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U.S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-K
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
For the year ended: Commission File No.:
December 31, 1997 0-22836
SOUTHERN FINANCIAL BANCORP, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-1779978
(State or other jurisdiction (I.R.S. Employer or
of incorporation or organization) Identification
Number)
37 East Main Street, Warrenton, Virginia 20186
(Address of principal executive office)(Zip Code)
(540) 349-3900
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12 (g) of the Act:
Common Stock, par value $0.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or such shorter period that the registrant
was required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not considered herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
registrant computed by reference to the last reported bid price of such stock as
of February 27, 1998 was $21,022,988 (747,484 shares @ $28.125 per share). For
purposes of this computation, it is assumed that directors, executive officers
and persons beneficially owning more than 5% of the Common Stock of the
registrant are affiliates. As of February 27, 1998, there were 1,592,781 shares
of the registrant's Common Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
I. Portions of Annual Report to Stockholders for the Year Ended
December 31, 1997 incorporated by reference into certain items
of Parts I. and II.
II. Portions of Proxy Statement for the Annual Meeting of Stockholders
to be held on April 23, 1998 incorporated by reference into certain
items of Part III.
Part I.
Special Note Regarding Forward-looking Information
Certain statements under the caption Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this
Annual Report and the documents incorporated herein by reference constitute
"forward-looking statements" within the meaning of the United States Private
Securities Litigation Reform Act of 1995. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of the Bancorp, or industry
results, to be materially different from any future results, performance, or
achievements expressed or implied by such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions in the Bancorp's market area, inflation, fluctuations in interest
rates, changes in government regulations and competition, which will, among
other things, impact demand for loans and banking services; the ability of the
Bancorp to implement its business strategy; and changes in, or the failure to
comply with, government regulations.
Forward-looking statements are intended to apply only at the time they
are made. Moreover, whether or not stated in connection with a forward-looking
statement, the Bancorp undertakes no obligation to correct or update a
forward-looking statement should the Bancorp later become aware that it is not
likely to be achieved. If the Bancorp were to update or correct a
forward-looking statement, investors and others should not conclude that the
Bancorp will make additional updates or corrections thereafter.
Item 1. Business
General
Southern Financial Bancorp, Inc. ("Southern Financial" or "the
Bancorp") was incorporated in Virginia as a bank holding company under the Bank
Holding Company Act of 1956, as amended. On December 1, 1995, Southern Financial
Bancorp, Inc. acquired all of the outstanding shares of Southern Financial Bank.
Southern Financial Bank, formerly Southern Financial Federal Savings Bank,
converted from a savings bank to a state chartered commercial bank effective
December 1, 1995. The only activity of the Bancorp is to own and control all of
the capital stock of Southern Financial Bank. Hereafter, references to Southern
Financial and the Bancorp include the activities of Southern Financial Bank.
Headquartered in Warrenton, Virginia, the Bancorp serves the retail and
commercial financial market as a deposit and loan specialist from ten full
service offices located in Warrenton, Herndon, Middleburg, Winchester, Leesburg,
Fairfax and Woodbridge, Virginia. Southern Financial's defined market area forms
a semi-circle to the west of the Metropolitan Washington, D.C. area roughly
centered on Warrenton. The counties included in the defined market area where
the Bancorp currently operates branches include: Loudoun (Middleburg and
Leesburg branches), Fauquier (Warrenton branches), Fairfax (Herndon and Fairfax
branches), Frederick (Winchester branches) and Prince William (Woodbridge
branch). Other counties in the defined market area include: Spotsylvania,
Culpeper, Rappahanock, Clarke and the three counties in the West Virginia
panhandle.
The inner ring of the semi-circle that comprises the Bancorp's market
area is the bedroom community for the close-in greater Metropolitan Washington
commercial centers that have grown up in Northern Virginia in the past 30 years.
As the economy of the Metropolitan Washington area has diversified away from its
concentration in government and government-related employment, the Dulles
Corridor has developed into a major center for communication and high-tech
activities. In the process, Reston, Herndon, Tysons Corner and Fairfax have
become important employment centers in their own right much as Stamford and
White Plains have done outside Manhattan. As a consequence, the commutable
radius has pushed west out to Loudoun and Fauquier Counties and south and
southwest to Stafford, Spotsylvania and Prince William Counties. The branch
locations in these areas situate Southern Financial to take advantage of the
rapid economic growth of these communities.
The principal business of the Bancorp is the acquisition of deposits
from the general public through its home and branch offices and use of these
deposits to fund its loan and investment portfolios. The Bancorp seeks to be a
full service community bank which provides a wide variety of financial services
to its middle market corporate clients as well as to its retail clients. The
Bancorp is an active commercial lender that often lends in conjunction with the
Small Business Administration ("SBA") 504 and 7(a) loan programs. In addition,
the Bancorp is an active residential construction lender and offers its retail
clients a full menu of permanent residential mortgage loan alternatives. The
Bancorp also invests funds in mortgage-backed securities, securities issued by
Agencies of the Federal Government and preferred stock of the Federal Home Loan
Mortgage Corporation.
The principal sources of funds for the Bancorp's lending and investment
activities are deposits, amortization and repayment of loans, proceeds from the
sales of loans, prepayments from mortgage-backed securities, repayments of
maturing agency securities, FHLB advances and other borrowed money.
Principal sources of revenue are interest and fees on loans and
investment securities and gains from the sale of loans, as well as fee income
derived from the maintenance of deposit accounts. The Bancorp's principal
expenses include interest paid on deposits and advances from the FHLB and other
borrowings, and operating expenses.
Lending Activities
The principal lending activity of the Bancorp is the origination of
loans on commercial real estate primarily through various lending programs of
the U.S. Small Business Administration program. The Bancorp is a certified SBA
lender. In addition, the Bancorp makes conventional and government fixed and
adjustable rate real estate loans to enable borrowers to purchase or refinance
one-to-four-family, owner-occupied residential properties. The Bancorp also
makes owner-occupied residential construction loans secured by first liens on
the properties to which they relate. At December 31, 1997, approximately 82% of
the Bancorp's total loan portfolio, or $107.3 million, consisted of loans
secured by real estate. To a lesser extent, the Bancorp also makes commercial
business and secured and unsecured consumer loans.
