern
Financial Bank that each of the statements made in this Article II are true and
correct in all material respects. Metro-County agrees that, at the Closing, it
shall provide Southern Financial with supplemental Schedules reflecting any
changes in the information contained in the Schedules which have occurred in the
period from the date of delivery of such Schedules to the date of Closing.
Section 2.1 Organization.
(a) Metro-County is a Virginia state bank duly organized,
validly existing and in good standing under the laws of the Commonwealth of
Virginia. Metro-County has full power and authority (including all licenses,
franchises, permits and other governmental authorizations which are legally
required) to own, lease and operate its properties, to engage in the business
and activities now conducted by it and to enter into this Agreement, except
where the failure to be so licensed or qualified would not have a Material
Adverse Effect on Metro-County. For purposes of this Agreement, "Material
Adverse Effect" with respect to any party shall mean an event, change, or
occurrence which, individually or together with any other event, change or
occurrence, has or is reasonably likely to have a material adverse impact on (i)
the financial position, business or results of operations or financial
performance of such party and their respective subsidiaries, taken as a whole,
or (ii) the ability of such party to perform its obligations under this
Agreement or to consummate the Merger and the other transactions contemplated by
this Agreement.
(b) Metro-County is duly authorized to conduct a general
banking business, embracing all usual deposit functions of commercial banks as
well as commercial, industrial and real estate loans, installment credits,
collections and safe deposit facilities subject to the supervision of the FDIC
and the Virginia Commission. Metro-County does not conduct any trust activities.
True and complete copies of the Articles of Incorporation and Bylaws of
Metro-County, as amended to date, have been delivered or made available to
Southern Financial.
(c) Metro-County (i) does not have any subsidiaries or
Affiliates, (ii) is not a general partner or material owner in any joint
venture, general partnership, limited partnership, trust or other non-corporate
entity, and (iii) does not know of any arrangement pursuant to which the stock
of any corporation is or has been held in trust (whether express, constructive,
resulting
-6-
or otherwise) for the benefit of all shareholders of Metro-County. "Affiliate"
means any natural person, corporation, general partnership, limited partnership
proprietorship, other business organization, trust, union, association or
governmental authority that directly, or indirectly through one or more
intermediaries, controls or is controlled by or is under common control with the
person specified.
(d) The deposit accounts of Metro-County are insured by the
FDIC through the Bank Insurance Fund to the fullest extent permitted by law, and
all premiums and assessments due and owning as of the date hereof required in
connection therewith have been paid by Metro-County.
Section 2.2 Capitalization. The authorized capital stock of
Metro-County consists of 3,000,000 shares of Metro-County Common Stock,
2,100,564 of which are issued and outstanding as of the date of this Agreement.
All of the issued and outstanding shares of Metro-County Common Stock are
validly issued, fully paid and nonassessable, and have not been issued in
violation of the preemptive rights of any person or in violation of any
applicable federal or state laws. A list of all existing options, warrants,
calls, convertible securities or commitments of any kind obligating Metro-County
to issue any authorized and unissued Metro-County Common Stock is contained in
Schedule 2.2. Metro-County does not have any outstanding commitment or
obligation to repurchase, reacquire or redeem any of its outstanding capital
stock. There are no voting trusts, voting agreements, buy-sell agreements or
other similar arrangements affecting the Metro-County Common Stock.
Section 2.3 Approvals; Authority.
(a) Metro-County has full corporate power and authority to
execute and deliver this Agreement (and any related documents), and Metro-County
has full legal capacity, power and authority to perform its obligations
hereunder and thereunder and to consummate the contemplated transactions.
(b) The Board of Directors of Metro-County has approved this
Agreement and the Plan of Merger and the transactions contemplated herein
subject to the approval thereof by the shareholders of Metro-County as required
by law, and, other than shareholder approval, no further corporate proceedings
of Metro-County are needed to execute and deliver this Agreement and consummate
the Merger. This Agreement has been duly executed and delivered by Metro-County
and is a duly authorized, valid, legally binding agreement of Metro-County
enforceable against Metro-County in accordance with its terms, subject to the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to creditors' rights generally and general equitable principles.
Section 2.4 Financial Statements.
(a) Metro-County has furnished or made available to Southern
Financial true and complete copies of its audited financial statements as of
December 31, 2001, 2000 and 1999, and for the years then ended, and any
Consolidated Reports of Condition and Income ("Call Reports") as of and for the
three months ended March 31, 2002. The Call Reports and the
-7-
audited financial statements referred to in this Section 2.4 are collectively
referred to in this Agreement as the "Metro-County Financial Statements."
(b) Each of the Metro-County Financial Statements fairly
present the financial position of Metro-County and the results of its operations
at the dates and for the periods indicated in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis.
(c) As of the dates of the Metro-County Financial Statements
referred to above, Metro-County did not have any liabilities, fixed or
contingent, which are material and are not fully shown or provided for in such
Metro-County Financial Statements or otherwise disclosed in this Agreement, or
in any of the documents delivered to Southern Financial. Since March 31, 2002,
there have been no changes in the financial condition, assets, liabilities or
business of Metro-County, other than changes in the ordinary course of business,
nor have there been any changes or events involving a prospective adverse change
in the financial condition, assets, liabilities or business, which individually
or in the aggregate has had or is reasonably likely to have, a Material Adverse
Effect on Metro-County.
Section 2.5 Investments. Metro-County has furnished to Southern
Financial a complete list, as of March 31, 2002, of all securities, including
municipal bonds, owned by Metro-County (the "Securities Portfolio"). Except as
set forth in Schedule 2.5, all such securities are owned by Metro-County (i) of
record, except those held in bearer form, and (ii) beneficially, free and clear
of all mortgages, liens, pledges and encumbrances. Schedule 2.5 also discloses
any entities in which the ownership interest of Metro-County equals 5% or more
of the issued and outstanding voting securities of the issuer thereof. There are
no voting trusts or other agreements or understandings with respect to the
voting of any of the securities in the Securities Portfolio.
Section 2.6 Loan Portfolio and Reserve for Loan Losses. (i) All
evidences of indebtedness in an original principal amount in excess of $10,000
reflected as assets in the Metro-County Financial Statements as of and for the
three months ended March 31, 2002 and the year ended December 31, 2001, were as
of such dates in all material respects the binding obligations of the respective
obligors named therein in accordance with their respective terms, subject to the
effect of bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to creditors' rights generally and general equitable principles,
(ii) the allowance for loan losses shown on the Metro-County Financial
Statements as of the three months ended March 31, 2002 and for the year ended
December 31, 2001, was, and the allowance for loan losses to be shown on the
Metro-County Financial Statements as of any date subsequent to the execution of
this Agreement will be, as of such dates, in the reasonable judgment of
management of Metro-County, adequate to provide for possible losses, net of
recoveries relating to loans previously charged off, in respect of loans
outstanding (including accrued interest receivable) of Metro-County and other
extensions of credit (including letters of credit or commitments to make loans
or extend credit), and (iii) the allowance for loan losses described in clause
(ii) above has been established in accordance with GAAP as applied to banking
institutions and all applicable rules and regulations; provided, however, that
no representation or warranty is made as to the sufficiency of collateral
securing or the collectibility of such loans.
-8-
Section 2.7 Certain Loans and Related Matters.
(a) Except as set forth in Schedule 2.7(a), Metro-County is
not a party to any written or oral: (i) loan agreement, note or borrowing
arrangement, other than credit card loans and other loans the unpaid balance of
which does not exceed $15,000 per loan, under the terms of which the obligor is
sixty (60) days delinquent in payment of principal or interest or in default of
any other material provisions as of the date hereof; (ii) loan agreement, note
or borrowing arrangement which has been classified or, in the exercise of
reasonable diligence by Metro-County or any regulatory agency with supervisory
jurisdiction over Metro-County, should have been classified as "substandard,"
"doubtful," "loss," "other loans especially mentioned," "other assets especially
mentioned" or any comparable classifications by such persons; (iii) loan
agreement, note or borrowing arrangement, including any loan guaranty, with any
director or executive officer of Metro-County, or any 10% or greater shareholder
of Metro-County, or any person, corporation or enterprise controlling,
controlled by or under common control with any of the foregoing; or (iv) loan
agreement, note or borrowing arrangement in violation of any law, regulation or
rule applicable to Metro-County including, but not limited to, those
promulgated, interpreted or enforced by any regulatory agency with supervisory
jurisdiction over Metro-County and which violation could have a Material Adverse
Effect on Metro-County.
(b) Schedule 2.7(b) contains the "watch list of loans" of
Metro-County ("Watch List") as of March 31, 2002. Except as set forth in
Schedule 2.7(b), to the knowledge of Metro-County, there is no loan agreement,
note or borrowing arrangement which should be included on the Watch List in
accordance with Metro-County's past practices and prudent banking principles.
Section 2.8 Real Property Owned or Leased.
(a) Other than real property acquired through foreclosure or
deed in lieu of foreclosure, Schedule 2.8(a) contains a true, correct and
complete list of all real property owned or leased by Metro-County (the
"Metro-County Real Property"). True and complete copies of all deeds, leases and
title insurance policies for, or other documentation evidencing ownership of,
the properties referred to in Schedule 2.8(a) and all mortgages, deeds of trust
and security agreements to which such property is subject have been furnished or
made available to Southern Financial.
(b) No lease with respect to any Metro-County Real Property
and no deed with respect to any Metro-County Real Property contains any
restrictive covenant that materially restricts the use, transferability or value
of such Metro-County Real Property. Each of such leases is a legal, valid and
binding obligation enforceable in accordance with its terms (except as may be
limited by bankruptcy, insolvency, moratorium, reorganization or similar laws
affecting the rights of creditors generally and the availability of equitable
remedies), and is in full force and effect; there are no existing defaults by
Metro-County or the other party thereunder and there are no allegations or
assertions of such by any party under such agreement or any events that with
notice lapse of time or the happening or occurrence of any other event would
constitute a default thereunder.
-9-
(c) To the knowledge of Metro-County, none of the buildings
and structures located on any Metro-County Real Property, nor any appurtenances
thereto or equipment therein, nor the operation or maintenance thereof, violates
in any material manner any restrictive covenants or encroaches on any property
owned by others, nor does any building or structure of third parties encroach
upon any Metro-County Real Property, except for those violations and
encroachments which in the aggregate could not reasonably be expected to cause a
Material Adverse Effect on the Condition of Metro-County. No condemnation
proceeding is pending or, to Metro-County's knowledge, threatened, which would
preclude or materially impair the use of any Metro-County Real Property in the
manner in which it is currently being used.
(d) Metro-County has good and indefeasible title to, or a
valid and enforceable leasehold interest in, or a contract vendee's interest in,
all Metro-County Real Property, and such interest is free and clear of all
liens, charges or other encumbrances, except (i) statutory liens for amounts not
yet delinquent or which are being contested in good faith through proper
proceedings and (ii) those liens related to real property taxes, local
improvement district assessments, easements, covenants, restrictions and other
matters of record which do not individually or in the aggregate materially
adversely affect the use and enjoyment of the relevant real property.
(e) Except as set forth in Schedule 2.8(e), all buildings and
other facilities used in the business of Metro-County are adequately maintained
and, to Metro-County's knowledge, are free from defects which could materially
interfere with the current or future use of such facilities.
Section 2.9 Personal Property. Except as set forth in Schedule 2.9,
Metro-County has good title to, or a valid leasehold interest in, all personal
property, whether tangible or intangible, used in the conduct of its business
(the "Metro-County Personalty"), free and clear of all liens, charges or other
encumbrances, except (i) statutory liens for amounts not yet delinquent or which
are being contested in good faith through proper proceedings and (ii) such other
liens, charges, encumbrances and imperfections of title as do not individually
or in the aggregate materially adversely affect the use and enjoyment of the
relevant Metro-County Personalty. Subject to ordinary wear and tear, the
Metro-County Personalty is in good operating condition and repair and is
adequate for the uses to which it is being put.
Section 2.10 Environmental Laws. To the knowledge of Metro-County,
Metro-County and any properties or businesses owned or operated by Metro-County,
whether or not held in a fiduciary or representative capacity, are in material
compliance with all terms and conditions of all applicable federal and state
Environmental Laws (as defined below) and permits thereunder. Except as set
forth in Schedule 2.10, (i) Metro-County has not received notice of any
violation of any Environmental Laws or generated, stored, or disposed of any
materials designated as Hazardous Materials (as defined below) under the
Environmental Laws, and they are not subject to any claim or lien under any
Environmental Laws; (ii) during the term of ownership by Metro-County no real
estate currently owned, operated, or leased (including any property acquired by
foreclosure or deeded in lieu thereof) by Metro-County, or owned, operated or
leased by Metro-County within the ten years preceding the date of this
Agreement, has been designated by applicable governmental authorities as
requiring any environmental cleanup or response action to comply with
Environmental Laws, or has been the site of release of any Hazardous Materials;
-10-
(iii) to the knowledge of Metro-County, no asbestos was used in the construction
of any portion of Metro-County's facilities; and (iv) to the knowledge of
Metro-County, no real property currently owned by it is, or has been, an
industrial site or landfill. Southern Financial and its consultants, agents and
representatives shall have the right to inspect Metro-County's assets for the
purpose of conducting asbestos and other environmental surveys, provided that
such inspection shall be at the expense of Southern Financial and at such time
as may be mutually agreed upon between Metro-County and Southern Financial.
"Environmental Laws," as used in this Agreement, means any applicable
federal, state or local statute, law, rule, regulation, ordinance, code, policy
or rule of common law now in effect and in each case as amended to date and any
judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree, or judgment, relating to the environment,
human health or safety, or Hazardous Materials, including without limitation the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601, et seq.; The Hazardous Materials Transportation
Authorization Act, as amended, 49 U.S.C. Section 5101, et seq.; the Resource
Conservation and Recovery Act of 1976, as amended, 42 U.S.C. Section 6901, et
seq.; the Federal Water Pollution Control Act, as amended, 33 U.S.C. Section
1201, et seq.; the Toxic Substances Control Act, 15 U.S.C. Section 2601, et
seq.; the Clean Air Act, 42 U.S.C. Section 7401, et seq.; and the Safe Drinking
Water Act, 42 U.S.C. Section 300f, et seq.
"Hazardous Materials," as used in this Agreement, includes, but is not
limited to, (a) any petroleum or petroleum products, natural gas, or natural gas
products, radioactive materials, asbestos, urea formaldehyde foam insulation,
transformers or other equipment that contains dielectric fluid containing levels
of polychlorinated biphenyls (PCBs), and radon gas; (b) any chemicals,
materials, waste or substances defined as or included in the definition of
"hazardous substances," "hazardous wastes," "hazardous materials," "extremely
hazardous wastes," "restricted hazardous wastes," toxic substances," "toxic
pollutants," "contaminants," or "pollutants," or words of similar import, under
any Environmental Laws; and (c) any other chemical, material, waste or substance
which is in any way regulated as hazardous or toxic by any federal, state or
local government authority, agency or instrumentality, including mixtures
thereof with other materials, and including any regulated building materials
such as asbestos and lead.
