<PAGE>

                    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, 2000              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 22, 2001 was $41,908,114 (2,296,335 shares @ $18.25 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 22, 2001, there were
3,072,470 shares of the registrant's Common Stock outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE
                      -----------------------------------

     I.   Portions of the Annual Report to Stockholders for the Year Ended
          December 31, 2000 are incorporated by reference into certain items of
          Parts I. and II.

     II.  Portions of the Proxy Statement for the Annual Meeting of Stockholders
          to be held on April 26, 2001 are incorporated by reference into
          certain items of Part III.
<PAGE>

Part I.
----------

Item 1. Business
----------------

General

          Southern Financial Bancorp, Inc. (Southern Financial) is incorporated
in Virginia. On December 1, 1995, Southern Financial 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 material
activity of Southern Financial is to own and control all of the capital stock of
Southern Financial Bank, Southern Financial Capital Trust I, and Southern
WebTech.com. References to Southern Financial include the activities its
subsidiaries.

          On September 1, 2000, Southern Financial acquired all the outstanding
common stock of First Savings Bank of Virginia for 409,906 shares of Southern
Financial common stock. The acquisition has been accounted for by the purchase
method, and accordingly, the results of operations of First Savings Bank have
been included in Southern Financial's consolidated financial statements from
September 1, 2000.

          On December 28, 1999, Southern Financial Capital Trust I, a wholly
owned subsidiary of the Bancorp, was formed for the purpose of issuing
redeemable capital securities. On May 24, 2000, a $5 million offering of
redeemable capital securities was completed, and on September 7, 2000, $8
million of trust preferred securities were issued through a pooled underwriting
totaling approximately $300 million.

          In October 1999, Southern Financial incorporated Southern WebTech.com,
100% (70% at December 31, 1999) of which is owned by Southern Financial.

          On October 1, 1999, Southern Financial completed its merger with the
Horizon Bank of Virginia ("Horizon"). The merger qualified as a tax-free
exchange and was accounted for as a pooling of interests. Southern Financial
issued 0.63 shares of its common stock for each share of Horizon stock
outstanding. A total of 1,045,523 shares (after adjustment for fractional
shares) of Southern Financial's common stock was issued as a result of the
merger. All financial statements and amounts have been restated due to the
merger.

          Headquartered in Warrenton, Virginia, Southern Financial serves the
retail and commercial financial market as a deposit and loan specialist from 19
full service offices located in Warrenton, Herndon, Middleburg, Winchester,
Leesburg, Fairfax, Sterling, Woodbridge, Manassas, Fredericksburg, and
Springfield, 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 Southern
Financial currently operates branches include: Loudoun, Fauquier, Fairfax,
Frederick and Prince William and the cities of Fredericksburg and Winchester.
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 Southern Financial'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, Connecticut and White Plains, New York 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 Southern Financial 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. Southern Financial
seeks to be a full service community bank that provides a wide variety of
financial services to its middle market corporate clients as well as to its
retail clients. Southern Financial is an active commercial lender that often
lends in conjunction with the Small Business Administration 7(a) and 504 loan
programs. In addition, Southern Financial is an active residential construction
lender and offers its retail clients permanent residential mortgage loan
alternatives. Southern Financial also invests funds in mortgage-backed
securities, securities issued by agencies of the Federal Government, obligations
of counties and municipalities and corporate obligations.

          The principal sources of funds for Southern Financial'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 investment securities, Federal Home Loan Bank 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. Southern Financial's principal
expenses include interest paid on deposits and advances from the Federal Home
Loan Bank and other borrowings, and operating expenses.

Lending Activities

          Our lending focus and the composition of our loan portfolio have
changed dramatically since June 30, 1995. The growth of our loan portfolio and
the change in its composition reflects our growth strategy and the conversion of
Southern Financial Bank from a savings association to a commercial bank. On
December 31, 1995, residential mortgage loans represented 32% of gross loans. By
December 31, 2000, residential mortgage loans had declined to 17% of gross
loans. In contrast, commercial business loans and non-residential mortgage loans
were 15% and 32%, respectively, of gross loans at December 31, 1995. By December
31, 2000 they had grown to 31% and 46%, respectively, of gross loans.

                                       2
<PAGE>

          Today, the principal lending activity of Southern Financial is the
origination of commercial mortgage and non-mortgage loans to small and medium-
sized businesses, including loans through various lending programs of the Small
Business Administration. Southern Financial is a Preferred Lender in the
Richmond District of Small Business Administration and a Certified Lender in the
Washington, D.C. District of Small Business Administration.

          Southern Financial also makes residential mortgage loans, consumer
loans and construction loans.

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, 2000. 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:

<TABLE>
<CAPTION>
                                                                     At December 31,
                                                  2000                     1999                     1998                 1997
                                            Amount    Percent       Amount    Percent        Amount    Percent     Amount   Percent
                                          ------------------------------------------------------------------------------------------
                                                                       (amounts in thousands)
<S>                                       <C>         <C>           <C>       <C>            <C>       <C>         <C>      <C>
Mortgage:
 Residential                              $  53,165       17%     $  48,604       20%      $  54,822       26%   $  61,328      29%
 Nonresidential                             130,271       41%       109,871       47%         85,124       41%      74,104      36%
Construction:
  Residential                                12,394        4%         7,853        3%          6,949        3%       8,766       4%
  Nonresidential                             15,913        5%         8,270        3%         11,214        5%      13,865       7%
                                          ------------------------------------------------------------------------------------------
   Total Mortgage                           211,743       67%       174,598       73%        158,109       75%     158,063      76%
                                          ------------------------------------------------------------------------------------------
Nonmortgage:
 Business                                   101,002       31%        54,175       23%         40,814       20%      36,578      18%
 Consumer                                     7,617        2%         9,995        4%         11,559        5%      13,524       6%
                                          ---------------------------------           ----------------------------------------------
   Total Nonmortgage                        108,619       33%        64,170       27%         52,373       25%      50,102      24%
                                          ------------------------------------------------------------------------------------------
Gross Loans                                 320,362      100%       238,768      100%        210,482      100%     208,165     100%