Commercial Real Estate Lending.
Commercial Construction Lending. Southern Financial is involved in
financing the construction phase of small business projects prior to the
project being approved by the U. S. Small Business Association ("SBA"). To a
lesser extent, the Bancorp also provides commercial construction financing
for projects outside of the SBA programs. At December 31, 1997, approximately
10% of the Bancorp's loan portfolio consisted of nonresidential construction
loans.
U. S. Small Business Administration ("SBA") Lending. A large majority
of Southern Financial's commercial real estate lending is done in conjunction
with the SBA 7(a) and 504 loan programs. The SBA 7(a) and 504 Loan Programs are
economic development programs of the U.S. Small Business Administration. The
Small Business Administration, in cooperation with banks and other lending
institutions, finances the expansion of small businesses. Southern Financial is
a certified SBA lender.
Section 7(a) loans may be used for the purchase of real estate,
construction, renovation or leasehold improvements, as well as machinery,
equipment, furniture, fixtures, inventory, and in some instances, working
capital and debt refinance. Start-up businesses are eligible. The SBA guarantees
up to 90% of the loan balance under the 7(a) Program. The 504 Program is used to
finance long-term fixed assets, primarily real estate and large/heavy equipment.
The 504 Program is an economic development program designed to create new jobs
or retain existing jobs. The credit structure of the 504 Program gives borrowers
access to 90% financing of the project. 50% is provided by the financial
institution (in the form of a first trust) and 40% is provided by the certified
development company (the 504 representative) with a second trust. The borrower
provides the remaining 10% of the funds required for the project. As of December
31, 1997, Southern Financial had approximately $7.3 million of loans originated
under the 7(a) Program and $52 million of loans originated under the 504
Program.
Residential Lending
The Bancorp makes fixed and adjustable rate, first mortgage loans with
terms from 3 to 30 years. It offers second mortgages in conjunction with its own
first mortgages or those of other lenders. These second mortgages typically have
terms of 5 to 15 years and have rates 2% to 3% above the prevailing rate for
fixed rate and adjustable rate first mortgages at the time of origination.
Southern Financial makes construction loans and permanent loans on individual
single family residences and on other residential properties. Construction loans
generally have interest rates of prime plus one to one and a half percent and
fees of one to three points, loan-to-value ratios of 80% or less based on
current appraisals and terms of generally nine months or less. In the case of
conventional loans, Southern Financial typically lends up to 80% of the
appraised value of single-family residences. The Bancorp requires private
mortgage insurance for loans exceeding 80% of the appraised value.
Residential mortgage loans are secured by single-family homes. At
December 31, 1997, loans secured by residential property, both permanent and
construction, totaled $37 million, which represented approximately 29% of total
loans receivable. Approximately 24% of the total loans receivable consisted of
loans secured by permanent mortgages on one-to-four family residential property.
Consumer and Commercial Business Lending.
Southern Financial offers various types of secured and unsecured
consumer and commercial business loans. In general, these loans involve somewhat
more credit risk than do residential mortgage loans and, therefore, usually
yield a higher return to Southern Financial. The increased credit risk for
consumer and commercial loans is due to the type of collateral securing these
loans. The increased risk also derives from the expectation that commercial
loans generally will be serviced principally from the business operations
conducted, and such operations may not be successful and, hence, may lead to
default on the loan. Historical trends have shown these types of loans to have
higher delinquencies than residential loans. The residential loan, as a
collateral loan, is a stable asset. At December 31, 1997, Southern Financial had
$24.3 million of consumer and commercial business loans which represent 18% of
the Bancorp's total loans receivable.
Income from Lending Activities.
Interest on loans, gains on sale of loans, and loan fees and service
charges amounted to approximately 64% of Southern Financial's total revenue for
the year ended December 31, 1997. Income from loan origination fees and other
fees are sources of income which vary with the volume and type of loans and
commitments made and with competitive and economic conditions.
Loan Portfolio Composition
The following table sets forth the composition of the Bancorp's loan
portfolio during the periods indicated:
At December 31, At June 30,
1997 1996 1995 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ ------- ------ -------
(amounts in thousands)
Mortgage:
Residential $ 30,421 24% $ 35,033 32% $ 37,583 35% $ 40,123 43% $ 38,211 55%
Nonresidential 57,160 43% 46,549 42% 36,742 35% 29,216 31% 14,037 21%
Construction:
Residential 6,534 5% 5,616 5% 8,516 8% 8,460 9% 7,906 12%
Nonresidential 13,161 10% 7,510 7% 11,029 10% 5,941 6% 3,742 5%
-------- ----- ------ ---- ------- ---- ------ ---- ------ ----
Total Mortgage 107,276 82% 94,708 86% 93,870 88% 83,740 89% 63,896 93%
-------- ----- ------ ---- ------- ---- ------ ---- ------ ----
Nonmortgage:
Business 21,253 16% 12,198 11% 9,265 9% 7,601 9% 2,614 4%
Consumer 3,093 2% 3,294 3% 2,761 3% 2,238 2% 1,944 3%
-------- ----- ------ ---- ------- ---- ------
Total Nonmortgage 24,346 18% 15,492 14% 12,026 12% 9,839 11% 4,558 7%
-------- ----- ------ ---- ------- ---- ------ ---- ------ ----
Gross Loans 131,622 100% 110,200 100% 105,896 100% 93,579 100% 68,454 100%
Less:
Deferred Fees 627 412 455 442 489
Allowance for Loan
Losses 2,037 1,501 1,190 1,057 1,008
------- ------ ------- ------ ------
Total Loans
Receivable, Net $ 128,958 $ 108,287 $ 104,251 $ 92,080 $ 66,957
=========== =========== =========== ========== =========
The following table sets forth the scheduled maturity of selected loans
as of December 31, 1997:
Over 1 Year
Through 5 Years Over 5 years
One Year Fixed Floating Fixed Floating
or Less Rate Rate Rate Rate Total
----------- --------- ---------- --------- ---------- ---------
(amounts in thousands)
Construction:
Residential $ 6,534 $ - $ $ - $ - $ 6,534
Nonresidential 12,696 - 465 - - 13,161
Business 10,472 1,490 2,572 689 6,030 21,253
------------ ------------ ------------ ------------ ------------ ------------
Total $ 29,702 $ 1,490 $ 3,037 $ 689 $ 6,030 $ 40,948
============== ============= ============== ============= ============= ==========
Loan Underwriting Policies
Because future loan losses are so closely intertwined with its
associated underwriting policy, Southern Financial has instituted what it
believes is a stringent loan underwriting policy. Its underwriting guidelines
are tailored for particular credit types, including lines of credit, revolving
credit facilities, demand loans, term loans, equipment loans, real estate loans,
SBA loans, stand-by letters of credit and unsecured loans.