Section 2.11 Litigation and Other Proceedings. Except as set forth in
Schedule 2.11, there are no legal, quasi-judicial, regulatory or administrative
proceedings of any kind or nature now pending or, to the knowledge of
Metro-County, threatened before any court or administrative body in any manner
against Metro-County, or any of its properties or capital stock, which might
have a Material Adverse Effect on Metro-County or the transactions proposed by
this Agreement. Metro-County does not know of any basis on which any litigation
or proceeding could be brought which could have a Materially Adverse Effect on
Metro-County or which could question the validity of any action taken or to be
taken in connection with this Agreement and the transactions contemplated
hereby. Metro-County is not in default with respect to any judgment, order,
writ, injunction, decree, award, rule or regulation of any court, arbitrator or
governmental agency or instrumentality.
Section 2.12 Taxes. Metro-County has filed with the appropriate
federal, state and local governmental agencies all Tax Returns and reports
required to be filed, and has paid all
-11-
Taxes and assessments shown or claimed to be due. The Tax Returns as filed were
correct in all material respects. Metro-County has not executed or filed with
the Internal Revenue Service any agreement extending the period for assessment
and collection of any federal income Tax. Metro-County is not a party to any
action or proceeding by any governmental authority for assessment or collection
of Taxes, nor has any claim for assessment or collection of Taxes been asserted
against Metro-County. Metro-County has not waived any statute of limitations
with respect to any Tax or other assessment or levy, and all such Taxes and
other assessments and levies which Metro-County is required by law to withhold
or to collect have been duly withheld and collected and have been paid over to
the proper governmental authorities to the extent due and payable, or segregated
and set aside for such payment and, if so segregated and set aside will be so
paid by Metro-County, as required by law.
True and complete copies of the federal income tax returns of
Metro-County as filed with the Internal Revenue Service for the years ended
December 31, 2001, 2000 and 1999 have been delivered or made available to
Southern Financial.
For purposes of this Agreement, "Taxes" shall mean any and all taxes,
charges, fees, levies or other assessments, including, without limitation, all
net income, gross income, gross receipts, excise, stamp, real or personal
property, ad valorem, withholding, social security (or similar), unemployment,
occupation, use, production, service, service use, license, net worth, payroll,
franchise, severance, transfer, recording, employment, premium, windfall
profits, environmental (including taxes under Section 59A of the Internal
Revenue Code), customs duties, capital stock, profits, disability, sales,
registration, value added, alternative or add-on minimum, estimated or other
taxes, assessments or charges imposed by any federal, state, local or foreign
governmental entity and any interest, penalties, or additions to tax
attributable thereto. For purposes of this Agreement, "Tax Return" shall mean
any return, declaration, report, form or similar statement required to be filed
with respect to any Tax (including any attached schedules), including, without
limitation, any information return, claim for refund, amended return or
declaration of estimated Tax.
Section 2.13 Contracts and Commitments.
(a) Except as set forth in Schedule 2.13, Metro-County is not
a party to or bound by any of the following (whether written or oral, express or
implied):
(i) employment contract or severance arrangement
(including without limitation any collective bargaining contract or union
agreement or agreement with an independent consultant) which is not terminable
by Metro-County on less than sixty (60) days' notice without payment of any
amount on account of such termination;
(ii) bonus, stock option or other employee benefit
arrangement, other than any deferred compensation arrangement disclosed in
Schedule 2.20 or any profit-sharing, pension or retirement plan disclosed in
Schedule 2.19(a);
(iii) material lease or license with respect to any
property, real or personal, whether as landlord, tenant, licensor or licensee;
(iv) contract or commitment for capital expenditures;
-12-
(v) material contract or commitment made in the
ordinary course of business for the purchase of materials or supplies or for the
performance of services over a period of more than one hundred twenty (120)
days' from the date of this Agreement;
(vi) contract or option to purchase or sell any real
or personal property other than in the ordinary course of business;
(vii) contract, agreement or letter with respect to
the management or operations of Metro-County imposed by any bank regulatory
authority having supervisory jurisdiction over Metro-County;
(viii) agreement, contract or indenture related to
the borrowing by Metro-County of money other than those entered into in the
ordinary course of business;
(ix) guaranty of any obligation for the borrowing of
money, excluding endorsements made for collection, repurchase or resell
agreements, letters of credit and guaranties made in the ordinary course of
business;
(x) agreement with or extension of credit to any
executive officer or director of Metro-County or holder of more than ten percent
(10%) of the issued and outstanding Metro-County Common Stock, or any affiliate
of such person, which is not on substantially the same terms (including, without
limitation, in the case of lending transactions, interest rates and collateral)
as, and following credit underwriting practices that are not less stringent
than, those prevailing at the time for comparable transactions with unrelated
parties or which involve more than the normal risk of collectibility or other
unfavorable features; or
(xi) contracts, other than the foregoing, with annual
payments aggregating $10,000 or more not made in the ordinary course of business
and not otherwise disclosed in this Agreement, in any schedule attached hereto
or in any document delivered or referred to or described in writing by
Metro-County to Southern Financial.
(b) Metro-County has in all material respects performed all
material obligations required to be performed by it to date and is not in
default under, and no event has occurred which, with the lapse of time or action
by a third party could result in default under, any material indenture,
mortgage, contract, lease or other agreement to which Metro-County is a party or
by which Metro-County bound or under any provision of its Articles of
Incorporation or Bylaws.
Section 2.14 Insurance. A true and complete list of all insurance
policies owned or held by or on behalf of Metro-County (other than credit-life
policies), including policy numbers, retention levels, insurance carriers, and
effective and termination dates, is set forth in Schedule 2.14. Such policies
are in full force and effect and contain only standard cancellation or
termination clauses. In the judgment of the Board of Directors of Metro-County,
such insurance policies in respect of amounts, types and risks insured are
adequate to insure against risks to which Metro-County and its assets are
normally exposed in the operation of its business, subject to customary
deductibles and policy limits.
-13-
Section 2.15 No Conflict With Other Instruments. The execution,
delivery and performance of this Agreement and the Plan of Merger and the
consummation of the transactions contemplated hereby and thereby will not (i)
conflict with or violate any provision of Metro-County's Articles of
Incorporation or Bylaws or (ii) assuming all required shareholder and regulatory
approvals and consents are duly obtained, will not (A) violate any statute,
code, ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Metro-County or any of its properties or assets, or (B) violate,
conflict with, result in a breach of any provision of or constitute a default
(or an event which, with or without notice or lapse of time, would constitute a
default) under, result in the termination of or a right of termination or
cancellation under, accelerate the performance required by, cause Southern
Financial or Metro-County to become subject to or liable for the payment of any
tax, or result in the creation of any lien, charge or encumbrance upon any of
the properties or assets of Metro-County under, any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, license, lease
agreement, instrument or obligation to which Metro-County is a party, or by
which any of its properties or assets may be bound or affected, except for such
violations, conflicts, breaches or defaults which either individually or in the
aggregate will not have a Material Adverse Effect on Metro-County.
Section 2.16 Laws and Regulatory Filings. Metro-County is in material
compliance with all applicable federal, state and local laws, rules, regulations
and orders applicable to them. Except for approvals by regulatory authorities
having jurisdiction over Metro-County, no prior consent, approval or
authorization of, or declaration, filing or registrations with, any person or
regulatory authority is required of Metro-County in connection with the
execution, delivery and performance by Metro-County of this Agreement and the
transactions contemplated hereby or the resulting change of control of
Metro-County except for certain instruments necessary to consummate the Mergers
contemplated hereby. Metro-County has filed all reports, registrations and
statements, together with any amendments required to be made thereto
("Governmental Filings"), that are required to be filed with the FDIC, the
Virginia Commission or any other regulatory authority having jurisdiction over
Metro-County, and such reports, registrations and statements are, to the
knowledge of Metro-County, true and correct in all material respects.
Section 2.17 Absence of Certain Changes. Since March 31, 2002,
Metro-County has not (a) issued or sold any of its capital stock or corporate
debt obligations; (b) declared or set aside or paid any dividend or made any
other distribution (whether in cash, stock or property) in respect of or,
directly or indirectly, purchased, redeemed or otherwise acquired any shares of
Metro-County Common Stock; (c) incurred any obligations or liabilities (fixed or
contingent), except obligations or liabilities incurred in the ordinary course
of business, or mortgaged, pledged or subjected any of its assets to a lien or
encumbrance (other than in the ordinary course of business and other than
statutory liens not yet delinquent); (d) discharged or satisfied any lien or
encumbrance or paid any obligation or liability (fixed or contingent), other
than accruals, accounts and notes payable included in the Metro-County Financial
Statements, accruals, accounts and notes payable incurred since March 31, 2002
in the ordinary course of business and accruals, accounts and notes payable
incurred in connection with the transactions contemplated by this Agreement; (e)
sold, exchanged or otherwise disposed of any of its capital assets other than in
the ordinary course of business; (f) made any general or individual wage or
salary increase (including increases in directors' or consultants' fees) other
than in accordance with past practices, paid any bonus, granted or paid any
perquisites such as automobile allowance, club
-14-
membership or dues or other similar benefits, entered into any employment
contract or made any accrual or arrangement for or payment of bonuses or special
compensation of any kind or severance or termination pay to any present or
former officer or salaried employee, or instituted any employee welfare,
retirement or similar plan or arrangement; (g) made any or acquiesced with any
change in accounting methods, principles and practices except as may be required
by GAAP; (h) excluding loan commitments made and certificates of deposit issued,
entered into any contract, agreement or commitment which obligates Metro-County
for an amount in excess of $10,000 over the term of any such contract, agreement
or commitment; (i) except in the ordinary course of business, entered or agreed
to enter into any agreement or arrangement granting any preferential rights to
purchase any of its assets, properties or rights or requiring the consent of any
party to the transfer and assignment of any such assets, properties or rights;
or (j) incurred any change or any event involving a prospective change in the
condition of Metro-County which has had, or is reasonably likely to have, a
Material Adverse Effect on Metro-County generally, including, without
limitation, any change in Metro-County's administrative or supervisory standing
with or rating by any regulatory agency having jurisdiction over Metro-County,
which shall include but not be limited to Metro-County having received a rating
of less than "3" on the Asset Quality portion of its next scheduled regulatory
examination to be conducted by the Federal Reserve, and to the knowledge of
Metro-County, no fact or condition exists as of the date hereof which might
reasonably be expected to cause any such event or change in the future.
Section 2.18 Employment Relations. The relations of Metro-County with
its employees are satisfactory, and Metro-County has not received any notice of
any controversies with, or organizational efforts or other pending actions by,
representatives of its employees. Metro-County has materially complied with all
laws relating to the employment of labor with respect to its employees,
including any provisions thereof relating to wages, hours, collective bargaining
and the payment of workman's compensation insurance and social security and
similar taxes, and no person has asserted that Metro-County is liable for any
arrearages of wages, workman's compensation insurance premiums or any taxes or
penalties for failure to comply with any of the foregoing.
Section 2.19 Employee Benefit Plans.
(a) Schedule 2.19(a) lists all employee benefit plans or
agreements providing benefits to any employees or former employees of
Metro-County that are sponsored or maintained by Metro-County to which
Metro-County currently contributes or is obligated to contribute on behalf of
employees or former employees of Metro-County, including without limitation any
employee welfare benefit plan within the meaning of Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), any employee
pension benefit plan within the meaning of Section 3(2) of ERISA or any
collective bargaining, bonus, incentive, deferred compensation, stock purchase,
stock option, severance, change of control or fringe benefit plan.
(b) No employee benefit plans of Metro-County or its ERISA
Affiliates (as defined below) (the "Metro-County Plans") are "multiemployer
plans" within the meaning of Section 4001(a)(3) of ERISA ("Multiemployer
Plans"). None of Metro-County or any of its respective ERISA Affiliates has, at
any time during the last six years, contributed to or been obligated to
contribute to any Multiemployer Plan, and none of Metro-County, or any of its
-15-
respective ERISA Affiliates has incurred any withdrawal liability under Part I
of Subtitle E of Title IV of ERISA that has not been satisfied in full.
(c) There does not now exist, nor, to the knowledge
Metro-County, do any circumstances exist that could result in, any Controlled
Group Liability that would be a material liability of Metro-County now or
following the Closing. "Controlled Group Liability" means (i) any and all
liabilities (A) under Title IV of ERISA, (B) under Section 302 of ERISA, (C)
under Sections 412 and 4971 of the Code, or (D) as a result of a failure to
comply with the continuation coverage requirements of Section 601 et seq. of
ERISA and Section 4980B of the Code, and (E) under corresponding or similar
provisions of foreign laws or regulations; (ii) with respect to any Metro-County
Plan any other material liability under Title I of ERISA or Chapter 43 or 68 of
the Code, and (iii) material unfunded liabilities under any non-qualified
deferred compensation plan for the benefit of any employee or former employee of
Metro-County.
(d) There is no contract, agreement, plan or arrangement
covering any employee or former employee of Metro-County that, individually or
in the aggregate, could give rise to the payment by Metro-County of any amount
that would not be deductible pursuant to the terms of Section 162(m) or Section
280G of the Code. Except as required by the continuation coverage requirements
of Section 601 et seq. of ERISA and Section 4980B of the Code, Metro-County has
no liability to provide post-retirement health or life benefits to any employee
or former employee of Metro-County.
(e) "ERISA Affiliates" means, with respect to any entity,
trade or business, any other entity, trade or business that is a member of a
group described in Section 414(b), (c), (m) or (o) of the Code or Section
4001(b)(1) of ERISA that includes the first entity, trade or business, or that
is a member of the same "controlled group" as the first entity, trade or
business pursuant to Section 4001(a)(14) of ERISA.
Section 2.20 Deferred Compensation Arrangements. Schedule 2.20 contains
a list of all deferred compensation arrangements of Metro-County, if any,
including the terms under which the cash value of any life insurance purchased
in connection with any such arrangement can be realized.
Section 2.21 Brokers and Finders. Other than the financial advisory
services performed for Metro-County by Scott & Stringfellow, Inc., neither
Metro-County nor any of its officers, directors or employees have employed any
broker or finder or incurred any liability for any brokerage fees, commissions
or finders' fees in connection with this Agreement and the transactions
contemplated herein.
Section 2.22 Derivative Contracts. Metro-County is not a party to nor
has it agreed to enter into an exchange-traded or over-the-counter swap,
forward, future, option, cap, floor or collar financial contract or agreement,
or any other contract or agreement not included in the Metro-County Financial
Statements which is a financial derivative contract (including various
combinations thereof).