Less:
  Deferred Fees, Net                          1,670                   1,230                    1,065                   862
  Allowance for Loan Losses                   4,921                   3,452                    3,062                 2,743
                                          ---------               ---------                ---------             ---------
Total Loans Receivable, Net               $ 313,771               $ 234,086                $ 206,355             $ 204,560
                                          =========               =========                =========             =========
<CAPTION>

                                                  1996
                                            Amount    Percent
                                           ------------------
<S>                                        <C>        <C>
Mortgage:
 Residential                              $  59,986       33%
 Nonresidential                              64,848       37%
Construction:
  Residential                                 8,037        4%
  Nonresidential                              8,090        4%
                                          ------------------
   Total Mortgage                           140,961       78%
                                          ------------------
Nonmortgage:
 Business                                    27,794       15%
 Consumer                                    12,555        7%
                                          ------------------
   Total Nonmortgage                         40,349       22%
                                          ------------------
Gross Loans                                 181,310      100%

Less:
  Deferred Fees, Net                            674
  Allowance for Loan Losses                   2,374
                                          ---------
Total Loans Receivable, Net               $ 178,262
                                          =========
</TABLE>

                                         3






















<PAGE>

         The following table sets forth the scheduled maturity of selected loans
as of December 31, 2000:

<TABLE>
<CAPTION>
                                             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)
<S>                     <C>           <C>              <C>           <C>                <C>               <C>
Construction:
   Residential          $ 11,792      $      -         $    602      $      -           $      -          $ 12,394
   Nonresidential         15,729             -              184             -                  -            15,913
Business                  44,559        17,726            4,918        20,758             13,041           101,002
                        --------      --------         --------      --------           --------          --------

        Total           $ 72,080      $ 17,726         $  5,704      $ 20,758           $ 13,041          $129,309
                        ========      ========         ========      ========           ========          ========
</TABLE>

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,
Small Business Administration 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 reviewed by the Executive Vice President of Risk Management
who reports his findings annually to Southern Financial's Credit Committee.

         It is Southern Financial'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 and hazard insurance.

         The aggregate amount of loans that Southern Financial may make to one
borrower is limited to 15% of Southern Financial's unimpaired capital and
surplus. The maximum amount of loans that Southern Financial could have made to
one borrower as of December 31, 2000 was approximately $7.9 million based on 15%
of its unimpaired capital and surplus.

         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 Audit Committee of the Board, which consists of five outside
members of the board of directors and the Chief Executive Officer, is
responsible for the qualitative review of the loan portfolio 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.

         Southern Financial has a standing credit committee comprised of
officers, in which the members have defined lending authorities as individuals
and in combination. These individual lending authorities are determined by the
Chief Executive Officer and approved by the Board based on the individual's
technical ability and must be agreed to by the Credit Committee. All authorities
are reviewed and approved 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.

                                       4
<PAGE>

Past Due Loans and Nonperforming Assets

         The following table sets forth information regarding past due loans and
nonperforming assets as of the periods indicated:

<TABLE>
<CAPTION>
                                                                                 At December 31,
                                                  2000                1999             1998             1997               1996
                                                 -------             -------          -------          -------            -------
                                                                              (amounts in thousands)
<S>                                              <C>                 <C>              <C>              <C>                <C>
Accruing Loans 90 Days (1)

   or More Delinquent

   Nonresidential                                $     -             $     -          $   372          $     -            $   194

   Business                                            1                 226              283               71                 11

   Consumer                                            8                   9              231                6                  2
                                                 -------             -------          -------          -------            -------

        Total                                          9                 235              886               77                207
                                                 =======             =======          =======          =======            =======

Nonperforming Loans

   Residential                                       555                 413              291              443                321

   Nonresidential                                  1,317                 109            1,033            1,002              1,257

   Business                                            -                   -            1,576              889                721

   Consumer                                            -                   -                6               74                532
                                                 -------             -------          -------          -------            -------

      Subtotal                                     1,872                 522            2,906            2,408              2,831
                                                 -------             -------          -------          -------            -------

Troubled Debt Restructuring

    Nonresidential                                    49                  68                -                -                  -
                                                 -------             -------          -------          -------            -------
Real Estate Owned:

    Residential                                       17                   -                -                -                  -

    Nonresidential                                     -               2,296              498              722              1,307
                                                 -------             -------          -------          -------            -------

      Subtotal                                        17               2,296              498              722              1,307
                                                 -------             -------          -------          -------            -------

Total Nonperforming Assets                       $ 1,938             $ 2,886          $ 3,404          $ 3,130            $ 4,138
                                                 =======             =======          =======          =======            =======
 Nonperforming Assets

    to Total Assets                                 0.32%               0.71%            0.84%            0.88%              1.33%
                                                 =======             =======          =======          =======            =======
</TABLE>

(1)  Includes portion guaranteed by the Small Business Administration.

         Southern Financial's loss and delinquency experience on its residential
real estate loan portfolio has been limited by a number of factors, including
its 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, Southern Financial'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 inherent losses.

         At December 31, 2000, loans totaling $4.2 million were classified as
potential problem loans that are not reported in the table above. The loans are
subject to management attention and their classification is reviewed on a
quarterly basis. At December 31, 2000, all of the potential problem loans were
adequately secured in the opinion of management.