More specifically, it is Southern Financial's policy to encourage all
loan applicants for sound and lawful purposes, regardless of race, religion or
creed. Extensions of credit will be made if the criteria of creditworthiness,
likelihood of repayment and proximity to market areas served indicate that such
extensions of credit will provide acceptable profitability to the Bancorp.
Detailed loan applications are obtained to determine the borrower's
ability to repay, and the more significant items on these applications are
verified through the use of credit reports, financial statements and
confirmations. All property valuations are performed by independent outside
appraisers who are approved annually by Southern Financial's Board of Directors.
It is the Bancorp's policy to retain a mortgage creating a valid lien
on real estate and to obtain a title insurance policy that insures the property
is free of encumbrances. Also required from the borrower is hazard insurance,
and flood insurance is required if the property is in a flood plain as
designated by the Department of Housing and Urban Development. Most borrowers
are also required to advance funds on a monthly basis from which Southern
Financial makes disbursements for items such as real estate taxes, private
mortgage insurance (required when the loan to value ratio exceeds 80%) and
hazard insurance.
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), the aggregate amount of loans that Southern Financial may
make to one borrower is limited to 15% of the Bancorp's unimpaired capital and
surplus. The maximum amount of loans that Southern Financial could have made to
one borrower as of December 31, 1997 was approximately $2.8 million based on 15%
of its unimpaired capital and surplus. As of December 31, 1997, the largest
aggregate amount of such loans by Southern Financial to any one borrower was
$2.6 million.
All commercial loans must be approved by the Chief Executive Officer
and one other authorized officer prior to disbursement of funds. In cases where
the loan amount exceeds $250,000 as to real estate or $150,000 on other loans,
the commercial loan must be approved by the Credit Committee and further
reported to the full Board of Directors. The information regarding the loan and
its borrower must include financial statements. Supporting financial data must
be verified by bank references, trade credit checks and similar procedures. In
addition, commercial loan files are generally reviewed on an annual basis to
ensure both the quality and timeliness of the information contained.
Interest rates charged by Southern Financial are affected primarily by
competitive market factors. These factors include general economic conditions,
monetary policies of the Federal Reserve Bank, legislative tax policies and
government budgetary matters.
The Credit Committee, which consists of two outside members of the
Board of Directors and the Chief Executive Officer, is responsible for the
qualitative review of the loan portfolio, for approving all loans exceeding
lending officers' authorities ($250,000 on real estate loans and $150,000 on
other loans) and for assuring compliance with all of the Board's policies and
procedures as well as all applicable state and federal laws, rules and
regulations. All loans approved by the Credit Committee are reported to the full
Board of Directors at its next regularly scheduled meeting.
Individual lending authorities are determined by the Chief Executive
Officer based on the individual's technical ability and must be agreed to by the
Credit Committee. All authorities are reviewed at least annually by the full
Board of Directors.
When a borrower fails to make a required payment, Southern Financial
attempts to cause the deficiency to be cured by contacting the borrower. After
17 days, a reminder notice is sent indicating that a late charge has been
levied. After 30 days delinquency, the borrower is contacted by phone and
responses are documented. After 90 days, if the loan has not been brought
current or an acceptable arrangement is not worked out with the borrower,
Southern Financial will institute measures to remedy the default, including
commencing foreclosure action with respect to mortgage loans and repossessions
of collateral in the case of consumer loans.
If foreclosure is effected, the property is sold at a public auction in
which Southern Financial may participate as a bidder. If Southern Financial is
the successful bidder, the acquired real estate property is then included in its
real estate owned account until it is sold. Such assets are carried at the lower
of cost or fair value net of estimated selling costs. To the extent there is a
decline in value, that amount is charged to operating expense.
Past Due Loans and Nonperforming Assets
The following table sets forth information regarding past due loans and
nonperforming assets as of the periods indicated:
At December 31, At June 30,
1997 1996 1995 1995 1994
------- ------- ------- ------- -------
(amounts in thousands)
Accruing Loans 90 Days
or More Delinquent
Residential $ - $ - $ 878 $ 607 $ 420
Nonresidential - 28 - 196 290
Business 1 - - - -
Consumer - - 3 2 -
------- ------- ------- ------- -------
Total 1 28 881 805 710
======= ======= ======= ======= =======
Nonperforming Loans
Residential 443 321 541 - 84
Nonresidential 1,002 1,257 - - 356
Business - 49 - 39 5
Consumer - 7 50 15 39
------- ------- ------- ------- -------
Subtotal 1,445 1,634 591 54 484
------- ------- ------- ------- -------
Real Estate Owned
Residential 176 340 357 387 -
------- ------- ------- ------- -------
Total Nonperforming Assets $ 1,621 $ 1,974 $ 948 $ 441 $ 484
======= ======= ======= ======= =======
Nonperforming Assets
to Total Assets 0.72% 1.03% 0.58% 0.28% 0.39%
======= ======= ======= ======= =======
The Bancorp's loss and delinquency experience on its residential real
estate loan portfolio has been limited by a number of factors, including the
Bancorp's underwriting standards. Whether Southern Financial's loss and
delinquency experience will increase significantly depends upon the value of the
real estate securing its loans, economic factors such as an increase in
unemployment as well as the overall economy of the region. As a result of
economic conditions and other factors beyond its control, the Bancorp's future
loss and delinquency experience cannot be accurately predicted. However,
management has provided an allowance for loan losses which it believes will be
adequate to absorb future losses.