-16-
Section 2.23 Deposits. Except as set forth in Schedule 2.23, to the
knowledge of Metro-County, none of the deposits of Metro-County is a "brokered"
deposit (as such term is defined in 12 C.F.R 337.6(a)(2)) or is subject to any
encumbrance, legal restraint or other legal process (other than garnishments,
pledges, set off rights, escrow limitations and similar actions taken in the
ordinary course of business).
Section 2.24 Accounting Controls. Metro-County has devised and
maintained a system of internal accounting controls sufficient to provide
reasonable assurances that: (i) all material transactions are executed in
accordance with general or specific authorization of the Board of Directors and
the duly authorized executive officers of Metro-County; (ii) all material
transactions are recorded as necessary to permit the preparation of financial
statements in conformity with GAAP consistently applied with respect to
institutions such as Metro-County or other criteria applicable to such financial
statements, and to maintain proper accountability for items therein; (iii)
access to the material properties and assets of Metro-County is permitted only
in accordance with general or specific authorization of the Board of Directors
and the duly authorized executive officers of Metro-County; and (iv) the
recorded accountability for items is compared with the actual levels at
reasonable intervals and appropriate actions taken with respect to any
differences.
Section 2.25 Community Reinvestment Act. Metro-County is in material
compliance with the Community Reinvestment Act (12 U.S.C. Section 2901 et seq.)
and all regulations promulgated thereunder, and Metro-County has supplied
Southern Financial with copies of Metro-County's current CRA Statement, all
support papers therefor, all letters and written comments received by
Metro-County since January 1, 1999 pertaining thereto and any responses by
Metro-County to such comments. Metro-County has a rating of "satisfactory" as of
its most recent CRA compliance examination and knows of no reason why it would
not receive a rating of "satisfactory" or better pursuant to its next CRA
compliance examination or why the FDIC or any other governmental entity may seek
to restrain, delay or prohibit the transactions contemplated hereby as a result
of any act or omission of Metro-County under the CRA.
Section 2.26 Federal Reserve Reporting Obligations. Metro-County has
filed all material reports and statements, together with any amendments required
to be made with respect thereto, that it was required to file with the Federal
Reserve. As of their respective dates, each of such reports and statements, as
amended, were true and correct and complied in all material respects with the
relevant statutes, rules and regulations enforced or promulgated by the Federal
Reserve or the SEC and none of the information contained in such reports and
statements is false or misleading with respect to any material fact, or omits to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Section 2.27 Intellectual Property Rights. Schedule 2.27 will contain a
correct and complete list of all registered trademarks, registered service
marks, trademark and service mark applications, trade names and registered
copyrights presently owned or held by Metro-County or used under license by it
in the conduct of its business (the "Intellectual Property"). Metro-County owns
or has the right to use and continue to use the Intellectual Property in the
operation of its business. Except as set forth in Schedule 2.27, Metro-County is
not infringing or violating any patent, copyright, trademark, service mark,
label filing or trade name owned or otherwise
-17-
held by any other party, nor has Metro-County used any confidential information
or any trade secrets owned or otherwise held by any other party, without holding
a valid license for such use.
Metro-County is not engaging, nor has it been charged with engaging, in
any kind of unfair or unlawful competition. Neither the execution, delivery and
performance of this Agreement nor the consummation of the transactions
contemplated hereby will in any way impair the right of Metro-County or the
Continuing Bank to use, sell, license or dispose of, or to bring any action for
the infringement of, the Intellectual Property.
Section 2.28 Shareholders' List. Metro-County has provided or made
available to Southern Financial as of a date within ten (10) days of the date of
this Agreement a list of the holders of shares of Metro-County Common Stock
containing for Metro-County's shareholders the names, addresses and number of
shares held of record, which shareholders' list is in all respects accurate as
of such date and will be updated prior to Closing.
III. REPRESENTATIONS AND WARRANTIES OF SOUTHERN FINANCIAL AND
SOUTHERN FINANCIAL BANK
Southern Financial and Southern Financial Bank represent and warrant to
Metro-County that the statements contained in this Article III are true and
correct in all material respects as follows:
Section 3.1 Organization. Southern Financial is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Virginia and a bank holding company duly registered under the
Bank Holding Company Act of 1956, as amended ("BHC Act"), subject to all laws,
rules and regulations applicable to bank holding companies. Southern Financial
Bank is a Virginia state bank duly organized, validly existing and in good
standing under the laws of the Commonwealth of Virginia. Southern Financial owns
100% of the issued and outstanding capital stock of Southern Financial Bank.
Southern Financial Bank is an insured bank as defined in the Federal Deposit
Insurance Act. Southern Financial and Southern Financial Bank have full power
and authority (including all licenses, franchises, permits and other
governmental authorizations which are legally required) to own their properties,
to engage in the business and activities now conducted by them and to enter into
this Agreement, except where the failure to be so licensed or qualified would
not have a Material Adverse Effect on Southern Financial.
Section 3.2 Capitalization. The authorized capital stock of Southern
Financial consists of 5,000,000 shares of Southern Financial Common Stock,
4,285,144 shares of which are issued and outstanding and 1,000,000 shares of
preferred stock, $0.01 par value, 13,621 shares of which are issued and
outstanding as of the date of this Agreement. All of the issued and outstanding
shares of Southern Financial Common Stock are validly issued, fully paid and
nonassessable, and have not been issued in violation of the preemptive rights of
any person or in violation of any applicable federal or state laws. The shares
of Southern Financial Common Stock to be issued to Metro-County shareholders
pursuant to the provisions of this Agreement have been duly authorized, will be
validly issued, fully paid and nonassessable and will not be issued in violation
of the preemptive rights of any person.
-18-
Section 3.3 Approvals; Authority.
(a) Southern Financial and Southern Financial Bank each have
full corporate power and authority to execute and deliver this Agreement, to
perform their respective obligations hereunder and to consummate the
transactions contemplated hereby.
(b) The Boards of Directors of Southern Financial and Southern
Financial Bank have approved this Agreement and the transactions contemplated
herein and no further corporate proceedings of Southern Financial or Southern
Financial Bank are needed to execute and deliver this Agreement and consummate
the Merger. This Agreement has been duly executed and delivered by Southern
Financial and Southern Financial Bank and is a duly authorized, valid, legally
binding agreement of Southern Financial and Southern Financial Bank enforceable
against Southern Financial and Southern Financial Bank in accordance with its
terms, subject to the effect of bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditors' rights generally and
general equitable principles.
Section 3.4 No Conflict With Other Instruments. The execution, delivery
and performance of this Agreement or the consummation of the transactions
contemplated hereby will not (i) violate any provision of the respective
Articles of Incorporation or Incorporation or Bylaws of Southern Financial and
Southern Financial Bank or (ii) assuming all required shareholder and regulatory
consents and approvals are duly obtained, (A) violate any statute, code,
ordinance, rule, regulation, judgment, order, writ, decree or injunction
applicable to Southern Financial or Southern Financial Bank or any of their
respective properties or assets, or (B) violate, conflict with, result in a
breach of any provision of or constitute a default (or an event which, with or
without notice or lapse of time, would constitute a default) under, result in
the termination of or a right of termination or cancellation under, accelerate
the performance required by, cause Southern Financial to become subject to or
liable for the payment of any tax, or result in the creation of any lien, charge
or encumbrance upon any of the properties or assets of Southern Financial under,
any of the terms, conditions or provisions of any note, bond, mortgage,
indenture, deed of trust, license, lease agreement, instrument or obligation to
which Southern Financial is a party, or by which any of its properties or assets
may be bound or affected, except for such violations, conflicts, breaches or
defaults which either individually or in the aggregate will not have a Material
Adverse Effect on Southern Financial.
Section 3.5 Financial Statements and Reports.
(a) Southern Financial has furnished or made available to
Metro-County true and complete copies of its (i) Annual Report on Form 10-K for
the year ended December 31, 2001 ("Annual Report"), as filed with the SEC, which
contains Southern Financial's audited balance sheets as of December 31, 2001 and
2000, and the related statements of income and statements of changes in
shareholders' equity and cash flow for the years ended December 31, 2001, 2000
and 1999 and (ii) its unaudited balance sheets and related statements of income
and statements of changes in shareholders' equity and cash flows as of an for
the three months ended March 31, 2001 and 2002. The Annual Report and unaudited
financial statements referred to in this Section 3.5 are collectively referred
to in this Agreement as the "Southern Financial Statements."
-19-
(b) The Southern Financial Statements fairly present the
financial position of Southern Financial and Southern Financial Bank and the
results of their respective operations at the dates and for the periods
indicated in conformity with GAAP applied on a consistent basis.
(c) As of the dates of the Southern Financial Statements
referred to above, neither Southern Financial nor Southern Financial Bank had
any liabilities, fixed or contingent, which are material and are not fully shown
or provided for in such Southern Financial Statements or otherwise disclosed in
this Agreement, or in any of the documents delivered to Metro-County. Since
March 31, 2002, there have been no changes in the financial condition, assets,
liabilities or business of Southern Financial or Southern Financial Bank, other
than changes in the ordinary course of business nor have there been any changes
or events involving a prospective adverse change in the financial condition,
assets, liabilities or business, which individually or in the aggregate has had
or is reasonably likely to have a Material Adverse Effect on Southern Financial
and Southern Financial Bank considered as a consolidated whole.
Section 3.6 Securities and Exchange Commission Reporting Obligations.
Southern Financial has filed all material reports and statements, together with
any amendments required to be made with respect thereto, that it was required to
file with the SEC. As of their respective dates, each of such reports and
statements, as amended, were true and correct and complied in all material
respects with the relevant statutes, rules and regulations enforced or
promulgated by the SEC and none of the information contained in such reports and
statements is false or misleading with respect to any material fact, or omits to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
Section 3.7 Litigation and Other Proceedings. There are no legal,
quasi-judicial or administrative proceedings of any kind or nature now pending
or, to the knowledge of Southern Financial, threatened before any court or
administrative body in any manner against Southern Financial, or any of its
properties or capital stock, which might have a Material Adverse Effect on
Southern Financial or the transactions proposed by this Agreement. Southern
Financial knows of no basis on which any litigation or proceeding could be
brought which could have a Material Adverse Effect on Southern Financial or
which could question the validity of any action taken or to be taken in
connection with this Agreement and the transactions contemplated hereby.
Southern Financial is not in default with respect to any judgment, order, writ,
injunction, decree, award, rule or regulation of any court, arbitrator or
governmental agency or instrumentality.
Section 3.8 Laws and Regulatory Filings. Southern Financial and
Southern Financial Bank are in material compliance with all applicable federal,
state and local laws, rules, regulations and orders applicable to them. Southern
Financial and Southern Financial Bank have filed all reports, registrations and
statements, together with any amendments required to be made thereto, that are
required to be filed with the FDIC, the Virginia Commission or any other
regulatory authority having jurisdiction over Southern Financial and Southern
Financial Bank, and such reports, registrations and statements are, to the
knowledge of Southern Financial and Southern Financial Bank, true and correct in
all material respects.
-20-
Section 3.9 Southern Financial Employee Benefit Plans. The employee
pension benefits plans and welfare benefit plans (referred to collectively
herein as the "Southern Plans") in effect at Southern Financial and Southern
Financial Bank have all been operated in all material respects in compliance
with ERISA, since ERISA became applicable with respect thereto. None of the
Southern Plans nor any of their respective related trusts have been terminated
(except the termination of any Southern Plan which is in compliance with the
requirements of ERISA and which will not result in any additional liability to
Southern Financial), and there has been no "reportable event," as that term is
defined in Section 4043 of ERISA, required to be reported since the effective
date of ERISA which has not been reported, and none of such Southern Plans nor
their respective related trusts have incurred any "accumulated funding
deficiency," as such term is defined in Section 302 of ERISA (whether or not
waived), since the effective date of ERISA. The Southern Plans are the only
employee pension benefit plans covering employees of Southern Financial and
Southern Financial Bank. Southern Financial and Southern Financial Bank will not
have any material liabilities with respect to employee pension benefits, whether
vested or unvested as of the Closing Date, for any of their employees other than
under the Southern Plans, and as of the date hereof the actuarial present value
of Southern Plan assets of each Southern Plan is not less (and as of the
Effective Time of the Merger such present value will not be less) than the
present value of all benefits payable or to be payable thereunder.
Section 3.10 Insurance. Southern Financial currently maintains
insurance in amounts reasonably necessary for its operations. In the judgment of
the Board of Directors of Southern Financial, such insurance policies in respect
of amounts, types and risks insured are adequate to insure against risks to
which Southern Financial and its assets are normally exposed in the operation of
its business, subject to customary deductibles and policy limits. Southern
Financial has no reason to believe that existing insurance coverage cannot be
renewed as and when the same shall expire upon terms and conditions as favorable
as those presently in effect, other than possible increases in premiums or
unavailability of coverage that do not result from any extraordinary loss
experience on the part of Southern Financial.
Section 3.11 Taxes. Southern Financial has filed with the appropriate
federal, state and local governmental agencies all Tax Returns and reports
required to be filed, and has paid all Taxes and assessments shown or claimed to
be due. The Tax Returns as filed were correct in all material respects. Southern
Financial is not a party to any action or proceeding by any governmental
authority for assessment or collection of Taxes, nor has any claim for
assessment or collection of Taxes been asserted against Southern Financial.
Southern Financial has not waived any statute of limitations with respect to any
Tax or other assessment or levy, and all such Taxes and other assessments and
levies which Southern Financial is required by law to withhold or to collect
have been duly withheld and collected and have been paid over to the proper
governmental authorities to the extent due and payable, or segregated and set
aside for such payment and, if so segregated and set aside will be so paid by
Southern Financial, as required by law.
Section 3.12 Allowance for Loan Losses. The allowance for loan losses
reflected on the Southern Financial Statements, as of their respective dates,
has been established in accordance with GAAP as applied to banking institutions
and all applicable laws and regulations.
-21-
Section 3.13 Environmental Matters. To the knowledge of Southern
Financial, Southern Financial and Southern Financial Bank are in material
compliance with all terms and conditions of all applicable federal and state
Environmental Laws (as defined in Section 2.10 hereof) and permits thereunder.
Neither Southern Financial nor Southern Financial Bank has received any
communication alleging that Southern Financial or Southern Financial Bank is not
in such material compliance and, to the knowledge of Southern Financial, there
are no present circumstances that would prevent or interfere with the
continuation of such material compliance.
Section 3.14 Brokers and Finders. Other than the financial advisory
services performed for Southern Financial by Hovde Financial LLC, neither
Southern Financial nor any of its officers, directors or employees have employed
any broker or finder or incurred any liability for any brokerage fees,
commissions or finders' fees in connection with this Agreement.