                                       5
<PAGE>

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 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 losses inherent in the loan portfolio in the
normal course of business. However, there are additional risks of 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. Southern Financial performs 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 Southern Financial's
allowance for loan losses during the periods indicated:

<TABLE>
<CAPTION>
                                                                                      Year Ended
                                                                                     December 31,
                                                     2000              1999              1998         1997              1996
                                                  ----------         ---------         ---------    ---------         ---------

                                                                                (amounts in thousands)

<S>                                               <C>                <C>               <C>          <C>               <C>
Allowance at Beginning of Period                  $    3,452         $   3,062         $   2,743    $   2,374         $   2,041
Provision for Losses                                   1,335             2,130             1,301        1,265               906
Allowance Acquired from First
    Savings Bank Merger                                  594                 -                 -            -                 -
Charge-offs:
Mortgage:
   Residential                                          (232)             (775)             (140)         (65)               (8)
   Nonresidential                                       (100)             (480)                -         (200)             (300)
   Construction:
      Residential                                          -                 -               (81)           -               (50)
      Nonresidential                                       -                 -              (261)           -                 -
Nonmortgage:
   Business                                             (488)             (736)             (514)        (256)             (155)
   Consumer                                              (54)              (55)               (9)        (413)              (79)
                                                  ----------         ---------         ---------    ---------         ---------

      Total Charge-offs                                 (874)           (2,046)           (1,005)        (934)             (592)
                                                  ----------         ---------         ---------    ---------         ---------

      Recoveries (Primarily Residential)                 414               306                23           38                19
                                                  ----------         ---------         ---------    ---------         ---------

          Net Charge-offs                               (460)           (1,740)             (982)        (896)             (573)
                                                  ----------         ---------         ---------    ---------         ---------

Allowance at End of Period                        $    4,921         $   3,452         $   3,062    $   2,743         $   2,374
                                                  ==========         =========         =========    =========         =========
Total Loans at End of Period,
    Net of Deferred Fees                          $  318,692         $ 237,539         $ 209,417    $ 207,538         $ 180,898

Ratio of Allowance to Loans                             1.54%             1.45%             1.46%        1.32%             1.31%

Ratio of Net Charge-offs to
    Average Loans Outstanding                           0.17%             0.79%             0.48%        0.46%             0.34%
</TABLE>

                                       6
<PAGE>

         The following table summarizes the composition of the allowance for
loan losses:

<TABLE>
<CAPTION>
                                                                         At December 31,
                                  2000                  1999                  1998              1997                 1996
                                        Percent               Percent              Percent             Percent            Percent
                                       of Loans               of Loans             of Loans            of Loans           of Loans
                                        in Each               in Each              in Each             in Each            in Each
                                       Category               Category             Category            Category           Category
                                       to Total               to Total             to Total            to Total           to Total
                             Amount      Loans     Amount      Loans     Amount     Loans     Amount    Loans     Amount   Loans
                             ------------------   --------------------  -------------------  ------------------   ----------------
                                                                  (amounts in thousands)
<S>                          <C>        <C>       <C>          <C>      <C>         <C>      <C>        <C>       <C>        <C>
Mortgage:
   Residential               $   219      17%     $   256       20%     $   361      26%     $   199     29%      $   377     33%
   Nonresidential              1,194      41%       1,043       47%         913      41%       1,316     36%          910     37%
   Construction:
      Residential                 55       4%          32        3%          21       3%          55      4%           71      4%
      Nonresidential              65       5%          34        3%          46       5%          43      7%          131      4%
Nonmortgage:
   Business                    2,377      31%         921       23%         752      20%         524     18%          442     15%
   Consumer                      116       2%         151        4%         151       5%          75      6%          312      7%
Unallocated                      895       NA       1,015        NA         818       NA         531      NA          131      NA
                             -------     ----     -------      ----      ------     ----     -------    ----      -------    ----
Allowance for loan losses    $ 4,921     100%     $ 3,452      100%     $ 3,062     100%     $ 2,743    100%      $ 2,374    100%
                             =======     ====     =======      ====      ======     ====     =======    ====      =======    ====
</TABLE>

         Southern Financial has allocated the allowance according to the amount
deemed to be reasonably necessary to provide for 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 losses within such categories since the total allowance is a
general allowance applicable to the entire portfolio. The increase in the
allowance for loan losses allocated to nonmortgage business loans is primarily a
result of the increase in the balance of such loans, and, to a lesser degree,
the portion of those loans classified as substandard.

                                       7
<PAGE>

Investment Activities

         The following table sets forth the investment portfolio as of the
periods indicated:

<TABLE>
<CAPTION>
                                                                   December 31,           December 31,       December 31,
                                                                      2000                  1999                1998
                                                               ------------------    -----------------   -----------------

                                                                                (amounts in thousands)
<S>                                                           <C>                    <C>                 <C>
Available-for-sale securities (at fair value):
    FHLMC preferred stock                                         $       -               $      -           $  3,889
    FHLMC MBS                                                        32,128                 16,369             12,006
    GNMA MBS                                                         13,576                  2,589              3,771
    FNMA MBS                                                         67,539                 25,678             29,814
    Collateralized mortgage obligations                              66,976                 25,303              1,529
    Commercial MBS                                                   28,788                 22,495             18,246
    Obligations of counties and municipalities                        6,118                  3,572              3,220
    Corporate obligations                                            12,416                    945                992
    U.S. Treasury and other Government agency obligations             2,482                    770             10,608
                                                                  ---------               --------           --------

Total classified as investment securities                           230,023                 97,721             84,075
    Corporate obligations classified as loans                        32,418                      -                  -
                                                                  ---------               --------           --------

                                                                  $ 262,441               $ 97,721           $ 84,075
                                                                  =========               ========           ========
<CAPTION>
Held-to-maturity securities (at amortized cost):
    FHLMC MBS                                                     $       -               $  3,837           $  4,091
    GNMA MBS                                                              -                 17,177             24,305
    FNMA MBS                                                              -                  6,764              6,780
    Collateralized mortgage obligations                                   -                  4,073              1,015
    Commercial MBS                                                        -                  2,865                  -
    Obligations of counties and municipalities                            -                  2,395              1,960
    U.S. Treasury and other Government agency obligations                 -                      -             19,532
                                                                  ---------               --------           --------

                                                                  $       -               $ 37,111           $ 57,683
                                                                  =========               ========           ========
</TABLE>



         In December 2000, investment securities classified as held-to-maturity
with an amortized cost of $48,269,175 were transferred to the available-for-sale
classification in order to provide more flexibility in managing the interest-
rate risk in the investment security portfolio. These investment securities had
gross unrealized gains of $562,828 and gross unrealized losses of $228,058.
Subsequent to the transfer, investment securities with an amortized cost of
$9,557,649 were sold, and a loss of $158,970 was recognized in the fourth
quarter of 2000. Because of the transfer, Southern Financial will be unable to
classify investment securities as held-to-maturity in the foreseeable future.