Allowance for Loan Losses
Management evaluates the adequacy of the allowance at least quarterly.
As a result of that process, loans are categorized as to doubtful, substandard
and/or special mention. Each quarter the Board of Directors considers a review
of the loans in Southern Financial's portfolio, conducts an evaluation of the
credit quality and reviews the adequacy of the loan loss provision, recommending
changes as may from time to time be required. In establishing the appropriate
classification for specific assets, management takes into account, among other
factors, the estimated value of the underlying collateral, the borrower's
ability to repay, the borrower's payment history and the current delinquent
status. The remaining loan portfolio is evaluated for potential loss exposure by
examining the growth and composition of the portfolio, previous loss experience,
current delinquency levels, industry concentration and the general economic
condition.
The allowance for loan losses represents management's estimate of an
amount adequate to provide for potential losses inherent in the loan portfolio
in the normal course of business. However, there are additional risks of future
losses that cannot be quantified precisely or attributed to particular loans or
classes of loans. Because those risks include general economic trends as well as
conditions affecting individual borrowers, management's judgement of the
allowance necessary is approximate. The Bancorp has also contracted with an
outside, independent company to perform a detailed loan review, including an
assessment of the adequacy of the allowance for loan losses. The allowance is
also subject to regulatory examinations and determination as to the adequacy of
the allowance in comparison to peer institutions identified by the regulatory
agencies.
The following table summarizes activity in the Bancorp's allowance for
loan losses during the periods indicated.
Six Months
Year Ended Ended Year Ended
December 31, December 31, June 30,
1997 1996 1995 1995 1994
------ ------ ------ ------ ------
(amounts in thousands)
Allowance at Beginning of Period $ 1,501 $ 1,190 $ 1,057 $ 1,008 $ 1,008
Provision for Losses 880 695 150 60 5
Chargeoffs:
Residential (65) (8) - - -
Nonresidential (200) (300) - - -
Business (77) (38) (16) - -
Consumer (27) (43) (1) (11) (6)
-------- -------- -------- -------- --------
Total Chargeoffs (369) (389) (17) (11) (6)
-------- -------- -------- -------- --------
Recoveries:
Residential 12 - - - -
Business 6 3 - - -
Consumer 7 2 - - 1
-------- -------- -------- -------- --------
Total Recoveries 25 5 - - 1
-------- -------- -------- -------- --------
Net Chargeoffs (344) (384) (17) (11) (5)
-------- -------- -------- -------- --------
Allowance at End of Period $ 2,037 $ 1,501 $ 1,190 $ 1,057 $ 1,008
======== ======== ======== ======== ========
Loans at End of Period $ 130,995 $ 109,788 $ 105,441 $ 93,137 $ 67,965
Ratio of Allowance to Loans 1.56% 1.37% 1.13% 1.13% 1.48%
The following table summarizes the composition of the Allowance for
Loan Losses.
At December 31, At June 30,
1997 1996 1995 1995 1994
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
--------------- ----------------- ----------------- ----------------- -----------------
(amounts in thousands)
Mortgage:
Residential $ 140 7% $ 152 10% $ 413 35% $ 79 7% $ 419 42%
Nonresidential 1,162 57% 708 47% 249 21% 188 18% 168 17%
Construction:
Residential 27 1% 23 2% 123 10% 254 24% 186 18%
Nonresidential 43 2% 131 9% 133 11% 227 21% 102 10%
Nonmortgage:
Business 438 22% 382 25% 219 18% 262 25% 96 10%
Consumer 41 2% 105 7% 53 4% 47 4% 37 4%
Unallocated 186 9% - 0% - 0% - 0% - 0%
--------- --------- -------- ------- ------- ------- ------- ------- ------- -------
Allowance for Loan Losses $ 2,037 100% $ 1,501 100% $ 1,190 100% $ 1,057 100% $ 1,008 100%
========= ========= ========= ======= ======== ======= ======== ======= ======== =======
The Bancorp has allocated the allowance according to the amount deemed
to be reasonably necessary to provide for the possibility of losses being
incurred within each of the above categories of loans. These figures are based
on gross loans. The allocation of the allowances as shown in the table above
should not be interpreted as an indication that loan losses in future years will
occur in the same proportions or that the allocation indicates future loan loss
trends. Furthermore, the portion allocated to each loan category is not the
total amount available for future losses that might occur within such categories
since the total allowance is a general allowance applicable to the entire
portfolio.
Investment Activities
The following table sets forth the Bancorp's investment portfolio as of
the periods indicated:
December 31, December 31, December 31,
1997 1996 1995
---------------- --------------- ---------------
(amounts in thousands)
Available-for-sale securities:
FHLMC preferred stock $ 3,866 $ 4,310 $ 2,810
FNMA MBS 782 903 1,039
------------------ ----------------- -----------------
$ 4,648 $ 5,213 $ 3,849
================== ================= =================
Heldtomaturity securities:
GNMA MBS $ 42,471 $ 27,388 $ 17,612
FNMA MBS 27,075 21,982 12,066
FHLMC MBS 6,078 7,300 9,397
Collateralized mortgage obligations 4,203 6,547 6,923
FHLB intermediate notes - 2,000 -
FHLB zero-coupon notes 642 - -
----------------- ------------------ -----------------
$ 80,469 $ 65,217 $ 45,998
================== ================= =================
The following table sets forth information regarding maturity and
average yields of the investment portfolio:
December 31, 1997
Available-for-sale Held-to-maturity
(amounts in thousands) Amortized Weighted Amortized Weighted
Cost Average Yield Cost Average Yield
--------------------------------------------------------------
FHLMC preferred stock $ 3,866 7.62% - -%
Mortgage-backed securities:
Maturing after 10 years 782 7.07% 79,827 6.71%
FHLB zero-coupon notes:
Maturing after 10 years - -% 642 7.87%
-------------------------------------------------------------
$ 4,648 7.53% $ 80,469 6.72%
=============================================================
Source of Funds
Deposits
Deposit accounts have been the primary source of the Bancorp's funds
for use in lending, making other investments, and for other general business
purposes. In addition to deposits, Southern Financial obtains funds from loan
repayments, maturing investments, loan sales, cash flows generated from
operations and FHLB advances. Borrowings may be used as an alternative source of
lower costing funds or to fund the origination of certain assets.