IV. COVENANTS OF METRO-COUNTY
Metro-County covenants and agrees with Southern Financial and Southern
Financial Bank as follows:
Section 4.1 Shareholder Approval and Best Efforts. Metro-County will,
as soon as practicable following acceptance of Southern Financial's regulatory
applications for processing, take all steps under applicable laws to call, give
notice of, convene and hold a meeting of its shareholders at such time as may be
mutually agreed to by the parties for the purpose of approving this Agreement
and the transactions contemplated hereby and for such other purposes consistent
with the complete performance of this Agreement as may be necessary and
desirable. The Board of Directors of Metro-County will recommend to its
shareholders the approval of this Agreement and the transactions contemplated
hereby, unless otherwise required by their fiduciary duties under applicable
law, and Metro-County will use its best efforts to obtain the necessary
approvals by its shareholders of this Agreement and the transactions
contemplated hereby. If the transaction is approved by such shareholders,
Metro-County will take all reasonable action to aid and assist in the
consummation of the Merger, and will use its best efforts to take or cause to be
taken all other actions necessary, proper or advisable to consummate the
transactions contemplated by this Agreement, including such actions as Southern
Financial reasonably considers necessary, proper or advisable in connection with
filing applications and registration statements with, or obtaining approvals
from, all governmental entities having jurisdiction over the transactions
contemplated by this Agreement.
Section 4.2 Activities of Metro-County Pending Closing.
(a) From the date hereof to and including the Closing Date, as
long as this Agreement remains in effect Metro-County shall (i) conduct its
affairs (including, without limitation, the making of or agreeing to make any
loans or other extensions of credit) only in the ordinary course of business
consistent with past practices and prudent banking principles; (ii) use its best
efforts to preserve intact its present business organizations, keep available
the services of its present officers, directors, key employees and agents and
preserve its relationships and goodwill with customers and advantageous business
relationships; and (iii) except as required by law or regulation, take no action
which would adversely affect or delay the ability of Metro-County, Southern
Financial or Southern Financial Bank to obtain any approvals from any
-22-
regulatory agencies or other approvals required for consummation of the
transactions contemplated hereby or to perform its obligations and agreements
under this Agreement.
(b) From the date hereof to and including the Closing Date,
except as required by law or regulation, as long as this Agreement remains in
effect or unless Southern Financial otherwise consents in writing (which consent
shall not be unreasonably withheld), Metro-County shall not:
(i) make or agree to make or renew any loans or other
extensions of credit to any borrower in excess of $250,000 (except (A) pursuant
to commitments made prior to the date of this Agreement, (B) loans fully secured
by a certificate of deposit at Metro-County and (C) renewals, extensions and
consolidations of any loans other than those loans listed in Schedule 2.7);
provided, however, that Metro-County shall consult and advise Southern Financial
in writing prior to making or renewing any loans or extensions of credit to any
borrower in excess of $250,000. Southern Financial shall notify Metro-County in
writing within three (3) business days of receipt of such notice whether
Southern Financial consents to such loan or extension of credit, provided that
if Southern Financial fails to notify Metro-County with such time frame,
Southern Financial shall be deemed to have consented to such loan or extension
of credit;
(ii) issue or sell or obligate itself to issue or
sell any shares of its capital stock or any warrants, rights or options to
acquire, or any securities convertible into, any shares of its capital stock;
(iii) open or close any branch office, or acquire or
sell or agree to acquire or sell, any branch office or any deposit liabilities,
and shall otherwise consult with and seek the advice of Southern Financial with
respect to basic policies relating to branching, site location and relocation;
(iv) enter into, amend or terminate any agreement of
the type that would be required to be disclosed in Schedule 2.13, or any other
material agreement, or acquire or dispose of any material amount of assets or
liabilities, except in the ordinary course of business consistent with prudent
banking practices;
(v) grant any severance or termination pay (other
than pursuant to Metro-County's policies in effect on the date hereof) to, or
enter into any employment, consulting, noncompetition, retirement, parachute,
severance or indemnification agreement with, any officer, director, employee or
agent of Metro-County, either individually or as part of a class of similarly
situated persons;
(vi) other than the payment of dividends as set forth
in clause (xvii) below, cause or allow any of the things listed in Section 2.17
to occur;
(vii) sell, transfer, convey or otherwise dispose of
any real property (including "other real estate owned") or interest therein;
(viii) foreclose upon or otherwise acquire any
commercial real property prior to receipt and approval by Southern Financial of
a Phase I environmental review thereof;
-23-
(ix) increase or decrease the rate of interest paid
on deposit accounts other than in accordance with the deposit pricing guidelines
as agreed to between Southern Financial and Metro-County; which deposit pricing
guidelines shall be established and agreed to by the parties as soon as
reasonably practicable after the date hereof;
(x) establish any new subsidiary or affiliate;
(xi) voluntarily make any material change in the
interest rate risk profile of Metro-County from that as of March 31, 2002;
(xii) materially deviate from policies and procedures
existing as of the date of this Agreement with respect to (A) classification of
assets, (B) the allowance for loan losses and (C) accrual of interest on assets,
except as otherwise required by the provisions of this Agreement;
(xiii) amend or change any provision of
Metro-County's Articles of Incorporation or Bylaws;
(xiv) make any capital expenditure which would exceed
an aggregate of $10,000, other than an expenditure of $15,000 for the
installation of the Automated Teller Machine to be located at 3003 West Cary
Street in Richmond, Virginia;
(xv) excluding deposits, certificates of deposit,
FHLB advances and borrowings consistent with past practices, undertake any
additional borrowings in excess of ninety (90) days;
(xvi) modify any outstanding loan or acquire any loan
participation, unless such modification is made in the ordinary course of
business, consistent with past practice; or
(xvii) pay any dividends other than regular periodic
cash dividends paid in the ordinary course of business and consistent with past
practices.
Section 4.3 Access to Properties and Records. To the extent permitted
by applicable law, Metro-County shall (i) afford the executive officers and
authorized representatives (including legal counsel, accountants and
consultants) of Southern Financial and Southern Financial Bank full access to
the properties, books and records of Metro-County in order that Southern
Financial may have full opportunity to make such reasonable investigation as it
shall desire to make of the affairs of Metro-County, and (ii) to furnish
Southern Financial with such additional financial and operating data and other
information as to the business and properties of Metro-County as Southern
Financial shall, from time to time, reasonably request. As soon as practicable
after they become available, Metro-County will deliver or make available to
Southern Financial all unaudited quarterly financial statements prepared for the
internal use of management of Metro-County and all Call Reports filed by
Metro-County with the appropriate federal regulatory authority after the date of
this Agreement. All such financial statements shall be prepared in accordance
with GAAP applied on a consistent basis with previous accounting periods. In the
event of the termination of this Agreement, Southern Financial will return to
-24-
Metro-County all documents and other information obtained pursuant hereto and
will keep confidential any information obtained pursuant to this Agreement.
Section 4.4 Information for Regulatory Applications and SEC Filings. To
the extent permitted by law, Metro-County will furnish Southern Financial with
all information concerning Metro-County required for inclusion in (a) any
application, filing, statement or document to be made or filed by Southern
Financial or Metro-County with any federal or state regulatory or supervisory
authority in connection with the transactions contemplated by this Agreement
during the pendency of this Agreement and (b) any filings with the Securities
and Exchange Commission ("SEC"), including a Registration Statement on Form S-4,
and any applicable state securities authorities. Metro-County represents and
warrants that all information so furnished for such applications and filings
shall, to the best of its knowledge, be true and correct in all material
respects without omission of any material fact required to be stated to make the
information not misleading. Metro-County agrees at any time, upon the request of
Southern Financial, to furnish to Southern Financial a written letter or
statement confirming the accuracy of the information with respect to
Metro-County contained in any report or other application or statement referred
to in this Agreement, and confirming that the information with respect to
Metro-County contained in such document or draft was furnished by Metro-County
expressly for use therein or, if such is not the case, indicating the
inaccuracies contained in such document or indicating the information not
furnished by Metro-County expressly for use therein.
Section 4.5 Attendance at Certain Metro-County Meetings. In order to
facilitate the continuing interaction of Southern Financial with Metro-County,
and in order to keep Southern Financial fully advised of all ongoing activities
of Metro-County, Metro-County agrees to allow Southern Financial to designate
one representative (who shall be an officer of Southern Financial Bank), who
will be allowed to attend as an invited guest and fully monitor all regular and
called meetings of the loan committee of Metro-County (including, but not
limited to, meetings of the officers' loan committee of Metro-County).
Metro-County shall promptly give Southern Financial prior notice by telephone of
all called meetings. Such representative shall have no right to vote and may be
excluded from sessions of the loan committee during which there is being
discussed (i) matters involving this Agreement, (ii) information or material
which Metro-County is required or obligated to maintain as confidential under
applicable laws or regulations or policies or procedures of Metro-County, or
(iii) pending or threatened litigation or investigations if, in the opinion of
counsel to Metro-County, the presence of such representative would or might
adversely affect the confidential nature of or any privilege relating to any
matters to be discussed. No attendance by a representative of Southern Financial
at loan committee meetings under this Section 4.5 or knowledge gained or deemed
to have been gained by virtue of such attendance will affect any of the
representations and warranties of Metro-County made in this Agreement. If the
transactions contemplated by this Agreement are disapproved by any regulatory
authority whose approval is required or the Agreement is otherwise terminated
prior to Closing, then Southern Financial's designee will no longer be entitled
to notice of and permission to attend such meetings.
Section 4.6 Standstill Provision. So long as this Agreement is in
effect, neither Metro-County nor any of its directors or officers shall
entertain, solicit or encourage any inquiries with respect to, or provide any
information to or negotiate with any other party any proposal which could
reasonably be expected to lead to the merger, consolidation, acquisition or sale
of all or
-25-
substantially all of the assets or any shares of capital stock of Metro-County;
except where the Board of Directors of Metro-County determines, based on the
advice of counsel, that the failure to furnish such information or participate
in such negotiations or discussions would constitute a breach of the fiduciary
or legal obligations of Metro-County's Board of Directors to its shareholders.
Metro-County agrees to notify Southern Financial immediately of any such
unsolicited acquisition proposals and provide reasonable detail as to the
identity of the proposed acquiror and the nature of the proposed transaction.
Section 4.7 Voting Agreement. Metro-County acknowledges that the
directors of Metro-County as of the date hereof have agreed to vote their shares
of Metro-County Common Stock in favor of this Agreement and the transactions
contemplated hereby, subject to required regulatory approvals, pursuant to a
Voting Agreement substantially in the form of Exhibit B to this Agreement which
has been executed as of the date of this Agreement.
(a) Termination of Data Processing Contracts. Metro-County
will timely take any and all actions necessary, including but not limited to
notifying appropriate parties, to ensure that its current data processing
contracts will not renew.
Section 4.8 Affiliates' Letters. No later than the fifteenth day
following the date of execution of this Agreement, Metro-County shall deliver to
Southern Financial, after consultation with legal counsel, a list of names and
addresses of those persons who are "Affiliates" of Metro-County with respect to
the Merger within the meaning of Rule 144 under the Securities Act of 1933, as
amended (the "Securities Act"). There shall be added to such list the names and
addresses of any other person (within the meaning of such Rule) which Southern
Financial identifies (by written notice to Metro-County within three business
days after receipt of such list) as possibly being a person who may be deemed to
be an "Affiliate" of Metro-County within the meaning of Rule 144. Metro-County
shall use all reasonable efforts to deliver, or cause to be delivered, to
Southern Financial not later than the thirtieth day following the date of
execution of this Agreement from each of the "Affiliates" of Metro-County
identified as aforesaid, a letter dated as of the date of delivery thereof in
the form of Exhibit C attached hereto.
Section 4.9 Conforming Accounting Adjustments. Metro-County shall, if
requested by Southern Financial, consistent with GAAP, immediately prior to
Closing, make such accounting entries as Southern Financial may reasonably
request in order to conform the accounting records of Metro-County to the
accounting policies and practices of Southern Financial. No such adjustment
shall of itself constitute or be deemed to be a breach, violation or failure to
satisfy any representation, warranty, covenant, condition or other provision or
constitute grounds for termination of this Agreement or be an acknowledgment by
Metro-County (i) of any adverse circumstances for purposes of determining
whether the conditions to Southern Financial's obligations under this Agreement
have been satisfied, or (ii) that such adjustment is required for purposes of
determining satisfaction of the condition to Southern Financial's obligations
under this Agreement set forth in Section 9.3 hereof or (iii) that such
adjustment has any bearing on the number of shares of Southern Financial Common
Stock issuable hereunder. No adjustment required by Southern Financial shall (a)
require any prior filing with any governmental agency or regulatory authority or
(b) violate any law, rule or regulation applicable to Metro-County.
-26-
V. COVENANTS OF SOUTHERN FINANCIAL AND SOUTHERN FINANCIAL BANK
Southern Financial and Southern Financial Bank covenant and agree with
Metro-County as follows:
Section 5.1 Best Efforts. Southern Financial and Southern Financial
Bank will take all reasonable action to aid and assist in the consummation of
the Merger and the transactions contemplated hereby, and will use their best
efforts to take or cause to be taken all other actions necessary, proper or
advisable to consummate the transactions contemplated by this Agreement,
including such actions which are necessary, proper or advisable in connection
with filing applications with, or obtaining approvals from, all regulatory
authorities having jurisdiction over the transactions contemplated by this
Agreement.
Section 5.2 Information for Regulatory Applications and Proxy
Solicitation. To the extent permitted by law, Southern Financial and Southern
Financial Bank will furnish Metro-County with all information concerning
Southern Financial and Southern Financial Bank required for inclusion in (a) any
application, statement or document to be made or filed by Metro-County with any
federal or state regulatory or supervisory authority in connection with the
transactions contemplated by this Agreement during the pendency of this
Agreement and (b) any proxy materials to be furnished to the shareholders of
Metro-County in connection with their consideration of the Merger. Southern
Financial and Southern Financial Bank represent and warrant that all information
so furnished for such statements and applications shall, to the best of their
knowledge, be true and correct in all material respects without omission of any
material fact required to be stated to make the information not misleading.
Southern Financial and Southern Financial Bank agree, upon the request of
Metro-County, to furnish to Metro-County a written letter or statement
confirming to the best of its knowledge the accuracy of the information with
respect to Southern Financial and Southern Financial Bank contained in any
report or other application or statement referred to in Sections 5.1 or 5.2 of
this Agreement, and confirming that the information with respect to Southern
Financial and Southern Financial Bank contained in such document or draft was
furnished expressly for use therein or, if such is not the case, indicating the
inaccuracies contained in such document or indicating the information not
furnished by Southern Financial or Southern Financial Bank expressly for use
therein.
