Southern Financial Bancorp, Inc.

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Southern Financial Bancorp, Inc.

37 East Main Street
Warrenton, Virginia 20186
Telephone: (540) 349-3900
Fax: (540) 349-3904
Web site:

Public Company
1986 as Southern Financial Federal Savings Bank
Employees: 225
Total Assets: $1 billion (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: SFFB
NAIC: 522110 Commercial Banking

Southern Financial Bancorp, Inc. is the holding company for Virginia-based Southern Financial Bank. Southern Financial has branches in northern central Virginia, and, since 2001, in Washington, D.C. To the delight of its shareholders, the community-oriented bank has been run by the notoriously thrifty husband-and-wife team of Georgia S. Derrico (chairman and chief executive officer) and R. Roderick Porter (president and chief operating officer). Derricos son, Devon, was picked to lead the commercial-services department. With total assets of about $1 billion in 2002, Southern Financial is the 250th largest bank in the United States. The bank is also known as a leading originator of Small Business Administration (SBA) loans in the Richmond and Washington, D.C, areas. The companys niche, reported FSB: Fortune Small Business in 2003, is $2 million to $8 million loans for business owners, especially government contractors.

Born Into the S&L Crisis

The roots of the Southern Financial Federal Savings Bank dont reach back far. It was established in 1986 in a strip mall in Herndon, Virginia, a site, according to FSB, chosen for its proximity to a Kmart store. The thrifts first day of business was April 11, 1986, and it was profitable by that July. Start-up capital was a little more than $4 million.

Southern Financial was led by Georgia S. Derrico. Derrico had been head of corporate affairs at New Yorks Chemical Bank (later part of J.P. Morgan Chase & Co.) before organizing Southern Financial. She brought Chemical veterans with her to the new thrift, and most of Southern Financials investors were from New York.

Derricos career had a slow start before she was able to amass this kind of big-bank backing. She studied international affairs at St. Marys, a womens college in Notre Dame, Indiana. Unable to break into the male-dominated corporate world of the 1960s with a bachelors degree, she next pursued graduate studies at Johns Hopkins University and Columbia University, going to work for Chemical Bank in 1970 after earning her Masters.

Derrico and her husband, R. Roderick Porter, settled in Middleburg, Virginia, on a farm, where they enjoyed raising horses and bichon frisé dogs. Another reason for choosing that area were the opportunities afforded by its location in the heart of northern Virginias high-tech corridor, near Dulles Airport and Washington, D.C.

At the time Southern Financial opened, the savings and loan industry was experiencing a massive crisis. In late 1989, the thrift applied for regulatory permission to convert its charter from that of a savings and loan to one of a national bank. It had assets of about $60 million and stockholder equity of about $7 million at the time, and was profitable. Banks were required to meet more stringent capital requirements than thrifts. However, they had more operational flexibility. Part of the reason for the change, Derrico told American Banker, was to distance Southern Financial from the sullied reputation of other savings and loans, which had given the industry a bad name by collapsing under the weight of numerous bad loans.

After two years, Derrico cancelled the tedious conversion process. By this time, Southern Financial had expanded to Middleburg and Winchester, Virginia, and had moved its headquarters from Herndon to Warrenton, Virginia, where cheaper rents could be found. Southern Financial had opened one new branch a year during each of its first 13 years, noted the Richmond Times-Dispatch.

Going Public in 1993

Southern Financial went public in 1993. Its initial public offering (IPO) sold out in ten days, raising $5 million. Most of the proceeds were earmarked for acquisitions from the Resolution Trust Corporation, the agency set up to sell off the remnants of failed savings and loans. Southern Financial had six offices and a staff of 35 at the time of the IPO, and its assets had grown 33 percent in one year to $103 million. Derrico and her husband owned 9.7 percent of shares after the offering.

American Banker noted that the thrift had been profitable through conservative and shrewd judgment calls. In the early 1990s, Southern Financial remained concentrated on residential mortgages, while its competitors lost bundles on failed commercial deals that ravaged the Washington market. Southern Financial removed its exposure to rising interest rates by maintaining variable-rate mortgages almost exclusively. However, by 2003, the mortgage business would be small compared to Southern Financials main focus of $2 million to $8 million commercial loans for small businesses.