The following table shows the average balances and rates
(presented on a monthly average basis) for the Bancorp's deposits for the
periods indicated:
Year Ended December 31, Six Months Ended June 30,
(amounts in thousands) 1997 1996 1995
------------------------ ------------------------ -------------------------
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ------- ------- ------- ------- --------
Demand $ 9,878 0.00% $ 6,658 0.00% $ 5,159 0.00%
Interest checking 15,720 1.18% 14,755 1.44% 11,509 2.36%
Money market and savings 22,834 3.33% 21,066 3.37% 18,607 3.39%
Certificates of deposit 135,863 5.71% 115,672 5.63% 103,047 5.80%
---------- ---------- ----------
$ 184,296 $ 158,151 $ 138,322
========== ========== ==========
Weighted average rate 4.73% 4.70% 4.97%
======== ======= =======
The following table sets forth by time remaining until
maturity Southern Financial's certificates of deposit of $100,000 or more at
December 31, 1997:
Time Deposits of
Maturity Period $100,000 or More
- ---------------- ------------------
(amounts in thousands)
Three months or less $ 19,291
Over three months through twelve months 20,091
Over twelve months 5,081
-----------------------
Total $ 44,463
=======================
Borrowings
Borrowings consist of short-term advances from the Federal Home Loan
Bank of Atlanta ("FHLB"). The following table sets forth information regarding
the Bancorp's borrowings for the periods indicated:
Six Months
Year Ended Ended
December 31, December 31,
1997 1996 1995
---------------------- --------------
(amounts in thousands)
Ending Balance $ 4,000 $ 8,500 $ 4,000
Average Balance for the Period 5,979 6,077 5,667
Maximum Month-end Balance
During the Period 8,500 12,000 19,000
Average Interest Rate for the Period 5.59% 5.63% 6.69%
Weighted Average Interest Rate at
the End of the Period 5.95% 6.57% 5.85%
Market Risk
Market risk is the risk of loss from adverse changes in market prices
and rates. The Bancorp's market risk arises primarily from interest rate risk
inherent in its lending and deposit taking activities. To that end, management
actively monitors and manages its interest rate risk exposure.
The Bancorp's profitability is affected by fluctuations in interest
rates. A sudden and substantial increase in interest rates may adversely impact
the Bancorp's earnings to the extent that the interest rates borne by assets and
liabilities do not change at the same speed, to the same extent, or on the same
basis.
The Bancorp's primary objective in managing interest rate risk is to
minimize the adverse impact of changes in interest rates on the Bancorp's net
interest income and capital while structuring the Bancorp's asset-liability mix
to obtain the maximum yield-cost spread on that mix. Southern Financial relies
primarily on its asset-liability management system to control interest rate
risk.
Market Value of Portfolio Equity
The Bancorp's interest rate sensitivity is primarily monitored by
management through the use of a model which generates estimates of the change in
the Bancorp's market value of portfolio equity ("MVPE") over a range of interest
rate scenarios. Such analysis was prepared by a third party for Southern
Financial. MVPE is the present value of expected cash flows from assets,
liabilities, and off-balance sheet contracts using standard industry assumptions
about estimated loan prepayment rates, reinvestment rates, and deposit decay
rates. The following table sets forth an analysis of the Bancorp's interest rate
risk as measured by the estimated change in MVPE resulting from instantaneous
and sustained parallel shifts in the yield curve (plus or minus 400 basis
points, measured in 100 basis point increments) as of December 31, 1997.
Sensitivity of Market Value of Portfolio Equity
(amounts in thousands)
Change in Market Value of Portfolio Equity Market Value of
Interest Rates Amount $ Change % Change Portfolio Equity as a % of
In Basis Points From Base From Total Portfolio
(Rate Shock) Base Assets Equity
Book Value
- --------------------------------------------------------------------------------------------
Up 400 $20,933 ($3,799) -15.36% 9.24% 113.28%
Up 300 22,476 (2,256) -9.12% 9.92% 121.63%
Up 200 24,019 (713) -2.88% 10.60% 129.97%
Up 100 24,375 (357) -1.44% 10.76% 131.90%
Base 24,732 - 0.00% 10.91% 133.83%
Down 100 24,376 (356) -1.44% 10.76% 131.90%
Down 200 24,020 (712) -2.88% 10.60% 129.98%
Down 300 24,649 (83) -0.33% 10.88% 133.38%
Down 400 25,279 547 2.21% 11.16% 136.79%
Sensitivity of Net Interest Income
Southern Financial's interest rate sensitivity is also monitored by
management through the use of a model that generates estimates of the change in
the adjusted net interest income over a range of interest rate scenarios. Such
analysis was also prepared by a third party for the Bancorp. Net interest income
represents the difference between income on interest-earning assets and expense
on interest-bearing liabilities. Net interest income also depends upon the
relative amounts of interest-earning assets and interest-bearing liabilities and
the interest rate earned or paid on them. In this regard, the model assumes that
the composition of the Bancorp's interest sensitive assets and liabilities
existing at the beginning of a period remains constant over the period being
measured and also assumes that a particular change in interest rates is
reflected uniformly across the yield curve regardless of the duration to
maturity or repricing of specific assets and liabilities.