Section 5.3 Registration Statement. As promptly as practicable after
the execution of this Agreement, Southern Financial shall prepare and file with
the SEC a Registration Statement on Form S-4 under the Securities Act and any
other applicable documents, relating to the shares of Southern Financial Common
Stock to be delivered to the shareholders of Metro-County pursuant to this
Agreement, and will use its best efforts to cause the Registration Statement to
become effective. At the time the Registration Statement becomes effective, the
Registration Statement will comply in all material respects with the provisions
of the Securities Act and the published rules and regulations thereunder, and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not false or misleading, and at the time of mailing thereof to
Metro-County's shareholders, at the time of each of the Metro-County
Shareholders' Meeting held to approve the Merger and at the Effective Time of
the Merger, the prospectus included as part of the Registration Statement, as
amended or supplemented by any amendment or supplement filed by Southern
Financial Bank (the "Proxy Statement/Prospectus"), will not contain any untrue
-27-
statement of a material fact or omit to state any material fact necessary to
make the statements therein not false or misleading; provided, however, that
none of the provisions of this subparagraph shall apply to statements in or
omissions from the Registration Statement or the Prospectus made in reliance
upon and in conformity with information furnished by Metro-County for use in the
Registration Statement or the Proxy Statement/Prospectus.
Section 5.4 Nasdaq Listing. Southern Financial will file all documents
required to be filed to have the shares of the Southern Financial Common Stock
to be issued pursuant to the Agreement included for quotation on Nasdaq and use
its best efforts to effect said listing.
Section 5.5 Issuance of Southern Financial Common Stock. The shares of
Southern Financial Common Stock to be issued by Southern Financial to the
shareholders of Metro-County pursuant to this Agreement will, on the issuance
and delivery to such shareholders pursuant to this Agreement, be duly
authorized, validly issued, fully paid and nonassessable. The shares of Southern
Financial Common Stock to be delivered to the shareholders of Metro-County
pursuant to this Agreement are and will be free of any preemptive rights of the
shareholders of Southern Financial.
Section 5.6 Employee Benefit Plans. Metro-County shall execute and
deliver such instruments and take such other actions as Southern Financial may
reasonably require in order to cause the amendment, merger or termination of any
of its employee benefit plans on terms satisfactory to Southern Financial and in
accordance with applicable law. Southern Financial agrees that the employees of
Metro-County who continue their employment after the Closing Date (the
"Metro-County Employees") will be entitled to participate as newly hired
employees in the employee benefit plans and programs maintained for employees of
Southern Financial and Southern Financial Bank, in accordance with the
respective terms of such plans and programs and on the same terms and conditions
as employees of Southern Financial and Southern Financial Bank, and Southern
Financial shall take all actions necessary or appropriate to facilitate coverage
of the Metro-County Employees in such plans and programs from and after the
Closing Date, subject to the following:
(a) Each Metro-County Employee will be entitled to credit for
prior service with Metro-County for all purposes under the employee welfare
benefit plans and other employee benefit plans and programs (other than stock
option plans), sponsored by Southern Financial and Southern Financial Bank to
the extent Metro-County sponsored a similar type of plan in which the
Metro-County Employees participated immediately prior to the Closing Date. Any
eligibility waiting period and pre-existing condition exclusion applicable to
such plans and programs shall be waived with respect to each Metro-County
Employee and their eligible dependents. For purposes of determining Metro-County
Employee's benefit for the calendar year in which the Merger occurs under
Southern Financial's vacation program, any vacation taken by the Metro-County
Employee immediately preceding the Closing Date for the calendar year in which
the Merger occurs will be deducted from the total Southern Financial vacation
benefit available to such Metro-County Employee for such calendar year. Southern
Financial further agrees to credit each Metro-County Employee and their eligible
dependents for the year during which coverage under Southern Financial's group
health plan begins, with any deductibles already incurred during such year,
under Metro-County's group health plan.
-28-
(b) Each Metro-County Employee shall be entitled to credit for
past service with Metro-County for the purpose of satisfying any eligibility or
vesting periods applicable to Southern Financial's employee benefit plans which
are subject to Sections 401(a) and 501(a) of the Code (including, without
limitation, Southern Financial's 401(k) Profit Sharing Plan).
(c) Southern Financial agrees that Metro-County may amend the
Virginia Bankers Association Master Defined Contribution Plan for Metro-County
Bank of Virginia, Inc. to provide for the acceleration of the vesting schedule
of the participants' accrued benefit under such plan prior to the Effective
Time.
Section 5.7 Indemnification. Southern Financial agrees that for a six
year period following the Effective Time, it shall indemnify and hold harmless
any person who has rights to indemnification from Metro-County, to the same
extent and on the same conditions as such person is entitled to indemnification
pursuant to Virginia law and Metro-County's Articles of Incorporation or Bylaws,
as in effect on the date of this Agreement, to the extent legally permitted to
do so, with respect to matters occurring on or prior to the Effective Time.
Southern Financial further agrees that any such person who has rights to
indemnification pursuant to this Section 5.7 is expressly made a third party
beneficiary of this Section 5.7 and may directly, in such person's personal
capacity, enforce such rights through an action at law or in equity or through
any other manner or means of redress allowable under Virginia law to the same
extent as if such person were a party hereto. Southern Financial shall apply to
its directors' liability insurance carrier for coverage for persons who are
currently covered by such insurance of Metro-County for a period of three years
after the Effective Time.
Section 5.8 Employment Matters. Southern Financial shall use its
commercially reasonable efforts to continue the employment of three (3)
specified officers of Metro-County in positions at Southern Financial Bank under
the terms and conditions set forth in a letter agreement agreed to between
Southern Financial Bank and Metro-County.
Section 5.9 Richmond Area Advisory Board. Southern Financial will form
an advisory board to serve the Richmond, Virginia area. All members of the
Metro-County Board of Directors as of the date of this Agreement will be invited
to join such Advisory Board. The Advisory Board members appointed pursuant to
this Section 5.9 and who continue to serve shall receive, as compensation for
service on the Advisory Board, fees in accordance with Southern Financial's
standard schedule of fees for service as an advisory board member in effect from
time to time. Each such Advisory Board member shall be reappointed to the
Richmond Area Advisory Board unless and until (i) he or she is deemed by
Southern Financial to be disqualified for good reason, (ii) Southern Financial
no longer maintains an Advisory Board for the Richmond area or (iii) the member
is prohibited from serving because he or she has attained the maximum age for
service thereon (currently age 75); provided, however, that for two years after
the Effective Time, no such Advisory Board member shall be prohibited from
serving thereon because he or she shall have attained the maximum age for
service thereon (currently age 75).
-29-
VI. MUTUAL COVENANTS OF SOUTHERN FINANCIAL, SOUTHERN FINANCIAL
BANK AND METRO-COUNTY
Section 6.1 Notification; Updated Disclosure Schedules. Metro-County
shall give prompt notice to Southern Financial, and Southern Financial shall
give prompt notice to Metro-County, of (i) any representation or warranty made
by it in this Agreement becoming untrue or inaccurate in any material respect,
including, without limitation, as a result of any change in a Schedule, or (ii)
the failure by it to comply with or satisfy in any material respect any
covenant, condition or agreement to be complied with or satisfied by it under
this Agreement; provided, however, that no such notification shall affect the
representations, warranties, covenants or agreements of the parties or the
conditions to the obligations of the parties under this Agreement.
Section 6.2 Confidentiality. Neither Southern Financial nor
Metro-County will, directly or indirectly, before or after the consummation or
termination of this Agreement, disclose any confidential information, whether
written or oral ("Subject Information") acquired from the other party to any
person, firm, corporation, association or other entity for any reason or purpose
whatsoever, other than in connection with the regulatory notice and application
process or, after termination of this Agreement pursuant to Section 8.1 hereof,
use such Subject Information for its own purposes or for the benefit of any
person, firm, corporation, association, or other entity under any circumstances.
The term "Subject Information" does not include any information that (i) at the
time of disclosure or thereafter is generally available to and known to the
public, other than by a breach of this Agreement by the disclosing party, (ii)
was available to the disclosing party on a nonconfidential basis from a source
other than the nondisclosing party or (iii) was independently acquired or
developed without violating any obligations of this Agreement.
Section 6.3 Restrictions on Trading in Southern Financial Common Stock.
Neither Southern Financial, Metro-County, any of their respective subsidiaries
nor any director or executive officer of Southern Financial or Metro-County or
their respective subsidiaries shall directly or indirectly purchase or sell on
the Nasdaq Stock Market, or submit a bid to purchase or offer to sell on the
Nasdaq Stock Market, any shares of Southern Financial Common Stock, or any
options, rights, warrants or other securities convertible into or exercisable
for shares of Southern Financial Common Stock during the period of the twenty
(20) trading days ending on and including the fifth trading day preceding the
Effective Time.
VII. CLOSING
Section 7.1 Closing. Subject to the other provisions of this Article
VII, on a mutually acceptable date ("Closing Date") as soon as practicable
within a thirty (30) day period commencing with the latest of the following
dates:
(a) the receipt of shareholder approval and the last approval
from any requisite regulatory or supervisory authority and the expiration of any
statutory or regulatory waiting period which is necessary to effect the Merger;
or
(b) if the transactions contemplated by this Agreement are
being contested in any legal proceeding and Southern Financial or Metro-County,
pursuant to Section 11.1 herein,
-30-
have elected to contest the same, then the date that such proceeding has been
brought to a conclusion favorable, in the judgment of each of Southern Financial
and Metro-County, to the consummation of the transactions contemplated herein,
or such prior date as each of Southern Financial and Metro-County shall elect
whether or not such proceeding has been brought to a conclusion;
A meeting ("Closing") will take place at which the parties to this
Agreement will exchange certificates, opinions, letters and other documents in
order to determine whether any condition exists which would permit the parties
hereto to terminate this Agreement. If no such condition then exists or if no
party elects to exercise any right it may have to terminate this Agreement, then
and thereupon the appropriate parties shall execute such documents and
instruments as may be necessary or appropriate to effect the transactions
contemplated by this Agreement.
The Closing shall take place at the offices of Bracewell & Patterson,
L.L.P. in Reston, Virginia, or at such other place to which the parties hereto
may mutually agree.
Section 7.2 Effective Time. Subject to the terms and upon satisfaction
of all requirements of law and the conditions specified in this Agreement
including, among other conditions, the receipt of any requisite approvals of the
shareholders of Metro-County and the regulatory approvals of the Federal
Reserve, FDIC, Virginia Commission and any other federal or state regulatory
agency whose approval must be received in order to consummate the Merger, the
Merger shall become effective, and the effective time of the Merger shall occur,
at the date and time specified in the certificate approving the Merger to be
issued by the Virginia Commission, ("Effective Time"). It is anticipated by
Southern Financial and Metro-County that the Closing and the Effective Time will
occur on the same day.
VIII. TERMINATION
Section 8.1 Termination.
(a) This Agreement may be terminated by action of the Board of
Directors of Southern Financial or Metro-County at any time prior to the
Effective Time if:
(i) any court of competent jurisdiction in the United
States or other United States (federal or state) governmental body shall have
issued an order, decree or ruling or taken any other action restraining,
enjoining or otherwise prohibiting the Merger and such order, decree, ruling or
other action shall have been final and non-appealable;
(ii) any of the transactions contemplated by this
Agreement are disapproved by any regulatory authority or other person whose
approval is required to consummate any of such transactions; or
(iii) the Merger shall not have become effective on
or before one year following the date of execution of this Agreement, or such
later date as shall have been approved in writing by the Boards of Directors of
Southern Financial and Metro-County; provided, however, that the right to
terminate under this Section 8.1(a)(iii) shall not be available to any
-31-
party whose failure to fulfill any material obligation under this Agreement has
been the cause of, or has resulted in, the failure of the Merger to become
effective on or before such date.
(b) This Agreement may be terminated at any time prior to the
Closing by the Board of Directors of Metro-County or Southern Financial if the
conditions set forth in Article XI have not been met or waived by the other
party.
(c) This Agreement may be terminated at any time prior to the
Closing by the Board of Directors of Metro-County if the conditions set forth in
Article X have not been met or waived by Metro-County.
(d) This Agreement may be terminated at any time prior to the
Closing by the Board of Directors of Southern Financial if the conditions set
forth in Article IX have not been met or waived by Southern Financial.
(e) This Agreement may be terminated at any time prior to the
Effective Time with the mutual written consent of Southern Financial and
Metro-County and the approval of such action by their respective Boards of
Directors.
(f) This Agreement may be terminated by Metro-County if the
Average Trading Price (as defined in Section 1.3 hereof) of Southern Financial
Common Stock is $20.80 or less. To terminate this Agreement pursuant to this
Section 8.1(f), Metro-County must provide to Southern Financial written notice
of its intent to terminate ("Termination Notice") within one business day
following the end of the twenty (20) day trading period over which the Average
Trading Price is determined. For a period of three business days from the date
of receipt of the Termination Notice, Southern Financial shall have the option,
but not the obligation, to increase the aggregate number of shares of Southern
Financial Common Stock into which shares of Metro-County Common Stock will be
converted at the Effective Time as set forth in Section 1.3(c) hereof ("Walkaway
Counter Offer"). In the event that Southern Financial elects to make the
Walkaway Counter Offer, the Termination Notice previously sent by Metro-County
shall be null and void and of no effect, and Metro-County shall no longer have
the right to terminate the Agreement pursuant to this Section 8.1(f). If
Southern Financial does not elect to make the Walkaway Counter Offer, this
Agreement shall terminate.
Section 8.2 Effect of Termination. In the event of termination of this
Agreement by either Southern Financial or Metro-County as provided in Section
8.1 or the abandonment of the Merger without breach by any party hereto, this
Agreement (other than Section 6.2) shall become void and have no effect, without
any liability on the part of any party or its directors, officers or
shareholders. Nothing contained in this Section 8.2 shall relieve any party
hereto of any liability for a breach of this Agreement.
Section 8.3 Damages.
(a) If this Agreement is terminated by Southern Financial or
Metro-County because of a willful and material breach by the other of any
representation, warranty, covenant, undertaking or restriction set forth herein,
and provided that the terminating party shall not have been in breach (in any
material respect) of any representation and warranty, covenant, undertaking or
restriction contained herein, then the breaching party shall bear and pay all
costs
-32-
and expenses of the other party, subject to Section 8.3(b), including fees and
expenses of consultants, investment bankers, accountants, counsel, printers and
persons involved in the transactions contemplated by this Agreement, including
the preparation of the Registration Statement and the Proxy
Statement/Prospectus.
(b) Any liability incurred by Southern Financial pursuant to
this Section 8.3 shall not exceed a total of $100,000 and any liability incurred
by Metro-County pursuant to this Section 8.3 shall not exceed a total of
$250,000.
(c) Final settlement with respect to the payment of such fees
and expenses by the parties shall be made within thirty (30) days after the
termination of this Agreement.