A Commercial Bank in 1995

Southern Financial was able to convert from a thrift to a commercial bank in late 1995, obtaining a state charter for that purpose and forming the holding company Southern Financial Bancorp, Inc.

Derricos husband, R. Roderick Porter, who had been on the banks board of directors since its founding, became president and chief operating officer in 1998, while his wife remained CEO. By this time, the bank had grown to record $250 million in total assets.

Porter had been in charge of the asset liability committee at Chemical, and had also been an executive at Morgan Stanley. With an investment banker as president, it was natural that Southern Financial should start acquiring other banks. Vienna, Virginia-based Horizon Bank was acquired in October 1999, adding four branches and raising Southern Financials total assets from $258 million to more than $400 million.

Horizon had been founded in 1990 by Riggs National veteran Richard Hall. The stock-swap deal valued Horizon at about $21.5 million. The timing of the deal surprised some observers, since most banks at that time were scrambling to ensure the Y2K integrity of their back office systems, rather than focusing on expansion.

Southern Financial also developed partnerships to extend its range of services. It entered a unique joint venture with Warrenton-based Piedmont Press in 1999. Piedmont/Southern Web Services was set up to help small businesses develop e-commerce web sites. Southern Financial initially had a 4.9 shareholding in the venture, but planned to increase that to a 51 percent majority holding. An online community directory of participating businesses was created and linked to Southern Financials home page; merchants could take credit card orders through the site.

In June 1999, Southern Financial began offering stock brokerage services on its web site in partnership with Fleet Securities Inc.s U.S. Clearing division. Southern Financial did not maintain its own retail brokerage office.

Another important acquisition in 1999 was that of Southern, a supplier of international banking software. This concern had been founded in 1978 in Connecticut as Darien Consulting Group by Aidan Harland, another Chemical Bank alumnus.

By 2000, Southern Financials presence had spread to six Virginia counties. The company acquired First Savings Bank of Virginia in September of that year. First Savings had total assets of just $69 million, and it maintained two branches, bringing Southern Financials total to 19 in a stock swap deal worth about $6 million. First Savings and the previously-acquired Horizon Bank were both based in Fairfax County, Virginias most heavily populated and most affluent county.

Entering D.C. in 2001

Having evolved from a community bank to a regional one, Southern Financial opened its first branch within the District of Columbia in August 2001. Located in the Georgetown area, this was its 20th branch. One company official told the Washington Times that she expected the new location to lead to more Small Business Administration (SBA) loans. The SBA praised Southern Financial for its commitment to small business.

Another branch opened in Charlottesville in early 2002. That year net income rose 19 percent to $10 million, while total assets approached $1 billion. Southern Financial had a work force of 225 employees at the time.

Company Perspectives:

Our primary strategic objective is to serve the small to medium-sized business market with an array of unique and useful services, including a full array of commercial mortgage and nonmortgage loans. These loans include commercial real estate loans, construction to permanent loans, development and builder loans, accounts receivable financing, lines of credit, equipment and vehicle loans, leasing options, commercial overdraft protection and corporate credit cards. We strive to do business in the areas served by our branches, and all of our marketing and the vast majority of our loan customers are located within our existing market areas. The only significant exceptions to this local lending philosophy are loans made with an undertaking from the Small Business Administration that may from time to time come to us because of our reputation and expertise as an SBA lender.

In August 2002, Southern Financial bought Metro-County Bank of Virginia, Inc., based in Mechanicsville. The price was $17.1 million, which was paid in a combination of stock and cash. This acquisition brought with it five branches, including Southern Financials first near the state capital of Richmond, and $92.3 million in assets. Metro-County had been in business just five years.