Sensitivity of Net Interest Income
(amounts in thousands)
Change in Adjusted Net
Interest Rates Interest Income Net Interest Margin
In Basis Points % Change Change
(Rate Shock) Amount From Base Percent From Base
- ----------------------------------------------- -----------------------------
Up 400 $7,732 0.49% 3.41% 0.02%
Up 300 7,871 2.30% 3.47% 0.08%
Up 200 8,010 4.11% 3.54% 0.14%
Up 100 7,852 2.06% 3.47% 0.07%
Base 7,694 0.00% 3.40% 0.00%
Down 100 7,493 -2.61% 3.31% -0.09%
Down 200 7,292 -5.23% 3.22% -0.18%
Down 300 7,325 -4.79% 3.23% -0.16%
Down 400 7,359 -4.35% 3.25% -0.15%
Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurements. Modeling changes in MVPE and in Sensitivity of
Net Interest Income require the making of certain assumptions which may or may
not reflect the manner in which actual yields and costs respond to changes in
market interest rates. Accordingly, although the MVPE table and Sensitivity of
Net Interest Income table provide an indication of the Bancorp's interest rate
risk exposure at a particular point in time, such measurements are not intended
to and do not provide a precise forecast of the effect of changes in market
interest rates on the Bancorp's worth and net interest income.
Competition
Southern Financial experiences substantial competition in attracting
and retaining savings deposits and in lending funds. The primary factors in
competing for savings are convenient office locations and rates offered. Direct
competition for savings deposits comes from other commercial banks and thrift
institutions. Additional significant competition for savings deposits comes from
money market mutual funds and corporate and government securities which may
yield more attractive interest rates than insured depository institutions are
willing to pay. The primary factors in competing for loans are interest rate and
loan origination fees and the range of services offered. Competition for
origination of real estate loans normally comes from other commercial banks,
thrift institutions, mortgage bankers, mortgage brokers and insurance companies.
Employees
At December 31, 1997, Southern Financial employed 68 full-time
equivalent persons. Management considers its relations with its employees to be
good. The employees are not covered by a collective bargaining agreement.
The Year 2000
Southern Financial has identified the business impact of preparation
for the Year 2000 as critical to the ongoing ability to serve its customers.
Management clearly understands the necessity to ensure that the client service
bureau which provides data processing services identifies and modifies all
computer applications to ensure that there are no operational issues in the Year
2000 and beyond. In addition, Southern Financial has established a Year 2000
Committee to ensure that Branch Operations, Accounting/General Ledger Systems,
and vendors are Year 2000 compliant. Southern Financial has adopted the Federal
Reserve Bank Board's definition of Year 2000 compliance. These strategies are
being applied against all systems, and the project is to be completed by
September 1999. To further support Year 2000, the Southern Financial Board of
Directors maintains a full awareness of the impact Year 2000 poses on customer
records and bank operations.
Executive Officers of the Registrant
At December 31, 1997, the executive officers of the Bank who were not
also directors were:
William H. Lagos, 47, joined the Bank in 1986 as Vice President. In
1993, he was promoted to Senior Vice President of Operations; in 1996, he became
Senior Vice President/Controller.
Linda W. Sandridge, 45, joined the Bank in 1987. In 1995, she was
promoted to Vice President/Commercial Lending; in 1997, she was promoted to
Senior Vice President/Commercial Lending.
Laura L. Vergot, 40, joined the Bank in 1989. In 1995, she was promoted
to Vice President/Branch Development; in 1997, she was promoted to Senior Vice
President/Branch Development.
Regulation
Set forth below is a brief description of certain laws and regulations
that relate to the regulation of Southern Financial. The description of these
laws and regulations, as well as descriptions of laws and regulations contained
elsewhere herein, does not purport to be complete and is qualified in its
entirety by reference to applicable laws and regulations.
General
Southern Financial is a bank holding company within the meaning of the
Bank Holding Company Act of 1956 as amended. As a bank holding company, Southern
Financial is supervised by the Board Of Governors of the Federal Reserve System
("FRB") and is required to file reports with the FRB and provide such additional
information as the FRB may require. Southern Financial is also subject to
Virginia laws regarding financial institution holding companies administered by
the Bureau of Financial Institutions of the State Corporation Commission of
Virginia. The Bank is also affected by rules and regulations of the Federal
Deposit Insurance Corporation ("FDIC"). Southern Financial is a member of the
Federal Reserve System and the FHLB of Atlanta. The various laws and regulations
administered by the regulatory agencies affect corporate practices, expansion of
business, and provisions of services. Also, monetary and fiscal policies of the
United States directly affect bank loans and deposits and thus may affect the
Bancorp's earnings. The future impact of these policies and of the continuing
regulatory changes in the financial services industry cannot be predicted.
FIRREA
Under the Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 ("FIRREA"), certain independent appraisal requirements are imposed upon
a bank's real estate lending activities, and certain loan-to-value restrictions
are imposed on a bank's real estate lending activities. The Bancorp's regulators
have promulgated regulations in these areas. Further, under FIRREA the failure
to meet capital guidelines could subject a bank to a variety of enforcement
remedies available to federal regulatory authorities, including termination of
deposit insurance by the FDIC.
FDICIA
The Federal Deposit Insurance Corporation Act of 1991 ("FDICIA"), which
became law in December, 1991, required each federal banking agency to revise its
risk-based capital standards to ensure that those standards take adequate
account of interest rate risk, concentration of credit risk and the risks of
non-traditional activities. In addition, pursuant to FDICIA, each federal
banking agency has promulgated regulations, specifying the levels at which a
financial institution would be considered "well capitalized", "adequately
capitalized", "under capitalized", "significantly under capitalized", or
"critically under capitalized", and to take certain mandatory and discretionary
supervisory actions based on the capital level of the institution.
Under the FRB's regulations implementing the prompt corrective action
provisions, an institution shall be deemed to be (i) "well capitalized" if it
has total risk-based capital of 10% or more, has a Tier I risk-based capital
ratio of 6% or more, has a leverage capital ratio of 5% or more and is not
subject to any order or final capital directive to meet and maintain a specific
capital level for any capital measure, (ii)"adequately capitalized" if it has a
total risk-based capital ratio of 8% or more, a Tier I risk-based ratio of 4% or
more and a leverage capital ratio of 4% or more (3% under certain circumstances)
and does not meet the definition of "well capitalized", (iii) "undercapitalized"
if it has a total risk-based capital ratio that is less than 8%, a Tier I
risk-based capital ratio that is less than 4% or a leverage capital ratio that
is less than 4% (3% in certain circumstances), (iv) "significantly
undercapitalized" if it has a total risk-based capital ratio that is less than
6%, a Tier I risk-based capital ratio that is less than 3% or a leverage capital
ratio that is less than 3% and (v) "critically undercapitalized" if it has a
ratio of tangible equity to total assets that is equal to or less than 2%. In
addition, under certain circumstances, a federal banking agency may reclassify a
well capitalized institution as adequately capitalized and may require an
adequately capitalized institution or an undercapitalized institution to comply
with supervisory actions as if it were in the next lower category (except that
the FDIC may not reclassify a significantly undercapitalized institution as
critically undercapitalized). Immediately upon becoming undercapitalized, or
upon failing to submit or implement a capital plan as required, an institution
shall become subject to various regulatory restrictions.