IX. CONDITIONS TO OBLIGATIONS OF SOUTHERN FINANCIAL AND
SOUTHERN FINANCIAL BANK
The obligations of Southern Financial and Southern Financial Bank under
this Agreement are subject to the satisfaction, at or prior to the Closing Date
of the following conditions, which may be waived by Southern Financial in its
sole discretion:
Section 9.1 Compliance with Representations and Warranties. Each of the
representations and warranties made by Metro-County in this Agreement must have
been true and correct in all material respects when made and shall be true and
correct in all material respects as of the Closing Date with the same force and
effect as if such representations and warranties were made at and as of the
Closing Date, except to the extent such representations and warranties are by
their express provisions made as of a specified date, and Southern Financial and
Southern Financial Bank shall have received a certificate signed by the chief
executive officer or president of Metro-County to that effect.
Section 9.2 Performance of Obligations. Metro-County shall have
performed or complied in all material respects with all covenants and
obligations required by this Agreement to be performed and complied with prior
to or at the Closing. Southern Financial and Southern Financial Bank shall have
received a certificate signed by the by the chief executive officer or president
of Metro-County to that effect.
Section 9.3 Absence of Material Adverse Changes and Events. There shall
have been no change after the date hereof in the assets, properties, business,
financial condition or results of operation of Metro-County which, individually
or in the aggregate, has had or is reasonably likely to have, a Material Adverse
Effect on Metro-County, nor shall any event have occurred which, with the lapse
of time, will result in a Material Adverse Effect on Metro-County.
Section 9.4 Legal Opinion. Southern Financial shall have received an
opinion of counsel to Metro-County, dated as of the Closing Date, in form and
substance satisfactory to counsel for Southern Financial.
Section 9.5 Releases. Metro-County shall have used its best efforts to
have each of the directors and officers (with a title of senior vice president
or above as of the date hereof) of Metro-County deliver to Southern Financial an
instrument in the form of Exhibit D dated as of
-33-
the Closing Date releasing Southern Financial and Southern Financial Bank from
any and all claims of such directors and officers (except as described in such
instrument).
Section 9.6 Affiliates' Letters. Each Affiliate of Metro-County shall
have delivered to Southern Financial Bank an executed copy of the Affiliate
Letter contemplated by Section 4.10 hereof.
Section 9.7 Acknowledgment of Option Cancellation. Each Metro-County
Stock Option shall be cancelled and terminated as of the Effective Time as
provided for in Section 1.4 hereof, and each holder of a Metro-County Option
outstanding immediately prior to the Effective Time shall have executed and
delivered to Southern Financial such instruments as Southern Financial, with the
advice of counsel, may deem necessary to effectuate the cancellation and
termination of such Metro-County Options and the release of rights under the
Metro-County Options and the Metro-County Stock Option Plan.
X. CONDITIONS TO OBLIGATIONS OF METRO-COUNTY
The obligations of Metro-County under this Agreement are subject to the
satisfaction, at or prior to the Closing Date, of the following conditions,
which may be waived by Metro-County in its sole discretion:
Section 10.1 Compliance with Representations and Warranties. Each of
the representations and warranties made by Southern Financial and Southern
Financial Bank in this Agreement must have been true and correct in all material
respects when made and shall be true and correct in all material respects as of
the Closing Date with the same force and effect as if such representations and
warranties were made at and as of the Closing Date, except to the extent such
representations and warranties are by their express provisions made as of a
specified date, and Metro-County shall have received a certificate signed by the
chief executive officer or president of Southern Financial to that effect.
Section 10.2 Performance of Obligations. Southern Financial and
Southern Financial Bank shall have performed or complied in all material
respects with all covenants and obligations required by this Agreement to be
performed and complied with prior to or at the Closing. Metro-County shall have
received a certificate signed by the by the chief executive officer or president
of Southern Financial to that effect.
Section 10.3 Absence of Material Adverse Changes and Events. There
shall have been no change after the date hereof in the assets, properties,
business, financial condition or results of operations of Southern Financial or
Southern Financial Bank which have individually or in the aggregate, has had or
is reasonably likely to have, a Material Adverse Effect on Southern Financial,
nor shall any event have occurred which, with the lapse of time, will result in
a Material Adverse Effect on Southern Financial.
Section 10.4 Legal Opinion. Metro-County shall have received an opinion
of Bracewell & Patterson, L.L.P., counsel to Southern Financial, dated as of the
Closing Date, addressed to Metro-County and in form and substance satisfactory
to counsel for Metro-County.
-34-
Section 10.5 Opinion of Financial Advisor. Metro-County shall have
received a written opinion from a financial advisor dated as of the date of this
Agreement and updated as of the date of the Proxy Statement/Prospectus that the
Merger Consideration is fair to the Metro-County shareholders from a financial
point of view.
XI. CONDITIONS TO RESPECTIVE OBLIGATIONS OF SOUTHERN FINANCIAL,
SOUTHERN FINANCIAL BANK AND METRO-COUNTY
The respective obligations of Southern Financial, Southern Financial
Bank and Metro-County under this Agreement are subject to the satisfaction of
the following conditions which may be waived by Southern Financial, Southern
Financial Bank and Metro-County, respectively, in their sole discretion:
Section 11.1 Government Approvals. Southern Financial and Southern
Financial Bank shall have received the approval, or waiver of approval, of the
transactions contemplated by this Agreement from all necessary governmental
agencies and authorities, including the Federal Reserve, Virginia Commission and
any other regulatory agency whose approval must be received in order to
consummate the Merger, which approvals shall not impose any restrictions on the
operations of the Continuing Bank which are unacceptable to Southern Financial,
and such approvals and the transactions contemplated hereby shall not have been
contested by any federal or state governmental authority or any third party
(except shareholders asserting dissenters' rights) by formal proceeding. It is
understood that, if any such contest is brought by formal proceeding, Southern
Financial or Metro-County may, but shall not be obligated to, answer and defend
such contest or otherwise pursue the Mergers over such objection.
Section 11.2 Shareholder Approval. The shareholders of Metro-County
shall have approved this Agreement and the transactions contemplated by this
Agreement.
Section 11.3 Tax Opinion. Southern Financial and Metro-County shall
have received an opinion of Bracewell & Patterson, L.L.P. in form and substance
satisfactory to Southern Financial and Metro-County to the effect that on the
basis of certain facts, representations and opinions set forth in such opinion
that the Merger will qualify as a reorganization under Section 368(a) of the
Internal Revenue Code. In rendering such opinion, such counsel may require and
rely upon and may incorporate by reference representations and covenants,
including those contained in certificates of officers and/or directors of
Southern Financial, Metro-County and others.
Section 11.4 Registration of Southern Financial Common Stock. The
Registration Statement covering the Southern Financial Common Stock to be issued
in the Merger shall have become effective under the Securities Act and no stop
orders suspending such effectiveness shall be in effect, and no action, suit,
proceeding or investigation by the SEC to suspend the effectiveness of the
Registration Statement shall have been initiated or continuing, or have been
threatened and be unresolved, and all necessary approvals under state's
securities laws relating to the issuance or trading of the Southern Financial
Common Stock to be issued in the Merger shall have been received.
-35-
Section 11.5 Listing of Southern Financial Common Stock. The shares of
Southern Financial Common Stock to be delivered to the shareholders of
Metro-County pursuant to this Agreement shall have been authorized for listing
on Nasdaq.
Section 11.6 Non-Compete Agreement. Mr. Stafford M. White shall have
entered into a non-compete agreement with Southern Financial Bank substantially
in the form set forth in Schedule 11.6.
XII. MISCELLANEOUS
Section 12.1 Non-Survival of Representations and Warranties. The
representations, warranties, covenants and agreements of Southern Financial,
Southern Financial Bank and Metro-County contained in this Agreement shall
terminate at the Closing, other than covenants that by their terms are to be
performed after the Effective Time (including Sections 5.6, 5.7., 5.8, 5.9 and
6.2 hereof), which shall survive the Closing.
Section 12.2 Definition of Knowledge. The term "knowledge", when used
with respect to any party, shall mean the knowledge, after reasonable
investigation, of any "executive officer" of such party, as the term "executive
officer" is defined in Regulation O (12 C.F.R. 215).
Section 12.3 Amendments. This Agreement may be amended only by a
writing signed by Southern Financial, Southern Financial Bank and Metro-County
at any time prior to the Effective Time with respect to any of the terms
contained herein; provided, however, that the Merger Consideration to be
received by the shareholders of Metro-County pursuant to this Agreement shall
not be decreased subsequent to the approval of the transactions contemplated by
the Agreement without the further approval by such shareholders.
Section 12.4 Expenses. Whether or not the transactions provided for
herein are consummated, each party to this Agreement will pay its respective
expenses incurred in connection with the preparation and performance of its
obligations under this Agreement. Similarly, each party agrees to indemnify the
other parties against any cost, expense or liability (including reasonable
attorneys' fees) in respect of any claim made by any party for a broker's or
finder's fee in connection with this transaction other than one based on
communications between the party and the claimant seeking indemnification.
Except as disclosed herein, Southern Financial and Metro-County represent and
warrant to each other that neither of them, nor any of their agents, employees
or representatives, has incurred any liability for any commissions or brokerage
fees in connection with this transaction.
Section 12.5 Notices. Except as explicitly provided herein, any notice
given hereunder shall be in writing and shall be delivered in person or mailed
by first class mail, postage prepaid or sent by facsimile, courier or personal
delivery to the parties at the following addresses unless by such notice a
different address shall have been designated:
-36-
If to Southern Financial and Southern Financial Bank:
Southern Financial Bancorp, Inc.
37 East Main Street
Warrenton, Virginia 20186
Fax No.: (540) 349-3904
Attention: Ms. Georgia S. Derrico
With a copy to:
Bracewell & Patterson, L.L.P.
711 Louisiana Street, Suite 2900
Houston, Texas 77002-2781
Fax No.: (713) 221-1212
Attention: Mr. William T. Luedke IV
If to Metro-County:
Metro-County Bank of Virginia, Inc.
8206 Atlee Road
Mechanicsville, Virginia 23166
Fan No.: (804) 559-0802
Attention: Mr. Stafford M. White
With a copy to:
LeClair Ryan
707 East Main Street
Richmond, Virginia 23219
Fax No.: (804) 783-2294
Attention: Mr. George P. Whitley
All notices sent by mail as provided above shall be deemed delivered three (3)
days after deposit in the mail. All notices sent by courier as provided above
shall be deemed delivered one day after being sent and all notices sent by
facsimile shall be deemed delivered upon confirmation of receipt. All other
notices shall be deemed delivered when actually received. Any party to this
Agreement may change its address for the giving of notice specified above by
giving notice as herein provided.
Section 12.6 Controlling Law. All questions concerning the validity,
operation and interpretation of this Agreement and the performance of the
obligations imposed upon the parties hereunder shall be governed by the laws of
the Commonwealth of Virginia and, to the extent applicable, by the laws of the
United States of America.
-37-
Section 12.7 Headings. The headings and titles to the sections of this
Agreement are inserted for convenience only and shall not be deemed a part
hereof or affect the construction or interpretation of any provision hereof.
Section 12.8 Modifications or Waiver. No termination, cancellation,
modification, amendment, deletion, addition or other change in this Agreement,
or any provision hereof, or waiver of any right or remedy herein provided, shall
be effective for any purpose unless specifically set forth in a writing signed
by the party or parties to be bound thereby. The waiver of any right or remedy
in respect to any occurrence or event on one occasion shall not be deemed a
waiver of such right or remedy in respect to such occurrence or event on any
other occasion.
Section 12.9 Severability. Any provision hereof prohibited by or
unlawful or unenforceable under any applicable law or any jurisdiction shall as
to such jurisdiction be ineffective, without affecting any other provision of
this Agreement, or shall be deemed to be severed or modified to conform with
such law, and the remaining provisions of this Agreement shall remain in force,
provided that the purpose of the Agreement can be effected. To the fullest
extent, however, that the provisions of such applicable law may be waived, they
are hereby waived, to the end that this Agreement be deemed to be a valid and
binding agreement enforceable in accordance with its terms.
Section 12.10 Assignment. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors and
assigns, but shall not be assigned by any party without the prior written
consent of the other parties.
Section 12.11 Consolidation of Agreements. All understandings and
agreements heretofore made between the parties hereto are merged in this
Agreement which (together with any agreements executed by the parties hereto
contemporaneously with or subsequent to the execution of this Agreement) shall
be the sole expression of the agreement of the parties respecting the Merger.
Section 12.12 Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original and all of which shall
be deemed to constitute one and the same instrument.
Section 12.13 Binding on Successors. Except as otherwise provided
herein, this Agreement shall be binding upon, and shall inure to the benefit of,
the parties and their respective heirs, executors, trustees, administrators,
guardians, successors and assigns.
Section 12.14 Gender. Any pronoun used herein shall refer to any
gender, either masculine, feminine or neuter, as the context requires.
Section 12.15 Disclosures. Any disclosure made in any document
delivered pursuant to this Agreement or referred to or described in writing in
any section of this Agreement or any schedule attached hereto shall be deemed to
be disclosure for purposes of any section herein or schedule hereto.
Section 12.16 Publicity. Subject to written advice of counsel with
respect to legal requirements relating to public disclosure of matters related
to the transactions contemplated by
-38-
this Agreement, the timing and content of any announcements, press releases or
other public statements (whether written or oral) concerning this Agreement or
the Merger will occur upon, and be determined by, the mutual consent of Southern
Financial and Metro-County; provided, however, that this shall not include
notices required to be published pursuant to the regulatory application process.
[Signature Page Follows]
-39-
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date first above written.
SOUTHERN FINANCIAL BANCORP, INC.
By: /s/ GEORGIA S. DERRICO
-------------------------------------
Georgia S. Derrico
Chairman of the Board and
Chief Executive Officer
SOUTHERN FINANCIAL BANK
By: /s/ R. RODERICK PORTER
-------------------------------------
R. Roderick Porter
President and Chief Operating Officer
METRO-COUNTY BANK OF VIRGINIA, INC.
By: /s/ STAFFORD M. WHITE, JR.
-------------------------------------
Stafford M. White, Jr.
Chairman and Chief Executive Officer
[Signature Page to Agreement and Plan of Reorganization]
-40-
EXHIBIT A TO THE
AGREEMENT AND PLAN
OF REORGANIZATION
PLAN OF MERGER
BETWEEN
METRO-COUNTY BANK OF VIRGINIA, INC.
AND
SOUTHERN FINANCIAL BANK
Pursuant to this Plan of Merger ("Plan of Merger"), Metro-County Bank
of Virginia, Inc., a Virginia state bank ("Metro-County"), shall merge with and
into Southern Financial Bank, Inc., a Virginia state bank ("Southern Financial
Bank"), pursuant to a merger under Section 13.1-716 of the Virginia Stock
Corporation Act. Capitalized terms used but not defined herein shall have the
meaning assigned to them in the Agreement.