Source of Funds

Deposits

         Deposit accounts have been the primary source of 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, capital
trust borrowings and Federal Home Loan Bank advances. Borrowings may be used as
an alternative source of lower costing funds or to fund the origination of
certain assets.

                                       8
<PAGE>

                  The following table shows the average balances and rates,
presented on a monthly average basis, for Southern Financial's deposits for the
periods indicated:

<TABLE>
<CAPTION>
                                                                         Year Ended December 31,
                                                 2000                           1999                              1998
                                     --------------------------     ---------------------------        --------------------------
                                       Average         Average        Average          Average          Average          Average
                                       Balance          Rate          Balance           Rate            Balance           Rate
                                     ------------    ----------     ------------     ----------        -----------     ----------
                                                                       (amounts in thousands)
<S>                                  <C>             <C>            <C>              <C>               <C>             <C>
Demand                               $  58,188         0.00%        $  50,750           0.00%          $  39,369         0.00%
Interest checking                       28,389         0.64%           33,744           0.96%             34,965         2.36%
Money market and savings                71,806         3.69%           59,743           3.22%             46,883         3.12%
Certificates of deposit                238,240         6.15%          209,993           5.38%            200,902         5.80%
                                     ---------                      ---------                          ---------

                                     $ 396,623                      $ 354,230                          $ 322,119
                                     =========                      =========                          =========


Weighted average rate                                  4.41%                            3.83%                            4.33%
                                                       ====                             ====                             ====
</TABLE>
                  The following table sets forth by time remaining until
maturity Southern Financial's certificates of deposit of $100,000 or more at
December 31, 2000:

<TABLE>
<CAPTION>
                                                                            Time Deposits of
                           Maturity Period                                  $100,000 or More
                           ------------------------------------------    -----------------------

                                                                          (amounts in thousands)
                           <S>                                                  <C>
                           Three months or less                                 $  67,635
                           Over three months through twelve months                 36,884
                           Over twelve months                                      77,548
                                                                                ---------

                           Total                                                $ 182,067
                                                                                =========
</TABLE>


Borrowings

         Borrowings consist of short-term and long-term advances from the
Federal Home Loan Bank of Atlanta and capital trust borrowings. The following
table sets forth information regarding Southern Financial's short-term
borrowings for the periods indicated:

<TABLE>
<CAPTION>
                                                                                         Year Ended
                                                                                         December 31,
                                                                               2000        1999          1998
                                                                           --------------------------------------
                                                                                   (Dollars in thousands)
                           <S>                                               <C>         <C>           <C>
                           Ending Balance                                    $ 19,000    $      -      $  3,500
                           Average Balance for the Period                      21,088      11,874         4,907
                           Maximum Month-end Balance
                              During the Period                                47,000      25,000        13,500
                           Average Interest Rate for the Period                  6.58%       5.23%         5.50%
                           Weighted Average Interest Rate at
                              the End of the Period                              6.35%                     5.15%
</TABLE>

                                       9
<PAGE>

Asset/Liability Management

          Southern Financial, like most other banks, is engaged primarily in the
business of investing funds obtained from deposits and borrowings into interest-
bearing loans and investments. Consequently, Southern Financial's earnings
depend to a significant extent on its net interest income, which is the
difference between (i) the interest income on loans and investments and (ii) the
interest expense on deposits and borrowing. Southern Financial, to the extent
that its interest-bearing liabilities do not reprice or mature at the same time
as its interest-bearing assets, is subject to interest rate risk and
corresponding fluctuations in its net interest income. Asset/liability
management policies have been employed in an effort to manage Southern
Financial's interest-earning assets and interest-bearing liabilities, thereby
controlling the volatility of net interest income, without having to incur
unacceptable levels of credit risk.

          With respect to the Bank's residential mortgage loan portfolio, it is
Southern Financial's policy to keep in portfolio those mortgage loans which have
an adjustable interest rate and to sell most fixed rate mortgage loans
originated into the secondary market. In addition, the Bank's commercial loans
generally have rates that are tied to the prime rate, the one-year CMT rate, or
the three-year CMT rate. Both of these policies help control Southern
Financial's exposure to rising interest rates.

          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. A third party prepared such analysis 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 tables set 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 300 basis points,
measured in 100 basis point increments) as of December 31, 2000 and 1999.

                Sensitivity of Market Value of Portfolio Equity
                            As of December 31, 2000
                            (amounts in thousands)

<TABLE>
<CAPTION>
                    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
               ------------------------------------------------------------------------------------------------------------
               <S>                      <C>                 <C>              <C>                   <C>            <C>
               Up 300                   $ 35,488              (9,871)         -21.76%                 5.82%           89.42%
               Up 200                     40,706              (4,653)         -10.26%                 6.67%          102.56%
               Up 100                     42,502              (2,857)          -6.30%                 6.97%          107.09%
               Base                       45,359                   -            0.00%                 7.44%          114.29%
               Down 100                   47,492               2,133            4.70%                 7.79%          119.66%
               Down 200                   48,809               3,450            7.61%                 8.00%          122.98%
               Down 300                   50,867               5,508           12.14%                 8.34%          128.16%
</TABLE>

                                       10
<PAGE>

                Sensitivity of Market Value of Portfolio Equity
                            As of December 31, 1999
                            (amounts in thousands)

<TABLE>
<CAPTION>
                       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
               --------------------------------------------------------------------------------------------------------------
               <S>                         <C>                 <C>               <C>               <C>             <C>
               Up 300                      $  37,391             (7,235)           -16.21%              9.20%          128.60%
               Up 200                         39,806             (4,820)           -10.80%              9.80%          136.91%
               Up 100                         42,343             (2,283)            -5.12%             10.42%          145.63%
               Base                           44,626                  -              0.00%             10.99%          153.49%
               Down 100                       46,578              1,952              4.37%             11.47%          160.20%
               Down 200                       48,580              3,954              8.86%             11.96%          167.09%
               Down 300                       51,150              6,524             14.62%             12.59%          175.92%
</TABLE>

          Certain shortcomings are inherent in the methodology used in the above
interest rate risk measurement. Modeling changes in MVPE requires the making of
certain assumptions that 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 provides an indication of the Bancorp's interest rate
risk exposure at a particular point in time, such measurement is not intended to
and does not provide a precise forecast of the effect of changes in market
interest rates on the Bancorp's worth.