A few months after acquiring Metro-County, Southern Financial opened an international banking division in Richmond, which was a manufacturing hub boasting 3,000 exporters, 1,500 importers, and more than 160 foreign-owned companies. The bank already owned a producer of international banking software, Southern, noted American Banker, which helped save hundreds of thousands of dollars in start-up costs.

A company executive told American Banker that the citys four existing import/export banks had been acquired by competitors from out of state, leaving a niche for a local bank. Both CEO Georgia Derrico and COO R. Roderick Porter had experience with Chemical Banks international divisions. Porter had managed offices in Tokyo and London.

In July 2003, Southern Financial acquired a lease for a brand new office in downtown Richmond, which would serve as the headquarters for the banks International Trade Services Department. Begun as a community thrift 19 years earlier, Southern Financial had grown into a considerable regional player with assets of more than $1 billion.

Principal Subsidiaries

Southern Financial Bank; Southern Financial Capital Trust I; Southern Financial Statutory Trust I; Southern, Inc.

Principal Divisions

International Trade Services Department.

Principal Competitors

BB&T; Bank of America Corporation; First Virginia Banks, Inc.; Wachovia Corporation.

Key Dates:

Southern Financial Federal Savings Bank founded.
Southern Financial attempts to convert to a national bank structure.
Initial public offering raises $5 million.
Southern Financial becomes a commercial bank under a state charter.
Horizon Bank is acquired.
First Savings Bank of Virginia acquired.
Washington, D.C., office opened.

Further Reading

Atkinson, Bill, Count-the-Pennies CEO in Va. Wins Top Marks, American Banker, January 11, 1994, p. 8.

, Southern Financial of Virginia, Fueled by IPO, Aims to Expand, American Banker, December 22, 1993, p. 6.

De Novo Thrifts Show Highest Net Worths, National Mortgage News, December 15, 1986, p. 39.

Hazard, Carol, Husband-and-Wife Team Run Sixth-Largest Bank Holding Firm in Virginia, Richmond Times-Dispatch, August 24, 2002.

, Metro-County Bank of Virginia Inc. to Become Southern Financial After Merger, Richmond Times-Dispatch, April 26, 2002.

, Warrenton, Va.-Based Bank Completes $17.1 Million Purchase, Richmond Times-Dispatch, August 16, 2002.

, Warrenton, Va.-Based Bank Opens International Department in Richmond, Richmond Times-Dispatch, March 25, 2003.

Heerwagen, Peter, Community Banks Get Physical, Quad-State Business Journal (Winchester, Va.), September 2001, p. 12.

Hyman, Julie, Southern Financial Buys First Savings, Washington Times, April 12, 2000, p. B8.

, Southern Financial Seeks OK to Open First Branch in District, Washington Times, March 26, 2001, p. D5.

, Warrenton, Va. Bank Gains Foothold in Northern Virginia with Acquisition, Washington Times, April 11, 2000.

Laval, Kevin, Southern Financial Awaits Conversion, Washington Business Journal, March 5, 1990, p. 48.

Millner, Marlon, Banking on the Internet: Local Financial Services Firms Stocks Soar with Online Deals, Washington Business Journal, April 23, 1999, pp. 1f.

, Horizon Bank Finds a Buyer: Southern Financial, Washington Business Journal, March 26, 1999, p. 5.

Monahan, Julie, High Tech Ways that Banks Stay High-Touch, American Banker, Community Banking Supplement, February 2000, p. 12A.

Reosti, John, Duo Has Expansion Plans for Va.s Southern, American Banker, September 10, 2001, p. 6.

, Richmond Newcomer Aims to Fill Vacuum, American Banker, March 24, 2003, p. 5.

Smith, Franklin, and Jeffrey Kutler, Southern Financial, a Va. Thrift, Nears Conversion to National Bank, American Banker, June 4, 1991, p. 13.

Va. Bank Offers Web-Based Broker Services, American Banker, June 18, 1999, p. 7.

Whitford, David, For Love and Money, FSB: Fortune Small Business, July/August 2003, p. 72.

Frederick C. Ingram

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Southern Financial Bancorp, Inc.

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Southern Financial Bancorp, Inc.