ARTICLE 1
TERMS OF THE MERGER
Section 1.1 THE MERGER. Subject to the terms and conditions of the
Agreement and Plan of Reorganization dated as of April 25, 2002 (the
"Agreement") by and among Southern Financial Bancorp, Inc., a Virginia
corporation ("Southern Financial"), Southern Financial Bank, the wholly owned
banking subsidiary of Southern Financial, and Metro-County, at the Effective
Time, Metro-County shall merge with and into Southern Financial Bank (the
"Merger"). Southern Financial Bank shall be the surviving corporation of the
Merger, and its name shall remain Southern Financial Bank (Southern Financial
Bank as existing at and after the Effective Time is sometimes referred to herein
as the "Continuing Bank"). Each outstanding share of common stock of
Metro-County shall be converted into shares of the common stock of Southern
Financial in accordance with Section 2.1 of this Plan of Merger. At the
Effective Time, the Merger shall have the effect as provided in Section 13.1-721
of the Virginia Stock Corporation Act.
Section 1.2 ARTICLES OF INCORPORATION, BYLAWS AND FACILITIES OF THE
CONTINUING BANK. At the Effective Time and until thereafter amended in
accordance with applicable law, the Articles of Incorporation of the Continuing
Bank shall be the Articles of Incorporation of Southern Financial Bank as in
effect at the Effective Time. Until altered, amended or repealed as therein
provided and in the Articles of Incorporation of the Continuing Bank, the Bylaws
of the Continuing Bank shall be the Bylaws of Southern Financial Bank as in
effect at the Effective Time. Unless and until changed by the Board of Directors
of the Continuing Bank, the main office of the Continuing Bank shall be the main
office of Southern Financial Bank as of the Effective Time. The established
offices and facilities of Metro-County immediately prior to the Merger shall
become established offices and facilities of the Continuing Bank. Until
thereafter changed in accordance with law or the Articles of Incorporation or
Bylaws of the Continuing Bank, all corporate acts, plans, policies, contracts,
approvals and authorizations of Metro-County and Southern Financial Bank and
their respective shareholders, boards of directors, committees elected or
appointed thereby, officers and agents, which were valid and effective
immediately prior to the Effective Time, shall be taken for all purposes as the
acts, plans, policies, contracts, approvals and authorizations of the Continuing
Bank and shall be as effective and binding thereon as the same were with respect
to Metro-County and Southern Financial Bank, respectively, as of the Effective
Time.
Section 1.3 DIRECTORS AND OFFICERS. The directors and officers of
Southern Financial Bank as in effect prior to the consummation of the Merger
shall remain the directors and officers of Southern Financial Bank following the
Effective Time.
ARTICLE 2
MANNER OF CONVERTING AND EXCHANGING SHARES
Section 2.1 CONVERSION OF SHARES. Upon, and by reason of, the Merger
becoming effective pursuant to the issuance of a Certificate of Merger by the
Virginia State Corporation Commission, cash shall be allocated, and stock shall
be issued and allocated to the shareholders of Metro-County as follows:
(a) Unless otherwise adjusted as provided in Section 2.1(b)
and (c), at the Effective Time, each share of common stock, par value $1.60 per
share, of Metro-County ("Metro-County Common Stock") issued and outstanding
immediately prior to the Effective Time shall be converted and exchanged for (i)
an amount of cash equal to $2.90 and (ii) a number of shares of common stock,
par value $0.01 per share, of Southern Financial ("Southern Financial Common
Stock"), with an aggregate market value equal to $4.35 (collectively, the
"Merger Consideration"). All such shares of Metro-County Common Stock shall no
longer be outstanding and shall automatically be canceled and retired and shall
cease to exist, and each certificate previously representing any such shares
shall thereafter represent the right to receive the Merger Consideration.
(b) The number of shares of Southern Financial Common Stock
into which each share of Metro-County will be converted into and exchanged for
will equal $4.35 divided by the Average Trading Price of Southern Financial
Common Stock (rounded to the nearest ten thousandth); provided, however, that
subject to Section 2.1(c), such number of shares of Southern Financial Common
Stock shall be no more than 0.1912 or no less than 0.1487 (the exchange ratio,
as adjusted if applicable, is hereinafter referred to as the "Exchange Ratio").
The "Average Trading Price" of Southern Financial Common Stock shall be the
average of the closing sale price per share of Southern Financial Common Stock
on The Nasdaq Stock Market, Inc. National Market System ("Nasdaq") (as reported
in The Wall Street Journal or, if not reported thereby, another alternative
source as chosen by Southern Financial) for the twenty (20) trading days ending
on and including the fifth trading day preceding the Effective Time.
(c) The Exchange Ratio may, if the Average Trading Price of
the Southern Financial Common Stock is $20.80 or less, be adjusted at the option
of Southern Financial to a number of shares equal to $3.98 divided by the
Average Trading Price. If Southern Financial elects not to adjust the Exchange
Ratio, Metro-County may terminate the Merger as provided in Article 3 of this
Plan of Merger.
(d) Notwithstanding the other provisions of this Section 2.1,
in the event (i) Southern Financial shall have entered into an agreement with
any person to (A) acquire, merge or consolidate, or enter into any similar
transaction, with Southern Financial, (B) purchase, lease or otherwise acquire
all or substantially all of the assets of Southern Financial or (C) purchase or
otherwise acquire securities representing 25% or more of the voting power of
Southern Financial; or (ii) any person shall have made a bona fide proposal to
Southern Financial by public announcement or written communication that is or
becomes the subject of public disclosure, to acquire Southern Financial by
merger, share exchange, consolidation, purchase of all or substantially all of
its assets or any similar transaction, the Average Trading Price of Southern
Financial Common Stock will be based on the average of the closing price per
share of Southern Financial Common Stock on Nasdaq (as reported by The Wall
Street Journal or, if not reported thereby, another alternative source as chosen
by Southern Financial) for each of the twenty (20) trading days immediately
preceding the public announcement of a transaction or event described in either
(i) or (ii).
(e) In the event Southern Financial changes (or establishes a
record date for changing) the number of shares of Southern Financial Common
Stock issued and outstanding before the Effective Time as a result of a stock
split, stock dividend, recapitalization or similar transaction with respect to
the outstanding Southern Financial Common Stock and the record date therefor
shall be prior to the Effective Time, appropriate and proportional adjustments
will be made to either (i) the maximum and minimum number of shares of Southern
Financial Common Stock that may be issued for each share of Metro-County Common
Stock in accordance with Section 2.1(a) or (ii) the Exchange Ratio in the event
Southern Financial changes (or establishes a record date for changing) the
number of shares of Southern Financial Common Stock issued and outstanding after
the Exchange Ratio has been established and before the Effective Time.
-2-
(f) Each share of common stock of Southern Financial Bank
issued and outstanding immediately prior to the Effective Time shall continue
unchanged as an outstanding share of common stock of the Continuing Bank.
Section 2.2 CONVERSION OF STOCK OPTIONS. Upon, and by reason of, the
Merger becoming effective pursuant to the issuance of a Certificate of Merger by
the Virginia State Corporation Commission, stock option holders of Metro-County
shall have the right to receive cash and stock as follows:
(a) At the Effective Time, each option to acquire shares of
Metro-County Common Stock which is outstanding and unexercised immediately prior
thereto ("Metro-County Option") pursuant to the Metro-County Stock Option Plan,
shall represent the right to receive (i) cash equal to $1.58 and (ii) a number
of shares of Southern Financial Common Stock, with an aggregate market value
equal to $2.36, subject to adjustment as provided in Sections 2.1(b) and (c).
(b) Subject to adjustment in the manner provided in Section
2.1(e), the number of shares of Southern Financial Common Stock into which each
Metro-County Option will be converted into and exchanged for will equal $2.36
divided by the Average Trading Price of Southern Financial Common Stock (rounded
to the nearest ten thousandth); provided, however, that subject to Section
2.1(c), such number of shares of Southern Financial Common Stock shall be no
more than 0.0808 or no less than 0.1039.
(c) Metro-County shall take all actions necessary or
reasonably requested by Southern Financial to ensure that at the Effective Time,
no holder of any Metro-County Option will have any right thereunder to acquire
any equity securities of Metro-County, Southern Financial or any of its
subsidiaries or any right to payment in respect of any such securities of
Metro-County, except for payment as provided in this Section 2.2.
Section 2.3 MANNER OF EXCHANGE. Upon, and by reason of, the Merger
becoming effective pursuant to the issuance of a Certificate of Merger by the
Virginia State Corporation Commission, stock certificates and cash shall be
exchanged as follows:
(a) Southern Financial shall deposit or cause to be deposited
in trust with Chase Mellon Shareholder Services (the "Exchange Agent") prior to
the Effective Time (i) certificates representing shares of Southern Financial
Common Stock and (ii) cash, each in an aggregate amount sufficient to make the
payments of the Merger Consideration set forth in Section 2.1 of this Plan of
Merger. The Exchange Agent shall promptly deliver the stock certificates
representing shares of Southern Financial Common Stock and the cash portion of
the Merger Consideration upon surrender of certificates representing shares of
Metro-County Common Stock.
(b) As soon as practicable after the Effective Time, the
Exchange Agent shall mail to each record holder of an outstanding certificate or
certificates which represent shares of Metro-County Common Stock (the
"Certificates"), a form letter of transmittal which will specify that delivery
shall be effected, and risk of loss and title to the Certificates shall pass,
only upon proper delivery of the Certificates to the Exchange Agent and contain
instructions for use in effecting the surrender of the Certificates for payment
therefor. At and after the Closing, as defined in Section 7.1 of the Agreement,
and upon surrender to the Exchange Agent of a Certificate, together with such
letter of transmittal duly executed, the holder of such Certificate shall be
entitled to receive in exchange therefor the Merger Consideration provided in
Section 2.1 hereof in the manner described herein, and such Certificate shall
forthwith be canceled. No interest will be paid or accrued on the shares of
Southern Financial Common Stock or cash payable upon surrender of the
Certificates. If certificates representing shares of Southern Financial Common
Stock are to be delivered or payment of cash is to be made to a person other
than the person in whose name the Certificate surrendered is registered, it
shall be a condition of payment that the Certificate so surrendered shall be
properly endorsed or otherwise in proper form for transfer and that the person
requesting such payment shall pay any transfer or other taxes required by reason
of the payment to a person other than the registered holder of the Certificate
surrendered or established to the satisfaction of Southern Financial that such
tax has been paid or is not applicable. Until surrendered in accordance with the
provisions of this Section 2.3, each Certificate shall represent for all
purposes the right to receive the Merger Consideration without any interest
thereon.
(c) After the Effective Time, the stock transfer ledger of
Metro-County shall be closed and there shall be no transfers on the stock
transfer books of Metro-County of the shares of Metro-County Common
-3-
Stock that were outstanding immediately prior to the Effective Time. If, after
the Effective Time, Certificates are presented to Metro-County, they shall be
promptly presented to the Exchange Agent and exchanged as provided in this
Section 2.3.
(d) Any portion of the Merger Consideration (including the
proceeds of any investments thereof) that remains unclaimed by the shareholders
of Metro-County for six months after the Effective Time shall be returned to
Southern Financial, and the holders of shares of Metro-County Common Stock not
theretofore presented to the Exchange Agent shall look to Southern Financial
only, and not the Exchange Agent, for the payment of any of the Merger
Consideration in respect of such shares.
(e) Former shareholders of Metro-County shall be entitled to
vote after the Effective Time at any meeting of Southern Financial's
shareholders the number of shares of Southern Financial Common Stock into which
their shares are converted, regardless of whether such shareholders of
Metro-County have surrendered their Certificates in exchange therefor.
Section 2.4 FRACTIONAL SHARES. Notwithstanding anything in this Plan of
Merger to the contrary, Southern Financial will not issue any certificates or
scrip representing fractional shares of Southern Financial Common Stock
otherwise issuable pursuant to the Merger. In lieu of the issuance of any such
fractional shares, Southern Financial shall pay to each former holder of
Metro-County Common Stock otherwise entitled to receive such fractional share an
amount of cash determined by multiplying (i) the closing price per share of
Southern Financial Common Stock on Nasdaq (as reported by The Wall Street
Journal or, if not reported thereby, another alternative source as chosen by
Southern Financial) on the trading day immediately prior to the Effective Time
by (ii) the fraction of a share of Southern Financial Common Stock which such
holder would otherwise be entitled to receive pursuant to Section 2.1.
Section 2.5 DIVIDENDS. No dividends or other distributions declared
after the Effective Time with respect to shares of Southern Financial Common
Stock and payable to the holders thereof shall be paid to the holder of a
Certificate until such holder surrenders such Certificate to the Exchange Agent
in accordance with Section 2.3. After the surrender of a Certificate in
accordance with Section 2.3, the holder thereof shall be entitled to receive any
such dividends or other distributions, without interest thereon, which had
become payable after the Effective Time with respect to the shares of Southern
Financial Common Stock represented by such Certificate.
ARTICLE 3
TERMINATION
This Plan of Merger may be terminated by action of the Board of
Directors of Southern Financial or Metro-County at any time prior to the
Effective Time as provided in Section 8.1 of the Agreement and Plan of
Reorganization, dated as of April 25, 2002.
-4-
Appendix B
[LETTERHEAD OF SCOTT & STRINGFELLOW, INC.]
June 19, 2002
Board of Directors
Metro-County Bank of Virginia, Inc.
8206 Atlee Road
Mechanicsville, Virginia 23166
Dear Madame and Gentlemen:
You have asked us to render our opinion relating to the fairness, from
a financial point of view, to the shareholders of Metro-County Bank of Virginia,
Inc. ("Metro-County") of the terms of an Agreement and Plan of Reorganization by
and among Southern Financial Bancorp, Inc. ("Southern Financial"), Southern
Financial Bank and Metro-County dated April 25, 2002 (the "Agreement"). The
Agreement provides for the merger of Metro-County with and into Southern
Financial Bank, a subsidiary bank of Southern Financial (the "Merger") and
further provides that each share of Metro-County Common Stock issued and
outstanding immediately prior to the Effective Time shall be converted into and
exchanged for (i) an amount of cash equal to $2.90 and (ii) a number of shares
of Southern Financial Common Stock equal to the quotient of $4.35 divided by the
average of the closing sales price per share for Southern Financial Common Stock
as reported on the NASDAQ National Market for the 20 trading days ending on and
including the fifth trading day preceding the Effective Time (the "Exchange
Ratio"). In no case will the Exchange Ratio be more than 0.1912 or less than
0.1487.