Regulation

          Set forth below is a brief description of the material laws and
regulations that affect Southern Financial. The description of these laws and
regulations, as well as descriptions of laws and regulations contained elsewhere
herein, is not necessarily complete and is qualified in its entirety by
reference to these 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 such, Southern Financial is
supervised by the Board of Governors of the Federal Reserve System. Southern
Financial is also subject to Virginia laws that regulate banks and bank holding
companies. Virginia's banking laws are administered by the Bureau of Financial
Institutions of the State Corporation Commission of Virginia. Southern Financial
is also affected by rules and regulations of the Federal Deposit Insurance
Corporation. Southern Financial is a member of the Federal Reserve System and
the Federal Home Loan Bank 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
Southern Financial's earnings. The future impact of these policies and of the
continuing regulatory changes in the financial services industry cannot be
predicted.

          The supervision, regulation and examination of Southern Financial Bank
are intended primarily for the protection of depositors rather than holders of
Southern Financial common stock.

Bank Holding Company Regulation

          Southern Financial is required to file with the Federal Reserve its
periodic reports and any additional information the Federal Reserve may require.
The Federal Reserve examines Southern Financial and may examine its
subsidiaries. The State Corporation Commission also may examine Southern
Financial.

          The Bank Holding Company Act requires prior Federal Reserve approval
for, among other things, the acquisition of direct or indirect ownership or
control of more than 5% of the voting shares or substantially all of the assets
of any bank, or a merger or consolidation of a bank holding company with another
bank holding company. A bank holding company may acquire direct or indirect
ownership or control of voting shares of any company that is engaged directly or
indirectly in banking or managing or controlling banks or performing services
for its authorized subsidiaries. A bank holding company also may engage in or
acquire an interest in a company that engages in activities which the Federal
Reserve has determined by regulation or order to be so closely related to
banking as to be a proper incident thereto.

                                       11
<PAGE>

          The activities permissible to bank holding companies and their
affiliates were substantially expanded by the Gramm-Leach-Bliley Act, which the
President signed on November 12, 1999. Gramm-Leach-Bliley repeals the anti-
affiliation provisions of the Glass-Steagall Act to permit the common ownership
of commercial banks, investment banks and insurance companies. Under
Gramm-Leach-Bliley, a bank holding company can elect to be treated as a
financial holding company. A financial holding company may engage in any
activity and acquire and retain any company that the Federal Reserve determines
to be financial in nature. A financial holding company also may engage in any
activity that is complementary to a financial activity and does not pose a
substantial risk to the safety and soundness of depository institutions or the
financial system generally. The Federal Reserve must consult with the Secretary
of the Treasury in determining whether an activity is financial in nature or
incidental to a financial activity.

          Southern Financial is a legal entity separate and distinct from
Southern Financial Bank. Section 23A of the Federal Reserve Act restricts loans
from Southern Financial Bank to Southern Financial. Section 23A defines "covered
transactions," which include loans, and limits a bank's covered transactions
with any affiliate to 10% of the bank's capital and surplus. It also requires
that all of a bank's loans to an affiliate be secured by acceptable collateral,
generally United States government or agency securities. Southern Financial and
Southern Financial Bank also are subject to Section 23B of the Federal Reserve
Act, which requires that transactions between Southern Financial Bank and
Southern Financial or its other subsidiaries be on terms and under
circumstances, including credit standards, that are substantially the same or at
least as favorable to Southern Financial Bank as those prevailing at the time
for transactions with unaffiliated companies.

          Federal Reserve policy requires a bank holding company to act as a
source of financial strength and to take measures to preserve and protect bank
subsidiaries in situations where additional investments in a troubled bank may
not otherwise be warranted. As a result, a bank holding company may be required
to lend money to its subsidiaries in the form of capital notes or other
instruments which qualify as capital under regulatory rules. Any loans from the
holding company to such subsidiary banks likely will be unsecured and
subordinated to such bank's depositors and perhaps to other creditors of its
bank subsidiaries.

Bank Supervision

          As a Virginia bank that is a member of the Federal Reserve System,
Southern Financial Bank is regulated and examined by the State Corporation
Commission and by its primary federal regulator, the Federal Reserve. The State
Corporation Commission and the Federal Reserve regulate and monitor all of
Southern Financial Bank's operations, including reserves, loans, mortgages,
payments of dividends and the establishment of branches.

          Various statutes limit the ability of Southern Financial Bank to pay
dividends, extend credit or otherwise supply funds to Southern Financial and its
non-bank subsidiaries. Dividends from Southern Financial Bank are expected to
constitute Southern Financial's major source of funds.

Regulatory Capital Requirements

          All banks are required to maintain minimum levels of regulatory
capital. The federal bank regulatory agencies have established substantially
similar risked based and leverage capital standards for banks that they
regulate. These regulatory agencies also may impose capital requirements in
excess of these standards on a case-by-case basis for various reasons, including
financial condition or actual or anticipated growth. Under the risk-based
capital requirements of these regulatory agencies, Southern Financial and
Southern Financial Bank are required to maintain a minimum ratio of total
capital to risk-weighted assets of at least 8%. At least half of the total
capital is required to be tier 1 capital, which consists principally of common
and certain qualifying preferred shareholders' equity, less certain intangibles
and other adjustments. The remainder, tier 2 capital, consists of a limited
amount of subordinated and other qualifying debt and a limited amount of the
general loan loss allowance. Based upon the applicable Federal Reserve
regulations, at December 31, 2000, Southern Financial Bank was considered to be
"well capitalized."