FDICIA also contained the Truth in Savings Act, which requires certain
disclosures to be made in connection with deposit accounts offered to consumers.
The FRB has adopted regulations implementing the provisions of the Truth in
Savings Act.
In addition, significant provisions of FDICIA required federal banking
regulators to draft standards in a number of other important areas to assure
bank safety and soundness, including internal controls, information systems and
internal audit systems, credit underwriting, asset growth, compensation, loan
documentation and interest rate exposure. FDICIA also required the regulators to
establish maximum ratios of classified assets to capital, and minimum earnings
sufficient to absorb losses without impairing capital. The legislation also
contained other provisions which restricted the activities of state-chartered
banks, amended various consumer banking laws, limited the ability of "under
capitalized" banks to borrow from the Federal Reserve's discount window, and
required federal banking regulators to perform annual onsite bank examinations
and set standards for real estate lending.
Regulatory Capital Requirement
The Federal Reserve Board mandates minimum capital requirements for
bank holding companies. In 1990, the FRB adopted a risk based capital measure to
determine capital adequacy. Under this system all balance sheet assets are
assigned a certain risk category with a prescribed weight. Off-balance sheet
items, such as loan commitments and letters of credit, also are classified by
risk with duly assigned weights. The sum of the balance sheet and off balance
sheet amounts multiplied by their respective risk weight factors must then meet
a required minimum capital test. Tier 1 capital is defined as stockholders'
equity minus certain intangible assets. Tier 2 capital includes a certain amount
of the allowance for loan losses. At December 31, 1997, the minimum total
capital ratio (Tier 1 plus Tier 2) required was 8 percent. Southern Financial's
Tier 1 ratio of 13.9% and its total capital ratio of 15.3% were well in excess
of minimum requirements. The FRB also utilizes a Tier 1 leverage ratio in
conjunction with its risk based capital standard. This ratio measures Tier 1
capital as a percent of total average assets less intangible assets. The minimum
leverage ratio is 4 percent. At December 31, 1997, the Bancorp's leverage ratio
was 8.1%.
Deposit Insurance
The deposits of the Bancorp are currently insured to a maximum of
$100,000 per depositor, subject to certain aggregation rules. The FDIC has
implemented a risk-related assessment system for deposit insurance premiums. All
depository institutions have been assigned to one of nine risk assessment
classifications based on certain capital and supervisory measures. The Bancorp's
deposits are subject to the rates of the Savings Associations Insurance Fund
("SAIF") since Southern Financial converted to a commercial bank from a federal
savings bank on December 1, 1995. Based on the Bancorp's current risk
classification, the Bancorp is required to pay the minimum SAIF assessment.
Federal Home Loan Bank System
Southern Financial is a member of the Federal Home Loan Bank System
which consists of 12 district Federal Home Loan Banks ("FHLBs") with each
subject to supervision and regulation by the Federal Housing Finance Board. The
FHLBs provide a central credit facility for member institutions. The Bancorp, as
a member of the FHLB of Atlanta, is required to acquire and hold shares of
capital stock in that FHLB in an amount equal to at least 1% of the aggregate
principal amount of its unpaid residential mortgage loans, home purchase
contracts and similar obligations at the beginning of each year, or 5% of its
advances (borrowings) from the FHLB of Atlanta, whichever is greater. At
December 31, 1997, Southern Financial had an investment of $931 thousand in the
stock of the FHLB of Atlanta and was in compliance with these requirements.
Advances from the FHLB of Atlanta are secured by mortgage-backed
securities. Interest rates charged for advances vary depending upon maturity,
the cost of funds to the FHLB of Atlanta and the purpose of the borrowing. At
December 31, 1997, Southern Financial had $4 million outstanding in borrowings
from the FHLB of Atlanta.
Federal Reserve System
The Federal Reserve Board of Governors requires all depository
institutions to maintain reserves against their transaction accounts (primarily
NOW and Super NOW checking accounts) and non-personal time deposits. Because
required reserves must be maintained in the form of vault cash or a
noninterest-bearing account at a Federal Reserve Bank, the effect of this
reserve requirement is to reduce the earning assets of Southern Financial.
Item 2. Properties
Offices and Other Material Properties
At December 31, 1997, the Bancorp conducted its business from its main
office in Warrenton, Virginia and nine branch offices. The following table sets
forth certain information with respect to the offices of the Bancorp as of
December 31, 1997:
=====================================================================================
Owned or Lease Expiration Date Facility
Office Location Leased Date Opened
=====================================================================================
Home Office:
37 E. Main Street Leased September February
Warrenton, VA 1998 1989
Branch Offices:
362 Elden Street Leased June April
Herndon, VA 2000 1986
101 W. Washington Street Leased June November
Middleburg, VA 2002 1987
33 W. Piccadilly Street Owned N/A November
Winchester, VA 1990
526 E. Market Street Leased June March
Leesburg, VA 2002 1992
4021 University Drive Owned N/A July
Fairfax, VA 1997
322 Lee Highway Leased August August
Warrenton, VA 2001 1994
2545 Q-18 Centreville Road Leased September April
Herndon, VA 2001 1995
13542 Minnieville Road Leased December April
Woodbridge, VA 1998 1995
1095 Millwood Pike Owned N/A July
Winchester, VA 1996
=====================================================================================
Item 3. Legal Proceedings
Neither the Bancorp nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings incidental to
the business of the Bancorp and its subsidiary other than those arising in the
ordinary course of business. Although the amount of any ultimate liability with
respect to such matters cannot be determined, in the opinion of management, any
such liability will not have a material adverse effect on the consolidated
financial position or results of operations of the Bancorp.