In developing our opinion, we have, among other things, reviewed and
analyzed: (1) the Agreement; (2) the Registration Statement and this Proxy
Statement; (3) Metro-County's annual reports to stockholders and its financial
statements for the three years ended December 31, 2001; (4) Metro-County's
unaudited financial statements for the quarter ended March 31, 2002 and 2001,
and other internal information relating to Metro-County prepared by
Metro-County's management; (5) information regarding the trading market for the
common stocks of Metro-County and Southern Financial and the price ranges within
which the respective stocks have traded; (6) the relationship of prices paid to
relevant financial data such as net worth, assets, deposits and earnings in
certain bank and bank holding company mergers and acquisitions in recent years;
(7) Southern Financial's annual reports to shareholders and its financial
statements for the three years ended December 31, 2001; and (8) Southern
Financial's unaudited financial statements for the quarter ended March 31, 2002
and 2001, and other internal information relating to Southern Financial prepared
by Southern Financial's management. We have discussed with members of management
of Metro-County and Southern Financial the background to the
Merger, reasons and basis for the Merger and the business and future prospects
of Metro-County and Southern Financial individually and as a combined entity.
Finally, we have conducted such other studies, analyses and investigations,
particularly of the banking industry, and considered such other information as
we deemed appropriate.
In conducting our review and arriving at our opinion, we have relied
upon and assumed the accuracy and completeness of the information furnished to
us by or on behalf of Metro-County and Southern Financial. We have not attempted
independently to verify such information, nor have we made any independent
appraisal of the assets of Metro-County or Southern Financial. We have taken
into account our assessment of general economic, financial market and industry
conditions as they exist and can be evaluated at the date hereof, as well as our
experience in business valuation in general.
On the basis of our analyses and review and in reliance on the accuracy
and completeness of the information furnished to us and subject to the
conditions noted above, it is our opinion that, as of the date hereof the terms
of the Agreement are fair from a financial point of view to the shareholders of
Metro-County Common Stock.
Very truly yours,
SCOTT & STRINGFELLOW, INC.
By: /s/ GARY S. PENROSE
--------------------------------
Gary S. Penrose
Managing Director
Financial Institutions Group
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS OF SOUTHERN FINANCIAL
BANCORP, INC.
Article 10 of Chapter 9 of Title 13.1 of the Code of Virginia of 1950,
as amended (the "Code"), permits a Virginia corporation to indemnify any
director or officer for reasonable expenses incurred in any legal proceeding in
advance of final disposition of the proceeding, if the director or officer
furnishes the corporation a written statement of his good faith belief that he
has met the standard of conduct prescribed by the Code, and a determination is
made by the board of directors that such standard has been met. In a proceeding
by or in the right of the corporation, no indemnification shall be made in
respect of any matter as to which an officer or director is adjudged to be
liable to the corporation, unless the court in which the proceeding took place
determines that, despite such liability, such person is reasonably entitled to
indemnification in view of all the relevant circumstances. In any other
proceeding, no indemnification shall be made if the director or officer is
adjudged liable to the corporation on the basis that personal benefit was
improperly received by him. Corporations are given the power to make any other
or further indemnity, including advance of expenses, to any director or officer
that may be authorized by the articles of incorporation or any bylaw made by the
shareholders, or any resolution adopted, before or after the event, by the
shareholders, except an indemnity against willful misconduct or a knowing
violation of the criminal law. Unless limited by its articles of incorporation,
indemnification of a director or officer is mandatory when he entirely prevails
in the defense of any proceeding to which he is a party because he is or was a
director or officer.
Southern Financial's Articles of Incorporation, as amended, contain
provisions indemnifying the directors and officers of Southern Financial against
expenses and liabilities (including counsel fees) incurred in legal proceedings
to the fullest extent permitted by Virginia law.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES.
(a) List of Exhibits
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization by and among Southern
Financial Bancorp, Inc., Southern Financial Bank and
Metro-County Bank of Virginia, Inc. dated as of April 25,
2002 (included as Appendix A to the proxy
statement/prospectus, which forms a part of this
Registration Statement on Form S-4).
2.2 Agreement and Plan of Reorganization between The Horizon
Bank of Virginia and Southern Financial Bancorp, Inc. and
Southern Financial Bank, dated as of May 3, 1999, as
amended, (incorporated herein by reference to Exhibit 2.1 to
Southern Financial's Registration Statement on Form S-4
(Registration No. 333-82159)).
2.3 Agreement and Plan of Reorganization between First Savings
Bank of Virginia and Southern Financial Bancorp, Inc. and
Southern Financial Bank, made and entered into as of March
31, 2000 (incorporated herein by reference to Exhibit 2.1 to
Southern Financial's Registration Statement on Form S-4
(Registration No. 333-39666)).
3.1 Articles of Incorporation of Southern Financial Bancorp,
Inc., as amended (incorporated herein by reference to
Exhibit 3.1 to Southern Financial's Registration Statement
on Form S-4 (Registration No. 33-95246 filed with the
Securities and Exchange Commission on August 4, 1995)).
3.2 Bylaws of Southern Financial Bancorp, Inc. (incorporated
herein by reference to Exhibit 3.2 to Southern Financial
Bancorp, Inc.'s Registration Statement on Form S-4,
(Registration No. 33-95246 filed with the Securities and
Exchange Commission on August 4, 1995)).
</Table>
II-1
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
4.1 Form of Junior Subordinated Indenture between Southern
Financial Bancorp, Inc. and Wilmington Trust Company, as
Trustee (incorporated herein by reference to Exhibit 4.4 to
Southern Financial's Registration Statement on Form S-1
(Registration Nos. 333-94461 and 333-94461-01)).
4.2 Form of Junior Subordinated Debenture (included as an
exhibit to the Form of Indenture that is incorporated herein
by reference to Exhibit 4.4 to Southern Financial's
Registration Statement on Form S-1 (Registration Nos.
333-94461 and 333-94461-01)).
4.3 Form of Trust Preferred Securities Guarantee Agreement of
Southern Financial (incorporated herein by reference to
Exhibit 4.7 to Southern Financial's Registration Statement
on Form S-1 (Registration Nos. 333-94461 and 333-94461-01)).
5.1** Opinion of Bracewell & Patterson, L.L.P. regarding the
legality of the securities being registered.
8.1** Opinion of Bracewell & Patterson, L.L.P. as to certain tax
matters.
10.1+ 1993 Stock Option and Incentive Plan of Southern Financial
Bancorp, Inc., As Amended and Restated (incorporated herein
by reference to Exhibit 4.4 to Southern Financial's
Registration Statement on Form S-8 (Registration No.
333-68706)).
10.2+ Employment Agreement (incorporated herein by reference to
Exhibit 10.2 to Southern Financial's Registration Statement
on Form S-1 (Registration No. 333-69282)).
21.1 Subsidiaries of Southern Financial Bancorp, Inc.
(incorporated herein by reference to Exhibit 21.1 to
Southern Financial's Registration Statement on From S-1
(Registration No. 333-69282)).
23.1* Consent of KPMG LLP., independent auditors of Southern
Financial.
23.2* Consent of Mitchell, Wiggins & Company LLP, independent
auditors of Metro-County.
23.3** Consent of Bracewell & Patterson, L.L.P. included as part of
its opinion filed as Exhibit 5.1 and incorporated herein by
reference.
23.4** Consent of Bracewell & Patterson, L.L.P. included as part of
its opinion filed as Exhibit 8.1 and incorporated herein by
reference.
24.1 Power of Attorney of Directors and Officers of Southern
Financial. Included on the signature page of this Form S-4
and incorporated herein by reference.
99.1** Form of proxy to be used by Metro-County.
99.2* Consent of Scott & Stringfellow, Inc.
</Table>
----------
* Filed herewith.
** Previously filed.
+ Management contract or compensatory plan or arrangement.
II-2
(b) Financial Statement Schedules
None.
All other schedules for which provision is made in Regulation
S-X of the Securities and Exchange Commission are not required
under the related restrictions or are inapplicable, and,
therefore, have been omitted.
(c) Opinion of Financial Advisor
Not applicable.
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation
of Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed in the
Registration Statement or any material change to such information in
the Registration Statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d)
of the Securities Exchange Act of 1934, as amended (and, where
applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Exchange Act) that is incorporated by
reference in the Registration Statement shall be deemed to be a new
Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(g)
(1) The undersigned registrant hereby undertakes as follows:
that prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this
registration statement, by any person or party who is deemed to be an
underwriter within the meaning of Rule 145(c), the issuer undertakes
that such reoffering prospectus will contain the information called for
by
II-3
the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that
is filed pursuant to paragraph (1) immediately preceding, or (ii) that
purports to meet the requirements of Section 10(a)(3) of the Act and is
used in connection with an offering of securities subject to Rule 415,
will be filed as a part of an amendment to the registration statement
and will not be used until such amendment is effective, and that, for
purposes of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification
is against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person
of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11 or 13 of this Form, within one business
day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to
the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and
the company being acquired involved therein, that was not the subject
of and included in the registration statement when it became effective.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Warrenton, State of Virginia, on June 19, 2002.
SOUTHERN FINANCIAL BANCORP, INC.
By: /s/ Georgia S. Derrico
-------------------------------------
Georgia S. Derrico
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Georgia S. Derrico and R. Roderick Porter
and each of them to act without the other, his true and lawful attorney-in-fact
and agent, with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign and file any and all amendments
(including post-effective amendments) to this registration statement with all
exhibits thereto, and all documents in connection therewith, with the Securities
and Exchange Commission, granting unto said attorney-in-fact and agent, full
power and authority to do and perform each and every other act on behalf of the
undersigned required to be done in connection therewith.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following person in the capacities
and on the dates indicated.
<Table>
<Caption>
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Georgia S. Derrico
- ----------------------------------------
Georgia S. Derrico Chairman of the Board and Chief June 19, 2002
Executive Officer
/s/ Patricia A. Ferrick
- ----------------------------------------
Patricia A. Ferrick Senior Vice President and Chief June 19, 2002
Financial Officer
*
- ----------------------------------------
R. Roderick Porter President and Chief Operating June 19, 2002
Officer and Director
*
- ----------------------------------------
David de Give Senior Vice President/Treasurer June 19, 2002
and Director
*
- ----------------------------------------
John C. Belotti Director June 19, 2002
*
- ----------------------------------------
Fred L. Bollerer Director June 19, 2002
</Table>
II-5
<Table>
- ----------------------------------------
Neil J. Call Director June 19, 2002
*
- ----------------------------------------
Alfonso G. Finocchiaro Director June 19, 2002
*
- ----------------------------------------
Barbara J. Fried Director June 19, 2002
*
- ----------------------------------------
Virginia Jenkins Director June 19, 2002
*
- ----------------------------------------
Michael P. Rucker Director June 19, 2002
*
- ----------------------------------------
Richard E. Smith Director June 19, 2002
*
- ----------------------------------------
Robert P. Warhurst Director June 19, 2002
</Table>
* By Georgia S. Derrico pursuant to a Power of Attorney executed by the
directors listed above, which Power of Attorney has previously been
filed with the Securities and Exchange Commission.
By: /s/ Georgia S. Derrico
-------------------------------
Georgia S. Derrico
Chairman of the Board and
Chief Executive Officer
II-6
EXHIBIT LIST
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 Agreement and Plan of Reorganization by and among Southern
Financial Bancorp, Inc., Southern Financial Bank and
Metro-County Bank of Virginia, Inc. dated as of April 25,
2002 (included as Appendix A to the proxy
statement/prospectus, which forms a part of this
Registration Statement on Form S-4).
2.2 Agreement and Plan of Reorganization between The Horizon
Bank of Virginia and Southern Financial Bancorp, Inc. and
Southern Financial Bank, dated as of May 3, 1999, as
amended, (incorporated herein by reference to Exhibit 2.1 to
Southern Financial's Registration Statement on Form S-4
(Registration No. 333-82159)).
2.3 Agreement and Plan of Reorganization between First Savings
Bank of Virginia and Southern Financial Bancorp, Inc. and
Southern Financial Bank, made and entered into as of March
31, 2000 (incorporated herein by reference to Exhibit 2.1 to
Southern Financial's Registration Statement on Form S-4
(Registration No. 333-39666)).
3.1 Articles of Incorporation of Southern Financial Bancorp,
Inc., as amended (incorporated herein by reference to
Exhibit 3.1 to Southern Financial's Registration Statement
on Form S-4 (Registration No. 33-95246 filed with the
Securities and Exchange Commission on August 4, 1995)).
3.2 Bylaws of Southern Financial Bancorp, Inc. (incorporated
herein by reference to Exhibit 3.2 to Southern Financial
Bancorp, Inc.'s Registration Statement on Form S-4,
(Registration No. 33-95246 filed with the Securities and
Exchange Commission on August 4, 1995)).
4.1 Form of Junior Subordinated Indenture between Southern
Financial Bancorp, Inc. and Wilmington Trust Company, as
Trustee (incorporated herein by reference to Exhibit 4.4 to
Southern Financial's Registration Statement on Form S-1
(Registration Nos. 333-94461 and 333-94461-01)).
4.2 Form of Junior Subordinated Debenture (included as an
exhibit to the Form of Indenture that is incorporated herein
by reference to Exhibit 4.4 to Southern Financial's
Registration Statement on Form S-1 (Registration Nos.
333-94461 and 333-94461-01)).
4.3 Form of Trust Preferred Securities Guarantee Agreement of
Southern Financial (incorporated herein by reference to
Exhibit 4.7 to Southern Financial's Registration Statement
on Form S-1 (Registration Nos. 333-94461 and 333-94461-01)).
5.1** Opinion of Bracewell & Patterson, L.L.P. regarding the
legality of the securities being registered.
8.1** Opinion of Bracewell & Patterson, L.L.P. as to certain tax
matters.
10.1+ 1993 Stock Option and Incentive Plan of Southern Financial
Bancorp, Inc., As Amended and Restated (incorporated herein
by reference to Exhibit 4.4 to Southern Financial's
Registration Statement on Form S-8 (Registration No.
333-68706)).
10.2+ Employment Agreement (incorporated herein by reference to
Exhibit 10.2 to Southern Financial's Registration Statement
on Form S-1 (Registration No. 333-69282)).
21.1 Subsidiaries of Southern Financial Bancorp, Inc.
(incorporated herein by reference to
</Table>
II-7
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
Exhibit 21.1 to Southern Financial's Registration Statement
on From S-1 (Registration No. 333-69282)).
23.1* Consent of KPMG LLP., independent auditors of Southern
Financial.
23.2* Consent of Mitchell, Wiggins & Company LLP, independent
auditors of Metro-County.
23.3** Consent of Bracewell & Patterson, L.L.P. included as part of
its opinion filed as Exhibit 5.1 and incorporated herein by
reference.
23.4** Consent of Bracewell & Patterson, L.L.P. included as part of
its opinion filed as Exhibit 8.1 and incorporated herein by
reference.
24.1 Power of Attorney of Directors and Officers of Southern
Financial. Included on the signature page of this Form S-4
and incorporated herein by reference.
99.1** Form of proxy to be used by Metro-County.
99.2* Consent of Scott & Stringfellow, Inc.
</Table>
----------
* Filed herewith.
** Previously filed.
+ Management contract or compensatory plan or arrangement.