          In addition, the federal regulatory agencies have established a
minimum leverage capital ratio, tier 1 capital divided by tangible assets. These
guidelines provide for a minimum leverage capital ratio of 3% for banks and
their respective holding companies that meet certain specified criteria,
including that they have the highest regulatory examination rating and are not
contemplating significant growth or expansion. All other institutions are
expected to maintain a leverage ratio of at least 100 to 200 basis points above
that minimum. The guidelines also provide that banking organizations
experiencing internal growth or making acquisitions will be expected to maintain
strong capital positions substantially above the minimum supervisory levels,
without significant reliance on intangible assets.

Limits on Dividends and Other Payments

          Virginia law restricts distributions of dividends to shareholders of
Southern Financial. Southern Financial shareholders are entitled to receive
dividends as declared by the Southern Financial Board of Directors. No
distribution to Southern Financial shareholders may be made if, after giving
effect to the distribution, Southern Financial would not be able to pay its
debts as they become due in the usual course of business or its total assets
would be less than its total liabilities. There are similar restrictions on
stock repurchases and redemptions.

          Banks have limits on all capital distributions, including cash
dividends, payments to repurchase or otherwise acquire shares, payments to
shareholders of another institution in a cash-out merger, and other
distributions charged against capital. As of December 31, 2000, Southern
Financial Bank had the capacity to pay no more than $6.6 million in total
dividends to its sole shareholder, Southern Financial.

          Southern Financial Bank may not make a capital distribution, including
the payment of a dividend, if, after the distribution, it would become
undercapitalized . The prior approval of the applicable Federal Reserve Bank is
required if the total of all dividends declared in any calendar year will exceed
the sum of the bank's net profits for that year and its retained net profits for
the preceding two calendar years. Federal Reserve Banks also may limit the
payment of dividends by any state member bank if it considers the payment an
unsafe or unsound practice. In addition, under Virginia law no dividend may be
declared or paid that would impair a Virginia chartered bank's paid-in capital.
The State Corporation Commission has general authority

                                       12
<PAGE>

to prohibit payment of dividends by a Virginia chartered bank if it determines
that the limit is in the public interest and is necessary to ensure the bank's
financial soundness.

FDIC Regulations

          The Federal Deposit Insurance Corporation Improvements Act of 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. Each
federal banking agency has issued 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. Those
supervisory actions become increasingly severe for banks that are under-
capitalized or worse.

          Under the Federal Reserve's regulations implementing the prompt
corrective action provisions, an institution is considered 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.

          An adequately capitalized institution 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.

          An undercapitalized institution 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).
Undercapitalized banks are subject to growth limits and are required to submit a
capital restoration plan for approval. For a capital restoration plan to be
acceptable, the bank's parent holding company must guarantee that the bank will
comply with the capital restoration plan. The aggregate liability of the parent
holding company is limited to the lesser of 5% of the bank's total assets at the
time it became undercapitalized and the amount necessary to bring the
institution into compliance with applicable capital standards. If a bank fails
to submit an acceptable plan, it is treated as if it is significantly
undercapitalized. If the controlling holding company fails to fulfill its
obligations and files (or has filed against it) a petition under the federal
Bankruptcy Code, the claim would be entitled to a priority in such bankruptcy
proceeding over third-party creditors of Southern Financial.

          A significantly undercapitalized institution 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%. Significantly
undercapitalized depository institutions may be subject to a number of
requirements and restrictions, including orders to sell sufficient voting stock
to become adequately capitalized, requirements to reduce total assets, and
cessation of receipt of deposits from correspondent banks.

          A critically undercapitalized institution has a ratio of tangible
equity to total assets that is equal to or less than 2%. A critically
undercapitalized bank is likely to be put in receivership and liquidated.

          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.

          The Federal Deposit Insurance Corporation Improvements Act also
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. The
Federal Deposit Insurance Corporation Improvements Act 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 undercapitalized banks to borrow from the Federal Reserve's discount
window and required federal banking regulators to perform annual onsite bank
examinations.

          The 1991 legislation also contains a variety of other provisions that
may affect the operations of Southern Financial and Southern Financial Bank,
including new reporting requirements, regulatory standards for estate lending,
"truth in savings" provisions, the requirement that a depository institution
give 90 days' prior notice to customers and regulatory authorities before
closing any branch, and a prohibition on the acceptance or renewal of brokered
deposits by depository institutions that are not well capitalized or are
adequately capitalized and have not received a waiver from the FDIC.

Deposit Insurance

          The deposits of Southern Financial Bank 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.
Southern Financial's deposits are subject to the rates of the Savings
Associations Insurance Fund since Southern Financial converted to a commercial
bank from a federal savings bank on December 1, 1995. Based on its current risk
classifications, Southern Financial pays the minimum Savings Associations
Insurance Fund assessment and Bank Insurance Fund assessments.

                                       13
<PAGE>

Community Reinvestment Act

          Southern Financial and Southern Financial Bank are subject to the
provisions of the Community Reinvestment Act of 1977, as amended ("CRA"). Under
the Community Reinvestment Act, all banks have an obligation, consistent with
its safe and sound operation, to help meet the credit needs for their entire
communities, including low and moderate-income neighborhoods. The Community
Reinvestment Act does not establish specific lending requirements or programs
for financial institutions, nor does it limit an institution's discretion to
develop the types of products and services that it believes are best suited to
its particular community consistent with the Community Reinvestment Act. A
depository institution's primary federal regulator, in connection with its
examination of the institution, must assess the institution's record in
assessing and meeting the credit needs of the community served by that
institution, including low and moderate-income neighborhoods. The regulatory
agency's assessment of the institution's record is made available to the public.
Further, such assessment is required of any institution which has applied to
charter a national bank, obtain deposit insurance coverage for a newly chartered
institution, establish a new branch office that accepts deposits, relocate an
office or merge or consolidate with, or acquire the assets or assume the
liabilities of, a federally regulated financial institution. If a bank holding
company applies for approval to acquire a bank or other bank holding company,
the Federal Reserve will assess the records of each subsidiary depository
institution of the applicant bank holding company, and such records may be the
basis for denying the application. Following the most recent Community
Reinvestment Act examination in February 1999, Southern Financial Bank received
a "satisfactory" Community Reinvestment Act rating.