Item 4. Submission of Matters to Vote of Security Holders
None.
PART II.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The information required herein is incorporated by reference from
the back page on the outside of the Registrant's 1997 Annual Report.
Item 6. Selected Financial Data.
The information required herein is incorporated by reference from page
1 of the Annual Report.
Item 7. Management's Discussion and Analysis.
The information required herein is incorporated by reference from pages
3 to 12 of the Annual Report.
Item 8. Financial Statements.
The information required herein is incorporated by reference from pages
13 to 29 of the Annual Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III.
Item 10. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
The information required herein is incorporated by reference from pages
3 to 4 and 10 to 11 of the definitive proxy statement of Southern Financial
Bancorp, Inc. filed on March 20, 1998 ("Definitive Proxy Statement"). For
additional information concerning executive officers of the Registrant who were
not also directors, see "Item I - Business - Executive Officers of the
Registrant" herein, which is incorporated by reference.
Item 11. Executive Compensation.
The information required herein is incorporated by reference from pages
9 to 10 of the Definitive Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required herein is incorporated by reference from pages
6 to 8 of the Definitive Proxy Statement.
Item 13. Certain Relationships and Related Transactions.
The information required herein is incorporated by reference from pages
5 of the Definitive Proxy Statement.
PART IV.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K.
(a) Documents filed as a part of the report:
(1) The following is an index to the financial statements of the
Registrant included in the Annual Report to Stockholders for the
year ended December 31, 1997, and incorporated herein by
reference in Item 8. The remaining information appearing in the
Annual Report to Stockholders is not deemed to be filed as part
of this Report, except as expressly provided herein.
Page(s) in
Annual Report
-------------
Independent Auditors' Report. 13
Balance Sheets:
December 31, 1997 and December 31, 1996. 14
Statements of Income:
Years Ended December 31, 1997 and 1996,
Six Months Ended December 31, 1995 and
Year Ended June 30, 1995 . 15
Statements of Changes in Stockholders' Equity:
Years Ended December 31, 1997 and 1996,
Six Months Ended December 31, 1995 and
Year Ended June 30, 1995. 16
Statements of Cash Flows:
Years Ended December 31, 1997 and 1996,
Six Months Ended December 31, 1995 and
Year ended June 30, 1995 . 17
Notes to Consolidated Financial Statements. 18-29
(2) All other schedules have been omitted as the required
information is either inapplicable or included in the Notes to
Financial Statements.
(3) Exhibits (listed numbers correspond to item 601 of Regulation
S-K)
(3) Articles of Incorporation of Southern Financial
Bancorp, Inc., by reference to the Form S-4
Registration Statement filed with the Securities and
Exchange Commission on August 4, 1995, and By-Laws, by
reference to Form S-4 Registration Statement filed with
the Securities and Exchange Commission on August 4,
1995.
(4) Instruments Defining the Rights of Security Holders,
Including Indentures--Reference is made to Exhibit (3)
above.
(9) Voting Trust Agreement--Not applicable.
(10) (a) Employment contract between Southern Financial Bancorp
and Georgia S. Derrico
(10) (b) Employment contract between Southern Financial Bancorp
and William H. Lagos
(11) Statement re Computation of Per Share
Earnings--Reference is made to Note 1 to Financial
Statements, Page 18 in Annual Report.
(12) Statement re Computation of Ratios--Not applicable.
(13) Pages 13-29 of Annual Report to Stockholders for the
Year Ended December 31, 1997.
(18) Letter re Change in Accounting Principles--Not
applicable.
(21) Subsidiaries of the registrant:
Percentage of Voting
Jurisdiction of Securities Owned by
Name Incorporation the Parent
------ --------------- ---------------------
Southern Financial Bank Virginia 100%
(22) Published Report Regarding Matters Submitted to Vote of Security Holders--Not applicable.
(23) (a) Consent of KPMG Peat Marwick LLP
(23) (b) Consent of Arthur Andersen LLP
(24) Power of Attorney - Not applicable
(27) Financial Data Schedule
(28) Information from Reports Furnished to State Insurance Regulatory Authorities - Not applicable
(b) No reports on Form 8-K were filed during the quarter ended December 31, 1997.
SIGNATURES
Pursuant to the requirement of Section 13 of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SOUTHERN FINANCIAL BANCORP, INC.
By: /s/Georgia S. Derrico
-------------------------
Georgia S. Derrico
Chairman of the Board
and Chief Executive Officer
Dated: March 30, 1998
- ------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on the dates indicated.
Name Title Date
------ ------ ------
/s/ Georgia S. Derrico Director and Chairman of March 30, 1998
- ---------------------- the Board, and --------------
Georgia S. Derrico Chief Executive Officer
/s/David de Give Director and Senior Vice March 30, 1998
- ---------------------- President/Treasurer --------------
David de Give
s/sWilliam H. Lagos Senior Vice President/Controller March 30, 1998
- ---------------------- (Principal Accounting Officer) --------------
William H. Lagos
/s/Virginia Jenkins Director March 30, 1998
- ---------------------- --------------
Virginia Jenkins
/s/R. Roderick Porter Director March 30, 1998
- ---------------------- --------------
R. Roderick Porter
/s/Neil J. Call Director March 30, 1998
- ---------------------- --------------
Neil J. Call
/s/John L. Marcellus, Jr. Director March 30, 1998
- ------------------------ ---------------
John L. Marcellus, Jr.
/s/Michael P. Rucker Director March 30, 1998
- ------------------------ ---------------
Michael P. Rucker
INDEX TO EXHIBITS
Number and Description
10(a) Employment Contract between Southern Financial Bancorp and Georgia S.
Derrico
10(b) Employment Contract between Southern Financial Bancorp and William H.
Lagos
13 Southern financial Bancorp, Inc. December 31, 1997 Annual Report to
Stockholders
23(a) Consent of KPMG Peat Marwick LLP
23(b) Consent of Arthur Andersen LLP
27 Financial Data Schedule