Fiscal and Monetary Policy

          Banking is a business which depends on interest rate differentials. In
general, the difference between the interest paid by a bank on its deposits and
its other borrowings, and the interest received by a bank on its loans and
securities holdings, constitutes the major portion of a bank's earnings. Thus,
the earnings and growth of Southern Financial and Southern Financial Bank will
be subject to the influence of economic conditions generally, both domestic and
foreign, and also to the monetary and fiscal policies of the United States and
its agencies, particularly the Federal Reserve. The Federal Reserve regulates
the supply of money through various means, including open market dealings in
United States government securities, the discount rate at which banks may borrow
from the Federal Reserve, and the reserve requirements on deposits. The nature
and timing of any changes in such policies and their effect on Southern
Financial and Southern Financial Bank cannot be predicted.

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 with each subject to
supervision and regulation by the Federal Housing Finance Board. The Federal
Home Loan Banks provide a central credit facility for member institutions.
Southern Financial, as a member of the Federal Home Loan Bank of Atlanta, is
required to acquire and hold shares of capital stock in that Federal Home Loan
Bank in an amount equal to at least 1% of the aggregate principal amount of
their unpaid residential mortgage loans, home purchase contracts and similar
obligations at the beginning of each year, or 5% of their borrowings from the
Federal Home Loan Bank of Atlanta, whichever is greater. At December 31, 2000,
Southern Financial had an investment of $2.7 million in the stock of the Federal
Home Loan Bank of Atlanta and was in compliance with these requirements.

          Advances from the Federal Home Loan Bank of Atlanta are secured.
Interest rates charged for advances vary depending upon maturity, the cost of
funds to the Federal Home Loan Bank of Atlanta and the purpose of the borrowing.
At December 31, 2000, Southern Financial had $34 million outstanding in
borrowings from the Federal Home Loan Bank of Atlanta.

Federal Reserve System

          The Federal Reserve Board of Governors requires all depository
institutions to maintain reserves against their transaction 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.

Competition

          Southern Financial experiences substantial competition in attracting
and retaining savings deposits and in lending funds. The primary factors in
competing for savings deposits 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, 2000, Southern Financial employed 170 full-time equivalent
persons. Management considers its relations with its employees to be good. The
employees are not covered by a collective bargaining agreement.

                                       14
<PAGE>

Item 2.  Properties
-------------------

Offices and Other Material Properties

At December 31, 2000, Southern Financial conducted its business from its main
office in Warrenton, Virginia and 18 branch offices. The following table sets
forth certain information with respect to the offices of Southern Financial as
of December 31, 2000:

<TABLE>
<CAPTION>
                                              Lease                                                          Lease
                                 Owned or  Expiration  Date Facility                             Owned or  Expiration  Date Facility
           Office Location       Leased       Date        Opened            Office Location       Leased      Date         Opened
     ---------------------------------------------------------------   -------------------------------------------------------------
     <S>                         <C>       <C>         <C>             <C>                       <C>       <C>         <C>
     Home Office:                                                      Branch Offices (Cont'd):

     37 E. Main Street           Leased     September    February      1095 Millwood Pike         Owned       N/A           July
     Warrenton, VA                            2003         1989        Winchester, VA                                       1996

     Branch Offices:                                                   46910 Community Plaza      Leased      May          April
                                                                       Sterling, VA                           2008          1998
     362 Elden Street            Leased       June         April
     Herndon, VA                              2005         1986        2062 Plank Road            Leased   September      January
                                                                       Fredericksburg, VA                     2016          1999
     101 W. Washington Street    Leased       June       November
     Middleburg, VA                           2002         1987        10175 Hastings Drive       Leased   September       March
                                                                       Manassas, VA                           2004          1999
     33 W. Piccadilly Street      Owned        N/A       November
     Winchester, VA                                        1990        7857 Heritage Drive        Leased     April          May
                                                                       Annandale, VA                          2008          1998
     526 E. Market Street        Leased       June         March
     Leesburg, VA                             2002         1992        9720 Lee Highway           Leased      June          July
                                                                       Fairfax, VA                            2006          1996
     4021 University Drive        Owned        N/A         July
     Fairfax, VA                                           1997        527 Maple Avenue           Leased    January        March
                                                                       Vienna, VA                             2005          1995
     322 Lee Highway             Leased      August       August
     Warrenton, VA                            2001         1994        8414 Lee Highway           Owned       N/A         October
                                                                       Merrifield, VA                                       1990
     2545 Q-18 Centreville Road  Leased     September      April
     Herndon, VA                              2001         1995        10693 Courthouse Road      Leased      June       September
                                                                       Fredericksburg, VA 22407               2003          2000
     13542 Minnieville Road      Leased     December       April
     Woodbridge, VA                           2003         1995        6551 Loisdale Court,       Leased      June       September
                                                                       Suite 150                              2001          2000
                                                                       Springfield, VA 22150
</TABLE>

                                       15
<PAGE>

Item 3.  Legal Proceedings
--------------------------

         On August 29, 2000, a Fauquier County jury returned an unfavorable
verdict against Southern Financial Bank in a lender liability suit filed by a
former customer of the Bank. On October 31, 2000, a Fauquier County Circuit
Court judge set aside the jury verdict and ordered that case be retried. A new
trial is scheduled for July 24, 2001.

         Southern Financial is not a party to, nor is any of their property the
subject of, any other material pending legal proceedings incidental to its
business 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 Southern Financial.

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 page
40 of the 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
8 through 15 of the Annual Report.

Item 7a. Quantitative and Qualitative Disclosure about Market Risk
------------------------------------------------------------------

         The information required herein is incorporated by reference from pages
13 through 14 of the Annual Report.

Item 8.  Financial Statements
-----------------------------

         The information required herein is incorporated by reference from pages
16 through 38 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 through 10 of the definitive proxy statement of Southern Financial Bancorp,
Inc. filed on March 26, 2001 ("Definitive Proxy Statement").

Item 11. Executive Compensation
-------------------------------

         The information required herein is incorporated by reference from pages
10 through 11 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
7 through 9 of the Definitive Proxy Statement.

Item 13. Certain Relationships and Related Transactions
-------------------------------------------------------

         The information required herein is incorporated by reference from page
7 of the Definitive Proxy Statement.


PART IV.
--------

Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
---------------------------------------------------------------------------

                                       16
<PAGE>

(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, 2000, 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.

<TABLE>
<CAPTION>
                                                                                             Page(s) in
                                                                                           Annual Report
                                                                                           -------------
                      <S>                                                                  <C>
                      Independent Auditors' Report                                               16
                      Consolidated Balance Sheets:
                             December 31, 2000 and December 31, 1999                             17
                      Consolidated Statements of Income:
                             Years Ended December 31, 2000, 1999 and 1998                        18
                      Consolidated Statements of Comprehensive Income:
                             Years Ended December 31, 2000, 1999 and 1998                        19
                      Consolidated Statements of Changes in Stockholders' Equity:
                             Years Ended December 31, 2000, 1999 and 1998                        20
                      Consolidated Statements of Cash Flows:
                             Years Ended December 31, 2000, 1999 and 1998                        21
                      Notes to Consolidated Financial Statements                                 22 - 38
</TABLE>

        (2)    All other schedules have been omitted as the required information
               is either inapplicable or included in the Notes to Consolidated
               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

                (11)     Statement re Computation of Per Share Earnings--
                         Reference is made to Note 1 and Note 15 to Financial
                         Statements, Page 25 and Page 38, respectively, in
                         Annual Report

                (12)     Statement re Computation of Ratios--Not applicable

                (13)     Pages 16-38 of the Annual Report to Stockholders for
                         the Year Ended December 31, 2000

                (18)     Letter re Change in Accounting Principles--Not
                         applicable

                (21)     Subsidiaries of the registrant:

<TABLE>
<CAPTION>
                                                                                          Percentage of Voting
                                                                Jurisdiction of           Securities Owned by
                                    Name                        Incorporation                   the Parent
                                    ----                        -------------             ----------------------
                         <S>                                    <C>                       <C>
                         Southern Financial Bank                   Virginia                         100%
                         Southern WebTech.com, Inc.                Virginia                         100%
                         Southern Financial Capital Trust I        Delaware                         100%
</TABLE>

                                       17
<PAGE>

                (22)     Published Report Regarding Matters Submitted to Vote of
                         Security Holders--Not applicable

            (23) (a)     Consent of KPMG LLP

            (23) (b)     Consent of Thompson, Greenspon &Co., P.C.

                (24)     Power of Attorney - Not applicable

                (28)     Information from Reports Furnished to State Insurance
                         Regulatory Authorities - Not applicable

(b)    Southern Financial filed a report on Form 8-K on September 18, 2000,
       which announced the consummation of the merger of First Savings Bank of
       Virginia with Southern Financial Bank. Southern Financial filed Amendment
       No. 1 to the report on Form 8-K on November 17, 2000, which amends the
       Form 8-K to include the financial statements of First Savings Bank of
       Virginia and pro forma financial information.

                                       18
<PAGE>

                                  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, 2001
      -----------------


       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on the dates indicated.

<TABLE>
<CAPTION>
                         Name                                             Title                                  Date
         --------------------------------------             ----------------------------------            -------------------
         <S>                                                <C>                                           <C>

         /s/ Georgia S. Derrico                              Director and Chairman of                         March 30, 2001
         --------------------------------------                                                           -------------------
         Georgia S. Derrico                                  the Board and Chief
                                                             Executive Officer

         /s/ R. Roderick Porter                              Director and President and                       March 30, 2001
         --------------------------------------                                                           -------------------
         R. Roderick Porter                                  Chief Operating Officer

         /s/ David de Give                                   Director and Senior Vice                         March 30, 2001
         --------------------------------------                                                           -------------------
         David de Give                                       President/Treasurer

         /s/ Patricia A. Ferrick                             Senior Vice President and                        March 30, 2001
         --------------------------------------                                                           -------------------
         Patricia A. Ferrick                                 Chief Financial Officer

         /s/ William H. Lagos                                Senior Vice President/Controller                 March 30, 2001
         --------------------------------------                                                           -------------------
         William H. Lagos                                    (Principal Accounting Officer)

         /s/ Virginia Jenkins                                Director                                         March 30, 2001
         --------------------------------------                                                           -------------------
         Virginia Jenkins

         /s/ Neil J. Call                                    Director                                         March 30, 2001
         --------------------------------------                                                           -------------------
         Neil J. Call

         /s/ John L. Marcellus, Jr.                          Director                                         March 30, 2001
         --------------------------------------                                                           -------------------
         John L. Marcellus, Jr.

         /s/ Michael P. Rucker                               Director                                         March 30, 2001
         --------------------------------------                                                           -------------------
         Michael P. Rucker
</TABLE>

                                       19
<PAGE>

<TABLE>
         <S>                                                     <C>                                 <C>
         /s/ Alfonso G. Finocchiaro                              Director                                    March 30, 2001
         ----------------------------------------                                                    -----------------------
         Alfonso G. Finocchiaro

         /s/ Robert P. Warhurst                                  Director                                    March 30, 2001
         ----------------------------------------                                                    -----------------------
         Robert P. Warhurst

         /s/ John C. Belotti                                     Director                                    March 30, 2001
         ----------------------------------------                                                    -----------------------
         John C. Belotti

         /s/ Fred L. Bollerer                                    Director                                    March 30, 2001
         ----------------------------------------                                                    -----------------------
         Fred L. Bollerer

         /s/ Richard E. Smith                                    Director                                    March 30, 2001
         ----------------------------------------                                                    -----------------------
         Richard E. Smith

         /s/ Barbara J. Fried                                    Director                                    March 30, 2001
         ----------------------------------------                                                    -----------------------
         Barbara J. Fried
</TABLE>

                                       20
<PAGE>

                               INDEX TO EXHIBITS

                            Number and Descriptions


13       Southern Financial Bancorp, Inc.
         December 31, 2000 Annual Report to Stockholders

23 (a)   Consent of KPMG LLP

23 (b)   Consent of Thompson, Greenspon & Co., P.C.


                                       21